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Cover: 1 -month percentage changes in the Consumer Price Index less food 2 and energy (“core inflation”), 1 7 - 1 9 . The bottom line of the 97 92 scale represents a 2 percent annual rate, with each higher line showing a one percentage point increment. ISSN 0 64 7 8 1 -0 9 LIBRARY OF CONGRESS CATALOG CARD NUMBER: Federal Reserve Bank of Richmond Publication Number: 1 -7 6 6 24 P-l Additional copies of this Annual Report may be obtained without charge from: Public Affairs Federal Reserve Bank of Richmond P.O. Box 2 6 2 72 Richmond, Virginia 2 2 1 36 © printed on recycled paper 1 9 9 2 C Annual Report o n t e n t s Message from the Chairman 3 Message from the President 5 Robert P. Black: An Inflation Fighter Departs 6 Interest Rate Policy and the Inflation Scare Problem: 1979-1992 7 Highlights 20 Directors/Federal Reserve Bank of Richmond 23 Directors/Baltimore Office 24 Directors/Charlotte Office 25 Small Business and Agriculture Advisory Council 26 Operations Advisory Committee 27 Comparative Financial Statements 28 Summary of Operations 30 Officers 31 M essa g e fr o m th e C h a ir m a n Henry J. Faison Deputy Chairman Anne Marie Whittemore Chairman Even though 1992 was a year of uneven re covery, economic growth accelerated and infla tion declined. These positive developments were appropriate tributes to the Bank’s president, Robert P. Black, who retired at the end of the year. Throughout his 19-year tenure as president, Bob Black championed monetary policies aimed at promoting economic growth through price sta bility. The other directors and I take pride in our support of Bob's efforts and in knowing that in 1992 the economy moved closer to price stabil ity than at any time in the last 20 years. This year’s feature article, by incoming Direc tor of Research Marvin Goodfriend, reviews and analyzes the Federal Reserve's actions to reduce inflation during the 1980s and early 1990s. It, too, is a fitting tribute to Bob Black's unwavering resistance to inflation. We are also proud of the Bank's many accomp lishments during 1992. In particular, the Bank successfully met several momentous challenges in accommodating within our Richmond Office the headquarters of Federal Reserve Automation Ser vices that will serve the mainframe computer needs of all 12 Federal Reserve Banks. In light of these and many other internal and external changes during the year, we directors have been especially impressed by the dedication and hard work of the Bank's employees, who have ad justed well and who have performed, as always, with integrity, mutual respect, service, and excellence as their guiding standards. During my service on the Bank's board, I have been privileged to work with an extraordinary group of directors who have been astute in assess ing economic and financial developments and in providing valuable contributions to the quality of the Bank's work in all areas of its responsibility. I thank them particularly for the time and effort they devoted to the important task of selecting a new Bank president. I am quite grateful, too, for their personal friendship and support. I also thank our member banks and our other constituents. With their cooperation and support, the Federal Reserve Bank of Richmond achieved high levels of service despite the problems in financial markets and in the economy as a whole. In closing, the directors join me in offering A1 Broaddus, who has succeeded Bob as president, and his fellow staff members at the Bank our best wishes for 1993. We are confident that their judg ment, experience, and energy will serve the Bank and the public well in the year ahead. C a mn of th B a d h ir a e or 3 M essa g e fro m th e P r e s id e n t Robert P. Black President Jimmie R. Monhollon First Vice President As I ended my career as a central banker, 1was encouraged by the economy’s upward movement against a background of low and declining infla tion. The continued improvement in business and financial conditions and the favorable economic outlook were largely a result of a monetary policy that had been aimed at making progress toward price-level stability as a means of promoting economic growth. I am confident that the Bank will continue to support this objective under the capable leadership of AI Broaddus. During 1992, the combination of progress against inflation, unused productive capacity, slack labor markets, and slower-than-expected growth in the broader measures of the money supply caused the Federal Reserve to act several times to expand reserves in the banking system to support additional economic activity. As a result of these open market actions and a reduction of the discount rate to 3 percent in July, short-term interest rates declined by over a full percentage point during the year. As the national economy improved in 1992 in response to these and earlier stimulative monetary policy actions so, too, did economic activity and the health of financial institutions in the Pifth District. Even so, our supervisory workload in creased as new banking laws and regulations took effect and changes in the structure of District financial institutions continued at a rapid pace. Our volume and types of operations also in creased. In 1992, electronic services were ex tended to additional institutions, and electronic transmission of Treasury auction orders and bill ing statements were implemented. The Bank’s Fed Online Exchange with depository institutions was also expanded to handle bank holding com pany reports and reports required by the Home Mortgage Disclosure Act. The Bank continued to figure importantly in the Federal Reserve System’s move toward greater consolidation of its operations. In Richmond, which is the headquarters site for the planned consolidation of the mainframe computer appli cations for all Federal Reserve Banks, progress proceeded ahead of schedule. In addition, in 1992 che Treasury selected Richmond as one of five Federal Reserve sites to process savings bonds. Our staff also developed an automated system located in Richmond to replace the manual pro cessing of U.S. Treasury letters of credit at all Reserve Banks. During the year, the Bank was active in help ing the countries of the former Soviet Union develop the infrastructures of their banking and financial markets, both by lending expert technical advice and by inviting central bankers to study our operations. It is impossible for me to express adequately my thanks to the many individuals and groups with whom I have worked over the years. I owe much to AI Broaddus; Jimmie Monhollon, our first vice president; and our other staff members, past and present, for their dedication and support. I am particularly grateful to the directors, the members of the Federal Reserve Board, and the District's financial institutions for the support they pro vided me throughout the more than 37 years I was associated with the Bank. Pe idn rs e t R obert P . A n In fla tio n As the highlights elsewhere in this annual report indicate, 1992 was an excellent year for the Federal Reserve Bank of Richmond marked by significant achievements in a number of areas. All of these achievements reflect the strong leader ship of the Bank’s president, Robert P. Black, who retired at the end of the year. Bob Black first came to the Bank on a temporary assignment in 1954 while completing the requirements for his doc torate in economics at the University of Virginia. He left to teach for several months in 1955 and 1956 and then returned permanently to the Bank in 1956 as an associate economist. Following several earlier promotions, he was named first vice president—the Bank's chief operating officer—in 1968, and was appointed the Bank’s fifth presi dent on August 6, 1973. During his 37 years at the Bank—and especi ally over his nearly 20 years as president—Bob made genuinely extraordinary contributions to the Federal Reserve System, to the Bank's employees, to the banking and financial industries, and to Richmond and other communities in the Fifth Federal Reserve District. Among the most impor tant and—in all likelihood—durable of these con tributions was his tireless effort to improve the conduct of Federal Reserve monetary policy: in particular to insure that monetary policy provides a firm foundation for sustained real economic growth by achieving and maintaining stability of the price level. Indeed, the defining characteristic of Bob's career as a monetary policymaker was his unshakable conviction that the Fed can make its m a x im u m contribution to growth by maintaining a stable price level, and he argued eloquently and relentlessly for a congressional mandate that would designate price level stability clearly and unam biguously as the pre-eminent objective of monetary policy. 6 B la c k : F ig h ter D e p a r ts Given his convictions regarding monetary policy and price stability, it is of more than passing interest that Bob Black’s tenure as president of the Bank coincided closely with a notable longer-term rise and subsequent decline in U.S. inflation. As pointed out above, Bob took office in August 1973, just prior to the first of the two oil price “shocks” of the 1970s. These oil shocks con tributed to sharp increases in the inflation rate, which were reinforced by excessive growth in the nation’s money supply. This increase in the actual rate of inflation, which—as measured by the Consumer Price Index—peaked at 13.5 percent in 1980, was accompanied by a corresponding in crease in the public’s expectations of future infla tion and a marked reduction in the credibility of the Federal Reserve's strategy of resisting infla tion through monetary policy. The latter half of Bob’s tenure, in contrast, witnessed a substantial reduction in the inflation rate and at least a par tial restoration of the credibility of monetary policy as a weapon against inflation. Although pleased by this significant progress against inflation, Bob regrets that the inflationary pressures that remain were not eliminated from the economy prior to his retirement, and he looks forward to their early demise. Against this background, this year’s feature article by Marvin Goodfriend, the Bank’s incom ing director of research, reviews and interprets the Federal Reserve’s use of monetary policy to resist and, ultimately, to help reduce inflation over the period since 1979. The article emphasizes, in par ticular, the substantial economic cost of re establishing the System’s credibility as an inflation fighter once it has been compromised. The article and the policy lessons it underscores are especially appropriate ways to salute the achievements of one of the Federal Reserve’s and the nation’s most dedicated and persistent oppo nents of inflation—Bob Black. I n te r e s t R a te P o lic y a n d th e In fla tio n S c a r e P r o b le m : 1 9 7 9 -1 9 9 2 M arvin G oodfriend U.S. monetary policy since the late 1970s is unique in the post-Korean War era in that rising inflation has been reversed and stabilized at a lower rate for almost a decade. The current inflation rate of 3 to 4 percent per year, representing a reduc tion of 6 percent or so from its 1981 peak, is the result of a disinflationary effort that has been long and difficult. This article analyzes the disinflation by review ing the interaction between Federal Reserve policy actions and economic variables such as the long term bond rate, real GDP growth, and inflation. The period breaks naturally into a number of phases, with the broad contour of events as follows. A period of rising inflation was followed by disinflation which, strictly speaking, was largely completed in 1983 when inflation stabilized at around 4 percent per year. But there were two more “ inflation scares" later in the decade when rising long-term rates reflected expectations that the Fed might once more allow inflation to rise. Confidence in the Fed was still relatively low in 1983, but the central bank has acquired more credibility since then by successfully resisting the inflation scares. I analyze the conduct of monetary policy using a narrative approach that pays close attention to monthly movements of long- and short-term in terest rates. My approach is intended to comple ment existing studies such as the VAR-based analyses by Bernanke and Blinder (1992) and Sims (1992), and the more conventional studies of the period by Friedman (1988) and Poole (1988). The goal is to distill observations to guide future analysis of monetary policy with the ultimate objective of improving macroeconomic perfor mance. Based on a familiarity with the Fed