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1990
Board of Governors of the Federal Reserve System
This publication is available from Publications Services, Board of Governors of the Federal
Reserve System, Washington, DC 20551.
Letter ofTransmittal
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., April 26, 1991
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-Seventh Annual Report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1990.
Sincerely,
Chairman
Contents
Part 1
Monetary Policy and
the U.S. Economy in 1990
3 INTRODUCTION
5
6
8
10
12
14
THE ECONOMY IN 1990
The household sector
The business sector
The government sector
Labor markets
Price developments
17
17
21
23
24
MONETARY POLICY AND FINANCIAL MARKETS IN 1990
The implementation of monetary policy
The monetary aggregates
The condition of financial institutions
Credit markets
27
28
30
33
INTERNATIONAL DEVELOPMENTS
Foreign economies
U.S. international transactions
Foreign currency operations
35 MONETARY POLICY REPORTS TO THE CONGRESS
35 Report on February 20,1990
50 Report on July 18, 1990
Part 2
73
73
74
74
75
75
76
77
77
78
79
80
Records, Operations,
and Organization
RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
Regulation D (Reserve Requirements of Depository Institutions)
Regulation H (Membership of State Banking Institutions in the Federal Reserve System)
Regulation H (Membership of State Banking Institutions in the Federal Reserve System)
and Regulation Y (Bank Holding Companies and Change in Bank Control)
Regulation J (Collection of Checks and Other Items by Federal Reserve Banks
and Funds Transfers through Fedwire)
Regulation T (Credit by Brokers and Dealers)
Regulation Y (Bank Holding Companies and Change in Bank Control)
Regulation Z (Truth in Lending)
Regulation BB (Community Reinvestment)
Regulation CC (Availability of Funds and Collection of Checks)
Policy statements and other actions
1990 discount rates
85 RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
85 Authorization for domestic open market operations
87 Domestic policy directive
87 Authorization for foreign currency operations
89 Foreign currency directive
90 Meeting held on February 6-7, 1990
101 Meeting held on March 27, 1990
110 Meeting held on May 15, 1990
117 Meeting held on July 2-3, 1990
128 Meeting held on August 21, 1990
136 Meeting held on October 2, 1990
144 Meeting held on November 13, 1990
151 Meeting held on December 18, 1990
161
161
164
166
CONSUMER AND COMMUNITY AFFAIRS
Regulatory matters
Community affairs
FFIEC activities
166
169
170
172
172
173
174
CONSUMER AND COMMUNITY AFFAIRS-Continued
Compliance with consumer regulations
Economic effect of the Electronic Fund Transfer Act
Complaints about state member banks
Unregulated practices
Consumer Advisory Council
Testimony and legislative recommendations
Recommendations of other agencies
175
175
175
176
177
LITIGATION
Bank holding companies - antitrust action
Bank Holding Company Act - review of Board actions
Other litigation involving challenges to Board procedures and regulations
Other actions
179
179
179
179
LEGISLATION ENACTED
Market Reform Act of 1990
Cranston-Gonzales National Affordable Housing Act
Crime Control Act of 1990
183
184
189
195
198
199
202
BANKING SUPERVISION AND REGULATION
Scope of supervisory and regulatory responsibilities
Supervisory policy
Regulation of the U. S. banking structure
International activities of U. S. banking organizations
Enforcement of other laws and regulations
Federal Reserve membership
203
203
203
203
204
204
REGULATORY SIMPLIFICATION
Foreign securities transactions
Funds transfers on Fedwire
Price reductions on credit cards
Changes in bank control
Nonbanking activities
205
205
208
209
209
210
210
210
FEDERAL RESERVE BANKS
Other developments in Federal Reserve services
Examinations
Income and expenses
Holdings of securities and loans
Volume of operations
Federal Reserve Bank premises
Financial statements for priced services
215 BOARD OF GOVERNORS FINANCIAL STATEMENTS
221 STATISTICAL TABLES
222 1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1990
224 2. Statement of condition of each Federal Reserve Bank, December 31,1990andl989
228 3. Federal Reserve open market transactions, 1990
230 4. Federal Reserve Bank holdings of U. S. Treasury and federal agency securities,
December 31, 1988-90
231 5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1990
232 6. Income and expenses of Federal Reserve Banks, 1990
236 7. Income and expenses of Federal Reserve Banks, 1914-90
240 8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1990
241 9. Operations in principal departments of Federal Reserve Banks, 1987-90
242 10. Federal Reserve Bank interest rates, December 31, 1990
243 11. Reserve requirements of depository institutions
244 12. Initial margin requirements under Regulations T, U, G, and X
245 13. Principal assets and liabilities and number of insured commercial banks,
by class of bank, June 30, 1990 and 1989
246 14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-90, and month-end 1990
252 15. Changes in number of banking offices in the United States, 1990
253 16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1990
265
266
268
269
270
271
272
273
274
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
Conferences of chairmen, presidents, and first vice presidents
Directors
295 INDEX
304 MAPS OF THE FEDERAL RESERVE SYSTEM
Parti
Monetary Policy and
the US. Economy in 1990
Introduction
The year 1990 was a difficult one for the
U.S. economy and a challenging one for
monetary policy. As the year began,
policy was aimed at supporting an expanding economy while trying to hold in
check, and eventually reduce, the rate of
price inflation, which had moved up a
notch in the latter part of the 1980s.
Through midyear, that delicate balancing
act appeared to be succeeding despite
problems in some industries and regions.
But in early August, Iraq's invasion of
Kuwait and a related surge in oil prices
bumped the economy off course, giving
new impetus to inflation and tilting the
economy from a path of slow growth to
one of recession. The longest peace-time
expansion in the nation's history thus
came to an end.
That the oil shock threatened both to
raise inflation and to reduce activity was
recognized from the outset, but which of
those threats posed the greater danger
was not immediately clear. The reaction
of household and business spending to
the oil shock was difficult to predict, as
was the degree to which the oil shock
would feed more generally into wage and
price decisions. Moreover, the extent
and duration of the disruption of world
oil markets were subject to great uncertainty. By mid-autumn, however, it appeared that the inflationary spillover of
the oil shock was being effectively contained and that the risk of an appreciable
economic contraction was growing. At
that point, the Federal Reserve began to
NOTE. The discussion here and in the following
move forcefully toward a more accommodative policy stance.
Earlier in the second half, policy had
been eased slightly on two occasions: in
July, to offset the effects on the economy
of apparent restraint in private credit
supplies, and in October, when prospective reductions in federal budget deficits
enabled interest rates to decline. Over the
balance of the year, money market rates
were reduced aggressively through open
market operations and, late in the year,
through a half-point decrease in the
discount rate. In total, short-term rates at
the end of 1990 were down more than
1 percentage point from their levels of
midyear, and long-term rates also had
moved lower. Falling interest rates contributed to an appreciable decline in the
foreign exchange value of the U. S. dollar
in the second half of the year.
The Federal Reserve's decisions to
ease policy in the latter part of 1990 were
influenced not only by developments in
the economy but also by the behavior of
the monetary and credit aggregates. M2
and M3 ended 1990 within the ranges set
by the Federal Open Market Committee
(FOMC), but they were in the lower
parts of those ranges, and their expansion
over the fourth quarter continued to be
quite sluggish. The sluggishness of the
aggregates during this period was worrisome because it suggested that the economy was weaker than anticipated and
because it indicated the possibility of
some undesirable restraint on future
spending from the constricted flow of
credit from depository institutions. In
particular, the thrift industry was con-
77th Annual Report, 1990
come increasingly reluctant to lend,
raising interest margins and tightening
nonprice terms. To bolster lending incentives, the Federal Reserve in December
eliminated the reserve requirements on
nonpersonal time deposits and net Eurocurrency liabilities.
To a significant extent, overall credit
flows were sustained in 1990 by sources
outside depositories: Debt of the domestic nonfinancial sectors grew about 7 percent over the year and ended in the middle
of the FOMC's monitoring range. The
shift toward nondepository sources of
credit made it possible to achieve a
greater amount of growth in nominal
income and expenditure for a given
expansion of the money stock. One facet
of this process was a shifting by the
public out of assets that are included in
the monetary aggregates and into holdings of Treasury issues and other securities. Velocity, the ratio of nominal GNP
to the money stock, thus exhibited
strength that was unusual, given the
circumstances. Although declines in
interest rates ordinarily are associated
with falling velocity, M2 velocity was
about unchanged in 1990, and M3 velocity registered an exceptionally large
increase.
As 1990 drew to a close, the immediate
concern was that of bringing the recession
to a halt and of getting the economy back
on a path of expansion. Support for
renewed expansion seemed likely to
come from lagged effects of the declines
in interest rates over the second half of
1990 as well as from a rise in purchasing
power brought on by a sharp drop in the
price of crude oil after mid-autumn. The
prospects for exports continued to look
favorable given the improved competitiveness of U.S. producers. At the same
time, however, the confidence of households and businesses was low at the end
of 1990, and problems in construction
and among some financial institutions
appeared to be deeply rooted; these
factors seemed to have the potential to
push back the economic recovery or
cause it to be distinctly subpar.
Looking beyond the cyclical processes
of recession and recovery, monetary
policy will need to continue aiming at the
longer-run objective of reducing the rate
of price inflation over time. In that
regard, price increases in 1990 were
larger than those of other recent years, a
result that reflected both the surge in oil
prices and more general inflation pressures. These inflation pressures seemed
to be easing a little in the latter part of the
year, however, perhaps setting the stage
for a more favorable inflation performance in 1991. Such an outcome clearly
would enhance the prospects for achieving maximum sustainable economic
growth.
•
The Economy in 1990
When 1990 began, the economy was in
its eighth year of expansion, and it
remained on a positive course into the
summer. During this period, problems
were evident in some sectors of the economy, notably construction, where activity
was being damped by the persistence of
high vacancy rates; and finance, where a
significant number of institutions were
encountering difficulties that reduced
their ability or willingness to provide
credit. Overall, however, production and
spending still were on a course of expansion at mid-year; and, while the rate of
price increase had not yet started to abate,
the conditions for slower inflation appeared to be developing without major
disruption to the economy.
Then, in early August, oil prices
surged with Iraq's invasion of Kuwait;
the price surge gave further impetus to
inflation, and it also portended reduced
domestic purchasing power and weaker
economic activity. Uncertainties about
the course of the economy were heightened enormously. Household and business sentiment plummeted almost overnight, a response that perhaps grew in
part out of memories of the difficult
adjustments that had followed the oil
shocks of the 1970s. At the time of the
invasion, and on into the autumn, sentiment also was being affected by the
considerable uncertainty that had developed regarding the course of fiscal policy.
Actual production and spending held
up for a time after the oil shock but
started to decline in early autumn. The
production cuts reduced real incomes
still further and added to the cumulating
forces of contraction, which included a
continued shift toward caution by lenders. The economy thus fell into recession
in the latter part of the year. Real gross
national product declined at an annual
rate of about Wi percent in the fourth
quarter, according to final estimates from
the Department of Commerce, and the
gain over the four quarters of the year
amounted to only 0.5 percent. The civilian unemployment rate, which had held
around 5lA percent through the first half
of the year, moved up steadily in the
second half, to 6.1 percent in December.
The consumer price index rose 6.1 percent from December 1989 to December
1990, the largest annual increase in nearly
a decade, and a surge in energy prices
after the invasion was only one of the
factors pushing inflation higher. The
year-to-year rate of increase in the CPI
excluding food and energy—a rough
indicator of basic inflation trends - maintained a gradual upward tilt through the
first three quarters of 1990, peaking at a
rate of 5.5 percent in August and September; a slight easing of pressures over the
Real GNP
Percentage change, Q4 to Q4
MIL
1986
1988
1990
The data are preliminary, seasonally adjusted, and come
from the Department of Commerce.
77th Annual Report, 1990
balance of 1990 brought the rate down to
5.2 percent by year-end. The year-toyear rate of increase in nominal labor
compensation, as measured by the employment cost index, also moved up in
the first half of 1990. After midyear,
however, wage pressures moderated, and
the rise in nominal compensation over
the year ended up at 4.6 percent, slightly
less than the increase recorded in each of
the two previous years.
Support for the growth of real activity
in 1990 continued to come from the
external sector, as real exports of goods
and services rose about 5% percent
over the four quarters of the year. By
contrast, gross domestic purchases, the
broadest indicator of domestic demand,
fell Vi percentage point on net over the
year; within this category an increase in
government purchases was more than
offset by weakness in consumption,
homebuilding, and business fixed investment and by a swing in inventories from
moderate accumulation late in 1989 to
decumulation in the fourth quarter of
1990.
As was true during much of the long
expansion of the 1980s, economic trends
in 1990 varied appreciably across different regions of the country. The New
England economy, which had been very
strong through much of the 1980s,
slumped in 1990; by year-end, unemployment rates in that region had moved well
above the national average. By contrast,
the economies of many locales with heavy
concentrations of manufacturing—especially capital goods manufacturing—held
up fairly well until the oil shock; the
continued growth of exports supported
activity in those areas. The farm economy was relatively strong again in 1990,
although some indications of softening
did show up in the second half. Energy
producers benefited from the climb in oil
prices; exploration and drilling activity
was restrained, however, by the great
uncertainty regarding the future course
of oil prices.
The Household Sector
In midsummer, consumer spending still
was on an uptrend, and it edged up a little
further after the oil shock, peaking in
September. But with real incomes being
dragged down by slumping employment
and soaring energy prices, the rise in
spending eventually ran out of steam.
Real outlays fell at an annual rate of about
3V2 percent in the fourth quarter; the
quarterly drop likely would have been
greater but for tax changes that caused
Income, Consumption, and Saving
Percentage change, Q4 to Q4
Real income and consumption
Disposable personal income
Personal consumption expenditures
I
Percent of disposable income
Personal saving
i
1986
1988
{_
1990
The data are preliminary, seasonally adjusted, and come
from the Department of Commerce.
The Economy in 1990
some households to make purchases in
advance of the turn of the year.
The declines in real income and spending in the latter part of the year essentially
reversed the moderate gains made earlier.
Over the year, after-tax income was down
about Vi percent in real terms; real
consumption spending was up over the
four quarters of 1990, but only fractionally. The personal saving rate rose over
thefirsthalf of the year, but then dropped
% percentage point over the last two
quarters. This drop in the saving rate
after midyear was a little surprising from
one perspective, in that an unprecedented
plunge in consumer attitudes between
July and October might have been expected to generate some increase in
precautionary saving. Moreover, many
households had suffered losses of wealth
because of decreases in house prices or in
the value of securities they held; these
developments would seem to have called
for a shift toward reduced consumption
out of current income. But while such
forces may well have been at work, they
apparently were outweighed by a tendency of households to dip into savings in
the short run when faced with a sudden
surge in expenses for energy.
Patterns of change in the various categories of consumer spending were mixed
in 1990. Real outlays for services continued to trend up over the year but at a
slower pace than during most years of the
expansion; on a quarterly basis, growth
in these outlays was quite erratic, largely
because of weather-related volatility in
gas and electric bills. Real outlays for
nondurables fell 2lA percent over the
course of the year, an unusually large
decline by historical standards. The drop
presumably was brought on in large part
by the downturn in real income over
the four quarters of 1990, the first such
decline since 1974.
The real outlays for consumer durables
fell VA percent over the four quarters of
7
1990; they had fallen about 1V4 percent
in 1989. Purchases of motor vehicles
and parts declined for a second year. In
addition, outlays for the other durables—furniture, household equipment,
and the like—turned down, after having
grown at a moderate pace in 1989. These
patterns of change in spending seemed
to reflect both macroeconomic forces,
notably the slower pace of real income
growth after the start of 1989, and the
normal workings of household investment cycles. With regard to the
latter, household spending for cars,
trucks, and other consumer durables
over the 1983-88 period were almost 50
percent above the average for the six
best years of the 1970s. By 1989 many
households may have reached a point
where they were in effect "stocked up"
and therefore well positioned to delay
making new purchases if the timing did
not seem right.
Spending for residential construction
got a transitory boost from good weather
in the first quarter of 1990 but then fell
sharply in each of the three subsequent
quarters. Over the year as a whole,
residential investment outlays declined
1014 percent in real terms; they had
dropped 7 percent in 1989.
This slump in housing investment
reflected a variety of influences, most of
which appeared to enter on the demand
side of the equation. The downshifting of
real income growth after the start of 1989
may have led households to view their
longer-run prospects in a more cautious
light and to hold back from housing
investments that they might otherwise
haveundertaken. In addition, theunwinding in some regions of the country of real
estate booms seen in the 1980s tarnished
the attractiveness of housing as a longerterm investment. These negative developments came at a time when housing
demand already was being restrained by
a much slower rate of growth of the adult
8
77th Annual Report, 1990
population than was seen in the 1970s and
early 1980s.
Builders cut back sharply on new
construction in 1990. The annual starts of
single-family units fell 11 percent from
their 1989 level, and starts of multifamily units declined about 20 percent
from an already low level. However,
these reductions in starts still were not
large enough to balance the market. The
ratio of unsold new homes to the pace of
sales jumped sharply in the first part of
1990 and then remained high over the
rest of the year; the vacancy rate on
multifamily rental units also remained
high.
In some instances, prospective builders were deterred from construction in
1990 by the difficulty of obtaining credit.
Failures of thrift institutions severed
established credit relationships for some
builders; the thrift institutions that survived moved toward more conservative
lending policies either out of choice or in
response to the more stringent capital
requirements and lending limits mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of
1989. Banks also were cautious about
extending credit to builders; with large
volumes of problem loans already on
their books, banks were sensitive to the
poor conditions in many local housing
markets.
In contrast to builders, potential homebuyers did not seem to have serious
problems in obtaining financing in 1990;
mortgage credit remained readily available, and the spreads between mortgage
rates and the rates on other long-term
loans actually narrowed. For the most
part, consumer credit also appeared to
be readily available, with lenders exhibiting only a mild tendency to tighten
standards on this generally profitable line
of business.
The Business Sector
The business sector began 1990 on a
rather shaky note. Profits had declined
during 1989, and overhangs of business
inventories had developed in the second
half of that year in some markets, notably
autos. In manufacturing, production
growth had been restrained late in 1989;
a sharp drop in output in January 1990
was led by a steep cutback in auto
assemblies. But conditions improved
Corporate Profits after Taxes
Percent of gross domestic product
Private Housing Starts
Millions of units, annual rate
1986
1986
1988
1990
The data are seasonally adjusted and are from the
Department of Commerce.
1988
1990
Profits of nonfinancial corporations from domestic
operations, with adjustments for inventory valuation and
capital consumption.
The Economy in 1990
over the next few months. Industrial
production rose fairly briskly, in fact,
from January into midsummer, and the
drop in business profits was halted for a
time.
From August on, the business climate
was dominated by the oil shock and its
attendant uncertainties. After peaking in
September, industrial production plummeted over the last three months of 1990,
and it closed out the year about 1 lA percent below the level of a year earlier.
Over the latter part of the year, the
operating rate in industry also fell sharply.
Corporate profits went into renewed
decline in the second half of the year.
Serious overhangs of business inventories were not apparent when the oil
shock hit in August, and prompt production adjustments that followed the shock
forestalled stockbuilding in the ensuing
months. Indeed, real manufacturing and
trade inventories fell moderately on net
between the end of July and the end of
December. Under the circumstances,
however, these reductions clearly were
not great enough to get actual stocks
down to desired levels. In wholesale and
retail trade, sales declined sharply from
July to December, and the constantdollar ratios of inventories to sales in
these sectors moved up to levels that
9
matched or exceeded the highs of the
previous two or three years. The inventory-sales ratio in manufacturing also
increased on net between July and December, and manufacturers continued to cut
output through the end of the year. Over
1990 as a whole, the level of real business
inventories in the nonfarm sector declined $5 billion. The rapid reductions of
nonfarm inventories that were seen in the
fourth quarter of 1990 more than accounted for all of that quarter's drop in
real GNP.
After relatively strong gains in each
year from 1987 to 1989, business outlays
for fixed investment slowed in 1990; the
gain over the four quarters of the year
was 2lA percent. Spending for equipment
was damped by the squeeze on profits,
the easing of pressures on capacity, and
the heightened uncertainties regarding
the business outlook. These influences
showed through most clearly in the
outlays for industrial equipment, which
fell almost 6 percent over the year.
Business purchases of motor vehicles
bounced around from quarter to quarter
but held to essentially the same range that
they have been in for the past several
Changes in Real Business Inventories
Billions of 1982 dollars, annual rate
Industrial Production
1986
1986
1988
1990
1988
1990
Total nonfarm sector. The data are preliminary, seasonally adjusted, and come from the Department of
Commerce.
10
77th Annual Report, 1990
years. By contrast, business outlays for
aircraft, which have been strong in recent
years, rose further in 1990. Real spending
for computers and other information
processing equipment also increased, but
the gain in this sector was not nearly so
large as it was in many other recent
years. In total, business outlays for
equipment rose about AVi percent over
the year.
Nonresidential construction declined
5Vi percent over the four quarters of
1990. Weakness was concentrated mainly
in the outlays for offices and other
commercial structures, which together
account for about one-third of the total.
An excess supply of these structures
developed in many cities during the
building boom of the mid-1980s, and
despite sharp cutbacks in construction
after 1985, vacancy rates remained high
through 1990. Reflecting this continued
imbalance—and the reluctance of creditors to finance new projects in this
troubled sector of the economy —such
indicators of future activity as the data on
new contracts and building permits continued to have a decidedly negative cast
through the second half of 1990. Spending for industrial structures rose over the
first three quarters of 1990 but fell sharply
in the fourth quarter, and the indicators of
future construction continued to weaken.
Investment in oil drilling remained relatively subdued in the second half of 1990
despite the rise in oil prices. In some
instances drillers may have been hampered by shortages of experienced crews,
but more important, the uncertainty about
whether prices would remain high enough
tojustifystepped-upinvestmentprompted
a cautious response.
Signs of mounting financial stress were
evident in the business sector in 1990.
The number of corporations reducing,
omitting, or deferring dividends in the
fourth quarter was the highest in more
than thirty years. A record dollar amount
of corporate bonds went into default in
1990; the default rate, calculated as a
percentage of the par amount of noninvestment grade bonds outstanding, was
8.7 percent, the highest in twenty years.
While the number of downgradings also
reached a record high, most of the
downgradings were attributable to deteriorating conditions affecting belowinvestment-grade nonfinancial corporations and financial institutions.
The Government Sector
Real Business Fixed Investment
Percentage change, Q4 to Q4
Producers' durable equipment
Jl Jl
1
Jl „
Structures
i
1986
t
i
1988
1990
The data are preliminary, seasonally adjusted, and come
from the Department of Commerce.
In the government sector, budgetary
pressures intensified in 1990. At the federal level, the rate of growth of receipts
slowed to 4.1 percent in fiscal year 1990,
less than half the rate of increase in the
previous fiscal year and more than 1 percentage point below the rate of growth in
nominal GNP. Meanwhile, spending
jumped 9.4 percent in fiscal 1990, and
the federal budget deficit increased to
$220 billion, up $67 billion from the
1989fiscalyear and well above the target
for 1990 that had been laid out in the
Gramm-Rudman-Hollings legislation.
Finding a way to get back on the track of
deficit reduction occupied the Congress
The Economy in 1990
and the Administration through much of
1990; an agreement reached in October
prescribed new targets and new procedures for the five-year period starting in
the 1991 fiscal year.
Part of the slowing of receipts in the
1990fiscalyear stemmed from the weakness in corporate profits; collections from
that source fell almost $10 billion. In
addition, the growth of tax receipts drawn
from the incomes of individuals slowed
appreciably, from 11 percent in 1989 to a
bit less than 5 percent in 1990; this
slowdown mainly reflected the absence
in 1990 of transitory factors that had led
Government Surpluses and Deficits
Billions of dollars
Federal government
100
200
State and local government
15
15
30
1986
1988
1990
The data on the federal government are for fiscal years.
They are on a unified budget basis and are from the
Department of the Treasury.
The data on state and local governments are preliminary.
They are for operating and capital accounts on a national
income accounts basis and are from the Department of
Commerce.
11
to the big jump in these receipts in 1989.
On the expenditure side of the ledger,
about one-third of the increase of $ 108 billion in nominal federal outlays in fiscal
1990 was attributable to federal deposit
insurance programs; the main portion of
these outlays went to honor obligations to
holders of deposits in failed thrift institutions. Spending also moved up rapidly in
1990 for entitlements. The outlays for
medicare rose 15 percent, pushed up by
continued rapid inflation in health costs
and an expansion in the number of
beneficiaries. Outlays for social security
and other income security programs,
which together account for close to onethird of total federal spending, rose about
IV2 percent in fiscal 1990, a pickup from
the pace of recent years. Net interest
outlays, which now account for almost
15 percent of total spending, also continued to climb rapidly.
Federal purchases of goods and services, the portion of federal spending that
is included directly in GNP, increased
5*4 percent in real terms over the four
quarters of 1990. Excluding the volatile
changes in the inventories owned or
financed by the Commodity Credit Corporation, federal purchases of goods and
services increased 4lA percent on net
over the year; nondefense purchases were
up 5J/2 percent and defense purchases,
which had declined moderately in each of
the three previous years, increased 4 percent in 1990. The rise in defense purchases came mainly in the fourth quarter
of the year and apparently reflected, in
part, outlays associated with Operation
Desert Shield.
The deficit in the combined operating
and capital accounts of state and local
governments (excluding social insurance
funds) averaged $30 billion at an annual
rate over the first three quarters of 1990,
and it widened considerably in the fourth
quarter as the recession cut into tax
receipts. State and local budgets first
12
77th Annual Report, 1990
moved into deficit in late 1986, and they
slipped further into the red in each
succeeding year. By 1990, concerns had
intensified about the repayment abilities
of some state and local governing units;
as evidence of this, the downgradings of
state and local credit ratings outnumbered
upgradings by a wide margin in 1990.
In an effort to strengthen their finances,
many state and local governments raised
taxes in 1990. Reflecting those increases,
total state and local receipts moved up
faster than nominal GNP through most of
the year, just as they had in 1989. In
addition, spending was scaled back from
planned levels in many cases. Overall,
however, the efforts to control spending
collided with the growing demands for
services that state and local governments
traditionally have provided in areas such
as education, public protection, and
health and income support. Thus, while
the growth of state and local outlays
slowed from the rate of rise seen earlier
in the expansion, it nonetheless ran above
that of total GNP. The nominal rise in
state and local purchases of goods and
services over the four quarters of 1990
was 8 percent; in real terms, purchases
grew 2% percent over the year.
nonfarm sector increased about 250,000
on net.
Sectoral patterns of employment
change varied considerably in 1990.
Employment in manufacturing fell about
Labor Market Conditions
Net change, millions of jobs, Dec. to Dec.
Nonfarm payroll employment
mu
Total
_
m
Manufacturing
I
I
i
Percent
Civilian unemployment rate
Percentage change, Dec. to Dec.
Labor Markets
Employment cost index
Payroll employment increased in each
month in the first half of 1990 and fell in
each month of the second half. The
declines of July and August, however,
reflected layoffs of federal workers who
had been hired temporarily to conduct
the 1990 census. In the private nonfarm
sector, employment continued to edge up
through early August and did not turn
down decisively until October. More than
600,000 jobs were lost over the final
three months of the year. Over the year as
a whole (December 1989 to December
1990), the number of jobs in the private
Total compensation
1986
1988
1990
The employment cost index is for private industry
excluding farms and households. The data are from the
Department of Labor.
The Economy in 1990
590,000 from December 1989 to December 1990; losses of factory jobs proceeded
at a slow and fairly steady pace through
the first half but accelerated after the
onset of the oil shock. The troubled
construction sector shed roughly 230,000
jobs over the course of the year; after a
weather-related jump early in the year,
the declines went on almost without
interruption through December. Employment in retail and wholesale trade was
down 50,000 on net over the course of
1990 as small gains through the first
seven months of the year were more than
oifset by sharp declines in the fourth
quarter. The number of jobs in the services industries increased in each month
of 1990, but the rate of gain slowed
progressively over the year; health services was the only major area in which
hiring was going on with much vigor at
year-end.
Growth in the supply of labor was
quite subdued in 1990. The civilian labor
force increased only 0.5 percent from
December to December, the smallest
annual gain in almost thirty years. Part of
the explanation for this slow labor force
growth is that the working-age population
has not been growing very rapidly in
recent years. In addition, the share of the
working-age population that chose to
participate in the work force declined
enough in 1990 to cut labor force growth
to half of what it would have been had the
rate of participation not changed. The
sluggishness of the labor markets in 1990
no doubt discouraged some potential
entrants from seeking jobs, a phenomenon typical of economic slowdowns.
Still, the drop in participation in 1990 left
some uncertainties regarding the future
trend in the growth of labor supply.
By mid-1990, the unemployment rate
had held tightly around 5 lA percent for
seven quarters and had stayed below
6 percent for nearly three years. Not
since the first half of the 1970s had the
13
unemployment rate been at such low
levels for so long. As in other periods of
reduced slack in the labor market, this
recent period of low unemployment was
marked by sharply increased wage inflation. The employment cost index, which
includes the cost of workers' benefits as
well as wages and salaries, moved up
about 4% percent in both 1988 and 1989,
after rising about 3V4 percent in both
1986 and 1987. And in the first half of
1990, the year-to-year rate of increase in
this measure of compensation rose still
further, to 5lA percent.
Factors besides tightness in the labor
market were also pushing up wages and
compensation between the end of 1987
and the middle of 1990. The updrift in
inflation caused workers to press for
nominal increases in wages and benefits
that were big enough to keep real incomes
on a reasonably even keel, and with labor
in short supply, businesses found it
necessary to accede to hefty increases to
attract and keep workers. The actions of
government also added to cost pressures:
A rise in social security taxes in 1990
added 0.2 percent to total compensation,
and a boost in the minimum wage may
have added another 0.1 percent.
A marked slowing of wage increases
emerged in the second half of 1990, and
by the end of the year the twelve-month
rate of increase in the employment cost
index had dropped to 4l/z percent. Although workers' real incomes were battered by the surge in energy prices during
this period, attempts to regain those
income losses appear to have been overwhelmed by the increase in labor market
slack and associated concerns about job
security. The efforts of management to
contain costs in a time of declining profits
probably also were a factor helping to
limit wage increases during this period.
Productivity measures in 1990 marked
a second successive year of subpar performance . Output per hour in the nonfarm
14
77th Annual Report, 1990
business sector was unchanged over the
four quarters of the year, after having
dropped 1.6 percent in 1989. More than
likely, the poor productivity results during 1989-90 mainly reflected the cyclical
slowing of demand in those years—under
such circumstances, firms typically cut
output faster than they cut hours. Unit
labor costs increased about 4V£ percent
over the four quarters of 1990, the largest
annual rise since 1982.
Persian Gulf set off a scramble for
inventories by refiners and others seeking
to guard against a possible further disruption in supplies. The price of oil fluctuated widely in this period, but generally
maintained an upward trend into early
Prices
Percentage change, Q4 to Q4
GNP fixed-weight
Price Developments
All of the major price measures—the
indexes of consumer, producer, and GNP
prices—rose faster in 1990 than they did
in 1989. In general, the increases seen in
1990 also were the largest since those of
the early 1980s. The surge in oil import
prices had a particularly strong effect on
those indexes, such as the CPI, that
measure price changes for goods and
services purchased by domestic buyers.
By contrast, the GNP price indexes cover
goods and services produced domestically, and they exhibited a less pronounced degree of acceleration this past
year.
The CPI for energy rose 18 percent
from December 1989 to December 1990.
Although the bulk of the 1990 rise came
after the start of August, intermittent
pressures had surfaced earlier in the year.
A severe bout of cold weather at the end
of 1989 cut into the inventories of heating
oil, disrupted operations at several refineries, and caused the prices of fuel oil and
gasoline to soar. After January, fuel oil
prices fell back, but gasoline prices
remained relatively firm into the summer
as still more supply interruptions prevented a rebuilding of stocks.
Iraq's invasion of Kuwait in August set
off another round of steep price increases.
World oil production dropped temporarily after the invasion, and the uncertainties associated with the tensions in the
Consumer
Consumer excluding food and energy
Services less energy
1986
Commodities less
food and energy
1988
1990
Consumer prices are for all urban consumers. The data
are seasonally adjusted. For GNPfixed-weightprices, the
data are preliminary and are from the Department of
Commerce; the data for consumer prices are from the
Department of Labor.
The Economy in 1990
October. By then, however, the losses of
oil from Iraq and Kuwait were being fully
offset by increased production from other
countries, and demand was weakening.
As a result, oil prices turned down and
held on a choppy downward pattern
through the end of the year, retracing
about half of the runup of the AugustOctober period.
The CPI for fuel oil also turned down
over the last two months of the year, but
gasoline prices again heldfirm,supported
this time by a December 1 rise of five
cents per gallon in the federal excise tax.
Over the year, fuel oil prices increased
about 30 percent at the consumer level,
and gasoline prices were up almost
37 percent. By contrast, increases over
the year in the prices of natural gas and
electricity were quite small—in the range
of Wi to 2 percent; the reaction of these
prices to the oil shock apparently was
damped by ample supplies of natural gas
and coal, as well as the customary lags in
adjusting rate structures at retail.
The consumer price index for food
rose 5.3 percent in 1990. This rise was
about the same as in 1988 and 1989, but
exceeded the pace of the preceding few
years, when food price increases had
tended to run more in the 3 to 4 percent
range. To a considerable degree, the
continued sharp increases in food prices
in 1990 seemed to reflect underlying
inflation processes similar to those at
work in other sectors of the economy. In
addition, prices were affected by the
changing supply conditions in agriculture. Production of beef and pork declined in 1990, and their prices at retail
increased 9 percent and 17 percent respectively over the course of die year. Dairy
production, which had fallen in 1989,
turned up in 1990; but with stocks initially
at low levels, the rise in production did
not have a damping effect on prices at
retail until relatively late in the year. The
spell of cold weather late in 1989 led to a
15
surge in the prices of orange juice and
fresh vegetables early in 1990; toward
the end of 1990, another cold snap
destroyed citrus crops in California and
boosted citrus prices. By contrast, big
wheat crops here and abroad in 1990
caused wheat prices to plunge and led to
some rebuilding of stocks; at retail, the
rise in the CPI for cereals and bakery
products slowed from 7 Vi percent in 1989
to AVi percent in 1990.
The CPI for non-energy services,
which accounts for more than half of the
total CPI, rose 6 percent during 1990,
after an increase of 5.3 percent in 1989.
Within this broad category, increases
were large for a number of items. The
prices of medical services, which have
been increasing rapidly for many years
and had risen 8.6 percent in 1989, were
up 9.9 percent in 1990. The cost of
tuition, another CPI category in which
pressures have been evident for some
time, rose more than 8 percent in both
1989 and 1990. Elsewhere in the services
sector, prices soared for public transportation and lodging. Airlines, which were
hit hard by the surge in energy costs,
raised their fares almost 23 percent over
the year. Price increases for other forms
of public transportation were in the 6 to
7 percent range.
The CPI for commodities excluding
food and energy rose 3.4 percent in 1990,
up sharply from 2.7 percent in 1989.
Within this category, tobacco prices were
up especially sharply, about 11 percent in
all; the increase reflected the passthrough to consumers of a jump in
manufacturers' prices and the continued
reliance by governments on higher taxes
on tobacco products as an attractive way
to boost revenues. The CPI for apparel
was up 5 percent in 1990; apparel prices
had changed little over the course of
1989, and thus at least part of the 1990
rise may have been an effort to restore
margins. Prices of new cars continued to
16
77th Annual Report, 1990
go up, even as sales were coming down;
by contrast, used car prices declined a bit
for a second year. The prices of many
household appliances fell in 1990, extending the gradual downward trend seen in
previous years.
Apart from energy, increases in producer prices were comparatively moderate in 1990. The producer price index for
finished goods excluding food and energy
rose 3.5 percent over the year, about
% percentage point less than in either of
the preceding two years. In manufacturing, the pressures from rising wages and
soaring energy costs were partly damped
by continued rapid gains in productivity
and softening demand. The prices of
intermediate materials excluding food
and energy rose 1.9 percent during 1990,
the second year in a row in which
increases for that category have been
small; materials prices had increased
sharply in 1987 and 1988. The spot prices
of raw industrial commodities moved up
on net in the first half of 1990, held firm
through September, and then fell rapidly
in the fourth quarter as the economy
weakened.
•
17
Monetary Policy and Financial Markets in 1990
Monetary policy held steady in the first
half of 1990, but it progressively eased in
the second half in resumption of the trend
that began in 1989. In moving again
toward ease, the Federal Reserve acted
against the backdrop of a weakening
economy, sluggish money growth, improved inflation prospects, greater fiscal
restraint, and indications of tightening
credit to private borrowers. Short-term
interest rates, in response to the System's
actions and to the softening of aggregate
demand after the oil shock, fell more than
1 percentage point in the second half, to a
level more than 2*/2 percentage points
below the peak that was reached in the
spring of 1989. Long-term rates also
movedlower over the second half, reversing most of the rise of the first half.
In the formulation of policy in 1990, as
in other recent years, the Federal Reserve
examined a variety of information bearing on economic activity and prices. In
addition, certain developments in financial markets also took on special significance for the economy and monetary
policy. The cost and availability of credit
was monitored in light of indications that
tightening credit supplies were constraining output to a greater degree than was
desirable; and considerable attention was
paid to changes in the money stock,
especially in the latter part of 1990, when
money growth virtually stalled. The Federal Reserve recognized that the relation
of the monetary aggregates to broad
measures of economic performance remained subject to considerable uncertainty, but the marked sluggishness of
money growth was seen as suggesting
both weak contemporaneous growth of
income and spending and the existence of
constraints on the availability of credit
through depository institutions that could
adversely affect spending in the future.
The Implementation
of Monetary Policy
During the first half of 1990, the Federal
Reserve took no actions in reserve markets designed to produce changes in
money market interest rates. Federal
funds—overnight interbank loans of immediately available funds—traded around
the %lA percent level that had been
established in December 1989, and other
short-term rates were little changed as
well. Throughout this period economic
activity continued to expand, the unemployment rate held steady, and inflation
showed no clear signs of abatement.
Yields on longer-term debt instruments
rose considerably during the early months
of 1990, restoring the yield curve's usual
upward tilt, which had been absent for
much of 1989. This rise in long-term
rates reflected an economy stronger than
some had expected, greater concern
about inflation, and higher foreign interest rates. As the second quarter progressed, however, bond rates began to
recede, responding to a shift in market
sentiment about the strength of the economy and the likely path of monetary
policy.
Growth of the broader monetary aggregates began to slow appreciably in the
second quarter. To a large extent, the
weakness in growth of the aggregates
was associated with a redirection of credit
flows away from depository institutions.
That shifting of credit flows appeared to
stem mainly from the ongoing restructuring of the thrift industry, but it also
reflected an apparent decrease in the
18
77th Annual Report, 1990
willingness or ability of banks to lend.
Because these developments represented
an abrupt departure from previous trends,
initial assessments of their potential effect
on the economy were subject to some
extra uncertainty. For the most part, however, the decline in depository credit
seemed likely to be taken up by other
lenders, with minimal impact on the
overall cost and availability of credit.
Growth of M3, the aggregate most affected by the reduction in depository
credit, was expected to be damped considerably, and M3 velocity was expected
to rise substantially. In recognition of
these developments, the FOMC at its
meeting in early July reduced the annual
target range for this aggregate by 1 Vi perInterest Rates
Percent
Short-term
Treasury bills
Three-month
Federal funds
Long-term
18
^•A Conventional mortgages
\
15
/s
U.S. government bonds
12
\
v
i
1982
i
i
1984
I
I
1986
I
9
!
1988
1990
The data are monthly averages.
The federal funds rate is from the Federal Reserve.
The rate for three-month Treasury bills is the market rate
on three-month issues on a coupon-equivalent basis and is
from the Department of the Treasury.
The rate for conventional mortgages is the weighted
average for thirty-year fixed-rate mortgages with level
payments at major financial institutions and is from the
Federal Home Loan Mortgage Corporation.
The rate for U. S. government bonds is their market yield
adjusted to thirty-year constant maturity by the Treasury.
centage points. Shortly thereafter, by
mid-July, it had become apparent that the
pullbackby depositories was constricting
credit supplies to some classes of borrowers; in response, the Committee eased
reserve conditions to bring down interest
rates slightly to offset the effects of this
tightening of credit conditions on an
already soft economy.
The invasion of Kuwait at the beginning of August fundamentally altered the
environment for monetary policy. World
oil prices soared, and a considerable
measure of uncertainty was added to the
outlook for the economy, complicating
the formulation of monetary policy.
Business and consumer confidence plummeted, and the adverse effects of high oil
prices on the public's spending plans,
domestic economic activity, and inflation
started to become apparent. As volatility
in financial markets increased, investor
preference for liquidity and safety was
heightened: Treasury bill rates fell during
August and September while private
short-term rates changed little; money
market mutual funds experienced large
inflows, boosting growth of the monetary
aggregates late in the summer as investors
apparently fled stock and bond markets;
and the ongoing decline in the foreign
exchange value of the dollar was halted
for a while by safe-haven demands.
In these circumstances, the benefits of
any easing action taken to cushion the
possible effects on output in the near term
needed to be weighed against the potential
for embedding higher energy prices in
the price level and, more important, into
inflationary expectations, a reaction that
ultimately would seriously undercut the
prospects for sustainable economic
growth. Policy decisions were further
complicated by the fact that the military
and political situation underlying the oil
price shock was so fluid; in fact, it clearly
was a war-risk premium rather than a
current shortage of supply that was
Monetary Policy and Financial Markets
maintaining a higher price of crude oil.
The possibility existed that any substantial moves in monetary policy might
prove ill-advised as circumstances
changed, and it appeared that the most
constructive role monetary policy might
play, until the balance of risks was
clarified, would be to foster a sense of
stability in the very nervous financial
markets.
As it was, financial markets had to
contend not only with the Gulf crisis
during the late summer and early fall, but
also with uncertainties surrounding the
timing and extent of a reduction in the
federal budget deficit. Yields were buffeted whenever the odds of a meaningful
deficit-reduction package appeared to
change. For example, Treasury bond
rates fell appreciably when an initial
budget accord was hammered out but
rose when the government was forced to
shut down temporarily after the pact
failed to win congressional approval. By
the end of October, a budget agreement
involving a major degree of fiscal restraint over a multiyear horizon had been
successfully concluded, and long-term
rates had come down again. In light of the
budget agreement, which promised
greater and more durablefiscalrestraint,
and with the economy weakening, the
Federal Reserve took another step to ease
pressures on reserves.
Late in the year, indications accumulated that inflationary pressures, apart
from those closely connected to the surge
in energy prices, were easing. As the
economy softened and wage pressures
also diminished, it seemed more likely
that the effects of higher oil prices would
not be built into ongoing inflation trends.
Market interest rates declined across the
maturity spectrum; the declines were
especially large for government obligations, as investors concerned about credit
quality were drawn toward these highgrade assets.
19
As the economy weakened, more and
more lending institutions came under
financial strain as problems emerged in
many real estate portfolios and as a
growing number of highly leveraged
firms ran into trouble. Efforts by banks
and other lenders to protect or improve
their capital positions as their loan portfolios deteriorated were reflected in
widespread signs of cutbacks in the
availability of credit and increases in its
cost, especially to less-than-prime borrowers lacking access to securities markets. While much of the tightening of
lending standards was welcome from the
standpoint of safety and soundness, it
exerted a contractionary influence on the
economy and was reflected in slow growth
of bank credit and the broad monetary
aggregates.
Against this backdrop, the Federal
Reserve took additional actions designed
to support the economy and to counter
the tightening in credit terms. In midNovember, the FOMC moved to lower
money market rates through open market operations, and in early December,
the Board eliminated the 3 percent
reserve requirement on nonpersonal
time deposits and net Eurocurrency
liabilities. This action was taken in
response to the increased restraint on
lending by commercial banks: Lower
reserve requirements reduce funding
costs to depository institutions, encouraging them to expand lending. Ultimately, the lower funding costs are
passed through as a combination of lower
rates for borrowers and higher rates
offered to depositors.
Following the reduction in reserve
requirements, further actions were taken
in reserve markets to bring down shortterm interest rates. These actions included additional steps toward a more
accommodative supply of nonborrowed
reserves through open market operations
and, in December, a reduction of Vi per-
20
77th Annual Report, 1990
centage point in the discount rate. All of
these moves were made in light of further
declines in economic activity, sluggish
money and credit growth, and evidence
of ebbing inflation pressures. In total, the
federal funds rate fell a bit more than
1 percentage point from mid-1990 to the
end of the year.
Under the impetus of the easing of
monetary policy and the softening of the
economy, most other short-term rates
also fell significantly in the second half of
Reserves, Money Stock, and Debt Aggregates
Annual rate of change based on seasonally adjusted data unless otherwise noted, in percentl
1990
Item
1987
1988
1989
Year
Depository institution reserves2
Total
Nonborrowed
Required
Monetary base 3
Concepts of money4
Ml
Currency and travelers checks .
Demand deposits
Other checkable deposits
M2
Non-Mi components
MMDAs, savings, and smalldenomimation time deposits
General-purpose and broker-dealer
money market mutual fund assets ...
Overnight RPs and Eurodollars (n.s.a.)..
M3
Non-M2 components
Large-denomination time deposits
Institution-only money market mutual
fund assets
Term RPs (n.s.a.)
Term Eurodollars (n.s.a.)
Domestic nonfinancial sector debt.
Federal
Nonfederal
4.8
4.9
4.7
7.6
2.8
2.5
2.7
6.8
-1.6
-1.3
-1.4
3.4
.3
.4
.0
8.5
2.7
1.6
2.5
8.2
6.3
8.7
-.9
13.7
4.2
8.0
-1.3
7.6
.6
4.6
-2.9
1.0
4.2
11.0
-.6
3.5
5.2
10.2
-.4
6.7
4.3
3.6
5.2
5.5
4.7
6.1
3.9
3.8
6.2
6.5
Q2
Q3
Q4
-1.4 -1.4
- . 8 -2.9
- . 9 -1.5
7.4
8.6
1.7
3.9
-.2
9.0
4.2
9.7
-2.7
6.7
3.7
11.3
1.3
-.3
3.4
11.2
-.7
.7
3.9
3.8
3.0
2.7
2.2
1.8
3.1
5.7
3.8
2.6
4.1
3.5
2.1
5.9
7.0
7.9
-4.9
30.1
-8.7
11.4
3.0
18.1
30.7
4.7
-1.3
9.9
-5.1
11.2
-21.0
5.8
12.2
9.4
6.3
10.7
11.7
3.6
-.6
4.9
1.7
-6.4
-9.5
1.3
2.9
-9.7 - 9 . 1
-7.3 - 1 0 . 1
1.6
-3.9
-8.9
1.1
-3.7
-13.0
3.0
36.7
14.1
-.6
14.7
11.3
17.0 20.2
9.1 14.7
4.5
-13.5 -12.0 -29.2
-22.0 -12.8 -52.0 - 2 4 . 1
21.6
1.6
12.2
30.4
-25.9
13.6
9.7
9.0
10.0
9.2
8.0
9.5
7.1
14.4
4.9
6.0
11.4
4.3
1. Changes are calculated from the average amounts
outstanding in each quarter. Annual changes are measured
from Q4 to Q4.
2. Data on reserves and the monetary base incorporate
adjustments for discontinuities associated with regulatory
changes in reserve requirements.
3. The monetary base consists of total reserves plus the
currency component of the money stock plus, for institutions without 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 excluding
vault cash; travelers checks of nonbank issuers; demand
deposits at all commercial banks other than those due to
depository institutions, the U.S. government, and foreign
banks and official institutions, less cash items in the process
of collection and Federal Reservefloat;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
Ql
7.7
7.5
7.8
6.8
11.0
5.5
6.3
6.8
6.2
7.0
9.7
6.2
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; wholesale overnight and
continuing-contract repurchase agreements (RPs) issued
by commercial banks and thrift institutions net of money
fund holdings; and overnight Eurodollars issued to U.S.
residents by foreign branches of U.S. banks worldwide net
of money fund holdings. M3 is M2 plus large-denomination
time deposits at all depository institutions other than those
due to money stock issuers; assets of institution-only
money market mutual funds; wholesale term RPs issued by
commercial banks and thrift institutions net of money fund
holdings; and term Eurodollars held by U.S. residents in
Canada and the United Kingdom and at foreign branches of
U.S. banks elsewhere net of money fund holdings.
Monetary Policy and Financial Markets
1990. The drop in yields on Treasury
bills roughly paralleled that in the federal
funds rate. Declines in the rates on
commercial paper and certificates of deposit were less than those on federal
funds or Treasury bills; this widening of
yield spreads was additional evidence of
investor concern about private credits,
though these spreads generally remained
narrower than those seen in past economic downturns. In contrast to other
short-term rates, the prime rates charged
by banks held steady through the end of
1990, a consequence of the tightening of
credit supplies.
In the weeks leading up to the end of
the year, yields on private money market
instruments were pressued upward as the
publication dates for financial statements
approached; to put their year-end statements in the best light, banks held down
credit extensions in order to bolster
capital ratios, and lenders in general
intensified their focus on asset quality.
Spreads soared at times in this period; but
with the Federal Reserve injecting large
amounts of reserves into the market
toward year-end, major dislocation was
averted.
In the second half of 1990, rates on
longer-term securities came down considerably less than did the rates on shortterm paper. Declines in these longerterm yields may have been limited in part
by the increased uncertainty and volatility
that followed the invasion of Kuwait. In
the stock market, indexes of share prices
had reached record highs in July 1990,
but the uncertain outlook both at home
and abroad after the invasion of Kuwait
and the slump in economic activity pushed
stock prices significantly lower in the
ensuing months.
The Monetary Aggregates
M2 grew unexpectedly slowly in 1990;
the rise over the four quarters of the year
21
was about 4 percent, well down in the
lower half of the FOMC's range. Growth
of M2 was robust in the first quarter but
weakened markedly over the remainder
of the year. M2 was affected by the sharp
dropoff in the expansion of nominal
income toward the end of 1990, but the
slow growth of M2 also reflected the
unusual behavior of velocity; M2 velocity
was fairly stable through 1990, even
though historical relationships suggest
that velocity should have fallen given the
decline in interest rates.
The shortfall of money growth, relative to historical patterns, probably reflected, in part, the shifting of financial
flows associated with the contraction of
the thrift industry and the increased
reluctance or the inability of commercial
banks to expand their balance sheets.
Indeed, the slowdown of M2 growth
coincided with a pickup in the activity
of the Resolution Trust Corporation
(RTC), the federal agency responsible
for resolving the problems of thrift
institutions. Depository credit fell over
the year, and although this drop affected
M3 the most, it also may have damped
M2 by reducing the need of commercial
banks and thrift institutions to bid for
retail deposits. In addition, the abrogation of some high-rate contracts in the
process of closing failed thrift institutions reduced the attractiveness of that
type of deposit; also, depositors who
were dislodged from existing relationships when thrift institutions were closed
may have reallocated their assets away
from depositories.
Nevertheless, even after taking account of these factors, M2 growth was
much slower than seems explainable,
indicating an underlying reevaluation of,
and shift away from, M2 assets. One
factor behind such a shift may have been
concerns generated by the publicity about
savings and loan failures and about the
problems at banks. To the extent that
22
77th Annual Report, 1990
households moved assets to money market funds, which grew rapidly in the
second half of the year, M2 was not
affected. However, funds may also have
Monetary Aggregates, Nonfinancial
Sector Debt, and Reserves
Trillions of dollars
3.4
3.2
Range
Total domestic nonfinancial debt
Billions of dollars
been shifted in ways that would affect
M2. For example, noncompetitive tenders at Treasury auctions were unusually
strong, suggesting a shift toward direct
holding of assets that are not included in
M2. In addition, M2 growth may have
been damped by a tendency of households
to lag in adjusting their spending in the
face of higher prices for energy products
and a sudden plunge in real income; by
contrast, households apparently were
reluctant to borrow to maintain spending,
as growth of consumer credit was especially slow in the fourth quarter.
The slowdown in M2 last year would
have been even more pronounced had it
not been for the rapid expansion of currency, which was up 11 percent over the
year, more than twice the 1989 pace and
the most rapid yearly rise of the postwar
period. However, the bulk of the pickup
appears attributable to increased demands
for U.S. currency outside our borders.
Information on shipments abroad suggests that demands for U.S. currency
were particularly heavy in areas experiencing economic and political turmoil,
Velocity of Money
Ratio scale
1.6
1.4
1989
The ranges were adopted by the FOMC for the period
from 1989:4 to 1990:4.
Reserves have been adjusted to remove discontinuities
associated with changes in reserve requirements. Nonborrowed reserves include extended credit; the difference
between total and nonborrowed reserves is used to meet
seasonal and adjustment needs.
_LJ_
1960
1970
1980
1990
Velocity is the ratio of gross national product, measured
in current dollars, to the stock of money. The data are
quarterly averages.
Monetary Policy and Financial Markets
especially Eastern Europe, Latin America, and, after the Iraqi invasion of
Kuwait, the Middle East.
The faster growth of currency, along
with the effects of lower market interest
rates on incentives to hold transactions
balances, boosted M l growth from near
zero in 1989 to more than 4 percent in
1990. The monetary base grew 8% percent over the year, also propelled by
strong currency growth. By contrast, the
total reserves portion of the monetary
base was about unchanged, reflecting
little net growth in reservable liabilities;
transactions deposits increased slightly,
but declines were registered in nonpersonal time deposits and net Eurodollar
borrowing (abstracting from the effects
of the reserve requirement decrease at
year-end).
The growth of M3 in 1990, 1% percent, was less than had been anticipated
early in the year. In following a quarterly
pattern roughly similar to that of M2,
growth of M3 fell off noticeably after the
first quarter, and the aggregate ended the
year somewhat above the lower bound of
its target range. That range itself had
been lowered by 1 Vi percentage points in
July 1990 amid evidence that the drop in
thrift assets was proceeding more rapidly
than had been expected and that credit
flows were being directed away from
depository institutions. Banks acquired a
substantial amount of deposits from thrift
institutions resolved by the RTC, but in
contrast to their behavior in 1989, banks
did not use newly acquired deposits to
expand their balance sheets. Significant
loan losses in 1990 limited the ability of
banks to generate capital internally and
raised the cost of external capital as
investors reevaluated risks. At the same
time, banks were facing the prospect of
adjusting to new capital standards. Banks
used the deposits they acquired from
thrift institutions to pay down other
liabilities, especially large time deposits;
23
the shift of M2 deposits from thrift
institutions to banks thus contributed to
sharp declines in M3 managed liabilities
at banks.
The Condition of Financial
Institutions
By and large, banks remained sound and
well capitalized in 1990. Some banks ran
into difficulties, however, in large part
because of problems in their portfolios of
commercial real estate loans. Before the
mid-1980s, developers typically arranged permanent financing for construction and land development projects,
usually from institutional investors, before obtaining initial bank financing. But
with real estate values rising rapidly in
the mid-1980s, many banks stopped
requiring such prearranged "takeouts."
Later, when the real estate market
cracked, those banks found themselves
holding a substantial volume of undercollateralized loans. At about the same time,
prospects declined for many of the highly
leveraged transactions (HLTs) that banks
had financed in recent years; while bank
losses attributable to HLTs were not
significant, the virtual disappearance of
the market for new low-rated bonds in
1990 implied that many HLT loans would
not be repaid as promptly as had been
hoped. Growing uneasiness about banks'
assets contributed to increases in their
cost of capital and, for some banks, the
cost of wholesale funding.
Concerns about the weakness of the
banking industry intensified in 1990. The
General Accounting Office and the Congressional Budget Office issued reports
that questioned the financial health of
some large banks and explored the possible difficulties that problems in banking
might pose for the Bank Insurance Fund.
Banks had to make large provisions for
loan losses in 1990 as delinquency and
loss rates rose on most major categories
24
77th Annual Report, 1990
of loans, especially real estate. By midSeptember, interest rates on the subordinated debt obligations of some major
bankingfirmshad jumped appreciably as
investors reevaluated the health of these
institutions. Rather than pay sharply
higher rates, several major bank holding
companies chose to redeem portions of
their outstanding auction-rate preferred
stock. Spreads between bank and Treasury obligations widened significantly,
and bank stock prices tumbled. These
price movements began to be reversed
toward the latter part of the year, however. Spreads on subordinated and other
bank obligations narrowed in the fourth
quarter but remained well above their
levels of the summer.
Financial institutions other than banks
and thrift institutions also encountered
difficulty in 1990. Finance companies
and insurance companies took a beating
in the securities markets beginning in
September, as these companies' holdings
of commercial real estate and HLT loans
were reevaluated in light of expectations
of a weaker economy. Yield spreads on
the obligations of the companies widened
significantly at that time.
Credit Markets
Extraordinary changes took place in the
credit markets in 1990. With lending by
thrifts continuing to decline and bank
lending slowing, growth of the total
volume of credit provided by depositories
turned slightly negative; this represented
a sharp break from past trends. Some
borrowers found themselves seeking
alternative sources of finance or facing
less favorable terms of credit than they
had previously. These problems were
greatest among borrowers in troubled
sectors of the economy like commercial
construction, but they also were evident
to some extent in other sectors. How
ever, growth of the total debt of all
nonfinancial sectors slowed only moderately from the pace of 1989 even as the
growth of credit extended by depositories
dwindled.
Banks tightened lending standards and
raised their margins in 1990 in response
to the rising cost of funds, capital shortages, and perceptions of greater risk of
default among some classes of borrowers. In the wake of HLT disclosure
guidelines, banks imposed caps on their
exposure to these types of transactions.
Banks with low capital cut back lending;
banks that were adequately capitalized
maintained credit growth at a substantial
pace but appeared to be reluctant to pick
up the slack.
The banks' tightening of credit standards and lending terms, together with
the weakening economy and attendant
softening of the demand for credit, caused
the growth of bank assets to slow in 1990,
especially in the fourth quarter. Growth
of bank loans during the year was roughly
half its 1989 pace, with slowing evident
in business, real estate, and consumer
lending. Regional disparities in the
growth of bank lending were substantial.
In New England, bank lending turned
down sharply at the beginning of 1990,
shifting from robust growth to outright
decline. Banks in that region were particularly aggressive in selling loans into
securities markets; these sales, together
with the write-off of problem loans,
contributed importantly to the overall
drop in loan volume. In the Southwest,
the volume of bank lending continued to
decline in 1990. In the rest of the country,
loan volume continued to grow.
The volume of credit held by thrift
institutions shrank rapidly during 1990.
The RTC resolved insolvent thrifts,
acquiring the bulk of their assets in the
process. In addition, many viable thrift
institutions shed assets in an effort to
meet the new capital guidelines.
Monetary Policy and Financial Markets
While the weakness of depository
credit may have damped total credit
growth to some extent, the effect was far
less than one for one. Both the secondary
market in mortgages and the securitization of consumer loans substituted for
bank and thrift intermediation in those
sectors. Securitization alone is estimated
to have removed more than $40 billion in
consumer loans from bank balance sheets
during 1990 as banks pared their asset
totals to improve capital ratios. With
these alternative financial arrangements
gaining greater prominence, homebuyers
and consumers generally appeared to
have continued access to credit, on terms
that were no less favorable than before.
While spreads on both asset-backed and
mortgage-backed securities did widen a
bit in the fourth quarter, they remained
well within their historical ranges. Thus,
Changes in Debt of
the Domestic Nonfinancial Sector
and in Depository Credit
Percent
Debt
1960
1970
1980
1990
Domestic nonfinancial debt covers borrowing by households, farm businesses, nonfarm noncorporate businesses,
corporate nonfinancial businesses, state and local governments, and the federal government.
Depository credit is the sum of credit market funds
advanced by savings institutions and commercial banks.
The percentage changes are four-quarter moving averages . They are calculated by first subtracting the level at the
end of the previous quarter from the level at the end of a
given quarter (flow) and dividing by the level at the end of
the previous quarter. The quarterly percentage rates are
then used in computing four-quarter moving averages.
25
the sluggishness that was evident in the
growth of these types of credit in 1990
would seem mainly to have come from
the demand side of the market and
reflected influences such as the slump in
sales of automobiles, other consumer
durables, and housing.
Business borrowing slowed further in
1990. The credit needed to finance corporate restructuring diminished—as indicated by a falloff in net equity retirements
to roughly half the pace of the previous
two years. In addition, the gap between
corporate capital expenditures and internal funds changed little over the year, on
net, thus limiting credit requirements. A
tightening of credit availability for all but
investment-grade firms became increasingly evident as the year progressed. The
pullback in lending to lower-rated borrowers was not limited to domestic banks;
U.S. offices of foreign banks, which
previously had been aggressive suppliers
of funds to U.S. borrowers, also cut
back, as did domestic nonbank lenders
such as insurance companies. In addition,
bond markets remained unreceptive to
offerings of below-investment grade issues.
The outstanding debt of state and local
governments grew slowly in 1990 as they
reduced new borrowing and retired sizable amounts of old debt. At the same
time, pressures on their credit ratings
increased. The ratings of a significant
number of local housing issues were
downgraded in response to the slipping
credit quality of several banks and insurance companies that provide credit enhancements. Also, late in the year, certain
municipalities and some states found
themselves paying substantially higher
rates in light of their own financial
difficulties.
Growth of the debt of all domestic
nonfinancial sectors was boosted last year
by the federal government, which borrowed in part to fund acquisitions of thrift
26
77th Annual Report, 1990
assets by the RTC. Borrowing for the
RTC accounted for about Vi percentage
point of the roughly 7 percent growth of
total debt from December 1989to December 1990. The growth of total nonfinancial debt has slowed over recent years,
but even abstracting from the effects of
RTC activity, it continued in 1990 at a
pace well in excess of the expansion of
nominal GNP.
•
27
International Developments
Economic growth in the major foreign
industrial economies slowed significantly
in 1990 as real GNP increased by about
2Vi percent, compared with VA in 1989.
Economic performance among the industrial countries was quite mixed, with
Canada and the United Kingdom, both
important U.S. trading partners, moving
into recession. Growth in non-OPEC
developing countries also slowed, to less
than 2 Vi percent on average; performance
there too was quite mixed, with Brazil
and Argentina experiencing substantial
declines in output. Adjustment of external
imbalances was obscured by the increase in oil import bills and by some
financial transfers related to the crisis in
the Persian Gulf. Nevertheless, the U.S.
current account deficit narrowed somewhat to $99 billion in 1990. Japan's
current account surplus declined about
$20 billion, and Germany's declined
$10 billion. The combined surplus of the
Asian newly industrialized economies
declined almost $10 billion.
The dollar, which depreciated against
all major foreign currencies other than
the Canadian dollar, fell 12 percent in
nominal terms against a trade-weighed
average of ten currencies. Adjusted for
changes in relative consumer price levels,
the dollar's depreciation was smaller
because U.S. inflation exceeded foreign
inflation by VA percent.
In the first half of the year the dollar
declined somewhat against European currencies, but it continued to rise against
the yen as the market remained concerned
about Japanese political uncertainties and
economic policy. This continued weakening of the yen was countered by coordinated intervention by U.S. and Japanese monetary authorities. After midyear, however, the dollar began a sharp
decline against all major currencies as
U.S. monetary policy eased in the face of
weakening U.S. economic activity while
Exchange Value of the Dollar
and Interest Rate Differential
Percentage points
6 ~
Ratio scale, March 1973 = 100
Price-adjusted
exchange value
Exchange Value of the Dollar
against Selected Currencies
December 1989 = 100
Long-term
real interest
rate differential
Japanese yen
110
Canadian dollar
2 -
U.S. minus foreign
i
i
i
1975
1990
Foreign currency units per dollar. The data are monthly.
80
i
i
i
i
i
1980
i
i
i
i
i
1985
i
i
i
i
1990
The exchange value of the U.S. dollar is its weighted
average exchange value against currencies of other Group
of 10 (G-10) countries using 1972-76 total trade weights
adjusted by relative consumer prices.
The interest rate differential is the rate on long-term U.S.
government bonds minus the rate on comparable foreign
securities, both adjusted for expected inflation estimated
by a thirty-six-month moving average of actual consumer
price inflation or by staff forecasts where needed.
The data are quarterly.
28
77th Annual Report, 1990
monetary policies in European countries
and Japan were tightening. The dollar
continued to decline into December,
when mounting concerns about year-end
pressures in dollar funding markets and
mounting fears of a military conflict in
the Persian Gulf contributed to some
dollar strengthening.
Official exchange market intervention
by authorities in fourteen major foreign
countries amounted to net dollar sales
totaling a little more than $3V4 billion,
while U.S. official intervention amounted
to net dollar sales of a little more than
%VA billion.
points higher than its level of a year
earlier. In contrast, Japanese unemployment rates remained near record low
levels last year amid other signs of labormarket tightness, causing heightened
concern about inflationary pressures.
Unemployment rates moved down during
the year in Western Germany as the
economy boomed, but in Eastern Germany measures of unemployment and
"short-time" employment indicated slack
labor-market conditions. Unemployment
rates in most other major foreign industrial countries remained steady or continued to move lower last year.
Foreign Economies
Economic growth in the foreign industrial
economies slowed on average last year,
as performance in individual countries
continued to diverge. Investment demand, which had been an important
source of strength, weakened during the
year in many countries. Slower growth
was a reaction to tight monetary conditions, decelerating activity in the United
States, and the repercussions on oil prices
and on consumer and investor confidence
of developments in the Persian Gulf. The
pace of economic growth in Japan and
Germany was comparatively strong.
Growth in other key European countries
was less robust, and both Canada and the
United Kingdom experienced recessions
in 1990.
Changes in labor market conditions
last year reflected differences in cyclical
conditions among industrial countries.
During 1990 the United Kingdom reversed almost four years of steadily
declining unemployment. After reaching
a low point of about 5Vi percent in the
first quarter, the U.K. unemployment
rate rose a full percentage point by the
end of the year. At the end of 1990,
Canadian unemployment was above
9VA percent, more than VA percentage
GNP, Demand, and Prices
Percentage change from previous year
Gross national product
Constant prices
\
^
\
i
I
y^ v
/
/
i
Foreign
4
XT
^
2
United
i Statesi \ -
i
Total domestic demand
Constant prices
6
^
/
\ ^ Foreign
4
\
^
United S t a t e s ^ * ^
v
2
4-
\ o
i
t
t
Consumer price index
United States A
Foreign
_j
i
1986
1988
1990
Foreign data are multilaterally weighted averages for the
G-10 countries using 1972-76 total trade weights and are
from foreign official sources.
Data for the United States are from the Departments of
Commerce and Labor.
For GNP and domestic demand, the data are quarterly
and preliminary; for consumer prices, the data are monthly.
International Developments
On average during 1990, monetary
conditions were tightened slightly as foreign monetary authorities remained
cautious with regard to inflationary
pressures—particularly following the
increase in oil prices in the second
half—but important differences emerged
among the major industrial countries
during the year. Japanese short-term
interest rates moved up by more than
1 percentage point, and the discount rate
was increased twice by a total of 134 percentage points. German monetary conditions also were tightened after mid-year
as activity continued to be robust. Although price pressures appeared to ease
in the United Kingdom near year-end as
the economy slumped, monetary conditions there remained tight, as U.K. entry
into the exchange rate mechanism of
the European Monetary System in October added an additional constraint on
U.K. policy. Reduced inflationary pressure in Canada and softness in the domestic economy provided scope for some
monetary easing and lower Canadian
interest rates.
In 1990 the combined current account
surplus of the foreign G-10 industrial
countries narrowed about $40 billion, to
$30 billion. About half of that change
was accounted for by a $20 billion
contraction of the Japanese current account surplus, due in part to increased
payments for imported oil. The German
current account surplus narrowed about
$10 billion, reflecting in part a substantial increase in imports following
reunification.
In 1990 the combined current account
deficit of developing countries declined
about $ 10 billion, to $9 billion. The large
increase in the surplus of oil exporters
more than explains the decline in the
aggregate deficit of the developing countries as a group. Economic growth in
most regions of the developing world
slowed in 1990, especially in the Western
29
Hemisphere, where output declined in
Brazil and Argentina.
Among subgroups of developing
countries, there was another large
reduction in the current account surplus
of the newly industrializing economies
of Asia. The surplus of the four Asian
NIEs fell from about $24 billion in 1989
to $14 billion in 1990, with most of the
adjustment taking place in Korea, which
recorded a current account deficit last
year. The reduction in the combined
surplus of the NIEs in 1990 resulted
from accumulated real appreciations of
these currencies and slower growth in
major export markets.
The current account deficit of the group
of fourteen heavily indebted developing
countries was roughly unchanged in 1990
at $7 billion. As a result of higher oil
prices and export volumes, Venezuela's
surplus widened about $5 billion. Brazil's
current account balance declined nearly
$4 billion as exports declined and imports
showed some increase. Mexico's deficit
increased slightly despite increased oil
exports, as imports boomed.
Economic performance in the larger
heavily indebted developing countries
was mixed in 1990. Growth in Mexico
accelerated to nearly 4 percent, although
inflation also accelerated somewhat.
Output declined in Brazil and Argentina
as those countries continued to struggle
with a variety of programs aimed at
combating high inflation.
A number of financing packages involving debt and debt-service reduction
were implemented between commercial
banks and debtor countries following
suggestions of Treasury Secretary Brady
in March 1989. Mexico, the Philippines,
Costa Rica, and Venezuela completed
such deals in 1990.
In June President Bush announced the
Enterprise for the Americas initiative.
This initiative allows for reductions on
bilateral concessional debt owed the
30
77th Annual Report, 1990
United States by Latin American and
Caribbean countries. The initiative suggests liberalizing tradeflowsbetween the
United States and the region and encourages foreign and domestic investment in
the region. It also allows for limited
reduction in nonconcessional loans of the
Agriculture Department's Commodity
Credit Corporation and of the ExportImport Bank to facilitate debt-for-equity
swaps. Aspects of the initiative need to be
approved by the Congress.
U.S. International Transactions
Merchandise exports rose 9 percent
over the four quarters of 1990, about the
same pace recorded in the preceding
year. Virtually all of the increase was in
quantity. This growth was supported by
significant gains in U.S. price competitiveness. The average dollar price of
exports was little changed, held down by
moderate increases in the domestic prices
of goods that are exported. However,
relative to foreign goods, the price of
U.S. exports declined sharply, largely
because of the substantial depreciation of
the dollar over the past year and a half.
During 1990, slower economic growth
The deficits in the U.S. merchandise
trade account and current account narrowed a bit further in 1990. A $29 billion U.S. International Trade
increase in merchandise exports and a
Billions of dollars
$23 billion increase in merchandise
Balances
+
imports yielded a trade deficit of $ 109 bilo
lion for the year, compared with $ 115 bil50
lion in 1989. There was a somewhat
Current account
100
larger improvement in the current account balance, as increased net receipts
150
Merchandise trade
from direct investments abroad and from
i
i
i
net service receipts exceeded the rise in
Ratio scale, billions of 1982 dollars
net payments of portfolio income to
Merchandise trade
foreigners. Recorded unilateral transfers
600
were affected by several special transacTotal imports _ — —
tions related to the war in the Middle
* 400
East. In the fourth quarter, forgiveness of ^ "
" _ ^ ^ - —
Egyptian debt was recorded as a $7 bilTotal exports .*
lion U.S. government grant offset by a
**
$2.1 billion payment of interest by the
Egyptians and a $4.9 billion reduction in
Ratio scale, 1982=100
principal; this transaction increased the
GNP fixed-weight price index
U.S. current account deficit by $4.9 bil' 120
lion in 1990. Cash contributions by foryr
Non-oil imports
eign governments to the United States to
110
...
^^+
help offset costs of the war in the Middle
100
East—recorded as receipts of government
Total exports
grants in the unilateral transactions sector
i
i
of the current account—were received
1986
1988
1990
beginning in the fourth quarter and
The data are preliminary; they are quarterly, seasonally
reduced the size of the current account adjusted at annual rates, and comefromthe Department of
deficit.
Commerce.
V
^—~
i
i
i
i
i
i
i
i
i
i
International Developments
abroad, on average, tended to damp the
growth of U. S. exports.
By geographical area, the largest (and
one of the sharpest) of the increases in
nonagricultural exports in 1990 was to
Western Europe, which accounts for
30 percent of U.S. nonagricultural exports. Exports to Mexico also rose
sharply, particularly automotive parts
used by Ford, General Motors, and
Chrysler in their Mexican plants. Nonagricultural exports to Canada (22 percent of nonagricultural exports) rose at a
much slower rate than in 1989 as that
economy entered a recession.
The expansion of exports during 1990
was broadly based across commodity
31
categories. The largest increases were in
industrial supplies, capital goods, and
consumer goods. Overall, the quantity of
nonagricultural exports rose 10 percent
in 1990 (Q4 to Q4). Agricultural exports
declined in 1990; about half the decline
was in quantity.
Merchandise imports rose IVi percent
in value but declined nearly 1 percent in
quantity in 1990 (Q4 to Q4). Almost all
of the increase in prices resulted from a
jump in oil prices (61 percent). Prices of
non-oil imports rose only about 3 percent
(Q4 to Q4) despite the much larger
decline in the dollar's foreign exchange
value. Worldwide declines in prices of
primary commodities helped hold down
U.S. International Transactionsl
Billions of dollars, seasonally adjusted
Quarter
Year
1990
1989
Transaction
1989
1990
Q4
Ql
Q2
Q3
Q4
-30
-29
96
100
126
129
1
2
4
13
14
-11
-9
6
6
-2
-2
7
8
-4
-9
Merchandise trade, net
Exports
Imports
Investment income, net
Direct investment, net
Portfolio investment, net
Services, net
Military transactions, net
Other services, net
Unilateral transfers, private and government, net
-115 - 1 0 9
360
389
475
498
- 1 8
40
49
-41
-42
21
23
-6
-6
27
29
-15
-21
-29
92
120
11
-10
6
-2
8
-5
-27
-23
96
97
123
120
1
2
12
10
-10
-11
6
6
-1
-1
7
7
-3
-4
Current account balance
-110
-99
-27
-22
-23
-26
-28
103
-5
31
12
-11
9
-15
11
-22
30
33
7
-32
72
4
21
-27
1
19
-15
-36
26
6
4
-4
6
12
-2
-9
21
2
20
o
-1
6
-3
-9
6
2
-9
-11
4
7
-4
-5
7
*
14
-1
*
1
-3
-19
12
5
-5
-7
-2
6
-5
-3
1
0
9
31
-7
-8
6
14
20
2
-1
Private capital flows, net
Bank-related 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 stock
U.S. direct investment abroad
Foreign direct investment in United States
Other corporate capital flows, net
Foreign official assets in United States (increase, + ) . . .
U.S. official reserve assets, net (increase, - )
U.S. government foreign credits and other claims, net.
Total discrepancy
Seasonal adjustment discrepancy
Statistical discrepancy
1. Details may not sum to totals because of rounding.
•In absolute value, greater than zero and less man
$500 million.
-25
-2
1
3
22
73
*
73
22
o
-3
-3
*
•
-1
-1
•
5
22
3
19
29
-1
30
2
-5
7
19
3
16
6
4
2
SOURCE. Department of Commerce, Bureau of Economic Analysis.
32
77th Annual Report, 1990
import prices. In the fourth quarter, however, non-oil import prices rose 5 percent
at an annual rate after increasing about
half that rate on average during the first
three quarters; this boost in prices showed
up most strongly in prices of imported
capital goods and consumer durables.
The prices of petroleum-related goods
also rose.
The quantity of non-oil imports rose
2 percent in 1990 (Q4 to Q4), less than
half the rate of increase recorded in 1989.
Excluding computers, non-oil imports
grew about Vi percent, reflecting the
sluggishness of U.S. domestic spending.
Imports of automotive products and
industrial supplies showed only small
increases. Imports of consumer goods,
machinery, and foods declined slightly
from levels recorded at the end of 1989.
The value of oil imports rose sharply
in 1990, primarily because of a jump in
the import price of oil at the end of the
year. Prices had declined during the first
half, the result of relatively strong OPEC
production in the face of flat demand.
Prices began to turn around in the middle
of July on the announcement of an OPEC
accord to limit production, and after
Iraq's invasion of Kuwait in August,
prices surged. The rise in prices of
imported oil lagged the sharp increases in
posted and spot prices, a repeat of the
pattern in previous oil market disruptions, and peaked in the fourth quarter at
an average of $28.47 per barrel.
The quantity of imported oil averaged
8.28 million barrels per day in 1990,
slightly more than in the previous year.
The quantity imported was strongest in
the first three quarters of the year. An
extremely cold December in 1989 had
pushed stocks of petroleum and products
in the United States well below average
historical levels by year-end 1989. A
scramble by companies to replenish
these stocks in the face of an unexpectedly mild first quarter resulted in
imports averaging 8.9 million barrels
per day in the first quarter (the highest
rate of imports since the first quarter of
1979) and a healthy rebound in stocks.
Falling world oil prices in the second
quarter encouraged additional stockbuilding from the healthy first quarter
levels and, coupled with further declines
in U.S. crude oil production (especially
in Alaska), kept imports relatively high
through July. Oil imports dropped off in
the fourth quarter in response to the
decline in U.S. economic activity, the
effects of mild weather, and the runup in
prices.
The counterpart to the U.S. current
account deficit in 1990 did not show up in
recorded capital flows, so that the statistical discrepancy in the U. S. international
transactions accounts reached $73 billion. A positive statistical discrepancy
represents some combination of net unrecorded exports of goods, services, and
investment income and net unreported
capital inflows from abroad.1 While
errors and omissions doubtless exist in
the reporting of current account transactions as well as capital account transactions, it seems likely that the increase in
the statistical discrepancy from $22 billion in 1989 was largely accounted for by
net unreported private capital flows. The
past relationship between the changes in
relative prices and incomes and changes
in the current Account provide no reason
to believe that the actual current account
1. In principle, the sum of all transactions in the
U.S. balance of payments accounts, a double-entry
bookkeeping system, should equal zero; for each
transaction there should be two equal entries of
opposite sign. In practice, the recorded accounts
never sum exactly to zero because the data that
would reflect the debit and credit counterparts of
each single transaction generally are obtained from
different sources. The statistical discrepancy is the
net of errors and omissions in all the components of
the international transactions accounts.
International Developments
improved by an additional $50 billion
between 1989 and 1990.
Certain omissions from the private
capitalflowsdata are obvious. For example, no estimate is included of increases
in foreign holdings of U.S. currency.
Fragmentary evidence indicates a sharp
rise in net bank shipments of currency
abroad in 1990, a year of increased
political and economic instability in many
parts of the world.
However, increased foreign holdings
of U.S. currency could explain only part
of the statistical discrepancy, and it is
difficult to pinpoint exactly where the
other errors and omissions occurred. In
recent decades, financial innovation,
technical change, deregulation of financial markets, and elimination of capital
controls have all contributed to the
increasing internationalization of financial markets. New channels for capital
flows have developed, involving new
instruments and new participants; information from current reporting institutions —a limited number of large financial
intermediaries and corporations located
in the United States—no longer covers
the bulk of U.S. capital flows. These
developments have made the tracking of
international capital flows far more
difficult.
The private capital flows that were
recorded in 1990 indicate an increase in
net inflows reported by banks. However,
net inflows resulting from securities
transactions and direct investment were
down sharply; other recorded capital
inflows were small. The decline in U.S.
interest rates while rates abroad were
rising made dollar assets less attractive
relative to yen and mark-denominated
assets and made raising funds in the
United States more attractive for multinational corporationsfinancingacquisitions
and operations. However, as long as the
United States runs substantial current
account deficits and net official capital
33
inflows are small, the sum of recorded
and unrecorded net private capital inflows must be large and positive. Although changes in relative interest rates
can affect exchange rates and alter the
composition of capitalflows,they cannot,
initially at least, change the total of
realized net capital flows. Over time, as
the current account responds to a decline
in the dollar's value, realized net capital
inflows will tend to decline. The data on
capital flows in 1990 should be viewed
with suspicion.
Foreign Currency Operations
The foreign exchange intervention operations of U.S. monetary authorities in
1990 were much less frequent and on a
much smaller scale than in 1989. U.S.
authorities (the Federal Reserve and the
Treasury's Exchange Stabilization Fund)
sold $2,380 million through April,
$2,180 million of which was against
Japanese yen and $200 million against
German marks.
Of this intervention, $675 million was
for the System account and $1,705 million was for the account of the ESF.
Some FOMC members expressed concern about sending uncertain signals to
the market about the System's intention to
achieve price stability and about the level
of System balances of foreign currency;
in view of this concern, all intervention
sales of dollars from March 5 onward
were for the ESF account. In the late
spring and early summer, the ESF purSystem Profits and Losses on Foreign
Currency Operations
Millions of dollars
Year
1987 .
1988
1989
1990
Realized
Translation
1,139
610
0
0
ooo
-1,121
1,204
2,139
34
77th Annual Report, 1990
chased $1,000 million against marks in
the market and another $1,000 million
directly from a foreign monetary authority to adjust ESF balances and to repurchase marks previously warehoused with
the System.
At year-end 1990 the System held
$32,633 million equivalent of foreign
currencies, valued at current exchange
rates. Of this amount $4,500 million
equivalent represented foreign currency
held under the warehousing agreement
with the ESF. The warehoused amount
was reduced by $4,500 million from its
March 1990 peak. System foreign currency holdings were denominated almost
entirely in marks and yen.
The System realized no profits or
losses on foreign operations in 1990 but
recorded a translation gain of $2,139 million from the net appreciation of the mark
and the yen against the dollar.
The only activity on the Federal Reserve swap network in 1990 involved the
Bank of Mexico, which in February fully
repaid the $784.1 million it drew the
previous September. In March 1990, the
Bank of Mexico drew $700 million,
which it repaid in full by July.
•
35
Monetary Policy Reports to the Congress
Given below are reports submitted to the
Congress on February 20 and July 18y
1990, pursuant to the Full Employment
and Balanced Growth Act of 1978.
Report on February 20,1990
Monetary Policy and the Economic
Outlook for 1990
The U.S. economy recorded its seventh
consecutive year of expansion in 1989.
Although growth was slower than in the
preceding two years, it was sufficient to
support the creation of 2Vi million jobs
and to hold the unemployment rate steady
at 5*4 percent, the lowest reading since
the early 1970s. On the external front,
the trade and current account deficits
shrank further in 1989. And while inflation remained undesirably high, the pace
was lower than many analysts—and,
indeed, most members of the Federal
Open Market Committee (FOMC)-had
predicted, in part because of the continuing diminution in longer-range inflation
expectations.
In 1989, monetary policy was tailored
to the changing contours of the economic
expansion and to the potential for inflation. Early in the year, as for most of
1988, the Federal Reserve tightened
money market conditions to prevent
pressures on wages and prices from
building. Market rates of interest rose
relative to those on deposit accounts, and
unexpectedly large tax payments in April
and May drained liquid balances, restraining the growth of the monetary aggregates in the first half of the year. By May,
M2 and M3 lay below the lower bounds
of the annual target ranges established by
theFOMC.
Around midyear, risks of an acceleration in inflation were perceived to have
diminished as pressures on industrial
capacity had moderated, commodity
prices had leveled out, and the dollar had
strengthened on exchange markets, reinforcing the signals conveyed by the weakness in the monetary aggregates. In June,
the FOMC began a series of steps,
undertaken with care to avoid excessive
inflationary stimulus, that trimmed
Wi percentage points from short-term
interest rates by year-end. Longer-term
interest rates moved down by a like
amount, influenced by both the System's
easing and a reduction in inflation
expectations.
Growth of M2 rebounded to end the
year at about the midpoint of the 1989
target range. Growth of M3, however,
remained around the lower end of its
range, as a contraction of the thrift
industry, encouraged by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), reduced needs to tap M3 sources of fluids.
The primary effect of the shrinkage of the
thrift industry's assets was a rechanneling
of funds in mortgage markets, rather than
a reduction in overall credit availability;
growth of the aggregate for nonfinancial
sector debt that is monitored by the
FOMC was just a bit slower in the second
half than in the first, and this measure
ended the year only a little below the
midpoint of its range.
Thus far this year, the overnight rate
on federal funds has held at %lA percent,
but other market rates have risen. Increases of as much as Vi percentage point
have been recorded at the longer end of
the maturity spectrum. The bond markets
responded to indicators suggesting a
36
77th Annual Report, 1990
somewhat greater-than-anticipated buoyancy in economic activity—which may
have both raised expected real returns on
investment and renewed some apprehensions about the outlook for inflation. The
rise in yields occurred in the context of a
general runup in international capital
market yields, which appears to have
been in part a response to emerging
opportunities associated with the opening
of Eastern Europe; this development had
particularly notable effects on the exchange value of the West German mark,
which rose considerably relative to the
dollar, the yen, and other non-European
Monetary System currencies.
Monetary Policy for 1990
The Federal Open Market Committee is
committed to the achievement, over time,
of price stability. The importance of this
objective derives from the fact that the
prospects for long-run growth in the
economy are brightest when inflation
need no longer be a material consideration in the decisions of households and
firms. The members recognize that certain short-term factors—notably a sharp
increase in food and energy prices-are
likely to boost inflation early this year,
but they anticipate that these factors will
not persist. Under these circumstances,
policy can support further economic
expansion without abandoning the goal
of price stability.
To foster the achievement of those
objectives, the Committee has selected a
target range of 3 to 7 percent for M2
growth in 1990. Growth in M2 may be
more rapid in 1990 than in recent years
and yet be consistent with some moderation in the rate of increase in nominal
income and restraint on prices; in particular, M2 may grow more rapidly than
nominal GNP in thefirstpart of this year
in lagged response to last year's interest
rate movements. Eventually, however,
slower M2 growth will be required to
achieve and maintain price stability.
The Committee reduced the M3 range
to 2 Vi to 6 Vi percent to take account of the
effects of the restructuring of the thrift
industry, which is expected to continue in
1990. A smaller proportion of mortgages
is likely to be held at depository institutions and financed by elements in M3;
thrift institution assets should continue to
decline, as some solvent thrift institutions
will be under pressure to meet capital
standards and insolvent thrift institutions
will continue to be shrunk and closed,
with a portion of their assets carried,
temporarily, by the government. While
some of the assets shed by thrift institutions are expected to be acquired by
commercial banks, overall growth in the
asset portfolios of banks is expected to be
moderate, as these institutions exercise
caution in extending credit. An increase
in lender—and borrower—caution more
generally points to some slowing in the
pace at which nonfinancial sectors take
on debt relative to their income in 1990.
In particular, recent developments suggest that leveraged buyouts and other
transactions that substitute debt for equity
in corporate capital structures will be
noticeably less important in 1990 than in
recent years. Moreover, a further decline
in the federal sector's deficit is expected
to reduce credit growth this year. In light
of these considerations, the Committee
reduced the monitoring range for debt of
the nonfinancial sectors to 5 to 9 percent.
Target Ranges of Growth for Monetary
and Debt Aggregates
Percentage change]
Aggregate
M2
M3
Debt2
1988
1989
1990
4to8
4to8
7toll
3to7
3to7
6V4 to lOVi
5to9
1. From average of the fourth quarter of the preceeding
year to average of the fourth quarter of the year indicated.
