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^Annual
^Report
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
j(etter of Transmittal
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., June 16, 1978
THE SPEAKER OF
THE HOUSE OF REPRESENTATIVES.
Pursuant to the requirements of Section 10 of the Federal Reserve
Act, as amended, I am pleased to submit the Sixty-Fourth Annual
Report of the Board of Governors of the Federal Reserve System.
This report covers operations of the Board during the calendar
year 1977.
Yours respectfully,
G. William Miller, Chairman
Contents
Part 1 Monetary Policy and the
U.S. Economy in 1977
3
INTRODUCTION
11 SOURCES OF ECONOMIC EXPANSION
13
Residential investment
14
Consumption
16
Income
17
Business fixed investment
19
Inventory accumulation
19
Government
21
Net exports
23
24
25
27
28
LABOR MARKET DEVELOPMENTS
Employment
Labor force and unemployment
Wages and collective bargaining
Wage and salary income
29
29
30
COST AND PRICE DEVELOPMENTS
Costs
Prices
34
34
43
46
MONETARY POLICY AND FINANCIAL MARKETS
Money and reserve aggregates
Interest rates
Aggregate flows of funds
56
59
62
63
63
66
INTERNATIONAL DEVELOPMENTS
U.S. international transactions
Foreign lending by U.S. banks
Foreign banks in the United States
Foreign exchange markets
Looking ahead
68
OFFICIAL STATEMENTS ON GROWTH TARGETS FOR
MONETARY AGGREGATES
Part 2 Records, Operations,
and Organization
115
RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS
152
RECORD OF POLICY ACTIONS—FEDERAL OPEN MARKET
COMMITTEE
326
FEDERAL RESERVE OPERATIONS IN FOREIGN
CURRENCIES
329
329
332
346
358
363
CONSUMER AFFAIRS
Introduction
Truth in Lending
Equal Credit Opportunity
Federal Trade Commission Act
Home Mortgage Disclosure
366
SECURITIES ACTS AMENDMENTS OF 1975
367
GOVERNMENT IN THE SUNSHINE
369
369
370
371
372
373
374
375
375
376
376
377
LEGISLATIVE RECOMMENDATIONS
Payment of interest on reserve balances—NOW accounts
Strengthened supervisory powers
Regulation of foreign banks
Financial transactions with affiliates
Interlocking relationships
Federal Reserve notes
Collateral for Federal Reserve notes
Truth in Lending Act simplification
Disclosure of the FOMC's domestic policy directive
Loans to bank examiners
Lending authority of Federal Reserve Banks
378
378
LITIGATION
Bank holding companies—Antitrust action
—Review of Board actions
Other litigation involving challenges to Board procedures and
regulations
386
391
391
391
391
392
392
393
393
393
394
394
394
394
395
396
396
397
397
398
399
400
LEGISLATION ENACTED
Emergency unemployment compensation extension
Depository institutions amendments
Tax Reduction and Simplification Act
Defense Production Act extension
Export Administration Act amendments
Small Business Act and Small Business Investment Act
amendents
Congressional budget resolutions
Fair Debt Collection Practices Act
International Development Assistance Act
Debt ceiling extension
Council on Wage and Price Stability Act amendments
Housing and Community Development Act
Export-Import Bank Act amendments
Interest on Treasury tax and loan deposits
Fair Labor Standards Act amendments
Renewal of Federal Reserve Banks' direct purchase authority
Federal Reserve Reform Act
Securities Exchange Act amendment
Social Security Act amendments
400
409
412
BANK AND BANK HOLDING COMPANY SUPERVISION AND
REGULATION BY THE FEDERAL RESERVE SYSTEM
Domestic activities and applications
Foreign activities and applications
Schools
413
413
416
418
420
421
CONDITION OF THE BANKING SYSTEM
Indexes of bank soundness
Potential problem areas
International activities
Improved supervision
Conclusion
422
422
422
423
424
425
426
426
427
FEDERAL RESERVE BANKS
Payments mechanism developments
Examination
Earnings and expenses
Federal Reserve bank premises
Holdings of loans and securities
Loan guarantees for defense production
Foreign accounts
Volume and cost of operations
428
428
BOARD OF GOVERNORS
Income and expenses
STATISTICAL TABLES
1. Detailed statement of condition of all Federal Reserve Banks
combined, Dec. 31, 1977
436
2. Statement of condition of each Federal Reserve Bank,
Dec. 31, 1977 and 1976
440
3. Federal Reserve Bank holdings of U.S. Government and
Federal agency securities, Dec. 31, 1975-77
442
4. Federal Reserve Bank holdings of special short-term Treasury certificates purchased directly from the United States,
1970-77
443
5. Open market transactions of the Federal Reserve System,
1977
444
6. Earnings and expenses of Federal Reserve Banks during
1977
446
7. Earnings and expenses of Federal Reserve Banks, 1914-77
448
8. Bank premises of Federal Reserve Banks and branches,
Dec. 31, 1977
449
9. Volume of operations in principal departments of Federal
Reserve Banks, 1974-77
450
10. Principal operations of Federal Reserve Banks, including
total expenses, average number of employees, and ratio of
total expense for each operation to total expenses, 1974-77
451
11. Number and salaries of officers and employees of Federal
Reserve Banks, Dec. 31, 1977
451
12. Federal Reserve Bank interest rates, Dec. 31, 1977
452
13. Member bank reserve requirements
454
14. Maximum interest rates payable on time and savings deposits
455
15. Margin requirements
456
16. Fees and rates under Regulation V on loans guaranteed pursuant to Defense Production Act of 1950, Dec. 31, 1977
457
17. Principal assets and liabilities, and number of commercial
and mutual savings banks, by class of bank, Dec. 31, 1977
and 1976
458
18. Member bank reserves, Federal Reserve Bank credit, and
related items—end of year 1918-77 and end of month 1977
462
19. Changes in number of banking offices in the United States
during 1977
464
20. Number of par and nonpar banking offices, Dec. 31, 1977
466
21. Description of each merger, consolidation, acquisition of
assets or assumption of liabilities approved by the Board of
Governors during 1977
434
475
MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS
478
480
481
482
FEDERAL RESERVE DIRECTORIES AND MEETINGS
Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Advisory Council
Federal Reserve Banks and branches
507
INDEX
"Parti
cMpnetarypolicy
and the
Sconomy in
1977
Introduction
The economy continued to expand at a brisk pace during 1977, and
gains in employment were substantial. Although the unemployment
rate was reduced significantly, joblessness remained historically quite
high at year-end, in large part a heritage of the severity of the past
recession. At the same time there was no progress in moderating the
underlying rate of inflation.
Gross national product (GNP) rose by about 5% per cent in real
terms from late 1976 to late 1977—somewhat more than during 1976.
As in 1976, however, over-all expansion of activity was strongest early
in the year. This early strength resulted in large part from a sharp
rebound of inventory investment, following a small liquidation of
stocks late in 1976. In addition, some special circumstances caused
spending to increase in the early months of the year; the most important of these was the effect of the auto strike in late 1976 in
delaying consumer and business purchases of motor vehicles.
Growth of real GNP moderated as the year progressed, reflecting
smaller increases in inventory investment, as well as a sluggishness
of consumer demand and an easing of capital outlays during the two
middle quarters of the year. But spending for consumption picked
up again in late 1977, and real final sales posted the largest gain of
the year, although a sharp reduction in inventory accumulation
damped the growth of real GNP.
The year 1977 witnessed the largest percentage increase in total
employment in more than two decades. Although labor force growth
was also rapid throughout the year, employment growth was faster,
and the over-all unemployment rate fell more than 1 percentage
point to less than (*Vi per cent at the year-end. The improvement was
concentrated among workers who had lost their last job rather than
among new entrants or re-entrants to the labor force. Unemployment
rates remained extremely high for young and inexperienced workers,
minority groups, and those disadvantaged by lack of skills or training.
In general the expansion in 1977 was quite widely based, with
most of the major sectors contributing to over-all growth. The rise
in real consumption spending, while slower than it had been earlier in
Introduction
Indicators of economic performance
Percentage change
Percentage change
Final sales
5
Percentage change
Unit labor costs
1976
1977
1975
1976
1977
1975
All figures for "percentage changes" are from previous quarter and are seasonally adjusted at annual rates.
Figures for the unemployment rate (seasonally adjusted monthly data) and for the change
in unit labor costs are from U.S. Dept. of Labor. All other data are from U.S. Dept. of
Commerce.
Fixed-weighted price index (1972 weights) is for gross domestic business product. Series
designated as "real" are based on 1972 dollars.
Scales for changes in GNP, consumption expenditures, and business fixed investment are
smaller than those for changes in final sales,fixed-weightedprice index, and unit labor costs.
Introduction
the expansion, was still substantial by historical standards. Spearheaded by a further strong rise in purchases of durable goods, consumer purchases rose 43A per cent in real terms over the four quarters of 1977.
Although growth of business fixed investment moderated after the
first quarter, such outlays provided support for economic expansion
in 1977. Capital expenditures increased by 8.3 per cent in real terms,
as compared with a rise of 7 per cent during 1976. Spending early
in 1977 was concentrated on light machinery, particularly on
vehicles. Outlays for commercial and industrial construction began
to pick up in the spring, however, and during the remainder of the
year they rose at a healthy rate. Nevertheless, business capital
spending continued to lag behind its typical cyclical performance; at
the year-end, after nearly 3 years of economic expansion, real business outlays were still below the pre-recession peak.
Residential construction remained a strong expansive force in
1977. A vigorous sales pace in housing markets stimulated a further,
major increase in homebuilding activity during the year. Private
housing starts were at an annual rate of 2.1 million units in the
final quarter, and for the year as a whole they totaled nearly 2
million, the most since 1973. Including additions and alterations as
well as new building, residential investment rose 15 per cent in real
terms during 1977. Strength in this sector was reflected in gains in
other areas such as employment in contract construction, production
of construction supplies, and sales of furniture and appliances.
Growth of final demands for goods and services in 1977 also reflected larger government outlays. Federal Government purchases in
real terms rose proportionately faster than total output of the economy. At the same time, outlays of States and localities were buoyed
by Federal grants-in-aid for countercyclical revenue sharing, local
public works, and public employment programs. These grants, together with a substantial improvement in fiscal positions of State
and local governments, helped to generate a 3 per cent increase in
real purchases of these governments during 1977; by contrast, such
purchases had declined marginally during 1976. In another fiscal
action supportive of over-all growth, personal income taxes were
reduced; this helped to sustain consumption spending and to build
savings flows after the unusual expansion of consumer spending during the winter.
Introduction
Higher costs of energy continued to have a strong influence on
economic developments in 1977. For some time consumption of fuel
had been constrained, reflecting both the reaction to the earlier
quadrupling of the price of imported oil and the curtailment of economic activity during the recession. During the unusually cold winter
of 1976-77, however, fuel imports rose strongly along with consumption, and as the economy expanded, they continued high. The
result was a sharply increased bill for imported oil. This, in combination with rising imports of other goods and little change in demand
for our exports, shifted the U.S. net balance on goods and services
into a deficit (national-income-accounts basis), which persisted
throughout the year. The deficit totaled $11 billion for the year as
a whole—a shift of $19 billion from the 1976 surplus.
In part reflecting this deficit, the value of the dollar declined relative to the currencies of a number of our major trading partners. The
initial effect was to raise the price of a wide range of imported goods,
and thus add to inflation. While U.S. exports should be stimulated
over the longer term by increased competitiveness, the impact to date
appears to have been quite small.
Inflation continued rapid during 1977. Consumer prices rose about
63A per cent; during 1976 they had risen somewhat less, almost
entirely because of a very small increase in food prices. Exclusive of
foods, the rise in consumer prices was about 6V4 per cent during
both 1976 and 1977. Wholesale prices exhibited a similar pattern;
the average rise for industrial commodities remained in the neighborhood of 6Vi per cent, whereas farm product and food prices, which
had declined in 1976, rose during 1977, reflecting in large measure
the effects of the unusually hard winter.
A variety of forces were operating to sustain price increases in
1977 in the face of continued sizable unemployment and ample productive capacity. The inflation of recent years continued to play an
important role. Formal and informal indexation of wages, pensions,
and welfare benefits to past price increases has mounted in the last
decade, and the presence of such escalators lengthens the period
necessary to unwind inflationary developments once under way. In
addition, substantial cost increases arise from various government
regulatory and payroll tax programs. Reflecting these and large increases in wage rates, hourly compensation in the private nonfarm
business sector rose about 8V2 per cent during 1977. At the same
Introduction
time, growth in productivity slowed from the cyclically advanced rate
of 1976. As a result unit labor costs rose about 5.9 per cent; this was
almost the same as in 1976, and much above the historical trend for
this vital determinant of average price change. In addition, the deterioration of dollar exchange rates provided an upward bias to
prices of imports and permitted larger price increases for domestically
produced competitive goods.
Monetary policy in 1977 continued to be directed toward sustaining growth in the U.S. economy, while seeking to avoid additional
inflationary pressures. Federal Reserve policy actions were designed
to moderate the expansion in the monetary aggregates and to establish the basis for a slowing in inflation over the longer term. With
demands for credit and money rising, short-term interest rates rose
1 to 2 percentage points over the year, and long-term market yields
generally rose about Vi of a percentage point.
Interest rates
Per cent per annum
12
3-month
Govt.
1973
1975
For notes see chart on p. 40.
1977
'78
Introduction
In the two previous years M-l, the narrow measure of the money
stock (currency and demand deposits), had grown considerably less
than would have been expected on the basis of the historical relationships among money, income, and interest rates. The counterpart of
this comparatively limited growth had been a larger increase in the
income velocity of M-l—GNP divided by M-l—than at similar
stages in previous business expansions. Since the spring of 1977,
however, M-l has grown about in line with earlier traditional relationships and from the fourth quarter of 1976 to the fourth quarter
of 1977 the rate of growth in M-l exceeded 7% per cent, well above
the upper end of the Federal Open Market Committee's longer-run
range of AlA to 6 ^ per cent for this aggregate for that period.
The more rapid growth of M-l appeared to reflect in part a reduction in the impact of previous financial innovations and of regulatory
changes on money growth. Several years earlier, in 1974, the high
levels of interest rates had induced the public, especially businesses,
to use a growing number of cash-management techniques and devices
that tend to minimize holdings of demand balances on which no explicit interest is paid. Moreover, regulatory and legislative changes
after 1974 had authorized interest-bearing transaction accounts—
particularly those subject to negotiable orders of withdrawal (NOW)
accounts in the New England States—and had permitted businesses
and State and local governments to hold savings accounts at commercial banks. These new accounts enhanced the ability of many
economic units—not just large ones—to economize on their cash
balances. With the passage of time, it was to be expected that such
adjustments of financial asset positions by the public—both to the
new regulatory environment and to the innovations in cash-management techniques—would gradually abate.
In the last few months of 1977 the attractiveness of smallerdenomination time and savings deposits at banks and thrift institutions—all of which are subject to interest rate ceilings—was reduced
as market rates of interest reached levels that exceeded rate ceilings
on time deposits of all but the longest term. The resulting slower
growth of such deposits reduced the rate of expansion of both M-2
and M-3 in 1977 to a pace about 1 percentage point below that of
1976, despite the acceleration in M-l growth. M-2, which—in addition to M-l—includes time and savings deposits at commercial
banks other than negotiable certificates of deposit (CD's) issued by
Introduction
Growth rates of monetary aggregates
Per cent
12
1977
For definitions of these aggregates, see Table 6, p. 38.
large banks, increased about 9% per cent over the year; this was
close to the upper end of the longer-run range of 7-10 per cent for
the aggregate for the period from the fourth quarter of 1976 to the
fourth quarter of 1977.
As the growth of deposits subject to interest ceilings slowed, banks
and thrift institutions turned increasingly to other sources for loanable
funds. In the second half of 1977 commercial banks, for example, raised more than $20 billion through time deposits in denominations of $100,000 or more, a class of deposits not subject to regulatory interest rate ceilings. By contrast, in all of 1976 such deposits
had declined by about an equal amount, and in the first half of 1977
they had contracted moderately, on average. Similarly, savings and
loan associations, which had made net repayments of borrowings
from the Federal home loan banks in 1976, borrowed more than $4
billion from this source in 1977 and an additional $4Vi billion from
other sources—mainly from commercial banks and by the issuance of
mortgage-backed bonds.
Total funds raised in domestic credit markets reached record proportions in 1977. Borrowing by the Federal Government—although
still large by historical standards—declined appreciably, and so did
that by foreigners. However, private domestic nonfinancial sectors
increased their credit demands sharply. Borrowing by households
reached record levels, with the largest increases occurring in the
mortgage market. The amount that consumers borrowed on mort-
10
Introduction
gages exceeded their outlays on new and existing houses, suggesting
withdrawals of equity built up in the increased value of the existing
housing stock; such withdrawals were probably used to finance consumer expenditures and to acquire financial assets.
Nonfinancial businesses increased both long- and short-term
borrowing as their financing gap—the amount by which their capital
outlays exceeded the amount of funds generated internally—widened
from the small total of 1976. At the same time these firms, in the
aggregate, continued to accumulate a sizable volume of liquid assets.
Finally, State and local governments borrowed a record $27 billion
in 1977. However, as a result of advance refunding and of considerable budget surpluses, these units also accumulated substantial
amounts of financial assets; they acquired, for example, more than
one-fourth of the net issues of U.S. Government and Federal agency
obligations.
Despite the considerable further increase in economic activity in
1977, resource utilization continued slack at the year-end, as indicated by the still high levels of unemployment and excess plant
capacity. In order to sustain the pace of economic advance, the
administration has proposed reductions in late 1978 in personal income taxes and in business taxes to encourage larger investment;
such reductions are designed to offset mandated increases in payroll
taxes and the effects of inflation in raising effective tax rates.
At the same time, the persistence of inflationary forces and the
weakness of the dollar in foreign exchange markets suggest that public policies must be particularly sensitive to increasing pressures
stemming from higher costs and higher prices. In this respect, the administration has initiated additional public and private efforts to
address the cost-price problem more directly in 1978. The Federal
Reserve, for its part, will pursue policies that encourage continued
growth in economic activity and reduction in the unemployment rate,
while seeking to attain further reduction in the rate of inflation over
the longer run.
11
Sources of
Economic Expansion
During 1977 gross national product rose by 5% per cent after allowance for rising prices, a larger increase than during 1976. Growth
was fastest early in the year as inventory investment and consumer
and business purchases of motor vehicles rebounded from the sluggish
rates of late 1976. Gains in GNP slowed continuously after the first
quarter. By contrast, advances in real final sales were largest late in
the year.
Growth of real outlays was particularly vigorous for residential
construction, business equipment, and consumer durable goods between late 1976 and late 1977. The strength of demand in these
markets reflected in part a continuing recovery from the unusually
depressed levels of the 1974-75 recession.
Residential building activity continued to expand briskly in 1977.
Real outlays in the housing sector rose 15 per cent during the year,
as total sales of homes reached a record level.
By contrast, sales of autos—a major component of consumer
durable goods—jumped to a high level early in the year and then
drifted lower through year-end, possibly signifying the completion of
GNP and final sales
Billions of 1972 doUars
S#
GMVj
1350
1300
Inventory
^
accumulation ~y^* Final sales
^^T^y^—. Inventory
^"^
liquidation
1250
1200
1975
1977
U.S. Dept. of Commerce data, seasonally adjusted at annual rates.
12
Sources of Economic Expansion
replacement buying that had been deferred during the recession and
the late 1976 auto strike. As auto sales eased, however, purchases of
other consumer durable goods—most notably furniture and appliances—showed renewed vigor. Consumer purchases of nondurable
goods and of services each rose 4 per cent during the year.
Business fixed investment advanced 8.3 per cent in real terms
during 1977, a large rise in view of the prevailing uncertainties
about the effects of pending legislation and about prospects for further economic expansion in a highly inflationary environment. In
addition, businesses avoided inventory imbalances for the most part
by making quick adjustments in production to the uneven pace of
sales during the year. A strong burst of sales at year-end, however,
probably reduced stocks in some lines below desired levels.
Businesses, like consumers, increased their purchases of motor
vehicles sharply early in 1977. Real purchases of other business
equipment and outlays for business structures each rose about 6 per
cent from late 1976 to late 1977. Industrial and commercial building
activity increased markedly around midyear, but at the same time
outlays for the Alaskan pipeline were reduced.
Total purchases by governments increased moderately during the
year after having shown a slight decline during 1976. Much of the
impetus for this rise reflected Federal fiscal initiatives, which led to
a substantial increase in grants to State and local governments.
Developments in the international economy resulted in a drag on
growth in domestic activity during 1977. With the economic recoveries of our major trading partners lagging behind the recovery
in this country, real demands for our exports were little changed
while our imports rose considerably, responding to a substantial improvement in domestic activity.
As 1977 came to a close, continued growth appeared to be in prospect for most sectors of the economy. Consumer spending was strong
through the holiday season, and buyer sentiment remained at relatively high levels. In part because of this strength in sales, inventory
accumulation moderated at year-end. With inventories low relative
to final sales, some increase in inventory accumulation would appear
to be in prospect for early 1978.
Continued growth of business fixed investment also appeared to be
in prospect. Surveys of anticipated spending on plant and equipment
Sources of Economic Expansion
13
1. Gross national product
Seasonally adjusted, annual rates
1977
1976
Q4
Measure
1977
Q4
Ql
Q3
Q4
1,916
23.6
1,892
1,962
13.5
1,948
Q2
Billions of dollars
Gross national product
Change in business inventories
Final sales
1,755
-.9
1,756
1,962
13.5
1,948
1,811
13.8
1,797
1,870
21.7
1,848
Percentage change from—
Year-earlier
quarter
GNP (constant dollars)
Final sales (constant dollars)
Implicit price deflator
4.7
4.4
4.7
5.7
4.8
5.8
Previous quarter
7.5
3.8
5.3
6.2
5.1
7.1
5.1
4.4
4.8
3.8
6.1
5.9
NOTE.—U.S. Dept. of Commerce data.
indicated that increases in such outlays in 1978 would be moderate
(about 10 or 11 per cent in nominal terms) and would be somewhat
less than those in 1977 (about 12V6 per cent).
RESIDENTIAL INVESTMENT
Throughout the recovery housing activity has been very brisk, with
especially large gains in the West and South. During 1977, record
sales of new and existing homes stimulated a continuous rise in private housing starts that, together with heavy spending on additions
and alterations, boosted real residential outlays 15 per cent.
The employment and product demands that were spawned by the
rise in residential investment were impressive. Employment in the
construction industry—including both residential and nonresidential
work—increased almost 10 per cent during the year. Production of
construction supplies rose &V4 per cent, generating large gains in employment within supplier industries.
The strong showing of residential construction activity in 1977 was
facilitated by developments in financial markets. Net residential mortgage debt formation is estimated to have totaled a record $100
14
Sources of Economic Expansion
billion, as lending by thrift institutions was supplemented with
stepped-up participation by commercial banks and with large increases
in issues of mortgage-backed, "pass-through" securities.
For the year as a whole, private housing starts totaled almost 2
million units. Starts of single-family homes rose about one-fourth
from the 1976 total to about 1.45 million units, reaching the highest
level since 1955. Multifamily starts totaled 535,000 units—an increase of 40 per cent from 1976, and approximately half the peak
reached in 1972. About a fifth of all multifamily units were started
under Federal support programs—primarily under the Department of
Housing and Urban Development's Section 8 Rental Assistance Program.
Market conditions facing builders of multifamily units that were
not Federally supported varied considerably across the country. In
some areas low vacancy rates and rising rents provided the basis for
moderate increases in rental housing, whereas elsewhere rents remained too low to justify much construction.
Demands for housing were very strong in the final quarter of the
year. Sales of new and existing homes were at an annual rate of 4.8
million units, and single-family housing starts were at a very rapid
annual rate—1.6 million units. Outstanding mortgage lending commitments at savings and loan associations were at a record level of
almost $35 billion, seasonally adjusted, at the end of 1977.
CONSUMPTION
Consumption spending rose unevenly in 1977, with especially large
increases in the first and last quarters and comparatively small gains
in the middle quarters. The surge in consumer spending early in the
year reflected in large part two events: delayed purchases of new
autos because of the strike in late 1976, and the unusually severe
winter weather, which had widespread impacts on consumption of
heating fuels and on prices of some foods. Later in the year the
strong growth of employment and of disposable income, coupled with
a high level of consumer confidence, provided support for an upturn
in consumption spending in the final quarter of 1977.
During the winter of 1976-77 consumers faced larger bills for
essentials. Consumption of heating fuels rose sharply in response to
unusually cold weather east of the Rockies, and spending for natural
Sources of Economic Expansion
15
gas, fuel oil, coal, and electricity in the first quarter of 1977 was 22
per cent above that a year earlier; about half of the rise was due to
higher prices.
With the return of more favorable weather, such spending declined
almost 10 per cent in the second quarter. At the same time, however,
consumer outlays for food rose considerably, mainly because of large
increases in prices that were partially a result of weather damage to
crops. With both utility and grocery bills large, spending on most
other nondurable goods was apparently held down early in the year.
But during the spring, as fuel bills eased and increases in food prices
began to moderate, purchases of apparel moved into an upswing that
continued for the remainder of the year.
Purchases of durable goods rose at a rapid pace during the first
quarter of 1977, as unit sales of automobiles jumped more than 10
per cent from the prior, strike-affected quarter. Auto sales rose
further to an annual rate of 11.7 million units in the second quarter—
the strongest quarterly pace since 1973. During that quarter demand
for autos shifted markedly in the direction of foreign models—in
part, perhaps, because the administration's energy proposals stimulated renewed interest in fuel-efficient cars. Sales of foreign-model
autos continued strong and for the year totaled a record 2.1 million
units. Sales of domestic autos averaged about 8.9 million units (an-
Auto sales
Millions of units
Total
1975
1977
Data from domestic manufacturers and foreign distributors, seasonally adjusted by Federal Reserve.
16
Sources of Economic Expansion
nual rate) during the second half of 1977; at that level they were
below the first-half rate, below manufacturers' anticipated sales, and
below production rates. As a result, inventories increased rapidly
late in the year, and selected downward adjustments in production
rates were instituted in November and December.
Outlays for other consumer durable goods rose strongly after midyear. Spending for furniture and appliances, stimulated in part by
record purchases of homes, rose at a 14 per cent annual rate during
the last three quarters of the year. Outlays for luxury items such as
jewelry and for sporting goods, as well as for a wide variety of other
"nonessential" durable goods, also rose briskly late in the year.
Surveys of consumer attitudes conducted near the end of 1977
indicated that confidence remained at a relatively high level. Furthermore, substantial growth of employment and disposable income late
in the year suggest good prospects for continued advances in consumer outlays during 1978.
INCOME
An acceleration in income growth supported the large increase in
consumer demand in 1977. Personal income rose 11% per cent during the four quarters of 1977 compared with less than 10 per cent
during 1976. Wage and salary disbursements in the private sector,
Income, consumption, and saving
Percentage change
Real consumption
HI
~1
1
~J
IS
I Real disposable income
4
—0
l
1975
1977
Based on U.S. Dept. of Commerce data, seasonally adjusted at annual rates. "Real" is in
terms of 1972 dollars. Changes are from Q4 to Q4.
Sources of Economic Expansion
17
particularly in manufacturing and services, led the advance in payroll
growth; government wages and salaries were up a modest IV2 per
cent.
Transfer payments rose about IV2 per cent during 1977 as reductions in unemployment insurance payments partially offset increases
in other benefits. The midyear cost-of-living increase for social
security recipients bolstered transfer payments in the second half of
the year. Farm income, after declining steadily in response to falling
farm prices, rose sharply at year-end as wheat price-support payments were distributed.
Increases in Federal estate and gift taxes held down growth in
disposable income early in the year, but such income was bolstered
later in the year by a cut in Federal income taxes. Lower withholding
rates, which relate directly to take-home pay, were instituted in the
second quarter. Consumers used some of the increase in disposable
income to increase their savings. The saving rate—which had reached
a 26-year low in the first quarter, in part because of 1976 estate- and
gift-tax-law revisions—rose moderately during the last three quarters.
Despite the large increase in disposable income, financial obligations of the household sector reached new highs relative to disposable
income late in 1977, mainly because of the record increase in home
mortgage debt. The resulting rise in debt-service requirements narrowed considerably the proportion of disposable income available
for current discretionary spending.
BUSINESS FIXED INVESTMENT
By the fourth quarter of 1977 real outlays for plant and equipment
had risen 8.3 per cent from a year earlier. Following sharp advances
in the first half, such outlays rose only moderately in the latter half
of the year as sales of transportation equipment declined and construction of the Alaskan pipeline drew to a close.
Continuing the pattern of recent years, spending on new equipment
was the primary source of strength for capital outlays in 1977; over
the year such spending rose 9.5 per cent. Within the equipment sector, spending on machinery rose steadily but still did not account for
the share of capital spending that historical experience would suggest.
Investment in structures advanced modestly during 1977—5.5 per
cent, as commercial and industrial building activity strengthened
in the spring, following 2 years of little change. The increase in
18
Sources of Economic Expansion
outlays for fixed capital was largest in manufacturing. Spending by
producers of durable goods was particularly robust, whereas that by
materials producers was damped by relatively low levels of capacity
utilization and by readily available foreign supplies at competitive
prices.
Despite healthy gains in the equipment sector during 1977, the
total of real spending for business fixed investment in the fourth
quarter was still 3 per cent below its earlier peak; a more typical
cyclical experience would have seen such outlays almost 13 per cent
above their previous peak. This shortfall can be attributed in part
to substantial unused capacity. At the year-end capacity utilization
rates in manufacturing were around 83 per cent, not much above
those in late 1976 and well below the levels normally experienced
after 33 months of cyclical recovery and expansion. Low-to-moderate
Capital outlays
Trou£h
Xonresidential fixed investment
120
100
1975 Ql=100
Xonresidential structures
Producers1 durable equipment
Commercial
and industrial
1
75 '
' 1977
1975
1977
Based on U.S. Dept. of Commerce data in 1972 dollars, seasonally adjusted. National
Bureau of Economic Research reference-cycle trough, 1975 Ql = 100.
Sources of Economic Expansion
19
utilization rates in most industries have probably had a depressing
effect on growth of fixed capital throughout the recent expansion.
Other factors also contributed to the relatively modest recovery
in investment spending. Continued uncertainty over tax and energy
policies heightened the caution that already characterized longerrange investment plans. The weakness in stock prices pushed up the
cost of equity capital and made the acquisition of existing productive
capacity relatively attractive. However, financial developments outside of equity markets did not seem to affect capital spending in an
adverse manner.
INVENTORY ACCUMULATION
Investment in business inventories proceeded cautiously in 1977, and
inventory-sales ratios remained below historical averages in most
sectors. After the abrupt shift to liquidation that had taken place in
the final quarter of 1976, inventory accumulation picked up sharply
in the first quarter of 1977. And in the second and third quarters
there were further advances, in response to gains in final demand.
At year-end, however, the pace of accumulation abated considerably,
as final sales strengthened. Indeed, at the year-end stocks may have
been a bit on the lean side relative to sales in some sectors; hence,
there could be some pick-up in accumulation during early 1978.
GOVERNMENT
The Federal Government continued to run a substantial deficit in
1977, reflecting in part new fiscal initiatives. In particular, spending
was buoyed by grants-in-aid to States and localities to implement
various countercyclical spending programs, and receipts were held
down by tax cuts embodied in the Tax Reduction and Simplification
Act of 1977. The Federal budget deficit, on a national-incomeaccounts (NIA) basis, was about $50 billion during calendar year
1977—$4.5 billion less than in 1976.
Real Federal purchases rose slightly more than 7 per cent during
1977. This contrasts with the small decline during 1976. Nondefense
spending was bolstered by large purchases of agricultural products by
the Commodity Credit Corporation following a sharp drop in farm
prices at midyear. Although the Federal civilian work force remained
essentially unchanged in 1977, Federal payrolls rose 7 per cent.
20
Sources of Economic Expansion
Federal receipts and expenditures
Billions of dollars
300
Deficit
L: U
•
1975
1977
Based on U.S. Dept. of Commerce data (national income series) seasonally adjusted at
annual rates.
Federal receipts rose 12Vi per cent for 1977 as a whole—considerably less than in 1976. Personal tax collections increased almost
16 per cent, led by a large increase in receipts of estate and gift taxes
associated with legislated changes in the method of taxing gifts. Social
insurance tax collections rose about 12V£ per cent, reflecting an increase in the social security taxable wage base as well as increases
in payrolls.
State and local government purchases of goods and services advanced VA per cent from late 1976 to late 1977, after a slight decline during 1976. Increases in Federally subsidized public service
jobs accounted for a large part of the rise. Between the fourth quarter
of 1976 and the fourth quarter of 1977, over-all employment in this
sector increased by 337,000 jobs. This compares with an advance of
225,000 positions the previous year. Despite an infusion of countercyclical Federal aid for public works projects and a record volume of
bond issues in 1977, real capital spending by State and local governments rose only marginally and at year-end was about one-fifth below
the level 3 years earlier.
State and local government receipts rose about 11 VA per cent for
1977 as a whole. The advance reflected increases in local tax bases
associated with the general economic expansion as well as sharply
higher Federal grants-in-aid during the second half. Total spending
was held below revenues throughout the year as many governmental
Sources of Economic Expansion
21
State and local government spending
Percentage change
Real purchases
4
0
iiiinons 01 dollars
Balances
Total
1977
1975
Based on U.S. Dept. of Commerce data, seasonally adjusted; changes are from Q4 to Q4.
Operational surplus excludes net savings by social insurance funds.
units used some of their receipts to rebuild cash balances that had
been drawn down by several years of fiscal stress. As a result of such
fiscal conservatism and some unspent countercyclical grants, the
operational balance—which excludes net savings by social insurance
funds—showed a record annual surplus of almost $14 billion.
N E T EXPORTS
U.S. net exports of goods and services showed a deficit of $11 billion
in 1977 on an NIA basis—a sharp reversal from the $7.8 billion
surplus recorded in 1976. The swing into deficit was the result of a
very large increase in the merchandise trade deficit that was only
partially offset by a small rise in net investment income.