and the work of Fed economists, I interpret policy ac tions in terms of the federal funds rate rather than a measure of money. I view the article as a case study of the Federal Reserve's interest rate policy. The Fed’s primary policy problem during the period under study was the acquisition and maintenance of credibility for its commitment to low inflation.1 I measure credibility by movements of inflation expectations reflected in the long-term interest rate. For much of the period the Fed’s policy actions were directed at resisting inflation scares signaled by large sustained increases in the long rate. A scare could take well over a year of high real short-term interest rates to contain. Moreover, just the threat of a scare appears to have made the Fed tighten aggressively in one instance and probably made it more cautious when pushing the funds rate down to encourage real growth on a number of occasions. Inflation scares are costly because resisting them requires the F"ed to raise real short rates with potentially depressing effects on business condi tions. Hesitating to react is also costly, however, because by revealing its indifference to higher ex pected inflation the Fed actually encourages workers and firms to ask for wage and price in creases to protect themselves from higher ex pected costs. The Fed is then inclined to accom modate the higher inflation with faster money growth. Inflation scares present the Fed with a funda mental dilemma the resolution of which has decided the course of monetary policy in the post-war period. Prior to the 1980s, the Fed generated an upward trend in the inflation rate by reacting to inflation scares with a delay. The more prompt and even preemptive reactions since the late 1970s have been a hallmark of the recent disinflation. The plan of the article is as follows. First, 1 discuss the premises that underlie my interpreta tion of monetary policy. A chronological analysis of policy follows. Finally, I summarize the main empirical findings in a series of observations that sharpen our understanding of the conduct of mone tary policy. A brief summary concludes the article. Tea thriss n rv epeidn a dd et ro rsac a t eFdr lRs r eBn o R h o d Teat lebnfite ge tlyfr m isuso swh h u o e io ic rs e t n irco f ee rh t h e e a ee v ak f ic mn. h ric e e d ra o d c si n it T o yCo a dRbr K ga wlla fr m rs n tio sa t eBn o Cnd , t eBn o Eg n, t eBn o I ly t eBado Gvr os imth ok n o e t in s e s o pee ta n t h a k f a a a h ak f nla d h a k f ta , h o r f oenr o t eFdr lRs r eSs m t eFdr lRs r eBn o S Lu , t eGauteSho o Bs esa t eUivrityo Cic g, t e1 9 Ntio a f h e ea ee v yte , h e ea eev ak f t. o is h r d a c ol f uins t h n es f h ao h 9 2 a nl Bra o Eo o icRsac S m e I sit t , t eS e is R s ak t eS is Ntio a Bn, a dt e Uivrity o Ntr Dm. Cme ts b ue u f c nm ee rh u mr nt ue h wd h ikb n, h w s a nl ak n h n es f o e a e o mn y Jh Bshn M h e Dts y Rbr Htzl, Pte I e n, a dGog Moewr a ovr hlp l. Teaa ssa dcnlui n aet oeo t eat o on oc e , ic al o e, o e t e e e r rlad n er e o r ee ls e y e fu h nlye n o c so s r hs f h uhr a dd nt ncsailyrflett ev w o t eFdr lRs r eBn o R h o do t eFdr lRs r eSs m n o o ees r e c h ie s f h e e a eev a k f ic mn r h e ea ee v yte . 7 P r e m is e s U n d e r l y in g t h e In t e r p r e t a t i o n o f P o l i c y The first step in any study of monetary history is to choose an indicator of the stance of policy. For example, in their study of U.S. monetary history Friedman and Schwartz (1963) focus on the monetary base (currency plus bank reserves) because it summarizes monetary conditions whether or not a country is on the gold standard and whether or not it has a central bank. Focus ing on the base allowed them to tie together a long period marked by many institutional changes, making possible their famous empirical findings about money, prices, and business conditions. For my purposes, however, the base is not a useful indicator. Although the Fed could have used the base as its instrument by controlling it closely in the short run, it has not chosen to do so. Instead, the Fed has chosen to use the federal funds rate as its policy instrument. Hence this study, which seeks to investigate the short-run interactions between Fed policy and other economic variables, interprets policy actions as changes in the funds rate. The remainder of this section discusses the premises underlying my interpretation of policy. Interest R ate T a rg etin g Throughout its history the Fed’s policy instru ment has been the federal funds rate or its equivalent. At times, notably from the mid to late 1970s, it has targeted the funds rate in a narrow band commonly 25 basis points wide (Cook and Hahn 1989). More often, it has targeted the funds rate indirectly, using the discount rate and bor rowed reserve targets. Although the funds rate appears noisier under borrowed reserve targeting than under direct funds rate targeting, it is never theless tied relatively closely to a chosen funds rate target (Goodfriend 1983). Since a borrowing target tends to be associated with a particular spread between the funds rate and the discount rate, targeting borrowed reserves lets a discount rate adjustment feed through one-for-one to the funds rate. Forcing banks to borrow more reserves at a given discount rate also raises the funds rate (Goodfriend and Whelpley 1986). The Fed has used the borrowed reserve procedure to help manage the funds rate since October 1982 (Wallich 1984, Thornton 1988). Significant funds rate movements since then should be viewed as deliberate target changes. It is less obvious that federal funds rate changes in the period of the New Operating Procedures from October 1979 to October 1982 should be interpreted as deliberate. Under those procedures, the Fed was to fix the path of nonborrowed reserves available to depository institutions so that increases in the money stock would force banks to borrow more reserves at the discount window and thereby automatically drive up the funds rate and other short-term interest rates. Despite the widespread emphasis on automatic adjustment in the description of the post-October 1979 procedures, however, it was well-recognized at the time that movements in the funds rate would also result from purely judgmental actions of the Federal Reserve (Levin and Meek 1981, Annual Reports of Open Market Operations 1981-83). These actions included: (1) judgmental adjust ments to the nonborrowed reserve path taken at FOMC meetings that changed the initially ex pected reserves banks would be forced to borrow at the discount window (in effect, a funds rate target change by the FOMC), (2) judgmental adjustments to the nonborrowed reserve path between FOMC meetings, (3) changes in the dis count rate, and (4) changes in the surcharge that at times during the period was added to the basic discount rate charged to large banks. Cook (1989) presents a detailed breakdown of policy actions affecting the funds rate during this period showing that two-thirds of funds rate changes were due to judgmental actions of the Fed and only one-third resulted from automatic adjustment. Moreover, as we shall see below, the large funds rate movements in the nonborrowed reserve targeting period are overwhelmingly attributable to deliberate discretionary actions taken by the Fed to manage short-term interest rates. Therefore, it is more accurate to refer to the period from October 1979 to October 1982 as one of aggressive federal funds rate targeting than one of nonborrowed reserve targeting. T h e R o le o f M o n e y The Federal Reserve was established with a mandate to cushion short-term interest rates from liquidity disturbances. Between the Civil War and the creation of the Fed, such disturbances caused short rates to rise suddenly and sharply from time to time. While generally trading in a range between 4 and 7 percent, the monthly average call loan rate reported by Macaulay (1938) rose roughly 5 percentage points in one month on 26 occasions between 1865 and 1914. Moreover, as a result of banking crises, sudden changes of over 10 percentage points occurred 8 times during the same period. These episodes were distinctly temporary, ranging from one to four months, with many lasting for no more than one month. Such extreme temporary spikes are ab sent from interest rates since the founding of the Fed (Miron 1986, Mankiw, Miron, and Weil 1987). In line with its original mandate, the Fed has routinely accommodated liquidity disturbances at a given targeted level of short-term interest rates. Furthermore, by giving banks access to the dis count window, the Fed has been careful not to exert excessively disruptive liquidity disturbances when changing its interest rate target.2 It follows that easing or tightening has mainly been accom plished by changing the level of short rates to set in motion forces slowing the growth of money de mand in order to allow a future reduction in money growth and inflation. T o view the Federal Reserve's policy instrument as the federal funds rate is thus to set money to the side, since at any point in time money demand is accommodated at the going interest rate. This does not say, however, that money can be left out of account altogether. The Fed, the markets, and economists alike recognize that trend inflation is closely connected to trend money growth, and that achieving and maintaining price stability requires controlling money. During the period under study, money growth was often viewed as an important indicator of future inflation or disinflation by both the Fed and the markets. Furthermore, we know from the work of McCallum (1981) and others that an interest rate policy just describes how changes in interest rates correspond to changes in the money stock. At a deeper level, then, there is an equivalence be tween talking in terms of interest rates or money. The important difference is that simple interest rate rules descriptive of policy have implications for how money and prices actually evolve over time (Goodfriend 1987, Barro 1989). We should keep this in mind when reviewing the current period for clues about how policy influences the inflation rate. Ultimately we seek to understand what it is about interest rate policy that turns one time macroeconomic shocks into highly persistent changes in the growth of money and prices. Interpreting C o -m o v e m e n ts B etw een S h ort and L o n g Rates The Fed targets the funds rate in order to stabilize inflation and real economic growth as best it can. Output and prices, however, do not respond directly to weekly federal funds rate movements but only to longer-term rates of perhaps six months or more. Hence, the Fed targets the funds rate with the aim of managing longer-term money market rates. It exercises its leverage as follows. The market determines longer-term rates as the average expected level of the funds rate over the relevant horizon (abstracting from a time varying term premium and default risk). T o see why, con sider the pricing of a three-month bank loan. A bank could fund the loan with a three-month CD, or it could plan to borrow federal funds overnight for the next three months. Cost minimization and competition among banks keep the CD rate in line with the average expected future funds rate; com petition in the loan market links loan rates to the CD rate and expected future funds rates. Finally, arbitrage among holders of money market securities links Treasury7bill and commercial paper rates to CD rates of similar maturity. Since simplicity is crucial in communicating policy intentions, the Fed tries to manage its funds rate target to maintain an expected constancy over the near-term future. Target changes are highly persistent and seldom quickly reversed, so that a target change carries the expected level of the funds rate with it and thus longer-term money market rates too.3 In this way, interest rate policy as practiced by the Fed anchors the short end of the term structure of interest rates to the current federal funds rate. By the above argument, the interest rate on long bonds also must be determined as an average of expected future short rates. At best, the Fed affects short-term real interest rates temporarily, so average future short rates over the horizon of a 30-year bond should sum to a real interest rate that varies in a range perhaps 1 or 2 percentage points around 3 percent per year plus the expected trend rate of inflation.4 From this perspective, we can view fluctuations in the long-term rate as driven by: (1) a component connected with the current funds rate target