2. Domestic nonfinancial sector.
Monetary Policy Reports
The setting of targets for money growth
in 1990 is made more difficult by uncertainty about developments affecting thrift
institutions. The behavior of M3 and, to a
more limited extent, M2 is likely to be
affected by such developments, but there
is only limited basis in experience to
gauge the likely effect. In addition, in
interpreting the growth of nonfinancial
debt, the Committee will have to take
into account the amount of Treasury
borrowing (recorded as part of the debt
aggregate) used to carry the assets of
failed thrift institutions, pending their
disposal. With these questions adding to
the usual uncertainties about the relationship among movements in the aggregates
and output and prices, the Committee
agreed that, in implementing policy, they
would need to continue to consider, in
addition to the behavior of money, indicators of inflationary pressures and economic growth as well as developments in
financial and foreign exchange markets.
Economic Projections for 1990
The Committee members, and other
Reserve Bank presidents, expect that
growth in the real economy will be
moderate during 1990. Most project real
37
GNP growth over the four quarters of the
year to be between VA and 2 percent—
essentially the same increase as in 1989,
excluding the bounceback in farm output
after the 1988 drought. It is expected that
this pace of expansion will be reflected in
some easing of pressures on domestic
resources; the central tendency of forecasts is for an unemployment rate of
5lA to 53A percent in the fourth quarter.
Certain factors have caused an uptick
in inflation early this year. Most notably,
prices for food and energy increased
sharply as the year began, reflecting the
effect of the unusually cold weather in
December. However, these run-ups
should be largely reversed in coming
months, and inflation in food and energy
prices for the year as a whole may not
differ much from increases in other
prices.
Given the importance of labor inputs
in determining the trend of overall costs,
a deceleration in the cost of labor inputs is
an integral part of any solid progress
toward price stability. Nominal wages
and total compensation have grown relatively rapidly during the past two years,
while increases in labor productivity have
diminished. With prices being constrained by domestic and international
Economic Projections for 1990
Measure
FOMC members and
other FRB presidents
Administration
MEMO
1989 actual
Range
Central tendency
Percentage change,
fourth quarter to fourth quarter'
NominalGNP
RealGNP
Consumer price index2
4 to 7
lto2K
3% to 5
5% to 6%
IK to2
4to4V4
7.0
2.6
4.1
6.4
2.4
4.5
Average level in the
fourth quarter (percent)
Unemployment rate
51/2to61/2
5V4to5K
5.4
5.3
1. Average for the fourth quarter of the preceding
year to the average for the fourth quarter of the year
indicated.
2. Data for 1989 and FOMC forecasts are for all urban
consumers; Administration forecast is for urban wage
earners and clerical workers.
3. Percentage of total labor force, including armed
forces residing in the United States.
38
77th Annual Report, 1990
competition, especially in goods markets,
profit margins have been squeezed to low
levels. A restoration of more normal
margins ultimately will be necessary if
businesses are to have the wherewithal
and the incentive to maintain and improve
the stock of plant and equipment.
Unfortunately, the near-term prospects
for a moderation in labor cost pressures
are not favorable. Compensation growth
is being boosted in the first half of 1990
by an increase in social security taxes and
a hike in the minimum wage. The anticipated easing of pressures in the labor
market should help produce some moderation in the pace of wage increases in
the second half of 1990, but the Committee will continue to monitor closely the
growth of labor costs for signs of progress
in this area.
Finally, the recent depreciation of the
dollar likely will constitute another impetus to near-term price increases, reversing the restraining influence exerted by a
strong dollar through most of last year.
Prices of imported goods, excluding oil,
increased in the fourth quarter after
declining through thefirstthree quarters
of 1989. The full effect of this upturn
likely will not be felt on the domestic
price level until some additional time has
passed.
Despite these adverse elements in the
near-term picture, the Committee believes that progress toward price stability
can be achieved over time, given the
apparently moderate pace of activity. In
terms of the consumer price index, most
members expect an increase of between
4 and AVi percent, compared with the
4.5 percent advance recorded in 1989.
Relative to the Committee, the Administration currently is forecasting more
rapid growth in real and nominal GNP.
At the same time, the Administration's
projection for consumer price inflation is
at the low end of the Committee's centraltendency range. In its Annual Report, the
Council of Economic Advisers argues
that, if nominal GNP were to grow at a
7 percent annual rate this year—as the
Council is projecting—then M2 could
exceed its target range, particularly if
interest rates fall as projected in the
Administration forecast. As suggested
above, monetary relationships cannot be
predicted with absolute precision, but the
Council's assessment is reasonable. And,
although most Committee members believe that growth in nominal GNP more
likely will be between 5Vi and 6V2 percent, a more rapid expansion in nominal
income would be welcome if it promised
to be accompanied by a declining path for
inflation in 1990 and beyond.
The Performance of the Economy
in 1989
Real GNP grew 2 Vi percent over the four
quarters of 1989, 2 percent after adjustment for the recovery in farm output
from the drought losses of the prior year.
This rate of growth of GNP constituted a
significant downshifting in the pace of
expansion from the unsustainably rapid
rates of 1987 and 1988, which had carried
activity to the point that inflationary
strains were beginning to become visible
in the economy. As the year progressed,
clear signs emerged that pressures on
resource utilization were easing, particularly in the industrial sector. Nonetheless,
the overall unemployment rate remained
at 5.3 percent, the lowest reading since
1973, and inflation remained at AVi percent despite the restraining influence of a
dollar that was strong for most of the
year.
The deceleration in business activity
last year reflected, to some degree, the
monetary tightening from early 1988
through early 1989 that was undertaken
with a view toward damping the inflation
forces. Partly as a consequence of that
Monetary Policy Reports
39
saving rate increased to 5 34 percent in the
fourth quarter of 1989.
The slackening in consumer demand
was concentrated in spending on goods.
Real spending on durable goods was
about unchanged from the fourth quarter
of 1988 to the fourth quarter of
1989—after jumping 8 percent in the
prior year-chiefly reflecting a slump in
purchases of motor vehicles. Spending
on nondurable goods also decelerated,
increasing only Vi percent in 1989 after
an advance of 2 percent in 1988. The
principal support to consumer spending
came from continued large gains in
outlays for services. Spending on medical
care moved up IVi percent in real terms
last year, and now constitutes 11 percent
of total consumption expenditures-up
from 8 percent in 1970. Outlays for other
services rose 3W percent, with sizable
increases in a number of categories.
Sales of cars and light trucks fell
3
4 million units in 1989, to 14V4 million.
Most of the decline reflected reduced
sales of cars produced by U.S.-owned
automakers; a decline in sales of imported
automobiles was about offset by an
increase in sales of foreign nameplates
produced in U.S. plants. The slowing in
sales of motor vehicles was most pronounced during the fourth quarter of
1989, reflecting a "payback" for sales that
had been advanced into the third quarter
and a relatively large increase in sticker
prices on 1990-model cars. Although
part of this increase reflected the inclusion
The Household Sector
of additional equipment—notably the
Household spending softened signifi- addition of passive restraint systems to
cantly in 1989, with a marked weakening many models—consumers nevertheless
in the demand for motor vehicles and reacted adversely to the overall increase
housing. Real consumer spending on in prices. Beyond these influences,
goods and services increased 2XA percent longer-run factors appear to have been
over the four quarters of 1989, \Vi per- damping demand for autos and light
centage points less than in 1988. Growth trucks during 1989; in particular, the
in real disposable income slowed last robust pace of sales earlier in the expanyear, but continued to outstrip growth in sion seems to have satisfied demand pent
spending, and, as a result, the personal up during the recessionary period of the
tightening, the U.S. dollar appreciated in
the foreign exchange markets from early
1988 through mid-1989, contributing to
a slackening of foreign demand for U.S.
products. At the same time, domestic
demand also slowed, more for goods
than for services. Reflecting these developments, the slowdown in activity was
concentrated in the manufacturing sector:
Factory employment, which increased a
total of 90,000 over thefirstthree months
of 1989, declined 195,000 over the
remainder of the year, and growth in
manufacturing production slowed from
5x/2 percent in 1988 to only 1% percent
last year. Employment in manufacturing
fell further in January of this year, but
that decline was largely attributable to
temporary layoffs in the automobile
industry, and most of the affected workers
have since been recalled.
As noted above, the rate of inflation
was about the same in 1989 as it had been
in the preceding two years. While the
appreciation of the U.S. dollar through
the first half of the year helped to hold
down the prices of imported goods, the
high level of resource utilization continued to exert pressure on wages and prices.
In that regard, the moderation in the
expansion of real activity during 1989
was a necessary development in establishing an economic environment that is more
conducive to progress over time toward
price stability.
40
77th Annual Report, 1990
early 1980s. The rebuilding of the motor
vehicle stock suggests that future sales
are likely to depend more heavily on
replacement needs.
Residential investment fell in real
terms through the first three quarters of
1989, and with only a slight upturn in the
fourth quarter, expenditures decreased
6 percent on net over the year. Construction was weighed down throughout 1989
by the overbuilding that occurred in
some locales earlier in the decade. Vacancy rates were especially high for
multifamily rental and condominium
units. In the single-family sector, affordability problems constrained demand,
dramatically so in those areas in which
home prices had soared relative to household income.
Mortgage interest rates declined more
than a percentage point, on net, between
the spring of 1989 and the end of the year,
helping to arrest the contraction in housing activity; however, the response to the
easing in rates appears to have been
muted somewhat by a reduction in the
availability of construction credit, likely
reflecting, in part, the tightening of
regulatory standards in the thrift industry
and the closing of several insolvent
institutions. Exceptionally cold weather
also hampered building late in the year,
but a sharp December drop in housing
starts was followed by a record jump in
activity last month.
profits reduced the availability of internal
finance.
Spending on equipment moved up
briskly during thefirsthalf of 1989, with
particularly notable gains in outlays for
information-processing equipment —
computers, photocopiers, telecommunications devices, and the like. However,
equipment outlays wereflatin the second
half of the year; growth in the information
processing category slowed sharply, and
spending in most other categories was
either flat or down. Purchases of motor
vehicles dropped sharply in the fourth
quarter from the elevated levels of the
second and third quarters. There were a
few exceptions to the general pattern of
weakness during the second half. Spending on aircraft was greater in the second
half of 1989 than in the first half, and
would have increased still more had it not
been for the strike at Boeing. Outlays for
tractors and agricultural machinery
moved up smartly; spending on farm
equipment has been buoyed by the substantial improvements over the past
several years in thefinancialhealth of the
agricultural sector. Over the four quarters
of 1989, total spending on equipment
increased 6 percent in real terms—about
1 percentage point below the robust pace
of 1988.
Business spending for new construction edged down xh percent in real terms
during 1989-the second consecutive
yearly decline. Commercial construction, which includes office buildings, was
especially weak; vacancy rates for office
The Business Sector
Business fixed investment, adjusted for space remain at high levels in many areas,
inflation, increased only 1 percent at an lowering prospective returns on new
annual rate during the second half of investment. Outlays for drilling and
1989 after surging 7 V* percent during the mining, which had dropped 20 percent
first half. Although competitive pressures over the four quarters of 1988, moved
forced many firms to continue seeking down further in thefirstquarter of 1989;
efficiency gains through capital invest- later in the year, drilling activity revived
ment, the deceleration in overall eco- as crude oil pricesfirmed.The industrial
nomic growth made the need for capacity sector was the most notable exception to
expansion less urgent, and shrinking the overall pattern of weakness: Real
Monetary Policy Reports
outlays increased 11 percent in 1989,
largely because of construction that had
been planned in 1987 and 1988 when
capacity in many basic industries tightened substantially and profitability was
improving sharply.
As noted above, the slowdown in
investment spending during the second
half of last year likely was exacerbated
by the deterioration in corporate cash
flow. Before-tax operating profits of
nonfinancial corporations dropped 12percent from the fourth quarter of 1988 to
the third quarter of 1989 (latest data
available); after-tax profits were off in
about the same proportion. Reflecting the
increased pressures from labor and materials costs-and a highly competitive
domestic and international environment—before-tax domestic profits of
nonfinancial corporations as a share of
gross domestic product declined to an
average level of 8 percent during the first
three quarters of 1989, the lowest reading
since 1982. At the same time, taxes as a
share of before-tax operating profits
increased to an estimated 44 percent in
the first three quarters of 1989; since
1985, this figure has retraced a bit more
than half of its decline from 54 percent in
1980.
Nonfarm business inventory investment averaged $21 billion in 1989.
Although the average pace of accumulation last year was slower than in 1988, the
pattern across sectors was somewhat
uneven. Some of the buildup in stocks
took place in industries—such as aircraft—where orders and shipments have
been strong for some time now. But
inventories in some other sectors became
uncomfortably heavy at times and precipitated adjustments in orders and production. The clearest area of inventory
imbalance at the end of the year was at
auto dealers, where stocks of domestically produced automobiles were at 1.7
million units in December—almost three
41
months' supply at the sluggish fourthquarter sales pace. In response, the
domestic automakers implemented a new
round of sales incentives and cut sharply
the planned assembly rate for the first
quarter of 1990. Elsewhere in the retail
sector, inventories moved up substantially relative to sales at general merchandise outlets. Overall, however, most
sectors of the economy have adjusted
fairly promptly to the deceleration in
sales and appear to have succeeded in
preventing serious overhangs from
developing.
The Government Sector
Budgetary pressures continued to restrain
the growth of purchases at all levels of
government. At the federal level, purchases fell 3 percent in real terms over
the four quarters of 1989, with lower
defense purchases accounting for the bulk
of the decline. Nondefense purchases
also declined in real terms from the fourth
quarter of 1988 to the fourth quarter of
1989; increases in such areas as the space
program and drug interdiction were more
than offset by general budgetary restraint
that imposed real reductions on most
other discretionary programs.
In terms of the unified budget, the
federal deficit in fiscal year 1989 was
$152 billion, slightly smaller than in
1988. Growth in total federal outlays,
which include transfer payments and
interest costs as well as purchases of
goods and services, picked up a bit in
fiscal year 1989. Outlays were boosted at
the end of the fiscal year by the initial
$9 billion of spending by the Resolution
Trust Corporation. On the revenue side
of the ledger, growth in federal receipts
also increased in fiscal 1989. The acceleration occurred in the individual income
tax category, but strong increases also
were recorded in corporate and social
security tax payments.
42
77th Annual Report, 1990
Purchases of goods and services at the
state and local level increased 2 Vi percent
in real terms over the four quarters of
1989, down more than a percentage point
from the average pace of the preceding
five years. Nonetheless, there were some
areas of growth. Spending for educational
buildings increased, and employment in
the state and local sector rose 350,000
over the year, largely driven by a pickup
in hiring by schools. Despite the overall
slowdown in the growth of purchases,
the budgetary position of the state and
local sector deteriorated further over the
year; the annualized deficit of operating
and capital accounts, which excludes
social insurance funds, increased $6
billion over the first three quarters of
1989 and appears to have worsened
further in the fourth quarter.
above its level in December 1988, but the
dollar has moved lower thus far in 1990.
In real terms, the net appreciation of the
dollar during 1989 in terms of the other
G-10 currencies was about 5 percent as
consumer prices rose somewhat faster
here than they did abroad, on average.
Over the year, the dollar moved lower on
balance against the currencies of South
Korea, Singapore, and especially Taiwan. From a longer perspective, the
modest uptrend on balance in the dollar
over the past two years marked a sharp
departure from the substantial weakening
seen during the 1985-87 period.
The behavior of the dollar differed
greatly between the two halves of 1989.
In the first half, the dollar appreciated
12 percent in terms of the other G-10
currencies, while depreciating against
the currencies of South Korea and Taiwan. The dollar fluctuated during the
summer, and later in the year unwound
The External Sector
The U.S. external deficits improved most of the prior appreciation, as U.S.
somewhat in 1989, but not by as much as interest rates eased relative to rates
in 1988. Onabalance-of-paymentsbasis, abroad and in response to concerted
the deficit on merchandise trade fell from intervention in exchange markets in the
an annual rate of $128 billion in the weeks immediately after the September
fourth quarter of 1988 (and $127 billion meeting of Group of Seven officials and
for the year as a whole) to $114 billion in to events in Eastern Europe. In the second
thefirstquarter of 1989. Thereafter, there half of the year, the dollar rose against the
was no further net improvement. The currencies of South Korea and Taiwan
appreciation in the foreign exchange while depreciating in terms of the Singavalue of the dollar between early 1988 pore dollar. Over the course of 1989, the
and mid-1989 appears to have played an dollar appreciated nearly 16 percent
important role in inhibiting farther against the Japanese yen and 14 percent
progress on the trade front. During the against the British pound, but it deprecifirst three quarters of 1989, the current ated slightly against the German mark,
account, excluding the influence of capi- the Canadian dollar, and most other major
tal gains and losses that are largely caused currencies.
by currencyfluctuations,showed a deficit
On a GNP basis, merchandise exports
of $106 billion at an annual rate—some- increased about 11 percent in real terms
what below the deficit of $124 billion in over the four quarters of 1989—roughly
the comparable period of 1988.
4 percentage points less than in 1988.
Measured in terms of the other Group This deceleration took place despite
of Ten (G-10) currencies, the foreign continued strong growth in economic
exchange value of the U.S. dollar in activity in most foreign industrial counDecember 1989 was about 3 percent tries (with the exception of Canada and
Monetary Policy Reports
the United Kingdom), and appears to
have reflected, in large part, the effect on
U.S. competitiveness of the dollar's
appreciation and the more rapid U.S.
inflation over 1988 and much of 1989.
Exports were also depressed in the fourth
quarter of 1989 by several special factors,
including the Boeing strike. The volume
of agricultural exports increased about
11 percent in 1989 - a bit faster even than
the robust pace of 1988. The value of
agricultural exports rose much less, however, as agricultural export prices reversed the drought-induced increases of
the previous year.
Merchandise imports excluding oil
expanded about 7 percent in real terms
during 1989, with much of the rise
accounted for by imports of computers.
Imports of oil increased 6 percent from
the fourth quarter of 1988 to the fourth
quarter of 1989, to a rate of 8.3 million
barrels per day. At the same time, the
average price per barrel increased almost
40 percent, and the nation's bill for foreign oil jumped 45 percent.
The counterpart of the current account
deficit of $106 billion at an annual rate
over thefirstthree quarters of 1989 was a
recorded net capital inflow of about
$60 billion at an annual rate and an
unusually large statistical discrepancy,
especially in the second quarter. More
than half of the recorded net inflow of
capital reflected transactions in securities, as foreign private holdings of U.S.
securities rose nearly $50 billion (half of
the increase being in holdings of U.S.
Treasury securities), while U.S. holdings
of foreign securities increased a bit less
than $20 billion. Net direct investment
accounted for another substantial portion
of the inflow; foreign direct investment
holdings in the United States rose more
than $40 billion, and U.S. holdings
abroad rose only half as much. Over the
first three quarters of 1989, foreign
official assets in the United States in
43
creased almost $15 billion, but this
increase was more than offset by the
increase in U. S. official holdings of assets
abroad, largely associated with U.S.
intervention operations to resist the dollar's strength.
Labor Markets
Employment growth slowed in the second
half of 1989; nonetheless, nonfarm payrolls increased nearly 2lA million during
the year. The bulk of this expansion
occurred in the service-producing sector.
By contrast, the manufacturing sector
shed 100,000 jobs. These job losses were
more than accounted for by declines in
the durable goods industries and appeared
to reflect the slump in auto sales, the
weakening in capital spending, and the
effects of a stronger dollar on exports and
imports.
Despite the slowdown in new job
creation, the overall balance of supply
and demand in the labor market remained
steady over the year. The civilian unemployment rate, which had declined about
Vz percentage point over the twelve
months of 1988,finished1989 at 5.3 percent—unchanged from twelve months
earlier. Moreover, there was no increase
in the number of "discouraged" workers—those who say they would re-enter
the labor force if they thought they could
find a job. Nor was there any net increase
in workers who accepted part-time employment when they would have preferred full-time. The proportion of the
civilian population with jobs reached a
historic high.
Reflecting the tightness of labor markets and the persistence of inflation
expectations in the range of 4 to 5 percent,
according to surveys, the employment
cost index for wages and salaries in
nonfarm private industry increased
414 percent over the twelve months of
1989 -about the same as in 1988. Benefit
44
77th Annual Report, 1990
costs continued to rise more rapidly than
wages and salaries last year, with health
insurance costs remaining a major factor;
nonetheless, the rate of growth in overall
benefit costs slowed in 1989, in part
because of a smaller increase in social
security taxes than in 1988. Total compensation—including both wages and
salaries and benefits—rose 43A percent
during 1989. Compensation growth in
the service-producing sector—at 5 percent—continued to outpace the gain in
the goods-producing sector by about
3
A percentage point.
A slowdown in the growth of productivity often accompanies a softening in
the general economy, and productivity
gains were lackluster in 1989. Output per
hour in the private nonfarm business
sector increased only Vi percent over the
four quarters of the year— 1 percentage
point below the rate of increase in 1988.
In the manufacturing sector, productivity
gains during the first half of 1989 kept
pace with the 1988 average of 3 percent;
in the second half, however, productivity
growth slowed to an annual rate of 2%
percent. Reflecting both the persistent
growth in hourly compensation and the
disappointing developments in productivity, unit labor costs in private nonfarm
industry rose 5 percent over the four
quarters of 1989—the largest increase
since 1982.
energy prices retraced about a third of the
earlier run-up. Prices for imported goods
excluding oil were little changed over
1989, on net, and acted as a moderating
influence on consumer price inflation.
Food prices increased 5lA percent at
the retail level, slightly more than in
1988 when several crops were severely
damaged by drought. Continued supply
problems in some agricultural markets in
1989—notably a poor wheat crop and a
shortfall in dairy production—likely prevented a deceleration from the droughtinduced rate of increase in 1988. At the
same time, increases in demand, including sharp increases in exports of some
commodities, also appear to have played
a role. Still another impetus to inflation in
the food area last year evidently came
from the continuing rise in processing
and marketing costs.
Consumer energy prices surged 17 percent at an annual rate during the first six
months of 1989, before dropping back
6 percent in the second half. During the
first half of the year, retail energy prices
were driven up by increases in the cost of
crude oil. The increase in gasoline prices
at midyear was exaggerated by the introduction of tighter standards governing
the composition of gasoline during summer months. Gasoline prices eased considerably in the second half, reflecting a
dip in crude oil prices and the expiration
of the summertime standards. Taking the
twelve months of 1989 as a whole, the
increase in retail energy prices came to a
Price Developments
bit
more than 5 percent. Heating oil
Inflation in consumer prices remained in
the neighborhood of 4Vi percent for the prices jumped sharply at the turn of the
third year in a row, as the level of eco- year, reflecting a surge in demand caused
nomic activity was strong and continued by December's unusually cold weather.
to exert pressures on available resources. The spike in heating fuel prices largely
During the first half of the year, overall reversed itself in spot markets during
inflation was boosted by a sharp run-up in January of this year, but crude oil prices
energy prices and a carry-over from 1988 remained at high levels.
of drought-related increases in food
Consumer price increases for items
prices. However, inflation in food prices other than food and energy remained at
slowed during the second half, and about41/2 percent in 1989. Developments
Monetary Policy Reports
in this category likely would have been
less favorable had the dollar not been
appreciating in foreign exchange markets
through the first half of 1989. The prices
of consumer commodities excluding food
and energy decelerated sharply, and this
slowdown was particularly marked for
some categories in which import penetration is high, including apparel and recreational equipment. Given the dollar's
more recent depreciation, however, the
moderating effect of import prices on
overall inflation may be diminishing.
Indeed, prices for imported goods excluding oil turned up in the fourth quarter of
1989, after declining earlier in the year.
In contrast to goods prices, the prices of
nonenergy services—which make up half
of the overall consumer price index—
increased 5 lA percent in 1989, lA percentage point more than in 1988. The pickup
in this category was led by rents, medical
services, and entertainment services.
At the producer level, prices of finished goods increased IVi percent at an
annual rate during the first half—almost
twice the pace of 1988— before slowing
to an annual rate of increase of 2 Vz percent
over the second half. In large part,
developments in this sector reflected the
same sharp swings in energy prices that
affected consumer prices. At earlier
stages of processing, the index for intermediate materials excluding food and
energy decelerated sharply during the
first half of the year and then edged down
in the second half. For the year as a
whole, this index registered a net increase
of only 1 percent, compared with more
than 7 percent in 1988. The sharp deceleration in this category appears to have
reflected a relaxation of earlier pressures
on capacity in the primary processing
industries, and the influence of the rising
dollar through the first half of last year.
Also consistent with the weakening in the
manufacturing sector and the strength of
the dollar, the index for crude nonfood
45
materials excluding energy declined
3 3A percent over the year, and spot prices
for industrial metals moved sharply lower
during the year, in part because of large
declines for steel scrap, copper, and
aluminum.
Monetary and Financial
Developments during 1989
In 1989, the Federal Reserve continued
to pursue a policy aimed at containing
and ultimately eliminating inflation while
providing support for continued economic expansion. In implementing that
policy, the Federal Open Market Committee maintained a flexible approach to
monetary targeting, with policy responding to emerging conditions in the economy and financial markets as well as to
the growth of the monetary aggregates
relative to their established target ranges.
This flexibility has been necessitated by
the substantial variability in the short-run
relationship between the monetary aggregates and economic performance; however, when viewed over a longer perspective, those aggregates are still useful
in conveying information about price
developments.
As the year began, monetary policy
was following through on a set of measured steps begun a year earlier to check
inflationary pressures. By then, however, evidence of a slackening in aggregate demand, along with sluggish growth
of the monetary aggregates, suggested
that the year-long rise in short-term
interest rates was noticeably restraining
the potential for more inflation. But, after
an increase of xh percentage point in the
discount rate at the end of February, the
Federal Reserve took no further policy
action until June. Over the balance of
1989, the Federal Reserve moved toward
an easing of money market conditions, as
indications mounted of slack in demand
and lessened inflation pressures. The
46
77th Annual Report, 1990
easing in reserve availability induced
declines in short-term interest rates of
l!/2 percentage points; money growth
strengthened appreciably, and M2 was
near the middle of its target range by the
end of 1989. The level of M3, on the
other hand, remained around the lower
bound of its range, with its weakness
mostly reflecting the shifting pattern of
financial intermediation as the thrift
industry retrenched. The growth of nonfinancial debt was trimmed to 8 percent
in 1989, about in line with the slowing in
the growth of nominal GNP, and ended
the year at the midpoint of its monitoring
range.
Implementation of Monetary Policy
In the opening months of the year, the
Federal Open Market Committee, seeking to counter a disquieting intensification
of inflationary pressures, extended the
move toward restraint that had begun
almost a year earlier. Policy actions in
January and February, restraining reserve availability and raising the discount
rate, prompted a further increase of
3
4 percentage point in short-term market
interest rates. Longer-term rates, however, moved up only moderately; the
tightening apparently had been widely
anticipated and was viewed as helping to
avoid an escalation in underlying inflation . Real short-term interest rates—nominal rates adjusted for expected price
inflation—likely moved higher, though
remaining below peak levels earlier in
the expansion; these gains contributed to
a strengthening of the foreign exchange
value of the dollar over this period, while
the growth of the monetary aggregates
slowed as the additional policy restraint
reinforced the effects of actions in 1988.
As evidence on prospective trends in
inflation and spending became more
mixed in the second quarter, the Committee refrained from further tightening and
in June began to ease pressures on reserve
markets. As the information on the real
economy, along with the continued rise
in the dollar, suggested that the outlook
for inflation was improving, most longterm nominal interest rates fell as much
as a percentage point from their March
peaks; the yield on the bellwether thirtyyear Treasury bond moved down to about
8 percent by the end of June. The decline
in interest rates outstripped the reduction
in most measures of investors' inflation
expectations, so that estimated real interest rates fell from their levels earlier in
the year. These declines in nominal and
real interest rates, however, were not
accompanied by declines in the foreign
exchange value of the dollar. Rather,
because of better-than-expected trade
reports and political turmoil abroad, the
dollar strengthened further.
In July, when the FOMC met for its
semiannual review of the growth ranges
for money and credit, M2 and M3 lay at,
or a bit below, the lower bounds of their
target cones. This weakness, reinforcing
the signals from prices and activity,
contributed to the Committee's decision
to take additional easing action in reserve
markets. The Committee reaffirmed the
existing annual target ranges for the
monetary and debt aggregates and tentatively retained those ranges for the next
year, since they were likely to encompass
money growth that would foster further
economic expansion and moderation of
price pressures in 1990.
Late in the summer, longer-term interest rates turned higher, as several releases
of economic data suggested reinvigorated
inflationary pressures. With growth in
the monetary aggregates rebounding, the
Committee kept reserve conditions about
unchanged until the direction of the economy and prices clarified.
Beginning in October, amid indications
of added risks of a weakening in the
economic expansion, the FOMC reduced
Monetary Policy Reports
47
pressures on reserve markets in three real, long-term rates in the United States
separate steps, which nudged the federal were incoming data pointing away from
funds rate down to around 8 lA percent by recession in the economy and from any
year-end, about Wi percentage points abatement in price pressures, especially
below its level when incremental tighten- as oil prices moved sharply higher.
ing ceased in February. Over those ten
months, other short- and long-term nomBehavior of Money and Credit
inal interest rates fell about 1 to VA perGrowth in M2 was uneven over 1989,
centage points; and most major stock
with marked weakness in the first part of
price indexes reached record highs at the
the year giving way to robust growth
turn of the year, more than recovering the
thereafter. On balance over the year, M2
losses that occurred on October 13.
expanded 4V2 percent, down from 5lA
Reflecting some reduction in inflation
percent growth in 1988, placing it about
anticipations over the same period, estiat the midpoint of its 1989 target range of
mated short- and long-term real interest
3 to 7 percent. The slower rate of increase
rates fell somewhat less than nominal
in M2 reflected some moderation in
rates, dropping probably about Vi to
nominal income growth as well as the
3
A percentage point. Still, most measures
pattern of interest rates and associated
of short- and long-term real interest rates
opportunity costs of holding money, with
remained well above their trough levels
the effects of increases in 1988 and 1989
of 1986 and 1987-levels that had preoutweighing the later, smaller drop in
ceded rapid growth in the economy and a
rates.
buildup of inflationary pressures.
M2 has grown relatively slowly over
Over the last three months of the year
the past three years, as the Federal
and into January 1990, the foreign exchange value of the dollar declined
substantially from its high, which was Growth of Money and Debt
reached around midyear and largely Percentage change •
Debt of
sustained through September. The dollar
domestic
fell amid concerted intervention undernonPeriod
Ml
M2
M3
financial
taken by the G-7 countries in the weeks
sector
immediately after a meeting of the finance
Fourth
quarter
ministers and central bank governors of
1980
7.4
8.9
9.5
9.5
these countries in September. The dollar 1981
5.4
9.3
12.3
10.2
2
(2.5)
continued to decline in response to the 1982
8.8
9.1
9.9
9.1
10.4
12.2
9.8
11.1
easing of short-term interest rates on 1983
5.4
7.9
10.6
14.2
dollar assets and increases in rates in 1984
12.0
8.9
7.8
13.1
1985 ..
15.5
9.3
9.1
13.2
Japan and Germany. The German cur- 1986
6.3
4.3
5.8
9.9
1987
rency rate rose particularly sharply as 1988
4.3
5.2
6.3
9.2
.6
4.6
3.3
8.1
developments in Eastern Europe were 1989
viewed as favorable for the West German Quarter
(annual rate)
economy, attracting global capital flows.
1989:1
-.1
2.3
3.9
8.4
Rising interest rates in Germany likely
2
-4.4
1.6
3.3
7.9
3
1.8
6.9
3.9
7.2
contributed to an increase in bond yields
4
5.1
7.1
2.0
8.0
in the United States early in 1990, even as
1. From average of the preceding period to average of
U.S. short-term rates remained essenindicated.
tially unchanged. More important, how- the2.period
Figure in parentheses is adjusted for shifts to NOW
ever, for the rise in nominal, and likely accounts in 1981.
48
77th Annual Report, 1990
Reserve has sought to ensure progress
over time toward price stability. There
appears to be a fairly reliable long-term
link between M2 and future changes in
inflation. One method of specifying that
link is to estimate the equilibrium level of
prices implied by the current level of M2,
assuming that real GNP is at its potential
and velocity is at its long-run average,
and compare that to actual prices. The
historical record suggests that inflation
tends to rise when actual prices are below
the equilibrium level and to moderate
when equilibrium prices are below actual. At the end of 1986, the equilibrium
level of prices was well above the actual
level, reinforcing the view that the risks
weighed on the side of an increase in
inflation; at the end of 1989, that equilibrium price had moved into approximate
equality with the actual price level,
indicating that basic inflation pressures
had steadied.
In 1989, compositional shifts within
M2 reflected the pattern of interest rates,
the unexpected volume of tax payments
in the spring, and theflowof funds out of
thrift deposits and into other instruments.
Early in the year, rising market interest
rates buoyed the growth of smalldenomination time deposits at the expense of more liquid deposits, as rates on
the latter accounts adjusted only sluggishly to the upward market movements.
The unexpectedly large tax payments in
April and May contributed to the weakness in liquid instruments as those balances also were drawn down to meet tax
obligations. As market interest rates fell,
the relative rate advantage reversed in
favor of liquid instruments and the growth
in liquid deposits rebounded, boosted as
well by the replenishment of accounts
drained by tax payments.
The Ml component of M2 was especially affected by the swings in interest
rates and opportunity costs last year, and
in addition was buffeted by the effects of
outsized tax payments in April. After its
riseof AlA percent in 1988, Ml grew only
Vi percent in 1989, with much of the
weakness in this transactions aggregate
occurring early in the year. By May, Ml
had declined at an annual rate of about
2V2 percent from its fourth-quarter 1988
level, reflecting a lagged response to
earlier increases in short-term interest
rates and an extraordinary bulge in net
individual tax remittances to the Treasury. From May to December, Ml rebounded at a 4 percent rate as the
cumulating effects of falling interest rates
and post-tax-payment rebuilding boosted
demands for this aggregate. Ml velocity
continued the upward trend that resumed
in 1987, increasing in the first three
quarters before turning down in the fourth
quarter of 1989.
The shift of deposits from thrift institutions to commercial banks and money
fund shares owed, in part, to regulatory
pressures that brought down rates paid by
some excessively aggressive thrift institutions. Beginning in August, the newly
created Resolution Trust Corporation
(RTC) targeted some of its funds to pay
down high-cost deposits at intervened
thrift institutions and began a program of
closing insolvent thrift institutions and
selling their deposits to other institutions—for the most part, banks. On
balance, the weak growth of retail deposits at thrift institutions appears to have
been about offset by the shift into commercial banks and money market mutual
funds, leaving M2 little affected overall
by the realignment of the thrift industry.
M3 was largely driven, as usual, by
the funding needs of banks and thrift
institutions; under the special circumstances of the restructuring of the thrift
industry, it was a less reliable barometer
of monetary policy pressures than is
normally the case. After expanding
6lA percent in 1988, M3 hugged the
lower bound of its 3lA to IVi percent
Monetary Policy Reports
target cone in 1989, closing the year
about 3 lA percent above its fourth quarter
of 1988base. In 1989, bank credit growth
about matched the previous year's 7 Vi percent increase, but credit at thrift institutions is estimated to have contracted a bit
on balance over the year, in contrast to its
6lA percent growth in 1988. This weakness in thrift credit directly owed to asset
shrinkage at savings and loan institutions
insured by the Savings Association Insurance Fund; credit unions and mutual
savings banks expanded their balance
sheets in 1989. In addition, funds paid
out by the RTC to thrift institutions and to
banks acquiring thrift deposits directly
substituted for other sources of funds. As
a result, thrift institutions lessened their
reliance on managed liabilities, as evidenced by the decline of 14% percent
over the year in the sum of large time
deposits and repurchase agreements at
thrift institutions. Institution-only money
market mutual funds were bolstered by a
relative yield advantage, as fund returns
lagged behind declining market interest
rates in the second half of the year; these
funds provided the major source of
growth for the non-M2 component of
M3. On balance, the effects of the thrift
restructuring dominated the movements
in M3, and the rebound in M2 in the
second half of the year did not show
through to this broader aggregate. As a
consequence, the velocity of M3 increased 3 percent in 1989,1 lA percentage
points faster than the growth in M2
velocity, and its largest annual increase
in twenty years.
Many of the assets shed by thrift
institutions were mortgages and mortgage-backed securities, but this appears
to have had little sustained effect on home
mortgage cost and availability. The spread
between the rate on primary fixed-rate
mortgages and the rate on ten-year Treasury notes rose somewhat early in the
year, but thereafter remained relatively
49
stable. The share of mortgages held in
securitized form again climbed in 1989,
facilitating the tapping of a base of
investors. Diversified lenders, acting in
part through other intermediaries, such
as federally sponsored agencies, mostly
filled the gap left by the thrift institutions.
However, some shrinkage of credit available for acquisition, development, and
construction appeared to follow from
limits imposed by the FIRREA on loans
by thrift institutions to single borrowers,
though the reduction in funds available
for these purposes probably also reflected
problems in some residential real estate
markets.
Aggregate debt of the domestic nonfinancial sectors grew at a fairly steady
pace over 1989, averaging 8 percent,
which placed it near the midpoint of its
monitoring range of 6lA to \Wi percent.
Although the annual growth of debt
slowed in 1989, as it had during the
preceding two years, it still exceeded the
6V2 percent growth of nominal GNP.
Federal sector debt grew IVi percent,
about Vi percentage point below the 1988
increase—and the lowest rate of expansion in a decade—as the deficit leveled
off. Debt growth outside the federal
sector eased by more to average 8*4 percent, mostly because of a decline in the
growth of household debt. Mortgage
credit slowed in line with the reduced
pace of housing activity, and consumer
creditgrowth, though volatile from month
to month, trended down through much of
the year. The growth of nonfinancial
business debt slipped further below the
extremely rapid rates of the mid-1980s.
Corporate restructuring continued to be a
major factor buoying business borrowing, although such activity showed distinct signs of slowing late in the year as
lenders became more cautious and the
use of debt to require equity ebbed.
The second half of 1989 was marked
by the troubling deterioration in indica-
50
77th Annual Report, 1990
tors of financial stress among certain
classes of borrowers, with implications
for the profitability of lenders, including
commercial banks. In the third quarter,
several measures of loan delinquency
rates either rose sharply or continued on
an uptrend. Delinquency rates on closedend consumer loans at commercial banks
and auto loans at "captive" auto finance
companies were close to historically high
levels. At commercial banks as a whole
in 1989, both delinquency and charge-off
rates for real estate loans were little
changed from the previous year. Still,
problem real estate loans continued to be
a drag on the profitability of banks in
Texas, Oklahoma, and Louisiana; in the
second half, such loans emerged as a
serious problem for banks in New England. On the other hand, smaller, agriculturally oriented banks continued to
recover from the distressed conditions of
the mid-1980s. Since 1987, agricultural
banks have charged off loans at well
below the national rate, and their nonperforming assets represented a smaller
portion of their loans than that for the
country as a whole.
The upswing in the profitability of
insured commercial banks that began in
1988 only extended through thefirsthalf
of 1989. A slowing in the buildup of loan
loss provisions, along with improvements
in interest rate margins, contributed to
these gains, with the money center banks
showing the sharpest turnaround. Information for the second half of 1989,
although still incomplete, clearly points
to an erosion of these profit gains, in part,
because of problems in the quality of
loans. Several money center banks
sharply boosted their loss provisions on
loans to developing countries, while
evidence of rising delinquency rates on
real estate and consumer loans suggested
more widespread weakening. Despite
these developments, the spread of rates
on bank liabilities, certificates of deposit,
and Eurodollar deposits, over comparable Treasury bill rates narrowed early in
1990.
Report on July 18,1990
Monetary Policy and the Economic
Outlook for 1990 and 1991
The Federal Reserve delivered its initial
Humphrey-Hawkins report of 1990 to
the Congress in February, and the period
since then has been an especially challenging one for monetary policy decisionmaking. The already difficult task of moving
a quite fully employed economy toward
price stability without contractionary
mishap has been complicated by a variety
of disturbances to business activity and
financial markets—among them developments that distorted some of the basic
indicators of the Federal Reserve's influence on the economic system.
On the whole, events in the economy
have been broadly in line with the projections for 1990 contained in the February
monetary policy report. Inflation has
been somewhat greater on average than
most members of the Federal Open
Market Committee (FOMC) and other
Reserve Bank presidents expected in
February; however, this mainly reflected
the influence of transitory factors early in
the year, and price increases recently
have been more moderate. Meanwhile,
the economy has continued to expand,
but apparently rather sluggishly overall
since the winter.
While these aspects of the economic
situation were important elements in the
FOMC's review of its policy plans earlier
this month, the Committee also gave
careful attention to developments in
financial markets. Although market interest rates had changed little on net since
February, slow growth of the monetary
stock and other evidence in hand pointed
to a small but significant tightening of
Monetary Policy Reports
credit supplies. This implied greater
effective restraint on aggregate demand
in the months ahead than was thought
desirable, and in the past week the System
shifted to a slightly more accommodative
stance in the provision of reserves to
depository institutions. As a result, the
overnight federal funds rate, which had
fluctuated narrowly around SlA percent
throughout the first half of the year, has
declined to about 8 percent, and other
market rates of interest also have eased a
bit in recent days.
51
policy. Early in the year, bond yields in
the United States rose along with rates in
Japan and Western Europe, as developments in Eastern Europe suggested a
further spur to worldwide economic
activity, carrying the potential for greater
inflation and heightened pressures on a
limited international pool of savings.
In the second quarter, some of the
weather-related increases in food and
energy prices that had caused inflation to
pick up earlier in the year were reversed,
and price increases for many other goods
and services moderated. Inflation trends
remained in the range prevailing over the
previous
three years, though price presDevelopments Thus Far in 1990
sures in the industrial sector gave signs of
In the early part of 1990, economic some easing. The incoming information
activity appeared to be regaining momen- pointed to a sluggish pace of economic
tum, a development that reduced previous expansion; most notably, growth in priconcerns about recessionary risks. At the vate sector employment slackened, consame time, even discounting weather- sumer spending flattened, and real estate
related spurts in food and energy prices markets weakened. Moreover, advance
and an unusual bunching of price in- indicators in some sectors—particularly
creases for some other items, there durable goods orders and construction
appeared to be no abatement in underly- contracts—gave no evidence of a signifiing inflationary pressures. Through the cant pickup in the second half. With the
first quarter, M2 remained near the top of economy appearing somewhat less buoythe annual range set by the FOMC, and ant, over May and June bond yields in the
although M3 was near the lower bound of United States retraced some of their
its range, this weakness appeared consis- earlier increases. Long-term rates in
tent with the anticipated effects of the Japan and West Germany also declined,
restructuring of the thrift industry.
but by much less, with the result that
The Federal Reserve maintained a yields in those countries have risen
steady pressure on reserve positions appreciably this year relative to those in
during the first quarter, rather than the United States.
extending the sequence of easing steps
In foreign exchange markets, the dollar
that had fostered a drop in the federal has depreciated somewhat on balance
funds rate of Wi percentage points be- thus far this year, under the influence of a
tween June and December 1989. How- diverse set of economic, financial, and
ever, in keeping with the tenor of most of political developments around the world.
the economic data released during the The dollar has appreciated slightly in
quarter, other interest rates generally terms of the yen, while depreciating
moved higher, particularly at the long somewhat in terms of the German mark
end of the yield curve. This shift sug- and other currencies of the European
gested thatmarketparticipantshadreeval- Monetary System exchange rate mechauated the prospects for moderating infla- nism and somewhat more in terms of the
tion and a further easing of monetary Swiss franc and pound sterling.
52
77th Annual Report, 1990
The monetary aggregatesflattenedout
during the second quarter, and by
midyear M2 was in the lower half of its
annual range, and M3 had fallen below
the lower bound of its annual range. The
weakness in the monetary aggregates
mainly, though not wholly, reflected a
rechannelling of credit flows away from
depository institutions. Total borrowing
by domestic nonfinancial sectors moderated only a little in the first half of
1990 from the pace of 1989, and growth
in the aggregate debt of these sectors
was in the middle of the FOMC's
monitoring range. However, the proportion of lending accounted for by depositories was down substantially. Much of
the decrease related to the shrinkage
of savings and loan associations: Marginal institutions continued to retrench,
and the Resolution Trust Corporation
(RTC) transferred large volumes of assets
to banks and onto its own books in the
course of closing failed thrift institutions. Meanwhile, concerns about credit
quality and pressures on capital positions led banks to adopt more cautious
lending postures and to hold down asset
growth.
Therweakness in lending by depositories was reflected dramatically in the
behavior of M3; this aggregate, encompassing managed liabilities as well as
M2 deposits, comprises most of the
liabilities used by these institutions to
fund credit extensions. With depository
credit damped, not only were managed
liabilities weak, but banks and thrift
institutions did not bid aggressively for
retail funds—thereby contributing to
reduced growth of M2. In addition,
increases in expected returns on stocks
and bonds may have restrained expansion
of this aggregate, although some portion
of the slowdown in M2 remains unexplained by changes in relative yields or
income. The weakness in depository
credit and the monetary aggregates likely
has had, to date, only limited effects on
spending: The bulk of the credit formerly
supplied by depositories has been provided by other lenders, in part through
the securities markets, with little change
in the terms to most borrowers.
Monetary Objectives
for 1990 and 1991
In reevaluating its ranges for money and
credit for 1990 and in establishing tentative ranges for 1991, the FOMC had to
take account of the redirection of credit
flows away from depository institutions
and the resulting effect on the growth of
thefinancialaggregates relative to spending and prices. In February, the Committee expected that the continued shrinkage
of the thrift industry would damp growth
in M3; to take account of this, it lowered
the M3 range for 1990 to 2*4 to 6Vi percent, 1 percentage point below the range
set tentatively in July 1989. However,
the contraction of thrift assets has been
faster than anticipated, in part because of
the step-up in RTC activity, and bank
credit has expanded less rapidly. As a
consequence, through June, M3 grew at
an annual rate of only 1 lA percent from its
fourth-quarter 1989 base.
Barring a marked slowdown in RTC
activity or a significant strengthening in
bank credit, M3 growth is likely to
remain sluggish over the balance of the
year. As in thefirsthalf, the weakness in
M3 growth is expected to be associated
with a further substantial increase in
velocity—the ratio of nominal GNP to
money—rather than with substantial restraint on overall credit supplies. Recognizing this unusual behavior of M3
velocity, the FOMC voted in early July to
reduce the M3 range for 1990 to 1 to
5 percent. At the same time, the Committee reaffirmed its range of 5 to 9 percent
for total growth in the debt of domestic
nonfinancial sectors. The Committee
Monetary Policy Reports
seeks to ensure that credit will remain
available in amounts and at terms compatible with moderate expansion of the
economy, and it will continue to assess
the implications of developments at depositories for credit conditions more
generally.
As noted above, the contraction of the
thrift industry and the moderate growth
in bank credit also have affected the
growth of M2, as potential inflows of
retail deposits have outpaced the needs of
depository institutions for such funds.
The velocity of this aggregate has risen,
unexpectedly, but less than that of M3:
Growth of M2 from its fourth-quarter
base through June was at a 334 percent
annual rate, within its annual range,
though in the lower half. M2 velocity is
likely to increase further over the second
half of the year; however, a substantial
slowing of M2 could suggest more restraint than would be consistent with
sustained upward momentum of the economy, and thus the Committee reaffirmed
the established range for M2 growth for
1990.
In setting tentative ranges for 1991,
the Committee faced more than the usual
uncertainty about the growth of money
that would foster its objectives of
sustained expansion and a gradual abatement of inflation. Developments in
credit markets will be shaped not only
by the special factors that have altered
patterns of intermediation thus far this
year, but also by the outcome of the
current deliberations regarding the federal budget. At this point, the forces that
recently have diminished the role of
depository credit seem likely to persist
for some time, and they may foster
further upward shifts in monetary
velocities, albeit probably smaller ones
than now appear in train for 1990. To be
sure, though, subsequent events may
dictate adjustments to the ranges next
February, when they are reexamined in
53
light of developments over the second
half of this year.
For growth in M2, the Committee
tentatively adopted a range of 2*/2 to
6^2 percent— Vi percentage point below
the 1990 range. The adjustment is consistent with the Committee's intention to
move over time toward the low trend
rates of monetary expansion that would
be consistent with price stability. At the
same time, the range is expected to allow
for sufficient expansion of money to
sustain moderate growth in the economy.
There may be some further upward shift
in velocity, but the range should be wide
enough to accommodate considerable
variation in credit market conditions.
The range for growth of M3 was
tentatively set at 1 to 5 percent, the same
as that now in effect for 1990. Growth of
this aggregate is especially sensitive to
the pattern of credit flows. Thus, the
continuing downsizing of the thrift industry is likely to result in slower growth of
M3 than of M2 again next year, as
managed liabilities in the broader aggregate run off. It also is likely to mean a
substantial further increase in M3 velocity. Given that growth of this aggregate
currently is running along the lower
bound of the new range for 1990, even if
the pace of creditflowsat banks and thrift
institutions were to pick up somewhat,
M3 growth between 1 and 5 percent
should be consistent with the Committee's
basic objectives.
For debt, the FOMC adopted a tentative monitoring range of 4V4 to 8V2 percent, a half percentage point below the
range for 1990. The Committee viewed
slower growth of debt, more in line with
the expansion of nominal income, as a
healthy development for the economy.
The rapid expansion of debt over the past
decade, relative to the ability to service
it, occasioned many of the difficulties
with asset quality now facing our lending
institutions.
54
77th Annual Report, 1990
Economic Projections for 1990 and 1991
The members of the FOMC and the
Reserve Bank presidents not currently
serving as members believe that the
monetary ranges for 1990 and 1991 are
consistent with achievement of sustainable economic growth and a reduction of
inflation over time. Most of them expect
that the pace of expansion will be moderate over the remainder of 1990 and
through next year, with the central tendency of their forecasts of real GNP
growth being Wi to 2 percent over the
four quarters of 1990 and 1% to 2Vi percent over the course of 1991.
Demand from abroad is likely to
provide support for continued growth in
U.S. production and employment. At
current exchange rates, U.S. producers
appear to be in a position to compete
effectively in most international markets,
and economic activity is growing relatively rapidly on average in other major
industrial countries. In time, export
demand should be bolstered by the shift
toward more open, market-based economic systems in Eastern Europe; although the continental European nations
may be most immediately affected by
these developments, given the high rates
of capacity utilization in those economies, the United States is likely to benefit
both directly and indirectly from the
increased demand for consumer and
capital goods.
In the aggregate, demands from sectors
outside of exports are unlikely to provide
much impetus to manufacturing activity.
Defense procurement is declining in real
terms. And there is little prospect of a
substantial resurgence in motor vehicle
production: High levels of auto sales in
the past several years appear to have
satisfied demands that were pent up
during the deep economic slump of the
early 1980s. Demand for construction
materials and equipment probably also
will remain subdued, because building
activity will be damped by the current
overhang of vacant residential and commercial space. That overhang, more than
any disruption of credit flows, explains
the current weakness in construction,
and, especially in the case of office
building, it will take some time for
existing space to be absorbed and to lay
the base for a solid upturn in activity.
In sum, the growth of total output
projected for 1990 and 1991 probably
will involve rather slow gains for the
goods-producing sectors of the economy. The service-producing industries
are likely to continue to be the locus of
important increases in output and, especially, employment. Demands for a wide
range of services have remained robust
thus far this year, and demographic trends
suggest that such sectors as medical care
and education will continue to experience
appreciable growth.
Target Ranges of Growth for Monetary and Debt Aggregates
Percentage change'
1990
1989
Aggregate
M2
M3
Debt2
3to7
31/2to71/2
61/2tol01/2
Adopted in
February
Adopted in
July
Provisional
ranges
for 1991
3to7
2V4to6V4
5 to 9
3to7
Ito5
5 to 9
2 1 / 2 to6 1 / 2
Ito5
4V4to8Vi
1. From average of the fourth quarter of the preceding
year to average of the fourth quarter of the year incidated.
2. Domestic nonfinancial sector.
Monetary Policy Reports
The overall growth in economic activity forecast by the Board members and
Bank presidents for the period ahead is
expected to be consistent with a slight
easing of pressures on resources and a
diminution of inflation. With respect to
the labor market, the central tendency of
the forecasts for the civilian unemployment rate is 5lA to 5% percent in the
fourth quarter of this year and 5^2 to
6 percent in the final quarter of 1991; the
jobless rate has fluctuated narrowly at a
little below 5V2 percent since late 1988.
Moderate growth in demands on industrial capacity should be conducive to an
extension of the recent more favorable
trends in producer prices for intermediate
and finished goods, which were, respectively, virtually unchanged and up just
3 percent in the past twelve months.
Inflation at the retail level also should
be damped over the remainder of this
year by favorable developments in the
energy sector. Despite the very recent
55
upturn in crude oil prices, gasoline prices
are widely expected to decline in coming
months, as the return of refinery output to
normal levels alleviates the tightness that
has characterized the product market.
With inflation for other goods and services expected to remain below the firstquarter pace, the central tendency of the
policymakers' forecasts of the overall
consumer price index is for an increase
of between 4V2 and 5 percent over the
four quarters of 1990-compared with
the 5% percent annual rate of increase
recorded during the first five months
of the year. The lower trajectory of the
consumer price index is projected to be
sustained in 1991, with forecasts for the
year centering on the 3% to 4V4 percent
range.
The Administration's economic projections, presented in connection with its
mid-session update of the budget, indicate similar expectations about inflation
trends but a more favorable outlook for
Economic Projections for 1990 and 1991
Measure
FOMC members and
other FRB presidents
Range
Administration
Central tendency
1990
Percentage change, fourth quarter to fourth quarter!
Nominal GNP
Real GNP
Consumer price index2
Average level in the fourth quarter (percent)
Civilian unemployment rate
5to6V2
Ito2
4 to 5
S'^toe^
I 1 /2to2
4% to 5
6.8
2.2
4.8
51/2to61/2
5V2to53/4
5.6 3
1991
Percentage change, fourth quarter to fourth quarterl
Nominal GNP
Real GNP
Consumer price index2
V/iiol
0to3
3**to5
51/* to 6*4
134 to2*2
3Hto4**
7.2
2.9
4.2
Average level in the fourth quarter (percent)
Civilian unemployment rate
5*4 to 7
5V4to6
5.6 3
1. Average for the fourth quarter of the preceding
year to the average for the fourth quarter of the year
indicated.
2. FOMC forecasts are for all urban consumers;
Administrative forecast is for urban wage earners and
clerical workers.
3. Percentage of total labor force, including armed
forces residing in the United States.
56
77th Annual Report, 1990
real GNP. As a result, the Administration's projection of nominal GNP growth
is somewhat above the central tendency
of those of the FOMC participants, and
might imply the need for faster monetary
growth than is currently contemplated by
the Committee. These differences must
be regarded as small, however, relative
to the degree of uncertainty that attaches
to any prediction of the economy—and,
in particular, of the short-run relation
between growth in GNP and the money
stock. More important, the differences
do not signal any basic inconsistency
between the goals of the Federal Reserve
and the Administration, for the Federal
Reserve would welcome a more rapid
expansion of output that occurred in the
context of solid progress toward price
stability.
The Performance of the Economy
during the First Half of 1990
Activity in many sectors of the economy
followed an erratic course during the first
half of the year, in part because of
transitory factors, such as last winter's
unusual weather. On balance, production
expanded further during the first half of
1990, but evidently no faster than the
reduced pace of 1989. The comparatively
slow rate of growth largely reflected
weaker spending by domestic businesses
and households, while merchandise exports apparently remained on a fairly
strong growth path. Although job creation in the private sector of the economy
has slowed this year, the civilian unemployment rate has remained near 5 lA percent, the lowest level in nearly twenty
years.
Prices rose sharply early in the year,
but the increases moderated this spring.
In the first quarter, there were large
weather-related surges in food and energy
prices and a bunching of increases in
prices of some other goods and services.
Given the character of the spurt, most
analysts—and policymakers in the Federal Reserve—judged that the runup in
aggregate price indexes overstated underlying inflation trends. In the event, some
of the transitory elements of the earlier
spurt were reversed in the spring, and
inflation moved down. Despite the recent
slowing, however, the twelve-month
change in the CPI as of May, at 4.4 percent, was about the same as that recorded
for each of the past three years. In part,
the persistence of inflation during a period
of slower economic growth reflects continued cost pressures from relatively tight
labor markets and weak productivity
performance. However, there have been
encouraging signs, particularly at the
earlier stages of processing, that an easing
of resource constraints in the manufacturing sector is reducing some of the pressures that had boosted prices from 1987
to early 1989.
The Household Sector
Total personal consumption expenditures
were buffeted this winter by large swings
in outlays for energy items and motor
vehicles. Expenditures for home heating
declined sharply in the first quarter as
unseasonably warm temperatures in January and February followed a December
that had been colder than usual. This
influence was largely offset by a rise in
motor vehicle sales. In late 1989 sales of
cars and light trucks had been depressed
by a scaling back of incentives and by
large price increases for new model-year
vehicles. Around the turn of the year,
enriched incentive programs revived
these sales. To date this year, sales of
cars and light trucks have averaged
14 million units (annual rate) - a pace not
far below the total for 1989-and seem
largely to reflect replacement demand
and growth in the driving age population.
Monetary Policy Reports
Abstracting from the swings in outlays
on home heating and motor vehicles,
consumption spending appears to have
stagnated this spring after posting a
moderate gain in the first quarter of
1990. The recent sluggishness in spending reflects declines in outlays for a
wide variety of consumer goods, including furniture and other household durables. In contrast, spending for services
other than energy, especially medical
services, continues to outpace real income growth.
Growth of consumption has slowed
this year against a backdrop of somewhat
smaller gains in real disposable personal
income. But consumption has slowed
even more than income, and the personal
saving rate rose above 6 percent in the
spring. Consumers may be spending
more cautiously as they reassess their
income and wealth prospects in light of
the slower growth of the economy and a
softening of residential property values
in many parts of the country. These
factors probably have been particularly
important in the Northeast, where consumer sentiment has deteriorated markedly. However, other indicators, such as
delinquency rates on consumer loans, do
not reveal broad pressure on household
finances. Nor are there signs that credit
availability has been reduced: Federal
Reserve surveys of bank lending officers
suggest no change in the willingness to
lend to consumers.
Residential investment spending also
was affected by unusual weather patterns
this winter. Housing starts were strong in
the first two months of the year, as mild
temperatures allowed builders to catch
up on work delayed by cold weather in
late 1989 and to begin projects that
normally would have been started later in
the year. Then starts slumped this spring,
in part reflecting a "payback" for the
winter activity. Averaging over this
period, residential construction appears
57
to have weakened; in the first five months
ofthe year, housing starts totaled 1.36 million units (annual rate), somewhat below
the pace of activity in 1989. By region,
housing markets have been very weak in
the Northeast, while homebuilding has
been better maintained, albeit at moderate
levels, in the North Central and Western
regions of the country.
Both demand and supply factors have
contributed to the recent weakness in
housing construction. Sales of new and
existing homes generally have been moving lower for more than a year; in part,
demand may have been restrained by
slower growth in income and reduced
investment motivation for home purchase
because of softening house prices. Demand also may have been tempered this
spring by some edging up in mortgage
rates. Since early May, however, mortgage rates have moved down about
Vi percentage point, and there is no
evidence that access to home loans has
been curtailed.
On the supply side, building is being
deterred in some parts of the country by
an overhang of unsold or unrented housing units. In addition, it appears that a
reduction in credit availability for construction may be playing some role in
damping building activity. To a degree,
this less favorable credit climate is attributable to the cutback in financing supplied
by thrift institutions owing to the closure
of savings and loans as well as the more
stringent capital requirements and lending limits mandated by the Financial
Institutions Reform, Recovery, and Enforcement Act. At the same time, other
institutions do not appear to be filling the
void completely. In part, the shift in
credit availability reflects the elimination
of the imprudently aggressive lending
that capsized so many thrift institutions.
A number of commercial banks also have
recently experienced reductions in their
lending capacity as they have written off,
58
77th Annual Report, 1990
or reserved against, bad loans. But, in
addition, the number of sound lending
opportunities undoubtedly has shrunk as
a consequence of economic weakness
and soft property values in specific
locales.
however, has been the growth in outlays
for computers and other informationprocessing equipment, after some slowing during the second half of 1989.
Nonresidential construction was
boosted by favorable weather early in the
year, but most of the gain has since been
reversed. The weakness is most evident
in office and commercial real estate, for
The Business Sector
The financial position of the business which vacancy rates are high, and data on
sector deteriorated further during the contracts and permits suggest that the
early part of 1990. Before-tax profits outlook for building remains decidedly
from current operations of nonfinancial negative. In some areas, this reflects
corporations edged down in the first sluggish growth in the regional econoquarter after falling nearly 18 percent mies. However, activity also may be
over the four quarters of 1989. Profits hindered by the shift in the credit climate,
have been squeezed by a combination of as more speculative projects that previmarked increases in wages and benefits ously might have beenfinancedno longer
during a period of weak growth in qualify. An exception to the weakness in
productivity, competitive pressures from business construction has been in the
both home and abroad that have pre- industrial sector; lead times can be quite
vented firms from completely passing long for these projects, however, and
increases in labor costs through to prices, much of the continued strength undoubtand higher debt-servicing costs associ- edly reflects in large part decisions made
when capacity pressures were mounting
ated in part with increased leverage.
Shrinking profits, which have reduced in 1988 and early 1989. Indeed, contracts
the availability of internal funds, along and permits for new industrial construcwith the slower growth of final sales and tion have been trending down for about a
easing of capacity pressures over the past year.
The emergence of uncomfortably high
year, have muted the demand for new
plant and equipment. Reflecting these inventories in some sectors in late 1989
developments, real businessfixedinvest- led to corrective actions in thefirstpart of
ment has decelerated considerably since this year. Most prominently, manufacturers of motor vehicles cut production
thefirsthalf of 1989.
Although total real spending on pro- sharply and reinstated widespread sales
ducers' durable equipment rose at an incentives to eliminate an overhang of
annual rate of about 7 percent in the first stocks on dealer lots. In most other
quarter, spending was boosted by a sectors, stocks have been trimmed or
rebound in outlays for motor vehicles have been increased only modestly this
and a resurgence in aircraft shipments year, and they appear to be in good
after the settlement of the strike last alignment with sales trends. Among the
November at Boeing. Excluding these possible exceptions are wholesale distribtransitory swings, real equipment spend- utors of machinery and nonauto retailers,
ing slowed further in the first quarter, where some mild overhangs appear to
and shipments of most types of capital have developed this spring; these could
goods—especially industrial machin- precipitate further adjustments, probably
ery—remained soft in April and May. affecting both domestic and foreign
One bright spot in the equipment picture, producers.
Monetary Policy Reports
The Government Sector
The federal budget deficit over the first
eight months of the fiscal year was
$152 billion, up from $113 billion in the
year-earlier period. About $15 billion of
this increase resulted from spending by
the Resolution Trust Corporation, and
further RTC outlays during June imply
that the year-to-year increase in the deficit
is likely to widen. Most of the RTC
spending reflectsfinancialtransactions in
which existing federal insurance obligations to thrift depositors are being recognized in the government's budget outlay
and public debt accounts. The RTC's
borrowing and spending thus should have
little effect on real economic activity or
interest rates.
However, several other budget components have contributed to the higher
deficit. Spending on Medicare and other
health care programs, and some discretionary spending for the space and other
programs, has surged. During the same
period, revenue growth has lagged as
weak corporate profits have cut into
receipts and last year's surprisingly large
personal income tax collections have not
been sustained. The latter suggests that
some of last year's receipts reflected
special factors, such as the deferral of tax
liabilities in response to the phased
reduction of income tax rates under the
Tax Reform Act of 1986, and the capital
gains realized during sharp movements
infinancialmarkets.
Federal purchases of goods and services, the part of expenditures that is
included directly in GNP, fell in real
terms over 1988 and 1989, owing
mainly to declines in defense spending.
Real defense purchases continued to
move lower in the first quarter of 1990;
however, the downtrend in total
purchases was interrupted by a pickup
in nondefense spending, mainly a
transitory surge in space expenditures.
In the second quarter, compensation for
59
temporary Census workers added to federal purchases.
Real state and local government purchases increased at an annual rate of
AVA percent in thefirstquarter, compared
with the 3 to 2>l/i percent pace recorded
over the past three years. Revenue growth
generally has not kept up with gains in
spending, however, and an increasing
number of state and local governments
face significant budgetary difficulties;
indeed, the overall deficit of the sector
(excluding social insurance funds) was
about $45 billion (annual rate) in the first
quarter of 1990, almost $11 billion
greater than the deficit recorded in the
1989 calendar year. These difficulties are
compounded by growing spending requirements in several important areas.
An increase in the number of school-age
children has boosted public school enrollments, the number of medicaid recipients
has increased, and prison populations
have risen rapidly. Meanwhile, legislatures have been reluctant to increase
personal income taxes, and federal grants
and increases in state excise taxes have
failed to prevent the widening of the gap
between spending and revenues.
The External Sector
Movements in the exchange rate have
been smaller than those in 1989, when
the dollar appreciated about 12 percent in
terms of the other G-10 currencies over
thefirsthalf of the year and then depreciated by a similar amount between last
summer and this past February. The
dollar appreciated approximately 2 percent between February and March this
year but has since declined about 4 percent, partly in response to publication of
weaker data on U.S. economic activity
and the associated washing out of expected increases in interest rates.
While the value of the dollar has not
changed dramatically on a trade-weighted
60
77th Annual Report, 1990
average basis against the other G-10 currencies this year, there have been some
divergences in bilateral exchange rates.
On balance, the dollar has depreciated
significantly against sterling and the
Swiss franc, and somewhat less against
the German mark and related currencies.
In contrast, the dollar has appreciated
against the yen, despite exchange market
intervention by the Bank of Japan and
other central banks to support the value
of the yen early in the year. Against the
currencies of our other major trading
partners in the Pacific Basin, the dollar
has depreciated against the Singapore
dollar, but appreciated in terms of the
South Korean won and the new Taiwan
dollar.
Prices of non-oil imports, which fell at
about a 3 percent annual rate between the
first and third quarters of last year, rose at
a similar pace between the third quarter
of 1989 and the first quarter of 1990,
partly in response to the drop in the dollar
between last summer and the early part of
this year. Prices of imported oil surged
around the turn of the year, moving above
$20 per barrel in January, but since then
they have more than retraced this runup.
On the export side, prices rose at an
annual rate of just 134 percent in the first
quarter of 1990 after recording little
change, on balance, over 1989 as a
whole. In the first quarter, prices for
agricultural exports fell somewhat, but
there was an acceleration in prices for
exported consumer and capital goods that
appears to have been related to some
pickup in prices for these items in domestic markets around the turn of the year.
Merchandise exports continue to provide an important impetus to growth in
the domestic economy, although the
increases in exports have slowed somewhat from the very rapid advances recorded in the latter part of the 1980s. So
far this year, exports have been boosted
by strong shipments of aircraft with the
rebound in activity at Boeing, as well as
by notable increases in other classes of
machinery, agricultural products, industrial supplies, and consumer goods. Two
factors have contributed to further large
gains in the quantity of U.S. exports:
Many of our major trading partners
abroad have continued to register strong
economic growth, and the average dollar
prices of U.S. exports have declined
somewhat relative to average prices
abroad. Movements in nominal exchange
rates do not appear to have contributed
significantly to either export growth or
overall U.S. external adjustment in recent
quarters; the effects of the large depreciation of the dollar through 1987 have
waned, and any residual positive effects
probably have been offset by the average
strengthening of the dollar last year.
However, the depreciation of the dollar
since last summer should lend some
stimulus to external adjustment in coming
quarters.
Meanwhile, slower import growth has
accompanied the slackening pace of
activity in the United States. Total imports were boosted by a surge in oil
imports in the first quarter, but, on
balance, non-oil merchandise imports
have edged down this year. The slowdown in imports has been pronounced in
automotive products and consumer
goods, reflecting both weaker domestic
final demands and the inventory adjustments in these sectors of the U.S.
economy.
Together, the continued growth in
exports and the slowdown in imports
narrowed the merchandise trade balance
to $ 105 billion at an annual rate in the first
quarter of 1990, its lowest rate since
early 1985. The current account deficit
was reduced to $92 billion at an annual
rate.
Net private capital inflows, and a large
statistical discrepancy, provided thecounterpart to the current account deficit in
Monetary Policy Reports
61
this reflects longer-run demographic
trends; but it may also reflect a tendency
for fewer people to seek jobs when the
growth of employment opportunities is
perceived to have slackened. Survey data
suggest that individuals have increasingly
viewed jobs as harder to find.
The slower rates of growth in employment and the labor force have been
roughly matching, and the civilian unemployment rate has remained near 5 lA percent throughout the year. While unemployment rates have risen noticeably in
the Northeast and moved up in some
Midwestern states, jobless rates in other
regions ofthe country either have changed
little or have edged down.
With labor markets remaining relatively tight by historical standards, pressures on labor costs have not abated.
Labor Markets
Job growth was strong early in the year, Although the rate of increase in straightbut has softened recently. In January and time wages has changed little over the
February, increases in nonfarm payroll past year and a half, benefit costs, which
employment averaged more than currently constitute roughly one-fourth
350,000, fueled by large increases in of compensation, have picked up markservice-producing industries as well as edly. In part, this increase reflected the
by robust hiring in construction during higher social security taxes that went into
the warmer than normal winter weather. effect in January, but benefits also have
Since March, however, job growth has been boosted by the continued rise of
averaged about 125,000 per month, health insurance costs and an acceleration
despite the net addition of about 300,000 of lump-sum payments and bonuses. All
temporary workers to help carry out the told, employee compensation in private
1990 Census; private payrolls have in- nonfarm industry rose 5lA percent over
creased less than 20,000 per month. the twelve months ended in March, a bit
Manufacturing employment has contin- above the pace recorded in the year ended
ued to shrink this year at about the same last December.
rate as in the second half of 1989, and
In addition to gains in hourly compenconstruction payrolls also have declined sation, unit labor costs have been boosted
since the winter. Meanwhile, job growth by a poor performance in labor producin the service-producing industries has tivity, as output per hour in the nonfarm
slowed in recent months. Although hiring business sector rose just lA percent
gains have continued strong for health between thefirstquarter of 1989 and the
services, growth in jobs in business ser- first quarter of 1990. While productivity
vices has moderated, and there have been has remained strong in the manufacturing
only small gains in employment at retail sector, rising almost 5 percent at an
establishments.
annual rate in thefirstquarter, productivGrowth in the labor force also has been ity performance outside of manufacturing
subdued in recent months. To an extent, has been quite weak. As a consequence,
the first quarter of 1990, as they did for
1989 as a whole. Most of the private
capital inflow in the first quarter came
through the banking sector. Private foreign investors continued to acquire U.S.
corporate bonds in thefirstquarter; however, they sold a small amount of U.S.
Treasury securities, and they continued
to sell U.S. corporate stocks as they have
since last October. Foreign direct investment flows into the United States slowed
markedly in thefirstquarter to a rate well
below that recorded in recent years.
Official capital showed a net outflow in
thefirstquarter, as it did throughout most
of 1989, reflecting the net sale of dollars
in exchange market intervention.
62
77th Annual Report, 1990
unit labor costs in thefirstquarter of 1990
were 5 percent above their level a year
earlier, about the same increase as recorded over 1989 as a whole, but well
above the rates that prevailed earlier in
the expansion.
Price Developments
After surging in thefirstquarter of 1990,
price increases moderated this spring.
Food and energy prices were boosted
early in the year by weather-related
developments, and prices for a wide
range of other goods and services also
picked up sharply. However, by May, the
transitory effects of the weather on inflation largely had been reversed, and price
increases for many other items slowed
significantly.
Energy prices surged this past winter,
as a result of demand pressures from the
unseasonably cold weather in December
and supply disruptions at U.S. refineries
and in Eastern Europe. The posted price
of West Texas Intermediate (WTI) oil,
the benchmark for U.S. crude prices,
rose about $3 per barrel to a peak of
$22 in January. Since early February, on
balance, the posted price for WTI has
moved down substantially, in large part
reflecting the effects on crude markets of
increased output by OPEC nations.
Movements in energy prices at the consumer level normally follow developments in crude oil prices. Gasoline prices,
however, remain higher than in December. In part, pump prices have been
boosted by the additional costs to refiners
of complying with environmental standards. In addition, inventories of gasoline
were relatively low during thefirsthalf of
the year as a result of a variety of supply
disruptions at refineries.
Overall, consumer food prices were
boosted by sharp increases in prices for
fresh fruits and vegetables after the freeze
in December, but during the spring these
prices retraced most of their earlier
climb. The prices for other foods for
home consumption have continued on an
upward course. In addition, the prices of
foods and beverages purchased at restaurants have risen at a 6 percent annual rate
so far this year, about \xh percentage
points above the average rate of increase
over the past two years; these prices
probably have reflected a dwindling
supply of entry-level workers and related
increases in labor costs, and perhaps in
some regions by the higher federal minimum wage.
The CPI excluding food and energy
rose about 4% percent over the twelve
months ending in May, near the upper
end of the range experienced during the
current expansion. Price increases for
consumer goods, particularly apparel,
rose sharply early in the year. However,
the burst in prices did not carry through
to the second quarter, as prices for
commodities excluding food and energy
changed little in April and May.
In the service sector, inflation rose
markedly in the first quarter, in part
reflecting some bunching of increases
for items whose prices tend to change
in irregular jumps, such as public
transportation fares and auto registration
fees. Although inflation in service prices
moderated in the spring, there was little
retracing of the earlier increases;
indeed, in May, the CPI for nonenergy
services was 5*/2 percent above its level
twelve months earlier, the upper end of
the range of increases seen over the
past three and a half years. As in 1989,
increases in prices of rents and medical
services contributed importantly to the
rise in overall service prices so far this
year. However, there also have been
widespread pickups in prices for a
variety of labor-intensive services, and
it is likely that, in addition to strong
consumer demands, higher labor costs
have boosted service prices.
Monetary Policy Reports
The signs of moderating inflation for
goods at earlier stages of processing,
which had surfaced as capacity utilization
rates moved down during 1989, appear
to have continued into 1990. After rising
AlA percent in 1989, the producer price
index for finished goods excluding food
and energy has increased at an annual
rate of about VA percent during the first
six months of 1990. Producer prices for
intermediate materials excluding food
and energy increased at an annual rate of
just 3A percent between December and
June, roughly the same rate of increase as
recorded over 1989 as a whole. The
moderation of inflation for goods at the
producer level is perhaps one indication
that earlier moves toward monetary
restraint and the slower pace of economic
activity have worked to ease the resource
constraints that had pushed up materials
prices between 1987 and early 1989.
Monetary and Financial
Developments during the First
Half of 1990
Shifts in financial intermediation and
credit flows, stemming from the continued restructuring of the thrift industry
and a more cautious attitude of banks
toward certain credit extensions, exerted
a major influence on the monetary aggregates and their relation to economic
activity during the first half of 1990. In
anticipation of further contraction in the
thrift industry, and its associated effects
on depository intermediation, the Committee reduced the annual growth range
for M3 by a full percentage point in
February. In the event, M3 has slowed
even more dramatically than had been
anticipated, leaving this aggregate below
the lower bound of its reduced range. Not
only has the thrift industry contracted
more rapidly than expected, but commercial banks have picked up little of the
lending forgone by thrift institutions and,
63
in fact, have curtailed their own lending
in some sectors, thus further depressing
depository credit. With little need to fund
asset growth, banks and thrift institutions
have pursued retail deposits less aggressively, leading to the opening of a sizable
gap between yields available in the open
market and those on such deposits. Partly
as a result, M2 also has slowed, moving
down into the lower portion of its annual
growth range.
The deceleration of the monetary
aggregates mainly reflects a reduction in
the share of credit provided by depositories, rather than a sharp slowing of
income or total credit flows. The velocities of both M2 and M3 posted sizable
increases, particularly in the second
quarter. Total debt of domestic nonfinancial sectors grew at an annual rate of
7 percent over the first half of the year—
down only slightly from its pace in the
latter half of 1989 and in the middle of its
monitoring range. However, growth of
total debt was boosted by federal government borrowing to support thrift resolutions; the debt of nonfederal sectors grew
somewhat less rapidly than it did last
year. Uncertainty about the effects of the
restructuring of credit flows, and about
the reasons for the extent of the slowdown
in money growth, underlined the need
for the FOMC to assess the behavior of
the aggregates in light of information on
spending and prices and the likely course
of monetary velocities.
The somewhat more cautious lending
posture that commercial banks have
recently adopted is mainly a response to
heightened credit risks caused by the
more moderate pace of economic expansion overall and a downturn in several
sectors. The resulting loan write-offs and
pressures on capital positions may also
have induced some tightening of standards. Growing markets for securitized
loans largely have filled the vacuum
created by the retrenchment of thrift
64
77th Annual Report, 1990
institutions in the area of mortgage
lending, with little attendant effect on the
cost or availability of residential mortgage credit to households. Both banks
and thrift institutions have cut back on
other types of lending that can less easily
be rechannelled, however, including
construction and nonresidential real estate loans, loans to highly leveraged borrowers, and loans to small and mediumsized businesses. To offset tighter credit
market conditions, which could exert
undue restraint on aggregate demand, the
Federal Reserve has recently adopted a
slightly more accommodative stance with
regard to reserve provision, fostering a
small decline in market interest rates.
The Implementation of Monetary Policy
The FOMC maintained a steady degree
of pressure in reserve markets during the
first six months of the year. Policy had
been eased in the second half of 1989
amid concerns that the economic slowdown might cumulate and thereby
threaten the expansion. In the first half of
1990, however, the Committee viewed
the balance of evidence as suggesting that
underlying trends were generally consistent with its objectives of sustaining economic growth while containing and eventually reducing inflationary pressures.
In the opening months of the year,
incoming information on spending and
prices caused markets to reevaluate the
prospects for a near-term reduction of
inflationary pressures and further easing
of monetary policy. As a result, market
interest rates rose, despite a steady federal funds rate. The rise was most pronounced at the longer end of the maturity
spectrum, and it restored the usual upward tilt to the yield curve that had been
absent much of last year. Developments
in Eastern Europe, which portended
increases in demands on the world's
limited pool of savings, also contributed
to increases in long-term rates in the
United States and abroad. By late April,
market participants expected a near-term
tightening of U.S. monetary policy.
In early May, the pendulum of market
opinion began to swing away from the
view that a tightening of U.S. monetary
policy was in the offing. Beginning with a
lackluster employment report on May 4,
economic data have pointed to a somewhat slower pace of activity and reduced
price pressures. In addition, a pronounced slowdown in the monetary aggregates began in April, followed by
outright declines in May. Although both
M2 and M3 recovered a little in June,
they remained below the midpoint and
the lower bound respectively of their
annual ranges at midyear. Evidence also
suggested that restricted credit availability, in part the result of tightened credit
standards, may have spread beyond
commercial real estate, construction, and
merger-related lending. In response to
thisfirmingof credit conditions, the Federal Reserve began providing reserves
slightly more generously through open
market operations in mid-July.
Market interest rates, which already
had receded somewhat from their early
spring highs, declined further with the
Federal Reserve's recent easing, though
intermediate and long-term rates remained above the levels seen last December. Lower interest rates also bolstered
the stock market, and some share price
indexes reached record highs this month.
Spreads between high-quality private
instruments and Treasury issues narrowed slightly over thefirsthalf of 1989.
This narrowing reflected the continued
availability of funds for investmentgrade borrowing as well as increases in
the borrowing needs of the RTC, which
are met partly through the Treasury. The
pickup in Treasury borrowing for the
RTC was necessitated by the faster pace
of thrift resolutions, which require the
Monetary Policy Reports
government to carry thrift assets on its
own balance sheet pending their disposition. The market for investment-grade
issues continued to function reasonably
well, with stable rate spreads between
quality tiers and generally well-maintained issuance volumes. On average,
however, the business sector faced somewhat higher borrowing costs, largely as
the result of numerous downgradings of
debt issues. The collapse of Drexel
Burnham Lambert had a marginal impact
on an already debilitated market for
below-investment-grade issues, widening spreads somewhat more between
yields on such bonds and those on other
long-term securities.
Monetary and Credit Flows
Growth of the monetary aggregates was
sluggish over thefirsthalf of 1990, with
M2 and M3 expanding at annual rates of
only 3x/2 percent and VA percent respectively from the fourth quarter of 1989
through June. The weakness in money
growth primarily reflected a redirection
of credit extensions away from depository institutions owing to the continued
downsizing of the thrift industry and a
more cautious lending posture of commercial banks.
The deceleration of M2 growth did not
begin until the second quarter of 1990,
when growth slowed to a 2XA percent
annual ratefromthe 6 to 7 percent range
seen in the previous three quarters. Retail
deposits (which include NOW accounts
as well as savings, small time deposits,
and similar instruments) had begun to
decelerate in thefirstquarter, slowing to
a pace of less than 4 percent from the
5 3A percent rate seen in the fourth quarter
of 1989. The effects of this slowdown on
M2 were partially masked, however, by
a surge in currency growth—apparently
owing in part to increased demand from
overseas—and a bulge in some of M2's
65
wholesale components, mainly overnight
RPs and Eurodollars. By the second
quarter, a steep runoff in retail money
market mutual fund (MMMF) shares and
a sharp decline in demand deposits reinforced weakness in core deposits in
damping growth in aggregate M2.
Increases in the opportunity costs of
holding M2 balances-that is, the rise in
other interest rates relative to those on
M2—retarded growth in this aggregate
during thefirsthalf of the year. This was
particularly evident for retail MMMFs.
Through much of 1989, the yield curve
was inverted, and MMMFs, whose portfolios typically average about 30 to 40
days in maturity, had historically large
yield advantages relative to longer-term
Treasury bills and short-dated Treasury
notes. As a result, MMMFs expanded
briskly. As the yield curve began to flatten
toward year-end, flows into MMMFs
ebbed, though they remained a key
element of overall M2 growth. With the
steepening of the yield curve in the early
part of 1990, MMMF growth stopped in
March. The recent rally in the stock
market also may have depressed
MMMFs, as data through May indicate
strong inflows to equity mutual funds, a
substantial portion of which may have
been transferred from MMMFs.
When yield curves have become more
steeply upward sloping in the past, the
effect on M2 of weakness in MMMFs
and other liquid balances often has been
partially offset by strength in retail time
deposits, as households lengthen the
maturity of their assets. This year, however, retail certificate of deposit (CD)
rates were unusually slow to respond to
the rise in market rates through April,
contributing to unexpected weakness in
M2. The reluctance of banks to raise
deposit rates in response to rising market
rates was particularly evident in the
intermediate-term area where, for example, the rise of 100 basis points in the
66
77th Annual Report, 1990
yield on the three-year Treasury note
during the first four months of the year
elicited an increase of less than 20 basis
points in rates on bank retail CDs of
comparable maturity. Evidence of the
rising opportunity cost of holding M2 can
be seen in the unusually heavy volume of
noncompetitive tenders in Treasury bill
and note auctions, which suggest a shift
out of M2 balances.
The unwillingness of banks to price
their deposits as aggressively as in the
past is partly an indirect result of the
contraction of the thrift industry. During
thefirstsix months of 1990, commercial
banks enjoyed $62 billion in retail deposit inflows—about a 10 percent increase at an annual rate-while thrift
institutions were shedding $28 billion in
retail deposits—about a 5 percent annual
rate of contraction. Much of this deflec-
Growth of Money and Debt
Percentage change *
Ml
M2
M3
Debt of
domestic
nonfinancial
sector
7.4
5.4
(2.5)i
8.8
10.4
5.4
12.0
15.5
6.3
4.3
.6
8.9
9.3
9.5
12.3
9.5
10.2
9.1
12.2
7.9
8.9
9.3
4.3
5.2
4.5
9.9
9.8
10.6
7.8
9.1
5.8
6.3
3.3
9.1
11.2
14.2
13.1
13.2
9.9
9.1
8.1
Quarter
(annual rate)
1990-1
2
4.8
3.6
6.0
2.3
2.7
.4
6.9
7.0 e
Halfyear
(annual rate)
1990:1
4.2
4.2
1.6
7.0
Period
Fourth quarter
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1. From average of the preceding period to average of
the period indicated.
2. Figure in parentheses is adjusted for shifts to NOW
accounts in 1981.
e Estimated.
tion of deposits toward commercial banks
was the direct result of RTC resolutions.
In the first half of the year, the RTC
resolved 170 thrift institutions holding
$32 billion of nonbrokered retail deposits, much of which was immediately
assumed by commercial banks.
Although deposit transfers do not
directly depress M2, they may have
contributed to the weakness in this aggregate by reducing banks' need to raise
their offering rates to attract additional
deposits at a time when growth in bank
credit was slow. Through thefirsthalf of
1990, commercial banks were able to
fund nearly 80 percent of their total credit
growth with retail deposits—almost
double the proportion seen in recent
years—even though they allowed spreads
between market rates and their retail
offering rates to widen substantially.
Widening opportunity costs of holding
M2 can explain only some of the moderation in this aggregate in the first half of
1990, however. M2 may also have been
responding to slower spending, and other
factors, some of which may have been
associated with deposit restructuring
under the RTC. Brokered deposits
formerly attracted to thrift institutions by
relatively high yields may have been
particularly sensitive to the recent sluggishness in deposit pricing; about $7 billion of brokered deposits were held at
thrift institutions that were resolved in
thefirstsix months of the year, and many
of these high-rate contracts were subsequently abrogated or not rolled over by
the acquiring institutions. Evidence also
suggests that, in light of large deposit
inflows from thrift institutions, banks
have curtailed marketing and promotional activity designed to attract retail
deposits. Finally, the issuance of shortterm Treasury paper to fund RTC holdings of former thrift assets has boosted
the supply of, and raised the rates on, a
close M2 substitute just when deposito-
Monetary Policy Reports
ries were becoming less aggressive in
seeking retail deposits. The rise in opportunity costs and these other factors contributed to an increase in the velocity of
M2 in thefirsthalf of 1990, though some
of this increase remains difficult to
explain.
The link between changes in depository intermediation and M3 is somewhat
more direct. This aggregate encompasses
managed liabilities, as well as deposits
and other sources of funds in M2, and is
thus a better barometer of the overall
funding needs of banks and thrift institutions. As has been evident since last
summer, the contraction of the thrift
industry and the failure of banks fully to
pick up the slack have already resulted in
a significant slowdown in growth of
depository credit relative to that of
aggregate nonfinancial sector debt and a
concomitant increase in M3 velocity.
This trend continued into thefirsthalf of
1990, as growth in depository credit all
but ceased-though overall debt growth
continued at a moderate pace—and M3
fell well below the lower bound of its
annual growth cone.
