View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

'[Report
XL> 1986

Board of Governors of the Federal Reserve System



Letter of Transmittal

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., May 18, 1987
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 Seventy-Third Annual Report of the Board of
Governors of the Federal Reserve System.
This report covers operations of the Board during calendar year 1986.
Sincerely,
Paul A. Volcker, Chairman




Contents
Part 1 Monetary Policy and the
U.S. Economy in 1986
3 INTRODUCTION
5
5
8
9
9
10

THE ECONOMY IN 1986
Prices
Labor markets
Household sector
Business sector
Government sector

13 MONETARY POLICY AND FINANCIAL MARKETS
15 Monetary aggregates
20 Aggregate credit flows
25 INTERNATIONAL DEVELOPMENTS
28 U.S. international transactions
31 Foreign exchange operations
33 MONETARY POLICY REPORTS TO THE CONGRESS
33 Report on February 19, 1986
53 Report on July 18, 1986




Part 2 Records, Operations,
and Organization
75 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
75 Regulation D (Reserve Requirements of Depository Institutions)
and Regulation Q (Interest on Deposits)
76 Regulation D (Reserve Requirements of Depository Institutions)
76 Regulation G (Securities Credit by Persons Other than Banks, Brokers,
or Dealers)
77 Regulation J (Collection of Checks and Other Items and Wire Transfers
of Funds)
77 Regulation K (International Banking Operations)
78 Regulation Y (Bank Holding Companies and Change in Bank Control)
78 Regulation Z (Truth in Lending)
79 Rules regarding delegation of authority
80 Policy statements
81 1986 discount rates
87 RECORD OF POLICY ACTIONS OF THE
FEDERAL OPEN MARKET COMMITTEE
88 Authorization for domestic open market operations
89 Domestic policy directive
90 Authorization for foreign currency operations
92 Foreign currency directive
93 Meeting held on February 11-12, 1986
103 Meeting held on April 1, 1986
110 Meeting held on May 20, 1986
119 Meeting held on July 8-9, 1986
130 Meeting held on August 19, 1986
138 Meeting held on September 23, 1986
145 Meeting held on November 5, 1986
153 Meeting held on December 15-16, 1986




161
161
163
164
165
165
168
169
171
171
171
173

CONSUMER AND COMMUNITY AFFAIRS
Regulatory and policy matters
Community affairs
Compliance examinations
Survey on delayed availability of funds
Compliance with consumer regulations
Economic impact of Regulation E
Complaints against state member banks
Unregulated practices
Community Reinvestment Act
Consumer Advisory Council
Legislative recommendations

177
177
178
179
179
179
180

LEGISLATIVE RECOMMENDATIONS
Bank holding company legislation
Emergency acquisition authority
Increasing the number of Class C directors
Funds for Reserve Bank Branches
Interstate banking
Improving check collection

181
181
181
183

LITIGATION
Bank holding companies—antitrust action
Bank Holding Company Act—review of Board actions
Other litigation involving challenges to Board procedures and regulations

187
187
191
196
198
202
204

BANKING SUPERVISION AND REGULATION
Supervision for safety and soundness
Supervisory policy
Regulation of the U.S. banking structure
Board policy decisions and developments in bank-related activities
Enforcement of other laws and regulations
Federal Reserve membership

205
205
205
206
207

REGULATORY SIMPLIFICATION
Regulation Q
Policy regarding risk on large-dollar wire transfer systems
Regulation Y
Regulation K

209 FEDERAL RESERVE BANKS
209 Developments in the pricing of Federal Reserve services
and in the payments mechanism
212 Examinations
212 Income and expenses
213 Federal Reserve Bank premises
213 Holdings of securities and loans
214 Volume of operations




215 BOARD OF GOVERNORS
215 Financial statements
221
222

STATISTIC"AL TABLES
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1986
224 2. Statement of condition of each Federal Reserve Bank, December 31,
1986 and 1985
228 3. Federal Reserve open market transactions, 1986
230 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency
securities, December 31, 1984-86
231 5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1986
232 6. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1986
233 7. Income and Expenses of the Federal Reserve System, 1982-86
234 8. Income and expenses of Federal Reserve Banks, 1986
238 9. Income and expenses of Federal Reserve Banks, 1914-86
242 10. Priced services revenue and expenses at Federal Reserve Banks,
1986 and 1985
244 11. Operations in principal departments of Federal Reserve Banks, 1983-86
244 12. Federal Reserve Bank interest rates, December 31, 1986
245 13. Reserve requirements of depository institutions
246 14. Dates of removal of interest rate ceilings on deposits at federally insured
institutions
246 15. Margin requirements for Regulations T, U, G, and X
247 16. Principal assets and liabilities, and number of insured commercial banks,
by class of bank, June 30, 1986 and 1985
248 17. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end, 1918-86, and month-end, 1986
252 18. Changes in number of banking offices in the United States, 1986
253 19. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1986
262

MAP OF FEDERAL RESERVE SYSTEM

263
264
266
267
268
270
271

FEDERAL RESERVE DIRECTORIES AND MEETINGS
Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Advisory Council
Consumer Advisory Council
Thrift Institutions Advisory Council
Officers of Federal Reserve Banks, Branches, and Offices

293

INDEX




DISTRICTS

Parti
Monetary Policy and
the U.S. Economy in 1986




Introduction
percent, a rate unprecedented during
the postwar years. In part, this rapid
money growth reflected the public's
response to changes in interest rates
that made holding NOW accounts
and demand deposits more attractive. However, the growth in Ml was
well in excess of what would be
expected based on past relationships
among money, interest rates, and
income. Growth in the broader aggregates was more in line with past
experience, taking account of interest rate movements. Both M2 and
M3 expanded almost 9 percent and
ended the year just within the upper
bound of their annual target ranges.
In the credit markets, short-term
interest rates declined about 2 percentage points through the first three
quarters of 1986, before backing up
somewhat in response to pressure
around the end of the year from a
huge volume of tax-related financial
transactions. Longer-term bond rates
fell more than 2 percentage points in
1986; most of the decline occurred
in the first four months of the year
in response to an improved inflation
outlook and sluggish growth in economic activity. After mid-April,
Treasury bond rates fluctuated in a
relatively narrow range, but corporate and municipal bond rates trended
down and reached their lowest levels
since the late 1970s.
The declines in interest rates contributed to the vigorous pace of
household spending last year by reNOTE. This discussion of economic and fi- ducing borrowing costs and boosting
nancial developments in 1986 is adapted from asset values. Housing starts, which
the Monetary Policy Report to the Congress
Pursuant to the Full Employment and Balanced are particularly sensitive to interest
Growth Act of 1978 (Board of Governors, Feb- rate developments, rose a bit despite

the drag of a depressed economy in
ruary 1987).
Economic activity continued to expand moderately in 1986, at about
the average pace prevailing since
mid-1984. This growth was sufficient
to create a substantial number of
new jobs and to produce another
small decline in the unemployment
rate. Further progress also was made
toward the objective of overall price
stability. Wage and price behavior
continued to be influenced by the
anti-inflationary thrust of policies put
in place earlier and by the adjustment of expectations to the new
environment. Thus, while the plunge
in world crude oil prices contributed
importantly to the marked slowing
in inflation in 1986, prices outside
the energy area also decelerated on
average. Labor cost pressures remained subdued, with nominal wage
gains across a broad range of occupations and industries continuing to
move toward rates more consistent
with trends in labor productivity.
The Federal Reserve encouraged
continued economic expansion by
supplying ample reserves for the
banking system and reducing the
discount rate four times, by a total
of 2 percentage points. A large
portion of the reserves provided were
aimed at accommodating the strong
demand for Ml-type deposits. Ml
grew in excess of 15 percent in 1986,
and its velocity declined more than 9



Introduction
regions heavily dependent on oil and
agriculture. In contrast, capital
spending declined over the course of
the year, largely because of the
substantial cutback in oil drilling;
more broadly, investment was restrained by an overhang of office and
other commercial space and the weak
pace of activity in major segments of
the manufacturing sector.
The disparity between household
spending and business investment is
indicative of the imbalances that
characterized the U.S. economy in
1986. Indeed, economic performance
throughout the expansion has varied
considerably across industries and
regions of the country. In some
cases, such as agriculture, special
circumstances have played a role.
But more fundamentally, the imbalances are rooted in the enormous—
and partly related—deficits in the
country's external accounts and in
the federal budget.
Although the foreign exchange
value of the dollar fell sharply through
early 1987 from its peak in early
1985, the nation's trade deficit deepened. The increased price competitiveness of U.S. producers contributed to a sizable improvement in the
growth of exports in 1986, but the
pickup was limited by the sluggishness of economic activity in many




other countries. At the same time,
the volume of imports continued to
rise rapidly through most of the year,
in part because the pass-through into
import prices of the dollar's depreciation against major foreign currencies was limited by the ability of
foreign exporters and U.S. distributors to absorb much of the swing in
exchange rates in their profit margins. Also, an increasing amount of
imports was coming from the newly
industrialized and developing countries whose currencies, as a group,
did not appreciate against the dollar.
With import penetration remaining
on an uptrend, domestic production
continued to expand less rapidly than
domestic demand.
The federal budget deficit also
remained huge, despite substantial
deficit-reducing actions taken by the
administration and the Congress. Official estimates suggest a deficit for
fiscal 1987 of around $175 billion, a
good deal less than the record 1986
figure but still equal to a historically
high 4 percent of the gross national
product. Further cuts in the federal
deficit are essential, in the context
of movement toward better external
balance, to ensure that an adequate
flow of domestic saving is available
to support needed domestic investment.

The Economy in 1986
The economy completed a fourth
consecutive year of expansion in
1986, with real gross national product
increasing about 2 percent. The rise
in overall activity resulted in 2V2
million new payroll jobs. The jobless
rate for civilians continued to edge
down and was 63A percent at yearend.
Inflation slowed sharply in 1986:
virtually all broad measures of price
trends showed their smallest increases in many years. Although the
sharpness of the deceleration owed
much to specific developments in the
markets for oil and other commodities, the favorable inflation performance also represented at a fundamental level the continuation of trends
in wage and price behavior fostered
by policies in place since the early
part of the decade.
While output continued to grow in
1986, the economy still was characterized by pronounced imbalances.
These were reflected in marked disparities in economic performance
across industries and geographic areas.
In particular, domestic oil exploration and investment were cut back
severely, and only massive federal
subsidies sustained many farm enterprises faced with sharply lower crop
prices. In addition, major segments
of the industrial sector continued to
struggle with intense foreign competition, and relatively low rates of
capacity utilization, along with a glut
of office space, depressed capital
spending.
The most serious imbalances continued to be in the external sector
and in the federal budget. Despite
the decline of roughly 40 percent



after early 1985 in the foreign exchange value of the dollar against
the other Group of Ten currencies,
the country's trade balance continued to deteriorate. Growth in the
volume of exports did pick up in
1986 in response to the enhanced
international competitiveness of U.S.
firms, but the rebound was damped
by the relatively slow growth of the
economies of U.S. major trading
partners. Import volumes continued
to expand rapidly through most of
the year, in part because much of
the swing in exchange rates apparently was absorbed in the profit
margins of foreign exporters and
U.S. distributors, and increases in
the prices of imported goods were
thereby limited. As a result, the
current account deficit continued to
widen, to about $150 billion in 1986.
The federal budget deficit also
increased, hitting $221 billion in fiscal 1986; the deficit vastly exceeded
official targets, as underestimates of
program costs and shortfalls in revenues offset the deficit-reducing actions taken by the administration and
the Congress. The much smaller
estimated deficit in the area of $175
billion for fiscal year 1987 is still
considerably above the GrammRudman-Hollings target of $144 billion.
Prices
The GNP fixed-weight price index
increased about 2V2 percent in 1986.
This was the smallest yearly increase
in more than two decades and followed a rise of 3V2 percent in 1985.
Some other popular measures of

6

The Economy in 1986
c Performance
Percent change, Q4 to Q4
Real GNP

Percent change, Q4 to Q4
Real personal income and consumption
6

Consumption
j expenditures
u

Millions of units
Total private housing starts

Percent of disposable income
Personal saving rate

2

Percent change, Q4 to Q4

Billions of 1982 dollars

Change in real
business inventories

Real business fixed investment
10

50

•

25

10

25

Percent
Unemployment rate

Percent change, Q4 to Q4
GNP fixed-weight price index

10

1982

1984

1986

All data are seasonally adjusted, and those that
involve dollar amounts are in 1982 dollars. The unemployment data are from the U.S. Department of



1982

Jlli
1984

1986

Labor; the other data are from the U.S. Department
of Commerce,

The Economy in 1986

7

prices decelerated even more. The Consumer Prices
Percent change, Dec. to Dec.
consumer price index for goods and
services rose only about 1 percent, Total
10
and the producer price index for
finished goods actually fell 2V2 percent.
The greater deceleration in the Energy
consumer and producer price indexes
than in the GNP price measure
10
reflects the greater importance of
energy prices in those indexes. The
movements in energy prices over the
past year or so have been striking.
World crude oil prices dropped from
$26 per barrel in late 1985 to about
$11 per barrel around midyear; they
trended up over the second half of
1986 and rose to around $18 per
barrel in early 1987 in the wake of
20
the agreement on production limits
reached by the Organization of Pe15
troleum Exporting Countries in late
December. The drop in crude oil
10
prices in the first half of 1986 was
Goods less food and energy
reflected promptly in prices of gasoline and home heating oil, which fell
around 30 percent over the course of
1984
1986
1982
the year. Charges for electricity and
The data are from the U.S. Department of Labor.
natural gas also declined, but much
less than those for refined petroleum
products. On balance, retail energy
prices declined 20 percent over the of home electronic and photographic
year.
equipment, and retail prices of such
Price increases outside the energy goods accelerated. But there was
area generally remained moderate in little evidence of any significant ag1986. Retail food prices rose 4 per- gregate impact on other consumer
cent, a bit more than in 1985, reflect- goods. Prices for nonenergy services
ing the effects of the summer's heat also slowed somewhat, but they still
wave in the Southeast. However, rose around 5 percent, boosted by
prices of retail goods excluding food continued large increases for medical
and energy continued to slow and, services and higher premiums for
on balance, were up only IV2 percent. various types of insurance.
The influence of the depreciating
Prices for many basic industrial
dollar on consumer goods prices was commodities continued to decline
highly variable across sectors and over most of the first three quarters
relatively small overall. Sizable in- of 1986. Excess capacity in some
creases occurred in dockside prices basic industries and the generally
for foreign cars and for some types abundant world supplies of many



I 1• • •

I

IIII lib

1.1.

8

The Economy in 1986

primary commodities contributed
significantly to the weakness in these
prices. Sluggish industrial activity in
the United States and other large
economies also was a factor. Prices
in a number of these markets turned
up late in the summer, possibly in
response to the firming in U.S.
industrial activity. Nonetheless, industrial commodity prices at yearend were well below the peaks
reached in mid-1984.
Labor Markets
The increase of 2V2 million in nonfarm payroll employment in 1986
was about the same as the robust
1985 pace. Hiring in trade and services again was quite vigorous, with
especially large increases for business
and health services. In contrast, manufacturing employment contracted
over the first three quarters of 1986.
However, it picked up in the autumn
in response to an apparent firming
in industrial activity; in nondurable
goods industries, where output had
risen steadily, employment gains were
widespread, but hiring at firms producing durable goods remained spotty.
The growth in the number of jobs
in 1986 slightly exceeded the rise in
the labor force. As a result, the
civilian unemployment rate edged
down, to 63/4 percent at year-end.
Labor force participation maintained
its upward trend: women continued
to enter the workforce in large numbers, in part responding to expanding
job opportunities; and participation
rates for adult men held steady.
Overall, the number of persons employed relative to the working-age
civilian population reached 61 percent, a new high.
Wages continued on a path of
moderation in 1986. Hourly compensation in
 the nonfarm private sector,


Labor Market Conditions
Millions of persons
Payroll employment
100
Total

90

Nonmanufacturing
80

70

Percent change, Q4 to Q4
Compensation per hour

10

Output per hour

1982

1984

1986

Payroll employment covers the total nonfarm
sector; hourly compensation and output cover the nonfarm business sector. All data are from the U.S. Department of Labor.

as measured by the employment cost
index, rose about 3XA percent, 3A
percentage point less than in 1985.
The deceleration in wages reflected
the continued slack in labor markets
as well as the reduction in price
inflation, and was widespread across
industries and occupations. In the
unionized sector, wage increases were
especially small, and a number of
alternative, more flexible compensa-

The Economy in 1986
tion arrangements were adopted, including the substitution of lump-sum
payments for general wage increases.
The advance in compensation for
white-collar workers also moderated,
although it remained more rapid than
that for other groups.
Unit labor costs in the nonfarm
business sector were well contained
in 1986, because of the relatively
moderate increase in wages. Gains
in output per hour, however, have
averaged less than 1 percent per year
since 1984; through 1986 the underlying trend in productivity for the
business sector as a whole improved
only slightly from the very low pace
of the 1970s, and it remains well
below the pace of earlier years in the
postwar period. In contrast, productivity in manufacturing has increased
about 3V2 percent a year over the
past three years, in part because
intense foreign competition has induced many producers to modernize
their factories and streamline their
operations.
Household Sector
The household sector was the major
contributor to overall growth again
in 1986. Consumer spending increased a robust 4 percent in real
terms, even though income growth
was only moderate on average for
the second year in a row. Real
disposable income soared in the first
half of the year because of the plunge
in energy prices, but it dropped after
midyear as wage and salary gains
remained sluggish and farm and interest income declined. Consequently, the personal saving rate fell
to around 4 percent, the lowest
annual average in nearly 40 years.
The growth in consumption last
year was paced by strong gains in
purchases
 of durable goods, while


9

spending on nondurable goods and
services increased at about the same
rate as in the preceding few years.
Among durable goods, sales of new
cars rose to around IIV2 million
units. Effective prices of new cars
were held down by incentive programs of below-market financing for
domestic makes and by the introduction of low-priced imports from Korea and Yugoslavia. At the same
time, sales of Japanese and European models remained brisk, despite
sizable increases in their sticker prices.
Total outlays for other durable goods
also rose substantially, as consumers
greatly increased their purchases of
home electronics products, and sales
of furniture and appliances were
supported in part by the robust pace
of home sales in recent years.
Housing activity continued to expand in 1986. Total housing starts
edged up to 1.8 million units for the
year as a whole, their highest level
since the late 1970s. Single-family
homebuilding increased about 10
percent, bolstered not only by a
sizable decline in mortgage rates—
which brought rates on fixed-rate
loans back to single digits for the
first time since 1978—but also by
continuing favorable demographic
trends. In contrast, multifamily activity dropped off considerably over the
course of the year; an important
factor in the decline was the restraining influence of record-high vacancy
rates on rental units, especially in
key markets in the South. In addition, several provisions of 1986 tax
legislation have reduced the profitability of building rental housing.

Business Sector
Business spending on plant and
equipment declined 4V2 percent in

10

The Economy in 1986

real terms in 1986. Much of the drop
was attributable to the sharp cutback
in oil and gas well drilling, which fell
almost 50 percent over the year. But
investment outside of the energy
sector also was generally lackluster
as many firms, especially in the
tradable goods sector, trimmed expansion plans in light of relatively
low rates of capacity utilization and
continuing uncertainty about future
sales trends. Investment in computers and other office machines
remained on the path of reduced
growth evident since the fading of
the high-tech spending boom in 1985,
in part because of concerns about
the productivity-enhancing potential
of some of these products. More
generally, the widely anticipated
elimination of the investment tax
credit prompted many firms to accelerate spending in late 1985; despite
another tax-related speedup late last
year, the net effect of tax changes in
1986 appears to have been to depress
equipment spending. Outlays for
nonresidential structures outside of
the energy area, which had risen
exceptionally fast over the first few
years of the expansion, fell in 1986.
The decline in office construction,
where vacancy rates reached extraordinarily high levels, was especially
sharp.
Inventory investment generally remained subdued in 1986. Faced with
sluggish orders and stable or falling
prices, manufacturers continued to
trim their stocks. In the retail and
wholesale trade sector, inventories
of goods other than automobiles
increased moderately for the second
year in a row; however, at year-end
such stocks appeared to be roughly
in line with near-term sales prospects. At auto dealers, stocks fluctuated widely but showed little net



change over the course of the year;
drops in inventories coincided mainly
with the special incentive programs
that pushed sales to record levels,
and also with a burst in sales in
December in anticipation of tax
changes in 1987.
After-tax economic profits in the
nonfinancial corporate sector, although at fairly high levels relative
to GNP, were essentially unchanged
overall from 1985. There was considerable diversity in the performance
of individual industries: the petroleum industry experienced a marked
decline in profits associated with the
fall in oil prices, while petroleumusing industries such as chemicals
and plastics fared relatively well.

Government Sector
Even though the administration and
the Congress have taken significant
action in the past few years to reduce
it, the federal budget deficit has
remained huge. In fiscal year 1986
the imbalance hit a record $221
billion, exceeding the previous year's
deficit by more than $8 billion. Revenue growth in 1986 was restrained
by the relatively moderate rise in
nominal income, while demands on
some programs were strong, especially in the areas of agriculture and
health. Although the budgetary program put in place for fiscal year 1987
was nominally consistent with the
Gramm - Rudman - Hollings deficit
target of $144 billion by January
1987, the published estimates of the
administration and the Congressional
Budget Office were around $175
billion, equal to about 4 percent of
GNP—still a high ratio historically.
Excluding changes in farm inventories held by the Commodity Credit

The Economy in 1986

Billions of dollars
Federal government
;-

0

100

200

State and local government

20

10

1982
1984
1986
The data on the federal government deficit are for
fiscal years and are on a budget basis; they are from
the U.S. Department of the Treasury.
The data on state and local governments are for
operating budgets. They are on a national income
accounts basis, and they come from the U.S. Department of Commerce.
The total 1986 surplus of $5.0 billion for state and
local governments contained about $4.7 billion of
nonrecurring inflows from settlements involving oil
company overcharges, Outer Continental Shelf rents,
and stripper-well charges, as well as shifting of some
revenue-sharing payments to fiscal 1986.




11

Corporation (CCC), federal purchases of goods and services rose
appreciably in 1986. Over the course
of the year defense purchases in real
terms grew about 7 percent, similar
to the increases recorded since the
early 1980s. Excluding CCC purchases, real nondefense outlays, which
have shown little net change in recent
years, were essentially flat.
Purchases of goods and services by
state and local governments rose
briskly in 1986, mainly because of a
surge in construction activity. An
upswing in the school-age population
in recent years has led to a step-up
in school building, and numerous
programs are under way to expand
and improve the infrastructure. The
growth in overall outlays has been
sustained despite concerns about the
financial condition of the sector.
Excluding some special one-time inflows, such as previously escrowed
oil-lease payments, the combined
surplus of operating and capital accounts for the sector as a whole fell
to near zero in 1986. Many states,
including most of those in the energy
and agricultural regions, responded
to budgetary pressures by raising
taxes and cutting spending.

13

Monetary Policy and Financial Markets
The Federal Reserve faced continuing challenges in 1986, not only in
discerning the underlying trends in a
complex domestic and international
economic setting, but also in specifying appropriate policy actions in a
financial environment marked by
rapid structural change. As in previous years, and in keeping with the
Full Employment and Balanced
Growth Act, the Federal Reserve
used money and credit aggregates as
a means of assessing and characterizing policy. At the same time, in
targeting these aggregates and in
reaching operational decisions with
respect to the degree of reserve
pressures and the discount rate, the
evaluation of signals provided by a
broad range of economic and financial indicators played a large role.
At its meeting in February 1986,
the Federal Open Market Committee
established target growth ranges,
measured from the fourth quarter of
1985 to the fourth quarter of 1986,
of 3 to 8 percent for Ml and 6 to 9
percent for both M2 and M3. The
associated monitoring range for
growth of domestic nonfinancial debt
was set at 8 to 11 percent. In light of
the experience of recent years, the
Committee recognized that the relationship between Ml and economic
activity was subject to especially
great uncertainty. Accordingly, the
FOMC agreed to evaluate movements in Ml in light of their consistency with the patterns in other monetary aggregates, developments in
the economy and financial markets,
and potential inflationary pressures.
Ml was well above its annual



target range when the FOMC met in
July. The available evidence suggested that the rapid growth of Ml
reflected shifts in portfolios toward
liquid assets in the context of declining market interest rates, rather than
excessive money growth with potential inflationary consequence. Against
this background, the Committee concluded that Ml growth above the
existing range would be acceptable,
provided the broader aggregates expanded within their target ranges,
price pressures remained in check,
and the economy continued to expand at a moderate pace.
The Committee reaffirmed the target ranges for M2 and M3 at its July
meeting. According to data at that
time, both of these aggregates had
expanded at rates near the midpoints
of their ranges, and Committee
members believed that growth within
those ranges for the year was still
consistent with the overall policy
objectives of reducing inflation further, promoting sustainable growth
in output, and contributing to an
improved pattern of international
transactions. In the first half of the
year, the growth of domestic nonfinancial debt exceeded both its monitoring range and the growth of
nominal GNP, as it had in previous
years. The Committee was concerned about the burdens and potential instabilities associated with the
persistence of rapid debt growth, and
it felt that raising the monitoring
range for debt would create an inappropriate benchmark for evaluating long-term trends. The existing
range was maintained, but the FOMC

14

Monetary Policy and Financial Markets

Monetar
Sect* Billions of dollars
Ml

M2

3400

3200

Total domestic nonfinancial debt
= 'ii
7300

6900

Reserves
55

Total

45

1985

1986

The ranges adopted by the FOMC for the monetary
aggregates and for total debt of the domestic nonfinancial sector were for the period from 1985:4 to
1986:4.
The reserve aggregates have been adjusted to remove discontinuities associated with changes in reserve requirements. Nonborrowed reserves include
extended credit. The shaded area is adjustment and
seasonal borrowing.




thought that debt growth could well
exceed its upper bound.
The growth of M2 quickened in
the second half of the year, and M3
expanded at a somewhat faster pace
as well. Nevertheless, both of the
broader aggregates ended the year
within their target ranges, although
near the upper bounds. Ml accelerated further in the second half of the
year, resulting in a record postwar
decline in velocity for 1986. The
growth of nonfinancial debt slowed
slightly in the second half of the
year, but still exceeded its monitoring range by nearly 2 percentage
points.
Pressure on reserve positions of
depository institutions changed little
over the course of 1986, as evidenced
by a relatively low volume of borrowing at Federal Reserve Banks. The
broadly accommodative thrust of
policy also was manifest in the four
reductions in the discount rate between March and August. In part,
these cuts were intended to keep this
rate in line with the yields on shortterm market instruments, but they
also were taken in the context of
hesitant worldwide economic growth,
an improved inflation outlook, and
growth of the broader monetary
aggregates within their annual target
ranges.
In setting monetary policy the
FOMC paid considerable attention
to the country's trade deficit and the
foreign exchange value of the dollar.
The Committee members generally
viewed the narrowing in the trade
deficit as a key to achieving a sustainable and smooth expansion of
activity across the economy. At the
same time, the Committee was concerned that an unduly precipitous
decline of the dollar against the
currencies of the country's major
trading partners could contribute to

Monetary Policy and Financial Markets
inflationary pressures here. To help
limit the effect on the value of the
dollar, the first reduction in the
discount rate was coordinated with
action by other major central banks;
similarly, the reduction in April was
accompanied by a cut in the Bank of
Japan's discount rate.

Monetary Aggregates
M2 expanded almost 9 percent in
1986, placing this aggregate near the
upper bound of its annual growth
target. Although in recent years M2
has exhibited a tighter relationship
with nominal GNP than Ml has, the
velocity of M2 still registered a decline of 4 percent last year and
reached its lowest level in decades.
The buildup of M2 balances relative
to income probably reflected incentives to place savings in various
components of the aggregate whose
offering rates were falling more slowly
than market interest rates were.
Among rates on retail deposits,
the slowest to adjust in 1986 were
those on short-term accounts. Depository institutions were reluctant
to reduce rates on savings deposits
because many of these accounts had
represented a stable, profitable source
of funds for many years. Rates on
NOW accounts also fell only slightly.
Much larger declines were registered
on time deposits, reflecting not only
quicker adjustment to market rates
but also the pattern of rate movements in the credit markets, where
long-term rates fell much more than
short-term rates in late 1985 and
early 1986. The changing structure
of deposit rates at banks and thrift
institutions led to a pronounced shift
in the composition of M2: inflows to
transaction deposits, savings deposits, money market deposit accounts,
and money market mutual fund shares



15

were very strong while small time
deposits ran off, marking the second
consecutive year of zero or negative
growth.
The weakness in small time deposits in 1985 and 1986 also could have
reflected "rate shock." As existing
time deposits matured, savers with
high-yielding deposits acquired several years earlier were unable to
reinvest the funds at comparable
returns. A sizable portion of maturing deposits evidently was placed in
liquid instruments in M2 while savers
searched for other investment opportunities. Yield-conscious investors also
may have been lured from time
deposits by attractive returns on
some nondeposit instruments. For
example, stock and bond mutual
funds grew rapidly in 1985 and 1986
after stagnating during most of the
1970s and early 1980s, and the issuance of savings bonds was strong in
the summer and fall before their
minimum yield was lowered from lxh
to 6 percent.
M3 also ended 1986 near the upper
bound of its annual target range,
increasing 8% percent over the year.
Growth of M3 close to that of M2 is
not surprising, inasmuch as M2 constitutes four-fifths of the larger aggregate. (The remaining share is
dominated by large time deposits
and certain other managed liabilities
of depository institutions.) Credit
growth at banks and thrift institutions remained quite strong last year;
but, with the exception of the first
quarter, the use of managed liabilities in M3 was light as growth of
core deposits was largely sufficient
to fund asset expansion. Large certificates of deposit expanded only 3
percent on balance, with commercial
banks paying down their outstanding
CDs during much of the year and
thrift institutions also doing so in the

16

Monetary Policy and Financial Markets

Reserves, Money Stock, and Debt Aggregates
Annual rate of change based on seasonally adjusted data unless otherwise noted, in percent1

1986

1985
Item

1984

1985

1986
Q4

Ql

02

Q3

Q4

2

Depository institution reserves
Total
Nonborrowed
Required
Monetary base3

Concepts of money4
Ml
Currency and travelers checks
Demand deposits
Other checkable deposits
M2
Non-Mi component
MMDAs (n.s.a.), savings,
and small-denomination
time deposits
General-purpose and broker/dealer
money market mutual
fund assets (n.s.a.)
Overnight RPs and
Eurodollars (n.s.a.)
M3
Non-M2 component
Large-denomination
time deposits
Institution-only money
market mutual fund
assets (n.s.a.)
Large-denomination
term RPs (n.s.a.)
Term Eurodollars (n.s.a.)
Domestic nonfinancial sector debt
Federal
Nonfederal

76
.
-2.9
73
.
73
.

15.2
26.6
15.1
88
.

20.4
22.5
20.3
97
.

12.4
10.3
11.5
82
.

13.1
19.1
12.3
83
.

18.1
17.9
19.8
9.0

23.5
23.8
23.9
10.1

21.5
22.4
19.9
10.3

54
.
71
.
16
.
10.5

12.1
80
.
89
.
22.2

15.3
75
.
11.6
28.6

10.9
72
.
85
.
18.1

88
.
73
.
46
.
16.8

15.5 16.5
6.7 7.5
14.6 12.6
25.5 30.6

17.0
78
.
12.8
31.1

79
.
86
.

88
.
78
.

89
.
68
.

66
.
53
.

53
.
42
.

9.4 10.6
74
.
86
.

91
.
64
.

8.0

7.3

5.5

4.5

5.2

5.7

6.1

4.7

17.0

9.2

17.3

0.5

11.3

27.3

14.0

12.7

4.7

20.0

13.4

27.3

5.3

-2.3

30.7

18.1

10.7
23.3

7.7
3.4

8.8
8.5

7.1
8.9

7.7
17.3

8.7
6.1

9.7
6.4

7.9
3.4

29.2

4.8

3.0

10.0

12.6

1.6

-0.1

-2.2

33.6

12.1

30.3

3.1

22.9

39.2

30.9

16.8

36.7
-8.5

-4.0
-5.0

27.3
4.9

40.6
-3.1

47.0
8.2

18.8
6.1

13.6
-4.5

21.0
9.6

13.9
16.0
13.3

13.5
15.2
12.9

12.9
14.6
12.3

13.6
13.7
13.5

15.4
17.0
15.0

10.3
11.6
9.8

12.0
14.5
11.2

11.5
12.6
11.1

1. Changes are calculated from the average amounts
outstanding in each quarter. Annual changes are
measured from 0 4 to 04.
2. Data on reserves and the monetary base incorporate adjustments for discontinuities associated with
the implementation of the Monetary Control Act and
other regulatory changes to reserve requirements.
3. The monetary base consists of total reserves plus
the currency component of the money stock (less the
amount of vault cash holdings of thrift institutions
that is included in the currency component of the
money stock) plus, for institutions not having required reserve balances, the excess of current vault
cash over the amount applied to satisfy current reserve requirements.
4. Ml consists of currency in circulation; travelers
checks of nonbank issuers; demand deposits at all
commercial banks other than those due to domestic
banks, the U.S. government, and foreign banks and
official institutions, less cash items in the process of
collection and Federal Reserve float; and other checkable deposits, which consist of negotiable orders of




withdrawal and automatic transfer service accounts
at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. M2
is Ml plus money market deposit accounts (MMDAs);
savings and small-denomination time deposits at all
depository institutions (including retail repurchase
agreements), from which have been subtracted all
individual retirement accounts (IRAs) and Keogh accounts at commercial banks and thrift institutions;
taxable and tax-exempt general-purpose and broker/
dealer money market mutual funds, excluding IRAs
and Keogh accounts; overnight and continuingcontract RPs issued by commercial banks; and overnight Eurodollars issued to U.S. residents by foreign
branches of U.S. banks worldwide. M3 is M2 plus
large-denomination time deposits at all depository institutions; assets of institution-only money market
mutual funds; large-denomination term RPs issued
by commercial banks and thrift institutions; and term
Eurodollars held by U.S. residents in Canada and the
United Kingdom and at foreign branches of U.S. banks
elsewhere.

Monetary Policy and Financial Markets
fourth quarter. The weakness in CDs
was widespread as institutions relied
more on other managed liabilities,
such as term repurchase agreements
(included in M3) and advances from
Federal Home Loan Banks (not included in M3).
The broad shift to liquid assets
greatly affected the behavior of Ml.
The narrow monetary aggregate expanded more than 15 percent in
1986, marking the second consecutive year of double-digit growth. Its
velocity fell 9V2 percent compared
with a decline of 5% percent in 1985.
Since 1981, the velocity of Ml has
declined 16 percent, a remarkable
development in view of its tendency
to climb about 3 percent a year in
the previous two decades.
Much of the rapid growth in narrow money over the past two years
appears to have been related to the
way the sharp decline in market
interest rates affected incentives to
hold NOW accounts and demand
deposits. Short-term market interest
rates fell about 5 percentage points
from their peak in the latter part of
1984 to their lowest levels since 1977,
while NOW account rates changed
much less. Although more rapid
money growth generally would be
expected in an environment of declining rates, the expansion of Ml in
1985 and 1986 was in excess of that
implied by the historical relationships
among money, interest rates, and
income.
About half of the growth of Ml in
both years occurred in interest-bearing checkable deposits. Because depository institutions were slow in
adjusting the rates paid on NOW
accounts, the spreads between those
rates and rates on substitutes narrowed substantially. For example,



17

between the first quarter of 1986,
when interest rates on NOW accounts were fully deregulated, and
the fourth quarter of the year, the
spread between the rate on threemonth Treasury bills and the average
rate on NOW accounts at commercial banks shrank from 135 basis
points to 53 basis points. Similarly,
the average rate on NOW accounts
in late 1986 was not far below that
on six-month small time deposits.
Demand deposits also accelerated;
they grew nearly 12 percent from the
fourth quarter of 1985 to the fourth
quarter of 1986. As with other checkable deposits, lower short-term interest rates are an important influence
on the growth of demand deposits
because they reduce incentives to
economize on transaction balances.
Also, some demand deposits are held
by business firms in exchange for
services provided by banks, and these
compensating-balance requirements
typically are enlarged as market rates
decline. Although these effects were
important to the expansion of demand deposits throughout 1986, the
apparent response to declining interest rates was much larger than would
be expected from historical experience.
Another element in the growth of
demand deposits apparently was the
large volume of financial transactions
in 1986. For example, because of
certain payment procedures—such
as transferring funds held in escrow
accounts by officer's check rather
than by wire—the massive volume
of mortgage originations and prepayments could have influenced the
movement of demand deposits. In
addition, a flurry of financial transactions around year-end induced in
part by impending changes in the tax

18

Monetary Policy and Financial Markets

law temporarily boosted demand deposits sharply.
In implementing monetary policy
in 1986, the FOMC generally accommodated through open market operations the strong demand for reserves associated with the rapid
growth of transaction balances. In
the context of prospects for slow
growth of real economic activity,
disinflationary trends in wages and
prices, and growth of the broader
monetary aggregates within their target ranges, four reductions in the

discount rate were implemented between March and August.
Early in the year, all the monetary
aggregates slowed sharply, with M2
dropping below its annual target
range. Also, evidence suggested that
the economy was growing sluggishly,
and the outlook for inflation improved as oil prices fell. In this
environment, market interest rates
began to decline in mid-February,
and the Federal Reserve reduced the
discount rate l/i percentage point to
7 percent in early March. At the

Interest Rates
Percent per year

Short-term
20

U.S. government bonds

State and local government bonds

1982
All the data are monthly averages. Their descriptions and sources are as follows: Federal funds, from
the Federal Reserve; three-month Treasury bills,
market rate on three-month issues, on a discounted
basis, from the U.S. Department of the Treasury;
conventional mortgages, weighted averages of 30-year,
fixed-rate, level-payment mortgages at savings and
loan associations, from the Federal Home Loan Mort-




1984

1986

gage Corporation; A-rated utility bonds, weighted averages of recently offered, 30-year investment-grade
bonds adjusted to an A-rated basis by the Federal
Reserve; U.S. government bonds, market yields adjusted to 30-year constant maturity by the U.S. Treasury; state and local government bonds, index based
on 25 issues of 30-year revenue bonds of mixed quality, from the Bond Buyer.

Monetary Policy and Financial Markets
time, there was concern that unilateral action to lower interest rates
might cause an excessive reaction in
the foreign exchange market, where
the dollar had been under downward
pressure. Accordingly, the reduction
was timed to correspond with similar
actions by the central banks of West
Germany, Japan, and several other
industrialized nations.
With the economy expanding slowly
and underlying price pressures continuing to moderate, interest rates
fell further throughout March and
into April. By mid-April, most market interest rates had reached their
lowest levels since the late 1970s,
and the Federal Reserve instituted
another reduction in the discount
rate to catch up with and to ratify
the declines in market rates.
After mid-April, interest rates rose
for a short time as market participants focused on an upturn in oil
prices, an acceleration in the growth
of the monetary aggregates, and a
further decline in the foreign exchange value of the dollar. By the
end of June, however, a steady flow
of weak statistics began to reveal
anemic growth in real economic activity in the second quarter. The
FOMC had expected an improvement in activity in the second half of
the year, but the rebound now appeared likely to be less vigorous than
previously anticipated and perhaps
delayed because of continued disappointing movements in the U.S. trade
position and the effects of pending
tax reform legislation on business
investment. Accordingly, shortly after
the July FOMC meeting, the Board
approved another cut of a half point
in the discount rate to 6 percent.
The final reduction in the discount
rate last year took place after the
August FOMC meeting. The last two
reductions in 1986 were adopted



19

without similar action by foreign
central banks. Unilateral action to
lower interest rates carried the risk
of adding to the downward pressure
on the dollar and possibly feeding a
source of inflationary pressure. However, the Federal Reserve thought
that prevailing economic and financial conditions warranted taking such
a risk, realizing that the provision of
reserves could be tightened through
open market operations if adverse
developments were to arise.
Although the value of the dollar
fluctuated considerably after the reduction in the discount rate in August, it showed no distinct downward
movement until around year-end.
Short-term interest rates declined
about 1 percentage point over the
summer months, moving either in
anticipation of, or in response to,
the reductions in the discount rate.
Long-term rates were about unchanged on balance over the summer, but more concern about interest
rate prospects developed in early
fall. Economic indicators began signaling a pickup in the pace of economic activity, and rising prices of
oil and precious metals, along with
the potential effects of the cumulative decline in the value of the dollar,
seemed to raise concerns about the
outlook for inflation. Through the
remainder of the year, the FOMC
attempted to keep a steady degree
of reserve pressure, and market interest rates fluctuated within a fairly
narrow range.
Even so, short-term interest rates
moved higher as the end of the year
approached, in part because of the
exceptional volume of tax-related
transactions. As firms rushed to complete mergers and buyouts, and
households stepped up their sales of
assets to realize capital gains, the
demand for business loans and trans-

20

Monetary Policy and Financial Markets

action balances surged. This heavy
volume of financing also was reflected in unusually strong demand
for reserves by depository institutions. The System added reserves
freely to accommodate this demand,
but the pressure nevertheless showed
through short-term rates. Shortly after
the turn of the year, short-term rates
moved down toward their earlier
levels. The dollar, however, was
under substantial downward pressure
in early 1987; disappointing figures
on the U.S. trade deficit prompted
selling of the dollar on exchange
markets, and this pressure intensified
with reported suggestions by some
U.S. policymakers that, particularly
in the absence of more growthoriented policies abroad, the dollar
might need to depreciate further to
correct the nation's external imbalance.
Aggregate Credit Flows
Domestic nonfinancial debt expanded almost 13 percent in 1986, a
slightly slower pace than that in the
two previous years but still above
both the Committee's monitoring
range and the growth of nominal
GNP.1 Debt issuance by the state
and local sector dropped off substantially from the pace set in 1985, when
it was boosted by borrowing in anticipation of tax reform restrictions. In
the household sector, mortgage borrowing strengthened, but a marked
decrease in the expansion of consumer installment credit contributed
1. When measured from the end of December to the end of December, domestic nonfinancial debt expanded IIV2 percent. The growth
from fourth quarter to fourth quarter cited in
the text is higher because of the surge in debt
at the end of 1985 and the arithmetical effects
ofFRASER averaging.
Digitized for quarterly


to a slowing in the overall growth of
household indebtedness. A continuation of corporate financial restructurings buoyed expansion of business
debt, despite the maintenance of a
moderate gap between capital spending and internal funds. Growth of
federal sector debt remained strong.
Growth of consumer installment
credit receded last year to about 12
percent from the 15 to 20 percent
pace of recent years. Nevertheless,
installment debt continued to grow
faster than income, and the ratio of
such debt to income established another record. With mortgage debt
expanding rapidly, the ratio of overall household debt to income also
reached a new high.
Assets of the household sector
have increased sharply in recent years;
rising stock prices alone added several hundred billions of dollars to
household wealth in 1986. At the
same time, many families, especially
in parts of the country hard hit by
economic adversities, have experienced difficulty in meeting their financial commitments. The number
of personal bankruptcies accelerated
dramatically in 1985 and 1986, surg-

Consumer Installment Debt
Percent of disposable income

20

1970

1975

1980

1986

Based on data from the Federal Reserve and from
the U.S. Department of Commerce.

Monetary Policy and Financial Markets
ing last year well beyond the historical experience. Strains in managing
credit card debt were particularly
evident as delinquency rates on revolving-balance accounts increased
appreciably. Delinquency rates on
other categories of installment debt
and on mortgage loans fell some last
year, although they were much higher
than in previous expansions. For
some households, debt-servicing burdens were reduced by the refinancing
of high-rate mortgages or the decline
in interest payments on their adjustable-rate mortgages.
Internal funds in the aggregate
were nearly sufficient to meet the
basic financing needs of nonfinancial
corporations in 1986. However, some
firms continued to borrow heavily to
fund massive retirements of equity
in association with mergers, buyouts,
and share repurchases. At the same
time, the drop in long-term interest
rates afforded businesses the opportunity to improve their financial positions.
As long-term interest rates declined in the spring of 1986 to their
lowest levels in eight years, corporate
bond issuance surged to record levels. Indeed, the volume of domestic
corporate bonds sold last year was
nearly twice the previous record set
in 1985. Much of the proceeds from
bond issuance in 1986 was used to
refund higher-cost long-term debt or
to pay down short-term debt. As the
stock market continued to register
impressive gains, new equity issuance
also reached record levels; of the
gross proceeds from issues sold last
year, about 30 percent was raised by
firms issuing stock in the public
market for the first time.
The retirement of high-coupon
bonds, the reduced dependence on
short-term credit, and the issuance
equity shares tended to imof new


21

prove conventional measures of corporate balance-sheet strength. However, massive volumes of outstanding
equity were retired through mergers,
acquisitions, buyouts, and other restructurings, resulting in the third
consecutive year of large net equity
retirements. Reflecting the financing
patterns in these years, the aggregate
debt-equity ratio of nonfinancial
corporations swelled to a record level
on a "book" basis. But when stated
at market values, the robust gains in
share prices kept debt-equity ratios
well below levels that generally prevailed during the 1970s. As interest
rates trended down after 1981, interest-coverage ratios crept up, suggesting that the ability of firms in the
aggregate to service their debt did
not deteriorate. These modest gains,
however, were achieved in relatively
benign market and economic circumstances.
The large paydown of equity reduced the ability of some corporations to weather economic shocks.
The weak financial structures of some
firms, along with strains in certain
industries, led to more than $3 billion
of corporate bond defaults in 1986,
an amount that dwarfs experience in
nearly every other year of the postwar period. Concern that other firms
also might have problems in meeting
their financial obligations was reflected in the pace of bond downgradings, which in 1986 were more
than three times as numerous as in
the late 1970s.
Firms with downgraded debt typically find their securities trading at
higher interest rates in the market.
In general, however, quality spreads
between private debt securities of
different grades have been relatively
stable in recent years, suggesting that
investors have not been alarmed
about the credit quality of corpora-

22

Monetary Policy and Financial Markets

Ratio of Debt to Equity for Nonfinancial Corporations
Percent

75

Debt (par)
Equity (book)
50

A

1961

1966

1971

1976

1981

1986

Federal Reserve flow of funds accounts.
The market value of debt is based on market prices
of bonds traded on the New York Stock Exchange

and par values of loans and short-term paper; the
market value of equity is based on market prices of
outstanding shares.

tions in the aggregate and have not
attempted to limit their portfolios to
higher-rated issues.2 During the first
half of 1986, spreads between the
yields on corporate bonds and Treasury securities widened considerably,
but this widening appeared to be
related to the heavy volume of corporate issues and to a revaluation of
call and refunding provisions on long-

term obligations. A narrowing of
these spreads early in 1987 reversed
much of the earlier increase.
While the economy had grown
continuously for more than four years
by the end of 1986, the expansion
was uneven and it left certain sectors
under severe strains. The well-known
problems faced by firms in the mining, energy, agricultural, and many
manufacturing industries, and by a
number of heavily indebted developing countries, were feeding through
to the financial intermediaries supplying them credit. For example, 136
commercial banks failed in 1986,
compared with only 7 in 1981. Many
of these institutions had heavy credit
exposures to the oil industry, while
more than 40 percent of them held
relatively large amounts of agricultural loans.

2. The interest rate spreads between investment-grade and speculative issues widened
about 50 basis points for a short time after the
bankruptcy filing by LTV Corporation in July
1986. Low-rated or unrated bonds also experienced substantial yield increases for a time
later in the year, further widening the spread,
when concerns about the liquidity of that market segment surfaced in connection with the
insider-trading scandal. That widening was reversed in early 1987.



Monetary Policy and Financial Markets
The impact of the distress in the
farm sector also has been severe for
the Farm Credit System, the government-sponsored agency that holds
about 25 percent of outstanding farm
debt in the United States. The losses
of the banks in the System totaled
nearly $2 billion in 1986, largely
reflecting provisions for loan losses,
and the System's capital surplus soon
will be exhausted if losses do not
abate. The Congress approved regulatory accounting procedures for the
Farm Credit System in the fall of
1986 that will allow the banks to
report higher net income than generally accepted accounting principles
would permit. The higher reported
income may ease some of the problems within the System relating to
the preservation of capital and help
to justify charging borrowers more
competitive rates. By themselves,
however, the accounting procedures
do not provide substantive relief.
The financial condition of the thrift
industry as a whole has improved
markedly since the early part of the
decade, but the difficulties of many
institutions have intensified. As interest rates fell from the elevated
levels of 1981 and 1982, the average
cost of funds at thrift institutions
declined much more rapidly than the
average yield on their assets. The
industry as a whole returned to
profitability in 1983, and aggregate
earnings jumped thereafter. Net income for the industry in 1986 probably was strong again, but lower than
in 1985.
At the same time, problems of




23

asset quality have become increasingly important for a sizable number
of these institutions. While some of
these problems are associated with
the economic distress in some regions
of the country, overly aggressive
investment strategies of some institutions certainly have contributed
heavily. For 1986, about one-quarter
of the thrift industry will report
negative net income, and the longterm prospects for many of these
institutions are unfavorable. Moreover, the resources of the Federal
Savings and Loan Insurance Corporation are inadequate to manage
these problems effectively.
While the many stresses and financial vulnerabilities are not amenable
to correction through general monetary policy, they do influence the
economic environment and represent
a potentially disruptive and destabilizing element in financial markets.
The Federal Reserve has been called
upon to play a positive role through
its regulatory and supervisory functions. For example, steps have been
taken to reduce the risks associated
with large payments made by wire
transfer, and several proposals have
been made to ensure the capital
adequacy of commercial banks. Many
of the financial and sectoral stresses
will take considerable time to alleviate, and will require a stable monetary environment, redress of the
imbalances in the nation's federal
budget and international trade positions, and prudent private behavior,
encouraged as necessary by sound
regulation.

25

International Developments
The international scene in 1986
brought a further substantial decline
in the dollar against the currencies
of major foreign industrial countries,
and some evidence emerged that the
process of adjustment of external
balances among major industrial
countries may be under way. Although domestic demand abroad accelerated, exceeding for the first time
since 1982 the rate of growth of real
domestic demand in the United States,
growth in real GNP in nearly all
industrial countries remained sluggish and turned out to be below
official forecasts at the start of the
year. The United States again posted
record trade and current account
deficits for the year as a whole; but
accelerating import prices during the
course of the year and an upturn in
real net exports in the fourth quarter
suggested that the effects of the
dollar's decline since February 1985
were beginning to show through. The
sharp drop in oil prices through the
first three quarters of 1986 were a
factor in the low rates of increase in
general price levels in major industrial countries. Although economic
growth varied widely among nonOPEC developing countries, it continued at a moderate pace for the
group as a whole.
The dollar's foreign exchange value
dropped another \5l/i percent against
a weighted average of 10 currencies
of major foreign industrial countries,
bringing its decline between February 1985 and December 1986 to 33
percent. (Over this period the German mark appreciated 66 percent
and the Japanese yen 61 percent



Exchange Value of the Dollar and
Interest Rate Differential
Percentage points

Ratio scale. March 1973 = 100
160

4 -

Long-term real interest
rate differential
(U.S. minus foreign)

2 -

2

120

-

4

140

-

1975
1980
1986
Exchange value of the U.S. dollar is its weighted
average exchange value against currencies of the other
G-10 countries using 1972-76 total trade weights adjusted by relative consumer prices.
Differential is rate on long-term U.S. government
bonds minus rate on comparable foreign securities,
both adjusted for expected inflation estimated by a
36-month centered moving average of actual inflation
or staff forecasts where needed.

against the dollar.) The dollar's decline was associated with a further
drop in the long-term real interest
rate differential, as U.S. rates fell
more than foreign rates. Indeed, one
measure of this differential showed
that it became negative during 1986,
after having been as high as around
4 percentage points in favor of the
dollar in mid-1984. Major foreign
central banks purchased a total of
$11V2 billion in exchange market
intervention in 1986, as contrasted
with sales of %\11A billion in 1985.
U.S. monetary authorities did not
intervene in foreign exchange markets at all in 1986.
After a further drop of 6lA percent
in the dollar in early 1987, monetary
authorities of the United States and

26

International Developments

five other major countries met in
Paris on February 22 to conduct
multilateral surveillance of their
economies in the framework of the
May 1986 Tokyo summit. In their
communique, they stated that the
exchange rate changes over the past
two years "have now brought their
currencies within ranges broadly consistent with underlying economic fundamentals" and that further substantial exchange rate changes "could
damage growth and adjustment prospects." Therefore, they "agreed to
co-operate closely to foster stability
of exchange rates around current
levels."
Real economic growth in the major foreign industrial countries was
somewhat disappointing in 1986. In
the first quarter, real GNP declined
in several European economies and
in Japan, partly as a result of unusually severe weather. A strong rebound of activity in the second quarter
was followed by substantially slower
growth during the remainder of the
year. Weakness was particularly evident in the manufacturing sector. In
the final quarter of 1986, industrial
production in Germany was only
slightly above its level at the end of
1985; Japan's industrial production
declined during the second half of
1986 to an average level in the fourth
quarter below that of a year earlier.
In contrast to the slowing in real
GNP, domestic demand expanded
somewhat faster abroad in 1986 than
had been the case in 1985. In the
European economies especially, demand strength shifted to the domestic sectors of the economy from the
export sector.
The pace of growth abroad was
generally insufficient to lower unemployment rates. In both Japan
and France the unemployment rate
atFRASER of the year was somewhat
Digitized for the end


GNP. Demand, and Prices
Percent change from previous year
Gross national product
(Constant prices)

Total domestic demand
(Constant prices)

Consumer price index

United States
1982

1984

1986

Foreign data are multilaterally wieghted averages
for the Group of Ten (G-10) industrial countries, using 1972-76 total trade weights, and are from foreign
official sources.
Data for the United States are from the U.S. Departments of Commerce and Labor.

above its level at the beginning of
1986; in Germany the rate was slightly
lower, and in the United Kingdom it
was about the same.
The rate of inflation in the major
foreign industrial countries dropped
sharply in 1986, on average, from its
already low 1985 level. In Japan
consumer prices were essentially unchanged during 1986, while in Germany consumer prices fell slightly.
Wholesale prices declined significantly in most foreign industrial
countries. Weakness in world oil
prices early in the year and further

appreciation relative to the dollar in
the currencies of most of these countries were the principal factors working to lower inflation rates abroad.
In several major foreign countries,
rates of money growth rose in 1986.
Target ranges announced for the
growth of specific aggregates were
exceeded in Germany and the United
Kingdom. In Japan, money growth
remained fairly rapid, whereas growth
of the monetary aggregates in France
slowed from its 1985 pace. Fiscal
policy abroad was again generally
restrained, and government deficits
as a fraction of GNP were either
about the same or down further in
most of the foreign industrial countries.
The aggregate current account surplus of the major foreign industrial
countries rose more than $60 billion
in 1986. The largest gains were experienced by Japan, whose surplus
rose more than $35 billion to reach
$86 billion, and by Germany, where
the gain of about $22 billion brought
the total surplus to $36 billion. In
contrast, in both the United Kingdom and Canada the current account
declined in 1986, to near balance and
a significant deficit, respectively.
Increases in the dollar value of
these current account surpluses
masked the adjustment of trade volumes that did occur in 1986 in several
of the major foreign economies. In
Japan the volume of exports declined
more than 4 percent from the fourth
quarter of 1985 to the fourth quarter
of 1986, while the volume of imports
rose more than 14 percent. German
export volume in the final quarter of
1986 was about unchanged from its
level one year earlier, while import
volume was more than 6 percent
higher than at the end of 1985.
Declining oil revenues induced a
further $10 billion contraction of



International Developments

27

imports by OPEC countries, whose
merchandise imports have now declined about $60 billion (or 40 percent) since 1981. However, the even
sharper decline in the oil export
revenue of OPEC countries resulted
in a net $30 billion increase in the
aggregate current account deficit of
those countries during 1986.
The exchange rate competitiveness
on world markets of most non-OPEC
developing countries continued to
improve during 1986. The value of
their currencies again declined significantly in real terms, reflecting the
large declines against the Japanese
and European currencies and only
little change against the U.S. dollar.
In most East Asian developing countries, the continuing rapid growth of
manufactured exports combined with
declining costs of oil imports to
produce strong increases in trade
surpluses. In the case of the highly
indebted countries of Latin America,
external interest payments continued
to fall in 1986, reflecting the downward trend of world interest rates.
However, declining oil and commodity prices along with domestic developments led to reemergence in 1986
of an overall current account deficit
which, for Latin America, had almost been eliminated in 1984-85.
Nevertheless, in some of these countries, particularly Mexico, Colombia,
and Ecuador, the shifts toward markedly more competitive exchange rates
in 1985 and 1986 aided a strong
expansion of nontraditional exports
during 1986.
Efforts to provide additional financing for the heavily indebted
developing countries faced growing
difficulties during 1986. The World
Bank helped several of these countries devise programs of structural
reform. In doing so, it contributed
significantly both to the resolution of

28

International Developments

economic distortions affecting those U.S. International Trade
countries and to sustainable ecoBillions of dollars
Balances
nomic growth. World Bank financial
commitments for sectoral-adjustment programs also rose sharply. For
Mexico and Nigeria, the interna100
tional bank creditors assembled parMerchandise trade
allel new-money packages that were
linked to the borrowing countries'
performance under World Bank and
Ratio scale, billions of 1982 dollars
IMF-approved adjustment programs.
Merchandise trade
However, by the end of 1986,
^ : ^ ^
" 400
bank creditors collectively were unable to complete action on the pro300
posed new loans for Mexico—a failure representative of the tendency of
the banks to act less rapidly and
Total exports
uniformly than during 1983-85 in
the provision of new resources to
Ratio scale, 1982=100
heavily indebted countries. On a net G N P fixed-weight price index
basis, banks based in the industrial
105
countries appear to have provided
Total exports
no new lending in 1986 to the 15
heavily indebted countries that were
identified in connection with the
Program for Sustained Growth put
forth by the U.S. Secretary of the
1982
1984
1986
Treasury in late 1985.
U.S. International Transactions
The U.S. merchandise trade and
current account deficits widened further in 1986. A $7 billion increase in
exports and a $31 billion increase in
imports yielded a trade deficit of
$148 billion; the deficit was $124
billion in 1985. The current account
deficit was $141 billion in 1986,
compared with $118 billion in 1985.
The rise in the value of exports in
1986 reflected a strong increase in
the volume of nonagricultural exports, which rose 14 percent from
the fourth quarter to the fourth
quarter, after having been flat in
1985. This strong recovery of exports
came despite a slowing of economic
growth in the rest of the world. The




Data are seasonally adjusted at annual rates and
are from the U.S. Department of Commerce.

improvement in the price competitiveness of U.S. products resulting
from the decline in the dollar appears
to have contributed heavily to this
rise in export volume. The growth,
spread over most major categories
of trade, was concentrated in sales
of industrial supplies and capital
goods, primarily to other industrial
countries but also to developing
countries in Asia.
The value of agricultural exports
fell by $3 billion in 1986, a drop due
almost entirely to falling prices. Lower
support prices introduced during the
year for major crops resulted in some
increase in price competitiveness.

International Developments
While ample foreign supplies have
made marketing abroad increasingly
difficult for many commodities,
fourth-quarter demand for U.S. exports of soybeans was augmented as
the result of a drought in Brazil, a
major world supplier.
The increase in the value of imports for 1986 as a whole reflected
mainly a rise in volume that covered
most trade categories. Increases were
particularly pronounced in consumer
goods and business machines. The

29

continued strength in imports of
consumer goods reflected in part the
strength of competition from abroad
as import prices were slow to adjust,
and in part the relative strength of
U.S. domestic consumption over this
period. Forty-five percent of U.S.
consumer goods imports come from
developing countries in Asia whose
currencies have not appreciated
against the dollar in real terms.
Nonetheless, the average price of
non-oil imports turned up during

U.S. International Transactions1
Billions of dollars, seasonally adjusted
Quarter
Year
Transaction

1985

1986

1985

1986

Q4

Ql

Q2

Current account
Merchandise trade balance
Exports
Imports
Investment income (net)
Direct investment, net
Portfolio investment, net
Other services (including military
transactions)
Unilateral transfers, private
and government

-118
-124
214
-339
25
26
-1

-141
-148
222
-369
23
33
-10

-34
-37
53
-90
9
10
-1

-34
-36
54
-90
7
8

-34
-36
55
-91
5
8
-2

Private capital flows
Bank-reported capital, net
(outflows, —)
U.S. net purchases (—) of foreign
securities
Foreign net purchases ( + ) of
U.S. Treasury securities
Foreign net purchases of U.S.
corporate bonds
Foreign net purchases of U.S.
corporate stocks
U.S. direct investment abroad
Foreign direct investment in
United States
Other corporate capital flows, net

-3

-1

-15

-15

-4

103

82

34

40

20

12

U.S. official reserve assets,
net (increase, - )
U.S. government foreign credits
and other claims, net

21

9

6

46

53

18

5
-19

17
-32

4
-10

33

15
-6
8
13
6
-10

7

27

-11

11

_2

-4

*
-2

26
5
3

1

16

13

7

4

-3
12
-6
14
n.a.

-1

15

-3

-3

-4

*

4

15

-1

-1

4
23

*Less than ± $500 million.
1. Details may not add to totals because of round
ing.



1
-4

-3
22

-37
-38
57
-96
5
8
-3

1
-5

26
-7

Seasonal adjustment discrepancy
Statistical discrepancy

-35
-37
56
-93
6

-1

-1

Foreign official assets in
United States (increase, + )

-2

Q4

Q3

27

1

-1

-4

4

5

10

13

-6

10

SOURCE. U.S. Department of Commerce, Bureau of
Economic Analysis.

30

International Developments

1986 after nearly five years of de- Taiwan, also added substantially to
cline. Prices of most major import their official holdings in the United
categories showed a significant accel- States, while the OPEC countries
eration during 1986. This general continued to draw down their assets.
trend suggests that in aggregate terms
Private capital flows were again
the price competitiveness of domest- dominated by securities transactions.
ically produced products has im- Attracted by expected gains in U.S.
proved somewhat.
stock prices, foreigners purchased,
The value of oil imports dropped net, a record $17 billion of U.S.
sharply in 1986. A nearly 50 percent stocks. Foreign purchases of corpodrop in price (year over year) was rate bonds remained strong, as U.S.
only partly offset by a 25 percent corporations continued to take adincrease in volume. The volume rose vantage of relatively low long-term
sharply, if irregularly, during much interest rates to restructure their
of 1986, partly to rebuild stocks and balance sheets, issuing a large volpartly in response to the break in oil ume of bonds in both the domestic
prices as OPEC oil production in- and Eurobond markets. However,
creased during the year. In anticipa- the share of Eurobonds in new pubtion of the announcement in Decem- licly offered bond issues by U.S.
ber of an agreement by OPEC to corporations fell sharply in 1986.
limit production, oil prices re- Recorded net purchases of U.S.
bounded and the volume of oil im- Treasury securities by private foreigners declined as well, but purports fell in the fourth quarter.
Among nontrade components of chases of Treasuries by foreign offithe current account, net payments cial reserve holders increased as
on foreign portfolio holdings in the foreign monetary authorities inUnited States increased noticeably, vested the bulk of their intervention
reflecting the growing stock of U.S. purchases of dollars in these instruportfolio liabilities to foreigners. This ments.
Foreign direct investment in the
increase was partly offset by higher
net income receipts on U.S. direct United States reached record levels
in 1986, swelled by mergers and
investments abroad.
The recorded $141 billion current takeovers bunched at the end of the
account deficit for 1986 was balanced year, before the effective dates of
by recorded net capital inflows of the new tax law. Direct investment
$114 billion and a statistical discrep- abroad by U.S. residents was up
ancy of $27 billion. Unlike the case sharply in 1986, largely because of
in earlier years of current account the accounting effects of the sharp
deficits, official reserve holders ac- depreciation of the dollar.
Inflows reported by banks were
counted for a significant part of the
recorded capital inflow in 1986 (al- moderate in 1986, down substantially
most $32 billion). A large part of the from 1985. Growth of liabilities to
official inflow was associated with Latin American institutions other
foreign exchange market interven- than banks dropped sharply from the
tion by the G-10 countries, especially high 1984 and 1985 rates, and the
Japan, to slow the depreciation of large 1985 decline in bankers acceptthe dollar. Several newly industrial- ances was followed by only a small
ized countries in Asia, particularly decline in 1986.



International Developments

Foreign Exchange Operations

31

The only activity on the Federal
Reserve swap network involved a
U.S. monetary authorities did not $210 million drawing by the Bank of
intervene in foreign exchange mar- Mexico in August. This was part of
kets in 1986. Because of the substan- an official bridge-financing package
tial further appreciations of major provided by the monetary authorities
foreign currencies against the dollar of the United States and 14 other
in 1986, the Federal Reserve System countries, pending drawings by Mexexperienced valuation gains of $1,971 ico on more permanent financing
million on its holdings of foreign facilities provided by the Internacurrency reserve assets. At year-end, tional Monetary Fund and the World
System holdings of foreign currencies Bank. This drawing on the Federal
were valued at $9,475 million. Essen- Reserve was completely repaid by
tially all of these holdings consisted February 1987.
of marks, yen, and Swiss francs.




33

Monetary Policy Reports to the Congress
Given below are reports submitted to
the Congress by the Federal Reserve
on February 19 and July 18, 1986,
pursuant to the Full Employment and
Balanced Growth Act of1978.
Report, on February 19, 1986
Monetary Policy and the
Economic Outlook for 1986
While there are unusual uncertainties
surrounding prospects for prices and
economic activity in 1986—stemming in part from questions about
the timing and dimension of domestic
adjustments to the weaker dollar on
exchange markets, about oil price
declines, and about the process of
fiscal restraint—the overall economic outlook for the year appears
generally favorable. Real economic
growth probably will pick up somewhat from last year's pace, and
inflationary pressures should remain
contained. The recent weakness in
oil prices, though it has the potential
for causing dislocations in energy
markets and adding to the strains on
some heavily indebted oil-producing
countries, should enhance real growth
and work to offset the upward impact
on the price level this year from the
drop of the dollar on exchange markets. Over the course of the year,
the prospective movement toward
fiscal restraint, and also the more
competitive exchange rate, should
help correct imbalances that in recent
years have threatened the sustainability of economic expansion and
affected domestic and international
financial markets.



Economic and Financial
Background
The past year was one of further
progress in the national economy.
Although growth in economic activity was slower than that in the earlier
phase of the expansion, increases in
output were great enough to reduce
the unemployment rate to its lowest
level since 1980. Moreover, even as
the economic upswing moved into its
fourth year, inflationary pressures
remained in check. In 1985, prices
generally rose less than they had the
year before and wage gains were
restrained.
Continued economic growth last
year was supported by a generally
accommodative monetary policy. The
demand for narrow money was strong,
partly in lagged response to earlier
interest rate declines and partly perhaps in response to more conservative cash management practices. Ml
expanded relatively rapidly throughout the year, growing about 12 percent, and its velocity exhibited an
unusual and large drop of 5V2 percent; growth exceeded both the original target range set in February and
the wider, rebased range for the
second half set in July. However, the
broader monetary aggregates behaved more normally and ended the
year within their target ranges. M2
expanded about 8V2 percent as compared with its range of 6 to 9 percent,
and M3 grew around 7V2 percent
compared with its range of 6 to 9V2
percent.
In credit markets, most short-term
interest rates declined about a percentage point over last year, while

34

Monetary Policy Reports

longer-term rates dropped approximately 2 percentage points, partly
reflecting an improved outlook for
inflation and expectations of greater
fiscal restraint. Stock prices also rose
substantially during the year. Meanwhile, debt growth was strong, with
expansion of domestic nonfinancial
debt for the year of 13V2 percent,
above the monitoring range of 9 to
12 percent set by the Committee.
The rapidity of debt creation reflected, in part, borrowings to finance retirements of corporate stock
associated with mergers, buy-outs,
and share repurchases and the acceleration of state and local debt issues
in response to proposed tax law
changes.
While output of the U.S. economy, measured by real gross national
product, expanded moderately in
1985, domestic sectors increased their
purchases of goods and services more
rapidly. The difference was reflected
in an increasing volume of imports
as the volume of exports declined.
Thus, all segments of the economy
did not share equally in the expansion. Key sectors such as manufacturing, mining, and agriculture continued to face strong competition
from foreign producers. Sluggish
growth abroad also limited export
markets for U.S. producers. In financial markets, a number of institutions
had to cope with loan problems
associated with the economic pressures and large debt burdens of
certain borrowers, including less developed countries and energy and
agricultural borrowers in the United
States.
Adjustments are in process that
should help correct the imbalances
that have emerged in recent years.
The resolve demonstrated by the
Congress and the administration in



passing the Balanced Budget and
Emergency Deficit Control Act of
1985 has had salutary effects on
expectation in financial markets. As
budgetary deficits are reduced, more
and more domestic saving can be
channeled into investment in the
plant and equipment needed to improve productivity and sustain economic growth over the long term.
The decline in the dollar should help
bring about an environment in which
U.S. producers will be able to compete more effectively in world markets. The efforts of many banks and
other financial intermediaries to
bolster capital and reserves, together
with lower interest rates, should help
financial institutions to strengthen
their ability to cope with financial
strain. Questions remain, however,
about other factors affecting the U.S.
economy—including the strength of
economic expansion abroad, the impact of a declining dollar on inflation
here, and the effect of reduced oil
prices on the financial health of
domestic energy producers and of a
number of oil-exporting developing
countries.
Monetary Policy for 1986

The Federal Open Market Committee framed its monetary policy plans
for 1986 in light of the fundamental
objectives of maintaining sustainable
growth of economic activity, making
continued progress over time toward
price stability, and working toward
better balance in the nation's external transactions. As shown in the
accompanying table, the Committee
set ranges for the monetary aggregates for the period from the fourth
quarter of 1985 to the fourth quarter
of 1986 of 3 to 8 percent for Ml and
6 to 9 percent for both M2 and M3;

Monetary Policy Reports
Ranges of Growth for Monetary and
Credit Aggregates
Percent change, fourth quarter to fourth quarter
Money or credit aggregate
Ml
M2
M3
Debt

1986
3 to 8
6 to 9
6 to 9
8 to 11

1

1985
3to82
6 to 9
6 to 9Vi
9 to 12

1. Annual rate, applied to period from second to
fourth quarter.

it established a monitoring range of
8 to 11 percent for debt. These are
the same ranges that had been tentatively set for 1986 in July of last
year, except that the Ml range has
been widened to reflect the uncertainties about the behavior of that
aggregate, as noted below.
Compared with ranges that had
most recently been in effect for 1985,
the new ranges involve a reduced
upper limit for M3 and a generally
lower range for debt. The ranges for
Ml and M2 are unchanged. The
width of the Ml range reflects continuing uncertainties about the behavior of Ml under varying economic
and financial circumstances, given
recent experience and the changed
composition of the aggregate over
the past few years. In particular, the
availability of interest-bearing checking accounts that serve both transaction and savings functions may
have increased the sensitivity of this
aggregate to changes in market rates
as well as to other factors influencing
the public's allocation of its savings
among various financial assets. While
the range for Ml is wide enough to
allow for some variation in behavior
of the aggregate's income velocity in
response to changing conditions, the
range was set on the assumption that
there would not be a large drop in
velocity, such as occurred in 1985.
In that connection, the Committee



35

will evaluate behavior of Ml in light
of its consistency with the other
monetary aggregates, economic and
financial developments, and the potential for inflationary pressures. In
sum, policy implementation will involve continuing appraisal of the
relationships among the various
measures of money and credit, their
velocity trends, and indicators of
economic activity and prices, as well
as conditions in domestic credit and
foreign exchange markets.
The growth of the broader aggregates in 1986 is not expected to be
far different from last year, when
their velocities declined somewhat.
Last year's velocity experience was
closer to the norm for these aggregates than was the case for Ml. The
final phase of deposit deregulation
this year—the removal of minimum
balance requirements on money market deposit accounts at the beginning
of the year and the elimination of
ceiling rates on savings and regular
NOW accounts at the end of March—
is expected to have only minimal
effects on the broad aggregates as
well as on Ml. Other ceiling-free
accounts have been widely available
for a number of years, and minimum
balance requirements already have
been reduced to a relatively low
level.
The Committee for some years has
had a monitoring range for the total
debt of domestic nonfinancial sectors. Historically, debt has expanded
about as rapidly as GNP, but in
recent years debt has grown more
rapidly than the economy, raising
some concern about the increasing
debt burden. The growth of debt is
expected to moderate somewhat in
1986. A diminution of debt financing
for purposes of stock retirement is
anticipated, and growth of state and

36

Monetary Policy Reports

local government debt is expected to
slow from last year's exceptional
pace, absent further changes in the
proposed tax law that might prompt
a renewed acceleration in borrowing.
While the federal deficit is expected
to remain at a high level for much of
1986, it should begin declining in the
course of the year as greater fiscal
restraint takes hold and helps to curb
the rate of increase in U.S. government debt.
Economic Projections
The Committee felt that its monetary
objectives were consistent with expectations for continued growth in
output, further reductions in unemployment, and muted inflation in
1986. While there clearly are a good
many uncertainties and risks in the
present environment—for instance,
the actual outcome for the budget,
behavior of the dollar, and oil prices—
the Committee members and nonvoting Reserve Bank Presidents generally believe that prospects for the
economy in the year ahead are reasonably favorable. As indicated in
the table, their expectations center
on real GNP growth of 3 to 3Vi
percent and on inflation in the range
of 3 to 4 percent. The expanding job
opportunities associated with the in-

crease in output are expected to
lower the unemployment rate gradually, although sluggish productivity
performance, if it should continue,
would limit the nation's growth potential.
Two key factors in the positive
economic outlook are the recent
developments in energy and financial
markets. The decline in energy prices
can be expected to raise the growth
of real disposable income and to
bolster consumer spending in the
months ahead. The marked increase
in household financial wealth associated with the rise in stock and bond
prices also should provide the basis
for continued gains in consumer outlays. This should work to offset the
restraint in spending that could be
exerted by the runup in household
indebtedness and the associated decline in the personal saving rate
during the past year. Nevertheless,
the high level of debt remains a risk
in the outlook for consumer spending.
The rise in stock prices and the
decline in interest rates have improved prospects for domestic investment in plant, equipment, and
housing. Moreover, while the federal
deficit is not likely to drop significantly for some months, as noted
earlier, greater fiscal restraint, as it

Economic Projections for 1986
Percent

Measure

FOMC Members and
other
FRB Presidents

Administration

Congressional
Budget Office

Range
Change, fourth quarter to fourth quarter
Nominal GNP
Real GNP
GNP implicit deflator
Average unemployment rate in the fourth quarter

 unemployment rate.
1. Civilian


Central
tendency

5to8V2
23/4to41/4
2VztoAVi

61/2to71/4
3to3V£
3 to 4

8.0
4.0
3.8

7.6
3.6
3.9

6y4to63/4

About 6I/2

6.7

6.71

develops, should enhance the availability of domestic saving for private
investment and reduce the need to
rely on foreign saving. Mortgage
rates are at their lowest levels since
1979, and the greater affordability of
housing can be expected to buoy
residential construction even in the
face of some evident overbuilding in
the multifamily sector. Similarly,
lower costs of capital should—along
with some improvement in the competitiveness of U.S. industry owing
to the dollar's decline—help to support business investment despite likely
weakness in the energy and office
building sectors. In the near term,
the leanness of manufacturers' stocks
suggests the likelihood of some pickup
in the rate of inventory accumulation.
The outlook for the external sector
is quite uncertain. The response of
U.S. industry, as well as of foreign
producers, to the decline of the
dollar will take place only over time
and will depend on a number of
factors, such as the extent to which
it is believed the exchange rate change
is "permanent" and the strategies
firms pursue with respect to the
potential trade-off between profit
margin and market share. Perhaps
more important in the short run, our
trade and current account position
also will depend on the pace of
economic growth abroad: if growth
in other countries is relatively slow,
that would tend to limit near-term
improvement.
With regard to the outlook for
inflation, wages in the aggregate
have shown no tendency toward
acceleration, and recent settlements
in major collective bargaining agreements indicate wage gains in manufacturing, construction, and transportation are likely to continue at
the moderate pace registered in re


Monetary Policy Reports

37

cent years, even though the unemployment rate is declining. Disappointing productivity performance
does raise questions about pressures
from the labor cost side, although
some pickup in productivity improvement is assumed this year. A decline
in oil prices also should be a constructive influence. Nevertheless, it
was recognized that a weaker dollar
poses a clear risk of greater inflationary pressures.
The projections by FOMC members and nonvoting Reserve Bank
Presidents of real GNP and prices
over 1986 generally are somewhat
lower than the administration's projections, although the full range of
expectations does encompass the latter. In any event, differences are not
large and economic growth at the
pace the administration anticipates
can be accommodated by the FOMC's
targets.
The Performance of the
Economy during the Past Year
The economy completed a third successive year of expansion in 1985,
with real gross national product increasing 2V2 percent over the year.
The rise in economic activity was
sufficient to create 3 million new
payroll jobs and the unemployment
rate edged down; with a further
strong increase in employment in
January of this year, the jobless rate
for civilians reached a six-year low
of 6.7 percent. Meanwhile, most
broad measures of price increase
indicate that inflation slowed to about
a 3V2 to 33/4 percent rate in 1985,
somewhat less than the pace registered over the previous two years.
Though output and employment
continued to grow in 1985, the rate
of expansion was slower than some
had anticipated, raising some con-

38

Monetary Policy Reports

cerns about the sustainability of the
recovery. Furthermore, the pattern
of developments in the past year had
some disturbing aspects: domestic
and foreign demands continued to
be diverted away from goods and
services produced in the United
States, draining income from our
households and businesses and exacerbating an inventory correction
by U.S. firms as their sales lagged;
meanwhile, consumers continued to
increase their spending at a substantial clip, but only by borrowing at a
pace that pushed household debt
burdens to still higher levels.
Although the nation as a whole
experienced continued growth, the
serious sectoral imbalances that had
emerged earlier during the recovery
became more apparent when gains
in activity moderated. Industrial output grew slowly in 1985, and manufacturing and mining employment
posted outright declines during much
of the year. The agricultural sector
remained under acute pressure, as
shrinking export markets and abundant harvests pushed prices sharply
lower. As a result, farmers continued
to face mounting difficulties in servicing the large volume of debt that
had accumulated in the 1970s.
To a considerable extent, these
imbalances and stresses are related
to fundamental disequilibria in the
nation's finances: the continuing huge
federal budget deficit and the growing deterioration in the U.S. current
account. During the past year, however, policymakers took important
steps to address these problems. The
Balanced Budget and Emergency
Deficit Control Act was passed, establishing a mechanism for deficit
reduction and signaling the resolve
of the Congress and the administration to achieve meaningful progress
Digitized foron this front. And the financial
FRASER


authorities of the G-5 nations agreed
that exchange rates should better
reflect underlying economic relationships, which would enhance the prospects for some improvement in our
external balance.
The federal budget deficit was of
record magnitude in fiscal year 1985.
The large federal deficit not only
absorbed a significant portion of the
saving available to the domestic
economy, but also continued to be a
source of concern to investors with
respect to longer-range potential for
inflationary pressures. Not surprisingly, the prospect for some reduction in the deficit contributed to the
downward trend in interest rates late
last year.
The importance of international
economic developments for the performance of the U.S. economy has
become increasingly apparent during
the current economic expansion. Although the foreign exchange value
of the dollar declined over most of
the year—encouraged at times by
coordinated official intervention activity—changes in spending patterns,
which typically lag movements in
exchange rates, were not yet evident
and imports made further inroads
into domestic markets. Meanwhile,
slow growth, on average, in much of
the rest of the world has failed to
provide strong markets for U.S. exports. The net result has been that
domestic demands have increased
more rapidly than domestic production throughout the course of the
expansion.
An important achievement of the
current recovery has been the sustained expansion of economic activity without any relinquishing of progress toward the goal of price stability.
The containment of inflation has
been aided by the high exchange
value of the dollar and excess world

Monetary Policy Reports
supplies of many basic materials,
which have left prices unchanged or
lower for a wide range of imported
goods, industrial commodities, agricultural products, and petroleum.
More fundamentally, wage increases
in the aggregate have been restrained, limiting upward pressure on
costs.
The Household Sector
Spending in the household sector
remained strong in 1985, despite a
sharp slowing in income growth.
Growth in real disposable income
rose about IV2 percent, much less
than the increase of 4 percent of the
previous year. Income growth was
limited as wage and salary gains
decelerated, interest income weakened, and farm income plummeted.
Meanwhile, real personal consumption expenditures advanced 3 percent
last year—only a little less than in
1984—buoyed by continued high
levels of borrowing. As a result, the
personal saving rate fell to an average of about 4V2 percent last year,
well below historical norms.
The strength in household spending last year reflected further gains
in outlays for consumer durables,
especially purchases of new automobiles. Sales of new cars totaled more
than 11 million units, the strongest
selling pace since 1978. Sales of
domestic autos picked up to 8V4
million units in response to the general downtrend in interest rates,
several rounds of price and financing
concessions offered by manufacturers, and increased availability of
some models that had been in short
supply in 1984. Sales of foreign cars
climbed to a record level of more
than 2% million units for the year; a
greater volume of exports to the
United States was permitted under
the Japanese voluntary restraint pro


39

gram for 1985-86, and this accounted for most of the pickup.
Activity in the housing sector was
flat in 1985. The number of new
homes started last year remained at
about the same rate of 1% million
units posted in the preceding two
years. Construction of single-family
housing showed no new strength,
despite a decline in mortgage rates
to their lowest level in six years and
favorable demographic trends. In
part, some of the effect of lower
mortgage rates may have been offset
by a tightening of qualification standards by lenders and mortgage insurers and higher mortgage insurance
premiums. Construction of multifamily housing remained at the relatively
high level of the two previous years,
notwithstanding high and rising vacancy rates for rental units. Rental
housing construction was supported
by heavy issuance of debt by state
and local authorities, partly in anticipation of constraints imposed by tax
reform legislation.
Recent trends in consumer balance
sheets continued last year. Consumer
installment debt, which had climbed
sharply in 1984, did so again in 1985,
and the ratio of debt to disposable
income reached a record high. Growth
in financial assets of households has,
however, more than kept pace with
the rapid rise in debt over the past
two years. In particular, the strong
gains posted by the stock and bond
markets in 1985 provided a substantial boost to household wealth.
Indications of debt-servicing difficulties in the household sector have
mounted. Delinquency rates on consumer installment loans have been
on the rise since mid-1984, and for
some categories—such as bank credit
cards—have reached relatively high
levels. Moreover, mortgage loan delinquencies persist at the historically

40

Monetary Policy Reports

high levels that have prevailed since
the 1981-82 recession, associated
with the influence of lingering high
rates of unemployment in some communities, slow income growth, and
weak housing prices in certain areas
of the country. However, surveys of
households continue to show favorable readings on attitudes concerning
financial positions, suggesting that
these financial strains are currently
limited to a small part of the population.
The Business Sector
Economic conditions in the business
sector also were mixed last year.
After-tax economic profits of nonfinancial corporations as a group increased sharply for a third consecutive year and as a percent of GNP
stood at their highest level since the
late 1960s. Many firms in manufacturing and mining industries, however, have encountered significant
difficulties brought about by the high
value of the dollar. In addition to
the influence of the exchange rate,
downward pressures on prices and
profits in the agricultural and energy
sectors have been exacerbated by
ample supplies in world markets.
Business spending for equipment
and structures advanced 6 percent in
real terms in 1985, supported by
falling interest rates, declining relative prices for capital equipment, and
continued efforts to modernize facilities in order to meet intensified
competition. Nevertheless, the growth
in business fixed investment was well
below the extraordinary pace of the
preceding two years. Furthermore,
the slowdown in capital outlays was
widespread, including many categories of high technology equipment,
heavy industrial machinery, and
structures. Some deceleration of investment spending may be expected



as an expansion progresses and the
growth of sales subsides to more
sustainable levels. However, the reduced pace of investment last year
was reinforced by declining capacity
utilization rates in the industrial sector. Moreover, rising vacancy rates
for office buildings contributed to
slower growth in expenditures for
nonresidential structures.
Businesses accumulated inventories at a much reduced pace in 1985,
particularly in the manufacturing sector. In real terms, nonfarm business
inventories rose $10 billion last year,
after the sharp $56 billion investment
that occurred in 1984. In the manufacturing sector, sluggish orders and
stable or falling prices have induced
businesses to adopt a cautious approach to inventory accumulation;
factory inventories declined over the
second half of 1985 and were little
changed on net for the year as a
whole. In the trade sector, stocks
increased over the year, boosted by
a large rise in auto inventories in the
fourth quarter. Excluding autos, inventories at retail establishments increased about in line with the moderate rise in sales over 1985.
Financial strains have remained
evident in several important sectors
of the economy. The decline in the
exchange value of the dollar has yet
to ease significantly the international
trading problems of many industrial
firms. Moreover, the activity and
earnings of the domestic energy sector have been affected adversely by
the weakening of petroleum prices
on world markets. The financial condition of U.S. agriculture worsened
further in 1985. A large portion of
the agricultural sector has continued
to struggle with sharply lower prices,
diminished export markets, and depressed land values. With farm incomes plunging, debt-servicing prob-

Monetary Policy Reports
lems have created serious strains on
both farmers and farm lenders.
The Government Sector
The federal budget deficit rose to
$212 billion in fiscal year 1985. Although the expanding economy continued to boost receipts, outlays rose
even faster, with large increases registered for agricultural support payments, interest outlays, and defense
purchases. As a percent of GNP, the
deficit remained at a historically high
level of 5 percent, absorbing a large
share of the net saving available to
the domestic economy.
Federal government purchases of
goods and services, which add directly to GNP and constitute a third
of total federal expenditures, posted
another strong advance last year.
Federal purchases, excluding changes
in farm inventories held by the Commodity Credit Corporation (CCC),
were up more than 3% percent over
the year, after adjustment for inflation. Defense outlays continued to
provide a major boost to federal
purchases, rising 6V2 percent over
the year. Purchases by the CCC rose
sharply, as low market prices encouraged farmers to shift massive
inventories of grain to the federal
government.
State and local governments increased purchases of goods and services about 3 percent in 1985, after
a similar increase in the preceding
year. Most of the growth in expenditures last year reflected strong increases in construction outlays as
states and localities continued efforts
to improve and expand basic infrastructure. With the rise in expenditures exceeding the growth in receipts,
the fiscal position of state and local
governments weakened throughout
the year; aggregate operating and
capital account surpluses, which had



41

risen to substantial levels in 1984,
were virtually eliminated by the end
of last year.
The Foreign Sector

After registering particularly sharp
gains toward the end of 1984 and in
the first two months of 1985, the
dollar generally fell in international
currency trading throughout the remainder of last year. By the end of
1985, the trade-weighted foreign exchange value of the dollar had fallen
nearly 25 percent from its peak in
February. This decline occurred
against the backdrop of a narrowing
of the differential between inflationadjusted, long-term interest rates in
the United States and other industrial countries, which at least in part
reflected the slowing of economic
growth in the United States relative
to growth abroad.
It will take some time before the
effects of the dollar's depreciation
manifest themselves in the external
position of the United States, which
continued to deteriorate last year.
The widening gap between imports
and exports boosted the current account deficit to about $120 billion,
up from $107 billion in 1984.
Merchandise imports continued to
rise in 1985, increasing about 3V2
percent in real terms over the year.
Consumer goods, capital equipment,
and industrial materials posted moderate increases. Although prices of
imported goods fell for the year as a
whole, some firming in the prices of
manufactured imports became apparent toward the end of the year,
in part attributable to the decline in
the value of the dollar.
The volume of merchandise exports declined in 1985; agricultural
exports fell abruptly, while exports
of nonagricultural goods were essentially unchanged. The failure of

42

Monetary Policy Reports

growth in other industrial countries,
on average, to pick up has limited
the expansion of markets for U.S.
products. Furthermore, economic
growth in developing nations slowed
a bit in 1985, as many countries
continued to face difficult debt-servicing problems externally and strong
inflationary pressures at home.
In this context, the Secretary of
the Treasury in October addressed
the economic and financial problems
confronted by many of these countries. He urged the borrowing countries to undertake comprehensive
programs of economic adjustment
designed to promote efficiency and
economic growth. At the same time,
he called upon the international
banking community, the World Bank,
and the other multilateral development banks, working with the International Monetary Fund, to provide
the assurance that adequate external
financing would be available to support such programs during the next
several years. The initial response to
these proposals has been positive; all
parties generally accept that the proposals represent a constructive
framework for dealing with the international debt problems of individual
countries and for promoting the
growth and stability of the world
economy.
Labor Markets
With the economy continuing to
expand, developments in labor markets remained generally favorable in
1985. The unemployment rate drifted
down over the year, as gains in
employment exceeded the growth of
the labor force. Labor force participation has maintained its upward
trend; women continued to enter the
workforce in large numbers, in part
responding to expanding job opportunities.
 Overall, the number of per

sons employed relative to the population rose to a record level.
Nonfarm payrolls expanded 3 million in 1985, somewhat below the
unprecedented hiring rate posted
during the first two years of the
recovery. Although growth in employment in the aggregate continued,
the composition of the gains reflected
the unevenness of current expansion.
Employment in the trade and service
sectors accounted for more than twothirds of the growth in payrolls last
year. Government employment rose
nearly one-half million, reflecting
primarily increased payrolls of state
and local governments. In contrast,
the weak expansion of output in the
manufacturing sector resulted in some
trimming of employment over the
first three quarters of the year. Although an upturn in manufacturing
jobs begain in the fall, employment
was down about 170,000 over the
year.
Wage increases remained restrained in most segments of the
labor market last year, despite a
further reduction in the unemployment rate. Hourly compensation in
the private sector, as measured by
the employment cost index, rose
about 4 percent in 1985,1 percentage
point less than in the preceding year.
Nearly all of the deceleration of
compensation per hour last year
reflected a slowing in the growth of
fringe benefits; wage rates increased
at about the same pace posted in
1984. To a large extent, the recent
slowing in the growth of benefits has
resulted from lower health care expenses for employers, as cost-sharing
arrangements shifted greater responsibilities to employees and programs
for hospital cost containment became
more widespread.
Meanwhile, labor productivity was
nearly unchanged in 1985, after in-

Monetary Policy Reports

43

energy markets continued to restrain
the overall rate of inflation in 1985.
Energy prices showed little change
last year; however, a substantial
margin of unutilized productive capacity, continued conservation efforts, and the debt-servicing problems of several important oil
producers have all contributed to a
situation of surplus availability of oil
and to a sharp break in oil prices on
world markets at the end of the year.
Crop prices at the farm have remained depressed by diminished export demand and high levels of
production. Lower prices for crude
foods and small increases in processing costs held food prices at the
retail level to an increase of 2%
percent last year.
Price Developments
Most broad measures of prices indiPrices for many basic industrial
cate that inflation was unchanged or commodities fell during 1985. Weak
perhaps moved a bit lower in 1985, expansion of industrial production in
even as the economy was passing the United States and in other major
through a third year of expanding industrial countries has limited the
activity. The consumer price index growth in demand for raw and semiadvanced 3% percent over 1985, processed materials. Furthermore, the
somewhat less than the 4 percent high prices for many raw commodiincrease posted the previous year. ties that prevailed over the 1970s and
The GNP fixed-weight price index, early 1980s induced a rapid expanwhich includes production for busi- sion of capacity, particularly in denesses, government, and export, as veloping countries. With productive
well as for consumers, increased 3V2 capacity in place and with many of
percent, about V percentage point these countries facing massive debt2
less than the average increase over servicing requirements, supplies of
the preceding two years. Producer commodities on world markets have
prices of finished goods advanced 13A remained plentiful.
percent last year, and prices of interOn balance, price increases outmediate materials were essentially side the food and energy area held
flat.
steady last year. Consumer prices
Progress toward price stability has other than food and energy increased
been sustained by several factors, the about 4V2 percent, a bit less than in
most important of which have been 1984. The prices of retail goods
subdued inflation expectations, mod- excluding food and energy were held
erate wage increases, and the influ- to a gain of 2 percent in 1985, at
ence of the high value of the dollar least in part by small increases or
on the prices of imports and goods declines in the prices of products in
that compete with imports. In addi- markets in which import competition
tion, developments in the food and is substantial. Price increases for

creasing substantially earlier in the
recovery. When viewed over a longer
period, the underlying trend in productivity in recent years appears to
have improved a little from the very
low pace of the 1970s, but remains
well below the pace earlier in the
postwar period. Management and
workers have responded to a more
competitive environment by modernizing plant and equipment, improving operational efficiency, and making work rules more flexible. Unit
labor costs in the nonfarm business
sector rose 3% percent in 1985,
higher than the increase during the
previous two years but well under
the pace registered in the early 1980s.