that anchors short matur ity rates and (2) a component driven by expecta tions of inflation. Because the present discounted value of coupon payments far out in the future is smaller at higher interest rates, we should expect 9 effect on the long b o n d at higher rates o f interest.5 It is useful to distinguish three sou rces o f en su in g re co v e ry exerts tw o co n flictin g forces. It tends to raise the long rate by reversing the cyclical funds rate d e clin e , but it also reverses som ew h at interaction b e tw e e n the federal funds rate and the lon g-term rate: the e x p e cte d rise in inflation, ten din g to low er the lon g rate. F or a relatively b rief re cession with a given funds rate target ch ange to exert a greater P ure ly C y c lic al F u n d s R a te P olicy A ctions. The F ed routinely low ers the funds rate in resp on se to cy clica l dow n tu rn s and raises it in cyclical exp a n sion s. I call such p o lic y actions purely cy clica l if th ey maintain the g o in g trend rate o f inflation. E ven pu rely cy clica l p o lic y actions exert a pull on lon ger rates, h o w e v e r, so th ey are a sou rce o f p ositiv e c o -m o v e m e n t b e tw e e n the funds rate and the lo n g rate. But b e ca u se cyclical actions strongly in flu en ce on ly the first few years o f e x p e c te d future sh ort-term interest rates, on ly a relatively small fraction o f purely cy clica l funds rate ch anges are transm itted to the lon g rate. Long- R un In fla tio n . little e x c e ss iv e easing, the cy clica l funds rate e ffe ct w ou ld dom in ate the inflation effe ct, so the lon g rate w ou ld ten d to rise with the funds rate during the re co v e ry . T h u s , the lo n g rate w ou ld m o v e o p p o s ite from the funds rate for on ly a few m on th s near a recession trough. N o w consider an aggressive increase in the funds rate in ten d ed to bring d o w n the tren d rate o f in flation. S u ch a tightening poten tially shifts both co m p o n e n ts o f the lon g rate sin ce short rates rise and e x p e c te d long-run inflation m ay fall. O n e e x p e cts the first e ffe ct to d om in a te initially, h o w e v e r, b eca u se a large aggressive increase in short rates exerts an im m ediate significant upward C h a n g es in the trend rate pull on the lon g rate, w hile the p u b lic m ay not o f inflation are a s e c o n d sou rce o f p o sitiv e c o y et have c o n fid e n c e in the disinflation. If the F ed m o v e m e n t b e tw e e n the funds rate and the lon g rate. T h e lon g rate m o v e s autom atically with inflation ex p e cta tio n s . T h e funds rate d o e s not, persists with sufficiently high short-term real rates, h o w e v e r, unless the F ed m akes it d o so. N e v e r theless, the F ed often c h o o s e s to h old short-term real rates relatively stead y in the p re se n ce o f rising or falling inflation b y m o v in g the funds rate up or d o w n to allow for a rising or falling inflation p rem iu m . D o in g so cau ses short and lon g rates to m o v e togeth er. h ow ev er, inflation and real grow th eventually slow and the F ed can tentatively brin g rates d ow n som ew h a t. A d eclin in g lon g rate, at this p oin t, w ou ld suggest that the F e d ’ s disinflation has acqu ired s o m e credibility. I n f l a t io n S c a r e s I call a significant lo n g rate rise in the a b sen ce T h e F ed o f an aggressive funds rate tightening an inflation scare sin ce it reflects rising e x p e c te d long-run in occasionally takes particularly aggressive funds rate p o lic y a ctions to e n co u ra g e real grow th or to stop fla tion .6 Inflation scares are o f c o n c e r n b eca u se higher inflation, if realized, w o u ld red u ce the and reverse a rising rate o f inflation. A ggressive e ffic ie n cy o f the paym en ts sy stem , with negative actions c o m b in e an e ffe ct on the lon g-term real c o n s e q u e n c e s for e m p lo y m e n t, p rod u ctivity, and rate with a potential change in the long-run rate o f inflation. T h e real rate e ffe ct m o v e s the lon g rate in the sam e d irection as the funds rate, w hile the inflation effect m o v e s the lon g rate in the op p osite e c o n o m ic grow th . M o r e o v e r, scares are costly Aggressive F u n d s R a te P olicy A ctions. direction. T h u s the net effect o f aggressive actions on the lon g rate is som ew h a t c o m p le x . C o n s id e r an aggressive red u ction in the funds b e ca u se th ey presen t the F e d with a difficult dilem m a. R esistin g th em requires the F ed to raise real short rates with poten tia lly d ep ressin g effects on business con d itio n s. Failing to resp on d p ro m p tly , h o w e v e r, can create a crisis o f c o n fi d e n c e that en cou rag es the higher inflation to m aterialize: w ork ers and firm s ask for w age and rate to en cou rag e real grow th . Initially, funds rate actions taken to fight re ce ssio n pull the lon g rate d o w n to o . F low ever, e x c e ss iv e easing that raises p rice increases to p ro te ct th em selv es from higher e x p e c te d co s ts. In short, b y hesitating, the F ed e x p e c te d inflation can cau se the lon g rate to sets in m o tio n higher inflation that it is then in reverse d irection and b eg in to rise, e v e n as the F ed con tin u es to push short rates d o w n . T h u s w e clined to a ccom m od a te with faster m o n e y grow th. T h e record o f rising inflation and disinflation m ight e x p e c t to see the lo n g rate m o v e in the o p p o s ite d irection from the funds rate near c y c li cal troughs. A funds rate tightening during the rev iew ed b e lo w con tain s ex a m p le s o f scares fo l lo w e d b y higher m o n e y grow th and inflation, as 10 w ell as scares su ccessfu lly resisted b y the F e d .7 A R e v i e w o f In t e r e s t R a t e P o l i c y T h is study fo cu se s on the p eriod o f inflation fighting beginning in O cto b e r 1979. N evertheless, I begin m y review b y briefly describing con ditions in the im m ediately p re ce d in g years. F or the m ost part, data d iscu ssed th rou ghou t are sh ow n in the chart and are given in the tables in clud ed at the en d o f the article. R is in g I n f l a t io n : th e L a t e 1 9 7 0 s S e p te m b e r 1 9 7 9 . O v e r the sam e p e rio d , the F ed steadily increased the federal funds rate from around 4 .7 p ercen t to 1 1 .4 p e rce n t, raising short term real rates from a range b e tw e e n 0 to - 2 p e rce n t to b e tw e e n 0 and + 2 p e rce n t. T h e negative short-term real rates at the b egin n in g o f the p e riod suggest that initially the F ed was stimulating real growth, though the steady increase in real short rates rep resen ted a m o d e st effort to resist inflation. Inflation was rising gradually in the late 19 7 0 s, with rates o f 7.3 percent, 8 .4 percent, and 8 .7 per A b o r t e d I n fl a t io n F ig h t in g : O c t o b e r 1 9 7 9 t o J u ly 1 9 8 0 cen t in 197 7, 1 9 7 8 , and 1979 as m easured b y By the tim e Paul V o lck e r b e c a m e L e d C hair m an in A ugust 1 9 7 9 , oil p rice increases follow in g the Iranian revolu tion in N o v e m b e r 1978 greatly fourth quarter o v er fourth quarter changes in the G D P deflator. T h e co rre s p o n d in g real G D P grow th rates w ere 4 .4 p e rce n t, 6 .0 p ercen t, and 0 .9 p e rcen t. R isin g inflation throu ghou t the late 1 970 s carried the 3 0 -y ea r g o v e rn m e n t b o n d rate from 7 .8 p ercen t in early 1977 to 9 .2 p ercen t b y w o rs e n e d the inflation o u tlo o k . O il p rices w ere to d o u b le b y early 1980 and triple b y early 1981 from N o v e m b e r 1978 levels, and b y the fall o f 197 9 the F ed felt that m o re drastic action was FEDERAL FUNDS RATE AND 30-Y E A R BOND RATE Jan u ary 1977 - D ecem ber 1992 Percent Per Annum 1977 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 Percent Change, 4Q to 4Q: 4.4 6.0 0.9 -0.2 -0.1 -1.1 6.7 4.5 3.3 2.2 4.5 3.3 1.6 -0.5 0.1 2.9 Implicit Price Deflator 7.3 Real GDP 8.4 8.7 10.1 9.4 4.4 4.0 4.3 3.6 2.6 3.3 4.2 4.4 4.5 3.4 2.4 11 n e e d e d to fight inflation. T h e a n n o u n ce m e n t on O c t o b e r 6 , 19 7 9 , o f the sw itch to n o n b o rro w e d reserve targeting officially o p e n e d the inflation fighting p erio d . T h e first aggressive p o licy actions in this period to o k the m on th ly average funds rate from 11.4 w ou ld have c o m e d o w n as the re ce ssion ran its cou rse in 198 0 if the F ed had then sustained its high interest rate p o licy . T h e im position o f credit con trols in M arch , h o w e v e r, fo rc e d the F ed to abort that p o licy . S ch reft (1 9 9 0 ) argues persua sively that b y en cou rag in g a d e clin e in con su m er A pril 1 9 8 0 . C o o k (1 9 8 9 ) reports that on ly 1 p e r sp en d in g, the credit co n tro l program was largely resp on sib le for the ex trem ely sharp - 9 . 9 p ercen t cen ta ge poin t o f this 6 p oin t rise can b e attributed to au tom atic adjustm ent. Virtually all o f it rep re annualized d e clin e in real G D P in the se co n d quarter o f 1 9 8 0 . S u pp ortin g her v iew is the fact sen ted d eliberate p o lic y actions taken b y the F ed to increase short-term interest rates. It was the m ost aggressive series o f actions the F ed had taken in the p ost-w a r p e rio d ov er so short a tim e, al that personal con su m ption expenditures accounted p erce n t in S e p te m b e r 1979 to 1 7 .6 p e rce n t in thou gh the 5 p ercen ta g e p oin t in crease from January to S ep tem ber o f 1973 was alm ost as large. F or its part, the 3 0 -yea r rate rose sharply from for abou t 80 p e rce n t o f the d e clin e in real output, m ore than tw ice its average 35 p e rcen t con trib u tion in post-w ar U .S . recession s. A cc o m p a n y in g th e dow n tu rn in e c o n o m ic ac tivity was a sharp fall in the d em a n d for m o n e y and bank reserves that, accordin g to C o o k (1 9 8 9 ), 9 .2 p e rce n t in S e p te m b e r to a tem p ora ry pea k o f 12.3 p e rce n t in M arch after w h ich it fell b a ck to 1 1.4 p e rce n t in April. A clo se r lo o k reveals the cau sed a 4 .2 p ercen ta g e p oin t autom atic d eclin e sou rces o f this sharp rise in the lo n g rate. T h e 2 .3 p e rce n ta g e p oin t funds rate ju m p from S e p tem ber to O c to b e r raised the lon g rate by 0 .7 p er actions, e .g ., reducing the discount surcharge, that re d u ce d the funds rate b y an additional 4 .3 p er centage points. T h e funds rate then held in a range b e tw e e n 1 3.2 p e rce n t and 14.1 p e rce n t through F ebruary. January 198 0 later turned out to b e an N B F R busin ess cy c le peak, and e v id e n c e o f a w ea k en in g e c o n o m y cau sed the F e d to pause in its aggressive tightening. But with the funds rate relatively steady, the lon g rate ju m p e d sharply b y o f the funds rate from April to July. T h e F ed e n h a n ced the autom atic easing with judgm en tal cen ta g e p oin ts ov er this p e riod . T h e sharp interest rate decline co u p led with the lifting o f cred it co n tro ls in July led to strong 8 .4 percen t annualized real G D P grow th in the fourth quarter o f 1980. B ecause the credit controls caused the F e d to interrupt its inflation-fighting effort, inflation rose through the year from an annual rate o f 9 .8 p e rce n t in the first quarter to 10.9 p ercen t around 2 p ercen ta g e p oin ts b e tw e e n D e c e m b e r and F ebruary, signaling a serious inflation scare. in the fourth quarter as m easured b y the G D P deflator. T h e scare was p ro b a b ly ca u sed in part b y the o n g o in g oil p rice rises, with the S o v ie t invasion o f A fghanistan in D e c e m b e r also playing a role. A g g r e s s iv e D is in fla t io n a r y P o lic y : A u g u st 1980 to O c to b e r 1982 T h e F e d ’ s hesitation to p r o c e e d w ith its tighten ing, h ow ever, probably contributed to the collapse o f c o n fid e n c e . In any ca se, the F e d rea cted with an e n o rm o u s 3 p ercen ta g e p oin t in crease o f the m on th ly average funds rate in M a rch , o n ly It was clear in late sum m er and early fall o f 1980 that inflationary p ressu res w ere as stron g as ev er. A fter b e in g pu lled d o w n abou t 1.6 p ercen tag e p oin ts b y the aggressive funds rate easing from 1 April to June, the 3 0 -y ea r rate rose b y about 4 0 p ercen ta g e p oin t o f w h ich was d u e to the auto m atic adjustm ent. T h e lon g rate hardly m o v e d in respon se, suggesting that the positive effect on the basis points b etw een June and July as the F