Exports of merchandise from the United States were little changed
in real terms as the slow economic recovery of our major trading
partners constrained expansion of demand. Slow growth of capital
investment in both developing and developed countries limited increases in demand, particularly for machinery and industrial materials, which normally constitute about half of our merchandise exports. The volume of agricultural exports in 1977 continued the
strong trend established in 1976, but the value of these exports
declined in the latter half of the year as grain prices fell sharply.
The sharp rise in merchandise imports in 1977 reflected a broad
range of developments, but the dominant factor was the substantial
22
Sources of Economic Expansion
U . S . foreign transactions
Billions of dollars
20
1977
U.S. Dept. of Commerce data, seasonally adjusted at annual rates. Includes both goods
and services.
rise in petroleum imports. The total bill for imported oil rose about
30 per cent from its 1976 total to $45 billion, as increased consumption and substantial expansion of petroleum inventories were met
almost entirely by imports. Price increases accounted for about onethird of the rise. Imports of industrial supplies, autos and related
equipment, and consumer goods increased significantly, reflecting
mainly demands generated by the expansion of the domestic economy. At the same time, sharply higher prices for coffee and some
other imported agricultural commodities provided a significant boost
to the cost of imports during the early part of the year.
Net exports of services and military transactions (NIA defined)
rose $5 billion in 1977 to $22 billion. These transactions have become a large part of total exports over the past several years, as
income from U.S. investment abroad and sales of military equipment
to foreign governments have grown.
23
Labor Market
Developments
The expansion of economic activity generated a 4.4 per cent gain
in total employment during 1977, the largest relative increase in more
than two decades. Demands for labor exceeded the growth in the
labor force, which also was at a very rapid rate, and unemployment
dropped to about 6 ^ per cent of the labor force at year-end—a
decline of 1XA percentage points from a year earlier. Total compensation of employees rose 12 per cent during 1977, reflecting both
the rapid growth of employment and large increases in wage rates.
Employment gains were concentrated in the private sector of the
economy where job creation in the goods-producing industries—
particularly in construction—accelerated from its lackluster pace in
1976. Increases in service-producing jobs, which had led job gains
in earlier stages of the expansion, also were somewhat larger. By the
year-end 2>VA million jobs had been added to nonfarm payrolls,
appreciably more than the increase of about 2Vs million during 1976.
Reductions in unemployment during 1977 were large for workers
who had lost their last job, heads of households, full-time workers,
and adult males. Rates of unemployment were little changed for
recent labor force entrants, minority groups, and youth.
2. Selected labor market measures
Seasonally adjusted data
Levels in Q4 of—
Measure, and unit
Civilian labor force (millions of persons)
Total employment (millions of persons)
Unemployment (per cent of labor force)...
Private payroll
employment (millions of
persons) l
Wage and salary disbursements 2 (billions
of dollars)
..
Government employment (millions of
persons)
Wage and salary disbursements2 (billions
of dollars)
1
2
Adjusted for strike activity.
Levels are at annual rates
Percentage change from
year-ear ier quarter
1975
1976
1977
93.1
85.3
8.3
95.6
88.2
7.8
98.6
92.1
6.6
63.0
65.1
68.0
3.4
4.3
654
731
822
11.8
12.5
14.8
15.0
15.4
1.3
2.3
181
193
207
6.2
7.5
1976 Q4
2.8
3.3
1977 Q4
3.1
4.4
24
Labor Market Developments
Wage rate increases were slightly larger in 1977 than the year
before. Average wage rates in durable goods manufacturing were up
sharply, reflecting in large part the timing of industry negotiations
in the collective bargaining cycle; settlements had occurred in the
auto industry late in 1976, and in the steel industry there were settlements early in 1977. Average wage increases in services, trade, and
transportation and public utilities also were larger in 1977 than in
1976. By contrast, growth of wages in contract construction decelerated for the third year in a row.
EMPLOYMENT
More rapid growth of employment was evident in virtually all
demographic, occupational, and industrial groups during 1977. Adult
men obtained more than two-fifths of the total positions added, and
their unemployment rate fell to 43A per cent. This reflects in part
the stronger expansion of goods-producing industries—in which men
hold three of each four jobs.
At the same time, continued strong growth of service-oriented industries generated job opportunities for women and youth. Nearly
2Vi million additional white-collar and service jobs, which are heavily
staffed by women, were created during the year. The number of
women employed rose by 1% million, and the proportion of their
population employed reached a record high. Teenage jobholders reg-
Payroll employment
Change, millions of persons
Xonfarm
*
• Ma
Manufacturing
1975
1977
Based on U.S. Dept. of Labor data, seasonally adjusted. Changes are from previous
quarter.
Labor Market Developments
25
istered a particularly sizable gain of more than half a million during
the year—almost three times the increase during 1976.
Jobs in trade, services, and finance grew steadily during 1977,
accounting for more than half of the increase in nonfarm payroll
employment over the year. Demand continued strong in medical and
health fields as well as in such areas as legal, educational, and business services. In view of substantial gains in residential construction
activity and of a pick-up in nonresidential bulding activity, employment in contract construction posted its largest gain of the current
expansion. Growth of State and local government payrolls was slow
early in the year, but it accelerated following the start-up of a new
round of Federally subsidized public service jobs in May. Largely
due to this stimulus, government employment at the State and local
level had risen almost 340,000 by the year-end—compared with a
gain of about 220,000 in 1976.
Factory employment rose about 720,000 (strike adjusted) during
1977, compared with 570,000 during 1976. Producers of durable
goods led the advance, with growth particularly strong in the machinery, electrical equipment, and fabricated metals industries.
In nondurable goods manufacturing, increases in employment and
in the average workweek in the first half of the year were reversed
between July and October as producers promptly adjusted output
to slower sales in markets for soft goods. Sales improved late in the
year, however, and by December employment in nondurable goods
manufacturing had about regained its June peak.
At the year-end employment in manufacturing was still 2% per
cent below its late 1973 peak, and construction jobs remained almost
4 per cent below the previous high. In durable goods manufacturing
shortfalls from prior peaks were most pronounced in primary metals
(11 per cent) as steel producers, faced with high costs and import
competition, curtailed employment during the latter half of 1977.
Employment in the apparel industry also continued to lag, and at the
year-end jobs in this sector were 9 per cent below the pre-recession
peak.
LABOR FORGE AND UNEMPLOYMENT
The civilian labor force increased 3 million during 1977, about onehalf of which represented population growth and the other half the
rise in labor force participation. The participation rate climbed to a
new record—62.7 per cent of the civilian population aged 16 years
26
Labor Market Developments
and older. Adult women continued to move into the labor market
in large numbers, as an apparent preference for work outside the
home was accompanied by expanding job opportunities, particularly
in the service sector. By year-end an additional W2 million women
aged 20 years and over had joined the labor force.
An even sharper increase in labor force participation had occurred
among teenagers, who tend to respond quickly to improvement in
labor demand; the 16- to 19-year-old population was little changed
over the year, but the teenage labor force expanded by 415,000.
As was the case in 1976, the participation rate of adult men was
relatively stable during 1977.
Growth in employment exceeded the expansion of the labor force
by a considerable margin early in 1977, and by midyear the
unemployment rate had dropped 0.7 percentage point. This decline
was concentrated among experienced workers who had lost their
last job, and it reflected in some part an acceleration of hiring in
the industrial and construction sectors. After slowing slightly in the
third quarter, employment growth was again strong in the final
quarter of the year. As a result, the unemployment rate fell another
V2 of a percentage point to just over 6V4 per cent.
At the end of 1977 unemployment was almost 900,000 below the
level a year earlier and was at the lowest level since late 1974. The
improvement was not evenly distributed, however, as unemployment
remained relatively high among less experienced workers. The high
unemployment rates for teenagers and blacks remained about unchanged. For heads of families and for prime-age workers (25 to
Labor force and employment
Ratio scale, millions of persons
Total employment
!
I
I
1975
1977
U.S. Dept. of Labor data, seasonally adjusted.
Labor Market Developments
27
54 years), on the other hand, jobless rates fell 1 percentage point
each during the year to 4.2 and 4.8 per cent, respectively; nevertheless, both rates remained well above pre-recession levels, which were
in the neighborhood of 3 per cent for both groups.
During the year the total number of workers collecting unemployment insurance benefits declined from AVi million to !>V?> million.
With high levels of joblessness plus the temporary extensions of
benefits and expansions of coverage legislated in 1975, Federal expenditures for unemployment insurance had more than tripled between 1973 and 1976. In fiscal year 1977 these outlays fell to an
estimated $ 1 3 ^ billion as unemployment declined and the Federal
Supplemental Benefit Program, which had provided up to an additional 26 weeks of benefits, was phased out. The number of claimants under the temporary special unemployment assistance program,
which had permitted previously uncovered workers to receive benefits, also fell in 1977. When the program ended in December, however, coverage for these workers was picked up by the States.
WAGES AND COLLECTIVE BARGAINING
Average pay increases in the private sector were somewhat larger
during 1977 than during 1976. The average hourly earnings index
for private nonfarm production workers—a broad measure of average wage-rate trends—rose more than IVi per cent compared with
about 634 per cent during 1976. The timing of major collective
bargaining settlements, the larger increases in consumer prices, and
some tightening of the labor market were important factors in the
faster rise in wages.
3. Changes in adjusted hourly earnings *
Change from year-earlier quarter in per cent
Category
Total
Construction
Manufacturing
Transportation and public
utilities
Services
Trade
1974
Q4
1975
Q4
9.3
7.8
10.4
8.1
8.9
9.1
1976
Q4
1977
Q4
8 2
6.8
7.7
6.3
8.8
5.5
7.4
5.0
8.2
9 8
7.8
7.5
7 4
6.9
6.4
8.0
8.2
7.5
1
Average hourly earnings index, private nonfarm production workers.
NOTE.—U.S. Dept. of Labor data.
28
Labor Market Developments
Larger wage increases were widespread. In manufacturing, services,
and transportation and public utilities the hourly earnings index rose
8 per cent—up from a range of 7 to IVi per cent during 1976.
Among unionized workers in contract construction first-year wage
adjustments averaged 6V^ per cent, about in line with the 1976
average. However, growth in employment in construction in 1977
appears to have been larger at nonunion firms—where wage rates
are often lower—than at union firms, and the wage index in total
contract construction increased only 5 per cent over the year.
New agreements were negotiated in 1977 for about half of the
10 million workers covered by major union contracts, and key settlements were signed in the steel, metal mining, metal containers, communications, and shipping industries. Most followed the pattern set
by the steel settlement—with effective wage increases of 10 to 12
per cent in the first year and about 30 per cent over the life of the
contract. First-year wage adjustments for all union workers averaged
about 7% per cent during 1977.
WAGE AND SALARY INCOME
More rapid increases in employment and in rates of pay during 1977
caused wage and salary income to rise faster than during 1976.
However, prices also rose more rapidly, and the increase in real
wages and salaries over the four quarters of 1977 was the same as in
1976.
Private wage and salary disbursements grew 12Vi per cent over
the four quarters of 1977, about the same as the year earlier.
Government payrolls grew IVi per cent—well below growth in the
private sector for the second consecutive year. Larger wage and
employment gains—particularly in the manufacturing and service
sectors—led the growth of nonagricultural personal income over the
year. At the same time, the 3-year downward trend in farm income
apparently ended. Farmers received higher prices for fruits and
vegetables as well as for livestock, and personal income in agriculture
rose sharply early in the year. Following this spurt, a continuing
erosion of crop prices pushed income down until the Congress passed
legislation providing higher price-support payments and larger cash
payments to farmers for certain crops. Due in large part to these
Government payments, farm income in the final quarter of the year
returned to levels of late 1975.
29
Cost and Price Developments
The dominant influence on the long-run behavior of prices in the
U.S. economy has been the trend in unit labor costs. During 1977
these costs rose 5.9 per cent, about the same as in 1976. This
advance reflected an historically high rate of increase in wages and
other forms of compensation coupled with a growth in productivity
that was only slightly above its postwar trend. Paralleling this increase in costs, the underlying rate of inflation remained in the
neighborhood of 6 per cent for the second successive year.
COSTS
The exceptionally rapid increase in compensation per hour was the
principal pressure on unit labor costs in 1977. For each of the past
2 years, the average annual increase in such compensation has been
around 9 per cent—the most rapid of the postwar era except during
1973-75. The past rate of inflation continued to be a significant
Productivity and costs
Percentage change
10
Hourly compensation
5
"1
Productivity
+
0
15
Unit labor costs
10
!
5
\
I 0
1975
1977
Based on U.S. Dept. of Labor data for nonfarm business sector.
30
Cost and Price Developments
4. Selected measures of prices and costs
Percentage change from year-earlier quarter
All sectors
Measure
Excluding food
sector
1976
Q4
1977
Q4
1976
Q4
1977
Q4
Consumer price i n d e x . . . .
Wholesale price i n d e x . . . .
Implicit deflator for gross
national product
5.0
4.1
6.6
6.0
6.3
6.6
6.4
6.7
4.7
5.8
5.4
5.9
Unit labor cost 1
5.8
5.9
1
Private nonfarm business sector.
factor in wage increases, since in many sectors wage adjustments
are linked—either formally or informally— to previous changes in
prices. In addition, large increases in payroll taxes and in minimum
wages have contributed to the sharp rise in compensation costs.
During 1977 growth in productivity decelerated to a 23A per cent
annual rate from the cyclically advanced pace of the previous 2
years—a pattern consistent with this stage of expansion.
PRICES
Although unit labor costs are the single most important determinant
of underlying price trends, other factors also affect prices. During
1976, for example, prices of food and energy rose slowly, and this
damped the rise in the over-all index; in 1977, on the other hand,
there was a marked acceleration in consumer prices in the first half
as a result of the weather-induced short supply of farm products and
the heavy demand for energy caused by the harsh winter.
Foods
In addition to weather-related supply shortages, two factors contributed to the first-half acceleration in consumer prices: One was a
huge increase in coffee prices stemming from the mid-1975 freeze
in Brazil, and the other was rising prices of meats. In the second
half, as farm supplies increased, the prices of almost all major food
groups decelerated. Food prices at the retail level slowed to an annual
rate of 3Vi per cent, which held the rate of increase in the consumer
price index to 4% per cent. Prices of consumer foods at wholesale
Cost and Price Developments
31
Food prices
Ratio scale, January 1974=100
!l40
120
100
WPI farm and food products
1975
U.S. Dept. of Labor data, seasonally adjusted.
also slowed considerably from the first-half rate, and wholesale
prices of farm and food products declined. Nevertheless, retail prices
of cereal and bakery products increased considerably over the year,
mainly because of higher costs of labor, energy, and other material
inputs.
Energy
A rapid rise in energy prices exacerbated inflationary pressures early
in 1977. Substantial price increases for fuel oil were posted as a
result of high prices charged by the Organization of Petroleum
Exporting Countries (OPEC) and of the cold winter that caused
imports of petroleum to soar. Much of the increase in fuel oil costs
reflected the fact that a large proportion of the expenditures for such
oil represented more expensive imports. Later in the year the rise
slowed, as demand returned to more normal levels and the OPEC
price increase had been largely accommodated.
A factor partially restraining price increases during much of 1977
was the slow rise in gasoline prices. Accumulation of large supplies
in the spring and only moderate growth of demand led to some
declines in gasoline prices in the summer. Nevertheless, for the year
as a whole retail prices of gasoline increased about 4Vi per cent,
about twice the rate during 1976 when the removal of import fees
and the rollback of upper-tier crude oil prices had held down prices
of gasoline.
32
Cost and Price Developments
At the retail level prices of natural gas and electricity rose at a
double-digit rate during 1977 for the fourth straight year. Higher
fuel costs for electric utilities were a factor, but the sharp rise in
allowable prices for natural gas was more important.
Other prices
Apart from food, retail prices of services showed the largest increase
during 1977, and prices of durable goods the smallest. For services,
the biggest component of consumer budgets, price increases were
about the same as in 1976. Rent increases accelerated to 6Vi per
cent, the fastest since 1947. These were moderate, however, compared with the rise in the cost of medical services
led by physicians' fees and hospital charges—of about 9 per cent.
Changes in used-car prices dominated the movement of average
prices of durable goods during 1977. Prices of such goods accelerated
markedly in the first quarter as used-car prices continued the spectacular climb that had begun in the fall of 1976. The increase in the
durable goods index then decelerated significantly as prices of used
cars fell at an annual rate of nearly 20 per cent from April through
October. New-car prices (domestic models and foreign-made combined) increased steadily during 1977 as a result of strong demands,
increased production costs, and the effect of less favorable foreign
exchange rates on domestic prices of foreign-made cars. Meanwhile,
prices of other durable goods, such as furniture and appliances, continued their moderate rate of increase. Over the four quarters of 1977
prices of durable goods rose 4.7 per cent.
At the wholesale level, prices of finished goods rose 6.8 per cent
in 1977; this was more than twice the increase in 1976, and it reflected mainly the behavior of food prices. Prices of producer finished
goods accelerated in 1977 due in large part to the rise in prices of
machinery and equipment. Late in the year sizable price increases for
1978-model-year trucks were also a major influence in the over-all
rise in this index. Prices of consumer finished goods other than food
rose 6% per cent in 1977 compared with 5 per cent in 1976.
Substantial increases in construction costs—reflecting sharp rises
for lumber and building materials—kept prices of intermediate materials from slowing in 1977. These increases, as well as a high level
Cost and Price Developments
33
Ratio scale, January 1974=100
Crude materials^
Wholesale
140
Intermediat
materials
120
100
1975
1977
U.S. Dept. of Labor data, seasonally adjusted.
1975
1977
of building activity, were an important factor in the rise of almost
13 per cent in prices of residential structures during 1977.
The pace of inflation for crude commodities slowed during 1977.
Prices of many commodities rose sharply early in the year in connection with the increased tempo of economic activity. By spring,
however, excess world capacity for internationally traded basic materials had led to significant downward adjustments in prices; late in
the year increases were moderate.
34
Monetary Policy
and Financial Markets
In 1977 monetary policy sought to foster conditions in financial
markets that would encourage further economic growth, while avoiding excessive expansion of money and credit, which would tend to
aggravate the Nation's inflationary problems. The public's demand
for money, relative to economic activity and interest rates, was
stronger during most of the year than in previous years. Although
this apparently reflected in part a diminution of the effects of changes
in financial techniques used, transactions demands for cash balances
also continued to expand in response to rapidly rising nominal
incomes and expenditures.
In view of the vigorous growth in the key monetary aggregates,
especially M-l, the Federal Reserve adopted a gradually less accommodative stance in the provision of reserves. At the same time,
demands for credit in the aggregate were exceptionally robust, and
total funds raised by all sectors reached a new high relative to GNP.
Beginning in the spring, interest rates rose appreciably in short-term
credit markets, but credit supplies generally were ample. Although
1977 saw a belated emergence of some normal cyclical pressures on
financial markets, conditions at year-end remained conducive to a
further expansion in economic activity.
MONEY AND RESERVE AGGREGATES
Each quarter since the spring of 1975, the Federal Open Market Committee (FOMC) has made projections of growth rates over the coming
year for the major monetary aggregates—M-l, M-2, M-3—believed
to be appropriate for expected economic conditions. The projections,
expressed as ranges, are from quarterly-average base periods, which
are moved ahead at quarterly intervals. The longer-run ranges are
subject to review and modification at any time, and it is understood
that short-run factors may cause month-to-month growth rates to fall
outside the ranges contemplated for the year ahead.
For the completed periods since the FOMC began to employ
1-year projections, the actual rates of expansion of the monetary
Monetary Policy
35
aggregates have been broadly in line with the announced ranges.
However, in contrast to experience earlier in the current recovery, the
actual growth of M-l during the 1-year periods ending in each of
the four quarters of 1977 was above the midpoint—and in two
instances above the upper end—of the ranges specified. This tendency
for actual growth of M-l to "overshoot" the projected ranges apparently reflected in part a sharper-than-anticipated slackening in
recent quarters of the rate of adoption of money-economizing financial innovations, which intensified demands for transactions balances
to support the continued expansion of economic activity.
An effort was made during 1977 to reduce the growth ranges as a
means of slowing the rate of inflation to the extent consistent with
the objective of supporting the economic expansion. At the FOMC
meeting in January 1977 the M-l range adopted for the period from
the fourth quarter of 1976 to the fourth quarter of 1977 was 4Vi to
6Vi per cent, unchanged from the range adopted earlier for the year
ending with the third quarter of 1977. However, the lower boundaries of the ranges for the broader aggregates were reduced by Vi of
a percentage point each—to 7 to 10 per cent for Af-2 and %V2 to
WVi per cent for M-3. These downward adjustments reflected in
part an expected moderation of flows into savings deposits and
small-denomination time deposits from the rapid rates of growth
in 1975 and 1976; in those years the public had shifted substantial
amounts of assets from market instruments to depositary claims as
market rates fell to levels considerably below the ceiling rates on
deposits. In late 1976 banks and thrift institutions reduced their
offering rates and curtailed their promotional activities in an attempt
to slow these deposit inflows.
At the April 1977 meeting members of the FOMC agreed that it
would be desirable to make a reduction of some kind in the longerrun ranges for monetary growth. It was observed that such action
would be a further step toward rebuilding confidence in economic
prospects and would be consistent with the President's announced
objective of achieving a 2-percentage-point reduction in the rate of
inflation by the end of 1979. Moreover, some Committee members
observed that the economic situation had strengthened and that inflationary forces had appeared to increase. Also, some of the key
monetary aggregates were growing at a relatively strong pace. Because of uncertainties associated with developments in the real
36
Monetary Policy
5. Adopted longer-run growth ranges
and actual growth rates
of monetary aggregates, 1975-77 1
Per cent
Period
M-l
March 1975 to March 1976:
Projected
Actual .
5-71/2
1975 Q2 to 1976 Q2:
Projected
Actual
5-71/2
1975 Q3 to 1976 Q3:
Projected
Actual
5.0
5.2
M-2
M-3
8i/2-10y2
9 6
10-12
12 3
9.5
81/2-10V2
10-12
12.0
4.6
9.3
71/2-IO1/2
9-12
11.5
1975 Q4to 1976 Q4:
Projected
Actual.
41/2-71/2
71/2-IO1/2
10.9
9-12
12.8
1976 Ql to 1977 Q l :
Projected
Actual
41/2-7
71/2-IO
10.9
9-12
12.8
1976 Q2 to 1977 Q2:
Projected
Actual.
41/2-7
71/2-91/2
6.6
10.7
9-11
12.4
t976Q3 to 1977 Q3:
Projected
Actual...
41/2-61/2
7.8
71/2-IO
11.0
9-IIV2
12.7
1976 Q4 to 1977 Q4:
Projected
Actual....
41/2-61/2
7-10
9.8
81/2-H1/2
5-71/2
5.7
6.3
7.8
11.7
1
The initial 12-month range established in March 1975 used the average for that month as the base;
all subsequent ranges were based on quarterly averages; thus the 12-month period ending with the
second quarter of 1976 started with the second quarter of 1975 as the base, and so on.
economy and with pending legislative actions—principally the energy
program—the Committee decided to leave the projected growth
range for M-l unchanged. At the same time/however, it reduced the
upper ends of the longer-run ranges for M-2 and M-3 by V2 of a
percentage point for the period from the first quarter of 1977 to the
first quarter of 1978.
In July the FOMC decided to retain the existing ranges for M-2
and M-3, but it reduced the lower limit of the M-l range by Vi of
a percentage point. As in January and April, this action was taken in
order to encourage a financial environment conducive to reduction
in longer-run inflationary pressures.
Discussion of the longer-run ranges at the October meeting
focused on the uncertainty regarding the factors that had caused the
growth in M-l to expand vigorously in the second and third quarters.
Monetary Policy
37
Among the possible explanations, it was suggested that the improvements in financial technology that had been acting to retard the
growth of demand deposits since late 1974 had moderated, and that
a slowing in the pace of substitution, rather than an increase in
transactions demands, might have produced much of the observed
pick-up in growth of cash balances during the preceding two quarters.
Given the difficulty of anticipating trends in monetary growth
at that time, the Committee decided to retain the growth range for
M-l at 4 to &A per cent for the period from the third quarter of
1977 to the third quarter of 1978. The upper and lower limits of the
ranges for the broader aggregates were reduced by Vi of a percentage
point to reflect the expected impacts of increases in market rates
since the spring on inflows of interest-bearing deposits to banks and
thrift institutions. The ranges for M-2 and M-3 then stood at 6V2 to
9 per cent and 8 to lOVi per cent, respectively.
Behavior of the aggregates
Expansion of the monetary aggregates (before revisions based on
new benchmark data and new seasonal adjustment factors) exhibited
exceptional month-to-month volatility during 1977. This was particularly true for M-l. Indeed, a substantial portion of the year's increase
in that aggregate occurred in the first month of the second, the third,
and the fourth quarters, with only small portions of these surges accounted for by identifiable special factors. For the year as a whole,
M-l grew about 2 percentage points faster than in 1976, while the
broader aggregates slowed slightly.1
During the first quarter of 1977, growth of the aggregates slowed
a little from the pace of the previous quarter. The moderate increase
in market yields early in the quarter had a larger-than-usual impact
on inflows of time and savings deposits to banks and thrift institutions; the firming in market rates came at a time when many of these
institutions had already curtailed promotional activity, had cut offering rates on certain types of accounts, and had stopped issuing some
categories of deposits in response to very rapid expansion of their
deposit inflows. Sharp increases in household spending—both on
fuel, made necessary by the severe winter weather, and on purchases
1
Figures in text and tables are based on data as revised in March 1978.
38
Monetary Policy
6. Growth in monetary aggregates
Per cent
Period
M-l
M-2
M-3
1973
1974
1975
1976
1977 . . .
6.2
5.0
4.4
5.7
7.8
8.8
7.7
8.3
10.9
9.8
9.1
7.1
11.1
12.8
11.7
1977—Ql
Q2
Q3
Q4
6.9
8.1
8.1
7.2
10.9
9.0
9.9
8.0
12.2
10.2
11.9
10.6
1
A/-1 = Currency held outside the Treasury, Federal Reserve Banks, and the vaults of all commercial
banks, plus demand deposits other than interbank and U.S. Government. M-2 = M-l plus time and
savings deposits at commercial banks other than large negotiable certificates of deposits (CD's) at
weekly reporting banks. M-3 = M-2 plus deposits at mutual savings banks, savings capital at savings
and loan associations, and shares at credit unions.
NOTE.—Yearly rates of growth are derived by relating daily-average data for the fourth quarter to
those for the year-earlier quarter; quarterly rates are seasonally adjusted and annualized.
of durable goods—also diverted funds that might otherwise have
flowed into time and savings deposits in this period.
Growth in the narrowly defined money stock picked up in the
second quarter—as demand deposits surged in April and then grew
at a much slower rate in the ensuing 2 months—but expansion of the
broader aggregates again slowed. The April bulge in demand deposits was attributable in small part to some special factors—including earlier-than-normal distribution of social security checks and a
build-up of balances before midmonth in anticipation of unusually
large personal income tax payments.
However, most of the second-quarter acceleration was probably
associated with increasing transactions, demands generated by the
continued strong pace of economic expansion and the declining influence of financial innovations on the demand for money. The rapid
expansion of M-l in April, in the context of reports of considerable
strength in the economy, prompted the FOMC to raise the operating
range for the Federal funds rate. Accordingly, that rate rose about
60 basis during late April and the first 3 weeks of May to a level of
5% per cent.
By mid-May yields on 90-day Treasury bills and other money
market instruments had increased to levels slightly above the ceiling
rates on commercial bank savings deposits, and inflows of these
Monetary Policy
39
deposits weakened each month during the quarter. Savings deposits
of State and local governments—generally larger depositors with
ready access to alternative money market investments—were particularly affected by the rise in market yields. In contrast, growth in bank
time deposits, especially those in denominations of less than
$100,000, was strong as ceiling rates remained above yields on
market instruments of comparable maturity.
The growth rates in M-l and in the broader aggregates continued
rapid in the third quarter. In the first month of the quarter demand
deposits again surged, and the rapid growth of the aggregates induced
the FOMC to raise the operating range for the Federal funds rate.
In late July and early August short-term market interest rates rose
in association with movements in the Federal funds rate. As a result,
businesses and State and local governments increasingly found
yields on market instruments more attractive than allowable rates on
savings deposits, and deposit levels in these accounts showed no
growth or declined somewhat during the quarter. Individuals and
nonprofit organizations did not react so promptly, however, and
flows into their savings accounts were larger than in the previous
quarter. Although the time deposit component of M-2 accelerated
during the third quarter, much of this growth reflected an increase
in large time deposits not subject to rate ceilings, which more than
offset a fall-off in flows into small-denomination time accounts.
Deposit flows to thrift institutions picked up during the summer
months as these institutions reinstated long-term accounts at ceiling
rates and increased promotional activities designed to retain or attract
maturing "wild card" accounts. In July 1973 banks and thrift institutions had been permitted to issue deposits in minimum denominations
of $1,000 with maturities of 4 years or more and with offering rates
exempt from regulatory ceilings. Before ceilings were reimposed in
November of that year, all depositary institutions had attracted about
$27 billion of these "wild card" deposits. As these accounts began to
mature in July 1977, the thrift institutions—with generally higher
ceiling rates than commercial banks—apparently were able to attract
a large portion of these interest-sensitive funds from banks while also
retaining a large share of their own accounts.
With short-term interest rates continuing to increase late in the
third quarter and early in the fourth, the monetary aggregates began
to slow somewhat. Rapid expansion of M-l in the first month of
40
Monetary Policy
Interest rates
Per eent per annum
Short-term
[ Federal funds
12
Treasury bills
3-month
Long-term
Aaa utilities
New issue
1973
1975
Conventional mortgages
HID
1977
'78
Monthly averages except for conventional mortgages, which are based on quotations for
one day each month. Yields: U.S. Treasury bills, market yields; prime commercial paper,
dealer offering rates; conventional mortgages, rates on first mortgages in primary markets,
unweighted and rounded to nearest 5 basis points, from Dept. of Housing and Urban
Development; Aaa utility bonds, weighted averages of new publicly offered bonds rated
Aaa, Aa, and A by Moody's Investors Service and adjusted to a Aaa basis; U.S. Govt.
bonds, market yields adjusted to 20-year constant maturity by U.S. Treasury; State and local
govt. bonds (20 issues, mixed quality), Bond Buyer.
this quarter again was followed by slower expansion in the subsequent 2 months. In part reflecting the earlier increases in interest
rates, the growth of the narrow money stock over the fourth quarter
as a whole, at a still substantial IV4 per cent annual rate, was somewhat below the rapid pace of the second and third quarters.
Monetary Policy
41
With yields on market securities for most of the fourth quarter
at or above ceiling rates on deposits with maturities of less than 4
years, inflows of savings and small-denomination time deposits to
banks and thrift institutions abated further. This slower growth was
offset in part by the continuing expansion of large time deposits other
than negotiable CD's at large weekly reporting banks, so the broader
aggregates decelerated only moderately.
In the second half of the year, banks relied heavily on managed
liabilities to finance strong growth of loans in the face of slowing
inflows of deposits subject to rate ceilings. Large time deposits increased by more than $20 billion in this period after having declined
almost continuously since early 1975. More than half of this increase
was in large-denomination time deposits, which are included in M-2
and M-3. Funds from nondeposit sources—including Federal funds
purchased from sources other than banks, securities sold under
repurchase agreements, Euro-dollar borrowings, loans sold to affiliates, and other liabilities for borrowed money—also grew rapidly;
over this period, such funds expanded $8 billion. None of these nondeposit sources is included in the major monetary aggregates.
Financial technology and the growth of M-l
During the last three quarters of 1977 the narrowly defined money
stock expanded rapidly even as growth in GNP moderated and shortterm market interest rates rose substantially. Over all, the behavior
of M-l during these three quarters was about in line with the
relationship among changes in money, income, and interest rates
that had prevailed prior to 1975.
This return to a pattern consistent with the historical relationships
contrasts with the first 2 years of the current recovery, when M-l
increased at a much slower rate than past experience would have
suggested. In this earlier period, regulatory actions as well as expanded efforts of the public to adopt financial innovations designed
to economize on cash balances contributed to a substantial retardation of the growth in M-l. More recently, however, the constraining
effects of these factors appear to have diminished.
By adding new classes of economic agents that are permitted to
hold savings accounts and by facilitating the use of such accounts
42
Monetary Policy
7. Growth in components of M-l
Per cent
M-l
Member
bank
demand
deposits
Currency
Nonmember
bank
demand
deposits
1975
1976
1977
4.4
5.7
7.8
2.2
3.1
5.3
8.9
9.6
9.5
4.8
7.6
11.3
1977—Ql ,,
Q2
Q3
Q4
6.9
8.1
8.1
7.2
2.5
5.0
8.1
4.9
8.5
8.8
9.1
10.3
14.9
13.8
6.2
8.6
Period
1
Yearly rates of growth are derived by relating daily-average data for the fourth quarter to those for
the year-earlier quarter; quarterly rates are seasonally adjusted and annualized.
for third-party payments, regulatory changes have played an important role in recent years in dampening expansion of M-l. For
example, it is estimated that NOW accounts, business and State and
local government savings accounts, telephonic transfers from savings
to demand deposits, and preauthorized payments from savings accounts depressed M-l growth by about, l1/^ percentage points from
late 1975 to late 1976. Reflecting principally a slower growth in
NOW accounts and the completion by many firms of a one-time
transfer of a portion of their demand balances to business savings
accounts, these factors probably depressed M-l growth by no more
than 1 percentage point in 1977. In general, the constraining effects
of these regulatory factors appear to have been disappearing gradually
as the public has adjusted its stock of financial assets to the new regulatory environment.
In addition to the effects of recent regulatory changes, unusually
high interest rates in 1973 and 1974 had provided businesses and
individuals with an increased incentive for updating and improving
cash-management techniques and for adopting more efficient payment
practices. Through increased use of such cash-management techniques
as remote disbursing and wire transfers, nonfinancial corporations
were especially successful in trimming their demand balances.
Implementation of more efficient cash-management practices,
whether by businesses or individuals, tends to lower the desired stock
of demand balances associated with a given level of economic activity
and interest rates. Such practices help to explain the shortfall in M-l
growth in 1975 and 1976. However, once the lower desired stock
Monetary Policy
43
of money balances has been reached, the rate of growth in M-l
should return to a range more consistent with historical experience.