Although the FOMC foresaw some
significant damping effects on M3
growth in 1990 in association with the
continued shrinkage of the thrift industry, the actual weakness in M3 so far
this year has been more pronounced
than anticipated. In setting out its expectations for M3 in 1990, the Committee
recognized that considerable uncertainties surrounded the thrift industry contraction in terms of the pace of RTC resolutions, the extent of asset shrinkage at
capital-impaired thrift institutions, and
the desire of commercial banks to step
into the breach. To this point, a fasterthan-expected shrinkage of thrift assets
has been manifested not only in weaker
M2 deposit inflows, but also in faster
runoffs of large time deposits and other
M3 managed liabilities at thrift institu
67
tions. In addition, commercial banks
apparently havefilledless of the void left
by thrift institutions than was originally
anticipated. As a result, they too have
pared their M3 managed liabilities, further depressing this aggregate.
Rates on large time deposits, like those
on retail deposits, have remained low
relative to yields on Treasury bills.
Facing a substantial deterioration in the
quality of their assets and constraints on
capital, banks apparently have attempted
to bolster profit margins and have not
aggressively pursued new lending opportunities. Not only have deposit rates been
held down, but loan rates also appear to
have been raised slightly relative to
market rates and nonprice terms have
tightened for certain types of credits.
The pullback in credit supplies, together with some leveling out of demands
for credit, likely contributed to a deceleration of bank asset growth. Over the
second quarter, growth of bank credit
slowed to a 5% percent pace from the
near 7 percent rate of growth seen over
the first quarter of 1990 and the second
half of 1989, with much of the deceleration centered in real estate and consumer
lending. Although the slowdown in real
estate lending has been especially pronounced in New England, this type of
lending remains sluggish in several other
regions as well. Some of the deceleration
in consumer lending represents sales of
loans by banks attempting to bolster
capital-asset ratios. Even adjusted for
these sales, however, growth of consumer loans at banks slowed further in
the second quarter from an already
reducedfirst-quarterpace. The weakness
in consumer borrowing this year is due
primarily to sluggish retail sales, particularly of automobiles and other durable
goods; banks evidently have remained
willing lenders to households, and interest rates on consumer loans have changed
little.
68
77th Annual Report, 1990
Bank lending to businesses also has
been depressed this year. Surveys of
commercial bank lending officers through
early May suggest that the slowdown in
bank credit largely reflects diminished
demand for credit and deteriorating
conditions in the real estate market,
although tighter lending terms and more
stringent credit standards were frequently
cited for borrowers below investment
grade, including many small businesses.
Banks seem to have raised lending rates
somewhat to small firms, judging from
the slight increase in the spread between
rates on small business loans and on
federal funds. Separate surveys in which
small businesses were queried about general credit availability have pointed to
some recent increases in the difficulty
these firms face in obtaining credit,
though on balance they found credit
availability little changed from mid1989. The slowdown in bank business
lending this year has mainly reflected
reduced merger activity. Bank retrenchment in this area is consistent with other
private credit judgments, as evidenced
by the major slump in the market for
bonds below investment grade.
The reduced volume of corporate
restructurings, coupled with a diminished
household demand for credit, has slowed
the growth of the aggregate debt of
domestic nonfinancial sectors to a 7 percent annual rate from the fourth quarter
of 1989 through May of this year, compared with the 8 percent rate seen last
year. Debt growth is currently in the
middle of its monitoring range and
broadly consistent with growth in nominal GNP. With the increasing leverage
and the attendant dramatic declines in
debt velocity witnessed in the 1980s
apparently ending, the Committee reduced the 1990 monitoring range for debt
by Wi percentage points in February.
Debt growth decelerated in the first
half of the year despite a spike in U.S.
government borrowing, which owed
primarily to the growing working capital
needs of the RTC. RTC spending, net of
capital raised off-budget by the Resolution Funding Corporation, jumped to
$31 billion in the second quarter, up from
the $4 billion to $5 billion levels of the
previous two quarters. This spending is
financed through the Treasury and is
therefore included in the debt aggregate.
The pace of household borrowing
slowed considerably in thefirstsix months
of 1990, reflecting decelerations in both
mortgage and consumer credit. The
recent slowing of home mortgage borrowing appears to be largely the result of
reduced demand, owing to increases in
interest rates earlier in the year and
weakening economic activity in some
regions of the country. Although banks
have picked up only some of the slack for
thrift institutions in the area of mortgage
lending, the expanding market for securitized mortgages has facilitated an orderly flow of mortgage credit. In fact,
spreads of mortgage-backed securities
over comparable Treasury issues remain
low by historical standards and rates on
home loans have not risen noticeably
relative to other long-term rates.
Consistent with households' sluggish
spending, overall consumer installment
credit has risen at a 23A percent rate from
the fourth quarter of 1989 through May
of this year, well below the 5!/2 percent
clip in 1989. Some of this deceleration
reflects substitution of home equity loans
for previously existing consumer indebtedness; households apparently continue
to recognize the lower relative after-tax
cost of mortgage debt since the 1986 tax
reform, which phased out the interest
deductibility of non-mortgage household
indebtedness. The slowdown in consumer loans on the books of depositories
has been even more pronounced, reflecting a marked pickup in securitizations.
The trend toward securitization of con-
Monetary Policy Reports
sumer loans, which has been evident in
the past few years, appears to have
accelerated in 1990, possibly because
depositories are making efforts to reduce
assets in order to meet the new risk-based
capital requirements.
Through the first half of the year, the
total borrowing of nonfinancialfirmshas
been maintained at about the same pace
as in the last half of 1989, despite a sharp
drop in equity retirements. Although
business lending by banks has slowed,
commercial paper issuance picked up the
slack, particularly in thefirstfew months
of the year. More recently, in light of
declines in bond yields, firms have
stepped up their issuance of bonds and
slowed their use of commercial paper.
Despite a recent slight narrowing of
spreads relative to investment-grade
securities, issuance of below-investmentgrade bonds has remained in the doldrums. Spreads between investmentgrade paper and Treasury issues are still
low by historical standards, held down in
part by supply pressures in the Treasury
market.
In the municipal market, the increase
in market interest rates and the downgradings of a number of key issuers during the
first half of 1990 combined to slow
refunding issuance to a crawl. As a result,
the total debt of state and local governments expanded at only an annual rate of
3 percent in the second quarter, compared
with 4 Vi percent in 1989.
•
69
Part 2
Records, Operations,
and Organization
73
Record ofPolicy Actions
of the Board of Governors
Regulation D
(Reserve Requirements
of Depository Institutions)
November 28, 1990-Amendments
The Board amended Regulation D to
increase the amount of transaction balances to which the lower reserve requirement applies.
Votes for this action: Mr. Greenspan,
Ms. Seger, and Messrs. Angell, Kelley,
LaWare, and Mullins.1
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, the Board set
reserve requirements at 3 percent of
an institution's first $25 million in transaction balances and at 12 percent of
balances above that level. The act directs
the Board to adjust annually the amount
subject to the lower reserve requirement to reflect changes in transaction
balances nationwide. By the beginning
of 1990, the amount was $40.4 million. Recent increases in transaction balances warranted an increase of $0.7 million. The Board therefore amended
Regulation D to increase to $41.1 million the amount of transaction balances to
which the lower reserve requirement
applies.
1. Throughout this chapter, note 1 indicates that
a vacancy existed on the Board when the action was
taken.
The amendment is effective with the
reserve computation period beginning
December 25, 1990, for institutions that
report weekly and December 18, 1990,
for institutions that report quarterly.
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. The act also provides for annual adjustments to that
exemption based on deposit growth nationwide. By the beginning of 1990, that
amount had been increased to $3.4 million. Because of a lack of growth in
deposits this year, no adjustment was
made to the exemption.
December 3 , 1990—Amendments
The Board amended Regulation D to
eliminate reserve requirements on certain
short-term nonpersonal time deposits and
on Eurocurrency liabilities.
Votes for this action: Mr. Greenspan,
Ms. Seger, and Messrs. Angell, Kelley,
LaWare, and Mullins.1
The Board reduced from 3 percent to
zero percent the required reserve ratio
on nonpersonal time deposits with original maturities of eighteen months or less
and on net Eurocurrency liabilities. The
Board took this action to ease credit
conditions and to encourage lending by
depository institutions.
For institutions that report weekly, the
reduction would be phased in over two
74
77th Annual Report, 1990
reserve maintenance periods, with reserve requirements of Wi percent applicable during the first period, and zero
percent reserve requirements applicable
the following period. For other institutions, the new reserve requirements
would be effective January 17,1991.
Regulation H
(Membership of State Banking
Institutions in the Federal
Reserve System) and
Regulation Y
(Bank Holding Companies and
Change in Bank Control)
June 20,1990-Amendments
Regulation H
(Membership of State Banking
Institutions in the Federal
Reserve System)
December 17,1990 -Amendments
The Board amended provisions in Regulation H governing the payment of
dividends.
Votes for this action: Mr. Greenspan, Ms.
Seger, and Messrs. Angell, Kelley, and
LaWare. Absent and not voting: Mr.
Mullins.1
The Board amended Regulation H by
adding a new section to clarify the
circumstances under which state member banks may pay dividends and to
make the calculation of their ability to
pay dividends align more closely with
current regulatory reporting standards
and generally accepted accounting
principles. The rule specifies that a bank
may pay a dividend if the payment will
not impair its capital and if it can be paid
from recent earnings. Proposed dividend
payments that do not satisfy those
requirements must be approved by the
Federal Reserve.
Most of the provisions are effective
January 25, 1991, except for the portion
governing capital limitations on the payment of dividends. Those provisions are
effective December 20, 1990, to allow
banks the option of applying the rule to
dividend payments in 1990.
The Board amended Regulations H and
Y to adopt real estate appraisal standards,
effective August 9, 1990, and July 1,
1991.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, LaWare, and Mullins.
Provisions of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 required federal regulators of
financial institutions to establish standards for the performance of appraisals
of all federally related transactions requiring the services of an appraiser. The
Board, therefore, amended Regulations
H and Y, as follows: (1) to stipulate those
transactions covered by the new standards —those transactions not covered by
the new standards would be governed by
the existing interagency appraisal guidelines; (2) to provide minimum standards
for performing an appraisal; and (3) to
distinguish those transactions that require
the services of an appraiser certified by
the state from those that require a licensed
appraiser. Transactions of less than
$100,000 would not require an appraisal
performed by a licensed or certified
appraiser. The amendments specify that
a state-certified appraiser is required
for all real estate transactions valued at
$ 1 million or more, and for nonresidential
transactions and complex one- to fourfamily residential properties valued at
$250,000 or more. For other transac-
Board Policy Actions
tions, the services of a licensed appraiser
would suffice.
The appraisal standards are effective
August 9,1990, and the certification and
licensing standards are effective July 1,
1991.
After adoption of these standards, the
Board sought comment on a possible
amendment that would lower from
$100,000 to $50,000 the transaction
amount below which an appraisal by a
licensed or certified appraiser would not
be required.
Also on June 20, the Board amended
Regulations H and Y, effective September
7, 1990, to adopt transition guidelines
and a leverage constraint for the new
risk-based capital standards.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, LaWare, and Mullins.
In early 1989 the Board, as well as
other U.S. and foreign regulators, announced new international risk-based
capital standards that would become
effective at the end of 1992. At that time,
the Board indicated that after 1990,
transitional standards would be phased in
and that a new leverage constraint also
might be adopted.
The Board adopted transition standards
to assist banks and bank holding companies in developing their capital plans
and in strengthening their capital base.
The Board also adopted a leverage constraint as a supplement to the risk-based
capital framework. In adopting these
measures, the Board indicated that the
standards are minimums. An institution
that has a high level of risk is expected to
operate well above the minimum standards. When an institution proposes to
expand, engage in new activities, or
otherwise faces unusual risks, the Board
will consider the organization's capital
75
and its leverage ratio in making an
assessment of the organization's overall
capital position.
Regulation J
(Collection of Checks and
Other Items by Federal Reserve
Banks and Funds Transfers
through Fedwire)
September 28, 1990-Revision
The Board revised subpart B of Regulation J, governing funds transferred over
Fedwire, effective January 1,1991.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, and Mullins.
Absent and not voting: Ms. Seger.1
The Board revised subpart B of the
regulation to make it consistent with
new provisions—article 4A—of the Uniform Commercial Code. In addition, the
revisions will: (1) provide a more comprehensive set of rules for funds transfers involving Federal Reserve Banks;
(2) make the subpart consistent with
state laws applicable to funds transfers,
as individual states adopt article 4A; and
(3) help ensure that the Reserve Banks,
subject to their central banking responsibilities, compete on an equitable basis
with private-sector providers of funds
transfer services.
Regulation T
(Credit by Brokers and Dealers)
March 21, 1990 - Amendments
The Board amended Regulation T, effective April 30, 1990, to accommodate
the settlement and clearance of transactions in foreign securities and to make
foreign securities eligible for margin
credit by brokers and dealers under
certain conditions.
76
77th Annual Report, 1990
Voting for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, and LaWare.1
The amendments to Regulation T permit foreign equity and debt securities that
meet the prescribed criteria to be eligible
for margin credit at broker-dealers on
the same basis as domestic securities. In
addition, brokers may isolate and recognize debt denominated in foreign currencies and may use that debt as margin
without converting it to dollars. The
amendments also ease the restrictions on
payment and settlement for foreign securities to recognize differences in trading
practices in the market in which the trade
occurs. Broker-dealers also may arrange
with foreigners to extend credit on foreign securities.
Under the revised regulation, a foreign equity security is eligible for margin credit if it meets the following conditions: (1) it has been traded for at least
six months on a recognized exchange
or market outside the United States;
(2) U.S. broker-dealers have continuous
access to quotations of both bid and
asked, or last sale, prices through an
electronic system; (3) the aggregate
value of the stock is at least $1 billion;
(4) weekly trading volume in the security
averages at least 200,000 shares or
$1 million; and (5) the issuer of the
security, or a predecessor, has been in
existence at least five years.
The revisions to the regulation make
foreign debt securities eligible for margin
credit under the following conditions:
(1) the issue is not in default, (2) the issue
is rated in one of the two highest rating
categories, and (3) at least $100 million
was outstanding after the initial offering
of the securities.
The Board will publish a "List of Foreign Margin Stocks"-foreign equity
securities eligible for margin credit—in
connection with the quarterly publication
of its "List of Marginable OTC Stocks."
Regulation Y
(Bank Holding Companies and
Change in Bank Control)
November 7,1990-Amendment
The Board amended Regulation Y, effective December 18,1990, to permit banks
to offer reduced-rate credit cards under
certain conditions.
Votes for this action: Mr. Greenspan,
Ms. Seger, and Messrs.
Angell, Kelley,
LaWare, and Mullins.1
Previously, Regulation Y had prohibited banks from offering discounts or
other reduced consideration if, to obtain
that consideration, customers also had to
purchase other servicesfromthe bank or
its holding company affiliate. Because of
the significant amount of competition in
the national credit card market, the Board
decided to provide an exemption to
permit reduced-rate credit cards under
certain conditions. The Board, therefore,
amended Regulation Y to allow banks to
offer a price reduction on credit cards
when a customer also purchases any of
certain additional products or services
from another subsidiary of the holding
company. The exemption is available
only on the condition that both the credit
card and the other products or services
offered in the arrangement can be purchased separately.
November 9, 1990-Amendment
The Board amended Regulation Y, effective immediately, to reducefilingrequirements under the Change in Bank Control
Act.
Board Policy Actions
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, and Mullins.
Absent and not voting: Ms. Seger.1
The portions of Regulation Y that
implement the Change in Bank Control
Act identify several circumstances under
which a person will be presumed to be
acquiring control of a bank or bank
holding company and for which the
acquiring person must file notice with the
Federal Reserve. Under the current
provisions of Regulation Y, a person
must file a notice under the act before
acquiring 10 percent of the voting shares
of an institution, and must file again each
time additional shares are acquired, until
the person owns or controls 25 percent
or more of the institution's voting shares,
if no other person will own a greater
portion of the shares immediately after
the transaction.
That requirement created unnecessary
regulatory burden in two types of situations: (1) when an acquiring person who
already has been subject to regulatory
review seeks to acquire a small number
of additional shares, and (2) when the
redemption of shares by another shareholder increases the person's percentage
ownership, even though that person has
not acquired additional shares. The Board
decided to amend Regulation Y to remove
the requirement that a person who already
has received authority to acquire 10 percent or more of the shares of a bank or
bank holding company file additional
notices for subsequent acquisitions that
result in ownership of between 10 percent and 25 percent of the bank or its
holding company. Notices are still required, however, when a person initially
acquires 10 percent or more of the shares
of a bank holding company, or when
making any acquisition that results in the
ownership of 25 percent or more of a
bank or bank holding company.
11
Regulation Z
(Truth in Lending)
September 12, 1990—Amendments
The Board amended provisions of Regulation Z relating to home equity lines of
credit.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, and Mullins.
Absent and not voting: Ms. Seger.1
The Board amended Regulation Z to
stipulate that creditors who want to freeze
a line of credit when the interest rate cap
on that line is reached must specifically
provide for that event in the credit
agreement. Previously, the regulation
had not expressly required creditors to
state in the loan contract that they had
retained the right to freeze a line of credit
when the rate cap is reached.
The regulation also was amended to
remove a provision that had permitted
creditors to delay providing certain disclosures about the repayment phase of
home equity plans until after the plan is
opened. The regulation now requires that
creditors provide the disclosure at the
time of application.
The amendments are effective September 19, 1990; compliance is not mandatory, however, until October 1, 1991.
Regulation BB
(Community Reinvestment)
May 2, 1990-Amendments
The Board amended Regulation BB to
implement changes in the Community
Reinvestment Act required by recent
legislation.
78
77th Annual Report, 1990
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, and LaWare.1
The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989
amended the Community Reinvestment
Act (CRA) to require regulatory agencies
to make certain additional disclosures.
Accordingly, the Board and the other
federal agencies that regulate financial
institutions made the following revisions
to their implementing regulations: The
agencies will use a four-tiered descriptive
rating system, instead of the five-tiered
system currently in use, in their assessments of institutions' compliance with the
act. Also, the agencies will publish
institutions' CRA ratings, as well as the
evaluations that support those ratings,
for examinations conducted after July 1,
1990.
December 5, 1990-Amendment
The Board amended Regulation CC,
effective September 1, 1990, to implement recent legislation.
Votes for this action: Mr. Greenspan,
Ms. Seger, and Messrs.
Angell, Kelley,
LaWare, and Mullins.1
Provisions of the Cranston-Gonzales
National Affordable Housing Act
amended the Expedited Funds Availability Act by extending for two years the
availability schedules for deposits at
nonproprietary automated teller machines. The legislation was enacted in
November, with a retroactive effective
date of September 1,1990.
Provisions of the Expedited Funds
Availability Act specified the time
period within which funds deposited at
an automated teller machine (ATM)
must be made available for withdrawal.
The act distinguished between deposits
Regulation CC
made at a proprietary ATM and a non(Availability of Funds and
proprietary ATM. (An ATM is conCollection of Checks)
sidered to be proprietary if it is located
at or near the receiving institution or if it
May 2 1 , 1990-Amendments
is owned or operated by, or exclusively
for, the receiving institution.) The act
The Board approved certain technical had provided, on a temporary basis,
amendments to Regulation CC.
different availability schedules for deposits at each type of ATM because of
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs. the special operating limitations related
to deposits at nonproprietary ATMs.
Angell, Kelley, and LaWare.1
The temporary schedules were set to
The revisions include changes to the expire August 31, 1990, and it had been
model forms as well as technical and expected that a viable technology would
clarifying amendments to the regulation be developed within the two-year period
and the official commentary. Most of the during which the temporary schedules
changes were effective May 22,1990. In were in effect to address the special
taking this action, the Board decided not operating limitations of nonproprietary
to adopt a proposal that would have ATMs. Since an operational solution has
shortened the amount of time within not yet been developed, the Congress
which a depository institution must notify extended the temporary schedules for an
a customer that a check for a large amount additional two years. The Board, therefore, made conforming changes to
($2,500) has been returned unpaid.
Board Policy Actions
Regulation CC on an interim basis and
sought comment on the rule.
79
Policy Statements
and Other Actions
May 2, 1990-Revisions to Payment
System Policies
Other Actions
In March the Board reported to the
Congress for a second time on the Expedited Funds Availability Act and Regulation CC, summarizing related activities
undertaken by the Federal Reserve since
the first report, issued in July 1989. The
report described improvements in the
check collection and return system and
summarized data on bank compliance
with the act and Regulation CC. The
Board made legislative recommendations
in the report to reduce the risk of fraud in
accepting checks for deposit and facilitate
compliance with the act. Another recommendation sought to clarify the Board's
authority to allocate liability among
entities such as states, their political
subdivisions, or other nonbank payors
for losses such as those resulting from the
mishandling of a returned check.
In July the Board issued the third and
final report to the Congress, as required
by the Expedited Funds Availability Act,
on deposits at nonproprietary automated
teller machines (ATMs). As in the October 1989 report, the Board recommended
that the Congress amend the act so that,
under the permanent schedule of availability, banks could treat checks deposited at nonproprietary ATMs as if they
were nonlocal checks (that is, provide
availability not later than the fifth business day following the banking day of
deposit). The proposed amendment
would help ensure that deposit-taking at
nonproprietary ATMs would not be
restricted or discontinued by those institutions that need the flexibility to place
longer holds on these deposits to limit
their risk.
The Board approved modifications to its
policy statements pertaining to risks on
the payment systems.
Votes for these actions: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, and LaWare.1
The Board approved a number of
operating changes governing transactions
on Fedwire and other large-dollar payment systems, to reduce the risks associated with such systems. Following are
the primary changes:
• The new risk-based capital measures
will be substituted for adjusted primary
capital when calculating sender net debit
caps for U.S. depository institutions.
• Net debits incurred on the Clearing
House Interbank Payments System
(CHIPS) by U. S. and foreign institutions
will be excluded from the amount of
daylight overdraft credit subject to crosssystem sender net-debit caps when CHIPS
adopts settlement finality. (After issuance
of this statement, CHIPS adopted settlement finality. Accordingly, CHIPS net
debits will be excluded from the calculation of cross-system caps beginning
January 10, 1991.)
• Healthy institutions whose overdrafts are less than $10 million or less
than 20 percent of their risk-based capital
are exempt from the self-evaluation and
cap-filing requirements.
• The frequency test and the dollar
limit will no longer be used for meeting
the requirements of the de minimis cap;
only the 20 percent capital limit will be
used.
• The net debit cap will be applied to
overdrafts caused both by funds transfers
80
77th Annual Report, 1990
and by book-entry transfers of U.S.
government and agency securities.
• Institutions that frequently and materially exceed their caps because of
overdrafts arising from book-entry securities transactions are required to pledge
collateral for those overdrafts; other
institutions may exclude book-entry securities overdrafts from their caps if the
overdrafts are collateralized.
• For U.S. agencies and branches of
foreign institutions that are headquartered
in countries that are participating in the
Basle accord, the uncollateralized Fedwire cap will be calculated using a "U.S.
capital equivalency" of 10 percent of the
worldwide capital that would meet the
Basle risk-based capital accord.
These revisions are effective January
10,1991.
1990 Discount Rates
The Board approved one change in the
basic discount rate during 1990, a reduction from 7 percent to 6Vi percent in
December. During the year the Board
also voted at two meetings to disapprove
requests for increases or decreases in the
basic rate submitted by two Federal
Reserve Banks. In early November the
Board decided to restructure, effective
January 1992, the rate imposed on seasonal borrowing by linking it to market
rates; until then, the Reserve Banks will
continue to charge the basic rate on such
credit.
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 (FOMC) and the related 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 1990,
including the votes on those actions,
follows this review.
Actions on the Basic Discount Rate
During the first half of 1990, the Board
considered but took no action on requests
from three Reserve Banks to lower or
raise the basic discount rate. The rate had
been maintained at a level of 7 percent
since February 1989. One Bank submitted requests to lower the rate to 6Vi percent, while two Banks proposed increases
to IV* and IVi percent respectively. One
or more of these requests were pending
during most of the period.
In the early months of the year, the
economic expansion appeared to have
strengthened somewhat, and sharp increases in food and energy prices associated with adverse weather conditions
pushed broad measures of inflation considerably higher. In thefirstquarter, M2
expanded at a pace near the top of the
FOMC's growth range for the year,
though the expansion of M3 was held
down by the effects of the restructuring of
thrift depository institutions. Both the
pace of the business expansion and the
rate of inflation moderated somewhat in
the second quarter, and monetary growth
slowed markedly. Problems clearly evident in some industries and regions
tended to cloud the outlook for business
activity at midyear, but the economy was
still expanding and the core rate of
inflation did not appear to be trending
down. Throughout this period, the policy
of the FOMC was directed at maintaining
a steady degree of pressure on reserve
positions following a sequence of easing
steps implemented during the second half
of 1989. In the circumstances, the Board
endorsed the view of the majority of the
Reserve Banks in deciding that, on balance, economic and financial developments pointed to the desirability of an
unchanged basic discount rate.
In mid-July the Board turned down
pending requests by the Federal Reserve
Banks of Cleveland and Dallas to raise
Board Policy Actions
and to lower, respectively, their basic
discount rates by V2 percentage point. In
reaching its decision, the Board took into
account an earlier decision by the FOMC
to implement some slight easing of reserve conditions. However, because of
the minor tightening that appeared to
have occurred in the general availability
of credit, such easing was viewed in
effect as serving to maintain the overall
degree of monetary restraint that the
FOMC had sought since late 1989. In
these circumstances, the Board concluded that a change in the discount
rate in either direction would not be
appropriate.
Iraq's invasion of Kuwait in early
August precipitated a surge in oil prices
that added to existing inflationary pressures and threatened a cutback in spending as higher oil prices eroded disposable
incomes. Business and consumer confidence deteriorated sharply, although
overall spending and production held up
for a time. An unsettled political and
military situation in the Middle East and
increased volatility in financial markets
added to the already considerable uncertainties that surrounded the economic
outlook. Under these conditions, monetary policy was directed in late summer
and early fall at maintaining a steady
course and providing a sense of stability
until a clearer picture emerged of the
balance of risks between greater inflation
and a weakening economy.
In mid-August, one Reserve Bank
submitted a request to lower the basic
discount rate by Vi percentage point; that
request was periodically renewed, and
starting in late October several other
Reserve Banks submitted similar requests. Near the end of October, the
FOMC acted to ease pressures on reserve
conditions in light of accumulating indications of a weakening economy and a
congressional budget agreement that
called for a major degree offiscalrestraint
81
over a multiyear horizon. Over the
balance of the year, evidence of worsening business conditions continued to
mount and inflationary pressures appeared to be easing. At the same time,
more and more lending institutions were
encountering increasing financial difficulties largely because of growing problems in their real estate portfolios, and a
rising number of highly leveraged business firms also were experiencing financial strain. Efforts by banks and other
lenders to protect and improve their
capital positions as their loan portfolios
deteriorated were reflected in widespread
indications of cutbacks in the availability
of credit and more stringent lending
terms.
Against this background and taking
special account of the sluggish monetary
growth in the closing months of the year,
the FOMC moved in a series of steps
to ease conditions in reserve markets
appreciably further. In early December,
the Board acted to eliminate the 3 percent
reserve requirement on nonpersonal time
deposits and net Eurocurrency liabilities
partly to bolster lending incentives for
depository institutions. Financial conditions and developments in the economy
also led the Board on December 18 to
approve a reduction in the discount rate
from 7 percent to 6V2 percent. The
reduction also served in part to realign
the basic discount rate with market
interest rates, which had declined
considerably.
Structure of Discount Rates
The basic discount rate is the rate charged
on loans to depository institutions for
short-term adjustment credit and for
credit extended under the seasonal program; under the latter program, loans
may be provided for periods longer than
those permitted under adjustment credit
to assist smaller institutions in meeting
82
77th Annual Report, 1990
regular needs arising from certain seasonal movements in their deposits and
loans.
A higher, flexible rate may be charged
on extended-credit loans (for other than
seasonal purposes) to depository institutions that are under sustained liquidity
pressure and are not able to obtain funds
on reasonable terms from other sources.
Theflexiblerate is somewhat higher than
the market rates to which it is linked, but
it is always at least 50 basis points above
the basic discount rate. The flexible rate
is adjusted periodically, subject to Board
approval. Thefirstthirty days of borrowing on extended credit may be at the basic
rate, but further borrowings ordinarily
are charged theflexiblerate. The highest
rate applicable to any credit extended to
depository institutions will be assessed
on exceptionally large adjustment-credit
loans that arise from computer breakdowns or other operating problems,
unless the difficulty clearly is beyond the
reasonable control of the borrowing
institution; under the current structure,
that rate is theflexiblerate.
At the end of 1990 the structure of
discount rates was as follows: a basic rate
of 6V2 percent for short-term adjustment credit and for credit under the
seasonal program and a flexible rate of
8.05 percent. During 1990 the flexible
rate ranged from a high of 8.90 percent to
a low of 8.05 percent.
1973, changes in statutes, regulations,
and financial markets had tended to
broaden the access of small banks to
alternative sources of funding. In these
circumstances, the Board concluded that
a market-related rate would be appropriate for the longer-term credit offered
under the seasonal program. The Board
decided to delay the effective date of the
change to give banks more opportunity to
adjust their funding patterns in a period
when some banks might be subject to
tightened availability of funds.
Board Votes
Under the provisions of the Federal
Reserve Act, the boards of directors of
the Reserve Banks are required to establish rates on loans to depository institutions at least every fourteen days and to
submit such rates to the Board of Governors for review and determination. Reserve Bank actions on the discount rate
include requests to renew the formula for
calculating the flexible rate on extended
credit. The votes of the Board of Governors listed below involved changes in the
basic discount rate. Votes relating to the
reestablishment of existing rates or the
updating of market-related rates under
the extended credit program are not
shown. All votes taken during 1990 were
unanimous.
Votes on the Basic Discount Rate
July 9, 1990. The Board disapproved
Change in Seasonal Credit Program an action taken on June 28 by the directors
On November 7, 1990, the Board modi- of the Federal Reserve Bank of Cleveland
fied its seasonal credit program by replac- to raise the basic discount rate from
ing the basic discount rate charged on 7 percent to IVi percent.
seasonal borrowing with a market-related
Votes for this action: Messrs. Greenspan,
rate, effective January 9,1992. The new
Angell, Kelley, and Mullins. Votes against
rate will be tied to the level of the federal
this action: None.
funds rate and the rate in the secondary
market for ninety-day certificates of deJuly 11,1990. The Board disapproved
posit. Since the program's inception in an action taken on June 28 by the directors
Board Policy Actions
of the Federal Reserve Bank of Dallas to
lower the basic discount rate from 7 percent to 6V2 percent.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, and Mullins. Votes against
this action: None.
December 18,1990. Effective December 19,1990, the board approved actions
taken by the directors of all the Reserve
Banks to reduce the basic discount rate
from 7 percent to 6V2 percent.
Votes for this action: Mr. Greenspan, Ms.
Seger, and Messrs. Angell, Kelley, LaWare,
and Mullins. Votes against this action:
None.1
Votes on the Seasonal Credit Program
November 7, 7990. Effective January
9,1992, the Board approved the charging
of a market-related rate of interest instead
of the basic discount rate on borrowings
under the seasonal credit program.
Votes for this action: Mr. Greenspan, Ms.
Seger, and Messrs. Angell, Kelley, LaWare,
and Mullins. Votes against this action:
None.1
•
83
85
Record ofPolicy 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.
The pages that follow contain entries
relating to the policy actions at the
meetings of the Federal Open Market
Committee held during the calendar year
1990, including the votes on the policy
decisions made at those meetings as well
as a r6sum6 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 1990 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, the Committee
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 1990. Changes in the instruments
during the year are reported in the records
for the individual meetings.
Authorization for Domestic Open
Market Operations
In Effect January 1, 1990
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary to
86
77th Annual Report, 1990
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 mat 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 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.
FOMC Policy Actions
87
above the lower bound of the Committee's
annual range.
The Federal Open Market Committee seeks
In Effect January 1, 19901
monetary and financial conditions that will
The information reviewed at this meeting foster price stability, promote growth in
suggests that economic activity is expanding output on a sustainable basis, and contribute
slowly in the current quarter. Total nonfarm to an improved pattern of international transpayroll employment has increased at a re- actions. In furtherance of these objectives,
duced pace on average over the past several the Committee at its meeting in July reafmonths, with declines continuing in the firmed the ranges it had established in Februmanufacturing sector. The civilian unemploy- ary for growth of M2 and M3 of 3 to 7 percent
ment rate edged up to 5.4 percent in Novem- and 3 Vi to 7 xh percent, respectively, measured
ber. Industrial production rose slightly in from the fourth quarter of 1988 to the fourth
November after a decline in October resulting quarter of 1989. The monitoring range for
from strike activity and other disruptions. growth of total domestic nonfinancial debt
Nominal retail sales excluding motor vehicles also was maintained at 6 Vi to 10 Vi percent for
strengthened in November, but continued the year. For 1990, on a tentative basis, the
weak sales of vehicles held total retail sales Committee agreed in July to use the same
for the month to a level that was little changed ranges as in 1989 for growth in each of the
from the third-quarter average. Housing starts monetary aggregates and debt, measured from
fell in November but for the October-Novem- the fourth quarter of 1989 to the fourth quarter
ber period were up somewhat on average of 1990. The behavior of the monetary
from their third-quarter level. Indicators of aggregates will continue to be evaluated in the
business capital spending suggest a weakening light of movements in their velocities, develin expenditures after a substantial increase opments in the economy and financial marearlier in the year. The preliminary data kets , and progress toward price level stability.
indicate that the nominal U.S. merchandise
In the implementation of policy for the
trade deficit widened appreciably in October immediate future, the Committee seeks to
from an upward revised September rate. decrease slightly the existing degree of presBroad measures of inflation suggest that prices sure on reserve positions. Taking account of
have risen more slowly on balance since progress toward price stability, the strength
midyear, partly reflecting sharp reductions in of the business expansion, the behavior of the
energy prices, but the latest data on labor monetary aggregates, and developments in
compensation suggest no significant change foreign exchange and domestic financial
in prevailing trends.
markets, slightly greater reserve restraint or
Interest rates have changed little on balance slightly lesser reserve restraint would be
since the Committee meeting on November acceptable in the intermeeting period. The
14. In foreign exchange markets, the trade- contemplated reserve conditions are expected
weighted value of the dollar in terms of the to be consistent with growth of M2 and M3
other G-10 currencies declined substantially over the period from November through
over the intermeeting period, with a particu- March at annual rates of about %Vi and 5Vi
larly pronounced depreciation against the percent respectively. The Chairman may call
German mark and related European cur- for Committee consultation if it appears to the
Manager for Domestic Operations that rerencies in the last week of the period.
M2 continued to grow fairly briskly in serve conditions during the period before the
November, largely reflecting strength in its next meeting are likely to be associated with a
retail deposit components; M2 has expanded federal funds rate persistently outside a range
this year at a pace near the midpoint of the of 6 to 10 percent.
Committee's annual range. Growth of M3
picked up in November but has remained
more restrained than that of M2, as assets of Authorization for Foreign
thrift institutions and their associated funding Currency Operations
needs apparently continued to contract; for
the year to date, M3 has grown at a rate a little
Domestic Policy Directive
In Effect January 1, 1990
1. Adopted by the Committee at its meeting on
Dec.18-19, 1989.
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
88
77th Annual Report, 1990
Bank of New York, for System Open Market
Account, to the extent necessary to carry out
the Committee's foreign currency directive
and express authorizations by the Committee
pursuant thereto, and in conformity with such
procedural instructions as the Committee may
issue from time to time:
A. To purchase and sell the following
foreign currencies in the form of cable
transfers through spot or forward transactions
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 $21.0
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 foreign currency is defined as holdings
of balances in that currency, plus outstanding
contracts for future receipt, minus outstanding
contracts for future delivery of that currency,
i.e., as the sum of these elements with due
regard to sign.2
2. Adopted by the Committee at its meeting on
Dec. 18-19,1989.
2. The Federal Open Market Committee
directs the Federal Reserve Bank of New
York to maintain reciprocal currency arrangements ("swap" arrangements) for the System
Open Market Account for periods up to a
maximum of 12 months with the following
foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of
Regulation N, Relations with Foreign Banks
and Bankers, and with the approval of the
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
Regular
Special
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
125*
500
250
300
4,000
600
1,250
*ExpiredFeb. 15,1990.
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
FOMC Policy Actions
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 Section214.5 of Regulation
N shall be referred for review and approval to
the Committee.
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;
89
C. From time to time, to transmit appropriate reports and information to the National
Advisory Council on International Monetary
and Financial Policies.
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.
Foreign Currency Directive
In Effect January 1, 1990
1. System operations in foreign currencies
shall generally be directed at countering
disorderly market conditions, provided that
market exchange rates for the U.S. dollar
reflect actions and behavior consistent with
the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
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 be
expressly authorized by die Committee.
4. System foreign currency operations
shall be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with
foreign monetary authorities; and
C. In a manner consistent with the
obligations of the United States in the International Monetary Fund regarding exchange
arrangements under the IMF Article IV.
90
77th Annual Report, 1990
Meeting Held on
February 6 - 7 , 1 9 9 0
1. Domestic Policy Directive
The information reviewed at this meeting
suggested continued but sluggish expansion in overall economic activity, with
conditions uneven across sectors. Industrial activity remained weak, partly because of the depressing effects of an
inventory correction on manufacturing
output, while the service-producing sector of the economy continued to grow
moderately. Aggregate price measures
had increased more slowly over most of
the second half of 1989, but unusually
cold weather in December put temporary
upward pressure on food and energy
prices. The latest data on labor compensation suggested no significant change in
prevailing trends.
Total nonfarm payroll employment
increased substantially in January after
growing at a reduced pace on average in
previous months. Employment surged in
the service-producing sector, and unusually warm weather brought a rebound in
hiring in the construction industry. These
increases more than offset a large decline
in factory jobs associated with sizable
short-term layoffs in the motor vehicle
and related industries. The civilian unemployment rate remained at the 5.3 percent
level that had prevailed over most of
1989.
Partial data for January indicated that
industrial production fell sharply. Automobile producers cut back temporarily
on assemblies to help reduce bulging
inventories of unsold vehicles, and the
January thaw in the weather apparently
brought a reduction in the generation of
electricity that more than reversed a
December surge. Abstracting from a
number of transitory factors affecting
production in recent months, industrial
activity had changed little since the third
quarter, although recent orders data
suggested some underlying support for
manufacturing output over the near term.
Total industrial capacity utilization remained at a relatively high level in the
fourth quarter but was down somewhat
from its level a year earlier.
Adjusted for inflation, consumer
spending was little changed in the fourth
quarter. Strong gains in spending for
services offset declines in purchases of
consumer goods, especially new cars and
light trucks. Although some of the
strength in the services category reflected
temporarily high energy-related expenditures, spending for medical and transportation services apparently remained
strong throughout the fourth quarter.
Near the end of the year, consumers
responded positively to incentive programs introduced by automakers to reduce bloated inventories, and higher sales
of domestically produced cars carried
over to January. Residential construction
in the fourth quarter was little changed
from its third-quarter level, partly because December's unusually cold weather
depressed single-family housing starts in
that month. Multifamily starts remained
at a low level as vacancy rates for such
units moved still higher.
Business capital spending, adjusted for
inflation, declined in the fourth quarter
because of strike activity in the aircraft
industry and sharply lower outlays for
motor vehicles. Spending for equipment
other than motor vehicles and aircraft
rose; sizable increases were registered
for computers and communications
equipment, and moderate gains were
evident for a wide variety of heavy
machinery. A pickup toward the end of
1989 in new orders for equipment other
than aircraft, and the return to work of
striking aircraft workers, pointed to some
improvement in equipment spending in
the current quarter. Nonresidential construction activity apparently weakened a
FOMC Policy Actions
little in the fourth quarter, partly reflecting the persisting high vacancy rates for
office and other commercial space. Manufacturers' inventories fell in December
after moderate increases in the two
previous months; for the fourth quarter
as a whole, increases in factory stocks
were well below those for previous
quarters in 1989. By contrast, nonauto
retail stockbuilding accelerated late in
the year, and there were reports that
inventory-sales ratios at general merchandisers were higher than desired.
The nominal U.S. merchandise trade
deficit rose slightly in November from a
revised October level. For the two months
together, the deficit was up substantially
from the averages for both the third
quarter and the first nine months of 1989.
Total exports for the two-month period
were little changed from their thirdquarter level as a reduction in exports of
aircraft, resulting from strike activity,
offset moderate increases in a broad array
of other products. Total imports increased rapidly in October-November,
with imports of capital goods being
especially strong. Indicators of economic activity in major foreign industrial
countries were mixed during the fourth
quarter of 1989. Growth continued strong
in Japan, and most indicators pointed to
renewed strength for Germany, Italy,
and France. By contrast, growth was
sluggish in the United Kingdom and
Canada.
Producer prices for finished goods
jumped in December, largely reflecting
higher prices for energy products, most
notably for heating oil. Abstracting from
food and energy items, producer prices
rose faster in December than in November, but the rate of increase in the fourth
quarter as a whole remained at the
reduced third-quarter pace. At the consumer level, prices rose somewhat more
rapidly toward the end of 1989, and food
and energy prices apparently increased
91
substantially further in January. Among
nonfood, non-energy categories, discounting of apparel and home furnishings
was more than offset by a sharp rise in
prices of new cars and by another month
of sizable price increases for services.
At its meeting on December 18-19,
1989, the Committee adopted a directive
that called for a slight easing in the degree
of pressure on reserve positions but that
provided for giving equal weight to
subsequent developments that might require some easing or tightening during
the intermeeting period. Accordingly,
the Committee agreed that slightly greater
or slightly lesser reserve restraint would
be acceptable during the intermeeting
period, depending on progress toward
price stability, the strength of the business
expansion, the behavior of the monetary
aggregates, and developments in foreign
exchange and domestic financial markets.
The contemplated reserve conditions
were expected to be consistent with
growth of M2 and M3 over the fourmonth period from November 1989 to
March 1990 at annual rates of about SV2
percent and 5lA percent respectively.1
1. These growth rates and all subsequent data on
the monetary aggregates reflect annual benchmarks
and seasonal factors as published on February 8,
1990.
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 (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,
92
77th Annual Report, 1990
Immediately after the Committee meeting, open market operations were directed toward implementing the slight
easing in the degree of pressure on
reserve positions called for by the Committee. Reserve conditions then remained
essentially unchanged over the rest of the
intermeeting period. Adjustment plus
seasonal borrowing averaged a little more
than $300 million for the intermeeting
period; the volume was boosted by
reserve shortfalls, borrowing by large
banks over the long holiday weekends,
and, in the latter part of the interval,
borrowing by a sizable bank whose
normal access to liquidity had been
impaired. The federalftindsrate declined
from about Wi percent at the time of the
December meeting to around 8 V4 percent
shortly thereafter; except for some firming in the last week of 1989 owing to
reserve shortfalls and year-end pressures,
the funds rate remained in the vicinity of
that lower level. Other private short-term
market rates also declined over the
period, including a Vi percentage point
drop in the prime rate to 10 percent,
while Treasury bill rates increased
somewhat.
Yields on intermediate- and long-term
debt instruments rose considerably over
the intermeeting period. Some strongerthan-anticipated economic data and rising
food and energy prices were interpreted
in thefinancialmarkets as pointing away
from recession and as suggesting little if
any moderation in underlying inflation
trends. Increases in interest rates abroad
probably also had an influence on U.S.
interest rates. Stock prices approached
new highs at the start of the year but have
fallen substantially since then.
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.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies declined further over the intermeeting period, as
monetary conditions abroad tightened
somewhat on average while those in the
United States eased slightly. The dollar's
movements against individual currencies
were mixed; most of its depreciation
occurredagainsttheGermanmark, which
continued to be buoyed by developments
in Eastern Europe, and against related
European currencies. On net, the U.S.
dollar remained relatively firm against
the yen and the Canadian dollar; the latter
declined sharply as Canadian short-term
interest rates edged lower amid signs of
slow growth in the Canadian economy
and a consequent easing of inflation
pressures.
Growth of M2, measured on a benchmarked and seasonally revised basis,
remained relatively strong in the fourth
quarter of 1989; for the year, this aggregate expanded at a rate a little below the
middle of the Committee's annual range.
Partly as a result of further contraction in
the assets and associated funding needs
of thrift institutions, M3 grew more
slowly in the fourth quarter and, for the
year, expanded at a rate just below the
lower bound of its annual range. In
January, both of the broader aggregates
increased at slower rates. A sharp drop in
transactions deposits damped expansion
of M2, even though retail-type savings
deposits remained strong and money
market funds evidently benefited from
fundsflowingout of weakening stock and
bond markets. Growth of M3 in January
slowed by less than that of M2.
The staff projection prepared for this
meeting suggested that the economy was
likely to expand relatively slowly over
the next several quarters. In the near
term, production adjustments to eliminate
excess inventories, most notably in the
motor vehicles industry, were expected
FOMC Policy Actions
to depress manufacturing activity and
overall growth; some pickup in the
expansion was anticipated after the inventory correction was completed, but final
sales were projected to continue growing
at a relatively sluggish pace. Homebuilding might rebound somewhat in the near
term after being disrupted by December's
cold weather, but prevailing interest rates
and possible cutbacks in construction
lending by thrift institutions likely would
restrain residential construction activity
throughout the year. The projection
assumed that fiscal policy would be
moderately restrictive and that net exports would make little contribution to
growth of domestic production in 1990.
The expansion of consumer demand
would be damped by slow gains in
employment and associated limited
growth in real disposable incomes. With
pressures on labor and other production
resources expected to ease only gradually, little improvement was anticipated
in the underlying trend of inflation over
the next several quarters.
In their discussion of the economic
situation and outlook, the Committee
members generally agreed that continuing growth in economic activity remained
a reasonable expectation for the year
ahead. Several observed that, on the
whole, recent indicators of business
conditions provided some assurance that
the expansion was no longer weakening
and indeed that a modest acceleration
might be under way from the considerably reduced growth experienced in the
fourth quarter. The members acknowledged that there were considerable risks,
stemming mainly from the financial side,
of a weaker-than-projected expansion,
and some did not rule out the possibility
of a downturn. In the latter connection,
several commented that they had observed a sense of unease and fragility in
the business and financial communities
arising from such factors as declining
93
profit margins, heavy debt burdens, and
problems in certain sectors of the financial markets that were contributing to
greater caution on the part of lenders and
a reduced availability of credit to some
borrowers. With regard to the outlook
for inflation, members remained generally optimistic that moderating pressures
on labor and other resources would lead
in time to a lower rate of inflation. However, most members saw little prospect
that significant progress, if any, would be
made in reducing the underlying rate of
inflation in the quarters immediately
ahead. Indeed, in part because of temporary pressures in the food and energy
sectors, key measures of inflation might
well register larger increases in the near
term before turning down later.
In keeping with the usual practice at
meetings when the Committee establishes
its longer-run ranges for growth of the
monetary and debt aggregates, the members of the Committee and the Federal
Reserve Bank presidents not currently
serving as members had prepared projections of economic activity, the rate of
unemployment, and inflation for the year
1990. In making these forecasts, the
members took account of the Committee's
policy of continuing restraint on demand
to resist any increase in inflation pressures and to foster price stability over
time. For the period from the fourth
quarter of 1989 to the fourth quarter of
1990, the forecasts for growth of real
GNP had a central tendency of 1% to
2 percent, a pace close to that experienced
in 1989 excluding the direct effects of the
rebound in farm output after the drought
in 1988. Estimates of the civilian rate of
unemployment in the fourth quarter of
1990 were concentrated in a range ofSVi
to 534 percent. The associated pressures
on prices resulted in projected increases
in the consumer price index centered on
rates of 4 to 4Vi percent for the year,
compared with a rise of 4V2 percent in
94
77th Annual Report, 1990
1989. Forecasts for growth of nominal
GNP had a central tendency of 5^2 to
6V2 percent. The forecasts assumed that
changes in the foreign exchange value of
the dollar would not be of sufficient
magnitude to have a significant effect on
the economy or prices during 1990.
In the Committee's discussion of developments bearing on the economic outlook, the members emphasized that despite indications of continuing growth in
overall business activity, there were
obvious areas of weakness in the economy, notably in manufacturing across
much of the nation and in construction in
many localities. Business sentiment appeared to have deteriorated in some areas,
perhaps more than was justified by actual
developments. While local business conditions were clearly uneven, business
activity was generally characterized as
growing on an overall basis in the various
regions, including recent evidence of a
modest pickup in some previously depressed parts of the country.
With regard to individual sectors of
the economy, the outlook for retail sales
was clouded to some extent by the
uncertain prospects for motor vehicles
and thefinancialproblems being experienced by some major retailers; nonetheless, in the context of expected further
gains in disposable incomes, many members expected overall consumer spending
to be relatively well maintained. Business
inventories probably were falling in the
current quarter, largely reflecting sharp
declines in stocks of motor vehicles, but
once the correction in that industry was
completed, some renewed increases in
overall inventory investment were anticipated in line with expanding sales.
Current indicators suggested that business fixed investment might be reasonably well maintained, but it also was
noted that overbuilding of commercial
real estate in many areas would restrain
overall nonresidential construction and
more generally that depressed profits and
cash flows could limit gains in business
investment. Concerning the outlook for
residential construction, conditions in
local housing markets varied markedly
and the prospects for the nation were
difficult to assess. Negative developments
included higher mortgage interest rates,
a reduced availability of financing for
many developers, and the overhang of
large inventories of housing units held by
the Resolution Trust Corporation (RTC).
Nonetheless, housing demand was holding up in many areas and booming in a
few, and on balance most members
expected little change this year in overall
expenditures for residential construction.
A number commented that the prospects
for exports were relatively bright; foreign demand was reported to be robust
for many types of goods, and overall
exports would be given some impetus
over time by the depreciation of the dollar
over the past several months.
Turning to the outlook for inflation,
members noted that broad measures of
labor compensation did not suggest any
lessening of pressures. Unit labor costs
appeared to be rising at a faster pace
recently than the underlying rate of
inflation, squeezing profit margins. Commodity prices displayed mixed changes
but generally remained on a high plateau.
Business contacts and broader surveys
indicated a widespread expectation that
the current rate of inflation would continue. Moreover, with higher social
security taxes and a rising minimum wage
adding to labor costs and earlier increases
in producer food and energy costs not yet
fully transmitted to retail prices, some
measures of inflation were expected to
show sharper increases over the near
term. On the other hand, reports from a
number of business contacts indicated
that input prices, especially for raw
materials, had stabilized or declined in
recent months. More generally, a number
FOMC Policy Actions
of members commented that continued
limited growth in business activity at a
time of uncertainties and concerns associated with various financial problems
and declining real estate values in many
areas should contribute to some restraint
in overall inflationary behavior.
Against the background of the members' views on the economic outlook and
in keeping with the requirements of the
Full Employment and Balanced Growth
Act of 1978 (the Humphrey-Hawkins
Act), the Committee reviewed the ranges
that it had established on a tentative basis
in July 1989 for growth of the monetary
and debt aggregates in 1990. The tentative ranges, which were unchanged from
those for 1989, included expansion of 3
to 7 percent for M2 and 3 Vi to 7 lh percent
for M3, measured from the fourth quarter
of 1989 to the fourth quarter of 1990. The
monitoring range for growth of total
domestic nonfinancial debt had been set
at 6^2 to 10V2 percent, also unchanged
from 1989.
With regard to M2, on which much of
the discussion was focused, a majority
of the members concluded that retention
of the tentative range of 3 to 7 percent
would best assure the flexibility that
the Committee was likely to need to
implement its policy objectives during
the year. A staff analysis prepared for
this meeting indicated that, were interest
rates to remain near recent levels, a
somewhat higher rate of M2 growth
than had occurred in any of the past
three years was likely to be consistent
with some reduction in the expansion of
nominal GNP. According to this
analysis, the lagged effects of earlier
declines in market interest rates would
continue to boost M2 growth in the first
part of 1990, and the velocity of M2 was
likely to fall for the year as a whole. To
the extent that the projected weakness in
M2 velocity turned out to be correct, it
implied M2 growth toward the upper
95
end of the tentative range on the basis of
the central tendency of the members'
forecasts of nominal GNP.
Given this outlook, an unchanged
range for M2 still left considerable
leeway for the Committee to embark on a
more aggressive policy to restrain inflation, should developments during the
year suggest an intensification of inflationary pressures or provide an opportunity to tilt the implementation of policy
toward greater restraint and faster
progress against inflation without impairing the forward momentum of the economy. Thus, although the Committee
recognized that over time lower ranges
and slower M2 growth would be compatible with price stability, retention of the
current range did not signal a diminished
determination to move toward the objective of price stability.
Preferences for slightly higher or
somewhat lower ranges for M2 also were
expressed. The arguments in favor of a
higher range focused on the risks of a
weaker economy than was anticipated
currently and the related desirability of
more maneuvering room for an easing of
short-run policy if such were needed to
help avert a cumulative deterioration in
economic activity. In those circumstances, faster monetary growth would
not be inconsistent with the Committee's
long-term commitment to price stability.
Other members believed that a somewhat
reduced range would allow adequate
growth in M2 to sustain moderate expansion in economic activity and would
provide a desirable signal of the System's
commitment to an anti-inflationary policy. In this connection, the credibility of
the System's anti-inflationary policy was
seen as an important channel for reducing
inflationary expectations directly and
thereby lessening the economic costs and
time needed to achieve price stability.
These members expressed concern that
growth around the upper end of a 3 to
96
77th Annual Report, 1990
7 percent range might well preclude any
progress in reducing inflation this year
and might make it more difficult to
achieve such progress later. For some of
these members, however, a 3 to 7 percent
range would be acceptable if its upper
limit was viewed as a firm constraint
on actual growth and if a clear explanation
was made of the Committee's commitment to achieve price stability over
time.
Turning to the ranges for M3 and debt,
most of the members indicated that they
favored or could accept reductions from
the tentative ranges that had been adopted
in July 1989 for this year. Some reduction
in the range for M3 was thought to be
consistent with an unchanged range for
M2 for technical reasons associated with
the restructuring of the thrift industry and
related shrinkage in thrift institution
balance sheets. Declines in thrift institution assets and associated funding needs,
including liabilities in M3, now seemed
likely to be larger in 1990 than had been
anticipated last summer, reflecting continued efforts of solvent institutions to
meet capital standards as well as the
closing of insolvent institutions. Beyond
that, while a reduction in the M3 range,
especially if it was limited, might have
little implication for policy, many members believed that the Committee should
take advantage of every opportunity to
reduce its ranges toward levels that were
consistent with price stability. With
regard to the monitoring range for total
domestic nonfinancial debt, the members
expected the expansion of such debt to
moderate for a fourth year in 1990, in
large measure because of anticipated
reductions in debt creation associated
with corporate merger and acquisition
activities but also because of some probable ebbing in the growth of household
debt. The prospect of slower growth of
debt was welcome, given concerns about
strains associated with highly leveraged
borrowers and high debt servicing
obligations.
A few members indicated a preference
for retaining the somewhat higher ranges
for M3 and debt that had been adopted on
a tentative basis for this year. In their
view, lowering those ranges would tend
to send potentially confusing signals,
raising questions as to why the M2 range
was not reduced also. Also, disparate
adjustments in the ranges for the various
aggregates could foster an unwarranted
impression of the precision with which
the Committee felt it could evaluate the
ranges.
The members generally agreed that
setting 1990 target ranges for M2 and
particularly for M3 was rendered more
difficult by uncertainty about developments affecting thrift institutions, especially given the relatively limited basis in
past experience for gauging the likely
impact of such developments. The establishment of an appropriate range for the
growth of nonfinancial debt also was
complicated by uncertainty about the
extent to which Treasury borrowing
would be used to carry the assets of failed
thrift institutions as opposed to funding
fromfinancial-sectorsources through the
RTC. With these questions adding to the
usual uncertainty about the relationship
of movements in the aggregates to broad
measures of economic performance, the
Committee decided to retain the 4 percentage point width of the ranges. It also
agreed that the implementation of policy
should continue to take into account, in
addition to monetary growth and its
velocity, indications of inflationary pressures in the economy, the strength of
business activity, and developments in
domestic and international financial
markets.
At the conclusion of the Committee's
discussion, a majority of the members
indicated that they favored or could
accept the M2 range for 1990 that had
FOMC Policy Actions
been established on a tentative basis in
July 1989 and reductions of one percentage point and Wi percentage points
respectively in the tentative ranges for
M3 and nonfinancial debt. Accordingly,
the Committee approved the following
paragraph relating to its 1990 ranges for
inclusion in the domestic policy directive:
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, 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 this meeting established
ranges for growth of M2 and M3 of 3 to
7 percent and 2Vi to 6*/2 percent respectively,
measured from the fourth quarter of 1989 to
the fourth quarter of 1990. The monitoring
range for growth of total domestic nonfinancial debt was set at 5 to 9 percent for the year.
The behavior of the monetary aggregates will
continue to be evaluated in the light of progess
toward price stability, movements in their
velocities, and developments in the economy
andfinancialmarkets.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boykin,
Johnson, Kelley, andLaWare. Votes against
this action: Mr. Hoskins, Ms. Seger, and
Mr. Stern.
Messrs. Hoskins and Stern dissented
because they wanted a lower range for
M2. They were concerned that growth
around the upper end of a 3 to 7 percent
range would not be compatible with
progress in reducing the rate of inflation
this year. An upper limit of 6 percent
would be preferable and would provide
adequate room in their view for policy to
foster sustained economic expansion.
Mr. Hoskins also stressed the desirability
of a predictable and credible monetary
policy, which he believed should include
persistent reductions in the ranges to
levels that would be consistent with stable
prices. The favorable effects of such a
policy on inflationary expectations would
tend to lessen the costs and also accelerate
the achievement of price stability.
97
Ms. Seger dissented because she believed that the M2 range should be raised
to at least 3 Vi to 7 Vi percent. In her view,
the considerable downside risks to the
expansion called for some added room to
accommodate the possible need for a
more stimulative policy and somewhat
faster M2 growth than was contemplated
by an unchanged range. In particular, a
shortfall in aggregate demands during
thefirsthalf of the year might well require
some easing of policy aimed at countering
developing weakness in the economy. In
such circumstances, M2 growth somewhat above 7 percent would not be
inconsistent with the Committee's antiinflation objective. She could accept
unchanged ranges for growth of M3 and
nonfinancial debt, given the outlook for
somewhat slower expansion of both
aggregates in relation to M2 than the
Committee had anticipated in July 1989.
Turning to policy implementation for
the intermeeting period ahead, a majority
of the members favored steady reserve
conditions. Given indications of some
pickup in activity from the latter part of
1989, such a policy offered the best
prospects at this point of reconciling the
Committee's objective of acceptable and
sustained economic growth with that of
some reduction over time in inflationary
pressures on labor and other resources.
A tightening of policy might have some
advantages in terms of moderating monetary growth and improving inflationary
expectations, but in this view such a
policy would incur too much risk of
creating financial conditions that could
lead to a weaker economy. Conversely,
significantly lower interest rates could
have inflationary consequences in an
economy that already was operating at
relatively high employment levels, partly
through their effects on the dollar in the
foreign exchange markets. Conditions in
the economy and in financial markets,
both in the United States and abroad,
98
77th Annual Report, 1990
suggested that monetary policy needed to
convey a sense of stability.
Other members acknowledged that
adjustments in monetary policy needed
to be made with a special degree of
caution in current circumstances, but on
balance they assessed the risks and the
related advantages and disadvantages of
a change in policy somewhat differently.
In one view, the risks of a recession
argued for a prompt adjustment toward
somewhat less monetary restraint, especially given the need to bolster relatively
interest-sensitive sectors of the economy
such as housing and motor vehicles. A
differing view focused on the desirability
of a somewhat tighter policy at this
juncture, particularly in light of the
outlook for relatively little progress
against inflation as the business expansion
tended to strengthen. One member gave
special emphasis to the desirability of
limiting M2 growth to a path closer to the
middle of the Committee's range for 1990
to help assure that progress would be
made this year in moderating inflationary
pressures.
In the Committee's consideration of
possible adjustments to the degree of
reserve pressure during the intermeeting
period, a majority of the members supported a directive that did not contain any
bias toward tightening or easing. They
felt that a symmetric instruction was
consistent at this point with their general
preference for a stable policy and that an
intermeeting adjustment should be made
only in the event of particularly conclusive economic or financial evidence,
including a substantial deviation in monetary growth from current expectations.
One member who preferred a slightly
tighter policy indicated that an unchanged
policy that was biased toward restraint
would be acceptable.
Members noted that seasonal borrowing was likely to turn up from its January
lows so that some increase in the total of
adjustment plus seasonal borrowing
would be associated with a given degree
of reserve restraint and a given federal
funds rate. It was understood that some
increase in the borrowing assumption
would be made at the start of the intermeeting period and that further adjustments might be made later during the
period, subject to the Chairman's review.
In keeping with the usual practice, persisting borrowings by troubled depository institutions that had not been classified as extended credit would be treated
as nonborrowed reserves in setting target
growth paths for reserves. More generally, in light of the uncertainties that were
involved, the Manager would continue to
exercise flexibility in his approach to the
borrowing assumption.
At the conclusion of the Committee's
discussion, a majority of the members
indicated that they favored or could
accept a directive that called for an
unchanged degree of pressure on reserve
positions. Some firming or some easing
of reserve conditions would be acceptable
during the intermeeting period depending
on progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated by the
Committee were expected to be consistent with growth of M2 and M3 at annual
rates of around 7 and 3 Vi percent respectively over the three-month period from
December to March. The members
agreed that the intermeeting range for the
federal funds rate, which provides one
mechanism for initiating consultation of
the Committee when its boundaries are
persistently exceeded, should be left
unchanged at 6 to 10 percent.
At the conclusion of the Committee's
meeting, the following domestic policy
directive was issued to the Federal Reserve Bank of New York:
FOMC Policy Actions
The information reviewed at this meeting
suggests that economic activity is continuing
to expand despite weakness in the industrial
sector. Total nonfarm payroll employment
increased substantially in January after growing at a reduced pace on average in previous
months; a surge in the service-producing
sector and a weather-related rebound in
construction were only partly offset by a large
decline in the manufacturing sector. The
civilian unemployment rate was unchanged at
5.3 percent. Partial data suggest that industrial
production in January was appreciably below
its average in the fourth quarter. Adjusted for
inflation, strong gains in consumer spending
on services in the fourth quarter offset declines
in consumer purchases of goods, especially
motor vehicles. Unusually cold weather
depressed housing starts appreciably in December, and residential construction in the
fourth quarter was little changed from its
third-quarter level. Business capital spending,
adjusted for inflation, declined in the fourth
quarter as a result of lower expenditures on
motor vehicles and strike activity in the
aircraft industry; spending on other types of
capital goods was strong, however, and new
orders for equipment picked up toward the
end of the year. The nominal U.S. merchandise trade deficit widened in October-November from the third-quarter rate. Consumer
prices had risen somewhat more rapidly
toward the end of 1989, and prices of food and
energy apparently increased substantially
further in January. The latest data on labor
compensation suggest no significant change
in prevailing trends.
Interest rates have risen in intermediateand long-term debt markets since the Committee meeting on December 18-19; in shortterm markets, the federal funds rate has
declined, and other short-term rates show
mixed changes over the period. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies declined further over the intermeeting period; most of the depreciation was
against the German mark and related European currencies, and there was little change
against the yen.
Growth of M2 slowed in January, almost
entirely reflecting a drop in transaction deposits. Growth of M3 also slowed in January
as assets of thrift institutions and their associated funding needs apparently continued to
contract. For the year 1989, M2 expanded at a
rate a little below the middle of the Commit
99
tee's annual range, and M3 grew at a rate
slightly below the lower bound of its annual
range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, 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 this meeting established
ranges for growth of M2 and M3 of 3 to
7 percent and 2XA to 6V2 percent respectively,
measured from the fourth quarter of 1989 to
the fourth quarter of 1990. The monitoring
range for growth of total domestic nonfinancial debt was set at 5 to 9 percent for the year.
The behavior of the monetary aggregates will
continue to be evaluated in the light of
progress toward price level stability, movements in their velocities, and developments in
the economy andfinancialmarkets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint or
slightly lesser reserve restraint would be
acceptable in the intermeeting period. The
contemplated reserve conditions are expected
to be consistent with growth of M2 and M3
over the period from December through
March at annual rates of about 7 and 3 Vi percent respectively. 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 the paragraph on short-term
policy implementation: Messrs. Greenspan,
Corrigan, Angell, Boehne, Johnson,
Kelley, LaWare, and Stern. Votes against
this action: Messrs. Boykin and Hoskins
and Ms. Seger.
While taking account of the various
elements of weakness and fragility in the
economy, Mr. Boykin dissented because
he preferred a policy directive tilted
toward increased reserve pressures
100 77th Annual Report, 1990
should economic andfinancialconditions
warrant. This view was based on his
concerns regarding the lagged effects of
policy actions and the risks of delaying
decisions until there was full confirmation of inflationary pressures. In this
context, Mr. Boykin expressed his preference for dealing promptly with inflation
if the Committee wished to make progress
toward its long-stated goal of lowering
the rate of inflation.
Mr. Hoskins dissented because he
preferred somefirmingof reserve conditions. He recognized that there was some
financial fragility in the economy, but he
believed that underlying inflation pressures were relatively strong and that the
balance of risks pointed to a need for
greater monetary restraint to curb such
inflation. He emphasized the desirability
of tightening monetary policy gradually
to reduce monetary growth to a pace
closer to the midpoint of the Committee's
range for the year.
Ms. Seger's dissent reflected a preference for some easing of reserve conditions at this point. In her view, even a
limited decline in interest rates would
provide timely assistance to relatively
weak, interest-sensitive sectors of the
economy such as housing and motor
vehicles and would tend to sustain the
expansion itself without adding to inflation risks in the economy.
rency directive, and the procedural instructions with respect to foreign currency operations in the forms in which
they were currently outstanding.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boykin,
Hoskins, Johnson, Kelley, LaWare, Ms.
Seger and Mr. Stern. Votes against this
action: None.
3. Authorization for Domestic
Open Market Operations
On the recommendation of the Manager
for Domestic Operations, the Committee
amended paragraph 1 (a) of the authorization for domestic open market operations
to raise from $6 billion to $8 billion the
limit on intermeeting changes in System
account holdings of U.S. government
and federal agency securities. The increase was thefirstpermanent change in
the limit since March 1985 when it was
raised from $4 billion to $6 billion. The
Manager indicated that temporary increases had been authorized more frequently in recent years and that the
existing limit also was approached more
often during intermeeting intervals when
no temporary increase was requested. A
permanent increase to $8 billion would
reduce the number of occasions requiring
special Committee action, while still
calling needs for particularly large
changes to the Committee's attention.
2. Review of Continuing
The Committee concurred in the ManagAuthorizations
er's view that a $2 billion increase would
The Committee followed its customary be appropriate.
practice of reviewing all of its continuing
Accordingly, effective February 6,
authorizations and directives at this first 1990, paragraph l(a) of the authorization
regular meeting of the Federal Open for domestic open market operations was
Market Committee following the election amended to read as follows:
of new members from the Federal Reserve Banks to serve for the year begin1. The Federal Open Market Committee
ning January 1, 1990. The Committee authorizes and directs the Federal Reserve
reaffirmed the authorization for foreign Bank of New York, to the extent necessary
currency operations, the foreign cur- to carry out the most recent domestic policy
FOMC Policy Actions
directive adopted at a meeting of the
Committee:
101
indicated previously, and robust employment growth in January and February
(a) To buy or sell U.S. Government suggested that output, especially in the
securities, including securities of the Federal service-producing sector, was being well
Financing Bank, and securities that are direct maintained. Despite a rebound in the
obligations of, or fully guaranteed as to motor vehicles industry, manufacturing
principal and interest by, any agency of the
United States in the open market, from or to activity remained sluggish. Consumer
securities dealers and foreign and interna- prices rose more rapidly over January
tional accounts maintained at the Federal and February, only partly as a result of
Reserve Bank of New York, on a cash, increases in the prices of food and energy
regular, or deferred delivery basis, for the items; wage data pointed to no significant
System Open Market Account at market
prices, and, for such Account, to exchange change in prevailing trends.
Total nonfarm payroll employment
maturing U.S. Government and Federal
agency securities with the Treasury or the increased sharply in the first two months
individual agencies or to allow them to mature of the year after growing at a reduced
without replacement; provided that the aggre- pace on average in previous months.
gate amount of U.S. Government and Federal
agency securities held in such Account (in- Employment in construction jumped,
cluding forward commitments) at the close of apparently as a result of unusually good
business on the day of a meeting of the weather, and job gains in the services
Committee at which action is taken with industries continued strong, notably in
respect to a domestic policy directive shall not health services. In the manufacturing
be increased or decreased by more than $8.0
billion during the period commencing with sector, employment was down on balance
the opening of business on the day following over the January-February period despite
such meeting and ending with the close of the return to work in February of auto
business on the day of the next such meeting; workers laid off at the start of the year;
job losses were evident in a number of
Votes for this action: Messrs. Greenspan, industries, including electrical equipCorrigan, Angell, Boehne, Boykin, ment, machinery, and lumber. The civilHoskins, Johnson, Kelley, and LaWare,
Ms. Seger, and Mr. Stern. Votes against ian unemployment rate remained at
5.3 percent in both January and February.
this action: None.
In February, industrial production
retraced more than half of a sharp January
Meeting Held on
decline, reflecting a swing in the producMarch 27,1990
tion of motor vehicles. Abstracting from
a variety of transitory influences associ1. Domestic Policy Directive
ated with unusual winter weather, a strike
The information reviewed at this meeting in the aircraft industry late last year, and
suggested some pickup in the expansion an inventory correction in the motor
of economic activity from the upward- vehicles sector, industrial production had
revised but still sluggish pace now indi- been flat on balance since last autumn. In
cated for the fourth quarter. Although the February, total industrial capacity utilistrengthening reflected, at least in part, zation partially recovered from a substanfavorable weather and a rebound from tial January decline but remained below
strike-related disturbances late in 1989, the high level of a year earlier.
underlying demands appeared to be conReal personal consumption expenditinuing to expand at a moderate pace. tures, abstracting from swings in spendRevised data signaled more momentum ing for motor vehicles and energy-related
in final sales near year-end than had been items, were about flat in January after
102 77th Annual Report, 1990
expanding at a relatively slow pace in the
two previous months. Outlays for goods
other than fuel oil and motor vehicles had
been weak while expenditures for services had remained strong. Total retail
sales rose on balance in January and
February, but adjusted for recent increases in prices, sales in February
probably were little changed from the
fourth-quarter average. Unusually mild
weather contributed to a higher level of
housing starts in January and February.
Single-family construction was strong in
both months; in the multifamily sector,
starts fell sharply in February but averaged somewhat above the fourth-quarter
pace over the two months.
Business capital spending, adjusted for
inflation, appeared to have turned up
after a decline in the fourth quarter.
Shipments of nondefense capital goods
rose sharply in February following a
sizable advance in January associated
with a rebound in shipments of aircraft to
domestic firms after the strike late in the
fourth quarter. The February increase
reflected greater purchases of communications equipment and many types of
industrial machinery, as well as a further
rise in shipments of aircraft. New orders
for nondefense capital goods, excluding
aircraft, rose in February and were
considerably above their fourth-quarter
level. Nonresidential construction activity rebounded in January from a substantial December decline, as the weather
turned unseasonably warm; however,
data on construction contracts and building permits continued to suggest a soft
outlook for coming months. Manufacturers' inventories rose in January, largely
because of increases in stocks of work-inprocess in the transportation equipment
sector. Outside of transportation equipment, the inventory-to-shipments ratio
had changed little on balance since mid1988. At the retail level, reductions in
auto dealers' stocks more than accounted
for declines in inventories in December
and January.
The nominal U.S. merchandise trade
deficit widened in January from a sharply
lower December rate, as the value of
imports rose more than that of exports.
Nevertheless, the deficit remained essentially unchanged from the fourth-quarter
average. Much of the sharp increase in
the value of imports in January reflected a
jump in imports of oil; however, imports
of consumer goods, foods, and industrial
supplies also rose strongly. Exports
increased substantially in January to a
level well above their fourth-quarter
average. Indicators of economic activity
in the major foreign industrial countries
generally suggested strength in the continental European economies, notably
France, Germany, and Italy. Among
other industrial countries, growth had
slowed in Japan and had remained sluggish in the United Kingdom and Canada.
Producer prices for finished goods
were unchanged in February, as energy
prices partially retraced their sharp rise
in January and food prices rose more
slowly. At the consumer level, prices
rose less rapidly in February than in
January, but the increases in both months
were substantial and the pickup from
1989 was only partly the result of increases in prices of food and energy
items. Among other goods and services,
several components posted sizable increases. Average hourly earnings fluctuated considerably in January and February, owing to shifts in employment status
among manufacturing and construction
workers, but the year-over-year increase
remained in the range evident since late
1988.
At its meeting on February 6-7,1990,
the Committee had adopted a directive
that called for maintaining the existing
degree of pressure on reserve positions
and that provided for giving equal weight
to developments that might require an
FOMC Policy Actions
adjustment in either direction during the
intermeeting period. The Committee had
agreed that some firming or some easing
in reserve conditions would be equally
acceptable during the intermeeting
period, depending on progress toward
price stability, the strength of the business
expansion, the behavior of the monetary
aggregates, and developments in foreign
exchange and domestic financial markets.
The contemplated reserve conditions
were expected to be consistent with
growth of M2 and M3 over the period
from December through March at annual rates of about 7 and 2>Vi percent
respectively.
Reserve conditions had remained essentially unchanged over the period since
the February meeting. Excluding some
special-situation borrowing early in the
intermeeting period that was related to
liquidity pressures at one sizable bank,
adjustment plus seasonal borrowing had
averaged about $160 million in the three
full reserve maintenance periods since
the meeting. The federal funds rate held
steady at about 814 percent over the
period, but other short- and intermediateterm interest rates edged higher, apparently reflecting the interpretation by
financial markets of incoming economic
data as pointing, on balance, to some
firming of economic activity and to
persisting price pressures. Treasury bond
yields fluctuated over a fairly wide range,
falling slightly on balance over the period, while major indexes of stock prices
rose somewhat. The collapse of a major
securities firm had little effect on
investment-grade financial markets, but
the failure, along with potential sales of
low-rated bonds by some large institutional holders, contributed to a further
widening of the yield spread between
noninvestment-grade instruments and
other long-term securities.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
103
the other G-10 currencies rose over the
intermeeting period. The dollar's appreciation occurred at a time when shortand long-term interest rates abroad were
increasing relative to interest rates in the
United States. Much of the rise of the
dollar was against the yen and the pound
sterling, but the dollar also gained relative
to the mark. The strength of the dollar
apparently owed in part to perceptions
that the U. S. economy might be strengthening and to market concerns regarding
various political and financial difficulties
in key foreign countries.
Growth of M2 rose in February from a
reduced January pace, reflecting strength
in transaction and other liquid accounts;
partial data suggested some moderation
in March. On balance, the expansion of
M2 had been damped somewhat in early
1990 by the rise in opportunity costs of
holding M2 instruments, as offering rates
on retail deposits, especially at shorter
maturities, had not been adjusted upward
in line with the rise in market rates.
Growth of M3 also picked up in February
but remained below that of M2. The
expansion of this aggregate continued to
be curbed by the apparent ongoing contraction in the assets and associated
funding needs of thrift institutions.
The staff projection prepared for this
meeting suggested that the economy was
likely to expand at a somewhat faster
pace over the next several quarters than
in the fourth quarter of 1989. Consumer
demand was expected to pick up substantially from the fourth-quarter pace but to
grow at a more moderate rate later.
Business capital spending was likely to
increase, though the rise could be limited
by further downward pressure on profit
margins associated with relatively sluggish growth of final demands. Greater
caution on the part of lenders might tend
to restrain spending, especially for commercial real estate, and some of the recent
weather-related boost to nonresidential
104 77th Annual Report, 1990
construction activity and homebuilding
was expected to be reversed in coming
months. Net exports were projected to
make little contribution to growth of
domestic production over the rest of the
year. The projection assumed moderate
restraint on expenditures at all levels of
government. On balance, the need to
contain inflation might involve some
additional pressures infinancialmarkets.
Price pressures were expected to ease
only gradually, and little improvement
was anticipated in the underlying trend of
inflation over the projection horizon.
In the Committee's discussion of the
economic situation and outlook, members observed that the latest information,
including recent revisions to data released
earlier, suggested a somewhat stronger
economic performance than had been
apparent at the time of the February
meeting. The employment statistics for
January and February exhibited particular strength, but members cautioned that
the latter had to be weighed against
indications of relatively restrained growth
in overall spending. Several commented
that it was more difficult than usual to
discern underlying economic trends because of the temporary effects of unusual
weather conditions and other special
factors in recent months. Developments
on thefinancialside, including the possibility of reduced credit availability,
constituted a risk to the continuing expansion. On balance, however, the members
viewed sustained growth in business
activity as a reasonable expectation for
the next several quarters. With regard to
the outlook for inflation, they recognized
that much of the recent surge in key
measures of inflation could be attributed
to transitory, weather-related factors that
had resulted in sharp increases in the
prices of food and energy, but they also
expressed a great deal of concern about
the apparent lack of improvement in
underlying inflation trends. While the
economy seemed to be on a course that
should prove consistent with reduced
inflationary pressures over time, given
appropriatefiscaland monetary policies,
recent developments suggested that little
or no progress toward lower inflation
was likely to be made during the quarters
immediately ahead.
Members reported that business conditions remained uneven in different sectors
of the economy and in different parts of
the country, depending on the mix of
local industries, but overall activity
appeared to be growing at least modestly
in most if not all regions. Further expansion for the nation as a whole was likely
to be sustained mainly by consumer
expenditures, though growth in the latter
might well moderate somewhat over the
quarters ahead in conjunction with reduced gains in disposable incomes. In
addition, the agricultural and energy
sectors of the economy, which appeared
to have strengthened in some regions,
could provide important support to the
overall expansion in business activity.
Foreign trade was characterized by some
members as the area of greatest uncertainty in the business outlook. Foreign
demand was helping to maintain production in a number of industries that were
experiencing reduced domestic demand,
and some improvement in the overall
trade balance was anticipated in response
to the earlier depreciation of the dollar
and to stronger economic growth in a
number of foreign countries. Business
fixed investment could continue to be
inhibited by weak profit margins and an
excess of commercial space in many parts
of the country, though members reported
that substantial commercial building
activity remained under way in several
regions. Residential construction had
been relatively vigorous in recent months,
reflecting exceptionally favorable
weather conditions in many parts of the
country; however, current mortgage rates
FOMC Policy Actions 105
together withfinancingdifficulties being
experienced by some builders and depressed housing markets in many areas
were seen as pointing to weaker housing
activity over the quarters ahead. With
regard to the government sector, growth
in federal spending for goods and services was projected to be relatively
restrained; in addition, many state and
local governments were experiencing
budgetary problems that were likely to
lead them to curb spending or to raise
taxes.
Financial developments introduced a
degree of uncertainty into the current
economic situation; on the whole, they
were likely to exert some restraining
influence on overall economic activity,
though it was difficult to judge their
quantitative significance. Interest rates
had increased noticeably since year-end;
this rise probably reflected growing
concerns about inflation in conjunction
with a stronger near-term outlook for the
economy, but higher interest rates likely
would damp demand, especially in construction and other interest-sensitive
sectors. In addition, members had heard
numerous reports of reduced availability
of credit to smaller businesses, notably
home builders. Credit terms also were
reported to have been tightened by some
lenders on new auto loans and home
equity loans. However, outside of lending
for corporate restructuring purposes and
certain real estate transactions, it was
difficult tofindfirmindications of greater
credit rationing in aggregate financial
statistics. Some tightening of credit standards probably was a desirable development in terms of correcting for past
excesses and adjusting to a more moderate pace of business activity, but a number
of members expressed concern that significant further restraint on credit availability, should it occur, could have adverse consequences for the overall
economy.
Turning to the outlook for prices and
wages, members commented that, while
increases in key measures of inflation
were likely to moderate after their recent
spurt, the prospects for inflation remained
the most disturbing aspect of the economic outlook. Apart from what appeared to be transitory hikes in food and
energy costs in late 1989 and early 1990,
a number of other prices had increased
somewhat more rapidly than earlier, and
that development tended to underscore
the deeply embedded nature of the current
inflation problem. Despite relatively tight
conditions in labor markets, the trend in
labor compensation costs did not appear
to be worsening, but some members
expressed concern that wage pressures
might increase if inflation did not recede
from its recent pace. On the other hand,
the intensity of competition in many
markets made it difficult or impossible
for affected businesses to pass on cost
increases in the form of higher prices,
and the addition of new plant capacity
would heighten competition in a number
of industries. On balance, little or no
progress in reducing inflation appeared
to be in prospect for the quarters immediately ahead, but if recent developments
did not lead to a worsening of inflationary
expectations, a decline in cost pressures
and the underlying rate of inflation still
appeared likely for the longer run in the
context of sustained, moderate growth in
economic activity.
In the Committee's discussion of policy
for the intermeeting period ahead, most
of the members indicated a preference
for maintaining an unchanged degree of
pressure on reserve positions. While
recent economic information could be
interpreted as pointing to a reduced risk
of a recession and to greater or at least
more deeply embedded inflationary pressures than were foreseen earlier, these
members concluded that it would be
premature to tighten reserve conditions
106 77th Annual Report, 1990
on the basis of a few months of data,
particularly in light of the special factors
at work that made it difficult to assess
underlying trends. Some of these members also noted that various developments, including the rise in most interest
rates since the beginning of the year, the
more recent strength of the dollar in
foreign exchange markets, indications of
some slowing in monetary growth, and
the apparent tightening of credit standards could be viewed as having the same
effects on the economy as a modest
firming of reserve conditions. Because a
firming of policy would be unexpected, it
could prove unsettling in the foreign
exchange markets and infinancialmarkets more generally. On balance, in light
of the uncertainties that were involved,
these members preferred to maintain a
steady policy course for now, subject to a
carefiil evaluation during the intermeeting period of developments that might
signal some intensification of inflationary
pressures. A few members, who were
particularly concerned about the outlook
for inflation, preferred an immediate
move to somewhat tighter reserve conditions, especially if the directive for this
meeting did not include a presumption
that any intermeeting adjustments were
more likely to be in the direction of some
tightening. In their view, the risks to the
expansion of some modestfirmingwere
minimal under current conditions, and
those risks needed to be accepted to place
monetary policy morefirmlyon an antiinflationary course consistent with the
Committee's objectives.
During the Committee's discussion,
members referred to a staff analysis that
pointed to some reduction in the expansion of M2 over the months ahead on the
assumption of an unchanged degree of
reserve pressures. It was recognized that
the rate of M2 growth could fluctuate
over a relatively wide range during the
second quarter, as balances were adjusted
in conjunction with large seasonal tax
payments. Additional uncertainty related
to the possibility of a major increase
in expenditures by the Resolution Trust
Corporation, associated with resolving
the affairs of intervened thrift institutions,
that would tend to depress monetary
growth, especially M3, by substituting in
effect Treasury financing for monetary
liabilities. Apart from such special factors, monetary growth could be expected
to moderate somewhat in lagged response
to the earlier updrift in interest rates and
less rapid expansion of nominal GNP. A
number of members commented that M2
growth at a rate somewhat below the pace
that had prevailed on average since mid1989 and more comfortably within the
Committee's range for the year would be
a welcome development; such growth
would enhance the prospects of reconciling the objectives of sustained economic
expansion with the need for progress in
bringing inflation under control.
In regard to possible intermeeting
adjustments in the degree of reserve
pressure, a majority of the members
indicated that they preferred a directive
that did not bias prospective operations
toward tightening or easing. Many of
these members agreed that the risks of a
recession appeared to have receded and
that intermeeting developments should
be watched with special attention to
potential developments that might signal
an intensification of inflationary pressures. Nonetheless, because of the considerable uncertainty surrounding the
near-term outlook, they did not want to
include a presumption in the directive
about the likely direction of any adjustment. In addition, adoption of a directive
tilted toward some firming could be
viewed as having greater policy implications than usual because it would represent a change from recent directives and
from the thrust of policy since the spring
of 1989. It also would be inconsistent
FOMC Policy Actions
with the preference of a number of
members for making any intermeeting
adjustment toward tightening at this stage
only on the basis of relatively conclusive
economic, financial, or money supply
developments. Other members indicated
that their concerns about the prospects
for inflation inclined them to favor a
directive that was tilted toward possible
firming during the intermeeting period.
It was noted in this connection that even
in the absence of any firming during the
period ahead, the subsequent release of
such a directive would underscore the
Committee's readiness to take prompt
and appropriate steps to bring inflation
under control.
At the conclusion of the Committee's
discussion, all but two of the members
indicated that they preferred or could
accept a directive that called for
maintaining the current degree of
pressure on reserve positions and that
did not include any presumption about
the likely direction of any intermeeting
adjustments in policy. Accordingly,
slightly greater or slightly lesser reserve
restraint would be appropriate during
the period ahead depending on progress
toward price stability, the strength of
the business expansion, the behavior
of the monetary aggregates, and
developments in foreign exchange and
domestic financial markets. The
unchanged reserve conditions contemplated at this meeting were expected
to be consistent with growth of M2 and
M3 at annual rates of about 6 percent
and 4 percent respectively over the
three-month period from March through
June. The intermeeting range for the
federal funds rate, which provides one
mechanism for initiating consultation
of the Committee when its boundaries
are persistently exceeded, was left
unchanged at 6 to 10 percent.
At the conclusion of the meeting, the
following domestic policy directive was
107
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
suggests some pickup in the expansion of
economic activity from the sluggish rate in the
fourth quarter. Total nonfarm payroll employment increased sharply in January and February after growing at a reduced pace on average
in previous months; a surge in the serviceproducing sector and a weather-related rebound in construction were only partly offset
by a net decline in manufacturing. The civilian
unemployment rate remained at 5.3 percent.
In February, production in the manufacturing
sector retraced its large January decline,
reflecting a swing in the production of motor
vehicles. Consumer spending has been affected in recent months by fluctuations in
expenditures for motor vehicles and energyrelated items but on balance has expanded at a
relatively slow pace; outlays for goods have
been weak while expenditures for services
haveremainedstrong. Unusually mild weather
contributed to a higher level of housing starts
in January and February. Business capital
spending, adjusted for inflation, appears to
have turned up after a decline in the fourth
quarter, reflecting a pickup in expenditures on
motor vehicles and aircraft. The nominal
U.S. merchandise trade deficit widened in
January from its low December rate but
remained at roughly its fourth-quarter average. Consumer prices rose more rapidly over
January and February, only partly as a result
of increases in prices of food and energy.
Most short- and intermediate-term interest
rates have risen a little since the Committee
meeting on February 6-7; rates in long-term
debt markets show mixed changes over the
period. In foreign exchange markets, the
trade-weighted value of the dollar in terms of
the other G-10 currencies rose over the
intermeeting period; much of the appreciation
of the dollar was against the yen.