44

Monetary Policy Reports

nonenergy services remained at an
annual rate of about 5% percent last
year. Capital equipment prices rose
23A percent in 1985, somewhat more
than in 1984.

Monetary Policy and Financial
Markets in 1985
At its meeting in February 1985, the
Federal Open Market Committee
established ranges for money and
credit growth during the year, measured from the fourth quarter of 1984
to the fourth quarter of 1985, of 4 to
7 percent for Ml, 6 to 9 percent for
M2, and 6 to 9/2 percent for M3.
The associated monitoring range for
the debt of domestic nonfinancial
sectors was set at 9 to 12 percent.
In July, the Committee reaffirmed
the ranges for M2, M3, and debt,
but established a new Ml growth
range of 3 to 8 percent, measured at
an annual rate, from the second to
the fourth quarter of the year. Over
the first half of the year, Ml had
grown well above the upper end of
its range and velocity had registered
an unusually steep decline, apparently reflecting substantial additions
to money balances, especially interest-earning transaction balances,
spurred by the sharp drop in interest
rates since mid-1984. The Ml objective for the second half of the year
anticipated a considerable slowing of
growth, on the assumption that historically more normal behavior in
the velocity of Ml would reemerge.
Continued uncertainty about the behavior of the aggregate, however,
was signaled in widening the Ml
range 2 percentage points.
The unusual pattern of Ml behavior in fact persisted over the second
half of the year; growth in the



aggregate did not slow, and its velocity registered an even steeper decline. At the same time, the broader
monetary aggregates were growing
generally within their ranges, while
economic growth had slowed to well
below the pace of the year before
and upward price pressures remained
muted. In the fall, the FOMC determined that, under these circumstances, growth in Ml above its range
for the second half of the year would
be acceptable.
In general, the FOMC last year
emphasized the need to evaluate
growth in all the aggregates in light
of developments in the economy and
prices, as well as conditions in financial and foreign exchange markets.
Throughout the year, monetary policy remained generally accommodative to emerging demands for money.
Pressures on bank reserve positions
were varied in a narrow range over
the year, and the discount rate was
reduced once, by Vi percentage point.
Money, Credit, and Monetary Policy
Ml increased at an annual rate of
12.7 percent from the second to the
fourth quarter of the year, compared
with its range of 3 to 8 percent for
this period; growth for the year as a
whole came to 11.9 percent. Much
of the unusually strong growth in Ml
in 1985 and the accompanying decline in velocity seemed to be attributable to lower interest rates, though
expansion in the aggregate was
stronger, particularly in the second
half of the year, than historical evidence on its relationship to income
and interest rates would have suggested.1 The behavior of this aggre1. Appendix A reviews the behavior of velocity in recent years.

Monetary Policy Reports

45

gate may have become more sensitive to changes in market rates in
recent years owing to the deregulation of certain transaction accounts.
By reducing the opportunity cost of
holding transaction balances, the creation of NOW and Super NOW
accounts has made Ml a much more
attractive savings vehicle for households. Moreover, with the rates on
NOW accounts fixed and those on
Super NOWs being adjusted sluggishly to changing conditions, falling
interest rates have led to relatively
substantial reductions in incentives
to economize on Ml balances, with
accompanying declines in velocity.
However, considerable uncertainty
about the response of Ml to variations in interest rates or income
unavoidably persists, as both money
holders and depository institutions
adapt to the elimination of important
regulatory constraints.2
In 1985, the interaction of lower
market interest rates with deregulated transaction deposit rates seemed
to induce especially heavy inflows to
interest-bearing checkable accounts.
Spreads between offering rates on
these deposits and interest rates on
time deposits and market instruments, low by the standards of recent
decades, apparently diminished the
incentives to keep savings in longerterm instruments, as well as to separate savings from transaction balances.
Demand deposits also contributed to
the increase in Ml last year, registering unusually rapid growth, especially in the second half. Business
demand balances paced the rise,

likely reflecting the cumulative effect
of lower interest rates on incentives
to economize on demand deposits
and on compensating balance requirements, as well as generally more
cautious cash management practices,
possibly in part because banks and
corporations sought to reduce risk in
response to financial problems that
had developed in certain areas of the
market.
M2 recorded growth of 8.6 percent
in 1985, in the upper part of its
range, as its nontransaction component increased 7.6 percent. The shift
toward more liquid assets evident in
the rapid rise of Ml also affected the
distribution of deposits within the
nontransaction portion of M2. Small
time deposits declined last year, while
some very liquid components, such
as money market deposit accounts,
posted very large increases, and even

2. Experimental alternative measures of
money, which attempt to allow for the varying
degree of "moneyness" in components of the
monetary aggregates, are discussed in appendix B.

1. Ml, M2, and M3 incorporate eftects of benchmark and seasonal adjustments made in February 1986.
2. Ml figure in parentheses is adjusted for shifts
to NOW accounts in 1981.
3. Mlfigurein parentheses is the annualized growth
rate from the second to the fourth quarter of 1985.




Growth of Money and Credit1
Percentage change

Period

Fourth quarter to
fourth quarter
1979
1980
1981
1982
1983
1984
1985
Quarterly growth
rates
1985 1
2
3
4

Ml

7.5
7.3
5.2
(2-5)2
8.7
10.4
5.4
11.9
(12.7)3

M2

Domestic
nonM3 financial
sector
debt

8.1 10.3
9.0 9.6
9.3 12.3

12.4
9.6
9.8

9.1 10.0
12.2 9.9
8.0 10.5
8.6 7.4

9.1
11.2
14.1
13.5

10.1 11.7 10.1
10.5 6.3 5.6
14.5 9.5 7.6
10.6 5.9 5.7

13.5
11.9
12.2
13.7

46

Monetary Policy Reports

savings deposits rose 4 percent after
several years of declines. However,
growth of M2 appears to have been
restrained to an extent by some
redirection of household portfolios
toward such non-M2 instruments as
shares in stock and bond mutual
funds.
M3 growth slowed to 7.4 percent
last year—close to the midpoint of
its range—reflecting in part a slower
pace of credit expansion at depository institutions and consequently a
reduced need to raise funds through
managed liability issuance. Thrift institutions, in particular, greatly reduced their net acquisition of assets,
partly in response to new Federal
Home Loan Bank Board regulations
that raised capital requirements for
rapidly growing thrifts. The growth
of large time deposits issued by thrift
institutions slowed to less than 7
percent in 1985, down sharply from
the pace of nearly 50 percent recorded in the preceding year.
Expansion in debt of domestic
nonfinancial sectors moderated only
a little from its elevated 1984 pace
and, at 13.5 percent, exceeded its
monitoring range of 9 to 12 percent.
Last year was the fourth consecutive
year in which debt expanded more
rapidly than GNP, after more than
20 years in which the ratio of debt
to GNP had been generally stable.
One factor boosting debt growth
relative to spending has been the
extraordinary pace of corporate borrowing to retire equity in mergers,
buyouts, and stock repurchases. The
volume of such borrowing appears
to have been as large in 1985 as in
1984. In addition, borrowing surged
late last year in the tax-exempt market, when issuance was accelerated
in anticipation of possible tax law
changes. Even after allowance for



these two factors, which together
may have accounted for roughly 2
percentage points of debt growth in
1985, the expansion of the debt of
domestic nonfinancial sectors remained very strong. An important
element in the continued rapid growth
of debt and the rise in its ratio to
GNP has been the huge size of
federal deficits. Although federal debt
growth has slowed since 1982, it
continued to run at more than 15
percent last year. •
In implementing policy during 1985,
the Federal Reserve basically accommodated the strong demands for
reserves by depository institutions.
In the early part of the year—when
Ml expansion was very rapid, and
M2 and M3 growth was also strong—
interest rates backed up somewhat.
However, these increases were more
than reversed later in the first half,
influenced in part by a cut of xh
percentage point in the discount rate
from 8 to IV2 percent in May, as
economic activity appeared more
sluggish, partly reflecting the drag
from the relatively high value of the
dollar on exchange markets. Growth
of the broader aggregates had slowed
appreciably after the early part of
the year, though Ml remained well
above its range. On balance over the
first six months of the year, most
market interest rates fell about 1
percentage point, leaving them about
3 to 4 percentage points below their
mid-1984 levels. On exchange markets, the dollar, which had risen
sharply through February, declined
thereafter and by midyear was 9
percent below its February peak on
a trade-weighted basis, leaving it just
under its level at the end of 1984.
When, at its July meeting, the
FOMC reaffirmed its ranges for M2,
M3, and debt, and widened and

Monetary Policy Reports
rebased the Ml range, the members
anticipated that these ranges would
be consistent with continued subdued
inflation and some pickup in economic growth from the sluggish firsthalf pace. As the summer progressed, however, it became clear
that the demand for Ml remained
strong. After slowing somewhat in
July, Ml spurted again in August
and continued to rise at a doubledigit annual rate in September. M2
growth also picked up during the
summer, climbing above its range in
this period.
In the summer, market interest
rates reversed a portion of their
earlier declines. With both Ml and
M2 growing relatively rapidly, economic activity apparently picking up,
and the dollar having declined further, the Federal Reserve provided
reserves a bit more cautiously for a
time. But beginning around midautumn, the Federal Reserve was
seeking a slight easing in bank reserve conditions, as incoming data
suggested that relatively moderate
increases in economic activity continued to be in prospect and upward
price pressures remained subdued.
Meanwhile, Ml growth was continuing strong on balance, but growth
in the broader aggregates was slowing.
On balance over the second half
of the year, most short-term rates
were little changed, ending the year
just slightly above their midyear lows
and about a percentage point below
their levels when 1985 began. However, on exchange markets, the dollar declined more than 15 percent
over the second half, impelled in
large part by the G-5 announcement
in September indicating the desirability of some appreciation of other
currencies relative to the dollar and



47

by the ensuing coordinated intervention by the United States and other
key industrial countries.
In long-term debt markets, interest
rates generally fell a percentage point
or more on balance over the second
half, with most of the decline occurring during a fourth-quarter rally that
accelerated as the year drew to a
close. The downward movement in
long-term rates and simultaneous
surge in stock market prices were
fueled in part by legislative initiatives
to mandate reductions in the federal
deficit and to pare the government's
demands on credit markets. Declining world oil prices and the continued
softness in markets for other commodities promoted expectations of
lower inflation among market participants, also contributing to the rally.
Other Developments
in Financial Markets
Corporations were able to reduce
their demands on credit markets in
1985 as strengthening profits and
weaker capital expenditures narrowed the sector's financing gap.
Nevertheless, business borrowing to
finance stock retirements remained
high—perhaps $70 billion in each of
the past two years. Spurred by the
drop in long-term rates, to six-year
lows, corporate credit demands focused on the bond markets. Record
amounts of securities were offered
publicly by nonfinancial firms in both
the domestic and the Eurobond markets last year. On the other hand,
short-term borrowing slowed, with
bank lending to businesses relatively
weak.
Tax-exempt borrowing was extraordinarily strong last year; a surge
in bond offerings late in the year
lifted 1985 volume to a record high.
While more favorable interest rates

48

Monetary Policy Reports

stimulated borrowing generally, efforts to finance in advance of possible
restrictions under a proposed tax law
scheduled to take effect after yearend boosted advance refunding and
private purpose issues in particular.
Households continued to borrow
heavily in 1985. Their debt-servicing
burden rose sharply as they continued to add to debt at a double-digit
rate at the same time that growth of
disposable income slowed. Signs of
potential strain appeared, as the
delinquency rate for consumer installment loans rose, although most
measures of debt quality remained
well within past experience. Consumer credit remained especially
strong, growing at nearly the 20
percent rate recorded in 1984. But
the growth of home mortgage borrowing, while near its 1983-84 average, was probably restrained somewhat by the tightening of lending
standards that accompanied the rise
of mortgage loan delinquency rates
to record levels.
Strains were evident in financial
markets at times in 1985 but did not
cause major disruptions in overall
market conditions. Financial market
concern over credit-quality issues was
not severe enough to be reflected in
a broad-based widening of yield
spreads between corporate and
Treasury debt or between privatesector securities of different risk
classes. Nevertheless, the agricultural sector of the economy continued to experience serious financial
distress and there were pressures on
some segments of the financial community at times last year.
Early in the year, privately insured
savings and loans in Ohio and, then,
in Maryland were closed or limited
to small withdrawals after depositor
runs in both states. The problem in
Ohio was
 triggered by news of losses


at one large thrift institution. Problems developed in Maryland when
heightened depositor anxiety in the
aftermath of the Ohio crisis combined with news of difficulties at a
savings and loan in Maryland. As
the difficulties emerged, the Federal
Reserve advanced funds at the discount window to the affected institutions to bolster their liquidity. Such
lending—whose expansive reserve
effect was offset through open market operations—has been repaid in
Ohio, where the troubled institutions
have been restructured and reopened, but remains outstanding at
a number of Maryland thrift institutions.
The thrift industry as a whole
showed some improvement in earnings and capital positions last year,
although many institutions remained
heavily burdened with low-quality or
low-yielding assets. Lower interest
rates lifted profits from their depressed 1984 levels by reducing the
cost of funds and generating capital
gains on asset sales. The profitability
of commercial banks also appears to
have increased in 1985, breaking the
downtrend of recent years. Asset
quality remained a concern for some
institutions, however, and was a
major factor in the sharp increase in
the number of bank failures. Banks
apparently again increased the rates
at which they charged off bad loans
and added to loan-loss reserves, reflecting continued financial strains in
such industries as agriculture, energy, and real estate. Higher profits
along with the rallies in stock and
bond markets helped many banks
improve their capital positions in
1985, facilitating efforts to comply
with more stringent capital adequacy
guidelines. As part of its efforts to
ensure the continued safety and
soundness of the financial system,

the Federal Reserve also initiated a
program to strengthen supervision of
commercial banking operations.
Agricultural finances drew special
attention last year. Farm income
remained depressed, and falling prices
for agricultural products left many
farmers unable to meet their debtservicing requirements. Moreover,
declining land prices eroded the value
of collateral behind many agricultural loans. Consequently, failures of
banks with relatively high proportions of agricultural loans in their
portfolios rose to 68 in 1985, from
32 in 1984 and an average of just 6
in each of the preceding three years.
The Farm Credit System, which holds
about one-third of U.S. agriculture's
debt, experienced mounting losses
and requested federal aid. Farm
Credit securities, which had been
priced very close to Treasury issues
of comparable maturity, yielded as
much as 100 basic points more than
Treasury debt at one point in the
fall. Rate spreads narrowed in December, after passage of legislation
enabling the Farm Credit System to
mobilize its resources more readily
and providing for the possibility of a
backup source of assistance once
internal sources of funds are exhausted.
To ease possible constraints on the
availability of credit at agricultural
banks over the 1985 growing season,
the Federal Reserve in March liberalized its regular seasonal borrowing
program and initiated a temporary
special seasonal program aimed at
making liquidity available to agricultural banks that might experience
strong loan demand. Although total
seasonal borrowing fell short of the
unusually high level in 1984, evidence suggests that these actions
increased access to seasonal credit,
boosting
 borrowing somewhat above


Monetary Policy Reports

49

what would otherwise have been
expected, given money market conditions and overall slack loan demand by farmers. In early 1986, the
Federal Reserve renewed the temporary seasonal program to assure
that agricultural banks would not
face liquidity constraints in accommodating the needs of their farm
borrowers this year.

Appendix A: Velocities
of the Monetary Aggregates
in the 1980s
In 1985, the relationship between Ml
and nominal GNP diverged substantially from historical patterns as Ml
velocity registered a sharp drop of
5V2 percent. In contrast to the increases that had doubled velocity
over the course of the 1960s and
1970s, last year's decrease left Ml
velocity about 8 percent below its
1981 peak level. Velocities of the
broader monetary aggregates also
declined in 1985, but these declines
were not so far off their historical
norms.
The downward trend of Ml velocity so far in the 1980s differs markedly from the annual rate of increase
of 3V4 percent averaged during the
preceding two decades. Two developments in recent years appear especially pertinent to explaining the
changed relationship between Ml
and income. First, interest rates at
the end of last year were substantially
below their peak levels in 1981. With
such a decline, the earnings forgone
in holding money, with its liquidity
advantage, were considerably reduced, and preferences for money
relative to other financial assets would
be expected to increase in response.
As this occurred, the velocity of Ml
would be expected to decline.
Second, deposit rate deregulation

50

Monetary Policy Reports

has changed the pricing behavior and
yield comparisons between some Ml
deposits and other deposits and financial instruments. Whereas earlier
only non-interest-bearing assets—
demand deposits and currency—directly served transaction needs, in
the 1980s individuals have had available for transaction purposes first
NOW accounts with a 5V4 percent
ceiling and subsequently Super NOW
accounts with higher, competitively
set rates.
These institutional changes have
reduced pressures for innovations
that would enable depositors to conserve on Ml holdings or use them
more intensively to support spending. Such innovations had contributed to the previous uptrend in Ml
velocity. But also, the proliferation
of interest-bearing checkable deposits for individuals, nonprofit organizations, and governmental units has
altered the balance of motives for
holding Ml deposits, making them
more attractive repositories for savings as well as transaction funds and
probably increasing the sensitivity of
Ml demand to changes in market
interest rates. This effect has grown
in importance as interest-bearing
checkable deposits have grown. Such
accounts have proven enormously
popular; at the end of last year,
almost $180 billion in interest-bearing checkable accounts was outstanding, including more than $60 billion
in Super NOWs, which have been
available for only three years. The
total figure compares with outstanding balances of less than $30 billion
when NOW accounts were first authorized on a nationwide basis at the
end of 1980. By the end of 1985
interest-bearing checkable deposits
had grown to about 30 percent of
Ml and 40 percent of the deposit
component of that aggregate.



The resulting higher interest rate
sensitivity of the public's demand for
Ml relates to the fact that when
market rates decline, the opportunity
cost—the gap between those rates
and the fixed ceiling on NOWs—
declines in percentage terms much
more than do market rates themselves. And the tendency of offering
rates on Super NOWs to lag changes
in market rates has made their opportunity costs also move like those
on fixed-rate accounts in the short
run. Recent trends at depository
institutions toward applying higher
interest rates or lower fees to transaction accounts with higher balances
have probably further changed opportunity cost calculations. This
"tiering" can have the effect of
providing a very high rate of return—and thus a low opportunity
cost—on funds added to an account
because, for example, per-check
charges or other fees may cease to
apply at the new larger balance.
Not only does the responsiveness
of Ml to interest rates and income
seem to have changed in the 1980s,
but the behavior of Ml also appears
to have become less predictable on
other grounds. In part, the increased
unpredictability of Ml demand is
due to the larger share of savings
balances in Ml, which has made
general portfolio-balance considerations a more important influence.
Over the past several years, deposit
rate deregulation has given institutions vastly increased freedom to set
deposit rates and has provided their
customers with a larger menu of
assets paying market-related rates.
With
regulations
progressively
changing and depositors and depository institutions continually adapting
to the changes, uncertainty has increased concerning the impact on
money demand of variations in eco-

Monetary Policy Reports
nomic and financial conditions, including changes in wealth of money
holders. Moreover, since the process
of deposit rate deregulation has occurred alongside a general decline in
inflation and market interest rates,
the reasons for permanence of apparent shifts in Ml behavior often
have been obscured.
The declines in the velocities of
M2 and M3 last year were neither as
large as in that of Ml, nor as far
from their longer-term trends. The
velocity of M2 has declined in recent
years, but on balance has shown little
change over recent decades. While
last year's drop in the velocity of M2
was about twice the average of the
past several years, its size was within
historical experience. The decline of
M3 velocity was somewhat smaller
than in recent years and continued a
long-term downtrend in that measure. Nevertheless, the behavior of
the broader aggregates probably has
been altered by developments in the
1980s. For example, the interest rate
responsiveness of M2 probably has
declined with deregulation, which
has permitted the yields on many of
its components to vary with market
rates. While this aggregate continues
to show strong responses to rates
over short periods, over intervals of
a half year or more it has been far
less affected than Ml.

Appendix B: Experimental
Money Stock Indexes
Financial deregulation and innovation since the mid-1970s have blurred
distinctions between transaction and
nontransaction balances. As businesses and consumers have changed
their payment practices and portfolios of financial assets, uncertainty
about the behavior of conventional
monetary aggregates and their ability



51

to foreshadow movements in GNP
has intensified. The narrow aggregate Ml has been affected most
noticeably. This aggregate consists
of currency, demand deposits, and
checkable deposits paying interest,
mainly NOW accounts. The share of
Ml balances paying interest has grown
substantially and is held partly for
savings purposes. In 1982-83 and
again in 1985, growth of Ml was
unusually strong relative to GNP.
Old Ml-A, which includes only currency and demand deposits, was less
affected in those years, but because
it excludes NOWs, it understates
transaction money. In 1981, Ml-A
was considerably distorted as demand deposits were shifted into
NOWs, which had been newly authorized nationwide.
In light of these developments, the
Board's staff has investigated several
alternative measures of money. This
appendix focuses mainly on the
transaction money stock measure,
MQ. Its components encompass currency and all checkable instruments
that serve as means of payment,
including money market deposit accounts (MMDAs) and certain money
market funds, both of which have
limited check-writing features. In
contrast to the conventional aggregates, though, MQ is an index number. In general, index numbers are
used to combine items that have
dissimilar characteristics; an example
would be the differing economic
values of the various items in the
industrial production index. In MQ,
components are treated conceptually
as differing in the volume of "GNP
transactions" each finances per dollar, notwithstanding their common
unit of account of one dollar.
MQ and conventional narrow
monetary aggregates are alike in that
the growth rate of either can be

52

Monetary Policy Reports

thought of as a weighted average of
the growth rates of its components.
But the weights applied to the growth
rates of components are not equal
for these different monetary aggregates. In conventional Ml and
Ml-A, the implied weights are simply dollar shares of each component
in the total. In MQ, the weights on
the growth rates of components reflect not only differences in dollar
amounts among components but also
differences in the estimated intensity
with which the various components
are used in carrying out GNP transactions. Thus, instead of dollar quantity shares, MQ uses as weights the
estimated share of GNP spending
financed by each component.
The implied quantity-share weight
on the growth rate of other checkable
deposits in Ml growth was about 26
percent in 1985, meaning that the 22
percent growth in this component
last year contributed about 53A percentage points (26 percent x 22
percent = 53A percent) to the growth
rate of Ml. Because they are excluded from Ml-A, these deposits
receive a zero weight in Ml-A growth.
The weight on the growth of other
checkable deposits in MQ growth
was about I2V2 percent in 1985, so
the rapid growth in this component
contributed only about 2% percentage points to MQ's growth rate over
last year.
When applied to the component
growth rates, these weights produce
the growth rates for MQ and the
conventional narrow aggregates. MQ
grew somewhat faster in the mid1970s than Ml. Over that period,
demand deposit growth, which was
relatively weak, received a lower
weight in MQ, and currency growth
a higher weight, than in Ml. Since
then, MQ growth has been between



growth of Ml-A and Ml. Although,
in principle, MQ tends to adjust
automatically for changes in payments practices, the experience in
1981 with major shifts from demand
deposits to nationwide NOWs exemplifies the practical difficulties in
developing appropriate weighting
procedures. Still, Ml-A was even
more distorted than MQ in 1981.
Over 1985, MQ growth was about
l3/4 percentage points slower than
conventional Ml growth but around 2
percentage points faster than Ml-A
growth.
In 1983, M2 growth was distorted
upward by the introduction of
MMDAs, but otherwise it has been
rather steady since the late 1970s.
Annual velocity growth for MQ,
has been between the growth rates
of VI and Vl-A since the late 1970s.
Over 1985, as over 1982, all three
velocities fell, with VI registering the
steepest declines in both years. Velocities of the broader conventional
aggregates declined at about the
same rate as VI in 1982 but by less
than VI in 1985.
The predictability of MQ's demand, given interest rate spreads
and GNP, has been roughly comparable with that of Ml and Ml-A
demand on average over the 1980s,
with all three narrow aggregates
exhibiting unexpectedly large increases in 1985 relative to econometric predictions. In 1982-83, however, MQ's demand was more
predictable than either Ml or Ml-A.
None of the three has been appreciably superior in its ability to presage
movements in nominal GNP so far
in the 1980s, on the basis of statistical
relations that held on average over
the 1970s; each signaled considerably
more nominal GNP growth than
actually occurred in 1982-83 and

Monetary Policy Reports
again in 1985. The broader conventional measures performed better
than MQ, as well as conventional
narrow measures, in these relatively
simple tests of their demand and
indicator properties for the 1980s,
but they were less reliable indicators
of GNP in the previous decade.
Research is continuing on the development of MQ and the assessment
of its demand and indicator properties. Efforts are under way to refine
the procedures used to estimate MQ's
weights, as well as to improve the
basic method of weighting major
outflows from particular accounts,
such as those distorting MQ in 1981.
At this time, however, understanding
the significance of movements in MQ
is hampered not only by limited
experience with the aggregate but
also by unresolved conceptual and
measurement questions.
In addition to MQ, several other
monetary indexes have been constructed experimentally. The transaction money stock index, MT, is
similar in concept to MQ but focuses
on the way money is used for all
transactions, including payments associated with financial trading, intermediate output, and so forth, instead
of just GNP spending. In a different
approach to monetary indexes, these
monetary services indexes have been
constructed to reflect a broader view
of money as providing a range of
services, such as liquidity, that goes
beyond the means of payment, and
these indexes correspondingly encompass broader collections of component assets; such indexes distinguish components by the estimated
opportunity cost of holding each
monetary asset rather than investing
in the highest-yielding alternative
financial asset. As with MQ, conceptual and measurement problems re


53

main to be solved for these other
experimental indexes, which thus far
do not appear to perform as well as
conventional aggregates.

Report on July 18, 1986
Monetary Policy and
the Economic Outlook for
1986 and 1987
Sharp contrasts among sectors and
regions of the economy characterized
economic developments during the
first half of 1986. Reflecting in substantial part continuing strong competitive pressures from abroad and
large spending cutbacks in the oil
industry in response to sharply declining prices, industrial and investment activity were restrained. In
contrast, activity continued to expand rather strongly in housing, the
financial sector, and the broad service area of the economy. On balance, real gross national product
remained on a rather sluggish growth
path.
Although there are substantial uncertainties about the degree and
timing of a pickup in economic activity, a number of positive economic
and financial developments have occurred that should provide the basis
for somewhat faster economic growth
and some reduction in unemployment over the year ahead. Interest
rates have moved lower, and, reflecting the decline of the dollar on
foreign exchange markets, U.S. industry is in a stronger competitive
position internationally. Also, inflation has remained subdued, reflecting not only declines in the prices of
energy and other basic commodities
but also continued restraint on wages
in many sectors. Much of the uncertainty about a pickup in growth turns

54

Monetary Policy Reports

on the strength of economic performance in other industrialized countries, and there is also some concern
over the transitional effects of tax
reform legislation.
What monetary policy has been
able to do, during a period of greater
overall price stability and adequate
capacity relative to the demands
actually placed upon it, is to accommodate demands for money and
credit, helping to facilitate further
declines in interest rates. Monetary
policy by itself cannot eliminate or
deal with the sectoral imbalances
that are still troubling the economy.
A reduction of the large deficit in
the nation's external accounts is of
critical importance over time, and
this reduction will be difficult to
achieve in an orderly way without
faster growth in key foreign economies. Agreement on tax reform also
would remove a major source of
uncertainty that probably has inhibited growth in the first half of the
year; over time, substantial progress
toward eliminating federal budget
deficits is essential to achieving better balance in the U.S. and world
economies. Overall, prospects for
the economy appear to be favorable,
but much will depend on the evolution of policy, both in this country
and abroad.
Economic and Financial
Background
The first half of this year saw a
continuation of the reduced pace of
economic growth that has prevailed
since the middle of 1984. Although
the service industries have been
strong, manufacturing activity has
been relatively sluggish in the face
of strong foreign competition, and
some sectors, such as energy and
agriculture, are under strong pressure. The
 economy has generated a


substantial number of new jobs this
year, but the labor force also has
grown rapidly and the unemployment rate has remained around 7
percent.
Perhaps the most significant economic event in the first half of 1986
was the plunge in world crude oil
prices. Despite the potential longerterm benefits from this development,
the initial impact on the U.S. economy was negative as, with less of an
incentive to search for new sources
of supply, oil exploration activity was
cut back sharply. However, falling
crude oil prices have been translated
quickly into lower rates of inflation
for a time, and in addition, they
have damped expectations about future price increases. Consumer confidence has been high, and with
purchasing power boosted by the
decline in energy prices, consumer
spending has been strong. By damping inflation expectations, the drop
in world oil prices also spurred a
rally in credit markets, further extending the decline in interest rates
that began in mid-1984.
Against the background of relatively slow economic growth and
little overall price pressure, monetary policy basically has accommodated strong demands for reserves to
back deposits thus far in 1986, while
responding to and facilitating the
drop in market interest rates with
three half-point cuts in the discount
rate. At the same time, with the
dollar under downward pressure in
foreign exchange markets during most
of the period and the economies of
other key industrial countries somewhat weak early in the year, international economic and financial developments remained an important
consideration in the conduct of monetary policy. Similar official changes
in interest rates in several major

foreign countries, where growth also
has been slower than expected, took
place around the time of the first
two discount rate reductions by the
Federal Reserve this spring. The
coordinated cuts helped avoid the
potential for disturbing exchange
market conditions.
Reductions in other short-term rates
were generally in line with the total
decline of IV2 percentage points in
the discount rate since the end of
last year. Yields on long-term credit
market instruments fell as much as
2Vi percentage points, encouraged
not only by the revision of inflation
expectations that seemed to be keyed
to falling energy prices but also by
the sluggish performance of the economy and, early in the year, by the
restraining effect of the GrammRudman-Hollings legislation on expected federal budget deficits.
These and earlier declines in market rates had a particularly strong
effect on the narrow monetary aggregate. By June, Ml had grown at an
annual rate of 12% percent from its
fourth-quarter 1985 level, well in
excess both of its target range of 3
to 8 percent and of the growth in the
economy. Over the first half of the
year, the velocity of the aggregate
appears to have declined at a faster
rate than the postwar record decline
in 1985. The interaction of lower
interst rates with the changed composition of Ml since deposit deregulation explains a good portion of this
rapid decline of velocity. The public
apparently has been shifting a considerable amount of its savings into the
negotiable order of withdrawal
(NOW) account component of the
aggregate in response to relatively
large declines in rates on competitive
outlets for liquid funds. Growth in
demand deposits also has been quite
strong, likely related to the effect of



Monetary Policy Reports

55

lower interest rates on the balances
that businesses must hold to compensate for banking services, as well as
to a surge in financial market activity. Even after taking account of
these factors, however, the strength
of Ml appeared extraordinary in the
first half.
The broader aggregates grew more
moderately, ending the first half near
the middle of their respective target
growth ranges of 6 to 9 percent.
Nevertheless, the strong demand for
liquid assets, generated by the relatively large declines in long-term
rates, was evident not only in soaring
Ml balances but also in the composition of the broader aggregates. For
example, the more liquid components of M2 grew rapidly, while its
time-deposit component increased
only marginally. Over the same period, the debt of domestic nonfinancial sectors is estimated to have
remained somewhat above its monitoring range, growing well in excess
of GNP.
The substantial decline in longterm interest rates since the middle
of last year has helped buoy interestsensitive sectors of the economy.
Activity in the housing market was
quite strong in the first half of 1986,
supported by the lowest level of
mortgage rates in more than seven
years. The reduction in interest rates
also was a factor in the strength of
consumer spending, both by reducing
the overall cost of credit and by
raising the value of the household
sector's security holdings.
Although the foreign exchange
value of the dollar has fallen a third
from its 1985 peak, the depreciation
apparently has not yet produced a
substantial increase in the volume of
exports or a reduction in the volume
of imports. Adjustments of trading
patterns to exchange rate movements

56

Monetary Policy Reports

quarter of 1987. Those ranges were
felt to be consistent with a pickup in
economic growth.
The rapid rise in Ml over the first
half of the year underscored the
degree of uncertainty surrounding
the behavior of the aggregate and,
in particular, about its behavior relative to GNP. The nature of the
relationship among Ml, income, and
interest rates appears to have been
significantly altered by the changed
composition of the aggregate in recent years, as well as by the prospects
for greater price stability. The precise implications of these developments for the future are not yet
clear, given the limited experience
to date. In these circumstances, the
Committee decided that growth of
Ml in excess of the previously established range of 3 to 8 percent for
1986 would be acceptable and growth
in that aggregate over the balance of
the year would continue to be evaluated in light of the behavior of the
other monetary aggregates. Developments in all the aggregates will be
judged against the background of
Ranges for Money and Debt Growth developments in the economy and
financial markets and potential price
in 1986 and 1987
The FOMC reaffirmed the 1986 pressures.
With respect to 1987, the Commitranges of 6 to 9 percent that had
been established in February for M2 tee expressed the preliminary view
and M3; as noted above, the broader that the current range for Ml—3 to
monetary aggregates ended the first 8 percent—should provide for adehalf of the year near the middle of quate money growth to support conthose target ranges. For 1987, the tinued economic expansion, assumCommittee tentatively decided that, ing that a greater stability reemerges
consistent with its intention to achieve in the link between Ml and income
money growth at a rate consistent in a more stable economic, price,
with maintaining reasonable price and interest rate environment than
stability and sustainable economic has existed in recent years. However,
expansion, the target growth ranges in the context of the experience of
for both M2 and M3 would be the past several years and keeping in
lowered Vi percentage point, to 5V2 mind the exceptiona uncertainties in
to 8V2 percent, measured from the predicting the behavior of Ml, the
fourth quarter of 1986 to the fourth Committee at the end of this year

take place over a number of years,
and it is not surprising that a dramatic improvement in our large merchandise trade deficit has yet to
occur. However, progress has been
somewhat slower than might have
been expected, partly because of the
slow growth in other major industrialized countries. The continuing
appreciation of the dollar against the
currencies of many developing nations also has been a factor.
The influence of strong foreign
competition remains pervasive. Agricultural products are in ample supply worldwide, reducing the export
opportunities of our producers. In
manufacturing, many industries continue to face weak foreign orders,
while an increasing portion of domestic demand has been met from
abroad in spite of price increases on
some competing foreign products.
With little observed pickup in demand, many firms have scaled back
their expenditure plans, and capital
spending remains weak as a result.




Monetary Policy Reports
Ranges of Growth for Monetary
and Debt Aggregates
Percent change, fourth quarter to fourth quarter
Aggregate
Ml
M2
M3
Debt

1986
[3
6
6
8

to
to
to
to

8]1
9
9
11

Tentative
for 1987
[3 to 8]2
5Vi to 8V2
5Vi to 8!/2
8 to 11

1. While no new range was specified for 1986, growth
in excess of the established range would be acceptable.
2. Indicative of likely range if more stable velocity
behavior shows signs of reemerging.

will review with particular care the
appropriate range and weight to be
placed on Ml in 1987.
As shown in the accompanying
table, the FOMC did not change the
1986 "monitoring" range for the
credit market debt of domestic nonfinancial sectors and tentatively retained the same range for next year.
It was anticipated that the debt
aggregate might exceed the monitoring range of 8 to 11 percent for 1986
as a whole, given its rapid growth
around the beginning of the year,
but as in the past, the Committee
felt that raising the target would
create an inappropriate benchmark
for evaluating longer-term trends in
debt growth.
Economic Projections
The Committee believes that the
monetary objectives it has set are
supportive of a strengthening of economic activity in the second half of
the year. However, the uncertainties
associated with the economic outlook
appear to be quite large, and continued vigilance and flexibility in the
conduct of policy clearly are needed.
As summarized in the table on economic projections, the central-tendency forecast of Committee members
and nonvoting Reserve Bank Presi


57

dents is for growth of 2l/i to 3 percent
in real GNP this year. Such an
increase in output would be expected
to generate appreciable further gains
in employment, but the unemployment rate might not drop below 7
percent before year-end. With the
decline in energy prices more than
offsetting effects from the depreciation of the dollar and with pressure
from domestic labor and product
markets restrained, the inflation rate
for the year is generally projected at
between 2lA and 23A percent, as
measured by the implicit deflator for
GNP.
In 1987, which would be the fifth
year of the current expansion, real
Economic Projections
for 1986 and 19871
Percent
FOMC Members and
other FRB Presidents
Central
tendency

Range
1986
Change, fourth quarter to
fourth quarter
33/4 tO 6V2
Nominal GNP
2]/4 tO 3!/2
Real GNP
GNP implicit deflator ... V/i t o 32/4
Average level in the
fourth quarter
Civilian unemployment
rate

4 3 /4 tO 5 3 /4

2Vi to 3
3
2VA to 2 /4

7

6.9 to 7.2
1987

Change, fourth quarter to
fourth quarter
5 to SVA
Nominal GNP
Real GNP
2 to 4V4
GNP implicit deflator ... IV2 to 4V4
Average level in the
fourth quarter
Civilian unemployment
6V1 to 7
rate

6 to IVi
3 to 31/2
3 to 4
Around 63/4

1. The administration has yet to publish its midsession budget review document, but spokesmen have
indicated that there will be revisions to earlier forecasts. As a consequence, the customary comparison
of FOMC forecasts and administration economic goals
has not been included in this report.

58

Monetary Policy Reports

GNP is projected by most participants to increase 3 to 3V2 percent,
and unemployment is expected to
decline moderately. A significant
portion of the increase in production
next year is expected to come from
the external sector, with the lower
value of the dollar expected to restrain the growth of imports and to
stimulate exports. However, with
energy prices leveling off, exchangerate-related increases in import prices
are expected to cause an acceleration
in inflation to a range of 3 to 4
percent next year.
The forecasts of the Committee
members and nonvoting Reserve
Bank Presidents assume that the
Congress will seek to achieve the
Gr amm - Rudman - Hollings deficit
reduction targets. Progress in reducing the federal deficit is seen as
crucial in maintaining financial conditions conducive to balanced growth
and to an improved pattern of international transactions.
A number of factors point toward
a reacceleration in growth, although
the exact degree and timing remain
uncertain. Despite their initial effects
on investment, lower energy prices
should help support economic activity, primarily by bolstering real consumer income. The lower level of
interest rates also is expected to give
some impetus to consumption while,
at the same time, maintaining the
strength in the housing market. Business spending on new plant and
equipment is projected to pick up
somewhat over time, but the degree
of improvement will depend in part
on the character of tax reform legislation.
A critical element in the expected
improvement in economic performance is progress toward reducing the
size of the merchandise trade deficit.
As previously noted, with import



prices rising as a result of the depreciation of the dollar, the growth in
imports is expected to slow, and the
increased price competitiveness of
U.S. goods should bolster export
growth. However, a substantial improvement in our trade performance
will require satisfactory growth of
demand in other countries. Moreover, such an improvement will require open access to foreign markets,
which underscores the critical importance of avoiding protectionist measures here and abroad.

The Performance
of the Economy
During the First Half of 1986
The economy continued to expand
in the first half of 1986, but apparently no more rapidly than in 1985.
The overall increase in output during
the first six months of the year
generated slightly more than 1 million new jobs, and the civilian unemployment rate held near 7 percent. At the same time, the dramatic
decline in world crude oil prices
caused a substantial slowing in inflation.
The combination of the lingering
effects of the high foreign exchange
value of the dollar during 1984 and
1985, the slow growth abroad, and
the initial impact of lower crude oil
prices played a key role in inhibiting
any acceleration in overall economic
activity. Industrial output declined
noticeably over the first half, with
activity reflecting the continuing intense competition from foreign producers in the manufacturing sector
and also the sharp cutbacks in energy-related investment. U.S. agriculture confronts growing world supplies of many farm products, and
many farmers continue to be squeezed
by a heavy debt-servicing burden and

falling land values. The drop in oil
prices has caused substantial adjustment problems in the short run. Oil
drilling has been reduced drastically,
and a number of high-cost wells have
been capped. More than 100,000 jobs
have been lost in the oil industry
since the beginning of the year.
At the same time, however, some
of the benefits from the drop in oil
prices did begin to emerge in the
first half. The lower price of crude
oil was reflected fairly quickly in the
prices of finished energy products,
which caused consumer prices to
register their largest three-month decline since the beginning of 1949.
This lower price level has given a
substantial boost to the purchasing
power of consumers and has helped
to support higher levels of spending.
Although the volume of oil imports
will rise, the sharper decline in price
is an aid in reducing the large deficit
in our trade account.
A potentially more significant
longer-term influence on our balance
of trade is the lower value of the
dollar. The prices of foreign goods
are rising in dollar terms and should
begin to shift expenditures from imports to domestic products. At the
same time, U.S. goods are more
competitive on world markets, although we have yet to experience a
sustained improvement in exports.
The rather moderate improvement
in export volume to date reflects, in
part, the effects of the dollar's earlier
rise and the slow pace of economic
activity abroad. Growth in the major
industrialized nations was particularly weak in the first quarter of
1986, although there appears to have
been some rebound in the second
quarter. Meanwhile, the drop in oil
revenues reduced import demand in
some developing countries, most importantly
 Mexico.


Monetary Policy Reports

59

Another factor affecting the economy this year has been the changing
fiscal-policy environment. It now appears that the deficit in the current
fiscal year may exceed earlier plans,
but the Congress has moved to implement the spirit of the deficit
targets contained in the GrammRudman-Hollings legislation in acting on its fiscal 1987 budget. The
prospect of lower federal budget
deficits in the years ahead, coupled
with the drop in oil prices, encouraged sizable reductions in long-term
interest rates at the beginning of
1986, which have begun to stimulate
the interest-sensitive sectors of the
economy. The most notable result
has been in the housing sector in
which lower mortgage rates have led
to substantial gains in building activity. Investment in new plant and
equipment has not shown a similarly
positive response to lower interest
rates, however; apart from the negative effects of the oil drilling decline, business spending has been
damped by the existence of a sizable
overhang of office and factory space
and by continuing uncertainties about
sales trends and tax reform.
With the decline in energy prices,
further progress has been made in
reducing the inflation rate. Continued moderation in wage increases
and abundant supplies of agriculture
commodities and industrial raw materials also were important factors in
restraining price increases in the first
half of 1986. These favorable developments worked to offset the inflationary tendencies associated with
the depreciation of the dollar and
the continued rapid rise in the prices
of services.
The Household Sector
Consumer expenditures were quite
strong in the first half of 1986,

60

Monetary Policy Reports

supported in part by rapid income
growth. Real disposable income increased at about 5Vi percent at an
annual rate, boosted by high levels
of farm subsidy payments and the
energy-related slowdown in inflation.
In addition, survey information indicates that consumer confidence remains high, and many households
consider it to be a good time to
purchase big-ticket items such as a
car or a new home. Under these
circumstances, consumers have been
willing to spend the bulk of their
income gains, and the personal saving rate has remained at a historically
low level.
The increase in consumer spending
was widespread. Purchases of nondurable goods, such as apparel, were
particularly strong in the first quarter,
while outlays for services also grew
briskly. The demand for new automobiles also remained quite high
after the large sales increase in 1985.
New cars sold at an annual rate of
11 million units in the first six months
of this year, with important support
coming from a series of below-market finance incentive programs for
many domestic models. Foreign automobiles continued to sell at a fast
pace even though sticker prices generally have increased more than 10
percent in response to the exchange
rate changes.
Activity in the housing sector also
has been strong this year. Stimulated
by the decline in mortgage rates,
sales of new single-family homes hit
a record high in March and remained
generally strong throughout the second quarter. Production responded
to this increase in demand, and
during the first half, single-family
units were begun at a rate of 1%
million units, the highest since 1979.
Despite elevated rental vacancy rates,
construction apparently was main


tained in the multifamily sector by
the large volume of mortgage revenue bonds issued by many state and
local governments at the end of last
year. However, as these tax-exempt
funds were depleted, activity in the
multifamily market began to taper
off in the spring. In addition, concerns about the treatment of income
properties under tax reform may
have begun to restrain the construction of multifamily dwellings.
Indicators of the financial position
of the household sector were mixed
in the first half of the year. Although
the growth in consumer credit slowed
from its rapid pace in 1985, the ratio
of consumer installment debt to disposable income edged up to a new
high. The rallies in the stock and
bond markets strengthened the asset
side of the household sector balance
sheet, and many homeowners took
the opportunity presented by the
decline in interest rates to ease their
debt-servicing burdens by refinancing mortgage loans. However, increased strains also were evident, as
personal bankruptcies rose to record
levels and mortgage delinquency rates
remained historically high.
The Business Sector
The financial position of the business
sector improved a bit in the aggregate during the early part of 1986,
albeit with considerable diversity
across industries. Economic profits
in the corporate sector rose at an
$11 billion annual rate in the first
quarter, and the share of after-tax
economic profits in GNP remained
at the highest level since the late1960s. Financial conditions in agriculture and manufacturing remained
weak, however. Agriculture continued to be hurt by excess supply
conditions worldwide, and farm loan
delinquencies rose to a postwar high.

In manufacturing, intense price competition from foreign sources squeezed
profit margins, and with little growth
in demand, capacity utilization moved
lower.
Business spending on plant and
equipment was weak in the first half
of the year. This poor performance
partly reflected a ''payback" after
very strong capital spending in the
fourth quarter of 1985. Firms apparently accelerated their spending at
the end of last year to take advantage
of investment incentives that were
targeted for scaling back or elimination under proposed tax reform legislation; expenditures then dropped
off in the first quarter of 1986. In
addition to these tax-anticipation effects, the demand for computers and
other high-technology equipment remained subdued, after increasing
rapidly in the first two years of the
recovery. Spending on nonresidential
structures was down substantially,
partly as a result of the cutback in
oil and gas well drilling, which was
large enough to reduce real GNP
growth V percentage point in the
2
first quarter and perhaps more in the
second quarter. However, a correction also began in the construction
of office buildings in response to past
overbuilding and high vacancy rates.
Much of the change in business
inventories in the first half of this
year was associated with fluctuations
in automobile dealers' stocks. Domestic car production outpaced sales
in the first quarter, and this resulted
in a substantial buildup of auto
inventories. Assembly schedules were
scaled back in the spring, which
helped dealers reduce their excess
inventories, although stocks remained high. Outside the auto area,
inventory investment remained moderate overall, but the pattern differed
markedly between manufacturing and



Monetary Policy Reports

61

trade. Manufacturers continued to
trim their stocks, preferring to keep
inventories lean until there was firm
evidence of a resurgence in demand.
In contrast, inventory investment
picked up at trade establishments,
even though merchants continued to
hold a historically high level of stocks
relative to sales.
With the declines in capital spending and the slow pace of inventory
investment, internal funds in the
aggregate were adequate to meet
almost all of the basic financing
needs of nonfinancial corporations.
However, the drop in long-term interest rates to the lowest levels since
1978 prompted businesses to issue
massive amounts of bonds; the proceeds were used not only to finance
new investment but also to retire
outstanding bonds and stocks and to
pay down short-term debt.
The Government Sector
Despite congressional action to slow
the growth of spending, the size of
the federal budget deficit in fiscal
1986 may match or exceed the record
$212 billion of fiscal 1985. Revenue
growth has slackened in association
with the slower pace of nominal
income growth. Expansion of corporate tax receipts has slowed significantly, while excise tax revenues
also are down as lower oil prices
virtually have eliminated the receipts
from the "windfall profits" tax.
Federal purchases of goods and
services fluctuated widely in the first
half of 1986. They dropped substantially in the first quarter, in part
reflecting a slowing in the purchases
of farm products by the Commodity
Credit Corporation (CCC), after a
record increase in the fourth quarter
of 1985. Excluding CCC purchases,
real federal outlays were down

62

Monetary Policy Reports

slightly, as a result of lower defense
spending.
Purchases of goods and services by
state and local governments in real
terms increased at an annual rate of
2.8 percent in the first quarter of
1986, about the same pace as in
1985. After a large increase in the
first quarter, construction spending
remained strong in the spring, while
employment rose further. However,
a number of states, particularly those
dependent on agriculture and the oil
industry, continued to experience a
substantial deterioration in their financial condition. A significant portion of tax revenues in many oilproducing states are tied directly to
the value of oil output, and the drop
in oil prices has induced a concomitant decline in receipts. In addition,
the secondary effects on energyrelated businesses are tending to
reduce revenues further. To restore
fiscal balance, many states have announced expenditure cuts or tax
increases.
The External Sector
Continuing the decline that began
early last year, the dollar depreciated
further against the currencies of foreign industrial countries during the
first half of 1986. On balance, the
trade-weighted value of the dollar
has fallen more than 30 percent from
its February 1985 peak, about onethird of which has occurred this year.
Associated with the depreciation was
a narrowing in inflation-adjusted interest rate differentials between the
United States and the other major
industrialized countries, as interest
rates declined both here and abroad.
Although a substantial correction
has occurred in the dollar's value, at
least against the currencies of the
major industrialized countries, the



nation's current account deficit was
unchanged in the first quarter from
the high rate of $135 billion in the
fourth quarter of 1985. This lack of
improvement was the result of large
increases in nonpetroleum imports
while exports grew more slowly. The
failure to date of the dollar's decline
to slow import growth reflects, in
part, the relatively slow pass-through
of the depreciation into import prices.
Because profit margins of foreign
exporters expanded during the period of dollar appreciation, they are
able, for a time, to absorb the
reduced receipts without raising
prices; slack markets at home also
have held down price increases. In
addition, the dollar has continued to
rise against the currencies of many
developing countries, which account
for about one-quarter of U.S. nonpetroleum imports. However, nonpetroleum import prices now are
increasing, led by large increases for
automobiles, other consumer items,
and capital equipment.
The decline in the dollar also
improved the price competitiveness
of U.S. goods in foreign markets.
However, exports have been slow to
pick up, in important part because
of the sluggish pace of foreign economic activity. Real gross national
product declined in both Japan and
West Germany in the first quarter,
but economic growth appears to have
been somewhat stronger in the spring.
Economic growth also has been
sluggish among many of our major
trading partners in the developing
world. Like other oil-producing
countries, Mexico is adjusting its
spending to lower oil revenues, and
this adjustment has reduced the demand for U.S. products. Falling world
commodity prices also have aggravated the financial difficulties of
other developing nations, including

Monetary Policy Reports
members of the Organization of Petroleum Exporting Countries.
Reflecting these influences, the
volume of U.S. merchandise imports
rose IV2 percent in the first quarter
of 1986, as nonpetroleum imports
continued to grow rapidly while oil
imports declined. The largest increases were in machinery, with
smaller advances registered for some
consumer goods. The volume of
merchandise exports was up somewhat in the first quarter, with a
decline of 3V2 percent in exports of
agricultural products offset by increased U.S. nonagricultural exports.
Labor Markets
Nonfarm payroll employment expanded in the first half at an average
pace of roughly 175,000 per month
on a strike-adjusted basis, down from
230,000 in 1985. Continuing the trend
of the past few years, gains at trade
and service establishments were quite
strong and accounted for most of the
overall employment increase. Hiring
also was brisk at construction sites
through much of the period, buoyed
by the strength in homebuilding.
However, manufacturing payrolls
contracted somewhat, with weakness
in the motor vehicle, metals, and
machinery industries.
The civilian unemployment rate
averaged somewhat higher over the
first half of the year than at the end
of 1985. The continued expansion of
job opportunities about matched the
rise in the number of individuals
entering or reentering the workforce,
and labor force participation reached
a new high by midyear. However,
the weakness in the industrial sector
was reflected in a rise in the number
of workers separated from their last
job.



63

In view of the continued slack in
labor markets as well as lower price
inflation, wage growth remained
moderate. The employment cost index, a broad measure of overall
compensation trends, rose 33A percent in the 12 months ending in
March, down from 4V2 percent over
the year ended in March 1985. Most
of the slowing was the result of
smaller increases in the cost of employee benefit programs, reflecting
in part efforts to contain medical
insurance expenses, while wages and
salaries rose at about the rate of 4
percent experienced in 1985. Continued moderation in union wage gains
also was evident in the collective
bargaining agreements reached in the
first half of 1986.
After declining at the end of 1985,
labor productivity in the nonfarm
business sector rebounded in the first
quarter of 1986. However, the gain
largely reflected erratic movements
in hours worked by self-employed
workers, and productivity has been
essentially flat over the past year
after rising substantially early in the
recovery. Productivity in manufacturing has increased somewhat faster
during this expansion, as intense
import competition has forced many
producers to modernize their factories and streamline work rules. As a
result of the first-quarter bounce
back in productivity, unit labor costs
in the nonfarm business sector fell
during that period, but they were
still up about 3 percent from a year
earlier.
Price Developments
Falling energy prices were largely
responsible for a significant slowing
in measures of aggregate inflation
during the first half of 1986. A broad
measure of prices—the fixed-weighted

64

Monetary Policy Reports

price index for GNP—increased at a
2V2 percent annual rate in the first
quarter, down from a rise of 3V2
percent in 1985. Consumer prices
actually declined over the Februaryto-April period, but they still were
up IV2 percent over the 12-month
period ended in May. The drop in
prices was greater at the wholesale
level, where weakness in the industrial sector added to the downward
pressure from energy prices.
The speed and magnitude of the
decline in world crude oil prices this
winter were dramatic. Over the January-to-April period, crude oil prices
fell more than $15 per barrel to their
lowest level since 1978. Prices of
refined petroleum products responded quickly to the drop in crude
oil prices, and retail gasoline prices
fell 25 percent, or about 28 cents a
gallon, over the January-to-May period. Charges for electricity and natural gas, which compete with fuel oil
as a power source, responded more
slowly to the lower crude oil prices
but by the end of May had fallen
about 1 percent.
The prices of industrial raw materials continued to decline in the first
half. Prices were depressed by abundant world supplies of many primary
commodities; debt-servicing obligations led many developing countries
to maintain or expand their output.
Sluggish industrial activity in the
United States and other large economies contributed to the softness of
commodity markets.
Outside the energy area, further
progress was made in reducing the
inflation rate during the first half of
the year. Retail food prices rose at
an annual pace of only 1 percent
through May, held down by falling
meat prices. A small decline in the
prices of consumer goods was responsible
 for the slowdown in the


consumer price index (CPI), excluding food and energy, to an annual
rate of increase of 3V2 percent from
its 4V2 percent rise during 1985. In
contrast, the prices of nonenergy
services continued to increase at an
annual rate of 6 percent, boosted by
rising housing costs and by higher
premiums for most types of insurance.

Monetary Policy and Financial
Markets in the First Half of 1986
The Federal Open Market Committee at its meeting in February of this
year established target growth ranges,
measured from the fourth quarter of
1985 to the fourth quarter of 1986,
of 3 to 8 percent for Ml and 6 to 9
percent for both M2 and M3. The
associated monitoring range for
growth of the debt of domestic nonfinancial sectors was set at 8 to 11
percent. As compared with the ranges
for 1985, the M2 target was unchanged, the upper limit for M3 was
reduced V percentage point, and the
2
debt range was lowered 1 full percentage point; the Ml target remained the same as that set last July
for the second half of 1985. It was
expected that growth of money and
credit within these ranges would be
adequate to encourage sustainable
economic expansion consistent with
progress over time toward reasonable price stability and an improved
pattern of international transactions.
In retaining the comparatively wide
target range for Ml, the FOMC
recognized continuing uncertainties
about the behavior of that aggregate.
Moreover, the Committee agreed
that, in view of these uncertainties
and the unexpectedly rapid growth
of Ml relative to GNP in recent
years, the behavior of the narrow
money stock would be evaluated in

Monetary Policy Reports
light of growth in the broader monetary aggregates, developments in
the economy and financial markets,
and the potential for inflationary
pressures.
In the event, rapid Ml growth
reemerged early this spring, and by
June the aggregate was far above its
range. M2 and M3, however, ended
the first half near the middle of their
1986 target ranges. This disparate
pattern of money growth, as well as
the modest expansion in economic
output, ebbing inflation, and continuing downward pressure on the dollar in foreign exchange markets,
provided the setting for policy during
the first six months of this year. In
general, monetary policy was accommodative. As an operational matter,
the degree of pressure on reserve
positions of depository institutions
remained limited, and the discount
rate was lowered twice in the first
half of the year, V percentage point
2
each time, in the context of sizable
declines in market interest rates and
similar actions by some other industrial countries. In early July, the
discount rate was cut another V
2
point, to 6 percent.
Money, Credit, and Monetary Policy
In 1985, Ml grew at a rate substantially above its target growth range
in the first half, and it continued to
do so over the remainder of the year,
even after the range had been rebased and widened in July. Instead
of the return to more normal behavior that the FOMC had looked for,
Ml velocity—the ratio of nominal
GNP to Ml balances—fell even
more rapidly in the second half of
the year than it had in the first.
Taking the prevailing economic and
financial conditions into account, the
Committee decided in the latter part



65

of 1985 that above-target Ml growth
would be acceptable.
In light of the uncertainties surrounding the behavior of Ml, in
February of this year the FOMC set
a 1986 target range for the aggregate
that, while not providing for a drop
in velocity as large as the 6 percent
decline posted in 1985, was wide
enough to allow for appreciable variation in velocity relative to historical
trends. Nevertheless, the Committee
recognized that the relationship of
Ml to income had become increasingly difficult to predict, owing importantly to the changing composition of Ml. An important share of
the aggregate now consists of interest-bearing deposits, which are potentially an attractive repository for
savings as well as transaction balances, introducing an additional
source of sensitivity to changes in
Growth of Money and Credit
Percentage change at annual rate

Ml

M2

M3

Domestic
nonfinancial
sector
debt

11.9

7.3

7.9

13.0e

12.8

7.8

7.8

12.7e

12.3
9.6
9.8

1982 ..
1983
1984
1985

7.5
8.1 10.3
7.3
9.0 9.6
5.2
9.3 12.3
(2.5)1
8.7
9.1 10.0
10.4 12.2 9.9
5.4
8.0 10.5
11.9
8.6 7.6

9.0
11.2
14.3
14.0

Quarterly
average
1985.1
2
3
4
1986:1
2

10.1
10.5
14.5
10.7
7.7
15.8

13.6
12.0
12.9
14.6
16.1
9.6e

Period

1985:4
to 1986:2
1985:4
to June 1986
Fourth quarter to
fourth quarter
1979
1980
1981

11.7 10.2
6.3 5.5
9.5 7.6
6.0 6.5
4.3 7.4
10.3 8.3

1. Ml figure in parentheses is adjusted for shifts
to NOW accounts in 1981.
e
Estimated.

66

Monetary Policy Reports

interest rates and other economic
variables. In these circumstances, the
Committee emphasized that policy
implementation would involve a continuing appraisal of trends in all of
the money and credit measures, as
well as of indicators of economic
activity and prices, and conditions in
credit and foreign exchange markets.
Within this framework for policy and
against a background of incoming
data indicating moderation of inflationary pressures and a relatively
slow pace of economic expansion—
including weakness in some important goods-producing sectors—the
Federal Reserve basically accommodated the demands for reserves associated with strong Ml growth over
the first half of 1986.
Early in the year, reserves were
provided slightly more freely, continuing the trend toward easier reserve
conditions that had developed late
last year. In the initial months of
1986, growth of Ml dropped off
sharply from its rapid 1985 pace, and
growth of M2 also slowed substantially, to a rate below its annual
target range. There were signs of
some sluggishness in economic activity, and steep declines in oil prices,
which were improving the outlook
for inflation, contributed importantly
to a rally in long-term credit markets
that picked up momentum in midFebruary. At the same time, shortterm interest rates edged a little
lower, but the federal funds rate
remained significantly above the
Federal Reserve's discount rate.
In this context, a cut in the discount rate would complement the
thrust of open-market operations and
would accommodate the market
tendency toward lower interest rates.
However, an important consideration in the timing and extent of any
rate cut
 was the risk posed by an


excessive reaction in the foreign exchange markets, when the dollar
remained under downward pressure
during much of the period. Ultimately, on March 7, the Federal
Reserve cut the interest rate charged
for discount window borrowings l/i
percentage point to 7 percent, and
the central banks of Japan, Germany, and several other industrial
nations took similar actions around
that time.
Short-term rates in U.S. markets
fell throughout March and much of
April. Interest rates in long-term
markets continued to benefit from
the favorable effect of slumping oil
prices on inflation expectations, as
well as improvements in the federal
budget outlook, with the GrammRudman-Hollings legislation beginning to bite and official projections
of the deficit being revised sharply
downward. To an extent, declining
rates also reflected the optimism
present in the markets that, with
economic growth remaining moderate, there was potential for a further
easing of monetary policy. Ml accelerated markedly—moving above its
target range in March—apparently
in response to lower interest rates,
but M2 and M3 growth were rather
restrained, with M2 remaining below
the lower end of its range throughout
the first quarter.
On April 18, the Federal Reserve
announced another reduction in the
discount rate, to 6V2 percent. This
change served primarily to catch up
with and validate declines that already had taken place in market
rates. Exchange rates and international interest rate considerations
again played a role, and our discount
rate cut coincided with a rate cut by
the Bank of Japan.
By this time, market interest rates
in the United States had fallen 1 to

2 percentage points since December,
to their lowest levels in eight or nine
years. Both short- and long-term
rates then turned higher for a time,
as some indications of stronger economic growth seemed to be developing and prospects for a further
easing of monetary policy receded.
Supporting the market's changed
outlook were an acceleration in the
monetary aggregates, strength in some
incoming economic indicators, and
the dollar's slide on foreign exchange
markets, which continued through
mid-May. The dollar subsequently
recovered a bit, but most of the
increase both in the exchange rate
and in U.S. market interest rates was
reversed before the first half ended,
as indications of an expected
strengthening of economic activity
failed to materialize. With market
interest rates falling, price pressures
remaining subdued, and the economies of the United States and other
industrial countries growing relatively slowly, the Federal Reserve
again reduced the discount rate V
2
percentage point, to 6 percent, effective July 11.
On balance since the end of 1985,
the dollar has declined more than 10
percent, and short-term rates, about
IV2 percentage points. Long-term
Treasury yields fell as much as 2V4
percentage points, but yields on other
long-term securities fell less; corporate and tax-exempt bond yields
dropped about 1 point, and fixedrate mortgages fell just V percentage
2
point. The smaller declines in these
other markets were due in part to
the massive issuance of these obligations (including a large volume of
refinancings) elicited by the drop in
rates over recent quarters, to investor desires for call protection, and in
the case of tax-exempt securities, to
concerns
 about tax reform.


Monetary Policy Reports

67

Lower market interest rates have
been an important factor in the rapid
growth of Ml this year. The strong
response of Ml to the decline in
rates has reflected in part the cumulative effect of the deposit deregulation of recent years. In the first half
of 1986, the final two installments of
deregulation—the removal of minimum balance requirements on money
market deposit accounts and Super
NOWs on January 1 and the lifting
of the ceiling on passbook savings
rates on April 1—appear to have
had little immediate effect on the
growth of Ml or the other aggregates
because relatively few institutions
actually changed their deposit pricing
practices. But the advent and expansion of interest-bearing checking accounts over the years have attracted
more savings-type balances and have
increased the responsiveness of Ml
to interest rate changes. Since rates
on the interest-bearing Ml accounts
have adjusted sluggishly to changes
in market rates, relatively wide swings
in the incentives to hold these deposits have resulted.
Growth in NOW accounts surged
in the first half of 1986, reaching an
annual rate of around 25 percent in
the second quarter, as it responded
to the lower overall level of market
interest rates and the narrower spread
between long- and short-term rates.
The latter development seemed to
spur shifts of funds from time deposits into shorter-term accounts, including NOW accounts. Demand deposit growth also strengthened as
interest rates declined. In part, lower
rates prompted increases in the compensating balances that businesses
needed to hold in the form of demand deposits to pay for bank services. In addition, deposit levels may
have been boosted to an extent by a
sizable increase in financial transac-

68

Monetary Policy Reports

tions in the first half of the year,
especially soaring mortgage prepayments and originations, which was
stimulated by lower rates.
The velocity of Ml fell only moderately in the first quarter, but as
money growth picked up and nominal GNP apparently failed to accelerate, velocity dropped at an extraordinary pace in the second quarter,
resulting in a first-half rate of decline
in Ml velocity that probably was
somewhat faster than the average
over 1985. Although the rapid Ml
growth and falling velocity stemmed
in large measure from interest rate
declines, the size of the Ml increase
was distinctly larger than what would
have been expected based on historical relationships among money, income, and interest rates.
In contrast to Ml, which grew at
an annual rate of 12% percent through
June and exceeded its target by a
large margin, both M2 and M3 grew
moderately in the first half of the
year and in June were near the
middle of their respective ranges.
Some of the more liquid components
of the broader monetary aggregates,
however, increased very rapidly, as
part of the larger shift in investor
portfolios toward short-term assets.
This shift had much less effect on
M2 or M3 than on Ml, because the
reallocation of funds took place largely
within these broader aggregates. In
addition to transaction deposits,
money market deposit accounts,
money market mutual funds, and
ordinary savings deposits all expanded strongly during the first half
of the year, while small time deposits
grew only slightly.
Investors looked not only to the
shorter-term components of the
monetary aggregates, but also to
stock and bond mutual funds (not
included
 in the aggregates), which


posted very attractive returns as a
result of ongoing market rallies. Flows
into such funds probably depressed
M2 growth somewhat in the first half
of this year, as they had in 1985.
Even so, lower market interest rates
and strong demands for short-term
assets lifted M2 in excess of income,
leading to an appreciable further
decline in M2 velocity over the first
two quarters of 1986. While M2
showed a fair amount of volatility in
the first half, growth of M3 was
comparatively steady from month to
month, as banks varied their issuance
of managed liabilities to compensate
for fluctuations in core deposit inflows.
The debt of domestic nonfinancial
sectors is estimated to have expanded
at a more moderate rate over the
first six months of 1986 than it had
in some time, although still well in
excess of the growth in income.1
Bond issuance had surged in December in advance of the possible effective
date of some provisions of tax-reform
legislation, lifting the first-quarter
level of the debt aggregate. Hence,
when measured from its fourthquarter-average base, the growth of
domestic nonfinancial sector debt has
remained above its monitoring range,
coming in at an annual rate of 123/4
percent through June. Measured from
its level at the end of December,
however, debt grew at an annual
rate of 10V4 percent through the end
of June.
To an extent, the lower rate of
debt growth since the end of December represented a reaction to the
inflated borrowing just before the
end of last year, when special factors
applying to particular sectors com1. The appendix reviews some aspects of the
recent behavior of the debt aggregate.

bined to boost debt issuance tremendously, far in excess of normal credit
needs. For example, the pronounced
slowdown of federal borrowing in
the first quarter reflected the drawdown of substantial cash balances
built up by the government before
year-end. Indeed, federal borrowing
picked up again in the second quarter,
and, for the year as a whole, the
huge federal deficit is likely to make
a strong contribution to aggregate
debt growth, as it has for the past
several years.
Following the surge in their borrowing late last year, state and local
governments showed a sharp drop in
debt growth. This earlier borrowing
and continued uncertainty about tax
reform restrained tax-exempt debt
growth in early 1986. Beginning in
March, however, public-purpose and
refunding issues increased again as
rates declined further and views
changed about the likely form and
effective date of restrictions proposed in tax-reform legislation.
Borrowing by the household sector
also eased somewhat from the heavy
pace of recent years. After a surprising slowdown early in the year, net
residential mortgage borrowing apparently expanded rapidly in the
second quarter. Over the entire period, lower mortgage rates spurred a
substantial pickup in total mortgage
originations, but the high volume of
refinancings reportedly strained the
ability of lenders to process real
estate transactions. Consumer credit
growth rates this year have been
substantially below those of last year,
though still outpacing the growth of
income. An increasing number of
consumers seem to be experiencing
difficulty in making timely payments
on outstanding credit; delinquencies
on consumer loans other than credit
cards have risen moderately, but



Monetary Policy Reports

69

those on bank credit cards have
surged in the past two years, and
personal bankruptcy rates have
soared.
The smallest degree of deceleration occurred in the debt of the
nonfinancial business sector, which
continued to be boosted by the wave
of corporate mergers, acquisitions,
and share repurchases. While the
stock market rally helped spur a
substantial rise in gross equity issuance, net stock issuance remained
decidedly negative because of the
mergers and restructurings. Most notable so far this year, however, was
the strength of long-term debt issuance by businesses in response to
steeply falling long-term rates; gross
issuance of corporate bonds, especially strong in March and April, ran
far in excess of previous records.
Nonfinancial firms increased their
short-term debt only slightly, however, and this was reflected in a
decline in their commerical paper
outstanding, as well as in slow business loan growth at banks.
The stresses evident in many parts
of the economy left their mark on
the books of banks and other financial institutions. Asset quality deteriorated as a consequence of the
sharp drop in oil prices and associated dislocations in the energy sector, overbuilding in commercial real
estate, and the continuing distress in
agriculture. Banks with relatively large
amounts of farm loans outstanding,
as well as other agricultural lenders,
have been particularly hard hit recently; loan losses at these institutions have soared and their profitability has continued to slide. While
banks in regions with economies
heavily dependent on energy production were among the most strongly
capitalized and profitable earlier, their
financial position has eroded under

70

Monetary Policy Reports

pressure of surrounding economic
difficulties. Bank failures in the first
half of this year continued to run at
about the rapid pace of 1985, with
agricultural banks again accounting
for a disproportionate share.
Overall bank earnings began to
improve in 1985, and the industry
has added significantly to its capital
and loss reserves, although the explosion in off-balance-sheet commitments and the clouded outlook surrounding the repayment of many
bank loans may have made it more
difficult to assess the level of risk in
the banking industry. At savings and
loan associations, overall profitability appears to be improving as interest rates have declined and mortgage
origination activity has surged. However, a substantial number of these
institutions continue to have severe
problems owing primarily to losses
on weak assets, prompting proposals
to add to the financial resources of
the Federal Savings and Loan Insurance Corporation.
Concerns over loans to certain
developing countries came to the
forefront again this year as Mexico
began to grapple with the additional
economic and financial problems
brought on in large part by dramatically lower oil prices. Banks have
remained cautious lenders in the face
of ongoing concerns about the economic and financial prospects of
these countries. However, despite
the weakness of global demand, some
progress has been made in implementing appropriate macroeconomic
policies and policies of internal structural reform. Financial support for
such policies both from multilateral
lending institutions and private creditors has been provided or is being
negotiated along the lines proposed



by Secretary of the Treasury Baker
in Seoul last fall.

Appendix: Some Aspects
of the Behavior of Domestic
Nonfinancial Sector Debt
After moving in rather close alignment for about a quarter of a century, debt growth in recent years has
far outpaced expansion of nominal
GNP. The ratio of debt outstanding
to GNP began climbing late in 1981
and subsequently soared well above
the range that had prevailed since
the early 1950s, a development that
extended through the first half of
1986.
The debt aggregate is derived from
the Federal Reserve's Flow of Funds
accounts. It contains the credit market debt of domestic nonfinancial
sectors—households, nonfinancial
businesses, state and local governments, and the federal government—whose spending accounts for
the vast bulk of income and production. It excludes debt of the financial
sector because funds raised by financial intermediaries are already counted
in the debt aggregate at the point
they are channeled to nonfinancial
sectors. To include financial sector
debt would lead to double counting.
Nonfinancial sectors also behave
to a degree as financial intermediaries, raising funds in credit markets
and using the proceeds, at least for
a while, to acquire credit market
claims on other nonfinancial units.
In such cases, "double counting"
may be said to exist, because the
initial borrowing appears as debt of
a domestic nonfinancial unit, and the
financial asset acquired has as its
counterpart, either directly or indirectly, debt of another nonfinancial

Monetary Policy Reports
unit. For example, a substantial portion of the funds raised by state and
local governments in 1985 was used
to acquire claims on the federal
government or mortgage claims on
households. The federal government
also issues debt and uses the proceeds to extend loans to private
borrowers—obligations that appear
elsewhere in the debt aggregate.
While nonfinancial sectors engage
to some degree in these intermediary
functions on a regular basis, a marked
increase in such activity can act to
boost measured growth in the debt
aggregate. This was the case last
year, when the proceeds of a large
volume of debt issued by state and
local governments with the intention
of retiring outstanding obligations at
a later time were placed largely in
special nonmarketable securities of
the federal government. In addition,
debt growth has been lifted in recent
years by a wave of corporate mergers, acquisitions, and share repurchases that has resulted in a massive
retirement of equity, financed with
credit.
To assess the degree to which this
double counting and corporate substitution of debt for equity have acted
to boost debt growth, the behavior
of an adjusted debt measure and of
an equity-augmented measure was
examined. The adjusted debt measure excludes readily identifiable double counting—in particular, that associated with the aforementioned
state and local and federal government borrowing as well as with credit
extended by nonfinancial businesses
to the household sector. The resulting measure of adjusted debt is
noticeably smaller in relation to GNP,
but it has behaved quite similarly to
the regular debt measure, rising



71

sharply relative to GNP in recent
years to well above the range prevailing since the 1950s.
The adjusted debt measure can be
augmented by the accumulated net
issuance of equity so that it encompasses funds raised in all markets.
Although increasing less rapidly than
debt or adjusted debt—for example,
it rose I2V2 percent in 1985 on an
end-of-period basis, as compared with
I4V2 percent for adjusted debt and
15 percent for debt—the augmented
measure also has risen rapidly in
recent years in relation to GNP,
indicating that borrowing to retire
equity explains only a small portion
of the increase in the debt-GNP
ratio. From a longer perspective, this
measure has remained within its
historical range, and its recent rise
returns it, in relation to GNP, to the
levels prevailing in the 1950s and
early 1960s.
The evidence thus suggests that
unusual behavior of the debt aggregate relative to GNP in recent years
is related more to changes in underlying behavior than to the special
factors just discussed. The unusual
rise in debt relative to GNP in recent
years has been in both the federal
and nonfederal components of the
aggregate. Growth in federal debt
strengthened in the early 1980s and
soared in 1982 with the widening of
the budget deficit. After 1982, growth
of federal debt slowed a bit in
percentage terms while continuing to
increase in dollar amounts and relative to GNP. Rising federal budget
deficits have been associated with
rising current account deficits and a
growing gap between domestic purchases and output as net exports
have contracted sharply. From one
perspective, the growing federal def-

72

Monetary Policy Reports

icit can be viewed as being financed
by an inflow of funds from abroad—
the counterpart to our current account deficit—which has enabled the
federal government to increase its
borrowing without curbing private
spending and credit use to the extent
that would be necessary in the absence of those external funds.2 However, the erosion of our international
competitive position, which is reflected in the current account deficit,
certainly has greatly affected individual industries.
Debt of each of the nonfederal
sectors—households, nonfinancial
businesses, and state and local governments—also has increased relative to economic activity, even after
removing the types of double counting mentioned above. In the case of
households, the exceptional growth
of debt has been evident in both
mortgage and consumer debt and has
been accompanied by a spectacular
buildup of financial assets and a low
personal saving rate. In other words,
the household sector has been
"grossing up" its balance sheet in
recent years by heavy financial asset
accumulation and borrowing. Financial deregulation and competition for
household assets likely have contributed to this process by expanding
access to market-related yields on
deposits and other financial assets,
while growing competition among
lenders for market share and the
trend toward securitization have
added to sources of credit and put
downward pressure on household

2. Not shown in the charts to the appendix
is the relation between debt measures and domestic spending (GNP less net exports). In recent years, debt growth has been somewhat
more in line with growth in domestic purchases
than output,
 but this ratio, too, hasrisensharply.


borrowing costs. The corresponding
narrowing of the spread between
borrowing and deposit rates adds to
the willingness of households to borrow rather than draw down liquid
assets when spending rises relative
to income. Demographic factors also
appear to have contributed to household debt growth as the baby boom
generation has moved further into
the age bracket in which spending
on housing and durables and borrowing tend to be high. In addition,
households have benefited from the
runup in stock market prices in
recent years, and this boost to their
net worth may have encouraged more
borrowing. Even so, household debt
growth has outstripped increases in
net worth.
For nonfinancial corporations, most
of the advance in indebtedness relative to output in recent years stems
from the substitution of debt for
equity, previously discussed. The unevenness of the current economic
expansion also appears to have
boosted corporate borrowing because some industries—especially
those dependent on export markets
and those competing with imports—
have experienced protracted weakness, even though overall cash flows
have been strong; thus, working
capital and investment needs have
been less closely matched with cash
flows among firms than is typical,
contributing to more rechanneling of
funds through credit markets and
more corporate borrowing. Finally,
state and local government borrowing was especially heavy in 1985,
even after removing the doublecounting factors already mentioned,
as lower interest rates and the anticipation of tax reform also fueled a
surge in tax-exempt bond issuance
for purposes other than advance
refunding and mortgage acquisitions.

Part 2
Records, Operations,
and Organization




75

Record of Policy Actions
of the Board of Governors
Regulation D (Reserve
Requirements of Depository
Institutions) and
Regulation Q (Interest on
Deposits)
March 12, 1986—Amendments
The Board amended Regulations D
and Q in connection with the expiration of its authority to set interest
rate ceilings and reserve requirements for deposit instruments.
Votes for these actions: Messrs. Volcker,
Martin, Wallich, Rice, Ms. Seger,
Messrs. Angell, and Johnson. Governor Seger dissented from the Board's
decision to establish early withdrawal
penalties for small institutions.
The Depository Institutions Deregulation Act of 1980 called for
phasing out over a six-year period
interest rate ceilings on all deposit
accounts except demand deposits.
The Board's authority under the act
to set interest rate ceilings expires
March 31, 1986, leaving only the
prohibition on the payment of interest on demand deposits as a constraint on deposit interest rates. Statutory authority for money market
deposit accounts (MMDAs) also expires on that date, as does the
Board's authority to set penalties for
early withdrawal of time deposits.
The Board amended Regulations
D and Q to continue the existing
exemptions of savings deposits and
MMDAs from reserve requirements
and from the prohibition against the
payment of interest on demand deposits. Thus savings accounts con


tinue to qualify for the zero or 3
percent reserve requirement if no
more than three transfers are allowed
each month; MMDAs qualify if no
more than six transfers are allowed
each month.
Previously, businesses had been
permitted to hold savings accounts
up to a maximum of $150,000. The
amendments remove the $150,000
limitation on business savings accounts, making their treatment similar to that of MMDAs. Any business
account from which more than three
telephone transfers are permitted per
month, however, is considered a
demand deposit and is subject to the
interest rate limitation and reserve
requirement appropriate for demand
deposits.
The Board also decided to continue some early withdrawal penalties to help preserve for reserve
requirement purposes the distinctions between transaction accounts
and time deposits and among nonpersonal time deposits of differing
maturities. In addition, the Board
decided to extend the applicability
of early withdrawal penalties to certain small institutions—primarily
credit unions—that had not had such
penalties under the 1980 act. The
Board agreed to allow these institutions a longer period for compliance
with this provision. Governor Seger
dissented from the Board's decision
to apply early withdrawal penalties
to small institutions.
Most of the amendments are effective April 1, 1986. Credit unions and
other small institutions that had not

76

Board Policy Actions

been subject to the early withdrawal
penalties have until January 1, 1987,
to begin imposing penalties on time
deposits opened, added to, or renewed after that date.
Regulation D (Reserve
Requirements of Depository
Institutions)

the lower reserve requirement applies.
The Garn-St Germain Depository
Institutions Act of 1982 established
a zero percent reserve requirement
on the first $2 million of an institution's reservable liabilities. It also
provided for annual adjustments to
that exemption based on deposit
growth nationwide. Recent growth
in deposits indicated that the amount
subject to a zero percent reserve
requirement should be increased from
$2.6 million to $2.9 million, and the
Board amended Regulation D accordingly.

November 24, 1986—
Amendment
The Board amended Regulation D,
effective December 31, 1986 (1) to
increase the amount of transaction
account balances to which the lower
reserve requirement applies; and (2)
to increase the amount of reservable Regulation G (Securities Credit
liabilities subject to a zero percent by Persons Other than Banks,
Brokers, or Dealers)
reserve requirement.
Votes for these actions: Messrs. Volcker,
Johnson, Ms. Seger, Messrs. Angell,
and Heller. Absent and not voting:
Messrs. Wallich and Rice.

Under the Monetary Control Act
of 1980, depository institutions, Edge
and agreement corporations, and U.S.
agencies and branches of foreign
banks are subject to reserve requirements set by the Board. Initially,
reserve requirements were set at 3
percent of an institution's first $25
million in transaction balances and
12 percent on balances above that
level. The act directs the Board to
adjust the amount subject to the
lower reserve requirement to reflect
changes in the amount of transaction
balances nationwide. By the beginning of 1986, this amount had been
raised to $31.7 million. Recent growth
in such balances indicated that a
further increase of $5 million was
warranted. The Board, therefore,
amended Regulation D to increase
to $36.7 million the amount to which



January 8, 1986—Interpretation
The Board issued an interpretation
of Regulation G, effective January
10, 1986, that clarifies the need for
margin requirements for certain debt
securities issued by a company seeking to acquire another.
Votes for this action: Messrs. Volcker,
Partee, and Rice. Votes against this action: Mr. Martin and Ms. Seger. 1 Absent and not voting: Mr. Wallich.

The interpretation addresses debt
securities issued by a shell corporation in a takeover attempt. (A shell
corporation is a firm that has no
significant business operations, functions primarily as a vehicle for acquiring the stock of the target company, and has virtually no assets
other than the margin stock.) The
1. On this and subsequent pages, footnote 1
indicates that there was a vacancy on the Board
when this action was taken.

Board Policy Actions
interpretation states that debt securities issued by such a shell company
are presumed to be indirectly secured
by the stock of the company being
acquired and, therefore, are subject
to the margin requirements of Regulation G. If specific evidence exists
of collateral other than the margin
stock or of a guarantee by the parent
of the shell company, then the securities are not covered by the interpretation.
Governors Martin and Seger believed that adoption of the interpretation was unnecessary. They noted
that a process already exists whereby
the staff provides advice on margin
stock matters, and they saw no reason for the Board to be involved in
such determinations. In addition, they
preferred a longer comment period.
Regulation J (Collection of
Checks and Other Items and

77

nonstandard holiday must pay for
checks made available to it on that
day or reimburse the Reserve Bank
for the value of the resultant float.
The Board also modified its ACH
procedures, effective April 1, 1987,
to reduce and reallocate float that
results from nonstandard holidays.
In addition, the Board adopted a
schedule for Reserve Bank observance of the 10 national holidays,
effective January 1, 1987.
In other amendments, the Board
established two-year limits for bringing actions against a Reserve Bank
for mishandling a payment item (beginning January 1, 1990) and for
bringing action against a paying bank
for failing to comply with the regulation's notification requirements
(beginning August 1, 1986). The
Board also authorized the Reserve
Banks to collect instruments drawn
on payors in foreign countries.

Wire Transfers of Funds)
May 28, 1986—Amendments
The Board amended Regulation J,
effective January 1, 1987, to reduce
and reallocate check float, to permit
Reserve Banks to collect checks drawn
on banks in foreign countries, and to
make other technical changes. The
Board also modified its automated
clearinghouse (ACH) procedures and
adopted a standard holiday schedule
for the Reserve Banks.

Regulation K (International
Banking Operations)

June 23, 1986—Amendment
Effective July 8, 1986, the Board
revised the procedures governing international investments by U.S.
banking organizations.
Votes for this action: Messrs. Volcker,
Wallich, Rice, Ms.1 Seger, Messrs.
Angell and Johnson.

Previously, the regulation's proviVotes for these actions: Messrs. Volcker,
Wallich, Rice, Ms.1 Seger, Messrs. sions on foreign investment had reAngell and Johnson.
quired a banking organization to
obtain the Board's consent to invest
The Board changed the procedures more than 10 percent of its capital
for recovering check float arising and surplus in a foreign company.
from the local or regional observance The amendment removes that reof a holiday not observed nationally. quirement and permits such an inEffective January 1, 1987, a paying vestment with written notice to the
bank that closes voluntarily on a Federal Reserve 45 days in advance.



78

Board Policy Actions

Regulation Y (Bank Holding
Companies and Change in Bank
Control)
June 25, 1986—Amendments
The Board amended Regulation Y,
effective December 15, 1986, to add
six activities to the list of nonbanking
activities permissible for bank holding companies.
Votes for this action: Messrs. Volcker,
Wallich, Rice, Ms.1 Seger, Messrs.
Angell and Johnson.
The Board also revised the portion
of the regulation governing insurance
activities.
Votes for this action: Messrs. Volcker,
Rice, Ms. Seger, Messrs. Angell, and
Johnson. Abstaining: Mr. Wallich.1
The amendments to Regulation Y
permit bank holding companies to
engage in the following nonbanking
activities: consumer financial counseling; tax preparation and planning;
commodity trading and futures commission merchant advisory services;
check guarantee services; credit bureau and collection agency services;
and personal property appraisal. The
regulation stipulates the conditions
under which holding companies may
engage in these activities.
The Board eliminated a requirement that holding companies that
underwrite credit-related insurance
provide rate reductions or other policy benefits to customers. The requirement had stipulated that holding companies must charge premiums
lower than the maximum established
by state rules. The Board found that
this requirement put holding companies at a competitive disadvantage
and that other safeguards exist to
address the possibility of adverse
effects on
 the public.