ed c o n tinued to push th e funds rate d o w n another 4 0 basis p oin ts. T h e reversal signaled an inflation lon g rate o f the aggressive tightening was offset scare in d u ced b y the e x ce ss iv e ly aggressive easing, and the F e d began an u n p reced en ted aggressive tightening. O f the rou gh ly 10 p e rce n t b y a d e clin e in e x p e c te d inflation. M o r e o v e r , the lon g rate actually ca m e d o w n b y 0 .9 p e rce n ta g e p oin ts in April e v e n as th e F ed p u sh e d the funds rate up another 0 .4 p ercen ta ge p oin ts, suggesting age p oin t rise in the m on th ly average funds rate from July to D e c e m b e r 1 9 8 0 , C o o k (1 9 8 9 ) that the F ed had already b egu n to w in cred ib ility for its disinflationary p o licy . attributes o n ly abou t 3 p ercen ta g e p oin ts to the autom atic adju stm ent. T h u s , the run-up o f the W h e n o n e co n sid e rs that bu sin ess p e a k e d in January, there is reason to b e lie v e that inflation funds rate to its 19 p e rce n t p e a k in January 1981 marked a deliberate return to the high interest rate 12 p o licy . A s m easu red b y the G D P deflator, w h ich was rising at nearly a 12 p e rce n t annual rate in the first quarter o f 1981, real short-term rates w ere a high 7 p ercen t at that p oin t. As soon as the funds rate pea k had b e e n established, h ow ever, very slow grow th in M l and ba n k reserves au tom atically put d ow n w a rd pressu re on the funds rate. A c c o r d in g to C o o k 9 p ercen ta g e p o in t funds rate d e clin e in the n o n b o r r o w e d reserve targeting p e rio d , w h ich e n d e d form ally in O cto b e r o f 1982. T h is last great decline sh ou ld b e seen as a deliberate funds rate easing calcu lated to a ch ie v e a sustained red u ction in inflation w ith ou t e x c e s s iv e harm to real g row th . (1 9 8 9 ), about 3 .4 p ercen ta g e p oin ts o f the 4 p erce n ta g e p oin t d rop in the funds rate b e tw e e n T h e lo n g rate p ro v id e s a p ictu re o f the F e d ’ s progress in reducing the trend rate o f inflation. T h e 3 0 -y ea r rate rose abou t 5 p e rce n ta g e p oin ts from a trough in June o f 1 9 8 0 to its 1 4 .7 p e rce n t pea k January and M arch was attributable to the autom atic adjustm ent. Since the autom atic adjust m en t had co rre ctly signaled w ea k n ess in the in O c t o b e r 1 9 8 1 . A b o u t 2 p e rce n ta g e p oin ts o f that rise rep resen ted a reversal o f the d e clin e in the secon d quarter o f 1980. T h e remaining 3 point e c o n o m y in the s e c o n d quarter o f 1 9 8 0 , the F ed gain through O c t o b e r 1981 reflected a c o n tin u ing inflation scare. T h e sharp rise in the lon g rate after the funds rate had rea ch ed its p ea k in was initially inclined to let rates fall in early 1 9 8 1 . H o w e v e r , real G D P actually g rew at a 5 .6 p e r cen t annual rate in the first quarter, and w h en the strength o f the e c o n o m y b e c a m e clear, the F ed early 1981 p ro b a b ly co n trib u te d to the F ed 's inclination to persist with its 19 percen t funds rate to o k deliberate actions to ov errid e what it to o k until A ugust to b e a false signal that disinflation had taken hold. R eversin g field, it ran the funds rate b a ck up to declining trend in the lon g rate from O cto b e r 1981 19 p e rce n t b y June, using a series o f d eliberate tightening actions to su p p lem en t what C o o k (1 9 8 9 ) reports w ou ld on ly have b e e n a 0 .8 p e r cen ta g e p oin t autom atic funds rate rise. 1 9 8 1 . M o r e o v e r , the discern a b le to A ugu st 1982 in d ica ted that the p o lic y was still ex ertin g disinflationary pressu re. W h e n the F ed finally d e c id e d to relax its disinflationary p o licy b y d ro p p in g the fu n ds rate b y o v e r 4 p ercen ta g e p oin ts in the su m m er o f 1 9 8 2 , the lon g rate also tionary p o licy began to take h old . A nn u alized real G D P grow th was — 1.7 p e rce n t in the s e co n d quarter o f 1 9 8 1 . T h e third quarter p o s te d 2.1 fell b y around 3 .5 p ercen ta g e p oin ts. W e can d e c o m p o s e this last d eclin e in the lon g rate into a real c o m p o n e n t and an inflation e x p e c tations c o m p o n e n t using e v id e n c e from earlier in p ercen t real grow th , but an N B E R business c y c le the aggressive funds rate targeting p e rio d . T h e p ea k was reach ed in July and real grow th fell to - 6 . 2 p ercen t in the fourth quarter o f 1981 and sharp 2 .3 p e rce n ta g e p oin t funds rate rise from S e p te m b e r to O c t o b e r 197 9 pu lled the lo n g rate up 0 .7 p e rce n ta g e p oin ts; and the sharp 8 .6 p ercen ta g e p o in t funds rate red u ction b e tw e e n April and June 1 9 8 0 pu lled the lon g rate d o w n It w as not lon g b e fo r e the aggressive disinfla - 4 . 9 p e rce n t in the first quarter o f 19 8 2 . M e a n w h ile, the quarterly inflation rate as m easu red b y the G D P deflator fell from 11.8 percent in the first quarter o f 1981 to the 4 .5 p e rce n t range b y early 1982. T h e F ed b rou g h t the funds rate d o w n from 19 p e rce n t at th e bu sin ess c y c le p ea k in July to 13.3 p e rce n t in N o v e m b e r and held the funds rate in the 13 to 15 p e rce n t range until the su m m er o f 1 9 8 2 , w h en it b rou gh t short rates d ow n another 4 p ercen ta g e p oin ts to around 10 p e rce n t. T h e funds rate red u ction through N o v e m b e r 1981 was large in nom inal term s, but w h e n o n e co n sid e rs that inflation had d eclined to the 4 .5 percen t range b y early 1 9 8 2 , the funds rate d e clin e actually represented a 1 or 2 percentage point rise in short term real rates. T h u s , o n e should still v ie w p o licy as aggressively disinflationary in early 1 9 8 2 . As calculated b y C o o k (1 9 8 9 ), autom atic adjustm ents a cco u n te d for on ly 1 p ercen ta g e p oin t o f the final 1.6 p ercen ta g e p o in ts. T a k in g 25 p e rce n t as the fraction o f aggressive funds rate p o lic y actions transm itted to the lon g real rate, about 2 .5 p e r cen ta g e p oin ts o f the 3 .5 p e rce n ta g e p oin t fall in the lo n g rate in the su m m er o f 1982 re fle cte d a red u ction o f inflation e x p e cta tio n s. E s t a b lis h in g C r e d i b i l i t y : N o v e m b e r 1 9 8 2 t o S p r in g 1 9 8 6 R eal G D P g row th was still p o o r in the s e c o n d half o f 1 9 8 2 , running - 1 . 8 p ercen t and 0 .6 p e rce n t in the third and fourth quarters, r e s p e c tively. C o n s e q u e n tly , th e F e d co n tin u e d to ease after relaxing its disinflationary p olicy , pushing the m on th ly average fu n ds rate d o w n to 8 .5 p ercen t b y February7 1 9 8 3 . N o v e m b e r 1982 turned out to b e an N B E R bu sin ess c y c le trough, and real 13 G D P g row th was 2 .6 p e rce n t in the first quarter o f 1 9 8 3 . But the F e d k ep t the funds rate around 8 .6 p e rce n t through M a y w h ile the lo n g rate re stron g 5 .4 p e rce n t rate in the first quarter. W ith inflation appearing to have settled d ow n in the m ained steady at around 10.5 p ercen t. It gradually beca m e clear, h ow ev er, that a strong recov ery had 4 p ercen t range, the F ed m o v e d to en courage real g row th b y d ro p p in g the funds rate to the m id -6 p e rce n t range. S tron g real grow th in 1987 was b eg u n . R eal G D P g rew at a spectacu lar 11.3 p e r cen t annual rate in th e s e c o n d quarter o f 1983 w h ich the lon g rate rose 2 full p e rcen ta g e p oin ts and a cco m p a n ie d b y still another inflation scare in p e rce n t, from around 7 .6 p e rce n t in M a rch to 9 .6 p ercen t 7 .9 p e rce n t, and 5 .4 p e rce n t in the follow in g four quarters. in O c t o b e r . A lth ou g h real G D P grow th was very strong T h e lo n g rate rose from 1 0.5 p e rce n t in M a y 1983 to 1 1 .8 p e rce n t in A u gu st, initiating an th rou ghou t the year, this tim e the F ed resp on d ed to the scare with on ly a relatively m o d e st increase inflation scare o n ly a year after the F ed had in the funds rate. A s it h a p p e n e d , the scare eased relaxed its disinflationary p o licy . T h e F ed reacted by raising the funds rate from 8 .6 p e rce n t in M a y so m e w h a t after the O c t o b e r s to c k m arket crash, to 9 .6 p e rce n t b y A u gu st. A n n u alized quarterly inflation as m easured b y the G D P deflator was 4 .8 p ercen t or b e lo w th rou ghou t 1983 and 1984 with W ith real grow th still reason ably stron g in 19 88, the F e d p r o c e e d e d to raise the fu n ds rate sharply from the 6 to 7 p e rce n t range in early 198 8 to a the e x c e p tio n o f th e first quarter o f 1 9 8 4 , w h en pea k o f 9 .9 p ercen t in M arch 1 9 8 9 . T h o u g h there was s o m e e v id e n c e o f a m od est at rates of 6 .1 p e rce n t, 7 .0 it was 6 p e rce n t. N e v e rth e le ss , the lon g rate c o n tinued its rise in early 1 9 8 4 , m o v in g up from the 1 1 .8 p e rce n t level it had m aintained sin ce the p rev iou s su m m er to a 1 3 .4 p e rce n t pea k in June although the lo n g rate rem ained a b o v e 8 p ercen t. rise in inflation in 1 9 8 8 , the sustained funds rate tightening during the year is u niqu e in that it was u ndertaken w ith ou t a rise in the lon g rate. A 19 8 4 . A m a zin g ly , this was o n ly abou t a p e rce n t age p oin t short o f its O c t o b e r 1981 p ea k , ev en p re e m p tiv e tightening m ay have b e e n n e e d e d to reverse the p e rce p tio n that p o lic y had eased thou gh b y 1 9 8 4 inflation was 4 or 5 p ercen ta g e p erm an en tly follow in g the s to ck m arket crash. A t any rate, the result was an in crease in credibility reflected in a further d e clin e in the lon g rate in p oin ts low er than in 1 9 8 1 . T h e F ed tigh ten ed in an effort to resist the o n g o in g inflation scare, raising the funds rate to an 11.6 p ercen t pea k in A ugust o f 1984. T h e lon g rate began to d eclin e in June 1 984, indicating that 19 8 9 . T h o u g h that fall was partially reversed in early 1 9 9 0 , a gen tly d eclin in g trend in the lon g the scare had b e e n co n ta in e d . T h e 7 p e rce n t real short rates n e e d e d to con ta in the scare ultim ate rate was d iscern able b y th en , in dicatin g grow in g c o n fid e n c e o n the part o f the p u b lic in the F ed 's c o m m itm e n t to lo w inflation. ly brought quarterly real G D P grow th dow n to the m ore n orm al 2 to 3 p e rce n t range in the s e c o n d T h e 1 9 9 0 -9 1 R e c e s s i o n half o f 1984. T h e F e d then low ered the funds rate rapidly b y 3 .2 p e rce n ta g e p oin ts fro m A ugust to D e c e m b e r and h eld it around 8 p e rce n t through 198 5 . M ea n w h ile, the lo n g rate fell abou t 6 p e r cen ta g e p oin ts fro m its June 198 4 pea k to the m id -7 p e rce n t range b y the spring o f 1 9 8 6 . By then, th e lo n g rate was 3 p ercen ta g e poin ts b e lo w w h ere it had b e e n at th e start o f the 1983 scare. T h e F e d 's co n ta in m e n t o f the scare apparently m ad e the p u b lic co n fid e n t o f another 3 p e rce n t age p oin t re d u ctio n in the trend rate o f inflation. M a in t a i n in g C r e d i b i l i t y : S p r in g 1 9 8 6 t o S u m m e r 1 9 9 0 Real G D P growth w eak en ed considerably in the s e co n d quarter o f 1 9 8 6 to - 0 . 3 p ercen t from the 14 T h e p eriod o f w ea k real grow th in 1989 en din g in an N B E R business c y c le peak in July 1990 may have b e e n partly du e to the high real short rates. T e m p o r a r y oil p rice increases fo llo w in g the in vasion o f Kuwait, h o w e v e r, also h elp ed accou n t for th e -1 .6 p e rce n t real g row th in the third quarter o f 19 9 0 , - 3 . 9 p e rce n t real grow th in the fourth quarter, and - 3 . 