With interest rates significantly below their 1974 peak levels the
incentives for introducing more sophisticated cash-management practices appear to have diminished. As the rate of implementation of
cash-economizing financial innovations has generally declined, the
drag on M-l growth—which was particularly strong in the early part
of the current recovery—appears to have abated somewhat.
Member bank reserves
During 1977 member banks' demands for reserves reflected the
quickening in the expansion of deposits—particularly demand
deposits, which have relatively high reserve requirements. The resultant increase in required reserves put upward pressure on the
Federal funds rate—the rate paid on overnight loans by banks and
others—as member banks sought funds to meet their reserve needs.
Despite several increases in the FOMC's operating ranges for the
Federal funds rate, which led to a cumulative rise in the rate of about
2 percentage points over the year, the System supplied reserves to
member banks at a considerably faster pace than in the preceding 2
years.
Part of the increase in such reserves was reflected in larger borrowings at the discount window, which many banks found to be an
attractive source of short-term funds. Despite increases in the discount
rate in August and October the Federal funds rate exceeded the discount rate by as much as 10 to 60 basis points after midyear. Consequently, although total reserves grew at a 5 ! 4 per cent pace during
the year, nonborrowed reserves increased only 23A per cent, with increased borrowings accounting for the difference.
INTEREST RATES
Interest rates generally increased in 1977, after having declined, on
balance, over the preceding months of the current economic expansion. Short-term market interest rates led the upswing, rising around
2 percentage points from year-end 1976 to year-end 1977. In longterm credit markets, yields on corporate and Treasury bonds advanced 60 to 75 basis points, while primary home mortgage rates
moved up about 20 to 30 basis points. Yields on municipal securi-
44
Monetary Policy
ties, on the other harid, remained about unchanged or moved down
somewhat during the year, reflecting some further reduction from
the high level of risk premiums reached in 1975 as well as strong
demands by institutional investors for tax-exempt securities.
In the early weeks of 1977 nearly all short- and long-term interest
rates rose significantly, reversing the large decline that had been
recorded in the closing weeks of 1976. Upward rate pressures were
intensified as market expectations regarding prospective credit demands apparently were raised in response to indications of renewed
strength in the economy and the likelihood of a larger Federal deficit
arising from the administration's proposed tax rebate plan.
By early February most market interest rates had adjusted to the
change in market outlook, and there was little further net movement
in either short- or long-term rates until April, when accelerating
growth in M-l initiated a period of rapid expansion in this key
aggregate that continued through October. With M-l expanding at a
pace well above the upper limit of the longer-run range set by the
FOMC, the Federal Reserve did not fully accommodate the associated increase in demands for bank reserves. As a consequence, the
Federal funds rate moved up in several successive steps from about
43A per cent in April to 6V2 per cent in October. Other short-term
market interest rates rose by roughly similar amounts.
Member bank borrowing at the Federal Reserve's discount window
increased substantially during the summer, as short-term interest
rates moved up to levels well above the 5 ^ per cent discount rate,
which had prevailed since November 1976. To restrain such borrowing, the Federal Reserve raised the discount rate to 5% per cent in
late August. Following an additional advance in market rates in
September and October, it raised the discount rate again—to 6 per
cent—in late October.
In contrast to the rise in short-term interest rates, yields in longterm credit markets generally edged lower over the spring and
summer. The modest downward pressures on most long-term rates
appeared attributable largely to adjustments in expectations occasioned by the withdrawal of the administration's tax rebate plan
and by indications of a slowing in the economic expansion and a
moderation in the rate of inflation. Demands of institutional investors
for long-term bonds, in addition, remained quite substantial throughout this period. Moreover, nonbank thrift institutions, with large
Monetary Policy
45
inflows of deposit funds, were able to accommodate strong demands
for mortgage credit at only slightly higher interest rates. In late
summer and early fall, however, long-term yields generally began
to rise, responding in part to the continued upward movement of
short-term rates.
With monetary expansion moderating after early October, the
Federal funds rate remained near 6V2 per cent between mid-October
and year-end. Given this stability, other short-term rates showed
little net change throughout this period. Long-term interest rates, on
the other hand, after having remained unchanged for a time, resumed
their upward movement during the latter half of the quarter. These
increases apparently were in response to changes in expectations,
given evidence of greater strength in the economy and the administration's announcement of its intention to propose substantial cuts in
taxes. The marked slowing of inflows into thrift institutions, meanwhile, contributed to upward pressures on mortgage rates.
Most short- and long-term rates rose somewhat further in early
January 1978, as the weakening in the foreign exchange value of the
dollar prompted the Federal Reserve to increase the discount rate to
6V2 per cent and to allow the Federal funds rate to rise to around
6% per cent. Tax-exempt bond yields and primary mortgage rates,
however, increased relatively little.
The rise in interest rates in 1977, especially in short-term rates,
conformed to the patterns experienced in past periods of appreciable
economic expansion. By contrast, over the earlier part of the current
recovery most interest rates had fallen rather than risen. The return
of late to a more typical cyclical pattern appears attributable to the
reversal of a number of factors that had lowered interest rates in
1975 and 1976. First, after having previously declined and having
supported a moderation in inflationary expectations, the rate of price
advance stabilized in 1977, thus limiting any further reduction in
inflation premiums in interest rates. Second, the Federal Reserve's
efforts to restrain monetary growth have added to general upward
pressures on interest rates. Finally, as discussed in greater detail later,
credit demands strengthened substantially, and credit flows during the
year reached record levels relative to GNP.
Even so, by early 1978 net increases in interest rates over the
current recovery were still well below those that had occurred during
comparable periods in other post-World-War-II business cycles.
46
Monetary Policy
Short-term rates stood only about % to 1 percentage point above
their levels at the cyclical trough of the economy in March 1975,
while most long-term interest rates were little changed or had
declined on balance.
AGGREGATE FLOWS O F FUNDS
Net funds raised in U.S. credit and equity markets by all nonfinancial sectors reached an estimated $336 billion in 1977; relative to
GNP this represented a new high of 18 per cent. Household borrow8. Net funds raised in credit and equity markets
Billions of dollars
19771
Sector, or type of instrument
1974
1975
1976
1977
HI
H2
Total funds raised
229.0
219.5
296.8
398.6
369.2
427.9
By sector:
Nonfinancial sectors
U.S. Govt
189.6
11.8
205.6
85.4
268.3
69.0
335.9
56.8
306.2
40.3
365.6
73.2
177.8
97.0
16.2
49.2
15.4
120.2
47.3
11.2
48.6
13.2
199.2
74.6
14.6
89.8
20.3
279.1
111.2
24.8
130.9
12.2
265.9
109.6
21.7
129.6
5.0
292.4
112.8
27.9
132.2
19.5
39.4
17.3
5.8
16.3
14.0
3.2
10.3
.4
28.6
2.9
15.7
10.0
62.7
5.7
20.4
36.5
63.1
7.8
17.9
37.4
62.3
3.7
22.9
35.7
34.3
11.9
22.4
16.6
5.8
98.2
85.5
12.7
2.3
10.3
88.1
69.1
19.0
3.3
15.7
84.2
56.8
27.3
6.9
20.4
68.4
40.4
28.0
10.1
17.9
99.9
73.3
26.6
3.7
22.9
Corporate and foreign bonds
Corporate equities
Tax-exempt securities 3
23.9
4.8
17.1
36.3
10.2
13.6
37.0
12.2
15.1
31.7
9.9
28.1
26.8
10.0
20.3
36.5
9.8
27.9
Mortgages
Residential
Other
60.5
40.2
20.3
57.2
41.4
15.8
86.8
67.0
19.8
129.7
100.1
29.6
119.5
93.8
25.7
139.8
106.3
33.5
Bank loans n.e.c
Open market paper and Rp's
Consumer credit
Loans 4from Federal home loan banks
Other
38.4
17.8
10.2
6.7
15.3
-14.4
.5
9.4
-4.0
12.5
6.7
13.0
23.6
-2.0
16.3
30.4
26.1
35.6
4.3
18.6
28.9
32.9
35.5
3.5
15.3
31.8
19.3
35.7
5.2
21.9
Other
Nonfinancial business
State and local govt
Households
Foreign
,
Financial sectors
Sponsored credit agencies
Mortgage-pool securities
Private financial intermediaries
By type of instrument:
U.S. Govt. securities
Public debt and budget agency securities2
U.S. Govt.-related
Sponsored credit agency securities
Mortgage-pool securities
1 Semiannual data are seasonally adjusted annual rates.
2 Includes mortgages.
3
Short- and long-term borrowing also includes industrial pollution control bonds, which are treated
as business borrowing.
4
Includes mutual fund shares.
NOTE.—Data from Federal Reserve flow of funds accounts. Rp's = repurchase agreements.
Monetary Policy
47
9. Net funds supplied in credit and equity markets
Billions of dollars
1977
Sector
1974
1975
1976
1977
HI
All sectors
All sectors to nonfinancial sectors
All sectors to financial sectors
U.S. Govt. and sponsored credit agencies
Mortgage-pool securities .
Federal Reserve System
Foreign sources
Private financial intermediaries..
Commercial banks.
Thrift institutions
Insurance and pension funds
Other
Private domestic nonfinancial sectors
Households
Nonfinancial business. .
State and local governments
Memo:
Net change in deposits and currency
held by private domestic nonfinancial
sectors
H2
229.0
219.5
296.8
398.6
369.2
427.9
189.6
39.4
205.6
14.0
268.3
28.6
335.9
62.7
306.2
3.1
365.6
62.3
29.6
5.8
6.2
11.7
19.3
10.3
8.5
10.8
13.9
15.7
9.8
18.0
17.3
20.4
7.1
42.3
15.6
17.9
4.6
31.0
19.0
22.9
2.7
53.7
132.0
64.7
27.1
36.7
3.5
129.3
27.6
52.1
50.8
249.5
79.8
86.8
71.4
11.5
239.9
80.6
85.1
68.8
5.3
259.1
79.1
88.4
73.9
17.7
43.7
37.5
2 2
41.2
23.0
14.2
4.1
40.0
11.4
15.3
13.3
61.9
20.7
17.5
23.7
53.2
19.9
13.6
19.7
70.5
21.5
21.3
27.6
75.7
97.1
130.1
143.6
127.2
160.0
199.6
58.0
71.8
61.6
8.1
1
Semiannual data are seasonally adjusted annual rates.
NOTE.—Data from Federal Reserve flow of funds accounts.
ing led the surge in credit demands. Much of this borrowing was in
home mortgages and reflected very large sales of existing homes and
the highest level of single-family housing starts in more than two
decades. Such borrowing expanded much more than capital expenditures on new and existing homes, as households—through refinancings, junior mortgages, and transactions in existing homes—drew
upon their increased equity associated with the large rise in house
prices in recent years. Flows of consumer credit rose vigorously as
well, supporting substantial increases in consumer spending.
External financing by nonfinancial businesses also increased markedly as the gap between capital outlays and internally generated funds
widened from the modest level in 1976. The appreciable expansion
in both long- and short-term financing reflected mainly increases in
commercial and industrial mortgage borrowing and in loans, other
than mortgages, from commercial banks.
Although net Federal borrowing in 1977 was noticeably less than
in the previous 2 years, it remained high by historical standards. Substantial foreign acquisitions of U.S. Government securities—mainly
48
Monetary Policy
in conjunction with support of the dollar by foreign central banks—
and large acquisitions of such obligations by State and local governments helped to limit interest rate pressures in the U.S. Government
securities market.
Although their aggregate surplus expanded, State and local governments raised an increasing volume of funds in credit markets. A significant portion of such borrowing was for advance refundings of
outstanding obligations; the proceeds of such refundings were reinvested in nonmarketable Treasury obligations to satisfy arbitrage
regulations of the Internal Revenue Service.
As is usual, private financial institutions provided the bulk of funds
advanced to nonfinancial sectors. Ample deposit growth during most
of 1977 enabled commercial banks and thrift institutions to expand
loan portfolios sharply, on balance, even though inflows of savings
and small-denomination time deposits slowed in the latter part of the
year. The depositary institutions liquidated U.S. Government securities and increased their reliance on managed liabilities in order to
accommodate vigorous loan demands in the face of this reduction in
deposit growth. Finance companies provided increased amounts of
short- and intermediate-term credit to both businesses and consumers
during the year, stepping up their borrowings in the bond and commercial paper markets to do so. Life insurance companies and pension funds—traditionally long-term investors—also increased their
lending in 1977, as their cash flows continued to expand.
Household sector
Households were the major borrowers in 1977; their borrowing,
which was a record $131 billion, represented two-fifths of the net
funds raised in credit and equity markets by all nonfinancial sectors.
With the strong expansion in mortgage and consumer credit, the ratio
of outstanding household debt to annualized disposable personal
income rose to a record of more than 70 per cent by year-end.
At the same time scheduled repayments of principal and interest on
such debts, relative to disposable income, approached earlier highs.
Meanwhile, the real value of the household sector's financial net
worth—financial assets less liabilities, deflated by the consumer price
index—declined somewhat, reflecting in part an erosion of common
stock values during the year. However, the real value of the sector's
Monetary Policy
49
total net worth, including tangible assets, changed little, as prices of
homes continued to increase at a faster pace than prices of most consumer goods and services.
Despite some apparent deterioration in the financial position of the
household sector, there were few direct indications of increasing
financial strains. At the year-end delinquency rates on short- and
intermediate-term consumer instalment debt were about a fifth below
those at the peak of the recession. Moreover, delinquency and foreclosure rates on home mortgages declined during the year.
Consumer instalment credit expanded sharply again in 1977, somewhat more than the substantial growth in sales of consumer durable
goods. Commercial banks provided more than one-half of the total
expansion of such debt, with finance companies and credit unions
supplying most of the balance. Reflecting strong auto sales, particularly in the first half of the year, auto credit led the expansion in
instalment borrowing. Rates paid on short- and intermediate-term
consumer credit, which normally move sluggishly, increased only
slightly over the course of the year.
As in 1976, home mortgages accounted for the major share of
household borrowing, lengthening the maturity of this sector's liabilities. Much of the increase in mortgage debt was associated with the
rapid pace of homebuilding. Nevertheless, the net increase in household mortgage debt exceeded the record volume of household capital
expenditures on new and existing homes by an unusually wide margin—on the order of $15 billion, compared with a high of about $6
billion in 1973.
The unprecedented difference between home mortgage debt formation and capital expenditures on homes apparently was associated
primarily with record sales of existing homes at high and rising prices.
Not all home-sellers invested all their housing equity—much of which
had been accumulated during the rapid inflation in home prices since
1970—in other dwellings.. In a period of ample mortgage funds,
many households opted instead for as large a mortgage as lenders
would permit on homes purchased, thus raising funds through the
mortgage market to be used for purposes other than housing outlays.
To a lesser degree, the surge in mortgage indebtedness represented
greater use of second mortgages and a larger number of refinancings
of first mortgages by homeowners who had not changed residences.
50
Monetary Policy
Direct mortgage investments by savings and loan associations accounted for more than half of the record volume of home mortgage
funds advanced to households in 1977. Rapidly expanding issues of
"pass-through" securities—guaranteed by the Government National
Mortgage Association or the Federal Home Loan Mortgage Corporation and representing shares in mortgage pools—accounted for about
a fifth of the total; substantial amounts of these securities were acquired by pension and retirement funds and a wide variety of other
investors. The share of home mortgage funds provided directly by
commercial banks rose to nearly a fifth of the net increase in such
mortgages outstanding, while mutual savings banks and households
accounted for most of the remaining 10 per cent.
The record volume of home mortgage funds was raised with relatively little upward pressure on interest rates. Average interest rates
on new commitments for conventional home mortgages in the primary
market increased only about 20 basis points during the year. However, in secondary markets for Government-underwritten mortgages,
where returns move more closely with corporate bond yields, rates
rose by 60 basis points or more.
Nonfinancial business sector
Although net funds raised by nonfinancial businesses in credit and
equity markets reached a record $111 billion in 1977, the volume of
funds obtained remained below previous highs relative to GNP.
Increased availability of internal funds, largely through moderately
improving profitability, supplemented external financing.
As corporations stepped up their capital outlays during the year,
the financing gap—the excess of capital expenditures, including inventory investment, over internally generated funds—widened considerably. While quite a bit larger than during the two previous
years, the gap was still smaller than the highs recorded in 1973
and 1974. Businesses were generally able to finance this expanding gap without significantly eroding the strength of balance sheets
built up over the two previous years. The ratio of corporate liquid
assets held to short-term liabilities edged up further over the year,
although the ratio of short- to long-term debt rose somewhat.
Financing in short- and intermediate-term markets picked up noticeably during the year, as the sum of business loans at banks and
of commercial paper issued by nonfinancial firms expanded by more
Monetary Policy
51
Funds raised relative to GNP
Per cent
' 1971 '
1973
1977
Based on flow of funds data (Federal Reserve) and on GNP data from U.S. Dept. of
Commerce. Seasonally adjusted.
than 13 per cent. Meanwhile, business loans at finance companies
grew at an even faster rate; such loans were used in large part to
carry inventories at automobile dealers.
Despite the step-up in short-term indebtedness, long-term financing predominated over the year. Public bond offerings by higherrated industrial corporations, many of which had largely completed
balance-sheet restructuring, were below the totals in the two previous
years. But private placements of corporate bonds, associated primarily
with debt issues of lower-rated manufacturing and other industrial
concerns, continued at a very high rate. The risk premiums in the
interest rates charged lower-rated borrowers remained relatively small,
as funds were readily available from life insurance companies and
pension funds—the major investors in private placements. Incomeproperty mortgages, to finance expansion of multifamily and commercial building activity, provided an additional important source
of long-term funds for nonfinancial businesses.
52
Monetary Policy
The net amount of equities issued by nonfinancial corporations in
1977 was moderately less than in either 1975 or 1976, and it
remained small in comparison with the early 1970's. With values
of manufacturing and industrial stocks eroding by 10 per cent or
more, new equity offerings were reduced substantially. By contrast,
price indexes for major utility stocks changed little, on balance, and
equity issues by this industry remained around the level of the two
previous years. As a consequence, utilities accounted for two-thirds
of the value of new equities sold during the year.
Federal Government
Net funds raised by the U.S. Government in 1977 fell nearly 20 per
cent below the volume in 1976. Nonetheless, the total matched 1944
as the third highest in history. Treasury borrowing declined sharply in
the early part of 1977, reflecting greater-than-seasonal strength in tax
receipts and a shortfall in Federal outlays. In the latter part of the
year, however, demands by the Treasury on credit markets increased
along with an expansion in the Federal deficit. Net borrowing by
Federally sponsored credit agencies rose slightly over the year, mainly
as a result of expanded support of the mortgage market in the fourth
quarter by such housing-related agencies as the Federal Home Loan
Bank System and the Federal National Mortgage Association.
The Treasury continued in 1977 to pursue a financing policy
designed to lengthen the maturity structure of its debt. To do this,
it sold cycles of intermediate-term notes and sold both a long-term
note and a bond in its midquarterly refundings. As a result the
Treasury was able to reduce the quantity of bills outstanding—the
first substantial reduction in any calendar year since 1953. Although
sales of Treasury bills picked up appreciably in the final 3 months of
the year, they still accounted for only one-fourth of total cash raised
through marketable offerings in that quarter.
The foreign sector represented a major source of demand for
Treasury securities during 1977; it accumulated more than half of
the net increase in the Federal debt. Meanwhile, State and local
government net purchases accounted for one-fourth of the net change
in the total. The banking system, which over the two previous years
had acquired record amounts of Treasury securities, reduced its holdings on balance.
Monetary Policy
53
State and local governments
State and local governments borrowed heavily during 1977, although
they had a record aggregate operational surplus for the year of almost $14 billion—excluding net savings by social insurance funds.
Despite lingering difficulties of some governmental units, such as
New York City, the surpluses were fairly widespread. A few States—
particularly Texas and California—experienced very large surpluses.
Net borrowing by these governments in 1977 reached an unprecedented $25 billion, nearly double the volume of 1976. Although net
offerings of short-term securities were light, reflecting in part the
more conservative financial practices of many governmental units,
issues of long-term, tax-exempt debt were swollen by advance refundings of outstanding high-cost obligations. Such refundings accounted
for about a fifth of the gross offerings of municipal securities over the
year. In addition, some State and local units, especially housing and
hospital authorities, took advantage of the favorable environment in
the municipal securities market to obtain funds for current or future
capital outlays.
The large supply of municipal securities was readily absorbed by
the market. Property and casualty insurance companies, with rising
cash flows and earnings, made record investments in State and local
government obligations, while commercial banks, with increased taxable earnings, acquired more of these securities than in any other
year except 1971. Individuals also made larger purchases of taxexempt obligations, partly through municipal bond funds.
Given the extremely strong demands for State and local government securities, average yields on municipal bonds declined by about
40 basis points over the year—in contrast to the moderate increases
posted for yields on long-term Treasury and corporate issues. The
decline reflected largely a reduction in yields on lower-rated municipal
issues as the risk premium on such issues narrowed considerably, owing to increased confidence on the part of investors that stemmed
from the general improvement in the financial positions of cities and
States and from court decisions reaffirming the rights of bondholders.
Private financial intermediaries
Private financial intermediaries provided about three-fourths of the
total volume of funds raised by all nonfinancial sectors of the econ-
54
Monetary Policy
omy in 1977. This was roughly the same proportion as in 1976, but
well below levels of 90 per cent or more recorded in the early
1970's. Total loans and investments of commercial banks expanded
by more than 10 per cent during 1977, as bank loans increased
about 14 per cent, while investments rose only moderately. Reductions in bank holdings of Treasury issues offset most of the increase
in other securities, which was concentrated mainly in tax-exempt
issues.
All major loan categories at commercial banks expanded briskly.
Growth of consumer and real estate loans was particularly rapid;
these components accounted for more than half of the net increase in
bank loans for the year. Reflecting both the willingness of business
firms to assume more short-term debt and the more aggressive loan
policies at large banks, business loans at banks grew by about 13
per cent, a markedly larger increase than in 1976. Business loans
increased quite rapidly at smaller banks over most of the year. At
large banks, in contrast, where business loans had declined from early
1975 to late 1976, growth in these loans was moderate in the early
months of 1977 and then accelerated in the latter part of the year.
During the first half of 1977 the rise in commercial bank credit
was supported primarily by growth in deposits subject to rate ceilings,
with bank holdings of Treasury securities expanding along with loans.
After midyear, however, banks reduced their portfolios of Treasury
securities and increased their reliance on managed liabilities in order
to meet stronger loan demands as inflows of savings and smalldenomination time deposits slowed. Large-denomination time deposits
—which are not subject to rate ceilings—rose sharply, particularly in
the fourth quarter. During the latter part of the year banks also
relied more heavily on nondeposit sources of funds, especially purchases of Federal funds from nonbank sources and sales of securities
under repurchase agreements.
Deposit growth at the nonbank thrift institutions was quite large
for 1977 as a whole, but toward the year-end it slowed as market
rates of interest moved above ceiling rates for most deposit categories.
Savings and loan associations utilized their large net deposit inflows,
and also increased their reliance on borrowed funds, to help meet
the extraordinarily strong demands by households for home mortgage funds. Borrowings from the Federal home loan banks expanded
significantly, particularly in the fourth quarter. Savings and loan
Monetary Policy
55
associations also increased their borrowing from other sources, partly
through issues of mortgage-backed bonds, but they did not reduce
their liquid asset holdings significantly. By year-end, with mortgage
demands continuing strong, outstanding mortgage commitments (including loans in process) at savings and loan associations reached a
record $35 billion, $10 billion higher than a year earlier.
Mutual savings banks concentrated their cash flows largely on
meeting high levels of mortgage demands. The over-all supply of
investable funds at savings banks, though smaller than at savings
and loan associations, was still quite large by historical standards.
Moreover, residential mortgage loans were attractive long-term
investments for these institutions. In all, the industry channeled fourfifths of its total deposit growth, including interest credited, into
mortgages and mortgage-backed, pass-through securities. Meanwhile,
the savings banks substantially increased their outstanding commitments to make mortgage loans.
A 20 per cent increase in deposits at credit unions supported a
strong increase in lending activity at these institutions. Credit unions
accounted for more than one-fifth of the total expansion in consumer instalment credit—a somewhat smaller share than in 1976,
but still well above their market share prior to 1975.
Life insurance companies continued to acquire large amounts of
corporate bonds through private placements in 1977. In addition,
the outstanding commitments of these companies to acquire longterm, income-property mortgages rose to a record high, as construction of commercial buildings expanded. Outstanding commitments for
residential mortgages, however, remained well below the levels of the
early 1970's. Property and casualty companies, as noted earlier,
greatly increased their acquisitions of tax-exempt securities.
Net accumulation of financial assets by private pension funds increased dramatically during the year, as cash flows into these funds
continued to be buoyed by increased funding requirements of the
Employee Retirement Income Security Act. Pension funds acquired
large amounts of equities, Treasury securities, and corporate bonds,
as well as appreciable amounts of mortgage-backed securities. Meanwhile, State and local government retirement funds, which were also
experiencing relatively large cash flows, concentrated their investments in corporate bonds and Treasury securities.
56
International
Developments
In 1977 the major industrial trading partners of the United States—
that is, Canada, France, Germany, Italy, Japan, and the United
Kingdom—made little progress in recovering from the 1974-75
recession.
Estimated growth in real GNP in those countries averaged only
about 3 per cent in 1977, and in most other countries in the Organization for Economic Cooperation and Development (OECD) growth
rates were even lower. Industrial production was especially weak.
After rapid growth in the first quarter, output grew slowly or declined, although there was a significant pick-up in Germany and
Japan late in the year. Unemployment rates in many countries were
higher than they had been at the trough of the recession.
Final domestic demand in the major industrial countries grew
even more slowly than GNP in 1977. Investment expenditures were
especially weak, and neither government nor private consumption
expenditures were strong enough to take up the slack, even though
the latter showed signs of increasing strength after midyear in several countries. Inventory accumulation fell short of the pace set in
Real GNP
Ql 1973=100
110
105
1977
1973
1975
Figures for foreign GNP are weighted-average, seasonally adjusted quarterly indexes of
real GNP for Canada, France, Germany, Italy, Japan, and the United Kingdom; weights
are average shares in 6-country total of real GNP.
International Developments
57
Inflation in 6 foreign countries
Annual rate of change, per cent
1973
1975
1977
Weighted-average increases in consumer price indexes of Canada, France, Germany,
Italy, Japan, and the United Kingdom; weights are shares in 6-country total of real GNP.
1976 and may even have been negative. Net exports, on the other
hand, made a significant contribution to growth in almost all major
foreign countries, as they had in 1976.
The slow rate of recovery in economic activity abroad, on the other
hand, permitted progress in controlling inflation, as consumer prices
in all countries except Canada rose more slowly in 1977 than they
had in 1976. In Italy and Japan the rate of inflation fell by 6 or more
percentage points, while in France, Germany, and the United Kingdom progress was less but nevertheless significant. In Canada, where
inflation had been in the low end of the range for major countries in
1976, the rate of price increase rose to nearly 10 per cent per annum.
While the generally lower rates of inflation abroad allow more room
for policies designed to promote economic activity, inflation rates are
still high by historical standards and, in some cases, continue to
constrain such policies.
In part because of the slow growth in economic activity, the current-account positions of the six major foreign industrial countries
showed smaller deficits or larger surpluses in 1977 than in 1976. For
countries such as Great Britain, France, and Italy, which had experienced difficulty in financing deficits in 1976 at stable exchange rates,
this was a welcome adjustment in their external positions. On the
other hand, the nearly unchanged $3Vi billion current-account sur-
58
International Developments
plus for Germany and the enlarged—$11 billion—current-account
surplus for Japan increased considerably the pressure on other
countries that had already been forced to accommodate the large
surplus of the Organization of Petroleum Exporting Countries
(OPEC).
Though a number of countries made considerable progress in
adjusting their external deficits in 1977, there remained a striking
imbalance between the aggregate surpluses of OPEC and a few
industrial countries on the one hand, and the large deficits of the
rest of the world on the other. Since 1973 much of the financing of
external deficits has come from commercial bank lending. Despite
misgivings about the sustainability of such a large capital flow, much
of it short term, the process thus far has been relatively smooth, and
many of the largest debtors have been able to reduce their need for
such financing.
Nevertheless, additional financing facilities—to supplement the
existing channels should they be required—are much needed to
stabilize the international economic environment. A major step to fill
that need is the proposed Supplementary Financing Facility of the
International Monetary Fund (IMF). Agreement was reached by
participating countries to provide $10 billion for such a facility
(called the Witteveen Facility), and the administration has requested
that the Congress approve U.S. participation in the amount of $1.7
billion.
Structure of world current-account balances
Billions of I .S. dollars
lOPEC
1
40
1975
1977
Data are from the U.S. Treasury, the IMF, the OECD, and national sources. LDC's
are "less developed countries." OPEC refers to the Organization of Petroleum Exporting
Countries.
International Developments
59
U.S. INTERNATIONAL TRANSACTIONS
With foreign economic activity almost flat during much of 1977, the
U.S. trade and current accounts moved sharply into deficit. Imports
of both petroleum and other products grew rapidly as recovery in the
United States proceeded, while exports were only slightly above
their 1976 level. The rise in the trade deficit was offset only in part
by an increase in net receipts from military and service transactions.
The resulting $20 billion current-account deficit was much larger
than had been expected, and it contributed to downward pressures
on dollar exchange rates in the fourth quarter of 1977.
In the course of the year growth in foreign official assets held in
the United States was more than adequate to cover the currentaccount deficit. This inflow reflected efforts by foreign authorities to
avoid appreciations of their currencies resulting from capital inflows
or large current-account surpluses. Private capital flows in the U.S.
accounts registered a sizable net outflow in 1977, and in addition the
errors and omissions in the accounts appear to have shifted from a
net inflow of nearly $10 billion in 1976 to a $3 billion outflow in
1977.
The increase in the merchandise trade deficit to $31 billion in
1977 from $9 billion in 1976 reflected a 22 per cent increase in the
value of imports, but only a slight increase in exports. Oil accounted
for about one-third of the rise in imports, as consumption rose and
stocks were built to record levels. The expansion in imports other
than oil in 1977 was spread over most commodity categories, with the
U. S. balances on trade and current account
Billions of dollars
20
1973
1975
1977
Data are from U.S. Dept. of Commerce. Changes are at seasonally adjusted annual rates.
60
International Developments
largest increase in industrial materials and nonautomotive consumer
goods.
Foreign countries shared unevenly in the 1977 expansion of U.S.
imports. Imports (mostly petroleum) from OPEC members increased
$8 billion, or about 30 per cent, while imports from other developing
countries grew $7 billion, or about 25 per cent. Imports from the
developed countries rose $12 billion; about one-third of this 18 per
cent increase was from the European Economic Community. Imports
from Japan rose $3 billion, or 20 per cent.
U.S. merchandise exports expanded about 5 per cent in 1977,
somewhat less than the rate in 1976. All of the 1977 increase, however, was accounted for by price rises as economic growth in most
major industrial countries slowed, particularly during the second
and third quarters. As investment demand abroad was fairly weak
during the year, the demand for U.S. capital goods and industrial
supplies, which account for about one-half of U.S. exports, was held
down during 1977. Agricultural exports increased about 4 per cent,
about half in volume and half in prices. Between June and December,
however, agricultural export prices dropped by 10 per cent as the
result of good harvests and ample supplies around the world.
The $6 billion increase in total exports went largely to Western
European countries ($2Vfc billion) and to Canada ($2 billion). U.S.
exports to OPEC countries increased about %ll/i billion; the size of
this increase was about the same as that in 1976, but only about half
the increases in 1974 and 1975. Exports to non-OPEC developing
countries increased $1 billion in 1977 after having declined slightly
the year before. Exports to communist countries declined by $1V£
billion.
Military sales increased $2 billion in 1977; transfers were primarily
to the Middle East and consisted of aircraft, military equipment, and
construction services. The increase of about $% billion in military
expenditures in 1977 reflected not only higher personnel payments
but also payments to foreign nationals for construction services.
Foreign official assets in the United States increased $31 billion in
1977, not including the $6.8 billion increase in OPEC investments in
this country. The $16 billion increase in foreign official assets in
the United States (excluding those of OPEC) during the first three
quarters resulted largely from the rebuilding of reserve holdings by
International Developments
61
10. U.S. international transactions
Billions of dollars
1977
Item
1976
1977 P
Q2
Ql
Q3
CURRENT ACCOUNT
Merchandise trade balance.
Exports
Imports
Military and service transactions, net
Investment income, net
Military transactions, net
Other services
-9.3 -31.2
114.7 120.5
124.0 151.7
-7.1
29.5
36.6
-7. 7
30.7
38.3
-7.6
30.9
38.4
-8.9
29.5
38.4
15.8
11.9
1.4
2.5
4.0
3.2
.5
.3
4.3
3.4
3
5
4.6
3.2
.6
.8
2.9
2.1
.1
.7
12.9
9.8
.4
2.7
Unilateral transfers
-5.0
-4.8
-1.2
Balance on current account.
-1.4
-20.2
-4.3
-1. 2
4 6
-1.3
-1.1
-4.3
-7.0
FOREIGN OFFICIAL ASSETS
Changes in foreign official assets in U.S.
(increase, + )
(Of which: U.S. ]Govt. liabilities other
than securities)
OPEC
:•••.•••.
Other foreign official institutions
17.9
37.4
5.7
7.9
8.2
15.5
(4• 9)
9 .3
8.6
(1• 9)
6.8
30.7
7)
3.2
2.5
(.5)
1.1
6.8
(.3)
1.4
6.8
(.4)
1.0
14.5
U.S. GOVT. TRANSACTIONS
Changes in U.S. assets (increase, —):
Reserve assets, total
Reserve position in the IMF
Convertible currencies and other
Other U.S. Govt. assets
-2.5
-2.2
-.3
-.2
-.3
.1
-4.2
-3.7
-.4
-.4
*
-.1
.1
.2
.1
*
-1.2
-.
-.8
PRIVATE CAPITAL FLOWS
Reported by banks and securities dealers
Bank-reported capital, net (outflow, —). ..