The Board also redefined the scope
of insurance activities permitted under
the Garn-St Germain Depository
Institutions Act of 1982. The act
prohibited some insurance activities
that had been permissible under
Regulation Y and permitted expansion of other activities. The act
generally prohibited agency and underwriting activities, except as specifically exempted. The Board revised Regulation Y to incorporate
exemptions that permit the following
activities: (1) selling credit-related
life, accident, and health insurance
and insurance for involuntary unemployment; (2) selling, through finance-company subsidiaries, property insurance on collateral of $10,000
or less (or $25,000 for manufactured
homes); (3) continuing and expanding certain agency activities authorized before specified grandfather
dates; (4) acting as a managing general agent for group insurance for
the holding company; (5) acting as a
general insurance agent if the holding
company has $50 million in assets or
less; and (6) acting as a general
insurance agent in towns with inadequate insurance agency facilities or
with fewer than 5,000 residents. The
Board determined that a bank holding company's authority to operate a
general insurance agency in small
towns should be confined to those
towns in which the company has
lending offices.

Regulation Z (Truth in Lending)
December 10, 1986—
Amendment
The Board amended Regulation Z,
effective December 16, 1986, to redefine what constitutes an advance
of new money in a refinancing and,

Board Policy Actions
thereby, to expand the exemptions
from the right of rescission.
Votes for this action: Messrs. Volcker,
Johnson, Ms. Seger, Messrs. Angell
and Heller. Absent and not voting:
Messrs. Wallich and Rice.

Under the Truth in Lending Act,
consumers who use their homes as
collateral for a loan have three days
within which to rescind the transaction. Creditors are required to provide borrowers with a written notice
of their right to rescind such a
transaction, and creditors cannot disburse funds or otherwise perform
services until the three-day rescission
period has expired. Regulation Z
exempts refinancings from the right
of rescission if the new credit is
extended by the same creditor who
made the original loan and if the
transaction does not involve an advance of new money. Regulation Z
had defined new money as the difference between the new "amount
being financed" and the outstanding
balance plus any earned unpaid finance charges. The Board amended
the regulation to redefine what constitutes a new advance of money so
that the right of rescission would not
be triggered if a consumer finances
charges such as attorney's fees, title
search fees, and insurance premiums.
The Board found that these charges
generally are not substantial relative
to the principal amount refinanced
and do not put the borrower's home
at a significantly higher risk of loss.
The Board decided to withdraw
one other proposed amendment to
the right of rescission that had been
published for comment. The amendment had pertained to refinancings
by creditors other than those who
made the original mortgage loans.
The Board's decision reflected the
limited nature of the exemption pro


79

posed, the complexity of an implementing rule, and several adverse
comments received on the proposal.

Rules Regarding Delegation
of Authority
December 15, 1986—
Amendment
The Board amended its rules, effective immediately, to permit certain
System officials to waive the requirements to publish notice and seek
public comment on a proposed change
in the control of a bank, if such
disclosures would seriously threaten
the bank.
Votes for this action: Messrs. Volcker,
Johnson, Ms. Seger, Messrs. Angell,
and Heller. Absent and not voting:
Messrs. Wallich and Rice.
Recent legislation amended the
Change in Bank Control Act to
require that public comment be sought
on any proposed change in bank
ownership. That legislation, however, permits a federal bank regulator to dispense with the publication
and comment requirements if the
regulator determines that such disclosure would seriously threaten the
safety or soundness of the bank being
acquired. The amendment to the
Board's rules delegates authority to
determine whether to waive the notice requirements either to the Board's
Director of the Division of Banking
Supervision and Regulation, with the
concurrence of the General Counsel,
or to the appropriate Reserve Bank,
with the concurrence of the Board's
Director of Banking Supervision and
the General Counsel. A waiver of
these requirements would be appropriate, for instance, when prompt
action is necessary to prevent the
bank's failure. These System officials

80

Board Policy Actions

already have comparable delegated
authority for applications filed under
the Bank Holding Company Act.
Policy Statements
July 11, 1986—Revisions to
Capital Adequacy Guidelines
The Board revised its guidelines for
capital adequacy to permit bank
holding companies to count perpetual debt as primary capital and to
limit the inclusion of certain sources
of equity as primary capital.
Votes for this action: Messrs. Volcker,
Wallich, Rice, Ms.1 Seger, Messrs.
Angell and Johnson.

The revised guidelines establish
criteria for determining whether a
perpetual debt instrument qualifies
as primary capital. The guidelines
now permit qualifying perpetual debt,
perpetual preferred stock, and mandatory convertible stock to compose
up to one-third of an institution's
primary capital. Also, 20 percent of
an institution's primary capital may
be in the form of mandatory convertible securities and perpetual debt.
Perpetual debt securities issued or in
the process of being issued on November 20, 1985, when the proposed
revisions were published for comment, are grandfathered and excluded from the limitations.

November 3, 1986—Basic
Financial Services
The Board authorized issuance of a
policy statement on the types of basic
services that financial institutions
should be encouraged to offer.
Votes for this action: Messrs. Volcker,
Johnson, Angell and Heller. Vote



against: Ms. Seger. Absent and not voting: Messrs. Wallich and Rice.
The Board's Consumer Advisory
Council had become concerned that
changes in the financial services market might have an adverse effect on
lower-income households. After careful study, the Council recommended
that the Board issue a policy statement encouraging state member banks
to offer the types of services most
needed by low- and moderate-income households. The Board agreed
with the need for such a statement
but believed that the policy should
have broader applicability. The Board
recommended that the Federal Financial Institutions Examination
Council propose such a statement for
all financial institutions.
After review, the council approved
a joint policy statement to be issued
by its member agencies that encourages efforts by trade associations and
individual financial institutions to
make basic banking services available to all customers. Rather than
identify particular accounts or services that should be offered, the
statement broadly defines the types
of services that institutions should
endeavor to provide and encourages
trade associations and financial institutions to ensure availability of certain basic services, such as a safe and
accessible place to keep money; a
way to obtain cash, including the
cashing of government checks; and a
means for making third-party payments. The Board adopted the policy
statement. Ms. Seger objected to
issuance of the policy statement because she believed that actions by
certain trade associations adequately
addressed the concerns in the statement and that Board action, therefore, was not necessary.

Board Policy Actions

81

By the latter part of February a
majority of the Board Members believed that, on balance, the latest
available information pointed to a
more sluggish expansion of business
activity than they had anticipated
earlier in the year. They also called
attention to the disinflationary effects of falling oil prices, to declining
interest rates, and to recent evidence
of slower monetary growth. Other
Members observed that the weakening in some business indicators was
relatively recent and did not necessarily portend a slower economic
expansion. Moreover, the recent
moderation in monetary growth came
after an extended period of generally
rapid expansion. These Members also
expressed concern about the potentially adverse influence that a reduction in the discount rate might have
on the foreign exchange value of the
dollar unless it was associated with
Actions on the Basic
movements toward ease by at least
Discount Rate
some of the leading industrial countries abroad.
January-February: No Change
At a meeting held on February 24,
During the early weeks of the year,
the Board discussed but took no the Board by a vote of 4 to 3
2
action on a number of requests by approved a reduction of V percentindividual Federal Reserve Banks to age point in the basic discount rate
reduce the basic discount rate by Vi to 7 percent. On the same day, the
or V2 percentage point. A rate of IV2 Board rescinded that action by unanpercent had been in effect since mid- imous vote following a review of
May 1985. The Board's ongoing re- prospective actions by key central
view of economic and financial de- banks abroad to reduce their lending
velopments, including the behavior rates. Members who favored a reof the monetary aggregates, resulted duction in the discount rate on doin decisions to defer action rather mestic grounds decided that a delay
than to approve or deny the pending of limited duration would be acceptrate cuts. The Board also took ac- able, given the outlook for easing
count of developments in foreign actions by at least some other major
exchange markets and noted the risks central banks during the next couple
to the dollar of a reduction under of weeks, if not within the next few
the prevailing circumstances, partic- days.
ularly if a lower discount rate were
not accompanied by cuts in the
lending rates of key central banks March-August: Basic Rate Reduced

abroad.
On March 6, by unanimous vote, the
1986 Discount Rates
The Board approved four reductions
of V percentage point in the basic
2
discount rate during 1986. Those
reductions served to lower the rate
from 7V2 percent in early March to
5V2 percent in the latter half of
August. There were no increases in
the discount rate during the year.
The reasons for the Board's decisions are reviewed below. Those
decisions were made in the context
of the policy actions of the Federal
Open Market Committee and of
general economic and financial developments that are covered in more
detail elsewhere in this REPORT. A
listing of the Board's actions on the
discount rate during 1986, including
the votes on those actions, follows
this review.



82

Board Policy Actions

Board approved a reduction from
7V2 to 7 percent in the basic discount
rate. This action was taken in the
context of similar actions announced
or expected by central banks in a
number of other major industrial
countries and in light of sizable
further declines in most domestic
interest rates in recent weeks. The
Members also noted that the expansion of the monetary aggregates had
been more limited thus far in 1986
than earlier, and the latest business
information tended to confirm previous indications of more sluggish
economic growth. In addition, a
relatively favorable outlook for prices
had been enhanced by the continuing
decline in oil prices.
On April 18, the Board approved
another reduction of V percentage
2
point in the basic discount rate. Most
of the members believed that such
an action was desirable to bring the
rate into better alignment with shortterm market rates, which had continued to decline since March 6. A
reduction was also thought to be
consistent with prospective policy
easing in one or more of the major
industrial nations abroad. Members
noted that the latest indicators of
business activity suggested on balance that economic growth would be
relatively sluggish in the second
quarter, especially reflecting weakness in business investment. Among
other factors an important influence
on such investment was the adverse
effect of lower oil prices on the
energy industry.
Governor Rice dissented from this
action. In his view the economic
outlook remained favorable despite
indications of slower expansion in
the current quarter. He stressed that
consumer spending was being well
maintained, and he believed that
some turnaround in business spend


ing was likely and would contribute
to faster economic growth during
the second half of the year. The outlook for net exports also appeared
to be more positive. He concluded
that a further cut in the discount
rate was not warranted in these
circumstances.
On July 10, the Board unanimously approved another reduction
in the basic discount rate to 6 percent. Such an action was judged to
be consistent with the accommodative monetary policy that had been
implemented for some time through
open market operations, and it took
account of recent declines in a number of market interest rates. A lower
discount rate also was deemed appropriate in the context of relatively
slow growth in overall business activity, relatively low prices for a number
of important commodities, and reduced pressures on the prices of
goods fostered by an economy that
was operating comfortably within
capacity limits and subject to strong
competition from abroad. Members
noted that while Ml had been growing rapidly in recent months, the
broader aggregates, M2 and M3,
were currently near the midpoints of
their target ranges for 1986. The
Federal Open Market Committee
had established those ranges in February and had reaffirmed them at its
meeting on July 8-9. Some Members
commented on the risks to the dollar
of reducing the discount rate when
few, if any, of the major central
banks abroad were likely to ease
their policies, at least over the near
term. In this situation the dollar
might remain under downward pressure in the foreign exchange market.
But it was noted that a reduction in
the System's rate might encourage
easing measures abroad later, if not
immediately.

Board Policy Actions
The last reduction in the discount
rate during 1986, to 5V2 percent, was
approved by unanimous vote on
August 20. The Members agreed that
such an action was consistent with
the policy decision reached by the
Federal Open Market Committee at
its meeting on August 19 and with
the System's broad objective of sustaining orderly economic growth
within a framework of progress toward price stability. The Members
recognized that there were risks of
downward pressures on the dollar in
the foreign exchange market, given
the prospect that key industrial nations abroad were not likely to lower
their discount rates in the near future. However, those risks were felt
to be manageable and to be acceptable in light of prevailing and prospective economic and financial conditions.
September-December: No Change
During the closing months of the
year, the Board made no further
changes in the discount rate. The
Members took account of a pickup
in the growth of economic activity
from the very sluggish pace in the
second quarter. Prices tended to rise
somewhat faster during the summer
and fall months, reflecting developments in food and energy markets,
but overall pressures on prices remained limited during this period.
Renewal of Temporary
Seasonal Credit Program
On February 14, 1986, the Board
approved the renewal for 1986 of its
temporary, simplified seasonal credit
program. This program was originally approved and implemented in
1985 as a means of making funds
available at the discount window to
agricultural banks experiencing unu


83

sually strong loan demands. The
program was intended to complement the longstanding regular seasonal credit program and thereby to
help assure that small- and mediumsized banks did not face liquidity
constraints in accommodating their
farm borrowers over the 1986 planting and production cycle. Under this
temporary program, eligible banks
could borrow at the discount window
to fund one-half of their loan growth
in excess of 2 percent over a base
level; such borrowing could not exceed 5 percent of their deposits.
For 1986, the Board modified the
temporary program slightly to enhance the program's usefulness to
potential borrowers. The modifications (1) gave banks the option of
borrowing at a fixed rate of V2
percentage point over the basic discount rate or at a variable rate that
is the basic discount rate itself, and
(2) permitted banks added flexibility
in determining the base from which
loan growth would be measured.
Banks were allowed to borrow under
either the regular or the temporary
seasonal programs, but not under
both at the same time.
New Policy on Large Borrowings
from the Discount Window
On May 19, 1986, the Board approved a new policy to deal with
exceptionally large borrowings from
the discount window that arise from
computer breakdowns or other operating problems. Under the new
policy, a rate higher than the basic
discount rate is applied to loans of
unusual size that result from a major
operating problem at the borrower's
facility unless the problem clearly is
beyond the reasonable control of the
borrowing institution. The rate to be
charged is the highest rate estab-

84

Board Policy Actions

lished for loans to depository institutions. The Board's objective was
to ensure that, in such circumstances,
credit extended by the Federal Reserve would be at rates as high as or
higher than those for short-term
accommodation in the open market.
The Board also wanted to encourage
institutions to maintain or install
appropriate measures and precautions to reduce the chances that
major problems might develop.
Structure of Discount Rates
The basic discount rate noted in this
report is the rate charged on loans
to depository institutions for shortterm adjustment credit. The basic
rate also applies to most seasonal
credit, including the regular seasonal
program; under that program, credit
may be provided for periods longer
than those permitted under adjustment credit to assist smaller institutions in meeting regular needs for
funds arising from certain expected
seasonal movements in their deposits
and loans. As noted above, credit is
also provided at the basic discount
rate under the variable-rate option
of the temporary seasonal program
and at a rate h percentage point
above the basic rate under the fixedrate option of the temporary seasonal
program.
Another category of discount-window credit relates to loans made over
extended periods to depository institutions that are under sustained liquidity pressure. Such extended credit
may also be provided when exceptional circumstances or practices adversely affect a particular depository
institution. The interest rate on extended credit rises relative to the
basic rate as the period of borrowing
lengthens. For loans that have been
outstanding for more than 150 days,



or for a shorter period if they are
expected to be outstanding for an
unusually long time and in relatively
large amounts, the Reserve Banks
may charge a flexible rate. The
flexible rate, which has a floor that
is 1 percentage point above the basic
discount rate, takes account of the
rates on market sources of funds.
The Board approved reductions in
the flexible rate periodically during
the year, from 8V2 percent in midMarch to 6V2 percent in early September.
As of December 31, 1986, the
structure of discount rates was as
follows: a basic rate of 5V2 percent
for short-term adjustment credit and
for credit under the regular seasonal
program. No loans were outstanding
under the temporary seasonal program at year-end. Rates on extended
credit ranged from the basic rate of
5V2 percent for the first 60 days of
borrowing, to 6V2 percent for the
next 90 days of borrowing, and to
7V2 percent after 150 days. The
flexible rate on extended credit was
6V2 percent at year-end and was
authorized for the Federal Reserve
Banks of Richmond, Atlanta, Chicago, Kansas City, Dallas, and San
Francisco.
Votes on Reserve Bank
Requests to Change the
Discount Rate
Under the provisions of the Federal
Reserve Act, the boards of directors
of the Federal Reserve Banks are
required to establish rates on loans
to depository institutions at least
every 14 days and to submit such
rates to the Board of Governors for
review and determination. The Board
votes listed below are those that
involved changes in the basic discount rate. Votes involving the re-

Board Policy Actions
establishment of existing rates are
not shown. All of the latter were
unanimous.
February 24, 1986
Effective February 25, 1986, the
Board approved actions taken by the
directors of the Federal Reserve
Banks of Dallas and San Francisco
to reduce the basic discount rate
from 7V2 percent to 7 percent.
Votes for this action: Mr. Martin, Ms.
Seger, and Messrs. Angell and
Johnson. Votes against this action:
Messrs. Volcker, Wallich, and Rice.
February 24, 1986
The Board rescinded its approval of
a reduction in the basic discount rate
from 7V2 percent to 7 percent at the
Federal Reserve Banks of Dallas and
San Francisco.
Votes for this action: Messrs. Volcker,
Martin, Wallich, Rice, Ms. Seger, and
Messrs. Angell and Johnson. Votes
against this action: None.
March 6, 1986
Effective March 7, 1986, the Board
approved actions taken by the directors of the Federal Reserve Banks of
Boston, New York, Philadelphia,
Richmond, Atlanta, Chicago, St.
Louis, Minneapolis, Kansas City,
Dallas, and San Francisco to reduce
the basic discount rate to 7 percent.
Votes for this action: Messrs. Volcker,
Martin, Wallich, Rice, Angell, and
Johnson. Votes against this action:
None. Absent and not voting:
Ms. Seger.
The Board subsequently approved
a similar action taken by the directors
of the Federal Reserve Bank of
Cleveland, effective March 10, 1986.
April 18, 1986
Effective
 April 21, 1986, the Board


85

approved actions taken by the directors of the Federal Reserve Banks of
Boston, New York, Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco
to reduce the basic discount rate to
6V2 percent.
Votes for this action: Messrs. Volcker,
Martin, Wallich, Ms. Seger, and Messrs.
Angell and Johnson. Vote against this
action: Mr. Rice.
The Board subsequently approved
similar actions taken by the directors
of the Federal Reserve Banks of
Atlanta and St. Louis, effective April
22, and Philadelphia, effective April
23, 1986.
July 10, 1986
Effective July 11, 1986, the Board
approved actions taken by the directors of the 12 Federal Reserve Banks
to reduce the basic discount rate to
6 percent.
Votes for this action: Messrs. Volcker,
Wallich, Rice, Ms. Seger, Messrs. Angell
and Johnson. Votes against this action:
None.1
August 20, 1986
Effective August 21, 1986, the Board
approved actions taken by the directors of the Federal Reserve Banks of
Boston, New York, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San
Francisco to reduce the basic discount rate to 5V2 percent.
Votes for this action: Messrs. Volcker,
Wallich, Rice, Ms. Seger, and Messrs.
Angell, Johnson, and Heller. Votes
against this action: None.
The Board subsequently approved
similar actions taken by the directors
of the Federal Reserve Banks of
Philadelphia and St. Louis, effective
August 22, 1986.

87

Record of Policy Actions of the
Federal Open Market Committee
The record of policy actions of the
Federal Open Market Committee is
presented in the ANNUAL REPORT
of the Board of Governors pursuant
to the requirements of section 10 of
the Federal Reserve Act. That section provides that the Board shall
keep a complete record of the actions
taken by the Board and by the
Federal Open Market Committee on
all questions of policy relating to
open market operations, that it shall
record therein the votes taken in
connection with the determination of
open market policies and the reasons
underlying each such action, and that
it shall include in its ANNUAL REPORT to the Congress a full account
of such actions.
In the pages that follow, there are
entries with respect to the policy
actions taken at the meetings of the
Federal Open Market Committee
held during the calendar year 1986,
including the votes on the policy
decisions made at those meetings as
well as a resume of the basis for the
decisions. The summary descriptions
of economic and financial conditions
are based on the information that
was available to the Committee at
the time of the meetings, rather than
on data as they may have been
revised later.
It will be noted from the record of
policy actions that in some cases the
decisions were made by unanimous
vote and that in other cases dissents
were recorded. The fact that a decision in favor of a general policy was



by a large majority, or even that it
was by unanimous vote, does not
necessarily mean that all members of
the Committee were equally agreed
as to the reasons for the particular
decision or as to the precise operations in the open market that were
called for to implement the general
policy.
During 1986 the policy record for
each meeting was released a few days
after the next regularly scheduled
meeting and was subsequently published in the Federal Reserve Bulletin.
Policy directives of the Federal
Open Market Committee are issued
to the Federal Reserve Bank of New
York as the Bank selected by the
Committee to execute transactions
for the System Open Market Account. In the area of domestic open
market activities, the Federal Reserve Bank of New York operates
under two separate directives from
the Open Market Committee: an
Authorization for Domestic Open
Market Operations and a Domestic
Policy Directive. (A new Domestic
Policy Directive is adopted at each
regularly scheduled meeting.) In the
foreign currency area, it operates
under an Authorization for Foreign
Currency Operations and a Foreign
Currency Directive. These four instruments are shown below in the
form in which they were in effect at
the beginning of 1986. Changes in
the instruments during the year are
reported in the records for the individual meetings.

88

FOMC Policy Actions

Authorization for Domestic
Open Market Operations
In Effect January 1, 1986
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve Bank of New York, to the extent
necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal Financing Bank, and securities that
are direct obligations of, or fully guaranteed as to principal and interest by, any
agency of the United States in the open
market, from or to securities dealers and
foreign and international accounts maintained at the Federal Reserve Bank of
New York, on a cash, regular, or deferred
delivery basis, for the System Open Market Account at market prices, and, for
such Account, to exchange maturing U.S.
Government and Federal agency securities with the Treasury or the individual
agencies or to allow them to mature without replacement; provided that the aggregate amount of U.S. Government and
Federal agency securities held in such Account (including forward commitments)
at the close of business on the day of a
meeting of the Committee at which action
is taken with respect to a domestic policy
directive shall not be increased or decreased by more than $6.0 billion during
the period commencing with the opening
of business on the day following such
meeting and ending with the close of business on the day of the next such meeting;
(b) When appropriate, to buy or sell
in the open market, from or to acceptance
dealers and foreign accounts maintained
at the Federal Reserve Bank of New York,
on a cash, regular, or deferred delivery
basis, for the account of the Federal Reserve Bank of New York at market discount rates, prime bankers acceptances
with maturities of up to nine months at
the time of acceptance that (1) arise out
of the current shipment of goods between
countries or within the United States, or
(2) arise out of the storage within the
United States of goods under contract of
sale or expected to move into the channels
of trade within a reasonable time and that
are secured throughout their life by a



warehouse receipt or similar document
conveying title to the underlying goods;
provided that the aggregate amount of
bankers acceptances held at any one time
shall not exceed $100 million;
(c) To buy U.S. Government securities, obligations that are direct obligations
of, or fully guaranteed as to principal and
interest by, any agency of the United
States, and prime bankers acceptances of
the types authorized for purchase under
l(b) above, from dealers for the account
of the Federal Reserve Bank of New York
under agreements for repurchase of such
securities, obligations, or acceptances in
15 calendar days or less, at rates that,
unless otherwise expressly authorized by
the Committee, shall be determined by
competitive bidding, after applying reasonable limitations on the volume of
agreements with individual dealers; provided that in the event Government securities or agency issues covered by any
such agreement are not repurchased by
the dealer pursuant to the agreement or
a renewal thereof, they shall be sold in
the market or transferred to the System
Open Market Account; and provided further that in the event bankers acceptances
covered by any such agreement are not
repurchased by the seller, they shall continue to be held by the Federal Reserve
Bank or shall be sold in the open market.
2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes
and directs the Federal Reserve Banks to
lend U.S. Government securities held in
the System Open Market Account to
Government securities dealers and to
banks participating in Government securities clearing arrangements conducted
through a Federal Reserve Bank, under
such instructions as the Committee may
specify from time to time.
3. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international
accounts maintained at the Federal Reserve Bank of New York, the Federal Open
Market Committee authorizes and directs
the Federal Reserve Bank of New York
(a) for System Open Market Account, to
sell U.S. Government securities to such
foreign and international accounts on the
bases set forth in paragraph l(a) under
agreements providing for the resale by such

FOMC Policy Actions
accounts of those securities within 15 calendar days on terms comparable to those
available on such transactions in the market; and (b) for New York Bank account,
when appropriate, to undertake with
dealers, subject to the conditions imposed
on purchases and sales of securities in paragraph l(c), repurchase agreements in U.S.
Government and agency securities, and
to arrange corresponding sale and repurchase agreements between its own account and foreign and international accounts maintained at the Bank.
Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when
appropriate.

Domestic Policy Directive
In Effect January 1, 19861
The information reviewed at this meeting
suggests that economic activity is expanding at a relatively modest pace in the current quarter. Total nonfarm payroll employment increased further in November,
though less than in October, and the civilian unemployment rate edged down to
7.0 percent. Retail sales and industrial
production picked up in November after
declining in October. After strengthening
in October, housing starts fell appreciably
in November. Incoming information generally suggests relatively sluggish business
capital spending. Revised merchandise
trade data for the third quarter confirm
that the deficit widened further, as nonoil imports continued to increase and exports fell somewhat. Broad measures of
prices and wages appear to be rising at
rates close to those recorded earlier in the
year.
After declining in October, Ml grew
substantially in November while growth
in M2 and M3 continued quite moderate.
Expansion in total domestic nonfinancial
debt has remained rapid. Through November, Ml expanded at a rate well above
the long-run range set by the Committee,
M2 grew at a rate a bit below the upper

1. Adopted by the Committee at its meeting
on Dec. 16-17, 1985.



end of its range for the year, and M3 expanded at a rate near the mid-point of its
range for 1985. Treasury bill rates have
fallen somewhat while other short-term
market interest rates have changed little
on balance since the November meeting
of the Committee; long-term rates have
moved appreciably lower over the period.
The trade-weighted value of the dollar
against major foreign currencies has declined on balance since the Committee's
meeting in early November, though the
dollar has tended to stabilize more recently.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation further, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee at the July meeting reaffirmed ranges for the year of 6 to 9 percent
for M2 and 6 to 9Vi percent for M3. The
associated range for total domestic nonfinancial debt was reaffirmed at 9 to 12
percent. With respect to Ml, the base was
moved forward to the second quarter of
1985 and a range was established at an
annual growth rate of 3 to 8 percent. The
range takes account of expectations of a
return of velocity growth toward more
usual patterns, following the sharp decline in velocity during the first half of the
year, while also recognizing a higher degree of uncertainty regarding that behavior. The appropriateness of the new range
will continue to be reexamined in the light
of evidence with respect to economic and
financial developments including developments in foreign exchange markets.
More generally, the Committee agreed that
growth in the aggregates may be in the
upper parts of their ranges, depending on
continuing developments with respect to
velocity and provided that inflationary
pressures remain subdued.
For 1986 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1985 to
the fourth quarter of 1986, of 4 to 7 percent for Ml, 6 to 9 percent for M2, and
6 to 9 percent for M3. The associated range
for growth in total domestic nonfinancial
debt was provisionally set at 8 to 11 percent for 1986. With respect to Ml particularly, the Committee recognized that uncertainties surrounding recent behavior of

90

FOMC Policy Actions

velocity would require careful reappraisal
of the target range at the beginning of
1986. Moreover, in establishing ranges for
next year, the Committee also recognized
that account would need to be taken of
experience with institutional and depository behavior in response to the completion of deposit rate deregulation early in
the year.
In the implementation of policy for the
immediate future, the Committee seeks
to decrease somewhat the existing degree
of pressure on reserve positions. This action is expected to be consistent with
growth in M2 and M3 over the period
from November to March at annual rates
of about 6 to 8 percent; while the behavior
of Ml continues to be subject to unusual
uncertainty, growth at an annual rate of
7 to 9 percent over the period is anticipated. Somewhat greater reserve restraint might, and somewhat lesser reserve restraint would, be acceptable
depending on behavior of the aggregates,
the strength of the business expansion,
developments in foreign exchange markets, progress against inflation, and conditions in domestic and international credit
markets. The Chairman may call for
Committee consultation if it appears to
the Manager for Domestic Operations that
reserve conditions during the period before the next meeting are likely to be associated with a federal funds rate persistently outside a range of 6 to 10 percent.

actions on the open market at home and
abroad, including transactions with the
U.S. Treasury, with the U.S. Exchange
Stabilization Fund established by Section
10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, with the
Bank for International Settlements, and
with other international financial institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks

Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs

B. To hold balances of, and to have
outstanding forward contracts to receive
or to deliver, the foreign currencies listed
in paragraph A above.
C. To draw foreign currencies and to
permit foreign banks to draw dollars under
the reciprocal currency arrangements listed
in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12
months after any amount outstanding at
that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding $10.0 billion. For this purpose,
the overall open position in all foreign
currencies is defined as the sum (disregarding signs) of net positions in individual currencies. The net position in a single
Authorization for Foreign
foreign currency is defined as holdings of
Currency Operations
balances in that currency, plus outstanding contracts for future receipt, minus
In Effect January 1, 1986
outstanding contracts for future delivery
of that currency, i.e., as the sum of these
1. The Federal Open Market Committee elements with due regard to sign.
2. The Federal Open Market Commitauthorizes and directs the Federal Reserve Bank of New York, for System Open tee directs the Federal Reserve Bank of
Market Account, to the extent necessary New York to maintain reciprocal curto carry out the Committee's foreign cur- rency arrangements ("swap" arrangerency directive and express authorizations ments) for the System Open Market Acby the Committee pursuant thereto, and count for periods up to a maximum of 12
in conformity with such procedural in- months with the following foreign banks,
structions as the Committee may issue from which are among those designated by the
Board of Governors of the Federal Retime to time:
A. To purchase and sell the follow- serve System under Section 214.5 of Reging foreign currencies in the form of cable ulation N, Relations with Foreign Banks
transfers through spot or forward trans- and Bankers, and with the approval of the




FOMC Policy Actions
Committee to renew such arrangements
on maturity:

Foreign bank

Amount
(millions of
dollars equivalent)

Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
700
500
250
300
4,000
600
1,250

Any changes in the terms of existing swap
arrangements, and the proposed terms of
any new arrangements that may be authorized, shall be referred for review and
approval to the Committee.
3. All transactions in foreign currencies undertaken under paragraph 1(A)
above shall, unless otherwise expressly
authorized by the Committee, be at prevailing market rates. For the purpose of
providing an investment return on System
holdings of foreign currencies, or for the
purpose of adjusting interest rates paid or
received in connection with swap drawings, transactions with foreign central
banks may be undertaken at non-market
exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the
Federal Reserve Bank of New York shall
not commit itself to maintain any specific
balance, unless authorized by the Federal
Open Market Committee. Any agreements
or understandings concerning the administration of the accounts maintained by the
Federal Reserve Bank of New York with
the foreign banks designated by the Board
of Governors under Section 214.5 of Regulation N shall be referred for review and
approval to the Committee.



91

5. Foreign currency holdings shall be
invested insofar as practicable, considering needs for minimum working balances.
Such investments shall be in liquid form,
and generally have no more than 12 months
remaining to maturity. When appropriate
in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign
central banks under agreements for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant
to the preceding paragraphs shall be reported promptly to the Foreign Currency
Subcommittee and the Committee. The
Foreign Currency Subcommittee consists
of the Chairman and Vice Chairman of
the Committee, the Vice Chairman of the
Board of Governors, and such other
member of the Board as the Chairman
may designate (or in the absence of members of the Board serving on the Subcommittee, other Board Members designated
by the Chairman as alternates, and in the
absence of the Vice Chairman of the
Committee, his alternate). Meetings of the
Subcommittee shall be called at the request of any member, or at the request
of the Manager for Foreign Operations,
for the purposes of reviewing recent or
contemplated operations and of consulting with the Manager on other matters
relating to his responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews
and consultations shall be referred for determination to the Federal Open Market
Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary
of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the
Treasury fully advised concerning System
foreign currency operations, and to consult with the Secretary on policy matters
relating to foreign currency operations;
C. From time to time, to transmit
appropriate reports and information to the
National Advisory Council on International Monetary and Financial Policies.

92

FOMC Policy Actions

8. Staff officers of the Committee are
authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the
Treasury Department.
9. All Federal Reserve Banks shall
participate in the foreign currency operations for System Account in accordance
with paragraph 3 G(l) of the Board of
Governors' Statement of Procedure with
Respect to Foreign Relationships of Federal Reserve Banks dated January 1,1944.

B. Maintain reciprocal currency
("swap") arrangements with selected foreign central banks and with the Bank for
International Settlements.
C. Cooperate in other respects with
central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light
of probable future needs for currencies.
B. To provide means for meeting
System and Treasury commitments in
particular currencies, and to facilitate operations of the Exchange Stabilization
Fund.
C. For such other purposes as may
Foreign Currency Directive
be expressly authorized by the Committee.
In Effect January 1, 1986
4. System foreign currency operations
shall be conducted:
1. System operations in foreign currenA. In close and continuous consulcies shall generally be directed at count- tation and cooperation with the United
ering disorderly market conditions, pro- States Treasury;
vided that market exchange rates for the
B. In cooperation, as appropriate,
U.S. dollar reflect actions and behavior with foreign monetary authorities; and
consistent with the IMF Article IV, SecC. In a manner consistent with the
tion 1.
obligations of the United States in the In2. To achieve this end the System shall: ternational Monetary Fund regarding exA. Undertake spot and forward pur- change arrangements under the IMF Archases and sales of foreign exchange.
ticle IV.




FOMC Policy Actions
Meeting Held on
February 11-12, 1986
Domestic Policy Directive
The information reviewed at this
meeting suggested that economic activity was expanding at a moderate
pace. A number of major indicators
of production and spending had shown
improvement in late 1985 and early
1986. Underlying inflationary pressures appeared to be generally well
contained. Prices in the latter part of
the year were boosted by developments in markets for food and energy, but oil prices declined substantially in early 1986.
The labor market, one of the few
areas for which data for early 1986
were available at the time of this
meeting, showed exceptional strength
in January. Total nonfarm payroll
employment rose 566,000—about
twice the average monthly increase
in the fourth quarter of 1985—and
the unemployment rate declined to
6.7 percent, its lowest rate in six
years. Hiring remained brisk at trade
establishments and in finance and
service industries, with those sectors
accounting for about two-thirds of
the rise. Employment gains in the
construction industry were also strong,
apparently due in part to unusually
good weather throughout most of the
country during the month. In the
manufacturing sector, employment
increased for the fourth consecutive
month, and the average number of
hours in the factory workweek remained at a high level.
The index of industrial production
rose an estimated 0.7 percent further
in December, after no change on
balance over the preceding two
months. Available information for
January suggested some additional
that month. The index of
rise in


93

capacity utilization for total industry
rose in December for the second
consecutive month, increasing 0.4
percentage point to 80.5 percent.
Nevertheless, the year-end rate remained below the most recent peak
of 82.0 percent recorded in the summer of 1984.
Total retail sales rose 1.9 percent
in December, after having declined
on balance over the previous two
months. Sales increased for all major
categories, but most of the rise was
attributable to sizable gains in outlays for durable goods. Boosted by
an expanded round of financing incentive programs, sales of domestic
automobiles registered a strong rebound toward the end of December
and were at an annual rate of 7.9
million units for the month as a
whole—about 1V2 million units above
the rate in each of the preceding two
months. Sales advanced further in
January to a rate of 8.6 million units.
Total private housing starts rose
sharply in December, more than
offsetting the appreciable decline in
the previous month, and newly issued permits for residential building
also increased substantially. The
strength in housing activity during
the month was apparent in both the
single-family and the multifamily sectors. For the fourth quarter as a
whole, both housing starts and permits were at annual rates of nearly
l3/4 million units—close to the pace
recorded in earlier quarters and for
the year 1985. Sales of new homes
improved a bit around year-end, and
sales of existing homes in the final
quarter of 1985 registered their fifth
consecutive quarterly increase.
Business capital spending strengthened somewhat in the fourth quarter.
Growth in expenditures for producers' durable equipment was especially rapid, possibly reflecting firms'

94

FOMC Policy Actions

attempts to realize tax benefits that
might be eliminated for equipment
installed after 1985. New orders for
nondefense capital goods grew appreciably in December but were
essentially flat over the fourth quarter
as a whole. Shipments of such goods,
however, rose about 3V2 percent in
the quarter. Outlays for nonresidential construction rose about 5 percent
in December after having changed
little on balance since August.
In the final months of 1985, the
rates of increase in consumer and
producer prices were somewhat higher
than in the spring and summer,
reflecting mainly what appeared to
be a temporary spurt in prices for
food and energy-related items. In the
agricultural component, prices of domestically produced crude foods had
leveled off in December and apparently fell in January. In the energy
sector, prices of crude oil and other
petroleum products tumbled dramatically in early 1986, and the effects
of these declines were likely to show
through at the consumer level in
coming months. Excluding the food
and energy sectors, consumer prices
rose in November and December at
a pace close to that for the year as a
whole, and producer prices changed
little on balance over the two-month
period. For the year 1985 consumer
prices rose about 3% percent, compared with 4 percent in 1984; producer prices rose about 1% percent
in both years. The index of average
hourly earnings of nonfarm production workers increased 3 percent last
year, about the same as in 1984.
The trade-weighted value of the
dollar against major foreign currencies had declined about 4 percent
further since the Committee's meeting in mid-December. Throughout
the period, and particularly around
 of the January meeting of
the time


the G-5 countries, exchange market
movements reflected varying assessments of official attitudes toward the
dollar and differing views about the
likely effects of sharply declining oil
prices on various industrial and developing countries. Preliminary data
on merchandise trade for the fourth
quarter suggested that the deficit
widened further from the already
high third-quarter level. Both oil and
non-oil imports rose, and exports
were little changed. For the year
1985 the deficit was estimated at
about $120 billion, up from $107
billion in 1984.
At its meeting on December 1617, 1985, the Committee had adopted
a directive that called for some limited decrease in the degree of pressure on reserve positions. The members expected such an approach to
policy implementation to be consistent with growth of M2 and M3 at
annual rates of about 6 to 8 percent
over the period from November to
March. Although the behavior of Ml
continued to be subject to unusual
uncertainty, the members expected
expansion of that aggregate to slow
to an annual rate of 7 to 9 percent
over the four-month period.1 It was
agreed that somewhat greater restraint might, and somewhat lesser
restraint would, be acceptable over

1. These growth rates and all subsequent data
on the monetary aggregates reflect annual
benchmarks and seasonal factors as published
on February 13, 1986.
The monetary aggregates are defined as follows: Ml comprises demand deposits at commercial banks and thrift institutions, currency
in circulation, travelers checks of nonbank issuers, negotiable order of withdrawal (NOW)
and automatic transfer service (ATS) accounts
at banks and thrift institutions, and credit union
share draft accounts. M2 contains Ml and savings and small-denomination time deposits (including money market deposit accounts

FOMC Policy Actions
the intermeeting period, depending
on the growth of the monetary aggregates, the strength of the business
expansion, the performance of the
dollar on foreign exchange markets,
progress against inflation, and conditions in domestic and international
credit markets. The intermeeting
range for the federal funds rate was
retained at 6 to 10 percent.
With respect to the Committee's
longer-run ranges for monetary
growth during 1985, Ml expanded at
a rate well above the range of 3 to 8
percent, at an annual rate, set for
the second half of the year; M2 grew
at a rate somewhat below the upper
end of its range of 6 to 9 percent for
the year; and M3 expanded at a rate
near the midpoint of its range of 6
to 9V2 percent for 1985. Expansion
in total domestic nonfinancial debt
was above the upper end of its
monitoring range of 9 to 12 percent
for the year. In early 1986, there was
evidence of a marked overall slowing
in the monetary aggregates. Ml,
which had increased at an annual
rate of about 12V2 percent in December, grew only a little in January; on
average over the two months, expansion in Ml was running near the
lower end of the short-run range
anticipated by the Committee at its
previous meeting. M2, which had

(MMDAs) at all depository institutions, overnight repurchase agreements (RPs) at commercial banks, overnight Eurodollars held at foreign
branches of U.S. banks by U.S. residents other
than banks, and money market mutual fund
shares other than those restricted to institutions). M3 is M2 plus large-denomination time
deposits at all depository institutions, large-denomination term RPs at commercial banks and
savings and loan associations, institution-only
money market mutual funds, and term Eurodollars held by U.S. residents in Canada and
the United Kingdom and at foreign branches
of U.S. banks elsewhere.



95

expanded moderately in December,
decelerated markedly in January,
reflecting both the slowdown in Ml
and quite low growth in its nontransaction component. Expansion in M3
picked up somewhat in January as
banks issued a substantial volume of
large time deposits to support a
further robust increase in bank credit;
its growth over the two-month period
was in line with the Committee's
expectations.
Open market operations during
the intermeeting period were directed toward achieving a slight decrease in pressures on reserve positions. Seasonal plus adjustment
borrowing from the discount window, while rising sharply around
year-end when excess reserves were
particularly large, averaged only about
$260 million during the two full
maintenance periods ending in January. Open market operations were
undertaken in an environment of
large seasonal fluctuations in reserve
needs, unusually high Treasury balances, a weakening tendency for the
dollar in foreign exchange markets,
incoming economic data that were
somewhat stronger than had generally been anticipated and, as the
period progressed, sharp further declines in oil prices. Under these
conditions the federal funds rate
generally hovered around the 8 percent level during much of the intermeeting interval and was considerably above that level for a few days
around year-end. More recently, the
rate moved down to a range of 73A
to 7% percent. Other short-term
rates rose a little over the period,
and intermediate- and long-term rates
were unchanged to somewhat lower.
The staff projections presented at
this meeting suggested that economic
activity and employment would be
somewhat stronger over the near

96

FOMC Policy Actions

term than had been anticipated at
the time of the previous meeting.
For the year 1985, the third successive year of economic expansion,
real GNP was estimated to have
increased about 2V2 percent, and
broad measures of inflation generally
had risen at rates of around 3V2 to
33/4 percent—close to, or somewhat
below, those recorded in the preceding two years. Real GNP was expected to grow a little more this year
than in 1985 and the average unemployment rate was projected to decline somewhat from the rate recorded last year. The rate of increase
in prices over the coming year was
expected to be little changed from
that experienced in 1985. It was
noted, however, that the sharp further declines in oil prices in the days
before this meeting had not been
incorporated in the projections.
In the Committee's discussion of
the economic situation and outlook
the members differed somewhat in
their assessments of the prospects for
business activity, but they generally
agreed that further expansion at a
somewhat faster pace than in 1985
was a reasonable expectation for
1986. At the same time, several
members commented that the outlook remained subject to substantial
uncertainties. Changes in the international prices of crude oil were so
large and so recent that they were
particularly difficult to evaluate.
Members also referred to uncertainties surrounding prospects for fiscal
policy stemming from the legal challenge to the Gramm-Rudman-Hollings legislation, the problems for
business investors associated with
pending tax reform legislation, and
the difficulties of predicting and assessing changes in the foreign exchange value of#the dollar.




While they recognized the limitations of any forecasts under present
circumstances, the members of the
Committee and the Federal Reserve
Bank presidents not currently serving
as members presented at this meeting
specific projections of economic activity, average prices, and the rate of
unemployment. For the period from
the fourth quarter of 1985 to the
fourth quarter of 1986, forecasts for
growth of real GNP centered on a
range of 3 to 3Vi percent, with a full
range of 23A to 41/* percent. Forecasts
of growth in nominal GNP had a
central tendency of 6V2 to 7V4 percent
and an overall range of 5 to 8V2
percent. With regard to the rate of
inflation, as indexed by the GNP
deflator, the projections centered on
rates of 3 to 4 percent and the range
was 2V2 to 4V2 percent. Estimates of
the rate of unemployment in the
fourth quarter of 1986 varied from
about 6V4 to 63/4 percent, with several
in the area of 6V2 percent. These
forecasts were based on the Committee's objectives for growth in money
and credit that were established at
this meeting. It was also assumed
that federal budget deficits would be
on a declining trend and that the
foreign exchange value of the dollar
would not change enough after its
substantial fall during 1985 to exert
a significant further impact on economic activity and prices during 1986.
In the course of the Committee's
discussion, members referred to the
recent improvement in several key
indicators of business activity. In
themselves these indicators augured
well for continuing economic growth
over the year ahead. On the other
hand some members commented that
the current and prospective performance of several important sectors of
the economy—such as agriculture

FOMC Policy Actions

97

and business fixed investment—did
The fiscal policy outlook, despite
not suggest a strengthening expan- current legal complications, was seen
sion. However, the actual perfor- as pointing to declining budgetary
mance of those sectors among others deficits. Members commented that
would be influenced to an important the better prospects for action on the
extent by a number of broad, over- federal budget had already helped to
riding factors.
reduce inflationary expectations and
Among the positive factors cited had exerted a quite favorable impact
by the members were the recent on domestic financial markets. The
decline in oil prices, lower interest actual implementation of deficit-rerates, and higher stock prices. These ducing measures—in terms of their
developments generally had favora- direct effects on government spendble implications for consumer spend- ing—would tend to restrain the
ing, housing, and many types of growth of income and economic acbusiness investment. Some members tivity. However, those effects might
also referred to the rapid growth in well be offset, at least in part, by
Ml and to the ample availability of increased private spending that would
liquidity as factors that would tend tend to be stimulated by downward
to support the expansion over the adjustments in interest rates as maryear ahead. The decline in the for- kets anticipated or responded to
eign exchange value of the dollar, reduced federal credit demands.
while exerting upward pressures on
In their discussion of the outlook
prices, was seen as another positive for inflation, the members expressed
development in terms of its impact somewhat differing views. These
on economic activity, although views ranged from expectations of little
differed considerably with regard to change, or perhaps some improvethe timing and extent of that impact. ment, from the recent trend to the
On the negative side, members anticipation of some deterioration.
mentioned the downside risks inher- In the context of the sizable decline
ent in the debt problems faced by in unemployment and poor producmany consumers and a number of tivity performance, some members
industries, including agriculture, and commented that the economy's
the associated financial strains on growth potential might be more limsome of their institutional lenders. ited than they had thought earlier
The recent decline in oil prices, while and that relatively rapid business
a favorable development in terms of expansion might at some point, though
its overall impact on the economy, not over the quarters immediately
nonetheless had negative conse- ahead, be associated with increasing
quences for energy producers and inflationary pressures. Other memtherefore for important parts of the bers, while also troubled by produccountry. Several members also tivity trends, nonetheless felt that the
stressed the adverse repercussions of rate of unemployment was still suflower oil prices on a number of ficiently high and capacity utilization
developing countries that were heav- rates sufficiently low to rule out such
ily dependent on oil exports to ser- a concern for the conduct of policy
vice their large debts to international for the time being. Views also diflending institutions, including major fered in emphasis with regard to the
inflationary impact of the decline in
U.S. banks.



98

FOMC Policy Actions

the foreign exchange value of the
dollar. The depreciation of the dollar, especially if it were to continue
substantially further, could involve
significant upward pressures on import prices at some point. Some
members emphasized their view that
the inflationary impact of the dollar
decline would be greatly dampened
by efforts of foreign business firms
to retain market shares. Others,
while recognizing that the effects of
the dollar's decline could be delayed
and in the short run offset by reduced
oil prices, felt that the inflationary
potential would be significant over
time, depending in part on other
economic policy developments. The
members generally agreed that, in
addition to oil price and federal
budgetary developments, the strong
price competition in many markets
and restrained labor settlements were
factors currently tending to curb
inflationary pressures.
At this meeting the Committee
reviewed the 1986 growth ranges for
the monetary and credit aggregates
that it had tentatively set in July
1985 within the framework of the
Full Employment and Balanced
Growth Act of 1978 (the HumphreyHawkins Act). Those tentative ranges
included growth, measured from the
fourth quarter of 1985 to the fourth
quarter of 1986, of 4 to 7 percent for
Ml and 6 to 9 percent for both M2
and M3. The associated range for
total domestic nonfinancial debt had
been provisionally set at 8 to 11
percent for 1986.
Discussion of the tentative range
for Ml focused on its appropriate
width and level in light of the economic and financial circumstances
that appeared to be in prospect for
the year ahead and on its unusual
behavior in recent years. While the
 expressed some differing
members


preferences regarding an appropriate
range for Ml, the differences were
not very large. All of the members
contemplated a marked slowing in
Ml growth from that experienced in
1985 as a likely development despite
their expectations of some pickup in
the expansion of nominal GNP.
Nonetheless, the members gave considerable emphasis to the uncertainties that continued to surround the
outlook for the velocity of Ml—the
relationship between Ml and GNP.
The sharp decline in Ml velocity
during 1985 was unexpected although
after the fact it could be explained
to a considerable extent, though not
entirely, by historical relationships
of money to income and interest
rates. Still, the changing composition
of Ml, involving a growing share of
interest-bearing components, had increased the proportion of Ml that
served both a transaction and a
savings function and appeared to
have made the behavior of this aggregate less predictable in comparison to earlier experience. Moreover,
demand deposits had grown much
more in 1985 than might have been
anticipated and it was not clear
whether that growth reflected more
cautious cash management practices
on the part of businesses or other
perhaps transitory factors.
In the view of most, but not all,
of the members it was desirable to
widen the tentative Ml range in
order to take account of the uncertainty in the relationship between
Ml and economic activity and prices,
but in general the suggested ranges
involved approximately the same
midpoints. The upper limits that
were proposed generally assumed
there would not be as large a drop
in velocity this year as had occurred
in 1985. But it was noted that in the
absence of some reversal in the sharp

1985 drop in Ml velocity, growth
toward the upper end of the range
might well prove to be consistent
with satisfactory economic performance. It might even be appropriate
for Ml to run above the upper bound
of its range should recent velocity
trends persist. On the other hand,
more moderate growth in Ml could
be indicated to the extent that its
velocity proved to be stronger than
expected. In general, there was
agreement that the behavior of Ml
should be evaluated in light of its
consistency with M2 and M3 and
also in the context of broader economic and financial developments
and the potential for inflationary
pressures.
With regard to the broader monetary aggregates, the members indicated that the tentative ranges established in July for 1986 were still
appropriate. Growth last year was
generally in line with expectations,
and on balance over the past few
years, the behavior of M2 and M3
seemed to have been less affected
than Ml by institutional and interest
rate changes. In part that development reflected the fact that the
broader aggregates include an array
of deposit and money market instruments that often exhibit offsetting
movements.
In the course of the Committee's
discussion, consideration was given
to the appropriate degree of emphasis to be given to Ml in policy
implementation, at least until there
was more evidence that the behavior
of Ml velocity could be anticipated
with a greater degree of confidence.
Most of the members felt that the
Committee's current procedures remained appropriate, taking account
of the considerations underlying the
range adopted and its interpretation.
Digitized forSome emphasized that Ml was likely
FRASER


FOMC Policy Actions

99

to prove again to be a more useful
guide for policy implementation in a
variety of potential economic settings. One member commented that
over time Ml would probably serve
as a better indicator of future GNP
than the broader measures of money.
Alternatively, it was suggested that
while Ml might have become a less
reliable guide, at least under recently
prevailing circumstances, it continued to have significant value as a
policy indicator when considered in
the context of the behavior of the
broader aggregates. Collectively, the
aggregates used by the Committee
appeared to have more significance
than any one of them viewed separately.
With respect to the monitoring
range for total domestic nonfinancial
debt, a majority of the members
favored adopting the range of 8 to
11 percent for 1986 that had been
tentatively established in July. A
number of other members preferred
somewhat higher ranges in the expectation that debt expansion, while
decreasing from its actual pace in
1985, might still be around—or perhaps a bit above—the upper limit of
the tentative range. In the course of
the discussion, it was suggested that
the Committee drop its monitoring
range for debt, perhaps substituting
another measure such as total liquid
assets. It was pointed out, among
other things, that the debt aggregate
was subject to serious measurement
problems, including a large amount
of double counting—related for example to financial activities such as
advance refundings and mortgage
financing by state and local governments—and distortions arising from
an extraordinary pace of share retirements financed by borrowing. It was
also noted that the debt measure had
been deviating substantially in recent

100 FOMC Policy Actions
years from past historical relationships to GNP. A majority of the
members, while acknowledging the
difficulties with this aggregate and
agreeing that further study was
needed, continued to feel that it
served as a useful benchmark for
evaluating the growth of debt in the
economy and that its behavior should
continue to be monitored, particularly in light of the Committee's
concern about the increasing debt
burden in the economy.
At the conclusion of the Committee's consideration of the long-run
ranges, all of the members indicated
that they favored or found acceptable
monetary growth ranges for 1986 of
3 to 8 percent for Ml and 6 to 9
percent for both M2 and M3. A
monitoring range of 8 to 11 percent
was also accepted for total domestic
nonfinancial debt. In keeping with
the Committee's usual procedures
under the Humphrey-Hawkins Act,
the ranges would be reviewed at
midyear, or sooner if deemed necessary, in the light of their behavior
in relation to economic and financial
developments.
The following paragraph relating
to the long-run ranges was approved
for the domestic policy directive:
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation further, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee agreed to establish the following ranges for monetary growth,
measured from the fourth quarter of 1985
to the fourth quarter of 1986. With respect to Ml, the Committee recognized
that, based on the experience of recent
years, the behavior of that aggregate was
subject to substantial uncertainties in relationship to economic activity and prices,
depending among other things on its re


sponsiveness to changes in interest rates.
It agreed that an appropriate target range
under existing circumstances would be 3
to 8 percent, but it intends to evaluate
movements in Ml in the light of its consistency with the other monetary aggregates, developments in the economy and
financial markets, and potential inflationary pressures. It adopted a range of 6 to
9 percent for M2 and 6 to 9 percent for
M3. The associated range for growth in
total domestic nonfinancial debt was set
at 8 to 11 percent for the year 1986.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Black, Forrestal,
Johnson, Keehn, Martin, Parry, Rice,
Ms. Seger, and Mr. Wallich. Votes
against this action: None.
In the Committee's discussion of
policy implementation for the weeks
immediately ahead, a number of
members referred to the difficulty of
clearly appraising the significance of
the most recent economic and financial developments. While monetary
expansion had slowed in recent weeks,
the period of reduced growth was
brief and it followed a period of
substantial expansion. Strong employment growth did not appear to
be fully matched by other current
economic indicators. The needed
correction of the value of the dollar
entailed risks of a more fundamental
change in market attitudes and a
cumulating decline in the exchange
rate that might discourage willingness to hold dollars at declining
interest rates. In these circumstances, nearly all participants agreed
that little or no change in reserve
availability was warranted. In that
connection, members also noted that
the recent slowing of the monetary
aggregates was reasonably in line
with the Committee's expectations at
the time of the December meeting
for the November-to-March period.
In the course of the Committee's

FOMC Policy Actions
discussion it was noted that while
monetary policy had been relatively
accommodative for some time, shortterm rates had shown little tendency
to decline and the Federal funds rate
remained significantly above the discount rate even though borrowing at
the discount window had dropped to
rather low levels last month. Moreover, long-term rates had declined
substantially since early fall. In that
context, and against the already accommodative mode of open market
operations, the point was made that
the discount rate might need to be
reduced to permit or accommodate
a market tendency toward lower
rates and that such a move would be
a desirable complement to open market operations in the light of the
risks of a slower rate of business
expansion. More generally, in prevailing circumstances, the members
wished to conduct open market operations in a manner that would not
in itself signal or encourage higher
interest rates or impede the tendency
for some market rates to decline. At
the same time, there was concern
that policy implementation be sensitive to a situation in which a decline
in the dollar might tend to feed upon
itself, leading to an exaggerated fall
with disturbing implications for inflation, financial markets, and the economy over time. In that connection it
was noted that the desirability of a
discount rate action would depend
on evolving economic and financial
circumstances; among other factors,
in the light of the risks for the dollar
in foreign exchange markets, such
action would need to take account
of the willingness of major central
banks abroad to take broadly similar
actions.
In the Committee's discussion of
possible intermeeting adjustments in



101

policy implementation, the members
agreed that the appropriate degree
of pressure on reserve positions should
continue to be determined in light of
the growth of the monetary aggregates judged in the context of incoming information about the economy,
the outlook for prices, and conditions
in domestic and international financial markets, including the value of
the dollar in the foreign exchange
markets. A majority of the members
agreed with the suggestion that there
should be no presumptions about the
likely direction of any intermeeting
adjustments, given the many uncertainties about prospective economic
and financial developments and the
behavior of the monetary aggregates.
However, some members believed
that policy implementation should
remain especially alert to developments that might call for some easing
of reserve conditions in light of the
considerable risks that they saw of
some weakening in the economic
expansion.
At the conclusion of the Committee's discussion a majority of the
members indicated their acceptance
of a directive that called for maintaining unchanged conditions of reserve availability. The members expected such an approach to policy
implementation to be consistent with
growth in M2 and M3 at annual rates
of about 6 percent and 7 percent
respectively for the period from November to March. Over the same
period they expected Ml to expand
at an annual rate of around 7 percent, although the behavior of Ml
was seen as still subject to unusual
uncertainty. The Committee indicated that it might find somewhat
greater or somewhat lesser reserve
restraint acceptable over the intermeeting period depending on the

102 FOMC Policy Actions
growth of the monetary aggregates,
the strength of the business expansion, the performance of the dollar
on foreign exchange markets, progress against inflation, and conditions
in domestic and international credit
markets. The members agreed that
the intermeeting range for the federal funds rate, which provides a
mechanism for initiating consultation
of the Committee when its boundaries are persistently exceeded, should
be left unchanged at 6 to 10 percent.
A t the conclusion of the meeting,
the following domestic policy directive, embodying the Committee's
long-run ranges and its short-run
operating instructions, was issued to
the Federal Reserve Bank of N e w
York:
The information reviewed at this meeting suggests that economic activity is currently expanding at a moderate pace. Total nonfarm payroll employment increased
substantially further in January, and the
civilian unemployment rate declined to 6.7
percent. In December industrial production rose further, and available information suggests some additional rise in January. Retail sales increased considerably
in December after declining on balance
over the previous two months, and housing starts rebounded from their OctoberNovember pace. Business capital spending strengthened somewhat in the fourth
quarter. Merchandise trade data for the
fourth quarter suggest that the deficit widened further from the very high thirdquarter level. In late 1985 consumer and
producer prices rose somewhat more than
earlier, but for the year as a whole broad
measures of prices and wages increased
at rates close to those recorded in 1984.
With respect to the Committee's ranges
for longer-term monetary growth, Ml expanded at a rate well above the range set
for the second half of 1985; M2 grew at
a rate somewhat below the upper end of
its range for the year; and M3 expanded
at a rate near the midpoint of its range
for 1985. Expansion in total domestic
nonfinancial debt was above the upper
end of its monitoring range for the year.
 growth in Ml and M2 slowed
In January


markedly, while growth in M3 picked up
as banks issued a substantial volume of
large time deposits to support further robust growth in bank credit. Interest rates
have fluctuated considerably since the
December meeting of the Committee; on
balance, short-term interest rates have
risen a little while longer-term rates are
unchanged to somewhat lower. The tradeweighted value of the dollar against major
foreign currencies has declined further.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation further, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee agreed to establish the following ranges for monetary growth,
measured from the fourth quarter of 1985
to the fourth quarter of 1986. With respect to Ml, the Committee recognized
that, based on the experience of recent
years, the behavior of that aggregate was
subject to substantial uncertainties in relationship to economic activity and prices,
depending among other things on its responsiveness to changes in interest rates.
It agreed that an appropriate target range
under existing circumstances would be 3
to 8 percent, but it intends to evaluate
movements in Ml in the light of its consistency with the other monetary aggregates, developments in the economy and
financial markets, and potential inflationary pressures. It adopted a range of 6 to
9 percent for M2 and 6 to 9 percent for
M3. The associated range for growth in
total domestic nonfinancial debt was set
at 8 to 11 percent for the year 1986.
In the implementation of policy for the
immediate future, the Committee seeks
to maintain the existing degree of pressure on reserve positions. This action is
expected to be consistent with growth in
M2 and M3 over the period from November to March at annual rates of about 6
percent and 7 percent, respectively; while
the behavior of Ml continues to be subject to unusual uncertainty, growth at an
annual rate of about 7 percent over the
period is anticipated. Somewhat greater
reserve restraint or somewhat lesser reserve restraint might be acceptable depending on behavior of the aggregates,
the strength of the business expansion,
developments in foreign exchange markets, progress against inflation, and conditions in domestic and international credit

FOMC Policy Actions 103
tially in January, rose further in
February, but employment in manufacturing fell after four months of
gains. The average monthly rise in
employment for the two months was
about 325,000, somewhat higher than
the average in the fourth quarter of
Votes for the short-run operational paragraph: Messrs. Volcker, Corrigan, 1985. Hiring was exceptionally brisk
Angell, Black, Forrestal, Johnson, at retail trade and service establishKeehn, Parry, Rice, and Wallich. Votes ments in both months. In contrast to
against this action: Mr. Martin and Ms. the employment gains reported in
Seger.
the payroll survey, employment as
measured by the household survey
Mr. Martin and Ms. Seger dis- fell almost 400,000 in February, about
sented because they preferred some offsetting the increase in January,
easing of reserve conditions given and the civilian unemployment rate
the risks they saw of unacceptably rose 0.6 percentage point to 7.3
sluggish economic expansion. Such percent. A sharp drop in agricultural
risks would be reduced in their view employment, not measured by the
by lower short-term interest rates, payroll survey, accounted for about
which had not declined in line with half of the decline; job losses in
recent reductions in long-term inter- energy-related industries apparently
est rates and in inflation expecta- also contributed to the decline.
tions. They also believed some modThe index of industrial production
est easing could lead to market
fell an estimated 0.6 percent in Febconditions that would facilitate a
ruary after edging up only slightly in
reduction in the discount rate.
January. Although output of automotive goods was higher in February, production cutbacks were wideMeeting Held on April 1, 1986
spread for most other categories of
goods. In particular, petroleum drillDomestic Policy Directive
ing activity was curtailed sharply in
The information reviewed at this response to the dramatic declines in
meeting indicated a mixed pattern of oil prices. Limited information availdevelopments. On balance it ap- able for March, including reported
peared that economic activity had cutbacks in motor vehicle assemblies
picked up from the reduced fourth- and steel production and a further
quarter pace, although spending re- decline in drilling activity, suggested
mained sluggish in some key sectors. continued sluggishness in producPrice developments thus far in 1986 tion. The index of capacity utilization
had been dominated by sharp de- for total industry declined 0.6 perclines in oil prices. Energy prices fell cent to 80.0 percent; over the past
substantially over the first two months year the index generally had flucof the year and food prices also tuated in a range of 80 to 81 percent.
declined somewhat, while prices of
Although retail sales changed little
most other goods and services rose in January and February, they reat a moderate pace.
mained about 1.0 percent above the
Total nonfarm payroll employ- average in the fourth quarter, owing

ment, which had increased substan- to a spurt in December. The rise
markets. The Chairman may call for
Committee consultation if it appears to
the Manager for Domestic Operations that
reserve conditions during the period before the next meeting are likely to be associated with a federal funds rate persistently outside a range of 6 to 10 percent.



104 FOMC Policy Actions
relative to the level of the fourth
quarter was attributable to gains in
outlays for durable goods, particularly automobiles and furniture and
appliances. Sales of domestic automobiles, boosted by additional financing incentive programs, rose to
an average annual rate of 8.3 million
units over the January-February period, about IV2 million units above
the depressed fourth-quarter rate.
However, sales slipped during the
first 20 days of March to a rate of 7
million units.
Total private housing starts surged
in the January-February period to
an annual rate of more than 2 million
units, compared with an average of
about l3/4 million units for the fourth
quarter and for the year 1985. The
increase was concentrated in the
single-family sector, though construction of multifamily structures
remained at a relatively brisk pace
despite continued high rental vacancy rates. Sales of new homes
declined somewhat in February to a
level about equal to the fourthquarter average, while sales of existing homes remained at about their
January pace and a little lower than
in the fourth quarter. Over the period since the FOMC meeting in
February, the average rate on commitments at savings and loan associations for conventional fixed-rate
home mortgage loans had declined
nearly 1 percentage point to about
10 percent, the lowest level since
1978.
Business capital spending apparently weakened somewhat in early
1986 after a surge around the end of
last year. Shipments of nondefense
capital goods from domestic producers rose 5 percent in February but
remained well below the average in
the fourth quarter. New orders for
nondefense capital goods, after hav


ing been essentially flat in the fourth
quarter, declined sharply in January
but turned up in February. Outlays
for nonresidential structures probably fell in early 1986, as spending on
petroleum drilling activity reportedly
plummeted.
Largely reflecting declines in energy prices, the producer price index
for finished goods fell substantially
in January and February, dropping
0.7 percent and 1.6 percent respectively. Producer prices for consumer
foods and for crude food materials
also declined appreciably over the
two months. The consumer price
index declined 0.4 percent in February—its first decline in more than
three years—more than offsetting a
rise in January. A sharp drop in
prices for gasoline and fuel oil accounted for most of the February
decline, but food prices also fell.
Prices of other goods and services
generally rose moderately. The index
of average hourly earnings edged up
on balance over the first two months
of the year.
The trade-weighted value of the
dollar against major foreign currencies continued to fall through about
mid-March but recently rose somewhat; on balance the dollar had
declined about 1% percent over the
period since the February meeting.
Disappointment among market participants about data released on U.S.
economic activity and concerns about
potential adverse effects of the sharp
declines in oil prices on U.S. banks
holding sizable loans to energy-related businesses and to oil-producing
developing countries exerted downward pressure on the dollar, offset
to some extent by views that foreign
authorities, especially the Japanese,
were reluctant to see further appreciation of their currencies. The merchandise trade deficit in January

appeared to have been only slightly
smaller than in December; preliminary data for February suggested
that exports increased and that the
price and quantity of oil imports
declined.
At its meeting on February 11-12,
1986, the Committee had adopted a
directive that called for maintaining
unchanged conditions of reserve availability. The members expected such
an approach to policy implementation
to be consistent with growth in M2
and M3 at annual rates of about 6
percent and 7 percent respectively for
the period from November to March.
Over the same period they expected
Ml to expand at an annual rate of
around 7 percent, though the behavior
of Ml was viewed as still subject to
unusual uncertainty. The Committee
agreed that somewhat greater or
somewhat lesser reserve restraint might
be acceptable over the intermeeting
period, depending on the behavior of
the aggregates, the strength of the
business expansion, developments in
foreign exchange markets, progress
against inflation, and conditions in
domestic and international credit markets. The intermeeting range for the
federal funds rate was retained at 6 to
10 percent.
After growing little in January, Ml
expanded at an annual rate of about
1XA percent in February and was
expected to grow at a rate of about
14 percent in March—leaving this
aggregate at a level somewhat above
the upper end of the Committee's
range for the year. On the other hand,
growth of M2 was generally sluggish
over the first three months of the
year, and expansion in M3 remained
moderate. As a result, M2 was running below its long-run range while
M3 was near the midpoint of its range
for 1986. The expansion in total domestic nonfinancial debt appeared to



FOMC Policy Actions 105
have slowed appreciably over the first
quarter, after extraordinarily rapid
growth around the end of last year.
Open market operations during the
intermeeting period were directed at
maintaining about the prevailing degree of pressure on reserve positions.
Seasonal plus adjustment borrowing
from the discount window averaged
about $350 million during the three
full reserve maintenance periods after
the February FOMC meeting. That
level was inflated a bit by technical
problems associated with wire transfers early in the interval; more recently, borrowing was running in the
area of $225 million to $250 million.
Federal funds generally traded in
the 7% to 8 percent area during the
first half of the intermeeting period.
After the announcement by the Federal Reserve on March 7 of a reduction in the discount rate from iVi to 7
percent, the federal funds rate fell to
around 7% percent and generally fluctuated around that level throughout
the remainder of the period. Other
short-term interest rates declined about
V2 to % percentage point over the
intermeeting interval. Long-term rates
dropped more sharply, falling by 1 to
nearly 13A percentage points, against
a background of further weakness in
oil prices, mixed economic news, and
declines in some aggregate measures
of prices.
During the Committee's discussion
of the economic situation and outlook, several members commented
on the contrast between current indications of some sluggishness in
economic activity and a number of
underlying developments that pointed
to stronger expansion later in the
year and perhaps in 1987 as well.
The incoming information on business activity was mixed, but it was
thought that on balance such information suggested a pickup in eco-

106 FOMC Policy Actions
nomic growth in the first half of this
year from the very slow pace in the
fourth quarter. Several members observed, though, that the near-term
outlook remained relatively weak,
particularly taking account of substantial cutbacks in oil company investments associated with declining
oil prices. At the same time a combination of developments—including reduced interest rates, higher
stock prices, lower oil prices, and a
decline in the dollar on exchange
markets—was likely to exert an increasingly stimulative impact on the
economy as the year progressed. The
staff projection presented at this
meeting had suggested that the expansion in real GNP would strengthen
by the second half of the year, after
relatively modest growth in the first
half.
In evaluating the economic outlook, some members referred to the
apparent improvement in business
confidence over the course of recent
weeks as the cost of capital declined
and international competitiveness
improved. It was thought that substantial declines in interest rates would
have a stimulative impact on interestsensitive sectors of the economy;
indeed, that impact was already being
felt in the housing sector. Members
also reported that lower interest rates
were leading to a large volume of
mortgage debt refinancings. The latter would reduce monthly servicing
costs and would therefore tend to
support consumer spending over time.
The rise in stock market prices and
the decline in oil prices also were
viewed as favorable for consumer
spending. Taking account of these
various factors, a few members commented that potential deviations from
the staff projection were likely to be
in the direction of more rapid growth.



Other members, while seeing some
improvement as a likely prospect for
the second half of the year, nonetheless emphasized the uncertainties—
both domestic and international—
that continued to trouble the business outlook and that could portend
more restrained expansion than was
currently anticipated. Consumer debt
burdens remained large and one
member observed that sales of new
automobiles currently appeared to
be inhibited to some extent by a
reduced willingness or capacity of
some consumers to borrow. In the
business sector, while investment
spending was likely to benefit considerably from the reduced cost of
capital, its overall growth might well
be restrained by weak demands for
business equipment in important sectors of the economy such as agriculture and energy, and by the impact
over time of apparent overbuilding,
notably of office structures, in some
parts of the country. One member
also noted that uncertainties relating
to tax reform legislation were continuing to inhibit business investment
spending. Members also indicated
that the improved conditions in financial markets stemmed to a large
extent from expectations of future
reductions in federal budget deficits
and a failure to implement such
reductions could have highly adverse
consequences for financial markets
and the economy.
With respect to exchange market
developments, the decline in the
dollar was viewed as implying upward pressures on domestic prices
over time, but also as likely to
stimulate business activity. While
there were few actual indications to
date of directly induced increases in
export sales, contacts with business
suggested that export markets were

FOMC Policy Actions 107
improving. The members continued
to differ in their assessment of when
and to what extent a lower dollar
would exert its favorable effects on
overall domestic economic activity or
begin to show through significantly
in prices. One emphasized that efforts by foreign firms to retain market shares, especially in the absence
of strong economic growth abroad,
would tend to reduce the expansionary and price effects of the dollar's
depreciation.
Some members commented that
the strength of the expansion in the
U.S. economy over the next few
quarters would depend to an important extent on the rate of economic
growth in key industrial nations
abroad and the resulting increase in
their demands for U.S. exports. It
was noted, however, that stronger
expansion in some major foreign
countries might well be contingent
on their pursuit of more stimulative
economic policies, and there was
question about the willingness of
some key countries to undertake
such policies at this time. A member
also commented on the importance
of world commodity prices in maintaining the international purchasing
power of many developing countries,
in addition to those that exported
oil, and the potentially adverse repercussions of lower commodity prices
on world trade and U.S. export
industries.
In their comments about the outlook for inflation the members gave
considerable emphasis to the favorable impact of declining oil prices,
but it was also noted that those
prices remained vulnerable to a reversal. In the staffs economic projections, the rate of increase in prices
was projected to slow over the near
term, largely because of the favora


ble, one-time effects of lower oil
prices. Members noted that the current downward pressures on prices
provided an opportunity for the more
effective pursuit of policies designed
to foster a continuing reduction in
the rate of inflation. It was observed
in this connection that while considerable progress had been made in
curbing inflation in key industries
such as manufacturing and construction, the services industries appeared
to be particularly resistant to further
anti-inflationary progress. Partly for
that reason but also in light of the
recent weakness in productivity, the
depreciation of the dollar, federal
budget uncertainties, and the possibility of a reversal in oil prices, some
members expressed concern about
the underlying inflationary potential
in the economy. They also cited
recent price increases by a major
automobile manufacturer as a worrisome development in terms of its
broader implications for inflationary
attitudes and future inflation.
At its meeting in February the
Committee had agreed on policy
objectives for monetary growth for
the period from the fourth quarter
of 1985 to the fourth quarter of 1986
that included ranges of 3 to 8 percent
for Ml and 6 to 9 percent for both
M2 and M3. The associated range
for total domestic nonfinancial debt
was set at 8 to 11 percent. In keeping
with the Committee's usual procedures under the Humphrey-Hawkins Act, these ranges would be reviewed at the July meeting or sooner
if warranted by unanticipated developments.
In the Committee's discussion of
policy implementation for the weeks
immediately ahead, all of the members favored directing open market
operations at least initially toward

108 FOMC Policy Actions
maintaining essentially unchanged
conditions of reserve availability.
However, some shadings of opinion
were expressed. A few preferred to
tilt the provision of reserves toward
slightly easier reserve conditions or
at least to retain flexibility in that
direction, depending on emerging
market conditions. Others expressed
the view that current reserve pressures should be well maintained,
recognizing the possibility that such
an approach to policy implementation might involve some little tightening of market conditions since
market participants might be anticipating some easing. More generally,
a number of members commented
that policy implementation needed
to take account of the already accommodative posture of monetary policy
and the favorable, though somewhat
uncertain, prospects for stronger expansion over the intermediate term,
if not in the period immediately
ahead.
The members anticipated that, with
little or no change in reserve conditions, the monetary aggregates would
tend to grow at rates that were
broadly consistent with the Committee's target ranges for the year. Ml
might remain on the high side in the
weeks ahead, but it was emphasized
that the behavior of Ml remained
subject to considerable uncertainty.
According to an analysis prepared
for this meeting, Ml growth over the
next three months might be close to
that experienced over the Decemberto-March period, assuming unchanged conditions of reserve availability, somewhat slower expansion
in nominal GNP, and no further
declines in short-term market rates.
However, demands for Ml balances
were likely to be boosted, possibly
substantially, if interest rates should
decline
 further during the period


ahead. Some members also stressed
the desirability of focusing on the
tendency for the velocity of Ml to
remain relatively weak and the associated possibility that relatively rapid
growth in Ml and in reserves might
be needed to help sustain the expansion. In general, the members agreed
that the behavior of Ml should
continue to be evaluated in light of
its consistency with M2 and M3 and
also in the context of broader economic and financial developments,
the potential for inflationary pressures, and exchange market conditions. Over the next three months
M2 was expected to strengthen from
its reduced pace in the first quarter,
while M3 was likely to continue to
expand at a moderate rate.
With regard to possible intermeeting adjustments in policy implementation, the members could foresee
potential developments that might
call for either some easing or some
tightening, given the uncertainties
about prospective economic and financial developments and the behavior of the monetary aggregates. In
these circumstances, most of the
members felt that there should be no
presumptions about the likely direction of any intermeeting adjustments. However, some members believed that policy implementation
should remain especially alert to
developments that might call for
some easing of reserve conditions,
given the risks that the expansion
might prove to be significantly weaker
than expected over the period immediately ahead. It was noted that a
further reduction in the discount
rate, should market conditions here
and policy developments abroad make
such an action desirable, could have
implications for monetary policy implementation and, depending on the
circumstances, might require a con-

FOMC Policy Actions 109
sultation of the Committee prior to
the next scheduled meeting on May
20.
At the conclusion of the Committee's discussion, all of the members
indicated their acceptance of a directive that called for maintaining about
the existing degree of pressure on
reserve conditions. The members expected such an approach to policy
implementation to be consistent with
growth of both M2 and M3 at an
annual rate of about 7 percent for
the period from March to June. Over
the same period, Ml was expected
to expand at an annual rate of about
7 to 8 percent, but the members
recognized that the behavior of Ml
remained subject to unusual uncertainty. The Committee indicated that
it might find somewhat lesser or
somewhat greater reserve availability
acceptable over the intermeeting period depending on the growth of the
monetary aggregates, the strength of
the business expansion, the performance of the dollar on foreign exchange markets, progress against inflation, and conditions in domestic
and international credit markets. The
Committee agreed that the current
intermeeting range of 6 to 10 percent
for the federal funds rate should be
retained, although some members
suggested that the current range
might be lowered as a technical
adjustment that would bring the
present trading level of the federal
funds rate closer to the midpoint of
the range.
At the conclusion of the meeting
the following domestic policy directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates a mixed pattern of developments with evidence of a pickup in eco
nomic activity from the reduced fourth

quarter pace but with spending sluggish
in some key sectors. Total nonfarm payroll employment increased appreciably
further in February following a large rise
in January, but employment in manufacturing fell after four months of gains and
industrial production declined. The civilian unemployment rate rose sharply to 7.3
percent. Retail sales were little changed
in January and February after rising over
the previous two months, while housing
starts were well above their pace in late
1985. Business capital spending apparently weakened somewhat in early 1986.
The merchandise trade deficit for January
appears to have been only slightly smaller
than in December; preliminary data for
February suggest that exports increased
and that the price and quantity of oil imports declined. Largely reflecting declines
in energy prices, consumer prices edged
down on balance over the first two months
of 1986 and producer prices fell substantially.
Growth in Ml picked up considerably
over the course of the first quarter, leaving this aggregate by March somewhat
above the upper end of its range for the
year. On the other hand, growth of M2
was generally sluggish over the past 3
months and was running below its longrun range. Expansion of M3 was moderate during the winter months, with
growth around the midpoint of its range
for 1986. Interest rates have declined considerably since the February meeting of
the Committee. On March 6, the Federal
Reserve Board approved a reduction in
the discount rate from TA to 7 percent.
The trade-weighted value of the dollar
against major foreign currencies continued to decline through mid-March but has
risen somewhat more recently; on balance
the dollar has declined slightly since the
February meeting.
The Federal Open Market Committee
seeks monetary and financial conditions
that will foster reasonable price stability
over time, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee agreed at its February
meeting to establish the following ranges
for monetary growth, measured from the
fourth quarter of 1985 to the fourth quarter
of 1986. With respect to Ml, the Committee recognized that, based on the experience of recent years, the behavior of
that aggregate was subject to substantial

110 FOMC Policy Actions
uncertainties in relationship to economic
activity and prices, depending among other
things on its responsiveness to changes in
interest rates. It agreed that an appropriate target range under existing circumstances would be 3 to 8 percent, but it
intends to evaluate movements in Ml in
the light of its consistency with the other
monetary aggregates, developments in the
economy and financial markets, and potential inflationary pressures. It adopted
a range of 6 to 9 percent for M2 and 6 to
9 percent for M3. The associated range
for growth in total domestic nonfinancial
debt was set at 8 to 11 percent for the year
1986.
In the implementation of policy for the
immediate future, the Committee seeks
to maintain the existing degree of pressure on reserve positions. This action is
expected to be consistent with growth in
M2 and M3 over the period from March
to June at annual rates of about 7 percent;
while the behavior of Ml continues to be
subject to unusual uncertainty, growth at
an annual rate of about 7 to 8 percent
over the period is anticipated. Somewhat
lesser reserve restraint or somewhat greater
reserve restraint might be acceptable depending on behavior of the aggregates,
the strength of the business expansion,
developments in foreign exchange markets, progress against inflation, and conditions in domestic and international credit
markets. The Chairman may call for
Committee consultation if it appears to
the Manager for Domestic Operations that
reserve conditions during the period before the next meeting are likely to be associated with a federal funds rate persistently outside a range of 6 to 10 percent.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Horn, Johnson, Melzer, Morris, Rice, Ms. Seger,
and Mr. Wallich. Votes against this action: None. Absent and not voting: Mr.
Martin.

On April 21, the Committee held
a conference by telephone after the
announcement of a reduction in the
discount rate from 7 to 6V2 percent
effective on that date. The members
reviewed recent economic and financial developments, including the behavior of
 the monetary aggregates


and technical factors affecting the
provision of reserves. At the conclusion of the discussion the members
agreed that no changes were needed
in the current directive adopted at
the meeting on April 1. It was
understood that in carrying out open
market operations within the framework of that directive, and recognizing that partial data suggested a
strengthening in all the monetary
aggregates in recent weeks, a degree
of caution should be exercised to
avoid an impression that a further
change in the discount rate was
sought over the period immediately
ahead.

Meeting Held on May 20, 1986
1. Domestic Policy Directive
The information reviewed at this
meeting indicated a mixed pattern of
economic developments. On balance,
growth in real GNP, estimated by the
Commerce Department to have picked
up in the first quarter to an annual
rate of 3.7 percent, appeared to be
expanding at a relatively modest pace
in the current quarter. Thus far in
1986, broad measures of prices, heavily influenced by sharp reductions in
petroleum prices, had shown declines
in energy and food prices and moderate increases in prices of most other
goods and services.
Total nonfarm payroll employment rose 200,000 further in April,
after increasing about 3A million in
the first quarter, but employment
trends continued to be unbalanced
across industries. Employment in finance and service industries remained strong, and hiring at construction sites picked up substantially
after changing little in the first quarter.
In manufacturing, however, job losses

were recorded for the third consecutive month, and the length of the
average factory workweek slipped
from the high levels registered at the
end of last year. Employment in the
oil and gas industry plummeted during the first four months of the year,
as firms curtailed drilling activity in
response to lower oil prices. The
civilian unemployment rate edged
down to 7.1 percent in April, close
to the level that had prevailed
throughout 1985.
The index of industrial production
rose an estimated 0.2 percent in
April after steep declines in the
preceding two months. The increase
was attributable mainly to a rebound
in motor vehicle assemblies, but
there were also some gains in steel
output and in production of equipment for business and for defense
and space; these developments offset
a further plunge in oil and gas well
drilling. The index of capacity utilization for total industry dropped 0.7
percent further in March to 79.3
percent, its lowest level since December 1983, and apparently changed
little in April.
Total retail sales rose Vi percent
in April, primarily reflecting a substantial increase in spending for automotive products and continued gains
in outlays for general merchandise.
Sales of domestic automobiles,
sparked by a new series of sales and
financing incentives, strengthened to
an annual rate of 8.0 million units
from their sluggish pace of 6.9 million units in March. Sales rose even
further in early May to a rate of 8.8
million units.
Total private housing starts increased about 4 percent in April
from a relatively high level. During
the first four months of 1986, starts
averaged nearly 2 million units at an
Digitized forannual rate, well above levels of
FRASER


FOMC Policy Actions 111
about l3/4 million units in each of the
previous three years. Issuance of
residential building permits also rose
somewhat in April, with the increase
concentrated in the single-family sector. Permits for multifamily structures fell, apparently in response to
high rental vacancy rates, particularly in the South, and perhaps to
heightened uncertainties about the
prospects for changes in tax legislation relating to certain types of real
estate investment.
Weakness in the energy sector has
contributed to a slowing in business
capital spending in recent months.
Outlays for nonresidential structures
fell sharply as spending on petroleum
drilling activity plummeted. Expenditures for capital equipment dropped
substantially, about reversing the rise
in the previous quarter that was
attributed to purchases of equipment
in advance of potentially adverse tax
law changes. New orders for nondefense capital goods, which had been
flat in the fourth quarter, remained
lackluster through March. Recent
surveys of capital spending plans
point to no more than modest growth
in outlays for the year as a whole.
Largely reflecting declines in energy prices, the producer price index
fell 0.6 percent in April, its fourth
consecutive monthly decline, and over
the first four months of the year the
index was down about 11 percent at
an annual rate. The consumer price
index had fallen 0.4 percent in March
for the second month in a row, and
had declined at an annual rate of
about 2 percent over the first three
months of the year. Though movements in these indexes were dominated by the sharp drop in prices of
petroleum products, declines in food
prices at both the producer and
consumer levels also helped to hold
down inflation in the first quarter.