Growth of M2 and M3 picked up considerably in February, reflecting strength in transaction and other liquid accounts; partial data
for March suggested some slowing from the
February pace.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives,
108 77th Annual Report, 1990
the Committee at its meeting in February
established ranges for growth of M2 and M3
of 3 to 7 percent and 2Vi to 6Vi percent
respectively, measured from the fourth quarter of 1989 to the fourth quarter of 1990. The
monitoring range for growth of total domestic
nonfinancial debt was set at 5 to 9 percent for
the year. The behavior of the monetary
aggregates will continue to be evaluated in the
light of progress toward price level stability,
movements in their velocities, and developments in the economy and financial markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint or
slightly lesser reserve restraint would be
acceptable in the intermeeting period. The
contemplated reserve conditions are expected
to be consistent with growth of M2 and M3
over the period from March through June at
annual rates of about 6 and 4 percent respectively. 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 ftinds
rate persistently outside a range of 6 to
10 percent.
eral Reserve in pursuing its goal of price
stability.
Mr. Hoskins dissented because he
preferred an immediate firming of reserve conditions. In his view, inflation
pressures remained relatively strong and
suggested that greater monetary restraint
was necessary to facilitate progress toward the Committee's long-term goal of
price stability. He was concerned that
any delay in tightening policy might lead
to the need for more aggressive actions
later.
2. Authorization for Domestic
Open Market Operations
The Committee approved a temporary
increase of $4 billion, to a level of
$12 billion, in the limit between
Committee meetings on changes in
System Account holdings of U.S.
government and federal agency securities. The increase amended paragraph l(a) of the Authorization for
Domestic Open Market Operations and
was effective for the intermeeting period
ending with the close of business on
May 15, 1990.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Johnson,
Kelley, and LaWare, Ms. Seger, and Mr.
Stern. Votes against this action: Messrs.
Boy kin and Hoskins.
Mr. Boykin dissented because he felt
that the risks were on the side of accelerating inflation, and he therefore preferred
a policy directive tilted toward increased
reserve pressures should there be indications of greater-than-anticipated strength
in economic activity during the intermeeting period. He stated that an asymmetric
directive leaning toward firmer reserve
pressures would convey important and
stabilizing information to the financial
markets about the seriousness of the Fed
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boykin,
Hoskins, Johnson, Kelley, and LaWare,
Ms. Seger, and Mr. Stern. Votes against
this action: None.
This action was taken on the recommendation of the Manager for Domestic
Operations. The Manager had advised
that the current leeway of $8 billion for
changes in System Account holdings
might not be sufficient over the intermeeting period because of a large projected
rise in Treasury balances at the Federal
Reserve Banks after the tax payment date
in mid-April.
FOMC Policy Actions
3. Authorization for Foreign
Currency Operations
At this meeting, the Committee reviewed
its operations in the foreign currency
markets. Transactions for the System
Open Market Account in those markets
are carried out within the general framework of policy on exchange rates established by the U.S. Treasury in consultation with the Federal Reserve and are
implemented at the Federal Reserve Bank
of New York, typically in conjunction
with similar transactions for the U.S.
Treasury's Exchange Stabilization Fund
(ESF). Members commented that such
operations at times can serve a useful
purpose, especially in helping to avert or
to correct disorderly conditions in the
foreign exchange markets. At the same
time, many expressed strong skepticism
that intervention operations can by themselves have a lasting effect on the value of
the dollar in foreign currency markets,
given that the effects of these operations
on bank reserves are routinely sterilized.
However, some argued that even sterilized intervention can, in some circumstances, have desired effects on exchange
rates, especially if carried out in conceit
with parallel operations by the monetary
authorities of other nations or if such
operations signal adjustments to fiscal or
monetary policies.
Over the past year, very large purchases of foreign currencies had raised
System Account holdings to historically
high levels, although relative to U.S.
imports such holdings were still moderate
compared with those of other countries.
Some members expressed concern that
the increased System Account holdings
carried the risk of sizable losses if the
dollar were to strengthen substantially.
While recognizing the potential difficulties that were involved, a majority of
the members agreed that continued System operations in the foreign exchange
109
markets in association with Treasury
transactions can serve a useful purpose.
Such operations can contribute to national
economic objectives under certain circumstances, and the System should continue to participate in the formulation of
exchange rate policy. However, they also
felt that the cumulative amount of foreign
currency operations for the System Account might have been more limited than
had been the case over the past year.
At the conclusion of this discussion,
the Committee approved an increase from
$21 billion to $25 billion in the limit on
holdings of foreign currencies that is
specified in paragraph l . D of the Committee's Authorization for Foreign Currency Operations. That limit applies to
the overall open position in all foreign
currencies held in the System Open
Market Account and is based on historical
acquisition costs. The limit had been
increased in steps from $12 billion in
May 1989 to $21 billion in December
1989. While purchases of foreign currencies had been relatively limited in
recent months, such purchases in combination with accruing interest on holdings
had raised the total to nearly $21 billion at
the time of the meeting.
Votes for this action: Messrs. Greenspan,
Corrigan, Boehne, Boykin, Johnson, and
Kelley, Ms. Seger, and Mr. Stern. Votes
against these actions: Messrs. Angell,
Hoskins, and LaWare.
Messrs. Angell, Hoskins, and LaWare
dissented because they did not want to
provide System funding for additional
intervention in the foreign exchange
markets. They were uncomfortable with
the large holdings of foreign currencies
now in the System Account and felt that
aggressive intervention policies could
lead to sizable additional increases in
such holdings. Messrs. Angell and
Hoskins expressed concern that the inter-
110
77th Annual Report, 1990
vention carried out over the past year had
undermined the credibility of the System's monetary policy by contributing to
uncertainty concerning the System's priority toward achieving price level stability. Mr. Hoskins also believed that
intervention was ineffective unless accompanied by changes in monetary policy that would be inconsistent with price
stability objectives. Mr. LaWare felt that
massive and frequent operations tended
to reduce the effectiveness of intervention
when the latter might otherwise prove
useful in countering disorderly conditions
in the exchange markets.
4. Agreement to "Warehouse"
Foreign Currencies
At this meeting, the Committee agreed
to accommodate any further Treasury
and ESF requests for financing under
the warehousing facility up to a limit of
$15 billion.
Votes for this action: Messrs. Greenspan,
Corrigan, Boehne, Boykin, Johnson, and
Kelley, Ms. Seger, and Mr. Stern. Votes
against these actions: Messrs. Angell,
Hoskins, and LaWare.
Messrs. Angell, Hoskins, and LaWare
indicated that in light of the significant
policy issues raised by the duration and
scale of the intervention activity, they
were unable to concur, as a matter of
policy, with the Committee's decisions to
increase further the authorization for
warehousing foreign currencies. Messrs.
Angell and Hoskins also were concerned
that substantial increases in the authorized limits on holdings of foreign currencies by the Federal Reserve System
for the U.S. Treasury and the ESF under
the warehousing authority were inappropriate in the absence of a definitive
indication of congressional intent in this
area. The transactions in question, which
are repurchase agreements that have the
characteristics of a loan to the Treasury,
could be viewed as avoiding the congressional appropriations process called for
under the Constitution.
On September 19, 1989, the Committee
had approved an increase from $5.0 billion to $10.0 billion in the amount of
eligible foreign currencies that the System was prepared to "warehouse" for the
Treasury and the ESF. Currently, a total
of $9.0 billion of such currencies was
being warehoused for the ESF. The
purpose of the facility is to supplement as
needed the resources of the Treasury and
the ESF for financing their purchases of
foreign currencies. Warehousing involves spot purchases of foreign currencies from the Treasury or the ESF and
simultaneous forward sales of the same
currencies at the same exchange rates to Meeting Held on
the Treasury or the ESF. Under a long- May 15,1990
standing interpretation by the Committee
and its General Counsel, warehousing Domestic Policy Directive
transactions are open market operations
in foreign currencies that are authorized The information reviewed at this meeting
under the Federal Reserve Act. Ware- suggested that economic activity was
housing is included under paragraphs continuing to expand at a moderate pace.
1 .A and 1 .B of the Committee's Authori- The service-producing sector remained
zation for Foreign Currency Operations the mainstay for growth in income and
and its use is referenced under paragraph employment; manufacturing was still
3.B of the Committee's Foreign Cur- sluggish, and construction activity was
rency Directive.
slipping after the weather-related bulge
FOMC Policy Actions 111
earlier in the year. Some broad measures
of prices reflected a partial unwinding of
the earlier surge in prices of food and
energy; however, underlying trends in
consumer prices and labor costs suggested no weakening in inflationary
pressures.
Total nonfarm payroll employment
increased more slowly in March and
April after sharp weather-related advances earlier in the year; job growth
thus far in 1990 had averaged a little
above that in the second half of last year,
in part because of the hiring of
temporary workers for the census. In the
private sector, nonfarm employment fell
in both March and April, partly owing to
an unwinding of an earlier surge in
construction jobs during unseasonably
mild winter weather. Job losses also
were widespread in manufacturing; and,
with the notable exception of health services, hiring in the services industries
weakened considerably from the strong
pace of 1989 and early 1990. In April,
the civilian unemployment rate edged up
to 5.4 percent.
Industrial production declined in April,
reflecting a cutback in the manufacture of
motor vehicles that was intended to bring
inventories of new cars into better balance
with sales. Industrial activity had been
buffeted by a variety of transitory influences in previous months, including
strike activity in the aircraft industry,
inventory adjustments in the motor vehicle industry, and unusual winter weather
patterns that had affected the energy
output of utilities; nevertheless, production in April was about unchanged from
the levels of last December and a year
earlier. Total industrial capacity utilization slipped in April after a small rise in
March; operating rates in manufacturing
had trended down over the twelve months
ending in April as capacity increased
while production remained about
unchanged.
Real personal consumption expenditures edged lower in March, reversing a
small net rise in the two previous months.
Spending for goods was weak on balance
over the three-month period, especially
for food and apparel items; outlays for
services continued to be robust, with
notably strong gains for spending on
medical care. Retail sales fell in April as
a result of reduced purchases of motor
vehicles, but upward revisions to data for
the two previous months suggested a
little more strength in consumption in the
first quarter than had been indicated
previously. Housing starts fell sharply in
March after surging earlier in the year.
The March decline likely reflected the
effect of higher mortgage interest rates
along with some payback for unusually
strong housing construction activity in
the two previous months of atypically
mild winter weather.
Business capital spending strengthened
in the first quarter of 1990 from a
temporarily depressed fourth-quarter
level. Outlays for nondefense capital
goods rose sharply, partly as a result of a
rebound in shipments of aircraft to domestic firms after a strike late in the fourth
quarter. Spending for informationprocessing equipment, notably computers, also increased while acquisitions of
industrial equipment continued to languish. New orders for business equipment other than aircraft advanced at a
slower pace in thefirstquarter. Favorable
weather aided nonresidential construction activity in January and February;
however, the pace of construction activity
fell off in March, and construction permits and contracts continued to trend
down. Manufacturing inventories were
reduced considerably in February and
March as factory shipments rebounded;
declines were widespread among producers of durable goods, primary metals,
fabricated metal products, nonelectrical
machinery, and motor vehicles. For most
112 77th Annual Report, 1990
industries, the inventory-to-shipments
ratio was lower in March than at yearend. At the retail level, many types of
establishments, including auto dealers,
retail apparel, and general merchandise
stores had trimmed their inventories
substantially.
The nominal U.S. merchandise trade
deficit narrowed in February as imports
declined sharply and exports were little
changed from January levels. For the
January-February period, exports were
moderately higher than in the fourth
quarter, led by a rebound in shipments of
aircraft. Over the same time period, the
value of imports fell; a sizable decline in
non-oil imports that was widespread
across commodity categories outweighed
higher imports of oil associated with the
rebuilding of stocks depleted during the
unusually cold weather in December.
Indicators of economic activity in the
major foreign industrial nations suggested a continuation of moderate growth
in real economic activity in most major
West European countries and Japan.
Declines in industrial production in the
United Kingdom and Canada appeared to
be signaling some slowing of economic
growth in these countries.
Producer prices for finished goods
dropped somewhat further in April,
reflecting additional unwinding of the
earlier surge in prices of food and energy.
Producer prices for items other than food
and energy had increased through April
at a slower rate than in 1989. By contrast,
consumer prices continued to rise in
March at a faster pace than in 1989.
Weather-related jumps in prices of food
and energy accounted for much of the
pickup in consumer price inflation in the
first quarter, but prices for a wide range
of other goods and services also increased
more rapidly. Labor compensation, as
measured by the employment cost index,
rose at a faster rate over the twelve
months ended in March than in the year
earlier period; wage increases remained
fairly stable, but the cost of benefits
jumped, only partly because of the January hike in social security taxes. Average
hourly earnings increased a little more
slowly in April, partly reflecting a sharp
drop in employment in the relatively
high-wage construction industry.
At its meeting on March 27, 1990, the
Committee adopted a directive that called
for maintaining the existing degree of
pressure on reserve positions and that did
not include any presumption regarding
the likely direction of any intermeeting
adjustments in policy. The Committee
agreed that some firming or easing in
reserve conditions would be appropriate
during the intermeeting period depending
on progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. With
unchanged reserve conditions, M2 and
M3 were expected to grow at annual rates
of about 6 and 4 percent respectively over
the period from March through June.
Open market operations in the interval
since the March 27 meeting had been
directed at keeping reserve conditions
essentially unchanged. Adjustment plus
seasonal borrowing levels moved up to
about $300 million by the end of the
intermeeting period from the $150 million range prevailing initially, reflecting
a normal rise in seasonal borrowing. The
federal funds rate remained in the vicinity
of 8 lA percent over the period, although
funds generally had traded a little below
this level since late April as shortfalls in
federal tax receipts tended to keep nonborrowed reserves at higher-thanexpected levels. Responding to shifting
sentiment regarding the strength of the
economy, inflation prospects, and the
likelihood of a near-term tightening of
monetary policy, other market interest
rates initially rose in the intermeeting
FOMC Policy Actions 113
period and then fell sharply. Short-term
rates declined a little on balance over the
period while rates in long-term debt
markets were somewhat higher.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies declined considerably over the intermeeting period.
Much of the decline occurred following
the release in early May of weaker-thanexpected U.S. employment data for April
and the related drop in U.S. interest
rates. Foreign interest rates showed
mixed movements over the intermeeting
period; the Japanese stock market rebounded substantially from its low in
early April. The dollar was weak against
the German mark, which strengthened
against most currencies as developments
appeared to relieve some concerns about
the outlook for inflation in Germany.
Very late in the intermeeting period the
dollar weakened against the yen as well.
Growth of M2 slowed further in April;
the expansion of this aggregate was
damped by the sizable opportunity costs
of holding retail deposits as interest rates
offered on these accounts continued to
lag behind earlier increases in market
rates. At thrift institutions, conservative
rate-setting reflected the ongoing contraction of their funding needs during a period
of asset reduction. Banks also held down
their deposit rates, as inflows of retail
deposits were proving sufficient to fund
credit expansion. The apparently steeper
contraction of thrift assets, along with
slow credit expansion at banks, held
down overall needs for funds at depository institutions and resulted in relatively
weak M3 growth in April. Expansion of
M2 and M3 through April was a little
above the midpoint and around the lower
end respectively of the ranges established
by the Committee for 1990.
The staff projection prepared for this
meeting suggested that the economy was
likely to expand at a moderate pace over
the balance of the year. Consumer demand, especially for services, was expected to be a major source of support for
continued growth of the economy. Business capital spending was projected to
increase further in 1990, but the extent of
the rise could be limited somewhat by
low profit margins associated with relatively slow growth in final demands and
lower levels of capacity utilization. Nonresidential construction activity was expected to be held down by the overbuilt
condition of many commercial real estate
markets around the country along with
greater caution on the part of lenders.
Homebuilding was projected to be
damped by the somewhat higher mortgage rates now in place. Net exports of
goods and services were expected to
increase only modestly in real terms over
the rest of the year. The projection
assumed moderate restraint on expenditures at all levels of government. Price
inflation was expected to ease substantially in the months ahead, following the
bulge earlier in the year; but little improvement was anticipated in the underlying trend of inflation over the next
several quarters, and reductions in price
pressures might ultimately involve some
additional pressures infinancialmarkets.
In the Committee's discussion of the
economic situation and outlook, members generally agreed that the current
information on business conditions
pointed on balance to relatively moderate
but sustained economic expansion. Final
demands appeared to be expanding further, though not rapidly, and available
information suggested that business inventories were quite lean. Fiscal policy
was an important source of uncertainty in
the outlook, though there was some basis
for optimism in light of the discussions
on deficit reductions that were just getting
under way between the Administration
and the Congress. Credit conditions
constituted another major area of uncer-
116
77th Annual Report, 1990
members believed it was premature to
reach a firm conclusion on this issue.
Moreover, despite its slowing in recent
months, growth of M2 for the year to date
was close to the midpoint of the Committee's range, reflecting relatively robust
expansion in late 1989 and early 1990.
With respect to possible adjustments
in the degree of reserve pressure during
the period before the next Committee
meeting in early July, a majority of the
members expressed a preference for a
directive that did not bias prospective
operations toward tightening or easing
but made an intermeeting adjustment, if
any, equally likely in either direction,
depending on economic and financial
developments and the behavior of the
monetary aggregates. Other members
preferred a directive that was tilted
toward possible tightening, given their
desire to respond promptly to any indications of greater inflationary pressures
and their judgment that in the current
inflationary environment the next policy
move was likely to be in the tightening
direction. Some of these members commented that such a bias in the directive
would tend, as it became known, to
enhance the credibility of the System's
anti-inflationary policy and help to make
that policy more effective over time.
However, given the risks to the economy
and the uncertainties in the outlook, these
members also could accept a symmetric
directive with regard to intermeeting
adjustments.
At the conclusion of the Committee's
discussion, all except one member indicated that they preferred or could accept
a directive that called for maintaining the
existing degree of pressure on reserve
positions and that did not include any
presumption about the likely direction of
adjustments in policy, if any, during the
intermeeting period. With regard to the
factors that were important in considering
the need for any intermeeting changes in
reserve conditions, the Committee continued to give primary weight to those
bearing on the inflation outlook. Accordingly, slightly more or slightly less
pressure on reserve positions would be
appropriate during the period ahead
depending on progress toward price
stability, the strength of the business
expansion, the behavior of the monetary
aggregates, and developments in foreign
exchange and domestic financial markets.
The maintenance of steady reserve conditions was expected to be consistent
with somewhat slower monetary expansion in the current quarter than the
members had anticipated at the time of
the March meeting, including growth of
M2 and M3 at annual rates of about 4 and
3 percent respectively over the threemonth period ending in June. The intermeeting range for the federal funds rate,
which provides one mechanism for initiating consultation of the Committee when
its boundaries are persistently exceeded,
was left unchanged at 6 to 10 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
suggests that economic activity is continuing
to expand moderately. Total nonfarm payroll
employment increased more slowly in March
and April after sharp advances earlier in the
year; its average growth thus far this year has
been above that in the second half of 1989, in
part because of the hiring of temporary
workers for the census. In April, the civilian
unemployment rate moved up to 5.4 percent.
Industrial production declined in April, reflecting what appears to be a temporary
cutback in the manufacture of motor vehicles.
Consumer spending has been sluggish on
balance in recent months; outlays for goods
have been weak while expenditures for services have remained strong. Business spending for equipment has been rising, but
construction activity, both residential and
nonresidential, appears to have weakened
after a temporary boost early in the year. The
FOMC Policy Actions 117
nominal U.S. merchandise trade deficit narrowed somewhat in January and February
from its average rate in the fourth quarter.
Consumer prices continued to rise at a faster
pace in March than in 1989; producer prices
were down somewhat further in April, reflecting additional unwinding of the earlier surge
in prices of food and energy. The latest data
on employment costs suggest some deterioration in underlying trends.
Short-term interest rates have declined a
little on balance since the Committee meeting
on March 27, while rates in long-term debt
markets have risen slightly over the period. In
foreign exchange markets, the trade-weighted
value of the dollar in terms of the other G-10
currencies declined considerably over the
intermeeting period.
Growth of M2 slowed in April and that of
M3 remained relatively weak. Through April,
expansion of M2 and M3 was a little above the
midpoint and around the lower end, respectively, of the ranges established by the
Committee for 1990.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, 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 its meeting in February
established ranges for growth of M2 and
M3 of 3 to 7 percent and 2Vi to &/i percent
respectively, measured from the fourth quarter of 1989 to the fourth quarter of 1990. The
monitoring range for growth of total domestic
nonfinancial debt was set at 5 to 9 percent
for the year. The behavior of the monetary
aggregates will continue to be evaluated in the
light of progress toward price level stability,
movements in their velocities, and developments in the economy andfinancialmarkets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint or
slightly lesser reserve restraint would be
acceptable in the intermeeting period. The
contemplated reserve conditions are expected
to be consistent with growth of M2 and M3
over the period from March through June at
annual rates of about 4 and 3 percent respec
tively. 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. Greenspan,
Corrigan, Angell, Boehne, Boykin,
Johnson, Kelley, and LaWare, Ms. Seger,
and Mr. Stern. Vote against this action: Mr.
Hoskins.
Mr. Hoskins dissented because he
preferred a tightening of reserve conditions to help assure that progress would
be made toward a reduced rate of inflation
and the Committee's ultimate objective
of price stability. Although price pressures appeared to be receding from the
pace of early in the year, inflation remained too high. He recognized that M2
growth had slowed and there were potential financial developments that might
have adverse consequences for the expansion, but he believed that growth of M2 in
the bottom half of the 1990 target range
would be desirable in order to achieve a
gradual reduction in inflation in 1991 and
thereafter. Moreover, a timely move
toward greater monetary restraint would
enhance the credibility and effectiveness
of monetary policy in countering the
persisting strength of inflationary
pressures.
Meeting Held on
July 2-3,1990
Domestic Policy Directive
The information reviewed at this meeting
suggested that economic activity was
continuing to expand but at a relatively
slow pace. Final demands seemed sluggish; while exports had increased further,
consumer expenditures had beenflatand
notable weakness was evident in new
housing and nonresidential structures.
118 77th Annual Report, 1990
Overall increases in business inventories
appeared to have been moderate, even
though the production of goods had
picked up. The unemployment rate had
remained in a relatively low range despite
limited growth in employment. An unwinding in recent months of the earlier
jump in the prices of food and energy had
damped the rise in producer and consumer prices, but the latest data on wages
suggested continued pressure on costs.
Total nonfarm payroll employment
rose moderately in May after a small
decline in April. Job gains in services
were muted over the two months, following strong increases earlier; factory
employment continued to ebb; and construction payrolls, after surging during
unseasonably mild winter weather,
slipped below their level of last fall.
Nonfarm payroll employment had grown
relatively slowly on average since February, and hiring by the Census Bureau had
accounted for all of the increase. Despite
the sluggish expansion of employment in
recent months, the civilian unemployment rate was 5.3 percent in May and had
remained near that level for more than a
year.
Industrial production increased substantially in May, largely reflecting a
rebound in the manufacture of motor
vehicles, and the April level of activity
was revised upward. Production of consumer goods had been relatively sluggish
thus far in 1990; however, output of
business equipment hadfirmedas notable
gains were recorded in the production
of aircraft and information-processing
equipment, and the output of other business equipment retraced a decline that
had occurred in the second half of last
year. Recent data on orders for durable
goods appeared to be consistent with a
further modest rise in manufacturing
activity in coming months. Total industrial capacity utilization edged higher in
May to nearly its level at the end of 1989;
in manufacturing, operating rates had
changed little on balance this year as
gains in factory output had about matched
the expansion of capacity.
Real personal consumption expenditures in April and May were little changed
on balance from their level in the first
quarter. Expenditures for non-energy services rose more slowly in May, extending
the pattern of smaller increases that had
been registered on balance this year.
Outlays for motor vehicles declined, and
spending for goods other than motor
vehicles fell for the third straight month.
Housing starts were about unchanged in
May after a substantial decline in April.
The average level of starts in the AprilMay period was substantially below the
first-quarter pace. This recent drop in
starts evidently reflected in part a retracing of the earlier surge in residential
construction associated with mild winter
weather, but higher mortgage rates and
some tightening of credit availability to
builders also appeared to exert a constraining effect.
Business capital spending appeared to
have slackened in recent months. After a
pickup in thefirstquarter that was paced
by strong purchases of office and computing equipment, outlays for nondefense
capital goods slowed in April and May,
with notable weakness evident in purchases of nonelectrical equipment. Other
than for aircraft and computers, new
orders for nondefense capital goods had
advanced little on balance this year.
Following the sizable gain earlier in the
year associated with unseasonably mild
weather, nonresidential construction activity slowed on average in March and
April. Construction of office and other
commercial buildings was especially
weak in the March-April period, and
permits and other indicators of future
activity suggested continued softness. At
manufacturing and trade establishments,
inventories increased somewhat in April
FOMC Policy Actions
after a decline in the first quarter associated with a sharp paring of stocks
of automobiles. In the manufacturing
and wholesale sectors, inventory-toshipments ratios were down in April
from year-end levels and were around the
middle of the ranges prevailing in 1989.
Among retailers of goods other than
automobiles, recent increases in inventories in conjunction with sluggish consumer spending had led to a reversal of an
earlier decline in inventory-sales ratios.
The nominal U.S. merchandise trade
deficit narrowed further in April from its
reduced average rate for the first quarter.
Both imports and exports fell, partly as a
result of less trade in automotive products
with Canada. The value of oil imports
also declined in April as oil prices moved
lower and the volume of imports slackened after surging earlier in the year. In
April, the value of exports retraced part
of its sharp March rise but nonetheless
remained at a higher rate than in the first
quarter. Measures of economic activity
in the major foreign industrial nations
indicated some pickup in growth in the
first quarter. Expansion was especially
strong in Germany and Japan, but preliminary data for these two countries for the
early part of the second quarter suggested
a return to more moderate growth. Inflation in the foreign industrial countries
remained little changed on average
recently.
Producer prices offinishedgoods were
unchanged on balance over April and
May as energy prices declined and food
prices registered no net change. The rate
of increase for goods other than food and
energy items was held down by manufacturers' discounts for motor vehicles.
Partly because of declines in food and
energy prices, consumer prices rose more
slowly in April and May; however, the
average rate of increase thus far this year
remained above the 1989 pace. Over the
April-May period, prices of nonfood,
119
non-energy goods were little changed
while prices of non-energy services rose
less rapidly than earlier in the year.
Average hourly earnings rose further in
May, with large increases recorded in
construction and in overtime in manufacturing. The latest data on total employer
costs for compensation indicated that
labor costs had increased more rapidly in
the twelve months ended in March than in
the year-earlier period.
At its meeting on May 15, 1990, the
Committee adopted a directive that called
for maintaining the existing degree of
pressure on reserve positions and that did
not include any presumption regarding
the likely direction of any intermeeting
policy adjustments. In considering the
possible need for such adjustments, the
Committee agreed that primary weight
would continue to be given to developments bearing on the inflation outlook;
accordingly, the directive indicated that
slightly more or less pressure on reserve
positions would be appropriate during
the period ahead depending on progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. Unchanged reserve conditions were expected to be consistent with
somewhat slower monetary expansion in
the second quarter than had been anticipated at the time of the March meeting,
including growth of M2 and M3 at annual
rates of about 4 and 3 percent respectively
over the period from March through
June.
Open market operations in the interval
since the May 15 meeting were directed
at maintaining unchanged reserve conditions. Adjustment plus seasonal borrowing averaged nearly $600 million over
the three complete reserve maintenance
periods in the intermeeting interval, well
above the level registered in the maintenance period that ended just after the
120 77th Annual Report, 1990
May meeting. Much of the sharp rise in
borrowing reflected the continued upswing in seasonal borrowing, for which
several technical adjustments were made
to assumed levels of borrowing, and a
funding need at a large bank experiencing
a temporary operational problem over a
long holiday weekend. The federal funds
rate stayed close to %lA percent over the
intermeeting period, and other shortterm market rates changed little from
their mid-May levels. In long-term debt
markets, interest rates declined somewhat on balance as markets responded to
evidence of some slowing in the economy and to indications that the chances
for substantial reductions in federal
budget deficits had improved. These
factors also contributed to a decline on
balance over the intermeeting interval in
the trade-weighted value of the dollar in
terms of the other G-10 currencies.
Both M2 and M3 declined in May;
available data suggested a partial rebound
in June for M2 and little change in M3.
The continuing contraction of deposits at
thrift institutions that was resulting from
the restructuring of the thrift industry
was one of the factors damping the
growth of M2 and especially of M3.
Through June, expansion of M2 was
estimated to be in the lower portion of its
range for 1990, and growth of M3
somewhat below its range for the year.
Growth of total domestic nonfinancial
debt appeared to have been at the midpoint of its monitoring range.
The staff projection prepared for this
meeting suggested that the economy
would expand over the remainder of 1990
at around the rate estimated for the first
half of the year and at a slightly faster
pace in 1991. Consumer demand was
projected to pick up a bit after a weak
second quarter, with spending on services expected to continue increasing
moderately and outlays for goods to
rebound somewhat. Business capital
spending was projected to strengthen a
little; however, the extent of the bounceback would be constrained by low profit
margins associated with relatively slow
growth in final demands and reduced
levels of capacity utilization along with
weakness in nonresidential construction
activity arising from the overbuilt condition of many commercial real estate
markets around the country and greater
caution on the part of lenders. The pace
of homebuilding was expected to remain
low, damped by slow growth in household incomes and relatively high borrowing costs. Exports of goods and services
were projected to increase substantially
but to be accompanied by an acceleration
of imports. Moderate restraint on expenditures at all levels of government was
assumed. Price inflation was expected to
ease somewhat further, following the
bulge earlier in the year, but little improvement was anticipated in the underlying trend of inflation.
In the Committee's discussion of the
economic situation and outlook, the
members generally saw sustained but
subdued growth in economic activity as a
reasonable expectation for the next several quarters. While business conditions
were relatively depressed in some sectors
of the economy and parts of the country,
business activity was better maintained
in other areas, and the economy as a
whole gave no current indications of
slipping into a recession. Many members
commented, however, that the risks
appeared to be weighted in the direction
of a weaker-than-projected economic
performance, especially in the context of
changing conditions in credit markets
stemming from the financial difficulties
of many borrowers and lending institutions. With regard to the outlook for
inflation, increases in key price measures
had moderated since earlier in the year,
but there was little evidence of significant
change in the trend rate of inflation.
FOMC Policy Actions 121
Nonetheless, the members generally
remained confident that some progress
would begin to be made in reducing the
underlying rate of inflation during the
period ahead, given their expectations of
diminished pressures on labor and capital
resources. Some also emphasized that
the moderate rate of money growth
experienced this year, and indeed for an
extended period, was indicative of a
sustained period of monetary restraint
that eventually should produce a lower
rate of inflation.
In conformance with the usual practice
at meetings when the Committee considers its long-run objectives for growth of
the monetary and debt aggregates, the
members of the Committee and the Federal Reserve Bank presidents not currently serving as members provided
individual projections of growth in real
and nominal GNP, the rate of unemployment, and the rate of inflation for 1990
and 1991. These forecasts took account
of the Committee's policy of continuing
moderate restraint on aggregate demand
to constrain inflationary pressures over
time. With regard to growth of real GNP,
the projections had central tendencies of
IV2 to 2 percent for 1990 as a whole and
VA to 2Vi percent for 1991. Forecasts of
nominal GNP converged on growth rates
of 5Vi to 62/2 percent for 1990 and 5lA to
6 Vi percent for 1991. With output expanding below potential, the members anticipated that unemployment would edge up
to rates centering around 5Vi to 5% percent in the fourth quarter of 1990 and 5 Vi
to 6 percent in the fourth quarter of 1991.
Some easing of pressures on resources
would help to damp inflation slightly by
1991. For the consumer price index, the
projections had central tendencies of AVi
to 5 percent for 1990 and 33A to 4Vi percent for 1991.
Turning to the prospects for individual
sectors of the economy, members commented that, with the possible exception
of exports, none appeared likely to
provide appreciable impetus to the expansion over the forecast period. Retail sales
were weak in many parts of the country;
and there were indications of some
decline in consumer confidence that
seemed to be associated with concerns
about weakening real estate values in
many parts of the country, reduced
employment opportunities, and persistent
reports offinancialproblems in the economy. In the circumstances, growth in
consumer spending was expected to
remain relatively sluggish, and while
retail sales might well pick up from their
recently depressed levels, there was
considerable uncertainty regarding the
outlook for expenditures for motor vehicles and other consumer durables. Construction activity was being inhibited in
many areas by an overhang of excess
capacity, notably in commercial real
estate but also in housing, and to some
extent by the difficulties being experienced by builders in securing financing.
Some members expressed concern that
building activity might weaken further,
and in any event this sector of the economy was believed likely to remain depressed over the forecast horizon. At the
same time, the outlook for spending on
capital equipment appeared to be somewhat more promising, at least for the
near term, judging from the recent pattern
of new orders, order backlogs, and
reports from industry contacts. In addition, business inventories appeared to be
at acceptable levels in most industries
and, unlike the experience in earlier
business cycles, seemed to be providing
an element of stability in a period of
adjustments in major industries such as
motor vehicles and construction. In the
view of many members, the outlook was
favorable for further sizable increases in
exports that would help to support U.S.
production and employment. On balance,
however, final demands, including de-
122 77th Annual Report, 1990
mands from abroad, appeared likely to
support only sluggish gains in the goodsproducing sectors of the economy, and
the service industries were likely to
continue to account for much of the
anticipated increases in output and
employment.
There also was discussion of two
special factors that added to the uncertainties bearing on the economic outlook.
One related to the unknown timing and
extent of a possible reduction in the federal budget deficit that the members
hoped would emerge from current discussions between congressional and Administration officials. Another was the uncertain degree to which lenders had cut back
on the availability of credit to creditworthy borrowers. The members continued
to hear numerous reports that some
businesses were finding it more difficult
to obtain credit from banks, notably
builders in many areas but also other
businesses, including auto dealers, in
some parts of the country. On the basis of
still fragmentary information, reduced
credit availability appeared to have had
some, but quite limited, effects on the
economy. However, a tightening of credit
standards could affect credit flows and
spending with a lag; and, in addition,
there was some concern that the trend to
greater restraint in the provision of credit
might continue.
With regard to the outlook for prices
and wages, the apparent lack of progress
in reducing the underlying rate of inflation was a major source of disappointment, but the members continued to
anticipate some deceleration in the core
rate of inflation during the year ahead.
Among the favorable portents were the
impact of the softness in house prices on
inflation attitudes, the still highly competitive conditions in many markets for
goods, the related emphasis on costcutting efforts by businesses to compensate for their difficulty or inability to raise
prices, and some evidence that wage
inflation was no longer worsening. Of
particular significance in the view of
some members was the relatively restrained monetary growth over the last
few years associated with a policy that
had been resisting inflation. This policy
was likely to damp inflation over time;
moreover, as the public's perceptions of
the System's anti-inflationary stance became more firmly held, progress in
reducing inflation would tend to accelerate. On the unfavorable side, persisting
inflation pressures in many service industries and relatively tight labor markets in
some areas remained a source of concern.
Moreover, as evidenced by recent increases in the prices of motor vehicles
despite weak sales, inflation psychology still was a serious problem in at
least some segments of the business
community.
In keeping with the requirements of
the Full Employment and Balanced
Growth Act of 1978 (the HumphreyHawkins Act), the Committee at this
meeting reviewed the ranges for growth
in the monetary and debt aggregates that
it had established in February for 1990
and decided on tentative ranges for
growth of those aggregates in 1991. The
current ranges for the period from the
fourth quarter of 1989 to the fourth
quarter of 1990 included expansion of 3
to 7 percent for M2 and 2 Vi to 6 Vi percent
for M3. The monitoring range for growth
of total domestic nonfinancial debt had
been set at 5 to 9 percent.
In its consideration of the ranges for
1990 and 1991, the Committee took
account of the much slower-thananticipated expansion of M2 and M3 in
the first half of the year and the possible
implications for spending and prices. To
a large extent, the weakness in monetary
growth was associated with a redirection
of credit flows away from depository
institutions to market channels, and total
FOMC Policy Actions
borrowing by domestic nonfinancial sectors did not moderate appreciably in the
first half of 1990 from the pace of 1989.
Much of the slower growth in lending by
depository institutions in turn reflected
continued shrinkage of the savings and
loan industry—to an important extent
because of a step-up in government
assumption of thrift assets by the Resolution Trust Corporation (RTC) and related
transfers of deposits and assets to commercial banks. Expansion of commercial
bank credit had remained moderate,
reflecting pressures on bank capital positions and bank concerns about the credit
quality of borrowers. The members
generally anticipated that these special
factors would continue to depress the
growth of M2 and M3 in the second half
of this year and in 1991, though perhaps
to a lesser extent next year. These factors
were exerting their largest and most
direct influence on M3, which includes
the bulk of bank and thrift funding
sources, but also were affecting M2.
Such developments had few if any precedents, and there was substantial uncertainty about their duration and effects on
the economy.
Against this background, most of the
members were in favor of reaffirming the
ranges for M2 and nonfinancial debt for
1990 that the Committee had established
at its February meeting, while others
indicated a preference for reducing the
range for M2. Members who preferred to
maintain the current ranges pointed out
that the expansion of these aggregates
was within their respective ranges in the
first half of the year, though toward the
lower end of the range in the case of M2.
With regard to the latter, it was suggested
that the 4-percentage-point width of the
current range should be enough to encompass likely and desirable outcomes for
the year. Several members also commented that, as a general rule, they
preferred not to adjust current ranges at
123
midyear, in part to avoid conveying an
impression of unwarranted precision—
particularly if the adjustments were
relatively small—or of changes being
made simply to reflect the actual data. A
shortfall from the current ranges should
be kept under careful scrutiny to judge
whether policy was indeed tighter than
intended or desired. If ultimately the
Committee elected to tolerate a shortfall
from the current ranges, it would accept
the useful discipline of explaining the
reasons for the deviations in its reports to
the Congress. Members also noted that
the reasons for the shortfall in M2 were
not entirely understood, and in the circumstances a downward adjustment to
the range might not be appropriate in
terms of furthering the Committee's basic
objectives for the economy. Those who
favored a lower range for M2 observed
that, despite the uncertainties that were
involved, enough was known to suggest
that velocity had increased for technical
reasons and that M2 growth lower than
previously contemplated would be consistent with the Committee's objectives.
One member also indicated that a lower
range would coincide with a continuing
preference, first expressed in February,
for a range that in this view appeared to
be more consistent with the Committee's
long-run, anti-inflation strategy.
With regard to the 1990 range for M3,
a majority of the members favored some
reduction, though there were differences
with regard to the precise amount. A
lower range was deemed to be warranted
by the strong indications that M3 growth
would fall below its current range for the
year to an important extent because of
continuing RTC activity in resolving
insolvent thrift institutions. While the
Committee had anticipated some slowing
in M3 growth and had reduced the M3
range in February, the shortfall in the
first half of the year was considerably
greater than expected. It represented
124
77th Annual Report, 1990
mostly a restructuring of credit flows
rather than an overall reduction in credit
availability, though there were signs of
some tightening of credit terms. In the
circumstances, a lower range would be a
technical adjustment and would not be
indicative of added restraint in overall
credit availability or an intention by the
Committee to increase the degree of
monetary restraint. A few members
expressed reservations about lowering
the M3 range, or at least lowering it
substantially, in part because a higher
range might be needed in later years
when special factors were no longer
depressing the growth of this aggregate.
In this view, to avoid potential misinterpretation of the Committee's policy, the
ranges should not be moved up and down
to fit special circumstances; instead,
they should be reduced steadily but
gradually to levels that were consistent
with the Committee's long-run objective
of sustainable, noninflationary economic
growth.
At the conclusion of this discussion,
the Committee voted to reaffirm the 1990
ranges that it had established in February
for growth of M2 and nonfinancial debt
and to lower the 1990 range for M3 by
Wi percentage points to 1 to 5 percent.
The Committee approved the following
statement for inclusion in its domestic
policy directive:
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boy kin,
Hoskins, Kelley, LaWare, Mullins, and
Stern. Vote against this action: Ms. Seger.
Absent and not voting: Mr. Johnson.
Ms. Seger dissented because she
wanted to reaffirm the existing range for
M3 as well as those for M2 and nonfinancial debt. In her view, the shortfall in M3
growth reflected not only technical factors, related in large part to the ongoing
restructuring of the savings and loan
industry, but an undesirable tightening in
the availability of credit. In the circumstances , she was concerned that tolerating
M3 growth at a rate near the lower end
of the 1 to 5 percent range would be
associated with credit conditions that
presented too great a risk to the current
economic expansion.
Turning to the provisional ranges for
1991, a majority of the members argued
for some reduction in the ranges for M2
and nonfinancial debt, and most favored
a relatively low range for M3. Reductions
in the ranges for M2 and debt would
serve to implement the Committee's
strategy of gradually lowering the ranges
to levels that were consistent with its
long-run goals. Additionally, a lower
range for M2 seemed appropriate in light
of the prospect that the velocity of this
aggregate, which like that of M3 had
risen to an unexpected extent this year,
might rise somewhat further in 1991 in
The Committee reaffirmed at this meeting conjunction with the ongoing restructurthe range it had established in February for ing of thrift institutions. In the view of
M2 growth of 3 to 7 percent, measured from many members, a reduction in the range
the fourth quarter of 1989 to the fourth quarter for M2 also was desirable because it
of 1990. The Committee also retained the
monitoring range of 5 to 9 percent for the year would underscore the Committee's comthat it had set for growth of total domestic mitment to an anti-inflationary policy
nonfinancial debt. With regard to M3, the and by potentially enhancing the credibilCommittee recognized that the ongoing re- ity of that policy possibly increase its
structuring of thrift depository institutions effectiveness. Several members indicated
had depressed its growth relative to spending that while a small reduction in the M2
and total credit more than anticipated. Taking
account of the unexpectedly strong M3 veloc- range was acceptable, a greater reduction
ity, the Committee decided to reduce the 1990 might imply tolerance of slower monerange to 1 to 5 percent.
tary growth than would be consistent
FOMC Policy Actions
with sustained economic expansion.
Moreover, the M2 range already had
been reduced substantially over the past
several years and was getting close to the
level that might be desirable over the
long run.
Some members preferred not to change
the 1991 range for M2 at this meeting.
They did not disagree with the strategy of
gradually reducing the Committee's
ranges over time, but they felt that current
uncertainties warranted approaching any
reduction with a special degree of caution. There was a possibility of a major
shift infiscalpolicy, and ongoing changes
in financial flows were affecting the
relationship of the monetary aggregates
to spending. By next February, the
Committee was likely to be in a much
better position to judge the implications
of these factors for the economy and
appropriate money growth as well as to
have in clearer focus the usual factors
bearing on the outlook for economic
activity and the financial system.
With regard to the range for M3, the
factors that were tending to depress M3
growth relative to income in 1990 could
well persist through 1991. In these circumstances, a majority of the members
favored a range that was equal to or lower
than the revised range of 1 to 5 percent
for 1990. Members who expressed a
preference for some further reduction
believed that a lower range was more
likely to encompass the actual outcome
and was consistent with the monetarypolicy restraint signaled by the reductions
favored by most members in the M2 and
debt ranges for 1991. Other members
preferred not to adopt a range that would
accommodate essentially no growth in
M3, even if technical factors suggested a
relatively high probability of such an
outcome. In this view, such a range would
be below the one likely to be warranted
for the longer term and would therefore
have to be raised at some point, possibly
125
even for 1991 depending on economic,
financial, and fiscal policy developments
prior to the Committee's review of the
ranges early next year.
At the conclusion of this discussion,
the Committee approved provisional
ranges for 1991 that involved reductions
of Vi percentage point for M2 and
nonfinancial debt from the 1990 ranges
and no further change in the M3 range
from the reduced 1990 range. The Committee voted to incorporate the following
statement regarding the 1991 ranges in
its domestic policy directive:
For 1991, the Committee agreed on provisional ranges for monetary growth, measured
from the fourth quarter of 1990 to the fourth
quarter of 1991, of 2Vi to 6Vi percent for M2
and 1 to 5 percent for M3. The Committee
tentatively set the associated monitoring range
for growth of total domestic nonfinancial debt
at4!/2 to 8V2 percent for 1991. The behavior of
the monetary aggregates will continue to be
evaluated in the light of progress toward price
level stability, movements in their velocities,
and developments in the economy and financial markets.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boykin,
Hoskins, Kelley, Mullins, and Stern. Votes
against this action: Ms. Seger and Mr.
LaWare. Absent and not voting: Mr.
Johnson.
Mr. LaWare dissented because he
preferred a somewhat lower range for
M3 in 1991. He did not view such a range
as implying greater monetary restraint
next year but as warranted by technical
factors, notably the further shrinkage in
prospect for the savings and loan industry, that pointed to a further rise in the
velocity of M3 and to little or no growth
in this aggregate in 1991. Moreover, he
believed that a further reduction in the
M3 range for next year would be more
consistent with the lower ranges tentatively adopted for M2 and nonfinancial debt.
126 77th Annual Report, 1990
Ms. Seger dissented because she
wanted to retain this year's ranges, at
least tentatively, for 1991. She was not
opposed to gradual reductions in the
ranges over time, and she would be
prepared to make adjustments in February if intervening developments warranted. However, she continued to believe that the inevitable uncertainties in
assessing the economic outlook over an
extended period of time argued for not
changing the ranges at midyear but
waiting until February. Such uncertainties loomed especially large at this time
because of the possibility of a major
adjustment in fiscal policy and the critical
questions that remained concerning the
outlook for credit conditions.
In the Committee's discussion of policy
implementation for the weeks ahead, all
of the members supported a proposal to
maintain unchanged conditions in reserve
markets at least initially following this
meeting, and a majority favored a directive that could accommodate some slight
easing of reserve conditions fairly soon
unless incoming indicators suggested
appreciably stronger monetary growth
and greater inflationary pressures than
the members currently expected. The
degree of monetary restraint sought by
the Committee since late 1989 remained
appropriate, but despite a steady policy
course, credit conditions appeared to
have tightened at least marginally in
recent months. The evidence of such
tightening, while not conclusive, had
become more persuasive and was a
source of increasing concern; the marked
slowing in monetary growth in the second
quarter in particular suggested the possibility of more restraint than the Committee intended. Nonetheless, in the view of
nearly all the members, the persistence
of inflation argued for caution and against
any adjustment that would have the effect
of easing the overall thrust of policy
unless incoming information on the mon
etary aggregates and the economy pointed
to a significantly weaker outlook for economic activity.
The members who preferred not to
bias the Committee's directive toward a
slight reduction in the degree of reserve
pressure believed that more evidence
would be helpful to assess the performance of the economy and the extent of
any inadvertent and inappropriate tightening in overall credit conditions. They
emphasized that the persistence of inflationary pressures and the related need to
maintain the credibility of the System's
anti-inflationary policy warranted particular caution against any premature easing
or any policy move that might be interpreted as such. However, a number of
these members acknowledged that they
too were concerned by the very sluggish
monetary growth in recent months, at
least to the extent that it could not be
explained by technical factors and might
therefore be signaling a weaker economy
or an inappropriately restrictive monetary policy.
According to a staff analysis prepared
for this meeting, growth of M2 was likely
to resume over the third quarter, but only
to a pace that would keep this aggregate
near the lower end of the Committee's
range for the year, assuming steady
money market conditions and an economic performance in line with the
members' expectations. The expansion
of M3 was projected to remain very
sluggish as components of this aggregate
continued to respond to thrift industry
and related developments that had inhibited their growth.
At the conclusion of the Committee's
discussion, all of the members indicated
that they favored or could accept a
directive that called for maintaining the
existing degree of pressure on reserve
positions for at least a short period after
this meeting. Subsequently, some slight
easing of reserve conditions could be
FOMC Policy Actions 111
implemented unless incoming data on the
monetary aggregates and the economy
evidenced greater strength; because of
the minor firming that appeared to have
occurred in general credit conditions,
such easing in the availability of reserves
would in effect serve to maintain the
overall degree of monetary restraint that
the Committee had sought to implement
since late 1989. In keeping with this
approach to policy, the directive provided
that slightly greater reserve restraint
might be acceptable during the intermeeting period or somewhat lesser restraint
would be acceptable depending on
progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated at this
meeting were expected to be consistent
with growth of M2 and M3 at annual
rates of 3 and 1 percent respectively over
the three-month period from June to
September. The intermeeting range for
the federal funds rate, which provides
one mechanism for initiating consultation
of the Committee when its boundaries are
persistently exceeded, was left unchanged at 6 to 10 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
suggests that economic activity is continuing
to expand but at a relatively slow pace. Total
nonfarm payroll employment has increased at
a much reduced rate in recent months. Nevertheless, the civilian unemployment rate has
remained in a narrow range for an extended
period and was 5.3 percent in May. Industrial
production increased substantially in May,
largely reflecting a rebound in the manufacture of motor vehicles. Consumer spending
has been sluggish in recent months; outlays
for goods have declined while expenditures
for services have increased at a slower pace.
Business capital spending appears to have
slackened a bit in the spring after a pickup
earlier in the year. Residential construction
has fallen to a relatively low level in recent
months. The nominal U.S. merchandise trade
deficit narrowed in April from its average rate
in the first quarter. Partly reflecting an
unwinding of the earlier jump in prices of
food and energy, consumer prices rose at a
slower rate in April and May, while producer
prices were unchanged over the two months.
The latest data on wages suggest no improvement in underlying trends.
Short-term interest rates have changed little
on balance since the Committee meeting on
May 15, while rates in long-term debt markets
have declined somewhat over the intermeeting
period. The trade-weighted foreign exchange
value of the dollar in terms of the other G-10
currencies was somewhat higher over much
of the period but declined late in the period to
a level slightly below that prevailing at the
time of the May meeting.
M2 and M3 declined in May; available data
for June suggest a partial rebound in M2 and
little change in M3. Growth of M2 and
especially of M3 has been damped by the
continuing contraction of deposits of thrift
institutions resulting from the restructuring of
the thrift industry. Through June, expansion
of M2 was estimated to be in the lower portion
of its range for 1990 and growth of M3
somewhat below its range for the year.
Expansion of total domestic nonfinancial debt
appears to have been at the midpoint of its
monitoring range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives the
Committee reaffirmed at this meeting the
range it had established in February for M2
growth of 3 to 7 percent, measured from the
fourth quarter of 1989 to the fourth quarter of
1990. The Committee also retained the monitoring range of 5 to 9 percent for the year that
it had set for growth of total domestic
nonfinancial debt. With regard to M3, the
Committee recognized that the ongoing restructuring of thrift depository institutions
had depressed its growth relative to spending
and total credit more than anticipated. Taking
account of the unexpectedly strong M3 velocity, the Committee decided to reduce the
1990 range to 1 to 5 percent. For 1991, the
128 77th Annual Report, 1990
Committee agreed on provisional ranges for business capital spending appeared slugmonetary growth, measured from the fourth gish, and the demand for new housing
quarter of 1990 to the fourth quarter of 1991, had weakened further. Labor demand
of 2Vi to 6V2 percent for M2 and 1 to 5 percent
for M3. The Committee tentatively set the had softened on balance since the spring
associated monitoring range for growth of and the unemployment rate had risen
total domestic nonflnancial debt at AVi to recently, but labor costs showed no sign
8^2 percent for 1991. The behavior of the of decelerating. Underlying trends in
monetary aggregates will continue to be inflation appeared to be little changed.
evaluated in the light of progress toward price
Total nonfarm payroll employment
level stability, movements in their velocities,
and developments in the economy and finan- registered a large decline in July after
cial markets.
having risen considerably over the two
In the implementation of policy for the previous months. Much of the July drop
immediate future, the Committee seeks to resulted from layoffs of temporary census
maintain the existing degree of pressure on
workers; however, payrolls shrank in
reserve positions. Taking account of progress
toward price stability, the strength of the manufacturing, construction, and busibusiness expansion, the behavior of the ness services, and hiring remained slow
monetary aggregates, and developments in elsewhere. The civilian unemployment
foreign exchange and domestic financial rate rose to 5.5 percent in July, just above
markets, slightly greater reserve restraint the narrow range that had prevailed for
might or somewhat lesser reserve restraint
would be acceptable in the intermeeting an extended period. In contrast to the
period. The contemplated reserve conditions employment data, hours worked by proare expected to be consistent with growth of duction and nonsupervisory workers
M2 and M3 over the period from June through edged up in July, and initial claims for
September at annual rates of about 3 and unemployment insurance continued to
1 percent respectively. The Chairman may
call for Committee consultation if it appears fluctuate narrowly around the average
to the Manager for Domestic Operations that pace of thefirsthalf of the year.
reserve conditions during the period before
After rising appreciably in the second
the next meeting are likely to be associated quarter, industrial production was unwith a federal funds rate persistently outside a changed in July. Output of goods other
range of 6 to 10 percent.
than motor vehicles rose at about the
moderate pace evident thus far this year.
Total industrial capacity utilization retraced its June rise but remained somewhat above its level at the start of the
year. The operating rate in manufacturing
also slipped in July, though it stayed in
the narrow range that had prevailed this
year after an appreciable reduction in
Meeting Held on
1989.
August 21,1990
After declining in earlier months,
nominal retail sales rose considerably on
Domestic Policy Directive
balance over June and July. There were
The information reviewed at this meeting substantial upward revisions to sales for
suggested that economic activity was both May and June; nevertheless, for the
continuing to expand at a relatively slow second quarter as a whole, gains in total
pace. Growth in exports and some expan- personal consumption expenditures apsion in consumer spending were support- peared to have been relatively limited. In
ing final demands. At the same time, July, housing starts fell for the sixth
Votes for the paragraph on short-run policy
implementation: Messrs. Greenspan, Corrigan, Angell, Boehne, Boykin, Hoskins,
Kelley, LaWare, and Mullins, Ms. Seger
and Mr. Stern. Votes against this action:
None. Absent and not voting: Mr. Johnson.
FOMC Policy Actions
straight month. Most of the decline was
in multifamily units, but starts in the
single-family segment of the market
edged lower as sales of new homes
continued sluggish and inventories of
unsold homes remained relatively large.
Shipments of nondefense capital goods
rose sharply in June after a decline, on
balance, in April and May; most of the
gain in June reflected higher outlays for
aircraft and for office and computing
equipment. Over the past four quarters,
however, equipment outlays had changed
little as increases in spending on computers had been offset by reduced purchases
of industrial equipment and motor vehicles . A net decline in the nominal value of
orders for nondefense capital goods in
recent months pointed to sluggishness in
equipment spending in the near term.
Nonresidential construction activity
strengthened in June, especially for office
buildings, but the downtrend in permits
and contracts for new construction suggested continued softness in this sector.
Business inventory investment had been
moderate in the second quarter, and there
was no general indication of inventory
imbalances in relation to sales. At manufacturing and wholesale establishments,
inventories fell appreciably in June, and
the ratio of inventories to shipments
edged lower. At the retail level, nonauto
stocks climbed somewhat further in June,
but with recent gains in sales, inventorysales ratios dropped back after widespread increases in the two previous
months.
The nominal deficit in U.S. merchandise trade narrowed sharply in June. The
value of exports rose substantially from
the May level, with most of the increase
occurring in civilian aircraft and parts,
consumer goods, and agricultural products. The value of imports was down
somewhat; about half of the decrease
resulted from declines in the price and
quantity of oil imports. The trade deficit
129
for the second quarter was substantially
reduced from its first-quarter rate and
was the lowest quarterly average since
1983. Measures of economic activity for
the second quarter suggested that growth
had remained robust in Japan and West
Germany but had slowed somewhat in
other major foreign industrial countries.
Measured inflation rates were unchanged
or had declined slightly in major industrial nations other than the United Kingdom, although the recent rise in oil prices,
among other factors, raised concerns
about renewed inflationary pressures.
Crude oil prices had risen sharply in
spot markets in the weeks before the
Committee meeting, largely in response
to the Iraqi invasion of Kuwait. Available
aggregate measures of producer and
consumer prices predated the increase in
oil prices, and these data suggested
persisting price pressures outside the food
and energy categories. Producer prices
of finished goods were little changed on
balance in June and July as declines in the
prices of food and energy products offset
a further rise in the prices of other
finished goods. Consumer prices rose
appreciably further in July, reflecting an
acceleration in prices of nonfood, nonenergy items. The latest data on total
labor costs indicated that hourly compensation for private industry workers had
increased more rapidly in the twelve
months ended in June than in the yearearlier period.
At its meeting on July 2 - 3 , 1990, the
Committee adopted a directive that called
for maintaining the existing degree of
pressure on reserve positions for at least
a short period after die meeting and that
provided for some slight easing subsequently unless incoming data on the
monetary aggregates and the economy
evidenced greater strength. Accordingly,
slightly greater reserve restraint might be
acceptable or somewhat lesser reserve
restraint would be acceptable during the
130 77th Annual Report, 1990
intermeeting period, depending on
progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. In the
circumstances, M2 and M3 were expected to grow at annual rates of about 3
and 1 percent respectively over the period
from June through September.
After the Committee meeting, open
market operations were directed initially
at maintaining unchanged reserve
conditions. Later, in mid-July, pressures
on reserve positions were eased slightly
as restrictions on credit supplies at
banks, signaled in part by lagging money
growth, suggested that credit conditions
were tighter than appropriate at a time
when the economy already was growing
very slowly. Adjustment plus seasonal
borrowing averaged about $500 million
in the three reserve maintenance periods
completed since the July meeting. In late
July and early August, technical
adjustments were made to assumed
levels of such borrowing to reflect the
continued upswing in seasonal borrowing. The federal funds rate averaged
about $lA percent at the time of the July
meeting but, after the easing of reserve
conditions in mid-July, federal funds
traded around the 8 percent level. Most
other short-term interest rates had
dropped somewhat since the July
meeting, largely in reaction to easier
reserve conditions but also to some
extent in reflection of expectations of
some further easing in light of additional
indications of a relatively sluggish economy. Bond yields had remained
unchanged on balance through the end
of July, but the invasion of Kuwait at the
beginning of August and the associated
rise in energy prices propelled longterm rates upward. Broad measures of
stock prices, some of which had reached
record highs earlier in the intermeeting
interval, were off substantially on net
over the period.
The trade-weighted foreign exchange
value of the dollar in terms of the other
G-10 currencies declined considerably
over the intermeeting period. Tighter
monetary conditions in Japan and West
Germany and some easing of short-term
interest rates in the United States, along
with market perceptions that these divergent trends might continue, contributed
to downward pressures on the dollar. The
dollar declined more sharply against the
German mark than the Japanese yen.
Late in the intermeeting period, uncertainty associated with the Iraqi invasion
of Kuwait provided a short-lived boost
for the dollar.
M2 grew slowly in June and July,
while M3 changed little; available data
for August suggested that growth of both
aggregates was rebounding. Growth of
M2 and especially of M3 had been
damped by the continuing contraction of
deposits at thrift institutions resulting
from the restructuring of the thrift industry. Through July, expansion of both M2
and M3 was estimated to be in the lower
portions of their respective ranges for
1990. Expansion of total domestic nonfinancial debt appeared to have been near
the midpoint of the Committee's monitoring range.
The staff projection prepared for this
meeting recognized that the recent steep
rise in oil prices could have important
adverse effects on economic activity and
inflation. It was not possible, though, to
determine with any confidence how oil
prices might evolve over time, and this
was clouding further an already uncertain
economic outlook. Under a variety of
plausible assumptions about oil prices,
economic activity was likely to expand
over the balance of the year, but at a
weaker pace than had been forecast
earlier. The retarding effects of higher
energy prices on the growth of disposable
FOMC Policy Actions
incomes were expected to damp consumer purchases of goods, notably consumer durables, over the quarters immediately ahead. If the price of oil were to
fall back somewhat next year, a strengthening of disposable incomes would tend
to boost economic growth toward a pace
that was closer to the economy's long-run
potential by the latter part of next year. If
oil prices were to stay at high levels,
however, the recovery in consumer
spending and economic growth would be
delayed for several quarters. In either
event, the staff anticipated considerable
growth in exports over the next several
quarters in conjunction with continuing
economic expansion in some major foreign industrial nations and the depreciation that had already occurred in the
foreign exchange value of the dollar.
Business capital spending was projected
to remain relatively sluggish in the
quarters ahead, though expenditures on
producers durable equipment could
strengthen were oil prices to drop back
and retail sales to improve. Moderate
restraint in expenditures at all levels of
government was assumed. The rise in oil
prices was expected to boost price inflation to an appreciable degree for the next
few quarters; the extent and duration of
these effects would depend on the future
behavior of oil prices, but the adverse
effect on inflation expectations and on
wage and price inflation over the longer
run would be limited by reduced pressures on resources.
In its discussion of the economic
situation and outlook, the Committee
focused on both the state of the economy
before the increase in oil prices and the
likely consequences for real output and
inflation of that rise. Available data,
which pertained to business conditions
prior to the invasion of Kuwait, pointed
to continuing slow economic growth,
even though business activity was slipping in various sectors of the economy
131
and some regions of the country. At the
same time, broad measures of prices and
labor costs suggested that the underlying
rate of inflation—abstracting from swings
in food and energy costs—had not turned
down despite slow monetary expansion
and the apparent growth of the economy
at a pace below potential over the past
several quarters. For some members,
these data pointed to a relatively even
balance, prior to the surge in oil prices,
between the risks of a weakening economy and rising inflation. For others, a
deterioration in consumer and business
attitudes even before the Iraqi invasion of
Kuwait and the indications of continuing
restrictions on credit availability at banks,
among other factors, suggested that the
risks had been tilted toward some potential further weakening of the economy.
The steep rise in oil prices was expected to have a retarding effect on economic activity during the months immediately ahead and to exacerbate
inflationary pressures. The increase in
oil prices also added greatly to the
uncertainties about the prospects for economic activity and inflation over time,
because the outcomes would depend on
the response of consumers to reductions
in real disposable incomes, the reaction
of businesses to potentially lower sales,
and the extent of acceptance by workers
of declines in their real wages associated
with a higher price of oil. Nonetheless, in
the absence of more pronounced or longlasting disturbances from events in the
Middle East, the members generally felt
that limited growth in economic activity
remained a reasonable expectation, and
in the circumstances they would anticipate some decline in the rate of inflation,
though progress was likely to occur only
after a nearer-term setback.
In their review of business conditions
in specific sectors of the economy and
regions of the country, members
observed that continuing expansion in
132 77th Annual Report, 1990
consumer spending and further growth
in net exports appeared likely to sustain
at least limited expansion in overall economic activity. Revised data suggested
that total retail sales had been reasonably
well maintained in recent months despite
mixed reports from different parts of the
country. However, as evidenced by
surveys conducted immediately after the
Iraqi invasion of Kuwait, consumer
sentiment could deteriorate rapidly.
Apparently, consumer attitudes already
had been adversely affected by the
softening in home prices and worsening
of employment prospects in many parts
of the country; moreover, higher costs
for energy were likely to limit any
increase in discretionary spending. With
regard to the prospects for foreign trade,
a number of members expressed some
optimism that the nation's trade balance
would continue to improve, given the
outlook for further economic growth in
a number of major industrial countries.
The report of a substantial decline in the
trade deficit for the second quarter was
viewed as an encouraging sign, and
contacts in many parts of the country
indicated that export demand was
helping to sustain manufacturing activity
at many firms. Higher oil prices would
adversely affect foreign economies, but
many other countries had trimmed their
energy consumption considerably, and
the reduction in oil supplies, if it
persisted, should not disrupt in a major
way the upward momentum of their
expansion.
On the other hand, the prospects for
business capital spending were less favorable, at least in the absence of faster
growth infinaldemand than the members
now anticipated. Business sentiment
seemed to have deteriorated in several
parts of the country. Commercial construction activity continued to be depressed by high vacancy rates in many
areas and appeared to be softening in
some others where previously it had been
relatively well maintained. Housing construction in the view of some members
might weaken somewhat further before it
began to stabilize. With regard to the
outlook for fiscal policy, members were
concerned that the prospects for a political compromise leading to a substantial
reduction in the federal budget deficit had
deteriorated as a consequence of the
invasion of Kuwait. It might prove more
difficult to curb spending or to raise taxes
in a period of weak economic expansion
or in conjunction with any surge in
military expenditures. At the state and
local level, by contrast, the worsening
budgetary situation in many jurisdictions
seemed likely to induce spending curbs
and higher taxes.
In the course of the Committee's discussion, members commented on continuing indications of tightened credit
standards. The results of a survey showed
that credit availability had been reduced
since the spring, but some members
sensed that lending institutions as a group
had not tightened credit terms further in
recent weeks. Many lenders reported
that they were making credit readily
available to good credit risks, and it was
clear that a sizable portion of the weakness in lending could be attributed to
reduced loan demand on the part of borrowers, including consumers, rather than
to a curtailed supply of loans. Nonetheless, contacts in many areas indicated
that some business borrowers, notably
builders, were continuing to experience
serious problems in obtaining credit and
that riskier borrowers were facing more
stringent standards at banks at a time
when markets for securities of less than
investment grade had virtually disappeared. Members remained concerned
about the exposure of many financial
institutions and of heavily indebted business firms and individuals to adverse
economic developments.
FOMC Policy Actions
Turning to the outlook for inflation,
the members continued to express disappointment over the lack of evidence of a
decline in the core rate of inflation; of
particular concern was the failure of
increases in labor costs to moderate. By
some measures, inflation could be judged
to have worsened marginally even before
the recent surge in oil prices. The future
course of oil prices was highly uncertain,
but the recent rise in these prices would
undoubtedly raise the measured inflation
rate in the period ahead. Moreover, the
depreciation of the dollar over the course
of previous months would exert upward
pressures on prices. Whether these pressures from oil prices and the dollar would
be translated into higher inflation rates
over longer periods of time would depend
not only on their near-term pass-through
into prices and wages but more fundamentally on their influence on inflation expectations. In this regard, the slack that
seemed to be developing in resource
utilization, while regrettable in some
respects, would help to forestall a more
permanent increase in wage and price
inflation.
In the Committee's discussion of policy
for the weeks ahead, members commented that the heightened uncertainties
and the prospectively less satisfactory
performance of the economy stemming
from events in the Middle East had
greatly complicated the formulation of an
effective monetary policy. Uncertainties
about the developments in the Middle
East made it difficult to judge an appropriate policy stance, and those uncertainties had been reflected in unusually
volatile financial markets. More fundamentally, with the surge in oil prices
tending to weaken economic activity
while also intensifying inflationary pressures, an easing in policy would incur the
risk of overcompensating for potential
weakness in the economy at the expense
of greater inflation, while a tightening
133
move to counter inflation might stall an
already weak economic expansion. In
these circumstances, the members generally concluded that the Federal Reserve
could best contribute to the nation's economic goals by fostering a stable policy
environment. The prospective performance of the economy was very likely to
be dominated by events that were outside
the Committee's control, including not
only developments in the Middle East but
decisions to be made with regard to the
federal budget deficit.
While acknowledging the current uncertainties and policy limitations that the
Committee was facing, several members
underscored the need to avoid any paralysis of policy as conditions evolved in the
weeks and months ahead and circumstances permitted an effective policy
response. In the opinion of several members, events appeared likely to unfold in a
direction that would require an easing of
policy at some point to counter weakening
tendencies in the economy that had been
in train before the oil price increase. The
timing and circumstances of any such
easing would have to be weighed carefully, however, to avoid an unfavorable
impact on inflationary attitudes and associated upward pressure on long-term
interest rates, especially since the dollar
had been under downward pressure in the
foreign exchange markets. A number of
other members viewed the risks to the
economy as more evenly balanced. These
members saw a substantial risk of some
intensification in inflationary pressures,
particularly in the context of higher
energy prices. The downward movement
of the dollar since the fall of 1989, flat or
even mildly rising commodity prices,
and the now upward sloping yield curve
argued for a relatively restrictive monetary policy, pending further developments. For the present, all the members
indicated that they could support a steady
policy, given the current uncertainties
134 77th Annual Report, 1990
and the possibility of unsettlement in
foreign exchange and domestic financial
markets.
In the course of the discussion, the
members took account of a staff analysis,
which suggested that, on the assumption
of an unchanged degree of reserve restraint, growth in M2 and M3 was likely
to pick up to some extent from the pace in
recent months, in part because of a
narrowing in the opportunity costs of
holding assets included in those monetary
measures. Members noted that the very
recent strengthening of the monetary
aggregates tended to reinforce the staff
assessment and to diminish the case for
any near-term easing of reserve conditions, though it also was recognized that
some of the strength represented a greater
preference for liquidity in an uncertain
environment. Given the particular difficulty of charting an appropriate course
for monetary policy in current circumstances, some members suggested that
the behavior of the monetary aggregates
needed to be monitored with special care
and that greater-than-usual emphasis
should be given to fostering desired rates
of monetary growth.
While all the members could support
an unchanged policy stance for at least
some initial period after today's meeting,
their somewhat differing assessments of
the most likely course for monetary
policy were associated with some differences in their views with regard to the
possible need to adjust reserve conditions
later during the intermeeting period. A
majority indicated a preference for a
directive that was tilted toward potential
easing. Some of these members indicated
that they had been leaning toward an
easing move prior to the events in the
Middle East, and they now felt that
reserve conditions should be eased
promptly if conditions in domestic financial and foreign exchange markets provided an appropriate opportunity. Tight
ening would be especially inappropriate
in this view, given the current indications
of weaknesses in the economy and the
vulnerability of many financial institutions and heavily indebted borrowers to
higher interest costs. Other members
acknowledged the threat of a deteriorating economy, but because they also saw a
considerable risk that underlying inflationary pressures might worsen, they
preferred a symmetrical directive that
gave equal weight to possible intermeeting adjustments in either direction. A few
members would not rule out the possibility of some tightening, which might foster
some decline in long-term interest rates
by having quite beneficial effects on
inflation expectations and by reinforcing
the public's perception of the Committee's commitment to its price-stability
objective.
At the conclusion of the Committee's
discussion, all the members indicated
that they favored or could accept a
directive that called for maintaining
unchanged conditions of reserve availability, at least initially, in the intermeeting period ahead and that provided for
giving emphasis to potential developments that might require some easing
during the intermeeting period. Accordingly, slightly greater reserve restraint
might be acceptable during the intermeeting period, while some easing of reserve
pressure would be acceptable, depending
on progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated by the
Committee were expected to be consistent with somewhat faster near-term
growth in money than the members had
anticipated earlier, including growth in
M2 and M3 at annual rates of about 4 and
2Vi percent respectively over the threemonth period from June to September.
FOMC Policy Actions
The intermeeting range for the federal
funds rate, which provides one mechanism for initiating consultation of the
Committee when its boundaries are persistently exceeded, was left unchanged at
6 to 10 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
suggests that economic activity is continuing
to expand at a relatively slow pace. After a
sizable rise in May and June, total nonfarm
payroll employment registered a large decline
in July, much but not all of which reflected
layoffs of temporary census workers. The
civilian unemployment rate rose to 5.5 percent
in July, just above the narrow range that had
prevailed for an extended period. Industrial
production was unchanged in July after rising
appreciably in the second quarter. Retail sales
rose considerably on balance over June and
July after declines in earlier months. Available
indicators point to a sluggish trend in business
capital spending. Residential construction
weakened further in July. The nominal U.S.
merchandise trade deficit narrowed sharply in
June; for the second quarter, the trade deficit
was substantially reduced from its firstquarter rate. Consumer prices rose appreciably further in June and July, while producer
prices were about unchanged over the two
months. The latest data on labor costs suggest
no improvement in underlying trends. Crude
oil prices have risen sharply over the last
several weeks.
Short-term interest rates have fallen somewhat since the Committee meeting on July
2-3, while rates in bond markets have risen
appreciably, as oil prices have increased. The
trade-weighted foreign exchange value of the
dollar in terms of the other G-10 currencies
declined considerably over the intermeeting
period.
M2 grew slowly in June and July, while M3
was little changed; available data for August
suggest a partial rebound in both aggregates.
Growth of M2 and especially of M3 has been
damped by the continuing contraction of deposits at thrift institutions resulting from the
restructuring of the thrift industry. Through
July, expansion of both M2 and M3 was
estimated to be in the lower portions of their
135
respective ranges for 1990. Expansion of
total domestic nonfinancial debt appears to
have been near the midpoint of its monitoring
range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, 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 its meeting in July reaffirmed the range it had established in February
for M2 growth of 3 to 7 percent, measured
from the fourth quarter of 1989 to the fourth
quarter of 1990. The Committee in July also
retained the monitoring range of 5 to 9 percent
for the year that it had set for growth of total
domestic nonfinancial debt. With regard to
M3, the Committee recognized that the
ongoing restructuring of thrift depository
institutions had depressed its growth relative
to spending and total credit more than anticipated. Taking account of the unexpectedly
strong M3 velocity, the Committee decided in
July to reduce the 1990 range to 1 to 5 percent.
For 1991, the Committee agreed on provisional ranges for monetary growth, measured
from the fourth quarter of 1990 to the fourth
quarter of 1991, of 2% to 6% percent for M2
and 1 to 5 percent for M3. The Committee
tentatively set the associated monitoring range
for growth of total domestic nonfinancial debt
at 4Vfc to 8 lA percent for 1991. The behavior of
the monetary aggregates will continue to be
evaluated in the light of progress toward price
level stability, movements in their velocities,
and developments in the economy and financial markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint
might or somewhat lesser reserve restraint
would be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with growth of
M2 and M3 over the period from June through
September at annual rates of about 4 and
2!/2 percent respectively. The Chairman may
call for Committee consultation if it appears
to the Manager for Domestic Operations that
reserve conditions during the period before
136 77th Annual Report, 1990
consumer goods other than motor vehiclesfirmeda bit on balance after declining
earlier in the year. Total industrial capacVotes for this action: Messrs. Greenspan, ity utilization slipped in July and August.
Corrigan, Angell, Boehne, Boykin, In manufacturing, operating rates deHoskins, Kelley, LaWare, and Mullins, clined further in most industries and were
Ms. Seger, and Mr. Stern. Votes against appreciably below year-earlier levels.
this action: None.
Consumer spending in real terms was
up slightly on balance in July and August;
however, averaged over the two months,
Meeting Held on
spending was significantly above the level
October 2,1990
for the second quarter. Outlays for services rose in August at a pace well below
Domestic Policy Directive
that registered over the previous several
The information reviewed at this meeting months. Spending for motor vehicles and
suggested that economic activity had parts fell, but outlays for other consumer
expanded at a slow pace in the third goods posted moderate increases. Major
quarter. The available data provided only surveys of consumer attitudes indicated a
limited evidence of a retarding effect of sharp deterioration in the confidence of
the recent large increase in oil prices on consumers. Total private housing starts
production and aggregate spending. Key declined for the seventh consecutive
measures of inflation had been boosted month. Single-family starts slid further,
by the rise in oil prices, but on the evidently in response to continued weakconsumer level the upward march in ness in sales of new homes.
In August, shipments of nondefense
prices of items other than food and energy
also appeared to have quickened some- capital goods retraced part of a large
what. Data on labor costs suggested no July decline. Average shipments for
the July-August period were below
improvement in underlying trends.
Total nonfarm payroll employment their second-quarter level, which
declined in July and August, largely suggested that overall equipment
because of layoffs of temporary census spending remained in a relatively flat
workers. Employment in the private trend. Shipments of office and comsector was little changed over the two puting equipment appeared to be
months as widespread declines in jobs at somewhat weaker, while shipments of
manufacturing and construction estab- aircraft in July were well above their
lishments offset limited gains in the second-quarter average. New orders for
service-producing sector. In the weeks nondefense capital goods changed little
after the August employment survey, in July and August from their level in the
initial claims for unemployment insur- second quarter, which pointed to
ance moved into a slightly higher range continued sluggish equipment spending
than had prevailed in the preceding few in coming months. Nonresidential
months. The civilian unemployment rate construction put in place increased in
June and July, but anecdotal information
edged up to 5.6 percent in August.
After showing strong gains over the and other indicators suggested a
previous two months, industrial produc- downward trend in nonresidential
tion was aboutflaton balance in July and building activity, reflecting the perAugust. Output of construction supplies sistence of high vacancy rates for
continued to fall, but production of commercial properties and the financial
the next meeting are likely to be associated
with a federal funds rate persistently outside a
range of 6 to 10 percent.
FOMC Policy Actions 137
pressures on builders and their lenders.
Manufacturing inventories rebounded in
July from a sizable June decline; the
stock-shipments ratio remained near the
lows of the current business expansion.
Wholesale and nonauto retail trade
inventories expanded in July at a pace
near the average rate of accumulation
over the second quarter.
The nominal U.S. merchandise trade
deficit widened sharply in July from the
revised, unusually low rate in June. The
value of exports more than retraced its
sizable June pickup, with decreases
widespread among major trade categories that had risen in June. The value of
imports increased in July for a range of
commodities, but the total remained
below peak monthly rates reached earlier
in the year. Higher oil imports in July
reflected a rise in the quantity of oil
imported as prices paid edged lower that
month before turning up in August and
September in response to developments
in the Middle East.
Markedly higher domestic oil prices
in August contributed to substantial
increases that month in producer and
consumer prices. Producer prices of
finished goods reflected a rapid passthrough of the higher oil costs into
consumer energy products. Prices of
non-energy, nonfood items rose in
August at about the moderate average
monthly pace evident thus far this year.
Consumer prices surged in August,
largely reflecting the higher oil prices.
Excluding food and energy items,
consumer inflation picked up in July and
August from the second-quarter rate;
the acceleration resulted from price
advances for non-energy services as
prices of commodities flattened out in
August after rising moderately in July.
Average hourly earnings rose in August
at a little slower pace; however, over the
twelve months ended in August, hourly
earnings increased at about the same rate
as that recorded during the previous
twelve months.
At its meeting on August 21, the
Committee adopted a directive that called
for maintaining unchanged conditions of
reserve availability, at least initially, in
the intermeeting period ahead and that
provided for giving emphasis to potential
developments that might require some
easing later in the period. Accordingly,
the directive indicated that slightly greater
reserve restraint might be acceptable
during the intermeeting period, while
some easing of reserve pressure would be
acceptable, depending on progress toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. The reserve conditions
contemplated by the Committee were
expected to be consistent with growth of
M2 and M3 at annual rates of about 4 and
2Vi percent respectively over the threemonth period from June to September.
With price pressures, even outside of
the energy sector, not abating and the
economy continuing to advance, albeit
slowly, open market operations during
the intermeeting period were directed at
maintaining unchanged reserve conditions. In the three reserve maintenance
periods completed since the August meeting, adjustment plus seasonal borrowing
averaged about $800 million, an amount
inflated by circumstances that gave rise
to sharply higher federal funds rates and
unusually heavy adjustment credit extensions on the final day of each of these
maintenance periods. The federal funds
rate generally remained near 8 percent
over the intermeeting period, but it edged
higher late in the period in the context of
quarter-end pressures and more cautious
reserve management policies at some
banks. Treasury bill rates fell somewhat
over the intermeeting period, apparently
reflecting heightened investor preference
138 77th Annual Report, 1990
for liquidity and safety, while rates on
private market instruments changed little
on balance. In the bond markets, yields
on investment-grade securities edged
down. Interest rates on lower-rated instruments rose considerably, as higher oil
prices were seen as presaging a sluggish
real economy and greater strains on
issuers of such debt. In addition, yields
on subordinated debt obligations of some
major banking organizations increased
sharply, reflecting growing investor concerns about the effects of softening real
estate values and sluggish economic
activity on the quality of bank loan
portfolios. Broad indexes of stock prices
moved lower over the period.
The trade-weighted foreign exchange
value of the dollar in terms of the other
G-10 currencies declined slightly further
on balance from the low level reached at
the time of the August meeting. The
dollar changed little against most major
currencies, but it depreciated substantially against the yen as monetary conditions were tightened further in Japan in
response to continued strength in economic activity and potential price pressures in that country. Economic growth
in the other G-10 countries slowed, on
average, in the second quarter, but recent
indicators suggested a rebound in some
of those countries.
M2 expanded at an appreciably faster
rate in August, and available data suggested continued strength in September.
M3 also accelerated in August, but its
growth appeared to have slowed somewhat in September. More rapid expansion
of Ml and a surge in money market
funds, as investors apparently switched
out of the stock and bond markets,
contributed to the greater strength of the
broader aggregates over the two months.
Through September, expansion of M2
was estimated to be a little below the
middle of the Committee's range for the
year, and growth of M3 was in the lower
portion of its range. Expansion of total
domestic nonfinancial debt appeared to
have been near the midpoint of its monitoring range.
The staff projection was prepared
against the background of unpredictable
developments in the Middle East and the
substantial adverse effects of high oil
prices on domestic inflation and economic activity. While it was recognized
that a range of plausible assumptions
could be made about the prospective
behavior of oil prices, the projection
assumed no further major disruption to
oil supplies and an appreciable drop in oil
prices in the first half of next year as
production expanded worldwide to fill
the void left by Kuwait and Iraq. In the
interim, the retarding effects of higher
energy costs would depress the growth of
real disposable incomes and consumer
spending. Weaker consumer demand
along with uncertainty about the outlook
would retard business capital spending.
Construction spending—both residential
and nonresidential — was expected to
continue to decline, reflecting the effects
of softer housing prices, reduced credit
availability, and high vacancy rates for
commercial structures. Under the circumstances, a mild downturn in overall economic activity was projected for the near
term. However, the staff continued to
anticipate considerable growth in exports
over the next several quarters in conjunction with further economic expansion in
several major foreign industrial nations
and in response to the substantial depreciation that had occurred in the foreign
exchange value of the dollar. The impetus
from the external sector and a rebound in
consumer expenditures fostered by the
assumed drop in oil prices in coming
quarters would bring a resumption of
moderate economic growth. The projection assumed that deficit reduction measures about in line with the proposal now
before the Congress would be adopted.
FOMC Policy Actions
The outlook for inflation remained
clouded by the very uncertain prospects
for oil prices. The sizable decline in oil
prices projected for next year along with
the opening up of slack in resource
utilization would foster a lower rate of
consumerprice inflation, but the improvement would be limited by the lagged
effects of the decline that had occurred in
the foreign exchange value of the dollar.
In the Committee's discussion of the
economic situation and outlook, members commented that despite weaknesses
in some sectors of the economy and parts
of the country, overall economic activity
appeared to be continuing to expand,
although at a relatively slow pace. Many
of the members observed that, insofar as
could be judged on the basis of traditional
indicators, the available data did not point
to cumulating weakness and the onset of a
recession. At the same time, however,
the risks of a recession were felt to have
increased. These risks stemmed to an
important extent from developments in
the Middle East and the continuing
financial strains in the economy that were
adding to stringency in credit markets.
Business and consumer confidence appeared to have deteriorated considerably,
especially since early August. The members generally agreed that some tendency
for economic growth to moderate and
inflation to worsen for a time could not
be avoided as a result of oil price
developments.
Despite the relatively limited growth
of the economy and the apparent fragility
of the expansion, the prospects for inflation were viewed with concern. To a
considerable extent, recent increases in
key measures of inflation reflected the
pass-through effects of the surge in oil
prices, but many of the members felt that
the underlying rate of inflation also had
worsened even apart from the effects of
higher oil prices. Reduced pressures on
resources would help to contain inflation
139
ary forces, but there was still some risk
that upward movements of oil and import
prices would intensify inflationary expectations, fostering increases in wages and
other costs that would become more
deeply embedded in the cost structure of
the economy.
Many of the members observed that
the recently negotiated federal budget
proposal incorporated a significant degree of fiscal restraint, a potentially
workable enforcement mechanism, and a
desirable multi-year commitment. Final
enactment of a budget along the lines of
the proposal would establish a sounder
basis for a satisfactory performance of
the economy. However, the federal budget deficit would still be extraordinarily
large, and the commitment to enforce
fiscal restraint measures in the future
remained to be tested.
In the course of the Committee's discussion, members focused considerable
attention on developments in credit markets. The financial strains being experienced currently by many lending institutions reflected especially the problems in
the real estate sector, although the buildup
in earlier years of debt owed by less
developed countries and the tenuous
condition of some highly leveraged domestic business firms tended to aggravate
current difficulties. Efforts by banks and
other lenders to protect or improve their
capital positions in the face of deteriorating loan portfolios were reflected in
widespread signs of growing constraints
on the availability of credit and increases
in its cost, especially to less than prime
borrowers that lack direct access to
securities markets. This pullback was not
limited to domestic lenders; foreign
institutions, which previously had been
quite aggressive suppliers of funds to
U.S. credit markets, now seemed less
willing to fill the gap left by domestic
lenders. It was difficult to judge the extent
of the reduced availability of credit
140 77th Annual Report, 1990
because the weakness in loan growth also
reflected an apparently substantial cutback in the demand for credit. In the view
of a number of members, the exposure of
the economy to a severe downturn in
business activity did not stem in present
circumstances from potential adjustments
of the usual cyclical kind to overcapacity
and overproduction, including excessive
inventories in relation to orders and sales,
but from the possible aggravation of the
strains in financial markets, further retrenchment in lending by banks and
others, and the increased difficulty of
many heavily indebted businesses and
individuals to meet and service their debt
obligations in a sluggish economy. On
the positive side, thefinancialsystem and
the economy continued to display a
remarkable degree of resiliency, and in
important respects manyfinancialinstitur
tions had improved their ability to resist
adverse developments by raising capital
and taking corrective measures, such as
adjusting their lending policies and loan
portfolios.
In their review of developments in key
sectors of the economy and parts of the
country, many of the members stressed
that a considerable divergence appeared
to have developed between available economic indicators, which suggested continued if only sluggish growth, and
deteriorating business confidence. Such
business attitudes in association with
adverse credit market conditions could
lead to efforts to curb inventories and cut
back on investments and thus trigger the
recessionary conditions that underlay
current concerns. While business activity
clearly seemed to have weakened in some
areas of the country, slow to moderate
growth continued to characterize business conditions in most parts of the
nation.
The prospects for consumer spending
remained a key element in the outlook for
the economy. Available data indicated
that real consumer outlays in July and
August were well above the secondquarter average. Nonetheless, there was
evidence that consumer sentiment had
worsened considerably in response to a
variety of developments including a
decline in the value of many consumer
assets, especially homes in numerous
parts of the country, the heavy debt
burdens of many consumers, declining
employment opportunities in a number of
areas, and more generally the reduced
purchasing power associated with rising
prices of energy. These developments
appeared likely to hold down consumer
spending for some period of time. With
regard to the outlook for business capital
spending, commercial construction
would continue to be curtailed by widespread overbuilding and constraints on
credit availability. More generally, business concerns about a possible recession
and sluggish consumer spending had
induced a cautious approach to planned
investment spending, although many
producers of capital goods reported that
their orders, including demand from
abroad, were continuing to hold up.
Nonetheless, even in the oil industry the
sharp rise in oil prices had elicited a quite
limited investment response to date apparently because of the uncertainties that
continued to surround the outlook for oil
prices and the difficulty of obtaining
skilled labor, at least in the short run. The
outlook for housing construction also
was restrained by soft housing markets
and the difficulties that many builders
continued to experience in securing
construction loans. On the other hand,
business inventories generally appeared
to be at or near desired levels, and while
business contacts around the country
pointed to increasingly cautious inventory management policies, there was little
evidence of any current or impending
cyclical inventory adjustments of the sort
that had characterized past recessions.
FOMC Policy Actions
Areas of current or potential strength in
the economy included agricultural conditions in many parts of the country and
demand for exports that continued to
buttress many industries. The substantial
decline in the foreign exchange value of
the dollar over the past year and the
prospects for relatively strong economic
growth in some major industrial countries
pointed to further improvement in the
nation's exports, although some members
questioned the potential strength of further expansion in some key foreign
countries.