Securities:
U.S. net purchases (—) of foreign
securities
Foreign net purchases ( + ) :
Of U.S. Treasury securities
Of U.S. corporate securities
-14.6
-9.9
-6.7
-4.9
.6
-1 .9
-.6
1.8
6
9
- 6 .;
- 5 .8
-8.7
-5.4
- .7
-1.8
-2. 2
- .7
2.8
1.3
.6
2.9
1.0
.9
-1.4
.7
- .3
.8
Corporate financial transactions
Direct investment:
U.S. direct investment (—) abroad
Foreign direct investment (+) in United
States
Other corporate transactions, net (outflow, - )
-5.0
-5.6
.0
-5.0
1.3
5
i.7
-i .4
-4.6
-5.0
- .4
-2.0
-1. 1
-1 .5
2.2
1.5
.5
.6
6
- .2
-2.6
-.1
-1 .1
-1.5
2.1
.4
STATISTICAL DISCREPANCY
Statistical discrepancy.
9.9
-3.0
1.4
1.1
-5.2
-.3
1
Largely prepayments for military and other purchases.
P Preliminary.
* Less than $50 million.
NOTE.—Current-account items are seasonally adjusted; seasonal factors are no longer calculated for
capital transactions. Data are from U.S. Dept. of Commerce, Bureau of Economic Analysis. Details
may not add to totals because of rounding.
62
International Developments
the United Kingdom and Italy. These increases in reserves reflected
borrowings from the IMF and in private international capital markets
as well as the proceeds of intervention purchases of dollars in the
exchange market. In the fourth quarter of 1977 the sources of official
inflows became more diffuse as several countries—including Germany, Japan, and Switzerland—engaged in large intervention purchases of dollars.
Private capital transactions reported by banks and securities dealers showed a net outflow of $7 billion in 1977, an $8 billion reduction from that recorded in 1976. More than one-half of the drop was
reported by banks, as the amount of new funds provided to their
overseas affiliates was considerably reduced. This reduction reflected
a somewhat slower growth in international credit demand and a
greater reliance by foreign branches of U.S. banks on funds raised
directly in foreign money markets. U.S. net purchases of foreign
securities declined more than $3 billion, mainly because of a reduction of Canadian borrowings in the United States. Foreign net purchases of U.S. Treasury and corporate securities were about the same
as in 1976, as an increase in purchases of both U.S. corporate bonds
and stocks was offset by net sales of U.S. Treasury securities by
private foreigners.
During 1977, U.S. Government foreign assets, apart from reserve
assets, rose about $4 billion, as they had in 1976. U.S. reserve assets
increased slightly as compared with an increase of $2.5 billion in
1976, reflecting reduced drawings of dollars by other countries from
the IMF. Such drawings increase U.S. reserve claims on the IMF.
FOREIGN LENDING BY U.S. BANKS
Although U.S. banks continued to increase their loans and other
claims on foreigners in 1977, the rate of increase was appreciably
smaller than in the immediately preceding years. Claims on foreigners
held by both domestic offices and foreign branches of U.S. banks rose
$27 billion, or 13 per cent, as compared with $40 billion, or 24 per
cent, in 1976. These numbers exclude U.S. offices of foreign banks.
Claims on the Group of Ten (G-10) countries, Switzerland, and
offshore banking centers, which accounted for almost 60 per cent of
total claims on foreigners at the end of 1977, rose more slowly in
1977 than in 1976. Claims on the smaller developed countries increased about as much in 1977 as the year before, although claims
International Developments
63
on Scandinavian countries accelerated while those on South Africa
and Turkey leveled off in reflection of the more cautious attitudes of
banks toward those countries. Claims on oil-exporting countries,
while still rising quite rapidly, increased more slowly in 1977, partly
because of Indonesia's reduced need for new external borrowing.
There was a marked deceleration in the rise in claims on the non-oil
developing countries, in large part because of improvement in the
trade balances of Brazil, Mexico, and the Philippines and because of
uncertainties about Peru's stabilization efforts.
FOREIGN BANKS IN THE UNITED STATES
Total assets of U.S. offices of foreign banks increased 15 per cent
during the 12 months ending November 1977, reaching a level of
$78 billion. During the same period their "standard banking assets,"
which include loans, money market assets, and securities but exclude
clearing balances and claims on related institutions, increased 18 per
cent, reaching $55 billion.
Commercial and industrial lending and participation in U.S. money
markets as both borrowers and lenders continue to be two important
activities of the U.S. offices of foreign banks. As of November 1977,
commercial and industrial loans of U.S. offices of foreign banks
amounted to $22 billion, a figure equal to 18 per cent of comparable
loans made by large U.S. banks that report weekly to the Federal
Reserve. While a large proportion of these loans are related to the
financing of U.S. trade with foreign countries and of third-country
trade, U.S. offices of foreign banks have become increasingly active
participants in the domestic commercial and industrial loan market.
Deposit liabilities to nonbanks grew more rapidly than standard
banking assets during the 12 months ending November 1977—
increasing 21 per cent to a level of $23 billion, more than two-thirds
of which represented liabilities to U.S. residents. The growth in their
deposit liabilities has enabled the U.S. offices of foreign banks to
reduce their relative reliance on net advances from related institutions, which amounted to $9.5 billion as of November 1977.
wmamm
EXCHAMCEE MARKETS
The dollar came under downward pressure in the exchange markets in 1977. Over the course of the year, it declined 6.7 per cent
64
International Developments
Weighted-average value of the U . S . dollar
March 1973=100
110
100
90
1973
1975
1977
* Calculated by dividing the index of the weighted-average exchange value of the dollar
(against 10 leading currencies) by the ratio of foreign to U.S. consumer price indexes.
NOTE.—Monthly-average market exchange rate of the U.S. dollar against 10 major
foreign currencies weighted by foreign trade in 1972. The weight for each currency is the
share of that country's total trade (exports plus imports) in the total trade of the 10
countries plus the United States.
against a weighted average of 10 major foreign currencies. If
exchange rates are adjusted for differential rates of inflation, the
decline in "price adjusted" exchange rates was even greater. The dollar came under particularly heavy selling pressure during the fourth
quarter, when it dropped 5.8 per cent—often in disorderly exchange
markets. Foreign central banks made net purchases of $35 billion
during the year, and the Federal Reserve System sold a net $800
million equivalent of German marks in the fourth quarter.
In 1976 private demands for dollar-denominated assets had been
strong enough to cause the dollar's exchange value to rise by 4.5 per
cent despite a sharp swing into deficit of the U.S. trade balance.
However, the dollar did not continue to rise in 1977. As our trade
deficit increased to $31 billion, with the prospect for little change in
1978, the dollar weakened, even though interest rate differentials
moved in favor of the dollar and U.S. price performance was relatively favorable.
The dollar's weakness in the early part of the year was disguised,
to some extent, by large intervention purchases of dollars by the
central banks of the United Kingdom and Italy. Those two central
banks had suffered heavy reserve losses during 1976, and they were
anxious to rebuild their reserve positions. At the same time, they were
concerned about limiting appreciations in their currencies that they
International Developments
65
felt might soon be reversed, given the fact that their domestic inflation rates continued to be substantially higher than those of most
other industrial countries. Their intervention purchases, while not
aimed at supporting the dollar, nevertheless had that effect.
Throughout the spring administration officials urged foreign countries with sizable current-account surpluses and with relatively low
inflation rates to expand their domestic economies at faster rates. At
the same time they pointed out that international adjustment required
that countries with surpluses allow appreciation of their currencies.
Following particularly strong statements of this sort in connection
with the June 24 OECD ministerial meeting, the market began to
believe that the United States welcomed a depreciation of the dollar,
particularly against the Japanese yen and the German mark, as part
of the process of international adjustment. In July the dollar dropped
sharply, particularly against the yen and the mark; this movement
was only partially reversed later following statements by the Chairman of the Board of Governors of the Federal Reserve System and
by the Secretary of the Treasury on the desirability of a strong U.S.
dollar.
After holding relatively steady during August and September, the
dollar again came under pressure near the end of September following the annual meeting of the IMF. It became apparent that economic
growth in major countries other than the United States was falling
considerably short of targets announced at the economic summit
meeting held in May and that prospects for economic growth in 1978
appeared only marginally better. Slow growth abroad and the increasing uncertainty surrounding U.S. energy policy made a substantial
reduction of the U.S. trade deficit in 1978 appear less likely. Downward pressure on the dollar intensified, particularly after the United
Kingdom ended its large purchases of dollars and allowed sterling to
float on October 31.
Exchange markets became even more disorderly in the fourth
quarter, especially near the year-end. The variation in the weightedaverage dollar, measured by the average daily absolute percentage
change, had declined quite steadily from March 1973 through the
spring of 1977. In December, however, the daily variation increased
to the highest for any month since the advent of generalized floating.
Bid-ask spreads increased commensurately, and rates moved sharply
in thin markets. In this atmosphere the System increased its scale of
66
International Developments
11. Changes in selected exchange rates,
December 1976-December 1977
Currency
Japanese yen
Swiss franc
German mark
U.K. pound
Belgian franc
Netherlands guilder
French franc
Italian lira 1
U.S. dollar
Canadian dollar
Swedish krona
1
Per cent
22.3
18.0
10.8
10.5
7.7
6.7
3.9
-0.9
-5.6
-7.2
-12.5
Weighted-average value against 10 leading currencies.
intervention. In this intervention, the System was joined by the U.S.
Treasury on January 4, 1978, when a new swap facility between the
Exchange Stabilization Fund and the German Federal Bank was
announced. By late January the exchange markets had become somewhat more settled.
Among individual foreign currencies, those showing the largest
percentage increases against the dollar were the yen, the mark, and
the Swiss franc—currencies of those countries that enjoyed the largest
current-account surpluses. Sterling was also particularly strong; it
appreciated by 10.5 per cent against the dollar, even as the Bank of
England added some $16 billion to its reserves. Among the currencies
of the G-10 countries, the dollar appreciated against only the Canadian dollar and the Swedish krona.
LOOKING AHEAD
The world economy made little progress in 1977 in what has become
a long, slow climb from the 1974-75 recession. The problems that
have slowed the recovery are likely to persist for some time. The
legacy of the demand pressures and inflation of the 1973 boom,
reinforced by the increase in the price of oil, is still very much in
evidence. The world has not yet found a structure of current-account
International Developments
67
balances that would allow the OPEC surplus to be absorbed in a
sustainable way by other countries. The dramatic rise in the U.S.
current-account deficit was largely offset by increases in surpluses
of other major developed countries. The deficits of non-oil developing
countries and of some of the smaller developed countries remained
large relative to their ability to attract financing, and such deficits
continue to be a constraint on policies designed to stimulate economic
growth.
The worldwide inflation that was produced in part by the jump in
energy prices is also still in evidence, although some progress has
been made in reducing it. A further shift in emphasis in 1978 toward
policies designed to encourage real growth will depend upon continued
progress in controlling inflation. Generally slack conditions in labor
markets and low rates of capacity utilization should allow increased
scope for noninflationary growth in 1978.
68
Official Statements on
Growth Targets for
Monetary Aggregates
Given below are statements by Federal Reserve Chairman Arthur F.
Burns on February 3, May 3, July 29, and November 9, 1977, in
response to H. Con. Res. 133, passed March 24, 1975, concerning
objectives and plans of the Federal Reserve with respect to the ranges
of growth or diminution of monetary and credit aggregates in the
upcoming 12 months.
STATEMENT BEFORE THE COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS,
U.S. HOUSE OF REPRESENTATIVES,
FEBRUARY 3, 1977
I am pleased to meet once again with this distinguished committee to
present the report of the Board of Governors of the Federal Reserve
System on the condition of the national economy and the course of
monetary policy.
When I last met with you in July 1976, the growth of economic
activity had begun to slow perceptibly, after a year of brisk recovery.
At that time, I noted that the balance of economic forces suggested
an early return to stronger rates of expansion in production and
employment. The favorable turn of events during the past several
months indicates that our economy is, in fact, emerging from the
recent pause.
Periods of retardation in economic growth, followed by a renewed
upsurge of economic activity, have been a fairly common feature of
business-cycle expansions. In 1962, for example, the growth of output slowed markedly for several quarters, but a more rapid pace
resumed in 1963. Earlier, economic expansion appeared to falter in
late 1951 and early 1952, and then picked up with some vigor.
Looking back still further to the business cycles before World War II,
we find that periods of retarded growth and subsequent resurgence
frequently occurred during the longer phases of economic expansion.
Growth Targets
69
The improvement in the condition of the national economy over
the past several months is due in some measure to the impetus provided by governmental policies. Monetary policy remained accommodative throughout 1976. Indeed, open market operations by the
Federal Reserve sought late last year to encourage somewhat more
ample supplies of money and credit. Also, the discount rate on loans
to member banks was reduced in November, and reserve requirements on demand deposits were again lowered in December. By
promoting some easing of conditions in the money and capital
markets at a time of business hesitation, these actions helped to
bolster the state of business and consumer confidence.
Fiscal actions also became more stimulative during the latter half
of 1976. Expenditures of the Federal Government, as measured in
the national income and product accounts, fell short of official projections during the first half of last year. Later in the year, as a part
of the earlier shortfall was made up, Federal expenditures rose rather
rapidly.
These facts deserve only passing notice. The noteworthy feature
of the recent pick-up in business activity is that it mainly resulted
from the normal workings of self-corrective forces within the private
economy. Last summer, many manufacturers curtailed production
of items for which inventories were rising too rapidly. Retailers, in
their turn, offered price concessions to consumers and increased their
advertising in order to stimulate sales. Before long, consumers began
to respond energetically. Retail sales regained strength in October
and then moved up substantially further in the closing months of
the year.
Homebuilding activity, which has been in an upward trend since
early 1975, also rose significantly late last year in response to improving conditions in the mortgage and real estate markets. The strong
underlying demand for housing—especially in sections of the country
experiencing rapid population growth—led to a rapid increase in
sales of new and existing homes and to a rising level of new starts for
both single-family and apartment dwellings. Total housing starts
during the last 3 months of 1976 advanced nearly 15 per cent from
the preceding quarter and reached the highest level in more than 3
years.
Thus, despite some weakening in the pace of business investment
in fixed capital, the physical volume of final purchases—that is, all
70
Growth Targets
purchases of goods and services except for additions to inventories—
rose at an annual rate of almost 5 per cent in the fourth quarter. This
was the most rapid advance of any quarter during 1976. The
strengthening of final purchases enabled business firms across the
Nation to work off a good part of the excess inventories that had
accumulated over the preceding months. True, the aggregate volume
of business inventories rose further in the fourth quarter, but the
rate of advance was much slower than in the summer and much
slower also than the increase in final sales. This reduced pace of
inventory accumulation, along with strikes in some major industries,
was responsible for a disappointing performance of physical output
during the final quarter of last year. But it set the stage for a return
to a more vigorous rate of economic expansion by bringing sales and
stocks into better balance.
Actually, the pace of orders and production has already begun
to quicken. New orders for* durable goods began moving up in
November and rose sharply further in December. The output of
our Nation's factories, mines, and power plants also rebounded
sharply in November, as the depressing impact of major strikes
abated; and another strong advance of production was registered in
December.
Conditions in labor markets were improving noticeably around
year-end. Employment rose briskly in December, and unemployment
declined across a range of industries. The reduction in unemployment among heads of households was particularly encouraging. A
strengthening of demand for labor has also been evident in the recent
declining rate of layoffs and the rising pace of new hires at manufacturing establishments. With employment growing more rapidly,
the volume of personal income during the fourth quarter rose at an
annual rate of nearly 11 per cent—half again as fast as in the previous 3-month period.
Activity in the current quarter is being adversely affected by plant
shutdowns in many parts of our country as a result of shortages of
natural gas and other fuels. The difficulties imposed on many American families by the bitterly cold winter will be long remembered,
but I do not expect large or lasting effects on the performance of
the economy during 1977.
Thus, further good gains in economic activity seem very likely
during the course of this year. Consumers are now spending more
Growth Targets
71
freely—the percentage of disposable personal income spent on goods
and services during the fourth quarter was the highest in several
years. Except for areas where the weather has been unfavorable,
retail sales during January appear to have continued at a satisfactory
pace. Moreover, consumers have built up their stock of liquid assets
substantially during the past year, and they have also been cautious
in adding to their debts. The over-all financial condition of the household sector has thus improved, and this will contribute to stronger
consumer markets in the months ahead.
Prospects for residential construction are also bright. Construction
of single-family homes has already rebounded sharply, and production of multifamily units is now gradually recovering from overbuilding and the other problems that had been troubling this sector.
Mortgage credit is in ample supply. Commitments by thrift institutions for home mortgage loans are at record levels; the inflow of
savings to these institutions is continuing at a high rate; and mortgage
interest rates are gradually declining. Housing starts should therefore
continue to move up at a good pace.
Our export trades, too, can be expected to improve during 1977.
Many foreign economies experienced a retardation of growth last
year just as we did, and they too are likely to enjoy a pick-up in
the tempo of activity relatively soon. The demand for our exports
should therefore increase. Of course, our imports will also be increasing as the domestic economy continues to expand, so that our net
trade balance may not improve appreciably during the course of
this year. The growth of imports, however, is not expected to be as
rapid as it was in 1976, and net income from services should increase
further. Thus, our deficit on current account with other countries
will probably be rather moderate in 1977.
Business spending should contribute substantially to economic
expansion this year. Inventory investment may proceed at a cautious
pace for a little while longer; but with consumer purchases continuing
to grow satisfactorily, business firms will soon have to add substantially to their inventories.
Outlays for plant and equipment should also strengthen as 1977
unfolds. During the course of this recovery, businessmen have been
planning for the future with considerable caution. Additional hesitancy developed last summer when the pace of expansion slowed, and
a few firms postponed new projects while some others stretched out
72
Growth Targets
their capital expenditure programs. These attitudes are now changing.
Confidence has been strengthened by President Carter's firm statement rejecting wage and price controls, as well as by the recent trend
of business developments.
I feel reasonably confident that 1977 will be a good year for the
Nation's economy, but this is no time for complacency. Much remains
to be accomplished. Although the proportion of our adult population holding jobs has been rising, more than 7 million people are
still out of work, and our labor force is growing very rapidly. Last
year women entered the labor force in exceptionally large numbers,
and the total number of individuals at work or seeking employment
rose on an unprecedented scale—by 2.8 million.
Although unemployment is widespread, the inflation from which
our country has also been suffering has not come to an end. Despite
heartening progress over the past 2 years, prices are still rising at a
troublesome rate. In 1976 consumer prices on the average rose about
5 per cent—down from 7 per cent in 1975 and 12 per cent in 1974.
But the American people are not content to live with a 5 per cent
rate of inflation, nor should they be. If the general price level were
to continue rising at a rate of 5 per cent a year, the value of a family's
savings—or the purchasing power of a retiree's pension check—
would be cut in half in just 15 years. Worse still, if a 5 per cent rate
of price advance were to be accepted complacently by Government,
inflationary expectations would intensify, and the actual rate of price
increases would then almost certainly move toward higher levels.
Unfortunately, it will be difficult to achieve a significant reduction
in the rate of inflation in the immediate future. Wholesale prices of
industrial commodities rose during the past half year at an annual
rate of over 9 per cent. At the consumer level, prices of heating fuels
and gasoline have of late been rising rapidly again. As the pace of
economic activity quickens in coming months, pressures could
develop for larger and more widespread increases in wages and prices
than we have recently experienced. The outlook for prices is thus
a worrisome matter, and it must be given very careful attention.
For a durable prosperity will not be achieved in our country until
we gain better control of the inflationary forces that have damaged
our economy for more than a decade.
There are several other longer-range problems to which public
policy must attend. During the past decade, increases in the output
Growth Targets
73
per manhour in the private sector have averaged less than 2 per
cent a year—a substantial decline from the 3 per cent rate achieved
during the preceding decade. There are numerous reasons for this
sorry performance. For one thing, the work habits of the American
people are not what they once were: abstenteeism is a growing
problem for many firms, and there are other manifestations of less
dedication by workers. Another reason is that the expansion and
modernization of our industrial plant has been inadequate. Last
year, our country devoted less than 10 per cent of its total output
of goods and services to the production of new plant and equipment. Other industrialized nations have been committing a much
larger fraction of their resources to capital formation than we—and
they have also been experiencing faster economic growth.
Public policy must also come to grips with the need to revitalize
our central cities, with the need to reform a welfare system that has
become chaotic and inordinately costly, and with the need to
strengthen our national security by regaining substantial independence in the energy area. Energy consumption is rising rapidly again,
and the recent very cold weather has reminded us poignantly of the
critical role played by supplies of natural gas and petroleum in our
economy. The shortage of natural gas is now receiving constructive
attention from the Congress. But, unfortunately, we are still at the
mercy of a few oil-exporting countries; in fact, our dependence on
foreign sources of oil is substantially larger now than at the time of
the 1973 oil embargo.
We will not solve this or our other longer-term problems simply
by loosening the Federal purse strings and letting the money roll
out. That course would sooner or later accelerate inflation and
thereby create other, and perhaps even greater, economic problems.
It should be abundantly clear by now that a healthy and prosperous
economy can be achieved only by pursuing policies that are consistent with steady progress toward restoration of general price stability.
That principle is continuing to guide Federal Reserve policy. Over
the past year, growth rates of the major monetary aggregates have
not been excessive, and our projected ranges for the future have
been gradually reduced. This course of action, by dampening inflationary expectations, has helped to restore public confidence—both
here and abroad—in the value of our currency and in the future of
our economy.
74
Growth Targets
Mainly as a result of this lessening of inflationary fears, interest
rates have not increased as they usually do in a period of cyclical
expansion. In fact, the level of interest rates on short- and long-term
securities is appreciably lower now than it was at the beginning of
economic recovery in 1975.
Thus, the monetary policy we have pursued has fostered conditions in financial markets that have aided the process of economic
recovery. Supplies of credit have been ample. In fact, the volume of
funds raised by the nonfinancial sectors of the economy has increased
considerably faster than the dollar value of the gross national product.
Meanwhile, the financial condition of business firms has improved
materially; and financial institutions have rebuilt their liquidity, so
that they will be able to accommodate a substantial rise of credit
demands in the months ahead.
The growth rates of major monetary aggregates have remained
relatively close to those we had expected earlier. In the year ended
in the fourth quarter of 1976, M-l—that is, the money stock defined
narrowly so as to include only currency and demand deposits—
rose 5.4 per cent, somewhat below the midpoint of the range projected a year ago. In contrast, fid-2—which also includes savings
and consumer-type time deposits at commercial banks—increased
10.9 per cent, just above the upper end of its projected range. Growth
of M-3—a still broader measure of money that encompasses, besides
the components of M-2, the deposits at savings banks, savings and
loan associations, and credit unions—amounted to 12.8 per cent,
and also exceeded its range by a small margin.
There was an unusually wide gap during the past year between
the growth rates of M-l and the broader monetary aggregates. This
stemmed in large measure from changes in financial markets that
have served to reduce reliance on demand deposits for handling
monetary transactions. Recent financial innovations have important
implications for the conduct of monetary policy, and it may therefore
be worthwhile to comment on them.
Elements of the innovational process currently under way in
financial markets can be traced as far back as the early 1950's.
When interest rates rose during the cyclical upswing of 1952 and
1953, some large corporations began to invest their spare cash in
Treasury bills. In subsequent years, more and more firms increased
their efforts to develop better systems of cash management, so as
Growth Targets
75
to minimize holdings of demand deposits which—under existing
law—bear no interest. In time, individuals began to emulate business practices—by shifting idle funds into liquid market securities or
savings deposits.
In the late 1950's and early 1960's, the innovational process was
accelerated by more aggressive efforts of commercial banks, especially
the larger institutions, to bid for loanable funds. Major efforts were
made to attract the highly interest-sensitive funds of corporations
and other large depositors. For example, banks in the money market
centers began in 1961 to sell large-denomination certificates of
deposit on a significant scale; and a secondary market, which soon
developed for these instruments, enhanced their acceptability.
With inflation pushing interest rates to extraordinary heights
during the past decade, both business firms and individuals have
intensified their search for ways to minimize holdings of non-interestbearing assets. Financial institutions, meanwhile, have been competing actively to meet the public's needs. As a consequence, the
innovational process has accelerated. An array of new financial
instruments and practices has developed that has enabled the public
to hold an increasing fraction of its transactions balances in interestbearing form.
For example, the so-called negotiable orders of withdrawal (NOW)
accounts have grown steadily in the New England States, and they
serve effectively as checking accounts for many individuals. Smaller
businesses and State and local governments nowadays hold a significant part of their cash balances in the form of savings accounts
at commercial banks—which only recently were granted authority
to accept such deposits. Moreover, many individuals are learning to
use savings accounts for transactions purposes by making payments
through third-party transfer arrangements, or by telephonic transfers
of funds from savings to demand deposits to cover newly written
checks. Others are using money market mutual funds for the same
purpose. And still others have worked out overdraft arrangements
with their banks to reduce the amount of funds held in demand
deposits bearing no interest.
In projecting its monetary growth ranges, the Federal Open Market
Committee has had to keep these developments of financial technology carefully in mind because they affect the rates of growth of
monetary aggregates that are needed to sustain economic expansion.
76
Growth Targets
At its meeting about 2 weeks ago, the Committee adopted ranges for
the year ending in the fourth quarter of 1977 that differ only a little
from those announced last November. For M-l, the previous range
of 4Vz to 6V2 per cent has been retained. For M-2 and M-3, the
lower boundaries of the ranges were reduced by V2 of a percentage point. Consequently, the new range is 7 to 10 per cent for
M-2 and 8V2 to 11V4 per cent for M-3.
The downward adjustment of the lower boundary of the ranges
for M-2 and M-3 largely reflects technical considerations. By historical standards, growth of the broader measures of money in 1976
was relatively rapid in relation to growth of M-l. Over the course
of last year, M-l rose 5.4 per cent, very close to the 5.6 per cent
average of the preceding 10 years. But M-2 increased 10.9 per cent
in 1976, in contrast to an average yearly rise of 8.3 per cent over
the preceding decade; and M-3 increased 12.8 per cent, in contrast
to an average annual increase of 8.8 per cent in the preceding 10
years.
It seems likely that growth rates of these broader aggregates will
move back toward historical norms in 1977. Last year the growth of
M-2 and M-3 was influenced by shifts of existing stocks of financial
assets from market securities to time and savings deposits. This
adjustment of assets may not go much further. Moreover, some banks
and thrift institutions, having experienced larger inflows of funds
than they can readily invest, have of late taken steps to slow deposit
inflows—by reducing the interest rate offered on savings certificates
and deposits, or by curtailing promotional activity, or in other ways.
These actions should tend to moderate the growth of M-2 and M-3
without impairing the flow of funds for homebuilding.
Besides these technical considerations, the adjustment of the
lower limit of the projected ranges for M-2 and M-3 reflects the
Federal Reserve's firm intention to continue moving gradually toward
rates of monetary expansion that over the longer run are consistent
with general price stability. The step we have taken on this occasion
is a very small one, but it may still bolster the confidence of the public in the commitment of the Federal Reserve to do what it can to
unwind the inflation from which our economy continues to suffer.
The projected range for M-l in the year ahead reflects our assumption that the financial innovations now in train will continue to reduce
materially the proportion of transactions balances that are held in
Growth Targets
77
the form of currency and demand deposits. If our assumption is correct, the range we have projected for M-l, together with the ranges
projected for M-2 and M-3, should be adequate to finance a faster
rate of growth of physical production in 1977 than we experienced
in 1976. I must note, however, as I have repeatedly in the past, that
profound uncertainties surround the relationships among the various
monetary aggregates and between rates of monetary expansion and
economic performance. We shall therefore monitor emerging developments closely and stand ready to modify our projected growth ranges
as circumstances may dictate.
Let me also take this opportunity to state once again that substantial further reduction in growth rates of all major monetary
aggregates will be needed over the next few years if our Nation is
to succeed in halting inflation. The long-run growth rate of physical
production at full employment has declined in recent years and
is probably around V/i per cent at present. Judging by the experience
of the past two or three decades, a stable price level would require a
rate of expansion in M-l that over the long run is well below the
growth rate of total output. Growth rates of the broader monetary
aggregates consistent with general price stability might be somewhat
higher than long-term growth of output; but in any event they would
have to be far below the rates experienced in recent years.
Our Nation needs to make progress during 1977 in creating more
jobs and in expanding our industrial capacity. We at the Federal
Reserve fully recognize this fact, as our recent policy actions have
made clear. We are also mindful of the need to make further progress
in the battle against inflation. Highly expansionist policies that seek
to achieve striking gains in economic activity with little or no regard
to their inflationary consequences are apt to fail. Once inflationary
expectations are inflamed, conditions in financial markets will deteriorate, and the confidence of businessmen and consumers will be
eroded. Hopes for a sustained economic recovery would then be
undermined.
Public policy must find a middle ground. Deficits in the Federal
budget must be scrupulously watched and gradually reduced. Growth
in supplies of money and credit must also be brought down gradually
to rates consistent with general price stability.
Our Nation has paid a heavy price for permitting inflation to
get out of control in the late 1960's and early 1970's. We must not
78
Growth Targets
lose sight of that fact. The substantial progress we have made in
slowing inflation since 1974 has helped to heal our economy. Gradual
restoration of price stability is within our means. Unless we stay
on that course, the lasting prosperity to which the American people
aspire will continue to elude us.
STATEMENT BEFORE THE COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS,
U.S. SENATE, MAY 3, 1977
It is a pleasure to meet once again with this distinguished committee
to present the report of the Board of Governors of the Federal
Reserve System on the condition of the national economy and the
course of monetary policy.
When we last met to discuss these subjects in November, the
economy was beginning to emerge from a period of relatively slow
growth. That fact was not widely recognized at the time. By concentrating unduly on comprehensive measures of economic activity,
many people failed to see the gathering momentum of positive economic forces. Then, early this year, the disruptions caused by unusual
weather obscured further the underlying strength of the economy.
It is quite apparent today, however, that a reacceleration of economic growth did get under way late last year and that expansion is
again proceeding vigorously. As 1976 drew to a close, final sales
of goods and services picked up, reflecting primarily a resurgence
of consumer buying and a strong advance in homebuilding. The
improvement in sales enabled business firms to work off a good part
of the excess inventories that had accumulated over the preceding
months when buying was sluggish. With sales and stocks coming
into better balance, the pace of new orders and production began to
quicken. The demand for labor strengthened, and personal income
expanded more rapidly.
The inclement winter weather and shortages in fuel supplies disrupted this expansionary process only briefly, and not nearly so
severely as was suggested by early reports. As the weather took a
turn for the better in the second half of February, industrial and
commercial activities snapped back smartly in most parts of the
country.
Even with the adverse effects of the weather, the Nation's total pro-
Growth Targets
79
duction of goods and services rose in the first quarter at about a
5V* per cent annual rate—twice the pace of the preceding quarter.
Conditions in the labor market improved, as is evidenced by the
sharp rise in hirings while layoffs remained at a low level. The
unemployment rate fell by V2 of a percentage point as sizable gains
in employment more than offset the continued rapid growth of
the labor force. At the same time, the rate of utilization of our
Nation's industrial plant also edged higher during the first quarter
and by March reached 82 per cent in manufacturing.
In all, the recent behavior of economic activity has been encouraging, and the prospects for further economic advance are good. Trends
in the consumer sector certainly are favorable. The expansion of jobs
and incomes during the past half year has served powerfully to
improve consumer sentiment. During the final quarter of 1976 the
percentage of disposable income devoted to consumer spending was
the highest in several years, and in the first quarter of this year the
spending percentage rose still further. Our households, viewed collectively, did not let higher fuel bills interfere with other expenditures.
In fact, automobile sales rose to the highest level since 1973, as
an increasing number of consumers displayed a willingness to incur
additional instalment debt in order to finance the purchase of bigticket items.
The strong pace of consumer buying late in 1976 caused inventories to fall below desired levels in many lines of activity. More
recently, inventory investment has picked up as businessmen sought
to keep larger stocks to accommodate their customers. The increasing
volume of work at manufacturing plants has had a similar effect.
Nevertheless, inventories generally remain quite lean, and inventory
investment can be expected to continue rising as sales move up in
the months ahead.
Homebuilding has also shown strength in recent months—especially in the single-family sector where new starts apparently reached
a record high in March. With credit readily available and consumer
confidence improving, sales of new homes were brisk even during
the harsh winter months. Activity in the multifamily sector, meanwhile, has recovered much more slowly from the depression brought
on by overbuilding in the early 1970's. But vacancy rates are now
generally falling, and it is thus reasonable to expect the construction
of apartment units to gather strength as time passes.
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Growth Targets
The pace of business investment in new plant and equipment,
while still lagging relative to earlier business-cycle expansions, is
also gaining strength. Business equipment posted the largest advance
of any major category of industrial production during the first
quarter. The most recent surveys of business plans point to a substantial further increase in spending on plant and equipment this
year. So, too, does the trend of orders for business capital goods,
which have risen more than 20 per cent over the past year. With
corporate profits improving and with rates of utilization of industrial
capacity rising, the potential clearly exists for good gains in business
fixed investment.
Governmental demand for goods and services also appears to be
an expansive influence in the economy at this time. Budget estimates
suggest that Federal purchases of goods and services in calendar 1977
will increase at a faster rate in constant-dollar terms than they did
last year. In addition, a quickening pace of spending by State and
local governments is likely to take place in the months ahead. In
the aggregate, State and local operating budgets have moved during
the past 2 years from deficit to surplus, thanks to the combination
of strongly rising tax receipts and relatively subdued expenditure
growth. With this turnabout in their budgetary situation, State and
local governments are likely to loosen their purse strings. And the
tendency in that direction may well be accelerated if the Congress
follows through with present plans to enlarge, both this year and
next, the flow of Federal grants-in-aid to States and localities.
The only major component of final demand that is not exhibiting
strength at present is our foreign trade balance. The dollar value of
oil imports increased sharply in the first quarter because of the cold
weather, but other imports—including coffee and other consumer
goods—also rose substantially. Meanwhile, the relatively slow recovery of many foreign economies kept down the expansion of our
exports. Only strength of investment income and other nontrade items
has held the over-all current-account deficit to moderate proportions.