112 FOMC Policy Actions
On the other hand, prices of goods
other than food and energy items
generally have been rising in recent
months at about the same pace that
prevailed last year, while prices of
services have been increasing a little
faster than in 1985.
The trade-weighted value of the
dollar against major foreign currencies rose somewhat in the week
before this meeting but on balance it
had declined about 43A percent further over the period since the Committee's meeting on April 1; the
largest decline was against the Japanese yen. There was little net change
over the period in the differential
between U.S. and a weighted average of foreign interest rates.
Throughout the period, but especially around the time of the Tokyo
Summit in early May, statements of
U.S. and foreign officials appeared
to influence trading behavior. The
U.S. merchandise trade deficit appeared to have decreased somewhat
in the first quarter, as both the
volume and average price of oil
imports fell and nonagricultural exports picked up.
At its meeting on April 1, 1986,
the Committee had adopted a directive that called for maintaining about
the existing degree of pressure on
reserve positions. The members expected such an approach to policy
implementation to be consistent with
growth of both M2 and M3 at an
annual rate of about 7 percent for
the period from March to June. Over
the same period, Ml was expected
to expand at an annual rate of about
7 to 8 percent, but the members
recognized that the behavior of Ml
remained subject to unusual uncertainty. The Committee agreed that
somewhat lesser or somewhat greater
reserve restraint might be acceptable



over the intermeeting period depending on the behavior of the aggregates, the strength of the business
expansion, developments in foreign
exchange markets, progress against
inflation, and conditions in domestic
and international credit markets. The
intermeeting range for the federal
funds rate was retained at 6 to 10
percent.
Ml grew at an annual rate of 14V2
percent in April, close to its rapid
pace in March, and data available
thus far for early May indicated
further strong expansion. Ml has
expanded more rapidly than the
Committee expected at the time of
its April 1 meeting, and for the year
to date has grown at a rate well
above the 8 percent upper limit of
the Committee's range for 1986. M2
and M3 expanded in April at annual
rates of about 133A percent and IOV2
percent respectively, also outpacing
the growth paths previously expected
for the second quarter. However,
given its earlier weakness, M2 moved
only into the lower part of its longrun range in April, while M3 rose to
a level slightly above the midpoint
of its range for 1986. Expansion of
total domestic nonfinancial debt,
which had slowed appreciably over
the first quarter, appeared to be
continuing at a relatively moderate
pace.
Open market operations during
the intermeeting period were directed at maintaining about the prevailing degree of pressure on reserve
positions. During the three full reserve maintenance periods after the
April 1 meeting, seasonal plus adjustment borrowing from the discount window averaged about $275
million. Borrowing was exceptionally
light in the days immediately preceding the announcement on April 18

FOMC Policy Actions 113
of a reduction in the discount rate
from 7 to 6V2 percent, but has
averaged a little more than $300
million since then.
Federal funds generally traded in
the 63/4 to 7 percent area over most
of the intermeeting period, down
about xh percentage point from the
rate prevailing around the time of
the previous meeting. Most other
short-term rates also declined on
balance, though by less than the
federal funds and discount rates,
while long-term rates moved somewhat higher. After declining early in
the intermeeting period, interest rates
subsequently rose against the background of an upturn in oil prices,
strong money supply growth, further
depreciation of the dollar, and
emerging views among market participants that the scope for further
easing in monetary policy was reduced.
The staff projections presented at
this meeting suggested that expansion in real GNP, though relatively
modest in the current quarter, would
likely strengthen over the second
half of 1986 and would be at a
moderate pace in 1987. The rate of
unemployment was expected to decline marginally over the projection
horizon. The general level of prices,
as measured by the GNP implicit
deflator, was projected to rise relatively slowly in the near term, but to
pick up later as the favorable effects
of declining oil prices dissipated and
upward pressures on prices from the
dollar's depreciation tended to intensify.
In the Committee's discussion of
the economic situation and outlook,
members commented that stronger
economic expansion in line with the
staff forecast was a reasonable expectation for the second half of the



year, but several members also stressed
the risks of a different outcome. It
was generally noted that there was no
firm evidence to date of a pickup from
the currently sluggish rate of expansion in overall economic activity and
that weaknesses remained in key sectors of the economy such as energy
and agriculture. However, a number
of fundamental factors pointed to
faster growth later, though there was
considerable uncertainty about both
the timing and the magnitude of the
prospective strengthening. These factors included substantially reduced interest rates, higher prices in equity
markets, lower oil prices, and the
favorable effects of the dollar's depreciation on the international competitiveness of U.S. products. At the same
time, some members observed that
inflationary pressures could increase
over the next several quarters, particularly if domestic demands for goods
and services proved to be quite strong
at a time when the lagged price effects
of the dollar's depreciation were being
felt. It was noted in this connection
that progress toward reducing federal
budget deficits was urgently needed to
improve prospects for balanced economic growth and help protect against
renewed inflation.
With regard to specific indications
of prospective strengthening in economic activity, members referred
among other developments to the
apparent improvement in business
confidence in many parts of the
country. Housing activity was described as strong in most areas, and
some members cited evidence of a
pickup in sales of consumer durables
related to housing. And although
activity in manufacturing industries
tended to remain sluggish, the service industries generally were experiencing considerable growth, includ-

114 FOMC Policy Actions
ing notably the financial services and
tourism. While the staff forecast had
indicated continuing growth of consumer spending and modest expansion in business fixed investment and
inventories, one member referred to
the possibility that expansion in these
key sectors might gather momentum
as uncertainties about the actual
strength of business were resolved
favorably, contributing to a greater
acceleration in real economic growth.
Another member commented that
the buildup of liquidity was seen by
many observers as a positive factor
for the expansion, especially in the
context of what was viewed as an
accommodative monetary policy.
While broad measures of liquidity
had not shown particular strength in
recent quarters, holdings of cash
balances had been expanding rapidly
and were available to support a
considerable pickup in spending at
some point in the future.
On the other hand, several members indicated that the possibility of
the expansion remaining weak could
not be ruled out. In this regard, a
number of members indicated that
they viewed business fixed investment as a major uncertainty in the
overall economic outlook, noting that
current indicators of future investment remained weak and that there
was considerable reluctance to undertake some investment activities
pending the passage of tax reform
legislation. Moreover, the apparent
overbuilding of commercial and other
facilities in some parts of the country
and weak investment demand in
depressed sectors of the economy
would tend to inhibit investment
spending over the quarters ahead.
Members also referred to shortfalls
in revenues of state and local governments in depressed areas of the
country
as a negative factor. Finally,


one member referred to the possibility of an inventory correction should
the currently positive business mood
begin to deteriorate.
A number of members expressed
the view that the performance of the
economy during the second half of
the year would hinge to a considerable extent on foreign developments.
Some felt that the main downside
risks in the nearer-term business
outlook were on the foreign trade
side. To an important degree, rising
demands for U.S. exports would
depend on faster growth in key
foreign industrial nations, and it was
observed that such growth had been
disappointing and a pickup might not
occur in the absence of more stimulative economic policies in at least
some of those countries. And while
a depreciated dollar could be expected to have a favorable impact on
U.S. foreign trade over time, that
impact might well be delayed and
muted in an environment of slow
growth abroad and of highly competitive markets for internationally traded
goods. Further growth in protectionism in the United States might likewise have a strongly inhibiting effect
on U.S. export markets as foreign
nations retaliated.
A number of members raised questions about the outlook for inflation.
It was pointed out that the recently
favorable behavior of overall prices
was the result of price declines in the
energy and food sectors. Those declines would soon be in the past, and
upward pressures on overall prices
would reemerge, stimulated in part
by the lagged inflationary effects of
the dollar's depreciation. Indeed,
prices of nonfuel imports were already indicated to have turned up.
Even if oil prices were to stabilize
near current levels, their favorable
impact on overall prices would tend

to wane over the quarters ahead,
and the possibility of a reversal in oil
prices could not be dismissed. Agricultural prices also could not be
expected to continue trending downward, and indeed some firming had
occurred recently. On the more favorable side, members referred to
the intense competition in many
markets and to restrained wage settlements in a number of industries.
Basic cost pressures appeared to be
well contained so far in manufacturing industries although price and
wage pressures in the service industries remained disturbing. In one
view any intensification of inflationary pressures might well be delayed
until well into 1987.
At its meeting in February the
Committee had agreed on policy
objectives for monetary growth for
the period from the fourth quarter
of 1985 to the fourth quarter of 1986
that included ranges of 3 to 8 percent
for Ml and 6 to 9 percent for both
M2 and M3. The associated range
for total domestic nonfinancial debt
was set at 8 to 11 percent. In keeping
with the Committee's usual procedures under the Humphrey-Hawkins
Act, these ranges would be reviewed
at the July meeting when provisional
ranges would also be established for
1987.
The Committee's policy discussion
focused to a considerable extent on
the members' evaluation of the recent behavior of the monetary aggregates, particularly Ml. With varying
degrees of emphasis, members questioned the reliability of Ml developments as a guide for the conduct of
monetary policy under prevailing circumstances. It was noted in this
connection that the rapid growth in
Ml and the associated weakness in
its velocity appeared to reflect to a
considerable but nonetheless uncer


FOMC Policy Actions 115
tain extent the earlier declines that
had occurred in market interest rates
in the context of subsiding inflationary expectations and softness in final
demands. From this viewpoint, the
relatively rapid growth in the demand for money balances needed to
be accommodated in order to assure
a satisfactory performance of the
economy. On the other hand, rapid
monetary growth also might imply
an excessive buildup in liquidity, with
inflationary implications for the future. In that context, several members emphasized the need to gauge
the performance of Ml in light of
whether behavior of other, broader,
monetary aggregates provided confirming evidence of a rapid growth
in liquid assets.
Members noted that expansion of
the broader aggregates, despite the
more rapid growth in recent weeks,
was well within the Committee's
ranges for 1986, and indeed near the
lower end of the range in the case of
M2. The more moderate growth of
the broader aggregates this year,
along with relatively moderate growth
of L, an even more encompassing
measure of the public's liquid asset
holdings, raised questions as to
whether the growth of Ml really
represented a potentially excessive
buildup in liquidity or was more of a
shift in the composition of liquid
holdings in response to relative
movements in interest rates. However, continuing growth in M2 and
M3 at the relatively rapid rates experienced recently could be a matter
of increasing concern. One member
expressed a somewhat differing assessment of the behavior of the
broader aggregates this year in that
the contingent liabilities of banks,
most of which back instruments that
are not included in M2 and M3, also
seemed to have grown rapidly. More-

116 FOMC Policy Actions
over, growth of M2 and M3 appeared
to have been held back by investor
portfolio shifts into bonds and equities, including mutual funds, and the
unwinding of such shifts could result
in faster growth later. In this view,
therefore, less comfort could be taken
from the relatively restrained growth
of the broader aggregates for the
year to date.
According to an analysis prepared
for this meeting, the maintenance of
the current degree of pressure on
reserve positions could be expected
to be associated with slower monetary growth over the balance of the
quarter. Even so, because of the
substantial expansion in April and
early May, growth for the quarter as
a whole would be considerably faster
than was expected at the time of the
previous meeting, notably in the case
of Ml. According to this analysis,
the unusual surge in demand deposits
was likely to subside over the course
of coming weeks, while some moderation could also be expected in the
growth of NOW accounts as both
depositors and depository institutions completed their adjustments to
the lower market interest rates that
had emerged. Members indicated
broad agreement with this analysis,
but they questioned the timing and
extent of the slower growth. In light
of the uncertainties that were involved, some proposed omitting numerical references in the directive to
the Committee's expectations for
monetary growth in the second
quarter. However, despite the greater
than usual uncertainties, a majority
of the members preferred to retain
the customary procedure of specifying numerical growth expectations in
the directive.
In the Committee's discussion of
policy implementation for the period

immediately ahead, most of the


members indicated that they were in
favor of continuing to direct open
market operations at least initially
toward maintaining the existing degree of reserve availability. In support of this view, members commented that the rapid growth of the
monetary aggregates and the favorable conditions for a pickup in business activity had to be weighed
against the currently sluggish growth
in overall business activity and the
consequent uncertainties surrounding the economic outlook. One member felt, however, that the rapid
growth in Ml and the potential for
increased inflationary pressures later
in the year and in 1987 argued for
some firming.
With regard to possible adjustments during the intermeeting period, a majority of the members felt
that policy implementation should be
alert to the potential need for some
firming of reserve conditions, especially if business indicators gave a
clear signal of a pickup in the rate of
economic expansion and monetary
growth did not slow in line with
expectations. Generally, these members did not want to rule out the
possibility of some easing in the
weeks immediately ahead, but they
foresaw the potential desirability of
such a course only in the context of
appreciably more sluggish economic
performance than was now expected.
In this connection, one member emphasized that continuing declines in
the velocity of money in combination
with a sluggish economic performance might warrant some easing of
reserve conditions. Other members
believed that there should be no
presumptions about the likely direction of any intermeeting adjustments, given the prevailing uncertainties about the performance of the
economy, possible developments in

domestic and international financial
markets, and the behavior of the
monetary aggregates. Some members also expressed the view that the
Committee should be tolerant of a
shortfall of Ml growth below current
expectations in light of the rapid
expansion of Ml recently and for the
year-to-date. It was noted that account needed to be taken of the
behavior of the dollar on foreign
exchange markets in any intermeeting adjustments.
At the conclusion of the Committee's discussion, all but one member
indicated their acceptance of a directive that called for no change in the
existing degree of pressure on reserve positions. The members expected such an action to be associated with a deceleration in monetary
growth over the balance of the second quarter. Because such growth
had been rapid thus far in the quarter,
the members anticipated faster growth
of the monetary aggregates, especially Ml, than was expected at the
time of the April 1 meeting. The
members recognized that the behavior of Ml remained subject to unusual uncertainty, but they agreed that
its growth might be in the area of 12
to 14 percent for the period from
March to June, assuming some decline over the balance of the quarter.
For the same period, M2 and M3
were now expected to expand at
annual rates of around 8 to 10
percent. The members agreed that if
the anticipated slowing in monetary
growth did not occur, somewhat
greater reserve pressure would be
acceptable in the context of a pickup
in the expansion of economic activity, with account being taken of
conditions in domestic and international financial markets and the behavior of the dollar on foreign exchange markets. On the other hand,



FOMC Policy Actions 117
somewhat lesser reserve restraint
might be acceptable in the event of
pronounced sluggishness in the performance of the economy in association with a marked slowing in monetary growth.
The Committee agreed that the
current intermeeting range for the
federal funds rate should be reduced
by 1 percentage point to 5 to 9
percent. The reduction was intended
as a purely technical adjustment in
the context of an unchanged degree
of reserve availability and its purpose
was to provide a more symmetrical
range around the lower federal funds
rate that had prevailed for some
time. The members regard the federal funds range as a mechanism for
initiating Committee consultation
when its boundaries are persistently
exceeded.
At the conclusion of the meeting
the following domestic policy directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates a mixed pattern of developments but suggests on balance that economic activity is expanding at a relatively
modest pace in the current quarter. Total
nonfarm payroll employment increased
moderately further in April following a
considerable rise in the first quarter, but
employment in manufacturing fell for the
third consecutive month. The civilian unemployment rate edged down to 7.1 percent. Industrial production and total retail
sales turned up in April following earlier
declines, while housing starts rose somewhat further from a relatively high level.
Weakness in the energy sector has contributed to a slowing of business capital
spending. The merchandise trade deficit
appears to have decreased somewhat in
the first quarter, as the volume and average price of oil imports fell. Largely reflecting declines in energy prices, consumer prices have declined somewhat since
late 1985 and producer prices have fallen
substantially.
In April Ml continued to grow at a rapid
pace, leaving this aggregate above the up-

118 FOMC Policy Actions
per end of its range for the year. Growth
of the broader aggregates, especially of
M2, strengthened considerably in April,
bringing M2 into the lower part of its longrun range and M3 slightly above the midpoint of its range for 1986. Most shortterm interest rates have declined on balance since the April 1 meeting of the
Committee, while long-term rates are
somewhat higher. On April 18, the Federal Reserve Board approved a reduction
in the discount rate from 7 to 6!/2 percent.
The trade-weighted value of the dollar
against major foreign currencies has risen
somewhat recently but on balance the
dollar has declined further since the April
meeting, particularly against the Japanese
yen.
The Federal Open Market Committee
seeks monetary and financial conditions
that will foster reasonable price stability
over time, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee agreed at its February
meeting to establish the following ranges
for monetary growth, measured from the
fourth quarter of 1985 to the fourth quarter
of 1986. With respect to Ml, the Committee recognized that, based on the experience of recent years, the behavior of
that aggregate was subject to substantial
uncertainties in relationship to economic
activity and prices, depending among other
things on its responsiveness to changes in
interest rates. It agreed that an appropriate target range under existing circumstances would be 3 to 8 percent, but it
intends to evaluate movements in Ml in
the light of its consistency with the other
monetary aggregates, developments in the
economy and financial markets, and potential inflationary pressures. It adopted
a range of 6 to 9 percent for M2 and 6 to
9 percent for M3. The associated range
for growth in total domestic nonfinancial
debt was set at 8 to 11 percent for the year
1986.
In the implementation of policy for the
immediate future, the Committee seeks
to maintain the existing degree of pressure on reserve positions. This action is
expected to be consistent with a deceleration in money growth over the balance
of the quarter. However, in view of the
rapid money growth thus far in the quarter
and the apparent weakness in velocity,
the Committee anticipates faster growth

for the monetary aggregates, particularly


Ml, than expected at the last meeting. M2
and M3 are expected to expand over the
period from March to June at annual rates
of about 8 to 10 percent. While the behavior of Ml continues to be subject to
unusual uncertainty, growth at an annual
rate of about 12 to 14 percent over the
period is now anticipated. If the anticipated slowing in monetary growth does
not develop, somewhat greater reserve
restraint would be acceptable in the context of a pickup in growth of the economy,
taking account of conditions in domestic
and international financial markets and
the behavior of the dollar in foreign exchange markets. Somewhat lesser reserve
restraint might be acceptable in the context of a marked slowing in money growth
anid pronounced sluggishness in economic
rformance. The Chairman may call for
per
Committee consultation if it appears to
the Manager for Domestic Operations that
reserve conditions during the period before the next meeting are likely to be associated with a federal funds rate persistently outside a range of 5 to 9 percent.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Mrs. Horn,
Messrs. Johnson, Melzer, Morris, Rice,
and Ms. Seger. Vote against this action:
Mr. Wallich. Absent and not voting:
None.

Mr. Wallich dissented because he
preferred to direct open market operations toward somewhat greater
restraint. He was concerned about
the implications of rapid monetary
expansion for inflation and wanted
to take action promptly to help
assure slower monetary growth.

2. Authorization for Domestic
Open Market Operations
On June 18, 1986, the Committee
approved a temporary increase of $3
billion, to $9 billion, in the limit
between Committee meetings on
changes in System Account holdings
of U.S. government and federal
agency securities specified in paragraph l(a) of the authorization for

FOMC Policy Actions 119
domestic open market operations.
The increase was effective immediately for the intermeeting period
ending with the close of business on
July 9, 1986.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Mrs. Horn,
Messrs. Johnson, Morris, Rice, and
Boykin. Votes against this action: None.
Absent and not voting: Mr. Melzer, Ms.
Seger and Mr. Wallich. (Mr. Boykin
voted as alternate for Mr. Melzer.)
This action was taken on the recommendation of the Manager for
Domestic Operations. The Manager
had advised that through June 17,
outright purchases of securities thus
far in the intermeeting interval had
reduced the leeway under the usual
$6 billion limit to about %2lA billion.
It was anticipated that substantial
additional purchases of securities in
excess of that leeway would be necessary over the remainder of the
intermeeting period. Currency in circulation was expanding rapidly, as
expected, while required reserves
were growing considerably faster than
had been anticipated earlier.
Meeting Held on July 8-9, 1986
Domestic Policy Directive
The information reviewed at this
meeting indicates that economic activity has expanded at a relatively
slow pace recently. Consumer spending and housing activity have been
strong, reflecting large gains in real
income and lower interest rates.
However, business investment has
remained sluggish, and the trade
balance has continued to deteriorate.
At the same time, wage and price
increases have been moderate.
Total nonfarm payroll employ
ment grew slowly again in June,


rising about 80,000 after adjusting
for strike activity. Employment continued falling in manufacturing, particularly in the metals and machinery
industries, and more jobs were lost
in oil and gas extraction. Hiring in
construction, which had surged in
April, levelled off in May and fell in
June. Service industries continued to
post large gains in employment in
June; however, hiring at retail establishments was markedly slower than
earlier in the year. The civilian unemployment rate declined to 7.1
percent from 7.3 percent in May.
The index of industrial production
fell 0.6 percent in May and has
declined 1% percent since December, erasing the gains that occurred
at the end of 1985. The decrease in
output in May was related in part to
a further contraction in oil and gas
drilling and to a decline in auto
assemblies. Output elsewhere generally was lower with notable weakness in the production of business
equipment and selected materials for
durable goods. Available indicators
of industrial activity in June are
mixed; auto assemblies are expected
to have increased, but the output of
steel decreased and strike activity
hampered production in the lumber,
aluminum,
and
communication
equipment industries. Capacity utilization in manufacturing was 78.6
percent in May, off 0.6 percentage
point from April and more than 2
percentage points from January.
Total retail sales were about unchanged in May; however, sales at
the retail control group of stores,
which excludes outlets for autos,
gasoline, and building materials, rose
somewhat and were stronger in the
previous two months than originally
reported. Total car sales in May were
at an annual rate of llVi million
units, up from the 10% million unit

120 FOMC Policy Actions
pace registered in the first quarter.
Sales of domestic automobiles have
held at around a rate of 8V4 million
units since the expansion of incentive
financing programs in late April, up
from the 73A million unit pace earlier
in the year.
Housing activity generally has been
brisk. Starts fell a little in May but
still were at a 1.9 million unit annual
rate. Single-family starts held steady
at a level that was fractionally above
the first-quarter average, while the
pace of house sales, although down
in May, has remained relatively robust. At the same time, home prices
have risen sharply. Multifamily starts
fell sharply in May, owing in part to
the depletion of tax-exempt funds
raised by huge issues of mortgage
revenue bonds in late 1985 and to
overbuilding in a number of major
markets.
Business investment probably declined again in the second quarter,
reflecting weakness in the energy
sector, the availability of unutilized
capacity, and concerns about tax
reform. Shipments of nondefense
capital goods have been sluggish in
recent months. In the construction
area, drilling activity has fallen sharply
further, and spending for office and
other commercial projects also has
weakened. Moreover, advance indicators of investment spending have
been weak. New commitments for
nonresidential building have fallen
since late last year, and new orders
for nondefense capital goods were
flat in May after two months of
declines. In addition, according to
the latest surveys, businesses are
planning little, if any, increase in
nominal spending for 1986 as a whole.
The producer and consumer price
indexes turned up in May, as the
steep decline in energy prices ended.
Producer
 prices rose 0.6 percent,


after declining in the previous four
months. Consumer prices were up
0.2 percent; retail gasoline prices
rose 2l/i percent, after falling around
25 percent from January to April.
Excluding food and energy, the CPI
has risen at an annual rate of about
3V2 percent so far this year, somewhat less than in 1985. Prices of
goods have been essentially flat,
while some types of services have
registered large increases.
The trade-weighted value of the
dollar against major foreign currencies has declined almost T}h percent
on balance since the FOMC meeting
on May 20; the largest decline was
registered against the yen. In the
first two weeks of the intermeeting
period, the dollar appreciated somewhat in response to data indicating a
possible strengthening of U.S. economic activity. This rise was subsequently reversed when additional information
on
the
economic
performance in the United States
disappointed market expectations.
The differential between U.S. interest rates and a weighted average of
foreign short-term interest rates
changed little on balance over the
period. Preliminary data for the U.S.
merchandise trade deficit showed a
somewhat larger deficit in April than
the average for the first quarter,
because a decline in the value of oil
imports was more than offset by an
increase in imports of other goods;
exports in April-May combined seem
to have been no higher than the firstquarter rate.
At its meeting on May 20, 1986,
the Committee had adopted a directive that called for maintaining the
existing degree of pressure on reserve positions. The members expected such an approach to policy to
be consistent with a deceleration in
money growth over the balance of

FOMC Policy Actions 121
the quarter. However, because such the midpoint of its range for the
growth had been rapid in April and year. M3 continued to increase at
early May, the Committee antici- rates around the middle of its longpated faster growth for the quarter run range in May and June.
as a whole, particularly for Ml, than
However, in the light of the clear
was expected at the time of the April indications that business activity,
meeting. M2 and M3 were expected rather than picking up momentum,
to expand over the period from was growing at a slower pace, open
March to June at annual rates of 8 market operations during the interto 10 percent. Over the same period, meeting period continued to be diMl was anticipated to grow at an rected at maintaining the prevailing
annual rate of 12 to 14 percent, degree of pressure on reserve posialthough the members acknowledged tions. In the three complete maintethat the behavior of Ml continues to nance periods since the May meetbe subject to unusual uncertainty. ing, adjustment plus seasonal
The Committee agreed that if money borrowing at the discount window
growth did not slow as anticipated, averaged $285 million. Excess resomewhat greater reserve restraint serves averaged around $830 million
would be acceptable in the context in the first two maintenance periods
of a pickup in the economic expan- after the meeting, but then rose to
sion, while also taking account of $1.3 billion in the most recent period,
conditions in domestic and interna- which included the quarter-end statetional financial markets and the be- ment date.
havior of the dollar on foreign exFederal funds generally traded in
change markets. On the other hand, a narrow range around 67/s percent
they agreed that somewhat lesser over the intermeeting period, aside
restraint might be acceptable if the from somefirmingaround the quarter
expansion weakened noticeably in end. Other interest rates rose early
conjunction with a marked slowing in the period but then retreated amid
in monetary growth. The intermeet- signs of weakness in the economies
ing range for the federal funds rate of the United States and some of its
was reduced to 5 to 9 percent.
major trading partners, renewing exIn the circumstances, Ml contin- pectations of a discount rate cut in
ued to expand rapidly over the past the near future. Since the May meettwo months, with growth surging to ing short-term market rates had dean annual rate of around 23 percent clined 10 to 40 basis points on
in May before decelerating to a rate balance. In long-term markets, yields
of about 15 percent in June. Conse- on Treasury securities were down
quently, growth in Ml from March about 35 to 45 basis points, while
to June, at an annual rate of almost rates on corporate and municipal
18 percent, substantially exceeded bonds were about unchanged and
the Committee's short-run expecta- those on fixed-rate mortgages were
tions and so far this year has been up around V of a percentage point.
2
well above the Committee's 3 to 8 The widening spread between rates
percent range for 1986. Growth in on long-term private securities and
M2 slowed in both May and June Treasury issues appeared to reflect
but was still somewhat above earlier strong foreign demand for recently
expectations for the quarter and issued long-term Treasuries, large
 this aggregate up to around
brought
supplies of private securities, and


122 FOMC Policy Actions
increased focus on the value of the
greater call protection for Treasury
issues.
The staff projections presented at
this meeting continued to suggest
that growth in real GNP, though
relatively slow in the second quarter,
was likely to strengthen somewhat in
the second half of the year. However, growth over the next two quarters probably would be at a slower
pace than had been expected earlier
in part because news on business
investment and foreign trade was
disappointing. Growth was projected
to continue at a moderate pace in
1987. The civilian unemployment rate
was forecast to decline somewhat
over the projection horizon. Inflation
was expected to pick up a bit over
the next six quarters, as the favorable
effects of declining energy prices
diminished while upward pressure on
prices from the effects of the dollar's
depreciation tended to intensify.
In their discussion of the economic
situation and outlook, Committee
members generally agreed that some
strengthening in the economic expansion was a reasonable expectation
for the second half of the year and
that, on the whole, the prospects
were favorable for continuing growth
at a moderate pace in 1987. At the
same time, members emphasized the
uncertainties that surrounded the
economic outlook and a number
commented that the improvement in
economic activity might well be more
delayed or less pronounced than they
had anticipated earlier. In this connection, some members expressed
concern about the lack of firm evidence to date of a prospective pickup
in the rate of economic growth and,
in particular, the absence thus far of
any apparent improvement in the
balance of trade, which many mem-




bers saw as the key to stronger
economic expansion. The members
continued to view the outlook for
inflation as relatively favorable, although they anticipated that, in the
context of a growing economy, the
lagged impact of the dollar's depreciation was likely to boost prices
somewhat.
In keeping with the usual practice
at meetings when the Committee
considers its long-run objectives for
monetary growth, the members of
the Committee and the Federal Reserve Bank presidents not currently
serving as members prepared specific
projections of economic growth, the
rate of unemployment, and changes
in the overall price level. With regard
to the rate of expansion in real GNP,
the projections had a central tendency of 2V2 to 3 percent for 1986 as
a whole and 3 to 3V2 percent for
1987. Forecasts of growth in nominal
GNP centered on ranges of 43A to
53/4 percent for 1986 and 6 to IV2
percent for 1987. The central tendency for the rate of unemployment
was an average of 7 percent in the
fourth quarter of 1986 and around
63/4 percent in the fourth quarter of
1987. With respect to the rate of
inflation, as indexed by the GNP
deflator, the projections centered on
rates of 2lA to 2% percent for 1986
and 3 to 4 percent for 1987. In
making these forecasts, the members
took account of the Committee's
objectives for monetary growth that
were established at this meeting. The
projections were based on the assumption that fluctuations over the
projection period in the foreign exchange value of the dollar would not
be of sufficient magnitude to have a
significant effect on economic activity or prices during the period. The
members also assumed that the Con-

FOMC Policy Actions 123
gress would seek to achieve the
deficit reductions contemplated by
the Gramm-Rudman-Hollings legislation. In the members' views, significant progress in reducing the federal
deficit was essential in order to
maintain financial conditions that
were conducive to sustained economic expansion and an improved
pattern of international transactions.
In their assessment of the factors
pointing to somewhat faster economic growth over the balance of
the year and in 1987, members referred as they had at earlier meetings
to a number of favorable underlying
developments including reduced interest rates, higher stock market
prices, lower energy costs, and the
positive impact of the dollar's depreciation on the competitive position
of U.S. businesses. Members also
made reference to the stimulative
impact of a broadly accommodative
monetary policy, as evidenced by
rapid growth in money and credit
and several decreases in the discount
rate. One member suggested that
stimulative financial conditions probably helped to account for the relative longevity of the current business
expansion in the face of a variety of
unfavorable factors. The latter included the negative impact that the
decline in oil prices and the uncertainties associated with pending tax
reform legislation were currently exerting on investment activity; some
members commented that both of
these factors were likely to have a
less inhibiting impact on the economy over the course of the next
several quarters. On the other hand,
the overbuilding of various commercial facilities, notably of office structures, in several parts of the country
and severe problems in agriculture
were deemed likely to have retarding



influences on economic activity that
could persist.
Such developments were reflected
in sharp contrasts in the economic
performance of different sectors and
regions of the country and in strains
on financial institutions that serviced
the depressed industries. Moreover,
members expressed concern about
the continuing rapid growth in total
debt and its negative implications for
sustained business expansion.
The members gave particular emphasis during the discussion to the
key role of foreign trade developments, which were seen as a major
source of uncertainty in shaping the
economic outlook. The substantial
depreciation of the dollar against the
currencies of several large industrial
countries had strengthened the international competitiveness of U.S.
businesses, notably in the industrial
sector, and pointed to eventual improvement in the U.S. trade balance.
Unfortunately, evidence of such improvement had proved elusive to
date and several members commented that significant progress in
reducing the nation's trade deficit
was unlikely in the absence of faster
economic growth in key industrial
nations abroad. Indications of such
growth were mixed, with several
countries having experienced relative
weakness earlier in the year. The
absence of more robust growth
abroad—and an improvement in the
U.S. trade balance—would constitute a major risk to the realization
of stronger domestic economic expansion.
At this meeting the Committee
reviewed its ranges for growth of the
monetary and debt aggregates in 1986
and established tentative ranges for
1987 within the framework of the
Full Employment and Balanced

124 FOMC Policy Actions
Growth Act of 1978 (the HumphreyHawkins Act). 1 At its meeting on
February 11-12, 1986, the Committee had adopted monetary growth
ranges of 3 to 8 percent for Ml and
6 to 9 percent for both M2 and M3
for the period from the fourth quarter
of 1985 to the fourth quarter of 1986.
The associated range for growth in
total domestic nonfinancial debt was
set at 8 to 11 percent. With respect
to Ml the Committee had recognized
that, based on the experience of
recent years, the behavior of that
aggregate was subject to substantial
uncertainties in relation to economic
activity and prices. The Committee
had indicated its intention to evaluate Ml behavior in the light of its
consistency with the other monetary
aggregates, developments in the
economy and financial markets, and
potential inflationary pressures.
In the Committee's discussion of
its long-run ranges at this meeting,
all of the members supported a
proposal to retain the range of 6 to
9 percent for growth in M2 and in
M3 for the year 1986. Both aggregates had expanded at rates that left
them close to the midpoint of their
ranges at midyear. Growth within
these ranges for the year as a whole
was still deemed to be consistent
with the Committee's overall policy
objectives. A majority of the members preferred a slightly lower range
for 1987. In their view, a modest
reduction would be consistent with
the Committee's long-term objective
of achieving a rate of monetary
growth compatible with price stability. They also believed that the lower
range was likely to prove fully con-

1. The midyear Monetary Policy Report prepared pursuant to this legislation was transDigitized formitted to the Congress on July 18, 1986.
FRASER


sistent with somewhat faster economic growth in 1987 and, in that
context, with some decline in velocity
should that develop. Some members
suggested maintaining the 6 to 9
percent range for 1987 because it
would provide a little extra leeway
that might prove useful in support of
continuing growth in nominal GNP,
given the possibility of some further
decline in the velocity of the broader
aggregates. However, the slightly
lower range favored by the majority
was considered acceptable by most
members.
In the discussion of appropriate
ranges for Ml growth in 1986 and
1987, the members gave considerable
emphasis to the exceptional uncertainties that continued to affect Ml
velocity. Over the course of recent
years, the relationship of Ml to
income appeared to have been significantly altered by changes in the
composition of the aggregate, resulting in part from the deregulation of
interest rate ceilings and the relatively rapid growth of its interestbearing components. In the process,
the demand for Ml balances has
become much more sensitive to
movements in interest rates. Given
the evolving nature of that demand,
it had become very difficult to assess
or predict the implications of Ml
growth for the future course of economic activity and the rate of inflation. As a consequence, a number of
members questioned the usefulness
of Ml as a guide for the conduct of
monetary policy under present circumstances. A few proposed dropping the Ml range, at least pending
the reestablishment of a more predictable relationship with overall
measures of economic performance.
A majority, however, preferred to
retain an Ml range even though they
believed its operational significance

could only be judged in the perspective of concurrent economic and
financial developments, including the
behavior of M2 and M3. It was noted
in this discussion that even under
current circumstances Ml continued
to have some information value for
policy and that retention of some
range for Ml, even if used only as a
benchmark for measuring deviations,
might well assist judgments about
monetary policy. Moreover, the importance of Ml could again become
greater in the future.
After reviewing the available evidence, the members concluded that
much of the rapid growth of Ml in
recent months probably reflected shifts
in holdings of liquid assets in response to declining interest rates and
subsiding inflationary expectations
rather than excessive money creation
with potentially inflationary consequences. Tending to reinforce that
judgment was the moderate growth
in overall economic activity, the behavior of broad measures of inflation, and the expansion of M2 and
M3 at rates well within their ranges
for the year. As events unfolded,
relatively rapid growth in Ml had
been needed to accommodate continuing economic expansion. Given developments for the year to date,
growth in excess of the 3 to 8 percent
range established in February appeared likely for 1986 as a whole,
but most of the members did not
want to raise or to rebase the existing
range; such an adjustment might
imply greater certainty about future
performance than in fact existed.
Since they believed that the significance of changes in Ml could only be
evaluated in the context of the behavior of the broader aggregates and
against the background of economic
and financial developments, includ
ing trends in interest rates, they


FOMC Policy Actions 125
agreed that after taking account of
those factors Ml growth above the
existing range would be acceptable
for the year.
With regard to 1987, some members argued that the uncertainties
precluded setting a meaningful range
for Ml so far in advance, but a
majority preferred to retain this year's
range of 3 to 8 percent. The members
noted that this range should be
considered even more tentative than
usual. Such a range assumed that the
velocity of Ml would not change as
much as in the recent period under
conditions of greater economic, price,
and interest rate stability. In any
event the members agreed that developments over the balance of this
year would provide a better basis for
judging the prospects for Ml behavior in 1987 and that careful appraisal
of the range—including the weight
that Ml should receive as a guide to
policy—would be required at the
start of next year.
Turning to the Committee's monitoring range for total domestic nonfinancial debt, most of the members
indicated that they were in favor of
retaining the 8 to 11 percent range
adopted in February for 1986 even
though growth in excess of that range
now appeared likely for the year.
Members expressed concern about
the persistence of rapid growth of
total debt in the context of already
large debt burdens. As in the past,
they felt that raising the Committee's
range for debt would create an inappropriate benchmark for evaluating long-term trends in debt expansion. One member proposed dropping
the range for total debt and substituting a measure for total liquid
assets, which, at least in the past
year or two, had had a closer relationship to developments in nominal
GNP. Other members preferred to

126 FOMC Policy Actions
continue to monitor debt trends explicitly in light of their concerns
about the implications of overall debt
levels. For 1987, the members generally felt that a range of 8 to 11
percent for total debt growth would
remain appropriate, though that range
would need to be reviewed early next
year.
At the conclusion of the Committee's review, all of the members
indicated that they favored, or could
accept, a proposal to reaffirm the
ranges for monetary and debt growth
that had been established in February for the year 1986. The behavior
of all of the monetary aggregates
would continue to be judged against
the background of developments in
the economy and financial markets
and potential price pressures. Growth
of Ml in excess of its range would
be acceptable and would be evaluated in the light of the behavior of
the broader aggregates. The Committee recognized that expansion in
total debt also might exceed its range
for the year.
The following paragraph relating
to the long-run ranges for 1986 was
approved for the domestic policy
directive:
The Committee agreed at this meeting
to reaffirm the ranges established in February for growth of 6 to 9 percent for both
M2 and M3, measured from the fourth
quarter of 1985 to the fourth quarter of
1986. With respect to Ml, the Committee
recognized that, based on the experience
of recent years, the behavior of that aggregate is subject to substantial uncertainties in relation to economic activity
and prices, depending among other things
on the responsiveness of Ml growth to
changes in interest rates. In light of these
uncertainties and of the substantial decline in velocity in the first half of the
year, the Committee decided that growth
of Ml in excess of the previously established 3 to 8 percent range for 1986 would
be acceptable. Acceptable growth of Ml



over the remainder of the year will depend on the behavior of velocity, growth
in the other monetary aggregates, developments in the economy and financial
markets, and price pressures. Given its
rapid growth in the early part of the year,
the Committee recognized that the increase in total domestic nonfinancial debt
in 1986 may exceed its monitoring range
of 8 to 11 percent, but felt an increase in
that range would provide an inappropriate benchmark for evaluating longerterm trends in that aggregate.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Mrs. Horn,
Messrs. Johnson, Melzer, Morris, Rice,
Ms. Seger, and Mr. Wallich. Votes
against this action: None. Absent and
not voting: None.
With respect to the tentative ranges
for 1987, most of the Committee
members supported a reduction of xh
percentage point in the ranges for
M2 and M3. For Ml and total debt
the members agreed that with the
reservations noted above, the 1986
ranges should be retained for 1987;
those ranges implied considerable
reductions from the rates of growth
that now seemed likely for 1986. It
was understood that all the ranges
were provisional and that, notably in
the case of Ml, they would be
reviewed in early 1987 in the light of
intervening developments.
The following paragraph relating
to the ranges for 1987 was approved
for inclusion in the domestic policy
directive:
For 1987 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1986 to
the fourth quarter of 1987, of 5^2 to 8V2
percent for M2 and M3. While a range of
3 to 8 percent for Ml in 1987 would appear appropriate in the light of most historical experience, the Committee recognized that the exceptional uncertainties
surrounding the behavior of Ml velocity
over the more recent period would require careful appraisal of the target range
at the beginning of 1987. The associated

FOMC Policy Actions 127
range for growth in total domestic nonfinancial debt was provisionally set at 8
to 11 percent for 1987.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Mrs. Horn,
Messrs. Johnson, Melzer, Morris, Rice,
and Wallich. Vote against this action:
Ms. Seger. Absent and not voting: None.
Ms. Seger dissented because she
preferred to retain—at least for
now—this year's range of 6 to 9
percent for growth in both M2 and
M3 in 1987. In her view, the higher
range might be needed to accommodate an acceptable rate of economic expansion, especially in light
of the possibility that the velocity of
these aggregates might remain weak
next year. At the same time she did
not want to rule out the possibility
that interim developments might justify reductions in the M2 and M3
ranges when the latter were reconsidered early next year. She also preferred not to specify a tentative range
for Ml at this time because of the
substantial uncertainties currently
surrounding the relationship between
Ml growth and broad measures of
economic activity.
In their discussion of policy implementation for the weeks immediately
ahead, Committee members took
account of the likelihood that the
discount rate would be reduced within
a few days after the meeting. Against
the background of sluggish expansion
in economic activity and a subdued
rate of inflation, most of the members believed that some easing was
desirable and they indicated a preference for implementing the easing,
at least initially, through a lower
discount rate rather than through
open market operations. Some members commented that further easing
could have a favorable impact on
interest-sensitive sectors of the econ


omy, particularly in light of what
could be viewed as still relatively
high real interest rates. It was also
suggested that a reduction in the
discount rate might encourage over
time similar actions by a number of
major countries abroad, although
such actions were not expected over
the near term, at least in the case of
some of the key industrial nations.
While nearly all the members indicated their acceptance of the policy
approach in question, a few referred
to the risks of easing under present
circumstances, particularly the risk
under current conditions of sharp
further depreciation of the dollar in
foreign exchange markets. Concern
also was expressed about the absence
of clearer indications of a reduction
in federal budgetary deficits. In one
view, a cut in the discount rate might
need to be accompanied by some
increase in the degree of pressure on
reserve positions, pending evaluation
of further economic and financial
developments.
With respect to the outlook for
monetary growth, the members expected that M2 and M3 might continue to expand at rates around their
1986 ranges over coming months,
even assuming some pickup in the
rate of business activity and some
easing in overall conditions of reserve availability. In their evaluation
of the outlook for growth in Ml, the
members took account of an analysis
that indicated that appreciably slower
growth might be expected over the
months ahead even if interest rates
were to fall somewhat further. However, the members recognized that
the timing and extent of any slowing
in Ml growth continued to be subject
to unusual uncertainty. In the circumstances and taking account of
their willingness to accept Ml growth

128 FOMC Policy Actions
in excess of the 3 to 8 percent range,
especially if growth of the broader
aggregates remained within their
ranges, a majority of the members
expressed a preference for not indicating a specific rate of expected
growth for Ml in the short-run operational paragraph of the Committee's directive.
In the Committee's discussion of
possible intermeeting adjustments in
policy implementation, the members
generally agreed that there should
be no presumptions about the likely
direction of any such adjustments,
given the current uncertainties about
prospective economic and financial
developments and the behavior of
the monetary aggregates. A majority
of the members also indicated a
preference for reducing the existing
intermeeting range for the federal
funds rate by 1 percentage point to
4 to 8 percent. The reduction was
viewed as a technical adjustment that
would provide a more symmetrical
range around a lower federal funds
rate that could be expected to emerge
following the anticipated reduction
in the discount rate. The Committee
regards the federal funds range as a
mechanism for initiating Committee
consultation when its boundaries are
persistently exceeded.
At the conclusion of the Committee's discussion, all but one member
indicated their acceptance of an operational paragraph for the directive
that called for some decrease in the
existing degree of reserve pressure,
recognizing that that relaxation could
be accomplished in the first instance
by a reduction in the discount rate.
The members expected such an approach to policy implementation to
be consistent with growth in M2 and
M3 at annual rates of about 7 to 9
percent over the three-month period
from June to September. Over the



same period growth in Ml was expected to moderate from the exceptionally large increase during the
second quarter. The specific rate of
Ml growth remained subject to unusual uncertainty and the Committee
agreed that this aggregate should
continue to be judged in the light of
the behavior of the broader aggregates and other factors. The Committee indicated that it might find
somewhat greater or somewhat lesser
reserve restraint acceptable over the
intermeeting period depending on
the growth of the monetary aggregates, the strength of the business
expansion, the performance of the
dollar on foreign exchange markets,
progress against inflation, and conditions in domestic and international
credit markets.
At the conclusion of the meeting,
the following domestic policy directive, embodying the Committee's
long-run ranges and its short-run
operating instructions, was issued to
the Federal Reserve Bank of New
York:
The information reviewed at this meeting indicates a mixed pattern of developments but suggests on balance that economic activity expanded slowly in the
second quarter. In June total nonfarm
payroll employment grew little after accounting for striking workers, with continued weakness in the industrial sector
reflected in further declines in employment in manufacturing and mining. The
civilian unemployment rate moved down
to 7.1 percent from 7.3 percent in May.
Industrial production declined in May.
Total retail sales were about unchanged
during the month, although consumer
spending rose considerably for the second
quarter as a whole. Housing starts fell
somewhat in May from a relatively high
level. Weakness in the energy sector has
contributed to a slowing of business capital spending. Preliminary data for the U.S.
merchandise trade balance in April show
a somewhat larger deficit than the rate
recorded in the first quarter. Both con-

sumer and producer prices turned up in
May but have fallen on balance since late
1985, largely reflecting declines in energy
prices.
Ml growth in June, though less than in
May, was still rapid; through June, Ml
grew at a rate well above the Committee's
range for 1986. Growth of M2 slowed
somewhat and expansion of M3 remained
relatively moderate in June, keeping these
two aggregates close to the middle of their
respective ranges for the year. Expansion
in total domestic nonfinancial debt remains appreciably above the monitoring
range for 1986. Most short-term interest
rates have declined on balance since the
May 20 meeting of the Committee. Rates
on Treasury bonds also have moved lower
while rates on private long-term obligations are about unchanged to somewhat
higher. The trade-weighted value of the
dollar against major foreign currencies has
declined somewhat on balance since the
May meeting.
The Federal Open Market Committee
seeks monetary and financial conditions
that will foster reasonable price stability
over time, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee agreed at this meeting to
reaffirm the ranges established in February for growth of 6 to 9 percent for both
M2 and M3, measured from the fourth
quarter of 1985 to the fourth quarter of
1986.With respect to Ml, the Committee
recognized that, based on the experience
of recent years, the behavior of that aggregate is subject to substantial uncertainties in relation to economic activity
and prices, depending among other things
on the responsiveness of Ml growth to
changes in interest rates. In light of these
uncertainties and of the substantial decline in velocity in the first half of the
year, the Committee decided that growth
of Ml in excess of the previously established 3 to 8 percent range for 1986 would
be acceptable. Acceptable growth of Ml
over the remainder of the year will depend on the behavior of velocity, growth
in the other monetary aggregates, developments in the economy and financial
markets, and price pressures. Given its
rapid growth in the early part of the year,
the Committee recognized that the increase in total domestic nonfinancial debt
in 1986 may exceed its monitoring range
Digitized forof 8 to 11 percent, but felt an increase in
FRASER


FOMC Policy Actions 129
that range would provide an inappropriate benchmark for evaluating longerterm trends in that aggregate.
For 1987 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1986 to
the fourth quarter of 1987, of 5Vi to $V2
percent for M2 and M3. While a range of
3 to 8 percent for Ml in 1987 would appear appropriate in the light of most historical experience, the Committee recognized that the exceptional uncertainties
surrounding the behavior of Ml velocity
over the more recent period would require careful appraisal of the target range
at the beginning of 1987. The associated
range for growth in total domestic nonfinancial debt was provisionally set at 8
to 11 percent for 1987.
In the implementation of policy for the
immediate future, the Committee seeks
to decrease somewhat the existing degree
of pressure on reserve positions, taking
account of the possibility of a change in
the discount rate. This action is expected
to be consistent with growth in M2 and
M3 over the period from June to September at annual rates of about 7 to 9 percent.
While growth in Ml is expected to moderate from the exceptionally large increase during the second (quarter, that
growth will continue to be judged in the
light of the behavior of M2 and M3 and
other factors. Somewhat greater or lesser
reserve restraint might be acceptable depending on the behavior of the aggregates, the strength of the business expansion, developments in foreign exchange
markets, progress against inflation, and
conditions in domestic and international
credit markets. The Chairman may call
for Committee consultation if it appears
to the Manager for Domestic Operations
that reserve conditions during the period
before the next meeting are likely to be
associated with a federal funds rate persistently outside a range of 4 to 8 percent.
Votes for the short-run operational paragraph: Messrs. Volcker, Corrigan,
Angell, Guffey, Mrs. Horn, Messrs.
Johnson, Morris, Rice, Ms. Seger, and
Mr. Wallich. Vote against this action:
Mr. Melzer. Absent and not voting:
None.
Mr. Melzer preferred to direct
open market operations toward
maintaining the existing degree of

130 FOMC Policy Actions
pressure on reserve conditions. He
was concerned that easing under
current circumstances could foster
inflationary expectations, especially
in light of the uncertain outlook for
reductions in the federal deficit, and
have adverse repercussions on the
dollar in foreign exchange markets.
In addition, he noted that the outlook for the balance of 1986 and
1987 appeared to be in line with the
economy's long-run potential and, in
any event, he believed that further
accommodation would have little
positive impact on real output in the
short run and would be accompanied
by greater price pressures in the long
run.

ufacturing employment registered
another drop, bringing the cumulative decline since January to 175,000.
The civilian unemployment rate declined 0.2 percentage point to 6.9
percent, toward the lower end of the
range that has prevailed over the
past year.
The index of industrial production
edged down 0.1 percent in July after
declining 0.3 percent in June. Since
reaching its most recent peak in
January, the index has dropped about
2 percent. Despite increased production in July in industries affected by
the settlement of strikes, particularly
the communication equipment industry, output has remained generally
sluggish. Weakness has persisted in
the output of business equipment
and consumer goods, although the
Meeting Held on August 19, 1986 direct effects of declines in petroleum
drilling are beginning to wane; auDomestic Policy Directive
tomobile assemblies were down
The information reviewed at this 400,000 in July, but the decline was
meeting indicated an uneven pattern largely offset by gains in the producof developments in different sectors tion of light trucks. Capacity utilizaof the economy but suggested on tion in manufacturing, mining, and
balance that economic activity was utilities decreased 0.2 percentage point
expanding at a moderate pace in the further in July to 78.2 percent; during
current quarter. Consumer spending the past six months the overall rate
and housing activity have been rela- of capacity utilization has fallen 2.6
tively robust, while business invest- percentage points.
Total retail sales were about unment has remained sluggish and the
trade balance does not appear to changed in June and July; however,
have improved. On average, prices excluding automobiles, gasoline, and
and wages have risen more slowly nonconsumption items, retail sales
this year than in 1985, although increased 0.7 percent in July after an
fluctuations in energy costs have upward-revised increase of 0.4 perresulted in some month-to-month cent in June. Sales remained particularly strong at furniture and applivolatility.
Total nonfarm payroll employ- ance stores. Total car sales slipped
ment grew strongly in July, rising to a 10.9 million unit annual rate in
nearly VA million after adjustment for July, as a drop in sales of domestic
strikes, well above the average models more than offset an increase
monthly gains during the first half of in foreign car sales.
the year. Hiring was up in construcResidential construction activity has
tion and remained robust in the trade continued to expand, reflecting the
and service sectors. However, man- rise in housing starts earlier in the



year. However, the level of starts
has tapered off recently from the
exceptional pace of the early spring,
reflecting in part high vacancy rates
and tax law changes that have damped
multifamily construction. In June,
total private starts were at an annual
rate of 13A million units. Sales of
single-family homes also weakened
in May and June, but from a very
high April peak.
Business fixed investment apparently remained sluggish with the
weakness concentrated in nonresidential structures. The sharp curtailment of petroleum drilling contributed to a further decline in the
nonresidential structures component,
although commercial and industrial
construction also fell. Moreover, new
commitments for nonresidential construction have fallen sharply since
late last year, suggesting that outlays
may retreat further during the third
quarter. In contrast to structures,
outlays for equipment rose markedly
in the second quarter, led by a
rebound in office and computer
equipment; however, this gain only
partly reversed a sharp decline in the
first quarter. New orders for nondefense capital goods fell for three
consecutive months before posting a
small gain in June. Inventory data
for the second quarter, though incomplete, suggested a marked slowdown in the rate of accumulation, as
auto dealers pared stocks slightly
after two quarters of rapid accumulation.
Wage increases appear to have
slowed further this year, and, except
for *a June rebound in consumer
energy prices, recent price data have
reflected continued restraint through
midyear. The producer price index
fell 0.4 percent in July, and the
consumer price index excluding energy was up 0.2 percent in June. For



FOMC Policy Actions 131
the second quarter as a whole, the
CPI excluding energy rose at an
annual rate of about 3 percent, down
almost a full percentage point from
the first quarter. In the commodity
markets, the price of crude oil on
spot markets fell through much of
July, but then rose sharply following
an accord by OPEC to restrain production. At the same time, livestock
and poultry prices have moved higher
while gold and platinum prices have
soared, apparently largely reflecting
expectations of reduced supplies.
Since the July FOMC meeting, the
weighted-average foreign exchange
value of the dollar declined a further
3V2 percent on balance; the dollar
depreciated almost 5V2 percent against
the mark and somwhat less against
the yen. The reduction in the discount rate by the Federal Reserve
announced on July 10 and the failure
of other central banks to follow
apparently contributed to the dollar's
weakness. Short-term interest rates
abroad were little changed during
the intermeeting period while comparable U.S. rates declined about xh
of 1 percentage point. The differentials between long-term interest rates
in the United States and comparable
rates in Germany and Japan were
about unchanged on balance. The
U.S. merchandise trade deficit in the
second quarter appeared unchanged
from the first quarter. The value of
oil imports continued to fall, while
that of non-oil imports rose further.
About one-half of the increase in the
value of non-oil imports apparently
reflected rising import prices.
At its meeting on July 8-9, the
Committee adopted a directive that
called for decreasing somewhat the
existing degree of pressure on reserve positions, taking account of the
possibility of a change in the discount
rate. The members expected such an

132 FOMC Policy Actions
approach to policy to be consistent
with growth in M2 and M3 over the
period from June to September at
annual rates of 7 to 9 percent. Over
the same period growth in Ml was
expected to moderate from the rapid
pace in the second quarter. The
Committee agreed that it would continue to evaluate Ml in light of the
broader aggregates and other factors.
The members also acknowledged that
somewhat greater or lesser reserve
restraint might be acceptable depending on the behavior of the aggregates, the strength of the business
expansion, developments in foreign
exchange markets, progress against
inflation, and conditions in domestic
and international credit markets. The
intermeeting range for the federal
funds rate was reduced 1 percentage
point to 4 to 8 percent.
An easing in reserve conditions
was implemented shortly after the
July meeting through a V2 point
reduction in the discount rate to 6
percent. In the two complete reserve
maintenance periods since the meeting, adjustment plus seasonal borrowing at the discount window averaged just under $400 million,
somewhat higher than in the previous
intermeeting period. A portion of
this borrowing, however, reflected
adjustment credit to depository institutions facing special situations. Incoming data during the intermeeting
period indicated that growth of all of
the monetary aggregates accelerated
in July. M2 and M3 were estimated
to have expanded at annual rates of
123/4 and 13 percent respectively. The
rapid growth in the broader aggregates pushed them into the upper
portions of their ranges for 1986. At
the same time growth in Ml in July
was close to the extraordinary pace
of the second quarter.



Federal funds generally traded in
the 6V4 to 63/s percent area after the
l
/i percentage point cut in the discount rate announced on July 10,
down from the 6% percent rate
prevailing at the time of the July
meeting. With the reduction in the
discount rate widely anticipated,
however, other interest rates generally did not post comparable declines. While rates on short-term
securities have fallen 25 to 50 basis
points over the intermeeting period,
yields in the longer-term markets
have been about unchanged to only
slightly lower on balance. The recent
behavior of longer-term interest rates
has reflected in part uncertainty about
the prospects for further rate declines
in light of the absence of policy
actions abroad to reduce interest
rates as well as a cautious interpretation of incoming economic and
price news, including the possibility
of some increase in inflationary pressures over time.
The staff projections presented at
this meeting suggested that growth
in real GNP likely would pick up
somewhat in coming months. Growth
was forecast to continue at a moderate pace in 1987. A projected
improvement in the U.S. trade position was anticipated to be a key
element supporting growth in domestic production over the next year and
a half. Over the same time period,
growth in domestic demand was expected to be relatively sluggish. The
rate of inflation was anticipated to
edge up in coming quarters, partly
reflecting upward pressure on prices
from the effects of the dollar's depreciation as well as the diminishing
impact of oil price declines, which
had served to hold down price indexes thus far in 1986. The civilian
unemployment rate was forecast to

FOMC Policy Actions 133
drop somewhat over the projection
horizon.
In the Committee's discussion of
the economic situation and outlook,
members focused considerable attention on the uncertain prospects for
the nation's foreign trade deficit.
They saw trade developments as a
key element in the outlook for domestic business activity, and several
commented that the business expansion might well remain relatively
weak if the trade balance did not
show significant improvement over
the quarters ahead. The substantial
depreciation of the dollar against
major foreign currencies was still
expected to foster a turnaround in
net exports at some point, but the
absence of progress to date could be
read as auguring a muted as well as
a further delayed response to the
dollar's depreciation.
During the discussion, a number
of members emphasized that improvement in the trade balance was
being inhibited by relatively sluggish
economic activity in several key industrial nations abroad. Other developments working in the same direction included the lack of dollar
depreciation against the currencies
of a number of developing countries
that had important trading relationships with the United States, the
severe debt problems of several less
developed nations, and the competition in agricultural export markets
stemming from large grain harvests
in many parts of the world. On the
more positive side, members referred
to the apparently more favorable
prospects for economic expansion in
a major European country. Some
members also commented that while
improvement in the trade balance
had been more delayed than many
had expected, some historical expe


rience in combination with current
circumstances provided reasons for
remaining optimistic that a substantial turnaround in trade would occur
later, perhaps toward the end of this
year or in early 1987.
The members differed to some
extent in their assessment of domestic developments bearing on the economic outlook. While economic performance remained uneven in
different sectors of the economy and
parts of the country, overall consumer spending and the demand for
housing were being well maintained
in association with continuing gains
in employment and incomes and
reduced interest rates. One member
observed that, given generally lean
inventories outside the automobile
industry, further gains in consumer
spending were likely to stimulate
increasing domestic production at
some point. A number of members
also referred to the relatively rapid
growth in money balances as a factor
that would tend to support business
activity over the quarters ahead. On
the negative side, rising consumer
debt burdens were likely to restrain
the expansion in consumer spending
and business investment showed no
evidence of an appreciable pickup.
The members recognized that a
number of developments, in addition
to the uncertainties surrounding the
outlook for trade, were currently
clouding economic prospects. These
included the tax reform legislation
whose overall impact was very difficult to predict, especially for the next
several quarters, because of the very
comprehensive and complex changes
incorporated in the legislation. In the
consumption area, for example, the
loss of deductibility for sales taxes
starting in 1987 and the phase-out of
interest deductions on consumer debt

134 FOMC Policy Actions
might tend to restrain spending on
consumer durables over time, but
some members noted that it might
also stimulate such spending over the
balance of the year. The impact of
the new legislation on business investment was especially hard to assess. It was suggested that on balance
the impact might tend to be negative
for some time, but many businessmen apparently saw the removal of
uncertainties about the legislation as
a positive development for the nearer
term. Members also commented that
the outlook for the federal budget
deficit and its consequent impact on
the economy remained unclear.
With regard to the prospects for
inflation, the members generally were
not concerned about a resurgence in
the nearer term, but several expressed uneasiness about the longerrun outlook. Members referred to
the inflationary implications of relatively rapid monetary growth, especially if it continued, and to the
further impact of the dollar's depreciation on prices of imports and
competing domestic products. In the
latter connection one member observed that, despite relatively large
inventories, domestic producers of
automobiles were raising their prices
in response to increases in the prices
of competing imports. One member
also expressed concern that the new
tax reform legislation, to the extent
that it shifted tax burdens to businesses, could put upward pressures
on prices, at least initially. The
favorable direct effects of large declines in oil prices now appeared to
be in the past, and one member
observed that commodity prices more
generally might be poised for an
upturn. Some members saw indications that inflationary expectations
were starting to intensify, even though
actual prices and wages generally



were rising less rapidly this year than
in 1985.
At its meeting in July the Committee had reviewed the basic policy
objectives that it had established in
February for growth of the monetary
and credit aggregates in 1986 and
had set tentative objectives for expansion in 1987. For the period from
the fourth quarter of 1985 to the
fourth quarter of 1986, the Committee had reaffirmed the ranges established in February for growth of 6 to
9 percent for both M2 and M3. The
associated range for expansion in
total domestic nonfinancial debt also
was reaffirmed at 8 to 11 percent for
1986. With respect to Ml, the Committee decided that growth in excess
of the 3 to 8 percent range set in
February would be acceptable and
would be evaluated in the light of
the behavior of Ml velocity, the
expansion of the broader aggregates,
developments in the economy and
financial markets, and price pressures. For 1987 the Committee agreed
on tentative monetary growth objectives that included a reduction of V2
percentage point to a range of 5V2 to
8V2 percent for both M2 and M3. In
the case of Ml the Committee expressed the preliminary view that
retention of the 1986 range of 3 to 8
percent, which implied a considerable reduction from the actual rate of
growth that now seemed likely for
1986, appeared appropriate for 1987
in the light of most historical experience. The Committee also retained
the range of 8 to 11 percent for
growth in total domestic nonfinancial
debt in 1987. It was understood that
all the ranges were provisional and
that, notably in the case of Ml, they
would be reviewed in early 1987 in
the light of intervening developments.
In the Committee's discussion of

policy implementation for the weeks
immediately ahead, a number of
members suggested that any further
easing might be accomplished through
a further xh percentage point reduction in the discount rate, while open
market operations would be directed
toward maintaining an essentially
unchanged degree of reserve availability. Some members expressed reservations about such a reduction,
especially in the absence of indications that it would be followed fairly
promptly by policy easing actions in
major industrial nations abroad. In
this view a unilateral decrease in the
discount rate might foster substantial
additional depreciation in the dollar,
with adverse repercussions on investor willingness to hold dollars. Several members, however, saw a lesser
risk to the dollar or one that needed
to be accepted. Some wanted to
reduce the risks of rapid dollar depreciation by a small increase in the
degree of reserve pressure in the
event of a reduction in the discount
rate. Several other members indicated that they did not agree. While
some firming should not be ruled out
in their view, it should be made
contingent on an adverse move in
the exchange rate and other potential
developments such as evidence of
greater inflationary danger and
stronger business activity. One member also commented that any increase in the degree of reserve pressure had to be weighed against the
risk of triggering a rise in long-term
interest rates; such a rise, if it occurred, would weaken the prospects
for a pickup in the rate of economic
expansion.
In further discussion, Committee
members expressed some concern
about the continuation of rapid growth
in the monetary aggregates and the
implications of such growth for po


FOMC Policy Actions 135
tential inflation later. The members
recognized that much of the rapid
growth, especially in Ml, probably
reflected increasing demands for liquid assets in response to declining
interest rates and subsiding inflation
rather than excessive money creation
with potentially inflationary consequences. They also felt that Ml
growth should continue to be evaluated in the context of a relatively
sluggish economy and in light of the
expansion in the broader aggregates.
While a sluggish economic performance would dampen inflationary risks,
continuing growth in M2 and M3 at
the relatively rapid rates experienced
recently might be a matter of growing
concern, especially if such expansion
tended to coincide with indications
of stronger business activity.
In their evaluation of the outlook
for monetary growth, the members
took into account an analysis which
indicated that much slower expansion, especially in the broader aggregates, was likely to develop over the
next few months if short-term interest rates stayed around their current
levels. On the other hand, monetary
growth might remain relatively rapid
over the period ahead if short-term
rates were to drop somewhat further.
The members recognized that the
timing and extent of any slowing in
monetary growth remained subject
to a great deal of uncertainty.
In the discussion of possible intermeeting adjustments in the degree
of reserve pressure, the members
agreed that a degree of flexibility
would be useful, taking into consideration whether or not the discount
rate was reduced and subsequent
developments in domestic financial
markets and especially in foreign
exchange markets. If the discount
rate were not reduced, a slight easing
in pressure on reserve positions might

136 FOMC Policy Actions
be appropriate. Alternatively, if the
discount rate were reduced and the
reduction was followed by a substantial weakening of the dollar in foreign
exchange markets, a little greater
caution in the provision of reserves
through open market operations
would be appropriate. In keeping
with the Committee's usual practice,
consideration also would need to be
given to ongoing economic and financial developments and the growth of
the monetary aggregates. Such developments might warrant an adjustment in either direction.
At the conclusion of the Committee's discussion, all but two members
indicated that they favored or could
accept a directive that called for
some slight easing in the degree of
reserve pressure, taking account of
the possibility that such easing might
be accomplished through a reduction
in the discount rate. The members
expected this approach to policy
implementation to be consistent with
growth in M2 and M3 at annual rates
of about 7 to 9 percent over the
June-to-September period. Over the
same interval, growth in Ml was
expected to moderate from the exceptionally large increase during the
second quarter. With the prospective
behavior of Ml remaining subject to
unusual uncertainty, the Committee
again decided not to specify a rate
of expected growth in the operational
paragraph of the directive but to
continue to evaluate this aggregate
in the light of the performance of
the broader aggregates and other
factors. The Committee indicated
that it might find somewhat greater
or somewhat lesser reserve restraint
acceptable over the intermeeting period depending on the decision with
respect to the discount rate and on
such other factors as the behavior of
the monetary aggregates, the strength



of the business expansion, the performance of the dollar in foreign
exchange markets, progress against
inflation, and conditions in domestic
and international credit markets. The
members agreed that the intermeeting range for the federal funds rate,
which provides a mechanism for
initiating consultation of the Committee when its boundaries are persistently exceeded, should be left
unchanged at 4 to 8 percent.
At the conclusion of the meeting,
the following domestic policy directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates a mixed pattern of developments but suggests on balance that economic activity is expanding moderately in
the current quarter. In July total nonfarm
payroll employment grew strongly, boosted
in part by the return of striking workers.
However, continued weakness in the industrial sector was reflected in further declines in employment in manufacturing and
mining. The civilian unemployment rate
moved down to 6.9 percent from 7.1 percent in June. Industrial production declined slightly further in July. The nominal value of total retail sales was about
unchanged during the month, as sales of
new autos declined somewhat but spending on other consumer goods remained
strong. Housing starts fell somewhat in
May and June from a relatively high level
earlier in the year. Business capital spending appears to have remained weak, partly
reflecting continuing declines in the energy sector. While fluctuations in energy
prices have caused some month-to-month
volatility, on average prices and wages are
rising more slowly this year than in 1985.
The trade-weighted value of the dollai
against major foreign currencies has continued to decline since the July 8-9 meeting of the Committee. The U.S. merchandise trade deficit in the second quarter
appears to have been about unchanged
from the first quarter. The value of total
exports and of total imports remained
about the same in the two quarters, although the value of oil imports continued
to fall in the second quarter while that of
non-oil imports rose further.
Growth of M2 and especially of M3

picked up in July, lifting expansion of these
two aggregates for the year through July
well into the upper portion of their respective ranges established by the Committee for 1986. In July Ml continued to
grow at a rate close to the very rapid pace
of the second quarter. Expansion in total
domestic nonfinancial debt remains appreciably above the Committee's monitoring range for 1986. Short-term interest
rates have declined somewhat since the
July meeting of the Committee, while most
long-term interest rates are about unchanged to slightly lower on balance. On
July 10, the Federal Reserve Board approved a reduction in the discount rate
from 6V2 to 6 percent.
The Federal Open Market Committee
seeks monetary and financial conditions
that will foster reasonable price stability
over time, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee agreed at the July meeting
to reaffirm the ranges established in February for growth of 6 to 9 percent for both
M2 and M3, measured from the fourth
quarter of 1985 to the fourth quarter of
1986. With respect to Ml, the Committee
recognized that, based on the experience
of recent years, the behavior of that aggregate is subject to substantial uncertainties in relation to economic activity
and prices, depending among other things
on the responsiveness of Ml growth to
changes in interest rates. In light of these
uncertainties and of the substantial decline in velocity in the first half of the
year, the Committee decided that growth
of Ml in excess of the previously established 3 to 8 percent range for 1986 would
be acceptable. Acceptable growth of Ml
over the remainder of the year will depend on the behavior of velocity, growth
in the other monetary aggregates, developments in the economy and financial
markets, and price pressures. Given its
rapid growth in the early part of the year,
the Committee recognized that the increase in total domestic nonfinancial debt
in 1986 may exceed its monitoring range
of 8 to 11 percent, but felt an increase in
that range would provide an inappropriate benchmark for evaluating longerterm trends in that aggregate.
For 1987 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1986 to
 quarter of 1987, of 5Vi to SVi
the fourth


FOMC Policy Actions 137
percent for M2 and M3. While a range of
3 to 8 percent for Ml in 1987 would appear appropriate in the light of most historical experience, the Committee recognized that the exceptional uncertainties
surrounding the behavior of Ml velocity
over the more recent period would require careful appraisal of the target range
at the beginning of 1987. The associated
range for growth in total domestic nonfinancial debt was provisionally set at 8
to 11 percent for 1987.
In the implementation of policy for the
immediate future, the Committee seeks
to decrease slightly the existing degree of
pressure on reserve positions, taking account of the possibility of a change in the
discount rate. This action is expected to
be consistent with growth in M2 and M3
over the period from June to September
at annual rates of about 7 to 9 percent.
While growth in Ml is expected to moderate from the exceptionally large increase during the second quarter, that
growth will continue to be judged in the
light of the behavior of M2 and M3 and
other factors. Somewhat greater or lesser
reserve restraint might be acceptable depending on the behavior of the aggregates, the strength of the business expansion, developments in foreign exchange
markets, progress against inflation, and
conditions in domestic and international
credit markets. The Chairman may call
for Committee consultation if it appears
to the Manager for Domestic Operations
that reserve conditions during the period
before the next meeting are likely to be
associated with a federal funds rate persistently outside a range of 4 to 8 percent.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Heller, Mrs.
Horn, Messrs. Johnson, Morris, Rice,
and Ms. Seger. Votes against this action: Messrs. Melzer and Wallich. Absent and not voting: None.

Messrs. Melzer and Wallich were
in favor of maintaining the existing
degree of reserve pressure. Mr. Melzer continued to be concerned about
the impact of further easing on inflationary expectations and the value of
the dollar in foreign exchange markets. In addition, he noted that
during the intermeeting period the

138 FOMC Policy Actions
outlook for real economic activity in
the second half of 1986 and in 1987
had not deteriorated and perhaps
even had improved slightly. Mr.
Wallich emphasized that the implementation of unchanged reserve conditions would improve the prospects
for significant slowing in monetary
growth, thereby reducing the potential for inflation.
Meeting Held on
September 23, 1986
Domestic Policy Directive
The information reviewed at this
meeting suggested a moderate pickup
in economic growth from the slow
pace in the second quarter. Payroll
employment expanded further in August with gains widespread by industry. Consumer spending has continued to increase at a relatively rapid
pace, and construction of singlefamily homes has remained at a high
level. Business capital spending,
however, has been sluggish, particularly for new structures. Wage rates
have continued to increase slowly in
recent months, while producer and
consumer prices have tended to firm
reflecting developments in food and
energy markets.
Total nonfarm payroll employment continued to expand in August,
rising about XA million further after
adjusting for strike activity, somewhat faster than the average gain so
far this year. Hiring at service establishments accounted for two-thirds
of the increase, but construction
employment also was up substantially, and manufacturing employment rose for the first time since
January. The civilian unemployment
rate edged down again in August to
6.8 percent, nearly xh percentage



point below the second-quarter average.
After declining on balance over
the first half of the year, industrial
production has picked up recently.
According to revised data, output
was flat in June and rose 0.3 percent
in July, rather than declining in both
months as previously reported. In
August industrial production edged
up 0.1 percent. Gains in output in
July and August were particularly
large for defense and space equipment. Production of business equipment, consumer goods, and construction supplies also registered strong
increases. Capacity utilization in
manufacturing, mining, and utilities
fell 0.1 percentage point in August
to 79 percent, about the same as the
rate in the preceding three months
but 1.6 percentage points below a
year ago.
Retail sales rose 0.8 percent in
August, after a July increase of 0.3
percent. Sales in the automotive
group strengthened noticeably in response to incentive plans offered at
the end of the month by domestic
auto producers. Total car sales rose
to an annual rate of 12.2 million
units in August, compared with 10.9
million units in July. In the early
part of September, sales of domestically produced autos soared to an
annual rate of 17 million units. Outlays for durable goods other than
autos, which were strong earlier in
the year, dropped back in August,
but sales at general merchandisers
posted another large gain.
Residential construction activity
remained relatively high through the
summer. Housing starts totaled 1.8
million units at an annual rate in
July and August. Single-family starts
remained close to the vigorous pace
of the first half of the year, while

FOMC Policy Actions 139
multifamily starts were appreciably index had risen on balance in other
below their average level in that recent months after falling somewhat
period. In July sales of new homes during the first four months of the
dropped below the extraordinary lev- year. In the commodity markets,
els recorded earlier in the year, but spot prices for precious metals rose
sales of existing homes remained at sharply during August, reflecting
about the advanced pace of the supply disruptions and, perhaps, renewed inflationary expectations. The
second quarter.
Business capital spending has re- latter appeared to be associated in
mained sluggish, reflecting continued part with oil price developments and
weakness in nonresidential construc- the lower foreign exchange value of
tion. Although the contraction in oil the dollar. Lumber prices also rose
and gas-well drilling appears to be significantly during August.
subsiding, the downtrend in commerThe trade-weighted value of the
cial and industrial building has con- dollar against major foreign currentinued partly because of high vacancy cies had changed very little on balrates and the impact of the tax ance since the August 19 meeting of
reform legislation. The value of non- the Committee, although it flucresidential construction put in place tuated over a fairly wide range.
fell in July for the fifth time in six Exchange rates appeared to be afmonths. Business outlays for equip- fected mainly by news about prosment, however, have expanded pects for economic activity in the
somewhat in recent months; ship- United States and abroad. Germany
ments of nondefense capital goods in and Japan did not follow the Federal
August were lVi percent above the Reserve's reduction in the discount
second-quarter average. New orders rate, and short-term interest rates
fell in August, partially reversing abroad were little changed while
gains in the previous two months, money market rates in the United
largely because orders for aircraft States were somewhat lower. At the
and parts dropped. Bookings for same time, long-term rates in the
office and computing equipment, United States moved up sharply relhowever, have rebounded from their ative to comparable foreign interest
level earlier this year.
rates. Preliminary data for the U.S.
Wage rates have continued to rise merchandise trade deficit in July
moderately over the past few months, indicated a substantially larger deficit
while producer and consumer prices than on average in the first half of
have firmed somewhat on balance the year as non-oil imports surged.
due to developments in food and Real economic growth appeared to
energy markets. Prices other than have picked up on balance in the
those for food and energy, however, foreign industrial countries during
have risen at about the same pace as the second quarter after a weak
earlier in the year. In August, the performance in the first quarter.
producer price index advanced 0.3
At its meeting in August, the
percent, after changing little on bal- Committee adopted a directive that
ance over the previous three months called for decreasing slightly the
and declining sharply earlier in the existing degree of pressure on reyear. The consumer price index in- serve positions, taking account of the
creased 0.2 percent in August. The possibility of a change in the discount



140 FOMC Policy Actions
rate. The members expected such an
approach to policy to be consistent
with growth in M2 and M3 over the
period from June to September at
annual rates of about 7 to 9 percent.
Over the same period growth in Ml
was expected to moderate from the
rapid pace during the second quarter.
The Committee agreed that it would
continue to evaluate growth of Ml
in light of the expansion of the
broader aggregates and other factors.
The members also decided that
somewhat greater or lesser reserve
restraint might be acceptable depending on the behavior of the aggregates, the strength of the business
expansion, developments in foreign
exchange markets, progress against
inflation, and conditions in domestic
and international credit markets. The
intermeeting range for the federal
funds rate was maintained at 4 to 8
percent.
The discount rate was reduced V2
percentage point shortly after the
August meeting. In the two complete
reserve maintenance periods ending
after the meeting, adjustment plus
seasonal borrowing at the discount
window averaged close to $460 million, somewhat higher than in the
previous intermeeting period. In the
first week of the current maintenance
period, borrowing dropped back to
about $280 million.
Growth in the broader monetary
aggregates slowed in August; M2
and M3 grew at annual rates of about
103/4 percent and 8V2 percent, respectively. In August, both aggregates
were close to the upper limits of
their longer-run ranges. In contrast
to the broader aggregates, growth in
Ml accelerated, but it appeared to
have slowed considerably in the early
weeks of September.
Federal funds generally have traded



around 57/s percent since the reduction in the discount rate shortly after
the August 19 meeting of the Committee. Other short-term interest rates
fell about 30 basis points following
the discount rate cut. Longer-term
bond yields changed little immediately after the discount rate action
but have increased noticeably in
recent weeks, with rates on Treasury
securities rising as much as 60 basis
points. The recent behavior of longterm rates apparently has reflected,
at least in part, some concerns by
market participants about whether
inflationary pressures could develop
in the context of some strengthening
in economic activity, the declining
dollar, firmer oil prices, and rapid
monetary growth in the United States
and abroad.
The staff projections presented at
this meeting suggested that growth
in real GNP likely would pick up a
bit further in coming months. Growth
was forecast to continue at a moderate pace in 1987. Through 1987,
the key element supporting expansion in domestic production was a
projected improvement in the U.S.
trade position. Growth in domestic
spending was forecast to slow over
the next several quarters. The staff
outlook for inflation indicated a limited increase from the current pace
due to some firming in world oil
prices and the effects of the dollar's
depreciation. The civilian unemployment rate was expected to decline
slightly over the projection horizon.
In the Committee's discussion of
the economic situation and outlook,
the members expressed general
agreement with the staff projection
that moderate growth through the
forecast horizon was the most likely
outcome. However, the outlook remained subject to substantial uncer-

FOMC Policy Actions 141
tainties relating to both domestic and
international factors. On the favorable side, consumer spending and
construction of single-family housing
remained elements of strength in the
domestic economy, and members
reported that business sentiment appeared to have improved recently in
several, but not all, parts of the
country. One member noted that
reduced personal income taxes could
help to sustain consumer expenditures next year. Another commented
that the emergence of apparently
more stable conditions in agriculture
and energy would tend to remove
the retarding influences that those
key sectors had been exerting on
overall economic activity. On the
negative side, the demand for automobiles undoubtedly would weaken
after the currently attractive incentive programs expired, and the apparent overbuilding of multifamily
housing in many areas would tend to
restrain overall residential construction. Business fixed investment was
not expected to provide much, if
any, impetus to the expansion despite indications of improvement recently in the demand for equipment.
Adverse factors bearing on the investment outlook included the current oversupply of office buildings
and other commercial facilities in
many parts of the country and the
negative effects of the tax reform
legislation on investment incentives
that many businessmen were reporting. The outlook for fiscal policy
remained uncertain; several members noted that some of the proposed
measures for reducing the deficit in
1987 did not deal with underlying
imbalances and that the prospects
beyond 1987 were especially unclear.
However, one member observed that
a reduction in government borrow


ing, if achieved, would tend to have
a favorable impact on financial markets and thus on the economy generally.
On balance, while a few members
supported the view that some pickup
in domestic demand was a reasonable
expectation, most believed that
growth in domestic demand would
probably taper off over the next
several quarters. In their view, therefore, the prospects for sustained
economic growth depended on an
improvement in the foreign trade
balance. The members generally
agreed that the substantial depreciation of the dollar against several
major foreign currencies provided a
basis for anticipating a reduction in
the trade deficit in real terms, but
the timing of such a reduction still
was subject to a great deal of uncertainty. Moreover, several expressed
concern that the improvement might
well be relatively modest, especially
in the absence of stronger economic
growth in key industrial nations
abroad; and some members also
commented on the inertia on both
the import and export sides associated with long-term contracts and
established marketing relationships.
It also was noted that the currencies
of a number of developing countries
had changed relatively little vis-a-vis
the dollar over the past year or so,
raising a question as to the speed of
adjustment in the trade balance.
With regard to currently available
information on trade developments,
a few members referred to limited
indications in reports from firms in
their Districts that tended to suggest
some gains in the international competitive position of U.S. firms and
better prospects for greater stability,
if not some improvement, in the
overall trade balance. However,

142 FOMC Policy Actions
broadly confirming evidence of such
a development had not materialized
thus far.
Against the background of the
dollar's depreciation, the members
agreed that some upward pressure
on prices could be expected over the
next several quarters, a tendency
that would be reinforced if world oil
prices continued to rise. Moreover,
most commodity prices appeared to
have stabilized recently, after declining earlier, while prices of precious
metals had increased considerably
and these developments along with
conditions in financial markets suggested increased concern about the
possibility of a pickup in inflation.
On the other hand, a number of
members observed that wages generally were rising somewhat less this
year than in 1985 and some members
also commented on the continuing
efforts of many business firms to
hold down their costs. And while
productivity gains had been relatively
limited in recent quarters, many
labor contracts incorporated provisions on work rules that should help
to improve efficiency and moderate
pressures on costs.
At its meeting in July the Committee reviewed the basic policy objectives that it had established in
February for growth of the monetary
and credit aggregates in 1986 and set
tentative objectives for expansion in
1987. For the period from the fourth
quarter of 1985 to the fourth quarter
of 1986, the Committee reaffirmed
the ranges established in February
for growth of 6 to 9 percent for both
M2 and M3. The associated range
for expansion in total domestic nonfinancial debt also was reaffirmed at
8 to 11 percent for 1986. With respect
to Ml, the Committee decided that
growth in excess of the 3 to 8 percent
range set in February would be



acceptable and that such growth
would be evaluated in the context of
the velocity of Ml, the expansion of
the broader aggregates, developments in the economy and financial
markets, and price pressures. For
1987 the Committee agreed on tentative monetary growth objectives
that included a reduction of Vi percentage point to a range of 5V2 to
8^2 percent for both M2 and M3. In
the case of Ml the Committee expressed the preliminary view that
retention of the 1986 range of 3 to 8
percent, which implied a considerable reduction from the likely rate of
growth in 1986, appeared appropriate for 1987 in the light of most
historical experience. The Committee also retained the range of 8 to 11
percent for growth of total domestic
nonfinancial debt in 1987. It was
understood that all the ranges were
provisional and that, notably in the
case of Ml, they would be reviewed
in early 1987 against the background
of intervening developments.
In the Committee's discussion of
policy implementation for the weeks
immediately ahead, nearly all the
members were in favor of directing
open market operations, at least
initially, toward maintaining unchanged conditions of reserve availability. Several emphasized that
monetary policy had moved toward
an increasingly accommodative posture over the course of recent months
and that it was now time to pause
and observe developments, given the
rapid growth in the broad as well as
the narrow monetary aggregates, a
few indications of more strength in
the economy, and some signs of
increasing inflationary expectations.
One member expressed the view,
however, that some tightening of
reserve conditions was desirable at
this time against the background of

recent economic and financial developments, notably the persistence of
rapid growth in the monetary aggregates.
In their discussion of policy implementation over the near term, the
members took into account an analysis that suggested that if current
conditions of reserve availability were
maintained and if short-term interest
rates did not deviate significantly
from their existing levels, the growth
of the monetary aggregates could be
expected to slow over the months
ahead, relative to the very rapid pace
over the summer months, even assuming somewhat stronger expansion
in economic activity. The most recent
behavior of the monetary aggregates
lent some weight to such an expectation. However, the anticipated
slowing still would result in growth
of the broad aggregates around the
upper bound of their long-term
ranges. Also, the members recognized that the extent of any slowing
in monetary growth was subject to
perhaps more than the usual uncertainties, reflecting for example questions about the pace of further adjustments in offering rates on various
types of interest-bearing deposits as
depository institutions continued to
respond to earlier declines in shortterm market rates. The members
also noted that the monetary aggregates might well continue to grow
very rapidly if short-term interest
rates were to decline appreciably
further.
In the course of the discussion, a
number of members expressed concern about the potential for the
broad monetary aggregates to exceed
their longer-term ranges. While recognizing the need to evaluate the
aggregates in the context of economic and financial developments
more generally, these members em


FOMC Policy Actions 143
phasized the potential for inflation
stemming from the buildup in money
balances, and in liquid assets more
generally, and these members attached considerable importance to
constraining the growth of the broader
monetary aggregates to within the
Committee's ranges for the year, A
slightly different view acknowledged
that the Committee's objectives for
M2 and M3 appeared to remain
appropriate for the year, but in this
view actual growth marginally in
excess of those ranges should be
tolerated—and the added risks of
some future inflation accepted—if
such growth occurred in the context
of continuing sluggish economic expansion. One member stressed that
if the velocity of money continued to
decline, further rapid expansion might
indeed be needed to sustain an acceptable rate of economic growth.
Turning to the question of possible
adjustments in the degree of reserve
pressure during the intermeeting period, the members did not foresee as
likely any developments that might
call for more than a slight change, if
any, in the availability of reserves
during the weeks ahead. In this
context, however, a number believed
that policy implementation should be
especially alert to the potential need
for some slight firming of reserve
conditions, particularly if monetary
growth did not slow in line with
expectations, though this growth
would continue to be viewed in the
context of other economic and financial developments. Most of these
members did not want to rule out
the possibility of some easing in the
weeks immediately ahead, but they
saw the prospects for such a move as
less likely, and two favored a directive that would not contemplate any
easing. Other members felt that there
should be no presumptions about the

144 FOMC Policy Actions
likely direction of any intermeeting
adjustments, given the many uncertainties that existed about the behavior of the monetary aggregates and
about prospective economic and financial developments. The members
agreed that the behavior of the dollar
on foreign exchange markets could
be an important factor influencing
any small intermeeting adjustments.
At the conclusion of the Committee's discussion, all but one member
indicated that they favored a directive that called for no change in the
current degree of pressure on reserve
positions. The members expected
this approach to policy implementation to be consistent with some
reduction in the growth of M2 and
M3 to annual rates of 7 to 9 percent
over the four-month period from
August to December. Over the same
interval, growth in Ml was expected
to moderate from the exceptionally
large increase during the past several
months. Because the prospective behavior of Ml remained subject to
unusual uncertainty, the Committee
again decided not to specify a rate
of expected growth for this aggregate
in the operational paragraph of the
directive but to continue to evaluate
Ml in the light of the performance
of the broader aggregates and other
factors. The members indicated that
slightly greater reserve restraint
would, or slightly lesser restraint
might, be acceptable over the intermeeting period depending on the
behavior of the monetary aggregates,
taking into account the strength of
the business expansion, the performance of the dollar in foreign exchange
markets, progress against inflation,
and conditions in domestic and international credit markets. The members agreed that the intermeeting
range for the federal funds rate,
which provides a mechanism for



initiating consultation of the Committee when its boundaries are persistently exceeded, should be left
unchanged at 4 to 8 percent.
A t the conclusion of the meeting,
the following domestic policy directive was issued to the Federal R e serve Bank of N e w York:
The information reviewed at this meeting suggests some pickup in the growth of
economic activity from the slow pace in
the second quarter. In August total nonfarm payroll employment grew considerably further, with employment in manufacturing rising for the first time since
January. The civilian unemployment rate
edged down further to 6.8 percent. Industrial production rose slightly in July
and August after declining on balance
during the first half of the year. Consumer
spending has remained relatively strong
in recent months, with gains in retail sales
in August paced by a sharp rise in auto
sales. Housing starts in July and August
stayed at a relatively high level. Business
capital spending appears to have remained sluggish, reflecting weakness in
nonresidential construction. A more
moderate rate of wage increases has been
sustained in recent months, while broad
measures of prices have firmed somewhat
due to developments in food and energy
markets.
The trade-weighted value of the dollar
against major foreign currencies is essentially unchanged on balance since the August 19 meeting of the Committee. Preliminary data for the U.S. merchandise
trade deficit in July indicate a larger deficit than in previous months.
Growth of M2 and especially of M3
moderated in August, but expansion of
these two aggregates for the year through
August has been at the upper end of their
respective ranges established by the Committee for 1986. In August Ml continued
to grow very rapidly. Expansion in total
domestic nonfinancial debt remains appreciably above the Committee's monitoring range for 1986. Short-term interest
rates have declined further since the August meeting of the Committee while longterm market rates have risen on balance.
On August 20, the Federal Reserve Board
approved a reduction in the discount rate
from 6 to 5V2 percent.
The Federal Open Market Committee

seeks monetary and financial conditions
that will foster reasonable price stability
over time, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee agreed at the July meeting
to reaffirm the ranges established in February for growth of 6 to 9 percent for both
M2 and M3, measured from the fourth
quarter of 1985 to the fourth quarter of
1986. With respect to Ml, the Committee
recognized that, based on the experience
of recent years, the behavior of that aggregate is subject to substantial uncertainties in relation to economic activity
and prices, depending among other things
on the responsiveness of Ml growth to
changes in interest rates. In light of these
uncertainties and of the substantial decline in velocity in the first half of the
year, the Committee decided that growth
of Ml in excess of the previously established 3 to 8 percent range for 1986 would
be acceptable. Acceptable growth of Ml
over the remainder of the year will depend on the behavior of velocity, growth
in the other monetary aggregates, developments in the economy and financial
markets, and price pressures. Given its
rapid growth in the early part of the year,
the Committee recognized that the increase in total domestic nonfinancial debt
in 1986 may exceed its monitoring range
of 8 to 11 percent, but felt an increase in
that range would provide an inappropriate benchmark for evaluating longerterm trends in that aggregate.
For 1987 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1986 to
the fourth quarter of 1987, of 5Vi to SVi
percent for M2 and M3. While a range of
3 to 8 percent for Ml in 1987 would appear appropriate in the light of most historical experience, the Committee recognized that the exceptional uncertainties
surrounding the behavior of Ml velocity
over the more recent period would require careful appraisal of the target range
at the beginning of 1987. The associated
range for growth in total domestic nonfinancial debt was provisionally set at 8
to 11 percent for 1987.
In the implementation of policy for the
immediate future, the Committee seeks
to maintain the existing degree of pressure on reserve positions. This action is
expected to be consistent with growth in

M2 and M3 over the period from August


FOMC Policy Actions 145
to December at annual rates of 7 to 9
percent. While growth in Ml is expected
to moderate from the exceptionally large
increase during the past several months,
that growth will continue to be judged in
the light of the behavior of M2 and M3
and other factors. Slightly greater reserve
restaint would, or slightly lesser reserve
restraint might, be acceptable depending
on the behavior of the aggregates, taking
into account the strength of the business
expansion, development in foreign exchange markets, progress against inflation, and conditions in domestic and international credit markets. The Chairman
may call for Committee consultation if it
appears to the Manager for Domestic Operations that reserve conditions during the
period before the next meeting are likely
to be associated with a federal funds rate
persistently outside a range of 4 to 8 percent.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Heller, Mrs.
Horn, Messrs. Johnson, Melzer, Morris, Rice, and Ms. Seger. Vote againstthis action: Mr. Wallich.
Mr. Wallich dissented because he
preferred a slight tightening of reserve conditions. He was concerned
about the persistence of rapid monetary expansion and the associated
potential for inflation. In his view
some reduction in the availability of
reserves was needed to increase the
likelihood of significant slowing in
monetary growth over the months
ahead.