0 p e rce n t in the first quarter o f 1 991. T h e F e d re sp o n d e d to the r e ce ssio n b y bring ing the funds rate d o w n from slightly a b ov e 8 p e rce n t in the fall o f 1 9 9 0 to around 3 p ercen t b y th e fall o f 1 992. It is rem arkable that this sus tained easin g has n ot y et cau sed th e lon g rate to rise, e v e n though real short rates are n ow around z e ro . R eal short rates w e re also abou t z ero w h en e x ce ss iv e easing sparked the inflation scare in the su m m er o f 1 980 , but th ey w ere around 4 p ercen t w h en ex cessive easing triggered the sum m er 1983 m arket crash. T h e current funds rate easing has y e t to trigger a rise in th e lo n g rate, but the scare, and around 3 p e rce n t at the tim e o f the scare in the spring o f 1 9 8 7 . T h e real short rate possibility o f an inflation scare has probably limited the funds rate d e clin e som ew h a t. floo r at w h ich easy m on eta ry p o lic y b e c o m e s e x cessiv e d ep en d s on such factors as the u n e m p lo y aggressive disinflationary p o lic y a ctions taken in m en t rate, g ov ern m e n t fiscal p o lic y , and the strength o f investm ent and con su m p tion dem an d .8 F or e x a m p le, the d ep ressin g e ffe ct o f the credit co n tro l program on co n s u m e r sp en d in g m ay help a ccou n t for the real rate gettin g as low as it did in 1980 b e fo re triggering a scare. L o n g rates, h ow ev er, m ay also b e m o re tolerant o f aggressive funds rate easing w h en the p u b lic is m o re c o n fi d en t o f th e F ed 's co m m itm e n t to maintain a low trend rate o f inflation. O b s e r v a t io n s T h e record o f interest rate p o lic y rev iew ed a bove contains a num ber o f em pirical findings that are im portant for interpreting and evaluating m on etary p o licy . T h is se ctio n sum m arizes the main findings in a series o f ob serv a tion s. 1) Inflation scares appear to b e central to u nderstanding the F e d ’ s m a n a gem en t o f sh ort term interest rates. T h e gradual funds rate rise from January 1977 to O c t o b e r 1 979 was u nder taken in an en v iron m en t o f slow ly rising lon g rates. T h e sharp lo n g rate rise in early 1 980, during a 4 -m o n th pause in the funds rate tighten ing, was probably an im portant factor inducing the F ed to undertake its en orm ou s 3 percen tage point tightening in M arch . Sharply rising lon g rates in the first nine m on th s o f 1981 in dicated that the F ed had yet to win credibility for its disinflationary p o lic y , and p rob a b ly co n trib u te d to the F e d ’ s m aintaining very high real short rates for as lon g as it d id. O n the oth er hand, the d eclin in g lon g rate from O c to b e r 1981 to O c to b e r 1982 e n co u r aged the F ed to ease p o lic y b y in dicatin g the p u b lic’ s grow in g c o n fid e n c e in the disinflation. T h e serious inflation scare set o ff in the su m m er o f 1983 largely a ccou n ts for the run-up 2) O n e m ight reason ably have e x p e c te d the late 197 9 to re d u ce lon g -term interest rate v ola tility b y q u ick ly stabilizing lon g -term inflation expectations at a low rate. Yet the reverse was true initially. L o n g rates turned out to b e surprisingly volatile du e to a co m b in a tio n o f particularly a ggressive funds rate m o v e m e n ts and inflation scares. A m a zin g ly , it to o k until 1 9 8 8 for the unusual long-rate volatility to disappear. 3) O n e m ight also have e x p e c te d the aggres sive funds rate a ctions beg in n in g in O c t o b e r 1979 to b e a cco m p a n ie d b y o p p o s ite m o v e m e n ts in the lo n g rate. A gain, the result was just the reverse. T h e aggressive actions m o v e d th e lon g rate in the sam e d ire ctio n , apparently in flu encing the lon g rate prim arily through their e ffe ct on shorter m aturity rates. O n ly at funds rate peaks and troughs did the lon g rate m o v e in the op p osite d irection from the funds rate. T h e lo n g rate appeared to b e influenced by a change in e x p e cted inflation o n ly after sustained aggressive funds rate a ctions. 4) T h e lo n g rate rea ch ed its p ea k in O c t o b e r 1 9 8 1 , in dicatin g that it to o k tw o years for p o lic y to reverse th e rise in the trend rate o f inflation. It w ou ld b e a m istake, h o w e v e r, to c o n c lu d e that acquiring credibility n ecessarily takes so lon g. O n the contrary', a clo se lo o k reveals that the long rate had already turned d o w n in April 1 9 8 0 w h ile the funds rate was still rising, su ggestin g that so m e credibility had been w on b y then. Credibility might e v e n have b e e n a ch ie v e d so o n e r if the F e d had not hesitated tem porarily b e tw e e n D e c e m b e r 197 9 and F ebruary 1 9 8 0 to co n tin u e th e aggres sive funds rate tightening begu n in O c t o b e r . In any ca se, the cred it co n tro l program interrupted the disinflationary p o licy actions in M a y 198 0 and high interest rates w e re restored fully on ly in o f the funds rate to A ugust 1 9 8 4 . T h e credibility acqu ired b y the F ed in con ta in in g that scare early 1 9 8 1 . T h e autom atic adju stm ent feature o f yield ed a 3 p ercen ta ge p oin t red u ction in the long rate that allow ed the funds rate to c o m e d ow n to o . T h e r e was no inflation scare p er se w h en the F ed raised the funds rate in 19 8 8 . N e v e rth e le ss, that series o f actions m ay b e u n d e rsto o d as p re cau sed a sharp d e clin e in th e funds rate b e tw e e n January and M arch o f 1981 that was o n ly fully reversed b y June. T h u s , three unfortunate inter ruptions a cco u n t for the delay in the F e d ’ s acqu i sition o f cred ib ility for its disinflationary p o licy . em p tive, taken to reverse a p u blic p e rce p tio n that p o licy had perm an en tly eased follow in g the stock 5) Interestingly e n o u g h , the lo n g rate was rou ghly in the sam e 8 p e rce n t range in the early the n on b orrow ed reserve operating p roced u re then 15 sin ce 1979. It fo cu se d on the prim ary p o licy p rob 19 9 0 s as it was in the late 1 9 7 0 s, in spite o f the 4 or 5 p ercen ta g e p oin t re d u ctio n in the inflation rate. A pp a ren tly, in vestors th en p e rc e iv e d the 7 lem during the p e rio d : the a cqu isition and m aintenan ce o f credibility for the co m m itm e n t to to 9 p e rce n t inflation rate as tem porarily high, w h ile, if anything, th ey p e r c e iv e the current 3 to acq u ired cred ib ility for its disinflation relatively lo w inflation. W e saw that the F ed m ight have d eclin in g lon g rate in the current p e rio d is indica q u ick ly in early 198 0 had it b e e n able to sustain high interest rates then. A fter all, lon g-term rates tive o f the steady acquisition o f credibility, but the w e re rou gh ly equal to the inflation rate in 1979 , high lon g rate indicates a lingering lack o f c o n fi d e n c e in the F e d . indicating that the p u b lic b e lie v e d inflation was o n ly tem porarily high at the tim e. U nfortunately, 6) T h e F e d appears to have had rem arkable latitude to push the federal funds rate d o w n in the rece n t recession and r e c o v e r y w ith ou t triggering a series o f interruptions d ela yed the actual dis inflation for tw o years, p ro b a b ly raising the cost 4 p e rce n t rate as a bit b e lo w trend. T h e slow ly a rise in the lo n g rate. O n th ree o c c a s io n s w h en trying to e n co u r a g e real grow th in the 1980s (su m m er 1 9 8 0 , su m m er 1 9 8 3 , and spring 1987) it co u ld not push the fu n ds rate m o re than 1 or 2 percentage points b elow the long rate b efore trig gerin g an inflation scare; y e t it p u sh ed the funds rate 4 p e rce n ta g e p oin ts b e lo w the lon g rate in in term s o f lost output o f acquiring credibility. O n ly a year after relaxing its disinflationary p o lic y in 1 9 8 2 , the F e d ’ s cred ib ility was again ch a llen g ed w ith a serious inflation scare that carried the lon g rate up from 10.5 p ercen t to 13.4 percent. It to o k 11 m onths and 7 percent real short rates to con ta in the scare, indicating h o w fragile the F e d ’ s cred ib ility was in 1983 and 1 9 8 4 . T h e lo n g rate d e clin e to the 7 .5 p e rce n t range b y the spring o f 1 9 8 6 reflected a b ig gain in credibility. 19 9 2 . T h e greater flexibility to re d u ce short rates ev i dent in the current recession is rem iniscent o f that Y et the F ed was tested b y another scare in 1987 in early p ost-w a r re ce ssio n s w h en the F ed p re su m ably had m o re credibility. T h e funds rate was that e n d ed with the stock m arket crash. T h e crash itself, h o w e v e r , then set in m o tio n ex p ecta tion s p u sh ed alm ost 3 p ercen tage points b e lo w the lon g o f e x c e s s iv e easing that the F e d resisted with a rate during the A ugust 1 9 5 7 -A p ril 1958 recession b e fo r e the lo n g rate began to rise. It was pu shed m o re than 2 p e rce n ta g e p oin ts b e lo w the lon g 3 p e rce n ta g e p oin t funds rate rise in 1 988 and 1 9 8 9 , a tightening that p ro b a b ly w ea k en ed real grow th so m e w h a t in 1989 and 1 9 90 . rate in the A pril 1 9 6 0 -F e b r u a r y 1961 recession w ith ou t m u ch o f a rise in the lo n g rate.9 stand h o w fragile the F e d ’ s cred ibility is and h ow 7) T h e p re ce d in g ob se rv a tio n suggests an attractive argum ent in favor o f a con gression a l m an date for p rice stability. By re d u cin g the risk poten tially c o s tly it is to maintain. E ven after inflation had stabilized at around 4 p ercen t in 1 9 8 3 , inflation scares and the F e d 's reaction to o f inflation scares, such a m an date w ou ld free the funds rate to react m ore aggressively to u n em p loy th em w ere associated with significant fluctuations in real grow th. W ith that in m ind, o n e can not help m en t in the sh ort run. T h u s , a m an date for p rice stability w ou ld not on ly h elp elim in ate in efficien but a p p reciate the potential value o f a co n g re s cies associated with long-run inflation, it w ould add R e v ie w in g the p o lic y re co rd m akes o n e under sional m an date for p rice stability that w ou ld help the F ed establish a cred ib le c o m m itm e n t to low flexibility to the funds rate that m ight im p rove inflation. In fact, there is e v id e n c e that an interest co u n te rcy clica l stabilization p o lic y as w e ll.10 rate p o licy assisted by such a mandate w ou ld w ork w ell. T h e B u n d esb a n k and the Bank o f Japan fo llo w interest rate p o licie s resem b lin g the F e d ’s C o n c l u s io n T h e article used institutional k n o w le d g e o f F ed p o lic y p ro ce d u re s , sim p le e c o n o m ic th eory , and the inflation scare c o n c e p t to analyze and inter pret interest rate p o licy as p ra cticed b y the F ed 16 and y e t, for the m ost part, th ey have ach iev ed better m a c r o e c o n o m ic p e rform a n ce. Perhaps it is b e ca u se th ey each e n jo y a stron ger m andate for p rice stability than d o e s th e F e d . En d n o tes 1 See R ogoff (1987) for a discussion o f cre d ib ility, reputation, and m onetary policy. 1 T o ta l reserve dem and is not very sensitive to interest rates in the short run. So whenever the Fed cuts nonborrow ed reserves to support a higher federal funds rate target, it allows banks to satisfy a roughly unchanged reserve dem and by borrow ing the difference at the discount w indow . T h e negative relation betw een nonbor rowed reserves and the funds rate in part reflects the adm inistration o f the discount w in d ow , w hich creates a positive relation between bank b orrow ing and the spread betw een the funds rate and the discount rate. C hristiano and Eichenbaum (1991) em phasize the im portance of this m echanism in understanding the liq u id ity effect. 5 G oodfriend (1991) discusses evidence consistent w ith this view found in Fama (1984), Fama and Bliss (1987), M a nkiw , M iron , and W eil (1987), Hardouvelis (1988), and C o ok and H ahn (1989). 