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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.

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0 64 7 8
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Federal Reserve Bank of Richmond Publication Number:

1 -7 6
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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.

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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

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con ic
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2 (S u m m e r 1988), pp. 7 3-10 0.
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ochester C feren Series on Public P
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sity Press, 1989, p p. 2 3 6 -6 4.
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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 .
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ic eview v o l. 36 (1 9 9 2 ), p p . 9 7 5 -1 0 0 0 .
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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
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ic
1988), pp. 3 0-54 .
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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
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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








Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102