Meeting Held on
November 5, 1986
1. Domestic Policy Directive
The information reviewed at this
meeting suggested that economic activity grew at a moderate rate in the
third quarter, after rising only slightly
in the previous quarter. Payroll employment expanded somewhat fur-

146 FOMC Policy Actions
ther in September, although manufacturing jobs declined following little
change in August. Consumer spending, which had been quite robust in
the first half of the year, strengthened further in the third quarter.
Business capital spending, however,
remained sluggish, reflecting declines
in outlays for nonresidential construction; new orders rose in September and equipment spending picked
up. Residential constuction expenditures advanced further in the third
quarter, but housing starts fell in
September. Wage increases have
continued to moderate, while prices
have increased a bit because of
developments in food and energy
markets.
Industrial production rose another
0.1 percent in September. The gain
partly reflected a surge in the production of cars and light trucks.
Other production was unchanged on
balance; production of defense
equipment rose, but output of nondefense goods edged down and materials production remained sluggish.
Domestic automakers apparently cut
back assemblies during October, but
still were planning relatively large
production for the fourth quarter as
a whole. Capacity utilization in manufacturing, mining, and utilities was
unchanged in September at 79.2
percent. The utilization rate in mining continued to decline, while the
rate in manufacturing edged up,
reflecting the pickup in motor vehicle
production.
Total nonfarm payroll employment grew somewhat further in September. The sluggish pace of industrial production was reflected in a
decline in manufacturing jobs that
more than offset the increase reported for August. Employment in
trade, finance, and services advanced
further in
 September, but at a less


rapid rate than in earlier months of
the year. The civilian unemployment
rate moved back up to 7 percent in
September, close to its average level
earlier in the year.
Total retail sales increased 4.6
percent in September because of a
substantial jump in auto sales following the expansion of sales incentive
programs by domestic automakers in
late August. During September, domestic cars sold at a record 11%
million unit annual rate, compared
with an average 8% million unit pace
in the preceding five months. Light
trucks and foreign cars also sold at
record monthly rates in September.
Outside of the auto group, sales
were virtually unchanged from August levels.
In the business sector, spending
has remained sluggish. Business purchases of motor vehicles were up
sharply in the third quarter, but
spending for other equipment declined, and outlays for nonresidential
structures dropped substantially further. However, new orders for nondefense capital goods rose sharply in
September; although aircraft orders
accounted for half of the increase,
bookings for many other types of
equipment also posted sizable gains.
For structures, data on new commitments have continued to point to
further declines in office building,
but the drop in oil- and gas-well
drilling appears to have ended.
Housing starts have declined since
earlier in the year but residential
construction
expenditures
rose
through the summer. Total private
housing starts dropped in September
to an annual rate of 1.68 million
units from a rate of about 1.8 million
units during July and August. Single
family starts fell somewhat in September, registering the lowest monthly
reading since December, but sales of

new and existing homes increased
during the month. Multifamily housing starts declined further apparently
reflecting in part record high vacancy
rates and prospectively diminished
rates of return on rental properties
as a result of tax reform.
Labor cost increases have moderated further over the past year, but
price increases have been a bit higher
in recent months than earlier in the
year due mainly to developments in
food and energy markets. Consumer
food prices rose sharply during the
summer, reflecting in part weatherrelated disruptions in some supplies.
By September conditions had improved, and increases in retail food
prices slowed noticeably. In the energy sector, petroleum prices moved
up at the wellhead and refinery levels
in the September PPI, reflecting the
OPEC agreement in early August to
curtail production. This increase in
crude oil costs apparently has already
reached the retail level as gasoline
and heating oil prices turned up in
the September CPI, after steep declines throughout much of the year.
Excluding food and energy, consumer prices have risen recently at
about the same pace as earlier in the
year.
The trade-weighted value of the
dollar against major foreign currencies continued to decline for several
weeks after the September 23 FOMC
meeting, but it subsequently recovered and has risen somewhat on
balance. Short-term and long-term
interest rate differentials increased a
bit during the intermeeting period;
foreign rates moved up, particularly
at the short end, while rates in the
United States eased slightly. Real
net exports of goods and services
dropped further in the third quarter,
mainly reflecting a surge in the volume of oil imports. After the recov


FOMC Policy Actions 147
ery in real economic activity in most
major foreign industrial countries in
the second quarter, available data
for the third quarter indicate further
moderate expansion in Germany,
France, the United Kingdom and to
a lesser extent in Japan.
At its meeting in September, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions. The members expected such
an approach to policy to be consistent with growth in M2 and M3 from
August to December at annual rates
of 7 to 9 percent. Growth in Ml over
the same period was expected to
moderate from the exceptionally large
increase during the previous several
months. The Committee agreed that
the growth in Ml would continue to
be evaluated in view of the behavior
of the broader aggregates and other
factors. The members also decided
that slightly greater reserve restraint
would, or slightly lesser reserve restraint might, be acceptable depending on the behavior of the monetary
aggregates, taking into account the
strength of the business expansion,
developments in foreign exchange
markets, progress against inflation,
and conditions in domestic and international credit markets. The intermeeting range for the federal funds
rate was maintained at 4 to 8 percent.
M2 and M3 increased at annual
rates of 83A and 7V2 percent respectively, on average over September
and October, well below their rates
of growth since early spring. Through
October, both aggregates were very
close to the upper ends of their 6 to
9 percent annual growth ranges established by the Committee for 1986.
Growth in Ml still was quite strong
over September and October, but
down substantially from its average
over the previous several months.

148 FOMC Policy Actions
Adjustment plus seasonal borrowing at the discount window averaged
about $325 million in the two complete maintenance periods after the
September meeting. Federal funds
generally continued to trade close to
5% percent over the intermeeting
period. Most other interest rates
eased somewhat on balance, with
short-term rates about unchanged to
down 15 basis points and long-term
rates off as much as 35 basis points.
Bond prices increased in the days
just before the meeting in part reflecting perceptions of stronger foreign demand for dollar assets,
prompted to some extent by the cut
in the Japanese discount rate on
October 31. In addition, market
participants reportedly interpreted the
cut in the Japanese rate as giving the
Federal Reserve more leeway to ease
domestic monetary policy.
The staff projections presented at
this meeting suggested that real GNP
would continue to grow at a moderate rate through the end of 1987.
Anticipations of sustained growth in
real exports, reflecting the improvement in the price competitiveness of
U.S. goods, continued to be a key
element supporting the expected expansion in domestic production.
Growth in domestic spending was
projected to be relatively sluggish
over the forecast horizon. The staffs
projection for inflation continued to
show some step-up early next year
associated with the effects of rapidly
rising import prices on the prices of
U.S. goods and with the turnaround
in energy prices.
In the Committee's discussion of
the economic situation and outlook,
the members agreed that incoming
data on business activity and reports
on specific conditions in many indus


tries were broadly consistent with the
staff forecast of continuing expansion
at a moderate pace. There were
uncertainties nonetheless about the
prospective performance of individual sectors of the economy and thus
of the economy generally. In the
view of most members the risks of a
deviation from the staff projection
appeared to be evenly balanced, but
a few felt the risks were greater in
the direction of less growth.
As they had at several previous
meetings, the members focused on
the performance of net exports as a
key factor in the outlook for economic activity. The most recent data
could be interpreted as suggesting
that the trade balance was no longer
worsening. However, clear evidence
of an actual turnaround in the trade
balance had not yet emerged and it
was far from certain that there would
be significant improvement during
the months ahead. Some members
reported that a growing number of
firms were experiencing increases in
orders from abroad, a development
that lent support to expectations of
a significant pickup in export sales
over the next few quarters. To an
important degree, the outlook for
U.S. exports remained contingent on
growing demands from major industrial nations. In that regard it was
noted that the evidence was mixed.
Domestic expansion—and also the
demand for foreign goods—appeared to be strengthening in some
major countries, but the outlook was
less promising in others. On the
import side, members observed that
foreign competition remained intense, notably from countries whose
exchange rates had not appreciated
against the dollar. Nonetheless, there
were reports that rising import prices

FOMC Policy Actions 149
were improving the competitive position of at least some domestic
producers.
In the Committee's review of the
outlook for spending by domestic
sectors of the economy, the members
generally expected demand to continue to increase, but at a slower
pace than in recent quarters. Individual members again highlighted the
uneven conditions in different industries and parts of the country. One
member commented that the complex tax reform legislation constituted a major source of uncertainty.
The members agreed that total consumer spending would tend to be
held down in the current quarter by
reduced purchases of automobiles
following the bulge associated with
attractive incentive programs. One
member observed, however, that
some offsetting expenditures on highpriced items might be induced before
year-end because the deductibility of
sales taxes in computing personal
income taxes would be terminated
starting in 1987. On the negative
side, one member suggested that the
adjustment in automobile sales might
take longer than many observers
currently expected and also stressed
that consumer debt burdens were an
important inhibiting factor on spending. In the area of business investment, members noted that construction activity would probably be held
down by relatively high vacancy rates
in office buildings, multifamily housing, and other commercial facilities
such as hotels, especially in the
context of the reportedly adverse
impact of the tax reform legislation
on such investments. Members also
referred to a number of plant closings
in the manufacturing sector. On the
other hand, some current economic



indicators pointed to a strengthening
in the demand for business equipment. One member also commented
that the prospects for improvement
in the nation's balance of trade, if
realized, would require more investment in domestic productive facilities
over time. In regard to agriculture
current conditions were mixed, but
one member indicated that the overall situation in that industry and also
in energy no longer appeared to be
worsening and accordingly those key
sectors of the economy had probably
ceased to exert a negative influence
on general economic activity. Likewise, the outlook for reduced government deficits, including surpluses
for state and local governments, and
the apparently favorable prospects
for foreign trade implied a reduction
in major structural imbalances and
an improved basis for sustained economic expansion.
With regard to the outlook for
inflation, the members agreed that
the lagged impacts of the dollar's
depreciation along with developments in energy markets were likely
to contribute to somewhat faster
price increases during the year ahead.
Many domestic businesses reportedly
continued to look for competitive
opportunities to raise prices and
widen profit margins. One member
observed that a potential inflation
risk, and one for business activity
generally, would be the emergence
of new protectionist measures in
response to unsatisfactory progress
in reducing the nation's trade deficit.
On the favorable side, wages generally appeared to be continuing to rise
more slowly than earlier and businesses were continuing to devote
considerable attention to paring costs
and improving their productivity.

150 FOMC Policy Actions
Some food prices might also tend to nonfinancial debt in 1987. It was
decline following increases in recent understood that all the ranges were
months. More generally, the pros- provisional and that, notably in the
pect that capacity utilization rates case of Ml, they would be reviewed
were likely to remain relatively low in early 1987 against the background
in most industries over the year of intervening developments.
ahead implied that inflationary presThe Committee's discussion of polsures would be muted during that icy implementation for the weeks
period.
immediately ahead reflected the sense
At its meeting in July the Com- that the economy was continuing to
mittee reviewed the basic policy ob- expand at a moderate rate and that,
jectives that it had established in while price pressures could be
February for growth of the monetary strengthening somewhat in response
and credit aggregates in 1986 and it to higher import prices, those price
set tentative objectives for expansion increases should be well contained.
in 1987. For the period from the Externally, some signs of greater
fourth quarter of 1985 to the fourth stability seemed to be emerging in
quarter of 1986, the Committee re- exchange markets. In those circumaffirmed the ranges established in stances, all of the members indicated
February for growth of 6 to 9 percent that they were in favor of continuing
for both M2 and M3. The associated to direct open market operations
range for expansion in total domestic toward maintaining unchanged connonfinancial debt also was reaffirmed ditions of reserve availability. That
at 8 to 11 percent for the current conclusion was also warranted by
year. With respect to Ml, the Com- indications that monetary growth had
mittee decided that growth in excess moderated somewhat over Septemof the 3 to 8 percent range set in ber and October, and an expectation
February would be acceptable and that the broad aggregates might stay
that such growth would be evaluated close to the Committee's earlier exin relation to the velocity of Ml, the pectations for growth near the upper
expansion of the broader aggregates, ends of their long-term ranges in the
developments in the economy and closing months of the year, assuming
financial markets, and price pres- no significant changes in reserve
sures. For 1987 the Committee agreed conditions and in short-term interest
on tentative monetary growth objec- rates.
tives that included reductions of xh
In the Committee's discussion of
percentage point to ranges of 5V2 to possible intermeeting adjustments in
8^2 percent for both M2 and M3. In the degree of reserve pressure, the
the case of Ml the Committee ex- members suggested that developpressed the preliminary view that ments calling for more than a slight
retaining the 1986 range of 3 to 8 change in reserve conditions would
percent, which implied a considera- be unlikely during the weeks ahead.
ble reduction from the likely rate of Although a few members felt that
growth in 1986, appeared appropri- policy implementation should remain
ate for 1987 in the light of most especially alert to the potential need
historical experience. The Commit- for some easing of reserve conditee also retained the range of 8 to 11 tions, notably the need to respond
percent for growth of total domestic to emerging indications, if any, of



FOMC Policy Actions 151
relatively weak business activity, most
felt that there should be no presumptions about the likely direction of
any small intermeeting adjustments,
should they be desirable. With respect to the monetary aggregates,
some members commented that a
shortfall from current expectations
would be a welcome development,
given the rapid growth earlier in the
year, and within limits a shortfall
should be tolerated provided it occurred in the context of satisfactory
economic performance and did not
appear to be associated with upward
pressures on market interest rates.
One member commented, however,
that a sharp and abrupt slowdown in
Ml growth might well signal a weaker
economy and, depending on the
circumstances, might require more
than a slight adjustment in policy
implementation.
At the conclusion of the Committee's discussion, all of the members
indicated that they favored a directive that called for no change in the
current degree of pressure on reserve
positions. The members expected
this approach to policy implementation to be consistent with growth of
M2 and M3 at annual rates of 7 to 9
percent over the fourth quarter from
a September base. Over the same
period, growth in Ml was expected
to moderate from its exceptional
pace during most of the period since
early spring. Because the behavior
of Ml remained subject to unusual
uncertainty, the Committee decided
to continue its recent practice of not
specifying a rate of expected growth
for purposes of short-run policy implementation but to evaluate this
aggregate in the light of the performance of the broader monetary aggregates and other factors. The members indicated that slightly greater or



slightly lesser reserve pressures might
be acceptable over the intermeeting
period depending on the behavior of
the monetary aggregates, taking into
account the strength of the business
expansion, the performance of the
dollar in foreign exchange markets,
progress against inflation, and conditions in domestic and international
credit markets. The members agreed
that the intermeeting range for the
federal funds rate, which provides a
mechanism for initiating consultation
of the Committee when its boundaries are persistently exceeded, should
be left unchanged at 4 to 8 percent.
At the conclusion of the meeting,
the following domestic policy directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that economic activity grew
at a moderate pace in the third quarter.
In September total nonfarm payroll employment grew somewhat further, although employment in manufacturing fell
after changing little in August. The civilian unemployment rate moved back up to
7.0 percent in September, close to its average level earlier in the year. Industrial
production rose slightly further in September and posted a moderate gain over
the third quarter. Consumer spending has
remained strong in recent months, with
gains in retail sales in August and especially in September paced by a sharp rise
in auto sales. Housing starts fell in September, but residential investment increased further in the third quarter as a
whole. Business capital spending appears
to have remained sluggish; equipment
spending picked up in the third quarter
and new orders were strong in September,
but outlays for nonresidential construction continued to decline. Real net exports of goods and services dropped further in the third quarter, reflecting in large
part a surge in the volume of oil imports.
Increases in labor compensation have
slowed over the course of the year, while
broad measures of prices have firmed
somewhat recently due to developments
in food and energy markets.

152 FOMC Policy Actions
Growth of M2 moderated further in
September, but appears to have picked
up in October, while growth of M3 has
tended to slow. Expansion of these two
aggregates for the year through September has been at the upper end of their
respective ranges established by the Committee for 1986. Growth of Ml slowed in
the September-October period from the
very rapid pace experienced since early
spring. Expansion in total domestic nonfinancial debt remains appreciably above
the Committee's monitoring range for
1986. Most interest rates have declined
somewhat since the September 23 meeting of the Committee. Although the tradeweighted value of the dollar against major
foreign currencies continued to decline for
several weeks after the September meeting, it subsequently recovered and has risen
somewhat on balance.
The Federal Open Market Committee
seeks monetary and financial conditions
that will foster reasonable price stability
over time, promote growth in output on
a sustainable basis, and contribute to an
improved pattern of international transactions. In furtherance of these objectives
the Committee agreed at the July meeting
to reaffirm the ranges established in February for growth of 6 to 9 percent for both
M2 and M3, measured from the fourth
quarter of 1985 to the fourth quarter of
1986. With respect to Ml, the Committee
recognized that, based on the experience
of recent years, the behavior of that aggregate is subject to substantial uncertainties in relation to economic activity
and prices, depending among other things
on the responsiveness of Ml growth to
changes in interest rates. In light of these
uncertainties and of the substantial decline in velocity in the first half of the
year, the Committee decided that growth
of Ml in excess of the previously established 3 to 8 percent range for 1986 would
be acceptable. Acceptable growth of Ml
over the remainder of the year will depend on the behavior of velocity, growth
in the other monetary aggregates, developments in the economy and financial
markets, and price pressures. Given its
rapid growth in the early part of the year,
the Committee recognized that the increase in total domestic nonfinancial debt
in 1986 may exceed its monitoring range
of 8 to 11 percent, but felt an increase in
that range would provide an inappropriate benchmark for evaluating longerDigitized forterm trends in that aggregate.
FRASER


For 1987 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1986 to
the fourth quarter of 1987, of 5Vi to %Vi
percent for M2 and M3. While a range of
3 to 8 percent for Ml in 1987 would appear appropriate in the light of most historical experience, the Committee recognized that the exceptional uncertainties
surrounding the behavior of Ml velocity
over the more recent period would require careful appraisal of the target range
at the beginning of 1987. The associated
range for growth in total domestic nonfinanical debt was provisionally set at 8
to 11 percent for 1987.
In the implementation of policy for the
immediate future, the Committee seeks
to maintain the existing degree of pressure on reserve positions. This action is
expected to be consistent with growth in
M2 and M3over the period from September to December at annual rates of 7 to
9 percent. While growth in Ml over the
same period is expected to moderate from
its exceptional pace during the previous
several months, growth in this aggregate
will continue to be judged in the light of
the behavior of M2 and M3 and other
factors. Slightly greater reserve restraint
or slightly lesser reserve restraint might
be acceptable depending on the behavior
of the aggregates, taking into account the
strength of the business expansion, developments in foreign exchange markets,
progress against inflation, and conditions
in domestic and international credit markets. The Chairman may call for Committee consultation if it appears to the
Manager for Domestic Operations that
reserve conditions during the period before the next meeting are likely to be associated with a federal funds rate persistently outside a range of 4 to 8 percent.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Heller, Mrs.
Horn, Messrs. Johnson, Melzer,
Morris, Rice, and Ms. Seger. Votes
against this action: None. Absent and
not voting: Mr. Wallich.

2. Authorization lor Domestic
Open Market Operations
Effective December 3, 1986, the
Committee approved a temporary

FOMC Policy Actions 153
increase of $1 billion, to $7 billion, vehicles, which dropped off with the
in the limit between Committee end of financing incentive programs,
meetings on changes in System Ac- consumer spending has posted sizacount holdings of U.S. government ble gains in recent months. Business
and federal agency securities speci- investment spending, however, has
fied in paragraph l(a) of the author- remained sluggish, while housing starts
ization for domestic open market have weakened. At the same time,
operations. The increase was effec- the trade balance has shown only
tive for the intermeeting period end- limited indications of improvement.
ing with the close of business on Increases in labor costs still were
moderate, but price increases have
December 16, 1986.
been somewhat higher than earlier
Votes for this action: Messrs. Volcker, in the year because of developments
Corrigan, Angell, Guffey, Heller, Mrs.
Horn, Messrs. Johnson, Melzer, in food and energy markets.
Morris, Rice, and Ms. Seger. Votes
Total nonfarm payroll employagainst this action: None. Absent and ment rose about Vi million in both
not voting: Mr. Wallich.
October and November. Much of the
This action was taken on the rec- gain was in the private service-proommendation of the Manager for ducing sector, but factory employDomestic Operations. The Manager ment also rose moderately, and the
had advised that outright purchases workweek lengthened. Aggregate
of securities in the intermeeting in- hours for production and nonsuperterval through December 1, 1986, visory workers in November were a
had reduced the leeway under the full percentage point above the thirdusual $6 billion limit to about $3.5 quarter average. The civilian unembillion. Additional purchases of se- ployment rate stayed at 7 percent in
curities in excess of that leeway likely November for the third consecutive
would be necessary over the remain- month.
Gains in employment and hours
der of the intermeeting period, chiefly
reflecting seasonal increases in cur- worked were associated with a sizarency in circulation and required ble pickup in industrial production
in November. The industrial producreserves.
tion index rose 0.6 percent last month,
after essentially no change over the
previous three months. Increases in
Meeting Held on
output were evident in most major
December 15-16, 1986
marketing groups, with only energy
materials showing a marked decline,
Domestic Policy Directive
although auto assemblies were about
The information reviewed at this unchanged from October. Capacity
meeting suggested that economic ac- utilization in manufacturing, mining,
tivity was continuing to expand at a and utilities rose 0.3 percentage point
moderate pace in the current quarter. in November to 79.3 percent. NonePayroll employment increased con- theless, utilization has changed little
siderably in October and November; on balance since March and is 2*/2
hiring in manufacturing rose some- points below its most recent peak in
what in both months after declining the summer of 1984.
on balance since the beginning of the
Sales of domestic cars fell sharply
year. Apart from sales of motor after the expiration of cut-rate fi


154 FOMC Policy Actions
nancing incentive programs in early
October. These sales averaged less
than 7 million units at an annual rate
over the October-November period,
compared with the strong 9*/2 million
unit pace for the third quarter as a
whole. Excluding autos, gasoline,
and nonconsumer items, retail sales
in November rose 0.9 percent paced
by continued strength in purchases
of furniture and appliances and in
other nonauto durables. In addition,
data for earlier months were revised
upward slightly.
Business investment appears to
have remained sluggish. Shipments
of nondefense capital goods increased in October, and construction
spending has firmed in recent months
but prospects for such spending have
continued to be affected adversely
by high vacancy rates and reactions
to tax reform. In contrast, sales of
heavy-weight trucks fell markedly in
October, and business purchases of
cars and light trucks also probably
declined sharply after the sales incentive programs ended. At the same
time, new orders for nondefense
capital goods fell 5 percent. Initial
surveys of capital spending plans for
1987 suggested that overall nominal
spending on plant and equipment is
likely to change little from the 1986
level.
Housing starts continued to decline in November. During the month
total private housing starts, at 1.6
million units, were a bit below the
reduced pace of September and October. Single-family starts were virtually unchanged from their rate
during the preceding two months,
but were below their level earlier in
the year; new home sales also have
remained below their previous pace
in recent months. Multifamily starts
declined further in November in



response to high vacancy rates and
adverse changes in tax laws.
Price increases, although still moderate, have been somewhat higher
than earlier in the year partly because of developments in food and
energy markets. The consumer price
index rose 0.2 percent in October
and the producer price index was up
0.2 percent in November. In the food
sector, some upward price pressure
continued to be evident, although
increases in food prices slowed from
the rapid pace during the summer.
In addition, energy prices turned
down a bit at both the retail and
refinery levels, despite the firming of
crude oil prices in spot markets since
midsummer. Excluding food and energy, the CPI rose 0.4 percent in
October, somewhat faster than earlier in the year as new car prices
increased sharply. Wage inflation has
picked up a bit recently, but has
continued at a moderate pace.
The trade-weighted value of the
dollar against other G-10 currencies
has declined somewhat on balance
since the November 5 meeting of the
Committee. Exchange rates have been
affected by news about the pace of
economic activity, developments in
the U.S. trade balance, and prospects for monetary actions in the
United States and in key industrial
nations abroad. Short-term interest
rates rose moderately abroad, about
in line with movements in U.S. rates,
while differentials in long-term interest rates moved slightly against dollar
assets. Over the period, the dollar
declined about 2 percent against the
mark and was essentially unchanged
against the yen, but the dollar's
depreciation had been somewhat
larger in early December. As of midDecember, the value of the dollar in
relation to other major currencies

FOMC Policy Actions 155
was little changed on balance from
the level prevailing in August. Economic activity in major foreign industrial countries was mixed in the
third quarter. The U.S. merchandise
trade deficit was estimated to be
about the same in the third quarter
as in the previous three quarters.
Exports were flat in the quarter,
while the value of oil imports was
close to that in the second quarter as
price declines about offset volume
increases. Very preliminary data indicated that the deficit in October
was the smallest in recent months as
exports of agricultural products rose
somewhat and imports declined moderately.
At its meeting on November 5,
the Committee adopted a directive
that called for maintaining the existing degree of pressure on reserve
positions. This action was expected
to be consistent with growth in both
M2 and M3 at annual rates of 7 to 9
percent from September to December. Growth in Ml over the same
period was expected to moderate
from its exceptional pace during the
previous several months. The Committee agreed that the growth in Ml
would continue to be evaluated in
light of the behavior of the broader
monetary aggregates and other factors. The members also decided that
slightly greater or slightly lesser reserve restraint might be acceptable
depending on the behavior of the
monetary aggregates, taking into account the strength of the business
expansion, developments in foreign
exchange markets, progress against
inflation, and conditions in domestic
and international credit markets. The
intermeeting range for federal funds
was maintained at 4 to 8 percent.
M2 growth slowed substantially in
November to a 6V2 percent annual



rate, and M3 growth moderated further to a 5V2 percent annual rate;
through November both M2 and M3
were just inside the upper bounds of
their 6 to 9 percent growth ranges
established by the Committee for
1986. Ml accelerated again in November, reaching a rate of 21 percent, as growth in demand deposits
surged. Ml growth has remained far
in excess of GNP growth so far this
year and its velocity is expected to
fall at a historically high rate.
Growth of total reserves picked up
sharply over the intermeeting period
largely because of a surge in required
reserves against transaction deposits.
In addition, excess reserves increased
from almost $750 million in the
previous three months to around $1
billion on average in November,
reflecting mainly the usual patterns
around holidays and social security
payment dates. Adjustment plus seasonal borrowing in the two complete
maintenance periods since the November FOMC meeting averaged
about $300 million, down somewhat
from the average over the previous
intermeeting period. Even so, the
funds rate firmed from around 57/s
percent at the time of the last meeting to well above 6 percent in early
December. More recently, the federal funds rate has averaged close to
6 percent.
With the federal funds rate firmer
through much of the intermeeting
period, other short-term market rates
rose 15 to 50 basis points. However,
bond yields generally were about
unchanged to down 25 basis points.
Rates on commitments for fixed-rate
home mortgages dropped about V2
percentage point, moving toward a
more normal alignment with Treasury bond yields. Although stock
prices fell initially on the announce-

156 FOMC Policy Actions
ment of insider trading violations
related to takeover activity, on balance they showed little change over
the period.
The staff projections presented at
this meeting suggested that real GNP
would continue to grow at a moderate rate through the end of 1987.
Prospects for an improvement in real
net exports of goods and services
continued to be a key element shaping the 1987 forecast; export growth
was expected to accelerate next year
and import growth to moderate as
world trade flows adjusted to increased U.S. competitiveness. Gross
domestic purchases were projected
to be relatively sluggish through the
end of 1987, reflecting mainly a shift
toward fiscal restraint, the likely
weakness in multifamily housing and
nonresidential construction, and the
damping influence of higher import
prices on the growth of real income
and consumption. Inflation was expected to pick up a bit in early 1987
as a consequence of the dollar's
depreciation and higher energy prices.
In the Committee's discussion of
current and prospective economic
developments, members generally
agreed that continuing expansion at
a moderate pace remained a reasonable expectation for the year ahead,
but a number of members emphasized the risks of a shortfall from
current projections, especially in the
early part of 1987. In particular,
members mentioned the risks that
the expected improvement in the
nation's foreign trade might be relatively disappointing next year and
that overall business spending might
remain sluggish. A few members also
referred to the possibility of slower
growth in consumer spending. On
balance, however, while no important sector of the domestic economy
seemed
 likely to be a source of


substantial strength in 1987, the
members read current economic indicators and other business information as pointing to a fifth year of
moderate expansion. Such expansion
might be accompanied by some rise
in the rate of inflation, primarily
reflecting the effects of the dollar's
depreciation and energy-sector developments.
The members again gave considerable attention to the outlook for
foreign trade. An improvement in
trade generally was viewed as an
essential factor in sustaining a moderate rate of business expansion in
the context of perhaps diminishing
growth in overall domestic demands.
Unfortunately, there was no convincing evidence thus far of a turnaround
in the trade balance, and a number
of members commented that the
expected improvement could be relatively limited next year. On the
favorable side, the depreciation of
the dollar evidently had enhanced
the competitive position of U.S.
firms, and individual reports of expanding export opportunities appeared to be multiplying as well as
indications of an improved ability of
many U.S. firms to compete domestically with imports. As they had at
earlier meetings, the members referred to a number of factors that
were inhibiting an overall improvement in net exports, including limited
expansion in many industrial nations
abroad and strong competition from
a number of countries whose currencies had not appreciated against the
dollar. One member also stressed
that persisting debt problems in several developing countries constituted
an element of vulnerability for international financial markets and international trade and also for the U.S.
economy.
With regard to the domestic econ-

omy, a number of members commented that consumer expenditures
on durables, especially automobiles,
and some business spending appeared to have been accelerated into
1986 in reaction to provisions of the
tax reform legislation. Compensating
adjustments in such spending later
could have a restraining effect on
economic growth, notably during the
first part of 1987. Nonetheless, a few
members referred to the possibility
that consumer spending might be
well maintained during 1987 as a
whole. The latter acknowledged the
inhibiting effects of the growth in
consumer debt, but they stressed the
favorable implications of cumulative
increases in the total assets and net
worth of consumers and the positive
impact of reductions in personal
income tax rates. The outlook for
business spending continued to be
uncertain and in some respects unpromising, especially with regard to
multifamily housing and nonresidential construction; both areas would
be adversely affected by high vacancy
rates and negative reactions to the
tax reform legislation. There were
further reports of plant closings,
notably in the Midwest. However,
one member observed that business
spending for plant and equipment
might well hold up in response to
continuing growth in overall economic activity. As usual, the prospects for inventory accumulation were
uncertain and would be affected by
the outlook for prices.
With regard to the outlook for
prices and wages, members generally
agreed that increases might be somewhat larger in 1987, reflecting the
impact of rising import prices and
indications of a turnaround in oil
prices. However, the prospect of
only moderate economic growth and
Digitized forcontinued margins of slack in labor
FRASER


FOMC Policy Actions 157
and product markets suggested that
strong wage pressures were not likely
over the year ahead. One member
observed that agricultural conditions
worldwide suggested an absence of
pressure on food prices. Moreover,
generally limited growth in key industrial nations together with an
ample availability of productive resources abroad implied continuing
strong competitive pressures and restrained advances in prices of U.S.
imports. Even so, a somewhat higher
rate of inflation appeared to be in
prospect for next year.
At its meeting in July, the Committee had agreed on tentative ranges
of 5V2 to 8V2 percent for growth in
both M2 and M3 during the period
from the fourth quarter of 1986 to
the fourth quarter of 1987. The
associated range for growth in total
domestic nonfinancial debt was set
at 8 to 11 percent for 1987. In the
case of Ml the Committee had indicated on a more tentative basis than
usual that it might retain the 1986
range of 3 to 8 percent for 1987.
Such a range implied a marked
reduction from the Ml growth experienced in 1986 and provisionally
assumed that the relationship of Ml
to income, interest rates, and other
economic variables next year would
be broadly consistent with earlier
historical experience.
At this meeting the Committee
held a preliminary discussion of the
factors bearing on appropriate ranges
for the various monetary aggregates
in 1987. Most of the attention was
devoted to the issue of whether a
range should be established for Ml,
given the uncertainty surrounding
behavior of that aggregate and its
velocity in recent years. While most
members currently did not favor
establishing a formal target range for
Ml growth in 1987, many of them

158 FOMC Policy Actions
believed that this aggregate should
continue to be monitored or evaluated
in light of information about the
economy, prices, and the broad monetary aggregates and other financial
variables. The Committee will complete its review of the role of Ml and
the ranges for the broad aggregates
for 1987 at its February meeting.
In the Committee's discussion of
policy implementation for the period
immediately ahead, all of the members indicated that they were in favor
of directing open market operations,
at least initially, toward maintaining
unchanged conditions of reserve
availability. For now, monetary policy was deemed to be exerting an
appropriate degree of pressure on
reserve positions in light of the growth
of the broader monetary aggregates
within—though at the upper ends
of—their longer-run ranges, and the
generally favorable prospects for sustained, albeit moderate, economic
growth.
The members recognized that the
outlook for the monetary aggregates
remained uncertain, notably in the
case of Ml. According to an analysis
presented at this meeting, a moderate trend in the growth of M2 and
M3 might be anticipated, given the
outlook for fairly limited growth in
economic activity and an abatement
of the effects of earlier interest rate
declines. For the months ahead,
growth in the broader aggregates
might be well within the Committee's
tentative ranges for 1987 on the
assumption that there would be no
significant changes in market interest
rates. The outlook for Ml growth
remained highly uncertain, although
underlying forces seemed consistent
with a considerable slowing over time
from the extraordinary expansion
experienced during 1986. Some concern was
 expressed that the failure


of such a slowing to occur and the
associated large provision of reserves
could eventually have inflationary
consequences. Even with some moderation over coming months, Ml
might continue to expand at rates
markedly in excess of the growth in
nominal GNP. In view of the uncertainties that were involved and in
keeping with the Committee's practice since mid-1986, the members did
not want to indicate specific expectations with regard to Ml growth in
the operational paragraph of the
Committee's directive. Nonetheless,
it was understood that growth of this
aggregate would continue to be evaluated in light of the behavior of the
broader monetary aggregates and
other economic and financial developments.
In their discussion of possible intermeeting adjustments in the degree
of reserve pressure, the members
thought it unlikely that developments
would warrant more than a minor, if
any, change in reserve conditions
during the weeks ahead. All of the
members understood that some small
adjustment in either direction might
be appropriate under certain circumstances. However, in the context of
what they perceived as greater downside risks in the outlook for economic
activity, several believed that policy
implementation should remain especially alert to developments that
might call for somewhat easier reserve conditions. It was noted in this
connection that the relative stability
of the dollar in foreign exchange
markets over the past few months
provided greater flexibility for potential easing actions.
At the conclusion of the Committee's discussion, all of the members
indicated that they favored a directive that called for no change in the
degree of pressure on reserve posi-

FOMC Policy Actions 159
tions. The members expected this
approach to policy implementation

generally appears to have remained sluggish. Preliminary data for the U.S. merOctober suggest
to be consistent with growth of both chandise trade deficit in Broad measures
a moderate narrowing.
M2 and M3 at an annual rate of of prices havefirmedsomewhat in recent
about 7 percent over the four-month months due to developments in food and
period from November to March. energy markets. Labor cost increases this
Because the behavior of Ml re- year have remained moderate compared
with other recent years.
mained subject to unusual uncerGrowth of M2 slowed substantially in
tainty, the members decided they November, while growth of M3 remained
would continue to evaluate this ag- moderate. Expansion of these two aggregregate in the light of the perform- gates for the year through November has
below the upper
of their
ance of the broader monetary aggre- been just ranges established endthe Comrespective
by
gates and other factors. The members mittee for 1986. In November growth of
indicated that slightly greater reserve Ml accelerated to a very rapid rate. Exrestraint or somewhat lesser reserve pansion in total domestic nonfinancial debt
restraint would be acceptable over remains appreciably above the Committee's monitoring range for 1986. Shortthe intermeeting period depending term interest rates have risen somewhat
on the behavior of the monetary since the November 5 meeting of the
aggregates, taking into account the Committee, while long-term rates have
strength of the business expansion, declined on balance. In foreign exchange
markets the trade-weighted value of the
the performance of the dollar in dollar against other G-10 currencies has
foreign exchange markets, progress declined moderately on balance since the
against inflation, and conditions in November meeting.
The Federal Open Market Committee
domestic and international credit
markets. The members agreed that seeks monetary and financial conditions
the intermeeting range for the fed- that will foster reasonable price stability
over time, promote growth in output on
eral funds rate, which provides a a sustainable basis, and contribute to an
mechanism for initiating consultation improved pattern of international transof the Committee when its bounda- actions. In furtherance of these objectives
ries are persistently exceeded, should the Committee agreed at the July meeting
to reaffirm the ranges established in Febbe left unchanged at 4 to 8 percent.
ruary for growth of 6 to 9 percent for both
At the conclusion of the meeting, M2 and M3, measured from the fourth
the following domestic policy direc- quarter of 1985 to the fourth quarter of
tive was issued to the Federal Re- 1986. With respect to Ml, the Committee
recognized that, based on the experience
serve Bank of New York:
of recent years, the behavior of that aggregate is subject to substantial uncerThe information reviewed at this meet- tainties in relation to economic activity
ing suggests that economic activity con- and prices, depending among other things
tinues to grow at a moderate pace in the on the responsiveness of Ml growth to
current quarter. Total nonfarm payroll changes in interest rates. In light of these
employment grew appreciably further in uncertainties and of the substantial deOctober and November, and employment cline in velocity in the first half of the
in manufacturing also rose after declining year, the Committee decided that growth
on balance in previous months. The ci- of Ml in excess of the previously estabvilian unemployment rate remained at 7.0 lished 3 to 8 percent range for 1986 would
percent in November for the third con- be acceptable. Acceptable growth of Ml
secutive month. Industrial production over the remainder of the year would depicked up considerably in November. To- pend on the behavior of velocity, growth
tal retail sales rose moderately last month in the other monetary aggregates, develafter changing little on balance over Sep- opments in the economy and financial
tember and October. Housing starts have markets, and price pressures. Given its
 and business capital spending rapid growth in the early part of the year,
weakened


160 FOMC Policy Actions
the Committee recognized that the increase in total domestic nonfinancial debt
in 1986 may exceed its monitoring range
of 8 to 11 percent, but felt an increase in
that range would provide an inappropriate benchmark for evaluating longerterm trends in that aggregate.
For 1987 the Committee agreed on tentative ranges of monetary growth, measured from the fourth quarter of 1986 to
the fourth quarter of 1987, of 5Yi to 8x/2
percent for M2 and M3. While a range of
3 to 8 percent for Ml in 1987 would appear appropriate in the light of most historical experience, the Committee recognized that the exceptional uncertainties
surrounding the behavior of Ml velocity
over the more recent period would require careful appraisal of the target range
at the beginning of 1987. The associated
range for growth in total domestic nonfinancial debt was provisionally set at 8
to 11 percent for 1987.
In the implementation of policy for the
immediate future, the Committee seeks
to maintain the existing degree of pressure on reserve positions. This action is
expected to be consistent with growth in




M2 and M3 over the period from November to March at an annual rate of about
7 percent. Growth in Ml will continue to
be appraised in the light of the behavior
of M2 and M3 and the other factors cited
below. Slightly greater reserve restraint
or somewhat lesser reserve restraint would
be acceptable depending on the behavior
of the aggregates, taking into account the
strength of the business expansion, developments in foreign exchange markets,
progress against inflation, and conditions
in domestic and international credit markets. The Chairman may call for Committee consultation if it appears to the
Manager for Domestic Operations that
reserve conditions during the period before the next meeting are likely to be associated with a federal funds rate persistently outside a range of 4 to 8 percent.
Votes for this action: Messrs. Volcker,
Corrigan, Angell, Guffey, Heller, Mrs.
Horn, Messrs. Johnson, Melzer,
Morris, and Ms. Seger. Votes against
this action: None. Absent and not voting: Mr. Rice.

161

Consumer and Community Affairs
In 1986 the Federal Reserve Board
used its rulewriting and enforcement
authority to maintain statutory protections for consumers while easing
regulatory burdens on institutions.
This report examines in detail the
activities of the Federal Reserve
System in support of those goals.

and promote widespread use of EFTs
(electronic fund transfers).

Regulation Z
(Truth in Lending):
Adjustable-Rate Mortgages

In November 1986 the Board issued
for public comment proposed
amendments to Regulation Z (Truth
in Lending) on disclosure of inforRegulatory and Policy Matters
mation about adjustable-rate mortgages (ARMs). Under the proposal,
The Board issued and proposed revisions to regulations and adopted a creditors would be required to give
policy statement encouraging depos- consumers general information about
itory institutions to provide basic ARMs; the Consumer Handbook on
services to low- and moderate-income Adjustable Rate Mortgages, by the
consumers. Also, the Board pub- Federal Reserve Board and the Fedlished a pamphlet, A Guide to Busi- eral Home Loan Bank Board, could
ness Credit and the Equal Credit Op- fulfill this requirement. In addition,
portunity Act, to advise applicants for creditors would give a more detailed
business credit of their rights under description of the variable-rate feathe act and help them prepare an ef- ture, along with an example of the
way changes in the index rate affect
fective loan presentation.
payments, with the application form
or before the consumer pays a nonRegulation E
refundable fee. These revisions would
(Electronic Fund Transfers)
permit consumers to shop for credit
In July the Board proposed revisions and would conform the Board's disto Regulation E (Electronic Fund closure rules with those of several
Transfers) to eliminate the require- other federal agencies. The Board
ment that service providers, such as developed this proposal after reviewretailers, that offer electronic fund ing the comments on a proposal
transfer services but do not hold published in May 1985 and after
consumers' accounts send periodic consulting with these other agencies.
statements to their customers. Instead, those providers would be required to furnish information for Regulation Z:
inclusion on the periodic statements Refinancings and Rescission
of the account-holding institutions. In December the Board issued reviThe changes were intended to elimi- sions to Regulation Z that exempted
nate duplication of information, re- certain refinancings by> original credduce the risk of confusion to con- itors from the right of rescission. The
sumers from duplicative statements, rule, which was effective immedi


162 Consumer and Community Affairs
ately, provides that the right of
rescission will not apply if the only
items included in the refinancing,
other than the unpaid principal, are
closing costs such as attorney's fees,
title examination fees, and insurance
premiums. At the same time, the
Board withdrew a proposal that would
have excluded from the right of
rescission certain refinancings by a
creditor other than the original creditor. Consumer groups had opposed
any expansion of the exemption from
the right of rescission, and creditors
were dissatisfied with the limited
nature of the proposed exemption.
The Board withdrew the proposal
because a rule that might accommodate both those concerns would be
complex and perhaps beyond the
Board's statutory authority.
Regulation A A
(Credit Practices Rule)
In November the Board granted a
request from the state of Wisconsin
for an exemption from the Credit
Practices Rule (Regulation AA). That
rule prohibits banks and their subsidiaries from using certain remedies
to enforce consumer credit obligations and from "pyramiding" late
charges; it also provides protections
for cosigners. It covers all consumer
credit transactions except those for
the purchase of real property.
To qualify for an exemption, a
state must have a requirement or a
prohibition that protects consumers
at least as well as the corresponding
federal provision does. Because the
Wisconsin law covers only transactions up to $25,000, transactions
above that amount remain subject to
the federal rule; however, compliance with Wisconsin law for such



transactions will constitute compliance with the federal requirements.
The exemption does not apply to
transactions in which the creditor is
a federally chartered institution.
The Board also received applications from California and New York
for exemptions from the Credit Practices Rule. It will take final action
on these requests in early 1987.
Interpretations
In 1986 the Board continued to
provide legal interpretations through
the official staff commentaries on
Regulation B (Equal Credit Opportunity), Regulation E (Electronic
Fund Transfers), and Regulation Z
(Truth in Lending). These commentaries help financial institutions and
others apply the regulations to specific situations; updates generally are
published by April 1 each year. In
November the Board also issued an
update to its staff guidelines on the
Credit Practices Rule.
Business Credit Pamphlet
In July the Board published A Guide
to Business Credit and the Equal
Credit Opportunity Act for distribution through government agencies,
women's groups, and other organizations. It describes the credit application process from the lender's perspective, offers guidance on the preparation of effective loan proposals, and
discusses protections the act affords
as they apply to business credit. The
pamphlet is designed to increase public awareness, particularly among
women and minority entrepreneurs,
of the rights of business credit applicants and the responsibilities of business credit lenders.

Consumer and Community Affairs 163
Cited as a goal in the joint policy
statement, a free or low-cost method
In September the Board approved a to cash government checks is fredraft policy statement on the need quently mentioned in discussions of
to make basic financial services ac- basic financial services. The Board
cessible to low- and moderate-in- has been exploring this issue and in
come consumers. The Board for- December held a conference with
warded the statement to the Federal representatives from government, inFinancial Institutions Examination dustry, and consumer groups to disCouncil (FFIEC) with the recom- cuss alternatives to government checks
mendation that the council's constit- and to address other concerns about
uent agencies—the Board, the Office the present system. One alternative
of the Comptroller of the Currency is direct delivery of payments, such
(OCC), the Federal Deposit Insur- as welfare or social security, through
ance Corporation (FDIC), the Fed- electronic terminals or special distrieral Home Loan Bank Board bution outlets, involving neither pa(FHLBB), and the National Credit per instruments nor accounts at fiUnion Administration (NCUA)— nancial institutions. The conferees
consider issuing it jointly. The policy believed that direct delivery might
statement encourages voluntary ef- work for state and local benefits but
forts by industry groups and individ- were less certain that it would be
ual depository institutions to offer economic for federal payments. Some
basic services. The statement gives conferees supported testing the idea
institutions maximum flexibility, con- by adding federal payments to a local
sistent with safe and sound business direct-delivery system already in place.
practices, in designing the services.
It asks that institutions consider providing a safe place to keep money, a
way to get cash (including the cashing
of government checks), and a way to Community Affairs
make payments to third parties. In During 1986 the Federal Reserve
October the FFIEC approved the System continued to encourage comdraft statement for submission to munity and economic development,
member agencies, and by year-end it in keeping with its responsibilities
had been adopted by the Board, the under the Community Reinvestment
OCC, the FDIC, and the NCUA.
Act (CRA). At the Reserve Banks,
The policy statement recognizes the Community Affairs Officers
the role of trade groups in this effort (CAOs) and their staffs carry out
and recommends that they encourage educational activities to further pubmember institutions to offer and lic-private partnerships and private
publicize low-cost basic financial sector initiatives for community deservices, survey the availability of velopment. The aim is to gather and
such services among member insti- disseminate information and to foster
tutions, and make available to their communication among those inmembers material on the successful volved in community development,
experiences of institutions with basic including banks and bank holding
financial services.
companies, borrowers, local govern-

Basic Financial Services




164 Consumer and Community Affairs
ments, and development organizations. The CAOs increased their
activities in 1986 toward these ends.
As federal funding decreased,
community organizations relied less
on federal programs to support community development and more on
those at the local level. In pursuing
its educational goal, the community
affairs program helped banks and
other organizations involved in community development to learn about
successful programs and strategies
they might duplicate. The community affairs program also brought
these groups together to help them
take full advantage of available resources and opportunities in devising
development strategies. In other cases,
the program enabled the parties to
improve communication and to identify common purposes, sometimes in
connection with protests of applications under the Community Reinvestment Act. These meetings often
helped promote understanding between applicants and community representatives and avoid protests of
applications altogether.
The staff members of the Board
and of the Reserve Banks developed
and participated in more than 50
presentations on economic and housing development topics such as cooperative housing, commercial revitalization, investment in black-owned
businesses, employee ownership of
businesses, and community development corporations. Presentations focused on the formation of bankcommunity and bank-public sector
partnerships that would foster private sector initiatives.
To facilitate the exchange of information among community development participants, the Federal Reserve Banks of Minneapolis, Dallas,
Philadelphia, Richmond, and At


lanta publish community affairs
newsletters that feature development
activities in their districts. Other
Reserve Banks publish lists of successful strategies and programs to
help bankers extend their involvement in community development.
During the year, the Federal Reserve held approximately 100 meetings on community development issues with bankers, holding company
officers, and community groups. At
these meetings the System's staff
learned about developments in banking and in local communities, and
bankers and community developers
learned about the services available through Reserve Banks. Another result was that some banks
have combined their efforts to address specific credit needs.
The Board continued to support
the Reserve Banks' community affairs activities with its quarterly
newsletter, Communique, with lists
of knowledgeable individuals and
organizations, and with presentations. It also gave information to
national community organizations,
bankers' associations, and individuals about the community affairs
program, the community development corporations that are subsidiaries of bank holding companies,
community economic development
programs, and community reinvestment. A member of the Board also
continued to serve on the board of
directors of the Neighborhood Reinvestment Corporation.

Compliance Examinations
State member banks are examined
regularly by the consumer affairs
examiners of the Reserve Banks for
compliance with the consumer credit

Consumer and Community Affairs 165
protection laws and the Community
Reinvestment Act. In 1986 the Board
lengthened the examination cycle for
some institutions. Effective January
1, 1987, a small percentage of the
banks with highly satisfactory records
of compliance with consumer protection and CRA laws will be examined
only every 24 months, instead of the
18 months specified for banks with
ratings of satisfactory or better. Banks
that perform poorly will continue to
receive closer supervisory attention
and be examined at least every 12
months.
Survey on Delayed
Availability of Funds
In March 1984 the Board joined the
Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and the Federal Home Loan
Bank Board in adopting an interagency policy statement on delayed
availability of funds. The statement
asked financial institutions that delay
availability on paper-check deposits
to review their policies and consider
reducing the delays, consistent with
prudent business practices; to disclose their policies to depositors at
the time an account is opened and,
when practical, at the time a deposit
is made; and to refrain from imposing unnecessary delays on all checks,
particularly social security and other
government checks.
Between 1984 and mid-1986 the
System surveyed the policies and
practices on delayed availability of
all state member banks. The findings
suggest that state member banks are
addressing appropriately the provisions of the policy statement:
• Most state member banks that
placed holds on check deposits did
so only in special cases.



• Few state member banks placed
automatic holds on all deposits or on
particular types of deposits.
• Most state member banks with
hold policies disclosed those policies
to depositors when an account was
opened, the majority of them in
writing.
• Most state member banks did
not hold funds beyond the provisional crediting period.
Compliance with
Consumer Regulations
Data received from the five federal
agencies that supervise financial institutions and from other federal
supervisory agencies indicate that
compliance with the Truth in Lending Act (implemented through Regulation Z), the Equal Credit Opportunity Act (Regulation B), and the
Electronic Fund Transfer Act (Regulation E) remained substantially the
same as in 1985. This section summarizes data covering the reporting
period July 1, 1985, to June 30,
1986.x
Truth in Lending Act
(Regulation Z)
The Board, the Federal Deposit
Insurance Corporation, the Office of
the Comptroller of the Currency, the
Federal Home Loan Bank Board,
and the National Credit Union
Administration reported that 62 percent of the institutions examined
were in full compliance with the
requirements of Regulation Z, compared with 63 percent in 1985. The
agencies that provide data on the
1. Not all the federal agencies that regulate
financial institutions use the same method to
compile compliance data. However, the data
support the general conclusions presented here.

166 Consumer and Community Affairs
frequency of violations (the Board,
the OCC, and the NCUA) reported
that 48 percent of the institutions
that were not in full compliance had
no more than five violations. These
data suggest that many institutions
not in full compliance are making a
satisfactory effort toward compliance.
From the findings of the five financial regulatory agencies, the most
frequent violations of Regulation Z
appear to be the following:
• Failure to disclose the annual
percentage rate accurately.
• Failure to disclose the number,
amounts, and timing of payments
scheduled to repay the obligation.
• Failure to disclose the amount
financed accurately.
• Failure to disclose the finance
charge accurately.
• Failure to make the disclosures
clearly and conspicuously in writing
in a form that the consumer may
keep.
The OCC and the FHLBB issued
five cease-and-desist orders for violations involving Regulation Z; the
Board issued three formal enforcement actions that included provisions
relating to Regulation Z. The Board,
the OCC, the FDIC, and the FHLBB
reported reimbursements of $1.3 million (involving 243 institutions and
12,252 customer accounts) under the
Regulation Z Interagency Enforcement Policy Guide. These numbers
compare with a total of $2 million in
1985 that involved 235 institutions
and 29,823 customer accounts.
The Federal Trade Commission
(FTC) continued its special efforts to
enforce the credit-advertising provisions of the Truth in Lending Act,
with particular attention to the sale
of homes and automobiles. The FTC
reported that 90 percent of the ad


vertisers in its real estate credit
program were in compliance, the
same as in 1985. This program has
enabled the FTC to monitor companies nationwide and, in most cases,
has resulted in voluntary compliance
with the law. The FTC follows up on
its monitoring program through enforcement action against companies
that continue to violate the law.
During this reporting period, four
real estate companies agreed to pay
$375,000 in civil money penalties for
advertising violations, such as advertising only a reduced, first-year rate
of interest for a mortgage without
disclosing the much higher annual
percentage rate, and advertising specific credit terms without providing
all the required disclosures.
Since it began in 1983, the FTC's
compliance program aimed at automobile credit advertising has brought
numerous automobile dealers into
voluntary compliance. In the past
year, enforcement efforts were concentrated on the relatively small
number of dealers that continued to
violate the law. The FTC filed four
complaints. Three of these cases
currently are in litigation; in the
fourth, the dealer agreed to pay
$70,000 in civil money penalties.
The other agencies that enforce
the Truth in Lending Act—the Packers and Stockyards Administration
of the Department of Agriculture,
the Farm Credit Administration, and
the Department of Transportation—
reported satisfactory levels of compliance. The Department of Transportation concluded an enforcement
action against an air carrier for violations of the rules governing credit
refunds.
To heighten consumer and creditor
awareness of the rights and responsibilities established by the act, the

Consumer and Community Affairs 167
• Failure to provide the specific
Board, the FTC, and the FHLBB
issued or distributed several publi- reasons for adverse action.
• Failure to request information
cations. The FTC issued new brochures entitled "Second Mortgage for monitoring purposes as part of
Financing," "Refinancing Your an application for credit primarily
Home," "Escrow Accounts," and for the purchase or refinancing of a
"A Consumer Guide to Vehicle dwelling.
• Illegally inquiring about the sex
Leasing," and revised editions of its
"Money Mortgage Guide" and "Hol- of an applicant.
The OCC and the FHLBB, in
iday Shopping Tips." The Board
issued four compliance brochures conjunction with the Department of
entitled "Construction Loan Disclo- Justice, issued two cease-and-desist
sures and Regulation Z," "Com- orders involving violations of Regubined Construction/Permanent Loan lation B. The Board issued five
Disclosures and Regulation Z," formal enforcement actions that in"Regulation Z: The Right of Rescis- cluded provisions relating to Regusion," and "Regulation Z: Under- lation B.
standing Prepaid Finance Charges."
Most creditors that were subject
As of August 1, 1985, the FHLBB to the FTC testing program, in which
required all institutions insured by auditors pose as credit applicants,
the Federal Savings and Loan Insur- appeared to be complying with the
ance Corporation to distribute the nondiscrimination provisions of the
Consumer Handbook on Adjustable act. However, some creditors conRate Mortgages, as a way of giving tinue to discourage or disfavor credit
early and uniform information about applicants because of their age or
these mortgages.
because they rely on alimony or
other protected income. During this
reporting period, the FTC took enEqual Credit Opportunity Act
forcement action against three cred(Regulation B)
itors, two of which were found through
The five federal agencies that super- the FTC's testing program. The FTC
vise financial institutions reported is conducting several other investithat 79 percent of the institutions gations to identify illegal discriminaexamined were in full compliance tion.
Other agencies responsible for enwith the Equal Credit Opportunity
Act (ECOA), compared with 81 forcing the ECOA—the Department
percent in 1985. These are the most of Transportation, the Interstate
frequent violations of Regulation B: Commerce Commission, and the
• Failure to provide a written no- Packers and Stockyards Administratice of adverse action that includes a tion—reported satisfactory levels of
statement of the action taken, the compliance. The Farm Credit
name and address of the creditor, Administration, the Securities and
the ECO A notice, and the name and Exchange Commission, and the Small
address of the federal agency that Business Administration reported violations, but none required formal
enforces compliance.
• Failure to notify the applicant of enforcement action.
the action taken within 30 days after
The FTC prepared a film for
receiving a completed application.
distribution to credit unions on the



168 Consumer and Community Affairs
requirements of the act and issued a
brochure entitled "Scoring for
Credit." As noted earlier, the Board
distributed "A Guide to Business
Credit and the Equal Credit Opportunity Act."
Electronic Fund Transfer Act
(Regulation E)
The federal regulatory agencies responsible for enforcing the Electronic Fund Transfer Act reported
that 91 percent of the institutions
examined were in full compliance,
compared with 93 percent in 1985.
The most frequent violations of Regulation E were the following:
• Failure to provide, in a timely
manner, a written statement outlining the terms and conditions of the
EFT service.
• Failure to provide a periodic
notice on procedures for resolving
disputes.
• Failure to provide a written receipt at the time of an electronic
fund transfer.
• Failure to provide a statement
of the consumer's liability for unauthorized transfers.
According to the FTC, the fact
that complaints regarding Regulation
E were so few suggests that there is
no special compliance problem. The
other agencies responsible for enforcing the EFT act, the Department
of Transportation and the Securities
and Exchange Commission, reported
a satisfactory level of compliance.
Economic Impact of Regulation E
In accordance with statutory requirements, the Board monitors the effects of the Electronic Fund Transfer
Act on the costs and benefits of EFT
service to financial institutions and



consumers. The economic effects of
the act spread during 1986 as more
financial institutions offered EFTs
and more consumers used them.
Approximately two-thirds of the nation's depository financial institutions, representing every class size,
now provide EFT services that are
covered by the requirements of the
act and Regulation E. These services
include direct deposits, preauthorized electronic transfers, and access
to automated teller machines (ATMs).
Although the number of ATMs remained about the same in 1986 as in
1985, the use of the machines continued to increase. Moreover, consumers gained wider access to EFT
services through the expansion of
shared ATM networks. The volume
of fund transfers made at electronic
point-of-sale terminals grew, and
point-of-sale transactions appeared
poised for rapid expansion in coming
years.
Consumer demand for EFT services has continued to grow. The
evidence indicates that at least 70
percent of households have a savings
or transaction account with an EFT
feature that they use at least occasionally. The number of transactions
conducted through ATMs has increased, and the number of consumers electing to receive payroll or
government transfer payments by
electronic direct deposit has also
risen.
The benefits to consumers from
the EFT act are difficult to measure
because they cannot be isolated from
consumer protections that would have
been provided in any case. Statistics
from examination reports do not
suggest widespread problems or violations of the consumer rights established by the act. The federal agencies that regulate financial institutions

Consumer and Community Affairs 169
reported little change from 1985 in
the percentage of institutions not in
full compliance. The most frequent
violation was failure to provide one
or more disclosures to consumers.
The majority of institutions cited for
noncompliance had one to five violations, a small number in light of
the volume of consumer EFT transactions.
Data from the Board's Consumer
Complaint Control System confirm
that consumers have no serious problems with EFT. Of the 2,400 complaints processed in 1986,94 involved
EFTs. The Federal Reserve System
forwarded 32, which did not pertain
to state member banks, to other
agencies for resolution. Of the remaining 62 complaints, only 2 involved a possible violation of the
regulation.
The costs of industry practices that
would have evolved in the absence
of statutory requirements are unknown. Consequently, the incremental costs associated with the act, as
in the case of consumer benefits, are
difficult to quantify. But the compliance cost of an EFT transaction is
probably not high enough to compromise the cost advantage such transactions have over check-based transactions.
As EFT systems mature, as transaction volume builds, and as start-up
costs for compliance are amortized,
compliance costs per EFT transaction and per dollar of transferred
funds are likely to decline. As noted
earlier, the Board has proposed to
amend Regulation E to eliminate the
statement requirement for providers
of point-of-sale services. The Board
expects this proposal, if adopted, to
lower costs substantially for these
EFT transactions and promote wider
use of the system.



Complaints against
State Member Banks
In 1986 the Federal Reserve System
received a total of 2,400 complaints
(see the accompanying table). Within
this total, 930 were complaints against
state member banks, which the Federal Reserve investigates and resolves. The System referred the remaining 1,470 complaints, involving
other creditors or businesses, to the
appropriate enforcement agencies.
Most of the complaints (1,909) were
made in letters; 478 came by telephone, and 13 were made in person.
The Board also received 181 written
inquiries concerning consumer credit
laws and regulations, and banking
policies and practices. In responding,
the Board's staff gave consumers
brochures on the general issues plus
explanations of laws, regulations,
Consumer Complaints Received
by the Federal Reserve System,
by Subject, 19861
Subject
Regulation B
(Equal Credit Opportunity)
Regulation C
(Home Mortgage Disclosure)
Regulation E
(Electronic Fund Transfers)
Regulation M (Consumer Leasing)
Regulation Q (Interest on Deposits)
Regulation Z (Truth in Lending)
Regulation BB
(Community Reinvestment)
Fair Credit Reporting Act
Fair Debt Collection Practices Act
Holder in due course
Real Estate Settlement
Procedures Act
Transfer agents

Number
144
9
94
8
100
494
2
118
34
1
1
3

Unregulated bank practices
Other 2 . . . .
.
.

1,329
63

Total

2,400

1. Includes 930 complaints about state member
banks, over which the Federal Reserve has jurisdiction, and 1,470 complaints about other lenders, which
the Federal Reserve referred to the appropriate agencies.
2. Primarily miscellaneous complaints against business entities.

170 Consumer and Community Affairs
and banking practices specific to
their complaints or inquiries.
The Board's staff continues regularly to review and assess the System's handling of complaints. The
staff reviews a sample of complaints
about state member banks for adherence to System policies; and, through
follow-up questionnaires, it attempts
to gauge complainants' perceptions
of the System's handling of complaints. Approximately 66 percent of
the respondents found the System's
explanations clear and understandable; 79 percent were satisfied with
the speed in handling their com-

plaints; 97 percent felt that the Federal Reserve staff treated them courteously; 92 percent said they would
contact the Federal Reserve again if
they had another problem with a
bank; and 55 percent found the
resolutions of their complaints acceptable. The proportion of those
satisfied with the System's handling
of their complaints is higher than the
proportion of those satisfied with the
outcome because some complaints
involved banking practices that are
permissible and that cannot be
changed unless the bank does so
voluntarily or the law is changed.

Consumer Complaints about State Member Banks Received
by the Federal Reserve System, by Function and Resolution, 1986
Type of complaint
Type of resolution

Total complaints about
state member banks
Number
Percent
By type
Insufficient information1
Information furnished to complainant2
Bank legally correct
No accommodation 3
Accommodation made
Clerical error, corrected
Factual dispute4
Bank violation, resolved5
Possible bank violation, unresolved6 ...
Customer error
Pending, December 31
Complaints referred to other agencies
Total, all complaints

Total
complaints

Loan function
Discrimination

Deposit
Other function

Electronic
fund
transfers

Trust

Other

930
100

72
8

432
46

216
23

57
6

34
117

4
15

10
50

7
26

0
2

0
0

355
90
164
40
15
3

21
9
5
1
3
1
0

173
43
76
21
4
2

77
18
52
10
4
0

34
1
10
2
2
0
0

7
1
0
0
1
0
0

6

0

37

3

9
103
1,470

2,400
1. The staff has been unable, after follow-up correspondence with the consumer, to obtain sufficient
information to process the complaint.
2. When it appears that the complainant does not
understand the law and that there has been no violation on the part of the bank, the Federal Reserve
System explains the law in question and provides the
complainant with other pertinent information.
3. In these cases the bank appears to be legally
correct but has chosen to make an accommodation.
4. These cases involve factual disputes not resolvable by the Federal Reserve System and contractual
disputes that can be resolved only by the courts. Con


13
72

4

5

49

17

741
1,173

360

144
15
13
24
43
18
21
6
1
0
0
18

257
94
12
576
401
sumers wishing to pursue the matter may be advised
to seek legal counsel or legal aid or to use small claims
court.
5. In these cases a bank appears to have violated
a law or regulation and has taken corrective measures
voluntarily or as indicated by the Federal Reserve
System.
6. When a bank appears to have violated a law or
regulation, customers are advised to seek civil remedy
through the courts. Cases that appear to involve criminal irregularity are referred to the appropriate law
enforcement agency.
144

Consumer and Community Affairs 171
The accompanying table summa- denials based on credit history indirizes the nature and resolution of cated that the applicant did not
complaints filed against state mem- realize the implications of a poor
ber banks in 1986, classified accord- credit history or of a lack of borrowing to bank functions: loans, depos- ing experience on the decision about
its, electronic fund transfers, trust creditworthiness.
services, and others. Of the 930
complaints received about state
member banks, just over half concern loan functions, including alleged Community Reinvestment Act
discrimination on a prohibited basis, The Board is required by the Comdisclosure of credit costs, and credit munity Reinvestment Act to encourdenial on a nonprohibited basis; age institutions under its jurisdiction
another quarter involved practices to help meet the credit needs of their
concerning deposit accounts, includ- communities—including low- and
ing disputes about interest.
moderate-income neighborhoods—in
a manner consistent with the safety
and soundness of the institutions.
Unregulated Practices
The Board assesses the record of
Under section 18(f) of the Federal state member banks in meeting these
Trade Commission Act, the Federal needs as part of its examinations and
Reserve Board is authorized to iden- takes an institution's CRA perfortify unfair or deceptive banking prac- mance into account when acting on
tices and adopt regulations that pro- certain applications filed by banks
hibit them. The Board has a system and bank holding companies.
to monitor complaints about banking
During the 1986 reporting period
practices that are not subject to (July 1, 1985, through June 30,
existing regulation but that may be 1986), Federal Reserve personnel
unfair or deceptive. The Board iden- examined 761 state member banks
tifies unregulated practices that are for compliance with the CRA. The
the subject of 15 or more complaints records of almost all of these banks
per quarter, or 50 or more for the were deemed satisfactory or better.
year. Of the 1,329 complaints about
During calendar year 1986, 20
unregulated practices received in 1986, applications filed by banks or bank
the 398 identified by this system fell holding companies with the Federal
into the following categories: credit Reserve System were protested under
denial based on credit history (109); the CRA; 13 were decided by yearother unregulated lending practices end. Seven of these protests were
(96); credit denial based on other withdrawn after the applicants and
nonprohibited factors, such as the protestants reached agreement, often
lack of sufficient assets (77); exces- as a result of meetings facilitated by
sive time taken to clear checks, the Federal Reserve Banks.
including delayed availability of funds
(60); and crediting of deposits to
accounts (56). Each of these categories accounts for less than 5 per- Consumer Advisory Council
cent of all consumer complaints re- November 1986 marked the tenth
ceived. Many of the complaints about anniversary of the Federal Reserve's



172 Consumer and Community Affairs
Consumer Advisory Council (CAC).
Created by the Congress and representing a wide spectrum of interests,
the 30-member CAC advises the
Board on the implementation of
federal laws governing consumers'
rights and responsibilities in their
dealings with the financial services
industry. In 1986 the council met in
March, June, and October.
Throughout 1986 a study group of
the CAC focused on reduced-rate
financing offered by automakers. The
CAC was concerned that these programs, which offer rates far below
the market, might undermine the
usefulness of the annual percentage
rate (APR) for comparing the cost
of credit offered by different credit
providers. In some reduced-rate programs, a purchaser has the choice of
financing the vehicle through the
automaker's subsidiary at a reduced
rate of interest or receiving a cash
rebate from the manufacturer. Some
critics believe that the rebate should
be treated as part of the financing
cost and taken into account in computing the APR, a required disclosure under truth in lending. The
act, however, does not require such
adjustments. The CAC was unable
to reach consensus on appropriate
disclosures for reduced-rate financing; it will continue to study the
issue.
In June 1986 the CAC unanimously reiterated its support, first
voiced in October 1985, for the
Board's issuing a policy statement
that would encourage state member
banks to offer basic financial services
for low- and moderate-income consumers. It also asked the Board to
encourage other financial regulatory
agencies to join in a statement. After
considering the council's strong views,



the Board approved a policy statement on basic financial services,
which it sent to the FFIEC in October (described above).
The council expressed views on
disclosures about funds availability
and on the general improvement of
the check-clearing process. It adopted
resolutions recommending the mandatory disclosure of hold periods by
all financial institutions, the adoption
of a uniform system for counting the
days that checks are held, and the
continuation of industry efforts to
streamline check-clearing.
Uniformity in the required disclosures for adjustable-rate mortgages
was another issue the CAC addressed in 1986. In March and October the council urged the federal
agencies to adopt uniform disclosure
requirements, supported the use of
an ARMs brochure, and encouraged
early disclosures. It also adopted a
resolution calling for the Board's
approval of consumer financial counseling as an activity of bank holding
companies.
In 1986 the council also considered
the following issues:
• A Board proposal for amending
Regulation E that would eliminate
the periodic statement requirements
for institutions that issue debit cards
but do not hold accounts.
• Protests by community groups
in connection with holding company
applications under the Community
Reinvestment Act.
• Projected increases in secondmortgage debt.
• The effect that proposed ceilings
on credit card interest rates might
have on creditors and consumers.
• The effect of interstate banking
on consumers, small businesses, and
the financial industry.

Consumer and Community Affairs 173
Legislative Recommendations
tutions and Consumer Affairs of the
In 1986 the Board testified before Senate Committee on Banking,
various subcommittees of the Senate Housing, and Urban Affairs on sevand the House on legislation dealing eral bills dealing with credit card
with credit card interest rates and disclosures. The proposed legislation
disclosures, truth in savings, and covered issues such as early disclosures of the cost of a credit card
business credit.
plan, additional disclosures of the
conditions under which a finance
charge may be imposed, a mandated
Credit Card Interest Rates
method for computing balances, and
In January the Board testified before quarterly reports to the Board by
the Subcommittee on Financial Insti- credit card issuers about costs. The
tutions and Consumer Affairs of the Board endorsed full disclosure both
Senate Committee on Banking, as the fair way to deal with customers
Housing, and Urban Affairs on leg- and as an aid in the competitive
islation that would establish a federal process. At the same time, the Board
ceiling on the interest rates that could pointed out that the costs of requirbe charged on credit card debt. The ing additional disclosures in all apBoard opposed the legislation in the plications (rather than only in mail
belief that credit is most efficiently solicitations, as one of the bills proand productively distributed when vided) may not be justified.
The Board believed that a maninterest rates are determined in markets free from artificial restraints. dated method for computing balThe Board noted that on average, ances would depart from the apfor the period 1972 through 1984, proach of the Truth in Lending Act,
the rate of return earned on credit which is to leave the regulation of
card operations was below that earned substantive terms to the states. The
on other types of lending. While the Board acknowledged that a uniform
Board noted that returns on credit method might eliminate the consumcards had increased in recent years, er's need to understand how one
it also pointed out that credit card creditor's method differs from anothfinance rates had tended to decline er's, but it noted that this approach
in the months before the hearing. had several drawbacks. Often the
The Board stated that efforts to timing of a consumer's purchases and
constrain rates through federal reg- payments determines which method
ulation are likely to reduce credit yields the lowest finance charge. In
availability, particularly for less afflu- addition, if regulating the method
ent borrowers, or encourage less causes an increase in operating costs
efficient means of recapturing credit or a reduction in revenues, creditors
might seek to make up the difference
costs.
by restricting credit availability, eliminating grace periods, or imposing
annual fees or higher interest rates.
Credit Card Disclosures
The Board also believed that states,
In May the Board testified before with their experience in regulating
the Subcommittee on Financial Insti- yield-producing terms of accounts,



174 Consumer and Community Affairs
were in a better position to regulate
this area. In addition, the Board
pointed to ongoing efforts by the
Federal Reserve System and others
to increase consumer awareness of
this and other aspects of credit card
transactions.
The Board suggested postponing
action on requiring creditors to report information on credit card costs
until it had evaluated an APR demonstration project then under way.
This study was conducted at the
request of the Congress in three test
cities to measure the benefits of
providing consumers with comparative information, through newspaper
charts, about the closed-end credit
charges of lenders.

deposit accounts evolve while minimizing the burden on depository
institutions. The Board noted its
proposal to amend Regulation Q to
update and clarify its rules on advertising of accounts and its work toward a policy statement on disclosures of terms on deposit accounts.
As these measures would be limited
to member banks, the Board is
consulting with the other regulatory
agencies so that these requirements
would be applied uniformly to all
depository institutions.

Regulation B
and Business Credit

In August the Board testified before
the Subcommittee on Consumer Affairs and Coinage of the House
Truth in Savings
Committee on Banking, Finance and
In June the Board testified before Urban Affairs on proposed changes
the Subcommittee on Financial Insti- to the Equal Credit Opportunity Act
tutions Supervision, Regulation and with respect to business credit transInsurance of the House Committee actions. The proposal would extend
on Banking, Finance and Urban to business transactions certain techAffairs on proposed truth-in-savings nical requirements of Regulation B
legislation. This legislation would that currently relate only to conestablish uniform requirements for sumer transactions, would require
all depository institutions regarding public hearings on any exemptions,
advertisements of interest rates and and would put a five-year limit on
disclosures. Among other things, it exemptions. The Board believed that
would require the disclosure of an the ECOA and Regulation B in their
annual percentage yield, an annual present form provide adequate legal
rate of simple interest, and a sched- protection against discrimination. The
ule of fees and charges. The Board exceptions established for business
supported providing bank customers credit are narrowly drawn and rewith clear and complete information spond directly to the distinctions
when they open accounts, but ques- between consumer and business
tioned whether legislation is neces- credit. The Board stated that the
sary. Should the Congress decide it legislation would not significantly
is necessary, the Board believed, the improve the Board's rulewriting
legislation should provide for a flex- processes. Although a public hearing
ible structuring of rules to enhance before granting or continuing any
consumer benefits as new types of exception for business credit would



Consumer and Community Affairs
afford an extra oppprtunity to gather
information, the Board has found
written public comment to be adequate. And the Board already periodically evaluates regulatory provisions
under
its
Regulatory
Improvement Project, a program
calling for the review of regulations
every five years or so. Finally, the
Board expects that the business credit
pamphlet developed with industry
and minority group organizations will
inform business credit applicants of
their rights under the ECOA, besides




175

giving them practical assistance in
obtaining credit.
Recommendations
of Other Agencies
Each year the Board asks the agencies with enforcement responsibilities
under Regulations B, E, and Z for
recommendations concerning changes
to the regulations or the underlying
acts. In 1986 the agencies submitted
no suggestions or recommendations
for changes.

177

Legislative Recommendations
The Board of Governors has made
the following recommendations for
legislation to the Congress of the
United States.

The Federal Reserve recommends that
the Congress recognize the competitive, technological, and international
forces operating in the banking and
financial marketplace and expand the
authorized role for bank holding
Bank Holding Company
companies.
Legislation
Plainly, the time has arrived to
The Federal Reserve believes that clarify and expand certain securities
reform of the existing statutory powers of bank holding companies,
framework is urgently needed to a matter that cannot be dealt with
maintain a strong, stable, and com- reasonably and rationally without
petitive banking system. The forces congressional action.
of change—technological, ecoThe Board believes that it would
nomic, and competitive—at work on be appropriate, as a matter of good
an international scale need to be public policy, to permit bank holding
channeled constructively if the broader companies to underwrite municipal
public interests are to be served. revenue bonds, mortgage-backed seClearly, areas exist in which market curities, commercial paper, and mucompetition should be freed and tual funds. The Board would also
efficiency promoted. At the same encourage the Congress to consider
time, there are areas in which insti- other financial areas appropriate for
tutional stability and public policy bank holding companies, including
objectives need to be protected by insurance and real estate brokerage,
maintaining an appropriate legisla- and insurance underwriting.
tive and regulatory framework.
The Federal Reserve would also
To these ends, the Federal Re- urge the Congress to undertake hearserve has recommended that the ings of other studies in the area of
Congress include in any legislative corporate underwriting—a process
reform these features:
that the Board would be pleased to
• Expansion of the powers of bank support. The issues in this area are
holding companies.
more complicated because of the
• Clarification of the definition of greater potential for conflict of inter"bank" to resolve the "nonbank est. However, a substantial amount of
bank" issue and clarification of the such activity is already conducted by
proper scope of powers for state- bank holding companies abroad, and
chartered institutions.
the increased securitization of financial
• Streamlining of the procedures assets by banks and others requires
of the Bank Holding Company Act. fresh consideration of how banks may
participate in that process.
Powers
The legitimate boundaries of activities Definitions
permitted to banking organizations New definitions of the terms "bank"
 be reviewed and enlarged.
and "thrift institution" are necessary
need to


178 Legislative Recommendations
to assure an orderly framework for
the development of the financial
system, to promote competitive
equity, and to maintain the basic
separation of banking and commerce. The Board believes that banks
continue to perform a unique and
critical role in the financial system
and the economy—as operators of
the payments system, as custodians
of liquid savings, as key and impartial
suppliers of short-term credit, and as
the link between monetary policy
and the economy.
The Board believes that all institutions having the unique character
of banks should be subject to the
rules applicable to banking institutions—that is, the limitations on the
range of activities and ownership, as
well as the protections against conflict of interest, concentration of
resources, and excessive risk. To
achieve that end and to close the socalled "nonbank bank" loophole, the
Board has recommended clarifying
the definition of "bank" in the Bank
Holding Company Act by, among
other changes, extending the definition to cover all institutions that are
insured by the Federal Deposit Insurance Corporation.
The Board has also recommended
that thrift institutions meet a minimum residential mortgage test to
remain eligible for the special benefits provided by law for such institutions. The holding companies of
thrift institutions not meeting the test
would be limited so that the scope
of their permissible nonbanking activities would be similar to those of
bank holding companies.
The Board has recommended that
the Congress establish limits with
respect to the ability of states to
authorize state-chartered institutions
to engage in certain activities that



may affect the safety and soundness
of the financial system with adverse
consequences for the federal insurance funds.
Procedures
The Board favors streamlining the
procedures for dealing with bank
holding company applications. By
recent changes in the regulation governing holding company activities,
the Board has gone as far as it
believes it can, consistent with present law, to speed up procedures and
lessen regulatory burdens. The Board
has recommended legislation eliminating the "benefits and burdens"
test of present law, providing for
expedited notice procedures for approval of new activities, and setting
out new and simplified criteria for
determining the permissibility of new
activities generally.
Emergency Acquisition Authority
The Board favors an extension and
modification of the provisions contained in title I of the Garn-St
Germain Depository Institutions Act
that permit the FDIC and the FSLIC
to arrange for emergency interstate
mergers and acquisitions of financially troubled thrift institutions and
failed insured commercial banks with
assets of $500 million or more.
In light of the continuing strains
evident in some sectors of the thrift
and banking industries, including difficulties experienced by some banks
engaged in lending to the agricultural
and energy sectors, the Board has
recommended that the emergency
arrangements for failing institutions
in the Garn-St Germain Act be
extended and liberalized in the following ways: (1) reduce the threshold

Legislative Recommendations 179
amount for interstate emergency acquisitions from $500 million to $250
million; (2) permit interstate acquisition of banks in danger of closing
as well as of closed banks; and (3)
allow for acquisition of a holding
company and its affiliated banks if
the holding company has a bank or
banks in danger of closing with total
assets of $250 million or more and
which represent at least 33 percent
of its banking assets.
Increasing the Number of
Class C Directors
The Board has recommended that
the Federal Reserve Act be amended
to increase the number of Class C
directors at each Federal Reserve
Bank from three to five. The proposal aims to diversify further the
backgrounds and interests represented on the boards of directors of
the Reserve Banks as a way of
accomplishing one of the objectives
of the Federal Reserve Reform Act
of 1977. That act provides for the
representation of the interests of
consumers, labor, and services, in
addition to agriculture, commerce,
and industry, on the boards of the
Reserve Banks.
The Board also has recommended
that thrift institutions be added to
the groups that should be considered
in selecting Class C directors in view
of the changes made by the Monetary
Control Act of 1980. That act applied
reserve requirements to such institutions and made Federal Reserve
credit and services available to them.
Funds for Reserve Bank
Branches
The Board has recommended that
the Federal Reserve Act be amended



with respect to the limit on the
cumulative dollar amount that may
be spent on construction of Federal
Reserve Bank branch buildings. The
System incurs expenses for branch
construction principally for additions
to, or replacements for, existing
branch facilities. The current limitation, set in 1974, will be exhausted
by projects that are under way or
that are currently at an advanced
planning stage. Branches of Federal
Reserve Banks provide important
services to the financial system and
the public, including the distribution
of coin and currency, the clearing of
checks, and the processing of electronic payments. The current statutory limitation will prevent needed
renovation and new construction at
branch buildings.

Interstate Banking
The Board believes that the Congress
should review and clarify national
policy toward interstate banking. It
recognizes that regional arrangements provide a possible transitional
approach to full interstate banking.
Viewed as a permanent solution,
however, regional compacts would
tend to balkanize banking, with a
tendency toward regional concentrations. The potential weaknesses of
regional compacts could be substantially ameliorated if states entering
into such regional arrangements were
also required after a few years to
permit reciprocal entry by banks in
any state that has enacted a regional
arrangement or otherwise provides
for entry of banks of any other states.
To forestall large concentrations
of domestic banking resources, the
Board has recommended that certain
safeguards be included in liberalizing

180 Legislative Recommendations
interstate banking. The Board has
suggested the following approaches:
the very largest holding companies
might be prohibited from merging
with one another; institutions could
be prohibited from obtaining by acquisition more than some fixed share
of banking assets, although de novo
or small acquisitions could still be
permitted; and states could set limits
on the percentage of banking assets
within their own boarders that could
be acquired through acquisitions or
mergers.
The Board has also recommended
that Congress authorize interstate
branching within metropolitan areas
and within neighboring areas of contiguous states.

depository institutions of making funds
available more promptly.
The Board has felt primary emphasis should be placed on efforts to
alleviate the problem of funds availability through disclosure and improvements to the check collection
and return process. However, the
Board is aware that some states have
enacted mandatory schedules that
appear to be operating reasonably
well. The Board believes that mandatory schedules could be workable
provided the Federal Reserve is given
authority to determine those schedules in the light of anticipated improvements to the check system.
Such schedules should be based on
the times in which most checks can
reasonably be expected to be collected and returned to the depository
institution in which they were first
Improving Check Collection
deposited in the event of dishonor.
The Board believes that depository The Board believes that, after a
institutions should clearly disclose to relatively short transition period,
customers their policies with respect schedules of from two to six business
to the availability of deposited funds days or even less are feasible deat the time an account is opened and pending on where the check is drawn.
when such policies are changed. The Board also believes that manMoreover, authority to override in- datory schedules should contain exdividual state statutes is necessary if ceptions to permit depository instithe process of collection and return tutions to place holds on deposits of
of checks is to be speeded, thus accounts presenting unusually high
reducing or eliminating the risk to risks.




181

Litigation
During 1986 the Board of Governors
was named in 47 pending lawsuits,
compared with 55 in 1985. Of the 12
new lawsuits filed in 1986, 9 raised
questions under the Bank Holding
Company Act, compared with 4 in
1985. As of December 31, 1986, 29
cases were pending, 14 of which
involve questions under the Bank
Holding Company Act. The sections
below briefly describe each of these
cases.
Bank Holding Companies—
Antitrust Action
In 1986 no bank holding company
acquisitions or mergers that had been
approved by the Board were challenged by the U.S. Department of
Justice under antitrust laws, and no
such cases were pending from previous years.
Bank Holding Company Act—
Review of Board Actions
In Dimension Financial Corporation
etal. v. Board of Governors, No. 832696 (10th Circuit, filed December
30, 1983); First Bancorporation v.
Board of Governors, No. 84-1011
(10th Circuit, filed January 5, 1984);
and Colorado Industrial Bankers Association et al. v. Board of Governors, No. 84-1122 (10th Circuit, filed
January 27, 1984), petitioners challenged the definition of "commercial
loan" and "demand deposit" in a
revision of the Board's Regulation Y
that was approved by the Board on
December 14, 1983 (Federal Reserve
Bulletin, vol. 70, February 1984, p.
121). The court of appeals set aside



the definitions challenged in Regulation Y on September 24, 1984 (744
F.2d 1402). A petition for writ of
certiorari (No. 84-1274, filed February 6, 1985) was granted by the
Supreme Court on April 29, 1985
(105 S. Ct. 2137). By decision dated
January 22,1986, the Court affirmed
the court of appeals decision (106 S.
Ct. 681).
In Florida Bankers Association et
al. v. Board of Governors, Nos. 843269 and 84-3270 (11th Circuit, filed
on April 20, 1984), petitioners seek
review of a Board order dated March
23, 1984, approving an application
by U.S. Trust Corporation, New
York, New York, to expand the
activities of its subsidiary, U.S. Trust
Company of Florida, N.A., Palm
Beach, Florida, to include the acceptance of time and demand deposits and the making of consumer loans
(Federal Reserve Bulletin, vol. 70,
April 1984, p. 371). On May 20,
1985, the court reversed the Board's
order of approval (760 F.2d 1135).
By order dated January 27,1986, the
Supreme Court granted intervenor
U.S. Trust Company's petition for
certiorari (No. 85-193), vacated the
court of appeals judgment, and remanded the case back to the court
of appeals (106 S. Ct. 875). In an
opinion dated October 6, 1986, that
court upheld the Board's order (800
F.2d 1534). A petition for certiorari
filed December 23,1986, by petitioners is pending (No. 86-1023).
In Florida Department of Banking
v. Board of Governors, Nos. 84-3831
and 84-3832 (11th Circuit, filed November 30, 1984), and Florida Bankers Association v. Board of Gover-

182 Litigation
nors, Nos. 84-3883 and 84-3884 (11th
Circuit, filed December 21, 1984),
petitioners seek review of Board
orders dated November 1, 1984,
approving the applications by Bank
of Boston Corporation, Boston,
Massachusetts, and Bankers Trust
New York Corporation, New York,
New York, to expand the activities
of their subsidiaries—Bank of Boston Trust Company of Southeast
Florida, N.A., Dearfield Beach,
Florida; Bank of Boston Trust Company of Southwest Florida, N.A.,
Sarasota, Florida; and Bankers Trust
Company of Florida, N.A., Palm
Beach, Florida—to include the acceptance of time and demand deposits and the making of consumer loans
(Federal Reserve Bulletin, vol. 71,
January 1985, pp. 55 and 51, respectively). Proceedings in the cases have
been stayed pending a final disposition by the Supreme Court in Florida
Bankers Association v. Board of
Governors.
In Independent Community Bankers Association of South Dakota v.
Board of Governors, No. 85-1496
(D.C. Circuit, filed August 7, 1985),
petitioner seeks review of the Board's
order dated July 12, 1985, approving
the application of First City Bancorporation of Texas, Inc., Houston,
Texas, to acquire First City BankSioux Falls, N.A., Sioux Falls, South
Dakota (Federal Reserve Bulletin,
vol. 71, September 1985, p. 716).
The case is pending.
In First National Bancshares Corp.
II v. Board of Governors, No. 853702 (6th Circuit, filed September 4,
1985), petitioner sought review of
the Board's order dated August 5,
1985, denying the application of First
National Bancshares Corporation II,
Lexington, Tennessee, to become a
bank holding company by acquiring
First National Bancshares Corpora


tion, Lexington, Tennessee, and, indirectly, its subsidiary, First National
Bank of Lexington, Lexington, Tennessee (Federal Reserve Bulletin, vol.
71, October 1985, p. 793). By order
dated October 28, 1986, the court
affirmed the Board's order (804 F.2d
54).
In First National Bank of Blue
Island Employee Stock Ownership
Plan v. Board of Governors, No. 852615 (7th Circuit, filed September
23, 1985), petitioner sought review
of the Board's order dated August
22, 1985, denying the application of
First National Bank of Blue Island
Employee Stock Ownership Plan,
Blue Island, Illinois, to become a
bank holding company by acquiring
Great Lakes Financial Resources,
Inc., Blue Island, Illinois (Federal
Reserve Bulletin, vol. 71, October
1985, p. 804). By order dated October 1, 1986, the court affirmed the
Board's order (802 F.2d 291).
In CBC, Inc. v. Board of Governors, No. 86-1001 (10th Circuit, filed
January 2, 1986), petitioner seeks
review of the Board's order dated
December 15, 1985, requiring that
bank holding companies with assets
of $150 million or more must file
certified financial statements with
their annual reports. The case is
pending.
In St. James Bancorp v. Board of
Governors, No. 86-1224 (8th Circuit,
filed February 19, 1986), petitioner
sought review of the Board's order
dated January 21, 1986, denying the
application of St. James Bancorp,
Inc., St. James, Minnesota, to become a bank holding company by
acquiring Roseville Bancorp, Inc.,
Minneapolis, Minnesota, and thereby
to indirectly acquire Mid America
National Bank of Roseville, Roseville, Minnesota (Federal Reserve
Bulletin, vol. 72, March 1986, p.