4 C onsider a bond paying nom inal interest (i) taxable at rate (r) when the expected inflation rate is (7re). T h e real after-tax ex ante return on such a bond is then r = (1 —r)i —7re, so the expected inflatio n rate over the life o f the bond m ay be expressed as 7re = [i —r/( 1 —r ) ]( l - ) . W oodw ard (1990) reports m arket expectations of the after-tax real rate o f interest on long-term bonds using quarterly data on B ritish in dex-linked gilt-edged securities from 1982:2 to 1989:1. T h e ex ante post-tax real rate ranged fro m 1.5 percent to 3.2 percent per annum w ith a mean o f 2.6 percent. Assum ing investors keep after-tax ex ante rates on long-term governm ent bonds in the U nited States and U nited Kingdom roughly equal, we can set r = 2.6 in the above expression to infer long-term expected inflation in the U nited States. A tax rate in the U nited States o f 0.2, for example, yields 7re = [i-3 .2 ](.8 ). If w e take i as the yield to m a turity on a 30-year U .S . governm ent bond, then x e is the average per annum inflation rate expected over the 30-year horizon. T h e tax rate in the above expression is the m arginal rate that applies to the relevant marginal investor, e.g., individual, corporate, or foreign. T h e rate is difficult to determine. Its exact value, however, is not im p o rtan t for the analysis in the text. T h e analysis relies on t the view that significant c a g sin the long-term nom inal rate prim arily h ne reflect m ovem ents in inflation expectations, a vie w supported by the relatively narrow range o f ex ante post-tax real rates reported by W oodw ard. 5 A given federal funds rate target change w ill exert a greater effect on the long-term bond rate the shorter the average life o f the security as measured by its duration. T h e duration o f a coupon bond m ay be thought o f as the term to m a turity of an equivalent zero coupon bond that makes the same total paym ents and has the same yield. T h e duration of a 30-year coupon bond selling at par is approxim ately 1/r, where r is the yield to m a turity. See M o ore (1989). T h u s, the duration o f the 30-year governm ent (coupon) bond discussed in the text is only about 12.5 years at an interest rate of 8 percent and 7.1 years at a 14 percent interest rate. 6 Since short m aturity rates are anchored to the federal funds rate target, they cannot convey as clear a signal o f in fla tio n expectations as the long rate. See D otsey and K ing (1986) fo r an analysis of the inform ational im plications o f interest rate rules. 7 A n inflatio n scare may be consistent w ith e ithe r a positive or a negative association between m oney or prices, on one hand, and unem ploym ent or real grow th on the other, depending on the nature of the underlying m acroshock that sets it off. F or exam ple, an investm ent boom tends to generate a positive association, and an o il price rise, a negative one. 8 See, for exam ple, the discussions in C am pbell and C larida (1987) and Poole (1988). 9 Kessel (1965) contains a good description and analysis o f the historical relation between long and short rates over the business cycle. 10 Black (1990) discusses the benefits o f price stab ility. H etzel (1990 and 1992) discusses a proposal that the U .S . T re a sury issue indexed bonds to provide a better in dicato r o f long-run inflation expectations. QUARTERLY CHANGES IN REAL GDP AND GDP IMPLICIT PRICE DEFLATOR (Seasonally Adjusted Compound Annual Rates) IQ 1 9 7 7 -4 Q 1992 (Percent) Real GDP Im plicit Price Deflator Real GDP Im plicit Price Deflator Real GDP Im plicit Price Deflator 2.7 3.2 5.2 2.3 4.9 3.0 2.6 3.9 1989 1 2 3 4 Real GDP Im plicit Price Deflator 3.2 1.8 0 .0 1.5 5.4 4 .6 3.8 3.7 1977 1 2 3 4 6.0 6.9 5.7 -0 .8 6.1 8.4 7.4 7.3 1981 1 2 3 4 5.6 - 1.7 2.1 -6 .2 11.8 7.5 9.6 8.8 1985 1 2 3 4 1978 1 2 3 4 2.8 13.5 3.1 4 .8 5.7 10.7 8.3 8.8 1982 1 2 3 4 -4 .9 1.6 - 1.8 0 .6 4.5 5.5 4.4 3.4 1986 1 2 3 4 5.4 -0 .3 2.3 1.3 2.1 2.1 2.9 3.3 1990 1 2 3 4 2.8 1.0 - 1.6 -3 .9 4.4 4.8 4.7 3.9 1979 1 2 3 4 0.1 0.4 2.5 0.7 8.6 8.4 9.6 8.1 1983 1 2 3 4 2.6 11.3 6.1 7.0 4.8 2.8 4.2 4.2 1987 1 2 3 4 3.0 5.1 4.0 5.9 3.3 2.9 3.3 3.6 1991 1 2 3 4 -3 .0 1.7 1.2 0.6 5.3 3.5 2.4 2.4 1980 1 2 3 4 1.7 -9 .9 0.1 8.3 9.8 9.6 10.0 10.9 1984 1 2 3 4 7.9 5.4 2.2 2.7 6.0 4.1 4.5 2.6 1988 1 2 3 4 2.6 4.3 2.5 3.9 3.6 4.4 5.1 3.9 1992 1 2 3 4 2.9 1.5 3.4 3.8 3.1 2.7 2.0 1.7 Source: Bureau of Economic Analysis. 17 FEDERAL FUNDS RATE AND 30-YEAR GOVERNMENT BOND RATE January 1977-D ecem ber 1992 (Percent per Annum) 1977 J F M A M J J A S 0 N D Federal 30-Year Funds Govt. Bond Rate Rate Federal 30-Year Funds Govt. Bor Rate Rate 8.35 8.50 8.5 8 8.27 7.97 7.53 7.88 7.90 7.92 7.99 8.05 8.27 11.45 11.47 11.81 11.47 11.05 10.45 10.50 10.56 10.61 10.50 10.06 9.54 1989 J F M A M J J A S 0 N D 1986 J F M A M J J A S 0 N D 8.14 7.86 7.48 6.99 6.85 6.92 6.56 6.17 5.89 5.85 6.04 6.91 9.40 8.93 7.96 7.39 7.52 7.57 7.27 7.33 7.62 7.70 7.52 7.37 10.63 10.88 10.63 10.48 10.53 10.93 11.40 11.82 11.63 11.58 11.75 11.88 1987 J F M A M J J A S 0 N D 6.43 6.10 6.13 6.37 6.85 6.73 6.58 6.73 7.22 7.29 6.69 6.77 11.75 11.95 12.38 12.65 13.43 13.44 13.21 12.54 12.29 11.98 11.56 11.52 1988 J F M A M J J A S 0 N D 6.83 6.58 6.58 6.87 7.09 7.51 7.75 8.01 8.19 8.3 0 8.3 5 8.7 6 19.08 15.93 14.70 15.72 18.52 19.10 19.04 17.82 15.87 15.08 13.31 12.37 12.14 12.80 12.69 13.20 13.60 12.96 13.59 14.17 14.67 14.68 13.35 13.45 1985 J F M A M J J A S 0 N D 1982 J F M A M J J A S 0 N D 13.22 14.78 14.68 14.94 14.45 14.15 12.59 10.12 10.31 9.71 9.20 8.95 14.22 14.22 13.53 13.37 13.24 13.92 13.55 12.77 12.07 11.17 10.54 10.54 8.94 9.00 9.03 9.08 9.19 8.92 8.93 8.98 9.17 9.85 10.30 10.12 1983 J F M A M J J A S 0 N D 8.6 8 8.51 8.77 8.80 8.63 8.9 8 9.37 9.56 9.45 9.4 8 9.34 9.47 10.60 12.13 12.34 11.40 10.36 9.81 10.24 11.00 11.34 11.59 12.37 12.40 1984 J F M A M J J A S 0 N D 9.56 9.59 9.91 10.29 10.32 11.06 11.23 11.64 11.30 9.99 9.43 8.3 8 4.61 4 .6 8 4 .6 9 4 .7 3 5.35 5.39 5.42 5.90 6.14 6.47 6.51 6.56 — — 7.80 7.73 7.80 7.64 7.64 7.68 7.64 7.77 7.85 7.94 1981 J F M A M J J A S 0 N D 1978 J F M A M J J A S 0 N D 6.70 6.78 6.79 6.89 7.36 7.60 7.81 8.0 4 8 .4 5 8 .9 6 9.76 10.03 8.18 8.25 8.23 8.34 8.43 8.50 8.65 8.47 8.47 8.67 8.75 8.88 1979 J F M A M J J A S 0 N D 10.07 10.06 10.09 10.01 10.24 10.29 10.47 10.94 11.43 13.77 13.18 13.78 1980 J F M A M J J A S 0 N D 13.82 14.13 17.19 17.61 10.98 9.47 9.03 9.61 10.87 12.81 15.85 18.90 Source: The Board of Governors of the Federal Reserve System. 18 30-Year Federal Funds Govt. Bond Rate Rate Federal 30-Year Funds Govt. Bom Rate Rate 9.12 9.36 9.85 9.84 9.81 9.53 9.24 8.99 9.02 8.8 4 8.55 8.45 8.93 9.01 9.17 9.03 8.83 8.27 8.08 8.12 8.15 8.00 7.90 7.90 1990 J F M A M J J A S 0 N D 8.23 8.24 8.2 8 8.26 8.1 8 8.29 8.15 8.13 8.2 0 8.11 7.81 7.31 8.26 8.50 8.56 8.76 8.73 8.46 8.50 8.86 9.03 8.86 8.54 8.24 7.39 7.54 7.55 8.25 8.78 8.57 8.64 8.97 9.59 9.61 8.95 9.12 1991 J F M A M J J A S 0 N D 6.91 6.25 6.12 5.91 5.78 5.90 5.82 5.66 5.45 5.21 4.81 4.4 3 8.27 8.03 8.29 8.21 8.27 8.47 8.45 8.14 7.95 7.93 7.92 7.70 8.83 8.43 8.63 8.95 9.23 9.00 9.14 9.32 9.06 8.89 9.02 9.01 1992 J F M A M J J A S 0 N D 4.0 3 4.06 3.98 3.73 3.82 3.76 3.25 3.30 3.22 3.10 3.09 2.92 7.58 7.85 7.97 7.96 7.89 7.84 7.60 7.39 7.34 7.53 7.61 7.44 R eferences A n n u a l R e po rts o f O p e n M a rk e t O p e ra tio n s , F ederal R eserve B ank o f N e w Y o rk Q arterly Review, v o l. 7-9, 1981-83. u B arro, R o b e rt J. “ In te re s t R ate T a rg e tin g ," Journal of M onetary E om , v o l. 23 (January 1989), pp. 3-30. con ics B e rna nke , B en and A la n B lin d e r. “ T h e F e de ra l F u nd s R a te and the C hannels o f M o n e ta ry T ra n s m is sio n ,” A ericanE om m con ic Review, vo l. 82 (S e p te m b e r 1992), pp. 9 0 1 -2 1 . 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P oole, W illia m . “ M o n e ta ry P o lic y L e sso n s o f R e ce n t In fla tio n and D is in fla tio n ,” T e Journal of Econom Perspectives, v o l. h ic 2 (S u m m e r 1988), pp. 7 3-10 0. R o g o ff, K en n e th . “ R e p u ta tio n , C o o rd in a tio n , and M o n e ta ry P o lic y ,” Cam egie-R ochester C feren Series on Public P on ce olicy, S p rin g 1987; re p rin te d in R o b e rt J. B arro, e d ., Modem B sin C u ess ycle T eory, C a m b rid g e , M a ss.: H a rv a rd U n iv e r h sity Press, 1989, p p. 2 3 6 -6 4. S ch re ft, S tacey L . “ C re d it C o n tro ls : 1 9 8 0 ,” F e d e ra l R eserve B an k o f R ic h m o n d Econom Review, v o l. 76 (N o v e m b e r/ ic D e c e m b e r 1990), p p. 2 5-55 . S im s, C h ris to p h e r. “ In te rp re tin g th e M a c ro e c o n o m ic T im e Series Facts: T h e E ffe cts o f M o n e ta ry P o lic y ,” E ropea .u n E conom R ic eview v o l. 36 (1 9 9 2 ), p p . 9 7 5 -1 0 0 0 . ', T h o r n to n , D a n ie l. “ T h e B o rro w e d -R e s e rv e s O p e ra tin g P rocedure: T h e o ry and E v id e n c e ,” F e d e ra l R e serve B an k o f St. L o u is Fxonom Review, v o l. 70 (Ja nu a ry/F eb ru a ry ic 1988), pp. 3 0-54 . W a llic h , H e n ry C . “ R e ce n t T e c h n iq u e s o f M o n e ta ry P o lic y ,” Federal R eserve B ank o f Kansas C ity Econom Review, ic v o l. 69 (M a y 1984), pp. 2 1-30 . W o o d w a rd , G . T h o m a s . “ T h e R eal T h in g : A D y n a m ic P ro file o f the T e rm S tru ctu re o f Real In te re s t Rates and In fla tio n E xp e cta tio n s in the U n ite d K in g d o m , 1 9 8 2 -8 9 ," Journal of B sin vo l. 63 (July 1990), p p. 3 7 3 -9 8 . u ess, 19 H ig h lig h ts A u t o m a t io n a n d O p e r a t io n s O v e r th e co u rse o f the year, the Bank intro d u ce d several n ew ele ctro n ic services, in cluding T rea su ry au ction orders and billing statem ent transm ission, and exp an ded the electron ic report ing o p tio n o n its Fed O n lin e E xch an ge n etw ork to a c c o m m o d a te e le ctro n ic subm ission o f bank h oldin g co m p a n y reports and data required by the H o m e M o rtg a g e D isclosu re A ct. A n ew v o ic e resp o n se system gives institutions access to infor m ation a b ou t their c h e c k activity and a ccou n t balances and handles their cash order requests and origination s o f autom ated clearin gh ou se returns. T h e R ic h m o n d O ffic e m o v e d its c h e c k o p e ra tions to refu rbish ed quarters b e lo w grou nd. T h e m o v e im p ro v e d efficien cy b y eliminating the n eed to use eleva tors to m o v e c h e ck s to and from the p ro ce ss in g floors. T h e B altim ore staff, w hich had d e v e lo p e d n ew c h e c k -p r o c e s s in g softw are for the Fifth D istrict, prepared the softw are for installation in four other the nation’ s savings b o n d s . R ich m o n d was o n e o f five F ederal R e s e rv e sites s e le cte d for this p u rp ose. T h e Bank p ro v id e d crucial p erson n el serv ices, in cluding the co o rd in a tio n o f staff recru itm ent, relocation, and payroll processing to the R ich m on d headquarters o ffice o f F ederal R e se rv e A u to m a tion S e rv ices, w h ich has respon sibility for c o n solidating the m ainfram e com p u ter applications o f the F ederal R e s e rv e Banks. T o a cco m m o d a te A utom ation Services staff and the additional electrical and m ech an ical su pport for the n ew m ainfram e com p u ters, the Bank m ade m ajor ren ovation s to o ffic e sp ace and began c o n struction o f an u n dergrou n d structure beh in d the R ic h m o n d building. T h e b e low -g ra d e structure will h ou se e m e rg e n cy d iesel gen erators, uninter ruptible p o w e r su p p ly eq u ip m en t and related batteries, and air co n d itio n in g eq u ip m en t. M e e tin g s a n d O t h e r A c t iv it ie s Federal R eserv e districts. T h e software automates and standardizes m ost o f the “ b a ck -en d " functions o f c h e c k p ro ce ssin g , such as settlem ent, a cco u n t T h e Bank and the three R ich m o n d universities c o s p o n s o r e d a lectu re b y D r. A lice M . R ivlin o f the B rookin gs Institution. D r. R ivlin sp o k e on ing, and billing. T h e C u lp e p e r staff w o rk e d clo s e ly with the “ T h e B udget and the E c o n o m y : A P o st-E lection V ie w ,” in the Bank’ s auditorium to a large grou p S y ste m ’ s S u b co m m itte e on C ash S erv ices on an au tom a tion p ro je ct d esig n ed to accelerate cur ren cy verifica tion . T h e p ro je ct team su p p orted o f business and com m u n ity leaders, and represen 37 cash dep artm en ts at R e se rv e Bank o ffice s around th e cou n try in their purchase and installa tion o f se co n d -g e n e ra tio n cu rren cy-verification e q u ip m e n t. T h e B altim ore O ffice , w h ich is the S y stem 's p ilo t site fo r s e c o n d -g e n e r a tio n c u r r e n c y p ro ce ss in g e q u ip m e n t, co n d u cte d m any tests o f this equ ipm en t and hosted several training sessions for R e s e r v e Bank staff from around the S ystem to p rep a re th em for the installation o f this e q u ip m en t at their o ffice s. T h e B ank d e v e lo p e d a system that, w h en im p le m e n te d , will con v ert the manual p rocessin g o f U .S . Treasury7 letters o f credit at all R eserve Banks to a cen tra lized autom ated op eration loca ted in R ich m o n d . In addition, the T reasu ry selected the R ic h m o n d O ffic e as a regional p ro cessin g site for 20 tatives o f area colleges and universities. D r. Rivlin, w h o has sin ce b e c o m e d ep u ty d irector o f the O ffice o f M a n a gem en t and B udget, is well k n ow n for her w o rk in the areas o f b u dget p o licy , in co m e distribution, inflation, and p u b lic finan ce. M o r e than 3 0 0 represen tatives o f D istrict fin a n cia l in stitu tio n s and c o m m u n it y -b a s e d organizations attended w ork sh op s that fo cu se d on co m m u n ity d e v e lo p m e n t finance and