Although the deterioration in our* trade balance may be behind us,
it is hard to see significant improvement over the remainder of the
year.
With the exception of foreign trade, however, demand factors
generally seem to point to good growth in our Nation's output of
goods and services this year. Buttressing that expectation is the fact
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that financial conditions provide a satisfactory foundation for further
economic expansion.
The Federal Reserve has continued to pursue a course of monetary
policy intended to promote conditions conducive to substantial expansion in economic activity, while guarding against the release of new
inflationary forces. During the past 2 years the increases that have
occurred in the stock of money have proved adequate to finance substantial gains in the physical volume of output and employment. This
experience has demonstrated once again that consideration of the
stock of money alone is not sufficient for assessment of the adequacy
of the economy's liquidity. Money has a second dimension, namely,
velocity, or—in common parlance—the intensity with which it is
being used. Over short periods of time the truly dynamic factor is not
so much the stock of money as the willingness of the public to use
their money balances. Upswings in business and consumer confidence
are commonly reflected in substantial increases of monetary velocity.
Moreover, in the case of the narrowly defined money supply, intensity of use has been increasing with special rapidity since 1975,
reflecting numerous innovations in financial technology that serve to
reduce reliance on demand deposits for handling monetary transactions.
Supplies of credit have been ample—perhaps more than ample—
during the past 6 months, and most rates of interest are near their
lowest levels in several years. In this environment, many economic
entities have been able to achieve a further strengthening of their
financial condition.
Large business firms with high credit ratings issued a massive
volume of long-term bonds during 1975 and the first half of 1976,
and they used the proceeds largely to repay short-term debt and to
acquire liquid assets. Such restructuring of balance sheets appears
to have abated in the past half year or so, and many companies are
now cautiously enlarging their borrowing from banks and through
the commercial paper market. This expansion of short- and intermediate-term liabilities has occurred unusually late in the current
cyclical expansion and it has been moderate to date.
Meanwhile, some large corporations—especially utility and communications firms—have availed themselves of the attractive financing conditions by selling bonds to refund high coupon issues of
earlier years. More important still, many smaller and lower-rated
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Growth Targets
firms have found in the past several quarters a more receptive market
for their long-term debt obligations, and they have thus been able
to make progress in strengthening their balance sheets. Life insurance companies and other investors in the private placement market
have been aggressively seeking lending opportunities and have recently supplied a record amount of credit to small- and medium-sized
firms. Moreover, the spread between interest rates on prime- and
lower-rated bond issues in the public market for securities—which
had become unusually wide during the recent recession—has now
narrowed to dimensions that are normal for business-cycle expansion.
The favorable condition of financial markets has been of help as
well to State and local governments during the past half year. Particularly in the final quarter of 1976, the proceeds of substantial
issues of new long-term bonds were used to repay outstanding shortterm debt, thus continuing a practice that has prevailed since mid1975. This process of debt restructuring, together with the progress
made in strengthening budgetary positions, has improved dramatically
the standing of many States and municipalities with the investment
community. Testifying to that is the fact that interest rates on municipal securities have declined more than interest rates on other fixedincome obligations. Not only that, the spread between yields on
higher- and lower-quality bond issues has narrowed sharply in recent
months. These developments have led to numerous advance refundings of existing debt, thereby lowering the future interest burden on
taxpayers.
Despite larger loan demand from business and consumers since
last fall, commercial banks have been able to maintain their sharply
improved liquidity. Indeed, they have added further to their holdings
of Treasury securities, which today are more than double what they
were at the end of 1974. Many banks have strengthened their equity
position during the past 6 months through earnings retention, and
some have also augmented their capital by issuing new stock or subordinated long-term debt.
Savings banks and savings and loan associations too have been
able to accommodate heavy credit demands without reducing liquidity. The relatively low level of market rates of interest has sustained
good inflows of consumer time and savings deposits to those institutions. Against this background, outstanding mortgage commitments
have risen to record levels and mortgage interest rates have declined.
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These developments have contributed to the brisk pace of home
sales and to the upward thrust of housing construction.
In sum, both general financial conditions and the growth patterns that have been unfolding in key sectors of our economy justify
considerable optimism about the immediate future. Even so, there
are some uncertainties in the present situation that deserve serious
attention. The most important of these relate to energy and inflation.
One of the reasons capital spending has lagged during this economic expansion has been a reluctance of businessmen to undertake
long-term investment projects without a clearer view of the future
cost and availability of petrochemical feedstocks and various energy
sources. The President's proposal of a broad energy program is a
long-needed step toward creating a more certain environment for
decision-making. However, with congressional action still to be
taken and with the final shape of any program unknown, the situation at the moment is as uncertain as ever. Furthermore, in view of
the prospect of significant tax or other incentives or disincentives in
the not too distant future, there will be a tendency here and there
to hold off on major expenditures a bit longer to see what develops.
This could have the effect of retarding the advance not only of
business capital outlays in the months ahead but also of spending
by households—especially on automobiles and energy-saving home
improvements.
Because of these possibilities, it obviously is important that the
Congress lose no time in considering the President's energy recommendations. I fully realize the practical obstacles to quick action in
matters so complex, but I also feel bound to observe that significant
risks to economic performance will exist as long as businessmen and
the general public remain uncertain of what to expect in the energy
area.
The course of economic expansion may also be significantly
affected by the pace of inflation. Inflation has accelerated in recent
months. Both wholesale and consumer prices advanced at an annual
rate of about 10 per cent in the first quarter, with the flare-up of
food prices only part of the explanation. Particularly worrisome is
the fact that we have now experienced three successive quarters of
increase at about an 8 per cent annual rate in the critically important
industrial commodities component of the wholesale price index. This
development reflects an upward climb during the past year of close
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Growth Targets
to 6 per cent in the labor cost per unit of output for private business
firms; it also reflects an effort on the part of many companies to widen
profit margins from the low level to which they had fallen during the
recession.
With wage increases now showing some tendency to quicken and
with the economy at a stage where productivity gains are likely to
become smaller than they have been during the past 2 years, there
is no relief in sight for the underlying cost pressures that businesses
have been experiencing. This unhappy circumstance inevitably casts
a cloud on our Nation's ability to maintain a satisfactory rate of
economic growth into 1978 and beyond.
Experience teaches that when serious inflation persists, consumer
confidence and purchasing power will ultimately erode. Continuing
inflation at high rates likewise tends to work against sustained expansion in business investment activity, for it raises the risk premium that
businessmen attach to new undertakings. Forward business planning
becomes more hesitant in an environment in which managers are
unable to assess cost and profit prospects with any confidence over the
longtime horizons that are frequently involved in new investment
projects.
Recognizing these difficulties, President Carter has outlined a
multifaceted program to fight inflation. I want to assure this committee that the members of the Federal Reserve Board fully support
the President's determination to bring down the rate of inflation. All
of the measures in his projected program can be helpful, but there
is no doubt in our minds that the main key to success in the battle
against inflation is prudent management of the Nation's finances.
The Federal Open Market Committee was well aware of its
heavy responsibility to encourage economic expansion and yet help
to curb inflation when it met last month to discuss the longer-run
growth of the monetary aggregates. The Committee decided to leave
unchanged over the year ending in the first quarter of 1978 the previous growth range of AV2 to 6V2 per cent in M-l, which is a monetary
measure confined to currency and demand deposits. For M-2, and
likewise for M-3, the upper boundary of the growth range was
reduced, however, by Vi of a percentage point. Consequently, the
growth ranges projected for the coming year are 7 to 9Vi per cent
for M-2 and W2 to 11 per cent for M-3. As the committee may
recall, M-2 includes savings and consumer-type time deposits at com-
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85
mercial banks besides currency and demand deposits, while M-3 is
a still more comprehensive aggregate—since it also includes the
deposits at savings banks, savings and loan associations, and credit
unions.
As you can see, the Federal Open Market Committee has again
moved very cautiously in adjusting the projected monetary growth
ranges. In addition to taking account of the usual uncertainties about
the relationship between money and economic activity, we recognized that the impact of the as yet unsettled energy program on
aggregate supply and demand in the period ahead cannot be foreseen with any precision. Nonetheless, we did feel it appropriate to
take another small step toward bringing the long-run growth of the
monetary aggregates down to rates compatible with general price
stability.
Sustained progress in this direction will, I believe, be absolutely
necessary if President Carter's publicly announced goal of reducing
the pace of inflation by 2 percentage points by the end of 1979 is
to be achieved. The trend of growth in monetary aggregates is still
rapid, perhaps much too rapid. To be sure, the Federal Reserve has
moved fairly steadily toward lower ranges for monetary expansion
during the past 2 years. But that movement has been extremely
gradual; indeed, at the current pace it would require nearly a decade
to reach rates of growth that are consistent with a stable price level.
I must report, moreover, that despite the gradual reduction of
projected growth ranges for the aggregates during the past 2 years, no
meaningful reduction has as yet occurred in actual growth rates.
That unintended consequence is partly the result of data deficiencies
that complicate the already formidable task of adjusting or approximating monetary growth objectives. Initial estimates of the monetary
aggregates sometimes differ considerably from estimates made later
when fuller data became available.
A factor contributing to the measurement problem has been the
inadequacy of deposit data for nonmember commercial banks. While
our estimates of nonmember bank deposits—which constitute a
growing proportion of the money stock—have often been on the
mark, on occasions there have been significant errors. Our most
recent benchmark revision of M-l, based on nonmember bank data
from the call report for last September, raised the estimate of growth
over the year ended in the fourth quarter of 1976 from 5.4 to 5.7
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per cent; and this figure is still subject to subsequent revision on the
basis of the call report for December.
We at the Federal Reserve are diligently trying to improve the
quality of the Nation's monetary data. Last year a committee of distinguished economists, whose aid we had sought, completed a study
of the statistics on monetary aggregates. Some of the recommendations of the committee are being implemented with the aid of the
Federal Deposit Insurance Corporation. Other recommendations of
the consultant committee are being studied by our staff, and further
changes are likely to be instituted in the near future. Nevertheless,
experience suggests that monetary measurement will continue to
lack the precision of science, and so too will the Federal Reserve's
actions aiming to influence developments in financial markets.
Events during the past several months have again demonstrated
quite clearly that the twists and turns that occur in financial markets
often are dominated by developments unrelated to Federal Reserve
actions. For instance, from late in 1976 to late April, the Federal
funds rate—the one interest rate over which the Federal Reserve
has close control—traded within a narrow range between 45/s per
cent and 4% per cent; yet, other market rates of interest in that
period fluctuated over ranges as wide as a full percentage point.
Those fluctuations in interest rates in large part reflected changing
public perceptions of the outlook for the Federal budget. Thus,
interest rates moved upward sharply when the administration proposed a new fiscal policy, including the so-called rebate program;
and they fell markedly when the President announced that he had
dropped the rebate plan.
What this demonstrates anew is that financial market participants
have become acutely aware of the inflationary pressures created by
Federal budget deficits and the resultant adverse impact on credit
conditions. The caution of the Congress with respect to the tax rebate
proposal and the President's willingness to adjust his fiscal program
in light of emerging economic developments have done much to
enhance confidence that our Government is moving toward a more
responsible financial posture.
In concluding this morning, I am obliged to observe that we have
still a considerable distance to go in putting our financial house in
order. Too often in the past, we have lacked the courage or the
patience to stay long enough on a monetary and fiscal path that will
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87
lead to noninflationary economic growth. We cannot afford to backslide once again. Unless we achieve a less inflationary environment,
there will be little chance of sustaining the expansion that is now in
progress or of significantly reducing the high level of unemployment
that is blighting the lives of millions of Americans. That, in a sentence, is the Board's central message to the Congress.
STATEMENT BEFORE T H E COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS,
U.S. HOUSE OF REPRESENTATIVES, JULY 29, 1977
I am pleased to appear before this committee once again to present
the report of the Board of Governors of the Federal Reserve System
on the condition of the national economy and the course of monetary
policy.
Since the closing months of 1976, our Nation has experienced a
vigorous and broadly based economic expansion. The gains in the
industrial sector have been especially impressive; during the past
8 months, the combined output of factories, mines, and power plants
has risen at an annual rate of 9Vi per cent. Activity in other sectors
of the economy also has increased briskly. As a result, total employment in June was almost 3 million higher than last October—an
unprecedented gain in so short a period. The unemployment rate
remains high; but it has declined in recent months by nearly a full
percentage point, despite rapid growth of the labor force. The rate
of utilization of our industrial plant capacity also has risen significantly and now exceeds 83 per cent in manufacturing.
Demand for consumer goods has continued to propel the expansion. With confidence buoyed by improving economic conditions,
consumers have been spending freely from current income besides
adding significantly to their personal indebtedness. The strong buying mood of consumers is reflected in the personal saving rate, which
in the first half of this year averaged less than at any time since the
early 1960's.
Retail sales climbed steeply during the fall and winter months and
remained at a high level this spring. Over the past three quarters,
retail sales, after adjustment for price increases, have risen at an
annual rate of about 6 per cent. Auto sales contributed greatly
to the advance, averaging—on a seasonally adjusted basis—almost
1 million cars per month since March.
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The rise of consumer spending played a major role in prompting
a resurgence of inventory investment early this year. A moderate
inventory correction in the latter part of 1976 had reduced the ratio
of stocks to sales to exceptionally low levels in many lines of trade
and manufacturing. Once sales again accelerated, businessmen had
to rebuild their inventories in order to meet customer demands. The
annual rate of additions to business inventories reached $14 billion
in the first quarter of this year and perhaps $20 billion in the quarter
just ended.
In the past 2 months or so, it appears that stocks in certain categories of nondurable goods reached somewhat higher levels than
businessmen desired. The latest data on employment and production
in manufacturing suggest that business firms have again moved
promptly to reverse the build-up. With inventory positions generally
still lean and sales prospects favorable, inventory investment is
likely to contribute to economic expansion later in the year and on
into 1978.
The upward trend of sales and of capacity utilization has encouraged businessmen to enlarge their outlays for plant and equipment.
There are some signs that business capital spending may finally be
gaining significant upward momentum. Order backlogs of capital
goods manufacturers have been climbing. Business equipment posted
the largest advance of any major category of industrial production
during the first half. New contracts and orders for plant and equipment most recently have been running more than 20 per cent above
year-earlier levels. To date, business capital expenditures have been
concentrated largely on vehicles and other light equipment, but there
is some tentative evidence that large construction projects and heavy
machinery are beginning to make a contribution to the capital goods
recovery. All told, the evidence at hand points to moderate strength
in spending on plant and equipment in the months ahead.
Residential construction meanwhile has remained a major area of
strength in the economy. Sales of homes have been brisk, and the
average level of single-family housing starts in the second quarter
was the highest in more than two decades. The multifamily sector has
continued to recover slowly, but the low vacancy rates in many
localities are likely to stimulate additional construction. In certain
parts of the country, especially in California, speculative activity in
the single-family sector has recently emerged, and this development
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89
bears watching. In general, however, the expansion of homebuilding
seems to be realistically attuned to the Nation's mobile population.
In the Board's judgment, residential construction will post further
gains in coming quarters.
Governmental spending has picked up recently, most markedly in
the State and local sector. The budgetary position of many State and
local governments has improved considerably, being bolstered by
Federal grants, by higher tax rates, and by the effects of economic
expansion on tax revenues. State and local units have been able to
expand employment more rapidly of late, although growth has not
been as strong as in the 1960's and early 1970's. Their construction
programs, delayed in many cases as governmental units concentrated on rebuilding their financial position, are moving ahead again
and should provide significant impetus to economic activity in coming
quarters.
The only major weak spot in the economy has been the foreign
trade sector. Exports have been sluggish this year, being limited
by the relatively slow economic expansion in other industrial
nations. Most of these countries have experienced indecisive rebounds
in business investment, and this has restricted the demand for American machinery—an important part of our sales abroad.
Cyclical developments have also played a large role on the import
side of the trade ledger. In general, the demand for imported industrial materials has increased in step with the recent rapid growth
of production in this country. Imports of cyclically sensitive durable
goods—such as machinery, autos, and other consumer items—are
also reflecting recent economic trends. And needless to say, oil imports have risen enormously this year, swelled first by cold weather
and then by inventory building in anticipation of price increases by
the Organization of Petroleum Exporting Countries (OPEC).
Continuing advances in investment income and other nontrade
items have partly offset the deficit in our foreign trade; even so, the
current-account deficit has reached record size. Oil imports should
experience some decline later this year, aided by the availability of
Alaskan oil. But prevailing trends in economic activity here and
abroad suggest little likelihood of significant near-term reduction in
our foreign trade or current current-account deficits.
In general, financial developments have favored economic expansion in our country, and they are continuing to do so. However,
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some familiar cyclical patterns have begun to emerge since the turn
of the year.
Borrowing by households has been growing very rapidly. Instalment credit has expanded at a 16 per cent annual rate thus far this
year. Measured relative to disposable personal income, growth of
instalment credit has reached a pace comparable to past peak rates.
Mortgage credit flows have been of record magnitude. Mortgage
credit has, in fact, grown much faster than could be expected on the
basis of past relationships between borrowing and residential construction, thus suggesting that households have been putting mortgage
funds to a broad variety of uses.
Despite the rapid growth of consumer and mortgage credit, measures of household debt burden generally remain within the range of
historical experience. Moreover, delinquency and bankruptcy rates
have declined significantly from their recession highs. At this juncture, debt burdens do not appear to constitute a serious impediment
to further gains in household expenditures; but we must not overlook the possibility of excesses in this area.
Business firms also have placed heavy demands on credit markets
this year. Their over-all need for external financing has grown because
capital outlays have risen much faster than profits. The net funds
raised by nonfinancial corporations increased by about 30 per cent
between the second half of 1976 and the first half of this year.
The character of business borrowing has also shifted considerably.
Until the latter part of 1976, business firms concentrated on repayment of short-term debt with the proceeds of long-term borrowing.
Since last fall, long-term indebtedness has continued to grow, but not
nearly so rapidly as short- and intermediate-term borrowing. Bank
loans to businesses have increased at an annual rate of 11 per cent
since last September, and commercial paper and finance company
loans have increased even faster.
These developments have caused liquidity ratios of corporate balance sheets to decline somewhat—a normal cyclical development,
although delayed in this case. Still, the state of corporate liquidity
remains relatively comfortable because of the extensive improvement
achieved during the preceding 2 years.
Credit demands by State and local governmental units have been
very large this year. About a fifth of the record bond offerings has
been devoted to advance refunding of debt issues that were sold in
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earlier years when interest rates were appreciably higher. The remainder has included substantial amounts to finance construction
of public power plants, hospitals, and water and sewer facilities.
Federal Government borrowing, in contrast, has declined from
last year—a development which, among other things, reflects the
recovery of Treasury revenues and an expenditure pattern still
characterized by shortfalls. However, both the administration's projection and the first concurrent resolution indicate that the deficit for
fiscal year 1978 will substantially exceed that for the current year.
If actually realized, this would be an unusual development. Normally,
of course, Federal borrowing diminishes in the course of an economic expansion. In view of the probable need to finance an increasing volume of private capital formation, the prospect of greater
demands for funds by the Federal Government in the next fiscal year
has been a cause of some disquietude in financial circles.
The strong demands for money and credit that have accompanied
our economic expansion have been reflected in a rise in short-term interest rates since the turn of the year. The Federal Reserve might have
accommodated credit demands by providing bank reserves more
liberally. However, such a course would only have postponed briefly
the rise in interest rates because the resulting build-up of liquidity
would have intensified inflationary expectations. By responding
promptly to the enormous expansion of the monetary aggregates
in April, the Federal Reserve gave clear notice that it was alert to
the danger of a new wave of inflation. This reassurance to the business and financial community that the Federal Reserve would not
permit the money supply to run riot was well received by credit
markets. Long-term interest rates, of course, are of much larger
significance to the economy than short-term rates; but the long-term
rates are also especially sensitive to inflationary expectations. It is
well, therefore, to take note of the fact that interest rates on corporate
and municipal bonds, instead of following the recent rise in shortterm rates, remained fairly stable and are actually a little lower now
than they were in April.
These developments in credit markets are, I believe, attributable
in significant part to public confidence in the Federal Reserve's
monetary policy. It is noteworthy that, in general, interest rates still
remain below levels prevailing at the beginning of the economic
recovery.
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During the past half year, the Federal Reserve has managed to
keep the growth of the major monetary aggregates on a moderate
path. M-l—which consists of currency and checking accounts at
commercial banks—increased at an annual rate of 6.4 per cent. This
is a faster rate of growth than occurred last year, and it reflects the
very intense demand for transactions balances in recent months.
Growth of the broader aggregates, on the other hand, has been
slower than last year—a deceleration due partly to the low personal
saving rate that has evolved and partly to some modest redirection
of savings flows away from deposit accounts and into market securities as short-term interest rates have risen. Despite the moderate
slowing of the broader monetary aggregates, financial institutions—
both commercial banks and the thrift institutions—remain relatively
liquid and in a good position to continue supporting economic
expansion.
During the next few quarters, it is improbable that over-all economic growth will proceed as rapidly as it did during the past 6
months. Typically, bursts of consumer spending of the kind witnessed
this year are followed by phases of moderation. Such moderation,
indeed, seems to be signaled by recent data on retail sales. Nor, of
course, is it to be expected that inventory investment will be adding
as much to economic expansion as it did in preceding quarters. And
in view of the high rate of single-family housing starts already
attained, it is likely that housing will contribute less to growth.
These probable developments, however, do not portend an end
to general economic expansion. We at the Board anticipate continuing
growth—albeit at less rapid rates—in consumption, inventory investment, and homebuilding. We think, moreover, that investment activity
by businessfirmswill maintain a good growth pace and perhaps accelerate as businessmen are confronted, as they may well be, by reduced
capacity margins next year. Meanwhile, as I noted earlier, there is
reason to expect that the pace of State and local government spending will continue to quicken. What these various trends suggest is
a change in the character of the expansion—with the over-all growth
rate slowing but still high enough to produce some further reductions
in unemployment.
The fact that the Nation's unemployment rate remains high by
historical standards is a source of continuing concern. If we as a
people are to address this problem effectively, our first task is to
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93
understand the special factors that make it so difficult now to achieve
rapid reductions in joblessness.
The stickiness of the unemployment rate, it needs to be appreciated, does not reflect unusual slowness in the opening up of new
job opportunities during the current expansion. On the contrary,
the growth of jobs since the recession trough in March 1975—some
6*/i million—has been more rapid than during the comparable phase
of any cyclical recovery since World War II. It happens, however,
that the rate of increase in the labor force also has been unprecedentedly rapid in the course of this expansion—amounting to more
than 5Vi million persons. Consequently, despite the huge rise that
has occurred in employment, the reduction in over-all unemployment
has been modest.
The single most important reason for the fast pace of labor force
growth has been a veritable rush of adult women into the job market.
Indeed, of the increase of 5.6 million that has occurred in the labor
force since the recession trough, 2.4 million—or more than 40 per
cent—is accounted for by women of age 25 or over. Strikingly, if
the percentage of this adult female population in the labor force
had been the same in June 1977 as it was in March 1975, when
economic recovery started, the adult female labor force would have
been lower by Wi million this June. What we are witnessing, literally,
is a revolution in the role of women in our society, and we need to
focus on the economic implications of this phenomenon more carefully than we have.
Obviously, the fact that the labor market has had to absorb the
"extra" influx of female job seekers is a major reason why the
Nation's over-all unemployment rate has not moved downward more
decisively. The rapid influx of women into the labor force takes on
particular significance because it happens to reinforce another demographic factor that also is taxing the absorptive capabilities of the
labor market. I refer to the continuing large additions of young
people to the labor force—a reflection of the high birth rates of
the 1950's.
Both adult women and young people tend to experience unemployment rates above average. Many have never held a regular job
before. Others left the work force years earlier on account of marriage
or the arrival of children. Whatever the state of the labor market, a
decision to enter or re-enter the labor force often involves a fairly
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extended period of job hunting—frequently prolonged by lack of
knowledge about available job opportunities. For married women—
especially those with young children—the desired job is often part
time and close to home, so finding the right position may take quite
a lot of time. For young people, early work experience frequently
involves various job shifts—and sometimes several periods of unemployment—until a job considered appropriate is found.
Because of the decline in birth rates that started in the early
1960's, growth in the younger-age component of the labor force can
be expected to taper off in the next few years. But no sign of tapering
is as yet visible in the labor force participation by adult women. A
decided slowing of the inflation rate—if that were to occur—might
check the rise in female labor force participation, since some women
clearly have taken jobs in order to offset the effects of inflation on
household budgets. However, social trends seem to be of greater
significance in conditioning the movement of women into the labor
force. Attitudes toward childbearing and childrearing and toward
educational and career aspirations of women have been undergoing
dramatic changes in our society, and it cannot be foretold when this
process will wane.
Thus rapid labor force growth may persist, thereby continuing
to make it difficult to reduce the over-all unemployment rate to
levels that were once considered reasonably consistent with the goal
of full employment. Indeed, the changed age-sex composition of the
labor force—now weighted more than formerly toward groups that
tend to have higher-than-average unemployment rates—probably
has imparted an upward tilt to over-all unemployment of about
1 percentage point compared with 20 years ago.
In time, of course, as women gain experience in the labor market
and as businesses adapt their operations so as to employ women
more effectively, the upward bias should lessen. One of our prime
policy objectives certainly should be to facilitate the assimilation of
adult women and young people into the active work force. That is
not likely to be accomplished by actions that rely simply on boosting
aggregate monetary demand. Such actions would tend to accentuate
inflationary pressures in the economy without doing a great deal to
facilitate the desired assimilation. In fact, the need to protect family
incomes against the ravages of inflation may cause even more
women and young people to enter the labor force. We therefore need
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to recognize very clearly that accommodation of significant changes
in the labor market requires policies that are specifically tailored to
the elimination of structural hindrances to full employment.
Even before the sharp acceleration of growth in the entry of
women into the labor force, there was reason to be concerned that
reasonably full use of our commercial and industrial capacity might
be reached before we began approaching full employment of our
labor force. That concern, arising from the laggard behavior of capital formation, is now greater because of the unexpected rapidity
with which the labor force is expanding. The inference seems inescapable that we need governmental policies that offer decisive encouragement to capital formation. Unless recognition of that need conditions the evolution of policies in such major areas as energy, taxes,
social security, welfare, and governmental regulation, there will be
small hope of maximizing job opportunities in the next several years.
We need an environment that is decidedly more conducive to business risk-taking than that which has prevailed in recent years. In my
judgment, we are very much in danger of forgetting that ours is
basically an enterprise economy whose vitality depends on whether
business firms are able to earn an adequate rate of return on invested
capital. Despite the increasing role of government in economic
activities, profits are still the essential driving force of our economic
system. Economic discussions nowadays deal extensively with the
effects of monetary and fiscal policies on economic activity; but they
do not focus frequently enough on the even more important matter
of whether private businesses—which dominate job creation in our
system—have adequate incentive to expand their operations or to
undertake new ventures. Our citizenry may pay dearly if this myopia
persists.
It also is important to rethink some of our national policies with
respect to the market for jobs. One of the most critical needs is to
avoid governmental actions that compound the problems that newcomers to the job market already have. New entrants—whether young
people or adult women—often cannot be highly productive in the
initial phase of their employment. Minimum wage legislation is blind
to that fact, and thus limits employment opportunities for job seekers
with little or no recent work experience. With young people and other
newcomers to the labor force now accounting for a disproportionate
share of the unemployed, this is hardly an opportune time for the
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Congress to contemplate a boost in the minimum wage that goes
well beyond the President's original recommendation.
Statutory changes in minimum wages affect not only the lower
end of the wage spectrum. In practice, they tend to have a leveraging
effect on the general wage structure as various tiers of workers seek
to maintain the differential between their wage and that of lowerpaid workers. Such a development would reinforce the upward pressure on wages that already derives from the continuing advance of
consumer prices, from tight labor markets here and there, and from
large and well-publicized collective bargaining settlements in some
industries.
Labor costs per unit of output in the private business sector rose
by 5.4 per cent in the year ending in March. This increase reflects the
difference between an average increase in labor compensation per
hour of about 8 per cent and an average increase of 2Vi per cent in
output per hour. Since we are now in a phase of the business cycle
when productivity gains are more likely to slow than to accelerate,
the upward pressures on wages may lead to still stronger pressures
on unit labor costs. Many businesses—not always justifiably—already
feel a need to recoup labor cost increases or to increase profit margins. To the extent that they succeed in raising their selling prices,
the inflation rate will tend to worsen and so too will inflationary
expectations. To the extent that they fail, profit margins may narrow—a development that would diminish the likelihood of sustained
expansion of capital investment.
The need to concern ourselves with impending cost distortions and
inflationary trends is evident from the price record of the first half
of this year. That record, to be sure, was influenced by some transitory forces, and there has been some diminution in the rate of
inflation lately. Even so, the rate of inflation this year is running
higher than it did last year. This is a disturbing development for
international as well as for domestic reasons.
In recent weeks, the dollar—which had maintained remarkable
stability against the average of foreign currencies since early last
year—has experienced limited but conspicuous depreciation. This
is a matter that no one in our Government can or does take lightly:
first, because any material depreciation of the dollar against foreign
currencies would have some adverse effect on our domestic price
level; second, because the dollar is a store of value for much of the
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rest of the world. The fact that the dollar has weakened even in
relation to the currencies of countries experiencing much greater
inflation than the United States is a reminder that market psychology
has a way of magnifying or distorting for a time underlying trends. A
sound dollar is essential to our economic future, and everyone with
major financial responsibility in our Government is keenly aware of
that.
We at the Federal Reserve have persistently sought to protect
the integrity of the dollar and at the same time to foster further
economic expansion. The members of the Federal Open Market
Committee, when they met earlier this month to discuss the longerrun growth of the monetary aggregates, carefully considered international as well as domestic developments. The Committee decided
to leave unchanged for the year ending in the second quarter of
1978 the previously projected growth ranges of the broader monetary
aggregates. M-2 thus is projected to grow within a range from 7 to
per cent during the next year, and M-3 within a range from
to 11 per cent. An adjustment, however, was made in the
growth range for M-l; the lower boundary of this range was dropped
by Vi of a percentage point, so this aggregate is projected to
increase within a range from 4 per cent to 6Vi per cent in the year
ahead.
The adjustment in the projected growth range for M-l, while small,
represents another step toward bringing the long-run growth of the
monetary aggregates down to rates compatible with general price
stability. Sustained progress in this direction is essential if the administration's publicly announced goal of reducing the pace of inflation
by about 2 percentage points by the end of 1979 is to be achieved.
The trend of growth in monetary aggregates, I regret to say, is
still too rapid. Even though the Federal Reserve has steadily sought
during the past 2 years to achieve lower ranges for monetary expansion, the evolution of its projections has been extremely gradual;
indeed, at the pace we have been moving it would require perhaps
a decade to reach rates of growth consistent with price stability. I
must report, moreover, that despite the gradual reduction of projected growth ranges for the aggregates during the past 2 years, no
meaningful reduction has as yet occurred in actual growth rates. That
unintended consequence is partly the result of data deficiencies that
complicate the already formidable task of adjusting or approximating
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monetary growth objectives. Some of the data deficiencies we have
experienced are being overcome. Even so, monetary measurement
will continue to lack the precision of a science. So too will the Federal Reserve's actions aiming to influence developments in financial
markets.
Implicit in our projections for monetary growth is the expectation
that the velocity—or turnover—of M-l will increase at a faster rate
than it has on the average during comparable periods of previous
business-cycle expansions. That does not seem an unreasonable
expectation, inasmuch as the velocity of M-l has, in fact, been
increasing more rapidly during the current recovery than the historical record would have suggested—a development that reflects the
increasing importance of a wide range of substitutes for traditional
checking deposits. The Federal Reserve Board's staff estimates that
the growing use of such substitutes—for example, negotiable orders
of withdrawal (NOW) accounts, credit union share drafts, drafts on
money market mutual funds, passbook savings accounts for business
firms and State and local governments, and telephonic transfers from
savings to checking accounts—depressed the rate of growth of M-l
by about W2 percentage points in 1976. This year the impact may
be smaller but nonetheless will remain significant.
The relationship between monthly or even yearly rates of monetary
expansion and the performance of the economy is subject to considerable uncertainty under the best of circumstances. In the current
environment of rapid change in methods of carrying on financial
transactions that uncertainty is heightened. Consequently, the Federal
Reserve will continue to maintain a posture of vigilance and flexibility
in the period ahead. Current monetary policy represents our best
judgment as to what is appropriate in the light of evolving economic
and financial developments. We will not be slow in modifying that
policy if actual conditions deviate materially from our expectations.
In concluding this report, I think it appropriate to emphasize the
great complexity of the economic problems currently confronting
our Nation. There are no instant, easy solutions that will deliver us
from our difficulties. For our part, we at the Federal Reserve know
that inflation ultimately cannot proceed without monetary nourishment. But we also live with a realization of our limited capacity to
move dramatically or quickly in making means of financing less
readily available. The shock of abrupt adjustment after so many years
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of druglike abuse of our economic system would be excessively risky.
To the maximum extent feasible, however, we are determined to move
toward re-establishing conditions of financial order in our society.
That is not because financial order is itself an end with which we
are preoccupied, but because our Nation cannot realize its potential
for sustained prosperity and well-being until existing apprehensions
about inflation are subdued.
We at the Board have no illusions about what the Federal Reserve
alone can accomplish. Sound monetary policy is a prerequisite to the
achievement of the employment and price goals set forth by the
administration. But other elements are no less critical. The President's timetable for eliminating the deficit in the Federal budget
deserves the earnest support of the Congress. Structural rigidities
that are weakening our economy also require serious attention. It is
fortunate that members of the Congress increasingly perceive that
persistent budget deficits and ever-faster increases of the money
supply, whatever their usefulness in the past, are no longer capable
of solving our economic problems.
STATEMENT BEFORE T H E COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS,
U.S. SENATE, NOVEMBER 9, 1977
I am pleased to meet with this committee once again to present the
report of the Board of Governors of the Federal Reserve System on
the condition of the national economy and the course of monetary
policy.
It might be useful to begin this testimony with a few comments
on economic developments during the past several years. I do so
because I believe that analysis of the current situation will be helped
materially if we start with a reasonably clear understanding of how
we got to where we are.