Litigation 183
199). On April 15, 1986, petitioner's fering of securities in violation of the
motion for dismissal of the case was Bank Holding Company Act. On
October 27, 1986, the court disgranted by the court.
In Securities Industry Association missed the case for lack of jurisdicv. Board of Governors, No. 86-1412 tion, and on October 30, 1986, peti(D.C. Circuit, filed July 14, 1986), tioner appealed. The case is pending
petitioner seeks review of the Board's (No. 86-5667).
order dated June 13,1986, approving
In Independent Insurance Agents
the application of National West- of America, Inc., et al. v. Board of
minster Bank PLC, London, Eng- Governors, Nos. 86-1572, 86-1573
land, and its U.S. subsidiary, NatWest and 86-1576 (D.C. Circuit, filed OcHoldings, Inc., New York, New tober 24, 1986), petitioners seek
York, to offer investment advice and review of the Board's order dated
securities brokerage services to insti- October 3, 1986, amending the protutional customers through a single visions of Regulation Y that deal
subsidiary (Federal Reserve Bulletin, with permissible insurance activities
vol. 72, August 1986, p. 584). The for bank holding companies. The
case is pending.
case is pending.
In Jenkins v. Board of Governors
et al, No. 86-1419 (D.C. Circuit,
filed July 18, 1986), petitioner seeks Other Litigation Involving
review of the Board's action of May Challenges to Board Procedures
21, 1986, approving the application and Regulations
of First Security Financial, Salt Lake
City, Utah, for membership in the In 1986 actions were taken or were
Federal Reserve System. The Board pending, including those under the
filed a motion to dismiss on August Financial Institutions Supervisory Act,
the Glass-Steagall Act, and the Farm
14, 1986. The case is pending.
In Independent Community Bank- Credit Act.
ers Association of South Dakota v.
Board of Governors, No. 86-5373 Financial Institutions
(8th Circuit, filed October 3, 1986), Supervisory Act
petitioner seeks review of the Board's In Carter v. Board of Governors et
order dated September 15, 1986, al, No. 85-4021 (6th Circuit, filed
approving the application of Michi- December 9, 1985), plaintiff sought
gan National Corporation, Bloom- review of the Board's order dated
field Hills, Michigan, to acquire In- November 18, 1985, removing him
dependence One Bank, N.A., Rapid as an officer of First National Bank
City, South Dakota (Federal Reserve of Clinton, Clinton, Kentucky. On
Bulletin, vol. 72, November 1986, p. February 13, 1986, the case was
voluntarily dismissed by the peti792). The case is pending.
In Securities Industry Association tioner.
v. Board of Governors, No. 86-2768
In Adkins v. Board of Governors,
(D.C. Circuit, filed October 7,1986), No. 86-3853 (4th Circuit, filed May
petitioner seeks a declaration from 8, 1986), petitioner seeks review of
the court that Charles Schwab & the Board's order dated April 24,
Co., Inc., a discount broker that is a 1986, assessing civil money penalties
subsidiary of a bank holding com- against him. The case is pending.
pany, participated in the public of
In a case filed in the U.S. District


184 Litigation
Court for the District of Minnesota,
No. 4-83-995 (filed November 16,
1983), which was placed under seal
by court order, plaintiff alleges that
the Board reviewed and copied his
records at a national bank in violation of the Right to Financial Privacy
Act. The case is pending.
In a case filed in the U.S. District
Court for the District of Columbia,
No. 86-2868 (filed October 20,1986),
which was placed under seal by court
order, plaintiff seeks injunctive relief
from a Temporary Order of Cease
and Desist issued against him by the
Board. The case is pending.
The Glass-Steagall Act
In Securities Industry Association v.
Board of Governors, Nos. 80-2614
and 80-2730 (D.D.C., filed October
24, 1980), plaintiffs sought review of
a Board statement dated September
26, 1980, denying in part plaintiff's
petition that the Board prohibit
Bankers Trust Company, a state
member bank, from selling thirdparty commercial paper as an agent
of the issuer, pursuant to the GlassSteagall Act. On June 28, 1984, the
Supreme Court overruled the Board's
decision and remanded the case to
the court of appeals (104 S. Ct.
2979), which remanded it to the
district court. On October 19, 1984,
the district court remanded the case
to the Board to determine whether
the methods that Bankers Trust uses
to place commercial paper constitute
underwriting or similar activities
within the meaning of the Act. On
June 4, 1985, the Board determined
that the current placement methods
of Bankers Trust are consistent with
the Act. By memorandum orders
dated February 4 and 18, 1986, the
district court invalidated the Board's



decision and permanently enjoined
Bankers Trust from their current
placement methods (627 F.Supp. 695,
628 F.Supp. 1438). The injunction
was subsequently stayed by the court
of appeals. By order dated December 23, 1986, the court of appeals
reversed the district court and reinstated the Board's decision (Nos. 865089, 86-5090, 86-5091, 86-5139).
Farm Credit Act
Several cases have been filed in
various district courts seeking injunctive relief and damages relating to
loans made to plaintiff farmers by
commercial banks and the Farm
Credit System. Populist Party of
Iowa v. Federal Reserve Board, No.
85-626-B (S.D. Iowa, filed August 2,
1985), was dismissed on December
11, 1985, for lack of jurisdiction.
Alfson v. Wilkinson et al., No. A l 85-267 (D.N.D., filed October 8,
1985), was dismissed by court order
on November 17, 1986. Jensen v.
Wilkinson et al, No. 85-4436-S (D.
Kan., filed October 10, 1985), and
related cases, were dismissed by
court order on October 7, 1986.
Souser et al. v. Volcker et al., No.
85-C-2370 (D. Colo., filed November
1, 1985), and related cases, were
dismissed by court order on December 4, 1985.
Kurkowski v. Wilkinson et al., No.
CV-85-0-916 (D. Neb., filed October
16, 1985) was dismissed on April 22,
1986, and plaintiff appealed to the
eighth circuit. The case is pending.
Podolak v. Volcker et al., No. C850456 (D. Wyo., filed October 28,
1985), and related cases were dismissed on February 24, 1986, and
plaintiffs appealed to the tenth circuit. The cases are pending.
A motion by the federal defend-

Litigation 185
federal monetary credit and bankruptcy statutes by the Board and
BancOhio National Bank. On November 20,1985, the U.S. magistrate
recommended dismissal of the action. Plaintiff filed a notice of appeal
on March 5, 1986, No. 86-3210 (6th
Circuit). The case is pending.
In Cook v. Spillman et al., No.
CIV-S-85-0953 EJG (E.D. Cal., filed
July 10,1985); Wight etal. v. Internal
Other Actions
Revenue Service et al., No. CIV-SIn Melcher v. Federal Open Market 85-0012 MLS (E.D. Cal., filed July
Committee, No. 84-1335 (D.D.C., 12, 1985); and Urwyler et al. v.
filed April 30, 1984), plaintiff chal- Internal Revenue Service et al, No.
lenges the constitutionality of the CV-F-85-402 REC (E.D. Cal., filed
Federal Open Market Committee. July 18, 1985), plaintiffs allege that
On June 5, 1986, the court denied the sixteenth amendment to the Conthe defendant's motion to dismiss stitution was not properly ratified
(644 F.2d 510). By order dated and that the use of Federal Reserve
September 26,1986, the court upheld notes constitutes illegal gambling.
the constitutionality of the Federal The Board's motions to dismiss the
Open Market Committee and dis- cases were granted by the district
missed the case (Id.). The court court. The plaintiff in Cook filed a
denied plaintiffs motion to alter or notice of appeal on January 10,1986,
amend judgment on November 18, No. 86-1642 (9th Circuit), and by
1986, and plaintiff filed a notice of order dated December 22, 1986, the
court dismissed the appeal. The
appeal. The case is pending.
In Brown v. United States Congress plaintiffs in Wight and Urwyler filed
etal,No. 84-2887-6 (IG) (S.D. Cal., notices of appeal on December 22,
filed December 7, 1984), plaintiff 1985, No. 85-2826, and December 3,
seeks damages resulting from alleged 1985, No. 85-2877, respectively (9th
discrimination in home financing and Circuit). These cases are pending.
In Johnson v. Federal Reserve
mandatory injunctions regarding the
Board's monetary policy. The court System et al., Nos. S85-0958(R) and
dismissed the case on September 17, S85-1269(N) (S.D. Miss., filed July
1985. Plaintiff filed a notice of appeal 16 and October 21, 1985), plaintiff
on September 20, 1985, No. 85-6313 sought injunctive relief and damages
(9th Circuit), then voluntarily dis- against defendants relating to foremissed the appeal on November 12, closures on plaintiffs property. By
1985. On September 27, 1985, plain- order dated June 23, 1986, the court
tiff filed a motion for reconsideration dismissed the complaint. Plaintiff filed
with the district court. The case is a notice of appeal on July 23, 1986,
No. 86-4536 (5th Circuit). On Seppending.
In Lewis v. Volcker et al., No. C- tember 29, 1986, the court dismissed
1-85-0099 (S.D. Ohio, filed January the appeal for failure to prosecute.
14, 1985), plaintiff seeks damages
In McHuin v. Volcker et al., No.
resulting from alleged violations of 85-2170 WARB (W.D. Okla., filed

ants to dismiss has been filed in each
of the following cases: Farmer v.
Wilkinson et al., No. 4-85-CIVIL1448 (D. Minn., filed October 21,
1985); Kolb v. Wilkinson et al, No.
C85-4184 (N.D. Iowa, filed October
22, 1985); Myers et al. v. Federal
Reserve Board, No. 85-1427 (D. Ida.,
filed November 18, 1985).




186 Litigaton
August 29, 1985), plaintiff sought
reinstatement as an employee at the
Federal Reserve Bank of Kansas
City. By order dated December 9,
1986, the complaint was dismissed
by the court.
In Howe v. United States et ai,
No. 85-4504-C (D. Mass., filed December 6, 1985), plaintiff challenges
the constitutionality of the current
monetary system. By order dated
April 18, 1986, the court dismissed
the complaint. Plaintiff filed a notice
of appeal on April 28, 1986, No. 861430 (1st Circuit). By order dated




July 30, 1986, the court affirmed the
district court's dismissal of the action, and plaintiff filed a petition for
rehearing. By order dated August
29, 1986, the court denied the petition. Appellant filed a petition for
writ of certiorari on November 26,
1986 (No. 86-889). The case is pending.
In Optical Coating Laboratory,
Inc. v. United States, No. 288-86C
(Ct. Cl., filed May 6, 1986), plaintiff
seeks damages based upon the expiration of its contract with the Federal
Reserve Board. The case is pending.

187

Banking Supervision and Regulation
In 1986 the Board of Governors
continued its program to strengthen
the supervision and regulation of the
banking organizations under its jurisdiction. The Board initiated the program in the fall of 1985 in light of
developments within the banking system over the past several years, and
it is aimed at three broad areas of
supervision: (1) preventing the emergence of problems in banking organizations through strengthened policies designed to encourage sound
banking practices, (2) the early identification of problems that do emerge
through more frequent and thorough
on-site examinations and inspections,
and (3) improved communication of
findings to bank management and
boards of directors so that they will
move quickly to correct problems.
The new program resulted in a 21
percent increase over 1985 in on-site
examinations and inspections and a
substantial expansion in the number
of meetings with boards of directors.
The Board took several steps in
1986 to further strengthen its supervisory program. The principal step
was its proposal in early 1986 for a
risk-adjusted measure of capital adequacy. The plan has been revised
and issued jointly for public comment with the other federal banking
regulators and the Bank of England.
The Board also revised its guidelines
on capital adequacy, specifying that
perpetual debt, properly structured,
could qualify as a noncommon equity
form of primary capital and respecifying the percentages of these forms
of capital that can qualify as primary
capital.



In recognition of the unique problems currently facing banks with
substantial exposure to the agricultural and energy sectors of the economy, the Board in 1986 adopted
policies to assist these banks. The
policy allows such banks to operate
with reduced levels of capital if they
have the ability to improve their
capital position over a reasonable
period of time and if they have
instituted reasonable plans to correct
their financial or operating deficiencies. In addition, the policy makes
clear that problem loans need not
necessarily be written down if they
are restructured in line with Financial
Accounting Standard 15 so that the
sum of future interest and principal
payments equals at least the face
amount of the loan.

Supervision for Safety
and Soundness
The Federal Reserve conducts the
following activities to ensure the
safety and soundness of financial
institutions: on-site examinations and
inspections, surveillance and monitoring, and enforcement and other
supervisory actions.
Examinations and Inspections
The on-site review of operations is
an integral part of ensuring the safety
and soundness of financial institutions. Examinations of state member
banks and Edge corporations and
inspections of bank holding companies and their subsidiaries entail (1)

188 Banking Supervision and Regulation
an appraisal of the quality of the
institution's assets; (2) an evaluation
of management, including internal
policies, operations, and procedures;
(3) an assessment of the key financial
factors of capital, earnings, asset and
liability management, and liquidity;
and (4) a review for compliance with
applicable laws and regulations.1

ments. System examiners conducted
811 examinations, many jointly or
concurrently with examiners from
state regulatory agencies.

Bank Holding Companies
In 1986 the number of bank holding
companies increased by 12 to a total
of 6,465. These organizations control
9,409 commercial banks, which hold
about 92 percent of the total assets
State Member Banks
The Federal Reserve is the primary of insured commercial banks in the
federal supervisor and regulator of United States.
state-chartered commercial banks that
Most large bank holding compaare members of the Federal Reserve nies, as well as small companies with
System. At the end of 1986 there significant nonbank assets, are inwere 1,110 state member banks, spected annually under the new polaccounting for about 8 percent of all icy. Others are inspected at least
insured commercial banks. These every three years or, in the case of
banks held about 18 percent of total the smallest companies that do not
assets of insured commercial banks. have nonbank assets, on a sample
As stated above, the Federal Re- basis. The inspection focuses on the
serve in 1986 increased the frequency operations of the parent holding
of scheduled examinations and in- company and its nonbank subsidispections of state member banks and aries; the subsidiary banks are exbank holding companies. In general, amined by the appropriate federal
the new guidelines, established by banking regulatory agencies. In 1986,
the Board in the fall of 1985, call for System examiners made 2,242 onstate member banks to be examined site inspections of bank holding comat least annually. Except for large or panies. An additional 96 off-site
troubled banks, examination by either inspections were conducted, and state
a Reserve Bank or a state banking examiners made 87 inspections.
agency will meet that requirement.
In 1986, 1,016 state member banks
were examined, 298 of which were Enforcement Actions
examined by state banking depart- and Civil Money Penalties
Under the Financial Institutions Supervisory Act of 1966, the Board of
1. The Board's Division of Consumer and
Community Affairs is responsible for review- Governors has the authority to enter
ing compliance with consumer and civil rights into written agreements with, or
laws. The responsibility is accomplished mainly issue cease and desist orders against,
through examinations by specially trained Re- state member banks and bank holdserve Bank examiners. These regulatory responsibilities are described in the section of this ing companies, and persons associREPORT covering consumer and community af- ated with such organizations that
fairs. Compliance with other statutes and reg- engage in unsafe or unsound praculations, which is treated in this section, is the tices or that violate applicable laws
responsibility of the Board's Division of Banking Supervision and Regulation and of the Re- or regulations. The Board may also
serve Banks, whose examiners check for safety assess civil money penalties for vioand soundness.
lations of a cease-and-desist order,



Banking Supervision and Regulation 189
of the Bank Holding Company Act,
or of certain provisions of the Federal Reserve Act.
In 1986 the Reserve Banks recommended and the Board's staff
initiated and worked on 260 enforcement cases that involved 481 separate
actions, such as cease and desist
orders, removals, and civil money
penalties, most dealing with unsafe
or unsound banking practices; 125
cases involving 178 actions were completed by year-end. Also, the Board
assessed or collected 12 civil money
penalties, totaling $625,000, paid by
1 state member bank, 1 bank holding
company, and 10 individuals. A description of all formal supervisory
actions during the year and the
reasons for them were made available to the public in the Board's
twice-yearly "Report on Formal Enforcement Actions."
International Activities
The Federal Reserve is responsible
for supervising several international
banking activities.
Edge and Agreement Corporations
Edge corporations are international
banking organizations chartered by
the Board to provide all segments of
the U.S. economy with a means of
financing international trade, especially exports. An agreement corporation is a company that enters into
an agreement with the Board not to
exercise any power that is impermissible for an Edge corporation. In
1986 the Federal Reserve conducted
examinations of 124 Edge and agreement corporations.
Foreign-Office Operations
of U.S. Banking Organizations
Examinations of the international
operations of state member banks,



Edge corporations, and bank holding
companies are conducted principally
at the banking organizations' head
offices in the United States, where
the ultimate responsibility for foreign
offices lies. To verify and supplement
the results of the head-office examinations, on-site reviews of important
foreign offices are performed at least
every three years. In 1986 the Federal Reserve examined 16 foreign
branches of state member banks and
15 foreign subsidiaries of Edge corporations and bank holding companies. All the examinations abroad
were coordinated with the supervisory authorities of the countries in
which the examinations took place.
U.S. Activities of Foreign Banks
Foreign banks continue to expand
their operations in the United States
and are significant participants in the
U.S. banking system. As of December 31, 1986, 259 foreign banks
operated 398 state-licensed branches
and agencies, of which 32 are insured
by the Federal Deposit Insurance
Corporation; at year-end these foreign banks also operated 89 branches
and agencies licensed by the Office
of the Comptroller of the Currency,
of which 3 have FDIC insurance.
Foreign banks also directly owned 19
Edge corporations and 11 commercial lending companies. In addition,
foreign banks held a majority interest
in 72 U.S. commercial banks. Together, these foreign banks at yearend controlled approximately 12 percent of U.S. banking assets.
The Federal Reserve has broad
authority to supervise and regulate
foreign banks that engage in banking
in the United States through branches,
agencies, commercial lending companies, Edge corporations, or banks.
In exercising this authority, the Fed-

190 Banking Supervision and Regulation
eral Reserve relies on examinations
conducted by the appropriate federal
or state regulatory agency. Although
states have primary authority for
examining state-licensed, uninsured
branches and agencies, the Federal
Reserve participated in the examination of 98 such offices during the
past year.
Specialized Examinations
The Federal Reserve conducts specialized examinations in the following areas of bank activity: electronic
data processing, trust activities, municipal securities dealing and clearing, and securities transferring. In
1986, guidelines for the frequency of
specialized
examinations
were
adopted, and in conformance with
the System's program for strengthening Reserve Bank supervision, the
frequency of specialized examinations for problem institutions was
increased.
Electronic Data Processing
Under the Interagency EDP Examination Program, the Federal Reserve
examines the electronic data processing (EDP) activities of state
member banks, Edge and agreement
corporations, and independent centers that provide EDP services to
these institutions. In 1986, System
examiners conducted 334 on-site EDP
reviews. In addition, the Federal
Reserve reviews reports of EDP
examinations issued by other bank
regulatory agencies on organizations
that provide data processing services
to state member banks.
Trust Activities
The Federal Reserve examines trust
departments of state member banks,
trust companies that are members of
the Federal Reserve System, and



certain foreign and domestic trust
company subsidiaries of bank holding companies. These examinations
review the trust functions to ensure
that they are conducted in accordance with laws, regulations, and applicable fiduciary principles. During
the year, the Federal Reserve conducted 250 such examinations.
Municipal Securities Dealers
and Clearing Agents
The Securities Act Amendments of
1975 made the Board responsible for
supervising state member banks and
bank holding companies that act as
municipal securities dealers or as
clearing agencies. In 1986 the Board
examined 32 of the 50 state member
banks registered with the Board that
deal in municipal securities.
A clearing agency acts as a custodian of securities involved in transactions settled by bookkeeping entries. The four agencies registered
with the Board were examined in
1986.
Transfer Agents
System examiners conduct separate
reviews of state member banks and
bank holding companies that act as
transfer agents. Transfer agents
countersign and monitor the issuance
of securities, register the transfer of
securities, and exchange or convert
securities. During 1986 the Board
examined 91 such banks and bank
holding companies.

Surveillance and Monitoring
In line with the overall supervisory
objective of maintaining a safe and
sound banking system, the Federal
Reserve monitors quarterly the financial condition of member banks
and bank holding companies. The
surveillance program supplements the

Banking Supervision and Regulation 191
examination process through computerized screening systems that
identify institutions with poor or
deteriorating financial profiles. It
further aids in the allocation of the
System's examination resources by
focusing on banking institutions that
have serious financial problems and
that may be subject to accelerated
examinations or may warrant closer
supervision. In 1986 the System
strengthened its surveillance program by revising its screening program while continuing the electronic
transmission of surveillance results
between the Reserve Banks and the
Board of Governors.
The Board revised the reporting
requirements for large and small
bank holding companies and introduced new requirements for reporting of data on nonbank subsidiaries.
These changes enhanced the Federal
Reserve System's ability to evaluate
the financial condition of these institutions. Also, the performance report for bank holding companies has
been revised and now includes information on nonbank activities.
Supervisory Reporting
Requirements
In 1986 the Federal Reserve completely revised the Bank Holding
Company Supervision Manual to incorporate amendments to Regulation
Y and the programs to strengthen
the overall supervision of bank holding companies. The Commercial Bank
Examination Manual, which covers
state member banks, was similarly
updated to incorporate the strengthened program of supervision and
regulation.
In 1986 the Federal Reserve made
major revisions to the following reports required of bank holding comthe financial statements for
panies:


bank holding companies with consolidated assets of $150 million or more
or with more than one subsidiary
bank (FR Y-9C) and the parentcompany-only financial statements for
these bank holding companies (FR
Y-9LP), both filed quarterly; the
parent-company financial statements
for one-bank holding companies with
less than $150 million (FR Y-9SP),
filed semiannually; and the combined
financial statements for nonbank
subsidiaries (FR Y-11Q), filed quarterly, with a supplement (FR Y11AS) filed annually by type of
nonbank subsidiary. Under these revisions, the Federal Reserve significantly improved the overall quality
of the financial data needed for the
timely supervision and monitoring of
bank holding companies.
Supervisory Policy
In 1986 the Board of Governors
made or initiated major changes in
its supervisory guidelines. The following sections summarize these
changes and review other activities
during the year to strengthen the
supervisory program.
Capital Adequacy
In November 1986 the Board of
Governors issued revisions to its
capital adequacy guidelines for bank
holding companies. These revisions
(1) allowed certain perpetual debt
securities to be treated as primary
capital and (2) placed a combined
limit on the amount of perpetual
debt, perpetual preferred stock, and
mandatory convertible debt securities that may qualify as primary
capital. The combined amount of
such securities that may qualify as
primary capital was limited to onethird of total primary capital. In
addition, the revisions limited the

192 Banking Supervision and Regulation
amount of mandatory convertible
securities and perpetual debt that
may qualify as primary capital to 20
percent of total primary capital.

of capital adequacy. In January 1987
the Board of Governors issued the
risk-based measure for public comment.

Supplemental Measure
of Adjusted Capital

Problem Loans
in Agriculture and Energy

In January 1986 the Federal Reserve
issued for public comment a proposal
to supplement its capital adequacy
guidelines for state member banks
and bank holding companies. The
supplemental adjusted capital measure was designed to relate capital
requirements more closely to the risk
profiles of banking organizations.
The goals of the proposal are to (1)
address off-balance-sheet exposures,
which have expanded rapidly at many
large banking organizations for the
past several years; (2) temper the
disincentives, inherent in the existing
guidelines, to hold low-risk, relatively liquid assets; and (3) move
capital requirements of state member
banks and bank holding companies
into closer alignment with capital
adequacy policies in use or under
development in other major industrial countries.
Similar proposals were issued by
the Office of the Comptroller of the
Currency (for national banks) and
by the Federal Deposit Insurance
Corporation (for federally insured
nonmember banks). After most of
the public comments that were to be
received were in hand, the three
U.S. bank regulatory authorities discussed with representatives of the
Bank of England ways to bring into
closer alignment the capital requirements of regulators in their respective countries. Those discussions produced a risk-based measure of capital
that would create for the two countries a single definition of primary
capital and a single set of standards



In 1986 the three federal bank regulatory agencies agreed to employ a
common general supervisory policy
to assist banks that are essentially
sound and well-managed yet are
experiencing difficulty with their capital ratios because of problems with
their loans in the agriculture and
energy sectors. The policy calls for
the Reserve Banks to exercise appropriate forbearance in applying capital
adequacy guidelines for such banks
if they demonstrate a clear potential
for restoring their capital position
over a reasonable period of time.
Banks seeking such "capital forbearance" are required to notify their
Reserve Bank immediately when loan
losses have caused their capital ratios
to fall to levels materially below the
minimum regulatory standards. Notification is to be followed by a
comprehensive operating plan for
restoring capital to normal levels.
This policy does not discourage
banks from forbearance on agricultural and energy loans in instances
where it will work to the benefit of
the bank as well as the borrower.
Restructured loans do not require an
automatic charge-off when future
payments of principal and interest
will at least equal the face amount
of the loan under the criteria of
Financial Accounting Standard 15
(Accounting by Debtors and Creditors for Troubled Debt Restructurings). In a related action effective
June 30, 1986, the Federal Financial
Institutions Examination Council
amended the regulatory reports for

Banking Supervision and Regulation 193
banks. These revised reports permit
such restructured, performing loans
to be reported separately from restructured but troubled loans.
Fees for Processing Applications
and for Examining
Edge Corporations
In 1986 the Board's staff studied the
various methods the Federal Reserve
System might use to recover some or
all of the expenses involved in examining Edge corporations and in
processing various types of applications. The Board has received, and
at year-end was analyzing, public
comments on its proposal to charge
fees for these activities.
Relations with the States
The Board approved a policy, adopted
by the Federal Financial Institutions
Examination Council, to share confidential information with state agencies regulating banks and thrift institutions. This policy was adopted to
better supervise the growing interstate activities of financial institutions.
The Board in 1986 provided
$100,000 to the Education Foundation of State Bank Supervisors. Established by the Conference of State
Bank Supervisors, the foundation
offers technical courses to state bank
examiners. The Board also authorized the Federal Reserve Banks to
provide scholarships to examiners
employed by state banking agencies
to help them cover expenses in attending training courses offered by
the Federal Reserve and by the
Federal Financial Institutions Examination Council.
Work on Accounting Standards
The Board and its staff are working
Digitized forto eliminate, to the greatest extent
FRASER


possible, differences between regulatory reporting requirements and
generally accepted accounting principles. Board staff members have
served on various advisory committees of the Financial Accounting
Standards Board (FASB) and are
participating in that group's project
on financial instruments. Staff members also provide commentary on
proposals affecting banking organizations that are issued by FASB and
by the American Institute of Certified Public Accountants.

Reducing Risks in Large-Dollar
Electronic Payment Systems
In March 1986 the Board implemented a policy to reduce the risks
associated with large-dollar payment
systems. The Board strongly encouraged depository institutions using
Fedwire or one of the private, largedollar wire networks to adopt voluntary limits on their own overdrafts.
The Board announced that institutions not complying with the policy
would not be permitted to incur
daylight overdrafts on Fedwire.
The program has reduced the risk
associated with daylight overdrafts in
several ways. First, the number of
depository institutions incurring overdrafts during a typical monitoring
period decreased from about 4,000
to about 3,200 between 1985 and
1986. Second, average cross-system
funds overdrafts (to be distinguished
from book-entry security overdrafts)
remained approximately constant
during this period, at about $80
billion, while the dollar volume of
wire funds transfers increased more
than 30 percent. Thus, overdrafts as
a portion of gross payments volume
declined markedly. Finally, virtually
no institutions exceeded their over-

194 Banking Supervision and Regulation
draft caps. Together, these facts
indicate that the program has contained the growth of overdrafts without disrupting the payments systems
and thereby has lowered the risks to
the Federal Reserve, to the depository institutions, and to the wider
economy.
In December 1986 the Board issued for comment a series of proposals to further reduce payments system risk. The most significant of
these would include in the total
overdraft subject to voluntary ceilings those overdrafts due to bookentry security transactions. Depository institutions would have two
options for including book-entry
overdrafts in their total net debits
subject to a cap: (1) depository
institutions could include all of these
overdrafts in their current net debit
cap, or (2) institutions could collateralize the overdrafts caused by the
book-entry transfers with book-entry
securities that are eligible for pledging. Under the second option, only
the uncollateralized portion of bookentry overdrafts would be added to
the net debit subject to the cap.
The Board is also seeking comment on whether there should be a
book-entry transfer limit and whether
that limit should be $25 million or
$50 million per transaction. Such a
limit would induce market participants to deliver securities earlier in
the day rather than "building" positions of securities until late in the
day. Position-building by securities
dealers is a major source of bookentry overdrafts.
The Board proposed the following
additional changes:
• Reduce the levels for the sender
net debit cap in the present policy
by 25 percent.
• Establish a new de minimis cap
category
 for institutions that do not


incur large or frequent daylight overdrafts. This cap would be the lesser
of 10 percent of capital or $500,000
and would be available to institutions
that do not wish to undergo the selfassessment currently required for establishing a regular cap.
• Amend its policy statement regarding consolidation of payments
activities by affiliated institutions.
Under one option, holding companies might consolidate payment activities at one subsidiary through
affiliate transfers over Fedwire, provided that the board of directors of
the sending institution approved such
transfers periodically. Under the second approach, transfers that create a
pattern of overdrafts at the sending
institution would be prohibited.
In addition, the Board proposed
several changes affecting automated
clearinghouse (ACH) procedures: (1)
for purposes of calculating daylight
overdraft levels only, post all entries
for ACH debit payments and checks
as of 1:00 p.m. Eastern time; (2)
grant finality for ACH credit payments of $5,000 or less at 1:00 p.m.
local time; (3) treat as provisional
credit all ACH debit items and those
ACH credit items greater than $5,000
until the Reserve Banks have received the funds; (4) accelerate the
deadline for the return of debit
transactions larger than $2,500 to the
nighttime deposit deadline on the
banking day following settlement or
receipt; and (5) require notification
of returns of $100,000 or more by
3:00 p.m. Eastern time on the banking day following settlement of receipt.
The Board will review the public
comments on these proposals in the
spring and summer of 1987. Final
actions that may be taken are likely
to have effective dates in both 1987
and 1988.

Banking Supervision and Regulation 195
Staff Training
System staff training emphasizes analytical and supervisory themes common to the four areas of supervision
and regulation—examinations, inspections, applications, and surveillance—and stresses the interdependence among these areas. In 1986 the
Federal Reserve conducted forty-two
school sessions covering a wide variety of topics.
Programs included twelve banking
sessions split into three levels—core,
intermediate, and advanced—plus a
seminar for senior examiners on
energy lending, six sessions of a
credit analysis course, two sessions
of a bank holding company applications school, and three consumer
compliance schools.
New courses were held on bank
holding company inspections, parent
cash flow and liquidity analysis, and
effective writing for banking supervision staff. In addition, some staff
members attended two schools conducted jointly with the Federal Bureau of Investigation on white-collar
crime and bank failures.
The Federal Financial Institutions
Examination Council (FFIEC), of
which the System is a member,
conducted approximately 78 courses
covering off-balance sheet risks, international banking, income property lending, securities dealers, whitecollar crime, management, conducting meetings with management, and
instructor training.
Overall, the Federal Reserve and
the FFIEC in 1986 trained 1,433
persons: 830, including 33 from foreign central banks, in System schools;
and 603 in FFIEC schools. In addition, 122 state examiners received
training under the scholarship program for states provided by the
Federal Reserve Banks—84 in Fed-




eral Reserve courses and 38 in FFIEC
courses.
Federal Financial Institutions
Examination Council
In 1986 the Federal Financial Institutions Examination Council made
several policy recommendations to
its constituent agencies; all the recommendations were adopted by the
Federal Reserve's Board of Governors.2 The Federal Reserve endorsed
guidelines on uniform disclosure for
adjustable-rate mortgages; and it endorsed a policy statement dealing
with the provision of basic financial
services, both of which are discussed
in detail in the chapter on consumer
and community affairs.
The Federal Reserve also endorsed the sharing of confidential
supervisory information with state
banking agencies, thereby formally
adopting a policy in place at the
Federal Reserve since the advent of
regional interstate compacts. The
new policy calls for the signing of
formal agreements between federal
and state regulatory agencies to assure uniform treatment of the information among the sharing agencies
and to provide increased security.
The council also approved new
and revised reporting requirements:
• The Reports of Condition and
Income (Call Reports) were modified to reflect adoption of new regulatory policies toward agricultural
lenders, which were announced by

2. The Federal Financial Institutions Examination Council consists of representatives
of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Federal Home Loan Bank
Board, the National Credit Union Administration, and the Office of the Comptroller of the
Currency.

196 Banking Supervision and Regulation
the banking constituency of the council.
• New reporting requirements for
the sale of assets permit banks to
treat loans transferred "without recourse" as sales in certain situations
where banks retain residual interests
in related escrow accounts. The new
rule provides guidance for banks
desiring to transfer assets and have
the transactions qualify as sales rather
than as borrowings.
• The Uniform Bank Performance
Report was revised in several respects to make the presentation in it
identical to that in the Call Report.

structure of U.S. banking at the
local, regional, and national levels.
The Board also has primary responsibility for regulating the international operations of domestic banking organizations and the U.S.
banking operations of foreign banks,
whether conducted directly through
a branch or agency or indirectly
through a subsidiary commercial
lending company. In addition, the
Board has established regulations for
the interstate banking activities of
these foreign banks and for foreign
banks that control a U.S. subsidiary
commercial bank.

Regulation of the U.S.
Banking Structure
The Board of Governors administers
the Bank Holding Company Act, the
Bank Merger Act, and^ the Change
in Bank Control Act for state member banks and bank holding companies. In doing so, the Federal Reserve acts on a variety of proposals
that directly or indirectly affect the

Bank Holding Company Act
By law, a company must obtain the
Board's approval if it is to form a
bank holding company by acquiring
control of one or more banks. Moreover, once formed, a bank holding
company must receive the Board's
approval before acquiring additional
banks or nonbanking companies.
In reviewing an application filed

Bank Holding Company Decisions by the Federal Reserve,
Domestic Applications, 1986

Proposal

Direct action
by the
Board of
Governors

Action under authority delegated
by Board of Governors
Director of
Division of Banking Office
of the
Supervision and Secretary1
Regulation1

Federal
Reserve Banks

Total

Approved Denied Approved Denied Approved Approved Permitted
Formation of holding company ...
Merger of holding
company
Acquisition
Bank
Nonbank
Acquisition of
bank service
corporation2 ...
Other
Total

274

57

3

0

0

3

457

0

520

23

0

0

0

6

71

0

100

76
117

2
0

0
0

0
0

28
14

405
171

0
240

511
542

0

3
0

0

5
3

53

1,107

240

1,681

0
1

0
1
6

0
1

0
1

1. Official staff of the Board of Governors.

2. Approved under the Bank Service Corporation


0

2
0

0

Act, which contains standards patterned after those
of the Bank Holding Company Act.

Banking Supervision and Regulation 197
by a bank holding company, the
Board considers factors relating to
the convenience and needs of the
community to be served, the applicant's financial and managerial resources, the prospects of both the
applicant and the firm to be acquired, and the competitive effects
of the proposal.
In 1986 the Federal Reserve System acted on 1,681 bank holding
company and related applications.
The System approved 517 proposals
to organize bank holding companies
and denied 3; approved 509 bank
acquisitions by existing bank holding
companies and denied 2; and approved 542 requests to acquire nonbank companies that are engaged in
activities closely related to banking
and denied none. Data on these and
related bank holding company decisions are shown in the accompanying
table.
Bank Merger Act
The Bank Merger Act requires that
all proposed bank mergers be acted
upon by the appropriate federal bank
regulatory agency. If the bank surviving the merger is a state member
bank, the Federal Reserve has primary jurisdiction. Before acting on a
proposed bank merger, the Federal
Reserve considers factors relating to
the community's convenience and
needs, the financial and managerial
resources and prospects of the existing and proposed institutions, and
the competitive effects of the proposal. The Board must also consider
the views of certain other agencies
on the competitive factors involved
in the transaction.
During 1986, the Federal Reserve
approved 61 merger applications: 1
was approved by the Board; under
authority
 delegated by the Board, its


Office of the Secretary approved 4
and the Reserve Banks approved 56.
As required by law, each merger is
described in this REPORT, in table
19 of the Statistical Tables section.
When the Office of the Comptroller of the Currency or the Federal
Deposit Insurance Corporation has
jurisdiction over a merger, the Board
is asked to comment on the competitive factors to assure comparable
enforcement of the antitrust provisions of the act. The Board and those
agencies have adopted standard terminology for assessing competitive
factors in bank merger cases to
assure consistency in administering
the act. On behalf of the Board, the
Reserve Banks submitted 722 reports
on competitive factors to the OCC
and the FDIC in 1986.

Change in Bank Control Act
The Change in Bank Control Act of
1978 requires persons seeking control
of a bank or bank holding company
to obtain approval from the appropriate federal banking agency before
the transaction occurs. The Board is
responsible for reviewing changes in
the control of state member banks
and of bank holding companies. In
evaluating a transfer of control under
the Change in Bank Control Act,
the Board must review the financial
condition, competence, experience,
and integrity of the acquiring person;
it must consider the effect on the
financial condition of the bank or
bank holding company to be acquired; and it must determine the
effect on competition in any relevant
market. In October 1986 the Congress amended the act, requiring the
federal banking agencies to publish
notice of each proposed change in
control and to invite public com-

198 Banking Supervision and Regulation
ment, particularly from persons located in the markets served by the
institution to be acquired. The
amendments also require the federal
banking agencies to investigate the
qualifications of each person seeking
control; the Board routinely conducts such an investigation under the
Change in Bank Control Act. In
1986, the Federal Reserve System
acted on 217 proposed changes in
control of state member banks and
bank holding companies. The Reserve Banks processed 208 cases, and
the Board processed 9; the Board
disapproved 1 proposal.

Delegation of Applications
The Board has delegated certain
regulatory functions—including the
authority to approve, but not the
authority to deny, certain types of
applications—to the Reserve Banks,
to the Director of the Board's Division of Banking Supervision and
Regulation, and to the Secretary of
the Board.
The delegation of responsibility for
applications permits staff members
to work more efficiently at both the
Board and the Reserve Banks by
removing routine cases from the
Board's agenda. During 1986, 85
percent of the applications were acted
upon under delegated authority.
Timely Processing
of Applications
The System maintains target dates
and procedures for the processing of
applications. These target dates promote efficiency at the Board and the
Reserve Banks and reduce the burden on applicants. The time allowed
for a decision is 60 days; during 1986,
93 percent of the applications met
Digitized forthis standard.
FRASER


In 1986, all of the 61 applications
for bank mergers were processed
within 60 days. The System also
prepared 722 reports on the competitive factors of proposed mergers for
the other two banking agencies; nearly
all of these reports were processed
within 30 days. Of the 217 changeof-control notices involving state
member banks or bank holding companies, 201 were handled within 60
days.
The System measures its performance in processing international
applications against a 60-day standard. In 1986 the Federal Reserve
acted on 119 international applications, 87 percent of which the System
handled within the time allowed.

Board Policy Decisions
and Developments
in Bank-Related Activities
In 1986 the Board approved a number of new nonbanking activities,
including several for individual bank
holding companies. It also had under
consideration other proposed nonbanking activities, including those
involving securities underwriting and
real estate investment. In addition,
the Board approved several acquisitions involving interstate banking.
Approval of Permissible
Nonbanking Activities
In 1986 the Board for the first time
approved the following activities for
individual bank holding companies:
(1) printing and selling checks and
related documents that carry coded
information for depository institutions; (2) providing investment advice in connection with securities
brokerage, subject to certain conditions; and (3) placement of commercial paper to a limited extent.
In addition, the Board permitted

Banking Supervision and Regulation 199
the formation of limited-purpose insurance companies, owned cooperatively by bank holding companies;
the insurance firms would underwrite
directors' and officers' blanket bond
insurance for the shareholder bank
holding companies.
The Board approved the addition
to Regulation Y of six nonbanking
activities for bank holding companies; the action means that applications for these activities, some of
which had been approved previously
in individual cases, are simplified
and action on them is quickened.
The new activities are: consumer
financial counseling; tax planning
and tax preparation; futures and
options advisory services; check
guaranty services; collection and credit
bureau services; and appraisals of
personal property. The Board also
revised the portion of Regulation Y
dealing with permissible insurance
activities for bank holding companies.
The Board approved the application of a bank holding company to
acquire a firm that electronically
processes and transmits banking and
economic data, a service permitted
in Regulation Y. The Board determined, however, that the portion of
the firm that designs and assembles
the hardware for the data services
was not incidental to the provision
of those services. Therefore the Board
disapproved the acquisition of the
hardware portion of the firm.
Applications to Engage in New
Nonbanking Activities
At year-end the Board also had
under consideration applications to
engage in two new nonbank activities: providing advisory services with
respect to futures contracts on stock
indexes; and acting as drawee for
variably denominated payment in


struments without a limit on face
value when such instruments are sold
or issued by nonaffiliated third parties.
At year-end, applications were also
pending that would allow affiliates
that already underwrite U.S. government securities to underwrite and
deal in commercial paper, mortgagebacked securities, municipal revenue
bonds and consumer-related receivables. The Board held a hearing in
February 1987 on the complex factual and legal issues involved in these
applications.
In 1986 the Board solicited public
comment on whether to permit bank
holding companies to engage in real
estate investment activities under
specific conditions. The conditions
are designed to ensure that the conduct of the activity does not result in
unsafe or unsound banking practices,
unfair competition, conflicts of interest, or other adverse effects.
Interstate Banking

The Federal Reserve during 1986
approved applications by out-of-state
banking organizations to acquire financially troubled thrift institutions.
In one case the institution was uninsured; in two others the institutions
were federally insured. These acquisitions helped restore financial stability to the affected communities
and provided depositors with better
access to their funds. Because of the
significant public benefits resulting
from the proposed transactions, the
Board approved the acquisitions despite its general prohibition on affiliations between bank holding companies and thrift institutions.
In other matters, the Board continued to approve interstate bank holding company applications based on
state laws that permit regional interstate banking. The U.S. Supreme

200 Banking Supervision and Regulation
Court has upheld the constitutionality of such laws, and the Board has
found in individual instances that
these laws satisfy the requirement of
the Bank Holding Company Act that
each state's laws must allow the
acquisition.

Applications
by State Member Banks
State member banks must obtain the
permission of the Board to open new
domestic branches, to make investments in bank premises that exceed
100 percent of capital stock, and to
add to the capital base from sales of
subordinated debt. State member
banks must also give six months'
notice of their intention to withdraw
from membership in the System,
although the Board may shorten or
eliminate the notice period in specific
cases. These matters are normally
handled under delegated authority
by the Federal Reserve Banks or, in
the case of bank premises or proposed sales of subordinated debt, by
the Director of the Board's Division
of Banking Supervision and Regulation.
Stock Repurchases
by Bank Holding Companies
A bank holding company sometimes
purchases its own shares from its
shareholders. When the company
borrows the money to buy the shares,
the transaction increases the debt of
the bank holding company and simultaneously decreases its equity.
Relatively large repurchases may undermine the financial condition of a
bank holding company and its bank
subsidiaries. The Board's regulations
require holding companies to give
advance notice of repurchases that
retire 10 percent or more of their



consolidated equity capital. The Board
may object to stock repurchases by
holding companies that fail to meet
certain standards, including the
Board's capital guidelines. During
1986 the Federal Reserve reviewed
142 proposed stock repurchases by
bank holding companies, 139 of which
were acted on by the Reserve Banks
on behalf of the Board.
Public Notice
of Board Decisions
Each action by the Board that involves a bank holding company,
bank merger, change in control, or
international banking proposal is effected by an order or announcement.
Orders state the decision along with
the essential facts of the application
and the basis for the decision; announcements state only the decision.
All orders and announcements are
released immediately to the public;
they are also reported in the Board's
weekly H.2 statistical release and in
the monthly Federal Reserve Bulletin.
Actions taken by the Reserve Banks
are also reported in the H.2 statistical
release and in the Bulletin. Announcements of applications and notices received by the System but not
yet acted on are made in the H.2
release.
International Activities
of U.S. Banking Organizations
The Board has four principal statutory responsibilities in supervising
the international operations of U.S.
banking organizations: it must provide authorization and regulation of
foreign branches of member banks;
of overseas investments by member
banks, Edge corporations, and bank
holding companies; and of investments by bank holding companies in

Banking Supervision and Regulation 201
export trading companies; and it
must charter and regulate Edge corporations and their investments.

branches and agencies of foreign
banks. By the end of 1986, 540 IBFs
had been established.

Foreign Branches
of Member Banks

Edge and Agreement
Corporations
Under sections 25 and 25 (a) of the
Federal Reserve Act, Edge and
agreement corporations may engage
in international banking and foreign
financial transactions. These corporations, which are usually subsidiaries of member banks, provide their
owner organizations with the following powers: (1) they may conduct a
deposit and loan business in states
other than that of the parent, provided that the business is strictly
related to international transactions;
and (2) their powers to make foreign
investments are broader than those
of member banks because they can
invest in foreign financial organizations, such as finance companies and
leasing companies, as well as in
foreign banks. By the end of 1986
there were 137 Edge corporations,
which had 104 branches. The Board
requires each Edge corporation that
is engaged in banking to maintain a
ratio of equity to risk-assets of at
least 7 percent.

Under provisions of the Federal Reserve Act and of Regulation K,
member banks in most cases must
seek Board approval to establish
branches in foreign countries. In
reviewing proposed foreign branches,
the Board considers the requirements of the law, the condition of
the bank, and the bank's experience
in international business. In 1986 the
Board approved the opening of three
foreign branches.
By the end of 1986, 158 member
banks were operating 952 branches
in foreign countries and overseas
areas of the United States; 131 national banks were operating 822 of
these branches, and 27 state member
banks were operating the remaining
130 branches.
International
Banking Facilities
The Board amended its Regulations
D and Q to permit the establishment
of international banking facilities
(IBFs) in the United States as of
December 3, 1981. An IBF is essentially a set of asset and liability
accounts that is segregated from the
other accounts of the office establishing the IBF. Deposits from, and
credit extended to, foreign residents
or other IBFs generally can be booked
at these facilities free from domestic
reserve requirements and interest
rate limitations. Subject to conditions specified by the Board, IBFs
may be established by U.S. depository institutions, by Edge and agreement corporations, and by U.S.



Foreign Investments
Under authority of the Federal Reserve Act and the Bank Holding
Company Act, U. S. banking organizations may engage in activities
overseas with the authorization of
the Board. To a significant extent,
the Board's Regulation K permits
such investments without prior Board
review. In 1986 the Board reviewed
and permitted 64 foreign investments
by member banks, Edge and agreement corporations, and bank holding

202 Banking Supervision and Regulation
companies. In most cases, the applicant requested permission to increase
an existing investment.

Export Trading Companies
In 1982 the Bank Export Services
Act amended section 4 of the Bank
Holding Company Act to permit
bank holding companies, their subsidiary Edge or agreement corporations, and bankers' banks to invest
in export trading companies, subject
to certain limitations and after Board
review. The purpose was to allow
effective participation by bank holding companies in the financing and
development of export trading companies. On June 2, 1983, the Board
adopted regulations to achieve the
objectives set forth in the law: to
facilitate the export of goods and
services produced in the United States
and to minimize potential adverse
effects on the subsidiary banks of the
bank holding companies involved. In
1986 the Board acted affirmatively
on the 2 notifications received for
the establishment of export trading
companies. At year-end, 33 bank
holding companies had investments
in export trading companies.

Enforcement of Other Laws
and Regulations
The preceding sections have discussed the Board's activities in carrying out its statutory responsibilities
for the supervision of bank safety
and soundness and the regulation of
the banking structure. This section
describes the enforcement of other
laws, rules, and regulations.
Bank Secrecy Act
Through the examination process,
the Federal Reserve monitors whether



the institutions it supervises are complying with the recordkeeping and
reporting requirements of the Currency and Foreign Transactions Reporting Act (the Bank Secrecy Act).
Among the stipulations in the act to
combat unlawful currency transactions is the requirement that financial
institutions and selected other businesses report to the Internal Revenue Service certain cash transactions
and shipments of more than $10,000.
As mandated by the passage of
the Anti-Drug Abuse Act of 1986,
Board staff members worked with
the other federal financial institutions to develop regulations to ensure
compliance with the Bank Secrecy
Act. The regulations took effect
January 27, 1987.
In 1986 the Board also strengthened its examination procedures to
emphasize the provisions of the Bank
Secrecy Act that federal law enforcement authorities consider to be critical. Board staff members continue
to serve as active participants on the
Bank Secrecy Act interagency working group headed by the Department
of the Treasury.
Securities Regulation
Under the Securities Exchange Act
of 1934, the Board is responsible for
regulating credit in certain transactions involving the purchase or carrying of securities. In fulfilling its
responsibility under the act, the Board
limits the amount of credit that may
be provided by securities brokers
and dealers (Regulation T), by banks
(Regulation U), and by other lenders
(Regulation G). Regulation X extends these credit limitations, or
margin requirements, to certain borrowers and to certain credit extensions, such as credit obtained from
foreign lenders by U.S. citizens.

Banking Supervision and Regulation 203
Brokers and dealers are examined
for compliance with Regulation T by
the Securities and Exchange Commission, the National Association of
Securities Dealers, and the national
securities exchanges. The three federal bank supervisory agencies examine banks under their respective
jursidictions for compliance with
Regulation U. Other lenders are
examined for compliance with Regulation G by the Board, the National
Credit Union Administration, the
Farm Credit Administration, or the
Federal Home Loan Bank Board
according to the jurisdiction involved. At the end of 1986 there
were 533 "G-lenders," of which 297
were subject to the Board's supervision. Of these 297, 180 are subject
to regular inspection by the Federal
Reserve System. During the year,
Federal Reserve examiners inspected
52 G-lenders for compliance with the
Federal Reserve's margin requirements (these lenders are inspected
on either a biennial or triennial basis,
according to the type of credit extended).
Regulations U and G in general
impose credit limits on loans whose
purpose is the purchasing or carrying
of publicly held equity securities and
that are secured by such securities.
Regulation T limits the amount of
credit that brokers and dealers may
extend when securities serve as collateral for credit that is used to
purchase or carry securities. This
collateral must consist of stocks and
bonds traded on national securities
exchanges, of certain over-the-counter
(OTC) stocks that the Board designates as having characteristics similar
to those of stocks listed on national
exchanges, or of bonds meeting certain requirements.
The Board's Division of Banking
Supervision and Regulation monitors



the market activity of all over-thecounter stocks to determine what
stocks are subject to the Board's
margin regulations. In 1986 the Board
published the resulting "List of Marginable OTC Stocks" in February,
May, August, and November. The
November list consisted of 2,887
stocks.
In January 1986 the Board adopted
an interpretive rule regarding the
margin requirements under Regulation G. The interpretation declares
that debt securities issued by a shell
corporation set up to acquire and
hold the stock of a target company
in a takeover attempt are presumed
to be secured indirectly by the target
stock and thus subject to the margin
restrictions of Regulation G. The
interpretation indicates that the presumption would not apply to certain
transactions if the lenders could rely
on assets other than the target stock
as collateral or look to a guaranty of
the parent of the shell corporation
for repayment.
Under section 8 of the Securities
Exchange Act, a nonmember domestic or foreign bank may lend to
brokers or dealers posting registered
securities as collateral only if the
bank has filed an agreement with the
Board that it will comply with all the
statutes, rules, and regulations applicable to member banks regarding
credit on securities. During the year,
the Board processed 17 such agreements.
In 1986 the Securities Regulation
Section of the Board's Division of
Banking Supervision and Regulation
issued 43 interpretations of the margin regulations. Those that presented
sufficiently important or novel issues
were published in the "Securities
Credit Transactions Handbook,"
which is part of the Federal Reserve
Regulatory Service. These interpre-

204 Banking Supervision and Regulation
Loans by State Member Banks to their Executive Officers, 1985-86
Period

October 1-December 31, 1985
January 1-March 31, 1986
April 1-June 30, 1986
July 1-September 30, 1986

tations serve as a guide to the margin
regulations.
Financial Disclosure
by State Member Banks
Under the Board's Regulation F,
state member banks must disclose
certain information of interest to
investors, including financial reports
and proxy statements, if they issue
securities registered under the Securities Exchange Act of 1934. Board
staff members review the information for compliance with the regulation. At the end of 1986, 31 state
member banks, most of which are of
small or medium size, were registered with the Board under Regulation F.
The disclosure rules of Regulation
F are required by statute to be
substantially similar to those issued
by the Securities and Exchange Commission. In 1986 a comprehensive
revision of Regulation F was under
consideration by the Board's staff.
That revision would require banks
subject to Regulation F to use the
forms prescribed by the Securities
and Exchange Commission. Small
banks would have the option of filing




Number

Amount (dollars)

Range of
interest rates
charged
(percent)

1,111
1,199
1,356
1,410

23,869,607
21,566,130
23,509,393
26,715,716

6.25-21
1.0-21
6.0-21
6.5-30.53

simplified quarterly reports. The proposal would ease compliance with
the regulation.
Loans to Executive Officers
Under section 22(g) of the Federal
Reserve Act, each state member
bank must include with each quarterly report of condition a report of
all extensions of credit made by the
bank to its executive officers since
the date of the bank's previous report
of condition. The accompanying table
summarizes these data for the last
quarter of 1985 and the first three
quarters of 1986.

Federal Reserve Membership
At the end of 1986, 5,995 banks
were members of the Federal Reserve System, a decrease of 55 from
the previous year.
Member banks operated 28,456
branches on December 31, 1986, a
net increase of 861 for the year.
Member banks accounted for 40
percent of all commercial banks in
the United States and for 64 percent
of all commercial banking offices.

205

Regulatory Simplification
The Board of Governors established
the Regulatory Improvement Project
in 1978 and reaffirmed its commitment to regulatory improvement by
creating a Regulatory Policy and
Planning Committee in 1986. The
program was established to minimize
the burdens imposed by regulation;
to ensure that consideration is given
to minimizing the economic impact
of regulation on small business; to
see that interested parties have the
opportunity to participate in the
design of proposed regulations and
to comment on them; and to ensure
that regulations are written in simple
and clear language. In addition to
monitoring the creation of new regulations, the program periodically
reviews all existing regulations for
adherence to these objectives.
Regulation Q
The statutory authority to set interest
rate ceilings on time and savings
deposits and to prescribe rules regarding early withdrawals from time
deposits expired on March 31, 1986.
In anticipation of that date, the
Board of Governors in early 1986
revised and simplified its Regulation
Q, which governed the payment of
interest on deposits. Following that
action, the major substantive provision of Regulation Q that remains,
as authorized by section 19(i) of the
Federal Reserve Act, prohibits a
member bank from paying interest
on a demand deposit. As part of the
revision, the definition of "savings
deposit" was deleted from Regulation Q, and an amended definition



of the term was incorporated in
Regulation D. Together, these
changes removed the $150,000 limitation on business savings accounts.
The provisions of Regulation Q
dealing with the advertising of interest on deposits were not amended in
final form in March; however, the
Board has issued for comment in a
separate rulemaking a consolidation
of the various provisions regarding
advertising that will be included in
the final version of Regulation Q.
To promote equity of treatment
among financial institutions and to
promote consumer understanding, the
Board is attempting to develop advertising provisions that will be
adopted by all the financial regulatory agencies.
Published interpretations of Regulation Q that are obsolete will be
rescinded; viable interpretations of it
will be revised in line with the
simplification of that regulation.

Policy Regarding Risk on
Large-Dollar Wire Transfer
Systems
In December 1986 the Board issued
for comment several refinements to
its policy regarding large-dollar
transfers. One of the proposals would
establish a de minimus cap for institutions that do not incur large or
frequent daylight overdrafts. This
cap would be the lesser of 10 percent
of capital or $500,000 and would be
available to institutions that do not
undergo the self-assessment required
for establishing a positive limit or

206 Regulatory Simplification
cap on the amount of daylight overdrafts that can be accumulated on
Fedwire.
Under the Board's current policy,
a bank must submit a formal cap to
the Federal Reserve for incurring
daylight overdrafts or else the Federal Reserve imposes a limit of zero.
This part of the policy has proved
difficult to administer. In any twoweek period, almost half of the 3,400
institutions incurring an overdraft
have either not filed a cap or have
filed a cap of zero. These 1,600
institutions are mainly small and
account for about 0.4 percent of all
overdrafts. The managements of these
institutions find either the self-evaluation or the absolute avoidance of
overdrafts excessively burdensome,
and many Reserve Banks have found
the resources required to monitor
and counsel these institutions to be
unusually high relative to the risks
involved. The proposed de minimus
cap is intended to alleviate these
burdens and costs.
In order to further reduce the
burden on participating institutions,
the Board amended its policy statement in December to provide that
depository institutions that perform
a self-assessment need do so only
once each year rather than every six
months as provided in the original
policy statement.
Regulation Y
In May 1986 the Board requested
comment on whether it should ease
the conditions it imposes through
Regulation Y on the acquisition of
thrift institutions by bank holding
companies. Currently, under regulations implementing the Bank Holding Company Act and the Garn-St
Germain Depository Institutions Act



of 1982, bank holding companies are
prohibited from allowing their thrift
subsidiaries and other affiliates to
conduct joint marketing and sales
operations; from cross-advertising
through thrift subsidiaries the services and products offered by other
affiliates; and from engaging in certain transactions, such as the transfer, purchase, sale, or loan of any
assets or liabilities between the thrift
institution and other affiliates of the
bank holding company.
These limitations were developed
in the context of specific applications
pending before the Board and after
informal public hearings and public
comment.
The conditions were designed to
assure that the thrift institution continued to be operated as a separate
and independent institution engaged
primarily in mortgage lending activities and did not operate in fact as a
bank in violation of the interstate
banking prohibitions of the Bank
Holding Company Act. The conditions were also designed to prevent
the acquiring bank holding company
from obtaining an unfair competitive
advantage over other banks and thrift
institutions.
In light of the deregulation of
interest rate differentials, the increasing similarity in the powers of
banks and thrift institutions, and the
spread of interstate deposit-taking in
both the thrift and banking industries, the Board believes that the
recent requests for relief from the
restrictions in Regulation Y present
an appropriate framework for reevaluating them.
In October 1986 the Federal Reserve Board expanded the list of
permissable nonbanking activities for
bank holding companies; it also elim7
inated a 1972 limit on the premiums

Regulatory Simplification 207
that could be charged by bank holding companies engaging in credit life
insurance underwriting. The requirement had stipulated that premiums
must be set on a sliding scale 2 to 5
percent lower than the maximum
allowed by the state where the company is located. In its decision, the
Board determined that this requirement put bank holding companies at
an unfair disadvantage with respect
to competing insurance providers.
During the past 14 years the underwriting of credit life insurance has
remained the only permissible nonbanking activity for which the Board
has imposed a requirement or condition that effectively determines the
fee structure for the activity. This is
a matter of concern to the Board
because, under authorization of a
federal statute, credit insurance rate
ceilings are set by the individual
states. Moreover, the rate reduction
requirement can give the appearance
that only lower rates than those
permitted by the states are in the
public interest or create a public




benefit. This may be inappropriate
at a time when the states have
become increasingly active in reviewing and setting credit life insurance
rate ceilings.

Regulation K
In July the Board amended the
portion of Regulation K (International Banking Activities) requiring
that a banking organization apply to
the Board when it proposes to invest
more than 10 percent of its capital
and surplus in a foreign organization.
After several years' experience with
these procedures, the Board has
found that the investments do not
always raise issues that require Board
consideration. The July amendment
permits the bank to make an additional investment after giving 45
days' notice to the Board, a change
that will shorten the time that banking organizations must wait before
making additional foreign investments.

209

Federal Reserve Banks
Developments in the Pricing
of Federal Reserve Services
and in the Payments Mechanism
In 1986 the Federal Reserve Banks
fully recovered their costs of providing priced services, as required by
the Monetary Control Act of 1980.
The System as a whole recovered
104.3 percent of its operating expenses and imputed costs, compared
with 105.6 percent in 1985. Table 10,
in the Statistical Tables section of
this REPORT, presents revenue and
expenses by major category of service for 1986 and 1985.
Revenue at the Reserve Banks
from all priced services totaled $742.0
million and costs were $711.7 million. These figures include the income and expenses related to clearing balances, the value of priced
float, and the PSAF (the private
sector adjustment factor—the taxes
and costs of capital that the System
would have incurred if it were a
private firm). The Federal Reserve
System had a net revenue of $30.3
million from priced services.
In March 1986 the Board implemented a policy to reduce risk on
networks used to transfer large-dollar payments. Proposals to further
reduce risk on funds transfer systems, on the book-entry securities
system, and on automated clearinghouse systems, were published in
December. See the chapter in this
REPORT on banking supervision and
regulation for a discussion of the
Board's policy and proposals on reducing and controlling risks in the
payments system.



Check Collection
Check operations of the Federal
Reserve Banks cost the System $547.9
million in 1986, including the cost of
float and the PSAF. Check operations generated $572.5 million in
revenue, for a surplus of $24.6 million. The number of checks processed by Federal Reserve Banks rose
5 percent in 1986, to 16.2 billion.
In May the Board adopted amendments to Regulation J, which governs
check collection and wire transfers.
One change permits the Reserve
Banks to collect checks drawn on
banks located in foreign countries.
This service will be limited, and the
checks will be collected through correspondent banks. The other amendments relate primarily to a Reserve
Bank's liabilities regarding check collection and funds transfers.
In July the Board requested public
comment on proposals to make permanent the two-tiered pricing structure being tested at the head offices
of the Federal Reserve Banks of
Minneapolis and Kansas City and to
establish criteria for determining the
conditions under which a tiered fee
structure would be extended to other
Federal Reserve offices. A tiered
pricing structure can reflect the costs
of check processing more accurately
because it permits setting fees for
sending institutions according to the
costs associated with the presentment
point. The Board approved the proposals in November.
The Federal Reserve System in
1986 continued its efforts to improve
the handling of return items (checks

210 Federal Reserve Banks
not honored by the institution on tablish a float factor that would be
which they were drawn). In one applied to the value of ACH debit
initiative, the Federal Reserve and transactions processed at night. No
the financial industry conducted a final action was taken in 1986 on this
test in which they learned that the proposal.
forward collection process had the
potential to speed the return of many
items to the institution of first de- Wire Transfer of Funds
posit. The Federal Reserve and the and Net Settlement Service
financial industry will continue to
The number of funds transfers over
pursue this initiative.
Fedwire grew 10.6 percent in 1986,
In November the Board issued for for a total of 49.9 million transacpublic comment a proposal to pro- tions. This service and the net settlevide a redeposit service for low- ment service incurred costs of $79.6
dollar checks that are returned be- million and earned $82.7 million, for
cause of insufficient or uncollected a net surplus of $3.1 million.
funds. Under this service, which is
In June the Board published for
being tested in the St. Louis, Atpublic comment a proposal to require
lanta, and Cleveland Districts, Reserve Banks would intercept dis- that information in third-party Fedhonored checks and redeposit them wire messages be in a standard foron behalf of the collecting institution. mat to facilitate the automated hanThis practice would speed processing dling of transfers. In November, the
times and reduce costs. No final Board approved a 25-cent surcharge
action was taken in 1986 on this to be imposed beginning April 1,
1988, for Fedwire funds transfers not
proposal.
conforming to the format; it set April
3, 1989, as the date on which use of
Automated Clearinghouse
the standard format will be mandaIn 1986, for the first time, the prices tory.
of automated clearinghouse (ACH)
In March the Board approved a
services were established to recover modification to the interim terms for
100 percent of costs. Previously, an treating ACH net settlement entries
incentive pricing program had been for credit transactions. Pending
in effect. The cost of providing com- adoption of policies to address the
mercial ACH services in 1986 was risk involved in these transactions,
$35.3 million; revenue was $36.5 net settlement entries for ACH credit
million. The System processed 363 transactions will be treated as final
million commercial transactions, 28 at 6:00 p.m. Eastern time on the
percent more than in 1985.
settlement date. Net settlement enIn September the Board issued for tries for ACH debit transactions are
public comment a proposal for re- treated as provisional until the busicovering the cost of float generated ness day following the settlement
by ACH transactions processed dur- date.
ing the night cycle and for a correNet settlement services based on
sponding reduction of the per-item next-day finality were approved for
surcharge on such transactions. Spe- one network of automated teller
cifically, the Board proposed to es- machines in 1986.



Federal Reserve Banks 211

Coin and Currency Services
In its coin and currency operations
the Federal Reserve continued to
focus on controls, on efficiency in
processing currency, and on the
maintenance of high quality in circulating currency.
Four Federal Reserve Districts
provided transportation of cash in
1986, and five Districts provided
wrapped coins for depository institutions. Two other priced services—
special packaging and more frequent
access—were approved by the Board
in December. These services are now
covered by the uniform standards for
cash services. In addition, the System
tested and evaluated prototype second-generation equipment intended
to improve the processing of currency.
The Federal Reserve continued to
work with the Treasury to develop
measures to deter the counterfeiting
of U.S. currency.
Definitive Securities
and Noncash Collection Services
The System received $24 million in
revenue for definitive safekeeping
and noncash collection services in
1986; the total cost of these services,
including the PSAF, was $24.4 million. The number of definitive securities issues and deposits increased 4
percent in 1986 to 165,000. The
number of items for noncash collection decreased 7 percent to 4.3 million.
In November the Board approved
the consolidation at the Federal Reserve Bank of Minneapolis of the
collections involving municipal bonds
and coupons that were being carried
out by the Federal Reserve Bank of
San Francisco. It also published for



public comment a list of factors to
be considered when the Reserve
Banks propose to consolidate in one
District the priced services offered
by one or more other Districts. No
action was taken on this proposal in
1986.

Book-Entry Securities
The Federal Reserve provides bookentry securities services for the
Treasury and for certain federally
sponsored agencies, such as the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation. Since October 1985
the Treasury has established the fees,
and the Reserve Banks have charged
institutions for these transfers. The
Treasury component of the bookentry service incurred costs, excluding the PSAF, of $11.9 million in
1986. For the year, the Federal
Reserve processed 6.0 million transfers of Treasury securities, 98 percent
of which were on line. Book-entry
services for federal agency securities
incurred costs, including the PSAF,
of $7.9 million and earned revenue
of $9.4 million in 1986. The Federal
Reserve processed 1.8 million such
transfers during the year, 98 percent
of which were on line.
In July 1986 the Federal Reserve
implemented the Treasury Direct
book-entry securities system. This
system, which was developed on
behalf of the Treasury, is used primarily by individual investors. Treasury bonds and notes were converted
to Treasury Direct in 1986; Treasury
bills will be phased into the system
in 1987.
Book-entry safekeeping and transfer of mortgage-backed securities issued by federal agencies were ex-

212 Federal Reserve Banks
panded from the Federal Reserve
Bank of New York to all Districts
during 1986.
Float
Federal Reserve float increased to a
daily average of $446 million in 1986,
compared with $440 million in 1985.
The costs of all Federal Reserve float
associated with priced services are
recovered each year.
In May the Board approved a
standard holiday schedule to be followed by the Federal Reserve Banks,
effective January 1, 1987. At that
time, it also adopted proposals to
modify the procedures that the Federal Reserve Banks use to recover
the cost of float generated by ACH
debit and check transactions associated with nonstandard holiday and
midweek closings. The allocation of
check float, which was adopted as an
amendment to Regulation J, is effective January 1, 1987. The modifications to the procedures for recovering the cost of ACH float take effect
on April 1, 1987.
In conjunction with proposals issued in December to reduce risk in
the ACH system, the Board proposed procedures to recover the cost
of float generated by ACH credit
transactions. No final action was
taken in 1986 on this proposal.

assess conformance with the policies
issued by the Federal Open Market
Committee, the Division annually
audits the accounts and holdings of
the Federal Reserve System Open
Market Account at the Federal Reserve Bank of New York and the
foreign currency operations conducted by that Bank. The Division
furnishes copies of these reports to
the Committee. The examination
procedures used by the Division are
reviewed each year by a private firm
of certified public accountants.

Income and Expenses
The accompanying table summarizes
the income, expenses, and distribution of net earnings of the Federal
Reserve Banks for 1986 and 1985.
Income was $17,465 million in
1986, $667 million less than in 1985,
reflecting the decrease in interest
rates on securities. Total expenses
were $1,254 million ($1,049 million
in operating expenses, $108 million
in earnings credits granted to depository institutions, and $97 million in
assessment for expenditures by the
Board of Governors). The cost of
currency was $181 million. Income
from financial services was $628 million.
The profit-and-loss account showed
a net addition of $1,976 million, due
primarily to a $1,971 million increase
in the value of assets denominated
Examinations
in foreign currencies and revalued at
The Board's Division of Federal market exchange rates. Statutory
Reserve Bank Operations examines dividends to member banks totaled
the 12 Reserve Banks and their 25 $110 million, $7 million more than
branches each year, as required by in 1985. The rise reflected an insection 21 of the Federal Reserve crease in the capital and surplus of
Act. The results of the audits are member banks and a consequent
given to the management and direc- increase in the paid-in capital stock
tors of the respective Banks and to of the Reserve Banks.
the Board of Governors. Also, to
Payments to the U.S. Treasury in




Federal Reserve Banks 213
Income. Expenses, and Distribution of Net Earnings of Federal Re* rve Banks.
1986 and 1985
Thousands of dollars
Item

1986

1985

Current income
Current expenses
Operating expenses
Earnings credits granted
Current net income
Net addition to (deduction from) current net income
Assessments by the Board of Governors
For expenditures of Board
For cost of currency
Net income before payments to U.S. Treasury
Dividends paid
Payments to U.S. Treasury (interest on Federal Reserve notes)
Transferred to surplus

17,464,528
1,156,868
1,049,159
107,709
16,307,661
1,975,893
278,118
97,338
180,780
18,005,437
109,588
17,803,895
91,954

18,131,983
1,127,744
1,022,527
105,217
17,004,238
1,301,624
251,116
77,378
173,739
18,054,746
103,029
17,796,464
155,253

Details may not add to totals because of rounding.

the form of interest on Federal Reserve notes totaled $17,804 million,
compared with $17,796 million in
1985. This sum consists of all net
income after dividends and the
amount necessary to bring the surplus of the Banks to the level of
their paid-in capital.
In the Statistical Tables section of
this REPORT, table 7 provides a
summary statement of the income
and expenses of the Federal Reserve
System for 1982-86; table 8 details
income and expenses of each Federal
Reserve Bank for 1986, and table 9
shows a condensed statement for
each Bank for 1914-86. A detailed
account of the assessments and expenditures of the Board of Governors appears in the next section,
Financial Statements.
In early 1986 the Board produced
a new document, Annual Report:
Budget Review, which consolidated
public information available from
other sources in order to provide a
single, comprehensive view of the
System's 1986 calendar year budgets
and its budgetary processes. That
publication has been produced again
to cover the budgets of the Board
and the Banks for 1987.



Federal Reserve Bank Premises
During 1986 the Board of Governors
authorized the construction of an
addition to the Federal Reserve Bank
of Atlanta and a new building for
the Charlotte Branch in North Carolina. With Board approval the
Helena Branch acquired two properties adjacent to the existing building for future expansion. Table 6, in
the Statistical Tables section of this
REPORT, shows the cost and book
values of premises owned or occupied by the Federal Reserve Banks
and Branches and of real estate
acquired for future banking-house
purposes.

Holdings of Securities and Loans
The accompanying table presents
holdings, earnings, and average interest rates on securities and loans
of the Federal Reserve Banks for the
years 1984-86.
Average daily holdings of securities and loans during 1986 were
$193,354 million, an increase of
$16,666 million over 1985. Holdings
of U.S. government securities in-

214 Federal Reserve Banks
Securities and Loans of Federal Reserve Banks, 1984-86
Millions of dollars, except as noted
Item and year
Average daily holdings2
1984
1985
1986
Earnings
1984
1985
1986
Average interest rate (percent)
1984
1985
1986
1. Includes acceptances.
2. U.S. Treasury securities and obligations of federal agencies.

creased $17,155 million, and holdings
of loans decreased $489 million.
From 1985 to 1986 the average
rate of interest on all types of holdings decreased—from 9.60 percent
to 8.38 percent on U.S. government
securities and from 8.38 percent to
6.84 percent on loans.




Total 1

U.S.
government
securities2

Loans

165 002
176,688
193,354

161 247
175,359
192,514

3 726
1,329
840

17,080
16,954
16 199

16,688
16,843
16 142

389
111
57

10.35
9.60
8.38

10.35
9.60
8.38

10.44
8.38
6.84

3. Based on holdings at opening of business.

Volume of Operations
Table 11, in the Statistical Tables
section of this REPORT, shows the
volume of operations in the principal
departments of the Federal Reserve
Banks for the years 1983-86.

215

Board of Governors
Financial Statements
The financial statements of the Board
for the years 1986 and 1985 were

examined by Price Waterhouse, independent public accountants.

R E P O R T OF INDEPENDENT ACCOUNTANTS

To the Board of Governors of the
Federal Reserve System
In our opinion, the accompanying balance sheets and the related statements of revenues and expenses and fund balance and of changes in financial position present
fairly the financial position of the Board of Governors of the Federal Reserve System
at December 31, 1986 and 1985, and the results of its operations and the changes in
its financial position for the years then ended, in conformity with generally accepted
accounting principles consistently applied. Our examinations of these statements were
made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we
considered necessary in the circumstances.

'

Washington, D.C.
February 18, 1987




216 Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS
As of December 31
1986

1985

ASSETS
CURRENT ASSETS

Cash
Accounts receivable
Stockroom and cafeteria inventories, at cost
Prepaid expenses and other assets
Total current assets
PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3)
OTHER ASSETS

$ 8,646,210
2,045,873
285,843
627,054

$ 8,144,767
1,542,680
290,475
151,851

11,604,980

10,129,773

64,827,375

56,176,157

1,708,506

Total assets

—

$78,140,861

$66,305,930

$ 4,655,794
2,861,053
3,896,398
478,716
11,891,961

$ 6,508,435
2,611,001
3,807,048
440,831
13,367,315

66,248,900
$78,140,861

52,938,615
$66,305,930

LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES

Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Other liabilities
Total current liabilities
COMMITMENTS AND CONTINGENCIES (Note 6)

FUND BALANCE
Total liabilities and fund balance

The accompanying notes are an integral part of these statements.




Financial Statements 217
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31
1986

1985

$ 97,337,500
3,169,567
100,507,067

$ 77,377,700
2,531,681
79,909,381

53,259,376
5,401,797
6,156,450
4,085,161
3,490,423
2,970,714
2,598,055
2,537,670
2,083,894
2,022,535
2,150,807
86,756,882

53,179,014
6,052,103
4,954,614
2,722,449
3,341,459
2,874,688
2,943,864
2,230,242
1,928,506
2,000,230
2,044,414
84,271,583

13,750,185

(4,362,202)

BOARD OPERATING REVENUES

Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 4)
Total operating revenues
BOARD OPERATING EXPENSES

Salaries
Retirement and insurance contributions
Depreciation and losses (gains) on disposals
Contractual services and professional fees
Postage and supplies
Utilities
Equipment and facility rentals
Travel
Repairs and maintenance
Printing and binding
Other (Note 4)
Total operating expenses
BOARD OPERATING REVENUES
OVER (UNDER) EXPENSES
ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES

Assessments levied on Federal Reserve
Banks for currency costs
Expenses for currency printing, issuance, retirement,
shipping and research costs (Note 5)
CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES

180,779,673

173,738,745

181,219,573

173,298,845

(439,900)

439,900

TOTAL REVENUES OVER (UNDER) EXPENSES

13,310,285

(3,922,302)

FUND BALANCE, Beginning of year

52,938,615

56,860,917

$ 66,248,900

$ 52,938,615

FUND BALANCE, End of year

The accompanying notes are an integral part of these statements.




218 Financial Statements
B O A R D OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CHANGES IN FINANCIAL POSITION
For the years ended December 31
1986
1985
SOURCES OF CASH

Board operations
Net revenues over (under) expenses
Add (deduct) items not affecting cash
Depreciation and losses (gains) on disposals
Accrued annual leave
(Increase) decrease in accounts receivable, inventories,
and prepaid expenses and other assets
(Decrease) increase in accounts payable, accrued payroll
and related taxes, and other liabilities
Funds provided by operations
Proceeds from disposals of furniture and equipment
Total sources

$13,310,285
6,156,450
89,350

$(3,922,302)
4,954,614
142,740

(973,764)

77,752

(1,564,704)
17,017,617
2,277,264
19,294,881

1,058,996
2,311,800
3,628
2,315,428

303,557
16,781,375
1,708,506

399,094
4,069,299
—

18,793,438

4,468,393

USES OF CASH

Capital expenditures for
Buildings
Furniture and equipment
Increase in other non-current assets
Total uses
INCREASE (DECREASE) IN CASH

CASH BALANCE, Beginning of year
CASH BALANCE, End of year

:

501,443

10,297,732

$ 8,646,210

$ 8,144,767

The accompanying notes are an integral part of these statements.




(2,152,965)

8,144,767

Financial Statements 219
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1986 AND 1985

plan benefits for the Federal Reserve Board Plan,
including those arising from COLA supplements, were
as follows:
As of January 1

(1) SIGNIFICANT ACCOUNTING POLICIES

Board Operating Revenues and Expenses—Assessments made on the Federal Reserve Banks for Board
operating expenses are calculated based on expected
cash needs. These assessments, other operating revenues, and operating expenses are recorded on the accrual basis of accounting.
Issuance and Redemption of Federal Reserve Notes—
The Board incurs expenses and assesses the Federal
Reserve Banks for the cost of printing, issuing, shipping and retiring Federal Reserve Notes. These assessments and expenses are separately reported in the
statements of revenues and expenses because they are
not Board operating transactions.
Property, Buildings and Equipment—The Board's
property, buildings and equipment are stated at cost
less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets, which range from 3 to 10
years for furniture and equipment and from 10 to 50
years for building equipment and structures.
Other Assets—The Board has made prepayments
for computer equipment to be received over the next
two years. In addition, maintenance on this and other
computer equipment received during 1986 has been
prepaid through January 1989. Other Assets includes
the equipment prepayments and the portion of the
prepaid maintenance services which will be received
during 1988 and 1989. As the equipment is received
and maintenance service provided the furniture and
equipment account and the appropriate expense account will be charged accordingly.
Contingency Processing Center—The Board operates on behalf of the Federal Reserve System a contingency processing center to handle data processing
requirements during emergency situations. The Board
recovers from the Federal Reserve Banks a proportionate amount of the operating expenses of the center in the form of fees.

1986
Actuarial present value
of accumulated
plan benefits
Vested
Nonvested

1985

$65,003,000
4,625,000
$69,628,000

$57,167,000
3,691,000
$60,858,000

The assumed rate of return used in determining the
present value of accumulated plan benefits was 8.5%
in 1986 and 9.5% in 1985.
As of January 1,1986 and 1985, net assets available
for plan benefits were approximately $165 million and
$135 million, respectively.
As of January 1, 1987, the Board will implement
Statement of Financial Accounting Standards No. 87,
Employers Pension Accounting. This implementation
will require changes in the accounting principles for
the Board Plan and the Bank Plan. Because of the
overfunded status of the plans, it is presently estimated that implementation of FAS 87 will result in a
reduction of operating expense (pension income) and
the recording of prepaid pension cost.
Employees of the Board may also participate in the
Federal Reserve System's Thrift Plan. Under the Thrift
Plan, members may contribute up to a fixed percentage of their salary. Board contributions are based
upon a fixed percentage of each member's basic contribution and were $1,337,000 in 1986 and $877,000
in 1985.
The Board also provides certain health care benefits for retired employees. The cost of providing the
benefits is recognized by expensing the insurance premiums which were $98,300 in 1986 and $54,200 in
1985.
(3) PROPERTY, BUILDINGS AND EQUIPMENT

(2) RETIREMENT BENEFITS

Substantially all employees of the Board participate
in either the Retirement Plan for Employees of the
Federal Reserve Board (Board Plan), the Retirement
Plan for Employees of the Federal Reserve System
(Bank Plan) or the Civil Service Plan. The Board
Plan, the Bank Plan and the Civil Service Plan are a
contributory defined benefit plan, a non-contributory
defined benefit plan, and a defined contribution plan,
respectively.
Board contributions to the Board Plan and the Bank
Plan are actuarially determined and funded in the
current period. Board contributions to the Civil Service Plan directly match employee contributions. The
Board contributions to the retirement plans totaled
$719,000 in 1986 and $1,960,000 in 1985.
As of January 1, 1986 and 1985 (the dates of the
most recent
 actuarial valuations), the accumulated



The following is a summary of the components of
the Board's fixed assets, at cost, net of accumulated
depreciation.
As of December 31
1986
Land and
improvements
Buildings
Furniture and
equipment
Less accumulated
depreciation
Total property,
buildings and
equipment . . .

1985

$ 1,301,314
62,062,311

$ 1,301,314
61,851,962

31,955,505
95,319,130

24,799,885
87,953,161

30,491,755

31,777,004

$64,827,375

220 Financial Statements
(4) OTHER REVENUES AND OTHER EXPENSES

The following are summaries of the components of
Other Revenues and Other Expenses.
As of December 31
1985
1986
Other Revenues
Contingency
Processing
Center fees
Sale of
publications
Miscellaneous
Total other
revenues
Other Expenses
Subsidies and
contributions ..
Tuition, registrations
and membership
fees
Cafeteria operations,
net

Miscellaneous
Total other
expenses

The Board's programs were research and development efforts and, accordingly, all costs were expensed as incurred. Board costs associated with this
program were $728,964 and $6,734,590 for 1986 and
1985, respectively, and are included in currency expenses. Certain equipment was sold for $750,000 in
1986 and $451,400 in 1985. The sale proceeds were
credited to currency costs.
(6) CONTINGENCIES

$1,543,761

$ 981,573

1,124,482
501,324

1,104,154
445,954

$3,169,567

$2^531,681

$ 703,213

$ 794,611

587,670

495,694

520,450
339,474

531,411
222,698

$2^150,807

The major research contract associated with the
counterfeit deterrence program discussed in Note 5
expired on January 31,1985. The contractor has filed
a lawsuit for contract termination costs of approximately $4 million. Board counsel believes that the
contract properly expired, the claim for termination
costs is without merit, and additional costs, if any, to
the Board will not be material.
The Board has been named as a defendant in various litigation involving challenges to, or appeals from,
actions or proposed actions of the Board pursuant to
statutory requirement or authorization. Such lawsuits
generally seek injunctive or declaratory relief against
the Board rather than monetary awards. It is the opinion of Board counsel that such lawsuits involving
monetary awards do not represent a material liability
to the Board.

$2,044,414
(7) FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL

(5) ADVANCED COUNTERFEIT DETERRENCE
RESEARCH

During the period 1983 through 1986, the Board
sponsored programs to develop technology to deter
counterfeiting of U.S. currency and to detect counterfeit currency in circulation. In connection with this
program, the Board: 1) sponsored basic research into
applying a deterrent device to currency; 2) sponsored
the prototyping of production equipment and processes; 3) purchased certain equipment required for a
contractor to make test production runs; 4) purchased
application machines for use in the production of currency; and 5) sponsored research into methods for
detecting counterfeit currency during sorting processes by the Federal Reserve Banks. The Board's
participation in this program was substantially complete by the end of 1985.




The Board is one of the five member agencies of
the Federal Financial Institutions Examination Council (the "Council"). During 1986 and 1985, the Board
paid $137,000 and $131,000, respectively, in assessments for operating expenses of the Council. These
amounts are included in subsidies and contributions
for 1986 and 1985.
The Board serves as custodian for the Council's
cash account. This cash is not reflected in the accompanying financial statements. It also processes accounting transactions, including payroll for most of
the Council employees, and performs other administrative services for which the Board is reimbursed
by the Council.
The Board is not reimbursed for the costs of personnel who serve on the Council and on the various
task forces and committees of the Council.

Statistical Tables




222 Tables
1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31,1986l
Thousands of dollars
ASSETS

Gold certificate account
Special drawing rights certificate account
Coin
Loans and securities
Loans to depository institutions
Federal agency obligations
Bought outright
Held under repurchase agreement
U.S. Treasury securities
Bought outright
Bills
Notes
Bonds

11,083,947
5,018,000
485,827
1,564,797
7,829,312
2,313,535
103,774,920
68,125,600
25,723,814

Total bought outright

197,624,334

Held under repurchase agreement

13,691,465

Total securities

211,315,799

Total loans and securities

223,023,443

Items in process of collection
Transit items

8,063,084

Other items in process of collection

2,211,741

Total items in process of collection

10,274,825

Bank premises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises

105,638
452,363
157,448
127,236
737,047

Less depreciation allowance
Bank premises, net
Other assets
Furniture and equipment
Less depreciation
Total furniture and equipment, net
Denominated in foreign currencies2
Interest accrued
Premium on securities
Due from Federal Deposit Insurance Corporation
Overdrafts
Prepaid expenses
Suspense account
Real estate acquired for banking-house purposes
Other
Total other assets
Total assets




182,516

554,531

'

660,169

515,885
249,460
266,425
9,474,797
2,601,442
1,206,675
2,904,299
190,096
26,159
17,483
6,368
126,488
16,820,232
267,366,443

Tables

223

— Continued

LIABILITIES

Federal Reserve notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks

231,612,805
36,252,042

Total Federal Reserve notes, net

195,360,763

Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts

48,107,361
7,587,759
286,709

Other deposits
Officers' and certified checks
International organizations
Other3

54,673
198,757
669,890

Total other deposits
Deferred credit items

923,320
9,012,278

Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other

2,247,837
49,437
30,228
14,121

Total other liabilities

2,341,623

Total liabilities

263,619,813
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts4
Total liabilities and capital accounts
1. Amounts in boldface type indicate items in the
Board's weekly statement of condition of the Federal
Reserve Banks.
2. Of this amount $3,028.1 million was invested in
securities issued by foreign governments, and the balance was invested with foreign central banks and the
Bank for International Settlements.




1,873,315
1,873,315
0
267,366,443
3. In closing out the other capital accounts at yearend, the Reserve Bank earnings that are payable to
the Treasury are included in this account pending
payment.
4. During the year, includes undistributed net income, which is closed out on Dec. 31; see table 8.

224 Tables
2. Statement of Condition of Each Federal Reserve Bank,
December 31,1986 and 1985
Millions of dollars
Total

Boston

Item
1986

1985

11,084
5,018
485

11,090
4,718
487

703
314
26

658
281
26

1,565
0

3,060
0

43
0

24
0

Federal agency obligations
Bought outright
Held under repurchase agreements

7,829
2,314

8,227
1,694

464
0

481
0

U.S. Treasury securities
Bought outright 1
Held under repurchase agreements
Total loans and securities

197,625
13,691
223,024

177,798
3,529
194,308

11,702
0
12,209

10,386
0
10,891

10,273
661

11,667
607

621
92

529
93

9,475
7,345

7,016
7,679

284
209

196
201

1986

1985

ASSETS

Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
Acceptances held under repurchase agreements ..

Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies2
All other

0

0

+1,444

+ 449

267,365

237,572

15,902

13,324

195,360

181,450

12,260

11,349

48,107
7,588
287
923
56,905

28,631
9,351
480
1,041
39,503

2,870
0
5
21
2,896

1,178
0
4
36
1,218

9,012
2,342

10,679
2,378

497
127

521
130

63,619

234,010

15,780

13,218

1,873
1,873
0

1,781
1,781
0

61
61
0

53
53
0

267,365

237,572

15,902

13,324

Federal Reserve notes outstanding (issued to Bank)
LESS: HeldbyBank

231,603
36,243

208,427
26,977

14,393
2,133

13,504
2,155

Federal Reserve notes, net

195,360

181,450

12,260

11,349

Collateral for Federal Reserve notes
Gold certificate account
Special drawing rights certificate account
Other eligible assets
U.S. Treasury and federal agency securities

11,084
5,018
0
179,258

11,090
4,718
0
165,642

195,360

181,450

Interdistrict Settlement Account
Total assets
LIABILITIES

Federal Reserve notes
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits
Deferred credit items
Other liabilities and accrued dividends3
Total liabilities
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE N O T E STATEMENT


Total collateral
http://fraser.stlouisfed.org/
For notes see end of table.
Federal Reserve Bank of St. Louis

Tables 225
2.-

('ontinued

Philadelphia

N e w York

Cleveland

1986

1985

3,277
1,354
16

431
162
20

483
195
23

650
314
33

1986

1985

3,146
1,489
14

1986

Richmond

1985

1986

1985

635
270
33

959
461
81

969
426
88

2,060

178

155

206

153

231

312

134
0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

2,539
2,314

2,744
1,694

251
0

288
0

460
0

481
0

673
0

726
0

64,079
13,691
82,757

59,305
3,529
69,332

6,328
0
6,757

6,226
0
6,669

11,605
0
12,271

10,394
0
11,028

16,985
0
17,889

15,682
0
16,720

1,311
32

1,338
31

595
47

533
48

375
32

432
28

701
100

682
101

2,341
2,038

1,712
1,521

436
115

344
128

569
203

449
212

483
280

344
365

-5,576

-3,210

-466

-651

+ 247

+ 215

-158

-All

87,552

75,371

8,097

7,772

14,694

13,302

20,796

19,278

61,693

53,848

5,513

5,870

12,482

11,341

17,150

16,656

14,639
7,588
174
516
22,917

8,153
9,351
367
495
18,366

1,945
0
7
8
1,960

1,136
0
7
28
1,171

1,528
0
9
27
1,564

1,126
0
10
43
1,179

2,645
0
8
45
2,698

1,584
0
7
69
1,660

1,158
852

1,486
793

381
71

485
80

298
128

434
134

564
182

584
196

86,620

74,493

7,925

7,606

14,472

13,088

20,594

19,096

466
466
0

439
439
0

86
86
0

83
83
0

112
112
0

107
107
0

101
101
0

91
91
0

87,552

75,371

8,097

7,772

14,694

13,302

20,796

19,278

65,671
4,068

57,138
3,290

7,908
2,395

7,999
2,129

13,896
1,414

12,543
1,202

19,955
2,805

18,176
1,520

61,693

53,848

5,513

5,870

12,482

11,341

17,150

16,656




226 Tables
2. Statement of Condition of Each Federal Reserve Bank,
December 31,1986 and 1985—Continued
Millions of dollars
Atlanta

Chicago

Item
1986

1986

1985

1985

1,394
656
29

1,451
620
29

ASSETS

Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other

507
203
47

413
192
53

73
0

38
0

89
0

32
0

•

0

0

,0

0

Federal agency obligations
Bought outright
Hela under repurchase agreements

312
0

252
0

873
0

906
0

U.S. Treasury securities
Bought outright 1
Held under repurchase agreements
Total loans and securities

7,885
0
8,270

5,446
0
5,736

22,040
0
23,002

19,588
0
20,526

Items in process of collection
Bank premises

815
51

909
48

1,013
43

958
22

Other assets
Denominated in foreign currencies2
Allother

777
158

582
220

1,279
3,319

982
3,659

+1,489

+ 3,476

+ 2,975

-263

12,317

11,629

33,710

27,984

Federal Reserve notes

7,557

7,341

27,064

23,724

Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits

3,430
0
12
28
3,470

2,893
0
12
31
2,936

5,008
0
20
103
5,131

2,545
0
21
109
2,675

867
87

914
144

752
261

849
254

11,981

11,335

33,208

27,502

168
168
0

147
147
0

251
251
0

241
241
0

12,317

11,629

33,710

27,984

12,545
4,988

10,558
3,217

29,158
2,094

25,553
1,829

7,557

7,341

27,064

23,724

Acceptances held under repurchase agreements

Interdistrict Settlement Account
Total assets
LIABILITIES

Deferred credit items
Other liabilities and accrued dividends3
Total liabilities
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE N O T E STATEMENT

Federal Reserve notes outstanding (issued to Bank)
LESS: Held by Bank
Federal Reserve notes, net
1. Includes securities loaned—fully guaranteed by
U.S. Treasury securities pledged with Federal Reserve
Banks—and excludes securities sold and scheduled to
be bought back under matched sale-purchase transactions.
2. Valued monthly at market exchange rates.