With regard to the outlook for inflation, several members commented that
inflation appeared to have intensified even
apart from the direct effects of the higher
oil prices. There were reports of business
efforts to raise prices in markets where
demand was relatively vigorous, though
it was unclear to what extent competitive
forces would permit sizable increases in
prices to be sustained. More generally,
members expected the decline in the value
of the dollar to be reflected over time in
greater pressure on domestic prices.
Under foreseeable circumstances and
assuming no sharp movements in oil
prices, whose course remained highly
uncertain, overall prices were likely to
remain under upward pressure for some
time, but the members still anticipated
eventual progress in reducing inflation as
continued sluggish demand was reflected
in diminished pressures on production
resources. A major concern in the interim
was that the rise in oil prices would
become more firmly entrenched in the
cost structure of the economy, thereby
making more difficult and delaying
progress toward price stability.
In the Committee's discussion of policy, a majority of the members were in
favor of easing reserve conditions at least
slightly during the intermeeting period
ahead. In their view, an easing move was
warranted in light of the indications that
141
there was a significant risk of a much
weaker economy, partly as a consequence
of some further tightening in the availability of credit since midsummer; in this
context, moreover, the budget proposal,
if enacted, would provide a degree of
fiscal restraint. Some of these members
emphasized that the stronger expansion
of the monetary aggregates in recent
months did not seem to reflect a healthier
intermediation process or a more accommodative monetary policy, but rather
sizable increases in components of M2,
notably currency and money market
funds, that under prevailing circumstances appeared to be related to uncertainty about economic and financial prospects and unsettlement in some foreign
countries. Growth in the core components of M2 had remained sluggish, and
in the view of these members that development tended to reinforce the conclusion
that the overall availability of credit had
continued to tighten. In these circumstances, many of the members concluded
that some modest easing of reserve
pressure would represent a stable monetary policy in the sense that such a move
would serve to maintain the appropriate
degree of overall credit restraint. In the
view of most members, any change in
reserve pressures should be limited in
light of the danger of leaning too far in
either direction in circumstances that
were characterized by a sluggish economy and upward pressures on prices. It
was argued that the Committee should
not try to offset, indeed it could not avoid,
some tendency for economic growth to
moderate and for inflation to intensify as
a result of the oil price developments.
One member gave more weight to the
recessionary risks in the economy and
called for the prompt easing of reserve
conditions, preferably by more than a
modest amount, although an acceptable
compromise in this view would be a
slight easing move at this meeting to be
142 77th Annual Report, 1990
followed by some further easing upon
passage of the new budget.
Members who favored some easing of
reserve conditions agreed that it would
be desirable to hold such a move until
passage of the federal budget package
was more certain. The reasons for the
easing were not keyed to the enactment of
the new federal budget alone but more
broadly to developments in credit markets and the economy, with the prospects
forfiscalrestraint only one element in the
outlook. Nonetheless, market participants expected a monetary policy response to the fiscal policy actions, and a
change in monetary policy while the latter
were still under consideration might
create unnecessary uncertainty and unwarranted reactions infinancialmarkets.
The easing could give rise to expectations
of a further move once the budget package
was enacted. In the view of some members, however, associating any easing
move too closely with a fiscal policy
action might set an undesirable precedent
in terms of producing expectations of
similar monetary policy adjustments in
the future.
A number of members expressed
strong reservations about any easing of
reserve conditions under prevailing circumstances. In their view, even a modest
move toward ease would be undesirable
or at least premature in the weeks ahead.
These members acknowledged the risks
of a weakening economy, but they believed that policy should continue to focus
on controlling inflation. In the absence of
more evidence that economic activity
might deteriorate substantially, such a
focus was likely to involve unchanged
reserve conditions for a time. In the
prevailing circumstances, they were
concerned that any easing in the near
term would worsen inflationary expectations by tending to erode the credibility
of the System's anti-inflationary effort.
Thus, such easing might well have the
unintended effects of generating upward
pressures on long-term interest rates and
adding to the downward pressures on the
dollar in foreign exchange markets. In
support of this view, some members
expressed satisfaction that the overall
expansion of M2 for the year was well
within the Committee's target ranges and
according to a staff forecast was likely to
remain comfortably within that range
through year-end.
The members also discussed whether
any further adjustments in policy should
be contemplated for the intermeeting
period in the event that a decision was
made to implement some modest easing
in the near term. A majority opinion
emerged in favor of retaining a bias in the
directive toward some further easing, but
any such move would need to take
account of the response to the initial
easing as well as developments in the
economy and credit markets.
At the conclusion of the Committee's
discussion, a majority of the members
indicated that they favored or could
accept a directive that called for maintaining the existing degree of pressure on
reserve positions for at least a short period
after this meeting. It was presumed that
some slight easing would be implemented
later in the intermeeting period, assuming
passage of a federal budget resolution
calling for a degree of fiscal restraint
comparable to that now being negotiated
and the absence of major unexpected
economic or financial developments.
Subsequently, some slight further easing
of reserve conditions could be implemented if such a move was deemed to be
warranted by incoming data on economic
andfinancialconditions in the context of
an already sluggish economy. On the
other hand, the Committee did not rule
out the potential need for some slight
firming should inflationary pressures
appear to be intensifying. In keeping with
this policy, the directive provided that
FOMC Policy Actions 143
slightly greater reserve restraint might be
acceptable during the intermeeting period
or somewhat lesser reserve restraint
would be acceptable depending on
progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
intermeeting range for the federal funds
rate, which provides one mechanism for
initiating consultation of the Committee
when its boundaries are persistently
exceeded, was left unchanged at 6 to
10 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
suggests that economic activity expanded at a
slow pace in the third quarter. The recent
large increase in oil prices has boosted key
measures of inflation and eroded real personal
income; however, data available thus far
provide only limited evidence of a retarding
effect on production and aggregate spending.
Total nonfarm payroll employment declined
in July and August, reflecting layoffs of
temporary census workers; employment in
the private sector changed little over the two
months. The civilian unemployment rate
edged up to 5.6 percent in August. Consumer
spending appeared to be about unchanged in
real terms over July and August but was at a
level significantly above the average for the
second quarter. Advance indicators of business capital spending point to some softening
in investment in coming months. Residential
construction weakened further in August. The
nominal U.S. merchandise trade deficit increased sharply in July from the low rate in
June. Markedly higher oil prices contributed
to substantial increases in consumer and
producer prices in August; excluding energy
and food items, consumer inflation has picked
up from the second-quarter rate. Data on
labor costs suggest no improvement in underlying trends.
In short-term debt markets, Treasury bill
rates have fallen somewhat since the Committee meeting on August 21, while rates on
private market instruments are little changed.
In the bond markets, most rates have edged
lower on balance over this period. The tradeweighted foreign exchange value of the dollar
in terms of the other G-10 currencies has
declined slightly further on balance from the
low level reached at the time of the August
meeting.
M2 and M3 expanded at appreciably faster
rates in August; available data for September
suggest continued strength in M2 and some
slowing in the growth of M3. More rapid
expansion of M1 and money market funds has
contributed to the greater strength in the
broad aggregates over the two months.
Through September, expansion of M2 was
estimated to be a little below the middle of the
Committee's range for the year and growth of
M3 in the lower portion of its range. Expansion of total domestic nonfinancial debt
appears to have been near the midpoint of its
monitoring range.
The Federal Open Market Committee
seeks monetary andfinancialconditions that
will foster price stability, 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 its meeting in
July reaffirmed the range it had established in
February for M2 growth of 3 to 7 percent,
measured from the fourth quarter of 1989 to
the fourth quarter of 1990. The Committee in
July also retained the monitoring range of
5 to 9 percent for the year that it had set
for growth of total domestic nonfinancial
debt. With regard to M3, the Committee
recognized that the ongoing restructuring of
thrift depository institutions had depressed
its growth relative to spending and total
credit more than anticipated. Taking account
of the unexpectedly strong M3 velocity, the
Committee decided in July to reduce the
1990 range to 1 to 5 percent. For 1991, the
Committee agreed on provisional ranges for
monetary growth, measured from the fourth
quarter of 1990 to the fourth quarter of
1991, of 2Vi to 6Vi percent for M2 and 1 to
5 percent for M3. The Committee tentatively
set the associated monitoring range for
growth of total domestic nonfinancial debt at
AVi to 8J/2 percent for 1991. The behavior of
the monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their
velocities, and developments in the economy
andfinancialmarkets.
144 77th Annual Report, 1990
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint
might or somewhat lesser reserve restraint
would be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with growth of
M2 and M3 over the period from September
through December at annual rates of about 4
and 2 percent respectively. 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. Greenspan,
Corrigan, Boehne, Kelley, LaWare, Mullins, and Stern. Votes against this action:
Messrs. Angell, Boykin, and Hoskins and
Ms. Seger.
Ms. Seger dissented because she favored an immediate easing of reserve
conditions. In her view, such a move was
needed at this time in light of the spreading weakness in the economy, the growing difficulty being experienced by many
borrowers in obtaining credit, and more
generally the increasing fragility of the
financial system. She also felt that enactment of the deficit-reduction measures
now under consideration would provide
a desirable opportunity for some additional easing later during the intermeeting
period.
Messrs. Angell, Boykin, and Hoskins
dissented because they were opposed to
the easing of reserve conditions contemplated by the majority. Not only was
there a presumption of some easing in the
near term, but the bias in the language of
the directive suggested the possibility of
some further easing later in the intermeeting period. To a considerable extent, this
policy seemed to be a response to shortrun softening in the economy that was an
inevitable outcome of the disruption to
oil supplies. By paying close attention to
those near-term developments, the Committee risked losing sight of its fundamental objective of controlling and ultimately
bringing down inflation. Moreover, the
timing of the prospective easing was
linked tofiscalpolicy actions, and such a
linkage could establish an undesirable
precedent that could limit the flexibility
of monetary policy in the future. Mr.
Hoskins also questioned the adequacy of
the fiscal policy measures being considered in the Congress and the desirability
of adjusting monetary policy in response
to the enactment of those measures.
Meeting Held on
November 13,1990
Domestic Policy Directive
The information reviewed at this meeting
suggested that economic activity was
weakening in the fourth quarter. A substantial decline in real disposable income
and falling consumer confidence pointed
to some softening in consumer demand,
and advance indicators of business capital
spending signaled considerable sluggishness in investment expenditures. At the
same time, businesses appeared to be
keeping a tight rein on their inventories,
partly through recent sharp cuts in output.
Industrial production had turned down
after rising moderately during the summer, and recent declines in nonfarm
payroll employment and average workweeks indicated some emerging slack in
labor markets. Broad measures of prices
continued to be boosted by the surge in
energy prices, but the trend in labor costs
appeared to have improved slightly.
Total nonfarm payroll employment
declined further in October. Job losses
were widespread across industries but
FOMC Policy Actions
were particularly notable in the manufacturing and construction sectors. Employment also contracted at wholesale and
retail trade establishments for the third
straight month. In October, the civilian
unemployment rate held steady at 5.7 percent while initial claims for unemployment insurance rose steeply.
After rising moderately during the
summer, industrial production declined
substantially in October. Part of the drop
reflected a slower pace of motor-vehicle
assemblies; however, reductions in output were widespread in other industries
as well, especially in those producing
non-auto consumer goods and construction supplies. Total industrial capacity
utilization fell in October after edging up
on balance in the previous two quarters.
Consumer spending was estimated to
have leveled out in real terms over August
and September, when a surge in energy
prices caused a substantial drop in real
disposable income. Nevertheless, over
the third quarter as a whole, the pace of
spending was substantially higher than in
the previous quarter. Major surveys of
consumer attitudes continued to indicate
a sharp deterioration in consumer confidence. Total private housing starts edged
lower in September; sales of new and
existing homes continued to weaken, and
the vacancy rate for rental apartments
persisted at a high level.
Shipments of nondefense capital goods
rose on balance over the August-September period; the gain resulted in part from
increases for office and computing equipment. New orders for business equipment
pointed to a considerable softening in
spending for such goods in coming
months. Nonresidential construction activity fell appreciably in August and
September, retracing the increases recorded in the two previous months.
Persisting high vacancy rates for commercial properties in many areas, financial
pressures on builders and their lenders,
145
and the downward trend in construction
permits and contracts suggested that
nonresidential building activity would
remain sluggish. Manufacturing inventories posted only modest increases over
the August-September period, and the
ratio of stocks to shipments edged lower.
At the retail level, non-auto inventories
changed little on balance over July and
August, and inventory-sales ratios remained within the range that had prevailed for an extended period.
The nominal U.S. merchandise trade
deficit widened slightly in August from
the revised July rate; for the two months
combined, the deficit was substantially
higher than its average rate for the second
quarter. In August, a sharp increase in
the price of imported oil was only partly
offset by a decline in the quantity imported; the value of non-oil imports was
little changed from the elevated July
level. Exports picked up somewhat in
August but remained within the range
recorded in the first half of the year. The
performance of the major foreign industrial economies had been mixed. In
Western Germany and Japan, the pace of
economic activity remained robust in the
third quarter, and growth in France
picked up after a weak second quarter. In
Canada and the United Kingdom, by
contrast, economic activity appeared to
be declining. Measures of consumer price
inflation had risen for almost all of the
major industrial countries, reflecting
mainly the effects of higher energy prices.
Producer prices of finished goods rose
sharply in October, boosted for the third
consecutive month by the effects of higher
oil prices; food prices also advanced and
reversed their September decline. Producer prices of non-energy, nonfood
finished goods increased in September
and October at about the moderate average pace evident in previous months of
the year. At earlier stages of processing,
the prices of metals and some raw mate-
146 77th Annual Report, 1990
rials had fallen considerably, despite the
depreciation of the dollar on foreign
exchange markets. Higher oil prices
continued to push up consumer prices,
which rose in September at the elevated
August rate. Excluding energy and food
items, consumer inflation slowed a little
in September, but the rate of increase
over thefirstnine months of the year was
appreciably above the pace during 1989.
The growth in total compensation costs
for private industry workers decelerated
in the third quarter, reflecting smaller
gains in wages and salaries. Measured on
a year-over-year basis, twelve-month
changes in total labor compensation had
fallen a bit below the rates recorded
earlier in the year, when increases in
payroll taxes and the minimum wage
exerted their initial effect on labor costs.
Average annual earnings of production
or nonsupervisory workers were unchanged in October.
At its meeting on October 2, the
Committee adopted a directive that called
for maintaining the existing degree of
pressure on reserve positions for at least
a short period after the meeting. It was
presumed that some slight easing would
be implemented later in the intermeeting
period, assuming passage of a federal
budget resolution calling for a degree of
fiscal restraint comparable to that under
consideration at the time of the meeting
and the absence of major unexpected
economic or financial developments.
After such an easing, the directive provided that slightly greater reserve restraint might be acceptable during the
remainder of the intermeeting period or
somewhat lesser reserve restraint would
be acceptable depending on progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. The reserve conditions
contemplated by the Committee were
expected to be consistent with growth of
M2 and M3 at annual rates of about 4 and
2 percent respectively over the period
from September through December.
After the Committee meeting, open
market operations were directed initially
at maintaining unchanged reserve conditions. In late October, against the background of a weakening economy and in
light of the conclusion of a budget
agreement involving large reductions in
the federal deficit over the next several
years, pressures on reserve conditions
were eased slightly. Over the course of
the intermeeting period, several technical
adjustments also were made to assumed
levels of adjustment plus seasonal borrowing to reflect the declines in seasonal
borrowing activity that typically occur
during the autumn. Adjustment plus
seasonal borrowing fell from about
$500 million in the reserve maintenance
period completed immediately after the
October meeting to an average of roughly
$250 million thus far in the maintenance
period ending the day after this meeting.
In the context of more cautious reserve
management policies at some banks and
some carryover of end-of-quarter pressures, the federal funds rate generally
remained near %lA percent in the early
part of the intermeeting period. Subsequently, as end-of-quarter pressures receded, the funds rate edged down to
8 percent; late in the period, after the
slight easing of reserve conditions, the
funds rate slipped further to 13A percent
or a bit below. Most other market interest
rates also declined over the intermeeting
period; however, the reductions tended
to be greater for Treasury than for private
issues, reflecting increased demand for
high-grade assets by investors concerned
about credit quality. Yields on Treasury
bonds rose appreciably shortly after the
October meeting when a budget accord
initially failed to receive congressional
approval; they more than retraced these
FOMC Policy Actions
increases as prospects for fiscal restraint
grew brighter, clearer signs of a softer
economy emerged, and investors sought
higher-quality investments.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies declined considerably further over the intermeeting
period. The long budget stalemate, indications of additional weakness in the
U.S. economy, concerns about the U.S.
financial system, and associated expectations of an easing in U. S. monetary policy
contributed to the drop in the dollar. The
decline was intensified by signs that
monetary policy remained restrictive in
Japan and might tighten in Germany.
In October, M2 grew only slightly
after two months of relatively rapid
expansion, while M3 was about unchanged. The sluggishness of M2 in
October owed partly to a contraction in
its transactions and liquid savings components. The managed-liability components of M3 also were weak, reflecting
restrained asset growth at banks and
stepped-up thrift resolution activity
around the end of the quarter. Through
October, expansion of M2 was estimated
to be somewhat below the middle of the
Committee's range for the year and
growth of M3 near the lower end of its
range. The expansion of total domestic
nonfinancial debt appeared to have been
near the midpoint of its monitoring range.
The staff projection was prepared
against the background of continuing
uncertainties associated with the situation
in the Persian Gulf region. The staff
continued to assume that no major further
disruption to world oil supplies would
occur and that oil prices would drop
appreciably in the first half of next year.
The staff also assumed continuing constraints on the supply of credit, reflected
in tighter terms and reduced availability,
in response to perceptions of increased
credit risks in a relatively weak economy
147
and the problems facing many financial
intermediaries. In the near term, higher
energy costs would damp real disposable
income and consumer spending, and
reduced credit availability would be
among the factors restraining outlays for
business equipment and spending for
residential and nonresidential construction. In these circumstances, a mild
downturn in overall activity was projected for the near term, but growth was
expected to resume during thefirsthalf of
1991, aided in part by the assumed
decline in oil prices. The staff anticipated
that exports would grow relatively rapidly over the next several quarters in
association with continued expansion on
average in the economies of major foreign industrial nations and the increased
international competitiveness of U.S.
goods owing to the dollar's depreciation
over the past year. As business sales and
orders improved, production could be
expected to pick up and business investment outlays to rise. The outlook for
inflation remained clouded by the uncertainties regarding oil prices, but given
the assumption of a sizable decline in the
latter and some increased slack in resource utilization, the staff projected a
slower rise in prices and labor costs.
In the Committee's discussion of the
economic situation and outlook, members focused on the growing indications
of a softening economy. Some key measures of business conditions suggested a
decline in the economy, and business and
consumer sentiment appeared to have
deteriorated appreciably; however, the
available data on recent developments
were still limited, particularly with respect to consumer and business capital
spending, and as a consequence were still
inconclusive. Moreover, some developments that typically can contribute to a
recession, such as a substantial buildup in
inventories, did not seem to be a factor in
the current economic situation. Assuming
148 77th Annual Report, 1990
lower oil prices in the months ahead and
given the outlook for further strength in
exports stemming especially from the
substantial decline that had occurred in
the foreign exchange value of the dollar,
a relatively mild downturn followed by a
limited rebound next year was viewed as
a reasonable expectation.
Many of the members noted that, while
the most likely outcome was a relatively
mild and brief downturn, there were risks
of a more severe or prolonged contraction
in economic activity. The substantial
decline that had occurred in business and
consumer confidence likely reflected not
only the course of events in the Middle
East, but perhaps also uncertainty about
developments in that area and their
implications for oil prices. A cutback in
spending that more fully reflected these
attitudes could be greater than currently
appeared to be under way. Another
source of risks that also could be contributing to the decline in confidence was the
state of the financial system, including
concerns about the condition of many
financial institutions, a curtailed supply
of credit to many borrowers, and more
generally a widespread perception of
relatively fragile financial conditions.
Bank loan officers appeared to be reacting
increasingly to what they perceived as
rising credit risks in a softening economy; their incentives to restrict their
lending were strengthened by concerns
about the capital positions of their own
banks and the possibility that their institutions could face a reduced availability
or higher cost of funds. To an important
extent, banker attitudes were being influenced by developments in the real estate
markets; further, or more widespread,
weakening in those markets would add to
problem loans in bank portfolios and
could foster further cutbacks in bank
lending activity more generally. Financial institutions other than banks also
were experiencing funding and other
difficulties, raising concerns that they
might become less willing suppliers of
credit. For now, growth in credit and
related expansion in money were sluggish
but did not seem to be collapsing. Nonetheless, members remained concerned
that supplies of credit might prove inadequate to the needs of many qualified
borrowers, thereby deepening any downturn and impeding a satisfactory rebound
in economic activity.
Members continued to report uneven
conditions in different parts of the country
and sectors of the economy, but signs of
some weakening in business activity were
increasing in most areas. Moreover, in
keeping with broad survey results, contacts indicated that business and consumer confidence had deteriorated in
virtually all parts of the country, including areas that were experiencing at least
modest growth in overall business activity. At the same time, conditions were
reported to be generally favorable in
agriculture, export demands were growing, and on the whole business inventories were indicated to be close to desired
levels, at least given current levels of
demand.
Members noted that the adverse effects
of sharply higher oil prices on disposable
incomes and consumer sentiment appeared among other developments to
have arrested the growth in real consumer
spending in recent months; retail sales,
notably of automobiles and other durables, were expected to remain weak and
possibly decline over the next several
months, although the prospective increase in federal excise taxes on certain
luxury items might well boost sales of
such goods through year-end at the
expense of sales early next year. Members agreed that in the absence of further
disturbances in oil markets, growth in
real consumer spending could be expected to resume, especially if oil prices
were to decline; indeed, such growth was
FOMC Policy Actions
likely to provide a major impetus for
some strengthening in the economy next
year. Net exports also appeared to be
positioned to contribute to expanding
business activity as a result of the substantial declines that had occurred in the
foreign exchange value of the dollar and
sustained expansion in a number of major
foreign industrial countries. Business
contacts reported that demands from
abroad were continuing to buttress manufacturing activity in many areas, although there were indications of some
slippage in such demands from some
countries. The prospects for business
investment remained less promising for a
number of reasons, including the uncertain outlook for sales and profits and the
weakness in commercial construction
associated with earlier overexpansion.
With regard to the outlook for fiscal
policy, the difficult and extended process
of securing the recent budget agreement
and the still massive deficits projected for
the nearer term appeared to have had an
adverse effect at least temporarily on
attitudes, and perhaps as a consequence
financial markets had not yet fully recognized the appreciable degree of enforceable restraint that was built into that
agreement.
Turning to the outlook for inflation,
members referred to accumulating indications that the core rate of inflation,
excluding the discernible effects of the
surge in energy prices, might have stabilized. There were signs of diminished
wage pressures in the aggregate data, and
the latter were confirmed by reports from
several parts of the country. In the context
of reduced pressures on productive resources, it now seemed more likely that
the effects of higher oil and import prices
would not be built into the general price
and wage structure. Nonetheless, members cautioned that an extended period
probably would be needed before substantial progress was achieved in reducing
149
inflation, given the strength of inflationary expectations.
In the Committee's discussion of policy
for the intermeeting period ahead, all of
the members indicated that they favored
or could support a proposal calling for
some slight immediate easing of reserve
conditions; one member expressed a
preference for somewhat greater easing
while another saw advantages in delaying
the easing move. The growing signs of a
softening economy, the related vulnerability of many business and financial
firms to added financial strains, and the
increased reluctance of institutional lenders to accommodate less than prime
business borrowers suggested that the
Committee should remain especially alert
during the weeks ahead to signals that
some further easing was appropriate. The
lack of significant monetary growth over
the course of recent months also was seen
as pointing in the same direction. However, the weakness in the economy reflected in part an external shock whose
effects could not be entirely offset without
exacerbating a still substantial inflation,
and the dollar had been under considerable downward pressure in the foreign
exchange markets. In this situation, any
easing needed to be approached with
caution. While there were some differences in emphasis, the members agreed
that a limited degree of easing at this
juncture would provide some insurance
against a deep and prolonged recession
without incurring a substantial risk in
current circumstances of fostering intensified inflationary pressures.
In their discussion, members took
account of a staff analysis that pointed to
weaker monetary growth in the current
quarter than had been anticipated at the
time of the previous meeting. The slower
expansion in M2 and M3 appeared to
reflect the tightening supply of credit
through depository institutions and the
associated damping of asset expansion
150
77th Annual Report, 1990
and funding needs at those institutions. In
addition, slower projected growth in
nominal GNP in the current quarter
implied reduced demands for money and
credit. Some members commented that
the projected expansion of both M2 and
M3 within the Committee's ranges for the
year suggested that monetary policy on
balance had been on an appropriate
course. However, the recent weakness in
monetary growth was becoming a matter
of increasing concern and was an important consideration for some members in
their support of some easing of reserve
conditions.
In regard to possible intermeeting
adjustments in the degree of reserve
pressure, most of the members indicated
a preference for retaining the current bias
in the directive toward potential easing.
In support of this view, it was noted that
in prevailing circumstances an intermeeting move, if any, was more likely to be
toward some easing than the reverse. A
few members questioned, however,
whether such a bias was desirable in light
of the slight easing that the members
already contemplated, especially since
any additional move would represent the
third easing action by the Committee in a
relatively short period. In the circumstances, it was understood that a tilt
toward ease in the directive would not
imply any commitment to a second easing
action during the intermeeting period; in
particular, the potential desirability of
any additional easing would need to be
assessed in the light of market reactions
to the initial action, especially the behavior of the dollar in the foreign exchange
markets.
At the conclusion of the Committee's
discussion, all of the members indicated
their acceptance of a directive that called
for a slight reduction in the degree of
pressure on reserve positions. The directive also called for giving weight to
potential developments that might require
some slight further easing during the
intermeeting period. Accordingly,
slightly greater reserve restraint might be
acceptable during the intermeeting period
or somewhat lesser reserve restraint
would be acceptable depending on
progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets.
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
suggests a weakening in economic activity.
Total nonfarm payroll employment declined
further in October, reflecting sizable job losses
in manufacturing and construction; the civilian unemployment rate held steady at 5.7 percent. Industrial production declined sharply
in October after rising moderately during the
summer. Consumer spending is estimated to
haveflattenedout in real terms over August
and September when a surge in energy prices
caused a substantial drop in real disposable
income. Advance indicators of business
capital spending point to considerable softening in investment in coming months. Residential construction weakened further in the third
quarter. The nominal U.S. merchandise trade
deficit widened substantially in July-August
from its average rate in the second quarter as
imports strengthened. Markedly higher oil
prices have boosted consumer and producer
prices in recent months. The latest data on
labor costs suggest some slight improvement
from earlier trends.
Most interest rates have fallen somewhat
since the Committee meeting on October 2. In
foreign exchange markets, the trade-weighted
value of the dollar in terms of the other G-10
currencies has declined considerably further
over the intermeeting period.
In October, M2 grew only slightly after two
months of relatively rapid expansion, while
M3 was about unchanged. Through October,
expansion of M2 was estimated to be somewhat below the middle of the Committee's
range for the year and growth of M3 near the
lower end of its range. Expansion of total
domestic nonfinancial debt appears to have
FOMC Policy Actions
been near the midpoint of its monitoring
range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, 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 its meeting in July reaffirmed the range it had established in February
for M2 growth of 3 to 7 percent, measured
from the fourth quarter of 1989 to the fourth
quarter of 1990. The Committee in July also
retained the monitoring range of 5 to 9 percent
for the year that it had set for growth of total
domestic nonfinancial debt. With regard to
M3, the Committee recognized that the
ongoing restructuring of thrift depository
institutions had depressed its growth relative
to spending and total credit more than anticipated. Taking account of the unexpectedly
strong M3 velocity, the Committee decided in
July to reduce the 1990 range to 1 to 5 percent.
For 1991, the Committee agreed on provisional ranges for monetary growth, measured
from the fourth quarter of 1990 to the fourth
quarter of 1991, of 2Vi to 6V2 percent for M2
and 1 to 5 percent for M3. The Committee
tentatively set the associated monitoring range
for growth of total domestic nonfinancial debt
2X4Vi to 8V2 percent for 1991. The behavior of
the monetary aggregates will continue to be
evaluated in the light of progress toward price
level stability, movements in their velocities,
and developments in the economy and financial markets.
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
progress toward price stability, the strength
of the business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint
might or somewhat lesser reserve restraint
would be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with growth of
both M2 and M3 over the period from
September through December at annual rates
of about 1 to 2 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boykin,
Hoskins, Kelley, LaWare, and Mullins,
Ms. Seger, and Mr. Stern. Votes against
this action: None.
151
At this meeting, the Committee reviewed its practice of including a sentence
in the operational paragraph of the directive that referred to the possibility of a
Committee consultation to be called at
the Chairman's discretion during an
intermeeting period in the event that the
federal funds rate fluctuated persistently
outside a relatively wide range. That
range had been set at 4 percentage points
for many years and was a legacy of now
outdated operating procedures that had
been in place in the early 1980s. The
members agreed that under current procedures the directive sentence in question
served no real purpose, at least in its
present form, in terms of providing
guidance for holding intermeeting consultations. Such consultations are based
on understandings that vary over time,
depending on surrounding circumstances. Accordingly, all of the members
favored or found acceptable a proposal
calling for deletion of the sentence. The
members noted that the deletion would
have no implications for the implementation of monetary policy or for the
Committee's understandings or procedures with respect to what reserve market, financial, or economic conditions
would call for consultations between
meetings.
At the conclusion of this discussion,
the members voted to delete the sentence
incorporating the federal funds range
from the operational paragraph.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boykin,
Hoskins, Kelley, LaWare, and Mullins,
Ms. Seger, and Mr. Stern. Votes against
this action: None.
Meeting Held on
December 18,1990
1. Domestic Policy Directive
The information reviewed at this meeting
suggested that economic activity had
152 77th Annual Report, 1990
fallen appreciably in recent months. A
depressed level of consumer confidence
and a decline in real disposable income
had contributed to sluggish consumer
spending. In response to apparent weakness in final demands, businesses had
reduced production and employment;
these cutbacks were most evident in the
motor vehicle and construction sectors,
but a broad range of other industries had
been affected to some degree. Consumer
inflation had moderated recently, largely
as a result of some softening in oil prices.
Despite the substantial increases in living
costs this year, wage gains appeared to
have slowed somewhat in recent months.
After a progressive weakening during
the first three quarters of the year, total
nonfarm payroll employment fell sharply
further in October and November. Job
losses were widespread across industries
in November but were especially pronounced in manufacturing and construction. In the service-producing sector,
which had generated most of the employment gains earlier in the year, the health
industry was one of the few to post
significant increases in jobs. The civilian
unemployment rate rose to 5.9 percent in
November.
Industrial output declined markedly
for a second straight month in November.
Production cutbacks were broadly distributed across industries but were especially
pronounced in motor vehicles and parts,
non-auto consumer goods, and construction supplies. Reflecting the sizable
decline in manufacturing production, the
rate of capacity utilization in manufacturing dropped farther below the midyear
high.
In October and November, retail sales
in real terms were below the downward
revised September level. Real disposable
incomes had been reduced by a decrease
in total hours worked and by the effects of
higher energy prices, and major surveys
of consumer attitudes in November indi
cated that consumer confidence remained
at depressed levels. In October, total
private housing starts declined substantially further; almost all of the drop
reflected additional weakness in starts of
multifamily units. Sales of both new and
existing houses fell in September and
October.
Shipments of nondefense capital goods
edged lower in October after changing
little on balance in previous months. A
sizable drop in shipments of aircraft and
parts more than offset further increases in
the office and computing equipment category. New orders for nondefense capital
goods pointed to a considerable softening
in business equipment spending in coming months. Nonresidential construction
activity fell for a third straight month,
and permits and contracts for new construction remained in a downtrend. Manufacturing inventories posted a small
increase in October, and the ratio of
stocks to sales continued to edge down.
At the retail level, non-auto inventories
rose moderately after two months of little
change; the inventory-to-sales ratio remained within the range that had prevailed for an extended period.
Reflecting a sharper rise in the value of
imports than in that of exports, the
nominal U.S. merchandise trade deficit
widened in October from its average rate
in the third quarter. After moderating
somewhat in September, non-oil imports
surged in October; the value of oil
imports also rose as a sharp increase in
prices offset a small decline in volume.
Nonagricultural exports registered a
sizable increase that more than offset a
further drop in exports of agricultural
products. Economic growth in the major
foreign industrial countries was mixed in
thethirdquarter. Growth remained strong
in Western Germany and appeared to
have rebounded in France. Some slowing
from the rapid rise early in the year
had occurred in Japan, while declines in
FOMC Policy Actions 153
economic activity were recorded in the
United Kingdom and Canada. Some
moderation in consumer price inflation
appeared to be in progress for the major
foreign economies, reflecting the nearly
completed pass-through to the retail level
of the earlier rise in oil prices.
In November, increases in producer
prices offinishedgoods moderated from
the rapid pace of previous months; the
prices of finished foods again advanced
sharply, but declines in the prices of
refined petroleum products damped the
overall rise in producer prices. Over
October and November, producer prices
of non-energy, nonfood finished goods
increased at about the third-quarter rate,
which in turn was somewhat below that
in the first half of the year. The pace of
consumer inflation also slowed in
November, mostly as a result of a
smaller rise in energy prices. Excluding
food and energy items, consumer prices
rose in November at the more moderate
pace seen in the previous two months.
Average hourly earnings of production
or nonsupervisory workers were unchanged on balance over October and
November; this represented a considerable slowing from the increases recorded
in earlier months of the year.
At its meeting on November 13, the
Committee adopted a directive that called
for a slight immediate reduction in the
degree of pressure on reserve positions
and that also called for giving weight to
potential developments that might require some slight further easing during
the intermeeting period. The reserve
conditions contemplated by the Committee were expected to be consistent
with growth of both M2 and M3 at
annual rates of about 1 to 2 percent
over the period from September through
December.
Following the meeting, open market
operations were directed toward implementing the slight easing of reserve
market conditions sought by the Committee. Subsequently, in early December, in
light of further indications of a softening
economy and continuing weakness in the
monetary aggregates, another slight easing in reserve pressures was carried out.
In addition, a number of technical adjustments were made to assumed levels of
adjustment plus seasonal borrowing to
reflect the declines in seasonal borrowing
activity that typically occur late in the
year. Adjustment plus seasonal borrowing fell from about $260 million for the
reserve maintenance period that ended
the day after the November meeting to a
little over $100 million for the period
completed prior to this meeting. In the
early part of the intermeeting period, in
the context of continued cautious reserve
management by banks and the settlement
of the midquarter Treasury refunding,
the federal funds rate averaged near
13A percent. Late in the period, after the
slight additional easing of policy and as
concerns about a year-end squeeze on the
availability of short-term ftinds abated
somewhat, the federal funds rate averaged around 11A percent. Other market
interest rates also declined on balance
over the intermeeting period, in some
cases substantially, as markets responded
to mounting evidence that the economy
was slowing significantly and to the
easing of monetary policy. Lower interest
rates and optimism over a possible peaceful resolution of the Persian Gulf situation
contributed to a rise in broad stock market
indexes.
The easing of concerns about year-end
pressures appeared to have been helped
by the announcement by the Board of
Governors on December 4, 1990, of the
elimination of reserve requirements on
nonpersonal time deposits and net Eurocurrency liabilities. These reserve requirements were phased down in two
steps, with the second occurring in the
reserve maintenance period spanning
154 77th Annual Report, 1990
year-end. This action was not expected to
affect underlying pressures on reserves
or federal funds rates but was intended to
help counter the tightening by depository
institutions of credit terms for many types
of borrowers by providing those institutions with added incentive to lend to
creditworthy borrowers.
In the foreign exchange markets, the
dollarfluctuatedin value over the intermeeting period in response to changing
perceptions regarding the Persian Gulf
situation, the release of U.S. employment
data for November, and the further easing
of U.S. monetary policy. On balance
over the period, the trade-weighted value
of the dollar rose slightly in terms of the
other G-10 currencies. The dollar appreciated more against the yen and sterling;
the recent decreases in oil prices along
with expectations of slowing or negative
economic growth had sparked large
rallies in bond markets in Japan and the
United Kingdom. The dollar increased
less against the mark, which was generallyfirmon the basis of continuing strong
economic growth in Western Germany
and heightened market expectations of
further tightening of German monetary
policy.
M2 was about unchanged over October
and November after growing at a relatively limited pace on balance in earlier
months of the year, while M3 declined
slightly in both months. The weakness in
M2, which persisted despite an earlier
decline in opportunity costs, perhaps
reflected very weak expansion of nominal
income in recent months as well as
damped credit growth at depository
institutions. From the fourth quarter of
1989 through November, expansion of
M2 was estimated to be in the lower half
of the Committee's range for the year and
M3 near the lower end of its range.
Expansion of total domestic nonfinancial
debt appeared to have been near the
midpoint of its monitoring range.
The staff projection prepared for this
meeting pointed to a mildfartherdecline
in economic activity over the near term
and an upturn before mid-1991. The
projection was prepared against the background of persisting uncertainties regarding the prospects for a peaceful resolution
of the situation in the Persian Gulf region.
The staff assumed that there would be no
major further disruption to world oil
supplies and that oil prices would drop
appreciably further in the first half of
next year. The projection took into account the constraints on the supply of
credit and an expectation that such constraints would persist to some degree
through the year ahead. Consumer outlays were expected to continue to be
damped in the near term by the erosion of
real disposable income associated with a
reduction in hours worked and the effects
of higher energy prices; in light of weak
consumer demands, business equipment
spending was projected to be sluggish
and commercial construction to decline
further, given the oversupply of currently
available space. Economic growth was
expected to resume during thefirsthalf of
1991 in association with the effects of the
assumed reduction in oil prices on consumer spending and the support provided
by further gains in exports. Subsequently,
as business sales and orders improved,
production and business investment outlays were expected to pick up. The
outlook for inflation remained clouded
by the uncertainties regarding oil prices
but, based on the assumption of a substantial decline in oil prices and some added
slack in resource utilization, the staff
projected a slower rise in prices and labor
costs.
In the Committee's discussion of the
economic situation and outlook, members commented that a relatively mild
and short recession remained a reasonable expectation, but they emphasized
the risks of a more severe and prolonged
FOMC Policy Actions
contraction in economic activity. Generally lean business inventories, favorable
conditions for the further growth of
exports, and appreciable declines in oil
prices from their recent peaks all promised to buoy spending and activity over
coming quarters. However, the key to a
near-term rebound in the economy was a
pickup in consumer spending. Even
under the assumption that the Persian
Gulf situation would be more settled and
oil prices lower, restoration of the degree
of confidence needed to induce a substantial upturn in spending was not assured.
The financial difficulties of many borrowers and financial intermediaries, especially banks, could continue to damage
confidence as well as to constrain further
the availability of credit to many borrowers and contribute to additional declines of asset values in commercial and
real estate markets. In general, the economy andfinancialmarkets were undergoing a process of adjustment to earlier
excesses in leveraging by borrowers and
speculative increases in asset prices;
while the course and effects of that
adjustment were difficult to predict, there
clearly had been an increase in the
downside risks to the economy as a result.
With regard to the outlook for inflation,
members saw growing indications that a
disinflationary process might be getting
under way, and some viewed recent price
and wage developments as consistent
with an outlook for faster progress in
reducing inflation than they had anticipated some months ago.
Regional business developments continued to indicate uneven conditions
ranging from modest further growth in
some parts of the country, including areas
that were benefiting from a relatively
strong agricultural sector, to declining
activity in an increasing number of
regions. Indications of softening economic conditions were widespread, however, even in regions where overall
155
business activity still appeared to be
expanding. Business sentiment was negative in much of the nation, and business
contacts suggested that it was worsening
in many areas. Many state and local
governments, notably in relatively depressed areas, were facing severe budgetary problems and were curbing expenditures in response to lagging tax receipts
and impaired access tofinancialmarkets.
Consumer caution was widespread and
was evidenced by reports of generally
soft retail sales thus far in the holiday
season. Some members commented,
however, that while its timing remained
uncertain, an improvement in consumer
sentiment associated possibly with more
settled conditions in the Middle East and
an upturn in real disposable income
would be likely to generate considerable
strengthening in deferred consumer
spending, particularly for motor vehicles, and to foster a rebound in overall
economic activity. Other comments focused on the possibility that consumer
sentiment might well remain bearish and
consumer spending restrained for an extended period, perhaps even in the context of favorable developments in the
Middle East, as consumers continued to
adjust to the adverse wealth effects of
weak housing markets, heavy debt loads,
concerns about the well publicized difficulties of many financial institutions, and
fears about their employment prospects.
Weak housing prices affected household
spending especially by reducing perceived wealth, but also by eroding the
margin of unborrowed equity available
to be liquified for spending on other
goods and services.
Many of the members stressed that
business investment spending was likely
to remain relatively weak, particularly
the construction of office and other
commercial facilities that were overbuilt
in many metropolitan areas. To date, the
manufacture of capital goods appeared to
156 77th Annual Report, 1990
have held up relatively well in key capitalproducing sections of the country, though
the output of some types of capital
equipment had turned down. Statistical
and anecdotal reports suggested that
inventories generally remained under
tight control, even in relatively depressed
industries and regions, and a pickup in
overall demand was therefore likely to
lead fairly promptly to stronger production activity.
Members commented that, apart from
the key role of consumer spending,
current forecasts of a rebound in overall
economic activity relied to an important
extent on expectations of appreciable
further growth in net exports over the
next several quarters. The substantial
depreciation of the dollar in terms of
other key currencies over the past year,
especially since mid-1990, would encourage exports and curb imports. Some
members noted, however, that economic
activity in a number of major trading
nations might be somewhat weaker than
was anticipated earlier, thereby tending
to limit the growth in U.S. exports. That
view was reinforced by comments from
some domestic exporters who now saw
more limited export opportunities in the
year ahead, at least to some countries.
Turning to financial developments,
members commented that economic recovery would depend to an important
degree on the availability of credit. While
credit terms and conditions were not
projected to tighten appreciably further,
the possibility of such a development
represented a risk to the economy that
could not be ruled out. A major source of
financial pressures was the decline in real
estate values in many areas and the
inability of many heavily indebted borrowers to service their real estate debts.
The difficulties in the real estate sector
and the related vulnerability of many
lending institutions obviously would be
aggravated by a prolonged recession.
Many business borrowers with less than
prime credit ratings continued to report
problems in securing financing, even
from their usual lenders, and those
problems seemed to be increasing in at
least some parts of the country in conjunction with bank efforts to rebuild their
capital positions and limit their lending
risks in a weak economy. At the same
time, there were indications of greater
efforts by banks in some areas to increase
their loans in order to improve their
profits; moreover, many large banks
appeared to have made significant
progress in adjusting the pricing of their
loans to take better account of lending
risks; those efforts also could lead to
improved profits and to a better availability of credit to many potential borrowers.
The softness in real estate prices was
having a pronounced effect on inflationary sentiment, and against the background of reduced pressures on production resources and an extended period of
limited monetary growth most of the
members believed that substantial
progress toward lower inflation was a
likely prospect over the next several
quarters. Rising unemployment in some
areas of the country was clearly reflected
in downward adjustments to the wages of
some categories of workers. More generally, the rise in broad wage measures
appeared to have peaked in an atmosphere
of concern about reduced employment
opportunities; it was noted in this connection that current unemployment rates
probably underestimated actual unemployment, as discouraged potential workers abandoned efforts to secure employment. Members also commented that
competitive pressures, including competition from foreign producers, remained
strong in retail markets around the country and also in markets for many producer
goods.
In the Committee's discussion of policy
for the intermeeting period ahead, all of
FOMC Policy Actions
the members indicated that they favored
or could accept a directive calling for
some slight easing in reserve conditions.
Members noted that monetary policy had
been eased in several steps over the
course of recent weeks; while substantial
additional easing might not be needed
under prevailing conditions, a limited
further move would provide some added
insurance in cushioning the economy
against the possibility of a deepening
recession and an inadequate rebound in
the economy without imposing an unwarranted risk of stimulating inflation later.
The members favored a cautious approach to further policy moves in light of
the appreciable easing in reserve conditions that already had been implemented
and the considerable decline that had
occurred in market interest rates. The
stimulus provided by the recent easing
actions had not yet been felt in the economy, and given the lags that were involved, there was some risk of overdoing
the easing of policy at some point, with
potential inflationary consequences once
the economic recovery got under way.
Most of the members viewed such a risk
as relatively remote and one that could be
dealt with, should the need arise, by a
future tightening of policy, although it
was recognized that moves toward restraint couldbe difficult. Persisting weakness in the monetary aggregates tended to
reinforce the view that policy was not
moving in a way that would promote a
resurgence in inflation. In evaluating the
behavior of the monetary aggregates,
members stressed the need for policy to
provide adequate liquidity in a period of
declining economic activity in order to
encourage economic recovery.
Growth of M2 had displayed an uneven
pattern but had tended to weaken over the
course of the year, especially in recent
months. The behavior of M2 was not
fully understood, but it appeared to be
associated, at least in the past year, with
157
the constrained availability of credit from
depository institutions and with lagging
income growth. In addition, other factors, such as perceptions of increased
risks in holding deposit balances in
current financial circumstances, seemed
to be affecting monetary expansion. A
staff projection prepared for this meeting
pointed to a pickup in M2 growth over
the months immediately ahead, reflecting
in part a projected upturn in the expansion
of nominal GNP and the lagged effects of
the recent declines in market rates on
demands for money balances. Members
noted that for the year 1990 as a whole,
M2 would increase at a rate within the
Committee's range, albeit in the lower
half of that range and that M2 growth had
now been within the Committee's ranges
consistently in recent years. While monetary policy might still be viewed as
somewhat restrictive from the standpoint
of monetary growth, members cited other
indicators such as the decline in interest
rates, the shape of the yield curve, and
conditions in die commodity and foreign
exchange markets as indicative of an
adequate provision of liquidity and a
basically satisfactory policy in current
circumstances. Nonetheless, members
stressed the need to maintain an appropriate rate of monetary expansion, and they
generally concluded that the behavior of
the monetary aggregates would need to
be monitored with special care in the
period ahead for any indication that their
growth might be falling significantly
short of current expectations.
During this discussion, members
noted the potential interactions between
open market policy and a possible, nearterm reduction in the discount rate. Most
of the Federal Reserve Banks had proposed a reduction of Vi percentage point
in the discount rate, and in light of their
concerns about the narrowing spread
between the discount rate and shortterm market rates, the members generally
158 77th Annual Report, 1990
favored Board approval of that reduction
to implement an easing of conditions in
money markets. Ordinarily, a reduction
in the discount rate would show through
fully in lower short-term market rates.
However, because of their desire to ease
reserve conditions only slightly in the
near term, the members generally
supported a proposal to gear open market operations toward allowing only
about one-half of the proposed cut in
the discount rate to be reflected immediately in the money market. If the
discount rate were not reduced, the
Manager for Domestic Operations
would execute the slight easing of policy
through open market operations alone.
With regard to any further adjustment in
the degree of reserve pressure later in
the intermeeting period, nearly all the
members expressed a preference for
retaining a bias in the directive toward
potential easing, especially given the
recessionary tendencies in die economy,
current fragilities in the financial system, and the weakness in the monetary
aggregates.
At the conclusion of the Committee's
discussion, all of the members indicated
that they could support a directive that
called for some slight further easing in
the degree of pressure on reserve positions and that also provided for giving
emphasis to potential developments that
might require some additional easing
during the intermeeting period. It was
recognized that open market operations
initially might need to take account of a
possible reduction in the discount rate.
Subsequent to the initial easing, slightly
greater reserve restraint might be acceptable during the intermeeting period or
somewhat lesser reserve restraint would
be acceptable depending on progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic finan
cial markets. The reserve conditions
contemplated by the Committee were
expected to be consistent with some
pickup in monetary growth, including
expansion of M2 and M3 at annual rates
of about 4 and 1 percent respectively over
the four-month period from November to
March.
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
suggests appreciable weakening in economic
activity. Total nonfarm payroll employment
fell sharply further in November, reflecting
widespread job losses that were especially
pronounced in manufacturing and construction; the civilian unemployment rate rose to
5.9 percent. Industrial output declined markedly in October and November, in part
because of sizable cutbacks in the production
of motor vehicles. Retail sales were weak in
real terms in October and November; real
disposable income has been reduced not only
by a decrease in total hours worked but also by
the effects of higher energy prices. Advance
indicators of business capital spending point
to considerable softening in investment in
coming months. Residential construction has
declined substantially further in recent
months. The nominal U.S. merchandise trade
deficit widened in October from its average
rate in the third quarter as non-oil imports
rose more sharply than exports. Increases in
consumer prices moderated in November
largely as a result of a softening in oil prices.
The latest data on labor costs suggest some
improvement from earlier trends.
Most interest rates have fallen appreciably
since the Committee meeting on November
13. In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies rose slightly on balance
over the intermeeting period.
M2 was about unchanged on balance over
October and November after several months
of relatively limited expansion, while M3
declined slightly in both months. From the
fourth quarter of 1989 through November,
expansion of M2 was estimated to be in the
lower half of the Committee's range for the
year and growth of M3 near the lower end of
its range. Expansion of total domestic nonfi-
FOMC Policy Actions
159
Ms. Seger, and Mr. Stern. Votes against
nancial debt appears to have been near the
midpoint of its monitoring range.
this action: None.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in 2 . Authorization for D o m e s t i c
output on a sustainable basis, and contribute
O p e n M a r k e t Operations
to an improved pattern of international transactions. In furtherance of these objectives, The Committee approved a temporary
the Committee at its meeting in July reaf- increase of $6 billion, to a level of
firmed the range it had established in February $14 billion, in the limit on changes
for M2 growth of 3 to 7 percent, measured between Committee meetings in System
from the fourth quarter of 1989 to the fourth
quarter of 1990. The Committee in July also Account holdings of U.S. government
retained the monitoring range of 5 to 9 percent and federal agency securities. The infor the year that it had set for growth of total crease amended paragraph l(a) of the
domestic nonfinancial debt. With regard to Authorization for Domestic Open Market
M3, the Committee recognized that the
Operations and was effective for the
ongoing restructuring of thrift depository
institutions had depressed its growth relative intermeeting period ending with the close
to spending and total credit more than antici- of business on February 6, 1991.
pated. Taking account of the unexpectedly
strong M3 velocity, the Committee decided in
Votes for this action: Messrs. Greenspan,
July to reduce the 1990 range to 1 to 5 percent.
Corrigan, Angell, Boehne, Boykin,
For 1991, the Committee agreed on proviHoskins, Kelley, LaWare, and Mullins,
sional ranges for monetary growth, measured
Ms. Seger, and Mr. Stern. Votes against
from the fourth quarter of 1990 to the fourth
this action: None.
quarter of 1991, of 2Vi to 6Vi percent for M2
and 1 to 5 percent for M3. The Committee
The Manager for Domestic Operations
tentatively set the associated monitoring range
advised
the Committee that the current
for growth of total domestic nonfinancial debt
at^/z to 8V2 percent for 1991. The behavior of leeway of $8 billion for changes in
the monetary aggregates will continue to be System Account holdings was not likely
evaluated in the light of progress toward price to be sufficient to accommodate the
level stability, movements in their velocities, potentially very large need to drain
and developments in the economy and finanreserves over the intermeeting period
cial markets.
ahead. That need would reflect a bulge in
In the implementation of policy for the
immediate future, the Committee seeks to available reserves stemming from the
decrease slightly the existing degree of pres- elimination of reserve requirements on
sure on reserve positions, taking account of a nonpersonal time deposits and net Europossible change in the discount rate. Depend- currency liabilities combined with the
ing upon progress toward price stability, effects of seasonal reductions in currency
trends in economic activity, the behavior of in circulation and in required reserves
the monetary aggregates, and developments
•
in foreign exchange and domestic financial over the intermeeting period.
markets, slightly greater reserve restraint
might or somewhat lesser reserve restraint
would be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with growth of
M2 and M3 over the period from November
through March at annual rates of about 4 and
1 percent, respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boykin,
Hoskins, Kelley, LaWare, and Mullins,
161
Consumer and Community Affairs
The Home Mortgage Disclosure Act and
the Community Reinvestment Act were
the focus of significant activity in the
Division of Consumer and Community
Affairs during the year. More lending
institutions became subject to the reporting requirements of HMD A, and those
requirements also expanded the information that covered institutions must report
about the loans and applications they
receive for the purchase or improvement
of homes. Regarding the CRA, evaluations and ratings under the act became
public for examinations performed after
Julyl.
This chapter presents the Board's efforts under these laws to promote fair
lending and detect illegal discrimination.
This chapter also presents the Board's
implementation in 1990 of new statutory
protections for consumers; reports on the
examination of institutions for compliance with consumer laws—by the Federal Reserve and other financial regulatory agencies— and on the System's
handling of consumer complaints; discusses the community affairs program of
the Board and Reserve Banks; details the
activities of the Board's Consumer Advisory Council; and reports on testimony.
Regulatory Matters
The Board amended the home equity
rules of Regulation Z to require, at the
time of application, detailed disclosures
about the repayment phase and to continue to allow creditors, under certain
conditions, to suspend borrowing privileges on an account once the interest rate
on the account reaches the maximum
specified in the contract (the rate cap).
The Board amended Regulation CC to
reflect the permanent availability schedule that went into effect in September and
extended for two years the schedules that
apply to deposits at nonproprietary automated teller machines.
The Board preempted inconsistent
state laws under Regulation Z and Regulation B and exempted state-chartered
institutions in Massachusetts from Regulation C.
The Board also issued a new pamphlet
about mortgage discrimination and revised its brochure regarding business
credit for women, minorities, and small
firms.
Regulation Z (Truth in Lending):
H o m e Equity Lines of Credit
In September the Board amended the
Regulation Z rules on home equity lines
of credit in response to a lawsuit, by
Consumers Union, that challenged the
rules issued earlier.1 Under the amendments, creditors may freeze the line of
credit when the rate cap is reached if the
contract specifically permits such action.
Previously, lenders could freeze the
credit line without a contractual clause;
they continue to be required to state in the
Truth in Lending disclosures the circumstances in which they may suspend borrowing privileges on accounts.
The amendments also require lenders
to include, at the time of the credit
application,detailed disclosures about
repayment plans. Previously, lenders
1. The district court ruled in favor of the Board,
and Consumers Union appealed the decision (see
the chapter on litigation).
162 77th Annual Report, 1990
could delay giving these disclosures until
the repayment phase was about to begin.
Regulation Z: Preemptions
In July the Board preempted provisions
of Wisconsin law that it found to be
inconsistent with Regulation Z. The state
provisions deal with disclosures for home
equity plans and the acceleration of
payments on an outstanding balance when
a nonapplicant spouse terminates the
credit plan.
Regarding disclosures, the Board determined that a provision of Wisconsin
law employed a term appearing in federal
law, annual percentage rate, but used it to
represent rates that in some circumstances differed from the rates that federal law would specify.
Regarding accelerated payments, Wisconsin law gives a nonapplicant spouse
the right to terminate a credit plan, and
the Board concluded that valid reasons
exist for not preempting this right. The
Board determined, however, that a provision permitting the creditor to require
accelerated payment of an outstanding
balance once the nonapplicant spouse
terminates the plan is inconsistent with
federal law.
In October the Board published a
proposed determination that a New Mexico law requiring disclosures for certain
credit transactions is consistent with
Regulation Z and is not preempted because a creditor can comply with the state
law without violating federal law. The
Board also held that having a separate
remedy for violations of state law does
not by itself contradict federal law. Final
action is expected in early 1991.
Regulation CC
(Expedited Funds Availability)
In May the Board adopted several amendments to Regulation CC and its official
commentary. The act and the regulation
address access to deposits and, among
other things, impose specific time periods
within which depository institutions must
make deposited funds available. One
amendment lengthened the time that
funds may be held when an exception to
the availability schedules applies. This
action was taken because the checkclearing process had not improved sufficiently before the permanent schedules
took effect on September 1, 1990.
The exceptions give institutions more
time to determine whether a check will be
paid, but they may be used only in special
cases (for example, for redeposited
checks and deposits exceeding $5,000 in
a day). Under the temporary schedule,
institutions could add four extra days to
the three days allowed for local checks to
clear and to the seven days for nonlocal
checks. Starting September 1, institutions
may add five extra days to the two-day
availability for local checks and six days
to the five-day availability for nonlocal
checks set by the permanent schedule.
Thus, the availability periods for exception items remain at seven and eleven
days, respectively. The Board also made
changes to the model forms, principally
to reflect the shortened time periods of
the permanent schedule, but also to
guide institutions in disclosing changes
in policy resulting from the permanent
schedule.
In December the Board issued interim
amendments to implement a change to
the statute. For a two-year period, institutions may treat deposits at nonproprietary automated teller machines as nonlocal checks under the permanent
schedule (thus allowing an institution to
delay availability until the fifth business
day after the day of deposit). The amendments, signed into law in November,
were retroactive to September 1, 1990.
After public comment, the Board expects
to issue afinalrule in early 1991.
Consumer and Community Affairs
Regulation C
(Home Mortgage Disclosure)
On January 1,1990, new rules took effect
under the Board's Regulation C, which
implements the Home Mortgage Disclosure Act (HMDA). Regulation C generally applies to mortgage lenders located
in metropolitan areas if their assets
exceed $10 million.
Previously, lenders that made or purchased mortgage and home improvement
loans had to report the type of loan and
the census-tract location of the home.
Amendments signed into law in 1989
expanded the information required to
include the race, sex, and income of the
applicants and, for loans the lender sells,
the type of purchaser. These data will
help the Board and other regulatory
agencies monitor the compliance of lenders with fair lending laws.
The first HMDA reports under the
new rules are due on March 1, 1991;
more than 15,000 reports are expected to
contain up to 10 million loan entries.
During 1990, the Board and the other
agencies that enforce HMDA made
extensive preparations for collecting
and tabulating the data that will be
submitted. The Federal Financial Institutions Examination Council (FFIEC)
published samples of the tables that will
constitute the new disclosure statements
for individual financial institutions as
well as the aggregate reports for each
metropolitan statistical area. The FFIEC
updated its "Guide to HMDA Reporting: Getting it Right!" to help lenders
understand and comply with the new
amendments taking effect in 1990. The
agencies published technical standards
and took other steps to encourage
electronic filing.
Besides making available the HMDA
disclosure statements for each institution, the FFIEC will make edited raw
data available to the public, thereby
163
giving community groups and others
access to a larger body of data about
lending patterns than under the old
system. In September the Board hosted a
meeting of community-group representatives and other HMDA data users on
how best to make the HMDA data
accessible to the public.
Regulation C: Exemptions
In August the Board granted an exemption from Regulation C for state-chartered
financial institutions in Massachusetts.
The Board found that the Massachusetts
law is substantially similar to federal law
and has adequate provisions for state
enforcement. The exemption means that
institutions will file their mortgage data
with the state banking commission instead of submitting reports to both federal and state regulators. The state agency
will send the data to the FFIEC for
processing and aggregation.
In December the Board published a
proposed exemption for state-chartered
financial institutions in Connecticut.
Regulation B (Equal Credit
Opportunity): Preemption
In July the Board preempted certain
provisions of Ohio law. The Board
determined that the provisions were
contrary to Regulation B and the Equal
Credit Opportunity Act because they
could be construed, first, to prohibit
favorable treatment of persons age 62 or
older and, second, to allow age discrimination in real estate transactions. Moreover, Ohio law permitted special credit
programs that take age into account only
if they were sponsored by a government
agency; federal law permits such programs to be offered by both the public and
private sectors if the programs meet
certain criteria.
164 77th Annual Report, 1990
Consumer Brochures
In September the Board issued a new
brochure entitled, "Home Mortgages:
Understanding the Process and Your
Rights." The brochure describes how to
shop for a mortgage and what to look for,
outlines the application process, and tells
potential homebuyers how to register
complaints in cases of discriminatory
treatment. The brochure also lists potentially discriminatory practices and outlines some of the laws that protect
consumers.
In September the Board issued a revised version of its brochure entitled "A
Guide to Business Credit for Women,
Minorities, and Small Businesses," which
explains the commercial credit process
and gives guidance on how to prepare the
necessary documents for loan application. The guide points out the responsibilities of lenders and borrowers and
suggests some sources for assistance and
recourse if an application is denied.
Interpretations
In 1990 the Board continued to offer legal
interpretations and guidance on Regulation B (Equal Credit Opportunity), Regulation E (Electronic Fund Transfers),
and Regulation Z (Truth in Lending)
through official staff commentaries. Published by April 1 of each year, these
commentaries help financial institutions
and others apply the regulations to specific situations.
Community Reinvestment Act
The Community Reinvestment Act
(CRA) requires the Board to encourage
financial institutions under its jurisdiction
to help meet the credit needs of their
entire communities, including low- and
moderate-income neighborhoods, in a
manner consistent with safe and sound
banking practices. The Board assesses
the CRA performance of state member
banks during regular compliance examinations and takes the CRA record into
account, along with other factors, when
acting on applications from state member
banks and bank holding companies.
The Federal Reserve System maintains
a three-faceted program for enforcing
and fostering better bank performance
under the CRA: (1) examinations of
institutions to assess compliance, (2)
dissemination of information on community development techniques to bankers
and the public through community affairs
offices at the Reserve Banks, and (3)
CRA analyses in processing applications
from banks and bank holding companies.
Federal Reserve examiners review
performance in fair lending, community
revitalization, and other areas relevant to
assessing CRA compliance. During the
1990 reporting period (July 1, 1989,
through June 30, 1990), they examined
649 state member banks and, when
appropriate, suggested ways to improve
CRA performance.
During calendar year 1990, adverse
CRA ratings were at issue in forty-two
bank and bank holding company applications , the same number as in 1989; twenty
such applications posed CRA issues in
1988. The number of applications protested because of CRA performance rose
from sixteen in 1989 to twenty-seven in
1990. At year-end, seventeen of the
protested applications had been approved, four were returned to the applicant or withdrawn, and six were still
pending.
Community Affairs
Implementation of amendments to the
CRA that require public disclosure of
CRA ratings and evaluations significantly
increased the activities of the Federal
Reserve's Community Affairs program
Consumer and Community Affairs
during 1990. Members of the Community
Affairs staff at the Board and Federal
Reserve Banks continued to focus attention on community development lending
through training, education, and the
dissemination of information to financial
institutions, community advocates, and
government representatives.
New procedures developed by the
FFIEC for disclosing CRA ratings and
evaluations of banks increased the interest in CRA among community groups,
civil rights organizations, and consumer
advocates as well as housing and small
business organizations and local government officials. As a result, Community
Affairs staff members at the Board and
Reserve Banks responded to a growing
number of inquiries and requests for
information regarding the CRA and the
new public disclosure process.
To further educate the public and the
banking community on these topics,
Reserve Banks sponsored 117 Community Affairs conferences and seminars.
The Reserve Banks' outreach programs
often focused on the new CRA procedures and their implications for banks,
supervisory agencies, and consumer and
community groups. Members of the
Community Affairs staff at the Board and
the Reserve Banks spoke at 356 other
conferences, seminars, and meetings
hosted by banking, community, and other
organizations on community development or CRA topics.
CRA training for consumer compliance examiners was a major priority for
the Federal Reserve's Community Affairs
program during 1990. Expanding on
training efforts begun in 1989, Community Affairs staff members at the Board
and at the Federal Reserve Banks of
Chicago and New York held five weeklong sessions on advanced CRA examination techniques. More than 125 examiners representing the 12 Reserve Banks
completed the course. Board staff mem
165
bers also participated in training Federal
Reserve commercial examiners to acquaint them with the key concepts of
community development lending and the
objectives of the CRA.
Banks are increasingly interested in
the relationship of community development finance activities to their CRA
performance. Members of the Community Affairs staff responded to numerous requests from banks and holding
companies for information about participation in local housing programs and in
community and economic development
efforts.
Some Reserve Banks worked directly
with banks and state banker associations
in helping to fashion finance programs
and to train bankers in community development techniques. The Richmond Bank
assisted bankers associations in its district
in training sessions. The Boston Bank
worked closely with the Massachusetts
Bankers Association in its creation (in
conjunction with the state government)
of statewide lending programs for community development. The San Francisco
Bank supported efforts by banks to create
a statewide, multibank consortium that
will finance low- and moderate-income
housing in California and other western
states.
The interest shown by bank holding
companies in forming community
development corporations (CDCs) and
in other community development equity
investments also grew, judging by the
increase in their requests for information and assistance from the System's
Community Affairs staff. The Federal
Reserve authorized 13* bank holding
companies to make community development investments during 1990. Although
many new CDCs and investments continued to focus on low-income housing, a
growing number of bank holding companies requested approval to establish or
invest in CDCs that will undertake eco-
166 77th Annual Report, 1990
nomic development and small business
assistance.
FFIEC Activities
issued a pamphlet, "Community Reinvestment Act Performance Evaluations,"
to inform the public about the structure
and scope of the written evaluations. At
year-end, the agencies planned to make
public, at least quarterly, lists of the
institutions whose CRA performance
evaluations have become available. The
FFIEC also adopted a policy for sharing
community contact information among
the agencies.
Other FFIEC initiatives, described
earlier, were undertaken to accommodate
the 1989 amendments to the Home Mortgage Disclosure Act.
The FFIEC revised examination
procedures to incorporate amendments
to Regulation Z involving home equity
lines of credit and credit cards. It also
issued examination procedures for
adjustable rate mortgages. At year-end,
all member agencies were reviewing the
extent to which errors occur in lender
calculations of adjustments to variable
rate mortgage loans and how such errors
should be treated. To support this effort,
Board staff members were assessing the
extent of errors at state member banks
and reviewing the legal authority under
the Truth in Lending Act for dealing
with such errors.
The Federal Financial Institutions Examination Council is an interagency body
that prescribes uniform principles, standards, and report forms for the examination offinancialinstitutions by the federal
supervisory agencies. The member agencies of the council include the Board, the
Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Office
of Thrift Supervision (OTS), and the
National Credit Union Administration
(NCUA).
During 1990 the FFIEC approved
several initiatives to implement amendments to the Community Reinvestment
Act contained in the FIRREA legislation.
For examinations conducted after July 1,
1990,financialinstitutions must disclose
to the public the written evaluation of
their CRA performance and the CRA
rating assigned under a new four-tiered
rating system.
In April the FFIEC issued guidelines
that included a uniform CRA rating
system and uniform methods for disclosing the ratings and presenting the
written evaluations. The evaluations will
Compliance with Consumer
state the examiner's conclusions and
Regulations
supporting facts for each assessment
factor set out in the CRA regulations. Federal regulators annually report on the
Interagency training sessions to familiar- extent to which the institutions they
ize examiners with these new CRA supervise comply with consumer regulaprovisions and the guidelines for imple- tions. The most recent reporting period
mentation were conducted in Atlanta, was July 1, 1989, to June 30, 1990. The
San Francisco, Pittsburgh, and Dallas data indicate that compliance with the
for more than 800 examiners from the Truth in Lending Act rose from 1989
Federal Reserve, the OCC, the FDIC, levels, while compliance with the Elecand the OTS.
tronic Fund Transfer Act remained unA joint temporary rule to implement changed. For the Equal Credit Opporthe new public disclosure requirements tunity Act and the Expedited Funds
of the CRA was put in place by the Availability Act, compliance declined
agencies effective July 1. The FFIEC from last year's levels.
Consumer and Community Affairs
Truth in Lending Act
(Regulation Z)
The Board, the FDIC, the OCC, the
OTS, and the NCU A reported that 37 percent of examined institutions were in full
compliance with the regulation, up from
30percentin 1989. The Board, the FDIC,
the OCC, and the NCU A all noted
improvements in compliance, while the
OTS reported a decline in the level of
compliance by savings associations. Data
gathered from the agencies that could
provide frequency ranges (the Board, the
OCC, and the NCUA) indicate that,
among the financial institutions that were
not in full compliance, about half had
between one and five violations.
The five most frequent violations of
Regulation Z were the failure to disclose
accurately thefinancecharge, the amount
financed, the annual percentage rate, and
the number, amounts, and timing of
payments scheduled to repay the obligation; and the failure to provide a separate
written itemization of the amount financed or to disclose the consumer's right
to ask for an itemization.
The FDIC and the OTS each issued
a cease-and-desist order involving violations of Regulation Z. In addition, the
OTS placed a savings association under
a supervisory agreement, in part for
violations of Regulation Z, and fined
another savings association for violating
the provisions of a supervisory agreement. Under the Interagency Enforcement Policy on Regulation Z, a total
of 408 institutions supervised by the
Board, the FDIC, the OCC, and the
OTS made reimbursements to consumers that totaled $4.5 million on 52,344
accounts. This compares with roughly
$8 million reimbursed on 87,447 accounts in 1989.
The Federal Trade Commission (FTC)
continued its program of seeking voluntary compliance to enforce the credit
167
advertising requirements of Regulation
Z, focusing on real estate and automobile
credit. Companies contacted through the
FTC's monitoring program promptly
brought their programs into compliance.
Three enforcement cases involved violations in which annual percentage rates
had been understated.
The FTC continued its enforcement
program against improper telemarketing
techniques and other frauds against
consumers involving credit card overcharges. It brought actions in federal
district court alleging violations of Truth
in Lending requirements for prompt
notification of returns and crediting of
refunds on credit card accounts. The
FTC filed consent agreements in two
telemarketing cases involving the unauthorized use of consumers' credit
accounts.
Efforts to educate consumers and businesses of their rights and responsibilities
continued to be an integral part of the
FTC's enforcement activities. The FTC
issued a revised and expanded version of
its manual, "How to Advertise Consumer
Credit," and published a brochure for
home buyers about various mortgage
financing options.
The Department of Transportation
reported a satisfactory level of compliance with Regulation Z by foreign and
domestic carriers. Consumer inquiries
investigated during the reporting period
resulted in no formal enforcement proceedings for violations.
The Farm Credit Administration reported a satisfactory level of compliance
with Regulation Z among the institutions
it supervises. Examinations and enforcement activities produced formal enforcement actions against sixteen institutions
for violations of Truth in Lending; most
of them are now in substantial compliance. Violations declined more than
24 percent from the 1989 reporting
period.
168 77th Annual Report, 1990
The Packers and Stockyards Administration of the Department of Agriculture
received no complaints and initiated no
enforcement actions during the 1990
reporting period. Individuals andfirmsit
regulates are believed by the agency to be
in substantial compliance.
Equal Credit Opportunity Act
(Regulation B)
The five financial regulatory agencies
reported a decline in the level of compliance with Regulation B, from 60 percent
in 1989 to 57 percent for the 1990
reporting period. The three agencies that
could provide a breakdown of the violation frequency (the Board, the OCC, and
the NCUA), reported that 73 percent of
the institutions that were not in full
compliance had between one and five
violations. The most frequent violations
involved the failure to meet the following
requirements:
• Notify the applicant of action taken
within 30 days after the creditor received
a completed application.
• Provide a written notice of adverse
action that contains a statement of the
action taken, the name and address of the
creditor, the ECOA notice, and the name
and address of the federal agency that
enforces compliance.
• Provide the specific reasons for
adverse action, or a notice of therightto
request the reasons.
• Request information for monitoring
purposes about race or national origin
and sex on credit applications for the
purchase or refinancing of a primary
dwelling, and note the information based
on visual observation or surname if an
applicant chooses not to provide it.
The FTC continued an investigatory
program in which testers pose as credit
applicants to monitor compliance with
ECOA. The FTC filed complaints in
federal court in two cases that involved
practices in violation of ECOA and
obtained consent decrees in two other
cases.
The Farm Credit Administration reported a satisfactory level of compliance
with ECOA by the institutions it supervises. Its examination and enforcement
activities led to formal enforcement
actions against eight institutions for
violations of the act; most of them are
now in substantial compliance. Violations increased 13 percent from 1989.
The other agencies that enforce
ECOA—the Department of Transportation, the Interstate Commerce Commission, the Small Business Administration,
the Packers and Stockyards Administration of the Department of Agriculture,
and the Securities and Exchange Commission (SEC)—reported substantial compliance among the entities they supervise.
Electronic Fund Transfer Act
(Regulation E)
The five financial regulatory agencies
reported that 84 percent of examined
institutions were in full compliance with
Regulation E, the same percentage as last
year. The following rules were the most
frequently violated:
• Provide, in a timely manner, written
disclosures outlining the terms and conditions of the EFT service.
• Provide a monthly statement of EFT
activity or a quarterly statement in the
absence of such activity.
• Adhere to procedures for promptly
investigating and resolving alleged
errors.
• Maintain evidence of compliance
with the regulation for two years.
• Provide a periodic notice of the
procedures for resolving alleged errors.
The other agencies that are responsible
for enforcing the Electronic Fund Transfer Act - the FTC and the SEC - reported
a satisfactory level of compliance.
Consumer and Community Affairs 169
and thrift institutions offer ATM services
to consumers, and about half of all
households currently have ATM access
The five financial regulatory agencies cards. The availability of ATM services
reported that 80 percent of examined has been widened by the expansion of
institutions were in full compliance with shared networks; the number of ATM
Regulation CC. In 1989 (thefirstyear in terminals participating in shared netwhich information was collected) the works increased from 85 percent in 1989
Board, the FDIC, and the OCC reported to 95 percent in 1990. The average
that 90 percent of the institutions exam- monthly number of ATM transactions
ined were in full compliance. The three increased about 12 percent, from
agencies that could provide a breakdown 437.4 million in 1989 to 474.9 million
of the violation frequency (the Board, the in 1990. During the same period, the
OCC, and the NCUA) reported that number of ATM terminals rose about
72 percent of the institutions that were 6 percent.
not in full compliance had between one
The number of point-of-sale (POS)
and five violations. The most frequent systems is growing rapidly, but the
violations involved the failure to meet the devices still account for only a small
following requirements:
fraction of EFT transactions. In 1990,
• Provide next-day availability for the number of POS terminals rose 14 perrequired items.
cent, to 53,300, and the average monthly
• Disclose the availability policy fol- number of POS transactions rose 21 perlowed in most cases.
cent, to 15.9 million.
• Train employees adequately and
Direct deposit is another widely used
devise procedures to ensure compliance. EFT service. In the public sector, about
• Post the availability policy at loca- half of all social security payments and
tions where employees accept deposits.
two-thirds of federal salary and retire• Print an availability notice on de- ment payments are made by direct deposit slips printed with the customer's posit. Private-sector use is lower, but it
name and account number.
grew substantially during 1990. The 1990
paychecks of 17 percent of private-sector
workers were deposited automatically
Economic Effect of the Electronic
into bank accounts, compared to 12 perFund Transfer Act
cent the year before.
In keeping with a statutory mandate, the
The benefits to consumers from the
Board monitors the effect of the Elec- Electronic Fund Transfer Act are difficult
tronic Fund Transfer Act on the compli- to measure because they cannot be isoance costs and consumer benefits of EFT lated from consumer protections that
services. The economic effect of the act would have been provided in the absence
increased in 1990 as a result of continued of regulation. Examination reports suggrowth in availability and use of EFT gest no widespread violations of conservices. About two-thirds of the depos- sumer rights established by the act. In
itory institutions in the United States 1990, about 84 percent of depository
offer EFT services and are covered by the institutions examined by federal agencies
were in full compliance with the act.
act and Regulation E.
Automated teller machines are the Statistics indicate that institutions not in
most widely used EFT service in the full compliance generally had fewer than
United States. Most of the nation's banks five violations. The most common viola-
Expedited Funds Availability Act
(Regulation CC)
170 77th Annual Report, 1990
tion was the failure to provide initial
disclosure statements.
Data from the Board's Consumer Complaint Control System provide no evidence of serious consumer problems with
electronic transactions. In 1990, fortyfive of the complaints processed involved
electronic transactions. The Federal Reserve System forwarded twenty-three,
which did not involve state member
banks, to other agencies for resolution.
Of the remaining twenty-two, none involved a violation of the regulation.
Because the industry practices that
would have evolved in the absence of
statutory requirements are unknown, the
incremental costs associated with the act
are difficult to quantify. Cost estimates
from 1981 suggest that the ongoing
compliance cost of an electronic transaction at that time was not high enough to
compromise the cost advantage of such
transactions over check-based transactions. Since then, few changes have been
made in the regulation and transaction
volume has increased, allowing financial
institutions to exploit scale economies in
compliance costs. Thus, it is likely that
the regulation has less effect on EFT
costs now than it did in 1981.
Complaints about
State Member Banks
The Board and Federal Reserve Banks
investigate complaints against state member banks and forward to appropriate
enforcement agencies those that involve
other creditors or businesses. In 1990 the
Board developed an on-line system for
tracking consumer complaints and inquiries, to be implemented in 1991. The new
system will provide more complete and
up-to-date information about complaints,
improve the Federal Reserve's ability to
monitor consumer concerns, and improve its ability to identify trends and
problems.
In 1990 the System received 2,003
complaints against state member banks,
nonmember banks, and other creditors
and businesses: 1,742 by mail, 255 by
telephone, and 6 in person (see the
accompanying table). The Federal Reserve investigated and resolved the 771
complaints against state member banks.
The Board also received 207 written
inquiries concerning consumer credit and
banking policies and practices. In responding, Board staff members gave
consumers brochures on the general
Consumer Complaints Received by the Federal Reserve System, by Subject, 1990
Subject
Regulation B (Equal Credit Opportunity)
Regulation E (Electronic Fund Transfers)
Regulation M (Consumer Leasing)
Regulation Q (Interest on Deposits)
Regulation Z (Truth in Lending)
Regulation BB (Community Reinvestment)....
Regulation CC (Expedited Funds Availability).
Fair Credit Reporting Act
Fair Debt Collection Practices Act
Fair Housing Act
Municipal Securities Dealer Regulation
Transfer agents
Unregulated bank practices
Other2
Total.
1. Referred by the Federal Reserve to the appropriate
agencies.
State member
banks
Other
lenders1
lotal
70
22
6
29
186
1
10
20
6
0
0
0
421
0
53
23
6
50
271
19
22
58
17
3
1
1
597
111
123
45
12
79
457
20
32
78
23
3
1
1
1,018
111
771
1,232
2,003
2. Primarily miscellaneous complaints against business
entities.
Consumer and Community Affairs
111
if they had another problem with a bank;
and 70 percent found the resolution of
their complaints acceptable.
A classification of the 771 complaints
against state member banks according to
bank function (see the corresponding
table) shows that 57 percent concerned
loan functions, 9 percent alleged discrimination on a prohibited basis, and 48 percent concerned credit denial on nonprohibited bases (such as length of residency)
and other unregulated lending practices
(such as release or use of credit information) . About 25 percent involved disputes
about interest on deposits and general
practices concerning deposit accounts.
issues plus explanations of laws, regulations, and banking practices specific to
their complaints or inquiries.
Board staff members regularly review
the System's handling of complaints by
sending follow-up questionnaires to
complainants. In 1990,46 percent of the
complainants returned the questionnaires. Approximately 65 percent reported that the explanations received
were clear and understandable; 65 percent were satisfied with the promptness
in handling; 100 percent said they were
treated courteously by Federal Reserve
staff members; 95 percent said they
would contact the Federal Reserve again
Consumer Complaints Received by the Federal Reserve System, by Function, Institution,
and Resolution, 1990
Function
Type of institution
and resolution
Loans
Total
Deposits
Discrimination
Complaints about state
member banks, by type
Insufficient information l
Information furnished to
complainant2
Bank legally correct
No accommodation
Accommodation made 3
Clerical error, corrected
Factual dispute4
Bank violation, resolved5
Possible bank violation,
unresolved6
Customer error
Pending, December 31
Other
Electronic
fund
transfers
Trust
services
Other
22
2
11
3
0
0
6
91
13
55
8
1
3
11
275
106
101
50
6
31
7
6
1
1
117
67
55
11
71
24
22
28
3
10
0
5
0
0
4
1
0
2
0
42
7
13
8
0
5
11
104
0
1
9
2
5
41
2
2
29
0
0
6
0
0
1
1
3
18
771
100
71
9
366
48
192
25
22
3
11
1
109
14
Complaints referred
to other agencies7
1,232
75
565
226
23
8
335
Total
2,003
146
931
418
45
19
444
Total, state member banks . . . .
Percent
1. The stafFhas 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
2
that can be resolved only by the courts. Consumers 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.
7. Complaints about nonmember institutions.
172 77th Annual Report, 1990
Unregulated Practices
In 1990 the Board continued to monitor,
under section 18(f) of the Federal Trade
Commission Act, complaints about banking practices that are not subject to
existing regulations to focus on those that
may be unfair or deceptive. Two categories each accounted for about 5 percent
of the 1,018 complaints: credit denial
based on credit history (56) and discrepancies in deposit accounts (51).
Many of the complaints about credit
denials based on credit history indicated
that the applicant underestimated the
importance lenders give to a poor credit
history or a lack of borrowing experience
when considering the applicant's creditworthiness. The complaints about discrepancies in deposit accounts usually
involved cases in which consumers had
noticed errors on their savings or checking account statements.
Consumer Advisory Council
The Consumer Advisory Council (C AC)
met in March, June, and October to
advise the Board on its responsibilities
under the consumer credit protection laws
and to discuss other issues dealing with
financial services to consumers. The
council's thirty members come from
consumer and community-based organizations, financial institutions, academia,
and state government. Council meetings
are open to the public.
In 1990 the council considered issues
related to CRA, electronic delivery of
government benefits, amendments to the
Home Mortgage Disclosure Act, discrimination in mortgage lending, expedited
funds availability, and affordable
housing.
A number of issues involved the public
disclosure of CRA ratings. In March
members offered views on draft guidelines issued by the FFIEC for examiners
to follow in CRA evaluations -FIRREA
legislation requires CRA ratings and
evaluations to be made public for examinations conducted after July 1, 1990. In
October the council's CRA committee
made preliminary observations about the
CRA performance evaluations it had
reviewed.
Electronic benefit transfers (EBT)
refers to the use of electronic means by
government agencies to disburse cash or
other benefits (such as food stamps) to
recipients. In March the council's Depository and Delivery Systems Committee
briefed CAC members on the advantages
of EBT over paper-based systems-in
minimizing fraud, theft, and diversion of
benefits; increasing recipient satisfaction;
keeping down administrative costs; and
providing uninterrupted benefits to recipients without stable mailing addresses,
including the homeless.
At its June meeting the council unanimously adopted a resolution urging the
Federal Reserve to pursue the development of EBT. In October the council
received a first-hand report on a pilot
EBT program run by the state of Maryland and a briefing by Board staff members on regulatory issues related to EBT.
In June the council explored the problem of detecting unlawful discrimination
in mortgage lending. Members raised the
possible use of testers, in which teams of
white and minority persons claiming
nearly identical family and financial
characteristics would approach mortgage lenders to assess how they are
treated. In October the council adopted a
resolution seeking information from the
Board on the possible scope and approximate cost of a testing project.
A roundtable discussion among members of the council and the Board members, known as the "Members Forum,"
gives council members the opportunity to
offer their views on a variety of topics.
During 1990 the council discussed mat-
Consumer and Community Affairs
ters such as how best to ensure that the
public understands the significance of the
CRA rating, which is distinct from the
safety and soundness rating of the institution. Members also offered views on
consumer credit; on financial schemes
that defraud consumers, especially the
elderly; on deposit insurance reform; on
how best to encourage consumers to
increase their saving rate; and on council
members' perceptions of the current
availability of commercial and real estate
credit in their local markets.
During the year, the council also
considered the following issues:
• Amendments to Regulation C
• Proposed amendments to the Expedited Funds Availability Act to retain the
three-day hold period for local checks
• The administration of the Affordable Housing Disposition Program by the
Resolution Trust Corporation
• Proposals before the Congress to
amend the Fair Credit Reporting Act,
which governs the use of consumers'
credit histories.
Testimony and Legislative
Recommendations
The Board testified in May 1990 before a
Senate Banking subcommittee on the
Federal Reserve's progress in ensuring
equal access to home loans and stimulating private investment in low- and
moderate-income communities. The
main points of the Board's testimony are
summarized below.
CRA and HMDA Revisions
The Board noted the FFIEC's development of interagency CRA guidelines to
help the agencies achieve uniformity in
assigning ratings, preparing readily understandable evaluations, and facilitating
public access. Extensive training of
agency examiners was under way to
173
gether with revisions of examination
procedures.
The Board observed that the new
HMDA requirements should help to
determine whether mortgage credit standards are being fairly applied and to
evaluate a lender's efforts in the context
of the entire mortgage market.
Mortgage Lending Initiatives
The Board gave the following update on
FFIEC initiatives previously brought to
the subcommittee's attention. The FFIEC
has continued to explore ways that lenders can increase access to mortgages in
low-income and minority neighborhoods. The agencies are looking at mortgage review boards, in which groups of
lenders and community representatives
offer a second chance to applicants who
have been turned down for mortgages.
The agencies are also examining a Philadelphia mortgage plan in which a group
of large banks have agreed not to reject a
mortgage applicant until a credit committee (representing the banks) reviews the
application, possibly placing the loan
with another lender.
The Board also reported on two educational brochures. One will help potential
homebuyers learn more about the mortgage lending process and their right to
fair lending. The other, which the FFIEC
is developing, will advise mortgage
lenders about practices that could result,
unintentionally, in unfair lending patterns
or in the appearance of discrimination.
The Board reported that new procedures will help the agencies trade information from CRA interviews with community contacts like consumer advocacy
and housing organizations, local businesses, trade associations, realtors, and
government offices.
And finally, as a means of providing
HMDA information to institutions in a
concise format, examination reports will
174 77th Annual Report, 1990
contain an executive summary that will
allow a bank to compare its home lending
patterns by race and income with the
lending record of all local lenders as a
whole. The summary is being developed
along with new computer applications to
process the expanded HMD A data. The
Federal Reserve is testing a preliminary
model.
showing how various tools available to
lenders (like grants or subsidies to the
buyer, or changes in the interest rates
and underwriting criteria) can produce
home loans that are both bankable and
affordable to low- and moderate-income
buyers.
The Boston Bank co-hosted, with the
Boston Federal Home Loan Bank, a
symposium for more than 300 members
of the National Association of Affordable
Federal Reserve Fair Lending
Housing Lenders.
Activities
The San Francisco Bank helped launch
The Board highlighted its efforts to the California Community Reinvestment
address fair lending concerns. In May the Corporation (a lender consortium pooling
Board sent letters to several hundred fair more than $100 million for long-term
housing and civil rights groups and to financing of affordable housing developstate and local fair lending enforcement ment) and has been asked to help bankers
authorities to explain the Federal Re- and community organizers in Hawaii and
serve's role in protecting the legal rights Nevada with similar programs.
of applicants. It asked for their help in
The Chicago Bank convened a seminar
identifying complainants that the Board for about 250 area bankers to share CRA
might assist.
policies and activities that have been
The Board testified about its updated successful in the District.