The key economic problems confronting our Nation today have
their origin in events that extend back over a considerable time. A
major conditioner of national economic affairs at present continues
to be the fact that inflation was allowed to get so far out of control
in the latter part of the 1960's and the early 1970's. Precisely why
that happened is a very complex matter, involving both shocks to
our economy—the chief one being the quantum jump in oil prices—
and some mistaken actions by governmental and private decision-
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makers alike. But it is no part of my immediate concern to explore
or assign responsibility. The point I want to stress is simply that the
distortions of the inflationary blow-up that occurred in the 1972-74
period are still casting a heavy shadow on our economic environment.
Certainly, the recession of 1974-75 would not have been nearly
so severe, and indeed might not have occurred at all, had it not been
for the inflationary stress of the preceding several years. Blinded by
the dizzying advance of prices and the effects of that advance on
their nominal profits, businessmen were slow to recognize that the
underlying condition of demand for their products was deteriorating.
They thus continued aggressive programs of inventory expansion
and capital-goods expansion longer than was prudent, with the
consequence that economic imbalances cumulated to major proportions in 1973 and 1974. By the time businessmen recognized the
mistaken assessments they had made, the need to scale back operations had become enormous. The worst recession in a generation
ensued.
The scars of both the recession and its prelude are with us still.
Psychologically, the recession was profoundly disturbing because of
its magnitude and because it caught so many people by surprise. A
good many of our citizens, it seems clear, had developed inordinate
faith in government's ability to manage and sustain economic expansion. When they discovered that that faith was not justified, the
experience was sobering—particularly for the not inconsiderable
number of businessmen who in the froth of the earlier prosperity had
added excessively to their short-term debts. Out of that trauma was
born a resolve in the minds of many businessmen to be much more
cautious in managing inventories, and also in adding to their fixed
costs or in enlarging their current liabilities.
And, as this committee knows well, it was not only the business
sector that was affected. Many State and local governments encountered problems that were just as searing—with New York City representing only the extreme case. That was partly because their normal
expenditures tend to respond more elastically to inflation than do
revenues, and partly because their budgets—particularly those of
local governments—were hard hit during the recession by the costs
of income-maintenance programs. It was not so long ago, as you
may recall, that grave concern was being voiced across our land
about the financial health of many State and local governments.
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The special legacy of inflation and recession has inevitably been
on our minds at the Federal Reserve in hammering out monetary
policy throughout the past 2Vi years of recovery. We have recognized, on the one hand, that formidable risks of adding to inflationary
expectations would accompany any pursuit of aggressive monetary
ease. But at the same time, we have been sensitive to our obligation
to foster financial conditions favorable to encouraging job opportunities so that the unemployment rate—which has remained very
high by historical yardsticks—might be further reduced.
What we feel has been virtually obligatory in these circumstances
is a middle course of moderate monetary expansion. That, in fact,
is the course we have pursued to the best of our ability. Monetary
aggregates, to be sure, have sometimes grown very slowly for short
timespans; in other periods, they have grown very rapidly. Over all,
however, the path has been one of moderation. This is evidenced, for
instance, by an average annual rate of growth of about 6 per cent
in MA—the narrow money stock, which includes only currency and
demand deposits—during the 10 full quarters of this recovery.
The rise in MA and in related monetary aggregates has been sufficient to finance a large gain in the physical volume of output and
employment. Indeed, nearly 7 million jobs have been created since
March 1975—a performance without parallel in both absolute and
percentage terms since World War II. But the increases in the money
supply, while so favorable to the physical expansion of economic
activity, were sufficiently limited to permit a retreat from doubledigit inflation. And clearly, the increases that occurred in the money
supply have not excited new inflationary expectations—a fact evidenced by the dramatically atypical behavior of interest rates in this
expansion. Short-term interest rates, despite the advances of recent
months, are not materially higher today than they were at the
beginning of this expansion. And long-term rates are actually lower
by a significant margin. Charts 1 and 2 of the appendix to this
statement, which depict the behavior of interest rates, make this
entirely clear.1
All in all, we at the Federal Reserve are satisfied that monetary
x
The appendix to this statement is available on request from Publications
Services, Division of Administrative Services, Board of Governors of the
Federal Reserve System, Washington, D.C. 20551.
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policy has made an important contribution to the recovery and to the
basic economic health of this Nation. Among other things, monetary
policy has helped to produce a receptive, orderly environment for a
massive amount of debt restructuring. During this expansion, business
firms have been notably successful in reducing the ratio of short- to
long-term debt, and State and local governments as well have been able
to strengthen their financial posture. Progress of this kind has not
only enhanced the potential of businesses and governmental units to
play a continuing supportive role in the economic expansion; it has
also quieted the not inconsiderable nervousness many investors felt
a short time ago about holding debt issues, especially those enjoying top ratings. That is a very constructive financial-market development.
The recovery of economic activity during the past 2Vi years has
had features that might have been expected from the special circumstances that prevailed earlier. For instance, retail sales and housing
starts weakened at the very beginning of 1973—well in advance of
the peak of the previous cyclical expansion. These activities consequently avoided some of the extreme end-phase distortion that
occurred elsewhere in the economy, and they have displayed the
most conspicuous elements of strength during the current expansion. In both instances, the percentage gains since the recession
trough in March 1975 are greater than have been usual in previous
expansions. By contrast, a large residue of caution has characterized
business spending for both inventories and fixed capital.
Indeed, the control that businesses are exercising nowadays over
inventories has produced very prompt slowing in production whenever consumer spending showed signs of hesitancy. That fact goes
a long way toward explaining why we have had considerable unevenness in the rate of over-all economic advance. While the pauses have
produced some anxiety from time to time, the new determination of
businessmen not to allow their inventories to become unbalanced is
actually a constructive development.
A worrisome feature of businessmen's current caution, however, is
their marked reluctance to proceed with capital investment programs
comparable to those of previous expansions. In the 2Vi years since
the recession trough, "real" capital outlays have increased less than
half as much as they did, on average, over like periods in previous
postwar expansions. The shortfall has been especially marked in
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103
the case of major long-lived industrial projects, and it has occurred
even in industries—such as basic chemicals—in which the rate of
capacity utilization is well advanced. The relative weakness of spending on plant and equipment is, indeed, the most troublesome feature
of the current expansion. In large part this weakness is due to the
unsatisfactory performance of corporate profits—a difficulty that I
discussed at length in a recent speech and one that must be overcome soon if the recovery is to take on a more balanced character
and hence enjoy a good chance of being sustained.
One other unusual weakness of this recovery—and this again is
something that could have been reasonably anticipated—has been
the subdued expenditure pattern, until recently, of State and local
governments. Their "real" spending, like that of businesses for fixedcapital assets, also is up by only about half as much from the recession trough as has been typical in previous expansions—a clear
reflection of the generalized financial strains that State and local
governments have experienced.
In sum, the character of the current economic recovery has
differed in some major respects from that of earlier recoveries. This
fact has considerable bearing on prospects for the continuation of the
recovery and also for policy formulation. One thing that should be
apparent is that the obstacles that have stood in the way of more
vigorous economic growth are not likely to be successfully addressed
by conventional stimulative actions. Simply opening up the monetary
faucets or spewing out funds from the Treasury does not seem a
promising course in view of the widespread concerns that now exist—
particularly in the business and financial community. We need policies, rather, that are attuned to our special legacy—namely, past
inflation, its aftermath of recession, and fears of new troubles that
may yet come from a continuing high rate of inflation.
It has not been easy during recent months to interpret economic or
financial developments with as much confidence as one would like to
feel. This committee is aware, I am sure, of the wide divergence of
judgment that has been expressed by private economists. A similar
diversity of views—although less pronounced—has existed within
the Federal Reserve System. This is simply a time when honest
differences in assessment can easily arise among conscientious
analysts. At the September meeting of the Federal Open Market
Committee, for instance, the consensus favoring some firming of
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monetary policy found 2 of the 12 Committee members dissenting
because they felt that the policy allowed for more firming than they
believed to be justified and another two members dissenting because
they thought that the intended firming was inadequate.
I can report, nevertheless, that the dominant view within the
Federal Reserve is that economic expansion will persist well into
1978, probably at a pace sufficiently strong to result in some further
reduction in the unemployment rate. The collective belief is that the
reduced rate of increase in real gross national product (GNP) in the
third quarter is now giving way to quicker expansion. A key element
in this expectation is the emergence recently of a strong pattern in
State and local government spending and employment—reflecting the
improved budget position of these governments. Also supportive of
the view that early 1978 will witness good gains in general economic
activity is the fact that business capital spending, although far from
robust, is moving ahead, and in particular is showing some recovery
in major industrial construction.
The judgments that we in the System have about the more distant future are much more tentative—mainly because of uncertainties
about capital formation and the generally weak trend of activity in
foreign economies. Lagging recovery abroad has, of course, worked
to the serious detriment of our export trades and this in turn has
caused some weakening of the dollar in foreign exchange markets.
The uneasiness that now appears to prevail in many parts of the
business world casts a cloud on the longer-run prospects of the economy, but the possibility that the general expansion will actually
accelerate as 1978 unfolds—particularly if capital spending can be
invigorated—is very much a part of my own thinking as well as
that of some other members of the Federal Reserve.
I must call your attention to a striking fact. The somewhat mixed
character of recent economic news has been reflected in equity prices
quoted on the stock exchanges, but it has had little counterpart in
other financial developments. General credit expansion, indeed, has
proceeded at a brisk pace this year—with an intensity that I do not
think has been fully appreciated. The Federal Reserve has naturally
given some weight to the evolving pattern of credit expansion in the
course of its monetary policy deliberations. We have not been able
to assume, as some others appear to have done, that the intense
reaching out for credit is a process without significance.
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The total amount of funds raised in credit markets this year not
only has expanded very rapidly from quarter to quarter in absolute
terms but also has expanded much more rapidly than has the dollar
value of GNP. Preliminary estimates indicate that total borrowings
by all entities in this country ran at an annual rate of about $400
billion in the third quarter of this year—or some $90 billion more
than in the third quarter of 1976. This raised the ratio of total borrowings to the dollar value of GNP above 20 per cent, close to the
all-time peak record during the speculative boom of early 1973. It
is hardly surprising, I submit, that such a volume of fund raising
should press against available supplies of credit and tend to cause
some interest rates to move upward. I would note especially that the
quest for credit accommodation has not been confined to just a few
sectors of the economy; rather, it has been very broadly diffused.
Households have absorbed a huge total of credit this year, mainly
in the form of mortgage and instalment debt. Their net addition to
mortgage and instalment debt, which was $46 billion in 1975 and
$82 billion in 1976, rose to an annual rate of $105 billion in the first
half of this year and to an estimated rate of $115 billion in the third
quarter. This, I might add, has raised the combined instalment and
mortgage repayment burden that households face—relative to their
disposable income—close to the previous high experienced in 1973.
I do not mean to imply that this as yet is a matter for serious concern. But this is an area that warrants continuing close scrutiny for
signs of excess, with special attention given to the apparently increasing tendency of homeowners to borrow heavily against the accumulated equity in their residences.
Business firms, too, have borrowed much more this year than last.
During the early stages of this economic expansion, the sum of
retained earnings and depreciation actually exceeded outlays by
nonfinancial corporations for inventories and fixed capital. This
relationship was reversed in 1976, and—with the tempo of capital
spending picking up this year—a larger "financing gap" than existed
in 1976 has developed. For all of 1977, the Board's staff estimates
that nonfinancial corporations will raise a net total of about $80
billion in credit markets, up almost 40 per cent from last year. The
higher volume of business borrowing this year is being distributed
between short- and long-term debt, with the former showing the more
prominent rise—partly because some of the higher-rated industrial
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corporations have largely completed their desired balance sheet
restructuring.
I know that it is widely believed that short-term and intermediateterm business borrowing has been sluggish. True, there has been
some unevenness in borrowing pressures from region to region and
from one type of lending institution to another; but any impression
that shorter-dated business credit demands have been anemic is
decidedly wrong. There has, in fact, been an impressively rapid
rise since late last year in the combined total of business credit raised
from banks, the commercial paper market, and finance companies.
The rate of increase, to be sure, did slow materially this September,
but that seems to have been an erratic deviation from the basic trend;
preliminary data indicate extremely fast-paced growth of business
loans in October.
Moreover, it has not been only the private sector of the economy
that has reached out aggressively for credit this year. Borrowing by
State and local governments has been running at record levels, partly
because these governments have moved to take advantage of the
significant renewal of lender confidence in tax-exempt securities.
Our Board staff estimates that the net borrowing of State and local
governments during this year for all purposes will come to about
$25 billion, up more than 60 per cent from the borrowing in 1976.
Much of this money is being used to finance construction of such
things as water treatment and sewer systems and municipal power
facilities.
And not to be forgotten is the continuing large appetite of the
Federal Government for credit. Thus far during calendar 1977, it is
true, such borrowing has been smaller than in the like period of 1976,
reflecting a reduced budget deficit. But the rate of Federal borrowing nevertheless has remained exceptionally large and—what is more
significant—it is now heading upward again, in contrast to the normal pattern of progressively lower financing needs as economic
expansion proceeds. That reflects, of course, various tax cuts or
tax-cut extensions embodied in the Tax Reduction Act of 1977 and
various spending initiatives taken last spring with a view to quickening the pace of economic growth. For the full fiscal year 1978, the
combined unified and off-budget deficit is now officially estimated
at about $69 billion—nearly $16 billion higher than for fiscal year
1977. The Treasury started this fiscal year with a large cash balance.
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Even so, it appears likely that in the 6-month period ending with
March 1978 the Treasury will have to raise about $10 billion more
in financial markets than it did in the corresponding period 1 year
earlier.
I have dwelt at some length on the evolving pattern of credit extension because, as I noted earlier, I do not think that what has been
happening in credit markets is as widely appreciated as it should
be. The vigor of credit extension certainly suggests a sense of greater
dynamism in the economy than appears, for example, from business
statistics for the third quarter. The vigor of credit extension is not,
however, patently at odds with economic developments averaged out
over several quarters. And it may be, of course, that undue attention
has been given to the summer pause in trying to gauge how well the
economy is doing. That is a possibility that the Federal Reserve has
had to weigh. It would be a happier situation if there were less
apparent conflict between different kinds of evidence, but in making
decisions on monetary policy we must do the best we can whatever
evidence can be mustered.
There is no rigid link between the total volume of credit outstanding in the economy and the Nation's stock of money, but movements
in credit and money do tend, of course, to be positively related. If
the demand for credit begins to strengthen at a time when financial
institutions are relatively liquid, a good amount of credit expansion
can occur without much—if any—change in monetary balances. But
as the economy grows and credit expansion continues, sooner or later
a need for enlarged money balances will arise in order to facilitate
the enlarged total of credit transactions. Such a process has unquestionably been at work this year, and it explains in some measure
why the growth of M-l—the narrow money stock—has accelerated
recently in relation to money growth earlier in this expansion.
As you know, the Federal Open Market Committee (FOMC) has,
however, the ability to take prompt steps that will in time check any
unwanted acceleration in the money aggregates. There has been
considerable discussion recently in economic and financial circles as
to why we at the Federal Reserve have allowed money growth in
the past 6 or 7 months to exceed the upside limit we had projected
for longer-term monetary expansion. M-l actually grew at an average
annual rate of 9 per cent during the second and third quarters of
this year—well above the 6Vi per cent upper end of the longer-term
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growth range previously projected. Growth in the broader monetary
aggregates has also run above their anticipated upper limits, but the
excess in their case has been minor. The growth actually recorded
in them has shown no quickening compared with earlier stages of
the economic expansion. Still, their growth has rather consistently
exceeded our objectives.
The high rate of growth in each of the major monetary aggregates
during the past 6 months is thus a setback to the Federal Reserve's
policy of gradually reducing the rates of growth of the monetary
aggregates, so that they may in time be once again consistent with
general price stability. But it is only a temporary setback. A zigzag
course is sometimes inevitable or perhaps even desirable.
One fact that needs to be borne in mind is that the acceleration
of money growth has not occurred in a smooth pattern. Instead, the
tendency toward excess has proceeded in fits and starts, so it was
virtually impossible to judge how durable—or meaningful—this or
that large increase in M-l was likely to be. Often in the past, spurts
in monetary growth such as occurred in April and July of this year
have been followed by strong reversals. Things did not quite happen
that way this year.
Besides, it was virtually impossible even 3 months ago to isolate
with any confidence the causes of the sudden spurt in monetary
growth. While still somewhat obscure, the forces at work have now
become clearer. At practically every hearing thus far held under
House Concurrent Resolution 133, I have called attention to the
dynamism of financial technology. More specifically, I have kept
stressing that the growth of M-l was for a time being retarded by
such things as the development of negotiable orders of withdrawal
accounts, the newly enjoyed authority of businesses and State and
local governments to have passbook savings accounts, and the steadily
increasing tendency of individuals as well as corporations to carry
at least a part of their transactions balances in one or another type
of income-earning asset. Such developments—which served to retard
the growth of M-l appreciably during 1975 and 1976—appear to
have waned considerably this year. Econometric work done at the
Board indicates that within the past half year the growth of M-l
moved back to something like its pre-1974 relationship to economic
activity. But we still do not know whether the slowing of changes in
financial technology is more than a temporary aberration.
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Under the circumstances, we have judged it wise to move cautiously in adapting policy. We have felt very keenly the need for some
clarification of ambiguities before striking out decisively. We well
realize that the middle course actually followed—that of gradually
limiting the availability of bank reserves and thereby slowing the
growth of money—has left us open to the charge of temporizing. In
fact, we did not temporize at all, but we did move prudently.
On the one hand, restrictive action vigorous enough to have kept
M-l growth within the projected ranges would, we believe, have
forced a far steeper climb in short-term interest rates than actually
has occurred since April. This could have proved destructive to the
smooth functioning of financial markets and might eventually have
brought serious injury to our economy.
On the other hand, a determined effort by the Federal Reserve
System to prevent any rise in interest rates during recent months
would have produced—in the face of the credit pressures that have
been experienced—a rate of monetary expansion well above the rise
that has actually occurred. That would have been very damaging,
for it would have practically destroyed any remaining hope of achieving mastery over the inflationary forces that now move our society.
Indeed, the Federal Reserve might then have been viewed as having
transformed itself into an engine of inflation—such as it was a generation ago when it reluctantly pursued a course of pegging Government
security prices.
The increase of short-term interest rates that has occurred since
late April has thus served to check what otherwise might well have
been an explosion of the money supply. By taking measures to curb
the growth of money, we have demonstrated that we remain alert
to the dangers of inflation. As a consequence, long-term interest
rates, which nowadays are extremely sensitive to expectations of
inflation, have remained substantially stable. Had we not taken steps
to bring the money supply under control, I have little doubt that
fears of inflation would now be running stronger and that long-term
interest rates, which play such a significant role in shaping investment decisions, would therefore now be higher than they in fact are.
In that event, of course, the continuance of economic expansion
would be less secure.
At the most recent meeting of the FOMC, held on October 18,
we deliberated at length on the monetary growth aggregates that
110
Growth Targets
appeared desirable in the coming year. For the period extending from
the third quarter of this year to the third quarter of 1978, the Committee decided to retain the growth range of 4 to 6V2 per cent for
M-l specified at the July meeting. Some sentiment was initially expressed for reducing the upper end of the M-l band with a view to
compensating for the excessive growth that has been occurring.
Other members favored widening the M-l band because of uncertainty as to whether the basic relationship between money growth
and GNP was again changing. In the end, there was a consensus
that the growth range previously established for M-l should be
retained until more certain knowledge developed as to the relative
importance of the influences now conditioning M-l growth.
However, in the case of the broader money stock measures—
which have been behaving more normally—the Committee decided to
lower both the upper and the lower bounds of the projected growth
ranges by Vi of a percentage point. Thus, the 12-month growth
range for M-2—a measure of money that includes, in addition to
M-l, savings and consumer-type deposits at commercial banks—was
set at 6 ^ to 9 per cent. That for M-3—a still broader measure,
which includes the deposits of thrift institutions as well—was set at
8 to 10V4 percent.
A crucial consideration in lowering the longer-term ranges for
the broader aggregates was the Committee's wish to reaffirm its
intent of gradually bringing down the growth of the monetary aggregates to rates compatible with reasonable price stability. Such action
seemed particularly appropriate at a time when the behavior of M-l
might be interpreted as indicating that the Federal Reserve was faltering in its determination to lean against inflationary pressures. No
such faltering has occurred, nor is it likely to occur. October's sharp
advance of the wholesale price index should remind everyone of the
need for unrelenting efforts to contain the push of inflation. The
resolve of the Federal Reserve to undernourish and weaken inflation remains undiminished. We fully recognize that a powerful
inflationary bias has become embedded in our economic life over
many years and that general price stability cannot therefore be
restored quickly; but we do not intend to depart from pursuing the
maximum degree of monetary firmness consistent with our companion
Growth Targets
111
obligation to foster financial conditions that favor expansion of job
opportunities.
I want to assure this committee that, in lowering the growth ranges
for the broader aggregates, we did not overlook the implications for
thrift institutions and the borrowers they serve. The new upper ends
of the ranges for M-2 and M-3 are compatible, in our judgment, with
a substantial flow of new savings into thrift institutions in the year
ahead. These institutions are less vulnerable to deposit outflows
than they were in earlier years, since a very large and increasing
portion of their liabilities now consist of longer-dated certificates.
Their earnings position has also strengthened considerably, and they
enjoy relatively large liquid assets and good capability to borrow if
necessary. In short, even if deposit inflows were to slow appreciably
in the coming year, the ability of these institutions to support the
homebuilding industry will probably remain strong.
I would like to emphasize one additional point before concluding
this statement. The objective of the administration and the Federal
Reserve to achieve better price performance in our country is obviously not being helped by the recent depreciation of the dollar against
foreign currencies. A cheaper dollar in foreign exchange markets
spells higher costs of imported goods—and these now have a much
larger role in our domestic markets than they did a decade or two
ago. Depreciation of the dollar can also cause serious international
difficulties since the dollar is a store of value not only for foreign
central banks but also for multinational corporations and individuals
of wealth all over the world. We dare not, therefore, be complacent
about the current depreciating tendencies of the dollar.
It is not easy to counter these tendencies at a time when our trade
deficit has become enormous—a phenomenon that partly reflects
the more advanced degree of economic recovery achieved in this
country than abroad. To some extent imbalance in our foreign trade
will be self-correcting as economic activity strengthens abroad, but
we surely should seize every opportunity to help accentuate any
tendency toward improvement. That means, first of all, that we need
to adopt an energy policy that relies less heavily on imports of oil.
It means, secondly, that we must have a business environment that
is hospitable to new investments. And it means, finally, that respon-
112
Growth Targets
sible monetary, fiscal, and structural policies are required to protect
our international price competitiveness. In short, and fortunately,
these international considerations reinforce our basic domestic needs.
We at the Federal Reserve, I need hardly tell you, will continue
to devote our energies to the maintenance of a sound dollar—a dollar
that is both strong here at home and strong abroad.
"Part!
Operations, and
Organization
115
Record of Policy Actions
of the Board of Governors
JANUARY 3, 1977
Amendment to Regulation L (Interlocking Bank Relationships
U n d e r the Clayton Act)
Effective January 4, 1977, the Board amended Regulation L to permit—
under certain conditions—a director, officer, or employee of a member
bank to serve simultaneously as a director, officer, or employee of a
minority or women's bank.
Votes for this action: Messrs. Gardner, Wallich,
Coldwell, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Burns, Jackson, and
Partee.
The Board took this action to aid the development of minority and
women's banks by making it easier for them to obtain the management
and operating expertise of experienced bankers.
Interlocking relationships between member banks and other banks
in the same city, town, or village are generally prohibited by the
Clayton Act and by Regulation L. However, the statute allows the
Board to make exceptions by regulation.
The amendment provides that any director, officer, or employee of
a member bank may at the same time be a director, officer, or employee of one other bank that is controlled or managed by women or
by members of minority groups subject to the following conditions:
1. The interlocking relationship must be determined by the Board
of Governors to be necessary to provide management or operating
expertise to the minority or women's bank.
2. No more than three interlocks are permitted between any two
such banks, and the interlocks may not represent a majority of the
board of the minority or women's bank.
3. No interlock may continue for more than 5 years.
116
Board Policy Actions
FEBRUARY 11, 1977
Bank Holding Company Divestitures
The Board issued a policy statement regarding divestitures required of
bank holding companies.
Votes for this action: Messrs. Gardner, Wallich,
Coldwell, Jackson, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr. Burns.
The Board issued this statement to provide guidance to bank holding companies. The policy applies to divestitures required either by
statute or by Board order. The text of the statement follows:
From time to time the Board of Governors receives requests from
companies subject to the Bank Holding Company Act, or other laws
administered by the Board, to extend time periods specified either by
statute or by Board order for the divestiture of assets held or activities engaged in by such companies. Such divestiture requirements
may arise in a number of ways. For example, divestiture may be
ordered by the Board in connection with an acquisition found to have
been made in violation of law. In other cases the divestiture may be
pursuant to a statutory requirement imposed at the time an amendment to the Act was adopted, or it may be required as a result of a
foreclosure upon collateral held by the company or a bank subsidiary
in connection with a debt previously contracted in good faith. Certain
divestiture periods may be extended in the discretion of the Board,
but in other cases the Board may be without statutory authority, or
may have only limited authority, to extend a specified divestiture
period.
In the past, divestitures have taken many different forms, and the
Board has followed a variety of procedures in enforcing divestiture
requirements. Because divestitures may occur under widely disparate
factual circumstances, and because such forced dispositions may have
the potential for causing a serious adverse economic impact upon the
divesting company, the Board believes it is important to maintain a
large measure of flexibility in dealing with divestitures. For these reasons, there can be no fixed rule as to the type of divestiture that will
be appropriate in all situations. For example, where divestiture has
been ordered to terminate a control relationship created or maintained in violation of the Act, it may be necessary to impose conditions that will assure that the unlawful relationship has been fully
terminated and that it will not arise in the future. In other circumstances, however, less stringent conditions may be appropriate.
Board Policy Actions
117
1. Avoidance of Delays in Divestitures. Where a specific time period has been fixed for accomplishing divestiture, the affected company should endeavor and should be encouraged to complete the
divestiture as early as possible during the specific period. There will
generally be substantial advantages to divesting companies in taking
steps to plan for and accomplish divestitures well before the end of
the divestiture period. For example, delays may impair the ability of
the company to realize full value for the divested assets, for as the
end of the divestiture period approaches the "forced sale" aspect of
the divestiture may lead potential buyers to withhold firm offers and
to bargain for lower prices. In addition, because some prospective
purchasers may themselves require regulatory approval to acquire the
divested property, delay by the divesting company may—by leaving
insufficient time to obtain such approvals—have the effect of narrowing the range of prospective purchasers. Thus, delay in planning for
divestiture may increase the likelihood that the company will seek an
extension of the time for divestiture if difficulty is encountered in
securing a purchaser, and in certain situations, of course, the Board
may be without statutory authority to grant extensions.
2. Submission and Approval of Divestiture Plans. When a divestiture requirement is imposed, the company affected should generally
be asked to submit a divestiture plan promptly for review and approval by the Reserve Bank or the Board. Such a requirement may
be imposed pursuant to the Board's authority under section 5(b) of
the Bank Holding Company Act to issue such orders as may be
necessary to enable the Board to administer and carry out the purposes of the Act and prevent evasions thereof. A divestiture plan
should be as specific as possible, and should indicate the manner in
which divestiture will be accomplished—for example, by a bulk sale
of the assets to a third party, by "spinoff" or distribution of shares to
the shareholders of the divesting company, or by termination of prohibited activities. In addition, the plan should specify the steps the
company expects to take in effecting the divestiture and assuring its
completeness, and should indicate the time schedule for taking such
steps. In appropriate circumstances, the divestiture plan should make
provision for assuring that "controlling influence" relationships, such
as management or financial interlocks, will not continue to exist.
3. Periodic Progress Reports. A company subject to a divestiture
requirement should generally be required to submit regular periodic
reports detailing the steps it has taken to effect divestiture. Such a
requirement may be imposed pursuant to the Board's authority under
section 5(b) of the Bank Holding Company Act, referred to above,
as well as its authority under section 5(c) of the Act to require re-
118
Board Policy Actions
ports for the purpose of keeping the Board informed as to whether
the Act and Board regulations and orders thereunder are being complied with. Reports should set forth in detail such matters as the
identities of potential buyers who have been approached by the company, the dates of discussions with potential buyers and the identities
of the individuals involved in such discussions, the terms of any offers
received, and the reasons for rejecting any offers. In addition, the
reports should indicate whether the company has employed brokers,
investment bankers or others to assist in the divestiture, or its reasons
for not doing so, and should describe other efforts by the company to
seek out possible purchasers. The purpose of requiring such reports
is to insure that substantial and good faith efforts are being made by
the company to satisfy its divestiture obligations. The frequency of
such reports may vary depending upon the nature of the divestiture
and the period specified for divestiture. However, such reports should
generally not be required less frequently than every three months,
and may in appropriate cases be required on a monthly or even more
frequent basis. Progress reports as well as divestiture plans should be
afforded confidential treatment.
4. Extensions of Divestiture Periods. Certain divestiture periods—
such as the December 31, 1980 deadline for divestitures required by
the 1970 Amendments to the Bank Holding Company Act—are not
extendable. In such cases it is imperative that divestiture be accomplished in a timely manner. In certain other cases, the Board may
have discretion to extend a statutorily prescribed divestiture period
within specified limits. For example, under section 4(c)(2) of the Act
the Board may extend for three one-year periods the two-year period
in which a bank subsidiary of a holding company is otherwise required to divest shares acquired in satisfaction of a debt previously
contracted in good faith. In such cases, however, when the permissible extensions expire the Board no longer has discretion to grant
further extensions. In still other cases, where a divestiture period is
prescribed by the Board, in the exercise of its regulatory judgment,
the Board may have broader discretion to grant extensions.
Where extensions of specified divestiture periods are permitted by
law, extensions should not be granted except under compelling circumstances. Neither unfavorable market conditions, nor the possibility that the company may incur some loss, should alone be viewed
as constituting such circumstances—particularly if the company has
failed to take earlier steps to accomplish a divestiture under more
favorable circumstances. Normally, a request for an extension will
not be considered unless the company has established that it has made
substantial and continued good faith efforts to accomplish the divesti-
Board Policy Actions
119
ture within the prescribed period. Furthermore, requests for extensions of divestiture periods must be made sufficiently in advance of
the expiration of the prescribed period both to enable the Board to
consider the request in an orderly manner and to enable the company
to effect a timely divestiture in the event the request for extension
is denied. Companies subject to divestiture requirements should be
aware that a failure to accomplish a divestiture within the prescribed
period may in and of itself be viewed as a separate violation of the
Act.
5. Use of Trustees. In appropriate cases a company subject to a
divestiture requirement may be required to place the assets subject to
divestiture with an independent trustee under instructions to accomplish a sale by a specified date, by public auction if necessary. Such
a trustee may be given the responsibility for exercising the voting
rights with respect to shares being divested. The use of such a trustee
may be particularly appropriate where the divestiture is intended to
terminate a control relationship established or maintained in violation
of law, or where the divesting company has demonstrated an inability
or unwillingness to take timely steps to effect a divestiture.
6. Presumptions of Control. Bank holding companies contemplating a divestiture should be mindful of section 2(g)(3) of the Bank
Holding Company Act, which creates a presumption of continued
control over the transferred assets where the transferee is indebted
to the transferor, or where certain interlocks exist, as well as section 225.2 of Regulation Y, which sets forth certain additional control presumptions. Where one of these presumptions has arisen with
respect to divested assets, the divestiture will not be considered as
complete until the presumption has been overcome. It should be
understood that the inquiry into the termination of control relationships is not limited by the statutory and regulatory presumptions of
control, and that the Board may conclude that a control relationship
still exists even though the presumptions do not apply.
7. Role of the Reserve Banks. The Reserve Banks have a responsibility for supervising and enforcing divestitures. Specifically, in
coordination with Board staff they should review divestiture plans to
assure that proposed divestitures will result in the termination of control relationships and will not create unsafe or unsound conditions in
any bank or bank holding company; they should monitor periodic
progress reports to assure that timely steps are being taken to effect
divestitures; and they should prompt companies to take such steps
when it appears that progress is not being made. Where Reserve
Banks have delegated authority to extend divestiture periods, that
authority should be exercised consistently with this policy statement.
120
Board Policy Actions
FEBRUARY 16, 1977
Regulation Y (Bank Holding Companies)
The Board determined that the operation of a savings and loan association
is not an appropriate activity for bank holding companies.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, Jackson, Partee, and Lilly. Votes
against this action: None.
The Bank Holding Company Act requires that the Board apply a
two-step test when evaluating the proposed permissibility of an activity
for bank holding companies. To reach an affirmative conclusion, the
Board must find that the activity is (1) closely related to banking or
managing or controlling banks and (2) a proper incident to banking.
The latter test requires a determination that performance of the activity by a bank holding company "can reasonably be expected to produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices."
The question of bank holding company operation of a savings and
loan association was occasioned by—
1. The application of D. H. Baldwin Company, Cincinnati, Ohio,
for permission to retain shares of Empire Savings, Building and Loan
Association, Denver, Colorado, and the latter's subsidiary.
2. A request by First Security Corporation, Salt Lake City, Utah,
for reconsideration of the Board's order requiring it to divest itself
of shares of First Security Savings and Loan Association, Pocatello,
Idaho.
In connection with similar applications submitted by two other
bank holding companies, the Board had previously determined that
the operation of a savings and loan association was closely related to
banking.1 The Board therefore turned now to the question of the
propriety of the proposed affiliation.
1
Refer to the Board's order dated November 4, 1974, denying the application of American Fletcher Corporation, Indianapolis, Indiana, to acquire shares
of Southwest Savings and Loan Association, Phoenix, Arizona {Federal Reserve
Bulletin, December 1974, p. 868); and the Board's order dated April 10, 1975,
denying the application of Memphis Trust Company, Memphis, Tennessee, to
acquire shares of Homeowners Savings and Loan Association, Inc., Collierville,
Tennessee (Federal Reserve Bulletin, May 1975, p. 327).