3. Includes exchange-translation account reflecting
the monthly revaluation at market exchange rates of
foreign-exchange commitments.
4. Includes special investment account at the Federal Reserve Bank of Chicago in Treasury bills maturing within 90 days.

Tables 227
2.--•("•

onli;Hied

St . Lou
i
s

Kansas City

Minneapolis

San Francisco

Dallas

1986

1985

1986

1985

1986

1985

1986

1985

1986

1985

366
160
26

357
157
26

168
66
20

156
63
22

598
216
43

617
263
48

692
307
40

713
307
39

1,470
670
106

1,361
590
84

37
0

15
0

206
0

3
0

152
0

207
0

195
0

19
0

21
0

42
0

230
0

239
0

113
0

108
0

321
0

367
0

501
0

532
0

1,092
0

1,103
0

5,816
0
6,083

5,162
0
5,416

2,856
0
3,175

2,343
0
2,454

8,118
0
8,591

7,930
0
8,504

12,655
0
13,351

11,492
0
12,043

27,556
0
28,669

23,844

568
20

828
18

492
24

654
25

1,527
46

1,840
46

710
20

1,358
19

1,545
154

1,606
128

284
104

197
114

313
60

232
92

426
162

316
156

786
214

561
540

1,497
483

24,989

-1

+ 487

+ 78

-39

-106

-769

-80

-612

+ 154

1,101
471
+ 1,334

7,610

7,600

4,396

3,659

11,503

11,021

16,040

14,968

34,748

31,664

5,889

5,796

2,838

2,391

8,293

7,823

11,250

11,100

23,371

24,211

1,021
0
4
12
1,037

896
0
4
21
921

884
0
5
12
901

471
0
5
13
489

1,425
0
7
28
1,460

1,055
0
7
37
1,099

3,675
0
12
41
3,728

2,615
0
12
51
2,678

9,037
0
24
82
9,143

4,979
0
24
108
5,111

504
64

709
66

495
40

630
33

1,495
93

1,837
102

610
136

751
143

1,391
301

1,479
303

7,494

7,492

4,274

3,543

11,341

10,861

15,724

14,672

34,206

31,104

58
58
0

54
54
0

61
61
0

58
58
0

81
81
0

ooo
oooo

158
158
0

148
148
0

271
271
0

280
280
0

7,610

7,600

4,396

3,659

11,503

11,021

16,040

14,968

34,748

31,664

7,467
1,578

7,091
1,295

3,383
545

2,999
608

11,665
3,372

11,100
3,277

14,236
2,986

13,043
1,943

31,236
7,865

28,723
4,512

5,889

5,796

2,838

2,391

8,293

7,823

11,250

11,100

23,371

24,211




228

Tables

3. Federal Reserve Open Market Transactions. 1986'
Millions of dollars
Type of transaction

Jan.

Feb.

I

Mar.

Apr.

U.S. TREASURY SECURITIES

Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchange
Redemptions

286
225
0
0

0
2,277
0
1,000

396
0
0
0

2,988
0
0
0

Others within 1 year
Gross, purchases
Gross sales
Maturity shift
Exchange
Redemptions

0
0
725
-596
0

0
0
4,776
-2,148
0

0
0
1,152
-1,458
0

0
0
447
-1,129
0

1 to 5 years
Gross purchases
Gross sales
Maturity shift
Exchange

0
0
-703
596

0
0
-4,776
1,548

0
0
-1,152
1,458

0
0
-447
1,134

5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchange

0
0
-22
0

0
0
0
350

More than 10 years
Gross purchases
Gross sales
Maturity shift
Exchange
All maturities
Gross purchases
Gross sales
Redemptions

0
0
-5
0

0
0
0
250
286
225
0

0
2,277
1,000

396
0
0

2,988
0
0

Matched transations
Gross sales
Gross purchases

63,109
61,156

90,459
94,368

88,917
88,604

109,253
103,957

Repurchase agreements1
Gross purchases
Gross sales

24,257
24,699

0
3,087

6,748
6,748

21,156
13,634

-2,335

-2,456

83

5,214

Net change in U.S. Treasury securities

*Less than $500,000 in absolute value.
1. Sales, redemptions, and negative figures reduce
holdings of the System Open Market Account; all
other figures increase such holdings. Details may not
add to totals because of rounding.




ooo

Total net change in System Open Market Account ...

ooo

Net change in agency obligations

ooo

Repurchase agreements2
Gross purchases
Gross sales

ooo

FEDERAL AGENCY OBLIGATIONS
Outright transactions
Gross purchases
Gross sales
Redemptions

5,384
6,454

0
623

1,821
1,821

3,387
1,955

1,070

-663

0

1,432

3,405

-3,119

83

6,647

2. In July 1984 the Open Market Trading Desk
discontinued accepting bankers acceptances in repurchase agreements.

Tables 229
3. -Continued
June

July

Aug.

Sept.

Nov.

Oct.

Dec.

Total

ooooo

May

3,318
0
0
0

5,422
0
0
0

22,602
2,502
0
1,000

0
0
974
-529
0

190
0
2,974
-1,810
0

0
0
1,280
-1,502
0

190
0
18,673
-20,179
0

0
0
-1,053
1,892

0
0
-969
529

893
0
-2,414
1,510

0
0
-1,280
1,502

893
0
-17,058
16,984

1,402
0
0
0

867
0
0
0

2,940
0
0
0

861
0
0
0

0
0
1,847
-1,819
0

0
0
1,152
-1,957
0

0
0
579
-1,253
0

0
0
1,715
-4,087
0

0
0
1,053
-1,892
0

0
0
-1,532
1,019

* 0
0
-1,152
1,957

0
0
-386
1,253

0
0
-1,194
2,587

0
0
-193
0

0
0
-520
1,000

0
0
0
0

0
0
-5
0

236
0
-560
200

0
0
0
0

236
0
-1,620
2,050

0
0
0
0

0
0
0
0

0
0
0
500

0
0
0
0

0
0
0
0

158
0
0
100

0
0
0
0

158
0
0
1,150

3,196
0
0

1,402
0
0

867
0
0

2,940
0
0

861
0
0

928
0
0

4,795
0
0

5,422
0
0

24,078
2,502
1,000

62,663
67,147

80,219
80,674

70,928
69,659

60,460
60,011

73,179
70,817

77,262
81,892

60,146
60,232

91,404
88,730

927,997
927,247

12,395
19,917

5,640
5,640

18,657
18,657

0
0

14,717
8,403

5,670
11,984

16,888
15,471

44,303
32,028

170,431
160,268

158

1,857

-403

2,491

4,814

-756

6,298

15,023

29,989

0
0
125

0
0

2,678
869

952
2,761

1,622
1,274

5,488
3,522

31,142
30,522

0

4,984
4,984
*

-90

1,809

-1,902

223

1,965

222

1,857

-403

2,401

6,623

-2,658

6,522

16,988

30,211

3,135
4,567

1,691
1,691

-1,482
-1,324




0
0

ooo

0
0
398

0
0
50

ooo

0
0
93

ooo

0
0
0
0

oo*

0
0
-315
500
oooo

3,196
0
0
0

230 Tables
4. Federal Reserve Bank Holdings of U.S. Treasury
and Federal Agency Securities, December 31, 1984-861
Millions of dollars
Increase or
decrease (-)

December 31
Description
1986

U.S. Treasury securities, total
By term 2
1-15 days
16-90 days
91 days to 1 year
1-5 years
5-10 years
More than 10 years
By type of holding
Held outright3
Treasury bills
Treasury notes
Treasury bonds
Held under RPs
Federal agency obligations, total
By term 2
1-15 days
16-90 days
91 days to 1 year
1-5 years
5-10 years
More than 10 years
By type of holding
Held outright
Banks for Cooperatives
Federal Farm Credit Banks
Federal Home Loan Banks
Federal Home Loan Mortgage Corporation
Federal Intermediate Credit Banks
Federal Land Banks
Farmers Home Administration
Federal National Mortgage Association
Government National
Mortgage Association
participation certificates
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
General Services Administration
Held under RPs
1. Details may not add to totals because of rounding.
2. Includes the effects of temporary transactions
(repurchase agreements and matched sale-purchase
agreements).




1985

1984

1986

1985

206,520

177,281

157,010

29,239

20,271

15,684
53,611
62,239
36,469
15,451
23,066

5,261
43,462
56,364
35,650
14,785
21,759

415
37,396
47,795
37,072
14,100
20,233

10,423
10,148
5,875

4,846
6,067
8,568
-1,421

103,775
68,126
25,724
13,691

85,425
67,647
24,726
3,529

10,143

9,921

2,704

1,836

818
666

685

1,308

1,526

71,035
65,237
22,951
1,627

18,350
10,163

14,390
2,410
1,775
1,902

8,777

222

1,144

808

961

575
521

1,224
3,854
1,178

1,471
4,056
1,187

1,665
4,350
1,267

374

409

399

0
2,486
2,252

21
2,477
2,260

21
2,363
2,260

0
30
236
101

0
50
236
101

2,490

479
997

868

1,261

-153
-247
-202

-193
-294

-9
-35

-80
10

440

-21

0

0
50
350
147

8
-8
0
-21
0
0

114
0
0
0

2,847

2,962

-357

-115

67
37

67
37

67
37

0
0

0
0

117
14

117
14
1,693

0
0
620

0
0

2,314

117
14
388

-115

-46

1,306

3. Excludes the effects of temporary transactions
(repurchase agreements and matched sale-purchase
agreements).

Tables 231
Number and Salaries of Officers and Employees of Federal Reserve Banks,
December 3), 1986
President
Federal Reserve
Bank (including
Branches)

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco ...
Total

Other officers

Employees
Number

Number

Annual
salaries
(dollars)

150,300
170,800
131,200
135,300
131,300
141,600
155,900
128,500
110,000
130,000
127,700
146,500

53
161
52
57
79
66
80
57
43
60
60
98

3,410,600
11,949,050
3,473,550
3,529,300
4,798,000
4,098,650
4,974,300
3,246,600
2,550,600
4,333,600
3,627,403
6,146,314

1,267
3,695
1,096
1,263
1,744
2,037
2,589
1,204
942
1,512
1,457
2,239

1,659,100

866

56,137,967 21,045

Annual
salary
(dollars)




Fulltime

Total

Annual
salaries
(dollars)

Number

Annual
salaries
(dollars)

242
57
81
62
153
81
32
86
152
61
47
82

33,767,315
98,737,087
26,130,930
28,421,330
37,015,168
44,564,265
63,141,844
26,000,824
22,400,458
33,762,405
32,746,058
55,969,264

1,563
3,914
1,230
1,383
1,977
2,185
2,702
1,348
1,138
1,634
1,565
2,420

37,328,215
110,856,937
29,735,680
32,085,930
41,944,468
48,804,515
68,272,044
29,375,924
25,061,058
38,226,005
36,501,161
62,262,078

1,136

502,656,948

23,059

560,454,015

Parttime

232 Tables
6. Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 31, 19861
Dollars

Federal Reserve
Bank or
Branch
BOSTON
Annex .

Acquisition costs
Land

Buildings
(including
vaults)2

22,036,681
27,840
3,436,277
477,863
887,844

80,543,612
89,202
21,160,038
1,136,219
2,693,864

PHILADELPHIA

1,876,601

CLEVELAND
Cincinnati
Pittsburgh

1,074,281
2,246,599
1,658,376

RICHMOND
Annex
Baltimore ....
Charlotte ....
ATLANTA ..
Birmingham .
Jacksonville ..
Annex
Miami
Nashville
New Orleans .

NEW YORK
Annex
Buffalo

Building machinery and
equipment

Total3

5,360,169 107,940,462
44,538
161,580

Net
book
value

Other
real
estate4

92,447,624
125,652

21,735,584
745,855
2,258,313

46,331,899
2,359,936
5,840,022

28,217,354
788,472
3,241,643

52,413,293

5,903,704

60,193,598

46,842,992

7,409,713
13,537,723
7,717,686

4,697,832
7,528,477
3,287,248

13,181,825
23,312,798
12,663,310

7,564,641
14,177,766
9,798,480

3,912,575
522,733
6,472,984
347,071

55,727,664
3,725,466
26,826,903
2,758,209

14,314,313
3,924,584
3,842,189
946,943

73,954,552
8,172,784
37,142,076
4,052,223

58,785,695
4,041,391
34,045,323
2,767,990

1,202,255
2,363,463
1,066,862
107,925
3,607,531
592,342
3,087,693

6,375,901
1,905,770
19,192,963
76,236
11,965,974
1,474,678
2,782,464

3,558,580
1,046,244
778,381
15,843
2,107,796
1,252,346
1,477,946

11,136,737
5,315,476
21,038,206
200,003
17,681,302
3,319,367
7,348,103

5,874,793
3,588,824
19,106,106
149,727
15,587,112
1,488,340
4,843,229
38,036,406
762,364
4,366,443

1,224,363

1,675,934
608,243
48,365

283,753

CHICAGO ..
Annex
Detroit

4,511,942
53,066
797,734

38,084,306
548,119
3,154,226

12,203,707
215,796
2,798,874

54,799,956
816,981
6,750,834

ST. LOUIS
Little Rock
Louisville ..
Memphis ...

700,378
1,148,492
700,075
1,135,623

10,601,614
2,082,669
3,182,471
4,216,382

4,634,979
1,010,869
1,131,238
2,126,755

15,936,971
4,242,031
5,013,784
7,478,760

9,320,327
2,689,032
2,574,551
5,015,257

MINNEAPOLIS .
Helena
KANSAS CITY
Denver
Oklahoma City .
Omaha

1,394,384
289,619
1,798,804
2,997,746
646,386
6,534,083

26,681,737
106,380
11,609,885
4,321,485
3,245,825
12,382,609

7,692,189
66,777

35,768,310
462,775

23,533,226
342,040

157,115

8,450,928
2,610,017
1,672,442
0

21,859,617
9,929,248
5,564,653
18,916,692

16,646,625
7,203,281
3,892,965
18,675,728

149,948

DALLAS ...
El Paso
Houston
San Antonio

3,738,290
262,477
2,049,064
459,635

5,137,194
1,348,665
2,722,066
2,293,818

3,738,335
393,301
898,037
574,346

12,613,819
2,004,443
5,669,167
3,327,799

9,816,367
1,692,162
5,153,564
2,699,718

SAN FRANCISCO .
Los Angeles
Portland
Salt Lake City
Seattle
Total

15,541,937 117,592,789
4,353,961
2,910,659
1,683,361
207,381
1,972,068
480,222
2,184,342
274,772

16,434,132 149,568,859 140,287,078
9,758,695
6,030,890
2,494,074
2,540,173
2,116,864
649,432
3,590,213
2,779,171
1,137,923
4,145,847
2,567,210
1,686,734

105,638,563 579,019,548

157,447,772 842,105,883 659,684,425

1. Details may not add to totals because of rounding.
2. Includes expenditures for construction at some
offices, pending allocation to appropriate accounts.




2,220,765

6,368,485

3. Excludes charge-offs of $17,698,968 before 1952.
4. Covers acquisitions for banking-house purposes
and Bank premises formerly occupied and being held
pending sale.

Tables 233

Millions of dollars
Item

1982

1983

1984

1985

1986

CURRENT INCOME

Loans
Acceptances
U.S. Treasury and
federal agency securities
Foreign currencies
Other

174.6
18.3

132.9
6.0

569.5
3.2

427.9
0

279.2
0

15,492.9
432.5
12.3

15,150.2
273.8
9.3

16,687.5
217.1
16.9

16,843.1
228.7
17.3

16,141.5
393.9
22.1

Total current income

16,130.7

15,572.1

17,494.2

17,517.1

16,836.8

138.4
140.3

148.3
155.0

152.0
163.3

148.3
175.7

145.8
189.1

648.8

678.4

704.6

746.2

773.2

115.1
1,042.6

120.3
1,102.1

126.3
1,146.1

131.5
1,201.6

136.8
1,244.9

77.3
386.7

78.1
496.2

85.8
574.7

97.4
614.9

112.1
627.7

578.6

527.7

485.6

489.4

505.0

98.4

152.1

162.6

173.3

181.2

677.0

679.8

648.2

662.7

686.2

28.3

71.8

118.7

105.2

107.7

15,425.4

14,820.5

16,727.2

16,749.2

16,042.9

-149.6

-456.3

-454.8

1,210.0

1,970.6

85.2
-4.5
-68.8

21.0
34.9
-400.4

48.6
-6.7
-412.9

99.4
-7.9
1 ,301.6

66.8
-61.6
1,975.9

15,356.6

14,420.2

16,314.3

18,050.8

18,018.7

CURRENT EXPENSES

Monetary and economic policy
Supervision and regulation
Services to financial institutions
and the public
Services to the U.S. Treasury
and other government agencies
Total current expenses
LESS

Reimbursements
Revenue from priced services
EQUALS

Net expenses
PLUS

Currency costs .
EQUALS

Net expenses including currency costs
PLUS

Earnings-credit costs1

Current net income
ADDITIONS TO AND DEDUCTIONS
FROM CURRENT NET INCOME

Unrealized gains or losses ( - ) on the
revaluation of foreign
currency assets
Gains or losses ( - ) on sales of U.S.
Treasury and federal agency
securities
Other
Total
Net income before distributions
DISTRIBUTIONS

Dividends paid
Transfers to surplus
Net transfers to or deductions from
( - ) Board account
Interest on Federal Reserve notes

79.4
78.3

85.2
106.7

92.6
162.0

103.0
155.3

109.6
92.0

-5.7
15,204.6

-.5
14,228.8

5.5
16,054.1

-3.9
17,796.5

13.3
17,803.9

Total distributions

15,356.6

14,420.2

16,314.3

18,050.8

18,018.7

1. The amount of the credits granted to depository
institutions on clearing balances maintained with the
Reserve Banks. These earnings credits may be used
to offset charges for Federal Reserve priced services.




The clearing balances are invested in U.S. Treasury
securities, the earnings on which are reflected in the
current-income section of this table.

234 Tables
8. Income and Expenses of Federal Reserve Banks, 1986
Dollars
Item1

Total

Boston

New York

Philadelphia

Cleveland

CURRENT INCOME

Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other

279,190,611

1,120,763

4,896,983

2,018,391

674,180

16,141,544,144
393,563,826
627,736,431
22,116,636

945,814,646
11,816,759
40,112,790
718,137

5,349,330,871
97,225,032
91,705,355
12,202,190

532,591,184
18,089,170
27,488,236
416,697

941,194,643
23,594,141
38,173,956
415,209

Total

17,464,151,647

999,583,095

5,555,360,431

580,603,678

1,004,052,128

596,170,328

37,836,420

121,402,742

31,833,173

33,961,449

133,360,309
11,206,609
19,775,226

8,309,368
3,115,473
895,990

24,926,134
1,410,355
2,608,710

7,455,196
544,866
781,103

8,233,284
1,586,532
1,642,322

81,879,848
15,254,693
46,004,715

3,689,087
1,032,847
2,647,573

9,081,204
3,485,763
8,607,238

4,700,356
659,592
2,702,203

5,996,838
734,643
2,958,404

22,213,256
23,549,010
22,809,177
14,975,977
14,217,178

4,049,382
2,451,201
2,024,412
491,003
831,804

3,942,496
2,266,744
3,473,847
9,019,992
3,097,100

1,484,083
1,699,042
2,339,572
44,964
1,121,352

1,032,263
1,336,295
1,572,713
238,568
683,830

3,095,811
40,665,348
68,000,516
38,997,781
107,709,013
42,977,117
(0)

144,496
1,575,224
4,122,377
2,310,667
6,285,764
2,709,019
(3,026,998
(6,460,239
(107,054

0
6,911,418
11,178,992
6,299,082
13,328,823
7,104,336
1,492,712
(3,283,543)
(5,734)

181,191
905,877
4,085,222
2,199,042
8,790,331
1,962,449
2,519,609
(2,165,453)
(55,564)

124,568
4,298,098
3,887,739
1,348,496
9,581,389
3,274,418
(1,148,176)
(3,014,681)
(234,019)

74,927,816
(5,318,162)
69,609,654

236,348,411
(23,720,410)
212,628,001

73,788,206
(13,028,800)
60,759,406

78,094,973
(7,215,209)
70,879,764

CURRENT EXPENSES

Salaries and other personnel
expenses
Retirement and other
benefits
Fees
Travel
Postage and other
shipping costs
Communications
Materials and supplies
Building expenses
Taxes on real estate
Property depreciation
Utilities
Rent
Other
Equipment
Purchases
Rentals
Depreciation
Repairs and maintenance
Earnings-credit costs
Other
Shared costs, net2
Recoveries
Expenses capitalized3
Total
Reimbursements
Net expenses
For notes see end of table




(31,379,530)
(2,484,527)
1,268,997,855
(112,130,141)
1,156,867,714

Tables 235
8.—Continued
Richmond

8,683,419

Atlanta

1,758,728

Chicago

St. Louis

Minneapolis

206,123,740

1,553,429

1,155,916

1,393,795,932
20,081,599
52,082,123
795,769

583,449,314 1,782,213,012
32,267,312
53,106,506
69,092,954
84,722,988

470,078,035
11,816,759
28,079,122

224,144,963
12,987,606
35,415,830
"

1,712,351

370,493

390,753

1,475,438,842

688,218,943 2,127,878,597

511,897,838

274,095,068

1,650,635

Kansas City

19,203,921

Dallas

29,553,875

San Francisco

2,447,266

681,240,909 1,031,823,291 2,205,867,344
17,710,372
32,680,564
62,188,006

41,805,226
351,111

46,291,219
1,096,215

72,766,632
1,997,076

760,311,539 1,141,445,164 2,345,266,324

44,080,072
10,038,418
349,272
1,665,257

51,549,126
11,539,975
513,462
1,619,936

72,064,506
16,365,777
1,137,153
3,242,904

30,525,105
7,139,832
482,665
1,009,051

26,434,759
5,724,870
472,366
787,209

39,562,626
9,171,739
526,234
1,469,358

38,673,184
8,274,539
341,835
1,352,176

68,247,166
16,181,177
726,396
2,701,210

6,576,593
999,950
4,117,490

8,825,877
2,004,836
4,500,592

8,763,448
1,560,278
5,348,490

4,514,170
553,216
3,017,772

5,681,792
524,644
1,864,426

6,398,070
1,110,055
3,075,365

4,643,382
911,626
2,912,327

13,009,031
1,677,243
4,252,835

1,798,916
3,584,287
1,990,046
471,346
1,505,402

1,192,616
1,221,876
1,901,214
331,446
840,507

2,467,453
1,253,534
2,582,728
2,344,884
2,503,667

439,828
807,715
1,275,662
374,633
658,529

2,499,795
1,049,995
842,796
120,392
579,423

822,327
1,807,786
1,378,799
57,265
635,011

576,649
1,239,587
1,097,629
1,090,216
679,652

1,907,448
4,830,948
2,329,759
391,268
1,080,901

398,444
2,236,631
6,502,505
3,660,276
7,809,201
4,538,660
(167,450
(4,092,201
(201,859

267,476
4,460,076
6,457,395
3,871,991
11,555,130
3,642,064
2,295,570
(1,408,749)
(228,960)

508,815
6,340,781
7,860,609
6,331,553
21,705,770
5,992,257
(5,718,346)
(2,438,685)
(546,832)

488,684
914,504
3,150,813
1,891,150
4,423,451
1,718,082
1,016,171
(1,224,932)
(29,033)

340,332
1,014,199
3,955,537
1,914,523
5,576,544
2,098,738
1,889,536
(635,004)
(58,479)

62,221
1,551,465
3,756,425
2,410,548
6,387,245
2,087,056
739,942
(1,061,559)
(482,825)

185,795
4,706,426
5,857,989
2,247,760
4,412,349
2,462,461
605,203
(2,281,496)
(423,006)

393,789
5,750,649
7,184,913
4,512,693
7,853,016
5,387,577
(497,773)
(3,312,988)
(111,162)

97,861,256 116,953,456 159,670,744
(7,619,873^ (8,052,423) (12,795,133)
90,241,383 108,901,033 146,875,611

63,147,068
(7,293,892)
55,853,176

62,678,393
(3,587,127)
59,091,266

81,465,153
(5,751,432)
75,713,721

79,566,283 144,496,096
(5,433,355) (12,314,325)
74,132,928 132,181,771




236 Tables
8. Income and Expenses of Federal Reserve Banks. 1986—Continued
Dollars
Item1

Total

Boston

New York

16,307,283,932

929,973,442

5,342,732,429

519,844,271

933,172,362

66,836,210
2,015,616,683
2,082,452,893

3,938,872
59,127,102
63,065,974

21,891,327
486,783,891
508,675,217

2,210,987
90,652,224
92,863,212

3,918,560
118,246,959
122,165,518

106,559,537

3,070,996

12,535,159

5,913,742

5,032,520

1,975,893,356

59,994,978

496,140,058

86,949,469

117,132,998

97,337,500
180,779,673

2,912,600
11,306,558

24,112,100
53,649,878

4,522,900
5,848,170

5,865,800
11,299,418

18,005,060,114

975,749,262

5,761,110,509

596,422,670

1,033,140,142

109,587,968

3,346,081

27,204,022

4,964,655

6,590,413

17,803,517,996

964,288,881

5,707,345,837

587,538,416

1,022,235,729

Philadelphia

Cleveland

PROFIT A N D LOSS

Current net income
Additions to and deductions
from current net income
Profits on sales of U.S.
Treasury and federal
agency securities
Other additions
Total additions . . . .
Deductions from current net
income
Net additions to or
deductions ( - )
from current net
income
Assessments by Board
Board expenditures4
Cost of currency
Net income before payment
to U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)
Transferred to surplus

91,954,150

8,114,300

26,560,650

3,919,600

4,314,000

Surplus, January 1
Surplus, December 31

1,781,361,150
1,873,315,300

52,798,900
60,913,200

439,440,700
466,001,350

82,545,900
86,465,500

107,000,300
111,314,300

1. Details may not add to totals because of rounding.
2. Includes distribution of costs for projects performed by one Bank for the benefit of one or more
other Banks.
3. Includes expenses for labor and materials tem-




porarily capitalized and charged to activities when the
products are consumed.
4. For additional details, see the last four pages of
the preceding section: Board of Governors, Financial
Statements.

Tables 237
8,

Continued

Richmond

1,385,197,458

Atlanta

Chicago

579,317,913 1,981,002,986

St. Louis

Minneapolis

456,044,663

215,003,799

Kansas City

Dallas

San Francisco

684,597,818 1,067,312,237 2,213,084,554

5,797,536
100,693,533
106,491,069

2,447,617
161,618,945
164,066,562

7,421,767
266,049,513
273,471,280

1,957,658
59,122,161
61,079,819

935,655
65,044,501
65,980,156

2,828,720
88,680,559
91,509,279

4,294,070
206,670,303
210,964,372

9,193,441
312,926,994
322,120,434

4,346,605

5,232,023

7,555,952

3,699,975

1,975,070

3,419,573

46,518,066

7,259,856

102,144,465

158,834,539

265,915,328

57,379,844

64,005,086

88,089,706

164,446,306

314,860,578

5,019,100
16,595,018

8,066,900
7,312,579

13,217,900
23,637,227

2,959,100
5,774,394

3,191,300
2,381,509

4,395,000
7,794,959

8,137,900
11,059,110

14,936,900
24,120,852

722,772,973 2,210,063,188

504,691,013

273,436,076

14,838,725

3,373,526

3,554,079

691,586,059 2,185,033,713

497,265,437

267,240,546

1,465,727,805
5,798,975
1,449,589,630

9,472,564

760,497,564 1,212,561,533 2,488,887,379
4,878,187

9,223,358

755,101,827 1,194,015,275 2,482,276,645

10,339,200

21,714,350

10,190,750

4,052,050

2,641,450

517,550

9,322,900

90,812,250
101,151,450

146,545,500
168,259,850

241,181,250
251,372,000

53,722,900
57,774,950

58,493,400
61,134,850

80,135,800
80,653,350

148,211,250
157,534,150




16,343,385

(9,732,650)
280,473,000
270,740,350

238 Tables
9. Income and Expenses of Federal Reserve Banks, 1914-861
Dollars

Period, or Federal
Reserve Bank

Current
income

Net
expenses

Net additions
or
deductions ( - )

Assessments by
Board of Governors
Board
expenditures

Costs
of currency

All Banks
1914-15 .
1916
1917
1918
1919

2,173,252
5,217,998
16,128,339
67,584,417
102,380,583

2,018,282
2,081,722
4,921,932
10,576,892
18,744,815

5,875
-193,001
-1,386,545
-3,908,574
-4,673,446

302,304
192,277
237,795
382,641
594,818

1920
1921
1922
1923
1924
1925
1926
1927
1928
1929

181,296,711
122,865,866
50,498,699
50,708,566
38,340,449
41,800,706
47,599,595
43,024,484
64,052,860
70,955,496

27,548,505
33,722,409
28,836,504
29,061,539
27,767,886
26,818,664
24,914,037
24,894,487
25,401,233
25,810,067

-3,743,907
-6,314,796
-4,441,914
-8,233,107
-6,191,143
-4,823,477
-3,637,668
-2,457,792
-5,026,029
-4,861,642

709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644

1,714,421
1,844,840
805,900
3,099,402

1930
1931
1932
1933
1934
1935
1936
1937
1938
1939

36,424,044
29,701,279
50,018,817
49,487,318
48,902,813
42,751,959
37,900,639
41,233,135
36,261,428
38,500,665

25,357,611
24,842,964
24,456,755
25,917,847
26,843,653
28,694,965
26,016,338
25,294,835
25,556,949
25,668,907

-93,136
311,451
-1,413,192
-12,307,074
-4,430,008
-1,736,758
485,817
-1,631,274
2,232,134
2,389,555

809,585
718,554
728,810
800,160
1,372,022
1,405,898
1,679,566
1,748,380
1,724,924
1,621,464

2,175,530
1,479,146
1,105,816
2,504,830
1,025,721
1,476,580
2,178,119
1,757,399
1,629,735
1,356,484

1940
1941
1942
1943
1944
1945
1946
1947
1948
1949

43,537,805
41,380,095
52,662,704
69,305,715
104,391,829
142,209,546
150,385,033
158,655,566
304,160,818
316,536,930

25,950,946
28,535,547
32,051,226
35,793,816
39,659,496
41,666,453
50,493,246
58,191,428
64,280,271
67,930,860

11,487,697
720,636
-1,568,208
23,768,282
3,221,880
-830,007
-625,991
1,973,001
-34,317,947
-12,122,274

1,704,011
1,839,541
1,746,326
2,415,630
2,296,357
2,340,509
2,259,784
2,639,667
3,243,670
3,242,500

1,510,520
2,588,062
4,826,492
5,336,118
7,220,068
4,710,309
4,482,077
4,561,880
5,186,247
6,304,316

1950
1951
1952
1953
1954
1955
1956
1957
1958
1959

275,838,994
394,656,072
456,060,260
513,037,237
438,486,040
412,487,931
595,649,092
763,347,530
742,068,150
886,226,116

69,822,227
83,792,676
92,051,063
98,493,153
99,068,436
101,158,921
110,239,520
117,931,908
125,831,215
131,848,023

36,294, 117
-2,12?,!
1,583,988
-1,058,993
-133,641
-265,456
-23,436
-7,140,914
124,175
98,247,253

3,433,700
4,095,497
4,121,602
4,099,800
4,174,600
4,194,100
5,339,800
7,507,900
5,917,200
6,470,600

7,315,844
7,580,913
8,521,426
10,922,067
6,489,895
4,707,002
5,603,176
6,374,195
5,973,240
6,384,083

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

1,103,385,257
941,648,170
1,048,508,335
1,151,120,060
1,343,747,303
1,559,484,027
1,908,499,896
2,190,403,752
2,764,445,943
3,373,360,559

139,893,564
148,253,719
161,451,206
169,637,656
171,511,018
172,110,934
178,212,045
190,561,166
207,677,768
237,827,579

13,874,702
3,481,628
-55,779
614,835
725,948
1,021,614
996,230
2,093,876
8,519,996
-557,553

6,533,700
6,265,100
6,654,900
7,572,800
8,655,200
8,576,396
9,021,600
10,769,596
14,198,198
15,020,084

7,455,011
6,755,756
8,030,028
10,062,901
17,229,671
23,602,856
20,167,481
18,790,084
20,474,404
22,125,657

For notes see end of table.




Tables 239
9.—Continued
Payments to U.S. Treasury
jjiviaenus

paid

Franchise
tax

Under
section 13b

Interest on
Federal Reserve
notes

Transferred
to surplus
(section 13b)

Transferred
to surplus
(section 7)

217,463
1,742,775
6,804,186
5,540,684
5,011,832

2,703,894

1,134^234
48,334,341
70,651,778

5,654,018
6,119,673
6,307,035
6,552,717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911

60,724,742
59,974,466
10,850,605
3,613,056
• 113,646
59,300
818,150
249,591
2,584,659
4,283,231

82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597

10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462

17,308

-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071
607,422
352,524
2,616,352
1,862,433
4,533,977

1,134,234

2,bil,418

8,214,971
8,429,936
8,669,076
8,911,342
9,500,126
10,182,851
10,962,160
11,523,047
11,919,809
12,329,373

297,667
227,448
176,625
119,524
24,579

-60,323
27,695
102,880
67,304
-419,140
-425,653

82,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605

-54,456
-4,333
49,602
135,003
201,150
262,133
27,708
86,772

75,233,818
166,690,356
193,145,837

17,617,358
570,513
3,554,101
40,327,362
48,409,795
81,969,625
81,467,013
8,366,350
18,522,518
21,461,770

13,082,992
13,864,750
14,681,788
15,558,377
16,442,236
17,711,937
18,904,897
20,080,527
21,197,452
22,721,687

196,628,858
254,873,588
291,934,634
342,567,985
276,289,457
251,740,721
401,555,581
542,708,405
524,058,650
910,649,768

21,849,490
28,320,759
46,333,735
40,336,862
35,887,775
32,709,794
53,982,682
• 61,603,682
59,214,569
-93,600,791

23,948,225
25,569,541
27,412,241
28,912,019
30,781,548
32,351,602
33,696,336
35,027,312
36,959,336
39,236,599

896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614
1,296,810,053
1,649,455,164
1,907,498,270
2,463,628,983
3,019,160,638

42,613,100
70,892,300
45,538,200
55,864,300
-465,822,800
27,053,800
18,943,500
29,851,200
30,027,250
39,432,450




240 Tables
9. Income and Expenses of Federal Reserve Banks, 1914-861—Continued
Dollars

Period, or Federal
Reserve Bank

Current
income

Net
expenses

Net additions
or
deductions ( - )

Assessments by
Board of Governors
Board
expenditures

Costs
of currency

1970
1971 ,
1972
1973
1974
1975
1976
1977
1978
1979

3,877,218,444
3,723,369,921
3,792,334,523
5,016,769,328
6,280,090,965
6,257,936,784
6,623,220,383
6,891,317,498
8,455,390,401
10,310,148,406

276,571,876
319,608,270
347,917,112
416,879,377
476,234,586
514,358,633
558,128,811
568,851,419
592,557,841
625,168,261

11,441,829
94,266,075
49,615,790
80,653,488
78,487,237
(202,369,615
7,310,500
(177,033,463
(633,123,486"
(151,148,220;

21,227,800
32,634,002
35,234,499
44,411,700
41,116,600
33,577,201
41,827,700
47,366,100
53,321,700
50,529,700

23,573,710
24,942,528
31,454,740
33,826,299
30,190,288
37,130,081
48,819,453
55,008,163
60,059,365
68,391,270

1980
1981
1982
1983
1984
1985
1986

12,802,319,335
15,508,349,653
16,517,385,129
16,068,362,117
18,068,820,742
18,131,982,786
17,464,528,361

718,032,836
814,190,392
926,033,957
1,023,678,474
1,102,444,454
1,127,744,490
1,156,867,714

(115,385,855
(372,879,185
(68,833,150
(400,365,922
(412,943,156
1,301,624,294
1,975,893,356

62,230,800
63,162,700
61,813,400
71,551,000
82,115,700
77,377,700
97,337,500

73,124,423
82,924,013
98,441,027
152,135,488
162,606,410
173,738,745
180,779,673

201,351,041,661

15,388,965,389

719,539,608

1,104,734,408

1,632,591,378

9,803,200,724
57,385,270,437
8,717,528,786
14,139,606,581
15,827,364,278
8,156,237,834
30,096,109,587
7,099,272,065
3,701,637,078
8,886,354,267
11,432,350,490
26,106,109,536

1,017,553,501
3,137,962,811
813,507,271
1,048,066,501
1,199,898,709
1,290,631,358
2,023,093,302
832,610,270
688,831,380
960,456,350
853,164,594
1,523,189,340

12,451,897
226,300,627
34,022,670
(11,731,536)
23,752,524
65,940,608
47,687,622
6,419,380
24,764,072
32,041,055
100,690,486
157,200,201

40,245,686
285,823,686
54,357,018
88,679,690
57,039,076
80,003,260
158,691,072
34,805,272
32,581,415
47,391,509
68,658,773
156,457,951

94,541,879
384,580,071
81,336,705
103,387,314
157,346,619
107,259,873
228,273,239
64,705,904
29,477,129
81,238,328
97,291,884
203,152,433

201,351,041,661

15,388,965,389

1,104,734,408

1,632,591,378

Total, 1914-86 ...
Aggregate for
each Bank,
1914-86
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total

1. Details may not add to totals because of rounding.
2. The $2,001,987,499 transferred to surplus was
reduced by direct charges of $500,000 for charge-off
on Bank premises (1927), $139,299,557 for contributions to capital of the Federal Deposit Insurance




719,539,608

Corporation (1934), and $3,657 net upon elimination
of sec. 13b surplus (1958); and was increased by transfer of $11,131,013 from reserves for contingencies
(1945), leaving a balance of $1,873,315,298 on Dec.
31, 1986.

Tables

241

.—Continued
Payments to U.S. Treasury
Dividends
paid

Franchise
tax

Under
section 13b

Interest on
Federal Reserve
notes

Transferred
to surplus
(section 13b)

Transferred
to surplus
(section 7)

41,136,551
43,488,074
46,183,719
49,139,682
52,579,643
54,609,555
57,351,487
60,182,278
63,280,312
67,193,615

3,493,570,636
3,356,559,873
3,231,267,663
4,340,680,482
5,549,999,411
5,382,064,098
5,870,463,382
5,937,148,425
7,005,779,497
9,278,576,140

32,579,700
40,403,250
50,661,000
51,178,300
51,483,200
33,827,600
53,940,050
45,727,650
47,268,200
69,141,200

70,354,516
74,573,806
79,352,304
85,151,835
92,620,451
103,028,905
109,587,968

11,706,369,955
14,023,722,907
15,204,590,947
14,228,816,297
16,054,094,674
17,796,464,292
17,803,894,710

56,820,950
76,896,650
78,320,350
106,663,100
161,995,900
155,252,950
91,954,150
2,001,987,4992

1,916,915,357

149,138,300

2,188,893

179,874,063,709

(3,657)

80,693,766
522,528,517
105,358,897
162,246,232
95,361,774
125,692,661
266,882,194
61,775,316
53,126,165
79,977,326
111,616,868
251,655,641

7,111,395
68,006,262
5,558,901
4,842,447
6,200,189
8,950,561
25,313,526
2,755,629
5,202,900
6,939,100
560,049
7,697,341

280,843
369,116
722,406
82,930
172,493
79,264
151,045
7,464
55,615
64,213
102,083
101,421

8,504,082,114
52,709,476,089
7,589,623,877
12,596,031,746
14,228,138,199
6,436,029,586
27,174,680,395
6,046,163,532
2,852,049,609
7,657,543,870
10,239,779,757
23,840,464,936

135,411
(433,412)
290,661
(9,906)
(71,517)
5,491
11,682
(26,515)
64,874
(8,674)
55,337
(17,089)

71,008,025
503,257,921
100,795,722
124,548,093
107,031,258
173,526,390
266,700,754
62,894,578
65,012,063
84,793,300
161,811,628
280,607,767

1,916,915,357

149,138,300

2,188,893

179,874,063,709

(3,657)

2,001,987,499




242 Tables
10. Priced Services Revenue and Expenses 1
at Federal Reserve Banks, 1986 and 1985
Millions of dollars

Service
Commercial
check
collection

Total

Item

Wire
transfer
and net
settlement

1986

Net revenue

Private sector adjustment

3

Net revenue after private sector
adjustment

1986

1985

1986

1985

733.0
617.2

572.5
481.3

555.8
464.6

82.7
68.8

77.4
62.4

116.2

Expenses

1985

742.0
625.8

Revenue22

115.7

91.2

91.2

13.9

14.9

85.9

82.2

66.6

61.6

10.8

10.6

30.3

33.6

24.6

29.6

3.1

4.3

MEMO

Net revenue after private sector adjustment, with allowance for ACH
program4
1. Derived from the income and expense data shown
in table 8. Expenses for priced services are based
primarily on the Federal Reserve Planning and Control System, which provides for the allocation of expenses to the principal areas of activity of the Banks.
2. Total System revenue for 1986 and 1985 respectively comprises $627.7 million and $613.8 million




38.6
of income from fees for services, and $114.2 million
and $119.1 million of income related to clearing balances established by depository institutions. Total
System expenses for 1986 and 1985 respectively include $106.3 million and $105.6 million of earnings
credits granted to depository institutions on clearing
balances.

Tables 243
10.—-Continued

Service
Definitive
safekeeping
and noncash
collection

Commercial
ACH 4

Bookentry
securities

Cash
services

1986

1985

1986

1985

1986

1985

1986

1985

36.5
31.2

27.5
29.1

24.0
21.9

25.0
23.0

9.4
6.3

28.8
20.1

16.8
16.3

18.5
18.0

5.4

(16)

2.1

2.0

3.1

8.7

.5

.5

4.1

2.5

2.5

2.3

1.6

4.8

.4

.3

1.3

(4.1)

(.4)

(.3)

1.5

3.9

Expenses for commercial check collection, wire
transfer and net settlement, commercial ACH, bookentry securities, and definitive safekeeping and noncash collection include costs of float.
3. An imputed cost intended to reflect the taxes
that would have been paid and the return on capital
that would have been provided had a private firm
furnished the services.




4. The Board established an incentive pricing program for the commercial ACH service that provided
for fee structures designed to recover an increasing
share of expenses over a period of several years. Revenue for the commercial ACtl service was expected
to represent approximately 80 percent of expenses
plus the private sector adjustment in 1985 and 100
percent of expenses plus the private sector adjustment
in 1986.

244 Tables
11. Operations in Prmeipal Departments of Federal Reserve Banks, 1983-86
Operation

1986

Millions of pieces (except as noted)
Loans (thousands)
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
All other1
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities
Transfer of funds2
Food stamps redeemed
Millions of dollars
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
All otheri
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities
Transfer of funds2
Food stamps redeemed
1. In the REPORT for 1983 and for 1984, data in-

cluded checks handled by more than one Federal Rer
serve office.

1985

1984

1983

19
15,408
5,584
20,461

24
14,655
5,744
19,691

33
13,422
5,329
19,201

22
11,464
4,403
17,712

584
140
16,226

592
130
15,965

598
135
15,178

612
115
14,650

204
50
2,216

171
45
2,322

168
42
2,536

168
38
2,684

193,424
195,515
47,842
3,088

307,856
182,095
51,081
3,226

852,777
183,419
50,164
3,624

214,190
141,684
36,224
2,795

606,029
11,103
11,137,202

538,261
9,486
9,557,753

529,895
9,085
9,553,515

552,493
7,854
9,854,112

75,447,899 65,866,333
125,028,070 109,126,369
10,475
10,195

50,327,014
98,003,445
9,941

51,352,275
87,754,086
10,861

2. In the REPORT for 1983 and for 1984, data in-

cluded transfers processed by both sending and receiving Federal Reserve offices.

12. Federal Reserve Bank Interest Rates, December 31, 1986
Percent per year

Loans to depository institutions
Bank

All Federal Reserve Banks

Short-term
adjustment credit
and seasonal
credit2
51/2

1. Rates applied to short-term advances for the
purpose of meeting temporary funding requirements
and to longer-term advances made to smaller institutions for the purpose of meeting seasonally recurring needs for funds. A temporary simplified seasonal
program was established on Mar. 8, 1985, and the
interest rate was a fixed rate Yi percent above the rate
on adjustment credit. The program was reestablished
on Feb. 18, 1986; the rate may be either the same as
that for adjustment credit or a fixed rate V2 percent
higher. See sections 201.3(a) and 201.3(b)(l) of Regulation A.
2. Applicable to advances when exceptional circumstances or practices involve only a particular de-




Extended credit2
First 60 days
of borrowing

Next 90 days
of borrowing

After 150
days

51/2

61/2

71/2

pository institution and to advances when an institution is under sustained liquidity pressures. As an
alternative, for loans outstanding for more than 150
days, a Federal Reserve Bank may charge a flexible
rate that takes into account rates on market sources
of funds, but in no case will the rate charged be less
than the basic rate plus one percentage point. Where
credit provided to a particular depository institution
is anticipated to be outstanding for an unusually prolonged period and in relatively large amounts, the
time period in which each rate under this structure is
applied may be shortened. See section 201.3(b)(2) of
Regulation A.

Tables 245
13, Reserve Requirements of Depository Institutions1

Type of deposit, and
deposit interval2

Depository institution requirements
after implementation of the
Monetary Control Act
Percent of deposits

Effective date

3
12

12/30/86
12/30/86

3
0

10/6/83
10/6/83

3

11/13/80

34

Net transaction accounts
$0 million-$36.7 million
More than $36.7 million

Nonpersonal time deposits5
By original maturity
Less than IV2 years
Vh years or more
Eurocurrency liabilities
All types
1. Reserve requirements in effect on Dec. 31,1986.
Required reserves must be held in the form of deposits with Federal Reserve Banks or vault cash. Nonmembers may maintain reserve balances with a Federal Reserve Bank indirectly on a pass-through basis
with certain approved institutions.
For previous reserve requirements, see earlier editions of the ANNUAL REPORT and of the Federal Re-

serve Bulletin. Under provisions of the Monetary
Control Act, depository institutions include commercial banks, mutual savings banks, savings and loan
associations, credit unions, agencies and branches of
foreign banks, and Edge corporations.
2. The Garn-St Germain Depository Institutions
Act of 1982 (Public Law 97-320) requires that $2
million of reservable liabilities (transaction accounts,
nonpersonal time deposits, and Eurocurrency liabilities) of each depository institution be subject to a
zero percent reserve requirement. The Board is to
adjust the amount of reservable liabilities subject to
this zero percent reserve requirement each year for
the succeeding calendar year by 80 percent of the
percentage increase in the total reservable liabilities
of all depository institutions, measured on an annual
basis as of June 30. No corresponding adjustment is
to be made in the event of a decrease. On Dec. 30,
1986, the exemption was raised from $2.6 million to
$2.9 million. In determining the reserve requirements
of depository institutions, the exemption shall apply
in the following order: (1) net NOW accounts (NOW
accounts less allowable deductions); (2) net other
transaction accounts; and (3) nonpersonal time deposits or Eurocurrency liabilities starting with those




with the highest reserve ratio. With respect to NOW
accounts and other transaction accounts, the exemption applies only to such accounts that would be subject to a 3 percent reserve requirement.
3. Transaction accounts include all deposits on which
the account holder is permitted to make withdrawals
by negotiable or transferable instruments, payment
orders of withdrawal, and telephone and preauthorized transfers in excess of three per month for the
purpose of making payments to third persons or others.
However, MMDAs and similar accounts subject to
the rules that permit no more than six preauthorized,
automatic, or other transfers per month, of which no
more than three can be checks, are not transaction
accounts (such accounts are savings deposits subject
to time deposit reserve requirements).
4. The Monetary Control Act of 1980 requires that
the amount of transaction accounts against which the
3 percent reserve requirement applies be modified
annually by 80 percent of the percentage increase in
transaction accounts held by all depository institutions, determined as of June 30 each year. Effective
Dec. 30, 1986, the amount was increased from $31.7
million to $36.7 million.
5. In general, nonpersonal time deposits are time
deposits, including savings deposits, that are not
transaction accounts and in which a beneficial interest
is held by a depositor that is not a natural person.
Also included are certain transferable time deposits
held by natural persons and certain obligations issued
to depository institution offices located outside the
United States. For details, see section 204.2 of
Regulation D.

246 Tables
14. Dates of Removal of Interest Rate Ceilings on Deposits at Federally Insured
Institutions1
Type of deposit

Effective date

Savings
Negotiable order of withdrawal
Money market deposit account

4/1/86
1/1/86
1/1/86

Time accounts
7-31 days
More than 31 days

1/1/86
10/1/83

1. All restrictions on the maximum rates of interest
payable on various categories of deposits were removed over a period beginning on Dec. 14,1982, and
ending on Apr. 1, 1986. For information on the maximum rates payable on specific types of accounts at

various times, see the Federal Reserve Bulletin, the
Federal Home Loan Bank Board Journal, and the
Annual Report of the Federal Deposit Insurance
Corporation.

15. Initial Margin Requirements under Regulations T, U, G, and X 1
Percent of market value
Short sales,
T only 2

Effective date
1934, Oct. 1 ..
1936, Feb. 1 .
Apr. 1 .
1937, Nov. 1 .
1945, Feb. 5 ,
July 5 ..
1946, Jan. 21 .
1947, Feb. 21
1949, Mar. 3
1951, Jan. 17
1953, Feb. 20
1955, Jan. 4 .,
Apr. 23
1958, Jan. 16
Aug. 5
Oct. 16
1960, July 28
1962, July 10
1963, Nov. 6
1968, Mar. 11
June 8
1970, May 6 .
1971, Dec. 6
1972, Nov. 24
1974, Jan. 3 .

25-45
25-55
55
40
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50

1. These regulations, adopted by the Board of
Governors pursuant to the Securities Exchange Act
of 1934, limit the amount of credit to purchase and
carry "margin securities" (as defined in the regulations) when such credit is collateralized by securities.
Margin requirements on securities other than options
are the difference between the market value (100 percent) and the maximum loan value of collateral as
prescribed by the Board. Regulation T was adopted
effective Oct. 15, 1934; Regulation U, effective May
1, 1936; Regulation G, effective Mar. 11, 1968; and
Regulation X, effective Nov. 1, 1971.
On Jan. 1, 1977, the Board of Governors for the
first time established in Regulation T the initial margin required for writing options on securities, setting




50
60
50
50
50
50

50
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50

it at 30 percent of the current market value of the
stock underlying the option. On Sept. 30, 1985, the
Board changed the required initial margin, allowing
it to be the same as the option maintenance margin
required by the appropriate exchange or self-regulatory organization; such maintenance margin rules
must be approved by the Securities and Exchange
Commission. Effective Jan. 31, 1986, the SEC approved new maintenance margin rules, permitting
margins to be the price of the option plus 15 percent
of the market value of the stock underlying the option.
2. From Oct. 1, 1934, to Oct. 31, 1937, the requirement was the margin "customarily required" by
the brokers and dealers.

Tables 247
16. Principal Assets and Liabilities and Number of Insured Commercial Banks, by
Class of Bank, June 30, 1986 and 19851
Asset and liability items shown in millions of dollars

Item

Member banks

Total
Total

National

State

Nonmember
banks

June 30, 1986
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets
Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital

1,847,784
1,429,545
1,415,173
418,239

1,362,285
1,086,417
1,076,351
275,868

1,088,052
869,696
861,926
218,356

274,233
216,721
214,426
57,512

485,499
343,128
338,822
142,371

253,205
165,034
220,219
1,805,885
63,279
539,334
1,343,692
173,666

161,648
114,220
170,583
1,298,430
56,234
402,206
934,080
127,109

131,632
86,724
134,379
1,048,265
39,356
318,165
770,128
98,472

30,016
27,496
36,205
250,166
16,878
84,041
163,952
28,637

91,557
50,814
49,636
507,454
7,045
137,127
409,611
46,557

14,186

5,954

4,866

1,088

8,232

Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

1,698,882
1,313,609
1,296,823
385,273

1,237,788
990,950
979,587
246,837

987,793
791,578
782,744
196,215

249,995
199,373
196,843
50,622

461,094
322,659
317,236
138,436

252,375
132,899
203,479

158,099
88,738
158,215

127,427
68,788
121,805

30,672
19,950
36,409

94,276
44,160
45,264

Deposits
Interbank
Other demand
Other time and savings
Equity capital

1,656,573
56,252
463,744
1,252,395
160,101

1,179,123
50,598
340,487
864,651
117,454

954,143
35,210
268,786
715,332
91,721

224,980
15,388
71,701
149,319
25,733

477,450
5,654
123,257
387,744
42,648

14,367

5,979

4,910

1,069

8,388

Number of banks

June 30, 1985

Number of banks

1. All insured commercial banks in the United
States. Details may not add to totals because of
rounding.




248 Tables
Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related
Items—Year-End 1918-X6, and Month-End I9861
Millions of dollars

Period

Factors supplying reserve tunas
Federal Reserve Bank credit outstanding
U.S. Treasury and
federal agency securities
Other
Held
2
Federal
All
under
Bought repur- Loans Float other3 Reserve
outTotal
assets4
chase
right agreement

Total

Gold
stock5

Special
drawing
rights
certificate
account

Treasury
currency
outstanding6

1918
1919

239
300

239
300

0 1,766
0 2,215

199
201

294
575

2,498
3,292

2,873
2,707

1,795
1,707

1920
1921 ,
1922
1923
1924

287
234
436
134
540

287
234
436
80
536

0 2,687
0 1,144
0
618
14
723
4
320

119
40
78
27
52

262
146
273
355
390

3,355
1,563
1,405
1,238
1,302

2,639
3,373
3,642
3,957
4,212

1,709
1,842
1,958
2,009
2,025

1925
1926
1927
1928
1929

375
315
617
228
511

367
312
560
197
488

3
57
31
23

643
637
582
1,056
632

63
45
63
24
34

378
384
393
500
405

1,459
1,381
1,655
1,809
1,583

4,112
4,205
4,092
3,854
3,997

1,977
1,991
2,006
2,012
2,022

1930
1931
1932
1933
1934

739
817
1,855
2,437
2,430

686
775
1,851
2,435
2,430

43
42
4
2
0

251
638
235
98
7

21
20
14
15
5

372
378
41
137
21

1,373
1,853
2,145
2,688
2,463

4,306
4,173
4,226
4,036
8,238

2,027
2,035
2,204
2,303
2,511

1935
1936
1937
1938
1939

2,431
2,430
2,564
2,564
2,484

2,430
2,430
2,564
2,564
2,484

1
0
0
0
0

5
3
10
4
7

12
39
19
17
91

38
28
19
16
11

2,486
2,500
2,612
2,601
2,593

10,125
11,258
12,760
14,512
17,644

2,476
2,532
2,637
2,798
2,963

1940
1941
1942
1943
1944

2,184 2,184
2,254 2,254
6,189 6,189
11,543 11,543
18,846 18,846

0
0
0
0
0

3
3
6
5
80

94
471
681
815

10
14
10
4

2,274
2,361
6,679
12,239
19,745

21,995
22,737
22,726
21,938
20,619

3,087
3,247
3,648
4,094
4,131

1945
1946
1947
1948
1949

24,252
23,350
22,559
23,333
18,885

24,262
23,350
22,559
23,333
18,885

0
0
0
0
0

249
163
85
223
78

578
580
535
541
534

2
1
1
1
2

15,091
24,093
23,181
24,097
19,499

20,065
20,529
22,754
24,244
24,427

4,339
4,562
4,562
4,589
4,598

1950
1951
1952
1953
1954

20,778
23,801
24,697
25,916
24,932

20,725
23,605
24,034
25,318
24,888

53
196
663
598
44

67
19
156
28
143

1,368
1,184
967
935

3
5
4
2
1

22,216
25,009
25,825
26,880
25,885

22,706
22,695
23,187
22,030
21,713

4,636
4,709
4,812
4,894
4,985

1955
1956
1957
1958
1959

24,785
24,915
24,238
26,347
26,648

24,391
24,610
23,719
26,252
26,607

394
305
519
95
41

108
50
55
64
458

1,585
1,665
1,424
1,296
1,590

29
70
66
49
75

26,507
26,699
25,784
27,755
28,771

21,690
21,949
22,781
20,534
19,456

5,008
5,066
5,146
5,234
5,311

1960
1961
1962
1963
1964

27,384
28,881
30,820
33,593
37,044

26,984
30,478
28,722
33,582
36,506

400
159
342
11
538

33
130
38
63
186

1,847
2,300
2,903
2,600
2,606

74
51
110
162
94

29,338
31,362
33,871
36,418
39,930

17,767
16,889
L 978
15,513
15,388

5,398
5,585
5,567
5,578
5,405

For notes see last two pages of table.



Tables

249

17.—Continued

Factors absorbing reserve funds

Currency
in
circulation

Treasury
cash
holdings7

Deposits, other
than reserves, with
Federal Reserve Banks

Treasury

Foreign

utner

Other
Federal
Reserve
accounts 4

Required
clearing
balances

Other
Federal
Reserve
liaWith
bilities Federal
and
Reserve
capital4 Banks

Member bank
reserves 8
Currency
and
coin9

Required10

Excess10

4,951
5,091

288
385

51
31

96
73

25
28

118
208

0
0

0
0

1,636
1,890

0
0

1,585
1,822

51
68

5,325
4,403
4,530
4,757
4,760

218
214
225
213
211

57
96
11
38
51

5
12
3
4
19

18
15
26
19
20

298
285
276
275
258

0
0
0
0
0

0
0
0
0
0

1,781
1,753
1,934
1,898
2,220

0
0
0
0
0

0
1,654
0
1,884
2,161

0
99
0
14
59

4,817
4,808
4,716
4,686
4,578

203
201
208
202
216

16
17
18
23
29

8
46
5
6
6

21
19
21
21
24

272
293
301
348
393

0
0
0
0
0

0
0
0
0
0

2,212
2,194
2,487
2,389
2,355

0
0
0
0
0

2,256
2,250
2,424
2,430
2,428

-44
-56
63
-41
-73

4,603
5,360
5,388
5,519
5,536

211
222
272
284
3,029

19
54
8
3
121

6
79
19
4
20

22
31
24
128
169

375
354
355
360
241

0
0
0
0
0

0
0
0
0
0

2,471
1,961
2,509
2,729
4,096

0
0
0
0
0

2,375
1,994
1,933
1,870
2,282

96
-33
576
859
1,814

5,882
6,543
6,550
6,856
7,598

2,566
2,376
3,619
2,706
2,409

544
244
142
923
634

29
99
172
199
397

226
160
235
242
256

253
261
263
260
251

0
0
0
0
0

0
0
0
0
0

5,587
6,606
7,027
8,724
11,653

0
0
0
0
0

2,743
4,622
5,815
5,519
6,444

2,844
1,984
1,212
3,205
5,209

8,732
11,160
15,410
20,499
25,307

2,213
2,215
2,193
2,303
2,375

368
867
799
579
440

1,133
774
793
1,360
1,204

599
586
485
356
394

284
291
256
339
402

0
0
0
0
0

0
0
0
0
0

4,026
12,450
13,117
12,886
14,373

0
0
0
0
0

7,411
9,365
11,129
11,650
12,748

6,615
3,085
1,988
1,236
1,625

28,515
28,952
28,868
28,224
27,600

2,287
2,272
1,336
1,325
1,312

977
393
870
1,123
821

862
508
392
642
767

446
314
569
547
750

495
607
563
590
106

0
0
0
0
0

0
0
0
0
0

15,915
16,139
17,899
20,479
16,568

0
0
0
0
0

14,457
15,577
16,400
19,277
15,550

1,458
562
1,499
1,202
1,018

27,741
29,206
30,433
30,781
30,509

1,293
1,270
1,270
761
796

668
247
389
346
563

895
526
550
423
490

565
363
455
493
441

714
746
111
839
907

0
0
0
0
0

0
0
0
0
0

17,681
20,056
19,950
20,160
18,876

0
0
0
0
0

16,509
19,667
20,520
19,397
18,618

1,172
389
-570
763
258

31,158
31,790
31,834
32,193
32,591

767
775
761
683
391

394
441
481
358
504

402
322
356
272
345

554
426
246
391
694

925
901
998
1,122
841

0
0
0
0
0

0
0
0
0
0

19,005
19,059
19,034
18,504
18,174

0
0
0
0
310

18,903
19,089
19,091
18,574
18,619

102
-30
-57
-70
-135

32,869
33,918
35,338
37,692
39,619

377
422
380
361
612

485
465
597
880
820

217
279
247
171
229

533
320
393
291
321

941
1,044
1,007
1,065
1,036

0
0
0
0
0

0
0
0
0
0

17,081
17,387
17,454
17,049
18,086

2,544
2,544
3,262
4,099
4,151

18,988
18,988
20,071
20,677
21,663

637
96
645
471
574




250 Tables
17. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related
Items—Year-End 1918-86, and Month-End 1986'—Continued
Millions of dollars
Factors supplying reserve funds

Period

Federal Reserve Bank credit outstanding
U.S. Treasury and
federal agency securities11
Other
Held
All Federal
2
under
Bought repur- Loans Float other3 Reserve
outTotal
assets4
chase
right12 agreement

Total

Gold
stock5

SpeTreacial
sury
drawcurig
n
rights rency
certif- outicate standing6
account
5,575
6,317
6,784
6 795
6,852

1965
1966
1967
1968
1969

40,768
44,316
49,150
52,937
57,154

40,478
43,655
48,980
52,9373
57,154

290
661
170
0
0

137
173
141
186
183

2,248
2,495
2,576
3,443
3,440

187
193
164
58
64

0 43,340 13,733
0 47,177 13,159
o 52,031 11,982
0 56 624 10 367
2,743 64,584 10,367

1970
1971
1972
1973
1974

62,142
70,804
71,230
80,495
85,714

62,142
69,481
71,119
80,395
84,760

o
1,323
111
100
954

335
39
1,981
1,258
299

4,261
4,343
3,974
3,099
2,001

57
261
106
68
999

1,123
1,068
1,260
1,152
3,195

67,918
76,515
78,551
86,072
92,208

10,732
10 132
10,410
11,567
11,652

400
400
400
400
400

7,147
7710
8,313
8,716
9,253

1975
1976
1977
1978
1979

94,124
104,093
111,274
118,591
126,167

92,789
100,062
108,922
117,374
124,507

1,335
4,031
2,352
1,217
1,660

211
25
265
1,174
1,454

3,688
2,601
3,810
6,432
6,767

1,126
991
954
587
704

3,312
3,182
2,442
4,543
5,613

102,461
110,892
118,745
131,327
140,705

11,599
11,598
11,718
11,671
11,172

500
1,200
1,250
1 300
1,800

10,218
10,810
11,331
11 831
13,083

1980
1981
1982
1983
1984
1985
1986

130,592
140 348
148,837
160,795
169,627
191,248
221,459

128,038 2,554
136,863 3,485
144,544 4,293
159,203 1,592
167,612 2 015
186,025 5,223
205,454 16,005

1,809
1,601
717
918
3,577
3,060
1,565

4,467
1,762
2,735
1,605
833
988
1,261

776
195
1,480
418
0
0
0

8,739
9,230
9,890
8,728
12,347
15,302
17,475

146,383
153,136
63,659
172,464
186,384
210,598
241,760

11,160
11,151
11,148
11,121
11,096
11,090
11,084

2,518
3 318
4,618
4,618
4 618
4,718
5,018

13,427
13 687
13,786
15,732
16 418
17,075
17,567

1986
187,842
Jan
184,723
Feb
Mar. . . 184,807
.
Apr. . . 191,454
.
190,129
May
191,986
June
July . . 191,583
..
Aug. . . 193,984
.
Sept. . . 200,607
.
197,949
Oct
Nov. . . 204,470
.
Dec. . . 221,459
.

184,132 3,710
0
184,723
0
184,807
182,499 8,955
0
190,129
0
191,986
0
191,583
0
193,984
192,484 8,123
0
197,949
202,705 1,765
205,454 16,005

827
661
818
954
850
952
737
913
879
806
557
1,565

663
-212
560
851
132
283
831
261
849
441
748
1,261

0
0
0
0
0
0
0
0
0
0
0
0

15,814
15,301
15,635
17,235
15,326
15,800
16,515
16,547
17,023
16,797
15,898
17,475

205,146
200,473
201,820
210,494
206,437
209,021
209,666
211,705
219,358
215,993
221,673
241,760

11,090
11,090
11,090
11,090
11,085
11,084
11,084
11,084
11,084
11,084
11,084
11,084

4,718
4,718
4,718
4,718
4,818
4,818
4,818
5,018
5,018
5,018
5,018
5,018

17,103
17,154
17,207
17,252
17,296
17,330
17,353
17,394
17,438
17,477
17,517
17,567

1. For a description of figures and discussion of
their significance, see Banking and Monetary Statistics, 1941-1970 (Board of Governors of the Federal
Reserve System, 1976), pp. 507-23.
2. Beginning with 1960, figures reflect a minor
change in concept; see Federal Reserve Bulletin, vol.
47 (February 1961), p. 164.
3. Principally acceptances and, until Aug. 21, 1959,
industrial loans, authority for which expired on that date.
4. For the period before Apr. 16, 1969, includes
the total of Federal Reserve capital paid in, surplus,
other capital accounts, and other liabilities and accrued dividends, less the sum of bank premises and
other assets, and was reported as "Other Federal Reserve accounts"; thereafter, "Other Federal Reserve
assets" and "Other Federal Reserve liabilities and
capital" are shown separately.
5. For the period before Jan. 30, 1934, includes
gold held in
Federal Reserve Banks and in circulation.


6. Includes currency and coin (other than gold)
issued directly by the Treasury. The largest components are fractional and dollar coins. For details see
"Currency and Coin in Circulation," Treasury Bulletin.
7. Coin and paper currency held by the Treasury,
as well as any gold in excess of the gold certificates
issued to the Reserve Bank.
8. Beginning in November 1979, includes reserves
of member banks, Edge corporations, and U.S. agencies and branches of foreign banks. Beginning on Nov.
13, 1980, includes reserves of all depository institutions.
9. Between Dec. 1, 1959, and Nov. 23, 1960, part
was allowed as reserves; thereafter all was allowed.
10. Estimated through 1958. Before 1929 data were
available only on call dates (in 1920 and 1922 the call
dates were Dec. 29). Beginning on Sept. 12, 1968,
the amount is based on close-of-business figures for

Tables 251

Factors absorbing reserve funds

Currency
in
culation

Treasury
cash
holdings7

Deposits, other
than reserves, with
Federa Reserve Banks

Treasury

Foreign

Other
Federal
Reserve
liaWith
bilities Federal
and
Reserve
capital 5 Banks

Member bank
reserves 8

Other

Other
Federal
Reserve
accounts 4

Required
clearing
balances

211
-147
-773
-1,353
0

0
0
0
0
0

0
0
0
0
0

18,447
19,779
21,092
21,818
22,085

4,163
4,310
4,631
4,921
5,187

22,848
24,321
25,905
27,439
28,173

30,033
-460
32,496
1,035
32,044
98 13
35,268 - 1 , 3 6 0
37,011 - 3 , 7 9 8

Currency
and
coin 9

ExRequired 10 cess 10 ' 13

42,056
44,663
47,226
50,961
53,950

760
1,176
1,344
695
596

668
416
1,123
703
1,312

150
174
135
216
134

355
588
563
747
807

57,903
61,068
66,516
72,497
79,743

431
460
345
317
185

1,156
2,020
1,855
2,542
2,113

148
294
325
251
418

1,233
999
840
1,41914
1,27514

0
0
0
0
0

0
0
0
0
0

1,986
2,131
2,143
2,669
2,935

24,150
27,788
25,647
27,060
25,843

5,423
5,743
6,216
6,781
7,370

86,547
93,717
103,811
114,645
125,600

483
460
392
240
494

7,285
10,393
7,114
4,196
4,075

353
352
379
368
429

1,090
1,357
1,187
1,256
1,412

0
0
0
0
0

0
0
0
0
0

2,968
3,063
3,292
4,275
4,957

26,052
25,158
26,870
31,152
29,792

8,036
8,628
9,421
10,538
11,429

35,197
35,461
37,615
42,694
44,217

136,829
144,774
154,908
171,935
183,796
197,488
211,995

441
443
429
479
513
550
447

3,062
4,301
5,033
3,661
5,316
9,351
7,588

411
505
328
191
253
480
287

617
781
1,033
851
867
1,041
917

0
0
0
0
0
0
0

0
111
436
1,013
1,126
1,490
1,812

4,671
5,261
4,990
5,392
5,952
5,940
6,088

27,456
25,111
26,053
20,413
20,693
27,141
46,295

13,654
15,576
16,666
17,821
n.a.
n.a.
n.a.

675
40,558
42,145 - 1 , 4 4 2
41,391
1,328
39,179
-945
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

190,430
191,033
193,209
194,503
197,812
199,281
200,552
201,778
200,630
202,506
206,878
211,995

565
604
617
638
631
601
532
497
492
485
459
447

16,228
5,026
3,280
11,550
3,083
3,143
3,983
1,106
7,514
2,491
2,529
7,588

256
277
274
326
254
354
233
227
342
303
225
287

477
436
511
441
417
450
688
461
663
479
425
917

0
0
0
0
0
0
0
0
0
0
0
0

1,164
1,226
1,542
1,590
1,582
1,593
1,631
1,169
1,681
1,744
1,802
1,812

6,622
6,735
6,162
6,680
6,110
6,484
6,658
6,652
6,463
6,342
6,480
6,088

22,316
28,098
29,240
27,826
29,747
30,347
28,644
32,901
35,113
35,222
36,494
46,295

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

the reserve period two weeks before the report date.
11. Beginning on Dec. 1, 1966, includes federal
agency obligations held under repurchase agreements
and beginning on Sept. 29,1971, federal agency issues
bought outright.
12. Includes, beginning in 1969, securities loaned—
fully guaranteed by U.S. government securities pledged
with Federal Reserve Banks—and excludes securities
sold and scheduled to be bought back under matched
sale-purchase transactions.
13. Beginning with week ending Nov. 15, 1972,
includes $450 million of reserve deficiencies on which
Federal Reserve Banks are allowed to waive penalties
for a transition period in connection with bank adaptation to Regulation J as amended, effective Nov.
9, 1972. Allowable deficiencies are as follows (beginning with first statement week of quarter, in millions):
1973—Ql, $279; Q2, $172; Q3, $112; Q4, $84; 1974—
Q l , $67; Q2,
 $58. The transition period ended with



n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

-238
-232
-182
-700
-901

-l,10315
-1,535
-1,265
-893
-2,835

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

the second quarter of 1974.
14. For the period before July 1973, includes certain deposits of domestic nonmember banks and foreign-owned banking institutions held with member
banks and redeposited in full with Federal Reserve
Banks in connection with voluntary participation by
nonmember institutions in the Federal Reserve System program of credit restraint.
As of Dec. 12, 1974, the amount of voluntary nonmember bank and foreign-agency and branch deposits
at Federal Reserve Banks that are associated with
marginal reserves are no longer reported. However,
two amounts are reported: (1) deposits voluntarily
held as reserves by agencies and branches of foreign
banks operating in the United States and (2) Eurodollar liabilities.
15. Adjusted to include waivers of penalties for
reserve deficiencies, in accordance with change in
Board policy effective Nov. 19, 1975.

252 Tables
18.

Changes in N u m b e r of Banking Offices in the United States, 19861
Commercial banks (including stock savings
banks and nondeposit trust companies)
Type of office
and change

All
banks

Member
Total

Banks, Dec. 31, 1985.
Changes during 1986
New banks
Ceased banking operation
Banks converted into
branches
Other 3
Net change
Banks, Dec. 31, 1986 .

Total

National

State

Insured

15,068

6,050

4,967

1,083

8,392

6262

358

16

307
-148

304
-148

154
-56

105
-46

49
-10

90
-78

60
-14

3
0

0
0

-305

-300

-133

-111

-88

-76

-23

-33

-22
10

-167
-4

0
-49

-3
1

-2
-13

-234

-220

-58

-85

15,208

14,848

5,992

4,882

43,092 27,595 22,661

27

-159

-3

1

-15

1,110

8,233

623

359

1

88 2,219

41

4,934 15,409

1,226
305
-615
0
4

1,098
300
-601
19
9

646
133
-411
16
419

490
111
-342
-8
307

156
22
-69
24
112

448
167
-190
3
-405

920

825

803

558

245

Branches and additional
offices, Dec. 31, 1986 4 .... 46,272

43,917

28,398

23,219

5,179

Other3

Net change

1. Preliminary. Final data will be available in the
Annual Statistical Digest, 1986, forthcoming.
2. As of Dec. 31, 1986, includes 14 noninsured
state member banks and 2 noninsured national trust
companies.




NonNoninsured Insured insured

15,442

Branches and additional
offices, Dec. 31, 1985 4 ... 45,352
Changes during 1986
De novo
Banks converted
Discontinued
Sale of branch

Nonmember

Mutual
savings
banks

4
0
0
0
-5

128
3
-14
-19
33

0
2
0
0
-38

23

-1

131

-36

15,432

87

2,350

3. Includes interclass changes.
4. Excludes banking facilities.

Tables 253
19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors, 1986
Colonial Bank, Montgomery, Alabama, to merge
with Luverne Bank and Trust Company, Luverne, Alabama
SUMMARY REPORT BY THE ATTORNEY GENERAL

The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.

(12/6/85)
The proposed transaction would not be significantly adverse to competition.

Norstar Bank of Upstate New York, Albany,
New York, to acquire six branches of The Bank
of New York, New York, New York

BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (1/8/86)

SUMMARY REPORT BY THE ATTORNEY GENERAL

Colonial Bank (Applicant) has assets of $102
million, and Luverne Bank and Trust Company (Bank) has assets of $31 million. Applicant and Bank are not located in the same
market, and the proposal would have no significant effect on competition.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
The Suburban Bank, Richmond, Virginia, to
merge with Virginia Capital Bank, Richmond,
Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/6/86)
The proposed transaction would not have a
significantly adverse effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (2/5/86)

The Suburban Bank (Applicant) has assets of
$13.2 million, and Virginia Capital Bank has
assets of $23.4 million. Although Applicant and
Bank compete in the Richmond banking market, the proposal would have no significant effect on competition. The resulting bank's pro
forma market share would be only 0.5 percent.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
Shelby County State Bank, Shelbyville, Illinois,
to merge with Windsor State Bank, Windsor,
Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/10/86)
The proposed transaction would not have a
significantly adverse effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (3/4/86)

Shelby County State Bank (Applicant) has assets of $52.6 million, and Windsor State Bank
(Bank) has assets of $11.5 million. Applicant
and Bank are not in the same banking market.
Thus, no adverse competitive factors exist.



(1/24/86)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (3/18/86)

Norstar Bank of Upstate New York (Applicant) has assets of $2.7 billion, and six branches
of The Bank of New York (Branches) have
assets of $220 million. Applicant and Branches
are both located in the Syracuse market; however, the Herfindahl-Hirschman index will
increase only 18 points to 1850, and thus no
adverse competitive factors exist.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
City Bank and Trust Company, Moberly, Missouri, to acquire certain assets and insured deposits of Farmers and Merchants Bank of
Huntsville, Huntsville, Missouri
SUMMARY REPORT BY THE ATTORNEY GENERAL

No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit
the Federal Reserve System to act immediately
to safeguard depositors of Farmers and Merchants Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (3/31/86)

City Bank and Trust Company (Applicant) has
assets of $108.2 million, and Farmers and Merchants Bank of Huntsville (Bank) has assets of
$18.8 million.
The FDIC has recommended immediate action by the Federal Reserve System to prevent
the probable failure of Bank.
American Trust and Savings Bank, Dubuque,
Iowa, to acquire certain assets and liabilities of
The National Bank, Dyers ville, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL

No report received. Request for report on
the competitive factors was dispensed with,
as authorized by the Bank Merger Act, to per-

254 Tables
19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors, 1986—Continued
mit the Federal Reserve System to act immediately to safeguard depositors of The National
Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (4/10/86)

American Trust and Savings Bank (Applicant)
has assets of $246 million, and The National
Bank (Bank) has assets of $41.6 million.
The Comptroller of the Currency has recommended immediate action by the Federal
Reserve System to ensure continuation of Bank's
services.
Georgia Railroad Bank & Trust Company, Augusta, Georgia, to merge with Bank of Waynesboro, Waynesboro, Georgia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(4/16/86)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (4/22/86)
Georgia Railroad Bank & Trust Company
(Applicant) has assets of $753.6 million, and

Bank of Waynesboro (Bank) has assets of $43.4
million. Applicant and Bank operate in separate banking markets.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
Norstar Bank of Upstate New York, Albany,
New York, to assume the assets and liabilities
of the Greenwich branch of Chemical Bank,
New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(4/25/86)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (4/25/86)

Norstar Bank of Upstate New York (Applicant), with assets of $2.7 billion, proposes to
assume $11.7 million in assets and $11.6 million
in liabilities of the Greenwich branch of Chemical Bank (Bank). Applicant and Bank operate
in the Glen Falls banking market. On a pro
forma basis, Applicant will control 12.3 percent of the commercial banking deposits in the
market. The Herfindahl-Hirschman index will
increase only 47 points. Consummation of the



proposal would have no significant effect on
competition.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
Manufacturers Hanover Trust Company, New
York, New York to acquire certain assets and
assume certain liabilities of six branches of Dollar Dry Dock Savings Bank, White Plains, New
York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/28/86)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (5/8/86)

Manufacturers Hanover Trust Company (Applicant), with assets of $62.3 billion, proposes
to acquire $333 million in assets and assume
$354 million in liabilities of six branches of Dollar Dry Dock Savings Bank (Branches). Both
Applicant and Branches are located in the metropolitan New York banking market. Applicant is ranked third in the market, with 8.1
percent of market deposits. On a pro forma
basis, Applicant's market share will increase to
8.3 percent, and Applicant will remain the third
largest banking organization in the market.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
First Community Bank, Inc., Princeton, West
Virginia, to merge with First Community BankCastle Rock, Pineville, West Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(5/2/86)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (5/23/86)

First Community Bank, Inc. (Applicant) has
assets of $136 million, and First Community
Bank-Castle Rock (Bank) has assets of $56
million. Applicant and Bank are not located in
the same market, and the proposal would have
no significant effect on competition.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.

Tables 255

Indiana Southern Bank, Sellersburg, Indiana,
to acquire United Bank of Indiana, N.A.,
Clarksville, Indiana

Ireland Bank, Malad City, Idaho, to acquire all
the assets and liabilities of Downey State Bank,
Downey, Idaho

SUMMARY REPORT BY THE ATTORNEY GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(5/2/86)
The proposed transaction would not be significantly adverse to competition.

(7/7/86)
No existing competition of significance will be
eliminated by the proposed transaction.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (6/26/86)

BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (8/15/86)

Indiana Southern Bank (Applicant) has assets
of $82.4 million, and United Bank of Indiana,
N.A. (Bank), has assets of $38 million. Applicant and Bank operate in the Louisville
banking market, and each controls less than 2
percent of the commercial banking deposits in
the market. Although Applicant, combined with
other commercial banking deposits controlled
by its parent holding company, would control
slightly more than 30 percent of the market
deposits, thrift institutions offer substantial
competition to commercial banks. No significant adverse competitive effects arise from the
transaction.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.

Ireland Bank (Applicant) has assets of $25.2
million, and Downey State Bank (Bank) has
assets of $18.1 million. The Director of the
Idaho Department of Finance has recommended immediate action by the Federal Reserve System to prevent the probable failure
of Bank.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
Norstar Bank of Upstate New York, Albany,
New York, to purchase assets and assume liabilities of three branches of Citibank (New York
State), N.A., Buffalo, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/12/86)
The proposed transaction would not have a
significantly adverse effect on competition.
The Bank of New York, New York, New York,
to acquire certain assets and assume certain liabilities of three branches of The Home Savings
Bank, Brooklyn, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(5/2/86)
The proposed transaction will not have a significantly adverse effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (7/2/86)

The Bank of New York (Applicant), with assets of $17.2 billion, proposes to acquire assets
of $1.4 million and liabilities of $79 million of
three branches of The Home Savings Bank
(Branches). Applicant and Branches operate
in the metropolitan New York-New Jersey
banking market. The pro forma market share
is 2.4 percent. The proposal would have no
significant effect on competition.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.



BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (10/1/86)

Norstar Bank of Upstate New York (Applicant), with assets of $2.7 billion, proposes to
purchase assets of $1 million and assume liabilities of $42 million of three branches of
Citibank (New York State), N.A., in the Albany banking market. Applicant's resulting increase in market share in the Albany area is
well within Justice Department and Board
guidelines.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
Security Savings Bank, Mars hall town, Iowa, to
acquire certain assets and liabilities of The First
National Bank of Prairie City, Prairie City, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL

No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit

256 Tables
19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors, 1986—Continued
the Federal Reserve System to act immediately
to safeguard depositors of The First National
Bank of Prairie City.

million in assets from the Hialeah branch of
Popular Bank of Florida (Bank), with total
banking assets of $71.2 million. Both Applicant
BASIS FOR APPROVAL BY THE FEDERAL RESERVE and Bank are in the Miami-Fort Lauderdale
banking market. As a result of this acquisition,
BANK (7/24/86)
Security Savings Bank (Applicant) has assets the Herfindahl-Hirschman index will remain
of $163.3 million, and The First National Bank unchanged at 909. Thus, no significant adverse
of Prairie City (Bank) has assets of $8.7 mil- competitive effects exist.
The banking factors and considerations relion.
The Comptroller of the Currency has re- lating to the convenience and needs of the comquested immediate action by the Federal Re- munity are consistent with approval.
serve System to ensure continuation of Bank's
Norstar Bank of Upstate New York, Albany,
services.
Banco de Ponce, Ponce, Puerto Rico, to acquire
certain assets and assume certain liabilities of
two branches of The East New York Savings
Bank, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/26/86)
The proposed transaction would not have a
significantly adverse effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (10/10/86)

Banco de Ponce (Applicant), with assets of $2.3
billion, proposes to acquire certain assets and
assume certain liabilities of two branches of
The East New York Savings Bank (Bank), with
assets of $1.4 billion. Both Applicant and Bank
are in the metropolitan New York-New Jersey
banking market. As a result of this acquisition,
Applicant's market share of 0.1 percent will
remain unchanged. Consummation would result in no significant adverse competitive effects.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
Imperial Bank of Florida, Coral Gables, Florida, to acquire certain assets and assume certain
liabilities of the Hialeah branch of Popular Bank
of Florida, Miami, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL

(7/25/86)
The proposed transaction would not have a
significantly adverse effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (10/14/86)

Imperial Bank of Florida (Applicant), with assets of $18.0 million, proposes to acquire $12.5



New York, to merge with Seaway National Bank,
Watertown, New York

SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/12/86)
The proposed transaction would not have a
significantly adverse effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (11/14/86)

Norstar Bank of Upstate New York (Applicant) has assets of $3.2 billion, and Seaway
National Bank (Bank) has assets of $25.8 million. Applicant does not currently operate in
Bank's market, and no issues are raised with
respect to competition. Thus, the proposed
transaction would have no adverse competitive
effects.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
United Virginia Bank, Richmond, Virginia, to
merge with People's Bank of Chesapeake, Chesapeake, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/17/86)
The proposed transaction would not have a
significantly adverse effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BANK (11/3/86)

United Virginia Bank (Applicant) has assets of
$6.9 billion, and People's Bank of Chesapeake
(Bank) has assets of $80 million. Applicant and
Bank compete in the areas of Norfolk-Portsmouth, Virginia, and Currituck County, North
Carolina, with Applicant ranked second and
Bank ranked eighth among 16 banks in the
market. Applicant would remain the second
largest bank in the market with 16.7 percent
of commercial banking deposits.

Tables 257

The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
First Interstate Bank of California, Los Angeles, California, to acquire the assets and assume
the liabilities of First National Bank, Willows,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL

No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit
the Federal Reserve System to act immediately
to safeguard depositors of First National Bank.
BASIS FOR APPROVAL BY THE BOARD (11/21/86)

First Interstate Bank of California (Applicant)
has assets of $20.6 billion, and First National
Bank (Bank) has assets of $65 million.
The Comptroller of the Currency has recommended immediate action by the Federal
Reserve System to ensure continuation of Bank's

First Virginia Bank-Citizens, Clintwood, Virginia, to merge with Peoples Bank of Pound,
Pound, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(11/21/86)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BANK (11/28/86)

First Virginia Bank-Citizens (Applicant) has
assets of $28.7 million, and Peoples Bank of
Pound (Bank) has assets of $45.9 million. Applicant and Bank are not located in the same
market, and the proposal would have no significant effect on competition.

The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
Security Bank, Marshalltown, Iowa, to purchase the assets and liabilities o/Hawkeye Bank
& Trust, Eldora, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL

(11/21/86)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BANK (12/30/86)

Security Bank (Applicant) has assets of $188
million, and Hawkeye Bank & Trust (Bank)
has assets of $16.5 million. Applicant and Bank
are not located in the same market, and the
proposal would have no significant effect on
competition.
The banking factors and considerations relating to the convenience and needs of the community are consistent with approval.
Mergers Approved Involving Wholly Owned
Subsidiaries of the Same Bank Holding Company
In each of the following cases, the summary
report by the attorney general indicates that
the transaction would not have a significantly
adverse effect on competition because the proposed merger is essentially a corporate reorganization. The Board of Governors, the Federal Reserve Bank, or the Secretary of the Board
of Governors, whichever approved the application, determined that the competitive effects
of the proposed transaction, the financial and
managerial resources and the prospects of the
banks concerned, and the convenience and
needs of the community to be served were consistent with approval.

Institution1

Commerce Union
Merger
Commerce Union
Tennessee
Commerce Union
Tennessee
Commerce Union
Tennessee

Assets
(millions of

Bank, Nashville, Tennessee

1,956

dollars)

Bank of Humphreys County, Waverly,
48
Bank of Rutherford County, Murfreesboro
118
Bank of Sumner County, Gallatin,




79

Date of
approval

3/7/86

258 Tables
19. Mergers, Consolidations, and Acquisitions of Ass;^ts or Assumptions of
Liabilities Approved by the Board of Governors. 1986—Continued
Institution1
The Toledo Trust Company Three Sea Gate, Toledo, Ohio...
Merger
First Buckeye Bank, N.A., Mansfield, Ohio

Assets
(millions of
dollars)

Date of
approval

2,184

3/25/86

833

The Merrill Trust Company, Bangor, Maine.
Merger
Merrill Bank, N.A., Farmington, Maine

665

The Central Trust Company, Newark, Ohio
Merger
The Clear Creek Valley Banking Company, Amanda, Ohio ..

367

Security Bank & Trust Company, Southgate, Michigan
Merger
Security Bank & Trust Company of Oakland County, Novi,
Michigan
State Bank of Carthage, Carthage, Indiana
Merger
The First National Bank of Mays, Mays, Indiana

108
5/27/86

15
1,100

6/19/86

50
11

6/23/86

9

Ohio Citizens Bank, Toledo, Ohio
Merger
The Citizens National Bank, Bryan, Ohio.