The Philadelphia Bank is working on a
statistical analysis concerning possible
racial discrimination by mortgage lenders video about CRA experiences.
in Atlanta and Detroit. Data show disparities, with predominantly white middle- Recommendations
income neighborhoods receiving more of Other Agencies
home purchase loans per single family
housing unit and minority middle-income The agencies that have enforcement
neighborhoods receiving more home responsibilities under Regulations B, E,
improvement loans. Although these data and Z made no recommendations in 1990
suggest problems in home lending, the for changes to the regulations or to the
•
Board could not conclude definitively underlying statutes.
that discrimination was at work.
The Board also testified about the online tracking system for consumer complaints, which it will implement in 1991.
Reserve Bank Initiatives
The Board testified about the work by
Federal Reserve Banks to promote fair
lending to low- and moderate-income
communities. For example, the Atlanta
Bank has developed a computer model
175
Litigation
During 1990, the Board of Governors
was named in twenty-seven pending
lawsuits, compared with thirty-nine in
1989. Of the thirteen new lawsuits filed
in 1990, five raised questions under the
Bank Holding Company Act, compared
with eight in 1989. As of December 31,
1990, sixteen cases were pending, seven
of which involved questions under the
Bank Holding Company Act.
Bank Holding Companies—
Antitrust Action
In United States v. First Hawaiian, Inc.,
No. 90-00904 (D. Hawaii, filed December 28, 1990), the Department of Justice
is challenging the acquisition by First
Hawaiian, Inc., a Hawaiian bank holding
company, of First Interstate of Hawaii,
Inc., under the antitrust laws. The Board
had approved the transaction on November 30,1990 (77 Federal Reserve Bulletin
52 (1991)). The case is pending.
Bank Holding Company A c t Review of Board Actions
In Lewis v. Board of Governors, Nos.
87-3455 and 87-3545 (1 lth Circuit, filed
June 25, August 3, 1987), petitioner
sought review of Board orders dated
May 29,1987, and July 1,1987, approving applications of Chemical New York
Corporation and of Manufacturers National Corporation to expand activities of
trust company subsidiaries in Florida (73
Federal Reserve Bulletin 609 and 735).
The cases were dismissed by stipulation
on July 3, 1990, following the Supreme
Court's decision in a related case, Lewis
v. Continental Illinois Corp., 110 S. Ct.
1249 (1990).
In Independent Insurance Agents of
America, Inc. v. Board of Governors,
No. 89-4030 (2nd Circuit, filed March
9, 1989), petitioner sought review of a
Board order dated March 3,1989, granted
at the request of Merchants National
Corporation, determining that the nonbanking prohibitions of the Bank Holding
Company Act do not apply to activities of
banks (75 Federal Reserve Bulletin 388).
The Court of Appeals for the Second
Circuit upheld the Board's order on
November 29, 1989 (890 F.2d 1275),
and the Supreme Court denied certiorari
on October 1, 1990 (111 S. Ct. 44). A
second case raising the identical issue
was dismissed by stipulation on January 8, 1990 {Independent Insurance
Agents of America v. Board of Governors, No. 89-4046, 2nd Circuit, filed
April 6, 1989).
In Synovus Financial Corporation v.
Board of Governors, No. 89-1394
(D.C. Circuit, filed June 21, 1989),
petitioner seeks review of a Board
order dated May 22, 1989, approving
the application of SouthTrust Corporation to acquire a national bank in
Georgia by relocating an Alabama national bank subsidiary across state lines
pursuant to 12 U.S.C. §30 (75 Federal Reserve Bulletin 516). The case is
pending.
In Babcock and Brown Holdings, Inc.
v. Board of Governors, No. 89-70518
(9th Circuit, filed November 22, 1989),
petitioners seek review of a Board order
dated October 25, 1989, in which the
Board requested the Federal Deposit
Insurance Corporation to condition de-
176 77th Annual Report, 1990
posit insurance for a proposed District
bank on Board approval of the acquisition
of control of the bank by Babcock and
Brown Holdings, Inc., a brokerage firm.
The case is pending.
In Woodward v. Board of Governors,
No. 90-3031 (11th Circuit, filed January 16, 1990), and Kaimowitz v. Board
of Governors, No. 90-3067 (11th Circuit, filed January 23,1990), petitioners,
raising issues under the Community
Reinvestment Act, seek review of a Board
order dated December 22,1989, approving an application by First Union Corporation to acquire Florida National Banks
(76 Federal Reserve Bulletin 83). The
Woodward case was dismissed on the
Board's motion on June 26, 1990. The
Kaimowitz case is pending.
In California Association of Life
Underwriters v. Board of Governors, No
90-70123 (9th Circuit, filed March 15,
1990), petitioner sought review of a
Board order dated February 16, 1990,
approving the acquisition by BankAmerica Corporation of a bank subsidiary to engage in insurance activities
pursuant to state law (76 Federal Reserve
Bulletin 244). The case was voluntarily
dismissed on June 29, 1990.
In Citicorp v. Board of Governors,
No. 90-4124 (2nd Circuit, filed October 4,1990), petitioner seeks review of
a Board order requiring Citicorp to
terminate certain insurance activities
by a nonbank subsidiary of Citicorp's
subsidiary bank in Delaware (76 Federal Reserve Bulletin 977). The case is
pending.
Other Litigation Involving
Challenges to Board Procedures
and Regulations
In 1990, seven actions were commenced,
were pending, or were dismissed under
the Financial Institutions Supervisory Act
and the Glass-Steagall Act.
Financial Institutions
Supervisory Act
In MCorp v. Board of Governors, No.
89-2816 (5th Circuit, filed May 2,1989),
the Board appealed a preliminary injunction entered by the district court enjoining
pending and future enforcement actions
against a bankrupt bank holding company (101 Bankr. 483, S.D. Texas 1989).
On May 15, 1990, the Court of Appeals
vacated the injunction in part and affirmed it in part (900 F.2d 852). On
December 10, 1990, both parties filed
petitions for certiorari in the Supreme
Court (Nos. 90-913 and 90-914). The
case is pending. A related case, MCorp v.
Board of Governors, No. CA3-882693-F (N.D. Texas, filed October 28,
1988), is stayed pending the outcome of
the Fifth Circuit appeal.
In BankTEXAS Group, Inc. v. Board of
Governors, No. CA-3-90-0236-R
(N.D. Texas, filed February 2, 1990),
plaintiff sought to enjoin the Board from
enforcing a temporary order to cease
and desist, which required injection of
capital into the plaintiffs subsidiary
banks. The court granted a preliminary
injunction on June 5, 1990, in light of
the Fifth Circuit's decision in MCorp.
On December 20, 1990, the parties submitted an agreed order of dismissal after
settlement of the administrative action.
In Burke v. Board of Governors, No.
90-9505 (10th Circuit, filed February
27, 1990), petitioners seek review of
Board orders assessing civil money penalties and issuing orders of prohibition.
The case is pending.
In Stanley v. Board of Governors, No.
90-3183 (7th Circuit, filed October 3,
1990), petitioners seek review of a Board
order imposing civil money penalties.
The case is pending.
Litigation 111
Glass-Steagall Act
In Securities Industry Association v.
Board of Governors, No. 89-1127 (D.C.
Circuit, filed February 16, 1989), the
petitioner sought review of a Board order
dated January 18,1989, which expanded
the scope of securities that could be
underwritten and dealt in by bank holding
companies to include all types of debt and
equity securities, subject to certain conditions (75 Federal Reserve Bulletin 192).
The Board's order was issued at the
request of J. P. Morgan & Co., The Chase
Manhattan Corporation, Bankers Trust
New York Corporation, Citicorp, and
Security Pacific Corporation. On April
10, 1990, the Court of Appeals upheld
the Board's order (900 F.2d 360).
In Securities Industry Association v.
Board of Governors, No. 89-1730 (D.C.
Circuit, filed November 29, 1989), the
petitioner sought review of a Board order
dated October 30, 1989, approving an
application by Bankers Trust New York
Corporation for its subsidiary to act as
agent in the placement of all types of
securities and to buy and sell all types of
securities on the order of investors as a
"riskless principal" (75 Federal Reserve
Bulletin 829). The case was dismissed by
stipulation.
Other Actions
In Cohen v. Board of Governors, No.
88-1061 (D. New Jersey, filed March 7,
1988), plaintiff sought to require disclosure of documents under the Freedom of
Information Act. In Fidata Trust Company New York v. Board of Governors,
No. 88-4846 (D. New Jersey, filed
November 9, 1988), plaintiff sought to
enjoin the Board from disclosing certain
documents involved in the Cohen case.
The Fidata case was dismissed by stipulation on January 30,1990, and the Cohen
case was dismissed by stipuation on June
25, 1990.
In White v. Board of Governors, No.
88-623 (D. Nevada, filed July 29,1988),
the plaintiff alleges discriminatory practices under the Age Discrimination in
Employment Act. The case is pending.
In Laufman v. State of California, No.
CIVS-89-1755 (E.D. California, filed
April 2,1990), plaintiff sought to require
bank regulatory agencies, including the
Board, to examine or bring enforcement
action against a bank. The case was
dismissed on July 25, 1990.
In Consumers Union of U. S., Inc. v.
Board of Governors, No. 90-5156 (D.C.
Circuit, filed May 2, 1990), appellant
appeals a district court decision granting
summary judgment for the Board in
connection with a challenge to various
amendments to Regulation Z implementing the Home Equity Loan Consumer
Protection Act. The appeal is pending.
In May v. Board of Governors, No.
90-1316 (D. District of Columbia, filed
June5,1990), the plaintiff challenged the
Board's response to his Freedom of
Information Act and Privacy Act requests. The District Court granted the
Board's motion to dismiss on July 17,
1990; plaintiffs appeal (No. 90-5235) to
the D.C. Circuit is pending.
In Kuhns v. Board of Governors, No.
90-1398 (D.C. Circuit, filed July 30,
1990), petitioner seeks review of a Board
order denying a request for attorney's
fees under the Equal Access to Justice
Act. The case is pending.
In Rutledge v. Board of Governors,
No. 90-7599 (1 lth Circuit, filed August
21, 1990), appellant appealed a district
court grant of summary judgment for the
Board in connection with his challenge to
Board and Reserve Bank supervisory
actions under a number of tort theories.
The Court of Appeals summarily affirmed the lower court on January 17,
1991.
178 77th Annual Report, 1990
In Sibille v. Federal Reserve Bank of
New York, et aL, No. 90-CIV-5898
(S.D. New York, filed September 12,
1990), plaintiff seeks review of a denial
of a request made under the Freedom of
Information Act. The case is pending.
In State of Illinois v. Board of
Governors, No. 90-C-6863 (N.D. Illinois, filed November 27,1990), the State
of Illinois filed suit to prevent disclosure
of state examination reports provided to
the Board under a confidentiality agreement. The documents were the subject of
a congressional subpoena. On December
28, 1990, the district court preliminarily
enjoined disclosure of the reports.
•
179
Legislation Enacted
In 1990 the following legislation directly
affecting the Federal Reserve or the
institutions it regulates was enacted.
within two years of the enactment of the
act on the development of linked settlement systems for securities, futures
contracts, options, and related products.
Market Reform Act of 1990
Public Law 101-432, the Market Reform
Act of 1990, was enacted on October 16,
1990. The act gives the Securities and
Exchange Commission (SEC) new powers over the trading of securities, including the ability to halt trading in emergencies and to require more extensive
reporting. Section 5 of the act provides
for improvements in the coordination of
securities clearing. The SEC is given
authority to adopt rules concerning the
transfer and pledge of certificated and
uncertificated securities, other than government securities under the Federal
Reserve's book-entry system, if it makes
certainfindingsconcerning the necessity
and effects of a uniform federal rule.
Before adopting rules, the SEC is required to consider the recommendations
of the Board, the Secretary of the Treasury, and the Advisory Committee created under this section. The Advisory
Committee will comprise members appointed by the SEC, the Secretary of the
Treasury, and the Board.
Under section 8 of the act, the Board,
along with the SEC, the Commodity
Futures Trading Commission (CFTC),
and the Secretary of the Treasury, is
required to make annual reports to the
Congress on the coordination of regulatory actions concerning payment and
market systems, as well as on the adequacy of margin levels and other issues
relating to the integrity of the financial
markets. The SEC, the CFTC, and the
Board are also required to submit a report
Cranston-Gonzales National
Affordable Housing Act
The Cranston-Gonzales National Affordable Housing Act, Public Law 101-647,
was enacted on November 28, 1990.
Although the provisions of the act primarily concern affordable housing and
programs to increase home ownership,
they also amend the Expedited Funds
Availability Act. The amendments allow
depository institutions to place holds of
four intervening days on deposits made at
nonproprietary automated teller machines before November 28, 1992, when
the permanent schedule for these deposits will take effect.
Crime Control Act of 1990
The Crime Control Act of 1990, Public
Law 101 -647, was enacted on November
29, 1990. The act contains diverse measures intended to address a variety of
crime problems, including provisions in
title I concerning money laundering. The
provisions require a representative of the
Board, along with representatives of the
Treasury, the Bureau of Engraving and
Printing, the Secret Service, and other
agencies, to participate in a task force to
study the feasibility of electronic scanning of U.S. currency notes.
Title XXV contains the Comprehensive Thrift and Bank Fraud Prosecution
and Taxpayer Recovery Act of 1990.
180 77th Annual Report, 1990
This title has several new provisions and
amendments to existing civil and criminal
laws that affect the manner in which the
Federal Reserve and other federal financial institution supervisory agencies conduct their regulatory responsibilities, as
well as the conduct of the Department of
Justice's criminal law enforcement duties
relating tofinancialinstitutions.
Subtitle A of title XXV establishes or
increases criminal penalties as follows:
• Establishes penalties for concealing
assets from a conservator, receiver, or
liquidator of afinancialinstitution, or for
obstructing an examiner
• Increases penalties for bank fraud
and embezzlement and for major bank
crime cases
• Extends the prohibition on participation in the affairs of an insured depository institution by persons convicted of
certain criminal offenses to persons that
have entered a pretrial diversion or other
program, and establishes a minimum tenyear prohibition for persons convicted of
certain offenses.
Subtitle B of title XXV protects the
assets of an insured depository institution
from wrongful disposition as follows:
• Authorizes the Federal Reserve and
other federal supervisory agencies of
depository institutions to apply for judicial restraining orders to prevent the
transfer of assets by persons subject to
administrative enforcement actions that
may involve civil money penalties, money
damages, or restitution, and establishes
the standards for the issuance of such
orders
• Prevents holding companies of
depository institutions from using
bankruptcy proceedings to evade capital
commitments made to the Federal
Reserve or other federal depository
institution regulators with regard to
insured depository institutions. The
provisions also prevent use of bankruptcy proceedings by individuals con
victed of criminal offenses involving
financial institutions to evade restitution
orders
• Authorizes the Federal Deposit Insurance Corporation (FDIC) to prohibit
or limit the payment of "golden parachute"
or indemnity payments made by depository institutions or their holding companies to institution-affiliated parties
under certain circumstances. Subtitle B
also prohibits the prepayment of salary or
legal expenses of an institution-affiliated
party in contemplation of insolvency or
to prevent the proper application of the
institution's assets.
• Adds civil and criminal forfeiture
provisions for fraud relating to the sale of
assets by a depository institution under a
conservatorship or receivership
• Provides that persons convicted of
certain offenses relating to a depository
institution or that are in default to the
depository institution may not purchase
assets of me institution from the receiver
or conservator of the institution
• Provides expedited procedures for
appeals from orders in cases brought by
the FDIC against a depository institution's officers and directors
• Gives the FDIC or other federally
appointed conservator the authority to
void certain transfers of assets made with
intent to hinder, delay, or defraud the
depository institution, the FDIC, a conservator, or a federal depository institution regulatory agency.
Subtitle C of title XXV makes the
following provisions for handling bankrelated cases:
• Permits wiretaps in cases relating to
bank fraud and otherfinancialinstitutionrelated offenses
• Allows the Board or other federal
banking agencies to obtain assistance
from foreign banking authorities and
maintain offices outside the United States
in connection with an investigation,
examination, or enforcement action
Legislation Enacted
• Permits the Board or other federal
banking agencies to assist investigations
conducted by foreign banking authorities
pertaining to violations of foreign laws or
regulations relating to banking or currency transactions
• Provides a ten-year statute of limitations for civil penalty actions brought in
connection with certain criminal violations relating to depository institutions
• Clarifies the subpoena authority of
the FDIC and the Resolution Trust Corporation when they act as receiver or
conservator.
Subtitle D of title XXV requires the
formation of a unit in the Department of
Justice to deal with fraud in financial
institutions and establishes an interagency
task force on financial institution fraud
comprising representatives of the Board,
the Department of Justice, the Department of the Treasury, and all other federal banking agencies.
Subtitle E of title XXV expands reporting and recordkeeping requirements as
follows:
• Requires the Department of Justice
to maintain extensive records and to file
reports with the Congress concerning
civil and criminal investigations, prosecutions; and enforcement and recovery
proceedings relating to criminal activities
at financial institutions
• Expands the requirements for public
disclosure of formal enforcement actions.
Any written agreement or statement that
may be enforced by the agencies must be
disclosed, as must the modification or
termination of such agreements, unless
public disclosure is determined to be
contrary to the public interest. Disclosure
of final orders may be delayed if the
agency finds that public disclosure would
threaten the safety and soundness of an
insured depository institution
• Provides that all hearings on the
record concerning any notice of charges
issued by a federal banking agency will
181
be open to the public unless the agency
determines that a public hearing would
be contrary to the public interest
• Requires that transcripts and documentary evidence from such hearings
will generally be made available to the
public unless disclosure is deemed to be
contrary to the public interest
• Requires each federal banking
agency to report to the Congress quarterly
regarding any determinations made not
to publish any order or written agreement
or not to hold a public hearing
• Provides that federal banking agencies must retain for a minimum of six
years all formal and informal agreements,
statements, orders, and supporting documents relating to administrative enforcement proceedings.
Subtitle F of title XXV establishes a
National Commission on Financial Institution Reform, Recovery, and Enforcement to study the problems in the savings
and loan industry, to make recommendations on reforms needed to prevent
reoccurrences of such problems in the
banking industry, and to authorize appropriations relating to civil and criminal proceedings involving financial
institutions.
Subtitle H, the Financial Institutions
Anti-Fraud Enforcement Act of 1990,
establishes a mechanism that would allow
private individuals under some limited
circumstances to bring actions on behalf
of the government to collect civil penalties in cases involving violations of law
by financial institutions. Under this subtitle, such individuals could receive
rewards for successful actions involving
the recovery of assets. Individuals could
also receive rewards when they provide
information that forms the basis of a
criminal conviction.
Subtitle I of title XXV clarifies the fact
that the Board has the same enforcement
powers with regard to foreign financial
institutions, their branches, agencies, and
182 77th Annual Report, 1990
associated persons doing business in the
United States as it has with regard to
domestic financial institutions and associated persons. This subtitle expands the
definition of thetermfinancialinstitution
as it is used in numerous bank fraud
provisions to include Federal Reserve
Banks, Edge corporations, Agreement
companies, and branches and agencies of
foreign banks. The amendment also
extends coverage of bank fraud statutes
relating to theft, embezzlement, or misapplication of funds to holding companies of depository institutions.
•
183
Banking Supervision and Regulation
During 1990, the Federal Reserve addressed many critical supervisory and
policy issues. Early in the year, the Federal Reserve received reports that, because of tightened lending standards,
bank credit was becoming difficult to
obtain in some areas of the country. The
Federal Reserve responded by conducting surveys to determine the nature and
extent of these conditions and by meeting
with banking groups to gain further
information and to encourage lenders to
make sound loans. In the second half of
the year, conditions continued to tighten
while economic activity showed signs
of slowing. The Federal Reserve, partly
in response to these developments, acted
to ease overall credit conditions by
increasing reserve availability, reducing
the discount rate, and lowering reserve
requirements.
The Federal Reserve continued to be
involved in implementing important elements of the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA). As mandated by title XI
of FIRREA, the Board, along with other
federal financial institution regulatory
agencies, issued appraisal regulations for
real estate lending activities of state
member banks and bank holding companies . The Board also participated in the
start-up of the Appraisal Subcommittee
of the Federal Financial Institutions
Examination Council. Board staff members were assigned to serve temporarily
on the subcommittee and on its staff,
pending permanent appointments to these
positions. As required by section 1215 of
FIRREA, the Board submitted on August
9, 1990, the first of its annual reports to
the Congress on capital and accounting
standards used by federal agencies that
supervise federally insured depository
institutions. Also, the Board's supervisory staff joined with other Board staff
members to assist the Treasury in its
FIRREA-mandated study of the deposit
insurance system. Finally, the Board's
Staff Director of the Division of Banking
Supervision and Regulation served as
acting president and chief executive
officer of the Oversight Board of the
Resolution Trust Corporation for several
months early in the year.
The initial phase-in of the risk-based
capital guidelines of the Basle Committee on Banking Supervision occurred
on December 31, 1990. The guidelines
had been adopted by the Federal
Reserve, the Federal Deposit Insurance
Corporation, and the Office of the
Comptroller of the Currency in early
1989. Throughout 1990, banking organizations took steps to achieve
compliance with the interim standards
specified for the phase-in date, with
many endeavoring to be in compliance
with the more stringent standards set
for December 31,1992. In August 1990,
the Board announced that, over the remainder of the year, organizations could
adhere either to the primary capital
standard (to be phased out at year-end) or
to the interim risk-based capital standard
(to be phased in at year-end). At the same
time, the Board adopted a new capital
leverage standard that requires organizations generally to maintain a ratio of tier 1
capital (as defined in the 1992 risk-based
capital standard) to total assets of 3 percent plus 100 to 200 basis points. Only
organizations in the strongest condition
and with no significant plans for growth
are permitted to operate at the minimum
level of 3 percent.
184 77th Annual Report, 1990
During the year, the Board adopted introduced a revised rating system,
inspection procedures for companies that closely paralleling the CAMEL system,
underwrite and deal in equity securities for the international activities of U.S.
in accordance with section 20 of the banks.1
Glass-Steagall Act. In September 1990,
Board staff members contributed to the
the Board, for thefirsttime, authorized a international attack on money laundering
bank holding company to commence this by participating on the U.S. Department
activity.
of die Treasury's Financial Action Task
In the international policy area, the Force, conducting seminars on U. S. bank
Federal Reserve published for com- regulatory practices in this area for
ments proposed revisions to Regulation delegations from several developing
K (International Banking Operations). countries, and providing resources to
The revisions include proposals to U.S. government task forces.
improve the competitiveness of U.S.
banks overseas; and they also deal with
the operations of foreign banks in the Scope of Supervisory
United States. Numerous comments and Regulatory Responsibilities
were received and were being evaluated The Federal Reserve is the primary fedat year-end. Also, the Federal Reserve, eral supervisor and regulator of state
in conjunction with the Basle Committee chartered commercial banks that are
on Banking Supervision, continued to members of the Federal Reserve System
consider whether further convergence and of all U.S. bank holding companies.
of regulatory standards is possible in In its supervision of the general operathe area of market risk-particularly risk tions of these organizations, the Federal
involving interest rates, foreign ex- Reserve primarily seeks to promote their
change, and securities positions. safety and soundness and their compliMembers of the Federal Reserve staff ance with laws and regulations, including
also attended joint meetings of securities the Bank Secrecy Act and consumer and
and insurance supervisors held under civil rights laws.2 The following specialthe auspices of the Basle Committee. ized activities of these institutions are
These joint meetings, the first such also reviewed: electronic data processwith insurance supervisors and the ing, fiduciary activities, government
third such with securities supervisors,
explored possible resolutions of
common problems, such as the sharing
1. In the CAMEL rating system, examiners
of prudential information among evaluate an institution's capital adequacy, asset
quality, management, earnings, and liquidity.
supervisors.
2. The Board's Division of Consumer and
Members of the Federal Reserve's staff Community Affairs has the responsibility of coorcontinued to work closely with enforce- dinating the Federal Reserve's supervisory activities
ment authorities and state bank supervi- with regard to the compliance of banking organizasory authorities to resolve several prob- tions with consumer and civil rights laws. To carry
out this responsibility, institutions are examined by
lems relating to offices of foreign banks specially trained Reserve Bank examiners. The
in the United States.
chapter of this REPORT covering consumer and
The Federal Reserve also developed community affairs describes these regulatory reand distributed a new procedures manual sponsibilities. Compliance with other statutes and
regulations, which is treated in this chapter, is the
for examining merchant bank activities. responsibility of the Board's Division of Banking
After consultation with state bank super- Supervision and Regulation and the Reserve Banks,
visory authorities, the Federal Reserve whose examiners check for safety and soundness.
Banking Supervision and Regulation 185
securities dealing and brokering, municipal securities dealing and clearing, and
securities underwriting and dealing
through section 20 securities subsidiaries.
The Federal Reserve also has responsibility for the supervision of (1) all Edge
and agreement corporations (organizations chartered by the Federal Reserve
Board to provide all segments of the U. S.
economy with a means of financing
international trade, especially exporting),
(2) the international operations of state
member banks and U.S. bank holding
companies, and (3) the operations of
foreign banking organizations in the
United States.
Through its administration of the Bank
Holding Company Act, the Bank Merger
Act, and—for bank holding companies
and state member banks—the Change in
Bank Control Act, the Federal Reserve
exercises important regulatory influence
over the structure of the U.S. banking
system. The Federal Reserve is also
responsible for regulating margin requirements on securities transactions. The
Federal Reserve coordinates its supervisory activities with other federal and
state regulatory agencies and with the
bank regulatory agencies of other nations.
Supervision for Safety
and Soundness
To ensure the safety and soundness of
banking organizations, the Federal Reserve conducts on-site examinations and
inspections, off-site 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 offinancialinstitutions. Examinations of state member banks and Edge
and agreement corporations and inspections of bank holding companies and
their subsidiaries entail (1) 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.
State Member Banks
At the end of 1990, there were 1,014 state
member banks, 33 fewer than in 1989.
These banks represented about 8 percent
of all insured commercial banks and
accounted for about 17 percent of their
assets.
The Federal Reserve in 1986 increased
the frequency of scheduled examinations
and inspections of state member banks
and bank holding companies. The guidelines call for state member banks to be
examined at least annually by either a
Reserve Bank or a state banking agency.
Large or troubled banks must be examined at least annually by a Reserve Bank.
Because of the reassignment in 1990 of
bank examiners to address other emerging problems in the banking industry,
scheduled examinations of 27 healthy,
well-managed banks were deferred into
1991. All other state member banks were
examined at least once in 1990. Because
of the requirement that some banks
should be examined more than once, the
Federal Reserve conducted 764 examinations (some of them jointly with state
agencies), and state agencies conducted
301 independent examinations. Also,
under policy guidelines, Reserve Bank
officials held 307 meetings with directors of either the largest state member
banks or those that displayed significant
weaknesses.
186 77th Annual Report, 1990
Bank Holding Companies
At year-end 1990, the number of bank
holding companies totaled 6,425, 19
fewer than in 1989. These organizations
control about 8,700 commercial banks,
which hold approximately 94 percent of
the assets of all insured commercial banks
in the United States.
Large bank holding companies and
smaller companies with significant nonbank assets are to be inspected annually
under the revised guidelines for frequency and scope of examination.
Medium-sized companies are inspected
at least every three years. For the smallest
companies, those without nonbank assets, inspections are conducted on a
sample basis.
The inspection focuses on the operations of the parent holding company and
its nonbank subsidiaries. In judging the
condition of subsidiary banks, Federal
Reserve examiners consult the examination reports of the federal and state
banking authorities that have primary
responsibility for the supervision of these
banks. Of the 2,173 inspections conducted in 1990, Federal Reserve System
examiners made 2,080 on-site inspections, and state examiners inspected 93
bank holding companies, 28 more than in
1989. Also, 161 off-site inspections were
completed. Because members of the
examining staff were assigned to work
with other industry problems in 1990,
53 bank holding company inspections
were deferred until 1991. During 1990,
Reserve Bank officials held 478 meetings
with the boards of directors of bank
holding companies to discuss supervisory
concerns.
Enforcement Actions,
Civil Money Penalties,
and Significant Criminal Referrals
In 1990, the Federal Reserve Banks
recommended, and members of the
Board's staff initiated and worked on,
175 formal enforcement cases that
involved 382 separate actions, such as
written agreements, cease-and-desist
orders, removals, prohibitions, and civil
money penalties, most dealing with
unsafe or unsound banking practices and
violations of law. Of these, 50 cases
involving 72 actions were completed by
year-end. The Board completed 21 civil
money penalty actions and assessed,
either by the issuance of consent orders
or after the completion of contested
proceedings, a total of $3,119,000. By
year-end 1990, the Board had collected
$270,975, with most of the remainder of
the assessments under review by the
appropriate courts of appeals or to be
paid in accordance with agreed-upon
payment schedules. The Board also
ordered two insiders to pay restitution
totaling $500,000 to their affiliated
banking organizations.
A description of all formal supervisory actions undertaken during the
year and the reasons for them are
available to the public in the Board's
yearly "Report on Formal Enforcement
Actions." Also, all final enforcement
orders issued by the Board of Governors after August 9,1989, and all written
agreements executed after November 29,
1990, areavailable to the public. In 1990,
the Federal Reserve Banks initiated 298
informal enforcement actions and completed 220 of them through instruments
such as memoranda of understanding
with state member banks, bank holding
companies, and foreignfinancialinstitutions subject to the jurisdiction of the
Federal Reserve.
In 1990, the staff of the Division of
Banking Supervision and Regulation
forwarded 181 criminal referrals to the
Fraud Section of the Criminal Division
of the Department of Justice for inclusion in its significant referral tracking
system.
Banking Supervision and Regulation
Specialized Examinations
The Federal Reserve conducts specialized examinations in the following
areas of bank activity: electronic data
processing, fiduciary activities, government securities dealing and brokering, municipal securities dealing and
clearing, and securities underwriting and
dealing through section 20 securities
subsidiaries.
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 1990,
System examiners conducted 302 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.
Fiduciary Activities
The Federal Reserve System has supervisory responsibility for institutions that
hold more than $4.1 trillion of discretionary and nondiscretionary assets in various
fiduciary capacities. This group of institutions includes 333 state chartered member banks and trust companies and 153
trust companies and investment advisory
companies that are subsidiaries of bank
holding companies.
On-site examinations are essential to
ensure the safety and soundness of financial institutions that have fiduciary operations. The scope of these examinations
includes (1) an evaluation of management, policies, audit procedures, and
risk management; (2) an appraisal of the
quality of trust assets; (3) an assessment
187
of earnings; (4) a review for conflicts of
interest; and (5) a review for compliance
with laws, regulations, and general fiduciary principles.
During 1990, Federal Reserve System
examiners conducted on-site trust examinations of 169 state member banks and
state member trust companies and 32
inspections of bank holding company
subsidiaries engaged in fiduciary activities. The institutions examined in 1990
held more than $1.7 trillion in fiduciary
assets.
Government Securities Dealers
and Brokers
The Board is responsible for examining
the activities of state member banks and
some foreign banks that are government
securities dealers and brokers for compliance with the Government Securities
Act of 1986 and with the Treasury Department's regulations. Forty-three state
member banks, three state branches of
foreign banks, and one state agency of a
foreign bank currently have on file with
the Board notices that they are government securities dealers or brokers that
are not otherwise exempt from Treasury
Department regulations.
Municipal Securities Dealers
and Clearing Agencies
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. Fortyfour banks that act as municipal securities
dealers and four clearing agencies that
act as custodians of securities involved in
transactions settled by bookkeeping entries are registered with the Board. In
1990, the Board examined all four of the
clearing agencies and twenty of the banks
that deal in municipal securities.
188 77th Annual Report, 1990
Securities Subsidiaries
ofBank Holding Companies
Section 20 of the Banking Act of 1933,
commonly known as the Glass-Steagall
Act, prohibits the affiliation of a member
bank with a company that is "engaged
principally" in underwriting or dealing in
securities. The Board in 1987 approved
proposals by banking organizations to
underwrite and deal on a limited basis in
specified classes of bank "ineligible"
securities (that is, commercial paper,
municipal revenue bonds, conventional
residential mortgage-related securities,
and securitized consumer loans) in a
manner consistent with the Glass-Steagall
Act and the Bank Holding Company Act.
At that time, the Board limited revenues
from these newly approved activities to
no more than 5 percent of total revenues
for each securities subsidiary.
In January 1989, the Board approved
applications by five U.S. bank holding
companies to underwrite and deal in
corporate and sovereign debt and equity
securities, subject in each case to reviews
of managerial and operational infrastructure and other conditions and requirements specified by the Board. Four of
these organizations subsequently received authorization to underwrite
and deal in corporate and sovereign
debt securities. In September 1989, the
Board increased the revenue limit from
5 percent to 10 percent. In 1990, the
Board approved applications by five
foreign banking organizations to engage
in the expanded underwriting powers,
and in September 1990, a bank holding company received authorization
to commence underwriting of equity
securities. At year-end 1990, proposals
by several other banking organizations to
commence equity underwriting were
pending.
Currently, thirty bank holding companies have section 20 subsidiaries that
have received authority to underwrite
and deal in ineligible securities. Specialized inspection procedures have been
developed for use in reviewing the operations of these securities subsidiaries.
Transfer Agents
Federal Reserve System examiners conducted 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 their transfer, and
exchange or convert them. During 1990,
System examiners reviewed 80 of the
167 banks and bank holding companies
registered as transfer agents with the
Board.
Surveillance and Monitoring
The Federal Reserve monitors the financial condition of state member banks and
bank holding companies through a quarterly surveillance program to supplement
the Federal Reserve's on-site examinations . This program consists of automated
screening systems that identify organizations with poor or deteriorating financial
profiles. Banking organizations submit
financial statements from which the
screening systems compute numerous
financial ratios. These ratios are then
analyzed by the staff members of the
division and of the Reserve Banks to
determine whether the organizations have
emerging problems that may require the
commitment of examiner resources for
on-site examinations or other appropriate
supervisory responses. The Federal Reserve supplements the quarterly surveillance programs with ad hoc screening
reports on specific areas of supervisory
concern.
To enhance the timeliness and quality
of the surveillance processes, the current
system is being revised and will include
an early-warning model to continually
Banking Supervision and Regulation 189
evaluate a banking organization's supervisory rating based on the most current
financial information available.
International Activities
The Federal Reserve is responsible
for supervising several international
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 1990, the
Federal Reserve examined 100 Edge and
agreement corporations.
Foreign-Office Operations
of U.S. Banking Organizations
The Federal Reserve examines the international operations of state member
banks, Edge corporations, and bank
holding companies, principally at the
U.S. head offices of these organizations
where the ultimate responsibility for their
foreign offices lies. The Federal Reserve
also conducts on-site reviews of important foreign offices at least every three
years to supplement the results of the
head-office examinations. In 1990, the
Federal Reserve examined seven foreign
branches of state member banks and
twenty-eight foreign subsidiaries of Edge
corporations and bank holding companies. In 1990, the Federal Reserve, in
coordination with the Office of the Comptroller of the Currency, conducted extensive on-site examinations of U. S. banking
organizations in the United Kingdom,
Germany, Spain, Hong Kong, and Brazil.
All the examinations abroad were con
ducted with the cooperation of the supervisory authorities of the countries in
which the examinations took place. Also,
examiners conducted five reviews of the
operations of overseas offices to evaluate
compliance with corrective measures
previously required.
U. S. Activities of Foreign Banks
Foreign banks continue to be significant
participants in the U.S. banking system.
As of year-end 1990, 307 foreign banks
operated 497 state-licensed branches and
agencies, of which 48 are insured by the
Federal Deposit Insurance Corporation.
At year-end, these foreign banks also
operated 90 branches and agencies licensed by the Office of the Comptroller
of the Currency, of which 9 have FDIC
insurance. Foreign banks also directly
owned 18 Edge corporations and 10
commercial lending companies. In addition, foreign banks held a 25 percent or
more interest in 90 U.S. commercial
banks. Altogether, foreign banks at yearend controlled approximately 22 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 Federal 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 conducted or participated in the examination of 125 such
offices during the past year.
Supervisory Policy
During 1990, the Board made many
changes to its supervisory policies to
190 77th Annual Report, 1990
implement the requirements of FIRREA
and to anticipate the phase-in of riskbased capital standards. The Board also
took several steps to strengthen its examination policies and procedures in view
of conditions in the banking system. The
following sections summarize these
changes and review other activities initiated in 1990 to enhance the Board's
supervisory programs.
Contribution to Treasury Study
As required by title X of FIRREA, the
Federal Reserve provided consultation to
the Department of the Treasury in connection with the study of the federal
deposit insurance system mandated by
the Congress. Federal Reserve staff
members made significant contributions
to the study by providing supporting
materials and information on several
critical supervisory issues. The Treasury's study was published in February
1991.
the appointment of a permanent staff.
The subcommittee was established pursuant to title XI of FIRREA to monitor
the overall implementation of real estate
appraisal reform. Among the subcommittee's assigned tasks are to assure that the
procedures followed by state agencies to
regulate real estate appraisals comply
with title XI and to coordinate the federal
agencies' regulatory activities related to
appraisals. Also, Federal Reserve staff
members were instrumental in the completion of the Appraisal Data Availability
Study, a report mandated by title XI of
FIRREA. This study summarized and
evaluated the information on real estate
transactions that is available throughout
the country to assist in the conduct of real
property appraisals.
Report on Capital and Reporting
Standards
As required by section 1215 of FIRREA,
the Federal Reserve, together with the
other federal banking agencies, is required to prepare an annual report to the
Real Estate Appraisals
Congress discussing any differences in
As mandated by title XI of FIRREA, the capital and accounting standards used by
Board and the other federal financial federal bank and thrift regulatory ageninstitutions regulatory agencies issued cies for federally insured depository
real estate appraisal regulations. The institutions. The first annual report was
regulations establish minimum appraisal delivered to the Congress on August 9,
standards and require depository institu- 1990.
tions and bank holding companies enAccording to the report, the three fedgaged in real estate lending to use apprais- eral bank regulatory agencies-the Feders certified or licensed by the state. eral Reserve, the Federal Deposit InsurThe Board's regulations became effective ance Corporation (FDIC), and the Office
onAugust9,1990. Examiners are review- of the Comptroller of the Currency
ing financial institutions' appraisal poli- (OCC)—for several years have employed
cies and procedures to ensure compliance. the same ratio of capital to total assets
The Federal Reserve participated in (leverage ratio) in assessing the capital
the start-up of the Appraisal Subcommit- adequacy of commercial banking organitee of the Federal Financial Institutions zations. More recently, the federal bankExamination Council. Members of the ing agencies have adopted a common
Board's staff have been assigned tempo- risk-based capital framework (see below)
rarily to assist the subcommittee, pending based on the international Capital Accord
Banking Supervision and Regulation 191
developed by the Basle Committee on
Banking Supervision. This risk-based
framework includes a common definition
of regulatory capital, a uniform system
of risk weights and categories, and
uniform minimum capital ratios. The
report also indicated that the accounting
and reporting requirements applicable to
commercial banks are uniform among
the three federal banking agencies. This
annual reporting requirement provides a
framework within which the depository
institution regulatory agencies can address any differences that exist between
the accounting and capital standards
applied to commercial banks and thrift
institutions.
Risk-Based Capital Standards
at Year-End 1990
The risk-based capital standard provides
for a two-year phase-in period beginning
December 31, 1990. As of that date,
banking organizations were expected to
maintain total capital equal to at least
7.25 percent of risk-adjusted assets.
This minimum standard increases to
8.0 percent at year-end 1992. The riskbased capital standard was developed in
cooperation with the FDIC and OCC,
along with members of the Basle
Committee on Banking Supervision.
The standard had been reviewed and
endorsed by the ten central bank
governors of the G-10 countries and was
adopted by all G-10 countries and
Luxembourg in 1988.
The risk-based capital framework encourages banking organizations to
strengthen their capital positions. The
standard offers the advantages of differentiating, in a broad way, among the
relative riskiness of banking assets and
taking into account off-balance-sheet
risks. Because of its acceptance by countries with major international banking
centers, the risk-based capital standard
helps to promote a level playing field for
U.S. banking organizations as they compete with banks in other countries.
Continuing International Efforts
to Improve the Risk-Based Capital
Framework
When the Basle Committee on Banking
Supervision adopted the risk-based
capital standards in 1988, the committee
expected that further efforts would be
required to incorporate certain noncredit
risks into the risk-based framework. In
this connection, the Federal Reserve
participated in 1990 in various efforts
under way at the international level to
strengthen the capital positions of
internationally active banking organizations. These efforts include incorporating into the risk-based capital framework a capital charge for risks arising
from changes in interest rates (interest
rate risk exposure) and from changes in
foreign exchange rates (foreign exchange position risk).
Leverage Ratio
The Board issued a new capital-to-total
assets (leverage) standard in 1990, establishing a minimum ratio of tier 1 capital
to total assets. This leverage ratio replaced the leverage standards that had
been in place since the early 1980s, which
had specified the ratio of primary and
total capital to total assets. Organizations
experiencing or anticipating significant
growth are expected to maintain capital
ratios, including tangible tier 1 capital
positions, well above the minimum levels. Only institutions in strong financial
condition, with the highest supervisory
ratings, and with nofinancialor operating
deficiencies are permitted to operate at or
near the minimum supervisory level.
192 77th Annual Report, 1990
Dividend Payments
In 1990, the Board adopted a revision to
regulations concerning the payment of
dividends by state member banks. The
revised rule brings the calculation of a
bank's dividend-paying capacity into
better alignment with the institution's
capital position. The rule also makes the
treatment of loan-loss allowances and
provisions for dividend payment purposes consistent with current regulatory
reporting standards and generally accepted accounting principles (GAAP).
Highly Leveraged Transactions
A common definition of highly leveraged
transactions was issued by the Federal
Reserve, the FDIC, and the OCC in
1989. In 1990, in response to questions
and comments received on the interagency definition of highly leveraged
transactions (HLTs), the agencies provided interpretive guidelines for use in
the supervision and examination of commercial banking organizations. These
guidelines increased the original de minimis test, provided guidance in reviewing
past transactions, clarified the leverage
test, and provided criteria for removing
loans from HLT status.
Revised Examination
and Inspection Reports
The Federal Reserve revised the formats
of its examination and inspection report
forms in 1990. The objectives of the
revisions are to communicate more effectively examiners' findings and conclusions to banking organizations' management and boards of directors and to
improve the timeliness of examination
reports. By presenting narrative and
financial information in a more concise
manner, these objectives will be accomplished without sacrificing the depth or
thoroughness of on-site examinations.
Sale of Uninsured Obligations
on Retail Banking Premises
The Federal Reserve reiterated its longstanding policy prohibiting the sale on
the retail banking premises of commercial banks of uninsured debt obligations
issued by bank holding companies, nonbank affiliates, and state member banks.
This prohibition applies to both long- and
short-term debt obligations of a bank
holding company and any nonbank affiliate as well as to uninsured debt securities issued by state member banks or
their subsidiaries. Commercial paper
and all other short-term and long-term
debt securities, such as thrift notes and
subordinated debentures, are also subject
to this restriction. Examiners will evaluate banking organizations for compliance with the policy during on-site
examinations.
Funding and Liquidity
of Bank Holding Companies
The Federal Reserve in 1990 reiterated
and reinforced its policy on the funding
and liquidity practices of bank holding
companies. Under this policy, bank
holding companies are expected to develop and maintain funding programs
that are consistent with their lending and
investment activities and that provide
adequate liquidity to the parent company
and its nonbank subsidiaries. A bank
holding company's funding strategy
should rely on capital and long-term
sources of funds to support capital investments in subsidiaries and other long-term
assets. Further, bank holding companies
are to avoid over-reliance or excessive
Banking Supervision and Regulation 193
dependence on any single short-term or
potentially volatile source of funds in
developing and carrying out funding
programs.
Deposit Sweep Accounts
The Federal Reserve provided guidance
in 1990 to examiners on the appropriate
use by bank holding companies of the
proceeds obtained from overnight funding obligations, such as deposit sweep
arrangements. Under these arrangements, funds in customer accounts at
subsidiary banks are reinvested in overnight obligations, including commercial
paper, program notes, and master notes
of the parent bank holding company. The
Federal Reserve's supervisory policy
limits the parent's use of the proceeds of
deposit sweep arrangements to shortterm bank obligations, short-term U.S.
government securities, or other highly
liquid, readily marketable, investmentgrade assets that can be disposed of with
minimal loss.
Reporting Requirements
for Section 20 Nonbank Subsidiaries
The Board authorized in 1990 a new
report, "Financial Statements for a Bank
Holding Company Engaged in Ineligible
Securities Underwriting and Dealing"
(FR Y-20). The purpose of the report is
to provide the Federal Reserve with
financial information to determine that
the section 20 nonbank subsidiaries are
not engaged primarily in underwriting
and dealing in ineligible securities. The
report also permits the Federal Reserve
to determine that the underwriting activities are being conducted in a manner
consistent with the orders issued by the
Board authorizing such activities. Further, the report enables the Federal
Reserve to assess the capital adequacy of
the consolidated bank holding company
and the support provided by the holding
company to its subsidiary banks.
Revisions to Bank Holding
Company Reports
The Board approved significant revisions
to the reporting requirements for bank
holding companies. To provide crucial
supervisory information on capital adequacy, bank holding companies now must
submit data on risk-based assets and the
components of tier 1 and tier 2 capital, on
exposure to highly leveraged transactions, and on the level of exposure to real
estate lending activities.
Interest Rate Risk
The Federal Reserve issued supervisory
guidelines and examination procedures
for managing the interest rate risk of state
member banks. The guidelines seek to
ensure that commercial banks monitor
the interest rate sensitivity of assets and
liabilities of state member banks and
have adequate policies and systems in
place for controlling these risks.
Staff Training
The training of System staff members
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. During 1990,
the Federal Reserve conducted a variety
of schools and seminars, and Federal
Reserve staff members participated in
several courses offered by or cosponsored
with other agencies, as shown in the
accompanying table. In 1990, the Federal Reserve trained 1,281 persons in
System schools, 1,117 in FFIEC schools,
and 64 in other schools, for a total of
194 77th Annual Report, 1990
2,462 students, including 133 representatives from foreign banks.
The Federal Reserve System also
provided scholarship assistance to the
states for training their examiners in
Federal Reserve and FFIEC schools.
Through this program, 592 state examiners were trained: 197 in Federal Reserve
courses, 386 in FFIEC programs, and 9
in other courses.
Federal Financial Institutions
Examination Council
The Federal Reserve Board took the
following actions in 1990 based on
recommendations of the Federal Financial Institutions Examination Council
(FFIEC).3
3. The FFIEC consists of representatives from
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.
The Federal Reserve adopted for state
member banks on the call report the
risk-based capital reporting requirements
initiated by the FFIEC. An important
feature of these reporting requirements is
a simplified capital calculation that banks
with less than $1 billion in total assets
will use to determine whether they have
adequate risk-based capital and are therefore exempt from reporting more detailed
information.
The members of the FFIEC, including the Federal Reserve Board, unanimously approved a report to the Congress on the council's plans to conduct
risk-management training for industry
executives and on the issue of developing a program for certification of
risk management analysts. This report
was done in accordance with FIRREA
requirements.
The five agencies represented on the
council issued an advance notice of
proposed rulemaking to address recourse
arrangements affecting regulatory capital
and reporting standards. Members of the
Training Programs for Banking Supervision and Regulation, 1990
Number of sessions
Agency and type of training
Total
Schools or seminars conducted by the Federal Reserve
Banking I
Banking II
Banking HI
Senior forum for current banking and regulatory issues ..
Risk-based capital and FIRREA
Cash flow, forecasting, and highly leveraged transactionsx
Effective writing for banking supervision staff
Credit analysis
Bank holding company applications
Bank holding company inspection
Basic entry-level trust
Consumer compliance
Seminar for senior supervisors of foreign central banks2 .
Other agencies conducting courses3
Federal Financial Institutions Examination Council .
Federal Deposit Insurance Corporation and
Office of the Comptroller of the Currency
Federal Bureau of Investigation4
1. One-time seminar.
2. Conducted jointly with the World Bank. One session
was held overseas.
3. Open to Federal Reserve employees.
4
7
4
2
2
1
18
9
7
7
1
4
2
Regional
16
7
110
16
5
4. Cosponsored by the Federal Reserve, Federal Deposit Insurance Corporation, Office of Thrift Supervision,
Office of the Comptroller of the Currency, and Resolution
Trust Corporation.
Banking Supervision and Regulation
Federal Reserve staff are participating in
a detailed study of these matters.
Regulation of
the U.S. Banking Structure
The Board administers the Bank Holding
Company Act, the Bank Merger Act,
and the Change in Bank Control Act for
bank holding companies and state
member banks. In doing so, the Federal
Reserve acts on a variety of proposals
that directly or indirectly affect the
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 overall 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
195
interstate banking activities of these foreign banks and for foreign banks that
control a U.S. subsidiary commercial
bank.
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 by a
bank holding company, the Board considers such factors as the financial and
managerial resources of the applicant,
the prospects of both the applicant and
the firm to be acquired, the convenience
and needs of the community to be served,
the potential public benefits, and the
competitive effects of the proposal.
Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1990
Action under authority delegated
by the Board of Governors
Proposal
Formation of holding company
Merger of holding
company
Retention of
bank
Acquisition
Bank
Nonbank
Bank service
corporation
Other
Total1
Direct action
by the
Board of Governors
Approved
Denied
21
2
6
0
0
0
29
191
0
0
247
Staff Director of
Division of Banking
Supervision and
Regulation
Approved
I2
0
0
0
1443
0
0
0
0
17
0
0
8
162
0
0
1
0
0
Federal
Reserve Banks
Total1
Approved Approved Permitted
0
1
5
1. Includes applications related to the sale of failed thrift
institutions by the Resolution Trust Corporation.
2. This action was delegated by the Board to the Staff
Director of the Division of Banking Supervision and
Regulation and to the General Counsel of the Board for
joint action.
Denied
Office
of the
Secretary
261
1
0
35
0
12
69
0
0
286
0
42
0
238
249
0
0
0
126
280
784
0
0
0
0
0
17
83
783
126
1,409
3. Each of these actions represents the acquisition of a
savings association that was subsequently merged into an
existing subsidiary of a bank holding company, as permitted
by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.
196 77th Annual Report, 1990
In 1990, the Federal Reserve acted on
1,409 bank holding company and related
applications. The Federal Reserve System approved 284 proposals to organize
a bank holding company and denied 2;
approved 279 bank acquisitions by existing bank holding companies and denied
1; approved 779 requests by existing
companies to acquire nonbank firms
engaged in activities closely related to
banking and denied 5; and approved 59
other applications. Data on these and
related bank holding company decisions
are shown in the accompanying table.
institutions regulatory agencies have
adopted standard terminology for assessing competitive factors in proposed mergers of banks to ensure consistency in
administering the act. On behalf of the
Board, the Reserve Banks submitted 771
reports on competitive factors to the other
federal banking agencies in 1990.
Change in Bank Control Act
The Change in Bank Control Act requires
persons seeking control of a bank or bank
holding company to obtain approval from
the appropriate federal banking agency
before the transaction occurs. Under the
Bank Merger Act
act, the Board is responsible for reviewThe Bank Merger Act requires that the ing changes in the control of state member
appropriate federal banking agency act banks and of bank holding companies. In
on all proposed mergers of insured so doing, the Board must review the
depository institutions. If the institution financial condition, competence, experisurviving the merger is a state member ence, and integrity of the acquiring
bank, the Federal Reserve has primary person; consider the effect on the finanjurisdiction. Before acting on a proposed cial condition of the bank or bank holding
merger, the Federal Reserve considers company to be acquired; and determine
factors relating to the financial and the effect on competition in any relevant
managerial resources of the applicant, market.
The appropriate federal banking agenthe future prospects of the existing and
proposed institutions, the convenience cies must publish notice of each proposed
and needs of the community to be served, change in control and invite public comand the competitive effects of the pro- ment, particularly from persons located
posal. The Board must also consider the in the markets served by die institution to
views of certain other agencies on the be acquired. The federal banking agencompetitive factors involved in the trans- cies also must assess the qualifications of
each person seeking control of a bank or
action.
During 1990, the Federal Reserve bank holding company. In each case, the
System approved eighty-eight merger Board routinely makes such a determinaapplications. As required by law, each tion and verifies information contained in
merger is described in this REPORT (in the proposal.
table 16 of the Statistical Tables chapter).
In 1990, the Federal Reserve System
When the Office of the Comptroller of acted on 248 proposed changes in control
the Currency, the Federal Deposit Insur- of state member banks and bank holding
ance Corporation, or the Director of the companies. Late in the year, the Board
Office of Thrift Supervision has jurisdic- amended RegulationY (Bank Holding
tion over a merger, the Board comments Companies and Change in Bank Control)
on the competitive factors to ensure to reduce the filing requirements for
comparable enforcement of the antitrust individuals purchasing additional shares
provisions of the act. The financial of a banking organization. The effect will
Banking Supervision and Regulation
be to reduce materially the number of
notices filed under the act, thereby reducing the regulatory burden on individuals,
particularly those buying small quantities
of shares.
Public Notice of Board Decisions
The Board announces each decision that
involves a bank holding company, bank
merger, change in control, or international banking proposal through orders
or releases. 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 and are
subsequently reported in the Board's
weekly H.2 statistical release and in
the monthly Federal Reserve Bulletin.
The H.2 release also contains announcements of applications and notices received by the System that have not yet
been acted on.
Timely Processing of Applications
The Federal Reserve maintains target
dates and procedures for the processing
of applications. These target dates promote efficiency at the Board and at the
Reserve Banks and reduce the burden on
applicants. The time allowed for a decision is sixty days; during 1990, about 95
percent of the decisions met this standard.
Delegation of Applications
The Board has delegated certain regulatory functions—including the authority
to approve, but not to deny, certain types
of applications - to the Reserve Banks, to
the Staff 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
197
and the Reserve Banks by removing
routine cases from the Board's agenda. In
1990,88 percent of the applications were
decided under delegated authority. During the year, the Board increased the
types of cases that may be acted on by the
Reserve Banks under delegated authority
without prior review, which should increase the speed and efficiency with
which many proposals are processed in
the future.
Board Policy Decisions
and Developments
in Bank-Related Activities
During 1990, the Board permitted a bank
holding company to commence the underwriting of equity securities under authority granted in January 1989. The original
approval had deferred commencement of
equity underwriting activities until proper
managerial and operational infrastructures were in place. At year-end 1990,
the Board was considering whether to
permit several other banking organizations to commence equity underwriting
activities as well. In 1990, the Board also
approved several new financially related
nonbanking activities for individual bank
holding companies and had under consideration other nonbanking proposals.
Approval of Permissible
Nonbanking Activities
During 1990, the Board approved a
proposal by a domestic bank holding
company to engage in asset management,
servicing, and collection activities with
regard to assets of failed or troubled
financial institutions. The Board also
permitted several domestic and foreign
organizations to engage in leasing transactions in a manner consistent with
expanded national bank leasing powers
authorized by the Competitive Equality
Banking Act of 1987.
198 77th Annual Report, 1990
The Board, for the first time, also
approved the following activities for
individual bank holding companies:
(1) acting as a tax refund agent in
connection with a state's tax-free shopping program for foreign visitors, and
(2) acting as agent in the sale of variableand fixed-rate annuities.
The Board approved proposals by
several foreign banks to engage in the
private placement of all types of securities, an activity previously approved for
large domestic banking organizations.
Proposals to Engage
in New Nonbanking Activities
During 1990, the Board requested public
comment on proposals to expand the list
of generally permissible nonbanking
activities for bank holding companies.
The proposal included (1) combined
investment advisory and securities brokerage activities, (2) financial advisory
activities, and (3) higher residual value
leasing activities. The Board also sought
public comment on proposals to modify
the Board's investment advisory policy
statement and to modify the current
limitations on the securities underwriting
powers of bank holding companies to
permit certain joint marketing activities
and common management officials.
At year-end, the Board had under
consideration a proposal to rescind a rule
that permits bank holding companies to
establish or acquire indirectly, through
their state-chartered bank subsidiaries,
nonbank operations subsidiaries engaged
in activities that may be conducted by the
parent bank.
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 their capital
bases from sales of subordinated debt.
State member banks must also give six
months' notice of their intention to withdraw from membership in the Federal
Reserve, although the Board may shorten
or eliminate the notice period in specific
cases. These matters are normally handled by the Federal Reserve Banks under
delegated authority.
Stock Repurchases
by Bank Holding Companies
A bank holding company sometimes
purchases its own shares from its shareholders, which results in a decrease in
equity. When the company borrows the
money to buy its shares, its debt increases. Borrowing large amounts to
purchase its own shares therefore 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 1990
the Federal Reserve reviewed 103 proposed stock repurchases by bank holding
companies, all of which were acted on by
the Reserve Banks on behalf of the Board.
International Activities
of U.S. Banking Organizations
The Board has several statutory responsibilities in supervising the international
operations of U.S. banking organizations . The Board 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
Banking Supervision and Regulation 199
investments by bank holding companies
in export trading companies. In addition,
the Board is required to charter and
regulate Edge corporations and their
investments.
which had 40 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.
Foreign Investments
Foreign Branches of Member Banks
Under provisions of the Federal Reserve
Act and of Regulation K (International
Banking Operations), 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 1990, the Board approved the
opening often foreign branches.
By the end of 1990,126 member banks
were operating 819 branches in foreign
countries and overseas areas of the United
States; 99 national banks were operating
702 of these branches, and 27 state
member banks were operating the remaining 117 branches.
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) they may make foreign investments
that 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
1990, there were 100 Edge corporations,
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. Significant investments
require prior review by the Board, although pursuant to Regulation K, most
foreign investments may be made under
general-consent procedures that involve
only after-the-fact notification to the
Board.
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 of this
amendment was to allow effective participation by bank holding companies in the
financing and development of export
trading companies. The Export Trading
Company Act Amendments of 1988
provide additional flexibility for bank
holding companies engaging in export
trading company activities. Since 1982,
the Board has acted affirmatively on
notifications by forty-seven bank holding
companies to establish export trading
companies.
Enforcement of
Other Laws and Regulations
This section describes the Board's responsibilities for the enforcement of laws,
rules, and regulations other than those
200
77th Annual Report, 1990
specifically related to bank safety and
soundness and the integrity of the banking
structure.
Bank Secrecy Act
The Federal Reserve has continued its
program of monitoring the institutions it
supervises for compliance with the requirements of the Currency and Foreign
Transactions Reporting Act (the Bank
Secrecy Act). The Bank Secrecy Act was
enacted primarily as a means of creating
and maintaining records of various transactions that otherwise would not be
identifiable. The records required by the
Bank Secrecy Act provide useful data for
aiding in the detection of unlawful activity
as well as determining the safety and
soundness offinancialinstitutions.
During 1990, the Federal Reserve
continued its efforts to promote compliance with the Bank Secrecy Act and to
see that those who do not comply are
prosecuted. The Federal Reserve enhanced its training in this area by developing, for new examiners, courses in
activities related to the Bank Secrecy
Act, money laundering, and fraud, as
well as refresher courses for seasoned
examiners. The Federal Reserve also
continued its practice of regularly examining financial institutions under its
supervision for violations of the Bank
Secrecy Act and providing quarterly
reports of violations discovered during
such examinations to the Department of
the Treasury.
In January 1990, the Federal Reserve
established a Systemwide committee to
provide enhanced coordination and direction for Federal Reserve activities
related to the Bank Secrecy Act and
money laundering. The committee has
been extremely successful in developing
innovative measures for addressing the
Federal Reserve's role in such activities.
Also, the Federal Reserve has continued
to cooperate and provide assistance to
law enforcement agencies conducting
criminal investigations offinancialinstitutions related to Bank Secrecy Act
violations.
When the Department of the Treasury
adopted a regulation under the Bank
Secrecy Act that requiresfinancialinstitutions to record sales of monetary instruments for cash in amounts between
$3,000 and $ 10,000, the Federal Reserve
established examination procedures to
audit for compliance with the regulation.
The Federal Reserve has also undertaken
a study to evaluate and update, if necessary, all examination procedures related
to compliance with the Bank Secrecy
Act.
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.
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.
Several regulatory agencies enforce
compliance with the securities credit
regulations. The Securities and Exchange
Commission, the National Association
of Securities Dealers, and the national
securities exchanges examine brokers
and dealers for compliance with Regulation T. The federal banking agencies
examine banks under their respective
jurisdictions for compliance with Regulation U. The compliance of other lenders
with Regulation G is examined by the
Board, the National Credit Union Admin-
Banking Supervision and Regulation 201
istration, the Farm Credit Administration, or the Office of Thrift Supervision,
according to the jurisdiction involved. At
the end of 1990, there were 616 lenders
registered under Regulation G, of which
344 came under the Board's supervision.
Of these 344, the Federal Reserve regularly inspects 211 either biennially or
triennially, according to the type of credit
they extended. During 1990, Federal
Reserve examiners inspected 50 lenders
for compliance with Regulation G.
In general, Regulations G and U impose credit limits on loans secured by
publicly held securities when the purpose
of the loan is to purchase or carry those or
other publicly held equity securities.
Regulation T limits the amount of credit
that brokers and dealers may extend when
the credit is used to purchase or carry
publicly held debt or equity securities.
Collateral for such loans at brokers and
dealers must be securities in one of the
following categories: those traded on
national securities exchanges, certain
over-the-counter (OTC) stocks that the
Board designates as having characteristics similar to those of stocks listed on
national exchanges, or bonds that meet
certain requirements.
The staff of the Federal Reserve monitors the market activity of all OTC stocks
to determine which of them are subject to
the Board's margin regulations. The
Board publishes the resulting "List of
Marginable OTC Stocks" quarterly. In
1990, the list was revised in February,
May, August, and November. The November list contained 2,773 stocks.
In March 1990, the Board adopted
amendments to Regulation T to accommodate the increasing international integration of the securities markets. The
amendments (1) permit the eligibility of
certain foreign equity and debt securities
for margin at broker-dealers on the
same basis as domestic margin securities,
(2) eliminate the current requirement that
all accounting be in U.S. dollars, (3) ease
restrictions on payment for foreign securities to accommodate the settlement
practices of the market where the trade
occurs, and (4) allow a broker-dealer
subject to Regulation T to arrange for
credit on foreign securities. After the
effective date of the amendments, the
Board published thefirst"List of Foreign
Margin Stocks" in August. Stocks on this
list receive the same treatment as domestic margin securities at broker-dealers
subject to Regulation T. The list was
revised in November and contained 276
foreign stocks. Future revisions will be
published in conjunction with the Board's
"List of Marginable OTC Stocks."
In July the Board issued an interpretation on the applicability of Regulation T
to unregistered securities sold and traded
pursuant to the Securities and Exchange
Commission's new Rule 144A. The interpretation clarifies that broker-dealers
may purchase debt securities from an
issuer for resale pursuant to rule 144A
and may make markets in such securities
under the investment banking service
exception to the arranging section in
Regulation T.
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. The Board
processed no new agreements in 1990.
In 1990, the Securities Regulation
Section of the Board's Division of Banking Supervision and Regulation issued
fifty-six 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.
202
77th Annual Report, 1990
These interpretations serve as a guide to
margin regulations.
Financial Disclosure
by State Member Banks
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. By statute, the Board's financial
disclosure rules must be substantially
similar to those issued by the Securities
and Exchange Commission. At the end of
1990, thirty-eight state member banks,
most of which are small or medium sized,
were registered with the Board under the
Securities Exchange Act.
previous report of condition. The accompanying table summarizes this information beginning with the last quarter of
1989 and continuing through the first
three quarters of 1990.
Federal Reserve Membership
At the end of 1990, 5,047 banks were
members of the Federal Reserve System,
a decrease of 209 from the previous year.
Member banks operated 33,305 branches
on December 31,1990, a net increase of
407 for the year.
Member banks accounted for 41 percent of all commercial banks in the United
States and for 66 percent of all commercial banking offices.
•
Loans to Executive Officers
Under section 22(g) of the Federal Reserve Act, state member banks 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
Loans by State Member Banks to their Executive Officers, 1989-90
Period
October 1-December 31,1989
January 1-March 31,1990
April 1-June 30,1990
July 1-September 30,1990
SOURCE. Call Report data for the period.
Number
Amount (dollars)
Range of interest
rates charged
(percent)
896
840
944
781
18,516,000
16,826,000
35,899,000
20,060,000
6.0-19.2
6.0-21.0
5.5-22.4
5.5-21.0
203
Regulatory Simplification
In 1978 the Board of Governors established the Regulatory Improvement
Project in the Office of the Secretary. The
project's charge was to help minimizethe
burdens imposed by regulation. Reaffirming its commitment to regulatory
improvement, the Board in 1986 renamed
the project the Regulatory Review Section and created a subcommittee of the
Board called the Regulatory Policy and
Planning Committee. The goals of the
section and the subcommittee are to
ensure that the economic effect of regulation on small business is considered, to
afford interested parties the opportunity
to participate in designing regulations
and to comment on them, and to ensure
that regulations are written in simple and
clear language. Staff members of the
Board continually review regulations for
their adherence to these objectives.
Foreign Securities Transactions
In March the Board approved amendments to Regulation T (Credit by Brokers
and Dealers) to accommodate the settlement and clearance of transactions in
foreign securities and to permit marginability of foreign securities at brokerdealers. The amendments
• Permit foreign equity and debt securities that meet prescribed criteria to be
eligible for margin at broker-dealers on
the same basis as margin securities
• Permit recognition and isolation of
debt denominated in foreign currencies
and allowed foreign securities denominated in that currency to be used as
margin for the debt without conversion
into dollars
• Ease restrictions on the payment
and settlement for foreign securities to
accommodate the practices of the market
where the trade occurs
• Allow broker-dealers subject to
Regulation T to arrange with foreign
persons to extend credit on foreign
securities.
Funds Transfers on Fedwire
In October the Board approved a comprehensive revision to subpart B of Regulation J (Collection of Checks and Other
Items by Federal Reserve Banks and
Funds Transfers through Fedwire) governing funds transfers through Fedwire.
The revision was designed to make
Regulation J consistent with the new
article 4A of the Uniform Commercial
Code, which governs the rights, responsibilities, and liabilities of parties to
wholesale funds transfers.
The revision, which became effective
on January 1, 1991, will provide a more
comprehensive set of rules for funds
transfers involving Federal Reserve
Banks, make subpart B consistent with
state laws applicable to funds transfers as
states adopt article 4A, and help ensure
that, subject to their central banking
responsibilities, Federal Reserve Banks
compete on an equitable basis with private providers of fiinds-transfer services.
Price Reductions on Credit Cards
In November the Board approved an
amendment to Regulation Y (Bank Holding Companies and Change in Bank
Control) to allow banks owned by bank
holding companies to off6r a price reduction on credit cards issued to their customers if the customer also obtains a
204
77th Annual Report, 1990
traditional banking service from any
affiliate of the credit card bank. The
change permitted bank holding companies to consolidate their credit card
operations into card-issuing banks without losing the ability to offer price
reductions to customers using products
from the card-issuing bank's affiliates.
Section 106 of the Bank Holding Company Act prohibits banks from offering
reduced prices for credit on the condition
of obtaining additional services from
affiliates. Section 106, however, authorizes the Board to grant exemptions that
are not contrary to the act's purpose of
preventing anticompetitive practices;
given the lack of economic evidence of
anticompetitive effects, the Board acted
under this authority in approving the
amendment.
Changes in Bank Control
In November the Board approved an
amendment to Regulation Y to reduce the
filing requirements under the Change in
Bank Control Act. With the amendment,
a person who has received regulatory
clearance to acquire 10 percent or more
of the shares of a state member bank or
bank holding company need not file
additional notices for subsequent acquisitions resulting in ownership of up to
25 percent of the institution.
Nonbanking Activities
During 1990 the Board proposed for
public comment the addition of three
activities to the list of permitted activities
under Regulation Y for nonbank subsidiaries of bank holding companies:
(1) non-full-payout leasing, (2) financial
advice tofinancialand nonfinancial institutions and to individuals with high net
worth, and (3) investment advice combined with securities brokerage.
The list of permissible activities simplifies applications by bank holding companies to form or acquire subsidiaries
engaging in the listed activities.
•
205
Federal Reserve Banks
The new Regional Delivery System for
over-the-counter savings bonds, which
the Federal Reserve began implementing
on behalf of the Department of the
Treasury in 1989, expanded to nine Federal Reserve Districts in 1990. Begun in
Ohio in 1987 as a pilot project managed
by the Pittsburgh Branch of the Cleveland
Federal Reserve Bank, the Regional
Delivery System was, by the end of
1990, fully implemented in Cleveland,
Richmond, St. Louis, and Kansas City
and partially implemented in Boston,
New York, Philadelphia, Chicago, and
Minneapolis.
The Federal Reserve Banks are the
fiscal agents of the United States, and the
largest component of their fiscal agency
services is savings bond processing.
When completed in 1993, the Regional
Delivery System (RDS) will reduce the
number of issuing agents for over-thecounter savings bonds from nearly 40,000
institutions to eleven Reserve Bank offices. And with full implementation of
the RDS, the Treasury has estimated that
annual savings to the taxpayer will be
more than $18 million.
Under the RDS, depository institutions
receive applications from the public for
Series EE savings bonds and forward
them to a regional Federal Reserve office,
which then inscribes and delivers the
bonds. With the encouragement of the
Reserve Banks, some institutions in each
of the nine participating Districts are
sending their RDS applications in automated form, and nearly one-third of all
RDS volume is automated.
The progress of such automation to
date has meant that the RDS will require
approximately 350 new positions at the
Reserve Banks rather than the original
estimate of 400 (the net increase will be
even lower because of reductions in the
number of staff members assigned to
other savings bond activities). And current automation together with technological innovations under investigation by
the System are likely to put the ultimate
savings to U.S. taxpayers from the RDS
even higher than the original estimate of
$18 million per year.
According to the Treasury, sales of
savings bonds have not suffered under
the new delivery system, and the RDS
has found widespread public acceptance.
For their part,financialinstitutions prefer
the new method because it frees them
from the burden of maintaining unissued
savings bond stock.
Other Developments in Federal
Reserve Services
As mandated in the Monetary Control
Act of 1980, the Federal Reserve System
endeavors to recover all its costs of
providing services. In 1990, revenues
from all priced services were $885.7 million, and costs were $857.1 million,
resulting in net revenue of $28.6 million
and a recovery rate of 103.3 percent; in
1989 the System recovered 100.0 percent of its service costs.1
1. For the elements of revenues, costs, and net
revenue, see the pro forma income statement at the
end of this chapter.
Revenues are the sum of income from services
and investment income.
Costs are the sum of production expenses,
imputed costs, earnings credits, imputed income
taxes, and the targeted return on equity.
Net revenue is net income less the targeted return
on equity.
206
77th Annual Report, 1990
Check Collection
The operating and imputed costs of check
collection by the Federal Reserve in
1990 were $526.1 million (see the pro
forma income statement for priced services, by service, at the end of this
chapter). Check services for the year
generated $558.1 million in revenue and
a net of $ 13.8 million in other income and
expenses. Income from operations after
imputed costs was $32.0 million. The
number of checks that the Federal Reserve Banks handled increased 3.2 percent, to 18.6 billion, from 1989.
In August the Board issued for public
comment a proposed change to the fee
structure for shipping checks via the
Interdistrict Transportation System
(ITS). The change would introduce a cap
on the cumulative amount of per-item
fees paid to ship checks from one Reserve
Bank office to another via ITS. In October
the Board extended the comment period
to January 1991. The proposed fee structure was designed to better mirror the
underlying costs of interdistrict check
transportation.
In November the Board issued for
public comment modifications to the
criteria for offering a tiered pricing
structure for check collection. The
changes would enable the Reserve Banks
to set fees that more precisely reflect their
costs to collect checks drawn on paying
banks within a given collection zone.
During 1990 the Federal Reserve
continued to pursue processing and
technological innovations in the collection of checks. Three districts
participated in a pilot program for
accepting intermingled deposits of
returned and forward collection checks.
In addition, the Federal Reserve continues to investigate the use of digitized
image technology in the check collection
process. Government check processing
and returned check operations are ex
pected to be the initial areas of application
for image technology.
Electronic Payments
As part of its strategic study of electronic
payments services in the 1990s, the Federal Reserve completed its pilot tests of
two alternative production processes, one
relying on distributed processing using
fault-tolerant machines and the other
relying on mainframe computers. The
Federal Reserve has selected the alternative that involves improving the existing
architecture to minimize operational risk
to the Federal Reserve and to depository
institutions; it will also provide flexible
and cost-effective automation and communications solutions for both the Federal Reserve and depository institutions.
The Federal Reserve continued to
expand its electronic network for delivery
of Federal Reserve services, and it introduced a product that offers a lower cost
alternative for depository institutions
receiving low volumes of automated
clearinghouse output.
Automated Clearinghouse
Operating and imputed costs of providing
automated clearinghouse (ACH) services in 1990 were $49.3 million; revenues were $52.7 million. The Reserve
Banks processed 915.3 million commercial transactions during the year, an
increase of 23.6 percent over 1989.
In December the Board published for
public comment a proposal to require
depository institutions to originate or
receive commercial ACH transactions
through the Federal Reserve Banks via
electronic connections. This proposal
will allow the Federal Reserve to improve
significantly its ACH service by increasing the speed of delivery of ACH payments and reducing the risks associated
Federal Reserve Banks 207
with ACH transactions. These improvements could not be achieved if a portion
of ACH endpoints continue to send and
receive ACH transactions via nonelectronic media.
Under the proposal, a per-transaction
surcharge would be assessed on commercial ACH transactions originated or
received by depository institutions using
nonelectronic ACH deposit or delivery
alternatives beginning January 1, 1993.
Beginning July 1, 1993, the Federal
Reserve would provide only electronic
commercial ACH services. ACH service
fees pertaining to physical input or output
media, including paper, diskettes, or
magnetic tape, are expected to rise significantly beginning in 1992 to further
encourage the transition to an allelectronic ACH.
Wire Transfer of Funds
and Net Settlement
The number of wire transfers originated
during 1990 increased 3.2 percent
over 1989, to 62.6 million. The number
of net settlement entries in 1990 was
800,000. Operating and imputed costs
totaled $67.9 million, and revenue was
$78.6 million.
In April the Board approved changes
to the Fedwire operating schedule to
establish a uniform opening time of 8:30
a.m. eastern time for the funds transfer
service and to establish a uniform deadline of 6:00 p.m. eastern time for thirdparty funds transfers. These changes
became effective August 1, 1990.
In September the Board approved a
proposal regarding telephone notice to
recipients of off-line Fedwire transfers.
Issued for comment in April, the approved proposal requires that Reserve
Banks give same-day telephone notice of
the receipt of incoming Fedwire thirdparty funds transfers (including nonvalue messages related to a transfer of
funds) to all depository institutions that
do not have electronic access to Fedwire.
Such notice to off-line banks would
promote efficiency in the payments mechanism by providing timely information,
which permits prompt crediting of funds
to the account of the beneficiary. The
telephone notice service became effective
January 1, 1991.
In June the Board issued for comment
a comprehensive revision to subpart B of
Regulation J, which governs funds transfers through Fedwire, and in September
the Board adopted it. The revision, which
became effective January 1, 1991, made
Regulation J consistent with the new
article 4A of the Uniform Commercial
Code, which governs the rights, responsibilities, and liabilities of parties to
wholesale funds transfers.
In October the Board approved a
proposal for the Federal Reserve Bank of
San Francisco to provide net settlement
services to depository institutions that
plan to participate in a national, multilateral ACH clearing arrangement.
By year-end 1990 all on-line depository institutions had converted their
communication links for funds transfers
to the System's standard protocols.
Currency and Coin
In its currency and coin operations the
Federal Reserve continued to focus on
the effectiveness of controls, efficiency in
processing, and the maintenance of high
quality in circulating currency.
The revenue from priced cash services
was $14.3 million in 1990, and the cost
was $13.8 million. In 1990, four Federal
Reserve Districts provided transportation
of cash by armored carrier and three
Districts provided wrapped coin to depository institutions.
In March the System found Recognition Equipment, Inc., to be in default of
the 1987 contract to provide equipment
208
77th Annual Report, 1990
for verification, counting, sorting, and
destruction of currency. In November
the Board awarded a new contract to
Giesecke and Devrient, Inc., to manufacture and maintain this equipment, which
is expected to meet the System's needs for
currency processing through the 1990s.
The Federal Reserve System continued
to work with the Departments of Treasury
and Justice and with others to deter the
counterfeiting and laundering of U.S.
currency.
Definitive Securities
and Noncash Collection
The System received $15.9 million in
revenue for definitive safekeeping and
noncash collection services in 1990; the
cost of these services was $14.8 million.
The average number of definitive securities issues and deposits maintained in
safekeeping accounts at the Reserve
Banks decreased 25.4 percent in 1990, to
82,000. The number of noncash collection items processed decreased 10.3 percent, to 2.9 million.
With declining volumes, Reserve
Banks continue to streamline and consolidate both definitive and noncash collection operations. Further, the System is
developing a long-range plan to guide the
Federal Reserve's involvement in the
definitive safekeeping service, and efforts
to consolidate noncash collection processing across district lines have begun.
Securities and Fiscal
Agency Services
The Federal Reserve provides bookentry securities services for the debt
issues of the federal government and of
certain federally sponsored agencies such
as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Book-entry services
for federal agency securities are treated
as a Federal Reserve priced service; these
services incurred costs of $9.6 million
and earned revenue of $10.6 million in
1990. The Federal Reserve processed
2.6 million such transfers during the
year, an increase of 0.7 percent over
1989. Industry efforts, supported by the
Federal Reserve, to net securities transactions among participants in private
clearing and settlement arrangements
have resulted in smaller volumes to be
processed by the Federal Reserve.
And, as noted at the outset of this
chapter, the Reserve Banks continue the
implementation of the Regional Delivery
System for over-the-counter savings
bonds.
Float
Federal Reservefloatdecreased to a daily
average of $431 million in 1990, compared with $588 million in 1989. The
costs of all Federal Reserve float associated with priced services are recovered
each year.
Examinations
The Board's Division of Reserve Bank
Operations and Payment Systems examines the twelve Reserve Banks and their
twenty-five Branches each year as required by section 21 of the Federal
Reserve Act. The results of the audits are
reported to the management and directors
of the respective Banks and to the Board
of Governors. Also, to assess conformance with the policies issued by the Federal Open Market Committee, the division annually audits the accounts and
holdings of the Federal Reserve 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
Federal Reserve Banks
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 1990 and 1989.
Income was $23,477 million in
1990 and $22,249 million in 1989.
Total expenses were $1,454 million
($1,211 million in operating expenses,
$139 million in earnings credits granted
to depository institutions, and $104 million in assessments for expenditures by
the Board of Governors). The cost of
currency was $193 million. Income from
financial services was $730 million.
The profit and loss account showed a
net addition of $2,201 million, primarily
a result of gains from the revaluation of
assets denominated in foreign currencies
to market exchange rates. Statutory
dividends to member banks totaled
$141 million, $11 million more than in
1989. The rise reflected an increase in the
capital and surplus of member banks and
a consequent increase in the paid in
capital stock of the Reserve Banks.
209
Payments to the U.S. Treasury in the
form of interest on Federal Reserve notes
totaled $23,608 million, compared with
$21,646 million in 1989. The payments
consist of all net income after the deduction of dividends and after the deduction
of the amount necessary to bring the
surplus of the Banks to the level of capital
paid-in.
In the Statistical Tables chapter of this
REPORT, table 6 details income and
expenses of each Federal Reserve Bank
for 1990, and table 7 shows a condensed
statement for each Bank for 1914-90. A
detailed account of the assessments and
expenditures of the Board of Governors
appears in the next chapter.
Holdings of Securities and Loans
The table on the next page presents
holdings, earnings, and average interest
rates on securities and loans of the Federal Reserve Banks for the years 1988-90.
Average daily holdings of securities
and loans during 1990 were $237,444
million, an increase of $3,995 million
from 1989. From 1989 to 1990 holdings
of U.S. government securities increased
Income, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1990 and 1989l
Thousands of dollars
Item
Current income
Current expenses
Operating expenses2
Earnings credits granted
Current net income
Net addition to (deduction from) current net income
Cost of unreimbursed services to Treasury
Assessments by the Board of Governors
For expenditures of Board
For cost of currency
Net income before payments to Treasury
Dividends paid
Payments to Treasury (interest on Federal Reserve notes) .
Transferred to surplus
1. Details may not sum to totals because of rounding.
2. Operating expenses include a net periodic credit for
1990
1989
23,476,604
1,349,726
1,211,029
138,697
22,126,878
2,201,470
102,142
296,759
103,752
193,007
23,929,447
140,758
23,608,398
180,292
22,249,276
1,332,161
1,184,253
147,907
20,917,115
1,295,623
41,009
264,623
89,580
175,044
21,907,105
129,885
21,646,417
130,802
pension costs of $60 million in 1990 and $47 million in
1989.
210
77th Annual Report, 1990
$4,211 million, and loans decreased
$216 million.
Also, during the period from 1989 to
1990, the average rate of interest decreased from 8.64 percent to 8.45 percent on holdings of U.S. government
securities and decreased from 8.70 percent to 7.88 percent on loans.
Volume of Operations
Table 9, in the Statistical Tables chapter
of this REPORT, shows the volume of
operations in the principal departments
of the Federal Reserve Banks for the
years 1987-90.
continued and the construction of a new
building for the Helena Branch was
completed. Other on-going construction
projects include the renovation of the
main lobby of the St. Louis Bank and the
renovation of the main auditorium of the
New York Bank. The upgrading of the
mechanical and electrical systems of the
Kansas City Bank was completed.
Table 8, in the Statistical Tables chapter 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.
Federal Reserve Bank Premises
Financial Statements
for Priced Services
During 1990 the Board of Governors
authorized the construction of the new
headquarters building for the Dallas
Bank. The construction of the new operations center for the New York Bank
The tables on the following pages show
pro forma statements for priced services
for 1989, including a balance sheet,
income statements, and a breakdown of
volumes.
Securities and Loans of Federal Reserve Banks, 1988-90
Millions of dollars, except as noted
Item and year
Average daily holdings2
1988
1989
1990
Earnings
1988
1989
1990
Average interest rate (percent)
1988
1989
1990
1. Includes federal agency obligations.
Total
U.S.
government
securities *
Loans
233,796
233,449
237,444
231,442
232,312
236,523
2,354
1,137
921
18,358
20,163
20,067
18,180
20,065
19,995
179
99
73
7.85
8.64
8.45
7.85
8.64
8.45
7.59
8.70
7.88
2. Based on holdings at opening of business.
Federal Reserve Banks 211
Pro forma balance sheet for priced services, December 31, 1990 and 19891
Millions of dollars
Item
1990
1989
2
Short-term assets
Imputed reserve requirement on clearing balances .
Investment in marketable securities
Receivables
Materials and supplies
Prepaid expenses
Items in process of collection
Total short-term assets
Long-term assets3
Premises
Furniture and equipment
Leases and leasehold improvements
Prepaid pension costs
Total long-term assets
270.4
1,982.6
60.4
6.2
15.4
2,474.1
4,809.1
319.9
158.0
18.3
71.1
Total assets
Short-term liabilities
Clearing balances and balances arising from early
credit of uncollected items
Deferred availability items
Short-term debt
Total short-term liabilities
Long-term liabilities
Obligations under capital leases .
Long-term debt
Total long-term liabilities
Total liabilities
Equity
Total liabilities and equity4
1. Details may not sum to totals because of rounding.
2. The imputed reserve requirement on clearing
balances held at Reserve Banks by depository institutions
reflects a treatment comparable to that of compensating
balances held at correspondent banks by respondent
institutions. The reserve requirement imposed on
respondent balances must be held as vault cash or as
nonearning balances maintained at a Reserve Bank; thus, a
portion of priced services clearing balances held with the
Federal Reserve is shown as required reserves on the asset
side of the balance sheet. The remainder of clearing
balances is assumed to be invested in three-month
Treasury bills, shown as investment in marketable
securities. Receivables are (1) amounts due the Reserve
Banks for priced services and (2) the share of suspenseaccount and difference-account balances related to priced
services. Materials and supplies are the inventory value of
short-term assets. Prepaid expenses include salary
advances and travel advances for priced service personnel.
Items in process of collection (CIPC) is gross Federal
Reserve CIPC stated on a basis comparable to that of a
commercial bank. It reflects adjustments for intra-System
items that would otherwise be double-counted on a
consolidated Federal Reserve balance sheet; for items
associated with nonpriced items, such as those collected
for government agencies; and for items associated with
providing fixed availability or credit before items are
received and processed. Among the costs to be recovered
under the Monetary Control Act is that of float, or net
203.8
1,494.2
58.2
6.4
11.1
3,652.3
5,426.0
289.8
123.9
6.2
52.1
567.3
427.1
5,376.4
5,898.0
2,726.8
2,000.3
82.0
2,584.8
2,765.5
75.7
4,809.1
1.2
157.4
5,426.0
1.2
133.2
158.6
134.4
4,967.7
5,560.4
408.7
337.7
5,376.4
5,898.0
CIPC during the period (the difference between gross
CIPC and deferred-availability items, which is the portion
of gross CIPC that involves a financing cost), valued at the
federal funds rate.
3. Long-term assets used solely in priced services, the
priced services portion of long-term assets shared with
nonpriced services, and an estimate of the assets of the
Board of Governors used in the development of priced
services. Effective Jan. 1, 1987, the Reserve Banks
implemented Financial Accounting Standards Board
Statement No. 87, Employers' Accounting for Pensions.
Accordingly, in 1989 the Reserve Banks recognized a
credit to expenses of $14.7 million and a corresponding
increase in mis asset account.
4. Under the matched-book capital structure for assets
that are not "self-financing," short-term assets are financed
with short-term debt. Long-term assets are financed with
long-term debt and equity in a proportion equal to the ratio
of long-term debt to equity for the twenty-five largest bank
holding companies, which are used in the model for the
private sector adjustment factor (PSAF). The PSAF consists of the taxes that would have been paid and the return
on capital that would have been provided had priced services been furnished by a private-sector firm. Other shortterm liabilities include clearing balances maintained at
Reserve Banks and deposit balances arising from float.
Other long-term liabilities consist of obligations on capital
leases.
212
77th Annual Report, 1990
Pro forma income statement for Federal Reserve priced services,
calendar years 1990 and 1989l
Millions of dollars
1990
Item
1989
[ncome from services provided
to depository institutions2
Production expenses3
730.2
702.4
597.1
599.4
Income from operations
133.1
103.1
Imputed costs 4
Interest on float
Interest on debt
Sales taxes
FDIC insurance
33.2
17.0
8.0
5.0
63.2
50.8
16.9
7.6
1.6
70.0
Income from operations after imputed costs
Other income and expenses5
Investment income
Earnings credits
155.5
139.2
16.3
76.9
26.2
163.4
147.1
16.2
Income before income taxes
86.2
42.4
Imputed income taxes6
24.0
8.7
Net income
62.3
33.7
33.6
32.9
MEMO
Targeted return on equity7
1. Details may not add to totals because of rounding.
2. Income for priced services is realized from direct
charges to an institution's account or from charges against
accumulated earnings credits.