the C o m m unity R e in v e stm e n t A ct. T h e F ederal R e se rv e c o s p o n s o r e d th ese w o rk sh o p s w ith ban k ers’ a ssociation s and state a gen cies. T h e Bank c o n d u c te d sem inars on R egu lation D D , w hich im plem ents the recent truth-in-savings legislation. T h e sem inars for e x e cu tiv e s o f d e p o sito ry institutions w ere held at four location s in the D istrict as part o f the Bank's w id er ed u ca tional efforts co n c e r n in g the F ederal D e p o s it In surance C o rp o ra tio n Im p ro v e m e n t A ct o f 19 91. F or the third tim e in four years, the B altim ore N orth and South C arolina d e p o sito r y institutions O ffic e was the site o f a w e e k -lo n g C o m m u n ity R ein vestm en t A ct training program sp o n so re d b y attended the tw o-d a y p rogram . T h e Bank p ro d u ce d A n Economic Prvfile o f South the Board o f G o v e rn o r s. A tte n d e e s from across C arolina a n d Its Counties and distribu ted it to all the nation in cluded com m u n ity affairs and exa m i nation staff from the F ederal R e se rv e and oth er financial institutions and libraries in that state. T h is Profile was the third in a series on Fifth D istrict agen cies that supervise financial institutions. states. G o v e rn o r L in d se y visited R ic h m o n d to discuss small business d e v e lo p m e n t n eed s with rep resen P erson n el C hanges tatives o f co m m u n ity grou p s, banks, h ou sin g association s, and local g o v e rn m e n ts. B efore the m eetin g , G o v e rn o r L in d se y visited several low and m o d e ra te -in c o m e areas w ith the Bank’ s staff. The R ich m o n d O ffic e co o p e r a te d with the R ussian -A m erican E xch an ge F ou n d a tion and the S c h o o l o f B usiness o f Virginia C o m m o n w e a lth U niversity to sp on sor e x te n d e d visits b y an e c o n o m is t and a banking su pervisor fro m the C entral Bank o f Russia. T h e y w ere attached to R o b e rt P. B lack retired at the en d o f 1992 after alm ost 20 years as p resid en t o f the F ederal R eserv e Bank o f R ic h m o n d . D u rin g his 3 7 -y e a r career as a central banker, M r. B lack h elp ed gu ide the S ystem tow ard m o re em p h a sis on m on eta ry co n tro l as a m eans o f attaining p rice stability and th ereb y p ro m o tin g stronger e c o n o m ic g row th . O n N o v e m b e r 2 3 , C hairm an A n n e M arie W h ittem ore a n n ou n ced that th e Bank’ s Board o f the Bank's R esea rch and Banking S u pervision D ire cto rs had a p p oin ted J. A lfred B roaddu s, Jr., to su cce e d M r. B lack as p resid en t on January 1, D ep a rtm en ts so that th ey co u ld gain practical k n o w le d g e and e x p e rie n ce o f use to the C entral 1993. M r. B roaddus, w h o jo in e d the Bank as an e co n o m is t in 1 9 7 0 , had b e e n sen ior v ic e p resi Bank o f Russia. Further, the Baltimore O ffice c o n den t and director o f research sin ce 1 9 8 5 . d u cted tw o program s on central bank op era tion s for officials o f the central banks o f the form er S oviet U n ion. T h e first program was for the C e n tral Bank o f R ussia. In the s e c o n d p rogram , the B altim ore O ffic e re ce iv e d a delegation o f central bankers from 11 o f the 12 form er S oviet republics that com p rise the C om m on w ea lth o f In dependen t States. T h e Fifth D istrict h osted the seven th biennial Federal R eserve System M anagem ent C o n fe re n ce in W illiam sbu rg, Virginia. T h e c o n fe r e n c e was atten d ed b y officers from each F ederal R e s e rv e Bank and the B oard o f G o v e rn o rs and featured presentations on supervision and regulation in the glob al e c o n o m y , the future o f the p a ym en ts system , the ch a n gin g structure o f the financial industry, the F ederal R e se rv e ’ s role in the w orld e c o n o m y , S ystem autom ation co n so lid a tio n , and th e le a d e rsh ip ch allen ges. r e q u ire d to a d d re ss th e s e T h e C h arlotte O ffic e h osted its tw entieth an nual O perations and Policy Seminar in Septem ber. O n e hun dred and se v e n ty -tw o represen tatives o f A l Broaddus is congratulated by Bob Black. 21 M arvin S. G o o d fr ie n d was ch o se n to s u cce e d M r. B roaddu s as sen ior v ice president and d ire c tor o f research . M r. G o o d frie n d , w h o jo in e d the Bank as an e c o n o m is t in 1978, had been a v ice p resid en t sin ce 19 8 4 . H e had also served as a sen ior staff e c o n o m is t for the President's C o u n cil o f E c o n o m ic A d v iso rs, and had taught at the G radu ate S c h o o l o f B usiness at the U niversity o f C h ica g o . B ruce J. S u m m ers, sen ior v ice presiden t, re turned to the Bank follow in g a th ree-a n d -on ehalf-year leave o f a b se n ce during w h ich he served on the staff o f the Board o f G o v e rn o rs o f the Federal R eserv e S ystem in W ashington, D .C . U p on his return to the Bank, M r. S u m m ers assu m ed resp on sibility for guiding the d e v e lo p m en t o f the Bank's strategic plan. A lbert D . T in k e le n b e r g retired as sen ior v ice p resid en t o n M a y 1 after alm ost 21 years o f serv ice to the Bank. M r. T in k e le n b e rg was the officer in charge o f the C harlotte O ffice since 1983 and had b e e n in charge o f the C u lp eper O ffice for several years b e fo re that. W alter A . V arvel s u c c e e d e d M r. T in k e le n b e r g as sen ior v ic e presiden t in charge o f the C harlotte O ffice. M r. Varvel was the vice president in charge o f the P u b lic S erv ices and C u stom er S u pport D ep a rtm e n ts in R ic h m o n d b efore he transferred to C h a rlotte. System Responsibility Jim m ie R . M o n h o llo n , first v ice p residen t, was chairm an o f the S ystem C o m m itte e on C ash S e rv ices. James D . R e e s e , senior v ice president, chaired its s u b co m m itte e . J. Alfred Broaddus, Jr., senior v ice president and d irector o f research, chaired the S ystem C o m m ittee o n Financial A nalysis. T h e S ystem group gave special attention to F ederal O p e n M arket C o m m itte e operating p ro ce d u re s and p o licy o b je ctiv e s. W alter A. Varvel, senior vice president in charge o f the C harlotte O ffic e , chaired the S ystem S u b c o m m itte e on B usiness D e v e lo p m e n t and was N ational P roduct M anager for the Federal R e se rv e 's Functional C o s t and Profit A nalysis P rogram . H. L ew is G arrett, sen ior v ice presiden t and general auditor, continued as chairman o f the Audit A u tom a tion C o n so lid a tio n C o m m itte e o f the C o n fe r e n c e o f G eneral A uditors. T h is com m ittee and its s u b co m m itte e , chaired b y B. W ayn e D e a l, audit officer, d e v e lo p e d a detailed plan, for use throughout the Federal R e s e rv e S ystem , for p rov id in g audit co v e ra g e during and after the co n so lid a tio n p ro ce ss . D ir e c to r s FE D E R A L (December 31, 1992) R ESERVE B A N K O F R IC H M O N D DEPUTY CHAIRMAN Henry J. Faison President Faison Associates Charlotte, North Carolina R. E. Atkinson, Jr. Chairman Dilmar Oil Company, Inc. Florence, South Carolina CHAIRMAN Anne Marie Whittemore Partner DEPUTY CHAIRMAN Henry J. Faison R. E. Atkinson. Jr. McGuire, Woods, Battle & Boothe Richmond, Virginia Stephen Brobeck Executive Director Consumer Federation of America Washington, D.C. Paul A. DelaCourt Chairman The North Carolina Enterprise Corporation Raleigh, North Carolina Paul A. DelaCourt Webb C. Hayes IV Chairman of the Board Palmer National Bancorp, Inc. President The Palmer National Bank Washington, D.C. M em ber, James G. Lindley F ed eral Chairman and Chief Executive Officer A d v is o r y South Carolina National Corporation Chairman C o u n c il Webb C. Hayes IV James G. Lindley South Carolina National Bank Columbia, South Carolina A. Pierce Stone Chairman, President, and Chief Executive Officer Virginia Community Bank Louisa, Virginia L. Newton Thomas, Jr. Retired, Senior Vice President ITT/Carbon Industries, Inc. Charleston, West Virginia Edward E. Crutchfield, Jr. Chairman and Chief Executive Officer First Union Corporation Charlotte, North Carolina A. Pierce Stone L. Newton Thomas, Jr. 23 D ir e c to r s B A L T IM O R E O F F IC E Richard M. Adams Chairman and Chief Executive Officer United Bankshares, Inc. Parkersburg, West Virginia Daniel I1. Henson, III Senior Development Director Struever Bros. Eccles & Rouse, Inc. Baltimore, Maryland CHAIRMAN John R. Hardesty, Jr. Richard M. Adams Daniel P. Henson, III President Preston Energy, Inc. Kingwood, West Virginia Thomas J. Hughes President/CEO Navy Federal Credit Union Merrifield, Virginia F. Levi Ruark Chairman of the Board and President The National Bank of Cambridge Cambridge, Maryland Thomas J. Hughes F. Levi Ruark Michael R. Watson President Association of Maryland Pilots Baltimore, Maryland Rebecca I lahn Windsor Chairman and CEO Hahn Transportation, Inc. New Market, Maryland Michael R. Watson 24 Rebecca Hahn Windsor D ir e c to r s C H A R L O T T E O F F IC E Dorothy H. Aranda President Dohara Associates, Inc. Hilton Head Island, South Carolina Jim M. Cherry, Jr. President and Chief Executive Officer Williamsburg First National Bank Kingstree, South Carolina CHAIRMAN Anne M. Allen President Anne Allen & Associates, Inc. Greensboro, North Carolina David B. Jordan Vice-Chairman, CEO and Director Security Capital Bancorp Salisbury, North Carolina 1larold D. Kingsmore President and Chief Operating Officer Graniteville Company Graniteville, South Carolina William E. Masters President Perception, Inc. Easley, South Carolina L. Glenn Orr, Jr. Chairman, President, and Chief Executive Officer Southern National Corporation Lumberton, North Carolina William E. Masters I.. Glenn Orr, Jr. 25 A d v is o r y SM A L L C o u n c ils B U S IN E S S A N D (December 31, 1992) A G R IC U L T U R E A D V IS O R Y C O U N C IL C H A IR M A N J o a n H . Z im m e r m a n President Southern Shows, Inc. Charlotte, North Carolina V IC E C H A IR M A N John W. H ane Partner!Manager Blackwoods Farm Fort Motte, South Carolina W a tts A u m a n Manager Auman Farm West End, North Carolina L e o n a r d A . B la c k s h e a r President Associated Enterprises, Inc. Annapolis, Maryland C . C h a m p C la r k Owner C. C. Clark Farm Chilhowie, Virginia W illia m M . D ic k s o n Owner Spring Valley Farm Ronceverte, W est Virginia M ic h e le V . H a g a n s President Fort Lincoln N e w T o w n Corporation Washington, D .C . J o se p h C . Jefferds, Jr. Chairman Jefferds Corporation St. Albans, W est Virginia L o u is e L y n c h President & Chief Executive Officer Courtesy Associates, Inc. Washington, D .C . R o b e rt A . Q u ic k e President and General Manager Southside Transportation Co. Inc. Blackstone, Virginia G e o rg e B. R e e ve s President Reeves Agricultural Enterprises, Inc. Chaptico, Maryland R o b e rt W . Stew art, Jr. Retired Chairman and CEO (Front Row) Dickson, Lynch, Reeves, Zimmerman, Stewart (Back Row) Auman, Quicke, Clark, Jefferds 26 Engineered Custom Plastics Corporation Easley, South Carolina O P E R A T IO N S A D V IS O R Y C O M M IT T E E (Floor, left to right) DiPietro, Hastings, Ericsson, Antani, Wright, Howell, Chapman, Richey, Wilson, Albert, Monhollon, Ellis, Martin, Pillow, Nicks, Wieczorek, Greear, BeHage, Gazelle (Stairs, right to left) iMnier, Beckham, Thomas, Schmitt, Raiden, Poole, Clark C H A IR M A N C . L . W ils o n , I I I R o b e rt P. E r ic s s o n President Vice President Senior Vice President Heritage Trust Federal Credit Union Charleston, South Carolina Virginia Credit Union League Lynchburg, Virginia Branch Banking and Trust Com pany W ilson, North Carolina R ic h a r d D . P illo w R a y m o n d L . G a z e lle D a v id G . P o o le W illia m E . A lb e r t Executive Vice President Senior Vice President Vice President and Cashier Citizens Bank of Maryland Laurel, Maryland Industrial Bank of Washington Washington, D .C . T h e First National Bank of Bluefield Bluefield, W est Virginia K e n n e th L . G re e a r E lw y n G . R a id e n , Jr. S u n il F . A n t a n i Senior Vice President President and Chief Executive Officer Executive Vice President United National Bank Charleston, West Virginia H om e Federal Savings Bank Washington, D .C . Maryland National Bank Baltimore, Maryland D . G . H a st in g s J a m e s W . R ic c i G eo rge E. B e c kh a m President and Chief Executive Officer President Senior Vice President Virginia Bank and T ru st Com pany Danville, Virginia Educational Systems Em ployees