773

First Source Bank, South Bend, Indiana
Merger
Community State Bank, North Liberty, Indiana.

827

7/8/86

134
8/15/86

19.7

Rocky Mountain State Bank, Salt Lake City, Utah
Merger
Rocky Mountain State Bank of Bountiful, Bountiful, Utah ..

15

Mercantile Bank & Trust Company, Kansas City, Missouri..
Merger
Noland Road Mercantile Bank, Independence, Missouri
Mercantile Regional Bank, Kansas City, Missouri
Mercantile National Bank of Clay County, Kansas City,
Missouri

237

Old Kent Bank of Kalamazoo, Kalamazoo, Michigan
Merger
The American National Bank in Portage, Portage, Michigan
The American National Bank & Trust Company
of Michigan, Kalamazoo, Michigan

28

Old Kent Bank-Southwest, Niles, Michigan
Merger
The American Bank of Niles, N.A., Niles, Michigan.



3/31/86

8/29/86

13
9/25/86

138
164
31
10/1/86

33
420
258
25

10/2/86

Tables 259

Assets
(millions of
dollars)

Institution1
Norstar Bank, Rochester, New York
Merger
Norstar Bank of Upstate New York, Albany, New York .

Date of
approval

1,682

10/10/86

1,043

Hawkeye-Capital Bank & Trust Company, Des Moines, Iowa.
Merger
Hawkeye Bank and Trust of Des Moines, Des Moines, Iowa...

107

Silicon Valley Bank, San Jose, California
Merger
National Intercity Bank, Santa Clara, California .

101

Commerce Union Bank, Nashville, Tennessee
Merger
Commerce Union Bank of Lawrence County, Lawrenceburg,
Tennessee

61
10/31/86

54
1,956

11/18/86

64

Security Bank of Richmond, Richmond, Michigan.
Merger
Security Bank Imlay City, Imlay City, Michigan ...

83

First Virginia-Commonwealth, Grafton, Virginia.
Merger
First Virginia Bank-Surry, Surry, Virginia

37

The Merchants Bank, Kansas City, Missouri.
Merger
The Bank of Kansas City, Kansas City
Westport Bank, Kansas City, Missouri

10/16/86

11/25/86

40
12/1/86

17
963

12/15/86

114
84

1. Each proposed transaction was to be effected
under the charter of the first-named bank. The entries

are in chronological order of approval,

Mergers Approved Involving a Nonoperating
Institution with an Existing Bank

to the acquisition of the surviving bank by the
holding company, the merger would have no
effect on competition. The Board of Governors, the Federal Reserve Bank, or the Secretary of the Board of Governors, whichever
approved the application, determined that the
proposal would, in itself, have no adverse competitive effects, and that the financial factors
and considerations relating to the convenience
and needs of the community were consistent
with approval.

The following transactions have no significant
effect on competition; they merely facilitate
the acquisition of the voting shares of a bank
or banks by a holding company. In such cases
the summary report by the attorney general
indicates that the transaction will merely combine an existing bank with a nonoperating institution; in consequence, and without regard
Institution1
Shelbyville Interim Bank
Merger
Shelby County State Bank, Shelbyville, Illinois.



Assets
(millions 2
of
dollars)

Date of
approval
3/4/86

50

260 Tables
19. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors, 1986—Continued
Institution1
B.N.S. Bank, Northbrook, Illinois
Merger
Bank of the North Shore, Northbrook, Illinois .
The New Waterford Interim Bank, New Waterford, Ohio
Merger
The New Waterford Bank, New Waterford, Ohio
The Bel Air Bank, Bel Air, Maryland .
Merger
Commercial Bank, Bel Air, Maryland .
PCB Company, Hurricane, West Virginia
Merger
Putnam County Bank, Hurricane, West Virginia.
New First Union Bank and Trust Company, Medaryville,
Indiana
Merger
First Union Bank and Trust Company, Winamac, Indiana
FIBC Service Bank III, Howe, Indiana.
Merger
State Bank of Lima, Howe, Indiana
Central Virginia Bank, Powhatan, Virginia
Merger
Community Bank of Powhatan, Powhatan, Virginia.
Barbour Interim Bank, Philippi, West Virginia.
Merger
Barbour County Bank, Philippi, West Virginia.
Beach Bank, Seabrook, New Hampshire
Merger
Seabrook Bank & Trust Company, Seabrook,
New Hampshire
Lake view Interim Bank, Lake view, Michigan.
Merger
Bank of Lake view, Lake view, Michigan
New Lowell State Bank, Lowell, Michigan.
Merger
State Savings Bank, Lowell, Michigan
Traders Interim Bank, Spencer, West Virginia .
Merger
Trader Bank, Spencer, West Virginia




Assets
(millions 2
of
dollars)

Date of
approval
3/11/86

32
3/27/86
46
4/21/86
122
6/5/86
128

6/19/86
476
8/5/86
31
8/28/86
31
9/15/86
36
9/26/86
44
10/29/86
50
11/25/86
67
11/26/86
63

Tables

261

19. — Continued
Assets
(millions 2
of
dollars)

Institution
The Lunenburg County Bank, Kenbridge, Virginia
Merger
Community Bank of Lunenburg, Kenbridge, Virginia
1. Each proposed transaction was to be effected
under the charter of the first-named bank. The entries
are in chronological order of approval.




Date of
approval
12/1/86

24

2. In each case, the first-named bank is newly organized and not in operation.

262

The Federal Reserve System
Boundaries of Federal Reserve Districts
and their Branch Territories

Q

©

Legend

o
®
•
•

Boundaries of Federal Reserve Districts
Boundaries of Federal Reserve Branch Territories
Board of Governors of the Federal Reserve System
Federal Reserve Bank Cities
Federal Reserve Branch Cities
Federal Reserve Bank Facilities




Federal Reserve
Directories and Meetings




264 Directories and Meetings

Board of Governors of the Federal Reserve System
December 31, 1986
PAUL A. VOLCKER of
MANUEL H. JOHNSON

Term expires
January 31, 1992
January 31, 2000
January 31, 1988

New Jersey, Chairman1
of Virginia, Vice Chairman1

Vacant
WAYNE D. ANGELL of Kansas

January 31, 1994

EMMETT J. RICE of New York
MARTHA R. SEGER of Michigan
H. ROBERT HELLER of California

January 31, 1990
January 31, 1998

January 31, 1996

OFFICE OF BOARD MEMBERS
JOSEPH R. COYNE, Assistant to the

Board
DONALD J. WINN, Assistant to the

Board
M. ROBERTS, Assistant to the
Chairman
BOB S. MOORE, Special Assistant to the
Board
STEVEN

OFFICE OF EXECUTIVE
DIRECTOR FOR INFORMATION
RESOURCES MANAGEMENT
ALLEN E. BEUTEL, Executive Director
STEPHEN R. MALPHRUS, Assistant
Director
OFFICE OF THE SECRETARY
WILLIAM W. WILES, Secretary
BARBARA R. LOWREY, Associate

OFFICE OF STAFF DIRECTOR
FOR MONETARY AND
FINANCIAL POLICY

Secretary
JAMES MCAFEE,

Associate Secretary

DONALD L. KOHN, Deputy Staff

Director
R. V. BERNARD, Special
Assistant to the Board

NORM AND

LEGAL DIVISION
MICHAEL BRADFIELD,

General Counsel

J. VIRGILMATTINGLY, JR., Deputy

OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT
S. DAVID FROST, Staff Director
EDWARD T. MULRENIN, Assistant

Director
CHARLES L. HAMPTON, Senior
Technical Adviser

Staff

PORTIA W. THOMPSON, Equal

Employment Opportunity Programs
Officer
OFFICE OF STAFF DIRECTOR
FOR FEDERAL RESERVE BANK
ACTIVITIES
THEODORE E. ALLISON, Staff Director

1. The designations as Chairman and Vice
Chairman expire on August 6, 1987, and August 4,
1990, respectively, unless the services of these
members of the Board shall have terminated




General Counsel
M. ASHTON, Associate
General Counsel
OLIVER IRELAND, Associate General
Counsel
RICKI R. TIGERT, Assistant General
Counsel
MARYELLEN A. BROWN, Assistant to
the General Counsel

RICHARD

DIVISION OF RESEARCH
AND STATISTICS
JAMES L. KICHLINE, Director
EDWARD C. ETTIN, Deputy Director
MICHAEL J. PRELL, Deputy Director

Directories and Meetings 265
DIVISION OF RESEARCH
AND STATISTICS—Continued
JARED J. ENZLER, Associate Director
DAVID E. LINDSEY, Associate Director
ELEANOR J. STOCKWELL, Associate
Director
MARTHA BETHEA, Deputy Associate
Director
THOMAS D. SIMPSON, Deputy Associate
Director
LAWRENCE SLIFMAN, Deputy Associate
Director
PETER A. TINSLEY, Deputy Associate
Director
SUSAN J. LEPPER, Assistant Director
RICHARD D. PORTER, Assistant
Director
MARTHA S. SCANLON, Assistant
Director
JOYCE ZICKLER, Assistant Director
LEVON H. GARABEDIAN, Assistant

Director (Administration)

DIVISION OF FEDERAL RESERVE
BANK OPERATIONS—Continued
CHARLES W. BENNETT, Assistant
Director
ANNE M. DEBEER, Assistant Director
JACK DENNIS, JR., Assistant Director
EARL G. HAMILTON, Assistant Director
JOHN H. PARRISH, Assistant Director
FLORENCE M. YOUNG, Adviser

DIVISION OF BANKING
SUPERVISION AND REGULATION
WILLIAM TAYLOR, Director

Director
DON E. KLINE, Associate Director
FREDERICK M. STRUBLE, Associate
Director
WILLIAM A. RYBACK, Deputy Associate
Director
STEPHEN C. SCHEMERING, Deputy

DIVISION OF INTERNATIONAL
FINANCE
EDWIN M. TRUMAN, Director

J. PROMISEL, Senior Associate
Director
CHARLES J. SIEGMAN, Senior Associate
Director
DAVID H. HOWARD, Deputy Associate
Director
ROBERT F. GEMMILL, Staff Adviser
LARRY

DONALD B. ADAMS, Assistant Director
PETER HOOPER, III, Assistant Director
KAREN H. JOHNSON, Assistant Director

RALPH W. SMITH, JR., Assistant

Director

DIVISION OF FEDERAL RESERVE
BANK OPERATIONS

Associate Director
RICHARD SPILLENKOTHEN, Deputy

Associate Director
HERBERT A. BIERN, Assistant Director
JOE M. CLEAVER, Assistant Director
ANTHONY CORNYN, Assistant Director
JAMES I. GARNER, Assistant Director

JAMES D. GOETZINGER, Assistant

Director
MICHAEL MARTINSON, Assistant

Director
ROBERT S. PLOTKIN, Assistant Director
SIDNEY M. SUSSAN, Assistant Director
LAURA M. HOMER, Securities Credit

Officer

DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS

CLYDE H. FARNSWORTH, JR., Director

GRIFFITH L. GARWOOD, Director

C. MCENTEE, Associate
Director
DAVID L. ROBINSON, Associate Director
C. WILLIAM SCHLEICHER, JR., Associate
Director

JERAULD

ELLIOTT




2

WELFORD S. FARMER, Deputy Director
FREDERICK R. DAHL, Associate

C.
Director

KLUCKMAN, Associate

GLENN E. LONEY, Assistant Director
ELLEN MALAND, Assistant Director
DOLORES S. SMITH, Assistant Director

2. On loan from the Federal Reserve Bank of
Richmond.

266 Directories and Meetings

Board of Governors of the Federal Reserve System —
Continued
DIVISION OF PERSONNEL
DAVID L. SHANNON, Director

JOHN R. WEIS, Assistant Director
CHARLES

W.

WOOD,

Assistant Director

DIVISION OF HARDWARE AND
SOFTWARE SYSTEMS
BRUCE M. BEARDSLEY, Director

THOMAS C. JUDD, Assistant Director
ELIZABETH

B.

RIGGS,

Assistant

Director
DIVISION OF SUPPORT SERVICES
ROBERT E. FRAZIER, Director
WALTER W. KREIMANN, Associate

Director
GEORGE M. LOPEZ, Assistant Director

ROBERT J. ZEMEL, Assistant Director

DIVISION OF APPLICATIONS
DEVELOPMENT AND
STATISTICAL SERVICES
WILLIAM R. JONES, Director

DAY RADEBAUGH, Assistant Director

OFFICE OF THE CONTROLLER
GEORGE E. LIVINGSTON, Controller
BRENT L. BOWEN, Assistant Controller

C. STEVENS, Assistant
Director
PATRICIA A. WELCH, Assistant Director
RICHARD

Federal Open Market Committee
December 31, 1986

Members
PAUL A. VOLCKER, Chairman, Board of Governors
E. GERALD CORRIGAN, Vice Chairman, elected member

by Federal Reserve Bank
of New York
WAYNE D. ANGELL, Board of Governors
ROGER GUFFEY, elected by Federal Reserve Banks of Minneapolis, Kansas City,
and San Francisco
H. ROBERT HELLER, Board of Governors
KAREN N. HORN, elected by Federal Reserve Banks of Cleveland and Chicago
MANUEL H. JOHNSON, Board of Governors
THOMAS C. MELZER, elected by Federal Reserve Banks of Atlanta, St. Louis,
and Dallas
FRANK E. MORRIS, elected by Federal Reserve Banks of Boston, Philadelphia,
and Richmond
EMMETT J. RICE, Board of Governors
MARTHA R. SEGER, Board of Governors

Alternate Members
G. BOEHNE, elected by Federal Reserve Banks of Boston, Philadelphia,
and Richmond
ROBERT H. BOYKIN, elected by Federal Reserve Banks of Atlanta, St. Louis,
and Dallas
SILAS KEEHN, elected by Federal Reserve Banks of Cleveland and Chicago
GARY H. STERN, elected by Federal Reserve Banks of Minneapolis, Kansas City,
and San Francisco

THOMAS M. TIMLEN, elected by Federal Reserve Bank of New York
http://fraser.stlouisfed.org/
EDWARD

Federal Reserve Bank of St. Louis

Directories and Meetings 267

Federal Open Market

Committee—Continued

Officers
NORMAND R. V. BERNARD,

Assistant Secretary
MICHAEL BRADFIELD,

General Counsel
JAMES H. OLTMAN,

Deputy General Counsel
JAMES L. KICHLINE,

Economist

RICHARD G. DAVIS,

Associate Economist
THOMAS E. DAVIS,

Associate Economist
DONALD L. KOHN,

Associate Economist
DAVID E. LINDSEY,

Associate Economist

EDWIN M. TRUMAN,

Economist (International)
ANATOL B. BALBACH,

Associate Economist
JOHN M. DAVIS,

ALICIA H. MUNNELL,

Associate Economist
MICHAEL J. PRELL,

Associate Economist
CHARLES J. SIEGMAN,

Associate Economist
Associate Economist
PETER D. STERNLIGHT, Manager for Domestic Operations,
System Open Market Account
SAM Y. CROSS, Manager for Foreign Operations,
System Open Market Account
During 1986, the Federal Open Market of the Federal Open Market Committee
Committee held eight regularly scheduled in this REPORT.)
meetings (See Record of Policy Actions

b'cdcuil

\iivisi>ry Council

December 31, 1986

Members
District 1—ROBERT L. NEWELL, Chairman and Chief Executive Officer,
Connecticut National Bank, Hartford, Connecticut
District 2—JOHN F. MCGILLICUDDY, Chairman of the Board and Chief Executive
Officer, Manufacturers Hanover Trust Company, New York, New York
District 3—GEORGE A. BUTLER, Chairman, First Pennsylvania Bank, N.A.,
Philadelphia, Pennsylvania
District 4—JULIEN L. MCCALL, Chairman and Chief Executive Officer, National
City Corporation, Cleveland, Ohio
District 5—JOHN G. MEDLIN, JR., Chairman of the Board and Chief Executive
Officer, Wachovia Bank and Trust Company, N.A., President and Chief
Executive Officer, The First Wachovia Corporation, Winston-Salem,
North Carolina
District 6—BENNETT A. BROWN, Chairman and Chief Executive Officer, Citizens
and Southern Georgia Corporation and The Citizens and Southern National
Bank, Atlanta, Georgia
District 7—HAL C. KUEHL, Chairman of the Board and Chief Executive Officer,
First Wisconsin National Bank of Milwaukee, Milwaukee, Wisconsin

District 8—WILLIAM H. BOWEN, Chairman of the Board and Chief Executive
http://fraser.stlouisfed.org/
Officer, First Commercial Bank, N.A., Little Rock, Arkansas
Federal Reserve Bank of St. Louis

268 Directories and Meetings

Federal Advisory Council—Continued
Members—Continued
District 9—D. H. ANKENY, JR., Chairman and Chief Executive Officer, First Bank
System, Minneapolis, Minnesota
District 10—F. PHILLIPS GILTNER, President, First National Bank, Omaha,
Nebraska
District 11—NAT S. ROGERS, Consultant and Director, First City National
Bancorporation of Texas, Inc., Houston, Texas
District 12—G. ROBERT TRUEX, JR., Chairman, Rainier Bancorporation and

Rainier National Bank, Seattle, Washington

Officers
ROBERT

L.

NEWELL,

President

WILLIAM H. BOWEN,
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVIK, Associate Secretary

Vice President

Directors
GEORGE A. BUTLER

JOHN G. MEDLIN, JR.

Meetings of the Federal Advisory Council
were held on February 6-7, May 1-2,
September 11-12, and November 13-14,
1986. The Board of Governors met with
the council on February 7, May 2, September 12, and November 14, 1986. The
council, which is composed of 12 repre-

HAL C. KUEHL

sentatives of the banking industry, one
from each Federal Reserve District, is required by law to meet in Washington at
least four times per year and is authorized
by the Federal Reserve Act to consult with
and advise the Board on all matters within
the jurisdiction of the Board.

Consumer Advisory Council
December 31, 1986

Members
G. BRATT, Associate Professor, Department of Urban and Environmental
Policy, Tufts University, Medford, Massachusetts
EDWIN B. BROOKS, President, Security Federal Savings and Loan Association,
Richmond, Virginia
JONATHAN A. BROWN, Director, BankWatch, Washington, D.C.
MICHAEL S. CASSIDY, Senior Vice President, Chase Manhattan Bank, New York,
New York
THERESA FAITH CUMMINGS, Social Services Consultant, Springfield, Illinois
NEIL J. FOGARTY, Attorney, Hudson County Legal Services, Jersey City,
New Jersey
STEVEN M. GEARY, Associate General Counsel, Missouri Division of Finance,
Jefferson City, Missouri
KENNETH A. HALL, President, Great Southern National Bank of Jackson, Jackson,
Mississippi
STEVEN W. HAMM, Administrator, South Carolina Department of Consumer
Affairs, Columbia, South Carolina

ROBERT J. HOBBS, Senior Attorney, National Consumer Law Center, Boston,
http://fraser.stlouisfed.org/
Massachusetts
Federal Reserve Bank of St. Louis
RACHEL

Directories and Meetings 269

Consumer Advisory Council—Continued
Members—Continued
W. JOHNSON, Professor of Management and Director, Credit Research
Center, Purdue University, West Lafayette, Indiana
JOHN M. KOLESAR, President, Ameritrust Development Bank, Cleveland, Ohio
EDWARD N. LANGE, Partner, Davis, Wright, Todd, Riese & Jones, Seattle,
Washington
ALAN B. LERNER, Senior Executive Vice President, Associates Corporation of
North America, Dallas, Texas
FRED S. MCCHESNEY, Visiting Fellow of Law and Economics, University of
Chicago, Chicago, Illinois
FRED H. MILLER, Professor of Law, University of Oklahoma, Norman, Oklahoma
MARGARET M. MURPHY, Associate Professor and Director, Columbia Center,
Johns Hopkins University, Columbia, Maryland
ROBERT F. MURPHY, Chairman, General Motors Acceptance Corporation, Detroit,
Michigan
HELEN E. NELSON, President, Consumer Research Foundation, Mill Valley,
California
LAWRENCE S. OKINAGA, Partner, Carlsmith, Carlsmith, Wichman & Case,
Honolulu, Hawaii
SANDRA R. PARKER, Chairman, Banking Committee, Richmond United
Neighborhoods, Richmond, Virginia
JOSEPH L. PERKOWSKI, Chief Executive Officer, Minneapolis Federal Employees
Credit Union, Minneapolis, Minnesota
BRENDA L. SCHNEIDER, Director of Community Relations, Manufacturers National
Bank, Detroit, Michigan
JANE SHULL, Director, Institute for the Study of Civic Values, Philadelphia,
Pennsylvania
TED L. SPURLOCK, Vice President and Director of Credit and Consumer Banking
Services, J.C. Penney Company, Inc., Dallas, Texas
MEL STILLER, Executive Director, Consumer Credit Counseling Service of Eastern
Massachusetts, Boston, Massachusetts
CHRISTOPHER J. SUMNER, President and Chief Executive Officer, Western Savings
& Loan Company, Salt Lake City, Utah
EDWARD J. WILLIAMS, Senior Vice President, Consumer Banking Group, Harris
Trust and Savings Bank, Chicago, Illinois
MERVIN WINSTON, Vice President, First Bank System, Inc., Minneapolis,
Minnesota
MICHAEL ZOROYA, Retail Services Consultant, The May Department Stores,
St. Louis, Missouri
Officers
MARGARET M. MURPHY, Chairman
LAWRENCE S. OKINAGA, Vice Chairman
The Consumer Advisory Council met with and representatives of consumer and
members of the Board of Governors on community interests. It was established
March 20-21, June 19-20, and October pursuant to the 1976 amendments to the
8-9, 1986. The council is composed of Equal Credit Opportunity Act to advise
academics, state government officials, the Board on consumer financial services,
representatives of the financial industry,

ROBERT



270 Directories and Meetings

Thrift Institutions Advisory Council
December 31, 1986

Members
G. CARR, President and Chief Executive Officer, The Cape Cod Five
Cents Savings Bank, Orleans, Massachusetts
M. TODD COOKE, Vice Chairman, Meritor Financial Group, Philadelphia,
Pennsylvania
RICHARD H. DEIHL, Chairman of the Board and Chief Executive Officer, Home
Savings of America, Los Angeles, California
JOHN C. DICUS, President, Capitol Federal Savings and Loan Association, Topeka,
Kansas
HAROLD W. GREENWOOD, JR., Chairman, President, and Chief Executive Officer,
Midwest Federal Savings and Loan Association, Minneapolis, Minnesota
JOHN A. HARDIN, Chairman and President, First Federal Savings Bank, Rock Hill,
South Carolina
JAMIE J. JACKSON, President, Commonwealth Financial Group, Houston, Texas
FRANCES LESNIESKI, President, Michigan State University Federal Credit Union,
East Lansing, Michigan
DONALD F. MCCORMICK, Chairman of the Board, Howard Savings Bank,
Livingston, New Jersey
HERSCHEL ROSENTHAL, President, Flagler Federal Savings and Loan Association,
Miami, Florida
GARY L. SIRMON, President, First Federal Savings and Loan Association,
Walla Walla, Washington
MICHAEL R. WISE, Chairman and Chief Executive Officer, Silverado Banking,
Denver, Colorado
ELLIOTT

Officers
RICHARD

H.

DEIHL,

President

The members of the Thrift Institutions
Advisory Council met with the Board of
Governors on January 31, May 1, September 9, and November 6, 1986. The
council, which is composed of representatives from credit unions, savings and loan




MICHAEL

R.

WISE,

Vice President

associations, and savings banks, consults
with and advises the Board on issues pertaining to the thrift industry and on various other matters within the Board's
jurisdiction,

Directories and Meetings 271

Officers nt Federal Reserve Banks, Branches,
and Office*
December 31, 19861

BANK,
Branch, or facility
BOSTON3

Chairman2
Deputy Chairman
Joseph A. Baute
George N.
Hatsopoulos

President
First Vice President
Frank E. Morris
Robert W.
Eisenmenger

NEW YORK3

John Brademas
Clifton R.
Wharton, Jr.
Mary Ann
Lambertsen

E. Gerald Corrigan
Thomas M. Timlen

PHILADELPHIA ..

Robert M. Landis
Nevius M. Curtis

Edward G. Boehne
Richard L. Smoot

CLEVELAND3

W.H. Knoell
E. Mandell de
Windt
Owen B. Butler
James E. Haas

Karen N. Horn
William H.
Hendricks

Leroy T.
Canoles, Jr.
Robert A.
Georgine
Robert L. Tate
Wallace J.
Jorgenson

Robert P. Black
Jimmie R.
Monhollon

John H.
Weitnauer, Jr.
Bradley
Currey, Jr.
A.G. Trammell
E. William
Nash, Jr.
Sue McCourt Cobb
Patsy R. Williams
Sharon A. Perlis

Robert P. Forrestal
Jack Guynn

Robert J. Day
Marcus Alexis
Robert E. Brewer

Silas Keehn
Daniel M. Doyle

W.L. Hadley
Griffin
Mary P. Holt
Sheffield Nelson
William C.
Ballard, Jr.
G. Rives Neblett

Thomas C. Melzer
Joseph P. Garbarini

Buffalo

Cincinnati
Pittsburgh
RICHMOND3

Baltimore
Charlotte

John T. Keane

Birmingham
Jacksonville
Miami
Nashville
New Orleans
CHICAGO3
Detroit
ST. LOUIS
Little Rock
Louisville
Memphis




Charles A. Cerino4
Harold J. Swart4

Robert D. McTeer4
Albert D.
Tinkelenberg4
John G. Stoides4

Culpeper
ATLANTA

Vice President
in charge of Branch

Delmar Harrison
Fred R. Herr
James D. Hawkins
Patrick K. Barron
Jeffrey J. Wells
Henry H.
Bourgaux, Jr.
Roby L. Sloan4

John F. Breen
James E. Conrad
Paul I. Black, Jr.

272 Directories and Meetings

BANK,
Branch, or facility
MINNEAPOLIS
Helena
KANSAS CITY

Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN FRANCISCO
Los Angeles
Portland
Salt Lake City
Seattle

Chairman2
Deputy Chairman
John B. Davis, Jr.
Michael W.
Wright
Marcia S. Anderson

President
First Vice President
Gary H. Stern
Thomas E. Gainor

Irvine O.
Hockaday, Jr.
Robert G.
Lueder
James E. Nielson
Patience S. Latting
Kenneth L.
Morrison

Roger Guffey
Henry R.
Czerwinski

Robert D. Rogers
Bobby R. Inman
Peyton Yates
Walter M.
Mischer, Jr.
Ruben M. Garcia

Robert H. Boykin
William H. Wallace

Alan C. Furth
Fred W. Andrew
Richard C. Seaver
Paul E. Bragdon
Don M. Wheeler
John W. Ellis

Robert T. Parry
Carl E. Powell

Vice President
in charge of Branch

Robert F. McNellis

Enis Alldredge, Jr.
William G. Evans
Robert D. Hamilton

James L. Stull
Joel L. Koonce, Jr.
J.Z. Rowe4
Thomas H. Robertson
Thomas C. Warren5
Angelo S. Carella4
E. Ronald Liggett4
Gerald R. Kelly4

1. A current list of these officers appears each month
in the Federal Reserve Bulletin.
2. The Chairman of a Federal Reserve Bank, by
statute, serves as Federal Reserve Agent.
3. Additional offices of these Banks are located at
Lewistown, Maine; Windsor Locks, Connecticut;
Cranford, New Jersey; Jericho, New York; Utica at

Oriskany, New York; Columbus, Ohio; Columbia,
South Carolina; Charleston, West Virginia; Des
Moines, Iowa; Indianapolis, Indiana; and Milwaukee, Wisconsin.
4. Senior Vice President.
5. Executive Vice President.

Conference of Chairmen

Robert J. Day as Vice Chairman, and Leroy
T. Canoles, Jr., as the other member.

The chairmen of the Federal Reserve
Banks are organized into the Conference
of Chairmen that meets to consider matters of common interest and to consult
with and advise the Board of Governors.
Such meetings, attended also by the deputy chairmen, were held in Washington
on June 4-5 and December 3-4, 1986.
The Executive Committee of the Conference of Chairmen during 1986 comprised Robert D. Rogers, Chairman; John
H. Weitnauer, Jr., Vice Chairman; and
Joseph A. Baute, member.
On December 4, 1986, the Conference
elected its Executive Committee for 1987,
naming Joseph A. Baute as Chairman,



Conference of Presidents
The presidents of the Federal Reserve
Banks are organized into the Conference
of Presidents, which meets periodically to
consider matters of common interest and
to consult with and advise the Board of
Governors. On October 15, 1985, Edward G. Boehne, President of the Federal
Reserve Bank of Philadelphia, was elected
Chairman of the conference for 1986, and
Silas Keehn, President of the Federal Reserve Bank of Chicago, was elected Vice
Chairman. Joanna H. Frodin, of the Federal Reserve Bank of Philadelphia, was ap-

Directories and Meetings 273
pointed Secretary, and Joan M. DeRycke,
of the Federal Reserve Bank of Chicago,
was appointed Assistant Secretary.

Conference of First Vice
Presidents
The Conference of First Vice Presidents
of the Federal Reserve Banks was organized in 1969 to meet periodically to consider operational issues and other matters. On October 21, 1985, Richard L.
Smoot, First Vice President of the Federal
Reserve Bank of Philadelphia, was elected
Chairman of the conference for 1986, and
Daniel M. Doyle, First Vice President of
the Federal Reserve Bank of Chicago, was
elected Vice Chairman. Joanna H. Frodin, of the Federal Reserve Bank of Philadelphia, was appointed Secretary, and
Joan M. DeRycke, of the Federal Reserve Bank of Chicago, was appointed
Assistant Secretary.

Directors
The following list of directors of Federal
Reserve Banks and Branches shows for
each director the class of directorship, the
principal business affiliation, and the date
the term expires. Each Federal Reserve
Bank has nine members on its board of
directors: three Class A and three Class
B directors, who are elected by the stockholding member banks, and three Class
C directors, who are appointed by the
Board of Governors of the Federal Reserve System. Directors are chosen without discrimination as to race, creed, color,
sex, or national origin.




Class A directors represent the stockholding member banks in each Federal
Reserve District. Class B and Class C directors represent the public and are chosen with due, but not exclusive, consideration to the interests of agriculture,
commerce, industry, services, labor, and
consumers; they may not be officers, directors, or employees of any bank. In addition, Class C directors may not be stockholders of any bank.
For the election of Class A and Class
B directors, the Board of Governors classifies the member banks of each Federal
Reserve District into three groups. Each
group, which comprises banks with similar capitalization, elects one Class A director and one Class B director. The Board
of Governors designates one Class C director as chairman of the board of directors and Federal Reserve Agent of each
District Bank and appoints another Class
C director as deputy chairman.
Federal Reserve Branches have either
five or seven directors, a majority of whom
are appointed by the parent Federal Reserve Bank; the others are appointed by
the Board of Governors. One of the directors appointed by the Board is designated annually as chairman of the board
of that Branch in a manner prescribed by
the parent Federal Reserve Bank.
For the name of the chairman and deputy chairman of the board of directors of
each Reserve Bank and of the chairman
of each Branch, see the preceding table,
"Officers of Federal Reserve Banks,
Branches, and Offices."

274 Directories and Meetings
Term

District 1—BOSTON
Class A
William S. Edgerly
Homer B. Ellis, Jr
Harry R. Mitiguy

Dec'fl
Chairman of the Board and President, State
Street Bank and Trust Company, Boston,
Massachusetts
Chairman, Factory Point National Bank,
Manchester Center, Vermont
President, Howard Bancorp, Burlington,
Vermont

1986
1987
1988

Class B

Richard M. Oster
Ralph Z. Sorenson
Matina S. Horner

President and Chief Executive Officer,
Cookson America, Inc., Providence,
Rhode Island
Chairman, President and Chief Executive
Officer, Barry Wright Corporation,
Newton Lower Falls, Massachusetts
President, Radcliffe College, Cambridge,
Massachusetts

1986
1987
1988

Class C

Michael J. Harrington

Harrington Company, Peabody,
Massachusetts
Joseph A. Baute
Chairman and Chief Executive Officer,
Markem Corporation, Keene,
New Hampshire
George N. Hatsopoulos....Chairman of the Board and President,
Thermo Electron Corporation, Waltham,
Massachusetts

1986
1987
1988

District 2—NEW YORK
Class A
T. Joseph Semrod
Robert W. Moyer
Lewis T. Preston

Chairman of the Board, United Jersey
Bank, Hackensack, New Jersey
President and Chief Executive Officer,
Wilber National Bank, Oneonta,
New York
Chairman of the Board, Morgan Guaranty
Trust Company of New York, New York,
New York

1986
1987
1988

Class B

John R. Opel
John F. Welch, Jr
Richard L. Gelb



Chairman of the Board, International
Business Machines Corp., Armonk,
New York
Chairman and Chief Executive Officer,
General Electric Company, Fairfield,
Connecticut
Chairman and Chief Executive Officer,
Bristol-Myers Company, New York,
New York

1986
1987
1988

Directories and Meetings 275

Class C
Clifton R. Wharton, Jr
Virginia A. Dwyer
John Brademas

Term
expires
Dec. 31
Chancellor, State University of New York
System, Albany, New York
Senior Vice President—Finance (Retired),
American Telephone and Telegraph Co.,
New York, New York.
President, New York University, New York,
New York

1986
1987
1988

BUFFALO BRANCH
Appointed by the Federal Reserve Bank
Herbert Fort
President, The Bath National Bank, Bath,
New York
Ross B. Kenzie
Chairman and Chief Executive Officer,
Goldome FSB, Buffalo, New York
R. Carlos Carballada
President and Chief Executive Officer,
Central Trust Company, Rochester,
New York
Donald I. Wickham
President, Tri-Way Farms, Inc., Stanley,
New York
Appointed by the Board of Governors
Matthew Augustine
President and Chief Executive Officer,
Eltrex Industries, Inc., Rochester,
New York
Joseph Yantomasi
Consultant, United Auto Workers, Buffalo,
New York
Mary Ann Lambertsen
Vice President, Human Resources,
Fisher-Price, East Aurora, New York

1986
1987
1988
1988

1986
1987
1988

District 3—PHILADELPHIA
Class A
John H. Walther

Chairman of the Board, New Jersey
National Bank, Pennington,
New Jersey
Ronald H. Smith
President and Chief Executive Officer,
CCNB Bank, N.A., New Cumberland,
Pennsylvania
Clarence D. McCormick...President, The Farmers and Merchants
National Bank, Bridgeton, New Jersey
Class B
Carl E. Singley
Charles F. Seymour




Dean and Professor of Law, Temple
University Law School, Philadelphia,
Pennsylvania
Chairman and Chief Executive Officer,
Jackson-Cross Company, Philadelphia,
Pennsylvania

1986
1987
1988

1986
1987

276 Directories and Meetings

Nicholas Riso

President and Chief Executive Officer,
Giant Food Stores, Inc., Carlisle,
Pennsylvania

Class C
Robert M. Landis
George E. Bartol III
Nevius M. Curtis

Partner, Dechert, Price, and Rhoads,
Philadelphia, Pennsylvania
Chairman of the Board, Hunt
Manufacturing Company, Philadelphia,
Pennsylvania
Chairman and Chief Executive Officer,
Delmarva Power & Light Company,
Wilmington, Delaware

Term
expires
Dec. 31
1988

1986
1987
1988

District 4—CLEVELAND
Class A
J. David Barnes
Raymond D. Campbell
William A. Stroud
Class B
John R. Hall
Richard D. Hannan
Daniel M. Galbreath
Class C
W.H. Knoell
E. Mandell de Windt
John R. Miller

Chairman and Chief Executive Officer,
Mellon Bank, Pittsburgh, Pennsylvania
Chairman, President, and Chief Executive
Officer, Independent State Bank of Ohio,
Columbus, Ohio
Chairman and President, First-Knox
National Bank, Mount Vernon, Ohio
Chairman of the Board and Chief Executive
Officer, Ashland Oil, Inc., Ashland,
Kentucky
Chairman of the Board and President,
Mercury Instruments, Inc., Cincinnati,
Ohio
President, John W. Galbreath & Co.,
Columbus, Ohio
President and Chief Executive Officer,
Cyclops Corporation, Pittsburgh,
Pennsylvania
Chairman of the Board (Retired), Eaton
Corporation, Cleveland, Ohio
Former President and CEO, The Standard
Oil Company, Cleveland, Ohio

1986
1987
1988

1986
1987
1988

1986
1987
1988

CINCINNATI BRANCH
Appointed by the Federal Reserve Bank
Vernon J. Cole
Executive Vice President and Chief
Executive Officer, Harlan National Bank,
Harlan, Kentucky
Sherrill Cleland
President, Marietta College, Marietta,

Ohio


1986
1987

Directories and Meetings 277

Jerry L. Kirby

Robert A. Hodson

Chairman of the Board, President, and
Chief Executive Officer, Citizens Federal
Savings & Loan Association, Dayton,
Ohio
President and Chief Executive Officer, 1st
Security Bank, Hillsboro, Ohio

Appointed by the Board of Governors
Owen B. Butler
Chairman of the Board (Retired), The
Procter & Gamble Company, Cincinnati,
Ohio
Don Ross
Owner, Dunreath Farm, Lexington,
Kentucky
Kate Ireland
National Chairman, Frontier Nursing
Service, Wendover, Kentucky

Term
expires
Dec. 31
1987
1988

1986
1987
1988

PITTSBURGH BRANCH
Appointed by the Federal Reserve Bank
G.R. Rendle
President and Chief Executive Officer,
Gallatin National Bank, Uniontown,
Pennsylvania
Charles L. Fuellgraf, Jr. ...Chief Executive Officer, Fuellgraf Electric
Company, Butler, Pennsylvania
James S. Pasman, Jr
Former Vice Chairman, Aluminum
Company of America, Pittsburgh,
Pennsylvania
Lawrence F. Klima
President, The First National Bank of
Pennsylvania, Erie, Pennsylvania
Appointed by the Board of Governors
Karl M. von der Heyden ..Senior Vice President-Finance and Chief
Financial Officer, H. J. Heinz Company,
Pittsburgh, Pennsylvania
Milton A. Washington
President and Chief Executive Officer,
Allegheny Housing Rehabilitation
Corporation, Pittsburgh, Pennsylvania
James E. Haas
President and Chief Operating Officer,
National Intergroup, Inc., Pittsburgh,
Pennsylvania

1986
1987
1987
1988

1986
1987
1988

District 5—RICHMOND
Class A
Robert S. Chiles, Sr

Robert F. Baronner



President and Chief Executive Officer,
Greensboro National Bank, Greensboro,
North Carolina
Chairman of the Board and Chief Executive
Officer, One Valley Bancorp of West
Virginia, Inc. and Kanawha Valley Bank,
N.A., Charleston, West Virginia

1986

1987

278 Directories and Meetings

K. Donald Menefee

Class B
Thomas B. Cookerly
Floyd D. Gottwald, Jr
Edward H. Covell
Class C
Leroy T. Canoles, Jr
Hanne Merriman
Robert A. Georgine

Chairman of the Board and Chief Executive
Officer, Madison National Bank,
Washington, D.C
President, Broadcast Division, Allbritton
Communications, Washington, D.C
Chairman of the Board and Chief Executive
Officer, Ethyl Corporation, Richmond,
Virginia
President, The Covell Company, Easton,
Maryland
President, Kaufman & Canoles, Norfolk,
Virginia
President, Garfinckel's, Washington, D.C. ..
President, Building & Construction Trades
Department, AFL-CIO, Washington,
D.C

Term
expires
Dec. 31
1988

1986
1987
1988

1986
1987
1988

BALTIMORE BRANCH
Appointed by the Federal Reserve Bank
Charles W. Hoff III
President and Chief Executive Officer,
Farmers and Mechanics National Bank,
Frederick Maryland
Raymond V.
Haysbert, Sr
President and Chief Executive Officer, Parks
Sausage Company, Baltimore, Maryland...
H. Grant Hathaway
Chairman of the Board, Equitable Bank,
N.A., Baltimore, Maryland
Joseph W. Mosmiller
Chairman of the Board, Loyola Federal
Savings and Loan Association, Baltimore,
Maryland
Appointed by the Board of Governors
Robert L. Tate
Chairman, Tate Industries, Baltimore,
Maryland
Gloria L. Johnson
President, Hutzler Brothers Company,
Baltimore, Maryland
Thomas R. Shelton
President, Resource Management Group,
Inc., Salisbury, Maryland

1986
1987
1988
1988

1986
1987
1988

CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank
John A. Hardin
Chairman of the Board and President, First
Federal Savings Bank, Rock Hill, South
Carolina



1986

Directories and Meetings 279

James M. Culberson, Jr. ..Chairman and President, The First National
Bank of Randolph County, Asheboro,
North Carolina
J. Donald Collier
Orangeburg, South Carolina
James G. Lindley
Chairman, South Carolina National
Corporation, and Chairman and
President, South Carolina National Bank,
Columbia, South Carolina
Appointed by the Board of Governors
Wallace J. Jorgenson
President, Jefferson-Pilot Communications
Company, Charlotte, North Carolina
James E. Bostic, Jr
Division General Manager, Convenience
Products Division, Georgia-Pacific
Corporation, Aiken, South Carolina
G. Alex Bernhardt
President, Bernhardt Industries, Inc.,
Lenoir, North Carolina

Term
expires
Dec. 31
1987
1988

1988

1986
1987
1988

District 6—ATLANTA
Class A
Mary W. Walker
E. B. Robinson, Jr

Virgil H. Moore, Jr

Class B
Harold B. Blach, Jr
Horatio C. Thompson
Bernard F. Sliger
Class C
Bradley Currey, Jr
Jane C. Cousins
John H. Weitnauer, Jr



Vice Chairman, The National Bank of
Walton County, Monroe, Georgia
Chairman and Chief Executive Officer,
Deposit Guaranty National Bank and
Deposit Guaranty Corporation,
Jacksonville, Mississippi
Chairman and Chief Executive Officer, First
Farmers and Merchants National Bank,
Columbia, Tennessee
President, Blach's Inc., Birmingham,
Alabama
President, Horatio Thompson Investments,
Inc., Baton Rouge, Louisiana
President, Florida State University,
Tallahassee, Florida
President, Rock-Tenn Company, Norcross,
Georgia
President and Chief Executive Officer,
Merrill Lynch Realty/Cousins, Miami,
Florida
Chairman (Retired), Rich way, Atlanta,
Georgia

1986

1987
1988

1986
1987
1988

1986
1987
1988

280 Directories and Meetings

BIRMINGHAM BRANCH
Appointed by the Federal Reserve Bank
Charles L. Peery
Chairman, The First National Bank of
Florence, Florence, Alabama
Willard L. Hurley
Chairman and Chief Executive Officer, First
Alabama Bancshares, Inc., Birmingham,
Alabama
Judith Thompson
Vice Chairman, Thompson Tractor
Company, Inc., Birmingham, Alabama ....
Milton A. Wendland
Owner-Operator, Autauga Farming
Company, Autaugaville, Alabama
Appointed by the Board of Governors
Margaret E.M. Tolbert
Associate Provost for Research and
Development and Director, Carver
Research Foundation, Tuskegee
University, Tuskegee, Alabama
A.G. Trammell
President, Alabama Labor Council,
AFL-CIO, Birmingham, Alabama
Roy D. Terry
President and Chief Executive Officer, Terry
Manufacturing Company, Inc., Roanoke,
Alabama

Term
expires
Dec. 31

1986
1987
1988
1988

1986
1987
1988

JACKSONVILLE BRANCH
Appointed by the Federal Reserve Bank
John D. Uible
Chairman and Chief Executive Officer,
Florida National Banks of Florida, Inc.,
Jacksonville, Florida
Buell G. Duncan, Jr
Chairman, President, and Chief Executive
Officer, Sun Bank, N.A., Orlando,
Florida
Robert R. Deison
President and Chairman of the Board,
Andrew Jackson State Savings and Loan
Association, Tallahassee, Florida
George W. Gibbs III
President, Atlantic Dry Dock Corporation,
Jacksonville, Florida
Appointed by the Board of Governors
Saundra H. Gray
Owner, Gemini Springs Farm, DeBary,
Florida
Andrew A. Robinson
Dean, College of Education and Human
Services, University of North Florida,
Jacksonville, Florida
E. William Nash, Jr
President, South-Central Operations, The
Prudential Insurance Company of
America, Jacksonville, Florida



1986
1987
1988
1988

1986
1987
1988

Directories and Meetings 281

MIAMI BRANCH
Appointed by the Federal Reserve Bank
Robert L. Kester
Vice Chairman, Barnett Bank of South
Florida, N.A., Pompano Beach, Florida...
Robert D. Rapaport
Chairman, Royal Palm Savings Association,
Palm Beach, Florida
Robert M. Taylor
Chairman and Chief Executive Officer,
The Mariner Group, Inc., Fort Myers,
Florida
William H. Losner
President and Chief Executive Officer, The
First National Bank of Homestead,
Homestead, Florida
Appointed by the Board of Governors
Eugene E. Cohen
Chief Financial Officer and Treasurer,
Howard Hughes Medical Institute,
Coconut Grove, Florida
Robert D. Apelgren
President, Apelgren Corporation, Pahokee,
Florida
Sue McCourt Cobb
Attorney, Greenberg, Traurig, Askew,
Hoffman, Lipoff, Rosen, and Quentel,
P.A., Miami, Florida

Term
expires
Dec. 31

1986
1987
1987
1988

1986
1987
1988

NASHVILLE BRANCH
Appointed by the Federal Reserve Bank
Robert W. Jones
Chairman and President, First National
Bank, McMinnville, Tennessee
Will A. Hildreth
President and Chief Executive Officer, First
National Bank of Loudon County,
Lenoir City, Tennessee
Eugene C. Cheatham
President, Advanced Integrated Technology,
Inc., Nashville, Tennessee
Shirley A. Zeitlin
President, Shirley Zeitlin & Co. Realtors,
Nashville, Tennessee
Appointed by the Board of Governors
Patsy R. Williams
Partner, Rhyne Lumber Company,
Newport, Tennessee
C. Warren Neel
Dean, College of Business Administration,
The University of Tennessee, Knoxville,
Tennessee
Condon S. Bush
President, Bush Brothers & Company,
Dandridge, Tennessee



1986
1987
1988
1988

1986
1987
1988

282 Directories and Meetings

NEW ORLEANS BRANCH
Appointed by the Federal Reserve Bank
Carl E. Jones, Jr
Chairman, President, and Chief Executive
Officer, First Alabama Bank of Mobile,
N.A., Mobile, Alabama
James G. Boyer
Chairman, President, and Chief Executive
Officer, Gulf National Bank at Lake
Charles, Lake Charles, Louisiana
Alan R. Barton
President and Chief Executive Officer,
Mississippi Power Company, Gulfport,
Mississippi
Robert M. Shofstahl
President and Chief Executive Officer,
Pelican Homestead and Savings
Association, Metairie, Louisiana
Appointed by the Board of Governors
Leslie B. Lampton
President, Ergon, Inc., Jackson,
Mississippi
Caroline K. Theus
President, Ingle wood Land and
Development Company, Alexandria,
Louisiana
Sharon A. Perlis
President, Sharon A. Perlis (APLC),
Metairie, Louisiana

Term
expires
Dec. 31

1986
1987
1988
1988

1986
1987
1988

District 7—CHICAGO
Class A
O. Jay Tomson
Barry F. Sullivan
John W. Gabbert

Class B
Leon T. Kendall
Edward D. Powers
Max J. Naylor
Class C
Robert J. Day



Chairman of the Board and Chief Executive
Officer, Citizens National Bank of Charles
City, Charles City, Iowa
Chairman of the Board and Chief Executive
Officer, First National Bank of Chicago,
Chicago, Illinois
,
President and Chief Executive Officer, First
National Bank and Trust Company,
LaPorte, Indiana

1986
1987
1988

Chairman of the Board, Mortgage Guaranty
Insurance Corporation, Milwaukee,
Wisconsin
President and Chief Executive Officer,
Mueller Company, Decatur, Illinois
Farmer, Jefferson, Iowa

1986

Chairman and Chief Executive Officer, USG
Corporation, Chicago, Illinois

1986

1987
1988

Directories and Meetings 283

Marcus Alexis
Charles S. McNeer

Dean, College of Business Administration,
University of Illinois at Chicago, Chicago,
Illinois
Chairman of the Board and Chief Executive
Officer, Wisconsin Electric Power
Company, Milwaukee, Wisconsin

Term
expires
Dec. 31
1987
1988

DETROIT BRANCH
Appointed by the Federal Reserve Bank
Ronald D. Story
Chairman and President, The Ionia County
National Bank of Ionia, Ionia, Michigan...
Richard M. Gillett
Chairman of the Board, Old Kent Financial
Corporation, Grand Rapids, Michigan
Thomas R. Ricketts
Chairman of the Board and President,
Standard Federal Bank, Troy, Michigan ...
Donald R. Mandich
Chairman and Chief Executive Officer,
Comerica Bank-Detroit, Detroit,
Michigan
Appointed by the Board of Governors
Karl D. Gregory
Professor of Economics and Management,
School of Economics and Management,
Oakland University, Rochester, Michigan....
Robert E. Brewer
Senior Vice President, Accounting,
Administration & Financial Services,
K mart Corporation, Troy, Michigan
Phyllis E. Peters
Director, Professional Standards Review,
Touche Ross & Company, Detroit,
Michigan

1986
1987
1987
1988

1986
1987
1988

District 8—ST. LOUIS
Class A
Clarence C. Barksdale
H.L. Hembree III
Paul K. Reynolds

Class B
Frank A. Jones, Jr
Jesse M. Shaver



Chairman of the Board, Centerre
Bancorporation, St. Louis, Missouri
Chairman of the Board and Chief Executive
Officer, Arkansas Best Corporation,
Fort Smith, Arkansas
President and Chief Executive Officer, The
First National Bank of Pittsfield,
Pittsfield, Illinois
President, Dietz Forge Company, Memphis,
Tennessee
President, JMS Corporation, Louisville,
Kentucky

1986
1987
1988

1986
1987

284 Directories and Meetings

Robert J. Sweeney

Class C
Mary P. Holt
W.L. Hadley Griffin
Robert L. Virgil, Jr

President and Chief Executive Officer,
Murphy Oil Corporation, El Dorado,
Arkansas
President, Clothes Horse, Little Rock,
Arkansas
Chairman of the Executive Committee,
Brown Group, Inc., St. Louis, Missouri....
Dean, School of Business, Washington
University, St. Louis, Missouri

Term
expires
Dec. 31
1988

1986
1987
1988

LITTLE ROCK BRANCH
Appointed by the Federal Reserve Bank
William H. Kennedy, Jr. ..Chairman of the Board (Retired), Worthen
Banking Corporation, Little Rock,
Arkansas
Wilbur P. Gulley, Jr
Chairman of the Board, Savers Federal
Savings & Loan Association, Little Rock,
Arkansas
W. Wayne Hartsfield
President and Chief Executive Officer, First
National Bank, Searcy, Arkansas
Robert C. Connor, Jr
President, Union National Bank of Little
Rock, Little Rock, Arkansas
Appointed by the Board of Governors
Richard V. Warner
Group Vice President, Wood Products
Group, Potlatch Corporation, Warren,
Arkansas
Sheffield Nelson
Attorney, Little Rock, Arkansas
James R. Rodgers
Airport Manager, Little Rock Regional
Airport, Little Rock, Arkansas

1986
1987
1987
1988

1986
1987
1988

LOUISVILLE BRANCH
Appointed by the Federal Reserve Bank
Frank B. Hower, Jr
Chairman of the Board and Chief Executive
Officer, Liberty National Bank and Trust
Company of Louisville, Louisville,
Kentucky
John E. Darnell, Jr
Chairman of the Board, The Owensboro
National Bank, Owensboro, Kentucky
R. I. Kerr, Jr
Chairman of the Board, President, and
Chief Executive Officer, Great Financial
Federal, Louisville, Kentucky
Allan S. Hanks
President, The Anderson National Bank
of Lawrenceburg, Lawrenceburg,
Kentucky



1986
1987
1987
1988

Directories and Meetings 285

Appointed by the Board of Governors
William C. Ballard, Jr
Executive Vice President, Finance and
Administration, Humana, Inc., Louisville,
Kentucky
Raymond M. Burse
President, Kentucky State University,
Frankfort, Kentucky
Lois H. Gray
Chairman of the Board, James N. Gray
Construction Company, Inc., Glasgow,
Kentucky

Term
expires
Dec. 31
1986
1987
1988

MEMPHIS BRANCH
Appointed by the Federal Reserve Bank
Wayne W. Pyeatt
President, Memphis Fire Insurance
Company, Memphis, Tennessee
Edgar H. Bailey
Chairman and Chief Executive Officer,
Leader Federal Savings and Loan
Association, Memphis, Tennessee
John P. Dulin
President, First Tennessee Bank, N.A.,
Memphis, Tennessee
William H. Brandon, Jr. ..President, First National Bank of Phillips
County, Helena, Arkansas
Appointed by the Board of Governors
Donald B. Weis
President, Tamak Transportation
Corporation, West Memphis, Arkansas ....
G. Rives Neblett
Neblett and Havens, Attorneys at Law,
Shelby, Mississippi
Katherine Hinds Smythe...President, Memorial Park, Inc., Memphis,
Tennessee

1986
1987
1987
1988

1986
1987
1988

District 9—MINNEAPOLIS
Class A
Burton P. Allen, Jr
Thomas M. Strong
Duane W. Ring

President, First National Bank, Milaca,
Minnesota
President and Chief Executive Officer,
Citizens State Bank, Ontonagon,
Michigan
President and Chief Executive Officer,
Norwest Bank La Crosse, N.A.,
La Crosse, Wisconsin

1986
1987
1988

Class B

Harold F. Zigmund
William L. Mathers
Richard L. Falconer



Chairman (Retired), Blandin Paper
Company, Grand Rapids, Minnesota
President, Mathers Land Company,
Miles City, Montana
District Staff Manager, Northwestern Bell,
Minneapolis, Minnesota

1986
1987
1988

286 Directories and Meetings

Class C
John B. Davis, Jr
Michael W. Wright
John A. Rollwagen

Term
expires
Dec. 31
President Emeritus, Macalester College,
St. Paul, Minnesota
Chairman, President, and Chief Executive
Officer, Super Valu Stores, Inc.,
Minneapolis, Minnesota
Chairman and Chief Executive Officer, Cray
Research Inc., Minneapolis, Minnesota ....

1986
1987
1988

HELENA BRANCH
Appointed by the Federal Reserve Bank
Dale W. Anderson
President and Chief Executive Officer,
Norwest Bank Great Falls, N.A.,
Great Falls, Montana
Seabrook Pates
President and General Manager, Midland
Implement Company, Inc., Billings,
Montana
F. Charles Mercord
President and Chief Executive Officer, First
Federal Savings Bank of Montana,
Kalispell, Montana
Appointed by the Board of Governors
Marcia S. Anderson
President, Bridger Canyon Stallion Station,
Inc., Bozeman, Montana
Warren H. Ross
President, Ross 87 Ranch, Inc., Chinook,
Montana

1986
1986
1987

1986
1987

District 10—KANSAS CITY
Class A
Harold L. Gerhart, Jr
Donald D. Hoffman
Robert L. Hollis

Class B
Richard D. Harrison
Vacancy
Jerry D. Geist




President and Chief Executive Officer, First
National Bank of Newman Grove,
Newman Grove, Nebraska
Chairman of the Board, Central Bank of
Denver, Denver, Colorado
Chairman of the Board and Chief Executive
Officer, First National Bank & Trust Co.,
Okmulgee, Oklahoma
Chairman and Chief Executive Officer,
Fleming Companies, Inc., Oklahoma City,
Oklahoma
Chairman and President, Public Service
Company of New Mexico, Albuquerque,
New Mexico

1986
1987
1988

1986
1987
1988

Directories and Meetings 287

Class C
Fred W. Lyons, Jr

President and Chief Executive Officer,
Marion Laboratories, Inc., Kansas City,
Missouri
Robert G. Lueder
Chairman of the Board, Lueder
Construction Company, Omaha,
Nebraska
Irvine O. Hockaday, Jr. ...President and Chief Executive Officer,
Hallmark Cards, Inc., Kansas City,
Missouri

Term
expires
Dec. 31
1986
1987
1988

DENVER BRANCH
Appointed by the Federal Reserve Bank
Roger L. Reisher
Co-Chairman, FirstBank Holding Company
of Colorado, Lakewood, Colorado
Junius F. Baxter
Chairman of the Board and Chief Executive
Officer, Bank Western Federal Savings
Bank, Denver, Colorado
George S. Jenks
President and Chief Executive Officer,
Sunwest Financial Services, Inc.,
Albuquerque, New Mexico
W. Richard Scarlett III
Chairman and President, The Jackson State
Bank, Jackson Hole, Wyoming
Appointed by the Board of Governors
James C. Wilson
President and Chief Executive Officer,
Rocky Mountain Energy, Broomfield,
Colorado
James E. Nielson
President and Chief Executive Officer, JN
Incorporated, Cody, Wyoming
Anthony W. Williams
Attorney, Williams, Turner, & Holmes,
P.C., Grand Junction, Colorado

1986
1987
1988
1988

1986
1987
1988

OKLAHOMA CITY BRANCH
Appointed by the Federal Reserve Bank
William O. Alexander
President and Chief Executive Officer,
Continental Federal Savings & Loan
Association, Oklahoma City, Oklahoma...
Marcus R. Tower
Tulsa, Oklahoma
William H. Crawford
Chairman and Chief Executive Officer, First
National Bank and Trust Company,
Frederick, Oklahoma

1987

Appointed by the Board of Governors
John F. Snodgrass
President and Trustee, The Samuel Roberts
Noble Foundation, Inc., Ardmore,
Oklahoma
Patience S. Latting
Oklahoma City, Oklahoma

1986
1987




1986
1986

288 Directories and Meetings

OMAHA BRANCH
Appointed by the Federal Reserve Bank
Donald J. Murphy
Director, Norwest Bank Nebraska, N.A.,
Omaha, Nebraska
John T. Selzer
President, Scottsbluff National Bank and
Trust Company, Scottsbluff, Nebraska
Charles H. Thorne
Chairman of the Board and Chief Executive
Officer, First Federal Savings and Loan
Association of Lincoln, Lincoln, Nebraska
Appointed by the Board of Governors
Janice D. Stoney
Executive Vice President and Chief
Operating Officer, Northwestern Bell
Telephone Company, Omaha, Nebraska...
Kenneth L. Morrison
President, Morrison-Quirk Grain
Corporation, Hastings, Nebraska

Term
expires
Dec. 31

1986
1987
1987

1986
1987

District 11—DALLAS
Class A
Miles D. Wilson
Gene Edwards
Charles T. Doyle
Class B
Kent Gilbreath
Robert L. Pfluger
Robert Ted Enloe III
Class C
Hugh G. Robinson
Bobby R. Inman

Robert D. Rogers

Chairman of the Board and Chief Executive
Officer, The First National Bank of
Bellville, Bellville, Texas
Chairman of the Board, First Amarillo
Bancorporation, Inc., Amarillo, Texas
Chairman and Chief Executive Officer, Gulf
National Bank, Texas City, Texas
Associate Dean, Hankamer School of
Business, Baylor University,
Waco, Texas
Rancher, San Angelo, Texas
President, Lomas & Nettleton Financial
Corporation, Dallas, Texas
President, Cityplace Development
Corporation, Dallas, Texas
Chairman of the Board, President, and
Chief Executive Officer, Microelectronics
and Computer Technology Corporation,
Austin, Texas
President and Chief Executive Officer,
Texas Industries, Inc., Dallas, Texas

1986
1987
1988

1986
1987
1988

1986

1987
1988

EL PASO BRANCH
Appointed by the Federal Reserve Bank
David L. Stone
President, The Portales National Bank,
Portales, New Mexico



1986

Directories and Meetings 289

Tony A. Martin
Gerald W. Thomas

Chairman of the Board, First City National
Bank of Midland, Midland, Texas
President Emeritus and Professor of Animal
Range Science, Center for International
Programs, New Mexico State University,
Las Cruces, New Mexico

Vacancy
Appointed by the Board of Governors
John R. Sibley
President, Delaware Mountain Enterprises,
Carlsbad, New Mexico
Mary Carmen Saucedo
Associate Superintendent, Central Area
Office, El Paso Independent School
District, El Paso, Texas
Peyton Yates
President, Yates Drilling Company, Artesia,
New Mexico

Term
expires
Dec. 31
1987

1987
1988

1986
1987
1988

HOUSTON BRANCH
Appointed by the Federal Reserve Bank
Marcella D. Perry
Port Commissioner, Port of Houston
Authority of Harris County, Houston,
Texas
Thomas B. McDade
Vice Chairman (Retired), Texas Commerce
Bancshares, Inc., Houston, Texas
David E. Sheffield
Victoria, Texas
Jeff Austin, Jr
President, First National Bank of
Jacksonville, Jacksonville, Texas
Appointed by the Board of Governors
Walter M. Mischer, Jr
President, The Mischer Corporation,
Houston, Texas
Andrew L. Jefferson, Jr. ..Attorney, Jefferson, Mims, and Plummer,
Houston, Texas
Leo E. Linbeck, Jr
Chairman and Chief Executive Officer,
Linbeck Construction Corporation,
Houston, Texas

1986
1987
1987
1988

1986
1987
1988

SAN ANTONIO BRANCH
Appointed by the Federal Reserve Bank
C. Ivan Wilson
Chairman of the Board and Chief Executive
Officer, First City Bank of Corpus Christi,
Corpus Christi, Texas
Joe D. Barbee
President and Chief Executive Officer,
Barbee-Neuhaus Implement Company,
Weslaco, Texas
Robert T. Rork
Chairman of the Board and Chief Executive
Officer, RepublicBank San Antonio,
N.A., San Antonio, Texas
Jane Flato Smith
Rancher, San Antonio, Texas



1986
1987
1987
1988

290 Directories and Meetings

Appointed by the Board of Governors
Lawrence L. Crum
Professor of Banking and Finance, The
University of Texas at Austin, Austin,
Texas
Ruben M. Garcia
Chief Executive Officer, Modern Machine
Shop, Inc., Laredo, Texas
Robert F. McDermott
Chairman of the Board and President,
United Services Automobile Association,
San Antonio, Texas

Term
expires
Dec. 31
1986
1987
1988

District 12—SAN FRANCISCO
Class A
Rayburn S. Dezember
Donald J. Gehb

Spencer F. Eccles

Chairman, Central Pacific Corporation, and
American National Bank, Bakersfield,
California
President and Chief Executive Officer,
Alameda Bancorporation and Alameda
First National Bank, Alameda,
California
Chairman, President and Chief Executive
Officer, First Security Corporation, Salt
Lake City, Utah

1986

1987
1988

Class B

John C. Hampton
George H.
Weyerhaeuser
Togo W. Tanaka

President, Willamina Lumber Company,
Portland, Oregon

1986

President and Chief Executive Officer,
Weyerhaeuser Company, Tacoma,
Washington
Chairman, Gramercy Enterprises, Inc.,
Los Angeles, California

1987
1988

Class C

Fred W. Andrew
Alan C. Furth

Carolyn S. Chambers

President, Apex Orchards, Inc., Bakersfield,
California
Vice Chairman, Santa Fe Southern Pacific
Corporation, and President, Southern
Pacific Company, San Francisco,
California
President and Chief Executive Officer,
Chambers Communications Corp.,
Eugene, Oregon

1986

1987
1988

LOS ANGELES BRANCH
Appointed by the Federal Reserve Bank
Harvey J. Mitchell
President and Chief Executive Officer,
Escondido National Bank, Escondido,

California


1986

Directories and Meetings 291

Robert R. Dockson
Howard C. McCrady
William L. Tooley

Chairman of the Board, CalFed, Inc., and
California Federal Savings and Loan
Association, Los Angeles, California
Chairman of the Board, Valley National
Bank, Phoenix, Arizona
Chairman, Tooley & Company, Investment
Builders, Los Angeles, California

Appointed by the Board of Governors
Lola M. McAlpin-Grant.. .Attorney, Inglewood, California
Richard C. Seaver
President, Hydril Company, Los Angeles,
California
Thomas R. Brown, Jr
Chairman of the Board, Burr-Brown
Corporation, Tucson, Arizona

Term
expires
Dec. 31
1987
1988
1988
1986
1987
1988

PORTLAND BRANCH
Appointed by the Federal Reserve Bank
William S. Naito
Vice President, Norcrest China Company,
Portland, Oregon
John A. Elorriaga
Chairman of the Board and Chief Executive
Officer, United States National Bank of
Oregon, Portland, Oregon
G. Dale Weight
Chairman of the Board and Chief Executive
Officer, Benjamin Franklin Savings and
Loan Association, Portland, Oregon
Herman C. Bradley, Jr
President and Chief Executive Officer,
Tri-County Banking Company,
Junction City, Oregon
Appointed by the Board of Governors
Paul E. Bragdon
President, Reed College, Portland, Oregon..
Sandra A. Suran
Partner in Charge, Peat, Marwick, Mitchell
and Co., Beaverton, Oregon
G. Johnny Parks
Former Northwest Regional Director,
International Longshoremen's &
Warehousemen's Union, Portland,
Oregon

1986
1987
1987
1988
1986
1987

1988

SALT LAKE CITY BRANCH
Appointed by the Federal Reserve Bank
Albert C. Gianoli
President and Chairman of the Board, First
National Bank of Ely, Ely, Nevada
Lela M. Ence
, Executive Director, University of Utah
Alumni Association, Salt Lake City,
Utah
Fred C. Humphreys
Chairman and Chief Executive Officer, The
Idaho First National Bank and Moore
Financial Group, Boise, Idaho
Gerald R. Christensen
President, First Federal Savings and Loan

Association, Salt Lake City, Utah


1986
1987
1987
1988

292 Directories and Meetings

Appointed by the Board of Governors
Robert N. Pratt
President, Moriah Enterprises, Inc.,
Bountiful, Utah
Don M. Wheeler
President, Wheeler Machinery Company,
Salt Lake City, Utah
D. N. Rose
President and Chief Executive Officer,
Mountain Fuel Supply Company, Salt
Lake City, Utah

Term
expires
Dec. 31
1986
1987
1988

SEATTLE BRANCH
Appointed by the Federal Reserve Bank
H. H. Larison
President, Columbia Paint Company,
Spokane, Washington
John N. Nordstrom
Co-Chairman of the Board, Nordstrom,
Inc., Seattle, Washington
William S. Randall
President and Chief Executive Officer, First
Interstate Bank of Washington, N.A.,
Seattle, Washington
William W. Philip
Chairman of the Board and President, Puget
Sound National Bank, Tacoma,
Washington
Appointed by the Board of Governors
Carol A. Nygren
Managing Partner, Laventhol & Horwath,
Seattle, Washington
John W. Ellis
President and Chief Executive Officer,
Puget Sound Power & Light Company,
Bellevue, Washington
Byron I. Mallott
Chief Executive Officer, Sealaska
Corporation, Juneau, Alaska




1986
1987
1987
1988

1986
1987
1988

Index




295

Index
Acceptances, bankers (See Bankers
acceptances)
Adjustable-rate mortgages
Amendment to Regulation Z, 161
Consumer Handbook on Adjustable
Rate Mortgages, 161, 167, 172
Agriculture
Farm Credit Act, 184
Problem loans, 192
Seasonal credit program, renewal, 83
American Institute of Certified Public
Accountants, 193
Annual Report: Budget Review, 213
Anti-Drug Abuse Act of 1986, 202
Assets and liabilities
Banks, by class, 247
Board of Governors, 215-20
Federal Reserve Banks, 224-27
Audits (See Examinations, inspections,
regulation, and audits)
Automated clearinghouse service, 77,
194, 210, 212
Automated teller machines, 168
Automobile credit, 166
Balance of payments (See U.S.

international transactions)
Bankers acceptances
Authority to purchase and to enter
into repurchase agreements,
87-89
Federal Reserve Banks
Holdings, 213, 222, 224, 226
Income, 212, 234-37
Open market transactions, 228
Repurchase agreements, 87-89,
222, 224, 226, 228
Bank Export Services Act, 202
Bank holding companies (See also
Regulations: Y)
Activities approved, pending, and
denied, 198-202
Amendment to Regulation Y, 78
Antitrust action, 181
Applications by, processing and
notice of Board decisions, 193,
198-202



Bank holding companies —
Continued
Capital adequacy guidelines, 80,
191-92
Examination, inspection, and
regulation, 187, 188-91, 206
International activities, 189, 200
Legislative recommendations, 177-78
Litigation, 181-86
Number and assets, 188
Stock repurchases by, 200
Surveillance and monitoring program,
190
Bank Holding Company Act (See also
Regulations: Y)
Amendment to Rules Regarding
Delegation of Authority, 80
Legislative recommendations and
litigation, 177-86, 200, 206-07
Provisions, 188, 196, 198, 201
Bank Holding Company Supervision
Manual, 191
Banking offices, changes in number, 234
Banking supervision and regulation by
Federal Reserve System, 187-204
Bank, new definitions, legislative
recommendations, 177-78
Bank of England, 187, 192
Bank of Japan, 15
Bank Merger Act, 197
Bank mergers and consolidations,
253-61
Bank Secrecy Act, 202
Basic financial services, 80, 163, 172
Board of Governors (See also Federal
Reserve System)
Budget, 213
Cash, sources, uses, and balance at
end of 1986, 215-20
Consumer Advisory Council, 171-72,
268
Delegated authority, 198
Expenses (See Income and expenses)
Financial statements, 215-20
Income (See Income and expenses)
Interpretations (See Interpretations of
Regulations)

296 Index
Board of Governors —Continued
Legislative recommendations,
173-75, 177-80
Litigation, 181-86
Members and officers, 264
Policy actions (See Policy actions)
Pricing of Federal Reserve services
(See Fees)
Publications (See Publications)
Regulations (See Regulations)
Regulatory simplification, 205-07
Salaries, 231
Branch banks
Federal Reserve (See Federal Reserve
Banks)
Foreign branches of U.S. banking
organizations, 189, 200-02
U.S. activities of foreign banks,
189-90
Budgets, Federal Reserve Board and
Banks, 213
Business credit transactions, proposed
legislation, 174
Call Reports, 195

Capital accounts
Banks, by class, 232
Federal Reserve Banks, 222, 224, 226
Capital adequacy guidelines, 80, 191-92
Change in Bank Control Act of 1978,
78, 197-98
Check clearing and collection
Availability of funds, speedup, 165,
172, 209
Fees for Federal Reserve services,
209-14
Float (See Float)
Legislative recommendations, 180
Volume of operations, 244
Coin and currency services, 211
Combined Construction/Permanent
Loan Disclosures and Regulation
Z, brochure, 167
Commercial Bank Examination Manual,
191
Commercial banks (See also Insured
commercial banks)
Banking offices, changes in number,
252
Supervision and regulation by Federal
Reserve System, 187-204
Transfers of funds (See Transfers of
funds)




Commodity Credit Corporation, 10-11,
61
Communique, newsletter, 164
Community Affairs Officers, 163-64
Community Affairs Program, 164
Community Reinvestment Act
Examination under, 163, 164, 165,
171, 172
Comptroller of the Currency
Conformity with, 192, 195
Jurisdiction, 189, 197
Reports, orders, and legislative
recommendations by, 163,
165-66
Condition statements of Federal
Reserve Banks, 222, 224-27
Congressional Budget Office, 10
Construction Loan Disclosures and
Regulation Z, brochure, 167
Consumer Advisory Council, 171-72,
268
Consumer and community affairs,
161-75
Consumer Complaint Control System,
169
Consumer Handbook on Adjustable
Rate Mortgages, 161, 167, 172
Credit (See also Loans)
Equal Credit Opportunity (See Equal
Credit Opportunity Act)
Real estate, 9, 166
Seasonal credit program, renewal, 83
Securities, 76-77, 202
Truth in Lending (See Truth in
Lending Act)
Credit cards, 173-74
Credit Practices Rule (See also
Regulations: A A)
Update to staff guidelines, 162
Currency and coin services, 211
Currency and Foreign Transactions
Reporting Act (Bank Secrecy Act),
202
Depository institutions

Checks (See Check clearing and
collection)
Interest on deposits (See Interest on
deposits)
Reserve requirements (See
Regulations: D)
Reserves and related items, 248-51
Services to (See Fees) '

Index 297
Deposits
Banks, by class, 247
Checks (See Check clearing and
collection)
Federal Reserve Banks, 222, 224,
226, 249, 253
Interest rates (See Interest on
deposits)
Reserve requirements (See Reserve
requirements of depository
institutions)
Directors, Federal Reserve Banks and
Branches
Legislative recommendation, 179
List, 272
Discount rates at Federal Reserve
Banks (See Interest rates)
Dividends
Federal Reserve Banks, 212-13, 234,
239, 240
Federal Reserve System, 233
Earnings of Federal Reserve Banks, 212,

234-37, 238-41
Economy in 1986, 5-11
Edge and agreement corporations,
187-88, 189, 190, 193, 201, 202
Educational activities, 193, 195
Education Foundation of State Bank
Supervisors, 193
Electronic data processing activities,
examination, 190
Electronic Fund Transfer Act
Compliance with, 168
Economic impact, 168-69
Electronic fund transfers (See Transfers
of funds and Regulations: E)
Electronic fund transfer systems, policy
of reducing risks on large-dollar
transfers, 193
Equal Credit Opportunity Act
Compliance with, 167-68
Regulation B (See Regulations)
Examinations, inspections, regulation,
and audits
Bank holding companies, 187-91,
177-78, 188
Federal Reserve Banks, 212
International activities, 189
Large-dollar electronic fund transfers,
193, 205
Specialized, 190
State member banks, 164-65, 188




Examinations, inspections, regulation,
and audits—Continued
Surveillance and monitoring program,
relation to, 190-91
System Open Market Account, 212
Expenses (See Income and expenses)
Export trading companies, 189, 202
Farm Credit Act, 183, 184

Farm Credit Administration, 166, 167,
203
Farm Credit System, 22
Federal Advisory Council, 267
Federal agency securities
Authority to purchase and to enter
into repurchase agreements,
87-89, 118, 153
Federal Reserve Bank holdings,
214, 222, 224, 226, 230, 248
Federal Reserve open market
transactions for 1986, 228
Repurchase agreements, 87-89, 222,
224, 226, 228, 230
Transfer, by Reserve Banks, 211
Federal Bureau of Investigation,
training by, 195
Federal Deposit Insurance Corporation,
163, 165-66, 178, 189, 192, 195
Provisions involving, and jurisdiction,
197
Federal Financial Institutions
Examination Council, 80, 163, 172,
193, 195
Federal Home Loan Bank Board
Actions taken, 95, 163, 165-66, 167
Compliance with, 195, 203
Publication, 161
Federal Home Loan Banks, 17
Federal Home Loan Mortgage
Corporation, 211
Federal National Mortgage Association,
211
Federal Open Market Committee
Audit of System Open Market
Account, 212
Litigation, 185
Meetings, 13, 87
Members and officers, 266
Policy actions, 81, 82, 83, 87-160
Federal Reserve Act
Legislative recommendations, 179
Provisions, 189, 201, 204, 212
Federal Reserve Agents, 272

298 Index
Federal Reserve Banks
Assessments for expenses of Board of
Governors, 217, 234, 238, 240
Atlanta Bank, 164
Bank premises, 179, 213, 222, 224,

226, 232
Branches
Bank premises, 179, 213, 232
Directors, 273
Vice presidents in charge, 271
Budgets, 213
Capital accounts, 223, 224, 226
Chairmen and deputy chairmen, 271
Coin and currency service, 211
Condition statement, 222, 224
Dallas Bank, 164
Delegated authority, 197, 198
Deposits, 223, 224, 226, 249, 251
Directors
Legislative recommendation, 179
List, 273
Dividends paid, 213, 234, 239, 241
Examination or audit, 212
Expenses (See Income and expenses)
Income (See Income and expenses)
Interest rates, 81-83, 244
Kansas City Bank, 186
Loans and securities, 213, 222, 224,
226, 230, 232, 248, 250
Minneapolis Bank, 164
New York Bank, 87, 160, 212
Officers and employees, number and
salaries, 231
Operations, volume, 244
Philadelphia Bank, 164
Presidents and first vice presidents,
231, 271
Pricing of services, 209-12, 234, 242
Profit and loss, 236
Richmond Bank, 164
Seasonal credit program, renewal, 83
Training, 193, 195
Federal Reserve Board (See Board of
Governors)
Federal Reserve Bulletin, 200
Federal Reserve notes
Condition statement data, 222-27
Cost of issuance and redemption, 213,
217
Interest paid to U.S. Treasury on,
213, 233
Litigation, 185
Federal Reserve Reform Act of 1977,
Digitized for 298
FRASER


Federal Reserve System (See also Board
of Governors)
Banking supervision and regulation
by, 187-204
Budgets, 212-13, 233, 234
Consumer affairs (See Consumer and
community affairs)
Costs of certain services, 193
Expenses (See Income and expenses)
Foreign currency operations (See
Foreign currencies)
Income (See Income and expenses)
Map of Federal Reserve Districts, 262
Membership, 204
Pricing of services, 193, 209-12, 234,
242
Training, 193, 195
Federal Savings and Loan Insurance
Corporation, 167, 297
Federal Trade Commission, 167, 168
Federal Trade Commission
Improvement Act, unregulated
practices, 171
Fedwire, 193, 206, 210
Fees
Federal Reserve services to
depository institutions
Automated clearinghouse service,
210
Check clearing and collection, 209
Pricing of, 209-12, 234, 242
Proposal to charge for services, 193
Securities and noncash collection
services, 211
U.S. Treasury securities, 211
Financial Accounting Standard 15, 187
Financial Accounting Standards Board,
193
Financial Institutions Supervisory Act of
1966, 183, 188
Financial markets and monetary policy,
13-23
Float (See also Check clearing and
collection), 77, 209, 210, 212
Foreign banking and financing (See
Regulations: K)
Foreign banks, U.S. activities, 189-90
Foreign branches of U.S. banking
organizations, 189, 200-02
Foreign currencies
Authorization and directive for
operations in, and review of
documents, 87, 90, 92
Federal Reserve income on, 234

Index 299
Foreign exchange operations, 31
Full Employment and Balanced Growth
Act of 1978, 3, 13, 33
Garn-St Germain Depository
Institutions Act of 1982, 76, 78,
178, 206
Glass-Steagall Act, 183, 184
Gold certificate accounts of Reserve
Banks and gold stock, 222, 224,
226, 248, 250
Gramm-Rudmann-Hollings legislation,
5, 10
Guide to Business Credit and the Equal
Credit Opportunity Act, 161, 162
Income and expenses

Board of Governors, 215-20
Federal Reserve Banks, 212-13,
234-37, 238-41
Federal Reserve System, 213, 233
Reports of Condition and Income,
(Call Reports), 195
Insured commercial banks (See also
Commercial banks)
Acquisition authority in emergency,
legislative recommendation,
178-79
Assets and liabilities, 247
Banking offices, changes in number,
252
Number, by class of bank, 247
Interest on deposits (See also Interest
rates)
Dates of removal of rate ceilings on
time and savings deposits, 246
Regulation Q (See Regulations)
Interest rates (See also Interest on
deposits)
Annual percentage rate, 172, 173-74
Credit cards, 173-74
Federal Reserve Banks
Changes, 81-83, 84-85
Discount window, new policy, 83
Structure of discount rate, 84
Table, 244
Mortgage loans, 161
Internal Revenue Service, 185, 202
International banking activities, 189-90,
200-02, 207
International banking facilities, 201
International banking operations, 77,
207
201,


International developments, review of
1986, 25-31
International Monetary Fund, 31
International transactions, U.S., 28-30
Interpretations of Regulations
Margin regulations, 76, 202-04
Regulations B, E, and Z, 162
Regulation Q, 201, 205
Interstate banking, 179-80, 199
Interstate Commerce Commission, 167
Investments
Banks, by class, 247
Federal Reserve Banks, 222, 224, 226
Foreign, by U.S. banking
organizations, 201
State member banks, 201, 247
Labor market developments, 8

Legislative recommendations
Board of Governors, 173-75, 177-80
Of other agencies with enforcement
responsibilities, 175
Litigation
Bank holding companies, 181-83
Board procedures and regulations,
challenges to, 183-86
Loans (See also Credit)
Agricultural (See Agriculture)
Banks, by class, 247
Energy, 192
Executive officers of state member
banks, 204
Federal Reserve Banks
Holdings and income, 213-14, 222,
224, 226, 230, 234, 236, 248,
250
Interest rates, 81-85, 244
To depository institutions, 222, 224,
226, 234, 248, 250
Volume of operations, 244
Real estate, 9, 166
Margin credit regulation (See

Regulations: G, T, U, and X)
Margin requirements, 76, 202-04, 246
Member banks (See also Depository
institutions and National banks)
Assets, liabilities, and capital
accounts, 247
Banking offices, changes in number,
252
Borrowings and loans (See Loans)
Branches, 200, 201

300 Index
Member banks —Continued
Capital adequacy guidelines, 80,
191-92
Control of, changes in, 197
Membership in Federal Reserve
System, 204
Number, 247
Reserve requirements, 245
Reserves and related items, 248-51
State member banks (See State
member banks)
Surveillance and monitoring program,
190
Transfers of funds (See Transfers of
funds)
Mergers and consolidations, 197, 198
Monetary Control Act of 1980, 179, 209
Monetary policy
Financial markets relative to, 13-23
Reports to the Congress, 3, 33-72
Review of 1986, 3-12
Mortgage loans, 9, 166
Mutual savings banks, 244
National banks (See also Member
banks)
Assets, liabilities, and capital
accounts, 247
Banking offices, changes in number,
244
Capital adequacy guidelines, 80,
191-92
Foreign branches, 189, 200, 201
Number, 247
National Credit Union Administration,
163, 165-66, 195, 203
Neighborhood Reinvestment
Corporation, 164
Net Settlement Service, 210
Nonbanking activities, 199
Nonmember depository institutions
Assets and liabilities, 247
Banking offices, changes in number,
244
Number, 247
Over-the-counter marginable stocks, 203
Payments mechanism (See also Fees),

209-12



Policy actions
Board of Governors
Discount rates at Federal Reserve
Banks, 81-85
Regulations, 75-79
Statements and other actions, 80,
161-63, 165, 172
Federal Open Market Committee
(See also System Open Market
Account), 87-160
Presidents and vice presidents of
Federal Reserve Banks
Conferences, 272
List, 271-72
Salaries of presidents, 230
Prices, 5-8
Pricing of Federal Reserve services,
209-12, 234, 242
Profit and loss, Federal Reserve Banks,
234
Proposed revisions to Regulation Q, 205
Publications
Annual Report: Budget Review, 213
Bank Holding Company Supervision
Manual, 191
'' Combined Construction/Permanent
Loan Disclosures and Regulation
Z," 167
Commercial Bank Examination
Manual, 191
Communique, newsletter, 164
"Construction Loan Disclosure and
Regulation Z," 167
Consumer Handbook on Adjustable
Rate Mortgages, by Federal
Reserve Board and Federal
Home Loan Bank Board, 161,
167, 172
Credit Practices Rule, staff
guidelines, 162
Federal Reserve Bulletin, 200
Guide to Business Credit and the
Equal Credit Opportunity Act,
161, 162
Marginable over-the-counter stocks,
list, 203
Regulations B, E, and Z, official staff
commentaries, 162
Regulation Z Interagency
Enforcement Policy Guide, 166
"Regulation Z: The Right of
Rescission," 167

Index 301
Publications —Continued
"Regulation Z: Understanding
Prepaid Finance Charges," 167
"Securities Credit Transactions
Handbook," Federal Reserve
Regulatory Service, 203

Real estate loans, 9, 166

Regulation of banking organizations
(See Banking supervision and
regulation by Federal Reserve
System)
Regulations (See also Regulatory
Improvement Project and Rules
Regarding Delegation of Authority)
AA, Unfair or Deceptive Acts or
Practices, 162
B, Equal Credit Opportunity, 162,
165, 167, 174, 175
D, Reserve Requirements of
Depository Institutions, 75, 76,
201, 205
E, Electronic Fund Transfers, 161,
162, 165, 168-69, 172, 175
F, Securities of State Member Banks,
204
G, Securities Credit by Persons Other
than Banks, Brokers, or Dealers,
76, 202-04
J, Collection of Checks and Other
Items and Wire Transfers of
Funds, 77, 212
K, International Banking Operations,
77, 201, 207
Q, Interest on Deposits, 75, 201, 205
T, Credit by Brokers and Dealers,
202-04
U, Credit by Banks for the Purpose
of Purchasing or Carrying Margin
Stocks, 202-04
X, Borrowers of Securities Credit,
202-04
Y, Bank Holding Companies and
Change in Bank Control, 78,
181, 191, 199, 206
Z, Truth in Lending, 78, 161, 162,
165, 167, 175
Regulation Z: The Right of Rescission,
brochure, 167



Regulation Z: Understanding Prepaid
Finance Charges, 167
Regulatory Improvement Project, 175,
205
Regulatory Policy and Planning
Committee, 205
Regulatory simplification, 205-07
Report on Formal Enforcement
Actions, 189
Repurchase agreements
Authority to purchase and to enter
into, 87-89
Bankers acceptances (See Bankers
acceptances)
Federal agency securities (See Federal
agency securities)
U.S. Treasury securities (See U.S.
Treasury securities)
Reserve requirements of depository
institutions
Regulation D (See Regulations)
Table, 245
Reserves and related items, 251
Right to Financial Privacy Act, 184
Rules Regarding Delegation of
Authority, 79, 198

Salaries

Board of Governors, 217
Federal Reserve Banks, 231
Schools, 193, 195
Seasonal Credit Program, renewal, 83
Securities (See also specific types)
Credit, 76, 203, 246
Municipal securities dealers, clearing
agents, and transfer agents, 190
Over-the-counter, 203
Regulation, 202-04
Services by Federal Reserve, 211
Securities Act Amendments of 1975,
190
"Securities Credit Transactions
Handbook," Federal Reserve
Regulatory Service, 203
Securities and Exchange Act of 1934,
202-04
Securities of state member banks, 204
Small Business Administration, 167
Special drawing rights, 222, 224, 226,
248, 250

302 Index
State member banks (See also Member
banks)
Applications by, 200
Assets and liabilities, 188, 247
Banking offices, changes in number,
252
Basic financial services,
recommendations, 172
Capital adequacy guidelines, 80,
191-92
Consumer complaints against, 169-71
Control of, changes, 197
Examinations and inspections, 164,
171, 187-91
Fees (See Fees)
Financial disclosures, 204
Foreign branches, 201
Interest on deposits (See Interest on
deposits)
Loans to executive officers, 204
Membership in Federal Reserve
System, 204
Mergers and consolidations (See Bank
mergers and consolidations)
Number, 188, 247
Reserve requirements (See Reserve
requirements of depository
institutions)
Securities of, 204
Survey on delayed availability of
funds, 165
Stock market credit (See Securities
credit)
Supervision of banking organizations
(See Banking supervision and
regulation by Federal Reserve
System)
System Open Market Account
Audit, 212
Domestic Open Market Operations,
Authorization for, 87, 88-89,
118-52
Domestic Policy Directive, 87, 89, 93,
103, 110, 119, 130, 138, 145, 153
Foreign Currency Directive, 92
Foreign Currency Operations,
Authorization for, 87, 90-92

Thrift institutions, legislative
recommendations and approval of
acquisitions, 177-79, 198
Training, 193, 195
Transfer agents, 190
Transfers of funds (See also Fees)
Check clearing and collection (See
Check clearing and collection)
Federal Reserve operations, volume,
244
Large-dollar transfers, policy on
reducing risks, 193, 205
Pricing of Federal Reserve services,
209-12, 234, 242
Trust activities, examination, 190
Truth in Lending Act
Annual percentage rate, 172, 173-74
Compliance with, 165, 173
Regulation Z (See Regulations)
Truth in Savings, proposed legislation,
174

Thrift Institutions Advisory Council, 270

World Bank, 31


FRB l-ll,200-0587C


Uniform Bank Performance Report, 196

U.S. Department of Agriculture,
Packers and Stockyards
Administration, 166, 167
U.S. Department of Justice, 181
U.S. Department of Transportation,
166, 167, 168
U.S. Department of the Treasury, 202,
212
U.S. international transactions, 28-30
U.S. Treasury securities
Authority to buy, to enter into
repurchase agreements, and to
lend, 87-89, 118, 152
Bank holdings, by class of bank, 247
Federal Reserve Banks
Holdings, 213-14, 222, 224, 226,
230, 248, 250
Income, 213, 234-37
Transfers by, 211
Open market transactions, 228
Repurchase agreements
Authorization for, 87-89
Board policy statement, 80
Tables, 222, 224, 226, 228, 230,
248, 250


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102