Board Policy Actions
121
Upon consideration of the entire record, including the record of
the hearings conducted in connection with the two earlier cases, the
Board concluded that operation of a savings and loan association is
not a proper activity for bank holding companies since the adverse
effects that were expected to result would not be outweighed by public
benefits. The Board viewed the proposal as a serious threat to existing
competition between banks and thrift institutions. Also, approval of
the proposed affiliation would lead to various types of regulatory
difficulties. For example, savings and loan associations are authorized
under State and Federal laws and regulations to engage, either directly
or indirectly, in several activities that the Board has deemed impermissible for bank holding companies. If the Board were to permit a
holding company to engage, through a subsidiary savings and loan
association, in an "impermissible" activity, it would most likely be
compelled to allow other bank holding companies to engage in such
activity directly even though the activity has been considered inappropriate for bank holding companies. On the other hand, if the Board
were to deny a holding-company-affiliated savings and loan association permission to engage in such activity, the institution might not
only be at a competitive disadvantage with respect to other savings
and loan associations but also be unable to provide the normal range
of services to the public.
The Board thereupon denied the two applications at hand.
The Board stated that any decision to permit affiliation between
banks and savings and loan associations should be made by the Congress.
M A R C H 7, 1977
Regulation Y (Bank Holding Companies)
The Board decided, for the present, that the issuance of money orders and
similar consumer-type payment instruments should not be added to the
list of activities generally permissible for bank holding companies under
Regulation Y. At the same time, however, the Board announced that it
would process bank holding company applications to engage in this activity on a case-by-case basis, and it approved two such applications.
Votes for these actions: Messrs. Gardner, Wallich,
Jackson, Partee, and Lilly. Votes against these
actions: None. Absent and not voting: Messrs.
Burns and Coldwell.
122
Board Policy Actions
To place a nonbanking activity on the list of activities permissible
for bank holding companies under Regulation Y, the Board must
apply a two-step test. It must determine that the activity is (1) closely
related to banking and (2) a proper incident to banking.
In March 1976 the Board had published for comment a proposal
to amend Regulation Y by adding to the list of permissible activities
the issuance of money orders and similar consumer-type payment instruments. On the basis of the comments received and the entire record, the Board determined that the activity in question is closely related to banking: It is comparable to certain services performed by
banks (such as the issuance of cashier's checks and certified checks);
it involves financial skills generally possessed by banks; and it is a
type of activity in which banks have historically engaged.
In the second step of the test—the question of whether the activity
is a proper incident to banking—the Board is required to consider
whether the performance of the activity by a bank holding company affiliate can be expected to produce public benefits (such as
greater convenience, increased competition, or gains in efficiency) that
would outweigh possible adverse effects.
Noting that very few bank holding companies had indicated a possible interest in engaging in this activity, the Board decided, for the
time being, to process any applications on a case-by-case basis in lieu
of amending Regulation Y. (The rulemaking proceeding would, however, be left open.) In evaluating each application, the Board would
assess the net public benefits of the particular proposal submitted.
The Board then turned to the two applications at hand:
1. An application by Republic of Texas Corporation (a bank holding company), Dallas, Texas, to retain indirect ownership of Republic
Money Orders, Inc., and Republic Money Orders of California, Inc.,
both of Dallas, and thereby to continue to engage in the issuance of
money orders.
2. An application by Citicorp, New York, New York, to acquire a
nonbank subsidiary, to be known as Citicorp Services, Inc., that would
issue variable-denomination payment instruments functionally similar
to money orders, cashier's checks, certified checks, and similar instruments currently issued by Citicorp's bank subsidiary.
The Board approved the applications but voted to place a limit of
$1,000 on the face value of each instrument. The Board anticipated
significant public benefits from the proposals submitted in that
Board Policy Actions
123
they included certain innovative features that would benefit consumers and promote competition in a market dominated by a few
large firms. In placing a limit of $1,000 on the face value, the Board
reasoned that the public benefits expected to flow from the two applications were associated primarily with the issuance of consumeroriented instruments, and that the limit would have the effect of
restricting the holding companies to that type of instrument.
MARCH 7, 1977
Adoption of Rules Regarding Public Observation of Meetings
Effective March 12, 1977, the Board adopted a new regulation, entitled
Rules Regarding Public Observation of Meetings, to set forth the procedures by which the Board will carry out the provisions of the Government
in the Sunshine Act.
Votes for this action: Messrs. Gardner, Wallich,
Jackson, Partee, and Lilly. Votes against this action:
None. Absent and not voting: Messrs. Burns and
Coldwell.
The law and the new regulation state that every portion of every
Board meeting must be open to public observation except when the
discussion is likely to disclose information falling within one or more
of the 10 categories of exemptions listed in the law. If a portion of a
meeting is closed, the discussion must be transcribed or recorded, except that in certain cases detailed minutes may be kept in lieu of a
transcript or recording. The Board is required to make available the
recording (or a transcription thereof), transcript, or minutes to the
public; however, those portions falling within any of the 10 exemptions may be withheld.
The law and the regulation require that all meetings be announced
to the public, and the Board is prohibited from conducting any business except in accordance with the law and the regulation.
MARCH 9, 1977
Amendment to Regulation Q (Interest on Deposits)
Effective March 24, 1977, the Board amended Regulation Q to provide
a new exception to the rule requiring an interest penalty for early withdrawal of a time deposit.
124
Board Policy Actions
Votes for this action: Messrs. Gardner, Wallich,
Jackson, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Burns, Coldwell,
and Partee.
The amendment provides that when a depositor who maintains a
time deposit in each of two or more merging banks loses Federal deposit insurance on a portion of the funds as a result of the merger, the
surviving member bank may, within 1 year of the date of the merger,
redeem the portion that has lost insurance coverage without imposing
the interest penalty that would otherwise be required due to withdrawal prior to maturity. (If a depositor maintains separate time deposits totaling more than $40,000—the current limit of the Federal
Deposit Insurance Corporation's coverage for a single depositor in
one institution—after the merger he or she will lose deposit insurance
on the portion that exceeds $40,000.)
The Board took this action because it did not believe that an interest penalty should be imposed when a depositor withdraws a time deposit prior to maturity solely to avoid loss of deposit insurance caused
by a bank merger.
The penalty otherwise required by Regulation Q for withdrawal of
a time deposit prior to maturity is (1) a reduction of the interest rate
paid on the portion of the time deposit withdrawn to the maximum
legal rate on passbook savings and (2) a loss of 3 months' interest on
the portion withdrawn.
MARCH 11, 1977
Amendment to Regulation Q (Interest on Deposits)
Effective July 6, 1977, the Board amended Regulation Q to establish a
new category of time deposit accounts at member banks for individual
retirement accounts (IRA's) and Keogh plan retirement accounts.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Jackson, Partee, and Lilly. Votes against this
action: None. Absent and not voting: Mr. Coldwell.
The Board's amendment set a minimum maturity of 3 years for the
new category of IRA and Keogh retirement accounts. By the terms
of the amendment, member banks may pay interest on such accounts
at a rate equal to the highest rate payable under Regulation Q for any
Board Policy Actions
125
category of time deposits by a Federally insured commercial bank,
mutual savings bank, or savings and loan association. At the time the
Board adopted the amendment, this rate was 7.75 per cent per year.
Retirement savers electing other types of time deposits for their
IRA or Keogh plan funds are subject to the interest rate ceilings applicable to those categories of deposits. A differential—generally VA
percentage point—between rates permitted to be paid by thrift institutions and rates permitted to be paid by commercial banks continues
to apply to most other categories of deposits.
The Board's action was intended to assist individuals in saving for
their retirement. The Board believed that it was in the public interest
to enable an IRA or Keogh plan participant to obtain the highest possible return on his or her retirement savings without regard to the
type of depositary institution in which the funds are maintained.
The Board also agreed to allow member banks to modify existing
IRA or Keogh plan agreements to permit retirement savers to take
advantage of the new rules.
MARCH 28, 1977
Regulation Q (Interest on Deposits)
The Board determined not to adopt a regulatory proposal regarding interest rates on pooled time deposits of $100,000 or more.
Votes for this action: Messrs. Burns, Gardner,
Coldwell, Jackson, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr. Wallich.
The regulatory proposal, as published for comment in March 1976,
would have prohibited member banks from paying interest on pooled
time deposits of $100,000 or more at a rate above the Regulation Q
ceiling rate for deposits of less than $100,000, when the bank knows
or has reason to know that such deposits consist of funds pooled
primarily to obtain higher interest rates. The Board's proposal was
based in part on the belief that any active solicitation of funds by
prospective poolers constituted a violation of the concept of the rate
ceilings established by the Board and might lead to disruptive shifts
of funds among depositary institutions.
On the basis of all available information and of the comments received, the Board determined that the regulatory proposal was not
126
Board Policy Actions
necessary at the present time. The Board noted that in February 1977
the Federal Deposit Insurance Corporation (FDIC) had decided to
limit to $40,000 its coverage on deposits of any trust or other business
arrangement that is required to register with the Securities and Exchange Commission as an investment company under the Investment
Company Act of 1940. Certain categories of trusts—such as employee
pension and profit-sharing plans and charitable trusts—were excluded
from the new rule, but money market mutual funds, a primary source
of pooled deposits, were included. The Board believed the FDIC's
action would minimize the potential for disruptive shifts of funds
among depositary institutions as a consequence of any active solicitation of pooled funds.
APRIL 11, 1977
Amendments to Regulation H (Membership of State Banking
Institutions In the Federal Reserve System)
Effective April 13, 1977, the Board adopted four technical amendments
to Regulation H regarding real estate loans made by State member banks
in flood-hazard areas of communities that are not participating in the
national flood insurance program.
Votes for these actions: Messrs. Gardner, Wallich,
Coldwell, Jackson, Partee, and Lilly. Votes against
these actions: None. Absent and not voting: Mr. Burns.
The Board took these actions to implement Public Law 94-375.
The Flood Disaster Protection Act of 1973 generally prohibits regulated lending institutions from making loans on improved real estate
in flood-hazard areas unless the community is participating in the
national flood insurance program. Since its enactment, the act has
been amended several times, each time necessitating conforming
amendments to the Board's Regulation H. (See the Board's ANNUAL
REPORTS for 1973 through 1976.)
Public Law 94-375 and the Board's implementing amendments exempt the following categories of loans from the requirements of the
act and the regulation:
1. Any loan made to finance the purchase of a dwelling occupied
as a residence before March 1, 1976, or 1 year following identification
of the area as a flood-hazard area, whichever is later.
2. Any loan made to finance the purchase of a building completed
Board Policy Actions
127
and occupied by a small business prior to January 1, 1976, subject to
a dollar ceiling set by the Secretary of Housing and Urban Development.
3. Any loan or loans, which in the aggregate do not exceed $5,000,
made to finance improvements or rehabilitation of a building occupied
as a residence prior to January 1, 1976.
4. Any loan or loans, which in the aggregate do not exceed an
amount set by the Secretary of Housing and Urban Development,
made to finance nonresidential additions to or improvements on a
farm.
A P R I L 11, 1977
Amendment to Regulation Z (Truth in Lending)
Effective immediately, the Board amended Regulation Z to permit creditors in the Commonwealth of Puerto Rico to provide Truth in Lending
information in Spanish if the information is available in English upon
request.
Votes for this action: Messrs. Gardner, Wallich,
Coldwell, Jackson, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr. Burns.
The Board took this action in light of the fact that Spanish is the
traditional and predominant language in Puerto Rico; census data
indicate that more than one-half of the people over 10 years of age
do not speak English.
Except in Puerto Rico, Truth in Lending disclosures must continue
to be made in English, with foreign language disclosures permitted as
supplemental information at the creditor's option.
A P R I L 11, 1977
Amendment to Regulation Z (Truth in Lending)
Effective October 10, 1977, the Board amended Regulation Z to require
advance disclosure of any variable-rate clause in a credit contract if that
clause may result in an increase in the cost of credit to the customer.
Votes for this action: Messrs. Gardner, Wallich,
Partee, and Lilly. Votes against this action: Messrs.
Coldwell and Jackson. Absent and not voting: Mr.
Burns.
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The Board took this action to assist consumers in shopping for
credit.
The amendment provides that if a credit contract contains a
variable-interest-rate clause that may result in an increase in the cost
of credit to the consumer, the lender must disclose the following items
to the borrower before the borrower becomes obligated on the contract:
1. The fact that the annual percentage rate on the transaction is
subject to increase.
2. The conditions under which the rate may increase, including
identification of any index to which the rate is tied, and any limitation
on the increase.
3. The manner in which an increase may be effected (such as an
increase in the amount of the periodic payment, an increase in the
number of payments, and/or an increase in the amount due at
maturity).
4. For transactions involving home mortgages, numerical examples
of the effects of a hypothetical increase of V4 of 1 percentage point
in the annual percentage rate.
Governors Coldwell and Jackson dissented from this action; Governor Coldwell preferred that creditors merely be required to alert
borrowers to the existence of the variable-rate clause, whereas Governor Jackson believed that the disclosure requirements of Regulation Z
were already too complex.
A P R I L 27, 1977
Amendment to Regulation T (Credit by Brokers and Dealers)
Effective June 1, 1977, the Board amended Regulation T to modify the
rule governing the calculation of the margin required on a "straddle"
transaction.
Votes for this action: Messrs. Gardner, Coldwell,
Jackson, Partee, and Lilly. Votes against this action:
None. Absent and not voting: Messrs. Burns and
Wallich.
The Board's existing regulation provided that on a straddle—that
is, when both a "put" and a "call" are issued, endorsed, or guaranteed
in a general account, a special bond account, or a special convertible
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129
debt security account on the same number of shares of the same underlying security with the same expiration date and the same exercise
price—the applicable margin requirement would be the margin on
either the put or the call, whichever was greater, plus any unrealized
loss on the other option. The Board's amendment deleted the requirement that the put and the call have the same expiration date and the
same exercise price to qualify for the special margin requirement. The
amendment also removed the reference to accounts other than the
general account.
The effective date of the Board's amendment coincided with the
date on which trading of put options would begin on the exchanges.
(When the Board adopted its existing rule for margin requirements on
options, the Securities and Exchange Commission had not yet authorized put trading for the exchanges.) The Board adopted this
amendment to provide additional flexibility to investors.
M A Y 2, 1977
Regulation Y (Bank Holding Companies)
The Board approved the application of European-American Bancorp,
New York, New York, after becoming a bank holding company, to
operate European-American Banking Corporation, a New York investment company.
Votes for this action: Messrs. Wallich, Coldwell,
Jackson, and Partee. Vote against this action: Mr.
Lilly. Absent and not voting: Messrs. Burns and
Gardner.
Since operation of a New York investment company was not on
the list of activities permissible for bank holding companies under
Regulation Y, the Board's consideration of the application of
European-American Bancorp involved the application of a two-step
test required by the Bank Holding Company Act. To permit bank
holding company involvement in a proposed new activity, the Board
must find that the activity is (1) closely related to banking or managing or controlling banks and (2) a proper incident to banking. (This
process was required for either (1) the placement of an activity on
Regulation Y's list of activities generally permissible for bank holding
companies or (2) the processing of applications on a case-by-case
basis; the Board elected to process on a case-by-case basis holding
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company applications—such as that submitted by European-American
Bancorp—to operate New York investment companies.)
Noting that the investment company was engaged in virtually all
of the usual activities of a commercial bank except that of accepting
deposits, the majority of the Board concluded that operation of the
investment company was so closely related to banking as to be a
proper incident thereto. Against the background of the entire record,
the Board approved, Governor Lilly dissenting, the application submitted by European-American Bancorp, subject to certain conditions.
The Board emphasized that its decision to approve the application
was based on two facts: (1) that the proposal involved merely a reorganization and (2) that insofar as the investment company's credit
balances were concerned, the proposal would not reduce the deposit
base of the banking system subject to reserves, or otherwise create an
opportunity that did not already exist to convert deposits from a reserve status to a nonreserve status. The Board stated that it would
not look favorably on any proposal under Section 4(c)(8) of the Bank
Holding Company Act that would have the effect of diminishing the
reserve base either by facilitating the acceptance of reserve-free credit
balances or by encouraging a shift from reserve-status deposits to
reserve-free credit balances.
Governor Lilly's dissent from the Board's approval of the acquisition of shares of the investment company was due to his conclusion
that European-American Banking Corporation was a "bank" for
purposes of the Bank Holding Company Act and that it would therefore be inappropriate to approve acquisition of the company as a
"nonbanking" company under Section 4(c)(8) of the act. He added
that he did not subscribe to the Board's 1971 determination that a
similar New York investment company was not a "bank" under the
act. Governor Lilly, unlike the other Board members, believed the
investment company's credit balances should be considered "deposits"
for purposes of the act. He pointed out that customers of investment
companies may draw against their credit balances by mail, telephone,
or cable instruction, and in some cases by draft—the functional
equivalent of a check—for the purpose of transferring funds to third
parties in settlement of a wide variety of financial and commercial
transactions. He added that for purposes of monetary policy, the
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131
Board considers credit balances to be sufficiently close to demand deposits to include them, along with demand deposits, in the narrow
definition of the money stock (M-l).
J U N E 8, 1977
Amendment to Regulation J (Collection of Checks and Other
Items by Federal Reserve Banks)
Effective September 1, 1977, the Board amended Regulation J by adding
a new section concerning wire transfers of funds between member banks.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, and Partee. Votes against this action: None. Absent and not voting: Messrs. Jackson
and Lilly.
The new section of Regulation J, designated Subpart B, codifies
Federal Reserve System rules and procedures that have evolved over
the years with respect to wire transfers of funds. The existing Regulation J, dealing with rules for check collection, remains unchanged
and becomes Subpart A of the regulation.
Subpart B sets forth the rights and responsibilities of member
banks and the Federal Reserve System for the wire transfers of funds.
The Federal Reserve's wire transfer service, which uses the System's computerized communications network linking the Board and
all Federal Reserve Banks and their offices, allows member banks to
transfer funds almost instantly from their reserve balances to the
reserve accounts of other member banks, either for themselves or
for their customers. The most frequent uses of this service are the
transfer of excess reserves of member banks to banks needing additional reserves and the transfer of funds for corporations. In 1976
approximately $36 trillion was transferred over the network, with
the average amount being approximately $2 million.
Neither Subpart A nor Subpart B deals with electronic payments
processed through automated clearing houses (a system for processing
payment instructions recorded on magnetic tape rather than on
checks) or point-of-sale terminals (an electronic system to verify
checks and/or to debit customers' bank accounts for their purchases
at the time of sale).
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J U L Y 20, 1977
Amendments to Regulation Z (Truth in Lending)
Effective immediately, the Board amended Regulation Z to clarify provisions that allow merchants to offer discounts to customers who pay by
cash rather than by credit card without disclosing the difference as a
finance charge.
Votes for this action: Messrs. Gardner, Wallich,
Partee, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Burns, Coldwell,
and Jackson.
The Board took this action to implement Public Law 94-222,
which had recently been enacted.
The amendments (1) distinguish between discounts and surcharges;
(2) prohibit merchants from imposing a surcharge for use of a credit
card until February 27, 1979; (3) clarify the conditions under which
merchants may give discounts of up to 5 per cent to cash customers
without providing a truth-in-lending notice to credit-card customers
that discloses the difference between the cash and credit prices as a
finance charge; and (4) provide that any discount that is not considered a finance charge under Regulation Z is not to be considered a
charge for credit under any State law (such as a usury or credit disclosure law).
If a merchant tags an item with only one price—the cash price—
and charges a higher price to customers who pay by credit card, the
difference is to be classified as a surcharge. Such a surcharge is prohibited until February 27, 1979, and thereafter the difference must
be disclosed to the credit-card customer as a finance charge. In each
of the following situations, however, the difference will be classified
as a discount: (1) the merchant tags the item with a single price—
the credit-card price—and offers cash customers a discount from this
price; (2) the merchant posts two prices for each item; and (3) without posting prices, the merchant offers to give customers a discount
for paying cash.
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133
A U G U S T 3, 1977
Amendment to Regulation H (Membership of State Banking
Institutions in the Federal Reserve System)
Effective October 31, 1977, the Board amended Regulation H to require
State member banks and their subsidiaries, departments, and divisions
that are municipal securities dealers to file with the Board information
regarding persons who are associated with them as municipal securities
principals or municipal securities representatives.
Votes for this action: Messrs. Wallich, Coldwell,
Partee, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Burns, Gardner, and
Jackson.
This action was taken to facilitate dealer compliance with rules
that had recently been adopted by the Municipal Securities Rulemaking Board concerning the qualifications of municipal securities
principals and municipal securities representatives. Concurrently, the
Board adopted several forms needed to implement the amendment.
The regulatory proposal, as published for comment in March
1977, had also included an amendment to Regulation Y (Bank
Holding Companies) to apply to bank holding companies requirements similar to those being imposed upon State member banks.
However, the Board declined to adopt the amendment to Regulation Y since it still had under consideration the issue of permissibility
of municipal securities dealer activities for bank holding companies.
A U G U S T 3, 1977
Regulation Q (Interest on Deposits)
Effective retroactively from July 21, 1977, the Board suspended Regulation Q penalties through January 31, 1978, to permit member banks to
give emergency financial assistance to depositors affected by the severe
flooding in the Johnstown, Pennsylvania, area in July 1977.
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Votes for this action: Messrs. Wallich, Coldwell,
Partee, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Burns, Gardner, and
Jackson.
The Board authorized member banks throughout the United States
to permit those depositors who suffered financial loss as a result of
the severe flooding in the Johnstown, Pennsylvania, area to withdraw
time deposits before maturity without paying the penalty that Regulation Q would otherwise impose. (The regulation requires that if all
or part of a time deposit is withdrawn before maturity, a member
bank may pay interest on the amount withdrawn at a rate not to
exceed that currently allowed for a passbook savings account, and
the depositor must forfeit 3 months' interest.)
Noting that the President had declared the seven-county Johnstown
area a major disaster area, the Board determined that the need to relieve the financial hardship being suffered by the victims of the disaster warranted suspension of the penalties.
AUGUST 29, 1977
Regulation Y (Bank Holding Companies)
The Board decided against adding to the list of activities generally permissible for bank holding companies under Regulation Y the business of
acting as a futures commission merchant for the execution of futures contracts in gold and silver bullion and coins. At the same time, however, the
Board decided that it would process bank holding company applications
to engage in this activity on a case-by-case basis.
Votes for this action: Messrs. Gardner, Wallich,
Jackson, Partee, and Lilly. Votes against this action:
None. Absent and not voting: Messrs. Burns and
Coldwell.
Since acting as a futures commission merchant for the execution
of futures contracts in gold and silver bullion and coins was not on
the list of activities permissible for bank holding companies, the
Board's consideration of the application involved a two-step test
required by the Bank Holding Company Act. To permit bank holding
company involvement in a proposed new nonbanking activity, the
Board must find that the activity is (1) closely related to banking
or managing or controlling banks and (2) a proper incident to bank-
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135
ing. The latter test requires a determination that performance of the
activity by a bank holding company "can reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices."
Such a test must be satisfied for either (1) the placement of the activity on the list of activities generally permissible for bank holding companies under Regulation Y or (2) the processing of applications on a
case-by-case basis.
Consideration of the question was prompted by the applications of
Republic New York Corporation, New York, New York, and its five
parent bank holding companies to engage in the activity in question
through Republic Clearing Corporation, also of New York. In June
1977, following receipt of the applications, the Board had published
the proposal for public comment.
Following consideration of the comments received and the complete record, the Board affirmed its determination—made in 1973 in
connection with an application by Standard and Chartered Banking
Group, Limited, London, England, to engage indirectly in the same
activity that was the subject of the Republic applications—that the
activity was closely related to banking since national banks, Edge
corporations, and most State member banks already had the statutory authority to deal in gold, silver, and coin. The Board decided,
however, to process applications on a case-by-case basis, observing
that there appeared to be limited bank holding company interest in
the activity, and that by processing applications on a case-by-case
basis it could assess the public benefits of the particular proposals
submitted.
Concurrently, the Board approved the applications of Republic
New York Corporation and its five parent bank holding companies.
AUGUST 31, 1977
Amendments to Regulation H (Membership of State Banking
Institutions in the Federal Reserve System) and Regulation Y
(Bank Holding Companies)
Effective October 3, 1977, the Board amended Regulations H and Y to
prescribe the form and content of certain notices to be filed with the
Board with respect to securities activities.
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Board Policy Actions
Votes for this action: Messrs. Gardner, Wallich,
Coldwell, Jackson, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr. Burns.
The Board took this action pursuant to the requirements of the
Securities Acts Amendments of 1975.
The amendment to Regulation H requires that State member banks
or their subsidiaries that are registered clearing agencies for stock
market transactions file a notice with the Board regarding (1) any
final disciplinary sanction imposed by them on any firm participating
in the operations of the clearing agency and (2) any denial of an
application to participate in their clearing operations.
The amendments to Regulations H and Y establish procedures by
which State member banks, bank holding companies, and nonbank
subsidiaries of bank holding companies that are participants in clearing agencies may request stays or review by the Board of disciplinary
sanctions and denials of participation imposed by clearing agencies.
OCTOBER 31, 1977
Amendments to Regulation Q (Interest on Deposits)
Effective December 1, 1977, the Board adopted two amendments to Regulation Q to modify the conditions under which a penalty must be imposed
for the early withdrawal of a time deposit.
Votes for these actions: Messrs. Gardner, Wallich,
Partee, and Lilly. Votes against these actions: None.
Absent and not voting: Messrs. Burns, Coldwell,
and Jackson.
The Board took these actions to provide consumers with more
flexibility in handling their time deposit accounts.
The first of the two amendments related to the regulation's provision that any change in a time deposit contract resulting in either
(1) an increase in the rate of interest paid or (2) an extension or
reduction of the maturity of the deposit constituted a payment of the
time deposit before maturity and was therefore subject to the regulation's mandatory early-withdrawal penalty. The amendment now
adopted provides that an extension of the maturity of a time deposit
will no longer be considered an early withdrawal so long as there is
no increase in the rate of interest paid on the deposit.
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137
The second amendment related to the regulation's rules regarding
early withdrawal of a time deposit in the event of the death of a
depositor. In 1975 the Board had amended Regulation Q to permit
member banks to redeem time deposits before maturity without imposing an interest penalty upon the death of any person whose name
appeared on the deposit instrument. The Board now modified that
provision to allow member banks to redeem a time deposit prior to
maturity without penalty upon the death of any person who has legal
or beneficial title to all or a part of the time deposit regardless of
whether the individual's name appears on the deposit instrument.
The penalty for withdrawal of a time deposit before maturity is
(1) a reduction of the interest paid on the portion of the time deposit
withdrawn to the maximum permissible rate on passbook savings
and (2) a loss of 3 months' interest on the portion withdrawn.
NOVEMBER 2, 1977
Amendment to Regulation M (Foreign Activities of National
Banks)
The Board amended Regulation M to reduce from 4 per cent to 1 per cent
the reserve requirement applicable to funds loaned by foreign branches
of U.S. member banks to U.S. borrowers.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Jackson, Partee, and Lilly. Vote against this
action: Mr. Coldwell.
This action was taken to enable the foreign branches of U.S. banks
to compete on more equal terms with foreign banks in lending to
U.S. borrowers.
Regulation M requires member banks that have one or more foreign branches to maintain (subject to certain exceptions) reserves
against their foreign branch deposits in an amount equal to a percentage of the daily-average credit outstanding at those branches to
U.S. residents. The requirement was established in 1969 during a
period of monetary restraint to prevent member banks from using
borrowings from their foreign branches to reduce the impact of the
Federal Reserve System's monetary policy actions taken at that time.
In recent years, as the spread between loan and deposit rates for
Euro-dollars has narrowed, the Board's reserve requirement on loans
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to U.S. borrowers by the foreign branches of member banks has
affected the ability of such foreign branches to compete with foreign
offices of foreign banks since the latter institutions can lend Eurodollars to domestic U.S. borrowers without maintaining reserve requirements.
Governor Coldwell would have preferred to take no action on
this question pending completion of a staff study that was currently
under way regarding banks' nondeposit sources of funds.
No change was made in the 4 per cent reserve requirement on
borrowings by member banks from their overseas branches or from
foreign banks.
The amendment applied to reserves required to be held beginning
December 1, 1977, against demand deposits during the period October 20 through November 16.
NOVEMBER 21, 1977
Amendment to Regulation Q (Interest on Deposits)
Effective November 23, 1977, the Board amended Regulation Q to lower
the minimum rate of interest that a member bank must charge on a loan
secured by a depositor's time or savings deposit at that bank.
Votes for this action: Messrs. Gardner, Wallich,
Coldwell, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Burns, Jackson, and
Partee.
To prevent a depositor from obtaining a bank loan as a means of
withdrawing a time deposit before maturity without incurring the
penalty for early withdrawal, Regulation Q previously required that
the interest rate on a loan secured by a depositor's time or savings
deposit at that bank be at least 2 percentage points above the rate
being paid on the deposit. (The requirement does not apply to savings
deposits unless it is the bank's practice to require prior notice for the
withdrawal of savings deposits.) The Board's amendment reduced the
mandatory differential to 1 percentage point.
The Board took this action because it believed that a differential
of 1 percentage point would be sufficient to discourage depositors
from circumventing the purpose of the regulation.
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139
NOVEMBER 30, 1977
Amendments to Regulation D (Reserves of Member Banks)
and Regulation Q (Interest on Deposits)
The Board amended Regulations D and Q as part of a proposed new program for Treasury investment of funds deposited in tax and loan accounts
at banks.
Votes for this action: Messrs. Gardner, Wallich,
Jackson, Partee, and Lilly. Votes against this action:
None. Absent and not voting: Messrs. Burns and
Coldwell.
Public Law 95-147, enacted on October 28, 1977, authorized the
U.S. Treasury to invest its tax and loan balances in interest-bearing
obligations issued by depositary institutions. The purpose of the legislation was to provide the Treasury with a means of obtaining interest
on the short-term balances that it maintains in tax and loan accounts.
(Such balances arise primarily from the crediting to the tax and loan
accounts of (1) income taxes withheld from taxpayers and (2) the
proceeds of sales of savings bonds and other Treasury obligations.)
Regulations D and Q require that a member bank's liability on its
promissory note issued as a means of obtaining funds to be used in
its banking business be considered a deposit, except in certain situations. The funds so obtained are thus subject to the reserve requirements and interest rate restrictions of Regulations D and Q, respectively. Under the amendments approved by the Board, member bank
obligations issued under the Treasury's new program would be exempt from such reserve requirements and interest rate restrictions.
Establishment of an effective date for the amendments was to be
coordinated with the Treasury's implementation of its new program.
DECEMBER 23, 1977
Amendment to Regulation D (Reserves of Member Banks)
Effective immediately, the Board amended Regulation D to exempt from
reserve requirements a member bank's borrowings from a member bank
whose head office is located outside the States of the United States and
the District of Columbia—in Puerto Rico, for example—provided the
lending bank is already maintaining reserves against its deposit liabilities.
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Board Policy Actions
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None. Absent and not voting:
Mr. Lilly.
The Board took this action in order to treat borrowings from all
member banks in an equal manner and to eliminate the duplication
of reserve requirements that might otherwise occur.
While Regulation D requires member banks to maintain reserves
on their deposits, the definition of "deposits" exempts from this requirement funds borrowed from the domestic office of another bank
(Federal funds) since the lending bank may already be maintaining
reserves on such funds. The existing regulation, however, imposes a
4 per cent reserve requirement on member bank borrowings from
foreign offices of other banks.
The Board's amendment modifies the definition of "domestic banking office" to exempt from reserve requirements a member bank's
borrowings from a bank whose main office is located outside the
States of the United States and the District of Columbia—in Puerto
Rico, for example—provided that the lending bank (1) is a member bank and (2) is already maintaining reserves against its deposit
liabilities.
The interbank borrowing exemption from the reserve requirements
of Regulation D and from the interest rate ceilings of Regulation Q
is intended to facilitate reserve adjustments by member banks.
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141
1977_DISGOUNT RATES
The Board approved two increases in the discount rate during
1977—from 5 ^ to 5% per cent, effective August 30, and from
5% to 6 per cent, effective October 26. During the course of the
year the Board voted on 2 occasions to turn down requests by individual Reserve Banks to lower the discount rate; it voted on 14 occasions to reject proposals to raise the rate.
The particular reasons for the Board's decisions are reviewed
below. In reaching those decisions the Board also took into account
general economic and financial developments, which are covered in
more detail elsewhere in this REPORT, especially in the discussion of
the U.S. economy in Part 1 and in the Record of Policy Actions of
the Federal Open Market Committee in Part 2.
Early January: Proposed reductions turned down
On January 3 and January 7 the Board considered requests by three
Federal Reserve Banks to reduce the discount rate from 5V4 per
cent—the rate in effect since the latter part of November 1976—to
5 or 43A per cent. Other Reserve Banks had proposed that the current discount rate be maintained. During the Board's discussion it
was observed that short-term market rates had declined considerably
over the preceding few weeks and that currently they were below the
discount rate. However, recently available indicators pointed to
improvement in the domestic economy; growth in key monetary
aggregates seemed to be accelerating; and the dollar was generally
weak in foreign exchange markets. In these circumstances the Board
felt that a reduction in the discount rate would not be desirable.
Board members also felt that signaling a further move toward monetary ease would not be appropriate so soon after the Board's
announcement of lower reserve requirements on December 17, 1976,
and the reduction by the Federal Open Market Committee in the
operating objective for the Federal funds rate in the closing weeks
of the year.
Mid-January to mid-May: No discount rate actions
During the interval from mid-January to mid-May no proposals to
change the discount rate were submitted by the Federal Reserve
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Banks. In the early weeks of the year short-term interest rates rose
considerably as markets reacted to expectations of more rapid economic expansion and a larger Federal Government deficit. Subsequently, short-term market rates tended to stabilize and were in
closer alignment with the discount rate than at the start of the year.
In late April and early May short-term interest rates rose somewhat
as rapid expansion in bank demand deposits—which coincided with
a strong demand for business loans—led to a less accommodative
provision of reserves by the System.