3. Production expenses include direct, indirect, and
other general administrative expenses of the Reserve Banks
for priced services and the expenses of staff members of the
Board of Governors working directly on the development
of priced services, which were $1.7 million in 1990 and
$1.4 million in 1989. The credit to expenses under FASB
87 is reflected in production expenses (see the pro forma
balance sheet, note 3).
4. Interest on float is derived from the value of float to
be recovered, either explicitly or through per-item fees,
during the period. Float costs include those for checks,
book-entry securities, noncash collection, ACH, and wire
transfers.
Interest is imputed on debt assumed necessary to finance
priced service assets. The sales taxes and FDIC insurance
assessment that the Federal Reserve would have paid had it
been a private-sector firm are among the components of the
PSAF (see the pro forma balance sheet, note 4).
The following list shows the daily average recovery of
float by the Reserve Banks for 1989 in millions of dollars.
Total float
Unrecovered float
Float subject to recovery
Sources of recovery of float
Income on clearing balances
As-of adjustments
Direct charges
Per-item fees
754.6
59.7
694.9
87.2
323.1
99.6
185.0
Unrecovered float includes that generated by services to
government agencies or by other central bank services.
Float recovered through income on clearing balances is the
result of the increase in investable clearing balances; the
increase is produced by a deduction for float for cash items
in process of collection, which reduces imputed reserve
require ments. The income on clearing balances reduces
the float to be recovered through other means. As-of
adjustments and direct charges are midweek closing float
and interterritory check float, which may be recovered
from depositing institutions through adjustments to the
institution's reserve or clearing balance or by valuing the
float at the federal funds rate and billing the institution
directly. Float recovered through per-item fees is valued at
the federal funds rate and has been added to the cost base
subject to recovery in 1989.
5. Investment income is on clearing balances and
represents the average coupon-equivalent yield on threemonth Treasury bills applied to the total clearing balance
maintained, adjusted for the effect of reserve requirements
on clearing balances. Expenses for earnings credits granted
to depository institutions on their clearing balances are
derived by applying the average federal funds rate to the
required portion of the clearing balances, adjusted for the
net effect of reserve requirements on clearing balances.
6. Calculated at the effective tax rate derived from the
PSAF model.
7. The after-tax rate of return on equity that the Federal
Reserve would have earned had it been a private business
firm, as derived from the PSAF model.
Federal Reserve Banks 213
Pro forma income statement for Federal Reserve priced services, by service, 1990l
Millions of dollars
Total
Commercial
check
collection
Wire
transfer
and net
settlement
Commercial
ACH
Definitive
safekeeping
and
noncash
collection
Bookentry
securities
Cash
services
Income from services
730.2
558.1
78.6
52.7
15.9
10.6
14.3
Operating expenses
597.1
471.1
63^
47.0
13.8
Income from operations .
133.1
87.0
14.7
5.8
2.1
1.7
.6
Item
2
13.7
63.2
55.0
4.0
2.3
1.0
.7
.1
Income from operations
after imputed costs ..
70.0
32.0
10.7
3.5
1.1
1.0
.5
Other income and
expenses, net 3
16.3
13.8
1.1
.8
.2
.2
.2
Income before
income taxes
86.2
45.8
11.8
4.2
1.3
1.1
.7
Imputed costs
1. Details may not sum to totals because of rounding.
The effect of implementing FASB 87 (see the pro forma
balance sheet, note 3) is reported only in the "total" column
in this table and has not been allocated to individual priced
services. Taxes and the aftertax targeted rate of return on
equity, as shown on the overall pro forma income
statement, have not been allocated among services because
these elements relate to the organization as a whole.
2. Includes float, interest on debt, sales taxes, and the
FDIC assessment. Float costs are based on the actual float
incurred in each priced service. Other imputed costs are
allocated among priced services according to the ratio of
operating costs less shipping costs in each service to the
total costs of all services less the total shipping costs of all
services.
3. Income on clearing balances and the cost of earnings credits. Because clearing balances relate directly to
the Federal Reserve's offering of priced services, the
income and cost associated with these balances are
allocated to each service based on the ratio of income from
each service to total income.
Activity in Federal Reserve priced services, calendar years 1990,1989, and 19881
Thousands of items, except as noted
Percent change
Service
Fund transfers
Commercial ACH
Commercial checks
Securities transfers
Definitive safekeeping
Noncash collection
Cash transportation
1990
62,559
915,257
18,594,652
2,555
82
2,854
330
1989
60,645
740,623
18,014,301
2,536
110
3,180
322
1. Activity is defined as follows: for wire transfer of
funds, the number of basic transactions originated; for
ACH, total number of commercial items processed; for
commercial checks, total number of commercial checks
collected, including both processed and fine-sort items; for
1988
56,334
602,406
17,617,744
2,236
138
3,337
341
1990-89
1989-88
3.2
23.6
3.2
.7
-25.4
-10.3
2.5
7.7
22.9
2.3
13.4
-20.4
-4.7
-5.6
securities, number of basic transfers originated on line; for
definitive safekeeping, average number of issues or
receipts maintained; for noncash collection, number of
items on which fees are assessed; and for cash transportation, number of armored-carrier stops.
214
77th Annual Report, 1990
Revenue and expenses of locally priced Federal Reserve services, by District, 19901
Millions of dollars
District
Total
Operating
Float
cost
Total
cost
Net
revenue
Commercial check collection
Boston
New Y o r k . . .
Philadelphia .
Cleveland . . .
Richmond . . .
Atlanta
Chicago
St. Louis . . . .
Minneapolis .
Kansas City..
Dallas
San Francisco
40.4
70.3
25.4
32.4
54.7
71.6
73.2
24.2
31.7
35.7
38.5
59.9
32.4
56.6
32.3
25.7
43.5
59.2
59.1
19.7
25.9
30.4
32.7
52.1
1.6
3.6
2.0
1.6
2.5
2.6
3.5
1.7
*
1.5
2.2
2.8
34.0
60.2
34.3
27.3
46.0
61.8
62.6
21.4
25.9
31.9
34.9
54.9
System total.
558.1
469.6
25.6
495.2
6.4
10.1
-8.9
5.1
8.7
9.8
10.6
2.8
5.8
3.8
3.6
5.0
62.8
Definitive safekeeping and noncash collection
Boston
New York...
Philadelphia .
Cleveland . . .
Richmond . . .
Atlanta
Chicago
St. Louis
Minneapolis .
Kansas City..
Dallas
San Francisco
.7
2.6
1.1
1.8
.8
2.1
2.5
.8
.8
1.3
1.4
System total.
15.9
•
.6
2.3
.9
1.3
.8
1.9
2.0
.7
.8
1.2
1.3
*
13.8
.1
*
.6
2.3
.9
1.4
.8
1.9
2.0
.7
.8
1.2
1.4
*
.1
.3
.2
.4
*
.2
.5
.1
*
.1
*
*
.2
14.0
1.9
>
.1
Cash services
Boston
New York...
Philadelphia .
Cleveland . . .
Richmond . . .
Atlanta
Chicago
St. Louis . . . .
Minneapolis .
Kansas City..
Dallas
San Francisco
System total.
1. Details may not sum to totals because of rounding;
also, expenses related to research and development
projects are reported at the System level, and therefore the
sum of expenses for the twelve Districts may not equal the
System total. The financial results for each Reserve Bank
shown here do not include the dollars to be recovered
through the PSAF and the net income on clearing balances.
1.8
1.8
.1
*
.5
.1
3.0
.5
*
6.5
14.3
1.7
1.8
.1
*
.4
.1
2.5
.5
*
6.5
.1
.0
.5
.0
.7
13.6
To reconcile net revenue by priced service shown in this
table with that shown in the income statement by service,
adjustments must be made for imputed interest on debt,
sales taxes, FDIC assessment, Board expenses for priced
services, and net income on clearing balances.
*In absolute value, greater than zero and less than
$50,000.
215
Board of Governors Financial Statements
The financial statements of the Board
were examined by Coopers & Lybrand,
independent public accountants, for 1990
and 1989.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Governors of the
Federal Reserve System
We have audited the accompanying balance sheets of the Board of Governors of the
Federal Reserve System (the Board) at December 31,1990 and 1989 and the related
statements of revenues and expenses and fund balance and cash flows for the years
then ended. These financial statements are the responsibility of the Board's
management. Our responsibility is to express an opinion on thesefinancialstatements
based on our audits.
We conducted our audit s in accordance with generally accepted auditing standards
and the Government Auditing Standards issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in thefinancialstatements. An audit also includes assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Board of Governors of the Federal
Reserve System as of December 31,1990 and 1989, and the results of its operations
and its cash flows for the years then ended in conformity with generally accepted
accounting principles.
Washington, D.C.
February 8, 1991
216
77th Annual Report, 1990
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS
As of December 31,
1990
1989
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Prepaid expenses and other assets
$ 9,256,285
1,146,044
827,876
$ 6,911,025
830,753
932,776
Total current assets
11,230,205
8,674,554
50,841,923
53,297,829
$62,072,128
$61,972,383
$ 4,208,717
3,673,252
4,760,513
1,042,167
$ 4,860,780
3,031,416
4,338,262
903,140
13,684,649
13,133,598
48,387,479
48,838,785
$62,072,128
$61,972,383
PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3)
Total assets
LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES
Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Unearned revenues and other liabilities
Total current liabilities
COMMITMENTS (Note 5)
FUNDBALANCE
Total liabilities and fund balance
The accompanying notes are an integral part of these statements.
Board 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,
1990
1989
BOARD OPERATING REVENUES
Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 4)
Total operating revenues
$103,752,200
4,217,225
$ 89,579,700
4,474,753
107,969,425
94,054,453
69,562,505
9,529,726
5,968,909
3,466,251
3,460,224
3,358,071
3,048,327
2,709,196
2,202,823
2,125,800
2,988,899
61,281,560
8,269,511
7,432,273
3,345,743
3,113,889
2,986,854
3,281,235
2,787,101
2,678,987
2,599,191
2,772,246
108,420,731
100,548,590
BOARD OPERATING EXPENSES
Salaries
Retirement and insurance contributions
Depreciation and net losses on disposals
Travel
Utilities
Postage and supplies
Contractual services and professional fees
Repairs and maintenance
Printing and binding
Software
Other expenses (Note 4)
Total operating expenses
BOARD OPERATING REVENUES (UNDER) EXPENSES
(451,306)
(6,494,137)
ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES
Assessments levied on Federal Reserve Banks
for currency costs
Expenses for currency printing, issuance,
retirement, and shipping
CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES
TOTAL REVENUES (UNDER) EXPENSES
FUND BALANCE, Beginning of year
FUND BALANCE, End of year
193,006,998
174,313,207
193,006,998
174,313,207
—
(451,306)
(6,494,137)
48,838,785
55,332,922
$ 48,387,479
$ 48,838,785
The accompanying notes are an integral part of these statements.
—
218
77th Annual Report, 1990
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
For the years ended December 31,
1990
1989
CASH FLOWS FROM OPERATING ACTIVITIES
Board operating revenues (under) expenses
$ (451,306)
$(6,494,137)
5,968,909
7,432,273
Adjustments to reconcile operating revenues (under) expenses to net cash
provided by operating activities:
Depreciation and net losses on disposals
Increase in accounts receivable, and prepaid expenses
and other assets
Increase in accrued annual leave
Increase in accounts payable, accrued payroll and related taxes,
and unearned revenue and other liabilities
Net cash provided by operating activities
(210,391)
422,251
(173,373)
49,998
128,800
1,025,844
5,858,263
1,840,605
8,900
(3,521,903)
2,453,537
(4,695,963)
(3,513,003)
(2,242,426)
CASH FLOWS FROM INVESTING ACTTVITIES
Proceeds from disposals of furniture and equipment
Capital expenditures
Net cash used in investing activities
NET INCREASE (DECREASE) IN CASH
2,345,260
CASH BALANCE, Beginning of year
6,911,025
7,312,846
$ 9,256,285
$6,911,025
CASH BALANCE, End of year
The accompanying notes are an integral part of these statements.
(401,821)
Board Financial Statements 219
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Board Operating Revenues and Expenses—Assessments
made on the Federal Reserve Banks for Board operating
expenses and capital expenditures 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. Upon the sale or other disposition of a
depreciable asset, the cost and related accumulated
depreciation are removed from the accounts and any gain
or loss is recognized.
(2) RETIREMENT BENEFITS
Substantially all of the Board's employees participate in
either the Retirement Plan for Employees of the Federal
Reserve System or the Civil Service Plan. The System's
Plan is a multiemployer plan which covers employees of
the Federal Reserve Banks, the Board, and the Plan
Administrative Office. Employees of the Board who
entered on duty before 1984 are covered by a contributory
defined benefits program under the Plan. Employees of the
Board who entered on duty after 1983 are covered by a
non-contributory defined benefits program under the Plan.
The Civil Service Plan is a defined contribution plan.
Contributions to the System's Plan are actuarially
determined and funded by participating employers at
amounts prescribed by the Plan's administrator. No separate
accounting is maintained of assets contributed by the
participating employers and net pension cost for the period
is the required contribution for the period. As of January 1,
1990, actuarial calculations showed that the fair value of
the assets of the System's Plan exceeded the projected
benefit obligations by 72 percent. Based on these calculations and similar calculations performed for 1989, it was
determined that employer funding contributions were not
required for the years 1990 and 1989 and the Board was not
assessed a contribution for these years. Excess Plan assets
will continue to fund future years' contributions.
Board contributions to the Civil Service Plan directly
match employee contributions. The Board's contributions
to the Civil Service Plan totaled $639,600 in 1990 and
$585,600 in 1989.
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
$2,107,700 in 1990 and $1,751,100 in 1989.
The Board also provides certain health benefits for
retired employees. The cost of providing the benefits is
recognized by expensing the insurance premiums which
were $367,300 in 1990 and $323,800 in 1989.
(3) PROPERTY, BUILDINGS AND EQUIPMENT
The following is a summary of the components of the
Board's fixed assets, at cost, net of accumulated
depreciation.
As of December 31,
1990
1989
Land and
improvements .
Buildings
Furniture and
equipment
Less accumulated
depreciation ..
Total property,
buildings and
equipment . . . .
$
1,301,314
63,573,336
$
1,301,314
63,556,144
32,768,173
97,642,823
30,920,877
95,778,335
46,800,900
42,480,506
$ 50,841,923
$ 53,297,829
(4) OTHER REVENUES AND OTHER EXPENSES
The following are summaries of the components of
Other Revenues and Other Expenses.
For the years
ended December 31,
1990
1989
Other Revenues
Data processing
revenue
Subscription
revenue
Assistance
to Federal
agencies
Miscellaneous
Contingency
Processing
Center fees
Total other
revenues
$2,002,546
$ 935,996
1,681,241
1,736,244
332,658
200,780
551,000
373,142
—
878,371
$4,217,225
$4,474,753
220
77th Annual Report, 1990
(4) OTHER REVENUES AND OTHER EXPENSES—Cont.
Other Expenses
Cafeteria operations,
net
Tuition, registrations
and membership
fees
Equipment and
facility rentals
Subsidies and
contributions
Miscellaneous
Total other
expenses
$ 694,047
$ 654,051
615,534
524,934
544,187
515,558
529,289
605,842
413,020
664,683
$2,988,899
$2,772,246
Through June 30,1989, the Board operated on behalf of
the Federal Reserve System a contingency processing
center to handle data processing requirements during
emergency situations. The Board recovered from the
Federal Reserve Banks a proportionate amount of the
operating expenses of the center in the form of fees.
Beginning on July 1, 1989, the equipment and the
responsibility for operating the center were transferred to
the Federal Reserve Bank of Richmond. Effective July 1,
1989, the Board began reimbursing the Federal Reserve
Bank of Richmond for the Board's share of the center's
operating expenses.
(5) COMMITMENTS
The Board has entered into several operating leases to
secure office, classroom, and warehouse space for periods
ranging from two to ten years. Minimum future rental
commitments under those operating leases having an initial
or remaining noncancelable lease term in excess of one
year at December 31, 1990, are as follows:
1991
1992
1993
1994
1995
$ 529,300
580,100
527,900
402,900
353,900
$2 ,394,100
Rental expenses under these operating leases were
$471,500 and $243,400 in 1990 and 1989, respectively.
(6) FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL
The Board is one of the five member agencies of the
Federal Financial Institutions Examination Council (the
"Council"). During 1990 and 1989, the Board paid
$146,200 and $259,780, respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1990 and 1989.
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 was reimbursed $34,000 and $30,300 for 1990 and
1989, respectively.
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
77th Annual Report, 1990
1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31, 1990l
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
11,058,359
10,018,000
535,132
189,549
6,341,556
1,340,750
112,519,895
91,406,519
31,163,174
Total bought outright
235,089,588
Held under repurchase agreement
17,013,250
Total securities
252,102,838
Total loans and securities
259,974,693
Items in process of collection
Transititems
5,185,181
Other items in process of collection
921,118
Total items in process of collection
Bankpremises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowance
6,106,299
141,671
666,467
186,496
104,110
957,073
227,082
729,991
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
871,662
755,347
425,079
330,268
32,632,862
3,111,078
1,394,731
484,966
216,677
276,746
355,637
16,751
192,962
39,012,678
327,576,823
Tables 223
1.—Continued
LIABILITIES
Federal Reserve Notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks
304,829,370
37,172,227
Total Federal Reserve notes, net
267,657,143
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
38,657,562
8,960,212
368,799
Other deposits
Officers' and certified checks
International organizations
Other 3
20,285
79,736
141,792
Total other deposits
Deferred credit items
241,813
3,540,076
Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other
2,915,740
52,788
31,564
304,822
Total other liabilities
3,304,914
Total liabilities
322,730,519
CAPITAL ACCOUNTS
Capital paidin
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 $7,951.8 million was invested in
securities issued by foreign governments, and the balance
was invested with foreign central banks and the Bank for
International Settlements.
2,423,152
2,423,152
0
327,576,823
3. In closing out the other capital accounts at year-end,
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.
224 77th Annual Report, 1990
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1990 and 1989
Millions of Dollars1
Total
Boston
Item
1990
1989
11,058
10,018
535
11,059
8,518
456
750
711
41
190
0
481
0
14
0
Federal agency obligations
Bought outright
Held under repurchase agreements
6,342
1,341
6,525
525
426
0
406
0
U.S. Treasury securities
Bought outright2
Held under repurchase agreements
Total loans and securities
235,090
17,013
259,975
226,775
1,592
235,898
15,794
0
16,233
14,112
0
14,523
6,106
872
8,903
790
287
90
470
91
32,633
6,376
31,333
7,465
1,207
287
1,097
311
0
0
1,909
2,705
327,573
304,422
21,515
20,453
267,657
241,739
18,879
17,166
38,658
8,960
369
242
48,228
38,327
6,217
590
1,298
46,430
2,109
0
6
3
2,118
2,510
0
5
52
2,567
3,540
3,301
7,773
3,994
132
192
376
178
22,727
299,935
21,320
20,286
2,423
2,423
0
2,243
2,243
0
97
97
0
83
83
0
327,573
304,423
21,515
20,453
279,665
37,926
21,409
2,530
Federal Reserve notes, net
304,829
37,172
267,657
241,739
18,879
19,741
2,575
17,166
Collateral for Federal Reserve notes
Gold certificate account
Special drawing right certificate account
Other eligible assets
U.S. Treasury and federal agency securities
11,058
10,018
Q
246,581
11,059
8,518
222^162
Total collateral
267,657
241,739
1990
1989
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
699
531
26
Acceptances held under repurchase agreements
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies3
All other
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 dividends4
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT
Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
Tables 225
2.—Continued
Cleveland
Philadelphia
New York
1990
1989
1990
Richmond
1989
1990
1989
1990
1989
3,501
3,395
16
3,410
2,896
13
384
319
31
400
247
33
688
645
39
661
508
35
1,008
961
105
943
745
78
23
0
27
0
24
0
45
0
0
0
261
0
6
0
3
0
2,341
1,341
2,300
525
185
0
188
0
380
0
375
0
590
0
541
0
86,783
17,013
107,501
79,934
1,592
84,378
6,846
0
7,055
6,544
0
6,778
14,084
0
14,464
13,046
0
13,682
21,881
0
22,476
18,794
0
19,338
570
76
1,070
47
527
45
442
46
257
36
311
34
341
122
534
127
8,844
2,373
8,398
2,125
1,468
179
1,535
254
1,795
332
1,692
305
2,023
906
1,817
408
-1,044
-928
-702
862
1,077
1,214
-5,674
3,702
125,233
101,408
9,307
10,597
19,332
18,441
22,270
27,692
102,697
81,921
7,078
7,703
17,005
15,566
18,904
23,180
9,934
8,960
259
156
19,310
8,130
6,217
480
498
15,324
1,774
0
7
2
1,782
1,943
0
7
38
1,988
1,817
0
8
2
1,827
2,107
0
8
62
2,178
2,654
0
9
16
2,679
3,456
0
9
88
3,553
382
1,511
822
2,126
132
84
619
87
83
167
288
163
119
271
447
233
123,899
100,192
9,077
10,397
19,082
18,194
21,974
27,413
667
667
0
608
608
0
115
115
0
100
100
0
125
125
0
124
124
0
148
148
0
139
139
0
125,233
101,408
9,307
10,597
19,332
18,441
22,270
27,692
108,722
6,026
86,003
4,082
8,380
1,302
9,601
1,898
18,651
1,646
17,776
2,210
24,543
5,639
26,559
3,379
102,697
81,921
7,078
7,703
17,005
15,566
18,904
23,180
226
77th Annual Report, 1990
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1990 and 1989-Continued
Millions of Dollars1
Atlanta
Chicago
Item
1990
1989
1990
1989
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
465
303
54
508
330
46
1,377
1,336
33
1,361
1,100
36
12
0
27
0
20
0
10
0
Federal agency obligations
Bought outright
Held under repurchase agreements
221
0
298
0
773
0
775
0
U. S. Treasury securities
Bought outright2
Held under repurchase agreements
Total loans and securities
8,209
0
8,443
10,358
0
10,682
28,672
0
29,465
26,940
0
27,725
581
58
763
59
759
110
851
110
Other assets
Denominated in foreign currencies3
All other
3,198
336
2,914
241
4,079
759
4,042
612
Interdistrict Settlement Account
2,887
-3,167
2,974
1,787
16,325
12,376
40,892
37,624
11,768
7,315
36,047
32,241
3,723
0
15
3
3,740
3,773
0
14
73
3,860
3,511
0
19
31
3,560
3,710
0
19
189
3,918
226
100
630
132
343
342
561
343
15,834
11,938
40,292
37,062
246
246
0
219
219
0
300
300
0
281
281
0
16,325
12,376
40,892
37,624
15,085
3,317
11,148
3,833
39,007
2,960
35,397
3,156
11,768
7,315
36,047
32,241
Loans
To depository institutions
Other
Acceptances held under repurchase agreements
Items in process of collection
Bank premises
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 dividends4
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT
Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
Federal Reserve notes, net
1. Components may not add to totals because of
rounding.
2. 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.
3. Valued monthly at market exchange rates.
4. Includes exchange-translation account reflecting the
monthly revaluation at market exchange rates of foreignexchange commitments.
Tables 227
2.—Continued
Minneapolis
St. Louis
San Francisco
Dallas
Kansas City
1990
1989
613
433
39
1,329
1,072
89
1,402
922
77
23
0
28
0
25
0
0
0
261
0
226
0
274
0
706
0
796
0
7,672
0
7,890
9,069
0
9,345
8,391
0
8,640
9,528
0
9,829
26,185
0
26,917
27,652
0
28,447
434
27
478
54
1,478
52
977
72
754
25
685
149
1,409
150
979
107
1,003
85
1,273
168
1,285
202
2,480
224
2,350
1,736
4,405
559
4,324
1,032
-140
-189
-405
-926
-2,110
986
-1,511
-1,482
-2,008
9,235
9,226
5,546
5,444
9,725
11,138
14,472
14,268
33,722
35,756
7,507
7,420
3,929
4,147
7,799
8,052
11,481
11,166
24,563
25,863
1,410
0
4
1
1,415
1,201
0
4
31
1,236
1,028
0
5
6
1,039
686
0
5
31
721
1,202
0
6
9
1,217
1,316
0
6
44
1,367
1,757
0
11
7
1,775
1,949
0
11
62
2,022
7,741
0
20
7
7,768
7,547
0
21
129
7,697
105
80
395
46
1,428
115
746
100
617
121
448
313
1,235
357
5,408
390
52
5,309
430
95
9,108
360
87
9,103
9,540
10,962
14,102
13,927
33,092
33,152
64
64
0
61
61
0
69
69
0
67
67
0
93
93
0
00 OO O
oo oo
185
185
0
171
171
0
315
315
0
302
302
0
9,235
9,226
5,546
5,444
9,725
11,138
14,472
14,268
33,722
35,756
9,163
1,656
9,009
1,589
4,698
769
5,003
857
9,910
2,111
10,306
2,254
13,926
2,445
14,620
3,454
31,335
6,773
34,502
8,639
7,507
7,420
3,929
4,147
7,799
8,052
11,481
11,166
24,563
25,863
1990
1990
1989
1990
1989
1990
346
307
36
370
290
30
203
172
13
198
153
12
422
334
33
494
362
30
585
463
44
28
0
53
0
6
0
9
0
10
0
15
0
184
0
201
0
101
0
110
0
207
0
6,817
0
7,028
6,982
0
7,235
3,755
0
3,862
3,818
0
3,936
280
28
387
23
365
33
881
146
877
153
183
1989
1989
228
77th Annual Report, 1990
3. Federal Reserve Open Market Transactions, 1990l
Millions of dollars
Apr.
Jan.
Feb.
423
1,489
15,960
1,000
108
3,384
18,113
400
543
0
21,551
0
5,796
0
17,286
0
Others within 1 year
Gross purchases
Gross sales
Maturity shift
Exchanges
Redemptions
0
0
1,201
-2,489
0
0
0
2,845
-5,418
0
100
0
1,876
0
0
0
0
993
-4,304
0
1 to 5 years
Gross purchases
Gross sales
Maturity shift
Exchanges
0
0
-1,163
2,373
0
0
-1,713
4,743
100
0
1,876
0
100
0
-739
4,081
5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
0
0
-38
116
0
0
-451
450
0
0
0
0
0
0
-254
223
oooo
Type of transaction
Mar.
0
0
-681
226
0
0
0
0
0
0
0
0
423
1,489
1,000
108
3,384
400
743
0
0
5,896
0
0
127,729
121,411
116,220
120,637
99,104
97,128
97,970
98,643
16,185
17,777
0
0
8,050
6,627
6,409
7,832
-9,975
740
190
5,145
U.S. TREASURY SECURITIES
Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchanges
Redemptions
More than 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
All maturities
Gross purchases
Gross sales
Redemptions
Matched transactions
Gross sales
Gross purchases
Repurchase agreements2
Gross purchases
Gross sales
Net change in U.S. Treasury securities
Total net change in System Open Market Account.
1. Sales, redemptions, and negative figures reduce
holdings of the System Open Market Account; all other
figures increase such holdings. Details may not sum to
totals because of rounding.
ooo
Net change in agency obligations
ooo
Repurchase agreements2
Gross purchases
Gross sales
ooo
FEDERAL AGENCY OBLIGATIONS
Outright transactions
Gross purchases
Gross sales
Redemptions
0
0
78
1,741
2,266
0
0
1,966
1,457
2,595
3,104
-525
0
509
-588
10,500
740
699
4,558
2. In July 1984 the Open Market Trading Desk discontinued accepting bankers acceptances in repurchase
agreements.
*Less than $500,000 in absolute value.
Tables 229
3.—Continued
Sept.
Oct.
Nov.
Dec.
Total
3,365
0
22,894
0
1,732
0
16,279
0
287
0
16,159
0
4,264
68
21,912
0
631
0
19,041
0
933
0
19,271
0
6,658
0
25,981
0
0
2,350
16,939
3,000
24,739
7,291
231,386
4,400
0
0
4,387
-2,771
0
50
0
1,314
0
0
0
0
1,321
-3,577
0
0
0
3,235
-4,550
0
0
0
1,010
0
0
0
0
1,934
0
0
325
0
3,531
-4,315
0
0
0
1,991
0
0
475
0
25,638
-27,424
0
0
0
-3,607
2,521
0
0
-1,314
0
0
0
-1,234
3,577
0
0
-2,188
4,200
0
0
-1,010
0
0
0
-1,677
0
0
0
-3,258
3,915
0
0
-1,991
0
200
0
-21,770
25,410
0
0
-530
0
0
0
0
0
0
0
-87
0
0
0
-697
0
0
0
0
0
0
0
-256
0
0
0
127
0
0
0
0
0
0
0
-2,186
789
0
0
-250
250
0
0
0
0
0
0
0
0
0
0
-350
350
0
0
0
0
0
0
0
0
0
0
-400
400
0
0
0
0
0
0
-1,681
1,226
3,365
0
0
1,782
0
0
287
0
0
4,264
68
0
631
0
0
933
0
0
6,983
0
0
100
2,550
3,000
25,514
7,491
4,400
121,596
121,218
107,896
110,042
95,144
95,787
113,647
110,635
120,036
120,280
127,265
129,722
116,601
114,488
125,844
123,442
1,369,052
1,363,434
3,959
3,959
11,242
11,242
13,106
11,447
26,700
23,764
31,996
34,932
19,844
19,844
36,457
34,105
45,684
31,022
219,632
202,551
2,987
3,928
2,590
4,121
-2,060
3,390
7,222
6,808
25,086
0
0
37
0
0
183
0
0
33
0
0
34
ooo
Aug.
ooo
July
ooo
June
ooo
May
0
0
1
2,314
2,314
3,221
3,221
4,697
4,137
7,130
5,944
7,394
8,580
5,913
5,913
2,774
2,504
2,091
1,021
41,836
40,461
0
0
527
1,149
-1,186
-34
270
1,070
1,192
2,987
3,928
3,117
5,270
-3,247
3,356
7,492
7,878
26,278
230
77th Annual Report, 1990
4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31,1988-90!
Millions of dollars
Increase or
decrease (—)
December 31
Description
U.S. Treasury securities, total
By term
l-15days 2
16-90days
91 days to 1 year
1-5 years
5-10years
More than 10 years
1990
1989
1988
1990
1989
252,103
228,367
238,422
23,736
-10,055
22,530
57,538
75,428
58,749
13,121
24,736
9,413
55,523
70,687
53,509
12,529
26,706
9,935
58,448
75,236
55,326
12,568
26,909
13,117
2,015
4,741
5,240
592
-1,970
-522
-2,925
-4,549
-1,817
-39
-203
112,010
91,407
31,163
17,013
104,581
91,381
30,814
1,592
112,782
90,950
29,929
4,760
7,430
25
350
15,421
-8,201
431
884
-3,168
6,342
6,525
6,966
-183
-442
200
737
1,639
2,555
1,022
188
153
568
1,346
3,198
1,071
188
170
697
1,492
3,419
1,000
189
47
169
293
-643
-49
0
-17
-129
-146
-221
71
-1
1,563
2,161
0
0
0
108
0
2,364
0
1,630
2,251
0
0
0
130
0
2,347
0
1,997
2,251
0
0
0
130
35
2,387
0
-67
-90
0
0
0
-22
0
17
0
-367
0
0
0
0
0
-35
-40
0
0
37
0
37
0
37
0
0
0
0
117
12
1,341
117
13
525
117
14
2,101
0
-1
816
0
-1
-1,576
By type of holding
Held outright
Treasury bills 3
Treasury notes
Treasury bonds
Held under RPs
Federal agency obligations, total
By term
l-15days 2
16-90 days
91 days to 1 year
1-5 years
5-10 years
More than 10 years
By type of holding
Held outright
Federal Farm Credit Banks
Federal Home Loan Banks
Federal Home Loan Financing Corporation .
Federal Home Loan Mortgage Corporation .
Federal Intermediate Credit Banks 4
Federal Land Banks
Federal Home Administration
Federal National Mortgage Association
Federal National Sinking Fund
Government National Mortgage Association
participation certificates4
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
General Services Administration
Held under RPs
1. Details may not sum to totals because of rounding.
2. Includes the effects of temporary transactions
(repurchase agreements and matched sale-purchase
agreements).
3. Includes the effects of matched sale-purchase
agreements.
4. There were no outstanding issues as of December 31,
1989.
Tables 231
5. Number and Salaries of Officers and Employees of Federal Reserve Banks,
December 31, 1990
President
Federal Reserve
Bank (including)
branches
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
Annual
salary
(dollars)
Other officers
Number
Number
Annual
salaries
(dollars)
152,000
231,500
167,500
163,500
175,600
186,700
200,000
170,500
154,000
170,000
161,000
195,700
58
162
55
63
82
72
95
49
50
61
60
103
5,122,400
15,451,800
4,393,800
4,509,200
6,174,000
5,440,600
7,363,500
3,473,500
3,763,000
4,525,500
4,569,200
8,568,470
1,259
3,752
1,211
1,336
1,881
2,188
2,428
1,096
974
1,597
1,579
2,467
2,128,000
910
73,354,970
21,768
Total
Employees
Fulltime
Annual
salaries
(dollars)
Number
Annual
salaries
(dollars)
266
48
159
71
145
69
35
90
128
43
47
52
43,305,054
124,647,431
36,327,403
35,415,957
48,966,676
58,112,098
70,469,923
28,855,514
27,894,906
42,787,259
43,670,048
75,459,052
1,584
3,963
1,426
1,471
2,109
2,330
2,559
1,236
1,153
1,702
1,687
2,623
48,579,454
140,330,731
40,888,703
40,088,657
55,316,276
63,739,398
78,033,423
32,499,514
31,811,906
47,482,759
48,400,248
84,223,222
1,153
635,911,321
23,843
711,394,291
Parttime
232
77th Annual Report, 1990
6. Income and Expenses of Federal Reserve Banks, 1990
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
CURRENT INCOME
Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other
117,880,135
40,249,682
5,464,905
1,139,773
773,106
19,994,508,215
2,603,894,184
730,186,109
30,135,008
1,306,870,543
96,019,740
49,907,873
1,446,638
7,365,276,260
705,168,806
101,758,531
18,987,456
577,158,997
117,823,929
34,801,129
751,767
1,176,904,432
143,052,007
43,460,030
623,088
Total
23,476,603,651
1,494,494,476
8,196,655,958
731,675,595
1,364,812,663
735,493,281
103,289,945
14,240,661
29,034,262
33,036,021
47,515,067
10,759,140
1,774,207
1,355,731
1,959,097
146,498,114
29,524,292
2,064,370
3,380,971
6,932,128
40,195,918
9,649,825
477,548
1,410,768
2,333,050
42,434,690
9,364,895
2,919,355
2,222,684
1,599,642
83,469,068
10,515,853
53,429,530
4,698,513
888,668
3,034,794
10,697,727
2,331,254
9,089,781
4,749,278
562,665
3,088,159
5,682,049
565,649
3,077,771
22,430,224
33,544,757
25,485,512
22,029,168
19,996,030
4,169,506
2,577,025
2,034,009
591,891
923,873
3,817,714
3,675,115
3,512,892
15,137,216
2,864,504
1,761,760
1,736,233
2,726,802
45,162
1,217,055
1,324,457
1,684,906
1,729,422
390,890
782,139
6,266,935
20,978,038
84,412,879
51,197,499
138,696,901
40,145,704
0
(35,204,879)
(2,441,365)
259,909
424,117
6,198,427
3,115,571
9,265,041
2,370,076
(1,031,130)
(8,565,482)
(171,964)
3,315
4,092,647
16,868,964
7,995,893
14,357,035
5,846,209
374,458
(3,990,803)
(6,317)
276,083
650,406
4,107,162
2,141,221
12,304,551
11,757,050
2,285,312
(2,750,438)
(39,324)
178,209
1,073,840
5,938,152
3,540,608
10,432,184
2,255,672
608,389
(3,293,745)
(368,473)
1,490,046,024
(140,320,212)
1,349,725,812
94,146,066
(5,973,230)
88,172,856
285,067,479
(28,216,330)
256,851,149
100,686,246
(16,768,465)
83,917,781
94,143,385
(14,193,063)
79,950,322
CURRENT EXPENSES
Salaries and other personnel
expenses
Retirement and other benefits2
Fees
Travel
Software expenses
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, net 3
Recoveries
Expenses capitalized4
,
Total
Reimbursements
Net expenses
For notes see end of table.
Tables 233
6.—Continued
Richmond
20,038,180
1,791,699,651
160,792,748
64,590,430
757,145
Atlanta
1,222,030
Chicago
2,087,399
St. Louis
5,552,980
Minneapolis Kansas City
5,596,473
1,607,339
754,680,400 2,405,484,721 586,281,665 322,274,531 690,057,809
254,370,767 326,135,464 70,467,315 78,441,171 101,876,219
87,925,707
95,255,549 30,802,461 40,885,955 47,558,582
1,019,513
2,716,550
438,178
450,663
480,395
Dallas
32,125,189
San Francisco
2,023,079
744,950,684 2,272,868,522
197,733,785 352,012,233
49,787,046
83,452,816
728,160
1,735,455
2,037,878,154 1,099,218,417 2,831,679,683 693,542,599 447,648,793 841,580,344 1,025,324,864 2,712,092,105
32,900,836
7,567,243
1,221,787
1,642,836
2,041,052
49,667,628
11,656,552
487,344
2,365,119
1,478,037
49,959,388
11,033,952
601,107
2,266,996
2,142,351
87,539,142
18,877,557
1,328,432
4,172,686
3,530,915
3,793,571
517,051
3,253,717
5,575,392
428,917
2,328,309
5,775,017
678,321
3,751,885
4,413,846
823,891
3,548,880
12,229,993
907,015
5,482,727
457,535
1,347,604
1,577,412
424,233
715,635
(512,222)
1,070,750
862,384
301,122
727,843
815,680
2,616,875
1,531,046
291,847
954,877
759,975
1,504,911
1,134,661
1,275,902
891,627
2,600,101
5,671,422
3,237,036
211,406
2,362,571
526,377
1,502,356
5,223,149
2,606,325
6,847,610
1,975,755
1,316,229
(798,616)
(350,692)
1,445,387
2,538,800
8,686,660
5,699,839
15,042,660
1,530,507
779,103
(3,772,294)
(108,895)
81,070,631 34,041,937
18,028,116 7,814,086
599,958
735,962
1,738,101
3,649,191
4,536,470 1,499,814
56,837,128
13,374,977
737,277
2,232,110
3,114,658
66,832,802
16,133,375
1,293,314
2,597,069
1,868,807
7,001,867
677,257
5,146,708
9,646,123
1,046,536
5,589,045
9,205,692
1,088,629
6,037,754
2,132,801
4,275,631
2,348,364
635,099
2,024,388
1,855,033
2,843,413
2,359,780
626,277
2,085,518
3,247,884
4,540,872
2,431,704
2,098,123
4,446,000
696,310
1,084,527
8,199,616
5,344,284
12,372,510
1,569,550
(3,729,457)
(4,007,755)
(262,789)
570,159
2,533,938
8,059,587
5,991,957
13,094,898
3,176,159
1,544,040
(2,263,906)
(308,915)
306,922
809,927
489,331
3,978,779
11,740,795 2,768,897
8,038,433 2,090,245
5,491,021
22,943,253
1,575,550
4,893,725
(6,878,249) 1,436,415
(2,709,274) (1,446,307)
(85,670)
(272,671)
302,592
891,745
2,042,096
567,201
2,940,260
3,681,210
1,973,210
2,659,913
6,426,341 10,119,796
1,892,206
1,303,245
1,191,877
2,103,013
(811,021)
(795,238)
(425,325)
(40,330)
121,805,061 147,175,009 183,661,746 70,407,058 72,953,349 101,295,919
(9,168,663) (10,572,072) (13,168,250) (8,149,074) (4,705,348) (9,037,973)
112,636,398 136,602,937 170,493,496 62,257,984 68,248,001 92,257,946
99,205,980 179,992,770
(6,336,848) (14,030,896)
92,869,132 165,961,874
234
77th Annual Report, 1990
6. Income and Expenses of Federal Reserve Banks, 1990—Continued
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
22,126,877,836
1,406,321,620
8,000,298,873
647,757,814
1,284,862,341
PROFIT AND LOSS
Current net income
Additions to and deductions
from current net income
Profits on sales of U.S.
Treasury and federal
agency securities
Profit on foreign
exchange transactions
Other additions
Total additions
Total deductions
Net additions to or
deductions ( - ) from
current net income
4,232,357
23,246,076
1,832,900
3,772,191
2,139,391,108
375,560
2,202,695,985
(1,225,589)
62,929,318
79,157,471
718
83,390,545
(561)
579,774,990
25,801
603,046,867
(541,196)
96,272,600
3,128
98,108,628
(1,325)
117,666,511
11,432
121,450,134
(1,712)
2,201,470,397
83,389,984
602,505,671
98,107,303
121,448,422
Cost of unreimbursed Treasury
services
102,141,926
4,836,318
15,561,379
14,618,868
11,878,601
Assessments by Board
Board expenditures5
Cost of currency
103,752,200
193,006,998
3,832,500
13,705,231
28,184,700
65,406,596
4,531,200
6,150,167
5,676,400
12,427,914
23,929,447,109
1,467,337,555
8,493,651,869
720,564,882
1,376,327,848
140,757,879
5,235,308
38,420,160
6,268,895
7,488,534
23,608,397,730
1,448,087,847
8,395,856,909
699,100,887
1,366,983,763
Net income before payment to
U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)
Transferred to surplus
180,291,500
14,014,400
59,374,800
15,195,100
1,855,550
Surplus, January 1
Surplus, December 31
2,242,860,100
2,423,151,600
83,267,100
97,281,500
607,678,250
667,053,050
99,978,900
115,174,000
123,500,150
125,355,700
1. Details may not sum to totals because of rounding.
2. The effect of the 1987 implementation of Financial
Accounting Standards Board Statement No. 8 7 Employers' Accounting for Pensions—is recorded in the
Total column only and has not been distributed to each
District. Accordingly, the sum of the Districts will not
equal the Total column for this category or for Total net
expenses, and New York will not sum to current net
income. The effect of FASB 87 on the Reserve Banks was a
reduction in expenses of $60,494,065.
3. Includes distribution of costs for projects performed
by one Bank for the benefit of one or more other Banks.
4. Includes expenses for labor and materials temporarily
capitalized and charged to activities when the products are
consumed.
5. For additional details, see the last four pages of the
preceding section: Board of Governors, Financial Statements.
Tables 235
6.—Continued
Richmond
1,925,241,756
5,866,672
Atlanta
Chicago
St. Louis
Minneapolis Kansas City
962,615,479 2,661,186,186 631,284,615 379,400,792 749,322,398
2,187,369
7,678,024
1,822,998
1,004,423
2,046,761
Dallas
San Francisco
932,455,734 2,546,130,229
2,240,131
6,999,416
132,642,249 209,660,329 267,423,888 57,763,560 64,181,733 83,436,253
13,033
9,672
169,900
6,401
86,130
164
138,521,954 212,017,597 275,111,585 59,592,959 65,272,286 85,483,178
(16,064)
(30,901)
(24,716)
(10,373)
(82,569)
(149,759)
162,593,724 288,817,800
41,452
7,728
164,875,307 295,824,944
(2,421)
(363,991)
138,505,890
211,986,696
275,086,868
59,582,586
65,189,717
85,333,420
164,872,886
295,460,953
6,766,915
7,439,483
10,162,026
4,674,951
3,893,281
6,853,796
4,278,286
11,178,022
6,446,700
18,507,249
10,157,200
5,840,582
12,908,700
25,741,345
2,834,800
5,923,963
3,094,200
3,311,034
4,051,400
6,428,486
7,937,300
8,914,997
14,097,100
20,649,434
2,032,026,782 1,151,164,911 2,887,460,983 677,433,487 434,291,993 817,322,136 1,076,198,037 2,795,666,626
8,693,667
14,123,790
17,329,763
3,772,407
4,061,449
5,407,333
11,027,264
18,929,309
2,014,703,415 1,110,356,270 2,850,606,670 671,682,930 429,101,544 807,648,854 1,050,998,473 2,763,270,166
8,629,700
26,684,850
19,524,550
1,978,150
1,129,000
4,265,950
14,172,300
13,467,150
139,430,700
148,060,400
218,822,250
245,507,100
280,506,350
300,030,900
61,582,150
63,560,300
67,382,400
68,511,400
88,237,400
92,503,350
170,564,500
184,736,800
301,909,950
315,377,100
236
77th Annual Report, 1990
7. Income and Expenses of Federal Reserve Banks, 1914-90 l
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
-2,456,792
-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
-2,127,889
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
10,769,5%
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 237
7.—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)
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
2,011,418
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
75,283,818
166,690,356
193,145,837
17,617,358
570,513
3,554,101
40,327,237
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
238
77th Annual Report, 1990
7. Income and Expenses of Federal Reserve Banks ,1914-90 - 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
8,455,309,401
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 .
1987 .
1988 .
1989.
1990.
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
17,633,011,623
19,526,431,297
22,249,275,725
23,476,603,651
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
1,146,910,699
1,205,960,134
1,332,160,712
1,349,725,812
(115,385,855)
(372,879,185)
(68,833,150)
(400,365,922)
(412,943,156)
1,301,624,294
1,975,893,356
1,796,593,9172
(516,910,320)
1,295,622,583
2,201,470,397
62,230,800
63,162,700
61,813,400
71,551,000
82,115,700
77,377,700
97,337,500
81,869,800
84,410,500
89,579,700
103,752,200
73,124,423
82,924,013
98,441,027
152,135,488
162,606,410
173,738,745
180,779,673
170,674,979
164,244,653
175,043,736
193,006,998
Total, 1914-90 .
Aggregate/or
each Bank,
1914-90
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco...
Total
284,236,363,958 20,423,722,746 5,496,337,185 1,464,346,608 2,335,561,744
14,819,792,498
85,066,294,030
11,228,465,209
18,896,798,643
22,574,814,791
12,094,473,444
40,342,775,285
9,555,068,162
5,160,526,333
12,066,279,870
16,045,788,680
36,385,287,014
284,236,363,958
1,348,728,618
4,033,851,718
1,089,448,550
1,356,254,562
1,613,537,792
1,794,720,302
2,672,799,574
1,073,911,136
953,155,521
1,309,632,616
1,194,448,489
2,139,623,275
52,818,886
380,879,986
71,030,818
108,676,590
77,874,176
113,352,460
204,871,672
44,999,172
43,744,015
62,084,409
97,422,373
206,592,051
139,494,542
617,769,128
101,777,200
147,188,090
218,917,796
133,585,728
323,445,239
87,111,870
40,766,714
108,804,008
134,430,902
282,270,527
20,423,722,7464 5,496,337,185 1,464,346,608 2,335,561,744
1. Details may not add to totals because of rounding.
2. For 1987 and subsequent years, includes the cost of
services provided to the Treasury by Federal Reserve
Banks for which reimbursement was not received.
3. The $2,551,844,799 transferred to surplus was
reduced by direct changes of $500,000 for charge-off on
Bank premises (1927), $139,299,557 for contributions to
187,713,374
1,482,746,976
247,243,866
257,762,578
312,713,511
515,239,405
667,047,416
140,778,979
173,170,964
224,704,610
466,842,818
820,372,683
capital of the Federal Deposit Insurance 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
$2,400,910,572 on Dec. 31,1990.
4. See note 2, table 6.
Tables 239
7.-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
117,499,115
125,616,018
129,885,339
140,757,879
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
17,738,879,542
17,364,318,571
21,646,417,306
23,608,397,730
56,820,950
76,896,650
78,320,350
106,663,100
161,995,900
155,252,950
91,954,150
173,771,400
64,971,100
130,802,300
180,291,500
2,551,844,7993
2,430,673,709
149,138,300
2,188,893
260,232,076,858
(3,657)
98,977,610
659,326,690
129,276,071
190,320,129
125,553,280
174,102,814
332,448,031
76,116,890
68,911,904
100,634,045
152,351,555
322,654,689
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
13,245,968,994
80,220,302,070
9,929,448,907
17,193,399,680
20,681,716,898
10,123,604,008
37,121,127,568
8,335,226,905
4,143,832,049
10,596,634,663
14,737,191,458
33,903,623,656
135,411
(433,412)
290,661
(9,906)
(71,517)
5,491
11,682
(26,515)
64,874
(8,674)
55,337
(17,089)
107,376,325
704,309,621
129,504,222
138,589,493
153,940,208
250,773,640
315,359,654
68,700,928
72,388,613
96,643,300
189,014,278
325,244,517
2,430,673,709
149,138,300
2,188,893
260,232,076,858
(3,657)
2,551,844,799
240
77th Annual Report, 1990
8. Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 31, 1990 *
Dollars
Acquisition costs
Federal Reserve
Bank or
Branch
Building machinery and
equipment
Net
book
value
Land
Buildings
(including
vaults)2
22,073,501
27,840
80,947,942
91,092
5,449,161
44,538
108,470,604 89,563,208
163,470
136,646
NEW YORK
Annex
Buffalo
3,436,277
447,863
887,844
66,104,026
1,136,219
2,728,294
21,735,584
745,855
2,465,047
91,275,887 72,142,664
2,359,936
747,628
6,081,185 3,202,065
PHILADELPHIA.
2,251,556
52,644,356
5,903,704
60,799,616 44,951,528
CLEVELAND.
Cincinnati
Pittsburgh
1,074,281
2,246,599
1,658,376
10,555,784
13,680,428
8,475,758
7,164,337
7,618,302
3,331,608
18,794,403 13,061,875
23,545,329 12,209,947
13,465,742 10,850,028
RICHMOND.
Annex
Baltimore
Charlotte
3,912,575
572,128
6,476,335
3,129,645
57,281,864
3,725,466
26,826,903
27,402,251
14,314,313
3,924,584
3,842,189
4,698,497
75,508,751 53,224,023
8,222,179 3,656,874
37,145,427 31,134,085
35,230,393 34,186,433
ATLANTA..
Birmingham .
Jacksonville .
Miami
Nashville....
New Orleans.
1,209,360
3,115,938
1,665,439
3,717,791
592,342
3,087,693
12,273,853
1,905,770
16,395,261
12,120,564
1,474,678
3,371,593
4,319,451
1,072,438
2,281,437
2,181,400
1,434,027
1,476,257
CHICAGO .
Annex
Detroit
4,511,942 104,200,254
969,147
53,066
4,361,309
797,734
16,898,497
426,419
4,102,944
125,610,692 101,639,918
1,448,632 1,230,892
9,261,987 7,214,914
ST. LOUIS .
Little Rock .
Louisville ..
Memphis ...
700,378
1,148,492
700,075
1,135,623
13,352,013
2,082,669
3,469,379
5,004,438
5,298,206
1,003,022
1,131,238
2,280,473
19,350,597 16,653,007
4,234,183 2,545,971
5,300,692 3,215,547
8,420,534 5,441,458
MINNEAPOLIS.
Helena
1,394,384
1,306,268
26,961,832
10,902,290
7,843,033
41,170
KANSAS CITY.
Denver
Oklahoma City..
Omaha
1,798,804 20,568,975
3,187,962
4,078,149
646,386
3,379,543
6,534,583 10,987,009
9,241,472
3,648,311
2,172,989
1,401,083
36,199,249
12,249,727
31,609,251
10,914,422
6,198,918
18,922,675
BOSTON.
Annex..
Total3
20,607,294
12,232,483
23,440,441
8,330,024
4,149,157
17,641,804
32,795,882
262,477
2,205,500
482,284
25,554,433
1,477,716
3,248,771
2,609,708
3,737,706
404,946
1,400,175
1,409,162
62,088,020 59,896,413
2,145,140
1,986,655
6,854,446 6,048,944
4,501,154
3,619,224
SAN FRANCISCO.
Los Angeles
Portland
Salt Lake City
15,541,937
3,891,887
207,381
480,222
274,772
68,266,726
49,540,237
3,800,542
4,178,378
2,442,008
17,402,808
8,334,890
1,028,879
1,448,400
1,836,988
101,211,472 81,836,313
61,767,014 56,119,371
5,036,801 4,318,432
6,107,000 3,550,313
4,553,768 2,668,707
Total
141,671,420 770,577,626 186,495,542 1,098,744,587 871,662,236
1. Details may not sum to totals because of rounding.
2. Includes expenditures for construction at some
offices, pending allocation to appropriate accounts.
3. Excludes charge-offs of $17,698,968 before 1952.
1,224,363
17,802,664 14,196,241 13,071,576
6,094,146 4,182,986
912,813
20,342,137 18,760,205
18,019,755 14,427,379
3,501,048 1,468,518
7,935,543 5,172,620
292,710
DALLAS....
El Paso
Houston
San Antonio .
Seattle
Other
real
estate4
149,948
1,100,000
16,751,410
4. Covers acquisitions for banking-house purposes and
bank premises formerly occupied and being held pending
sale.
Tables
241
9. Operations in Principal Departments of Federal Reserve Banks, 1987-90
Operation
1990
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
Allother
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities u
Transfer of funds
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
Allother
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities u
Transfer of funds
Food stamps redeemed
1987
22
17,580
5,910
17,137
25
16,881
5,217
19,871
541
547
147
18,014
17,623
568
146
17,006
40
60
2,334
186
56
2,327
191
52
2,210
194,538
252,430
65,863
1,734
229,358
246,598
59,985
1,828
537,952
195,647
47,184
3,684
151,323
216,151
44,907
3,517
623,008
16,485
12,519,171
635,064
14,284
12,321,576
608,307
13,189
11,789,787
610,678
12,511
11,453,158
102,332,172
98,130,603
182,575,303
11,714
89,516,419
160,730,050
10,748
90,056,338
152,453,528
10,322
15
19,462
6,561
12,072
22
19,857
6,319
12,668
547
162
18,598
44
63
2,899
199,067,200
14,517
1. Before 1988, data included book-entry securities
transfers both sent and received. After 1987, the data
include only the transfers sent.
2. Agents' savings bonds transactions are not included
after 1988.
1988
1989
144
3. Agents' savings bonds transactions, although excluded after 1988, are small in dollar amounts.
242
77th Annual Report, 1990
10. Federal Reserve Bank Interest Rates, December 31, 1990
Loans to depository institutions
Bank
All Federal Reserve Banks..
Adjustment credit
and seasonal
credit1
6.5
1. Adjustment credit is available on a short-term basis to
help depository institutions meet temporary needs for
funds that cannot be met through reasonable alternative
sources. After May 19,1986, the highest rate established
for loans to depository institutions may be charged on
adjustment credit loans of unusual size that result from a
major operating problem at the borrower's facility.
Seasonal credit is available to help smaller depository
institutions meet regular, seasonal needs for funds that
cannot be met through special industry lenders and that
arise from a combination of expected patterns of movement
in their deposits and loans.
See section 201.3(b)(l) of Regulation A.
2. Extended credit is available to depository institutions,
if similar assistance is not reasonably available from other
Extended credit2
First 30 days
of borrowing
After 30 days of borrowing3
6.5
8.05
sources, when exceptional circumstances or practices
involve only a particular institution or when an institution
is experiencing difficulties adjusting to changing market
conditions over a longer period of time. See section
201.3(b)(2) of Regulation A.
3. For extended-credit loans outstanding more than 30
days, a flexible rate somewhat above rates on market
sources of funds ordinarily will be charged, but in no case
will the rate charged be less than the basic discount rate
plus 50 basis points. The flexible rate is reestablished on
thefirstbusiness day of each two-week reserve maintenance
period. At the discretion of the Federal Reserve Bank, the
time period for which the basic discount rate is applied may
be shortened.
Tables 243
11. Reserve Requirements of Depository Institutionsl
Type of deposit, and
deposit interval2
Depository institution requirements
after implementation of the
Monetary Control Act
Percent of deposits
Effective date
3
12
12/18/90
12/18/90
Nonpersonal time deposits5-6
0
12/27/90
Eurocurrency liabilities7
0
12/27/90
Net transaction accounts3-4
$0million-$41.1 million
More than $41.1 million
1. Reserve requirements in effect on Dec. 31, 1990.
Required reserves must be held in the form of deposits with
Federal Reserve Banks or vault cash. Nonmember institutions 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 or the Federal
Reserve 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 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. 20, 1988, the exemption was raised
from $3.2 million to $3.4 million. In determing the reserve
requirements of depository institutions, the exemption
shall apply in the following order: (1) net NOW accounts
(NOW accounts less allowable deductions); and (2) net
other transaction accounts. The exemption applies only to
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).
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 change in transaction accounts
held by all depository institutions, determined as of June 30
each year. Effective Dec. 18,1990 for institutions reporting
quarterly and Dec. 25, 1990 for institutions reporting
weekly, the amount was increased from $40.4 million to
$41.1 million.
5. The reserve requirements on nonpersonal time deposits with an original maturity of less than 1 xh years were
reduced from 3 percent to 1V4 percent on the maintenance
period that began Dec. 13, 1990, and to zero for the
maintenance period that began Dec. 27, 1990, for
institutions that report weekly. The reserve requirement on
nonpersonal time deposits with an original maturity of
1VS years or more has been zero since Oct. 6, 1983.
6. For institutions that report quarterly, the reserves on
nonpersonal time deposits with an original maturity of less
than Vh years will be reduced from 3 percent to zero on
Jan. 17,1991.
7. The reserve requirements on Euroccurency liabilities
were reduced from 3 percent to zero in the same manner
and on the same dates as were the reserves on nonpersonal time deposits with an original maturity of less than
1 Vi years (see notes 5 and 6).
244
77th Annual Report, 1990
12. Initial Margin Requirements under Regulations T, U, G, and X l
Percent of market value
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 ..
Margin
stocks
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 ofGovernors for the first time
established in Regulation T the initial margin required
for writing options on securities, setting it at 30 percent of
Convertible
bonds
Short sales,
Tonly 2
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
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 selfregulatory organization; such maintenance margin rules
must be approved by the Securities and Exchange Commission. Effective June 6, 1988, the SEC approved new
maintenance margin rules, permitting margins to be the
price of the option plus 20 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 245
13. Principal Assets and Liabilities and Number of Insured Commercial Banks,
by Class of Bank, June 30,1990 and 1989l
Asset and liability items shown in millions of dollars
Member banks
Item
Total
Total
National
State
Nonmember
banks
June 30,1990
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,397,535
1,850,521
1,838,093
547,014
1,764,200
1,387,190
1,378,584
377,010
1,430,081
1,134,705
1,127,800
295,376
334,119
252,485
250,783
81,634
633,335
463,331
459,509
170,005
398,798
148,216
208,095
274,686
102,323
161,116
218,947
76,429
129,473
55,739
25,895
31,643
124,112
45,893
46,979
Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
2,223,873
48,283
590,923
1,789,730
211,833
1,607,549
41,506
435,685
1,272,269
150,801
1,314,078
31,007
352,317
1,050,083
119,348
293,471
10,500
83,368
222,186
31,453
616,324
6,777
155,238
517,461
61,032
12,436
5,065
4,049
1,016
7,371
Number of banks
June 30,1989
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,259,724
1,757,586
1,744,053
502,138
1,670,985
1,327,599
1,317,906
343,386
1,356,609
1,088,040
1,080,141
268,569
314,376
239,559
237,765
74,817
588,740
429,987
426,147
158,753
341,591
160,548
216,074
229,994
113,392
167,913
183,622
84,948
134,291
46,372
28,445
33,622
111,597
47,156
48,161
Deposits, total
Interbank
Other demand
Other time and savings
Equity capital
2,093,348
52,657
579,765
1,650,352
202,278
1,520,418
45,449
429,752
1,176,123
146,044
1,235,267
33,420
344,296
967,596
113,650
285,151
12,029
85,456
208,527
32,395
572,930
7,208
150,013
474,229
56,234
12,876
5,305
4,269
1,036
7,571
Number of banks
1. All insured commercial banks in the United States.
Details may not sum to totals because of rounding.
246
77th Annual Report, 1990
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-90, and Month-End 1990{
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
Special
draw-
U.S. Treasury and
federal agency securities
Total
Bought
outright
Held
under
repurchase
agreement
2
Loans
Float
Other
All
Federal
other3 Reserve
assets4
Total
Gold
stock5
ing
«*©
rights
certificate
account
Treasury
currency
outstanding6
1918 . . . .
1919....
239
300
239
300
0
0
1,766
2,215
199
201
294
575
0
0
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
0
0
54
4
2,687
1,144
618
723
320
119
40
78
27
52
262
146
273
355
390
0
0
0
0
0
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
8
3
57
31
23
643
637
582
1,056
632
63
45
63
24
34
378
384
393
500
405
0
0
0
0
0
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
0
0
0
0
0
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
0
0
0
0
0
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 . . . . 2,184
1941 . . . . 2,254
1942 . . . . 6,189
1943 . . . . 11,543
1 9 4 4 . . . . 18,846
2,184
2,254
6,189
11,543
18,846
0
0
0
0
0
3
3
6
5
80
80
94
471
681
815
8
10
14
10
4
0
0
0
0
0
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
24,252
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
0
0
0
0
0
15,091 20,065
24,093 20,529
23,181 22,754
24,097 24,244
19,499 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
808
3
5
4
2
1
0
0
0
0
0
22,216 22,706
25,009 22,695
25,825 23,187
26,880 22,030
25,885 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
0
0
0
0
0
26,507 21,690
26,699 21,949
25,784 22,781
27,755 20,534
28,771 19,456
5,008
5,066
5,146
5,234
5,311
I960....
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
0
0
0
0
0
29,338
31,362
33,871
36,418
39,930
17,767
16,889
15,978
15,513
15,388
5,398
5,585
5,567
5,578
5,405
....
....
....
....
....
Digitized for
ForFRASER
notes see last two pages of table.
Tables 247
14.—Continued
Factors absorbing reserve funds
Currency
in
circulation
Deposits, other
than reserves, with
Federal Reserve Banks
Member bank
Required
clearing
bal-
Other
Federal
Reserve
liaWith
bilities Federal
and
Reserve
capital4 Banks
Other
Other
Federal
Reserve
accounts4
96
73
25
28
118
208
0
0
0
0
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
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
4,603
211
222
5,360
272
5,388
284
5,519
5,536 3,029
19
54
8
3
121
6
79
19
4
20
22
31
24
128
169
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
8,732 2,213
11,160 2,215
15,410 2,193
20,499 2,303
25,307 2,375
368
867
799
579
440
28,515
28,952
28,868
28,224
27,600
2,287
2,272
1,336
1,325
1,312
27,741
29,206
30,433
30,781
30,509
31,158
31,790
31,834
32,193
32,591
Treasury
cash
holdings7
Treasury
4,951
5,091
288
385
51
51
5,325
4,403
4,530
4,757
4,760
218
214
225
213
211
4,817
4,808
4,716
4,686
4,578
Currency
and
coin9
Required10
1,636
1,890
0
0
1,585
1,822
51
68
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
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
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
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
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
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
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
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
217
32,869
377
485
422
465
279
33,918
597
35,338
380
247
361
880
171
37,692
612
820
229
39,619
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
Foreign
Ex-
248
77th Annual Report, 1990
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items —
Year-End 1918-90, and Month-End 1990 ^Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
U.S. Treasury and
federal agency securities
Other
Federal
All
other3 Reserve
assets4
Gold
stock5
Special
drawing
nghts
certificate
account-
Treasury
currency
outstanding6
Bought
outrightn
Held
under
repurchase
agreement
40,768
44,316
49,150
52,937
57,154
40,478
43,655
48,980
52,937
7,154 3
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
0
0
0
2,743
43,340
47,177
52 031
56,624
64,584
13,733
13,159
11,982
10,367
10,367
62,142
69,481
71,119
80,395
84,760
0
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
7,710
8,313
8,716
9,253
1975 . . . .
1976 . . . .
1977 . . . .
1978 . . . .
1979....
62,142
70,804
71,230
80,495
85,714
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....
1987 . . . .
1988 . . . .
1989
1990 . . . .
130,592
140,348
148,837
160,795
169,627
191,248
221,459
231,420
247,489
235,417
242,643
128,038
136,863
144,544
159,203
167,612
186,025
205,454
226,459
240,628
233,300
239,499
2,554
3,485
4,293
1,592
2,015
5,223
16,005
4,961
6,861
2,117
3,144
1,809
1,601
717
918
3,577
3,060
1,565
3,815
2,170
481
313
4,467
1,762
2,735
1,605
833
988
1,261
811
1,286
1,093
1,727
776
195
1,480
418
0
0
0
0
0
0
0
8,739
9,230
9,890
8,728
12,347
15,302
17,475
15,837
18,803
39,631
40,011
146,383
153,136
63,659
172,464
186,384
210,598
241,760
251,883
269,748
276,622
284,697
11,160
11,151
11,148
11,121
11,096
11,090
11,084
11,078
11,060
11,059
11,058
2,518
3,318
4,618
4,618
4,618
4,718
5,018
5,018
5,018
8,518
10,018
13,427
13,687
13,786
15,732
16,418
17,075
17,567
18,177
18,799
19,620
20,368
Total
1965 . . . .
1966 . . . .
1967 . . . .
1968 . . . .
1969....
1970
1971
1972
1973
1974
....
....
....
....
....
Loans
Float2
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. Components may not add to
totals because of rounding.
2. Beginning with 1960, figures reflect a minor change
in concept; set 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.
Total
5,575
6,317
6 784
6,795
6,852
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 the reserve period
two weeks before the report date.
Tables 249
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Other
Federal
Reserve
liaWith
bilities Federal
and
Reserve
capital4 Banks
Required
clear-
Other
Other
Federal
Reserve
accounts 4
150
174
135
216
134
355
588
563
747
807
211
-147
-773
-1,353
0
0
0
0
0
0
0
0
0
0
0
1,156
2,020
1,855
2,542
2,113
148
294
325
251
418
,233
999
840
,41914
1 ,27514
0
0
0
0
0
0
0
0
0
0
483
460
392
240
494
7,285
10,393
7,114
4,196
4,075
353
352
379
368
429
,090
,357
1 ,187
,256
1 ,412
0
0
0
0
0
441
443
429
479
513
550
447
454
395
450
552
3,062
4,301
5,033
3,661
5,316
9,351
7,588
5,313
8,656
6,217
5,809
411
505
328
191
253
480
287
244
347
589
251
617
781
1 ,033
851
867
1 ,041
917
1 ,027
548
1 ,298
226
0
0
0
0
0
0
0
0
0
0
0
Currency
in
circulation
Treasury
cash
holdings7
Treasury
Foreign
42,056
44,663
47,226
50,961
53,950
760
1,176
1,344
695
596
668
416
1,123
703
1,312
57,903
61,068
66,516
72,497
79,743
431
460
345
317
185
86,547
93,717
103,811
114,645
125,600
136,829
144,774
154,908
171,935
183,796
197,488
211,995
230,205
247,649
260,453
283,000
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 salepurchase 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 - Q l , $279; Q2,
$172; Q3, $112; Q4, $84; 1974-Q1, $67; Q2, $58. The
transition period ended with the second quarter of 1974.
Member bank
reserves8
Currency
and
coin9
Required10
Ex-
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
-238
-232
-182
-700
-901
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
30,033 -460
32,496 1,035
32,044
981
35,268 -1,360
37,011 -3,798
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
0
117
436
1,013
1,126
1,490
1,812
1,687
1,605
1,626
1,846
4,671
5,261
4,990
5,392
5,952
5,940
6,088
7,129
7,683
8,486
9,170
27,456
25,111
26,053
20,413
20,693
27,141
46,295
40,097
37,742
36,701
33,746
13,654
15,576
16,666
17,821
40,558
675
42,145 -1,442
41,391
1,328
39,179 -945
-1.1031
-1,535
-1,265
-893
-2,835
t t 1
n.a.
n.a.
n.a.
1i i
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.
250
77th Annual Report, 1990
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items —
Year-End 1918-90, and Month-End 1990^Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
1990
Jan
Feb . . .
Mar...
Apr . . .
May...
June...
July...
Aug...
Sept...
Oct....
Nov...
Dec ...
Gold
stock5
Special
drawing
nghts
certificate
account-
Treasury
currency
outstanding 6
11,059
11,059
11,059
11,060
11,063
11,065
11,065
11,064
11,064
11,061
11,060
11,058
8,518
8,518
8,518
8,518
8,518
8,518
8,518
8,518
8,518
8,566
10,018
10,018
19,666
19,734
19,802
19,878
19,951
20,024
20,093
20,145
20,196
20,261
20,321
20,368
U S. Treasury and
federal agency securities
Total
Bought
outright12
Held
under
repurchase
agreement
222,417
215,796
219,454
223,806
224,529
229,682
231,647
233,505
236,501
235,638
241,193
242,643
221,432
215,796
219,148
223,445
224,344
228,752
230,592
231,366
233,704
234,588
238,788
239,499
985
0
306
361
185
930
1,055
2,139
2,797
1,050
2,405
3,144
Loans
Float2
412
1,428
2,143
1,655
1,304
888
768
885
664
411
231
313
978
1,059
431
659
720
486
674
566
752
704
482
1,727
Other
Federal
All
other 3 Reserve
assets4
0
0
0
0
0
0
0
0
0
0
0
0
39,455
39,284
39,846
39,984
40,085
40,404
39,840
39,133
40,785
41,568
39,803
40,011
Total
263,262
257,567
261,874
266,104
266,638
271,460
272,927
274,089
279,366
278,321
281,709
284,697
Tables 251
14.-Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Currency
in
circulation
Treasury
cash
holdings7
Treasury
Foreign
Other
Federal
Reserve
acOther counts4
256,685
254,662
256,791
260,024
262,397
265,784
268,968
270,536
272,888
274,668
278,216
283,000
468
494
524
549
572
582
568
544
525
529
552
552
302
5,867
5,349
4,351
5,054
5,078
5,408
5,415
6,358
5,544
5,543
5,809
255
214
215
230
214
250
243
265
258
250
250
251
364
325
339
316
334
289
243
236
279
309
240
226
0
0
0
0
0
0
0
0
0
0
0
0
Required
clearing
balances
Other
Federal
Reserve
liabilities
and
capital4
1,624
1,501
1,722
1,606
1,764
1,768
,765
1,605
1,735
1,732
1,767
1,846
8,928
8,913
8,997
9,033
9,468
9,788
9,176
9,219
9,909
9,375
9,380
9,170
Member bank
reserves8
CurWith
Federal rency
Reserve and
Banks
36,375
32,962
35,822
37,883
34,797
36,034
34,914
34,610
35,621
34,242
35,543
33,746
n.a
Required 10
1
Ex-
252
77th Annual Report, 1990
15. Changes in Number of Banking Offices in the United States, 1990l
Commercial banks2
Type of office
and change
Member
Total
Total
Total
Banks, Dec. 31,1989..
Nonmember
National
State
Insured
Noninsured3
Mutual
savings
banks
Insured
13,387
13,011
5,253
4,179
1,074
7,498
260
376
196
194
84
64
20
92
18
2
-10
-65
-17
-8
-33
6
-187
9
0
17
-9
-151
18
Changes during 1990
New banks
Ceased banking
operation
Banks converted
into branches
Other 4
-199
-191
-109
-99
-383
33
-374
32
-187
6
-154
0
Net change
-353
-339
-206 -189
-17
Noninsured
1
-14
Banks, Dec. 31,1990..
13,034 12,672
3,990
5,047
1,057
7,347
278
362
Branches and
additional offices,
Dec. 31,1989
Changes during 1990
De novo
Banks converted
into branches
Discontinued
Sale of branch
Other 4
Net change4
Branches and
additional offices,
Dec. 31,1990
51,665 48,771 31,764
26,034
5,730
16,899
2,786
2,660
1,556 1,366
190
1,101
383
-729
0
42
373
-680
58
60
225
-490
26
223
195
-390
45
146
30
-100
-19
77
148
-188
32
-165
2,482
2,471 1,540 1,362
178
928
5,908
17,827
54,147
51,242
33,304
27,396
1. Preliminary. Final data will be available in the Annual
Statistical Digest, 1990, forthcoming.
2. Includes stock savings banks, nondeposit trust companies, private banks, industrial banks, and nonbank banks.
108
2,894
126
0
-2
0
2
10
-49
-58
-18
11
111
2,905
3. As ot Dec. 31, 1988, includes noninsured national
trust companies.
4. Includes interclass changes,
Tables 253
16. Mergers, Consolidations, Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1990
Ohio Citizens, Toledo, Ohio to acquire certain
assets and liabilities of the Fremont Branch of
Diamond Savings and Loan, Findlay, Ohio
to the convenience and needs of the community are
consistent with approval.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1/16/90)
The proposed transaction would not be significantly
adverse to competition.
Kent City State Bank, Kent City, Michigan to
acquire the assets and assume the liabilities of the
Coopersville branch of Ameribank Federal
Savings Bank, Muskegon, Michigan
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1/19/90)
Ohio Citizens (Applicant) has assets of $1.1 billion
and the Fremont branch (Branch) has assets of
$ 10 million. Applicant and Branch do not operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(12/22/89)
The proposed transaction would not be significantly
adverse to competition.
Manufacturers & Traders Trust Company,
Buffalo, New York, to merge with Monroe
Savings Bank, FSB, Rochester, New York
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/2/90)
Kent City State Bank (Applicant) has assets of
$64.8 million and Coopersville branch (Branch)
has assets of $4.9 million. Applicant and Branch
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
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 the
depositors of Monroe Savings Bank, FSB.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/29/90)
Manufacturers & Traders Trust Company (Applicant) has assets of $4.0 billion and Monroe Savings
Bank (Bank) has assets of $546.5 million. The
FDIC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Bank.
Iron & Glass Bank, Pittsburgh, Pennsylvania, to
acquire the assets and assume the liabilities of the
South Park Township branch of Landmark
Savings Association, Pittsburgh, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2/2/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2/23/90)
Iron & Glass Bank (Applicant) has assets of $99.5
million and the South Park Township branch
(Branch) has assets of $10.9 million. Applicant and
Branch operate in the same market.
The banking factors and considerations relating
Bank of Livingston, Livingston, Texas, to acquire
the assets and assume the liabilities of Community
State Bank of Onalaska, Onalaska, Texas
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 the
depositors of Community State Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/5/90)
Bank of Livingston (Applicant) has assets of $19
million and Community State Bank (Bank) has
assets of $9.9 million. The FDIC has recommended
immediate action by the Federal Reserve System to
prevent the probable failure of Bank.
Crestar Bank, Richmond, Virginia to acquire the
Shore Drive branch, Virginia Beach, and the
Coliseum Crossing branch, Hampton, of Perpetual Savings Bank, FSB, McLean, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2/9/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/5/90)
Crestar Bank (Applicant) has assets of $10.2 billion
and the Shore Drive and Coliseum Crossing
254
77th Annual Report, 1990
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1990—Continued
branches (Branches) have assets of $36.6 million.
Applicant and Branches operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Pacific Western Bank, San Jose, California, to
acquire the assets and assume the liabilities of eight
branches of the Northern California Division of
Household Bank, FSB, Newport Beach,
California
Crestar Bank (Applicant) has assets of $10.2 billion
and the Virginia Beach branch (Branch) has assets
of $10.7 million. Applicant and Branch operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
United Nebraska, North Platte, Nebraska, to
merge with North Platte Trust Company, North
Platte, Nebraska
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1/25/90)
The proposed transaction would not be significantly
adverse to competition.
(3/23/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/8/90)
Pacific Western Bank (Applicant) has assets of $ 1.1
billion and the Northern California Division
(Branches) has assets of $221.5 million. Applicant
and Branches operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(5/7/90)
United Nebraska Bank (Applicant) has assets of
$51.2 million and North Platte Trust Company
(Bank) has assets of $2.3 million. Applicant and
Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Texas Bank, Weatherford, Texas, to merge with
Citizens National Bank, Weatherford, Texas
Consolidated Bank & Trust Company, Richmond, Virginia, to acquire the assets and assume
the liabilities of Peoples Savings and Loan
Association, Hampton, Virginia and Community
Federal Savings and Loan, Newport News,
Virginia
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 the
depositors of Citizens National Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/9/90)
Texas Bank (Applicant) has assets of $170.7 million
and Citizens National Bank (Bank) has assets of
$18.6 million. The FDIC has recommended immediate action by the Federal Reserve System to
prevent the probable failure of Bank.
Crestar Bank, Richmond, Virginia, to acquire
the assets and assume the liabilities of the Virginia
Beach branch of Perpetual Savings Bank,
FSB, McLean, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/13/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4/26/90)
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 the
depositors of the Peoples Savings & Loan Association and Community Federal Savings and Loan.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/18/90)
Consolidated Bank & Trust Company (Applicant)
has assets of $64 million and Peoples Savings and
Loan Association and Community Federal Savings
and Loan (Thrifts) have assets of $31 million. The
RTC has recommended immediate action by the
Federal Reserve to prevent the probable failure of
Thrifts.
Marine Bank of Monticello (formerly Deland
State Bank), Deland, Illinois, to acquire the assets
andassume the liabilities oftheMonticeMo, Illinois,
office of Citizens Federal Bank, Miami, Florida
Tables 255
16.—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/20/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/25/90)
Deland State Bank (Applicant) has assets of
$82.9 million and the Monticello branch (Branch)
has assets of $19.2 million. Applicant and Branch
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Pacific Western Bank, San Jose, California, to
acquire the assets and assume the liabilities of
Saratoga Federal Savings and Loan Association,
San Jose, 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 the
depositors of the Saratoga Federal Savings and
Loan Association.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/1/90)
Pacific Western Bank (Applicant) has assets of
$1.1 billion and Saratoga Federal Savings and Loan
Association (Thrift) has assets of $92.1 million.
The OTS has recommended immediate action by
the Federal Reserve System to prevent the probable
failure of Thrift.
immediate action by the Federal Reserve System to
prevent the probable failure of Branch.
Northern Neck State Bank, Warsaw, Virginia,
to acquire the assets and assume the liabilities ofthe
Lappahannock branch of Perpetual Savings
Bank, FSB, Alexandria, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6/15/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/19/90)
Northern Neck State Bank (Applicant) has assets of
$86.0 million and the Lappahannock branch
(Branch) has assets of $12.3 million. Applicant and
Branch operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Arkansas Bank & Trust Company, Hot Springs,
Arkansas, to acquire the assets and assume the
liabilities of Arkansas Trust Savings Bank (formerly Landmark Savings Bank, FSB), Hot
Springs, Arkansas
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 the
depositors of Landmark Savings Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6/22/90)
Arkansas Bank & Trust Company (Applicant) has
assets of $294 million and Landmark Savings Bank
(Thrift) has assets of $173.8 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Thrift.
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 the
depositors of the Blue Valley Federal Savings &
Loan Association.
First Exchange Bank of North St. Louis County,
Florrisant, Missouri, to acquire the assets and
assume the liabilities of Cass Federal Savings
and Loan Association of St. Louis, Florrisant,
Florrisant, Missouri
Mercantile Bank, Kansas City, Missouri, to
acquire the assets and liabilities of the Blue Springs
branch of Blue Valley Federal Savings & Loan
Association, Kansas City, Missouri
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6/6/90)
Mercantile Bank (Applicant) has assets of $490.6
million and Blue Springs branch (Branch) has assets
of $696.5 million. The RTC has recommended
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 the
256
77th Annual Report, 1990
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1990—Continued
depositors of Cass Federal Savings and Loan
Association of St. Louis.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/22/90)
First Exchange Bank of North St. Louis County
(Applicant) has assets of $75.6 million and Cass
Federal Savings and Loan Association (Thrift) has
assets of $58.1 million. The RTC has recommended
immediate action by the Federal Reserve System to
prevent the probable failure of Thrift.
Citizens Trust and Savings Bank, South Haven,
Michigan, to acquire the assets and assume the
liabilities ofthe Allegan and Paw Paw branches of
Fidelity Federal Savings and Loan Association,
Kalamazoo, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5/4/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/28/90)
Citizens Trust and Savings Bank (Applicant) has
assets of $141.2 million and the Allegan and Paw
Paw branches (Branches) have assets of $25.8
million. Applicant and Branches operate in the
same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Valley Bank of Nevada, Las Vegas, Nevada, to
acquire the Dayton Nevada branch of Comstock
Bank, Carson City, Nevada
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 the
depositors of American National Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/12/90)
Sulphur Springs State Bank (Applicant) has assets
of $135.7 million and American National Bank
(Bank) has assets of $29.1 million. The OCC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Bank.
Albermarle Bank and Trust Company, d/b/a
F&M Bank-Charlottesville, Charlottesville, Virginia, to merge with Peoples Bank of Central
Virginia, Lovingston, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6/22/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/19/90)
Albermarle Bank and Trust Company (Applicant)
has assets of $2.4 million and Peoples Bank of
Central Virginia (Bank) has assets of $35.6 million.
Applicant and Bank do not operate in the same
market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(6/1/90)
The proposed transaction would not be significantly
adverse to competition.
Signet Bank/Virginia, Richmond, Virginia, to
acquire the assets and assume the liabilities of the
First Colonial branch of Perpetual Savings Bank,
FSB, McLean, Virginia
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7/2/90)
Valley Bank of Nevada (Applicant) has assets of
$2.8 billion and the Dayton branch (Branch) has
assets of $4.1 million. Applicant and Branch operate
in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(6/29/90)
The proposed transaction would not be significantly
adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
Sulphur Springs State Bank, Sulphur Springs,
Texas, to merge with American National Bank,
Greenville, Texas
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/20/90)
Signet Bank/Virginia (Applicant) has assets of
$8.8 billion and the First Colonial branch (Branch)
has assets of $8.5 million. Applicant and Branch
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Tables
257
16.-Continued
First Virginia Bank-Planters, Bridgewater,
Virginia, to acquire the assets and assume the
liabilities of the Harrisonburg branch of CorEast
Savings Bank, FSB, Harrisonburg, Virginia
assets of $6 million. The RTC has recommended
immediate action by the Federal Reserve System to
prevent the probable failure of Branch.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/17/90)
The proposed transaction would not be significantly
adverse to competition.
Peoples Bank of Montross, Virginia, to acquire
the assets and assume the liabilities of a branch of
Newport News Savings Bank, Newport News,
Virginia
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/6/90)
First Virginia Bank-Planters (Applicant) has assets
of $79.2 million and the Harrisonburg branch
(Branch) has assets of $28.6 million. Applicant and
Branch operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(8/17/90)
The proposed transaction would not be significantly
adverse to competition.
First City, Texas-Corpus Christi, Texas, to
merge with First National Bank of Corpus
Christi, Corpus Christi, Texas
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 the
depositors of First National Bank of Corpus Christi.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/24/90)
First City, Texas, Corpus Christi (Applicant) has
assets of $583 million and First National Bank of
Corpus Christi (Bank) has assets of $116.6 million.
The OCC has recommended immediate action by
the Federal Reserve System to prevent the probable
failure of Branch.
Citizens First State Bank of Walnut, Walnut,
Illinois, to acquire the assets and assume the
liabilities of the Princeton branch of Chillicothe
First Savings and Loan Association, Chillocothe,
Illinois
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 the
depositors of the Princeton branch.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/24/90)
Peoples Bank of Montross (Applicant) has assets of
$43.8 million and the branch (Branch) has assets of
$8.7 million. Applicant and Branch do not operate
in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Centura Bank, Rocky Mount, North Carolina,
to merge with Planters National Bank & Trust
Company, Rocky Mount, North Carolina; Peoples Bank & Trust Company, Rocky Mount,
North Carolina; and Peoples Bank Triad,
Winston-Salem, North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/17/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/30/90)
Centura Bank (Applicant) will derive its assets
from the banks (Banks) which have assets of
$2.6 billion. Applicant and Banks operate in the
same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
AmSouth Bank of Tennessee, Columbia, Tennessee, to merge with First Bank of Maury County,
Columbia, Tennessee
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
The proposed transaction would not be significantly
adverse to competition.
(8/24/90)
Citizens First State Bank (Applicant) has assets of
$28 million and the Princeton branch (Branch) has
(9/10/90)
AmSouth Bank of Tennessee (Applicant) will derive
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
258
77th Annual Report, 1990
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1990—Continued
its assets from First Bank of Maury County (Bank)
which has assets of $5 million. Applicant and Bank
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Valley Bank & Trust Company, Grand Forks,
North Dakota, to acquire the assets and assume
the liabilities of New Grand Forks State Bank
(formerly Midwest Federal Savings Bank of
Minot, Minot, North Dakota), Grand Forks,
North Dakota
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 the
depositors of Midwest Federal Savings Bank of
Minot.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/20/90)
Valley Bank & Trust Company (Applicant) has
assets of $82.5 million and Midwest Federal
Savings Bank (Thrift) has assets of $497.8 million.
The RTC has recommended immediate action by
the Federal Reserve System to prevent the probable
failure of Thrift.
Bank of Forest, Forest, Mississippi to acquire the
assets and assume the liabilities of Forest Bank
for Savings, FSB (formerly Central Savings
Bank), Jackson, Mississippi
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 the
depositors of Central Savings Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/28/90)
Bank of Forest (Applicant) has assets of $142
million and Central Savings Bank, FSB (Thrift) has
assets of $27.9 million. The RTC has recommended
immediate action by the Federal Reserve System to
safeguard the depositors of Thrift.
Chemical Bank, New York, New York, to acquire
the assets and assume the liabilities of a branch of
The Greater New York Savings Bank, New York,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/14/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/28/90)
Chemical Bank (Applicant) has assets of $48.4
billion and the branch (Branch) has assets of
$118.0 million. Applicant and Branch operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Comerica Bank-Detroit, Detroit, Michigan to
acquire the assets and assume the liabilities of
eighteen Michigan branches of Empire Federal
Bank of America, Buffalo, New York
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 the
depositors of the 18 Michigan branches.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/28/90)
Comerica Bank (Applicant) has assets of $9.7
billion and the 18 Michigan branches (Branches)
have assets of $1.1 billion. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of Empire
Federal Savings Bank of America.
Crestar Bank, Richmond, Virginia to acquire the
assets and assume the liabilities of Seasons Federal Savings Bank, Richmond, Virginia
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 the
depositors of Seasons Federal Savings Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/28/90)
Crestar Bank (Applicant) has assets of $10.9 billion
and Seasons Federal Savings Bank (Thrift) has
assets of $186.1 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of Thrift.
UniSouth Banking Corporation, Columbus,
Mississippi, to acquire the assets and assume the
Tables 259
16.-Continued
liabilities of the Tupelo and Fulton, Mississippi,
branches of Eastover Bank for Savings, Jackson,
Mississippi
The Peoples Bank, Pratt, Kansas, to acquire the
assets and assume the liabilities ofthe Pratt branch
of Valley Savings, Hutchinson, Kansas
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/17/90)
The proposed transaction would not be significantly
adverse to competition.
No report received. Request for report on the
competitive factor was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard the
depositors of Valley Savings.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/2/90)
UniSouth Banking Corporation (Applicant) has
assets of $141.3 million and the Tupelo and Fulton
branches (Branches) have assets of $12 million.
Applicant and Branches do not operate in the same
market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Trust Company Bank, Atlanta, Georgia, to
acquire the assets and assume the liabilities of 18
Georgia branches of Anchor Savings Bank,
Hewlett, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/17/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/22/90)
Trust Company Bank (Applicant) has assets of
$31.2 billion and the branches (Branches) have
assets of $403 million. Applicant and Branches do
not operate in the same market.