Federal Credit Union Bladensburg, Maryland South Carolina Federal Savings Bank Columbia, South Carolina W a lt e r A . H o w e ll K e n n e t h L . R ic h e y Ro b ert L . B e H a g e Executive Vice President Senior Vice President Senior Vice President 'The Riggs National Bank of Washington, D.C . Washington, D .C . NationsBanc Services Columbia, South Carolina D a n ie l E . L a n ie r , Sr. C h a r le s C . Sc h m itt NationsBanc Services, Inc. Richmond, Virginia Fra n ce s B ra d sh a w Vice President-Operations Executive Vice President Assistant Vice President-Operations O n e Valley Bank Charleston, West Virginia Loyola Federal Savings Bank Glen Burnie, Maryland A s h p v P. L o w r im o r e C h a r le s E . T h o m a s First Carolina Corporate Credit U nion Greensboro, North Carolina John G. C h a p m an Senior Vice President-City Executive Vice President Senior Vice President Southern National Bank of South Carolina Florence, South Carolina West Virginia Credit U nion League, Inc. Parkersburg, W est Virginia SouthTrust Bank of Charleston Charleston, South Carolina G e r a ld L . M a r t in R i c k A . W ie c z o r e k J. M a u r ic e C l a r k Executive Vice President and Chief Financial Officer President President Fidelity Federal Savings Bank Richmond, Virginia District of Colum bia Credit Union league Washington, D .C . Huntington Federal Savings & Loan Association Huntington, W est Virginia R ic k y B . N ic k s S t a n le y E . W r ig h t J o h n S. D iP ie t r o Senior Vice President President, Chief Executive Officer, and Treasurer Senior Vice President Wachovia Operational Services Corporation Winston-Salem, North Carolina Raleigh Federal Savings Bank Raleigh, North Carolina Peninsula Bank Princess Anne, Maryland R ic h a r d C . P e n la n d F . D u a n e E llis Senior Vice President Senior Vice President First Union National Bank of North Carolina Charlotte, N orth Carolina D om inion Bankshares Corporation Roanoke, Virginia 27 Comparative Financial Statements C O N D IT IO N A s s e ts D ecem ber 31, 1991 D e c e m b e r 31, 1992 Gold certificate account Special Drawing Rights certificate account Coin Loans to depository institutions Federal agency obligations $ 9 4 1 ,0 0 0 ,0 0 0 .0 0 6 5 2 ,0 0 0 ,0 0 0 .0 0 9 4 ,5 9 5 ,8 5 4 .1 4 0 4 2 3 ,2 3 9 ,9 0 7 .3 3 $ 948,000,000.00 961.000.000.00 98,795,794.25 105.000.000.00 478,120,549.04 U.S. government securities Bills Notes Bonds Total U.S. government securities Cash items in process of collection Bank premises Furniture and equipment (net) Other assets Interdistrict settlement account Accrued service income T O T A L A SSET S 1 1 ,0 8 7 ,5 9 5 ,7 4 6 .3 7 9 ,2 4 1 ,0 1 2 ,2 9 7 .6 0 2 ,7 3 9 ,7 2 9 ,6 9 3 .1 6 10,491,442,040.07 2 3 ,0 6 8 ,3 3 7 ,7 3 7 .1 3 21,079,084,671.56 7 5 9 ,6 9 6 ,5 8 0 .4 2 1 2 7 ,7 4 1 ,1 6 7 .2 9 608,084,027.83 1 1 1 ,5 4 2 ,0 2 6 .2 5 f 2 ,1 4 0 ,9 7 2 ,9 0 5 .4 3 -2 1 9 ,4 9 3 ,9 2 6 .6 0 5 ,9 7 7 ,5 0 9 .7 8 8,030,219,833.90 2,557,422,797.59 122,786,026.17 32,169,642.12 2,025,123,541.59 321,133,485.56 5,006,657.05 $ 2 8 ,1 0 5 ,6 0 9 ,7 6 1 .1 7 $26,784,304,395.17 $ 2 5 ,0 8 3 ,0 2 4 ,4 0 8 .0 0 $23,425,486,317.00 2 ,0 2 5 ,4 2 0 ,2 0 7 .9 2 8 ,9 3 7 ,7 0 0 .0 0 3 2 ,3 5 9 ,8 4 5 .1 7 2,210,349,620.36 2 ,0 6 6 ,7 1 7 ,7 5 3 .0 9 2,285,289,785.32 3 9 1 ,6 0 0 ,8 6 2 .5 0 1 4 4 ,1 4 2 ,7 3 7 .5 8 541,202,140.88 S 2 7 ,6 8 5 ,4 8 5 ,7 6 1 .1 7 $26,443,290,195.17 2 1 0 ,0 6 2 ,0 0 0 .0 0 2 1 0 ,0 6 2 ,0 0 0 .0 0 170.507.100.00 8 2 8 ,1 0 5 ,6 0 9 ,7 6 1 .1 7 $26,784,304,395.17 L ia b ilitie s Federal Reserve notes Deposits Depository institutions Foreign Other Total deposits Deferred availability cash items Other liabilities T O T A L L IA B IL IT IE S 9,165,000.00 65,775,164.96 191,311,951.97 C a p ita l A c c o u n ts Capital paid in Surplus T O T A L L IA B IL IT IE S A N D C A P IT A L A C C O U N T S t Includes furniture and equipment (net) for Federal Reserve Automation Services in the amount of $83,447,193.14. 28 170.507.100.00 E A R N IN G S A N D E XPEN SES 1992 E a rn in gs L o an s to depository institutions $ F D I C assum ed indebtedness Interest on U .S . g o ve rnm e nt securities Foreign currencies In co m e from services O th e r earnings T o ta l current earnings 3 3 6 ,9 3 4 .1 7 0 1 ,3 5 3 ,3 4 1 ,1 6 2 .5 2 1 3 6 ,0 3 5 ,2 6 2 .5 0 6 5 ,4 2 5 ,7 8 8 .9 7 3 1 2 ,6 0 3 .7 0 $ 1 ,5 5 5 ,4 5 1 ,7 5 1 .8 6 1991 $ 1 ,0 8 8 ,9 0 3 .1 0 4 ,3 5 2 ,7 3 1 .9 5 1 ,6 0 0 ,4 3 9 ,6 0 4 .8 6 15 2 ,9 0 7 ,4 5 5 .5 1 6 4 ,1 5 0 ,9 6 8 .3 6 8 3 8 ,7 1 2 .8 9 $ 1 ,8 2 3 ,7 7 8 ,3 7 6 .6 7 E x p e n se s 1 3 7 ,1 9 9 ,4 8 4 .5 5 f 1 1 ,4 5 6 ,4 4 4 .5 0 1 0 7 ,3 5 4 ,2 2 0 .0 8 1 4 8 ,6 5 5 ,9 2 9 .0 5 1 2 1 ,7 3 6 ,3 6 8 .2 6 § 1 ,4 0 6 ,7 9 5 ,8 2 2 .8 1 $ 1 ,7 0 2 ,0 4 2 ,0 0 8 .4 1 9 ,5 1 4 ,1 8 1 .8 5 0 1 1 ,2 1 5 .2 4 2 3 ,1 7 7 ,6 4 9 .4 0 9 ,5 2 5 , 3 9 7 . 0 9 3 4 ,4 3 7 ,6 9 7 .8 6 6 9 ,3 6 1 ,0 2 5 .1 7 1 2 0 ,0 2 0 .3 2 6 1 ,6 1 9 .2 2 O p e ra tin g expenses C o s t o f earnings credits N e t expenses C U R R E N T N E T E A R N IN G S 1 4 ,3 8 2 ,1 4 8 .1 8 A d d itio n s to current net earnings Profit on sales of U .S . g o v e rn m e n t securities (net) Profit on foreign exchange transactions All other T o ta l additions 1 1 ,2 5 4 ,1 3 6 .7 5 5 ,9 11 .71 D e d u c tio n s from current net earnings Losses on foreign exchange transactions A ll other 6 9 ,4 8 1 ,0 4 5 .4 9 6 1 ,6 1 9 .2 2 -5 9 ,9 5 5 ,6 4 8 .4 0 + 3 4 ,3 7 6 ,0 7 8 .6 4 2 ,8 9 1 , 3 5 0 . 6 6 8 ,4 7 4 , 0 0 0 . 0 0 2 5 ,5 2 7 ,4 7 9 .0 0 6 ,2 1 0 ,2 0 5 .7 4 1 8 ,4 6 4 ,9 2 2 .0 0 § 1 ,3 0 9 ,9 4 7 ,3 4 4 .7 5 $ 1 ,7 0 4 ,7 9 5 ,4 5 9 .3 1 $ $ T o ta l deductions N e t additions or deductions C o s t of unreim b u rsed T reasury services A ssessm ent for expenses o f B oard of G overnors Federal Reserve currency costs N E T E A R N I N G S B E F O R E P A Y M E N T S T O U .S . T R E A S U R Y 0 6 ,9 4 7 ,5 0 0 .0 0 D istrib u tio n o f N e t E a rn in g s D iv id e n d s paid P aym e nts to U .S . T reasury (interest on Federal Reserve notes) T ransferred to surplus 1 1 ,4 6 4 ,7 5 2 .0 8 1 ,2 5 8 ,9 2 7 ,6 9 2 .6 7 3 9 ,5 5 4 ,9 0 0 .0 0 9 ,7 7 0 ,1 1 8 .6 3 1 ,6 7 2 ,5 7 8 ,6 4 0 .6 8 2 2 ,4 4 6 ,7 0 0 .0 0 8 1 ,3 0 9 ,9 4 7 ,3 4 4 .7 5 $ 1 ,7 0 4 ,7 9 5 ,4 5 9 .3 1 S 1 7 0 ,5 0 7 ,1 0 0 .0 0 3 9 ,5 5 4 ,9 0 0 .0 0 $ 1 4 8 ,0 6 0 ,4 0 0 .0 0 $ 2 1 0 ,0 6 2 ,0 0 0 .0 0 $ 1 7 0 ,5 0 7 ,1 0 0 .0 0 1 7 0 ,5 0 7 ,1 0 0 .0 0 4 5 ,4 1 6 ,8 5 0 .0 0 $ 1 4 8 ,0 6 0 ,4 0 0 .0 0 Issued d u ring the year C a n ce le d d u rin g the year 2 1 5 ,9 2 3 ,9 5 0 .0 0 5 ,8 6 1 , 9 5 0 . 0 0 TOTAL S u rp lu s A c c o u n t Balance at close of previous year A d d itio n of profits for year BALANCE AT C LO SE O F C U R R E N T YEAR 2 2 ,4 4 6 ,7 0 0 .0 0 C a p ita l S to c k A c c o u n t (representing amount paid in, which is 50% of amount subscribed) Balance at close of previous year BA LA N CE AT C L O S E O F C U R R E N T YEAR $ S 2 1 0 ,0 6 2 ,0 0 0 .0 0 2 6 ,3 3 1 ,0 5 0 .0 0 1 7 4 ,3 9 1 ,4 5 0 .0 0 3 ,8 8 4 ,3 5 0 .0 0 $ 1 7 0 ,5 0 7 ,1 0 0 .0 0 t Includes operating expenses for Federal Reserve Automation Services in the amount of $18,954,789.00. 29 Summary of Operations O peration A m ou n t ($thousands) N um ber 1991 1992 1992 1991 Currency and coin processed 2 .0 8 2 .1 4 3 .0 0 0 1,959,126,000 2 6 ,8 7 3 ,9 1 4 25,000,656 Currency verified and destroyed 8 0 4 .6 0 1 .0 0 0 740,139,000 9 ,1 3 7 ,5 1 1 7,719,990 Coin bags received and verified 2 6 8 ,0 6 8 261,876 2 0 4 ,9 1 4 194,359 1 .5 6 6 .5 2 9 .0 0 0 1,550,648,000 1 ,0 8 3 ,7 6 8 ,0 0 0 1,019,044,000 3 9 6 .7 3 0 .0 0 0 367,468,000 1 4 0 .3 9 6 .0 0 0 121,636,000 5 8 ,2 8 9 ,0 0 0 60,422,000 1 1 6 .8 5 7 .0 0 0 129,200,000 U.S. government coupons paid 2 0 ,3 6 9 24,538 1 5 ,2 4 1 55,108 Noncash items 5 8 ,6 2 6 106,172 1 2 8 ,7 6 8 278,960 Currency received and verified Checks handled Commercial—processed * Commercial—packaged items U.S. government Collections items handled Commercial book-entry transfers originated Funds transfers sent and received Food stamps redeemed Loans advanced * xclu in c e k o th B n . E d g h c s n is a k 30 2 8 0 ,8 0 8 284,110 2 .6 1 8 .2 4 1 .0 0 0 2,309,359,000 5 ,9 0 2 ,6 7 0 5,652,028 8 .8 1 4 .6 3 9 .0 0 0 8,818,391,000 3 2 4 ,0 1 8 ,0 0 0 282,818,000 1 ,6 5 9 ,4 5 1 1,448,377 432 454 3 ,4 4 4 ,7 4 2 4,635,089 O ffic e r s < ^ 0 , 3, , , ^ , R IC H M O N D President First Vice President Lloyd W. Bostian, Jr., Senior Vice President J. Alfred Broaddus, Jr., Senior Vice President and Director of Research Roy L. Fauber, Senior Vice President James McAfee, Senior Vice President and General Counsel Joseph C. Ramage, Senior Vice President James D. Reese, Senior Vice President Bruce J. Summers, Senior Vice President Fred L. Bagwell, Vice President Dan M. Bechter, Vice President William H. Benner, Jr., Vice President Timothy Q. Cook, Vice President William E. Cullison, Vice President Wyatt F. Davis, Vice President Michael Dotsey, Vice President George B. Evans, Vice President William C. Fitzgerald, Associate General Counsel Marvin S. Goodfriend, Vice President and Associate Director of Research Robert L. Hetzel, Vice President Thomas M. Humphrey, Vice President Yash P. Mehra, Vice President Michael W. Newton, Vice President G. Ronald Scharr, Vice President John W. Scott, Vice President Andrew L. Tilton, Vice President Roy H. Webb, /'ice President Robert P. Black, Jimmie R. Monhollon, Robert P. Black Jimmie R. Monhollon Kemper W. Baker, Jr., Assistant Vice President Jackson L. Blanton, Assistant Vice President William A. Bridenstine, Jr., Assistant General Counsel Bradford N. Carden, Assistant Vice President Betty M. Fahed, Assistant Vice President Sharon M. Haley, Assistant Vice President and Secretary Eugene W. Johnson, Jr., Assistant Vice President Thomas P. Kellam, Assistant Vice President Anatoli Kuprianov, Research Officer Harold T. Lipscomb, Assistant Vice President Susan Q. Moore, Assistant Vice President Joseph F. Morrissette, Assistant Vice President Virginius H. Rosson, Jr., Assistant Vice President Marsha S. Shuler, Assistant Vice President James R. Slate, Assistant General Counsel Robert E. Wetzel, Jr., Assistant Vice President William F. White, Assistant Vice President Howard S. Whitehead, Assistant Vice President Bobby D. Wynn, Assistant Vice President Arthur J. Zohab, Jr., Assistant Vice President Malcolm C. Alfriend, Examining Officer Floyd M. Dickinson, Jr., Examining Officer A. Linwood Gill III, Examining Officer Janice E. Haase, Information Systems Officer Jeffrey S. Kane, Examining Officer Jeffrey M. Lacker, Associate Research Officer Lawrence P. Nuckols, Examining Officer Ruth S. Pratt, Information Systems Officer Arlene S. Saunders, Personnel Officer Charlotte L. Waldrop, Examining Officer H. I xwis Garrett, Senior Vice President and Genera! Auditor Edgar A. Martindale III, Assistant General Auditor B. Wayne Deal, Audit Officer Susan A. Saavedra, Audit Officer B A L T IM O R E Ronald B. Duncan, Senior Vice President William E. Pascoe III, Vice President John S. Frain, Assistant l rce President i Margaret M. Murphy, Assistant Vice President William J. Tignanelli, Assistant Vice President Patricia S. Tunstall, Assistant Vice President John I. Turnbull II, Assistant Vice President R. William Ahern, Automation Officer C U LPE PER John G. Stoides, Senior Vice President James J. Florin III, Assistant Vice President Thomas C. Judd, Assistant Vice President Julius Malinowski, Jr., Assistant Vice President C H A R L E ST O N Richard L. Hopkins, Ronald B. Duncan Vice President C H A R L O T T E Senior Vice President Samuel W. Powell, Jr., Vice President Robert F. Stratton, Vice President Jeff A. Walker, Vice President Lyle C. DeVane, Assistant Vice President Marsha H. Malarz, Assistant Vice President Ronald D. Steele, Assistant Vice President Walter A. Varvel, C O L U M B IA Woody Y. Cain, Vice President Walter A. Varvel 31 F IF T H F E D E R A L R E SE R V E R ic h m o n d 701 E a s t B y rd S tre e t R ic h m o n d , V irg in ia 2 3 2 1 9 (8 0 4 ) 6 9 7 -8 0 0 0 B a ltim o r e 5 0 2 S o u th S h a rp S tre e t B a ltim o re , M a ry la n d 2 1 2 0 1 (4 1 0 ) 5 7 6 -3 3 0 0 C h a r lo t t e 5 3 0 E a s t T ra d e S tre e t C h a rlo tte , N o r th C a ro lin a (7 0 4 ) 3 5 8 -2 1 0 0 28202 C h a r le s t o n 1 2 0 0 A ir p o r t R o a d C h a rle s to n , W e s t V irg in ia (3 0 4 ) 3 4 5 -8 0 2 0 253 11 C o lu m b ia 1 6 2 4 B ro w n in g R o a d C o lu m b ia , S o u th C a ro lin a (8 0 3 ) 7 7 2 -1 9 4 0 29210 C u lp e p e r M o u n t P o n y R o a d , S ta te R o u te 6 5 8 C u lp e p e r, V irg in ia 2 2 7 0 1 (7 0 3 ) 8 2 9 -1 6 0 0 D IS T R IC T O F F IC E S