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
(11/9/90)
Peoples Bank (Applicant) has assets of $142.9
million and the Pratt branch (Branch) has assets of
$4.8 million. The RTC has recommended immediate action by the Federal Reserve System to prevent
the probable failure of Valley Savings.
Crestar Bank, Richmond, Virginia, to merge
with Community Trust Bank, Portsmouth,
Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/9/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/14/90)
Crestar Bank (Applicant) has assets of $10.9 billion
and Community Trust Bank (Bank) has assets of
$22 million. Applicant and Bank do not operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Banco de Ponce, Puerto Rico, to merge with
Banco Popular, Hato Rey, Puerto Rico
State Bank of Croswell, Croswell, Michigan, to
acquire the assets and assume the liabilities of the
Port Huron branch of First Federal State Bank
and Trust, Pontiac, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7/26/90)
The proposed transaction would not be significantly
adverse to competition.
(10/26/90)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/5/90)
Banco de Ponce (Applicant) has assets of $2.9
billion and Banco Popular (Bank) has assets of $5.8
billion. Applicant and Bank operate in the same
market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(11/16/90)
State Bank of Croswell (Applicant) has assets of
$74.9 million and the Port Huron branch (Branch)
has assets of $16.4 million. Applicant and Branch
do not operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
260 77th Annual Report, 1990
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1990—Continued
The Ohio Bank, Findlay, Ohio, to merge with
Citizens Community Bank, Mount Blanchard,
Ohio
prevent the probable failure of First Federal Savings
Bank of Kansas.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/26/90)
The proposed transaction would not be significantly
adverse to competition.
American Trust & Savings Bank, Dubuque,
Iowa, to acquire the assets and assume the liabilities
of the Dyersville branch of Midland Savings
Bank, FSB, Des Moines, Iowa
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/29/90)
The Ohio Bank (Applicant) has assets of $234.7
million and Citizens Community Bank (Bank) has
assets of $23 million. Applicant and Bank do not
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(10/10/90)
The proposed transaction would not be significantly
adverse to competition.
Bank of Lakeview, Lakeview, Michigan, to
acquire the assets and assume the liabilities of the
Morley branch of Independent Bank-West
Michigan, Rockford, Illinois
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/14/90)
American Trust & Savings Bank (Applicant) has
assets of $283.5 million and the Dyersville branch
(Branch) has assets of $11.8 million. Applicant and
Branch do not operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(11/20/90)
The proposed transaction would not be significantly
adverse to competition.
The Stock Exchange Bank, Caldwell, Kansas, to
acquire the assets and assume the liabilities of the
Caldwell branch of First Federal Savings Bank
of Kansas, Wellington, Kansas
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/30/90)
Bank of Lakeview (Applicant) has assets of $62.1
million and the Morley branch (Branch) has assets
of $2.3 million. Applicant and Branch do not
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
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 the
depositors of First Federal Savings Bank of Kansas.
SUMMARY REPORT BY THE ATTORNEY GENERAL
American State Bank, Great Bend, Kansas, to
acquire the assets and assume the liabilities of the
Great Bend branch of First Federal Savings
Bank of Kansas, Wellington, Kansas
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 the
depositors of First Federal Savings Bank of Kansas.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/14/90)
American State Bank (Applicant) has assets of $ 106
million and the Great Bend branch (Branch) has
assets of $56 million. The OTS has recommended
immediate action by the Federal Reserve System to
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/14/90)
The Stock Exchange Bank (Applicant) has assets of
$24 million and the Caldwell branch (Branch) has
assets of $3 million. The OTS has recommended
immediate action to prevent the probable failure of
First Federal Savings Bank of Kansas.
Mergers Approved Involving Wholly Owned
Subsidiaries of the Same Bank Holding
Company
The following transactions involve banks that are
subsidiaries of the same bank holding company. In
each case, 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
Tables 261
16.-Continued
application, determined that the competitive effects
of the proposed transaction, the financial and
managerial resources and prospects of the banks
concerned, as well as the convenience and needs of
the community to be served were consistent with
approval.
Assets
(millions
of dollars)
Institutionl
First Illini Bank,Galesburg, Illinois
Merger
Madison Park Bank, Peoria, Illinois
Abingdon Bank & Trust Company, Abingdon, Illinois
Community Bank & Trust Company, Canton, Illinois
178
58
58
1,000
6
4/6/90
77
First of America Bank-North Michigan, Traverse City, Michigan
Merger
First of America Bank, Alpence, Michigan
First America Bank-No. Michigan,
Merger
First America Bank-Manistee, Lewiston, Michigan
3/19/90
5,300
Deland State Bank, Deland, Illinois
Merger
National Bank of Monticello, Monticello, Virginia
Boatmen's Bank of Carthage, Carthage, Missouri
Merger
Boatmen's National Bank of Neosho, Neosho, Missouri
3/2/90
94
United Jersey Bank/Commerical Trust, Jersey City, Jersey
Merger
United Jersey Bank, Hackensack, New Jersey
Bank of Commerce, Hamtramck, Michigan
Merger
The State Bank of Fraser, Fraser, Michigan
3/2/90
63
First Virginia Bank South Central, Lynchburg, Virginia
Merger
First Virginia Bank South, Hurt, Virginia
Trust Company Bank, Atlanta, Georgia
Merger
Trust Company of Douglas County, Georgia
1/13/90
45
17
37
First Virginia Bank, Damascus, Virginia
Merger
First Virginia Bank, Cumberlands, Clintwood, Virginia
Caliber Bank (formerly Business Bank), Phoenix, Arizona
Merger
VOC Acquisition Bank, Phoenix, Arizona
Date of
approval
286
120
47
,
5/10/90
6/1/90
118
5,797
6/12/90
94
430
6/16/90
137
88
7/11/90
57
278
64
7/19/90
262
77th Annual Report, 1990
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1990-Continued
Assets
(millions
of dollars)
Institutionl
Crestar Bank, Richmond, Virginia
Merger
The National Bank of Northern Virginia, Sterling, Virginia
Star Bank, Kenton County, Covington, Kentucky
Merger
Star Bank, Northern Kentucky, Verona, Kentucky
9/10/90
30
67
10/11/90
17
Trust Company Bank, Atlanta, Georgia
Merger
Trust Company of Carroll County, Bowder, Georgia
Trust Company of Cobb County, N. A., Atlanta, Georgia
Trust Company of Henry County, N. A., McDonough, Georgia
Trust Company of Clayton County, Jonesboro, Georgia
Trust Company of Gwinnett, Lawrenceville, Georgia
Trust Company of Rockdale, Conyers, Georgia
Montana Bank of Billings, Billings, Montana
Merger
Montana Bank of Baker, Baker, Montana
Montana Bank of Bozeman, N. A., Bozeman, Montana
Montana Bank of Butte, N. A . , Butte, Montana
Montana Bank of Circle, Circle, Montana
Montana Bank of Forsyth, Forsyth, Montana
Montana Bank of Livington, Livingston, Montana
Montana Bank of South Missoula, Missoula, Montana
Montana Bank of Red Lodge, Red Lodge, Montana
Montana Bank of Roundup, N. A . , Roundup, Montana
Montana Bank of Sidney, Sidney, Montana
Montana Bank of Mineral County, Superior, Montana
8/13/90
24
256
North Shore Bank of Commerce, Duluth, Minnesota
Merger
Airport State Bank of Duluth, Duluth, Minnesota
1. Each proposed transaction was to be effected under
the charter of the first-named bank. The entries are in
11,000
Date of
approval
6,500
12/18/90
74
360
109
132
248
197
14
17
38
45
17
8
7
68
19
14
28
17
chronological order of approval.
12/27/90
Tables 263
16.—Continued
Mergers Approved Involving a Nonoperating
Institution and an Existing Bank
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 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, 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.
Assets
(millions
of dollars)2
Institutionl
New Bank, Cockeysville, Maryland
Merger
Clifton Trust Bank, Cockeysville, Maryland
1/26/90
66
1/26/90
Metro Interim Bank, Atlanta, Georgia
Merger
Metro Bank, Atlanta, Georgia
98
3/19/90
Citizens Interim Bank, Sandusky, Ohio
Merger
Castalia Banking Company, Castalia, Ohio
46
3/21/90
Peoples Interim Bank, Inc., Mullens, West Virginia
Merger
Peoples Bank of Mullens,
88
8/17/90
Clanton Interim Bank, Clanton, Alabama
Merger
Peoples Savings Bank, Clanton, Alabama
78
Manufacturers & Traders Interim Bank, Buffalo, New York
Merger
Manufacturers & Traders Trust Company, Buffalo, New York
Plaza Merger Company, Miami, Florida
Merger
Plaza Bank of Miami, Miami, Florida
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
9/28/90
4,296
12/19/90
64
2. Where no assets are listed, the bank is newly
organized and not in operation.
Federal Reserve
Directories and Meetings
266
77th Annual Report, 1990
Board of Governors of the Federal Reserve System
December 31,1990
Term expires
January31,1992
January 31,1998
January 31,1994
January 31,2004
January 31,2002
January 31,1996
January 31,2000
ALAN GREENSPAN of New York, Chairman1
MARTHA R. SEGER of Michigan
WAYNE D. ANGELL of Kansas
EDWARD W. KELLEY, JR., of Texas
JOHN P. LAWARE of Massachusetts
DAVID W. MULLINS JR., of Missouri
VACANCY
OFFICE OF BOARD MEMBERS
OFFICE OF THE SECRETARY
Joseph R. Coyne, Assistant to the Board
Donald J. Winn, Assistant to the Board
Bob Stahly Moore, Special Assistant
to the Board
Diane E. Werneke, Special Assistant to
Boardfor Congressional Liaison
William W. Wiles, Secretary
Jennifer J. Johnson, Associate Secretary
Barbara R. Lowrey, Associate Secretary
T
LEGAL
DTVTSTON
UIVISION
J. Virgil Mattingly, Jr., General Counsel
DIVISION OF MONETARY AFFAIRS
Donald L. Kohn, Director
David E. Lindsey, Deputy Director
Brian F. Madigan, Assistant Director
Richard D. Porter, Assistant Director
Normand R. V. Bernard, Special Assistant
to the Board
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT
S. David Frost, StaffDirector
William C. Schneider, Jr., Project Director
Portia W. Thompson, Equal Employment
Opportunity Programs Officer
OFFICE OF STAFF DIRECTOR FOR
FEDERAL RESERVE B A N K ACTIVITIES
Theodore E. Allison, StaffDirector
OFFICE OF THE EXECUTIVE
DIRECTOR FOR INFORMATION
RESOURCES MANAGEMENT
Allen E. Beutel, Executive Director
Stephen R. Malphrus, Deputy Executive
Director
Marianne M. Emerson, Assistant Director
Edward T. Mulrenin, Assistant Director
1. The designation as Chairman expires on August 10,
1991, unless the services of this member of the Board shall
terminated sooner. The designation of Vice Chairman
Digitizedhave
for FRASER
had not been assigned as of Dec. 31,1990.
&,„„„{
Counsel
Ricki R. Tigert, Associate General Counsel
Scott G. Alvarez, Assistant General Counsel
MaryEllen A. Brown, Assistant
to tne General Counsel
O l i v e r I r e k n d Msociate
DIVISION OF RESEARCH
A N D STATISTICS
Michael J. Prell, Director
Edward C. Ettin, Deputy Director
Thomas D. Simpson, Associate Director
Lawrence Slifman, Associate Director
David J. Stockton, Associate Director
Martha Bethea, Deputy
Associate Director
Peter A. Tinsley, Deputy
Associate Director
Myron L. Kwast, Assistant Director
Patrick M. Parkinson, Assistant Director
Martha S. Scanlon, Assistant Director
Joyce K. Zickler, Assistant Director
Levon H. Garabedian, Assistant Director
(Administration)
Directories and Meetings
DIVISION OF INTERNATIONAL FINANCE
DIVISION OF CONSUMER
Edwin M. Truman, Staff Director
Larry J. Promisel, Senior
Associate Director
Charles J. Siegman, Senior
Associate Director
David H. Howard, Deputy
Associate Director
Robert F. Gemmill, StaffAdviser
Donald B. Adams, Assistant Director
Dale W. Henderson, Assistant Director
Peter Hooper, III, Assistant Director
Karen H. Johnson, Assistant Director
Ralph W. Smith, Jr., Assistant Director
A N D COMMUNITY AFFAIRS
267
Griffith L. Garwood, Director
Glenn E. Loney, Assistant Director
Ellen Maland, Assistant Director
Dolores S. Smith, Assistant Director
DIVISION OF H U M A N
RESOURCES MANAGEMENT
David L. Shannon, Director
John R. Weis, Associate Director
Anthony V. DiGioia, Assistant Director
Joseph H. Hayes, Jr., Assistant Director
Fred Horowitz, Assistant Director
DIVISION OF FEDERAL RESERVE B A N K
OPERATIONS A N D PAYMENT SYSTEMS
DIVISION OF SUPPORT SERVICES
ClydeH. Farnsworth, Jr., Director
David L. Robinson, Deputy Director
Bruce J. Summers, Deputy Director2
Charles W. Bennett, Assistant Director
Jack Dennis, Jr., Assistant Director
Earl G. Hamilton, Assistant Director
John H. Parrish, Assistant Director
Louise L. Roseman, Assistant Director
Florence M. Young, Assistant Director
Robert E. Frazier, Director
George M. Lopez, Assistant Director
David L. Williams, Assistant Director
DIVISION OF BANKING SUPERVISION
A N D REGULATION
William Taylor, Staff Director
Don E. Kline, Associate Director
Frederick M. Struble, Associate Director
William A. Ryback, Deputy
Associate Director
Stephen C. Schemering, Deputy
Associate Director
Richard Spillenkothen, Deputy
Associate Director
Herbert A. Biern, Assistant Director
Joe M. Cleaver, Assistant Director
Roger T. Cole, Assistant Director
James I. Garner, Assistant Director
James D. Goetzinger, Assistant Director
Michael G. Martinson, Assistant Director
Robert S. Plotkin, Assistant Director
Sidney M. Sussan, Assistant Director
Laura M. Homer, Securities Credit Officer
2. On loan from Federal Reserve Bank of Richmond.
OFFICE OF THE CONTROLLER
George E. Livingston, Controller
Stephen J. Clark, Assistant Controller
Darrell R. Pauley, Assistant Controller
DIVISION OF HARDWARE
A N D SOFTWARE SYSTEMS
Bruce M. Beardsley, Director
Day W. Radebaugh, Assistant Director
Elizabeth B. Riggs, Assistant Director
DIVISION OF APPLICATIONS
DEVELOPMENT A N D STATISTICAL
SERVICES
William R. Jones, Director
Robert J. Zemel, Associate Director
Pokyung Kim, Assistant Director
Raymond H. Massey, Assistant Director
Richard C. Stevens, Assistant Director
OFFICE OF THE INSPECTOR GENERAL
Brent L. Bowen, Inspector General
Barry R. Snyder, Assistant Inspector
General
268
77th Annual Report, 1990
Federal Open Market Committee
December 31,1990
Members
ALAN GREENSPAN, Chairman, Board of Governors
E. GERALD CORRIGAN, Vice Chairman, President, Federal Reserve Bank of New York
WAYNE D. ANGELL, Board of Governors
EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia
ROBERT H. BOYKIN, President, Federal Reserve Bank of Dallas
W. LEE HOSKINS, President, Federal Reserve Bank of Cleveland
EDWARD W. KELLEY, JR., Board of Governors
JOHN P. LAWARE, Board of Governors
DAVID W. MULLINS JR. , Board of Governors
MARTHA R. SEGER, Board of Governors
GARY H. STERN, President, Federal Reserve Bank of Minneapolis
Alternate Members
ROBERT B. BLACK, President, Federal Reserve Bank of Richmond
ROBERT P. FORRESTAL, President, Federal Reserve Bank of Atlanta
SILAS KEEHN, President, Federal Reserve Bank of Chicago
ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco
JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York
Officers
DONALD L. KOHN,
Secretary and Economist
NORMAND R.V. BERNARD,
Assistant Secretary
GARY P. GILLUM,
Deputy Assistant Secretary
J. VIRGIL MATTINGLY,
General Counsel
ERNEST T. PATRIKIS,
Deputy General Counsel
MICHAEL J. PRELL,
Economist
EDWIN M. TRUMAN,
Economist
JOHN M. DAVIS,
Associate Economist
RICHARD W. LANG,
Associate Economist
DAVID E. LINDSEY,
Associate Economist
LARRY J. PROMISEL,
Associate Economist
ARTHUR J. ROLNICK,
Associate Economist
HARVEY ROSENBLUM,
Associate Economist
CHARLES J. SIEGMAN,
Associate Economist
THOMAS D. SIMPSON,
Associate Economist
DAVID J. STOCKTON,
Associate Economist
RICHARD G. DAVIS,
Associate Economist
PETER D. STERNLIGHT, Manager for Domestic Operations,
System Open Market Account
SAM Y. CROSS, Managerfor Foreign Operations,
System Open Market Account
During 1990, the Federal Open Market
Committee held eight regularly scheduled
meetings (see Record of Policy Actions of the
Federal Open Market Committee in this
REPORT.)
Directories and Meetings 269
Federal Advisory Council
December 31,1990
Members
District 1 - I R A STEPANIAN, Chairman and Chief Executive Officer,
Bank of Boston, Boston, Massachusetts
District 2-WILLARD C. BUTCHER, Chairman and ChiefExecutive Officer,
The Chase Manhattan Bank, N. A., New York, New York
District 3-TERRENCE A. LARSEN, Chairman, President, and ChiefExecutive Officer,
CoreStates Financial Corp., Philadelphia, Pennsylvania
District 4-THOMAS H. O'BRIEN, Chairman, President, and ChiefExecutive Officer,
PNC Financial Corp, Pittsburgh, Pennsylvania
District 5 -FREDERICK DEANE, JR. , Chairman Emeritus and Chairman of
the Executive Committee, Signet Banking Corporation, Richmond, Virginia
District 6-Vacancy
District 7 - B . KENNETH WEST, Chairman and ChiefExecutive Officer,
Harris Bankcorp, Inc. and Harris Trust and Savings Bank, Chicago, Illinois
District 8 - D A N W. MITCHELL, Chairman, Old National Bancorp and Old National Bank of
Evansville, Evansville, Indiana
District 9-LLOYD P. JOHNSON, Chairman and ChiefExecutive Officer,
Norwest Corporation, Minneapolis, Minnesota
District 10—JORDAN L. HAINES, Chairman, Fourth Financial Corporation and
BANK IV Wichita, Wichita, Kansas
District 11 -RONALD G. STEINHART, Chairman and Chief Executive Officer,
Team Bank, Dallas, Texas
District 12-PAUL HAZEN, President and Chief Operating Officer, Wells Fargo and Co.,
San Francisco, California
Officers
THOMAS H. O'BRIEN, President
PAUL HAZEN, Vice President
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVK, Associate Secretary
Directors
B. KENNETH WEST
The Federal Advisory Council met on February 1-2, May 3-4, September 6-7, and
November 1-2, 1990. The Board of Governors met with the council on February 2, May
4, September 7, and November 2,1990. The
council, which is composed of one representative of the banking industry from each of
LLOYD P. JOHNSON
the twelve Federal Reserve Districts, is
required by law to meet in Washington at least
four times each 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,
270
77th Annual Report, 1990
Consumer Advisory Council
December 31,1990
Members
GEORGE H. BRAASCH, Corporate Credit Counsel, Spiegel, Inc., Oak Brook, Illinois
BETTY TOM CHU, Chairman and ChiefExecutive Officer, Trust Savings Bank, Arcadia,
California
CLIFF E. COOK, Vice President and Compliance Officer, Puget Sound National Bank,
Tacoma, Washington
JERRY D. CRAFT, Executive Vice President, First National Bank of Atlanta, Atlanta, Georgia
DONALD C. DAY, President, New England Securities Corporation, Boston, Massachusetts
R. B. DEAN, JR., Administrator, Community and Consumer Affairs, South Carolina
National Bank, Columbia, South Carolina
WILLIAM C. DUNKELBERG, Dean, School of Business and Professor of Economics, Temple
University, Philadelphia, Pennsylvania
JAMES FLETCHER, President and Director; South Shore Bank-Chicago, Chicago, Illinois
GEORGE C. GALSTER, Professor ofEconomics, The College of Wooster, Wooster, Ohio
E. THOMAS GARMAN, Professor of Consumer Studies, Virginia Polytechnic Institute and
State University, Blacksburg, Virginia
DEBORAH B. GOLDBERG, Reinvestment Specialist, Center for Community Change,
Washington, D.C.
MICHAEL M. GREENFIELD, Professor ofLaw, Washington University, St. Louis, Missouri
ROBERT HESS, President, Wright Patman Congressional Federal Credit Union, Washington,
D.C.
BARBARA KAUFMAN, Co-Director, KCBS Call for Action, San Francisco, California
KATHLEEN E. KEEST, StaffAttorney, National Consumer Law Center, Boston,
Massachusetts
A. J. KING, Chairman and Chief Executive Officer, Valley Bank of Kalispell, Kalispell,
Montana
COLLEEN D. MCCARTHY, Executive Director, Kansas City Neighborhood Alliance,
Kansas City, Missouri
MICHELLE S. MEIER, Counsel for Government Affairs, Consumers Union, Washington,
D.C.
LINDA K. PAGE, President and Chief Operating Officer, Star Bank Central, Columbus, Ohio
BERNARD F. PARKER JR., Executive Director, Community Resource Projects, Detroit,
Michigan
SANDRA PHILLIPS, Executive Director, Pittsburgh Partnership for Neighborhood
Development, Pittsburgh, Pennsylvania
VINCENT P. QUAYLE, Director, St. Ambrose Housing Aid Center, Baltimore, Maryland
CLIFFORD N. ROSENTHAL, Executive Director, National Federation of Community
Development Credit Unions, New York, New York
NANCY HARVEY STEORTS, President, Nancy Harvey Steorts and Associates, Dallas, Texas
ALAN M. SILBERSTEIN, Executive Vice President, Chemical Bank, New York, New York
RALPH E. SPURGIN, President and Chief Executive Officer, Limited Credit Services, Inc.,
Columbus, Ohio
DAVID B. WARD, Of Counsel, Gebhardt and Kiefer, Clinton, New Jersey
LAWRENCE WINTHROP, President, Consumer Credit Counseling Service of Oregon, Inc.,
Portland, Oregon
Directories and Meetings 271
Consumer Advisory Council—Continued
Officers
WILLIAM E. ODOM, Chairman
JAMES W. HEAD, Vice Chairman
The Consumer Advisory Council met with financial industry, and representatives of
members of the Board of Governors on consumer and community interests. It was
March 29, June 28, and October 25, 1990. established pursuant to the 1976 amendments
The council is composed of academics, state to the Equal Credit Opportunity Act to advise
government officials, representatives of the the Board on consumer financial services.
Thrift Institutions Advisory Council
December 31,1990
Members
CHARLOTTE CHAMBERLAIN, Vice Chairman, NewAmerica Saving, Los Angeles, California
DAVID L. HATFIELD, President, Fidelity Federal Savings and Loan Association, Kalamazoo,
Michigan
LYNN W. HODGE, President and Chief Executive Officer, United Savings Bank Inc.,
Greenwood, South Carolina
ADAM A. JAHNS, Chairman and President, Cragin Federal Bank for Savings, Chicago,
Illinois
H. C. KLEIN, President and ChiefExecutive Officer, Little Rock Air Force Base Federal
Credit Union, Jacksonville, Arkansas
ELLIOT K. KNUTSON, Chairman and Chief Execuive Officer, Washington Federal Savings
and Loan Association, Seattle, Washington
JOHN WM. LAISLE, President and Chief Executive Officer, MidFirst Bank SSB, Oklahoma
City, Oklahoma
PHILIP E. LAMB, Chairman and ChiefExecutive Officer, Springfield Institution for Savings,
Springfield, Massachusetts
MARION O. SANDLER, President and Chief Executive Officer, World Savings and Loan
Association, Oakland, California
DONALD B. SHACKELFORD, Chairman of the Board, State Savings Bank, Columbus, Ohio
CHARLES B. STUZIN, Chairman, President, and Chief Executive Officer, Citizens Federal
Savings and Loan Association, Miami, Florida
Officers
DONALD B. SHACKELFORD, President
The members of the Thrift Institutions Advisory Council met with the Board of Governors
on February 27, May 8, September 18, and
November 27, 1990. The council, which is
composed of representatives from credit
MARION O. SANDLER, Vice President
unions, savings and loan 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.
272
77th Annual Report, 1990
Officers of Federal Reserve Banks, Branches, and Offices
December 31,1990*
BANK,
Branch, ox facility
Chairman2
Deputy Chairman
President
First Vice President
BOSTON3
Richard N. Cooper
Richard L. Taylor
Richard F. Syron
Robert W.
Eisenmenger
NEW YORK 3 ....
Cyrus R. Vance
Ellen V. Futter
Mary Ann Lambertsen
E. Gerald Corrigan
James H. Oltman
PHILADELPHIA
Peter A. Benoliel
Vacancy
Edward G. Boehne
William H. Stone, Jr.
CLEVELAND3..
Charles W. Parry
John R. Miller
W. Lee Hoskins
William H.
Hendricks
Cincinnati
Pittsburgh
Kate Ireland
Robert P. Bozzone
RICHMOND3 ...
Hanne M. Merriman
Anne Marie
Whittemore
John R. Hardesty, Jr.
William E. Masters
Robert P. Black
Jimmie R.
Monhollon
Larry L. Prince
Edwin A. Huston
A. G. Trammell
Lana Jane Lewis-Brent
Robert D. Apelgren
Victoria B. Jackson
Andre M. Rubenstein
Robert P. Forrestal
Jack Guynn
Marcus Alexis
Charles S. McNeer
Phyllis E. Peters
Silas Keehn
Daniel M. Doyle
H. Edwin Trusheim
Robert H. Quenon
L. Dickson Flake
Raymond M. Burse
Katherine Hinds
Smythe
Thomas C. Melzer
James R. Bowen
Michael W. Wright
Delbert W. Johnson
J. Frank Gardner
Gary H. Stern
Thomas E. Gainor
Buffalo
Baltimore
Charlotte
James O. Aston
Culpeper
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
CHICAGO3
Detroit
ST. LOUIS
Little Rock
Louisville
Memphis
MINNEAPOLIS .
Helena
Vice President
in charge of Branch
Charles A. Cerino4
Harold J. Swart4
Robert D. McTeer, Jr.4
Albert D.
Tinkelenberg4
JohnG. Stoides4
Donald E. Nelson
Fred R. Herr4
James D. Hawkins4
James T. Curry, III
Melvyn K. Purcell
Robert J. Musso
Roby L. Sloan4
Karl W. Ashman
Howard Wells
Raymond Laurence
John D. Johnson
Directories and Meetings 273
BANK,
Branch, or facility
Chairman2
Deputy Chairman
President
First Vice President
KANSAS CITY
Fred W. Lyons, Jr.
Burton A. Dole, Jr.
Barbara B. Grogan
John R Snodgrass
Herman Cain
Roger Guffey
Henry R. Czerwinski
Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN FRANCISCO
Los Angeles
Portland
Salt Lake City
Seattle
Kent M. Scott
David J. France
Harold L. Shewmaker
Bobby R. Inman
Robert H. Boy kin
Hugh G. Robinson
William H. Wallace
Donald G. Stevens
Andrew L. Jefferson, Jr.
Roger R.
Hemminghaus
Robert F. Erburu
Carolyn S.
Chambers
Yvonne B. Burke
William A. Hilliard
Don M. Wheeler
Bruce R. Kennedy
Vice President
in charge of Branch
Sammie C. Clay
Robert Smith III4
Thomas H. Robertson
Robert T. Parry
Carl E. Powell
Thomas C. Warren5
Angelo S. Carella4
E. Ronald Liggett4
Gerald R. Kelly 4
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
Lewiston, 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 P. Forrestal, President of the Federal Reserve Bank of Atlanta, served as
Chairman of the Conference in 1990, and
Thomas C. Melzer, President of the Federal
Reserve Bank of St. Louis, served as its Vice
Chairman. Christopher G. Brown, of the
Federal Reserve Bank of Atlanta, served as its
Secretary, and Frances E. Sibley, of the Federal Reserve Bank of St. Louis, served as its
Assistant Secretary.
The Chairmen of the Federal Reserve Banks
are organized into the Conference of Chairmen, which 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 May 30 and 31,
and on November 28 and 29, 1990.
The Executive Committee of the Conference of Chairmen during 1990 comprised
Cyrus R. Vance, Chairman; Peter A. Benoliel,
Vice Chairman; and Bobby R. Inman,
member.
On November 29, 1990, the Conference
elected its Executive Committee for 1991,
naming Peter A. Benoliel as Chairman, Hugh
G. Robinson as Vice Chairman, and Larry L.
Prince as the third member.
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.
Conference of First
Vice Presidents
The Conference of First Vice Presidents of
the Federal Reserve Banks was organized in
1969 to meet periodically for the consideration
of operations and other matters.
On November 14, 1988, the Conference
elected James R. Bowen, First Vice President
of the Federal Reserve Bank of St. Louis, as
its Chairman for 1990, and Jimmie R.
Monhollon, First Vice President of the Federal Reserve Bank of Richmond, as its Vice
Chairman. The Conference appointed Frances
E. Sibley, of the Federal Reserve Bank of St.
Louis, as its Secretary, and Marsha S. Shuler,
274 77th Annual Report, 1990
of the Federal Reserve Bank of Richmond, as
its 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
or bank holding company. In addition, Class
C directors may not be stockholders of any
bank or bank holding company.
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."
Directories and Meetings 275
Term expires
Dec. 31
DISTRICT 1-BOSTON
Class A
Richard D. Wardell
WilliamH. Chadwick
Terrence Murray
Class B
Stephen R. Levy
Edward H. Ladd
Joan T. Bok
President and Chief Executive Officer, National
Iron Bank of Salisbury,
Salisbury, Connecticut
Vice Chairman of the Board and Chief Operating
Officer, Banknorth Group, Inc.,
Burlington, Vermont
Chairman of the Board, President, and Chief
Executive Officer, Fleet/Norstar Financial
Group, Inc., Providence, Rhode Island
1990
Chairman of the Board and Chief Executive
Officer, Bolt Beranek and Newman, Inc.,
Cambridge, Massachusetts
Chairman and Chief Executive Officer, Standish,
Ayer and Wood, Inc., Boston, Massachusetts
Chairman of the Board, New England Electric
System, Westborough, Massachusetts
1990
Class C
Richard L. Taylor
President, Taylor Properties, Inc., Boston,
Massachusetts
Dr. Jerome H. Grossman .... Chairman of the Board and Chief Executive
Officer, New England Medical Center, Inc.,
Boston, Massachusetts
Richard N. Cooper
Maurits C. Boas Professor of International
Economics, Harvard University,
Cambridge, Massachusetts
1991
1992
1991
1992
1990
1991
1992
DISTRICT 2 - N E W YORK
Class A
J. Kirby Fowler
JohnF. McGillicuddy
Victor J. Riley, Jr
Class B
John F. Welch, Jr
Richard L. Gelb
President and Chief Executive Officer, The
Flemington National Bank and Trust
Company, Flemington, New Jersey
Chairman of the Board and Chief Executive
Officer, Manufacturers Hanover Trust
Company, New York, New York
Chairman of the Board, President, and Chief
Executive Officer, KeyCorp, Albany,
New York
1990
Chairman of the Board and Chief Executive
Officer, GE, Fairfield, Connecticut
Chairman of the Board and Chief Executive
Officer, Bristol-Myers Squibb Company,
New York, New York
1990
1991
1992
1991
276
77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 2, Class B-Continued
John A. Georges
Class C
Ellen V. Futter
Maurice R. Greenberg
Cyrus R. Vance
Chairman of the Board and Chief Executive
Officer, International Paper, Purchase,
New York
1992
President, Barnard College, New York, New York
Chairman, American International Group, Inc.,
New York, New York
Presiding Partner, Simpson Thacher & Bartlett,
New York, New York
1990
1991
1992
BUFFALO BRANCH
Appointed by the Federal Reserve Bank
Norman W. Sinclair
Chairman of the Board, Lockport Savings Bank,
Lockport, New York
Richard H. Popp
Operating Partner, Southview Farm, Castile,
New York
RobertG. Wilmers
Chairman of the Board and Chief Executive
Officer, Manufacturers and Traders Trust
Company, Buffalo, New York
Wilbur F. Beh
President and Chief Executive Officer,
FNB Rochester Corp., Rochester, New York
Appointed by the Board of Governors
Paul E. McSweeney
Executive Vice President, United Food and
Commercial Workers, District Union Local
One, AFL-CIO, Amherst, New York
Mary Ann Lambertsen
Vice President-Human Resources and
Information Systems, Fisher-Price,
Division of The Quaker Oats Company,
East Aurora, New York
Herbert L. Washington
HLW Fast Track, Inc., Rochester, New York
1990
1991
1991
1992
1990
1991
1992
DISTRICT 3-PHILADELPHIA
Class A
Constantinos I. Costalas
H. BernardLynch
Samuel A. McCullough
Class B
Charles F. Seymour
Chairman of the Board, President, and Chief
Executive Officer, Glendale National Bank of
New Jersey, Voorhees, New Jersey
President and Chief Executive Officer, The First
National Bank of Wyoming, Wyoming,
Delaware
Chairman of the Board and Chief Executive
Officer, Meridian Bancorp, Inc., Reading,
Pennsylvania
Chairman of the Board, Jackson-Cross Company,
Philadelphia, Pennsylvania
1990
1991
1992
1990
Directories and Meetings 277
Term expires
Dec. 31
DISTRICT 3, Class B-Continued
Nicholas Riso
David W. Huggins
Class C
Jane G. Pepper
Vacandy
Peter A. Benoliel
Executive Vice President, AHOLD, U.S.A.,
Harrisburg, Pennsylvania
President, RMS Technologies, Inc.,
Marlton, New Jersey
President, The Pennsylvania Horticultural
Society, Philadelphia, Pennsylvania
Chairman of the Board, Quaker Chemical
Corporation, Conshohocken, Pennsylvania
1991
1992
1990
1991
1992
DISTRICT 4 - CLEVELAND
Class A
William H. May
William T. McConnell
Frank Wobst
Class B
Verna K. Gibson
Douglas E. Olesen
Laban P. Jackson, Jr
Class C
Robert D. Storey
JohnR. Miller
Charles W. Parry
Chairman of the Board and President, First
National Bank of Nelsonville, Nelsonville,
Ohio
President, The Park National Bank,
Newark, Ohio
Chairman of the Board and Chief Executive
Officer, Huntington Bancshares Incorporated,
Columbus, Ohio
1990
1991
1992
President, The Limited Stores, Inc., Columbus,
Ohio
President and Chief Executive Officer, Battelle
Memorial Institute, Columbus, Ohio
Chairman of the Board, Clearcreek Properties,
Lexington, Kentucky
1990
Partner, Burke, Haber & Berick,
Cleveland, Ohio
Former President and Chief Operating Officer,
The Standard Oil Company (Ohio),
Cleveland, Ohio
Retired Chairman and Chief Executive Officer,
Aluminum Company of America,
Pittsburgh, Pennsylvania
1990
1991
1992
1991
1992
CINCINNATI BRANCH
Appointed by the Federal Reserve Bank
Jack W. Buchanan
President, Sphar & Company, Inc.,
Winchester, Kentucky
Jerry L. Kirby
Chairman of the Board, President, and Chief
Executive Officer, Citizens Federal Savings
& Loan Assn., Dayton, Ohio
1990
1990
278
77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 4-CINCINNATI BRANCH
Appointed by the Federal Reserve Bank—Continued
AllenL. Davis
Clay Parker Davis
President and Chief Executive Officer,
The Provident Bank, Cincinnati, Ohio
President and Chief Executive Officer, Citizens
National Bank, Somerset, Kentucky
Appointed by the Board of Governors
Marvin Rosenberg
Partner, Towne Properties, Ltd., Cincinnati,
Ohio
Kate Ireland
National Chairman of the Board, Frontier
Nursing Service, Wendover, Kentucky
Eleanor Hicks
Advisor for International Liaison Protocol and
Services, and Associate Professor of Political
Science, University of Cincinnati,
Cincinnati, Ohio
1991
1992
1990
1991
1992
PITTSBURGH BRANCH
Appointed by the Federal Reserve Bank
George A. Davidson, Jr
Chairman of the Board and Chief Executive
Officer, Consolidated Natural Gas Company,
Pittsburgh, Pennsylvania
StephenC. Hansen
President and Chief Executive Officer, Dollar
Bank, F.S.B., Pittsburgh, Pennsylvania
E. James Trimarchi
President and Chief Executive Officer, First
Commonwealth Financial Corporation,
Indiana, Pennsylvania
William F. Roemer
President and Chief Executive Officer,
Integra Financial Corporation,
Pittsburgh, Pennsylvania
Appointed by the Board of Governors
Milton A. Washington
President and Chief Executive Officer,
Allegheny Housing Rehabilitation
Corporation, Pittsburgh, Pennsylvania
Jack B. Piatt
Chairman of the Board and President, Millcraft
Industries, Inc., Washington, Pennsylvania
Robert P. Bozzone
President and Chief Operating Officer,
Allegheny Ludlum Corporation,
Pittsburgh, Pennsylvania
1990
1990
1991
1992
1990
1991
1992
DISTRICT 5 - RICHMOND
Class A
John F. McNair III
C. R. Hill, Jr
Director, Wachovia Bank & Trust Company,
N.A. and Wachovia Corporation,
Winston-Salem, North Carolina
Chairman of the Board and President,
Merchants & Miners National Bank,
Oak Hill, West Virginia
1990
1991
Directories and Meetings
279
Term expires
Dec. 31
DISTRICT 5, Class A - Continued
A. Pierce Stone
Class B
JackC. Smith
Edward H. Covell
R. E. Atkinson, Jr
Class C
Hanne Merriman
Anne Marie Whittemore
Henry J. Faison
Chairman, President, and Chief Executive
Officer, Virginia Community Bank,
Louisa, Virginia
1992
Chairman ofthe Board and Chief Executive
Officer, K-VA-T Food Stores, Inc.,
Grundy, Virginia
President, The Covell Company, Easton,
Maryland
Chairman, Dilmar Oil Company, Inc.,
Florence, South Carolina
1990
Retail Business Consultant, Washington, D.C.
Partner, McGuire, Woods, Battle & Boothe,
Richmond, Virginia
President, Faison Associates, Charlotte,
North Carolina
1991
1992
1990
1991
1992
BALTIMORE BRANCH
Appointed by the Federal Reserve Bank
Raymond V. Haysbert, Sr. .. .President and Chief Executive Officer, Parks
Sausage Company, Baltimore, Maryland
H. Grant Hathaway
Chairman ofthe Board, Maryland National Bank,
Baltimore, Maryland
Joseph W. Mosmiller
Chairman ofthe Board, Loyola Federal Savings
and Loan Association, Baltimore, Maryland
Richard M. Adams
Chairman and Chief Executive Officer, United
Bankshares, Inc., Parkersburg, West Virginia
Appointed by the Board of Governors
GloriaL. Johnson
Deputy Director of Administration, The
Baltimore Museum of Art,
Baltimore, Maryland
Thomas R. Shelton
President, Case Foods, Inc., Salisbury, Maryland
John R. Hardesty, Jr
President, Preston Energy, Inc., Kingwood,
West Virginia
1990
1991
1991
1992
1990
1991
1992
CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank
James M. Culberson, Jr
Chairman and President, The First National
Bank of Randolph County,
Asheboro, North Carolina
Crandall C. Bowles
President, Hie Springs Company, Lancaster,
South Carolina
1990
1991
280
77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 5, CHARLOTTE BRANCH
Appointed by the Federal Reserve Branch—Continued
James G. Lindley
David B. Jordan
Chairman, President, and Chief Executive
Officer, South Carolina National Corporation
and The South Carolina National Bank,
Columbia, South Carolina
President, Chief Executive Officer and Director,
Omni Capital Group, Inc. and Home Federal
Savings Bank, Salisbury, North Carolina
Appointed by the Board of Governors
William E. Masters
President, Perception, Inc., Easley,
South Carolina
Harold D. Kingsmore
President and Chief Operating Officer,
Graniteville Company,
Graniteville, South Carolina
Anne M. Allen
President, Anne Allen & Associates, Greensboro,
North Carolina
1991
1992
1990
1991
1992
DISTRICT 6-ATLANTA
Class A
E. B. Robinson, Jr
Virgil H. Moore, Jr
W. H. Swain
Class B
GaryJ. Chouest
Saundra H. Gray
J. Thomas Holton
Class C
Edwin A. Huston
Larry L. Prince
Leo Benatar
Chairman of the Board and Chief Executive
Officer, Deposit Guaranty National Bank and
Deposit Guaranty Corporation, Jackson,
Mississippi
Chairman of the Board and Chief Executive
Officer, First Farmers and Merchants National
Bank, Columbia, Tennessee
Chairman of the Board, First National Bank,
Oneida, Tennessee
1990
President and Chief Executive Officer, Edison
ChouestOffshore, Inc., Galliano, Louisiana
Co-Owner, Gemini Springs Farm, DeBary,
Florida
Chairman of the Board and President, Sherman
International Corporation, Birmingham,
Alabama
1990
Senior Executive Vice President-Finance,
Ryder System, Inc., Miami, Florida
Chairman and Chief Executive Officer, Genuine
Parts Company, Atlanta, Georgia
Chairman of the Board and President, Engraph,
Inc., Atlanta, Georgia
1990
1991
1992
1991
1992
1991
1992
Directories and Meetings 281
Term expires
Dec. 31
DISTRICT 6-Continued
BIRMINGHAM BRANCH
Appointed by the Federal Reserve Bank
Harry B. Brock, Jr
Chairman of the Board and Chief Executive
Officer, Central Bank of the South,
Birmingham, Alabama
Shelton E. Allred
Chairman of the Board, President, and Chief
Executive Officer, Frit Industries, Inc., Ozark,
Alabama
William F. Childress
President, First American Federal Savings and
Loan Association, Huntsville, Alabama
Robert M. Barrett
Chairman and President, The First National
Bank, Wetumpka, Alabama
Appointed by the Board of Governors
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
Nelda P. Stephenson
President, Nelda Stephenson Chevrolet, Inc.,
Florence, Alabama
1990
1991
1991
1992
1990
1991
1992
JACKSONVILLE BRANCH
Appointed by the Federal Reserve Bank
HughH. Jones, Jr
Chairman of the Board and Chief Executive
Officer, Barnett Bank of Jacksonville, N. A.,
Jacksonville, Florida
Perry M. Dawson
President and Chief Executive Officer,
Suncoast Schools Federal Credit Union,
Tampa, Florida
Samuel H. Vickers
Chairman, President and Chief Executive
Officer, Design Containers, Inc., Jacksonville,
Florida
Merle L. Graser
Chairman and Chief Executive Officer, First
National Bank of Venice, Venice, Florida
Appointed by the Board of Governors
Joan Dial Ruffier
General Partner, Sunshine Cafes, and Vice
President, Vista Landscaping, Orlando,
Florida
Hugh M. Brown
President and Chief Executive Officer, BAMSI,
Inc., Titusville, Florida
Lana Jane Lewis-Brent
Vice Chairman of the Board, President, and
Chief Executive Officer, Sunshine Jr. Stores,
Inc., Panama City, Florida
1990
1991
1991
1992
1990
1991
1992
282
77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 6-Continued
MIAMI BRANCH
Appointed by the Federal Reserve Bank
RobertM. Taylor
Chairman of the Board and Chief Executive
Officer, The Mariner Group, Inc., Fort Myers,
Florida
Frederick A. Teed
President and Chief Executive Officer,
Community Savings, F. A., North Palm Beach,
Florida
RobertoG. Blanco
Vice Chairman of the Board and Chief Financial
Officer, Republic National Bank of Miami,
Miami, Florida
A. Gordon Oliver
Chairman, President and Chief Executive
Officer, Citizens and Southern National Bank
of Florida, Fort Lauderdale, Florida
Appointed by the Board of Governors
Robert D. Apelgren
President, Apelgren Corporation, Pahokee,
Florida
Dorothy C. Weaver
Executive Vice President, Intercap Investments,
Inc., Coral Gables, Florida
Jose L. Saumat
President, Greater Miami Trading, Inc.,
Miami, Florida
1990
1990
1991
1992
1990
1991
1992
NASHVILLE BRANCH
Appointed by the Federal Reserve Bank
Vincent K. Hickam
President and Chief Executive Officer, Executive
Park National Bank, Kingsport, Tennessee
William Baxter Lee HI
Chairman of the Board and President, Southeast
Services Corporation, Knoxville, Tennessee
Edwin W. Moats, Jr
Chairman of the Board and Chief Executive
Officer, Metropolitan Federal Savings and
Loan Association, Nashville, Tennessee
James A. Rainey
Chairman of the Board, Sovran Financial
Corporation/Central South, Nashville,
Tennessee
Appointed by the Board of Governors
Victoria B. Jackson
President and Chief Executive Officer, Diesel
Sales and Service, Inc. and Prodiesel, Inc.,
Nashville, Tennessee
Shirley A. Zeitlin
President, Shirley Zeitlin & Co. Realtors,
Nashville, Tennessee
Harold A. Black
Professor and Head, Department of Finance,
College of Business Administration, University
of Tennessee, Knoxville, Tennessee
1990
1991
1991
1992
1990
1991
1992
Directories and Meetings 283
Term expires
Dec. 31
DISTRICT 6-Continued
NEW ORLEANS BRANCH
Appointed by the Federal Reserve Bank
Ronald M. Boudreaux
President and Chief Executive Officer, First
National Bank of St. Landry Parish,
Opelousas, Louisiana
Joel B. Bullard, Jr
President, Joe Bullard Automotive Companies,
Mobile, Alabama
Stanley S. Scott
President, Crescent Distributing Company,
Harahan, Louisiana
Earl W. Lundy
Chairman of the Board and Chief Executive
Officer, First National Bank of Vicksburg,
Vicksburg, Mississippi
Appointed by the Board of Governors
Victor Bussie
President, Louisiana AFL-CIO, Baton Rouge,
Louisiana
AndreM. Rubenstein
Chairman ofthe Board and Chief Executive
Officer, Rubenstein Brothers, Inc.,
New Orleans, Louisiana
James A. Hefner
President, Jackson State University, Jackson,
Mississippi
1990
1991
1991
1992
1990
1991
1992
DISTRICT 7-CHICAGO
Class A
Barry F. Sullivan
John W. Gabbert
B. F. Backlund
Class B
Edward D. Powers
Max J. Naylor
Paul J. Schierl
Class C
Marcus Alexis
Charles S. McNeer
Richard G. Cline
Chairman ofthe Board, First Chicago
Corporation, Chicago, Illinois
President and Chief Executive Officer, First of
America Bank-LaPorte, N.A., LaPorte,
Indiana
Chairman ofthe Board and Chief Executive
Officer, Bartonville Bank, Bartonville, Illinois
1990
Chief Executive Officer, Fire Brick Engineers,
Milwaukee, Wisconsin
President, Naylor Farms, Inc., Jefferson, Iowa
Financial Consultant, Green Bay, Wisconsin
1990
Visiting Professor, Department of Economics,
Northwestern University, Evanston, Illinois
Chairman of the Board and Chief Executive
Officer, Wisconsin Energy Corporation,
Milwaukee, Wisconsin
Chairman ofthe Board, President, and Chief
Executive Officer, NICOR, Inc., Naperville,
Illinois
1991
1992
1991
1992
1990
1991
1992
284 77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 7-Continued
DETROIT BRANCH
Appointed by the Federal Reserve Bank
James A. Aliber
Retired Chairman of the Board and Chief
Executive Officer, First Federal of Michigan,
Detroit, Michigan
Frederik G. H. Meijer
Chairman of the Executive Committee, Meijer,
Incorporated, Grand Rapids, Michigan
Robert J. Mylod
Chairman of the Board, President, and Chief
Executive Officer, Michigan National
Corporation, Farmington Hills, Michigan
Norman F. Rodgers
President and Chief Executive Officer, Hillsdale
County National Bank, Hillsdale, Michigan
Appointed by the Board of Governors
Beverly Beltaire
President, P R Associates, Inc., Detroit,
Michigan
Phyllis E. Peters
Director, Professional Standards Review,
Deloitte & Touche, Detroit, Michigan
J. Michael Moore
Chairman of the Board and Chief Executive
Officer, Invetech Company, Detroit, Michigan
1990
1990
1991
1992
1990
1991
1992
DISTRICT 8 - S T . LOUIS
Class A
H. L. Hembree III
Henry G. River, Jr
W. E. Ayres
Class B
Roger W. Schipke
Thomas F. McLarty m
Frank M. Mitchener, Jr
Class C
Janet McAfee Weakley
Robert H. Quenon
H. Edwin Trusheim
Chairman of the Executive Committee,
Merchants National Bank,
Fort Smith, Arkansas
President and Chief Executive Officer, First
National Bank in Pinckneyville,
Pinckneyville, Illinois
Chairman of the Board and Chief Executive
Officer, Simmons First National Bank of Pine
Bluff, Pine Bluff, Arkansas
President, Ryland Company, Columbia,
Maryland
Chairman of the Board and Chief Executive
Officer, Arkla, Inc., Little Rock, Arkansas
President, Mitchener Farms, Inc., Sumner,
Mississippi
President, Janet McAfee, Inc., Clayton, Missouri
Chairman, Peabody Holding Company, Inc.,
St. Louis, Missouri
Chairman of the Board and Chief Executive
Officer, General American Life Insurance
Company, St. Louis, Missouri
1990
1991
1992
1990
1991
1992
1990
1991
1992
Directories and Meetings 285
Term expires
Dec. 31
DISTRICT 8-Continued
LITTLE ROCK BRANCH
Appointed by the Federal Reserve Bank
David Armbruster
President, First America Federal Savings Bank,
Fort Smith, Arkansas
W. Wayne Hartsfield
President and Chief Executive Officer, First
National Bank, Searcy, Arkansas
Barnett Grace
President and Chief Executive Officer, First
Commercial Bank, N. A., Little Rock,
Arkansas
Patricia M. Townsend
President, Townsend Company, Stuttgart,
Arkansas
Appointed by the Board of Governors
William E. Love
President, Sound-Craft Systems, Inc., Morrilton,
Arkansas
James R. Rodgers
Airport Manager, Little Rock Regional Airport,
Little Rock, Arkansas
L. Dickson Flake
President, Barnes, Quinn, Flake & Anderson,
Inc., Little Rock, Arkansas
1990
1990
1991
1992
1990
1991
1992
LOUISVILLE BRANCH
Appointed by the Federal Reserve Bank
Irving W. Bailey II
Chairman of the Board, President, and Chief
Executive Officer, Capital Holding
Corporation, Louisville, Kentucky
Wayne G. Overall, Jr
President, First Federal Savings Bank,
Elizabethtown, Kentucky
Douglas M. Lester
Chairman of the Board, President, and Chief
Executive Officer, Trans Financial Bancorp,
Inc., Bowling Green, Kentucky
Morton Boyd
Chairman, President and CEO, First Kentucky
National Corporation, Louisville, Kentucky
Appointed by the Board of Governors
Raymond M. Burse
Partner, Wyatt, Tarrant and Combs,
Louisville, Kentucky
Lois H. Gray
Chairman of the Board, James N. Gray
Construction Company, Inc.,
Glasgow, Kentucky
Daniel L. Ash
President and Plant Manager (Retired), Rohm
and Haas Kentucky Incorporated, Louisville,
Kentucky
1990
1990
1991
1992
1990
1991
1992
286
77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 8-Continued
MEMPHIS BRANCH
Appointed by the Federal Reserve Bank
Thomas M. Garrott
President and Chief Operating Officer, National
Bank of Commerce and National Commerce
Bancorporation, Memphis, Tennessee
Larry A. Watson
Chairman of the Board and President, Liberty
Federal Savings Bank, Paris, Tennessee
Ray U. Tanner
Chairman of the Board and Chief Executive
Officer, Jackson National Bank and Volunteer
Bancshares, Inc., Jackson, Tennessee
Michael J. Hennessey
President, Munro & Company, Inc., Wynne,
Arkansas
Appointed by the Board of Governors
Seymour B. Johnson
Owner, Kay Planting Company, Indianola,
Mississippi
Katherine Hinds Smythe
President, Memorial Park, Inc., Memphis,
Tennessee
Sandra B.
Sanderson-Chesnut
President and Chief Executive Officer, Sanderson
Plumbing Products, Inc., Columbus,
Mississippi
1990
1990
1991
1992
1990
1991
1992
DISTRICT 9-MINNEAPOLIS
Class A
Joel S. Harris
James H. Hearon III
Rodney W. Fouberg
Class B
Earl R. St. John, Jr
Duane E. Dingmann
Bruce C. Adams
Class C
Delbert W. Johnson
Michael W. Wright
President, Yellowstone Bank, Billings, Montana
Chairman of the Board and Chief Executive
Officer, National City Bank, Minneapolis,
Minnesota
Chairman of the Board, Farmers and Merchants
Bank and Trust Co., Aberdeen, South Dakota
1990
1991
President, St. John Forest Products, Inc.,
Spalding, Michigan
President, Trubilt Auto Body, Inc.,
Eau Claire, Wisconsin
Partner, Triple Adams Farms, Minot,
North Dakota
1990
President and Chief Executive Officer, Pioneer
Metal Finishing, Minneapolis, Minnesota
Chairman of the Board, Chief Executive Officer,
and President, Super Valu Stores, Inc.,
Minneapolis, Minnesota
1992
1991
1992
1990
1991
Directories and Meetings
287
Term expires
Dec. 31
DISTRICT 9, Class C-Continued
Gerald A. Rauenhorst
Chairman of the Board and Chief Executive
Officer, Opus Corporation, Minneapolis,
Minnesota
1992
HELENA BRANCH
Appointed by the Federal Reserve Bank
Noble E. Vosburg
President and Chief Executive Officer, Pacific
Hide and Fur Corporation,
Great Falls, Montana
Robert H. Waller
President and Chief Executive Officer, First
Interstate Bank of Billings, N. A.,
Billings, Montana
Beverly D. Harris
President, Empire Federal Savings and Loan
Association, Livingston, Montana
Appointed by the Board of Governors
J. Frank Gardner
President, Montana Resources, Inc., Butte,
Montana
James E. Jenks
Jenks Farms, Hogeland, Montana
1990
1990
1991
1990
1991
DISTRICT 10-KANSAS CITY
Class A
Roger L. Reisher
RobertL. Hollis
Harold L. Gerhart, Jr
Class B
S. Dean Evans, Sr
Frank J. Yaklich, Jr
Frank A. McPherson
Class C
Thomas E. Rodriguez
Burton A. Dole, Jr
Fred W. Lyons, Jr
Co-Chairman of the Board, FirstBank of
Westland, N.A., Lakewood, Colorado
Chairman of the Board and Chief Executive
Officer, First National Bank and Trust Co.,
Okmulgee, Oklahoma
Chairman and Chief Executive Officer, First
National Bank, Newman Grove, Nebraska
1990
1991
1992
Partner, Evans Grain Company, Salina, Kansas
President, CF & I Steel Corporation, Pueblo,
Colorado
Chairman of the Board and Chief Executive
Officer, Kerr-McGee Corporation,
Oklahoma City, Oklahoma
1990
1991
President and General Manager, Thomas E.
Rodriguez & Associates, P C , Aurora,
Colorado
Chairman of the Board and President,
Puritan-Bennett Corporation, Overland Park,
Kansas
President, Marion Merrell Dow Inc.,
Kansas City, Missouri
1990
1992
1991
1992
288
77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 10-Continued
DENVER BRANCH
Appointed by the Federal Reserve Bank
Junius F. Baxter
Denver, Colorado
Norman R. Corzine
President and Chief Executive Officer, First
National Bank in Albuquerque,
Albuquerque, New Mexico
W. Richard Scarlett III
Chairman of the Board and Chief Executive
Officer, Jackson State Bank, Jackson Hole,
Wyoming
Henry A. True III
Partner, True Companies, Casper, Wyoming
Appointed by the Board of Governors
Gilbert Sanchez
President, New Mexico Highlands University,
Las Vegas, New Mexico
Barbara B. Grogan
President, Western Industrial Contractors, Inc.,
Denver, Colorado
Sandra K. Woods
Vice President, Corporate Real Estate, Adolph
Coors Company, Golden, Colorado
1990
1991
1991
1992
1990
1991
1992
OKLAHOMA CITY BRANCH
Appointed by the Federal Reserve Bank
W. DeanHidy
Chairman of the Board and Chief Executive
Officer, Triad Bank, N.A., Tulsa, Oklahoma
John Wm. Laisle
President, MidFirst Bank, SSB, Oklahoma City,
Oklahoma
C. Kendric Fergeson
Chairman of the Board and Chief Executive
Officer, The National Bank of Commerce,
Altus, Oklahoma
Appointed by the Board of Governors
John F. Snodgrass
President and Trustee, The Samuel Roberts
Noble Foundation, Inc., Ardmore, Oklahoma
Ernest L. Holloway
President, Langston University, Langston,
Oklahoma
1990
1990
1991
1990
1991
OMAHA BRANCH
Appointed by the Federal Reserve Bank
John R. Cochran
President and Chief Executive Officer, Norwest
Bank Nebraska, N.A., Omaha, Nebraska
Sheila Griffin
Associate Director for Audience and Program
Development, Lied Center for Performing
Arts, University of Nebraska-Lincoln,
Lincoln, Nebraska
John T. Selzer
Chairman of the Board and Chief Executive
Officer, FirsTier Bank, N.A., Scottsbluff,
Nebraska
1990
1991
1991
Directories and Meetings 289
Term expires
Dec. 31
DISTRICT 10, OMAHA BRANCH-Continued
Appointed by the Board of Governors
Herman Cain
President and Chief Executive Officer,
Godfather's Pizza, Inc., Omaha, Nebraska
Leroy William Thorn
President, T-L Irrigation Company, Hastings,
Nebraska
1990
1991
DISTRICT 11-DALLAS
Class A
T. C. Frost
Charles T. Doyle
Robert G. Greer
Class B
Robert L. Pfluger
Peyton Yates
Gary E. Wood
Class C
Bobby R. Inman
Hugh G. Robinson
LeoE. Linbeck, Jr
Chairman of the Board, Frost National Bank,
San Antonio, Texas
Chairman of the Board and Chief Executive
Officer, Gulf National Bank, Texas City, Texas
Chairman of the Board, Tanglewood Bank,
N.A., Houston, Texas
1990
1991
1992
Rancher, San Angelo, Texas
President, Yates Drilling Company, Artesia,
New Mexico
President, Texas Research League, Austin,
Texas
1990
1991
Austin, Texas
Chairman of the Board and Chief Executive
Officer, The Tetra Group, Inc., Dallas, Texas
Chairman of the Board and Chief Executive
Officer, Linbeck Construction Corporation,
Houston, Texas
1990
1991
1992
1992
EL PASO BRANCH
Appointed by the Federal Reserve Bank
Henry B. Ellis
President and Chief Credit Officer, MBank
El Paso, N. A., El Paso, Texas
Ethel Ortega Olson
Owner, NAMBE of Ruidoso, Ruidoso,
New Mexico
Humberto F. Sambrano
President, SamCorp General Contractors,
El Paso, Texas
Wayne Merritt
Claydesta National Bank, Midland, Texas
Appointed by the Board of Governors
Diana S. Natalicio
President, The University of Texas at El Paso,
El Paso, Texas
Donald G. Stevens
Owner, Stevens Oil Company, Roswell,
New Mexico
W. Thomas Beard m
President, Leoncita Cattle Company, Alpine,
Texas
1990
1990
1991
1992
1990
1991
1992
290
77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 11 -Continued
HOUSTON BRANCH
Appointed by the Federal Reserve Bank
Clive Runnells
President and Director, Runnells Cattle
Company, Bay City, Texas
David E. Sheffield
Financial Consultant, Victoria, Texas
Jeff Austin, Jr
President, First National Bank of Jacksonville,
Jacksonville, Texas
Jenard M. Gross
President, Gross Builders, Inc., Houston,
Texas
Appointed by the Board of Governors
Andrew L. Jefferson, Jr
Attorney, Jefferson and Mims, Houston, Texas
Gilbert D. Gaedcke, Jr
Chairman of the Board and Chief Executive
Officer, Gaedcke Equipment Company,
Houston, Texas
Judy Ley Allen
Partner and Administrator, Allen Investments,
Houston, Texas
1990
1990
1991
1992
1990
1991
1992
SAN ANTONIO BRANCH
Appointed by the Federal Reserve Bank
Javier Garza
Executive Vice President, The Laredo National
Bank, Laredo, Texas
Sam R. Sparks
President, Sam R. Sparks, Inc., Santa Rosa,
Texas
Jane Flato Smith
Investor and Rancher, San Antonio, Texas
Gregory W. Crane
Chairman of the Board, President, and Chief
Executive Officer, Broadway National Bank,
San Antonio, Texas
Appointed by the Board of Governors
Erich Wendl
President, Maverick Markets, Inc.,
Corpus Christi, Texas
Roger R. Hemminghaus
Chairman of the Board, President, and Chief
Executive Officer, Diamond Shamrock, Inc.,
San Antonio, Texas
Lawrence E. Jenkins
Vice President (Retired), Austin Division,
Lockheed Missiles and Space Co., Austin,
Texas
1990
1990
1991
1992
1990
1991
1992
DISTRICT 1 2 - S A N FRANCISCO
Class A
R. Blair Hawkes
William E. B. Siart
President and Chief Executive Officer, Ireland
Bank, Malad City, Idaho
Chairman of the Board, President, and Chief
Executive Officer, First Interstate Bank of
California, Los Angeles, California
1990
1991
Directories and Meetings 291
Term expires
Dec. 31
DISTRICT 12, Class A -Continued
Warren K. K. Luke
Class B
John N. Nordstrom
William L. Tooley
James A. Vohs
Class C
Cordell W. Hull
CarolynS. Chambers
Robert F. Erburu
President and Director, Hawaii National
Bancshares, Inc., and Vice Chairman of the
Board, Hawaii National Bank, Honolulu,
Hawaii
1992
Co-Chairman of the Board, Nordstrom, Inc.,
Seattle, Washington
Chairman, Tooley & Company, Investment
Builders, Los Angeles, California
Chairman of the Board, President, and Chief
Executive Officer, Kaiser Foundation Health
Plan, Inc., and Kaiser Foundation Hospitals,
Oakland, California
1990
Executive Vice President and Director, Bechtel
Group, Inc., San Francisco, California
President and Chief Executive Officer, Chambers
Communications Corp., Eugene, Oregon
Chairman of the Board and Chief Executive
Officer, The Times Mirror Company,
Los Angeles, California
1991
1992
1990
1991
1992
Los ANGELES BRANCH
Appointed by the Federal Reserve Bank
Ross M. Blakely
Chairman of the Executive Committee of the
Board, Coast Savings and Loan,
Los Angeles, California
David R. Lovejoy
Vice Chairman of the Board, Security Pacific
National Bank, Los Angeles, California
Ignacio E. Lozano, Jr
Editor-in-Chief, La Opinion, Los Angeles,
California
Fred D. Jensen
Chairman of the Board, President, and Chief
Executive Officer, National Bank of Long
Beach, Long Beach, California
Appointed by the Board of Governors
Richard C. Seaver
Chairman, Hydril Company, Los Angeles,
California
Harry W. Todd
Managing Partner, Carlisle Enterprises, L.P.,
Coronado, California
Yvonne Brathwaite Burke ... .Partner, Jones, Day, Reavis & Pogue,
Los Angeles, California
1990
1991
1991
1992
1990
1991
1992
292
77th Annual Report, 1990
Term expires
Dec. 31
DISTRICT 12-Continued
PORTLAND BRANCH
Appointed by the Federal Reserve Bank
Stephen G. Kimball
President and Chief Executive Officer, Baker
Boyer Bancorp, Walla Walla, Washington
G. Dale Weight
Dean, George H. Atkinson Graduate School of
Management, Willamette University, Salem,
Oregon
StuartH. Compton
Chairman of the Board and Chief Executive
Officer, Pioneer Trust Bank, N.A., Salem,
Oregon
E. Kay Stepp
President, Portland General Electric, Portland,
Oregon
Appointed by the Board of Governors
Sandra A. Suran
President, The Suran Group, Portland, Oregon
William A. Hilliard
Editor, The Oregonian, Portland, Oregon
Wayne E. Phillips, Jr
Vice President, Phillips Ranch, Inc., Baker,
Oregon
1990
1990
1991
1992
1990
1991
1992
SALT LAKE CITY BRANCH
Appointed by the Federal Reserve Bank
Curtis H. Eaton
Vice President; Manager, Community Banking
Area; and Member of the Board of Directors,
First Security Bank of Idaho, N. A.,
Twin Falls, Idaho
Virginia P. Kelson
Partner, Ralston & Associates, Salt Lake City,
Utah
Gerald R. Christensen
President and Chairman, First Federal Savings
Bank, Salt Lake City, Utah
Ronald S. Hanson
President, Zions First National Bank,
Salt Lake City, Utah
Appointed by the Board of Governors
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
Gary G. Michael
Vice Chairman, Chief Financial and Corporate
Development Officer, Albertson's, Inc., Boise,
Idaho
1990
1990
1991
1992
1990
1991
1992
SEATTLE BRANCH
Appointed by the Federal Reserve Bank
B. R. Beeksma
Chairman of the Board, InterWest Savings Bank,
Oak Harbor, Washington
1990
Directories and Meetings 293
Term expires
Dec. 31
DISTRICT 12, SEATTLE BRANCH
Appointed by the Federal Reserve Bank—Continued
Gerry B. Cameron
Robert P. Gray
H. H. Larison
President and Chief Operating Officer, U.S. Bank
of Washington, N.A., Seattle, Washington
President, National Bank of Alaska, Anchorage,
Alaska
President, Columbia Paint & Coatings, Spokane,
Washington
Appointed by the Board of Governors
George F. Russell, Jr
Chairman, President and Chief Executive
Officer, Frank Russell Company, Tacoma,
Washington
Bruce R. Kennedy
Chairman and Chief Executive Officer, Alaska
Air Group, Inc., Seattle, Washington
Judith M. Runstad
Co-Managing Partner, Foster Pepper and
Shefelman, Seattle, Washington
1990
1991
1992
1990
1991
1992
Index
297
Index
Accounting standards, 190
Acquisitions approved (See also bank
holding companies), 253-63
Affordable Housing Disposition Program,
173
Agriculture, price developments in 1990,15
Agriculture, U.S. Department of, Packers
and Stockyards Administration, 168
Assets and liabilities
Banks, by class, 245
Board of Governors, 216
Federal Reserve Banks, 224
Automated clearinghouse, fees for services,
206
Bank Holding Company Act of 1956 (See
also Regulations: Y)
Examinations, 188
Regulation and compliance, 195
Bank holding companies (See also
Regulations: Y)
Acquisitions approved, 253-63
Applications by, processing and notice of
Board decisions, 195
Bank Merger Act, 196
Board actions, review, 175
Change in Bank Control Act, 196
Delegation of applications, 197
Deposit sweep accounts, 193
Enforcement, 186
Examinations, 186
Examinations, inspection, and regulation,
185
Surveillance and monitoring, 188
Transfer agents, 188
Financial Statements for a Bank Holding
Company Engaged in Ineligible
Securities Underwriting and
Dealing, new report form, 193
Funding and liquidity policy, 192
International activities, 189,198
Litigation, 175
Mergers approved, 253-63
Reporting requirements, revisions, 193
Stock repurchases, 198
Bank Insurance Fund, 23
Bank Merger Act, regulation and
compliance, 196
Bank mergers and consolidations, 253
Bank Secrecy Act, 184,200
Bankers acceptances, Federal Reserve
Banks, holdings, 224
Banking Act of 1933 (See also
Glass-SteagallAct), 188
Banking activities, 204
Banking offices, changes in number, 252
Banking premises, policy on sale of retail
banks, 192
Banking supervision and regulation by the
Federal Reserve System, 183
Basle Committee, Banking Regulations and
Supervisory Practices, 183,184,191
Board of Governors (See also Federal
Reserve System)
Financial statements, 215
Litigation, 175
Members and officers, 266
Regulatory simplification, 203
Salaries, 231
Testimony
Community Reinvestment Act, 173
Fair lending, 174
Home Mortgage Disclosure Act, 173
Mortgage lending initiatives, 173
Reserve Bank promotion of fair lending
practices, 174
Bonds, savings (See also Treasury
securities), 205,208
Brady, Nicholas R, Secretary of the
Treasury, 29
Branch banks, foreign branches of U.S.
banking organizations, 189,199
Bureau of Engraving and Printing, 179
Bush, George, President of the United
States, 29
California Community Reinvestment
Corporation, 174
CAMEL rating system, 184
Capital accounts
Banks, by class, 240
Federal Reserve Banks, 223,224,226
298
77th Annual Report, 1990
Chairmen, presidents, and vice presidents of
Federal Reserve Banks
Conferences, 273
List, 272
Salaries of presidents, 231
Change in Bank Control Act, 204
Check clearing and collection
Fees for Federal Reserve services, 206
Float, 208
Volume of operations, 210,241
Clearing House Interbank Payments System
(CHIPS), 79
Commercial banks (See also Insured
commercial banks), banking offices,
changes in number, 252
Commodity Credit Corporation, 11, 30
Commodity Futures Trading Commission,
Market Reform Act of 1990,
responsibilities under, 179
Community Affairs program, 164
Community Development Corporations,
165
Community Reinvestment Act of 1977
Compliance, 164
Consumer affairs, 161
Disclosure of ratings, 164
Regulation BB, amendment to implement
changes in, 77
Seminar for Chicago District bankers,
174
Testimony, 173
Video from Philadelphia Reserve Bank,
174
Comprehensive Thrift and Bank Fraud
Prosecution and Taxpayer Recovery
Act of 1990,179
Comptroller of the Currency, Office of, 166,
183,189,196
Condition statements of Federal Reserve
Banks, 222
Conferences of chairmen, presidents, and
vice presidents of Federal Reserve
Banks, 273
Congressional Budget Office, 23
Consumer Advisory Council, 172,270
Consumer and community affairs, 161
Consumers Union, lawsuit regarding
Regulation Z, 161
Council of Economic Advisers, 38
Cranston-Gonzales National Affordable
Housing Act, 78, 179
Credit cards, price reductions on, 203
Crime Control Act of 1990, 179
Debt aggregates, 20
Definitive securities, 208
Deposit insurance, study by Treasury
Department, 190
Deposit sweep accounts, 193
Depository institutions, reserves and related
items, 20,246
Deposits
Banks, by class, 245
Federal Reserve Banks, 224,246
Directors, Federal Reserve Banks and
Branches, list, 274
Dividend payments to state member banks,
192
Dividends, FederalReserveBanks,234,236
Drexel Burnham Lambert, 65
Earnings of Federal Reserve Banks (See
also Federal Reserve Banks, income
and expenses), 232
Economy in 1989
Business, 40
External, 42
Government, 41
Household, 39
Labor markets, 43
Price developments, 44
Economy in 1990
Business, 8, 58
External, 59
Government, 10,59
Household, 6,56
Labor markets, 12, 61
Price developments, 14,62
Electronic benefits transfers, 172
Electronic Fund Transfer Act
Compliance with, 168
Economic effect of, 169
Enterprise for the Americas initiative, 29
Equal Credit Opportunity Act, compliance
with, 168
Examinations, inspections, regulation, and
audits
Bank holding companies, 185
Compliance with consumer regulations,
166
Enforcement actions, civil money
penalties, 186
Federal Reserve Banks, 208
Inspection reports revised, 192
Index
Examinations, inspections, regulation, and
audits—Continued
International activities, 189
Specialized
Electronic data processing, 187
Fiduciary activities, 187
Government securities dealers, 187
Municipal securities dealers and
clearing agencies, 187
Securities subsidiaries of bank holding
companies, 188
Transfer agents, 188
State member banks, 185
Surveillance and monitoring, 188
Exchange Stabilization Fund, 33
Expedited Funds Availability Act of 1988
Amendments proposed by the Consumer
Advisory Council, 173
Board report to the Congress, 79
Compliance with, 169
Cranston-Gonzales Housing Act,
amendments to, 179
Deposits at nonproprietary teller
machines, 78,162,179
Export Trading Company Act Amendments
of 1988,199
Export-Import Bank, 30
Fair Credit Reporting Act, 173
Fair lending initiatives, testimony, 174
Farm Credit Administration, 167, 168, 201
Federal Advisory Council, 269
Federal agency securities
Federal Reserve Bank holdings and
earnings, 224, 246
Federal Reserve open market
transactions, 1989,228
Repurchase agreements, 223,224,228,
230
Federal Deposit Insurance Corporation,
166,180,183,189,196
Federal deposit insurance, study by
Treasury Department, 190
Federal Financial Institutions Examination
Council
Activities, 166
Appraisal Subcommittee, 183,190
Forms and guidelines for lender reports
under the Home Mortgage
Disclosure Act, 163
Procedures for disclosing CRA ratings,
165
299
Federal Financial Institutions Examination
Council—Continued
Training courses, 194
Federal Home Loan Mortgage Corporation,
208
Federal National Mortgage Association, 208
Federal Open Market Committee
Meetings, 90,101,110,117,128,136,
144,151
Members and officers, list, 268
Policy actions, 3, 85
Federal Reserve Banks
Assessments for expenses of Board of
Governors, 234,236
Bank premises, 222, 224, 240
Banks
Atlanta, 174
Boston, 165,174
Chicago, 165,174
Kansas City, 210
Minneapolis, Helena Branch, 210
New York, 165,208,210
Philadelphia, 174
Richmond, 165
San Francisco, 165,174
St. Louis, 210
Branches
Bank premises, 210,240
Directors, list, 274
Vice presidents in charge, 272
Capital accounts, 223, 224
Chairmen and deputy chairmen, 272
Check clearing and collection, 206
Condition statement, 222
Conferences of chairmen, presidents, and
vice presidents, 273
Deposits, 223, 224
Directors, list, 274
Dividends paid, 234, 237, 239
Examination or audit, 208
Income and expenses, 209
Interest rates, 80,242
Loans and securities, 222,224,230,232,
246,248, 250
Officers and employees, number and
salaries, 231
Operations, volume, 241
Payments to the U.S. Treasury, 237,239
Premises, 210
Presidents and first vice presidents, 231,
272
Priced services
Developments, 205
300 77th Annual Report, 1990
Federal Reserve Banks—Continued
Price services—Continued
Financial statements, 210
Pro forma balance sheet, 211
Pro forma income statement, 212
Tables, 246
Promotion of fair lending practices, 174
Securities and loan holdings, 209
Training, 193
Federal Reserve notes
Condition statement data, 224
Cost of issuance and redemption, 219,
234
Federal Reserve System (See also Board of
Governors)
Map, 304, 305
Training, 193
Federal Trade Commission, 167,168
Fedwire (See also Electronic Fund Transfer
Act), 203
Fees, Federal Reserve services to depository
institutions
Automated clearinghouse, 206
Check clearing and collection, 206
Currency and coin, 207
Electronic payments, 206
Pricing of, 210, 232, 205
Securities, 208
Wire transfer of funds, 207
Financial Institutions Anti-Fraud
Enforcement Act of 1990,181
Financial Institutions Reform, Recovery,
and Enforcement Act of 1989
Amendment to the Community
Reinvestment Act, 78
Bank supervision and regulation, 183
Monetary policy, 8, 35, 57
Treasury Department study of federal
deposit insurance, 190
Financial Institutions Supervisory Act,
challenges to Board regulations, 176
Financial institutions, condition in 1990,23
Float (See also Check clearing and
collection), 208
Foreign currencies
Authorization and directive for operations
in, and review of documents, 33
Federal Reserve income on, 232
Foreign economies, 28
General Accounting Office, 23
Giesecke and Devrient, Inc., 208
Glass-Steagall Act
Challenges to Board regulations, 177
Securities subsidiaries of bank holding
companies, 188
Gold certificate accounts of Reserve Banks
and gold stock, 224,248,250
Government Securities Act of 1986,187
Gramm-Rudman-Hollings (Balanced
Budget and Emergency Deficit Control
Act of 1985), 10
Garn-St Germain Depository Institutions
Act of 1982, 73
Kuwait, invasion of, by Iraq, 5,11,14,18,
23
Highly leveraged transactions, definition,
192
Home Mortgage Disclosure Act, 161
Reporting requirements expanded, 163
Testimony, 173
Income and expenses
Board of Governors, 217
Federal Reserve Banks, 209,232
Insured commercial banks (See also
Commercial banks)
Assets and liabilities, by class of bank,
245
Banking offices, changes in number, 252
Number, by class of bank, 245
Interagency Enforcement Policy, 167
Interdistrict Transportation System, 206
Interest rates, Federal Reserve Banks
Discount rates, 1990, 80, 83
Examination procedures for managing
risk, 193
Seasonal credit program, modification,
82,83
Table, 242
International banking activities, 198
International developments, review of 1990,
27
International transactions, 31
Interpretations of regulations, 164
Interstate Commerce Commission, 168
Investments
Federal Reserve Banks, 222, 224
State member banks, 245
Iraq (See Kuwait)
Justice, U.S. Department of, 175,181,208
Index 301
Legislation enacted (See also specific act),
179
Legislative recommendations, other
agencies with enforcement
responsibilities, 174
Litigation
Bank holding companies, 175
Board procedures and regulations,
challenges to, 176
Loans
Banks, by class, 245
Federal Reserve Banks
Depository institutions, 222, 224, 232,
248,250
Holdings and income, 222, 224, 248,
250
Interest rates, 242
Volume of operations, 241
Margin requirements, 244
Market Reform Act of 1990, 179
Massachusetts Bankers Association, 165
Member banks (See also Depository
institutions and National banks)
Assets, liabilities, and capital accounts,
245
Banking offices, changes in number, 252
Number, 245
Reserve requirements, 243
Surveillance and monitoring, 188
Mergers approved (See also Bank holding
companies), 253-63
Monetary policy
Aggregates, 21
Condition of financial institutions, 23
Credit markets, 24
Financial markets relative to, 17
Implementation, 17
Reports to the Congress, 35
Review of 1989,45
Review of 1990, 5
Mortgage lending initiatives, testimony, 173
Mutual savings banks, 252
National Association of Securities
Dealers, 200
National banks (See also Member banks)
Assets, liabilities, and capital accounts, 243
Banking offices, changes in number, 252
National Commission on Financial
Institution Reform, Recovery, and
Enforcement, 181
National Credit Union Administration, 166,
200
Nonmember depository institutions
Assets and liabilities, 245
Banking offices, changes in number, 252
Number, 245
Office of Thrift Supervision, 166,196
Officers of Federal Reserve Banks,
Branches, and Offices, 272
Oil, price developments in 1990,14
Operation Desert Shield (See Kuwait)
Over-the-counter marginable stocks, 201
Over-the-counter savings bonds (See also
Treasury securities), 205, 208
Payment system, revised statement on risk,
79
Policy actions
Board of Governors
Discount rates at Federal Reserve
Banks, 80
Regulations, 73
Statements and other actions, 79
Federal Open Market Committee (See
also System Open Market Account),
85
Priced services, Federal Reserve, 205,232
Profit and loss, Federal Reserve Banks, 234
Publications
"A Guide to Business Credit for Women,
Minorities, and Small Businesses,"
revised brochure, 164
"Home Mortgages: Understanding the
Process and Your Rights," brochure,
164
Securities Credit Transactions Handbook,
201
Real estate, appraisal regulations issued,
190
Recognition Equipment, Inc., 207
Regional Delivery System for savings
bonds, 205,208
Regulation of banking organizations
Change in Bank Control Act, 196
Delegation of applications, 197
Public notice of board decisions, 197
State member bank applications, 198
Timely processing of applications, 197
Regulations
B, Equal Credit Opportunity
Compliance with, 168
302
77th Annual Report, 1990
Regulations - Continued
B, Equal Credit Opportunity—Continued
Ohio law, preemption of provision, 163
BB, Community Reinvestment
Amendment to implement changes in
the Community Reinvestment Act,
77
C, Home Mortgage Disclosure
Amenmdments considered by the
Consumer Advisory Council, 173
Massachusetts, exemption for
state-chartered financial
institutions, 163
Reporting requirements expanded, 163
CC, Availability of Funds and Collection
of Checks
Amendment to implement changes to
Expedited Funds Availability Act,
78
Compliance with, 169
Extension of exceptions to permanent
schedule, 162
D, Reserve Requirements of Depository
Institutions
Amendment to eliminate reserve
requirements on certain items, 73
Amendment to increase the amount of
transaction balances to which the
lower reserve requirement
applies, 73
Garn-St Germain Depository
Institutions Act of 1982,73
Monetary Control Act of 1980, 73
E, Electronic Fund Transfer
Compliance with, 168
H, Membership of State Banking
Institutions in the Federal Reserve
System
Amendment regarding payment of
dividends, 74
Amendment to adopt guidelines and
leverage constraint for risk-based
capital standards, 75
Amendment to adopt real estate
appraisal standards, 74
Financial Institutions Reform Recovery
and Enforcement Act of 1989,
requirements, 74
J, Collection of Checks and Other Items
by Federal Reserve Banks and Funds
Transfers through Fedwire
Funds transfers on Fedwire, 75,203
Regulations—Continued
K, International Banking Operations
Proposed revisions, 184
T, Credit by Brokers and Dealers
Amendment regarding transactions and
margin credit involving foreign
securities, 75
Y, Bank Holding Companies and Change
in Bank Control
Amendment to adopt guidelines and
leverage constraint for risk-based
capital standards, 75
Amendment to adopt real estate
appraisal standards, 74
Amendment to permit banks to offer
reduced-rate credit cards, 76
Amendment to reduce filing
requirements under the Change in
Bank Control Act, 76
Changes, 204
Z, Truth in Lending
Amendment relating to home equity
lines of credit, 77
Compliance with, 167
Errors in adjustments to ARM rates,
166
Examination procedures, 166
Home equity lines of credit,
amendment, 161
Interagency Enforcement Policy on,
167
New Mexico law, credit transactions,
162
Wisconsin law, preemption of
provisions, 162
Regulatory Improvement Project, 203
Regulatory Policy and Planning Committee,
203
Regulatory Review Section, 203
Regulatory simplification, 203
Reporting requirements, bank holding
companies, 193
Reserve requirements of depository
institutions, table, 243
Reserves and related items, 20,246
Resolution Trust Corporation, 21,23,24,
26,41, 59, 64,66,68,173,181,183
Risk-based capital, 183,191
Salaries
Board of Governors, 217
Federal Reserve Banks, 231
Index
Savings bonds (See also Treasury
securities), 205, 208
Secret Service, U.S., 179
Securities (See also specific types)
Credit, 244
Definitive, 208
Over-the-counter, 201
Regional Delivery System for savings
bonds, 205,208
Regulation, 200
Services, 208
Securities Act Amendments of 1975,188
Securities and Exchange Commission, 168,
200
Securities and Exchange Commission,
Market Reform Act of 1990, authority
under, 179
Securities Credit Transactions Handbook,
201
Securities Exchange Act of 1934,200
Special drawing rights, 222, 224, 246, 248,
250
State member banks (See also Member
banks)
Application regulation, 198
Assets and liabilities, 245
Bank Merger Act, 196
Banking offices, changes in number, 252
Banking premises, sale of retail, 192
Board decisions, 197
Complaints against, 170
Dividend payments, 192
Examinations and inspections, 185
Federal Reserve membership, 202
Financial disclosure by, 202
Interest rate risk, 193
Loans to executive officers, 202
Number, by class of bank, 245
Surveillance and monitoring, 188
Transfer agents, 188
Supervision
Information supplied to Treasury
Department for study of federal
deposit insurance, 190
Policy, 189
Safety and soundness, 185
Scope, regulatory responsibilities, 184
System Open Market Account, authority to
effect transactions in domestic
operations and in foreign currencies
Domestic Open Market Operations
Authorization for, 85, 100, 108,159
303
System Open Market Account—Continued
Domestic Policy Directive, 87,90,101,
110,117,128,136,144,151
Foreign currency directive, 89
Foreign currency operations
Agreement to "warehouse" foreign
currencies, 110
Authorization for, 87,109
Review of continuing authorizations, 100
Thrift Institutions Advisory Council, 271
Thrift Supervision, Office of, 201
Training, 193
Transfer agents, 188
Transfers of funds (See also Fees and
Regulations: E)
Federal Reserve operations, volume, 241
Priced services, Federal Reserve, 232
Transportation, U.S. Department of, 167,
168
Treasury securities
Bank holdings, by class of bank, 245
Federal Reserve Banks
Holdings, 222,224, 230, 246,248,
250
Income, 232
Open market transactions, 228
Regional Delivery System for savings
bonds, 205,208
Repurchase agreements
Tables, 222, 224, 228, 230, 246, 248,
250
Savings bonds, 205, 208
Treasury, U.S. Department of, 179, 181,
190,200,205,208,209, 187
Treasury, U.S. Department of, Financial
Action Task Force, 184
Truth in Lending Act, compliance with, 167
U.S. banking structure, regulation, 195
Uniform Commercial Code, 75
Unregulated practices, complaints about,
172
Wire transfer of funds, fees for services,
203,207
.
FRB 1-12,500-0491
304 77th Annual Report, 1990
Maps of the Federal Reserve System
1
9
MINNEAPOLIS
•
^
2
7
12
10 KANSAS CITY I 1
11 DALLAS
•
ALASKA
HAWAII
a.
•
4
H
RICHMOND
ST. LOUIS
8
•
O
B N E W YORK
CLEVELAND ~* •PHILADELPHIA
CHICAGO •
• SAN FRANCISCO
BOSTON
6ATLANTA
.
5
' ^
LEGEND
Both pages
• Federal Reserve Bank city
• Board of Governors of the Federal
Reserve System
Facing page
• Federal Reserve Branch city
— Branch boundary
NOTE
The Federal Reserve officially identifies
Districts by number and Reserve Bank
city (shown on both pages) and by letter
(shown on the facing page).
In the 12th District, the Seattle Branch
serves Alaska, and the San Francisco
Bank serves Hawaii.
The System serves commonwealths
and territories as follows: the New York
Bank serves the Commonwealth of Puerto
Rico and the U.S. Virgin Islands; the San
Francisco Bank serves American Samoa,
Guam, and the Commonwealth of the
Northern Mariana Islands. The Board of
Governors revised the boundaries of the
System most recently in August 1986.
Maps of the Federal Reserve System 305
2-B
5—E Baltimore
4-D
Pittsburgh
Charlotte
• Cincinnati
RICHMOND
CLEVELAND
6
"F
7-G
• Nashville
8-H
T
Birmingham J
Detroit •
Jacksonville
New Orleans
Memphis
Little )
Rock
y.
Miami
ATLANTA
CHICAGO
MS
ST. LOUIS
9-1
+s>
• Helena
M
MINNEAPOLIS
10-J
12-L
Omaha •
Denver
Oklahoma City
KANSAS CITY
11-K
Salt Lake City
• Los Angeles
SAN FRANCISCO
@FedFRASER