Mid-May through mid-August:
Proposed increases turned down
From mid-May to mid-July the Board rejected a number of requests
to raise the discount rate by XA or Vi percentage point. In proposing
those increases the directors of the Federal Reserve Banks in question stressed the outlook for rising prices and the desirability of providing a signal of the System's determination to continue pursuing an
anti-inflationary monetary policy. It was also argued that the rise in
the Federal funds rate since mid-April was not likely to be reversed
in light of the strength of the monetary aggregates.
During this period the Board felt that economic and financial developments did not warrant an increase in the discount rate, especially
one of Vi percentage point. It was noted that the rise in the Federal
funds rate had brought the two rates into reasonably close alignment
and that the announcement of a higher discount rate might well be
misconstrued as an indication of a major shift in monetary policy.
The Board also noted that the discount rate was relatively close to
other short-term market rates. In the circumstances the Board decided
that it should continue its usual practice of allowing the discount rate
to follow, rather than to lead, movements in market rates. This view
was reinforced after the middle of May by a moderation in the growth
of the monetary aggregates and by general stability in short-term
market rates. Some Board members also believed that the discount
rate should not be raised until it could be determined whether the
sizable increases in the monetary aggregates in late April and the first
part of May were transitory developments or the consequence of a
more lasting strengthening in the demand for money.
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143
From late July to mid-August the Federal funds rate was raised
from around 53/s per cent to 6 per cent as the System sought to
moderate another escalation in the expansion of the monetary aggregates through a more restrained provision of reserves. Other shortterm rates of interest also rose in this period, and by the middle
of August they were well above the discount rate. Beginning in early
August several Federal Reserve Banks proposed increases of lA or
V2 percentage point in the discount rate.
At a meeting held on August 8 the Board turned down a pending
increase of VA percentage point. Although sharing the view that a
higher discount rate might be desirable soon in light of emerging conditions in financial markets, Board members did not feel that the discount rate was then greatly out of line with most short-term interest
rates. The Board viewed the Treasury financing in progress at that
time as an additional reason for not changing the discount rate.
Subsequently, on August 12, the Board turned down increases of
VA or V-i percentage point recommended by four Federal Reserve
Banks. Some Board members felt that a VA percentage point increase
might be justified by the further advance in the Federal funds rate,
although it was pointed out that other short-term market rates had
risen by lesser amounts recently. In reaching its decision the Board
agreed with the observation that the recent acceleration in monetary
growth and the related rise in the Federal funds rate might prove
transitory and that it would be prudent to wait until new data were
available to facilitate an interpretation of the performance of the
monetary aggregates.
On August 19 the Board rejected an increase of V2 percentage point
that had been proposed by several Federal Reserve Banks. There was
considerable sentiment among the Board members for bringing the
discount rate into closer alignment with short-term market rates. In
this connection it was noted that the recent rise in member bank borrowings appeared to be associated at least in part with the relatively
low discount rate. One Board member indicated that he would have
been prepared to approve a VA percentage point increase had such a
proposal been pending at this meeting. Nevertheless, the Board members were unanimous in their view that a V2 percentage point increase
would be too large at this time. In arriving at this decision the Board
took into account a recent weakening in some economic indicators.
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Board Policy Actions
The Board also felt that it would be desirable to allow more time for
financial markets to adjust to the recent rise in the Federal funds rate
and for the Board to observe the related performance of the monetary
aggregates.
Late August to late October:
Two proposed increases approved and others turned down
On August 29 the Board approved an increase in the discount rate
from 5XA to 5% per cent. The Board did not regard the increase as
a monetary policy action, but rather as a technical move to bring the
discount rate into better alignment with other short-term interest
rates. In particular, the higher discount rate was intended to reduce
the incentive for member banks to borrow from the Federal Reserve.
Such borrowings had risen from a daily average of about $335 million in July to nearly $600 million in the first 2 weeks of August and
to $1.7 billion in the most recent statement week. The Board felt that
continued heavy borrowing at the discount window would tend to
complicate the conduct of the System's open market operations. It
also believed that the subsidy involved in the rate differential was
likely to induce an increasing number of banks to borrow as time went
on. In the circumstances, policing the discount window would become
an increasingly difficult task for the Reserve Banks, although only a
few cases of apparent arbitrage—borrowing from the Federal Reserve
to relend at a higher rate—had been reported.
It was noted in the discussion that the market already seemed to
have largely discounted a rate increase, even one of VT. percentage
point, and that the market adjustment in other short-term rates was
therefore likely to be minimal. One Board member also observed
that an increase would tend to have a favorable impact on the position of the dollar in foreign exchange markets.
In the judgment of a majority of the Board members the foregoing considerations outweighed the possible disadvantage of raising
the discount rate at a time when a number of economic indicators
suggested a slowdown in the pace of the economic expansion. While
the Board agreed that the expansion was likely to continue for some
time, the risk of a downturn in economic activity could not be dis-
Board Policy Actions
145
missed entirely. One Board member also noted that a rise in the discount rate would tend to validate increases that had occurred in other
interest rates during recent weeks.
In late September and early October the Board turned down several requests by two Federal Reserve Banks to raise the discount rate
from 5% to 6 per cent. The Board took account of the facts that
short-term interest rates had risen somewhat since late August and
that member bank borrowings, after contracting sharply in the first
half of September, had expanded again recently as the Federal funds
rate had risen increasingly above the discount rate. Although an argument for a higher discount rate could thus be made on technical
grounds and although a rise might help the dollar in foreign exchange
markets, the Board felt there was no compelling case for an increase
under current economic and financial conditions. The Board also believed that a discount rate increase under the circumstances prevailing at the time could be misconstrued as signaling a move toward a
more restrictive monetary policy. Board members indicated that they
did not want to reinforce market expectations of higher interest rates.
However, some Board members believed that the discount rate might
well have to be increased within the next few weeks, especially if
continued strength in the monetary aggregates prompted a further
rise in the Federal funds rate.
On October 25 the Board approved an increase in the discount rate
from 53A to 6 per cent at all 12 Federal Reserve Banks. Short-term
interest rates had risen appreciably further in recent weeks, and the
relatively low discount rate had encouraged a large increase in member bank borrowings. In these circumstances the Board decided that
a technical adjustment in the discount rate was desirable. A Vi percentage point increase could have been justified on those grounds, and
indeed proposals for such an increase had been made by some Reserve Banks. However, the Board members were unanimous in the
view that the increase should be limited to V* percentage point in
light of the uncertainty prevailing then about the strength of the
economy. In the Board's view the V* point increase was not intended,
and was not likely to be interpreted, as a monetary policy move.
Subsequently, on October 28, the Board turned down a request
from a Federal Reserve Bank to raise the discount rate by a further
146
Board Policy Actions
VA percentage point to 6V4 per cent. The Board continued to feel
that, while the higher rate might be justified in terms of interest rate
differentials, it was not warranted by current economic conditions.
The Board also felt that an increase so soon after the previous rise
could be misconstrued as signaling a further firming in monetary
policy.
November-December: No discount rate actions
No proposals to change the discount rate were made by the Federal
Reserve Banks during the last 2 months of the year. In this period,
growth of the monetary aggregates moderated considerably from the
rapid rates experienced in previous months and short-term interest
rates fluctuated within a relatively narrow range.
Shortly after the turn of the year the Board approved an increase
in the discount rate of V2 percentage point to a level of 6Vi per cent.
The action was taken in light of recent disorder in foreign exchange
markets, which was viewed as constituting a threat to the orderly
expansion of the domestic and international economy.
Votes on Reserve Bank actions to change the discount rate
Under the provisions of the Federal Reserve Act, the boards of directors of the Federal Reserve Banks are required to establish rates on
discounts for and advances to member banks at least every 14 days
and to submit such rates to the Board for review and determination.
The Board votes listed below are those that involved approval or disapproval of actions to change the rate. Specific reference is made to
the rate on discounts for and advances to member banks under Sections 13 and 13a of the Federal Reserve Act.
A corresponding change in the rates under other sections of the
Federal Reserve Act was approved each time the rate under Sections
13 and 13a was raised during 1977. As of December 31, 1977, the
structure of rates was as follows: 6 per cent for borrowings under
Sections 13 and 13a; 6Vi per cent for borrowings at the regular rate
and 7 per cent for borrowings at the special rate under Section 10(b);
and 9 per cent for borrowings by individuals, partnerships, or corporations other than member banks under the last paragraph of
Section 13.
Board Policy Actions
147
January 3, 1977
The Board disapproved actions taken by the directors of the Federal
Reserve Banks of Kansas City and San Francisco on December 30, 1976,
to reduce the discount rate from 5VA to 5 per cent.
Votes for this action: Messrs. Gardner, Wallich,
Coldwell, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Burns, Jackson, and
Partee.
January 7, 1977
The Board disapproved actions taken by the directors of the Federal
Reserve Banks of Dallas and San Francisco on January 6 to reduce the
discount rate to 5 per cent and 43A per cent, respectively.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr. Jackson.
May 13, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of St. Louis on May 12 to increase the discount rate to
53A per cent.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Messrs. Coldwell and Lilly.
May 16, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Atlanta on May 13 to increase the discount rate to
5Vi per cent.
Votes for this action: Messrs. Gardner, Coldwell,
Jackson, Partee, and Lilly. Votes against this action:
None. Absent and not voting: Messrs. Burns and
Wallich.
148
Board Policy Actions
May 27, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Chicago on May 26 to increase the discount rate to
5J/i per cent.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, Jackson, and Lilly. Votes against
this action: None. Absent and not voting: Mr.
Partee.
June 1, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Atlanta on May 27 to increase the discount rate to 5Vi
per cent.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, Jackson, Partee, and Lilly.
June 13, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Atlanta on June 10 to increase the discount rate to
5Vi per cent.
Votes for this action: Messrs. Burns, Gardner,
Coldwell, Jackson, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr. Wallich.
June 29, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Atlanta on June 24 to increase the discount rate to
SVi per cent.
Votes for this action: Messrs. Gardner, Wallich,
Jackson, Partee, and Lilly. Votes against this action:
None. Absent and not voting: Messrs. Burns and
Coldwell.
Board Policy Actions
149
July 11, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Atlanta on July 8 to increase the discount rate to 5Vi
per cent.
Votes for this action: Messrs. Burns, Jackson,
Partee, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Gardner, Wallich,
and Coldwell.
August 8, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Atlanta on August 5 to increase the discount rate to
5!/2 per cent.
Votes for this action: Messrs. Burns, Wallich,
Coldwell, Jackson, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr.
Gardner.
August 12, 1977
The Board disapproved actions taken on August 11 by the directors of
the Federal Reserve Banks of Cleveland and St. Louis to increase the
discount rate to 53A per cent and by the directors of the Federal Reserve
Banks of Chicago and Minneapolis to increase the rate to 5Vi per cent.
Votes for this action: Messrs. Burns, Wallich,
Coldwell, Jackson, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr.
Gardner.
August 19, 1977
The Board disapproved actions taken by the directors of the Federal
Reserve Banks of New York, Philadelphia, Kansas City, and San Francisco on August 18 to increase the discount rate to 53A per cent.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Jackson, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr.
Coldwell.
150
Board Policy Actions
August 29, 1977
Effective August 30, 1977, the Board approved actions taken by the
directors of the Federal Reserve Banks of Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, and Minneapolis to increase the discount rate to 53A per cent.
Votes for this action: Messrs. Gardner, Jackson,
Partee, and Lilly. Vote against this action: Mr. Wallich. Absent and not voting: Messrs. Burns and
Coldwell.
The Board subsequently approved similar actions taken by the directors
of the Federal Reserve Bank of New York, effective August 31, and the
Federal Reserve Banks of Boston, Kansas City, Dallas, and San Francisco, effective September 2.
Mr. Wallich dissented from this action because of the hesitation in
some key indicators of economic activity and the associated uncertainty about the duration of the economic expansion. He conceded a
technical argument in favor of raising the discount rate to bring it
into better alignment with short-term market rates, but he preferred
to wait for further evidence on the performance of the economy before
taking any action.
September 26, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Boston on September 23 to increase the discount rate
to 6 per cent.
Votes for this action: Messrs. Coldwell, Jackson,
Partee, and Lilly. Votes against this action: None.
Absent and not voting: Messrs. Burns, Gardner, and
Wallich.
September 30, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of New York on September 29 to increase the discount
rate to 6 per cent.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, Jackson, Partee, and Lilly.
Board Policy Actions
151
October 7,1977
The Board disapproved actions taken by the directors of the Federal
Reserve Bank of Boston on October 3 and by the directors of the Federal Reserve Bank of New York on October 6 to increase the discount
rate to 6 per cent.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None. Absent and not voting:
Mr. Lilly.
October 25, 1977
Effective October 26, 1977, the Board approved actions taken by the
directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis,
Kansas City, Dallas, and San Francisco to increase the discount rate to
6 per cent.
Votes for this action: Messrs. Burns, Gardner,
Wallich, Coldwell, Partee, and Lilly. Votes against
this action: None. Absent and not voting: Mr.
Jackson.
October 28, 1977
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Chicago on October 27 to increase the discount rate to
614 per cent.
Votes for this action: Messrs. Gardner, Wallich,
Coldwell, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Burns, Jackson, and Lilly.
152
Record of Policy Actions
of the Federal Open Market
Committee
The record of policy actions of the Federal Open Market Committee
is presented in the ANNUAL REPORT of the Board of Governors
pursuant to the requirements of Section 10 of the Federal Reserve
Act. That section provides that the Board shall keep a complete
record of the actions taken by the Board and by the Federal Open
Market Committee on all questions of policy relating to open market
operations, that it shall record therein the votes taken in connection
with the determination of open market policies and the reasons
underlying each such action, and that it shall include in its ANNUAL
REPORT to the Congress a full account of such actions.
In the pages that follow, there are entries with respect to the policy
actions taken at the meetings of the Federal Open Market Committee
held during the calendar year 1977, including the votes on the policy
decisions made at those meetings as well as a resume of the basis for
the decisions. The summary descriptions of economic and financial
conditions are based on the information that was available to the
Committee at the time of the meetings, rather than on data as they
may have been revised later.
It will be noted from the record of policy actions that in some
cases the decisions were by unanimous vote and that in other cases
dissents were recorded. The fact that a decision in favor of a general
policy was by a large majority, or even that it was by unanimous
vote, does not necessarily mean that all members of the Committee
were equally agreed as to the reasons for the particular decision or as
to the precise operations in the open market that were called for to
implement the general policy.
During 1977 the policy record for each meeting was released
a few days after the next regularly scheduled meeting and was subsequently published in the Federal Reserve Bulletin as well as in this
ANNUAL REPORT.
Policy directives of the Federal Open Market Committee are issued
FOMC Policy Actions
153
to the Federal Reserve Bank of New York as the Bank selected by
the Committee to execute transactions for the System Open Market
Account. In the area of domestic open market activities the Federal
Reserve Bank of New York operates under two separate directives
from the Open Market Committee—an Authorization for Domestic
Open Market Operations and a domestic policy directive. In the
foreign currency area it operates under an Authorization for Foreign
Currency Operations and a foreign currency directive. These four
instruments are shown below in the form in which they were in effect
at the beginning of 1977. Changes in the instruments during the year
are reported in the records for the individual meetings.
A U T H O R I Z A T I O N FOR DOMESTIC
OPEN MARKET OPERATIONS
In effect January 1, 1977
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, to the extent necessary to carry out
the most recent domestic policy directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government securities, including securities
of the Federal Financing Bank, and securities that are direct obligations
of, or fully guaranteed as to principal and interest by, any agency of the
United States in the open market, from or to securities dealers and
foreign and international accounts maintained at the Federal Reserve
Bank of New York, on a cash, regular, or deferred delivery basis, for
the System Open Market Account at market prices and, for such Account, to exchange maturing U.S. Government and Federal agency
securities with the Treasury or the individual agencies or to allow them
to mature without replacement; provided that the aggregate amount of
U.S. Government and Federal agency securities held in such Account
(including forward commitments) at the close of business on the day
of a meeting of the Committee at which action is taken with respect to
a domestic policy directive shall not be increased or decreased by more
than $3.0 billion during the period commencing with the opening of
business on the day following such meeting and ending with the close
of business on the day of the next such meeting;
(b) To buy or sell in the open market, from or to acceptance dealers
and foreign accounts maintained at the Federal Reserve Bank of New
York, on a cash, regular, or deferred delivery basis, for the account of
the Federal Reserve Bank of New York at market discount rates, prime
154
FOMC Policy Actions
bankers' acceptances with maturities of up to 9 months at the time of
acceptance that (1) arise out of the current shipment of goods between
countries or within the United States, or (2) arise out of the storage
within the United States of goods under contract of sale or expected to
move into the channels of trade within a reasonable time and that are
secured throughout their life by a warehouse receipt or similar document conveying title to the underlying goods; provided that the aggregate amount of bankers' acceptances held at any one time shall not
exceed $1 billion.
(c) To buy U.S. Government securities, obligations that are direct
obligations of, or fully guaranteed as to principal and interest by, any
agency of the United States, and prime bankers' acceptances of the
types authorized for purchase under l(b) above, from dealers for
the account of the Federal Reserve Bank of New York under agreements for repurchase of such securities, obligations, or acceptances in
15 calendar days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding,
after applying reasonable limitations on the volume of agreements with
individual dealers; provided that in the event Government securities or
agency issues covered by any such agreement are not repurchased by
the dealer pursuant to the agreement or a renewal thereof, they shall
be sold in the market or transferred to the System Open Market Account; and provided further that in the event bankers' acceptances covered by any such agreement are not repurchased by the seller, they
shall continue to be held by the Federal Reserve Bank or shall be sold
in the open market.
2. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, or, under special circumstances, such
as when the New York Reserve Bank is closed, any other Federal Reserve
Bank, to purchase directly from the Treasury for its own account (with
discretion, in cases where it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the
temporary accommodation of the Treasury; provided that the rate charged
on such certificates shall be a rate V* of 1 per cent below the discount
rate of the Federal Reserve Bank of New York at the time of such purchases, and provided further that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not exceed
$2 billion.
3. In order to insure the effective conduct of open market operations,
the Federal Open Market Committee authorizes and directs the Federal
Reserve Banks to lend U.S. Government securities held in the System
FOMC Policy Actions
155
Open Market Account to Government securities dealers and to banks
participating in Government securities clearing arrangements conducted
through a Federal Reserve Bank, under such instructions as the Committee may specify from time to time.
DOMESTIC POLICY DIRECTIVE
In effect January 1, 1977
The information reviewed at this meeting suggests that growth in real
output of goods and services in the fourth quarter has remained at about
the reduced pace of the third quarter. In both October and November
retail sales increased substantially. Industrial production rose appreciably
in November—following 2 months of decline—in large part as a result
of termination of strikes in two major industries, although advances in
output were widespread among other industries. Employment in manufacturing also recovered from the effects of strikes. According to household survey data, the gain in total employment was large, but the unemployment rate increased from 7.9 to 8.1 per cent as the civilian labor
force—which had changed little over the preceding 3 months—increased
considerably. The wholesale price index for all commodities rose as much
in November as in October, reflecting another substantial increase in
average prices of industrial commodities; average prices of farm products
and foods changed little. The advance in the index of average wage
rates over recent months has remained below the rapid rate of increase
during 1975.
The average value of the dollar against leading foreign currencies has
declined slightly in recent weeks. The pound sterling and also the currencies associated in the European "snake" arrangement strengthened
against the U.S. dollar, while the Canadian dollar depreciated sharply. In
October the U.S. foreign trade deficit remained substantial.
M-l, which had expanded sharply in October, was unchanged in November. Although growth in M-2 and M-3 moderated, it remained substantial as inflows of the time and savings deposits included in these
broader aggregates continued strong. Interest rates have declined appreciably in recent weeks. In late November Federal Reserve discount rates
were reduced from 5Vi to 5*4 per cent, and in mid-December member
bank reserve requirements were lowered somewhat.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster financial conditions that will encourage
continued economic expansion, while resisting inflationary pressures and
contributing to a sustainable pattern of international transactions.
To implement this policy, while taking account of developments in
156
FOMC Policy Actions
domestic and international financial markets, the Committee seeks to
maintain prevailing bank reserve and money market conditions over
the period immediately ahead, provided that monetary aggregates appear
to be growing at about the rates currently expected.
AUTHORIZATION FOR FOREIGN
CURRENCY OPERATIONS
In effect January 1, 1977
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, for System Open Market Account,
to the extent necessary to carry out the Committee's foreign currency
directive and express authorizations by the Committee pursuant thereto,
and in conformity with such procedural instructions as the Committee
may issue from time to time:
A. To purchase and sell the following foreign currencies in the
form of cable transfers through spot or forward transactions on the open
market at home and abroad, including transactions with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve
Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts
to receive or to deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw
dollars under the reciprocal currency arrangements listed in paragraph 2
below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months after any amount outstanding
at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an over-all open position in all foreign currencies
not exceeding $1.0 billion, unless a larger position is expressly authorized
by the Committee. For this purpose, the over-all open position in all
foreign currencies is defined as the sum (disregarding signs) of open
FOMC Policy Actions
157
positions in each currency. The open position in a single foreign currency
is defined as holdings of balances in that currency, plus outstanding
contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard
to sign.
2. The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for the System Open Market Account for periods up to a
maximum of 12 months with the following foreign banks, which are
among those designated by the Board of Governors of the Federal
Reserve System under Section 214.5 of Regulation N, Relations with
Foreign Banks and Bankers, and with the approval of the Committee
to renew such arrangements on maturity:
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
250
1,000
2,000
250
3,000
2,000
2,000
3,000
2,000
360
500
250
300
1,400
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
600
1,250
Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be
referred for review and approval to the Committee.
3. Currencies to be used for liquidation of System swap commitments
may be purchased from the foreign central bank drawn on, at the same
exchange rate as that employed in the drawing to be liquidated. Apart
from any such purchases at the rate of the drawing, all transactions in
foreign currencies undertaken under paragraph 1(A) above shall, unless
otherwise expressly authorized by the Committee, be at prevailing market
rates.
158
FOMC Policy Actions
4. It shall be the normal practice to arrange with foreign central
banks for the coordination of foreign currency transactions. In making
operating arrangements with foreign central banks on System holdings
of foreign currencies, the Federal Reserve Bank of New York shall
not commit itself to maintain any specific balance, unless authorized
by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the
Federal Reserve Bank of New York with the foreign banks designated
by the Board of Governors under Section 214.5 of Regulation N shall
be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested insofar as practicable,
considering needs for minimum working balances. Such investments shall
be in accordance with Section 14(e) of the Federal Reserve Act.
6. All operations undertaken pursuant to the preceding paragraphs
shall be reported daily to the Foreign Currency Subcommittee. The
Foreign Currency Subcommittee consists of the Chairman and Vice
Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the
Subcommittee, other Board Members designated by the Chairman as
alternates, and in the absence of the Vice Chairman of the Committee,
his alternate). Meetings of the Subcommittee shall be called at the
request of any member, or at the request of the Manager, for the purposes of reviewing recent or contemplated operations and of consulting
with the Manager on other matters relating to his responsibilities. At
the request of any member of the Subcommittee, questions arising from
such reviews and consultations shall be referred for determination to
the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed
agreement or understanding with the Secretary of the Treasury about
the division of responsibility for foreign currency operations between the
System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning
System foreign currency operations, and to consult with the Secretary on
policy matters relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and
Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent
information on System foreign currency operations to appropriate officials
of the Treasury Department.
FOMC Policy Actions
159
9. All Federal Reserve Banks shall participate in the foreign currency
operations for System Account in accordance with paragraph 3G(1)
of the Board of Governors' Statement of Procedure with Respect to
Foreign Relationships of Federal Reserve Banks dated January 1, 1944.
FOREIGN CURRENCY DIRECTIVE
In effect January 1, 1977
1. System operations in foreign currencies shall generally be directed
at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent
with the proposed IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign
exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks and with the Bank for International Settlements.
C. Cooperate in other respects with central banks of other countries and with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for
currencies.
B. To provide means for meeting System and Treasury commitments
in particular currencies, and to facilitate operations of the Exchange
Stabilization Fund.
C. For such other purposes as may be expressly authorized by the
Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the
United States Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities;
and
C. In a manner consistent with the obligations of the United
States in the International Monetary Fund regarding exchange arrangements under the proposed IMF Article IV.
160
FOMC Policy Actions
MEETING HELD ON JANUARY 17-18, 1977
1. Domestic Policy Directive
Preliminary estimates of the Commerce Department indicated that
growth in real output of goods and services (real gross national
product) had slowed to an annual rate of 3.0 per cent in the fourth
quarter, from 3.9 per cent in the third quarter and 4.5 per cent
in the second. Such estimates also indicated that average prices—as
measured by the fixed-weighted index for gross domestic business
product—had risen at an annual rate of 5.0 per cent in the fourth
quarter, compared with 4.3 per cent in the third and 5.2 per cent
in the second.
According to those estimates, a sharp curtailment in business
inventory accumulation during the fourth quarter had been the main
factor in the reduction of growth in real output. The rise in business
expenditures for fixed capital had also slowed, but total final
purchases had risen at a somewhat more rapid pace than in the
third quarter; in fact, at an annual rate of 4.8 per cent, growth
in real final sales exceeded that in the first two quarters as well.
In the fourth quarter personal consumption expenditures had expanded sharply and residential construction had risen at an accelerated pace.
The staff projections suggested that the rate of growth in real
GNP would increase appreciably in the first quarter of 1977 as
the decline in business inventory accumulation came to a halt.
Growth in final purchases of goods and services in real terms was
projected to be sustained; it was expected that the rise in business
investment in fixed capital would pick up while the expansion in
personal consumption expenditures and in residential construction
would moderate somewhat from the high rates in the fourth quarter
of 1976.
Staff projections for subsequent quarters of 1977 incorporated
FOMC Policy Actions
161
assumptions that rebates of Federal income taxes and one-time
payments to recipients of social security would be disbursed in
the second quarter; that both personal income taxes and corporate
taxes would be reduced; and that Federal spending for job-creating
programs would be expanded. Reflecting these assumptions as well
as expectations of a strengthening in business fixed investment,
the projections suggested that real GNP would grow at a moderately
faster pace than in the first quarter. It was expected that the rate
of increase in the fixed-weighted price index for gross business
product would change relatively little during 1977.
Retail sales—which had strengthened considerably in October
and November—were indicated by the advance estimate to have
risen sharply further in December, with gains fairly widespread
among categories of stores. The rise in the fourth quarter as a
whole had been much larger than that in the third.
The number of new domestic automobiles sold rose to an annual
rate of about 9% million in December, the highest rate in more
than 3 years. To some extent, however, the rise reflected recovery
from the strike that had limited sales in October and November;
sales for the fourth quarter as a whole—at an annual rate of about
8V4 million—were down a little from the third-quarter pace. The
number of foreign models sold was the same in the fourth quarter
as in the third.
Indicators of residential construction activity had remained strong
in recent months. Private housing starts rose sharply in December
to an annual rate of more than 1.9 million units, the highest since
August 1973. Starts in the fourth quarter, at an annual rate of
about 1.8 million units, were up 15 per cent from the third quarter.
Although residential building permits declined somewhat in December, from the third to the fourth quarter they rose about as
rapidly as starts. Mortgage commitments outstanding at savings
and loan associations had risen $1 billion further in November to
a record level of $24.5 billion.
In contrast with developments in markets for consumer goods
and services and for housing, current indicators of business fixed
investment had been relatively weak. New orders for nondefense
capital goods had declined sharply in November, and the average
for October and November was only a little above that for the
third quarter. Contract awards for commercial and industrial build-
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ings—measured in terms of floor space—also had declined sharply
in November and the average for October and November was below
that of both the second and the third quarters.
Moreover, such indicators of business investment as shipments
of nondefense capital goods, sales of trucks, and expenditures for
nonresidential construction suggested that actual business outlays
for plant and equipment would not show the strong gain in the
fourth quarter that had been indicated by the Department of Commerce survey of spending plans taken in late October and November. That survey had also suggested that the increases planned
for the first two quarters of 1977 would be no greater than the
rise in prices. On the other hand, a later Department of Commerce
annual survey, conducted in December, indicated that businesses
were planning to spend 11.3 per cent more for plant and equipment
in 1977 than in 1976. Thus, it appeared that the shortfall in the
fourth quarter of 1976 might be made up early in 1977 and that
capital spending might strengthen further during the course of the
year.
The index of industrial production—which had risen 1.2 per cent
in November, more than recovering the losses in the preceding
2 months caused in part by strikes—rose 0.7 per cent further in
December. Expansion in production of motor vehicles accounted
for a large share of the over-all gain in December, but increases
were widespread among other final products and also among materials other than metals. Over the 12 months ending in December
1976 the total index had risen about 7 per cent.
Payroll employment in nonfarm establishments expanded considerably in December—reflecting mainly increases among the
service-producing industries, although employment in manufacturing also increased somewhat. The average factory workweek
was unchanged, after having recovered in November from the
effects of strikes. As measured by the household survey, total
employment had increased in December while the civilian labor
force had changed little, and the unemployment rate declined from
8.1 to 7.9 per cent. Most of the reduction in unemployment was
among adult men; for this group, the rate declined from 6.5 to
6.2 per cent.
The advance in personal income—which had been large in
November, in part because of the ending of major strikes—was
FOMC Policy Actions
163
even larger in December. Gains in wage and salary payments were
widespread among industries, and large increases were reported
for farm proprietors' income and for dividend payments.
The index of average hourly earnings for private nonfarm production workers advanced at an annual rate of about 5 per cent
in December, somewhat less than in the two preceding months.
Over the 12 months of 1976 the index rose about 6% per cent,
compared with about 8 per cent over the 12 months of 1975.
The rise in the wholesale price index for all commodities remained rapid in December. Average prices of farm products and
foods rose substantially, in large part because of sizable increases
for pork, oilseeds, coffee, cocoa beans, tea, and fresh fruits and
vegetables. The rise in average prices of industrial commodities—which had accelerated around midyear—slowed to a relatively
low rate, mainly reflecting a reduction in prices for natural gas.
Sizable increases were recorded for steel mill products, fabricated
metal products, lumber and wood products, and refined petroleum
products. Over the 12 months ending in December, the index for
all commodities rose about 43A per cent, as industrial commodities
advanced about 6V2 per cent and farm products and foods declined
about 1 per cent.
The average value of the dollar against leading foreign currencies
declined in December, but then it recovered somewhat as U.S.
market interest rates rose not only in absolute terms but also in
relation to rates in European markets. The pound sterling strengthened following negotiation of a $3.9 billion standby arrangement
with the International Monetary Fund and subsequent announcement of a plan to seek an orderly reduction in the reserve currency
role of sterling.
The U.S. foreign trade deficit increased in November, and the
average for October and November was close to the substantial
rate for the third quarter. For the 2-month period both exports and
imports were somewhat below their high rates in the third quarter.
Total credit at U.S. commercial banks rose little during December after 2 months of sizable increases. Bank holdings of
Treasury securities and of mortgages expanded during December,
but bank holdings of other securities declined; outstanding loans
to businesses contracted slightly following 2 months of appreciable
expansion. Over the fourth quarter bank loans to businesses grew
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FOMC Policy Actions
at an annual rate of about 9V4 per cent. However, about one-third
of the growth in such loans represented acquisitions of bankers
acceptances by some commercial banks.
The volume of commercial paper outstanding rose sharply during
December for the second consecutive month. The volume issued
by nonfinancial corporations expanded appreciably, after having
declined in October and having risen only a little in November.
Over the fourth quarter the combined total of nonfinancial commercial paper and business loans at banks grew at an annual rate
of almost 10V2 per cent.
The narrowly defined money stock (M-l), 1 which had grown
at an annual rate of almost 14 per cent in October and had been
unchanged in November, expanded at a rate of about 8 per cent
in December. From the third to the fourth quarter, M-l grew at
a rate of 6 per cent. Over the year from the fourth quarter of
1975 to the fourth quarter of 1976, growth had been about 5l/i
per cent.
Growth in M-2 and M-32—which had moderated in November
but had still remained substantial—accelerated somewhat in December, reflecting the renewal of growth in M-l. Inflows of the
time and savings deposits included in these broader aggregates were
almost as large as in November. Although there had been reports
of recent reductions in interest rates paid on these deposits by some
institutions, such rates in general remained more attractive than
yields available on competing market instruments. From the third
to the fourth quarter, M-2 and M-3 grew at annual rates of about
12 and 14 per cent, respectively. Over the year ending in the fourth
quarter of 1976, growth had been 11 per cent for M-2 and 123A
per cent for M-3.
At the December meeting, the Federal Open Market Committee
had decided to maintain prevailing bank reserve and money market
conditions, provided that monetary aggregates appeared to be
'M-l is composed of private demand deposits and currency in circulation.
M-2 includes M-l and commercial bank time and savings deposits other than
large-denomination certificates of deposit. M-3 includes M-2 and deposits at
nonbank thrift institutions (savings and loan associations, mutual savings banks,
and credit unions).
2
FOMC Policy Actions
165
growing at about the rates then expected. Over most of the intermeeting period incoming data suggested that the aggregates were
growing at about the expected rates, and the Manager of the System
Open Market Account conducted operations with a view to maintaining the Federal funds rate close to 4% per cent—the level
prevailing at the time of the December meeting. Near the end of
the inter-meeting period, incoming data began to suggest that over
the December-January period growth in M-l would be somewhat
above the range that had been specified by the Committee but that
growth in M-2 would be near the midpoint of its range. With the
Committee scheduled to meet in a few days, the Manager continued
to aim for a Federal funds rate of about 45/s per cent, although
with a little greater willingness to tolerate small deviations above
that rate than below it.
Interest rates generally changed little during the latter half of
December. In early January, however, substantial upward pressures
developed, particularly on rates for intermediate-term Treasury
issues—in part, apparently, because market expectations of some
further decline in the Federal funds rate were not realized. Interest
rates also appeared to be influenced by indications of improvement
in the outlook for economic activity, by a more rapid rate of growth
in M-l than had been generally anticipated, and by announcement
of the incoming administration's fiscal proposals. Advances in rates
over the inter-meeting period ranged from 10 to 40 basis points
for short-term instruments, from 45 to 60 basis points for intermediate-term Treasury issues, and from 10 to 25 basis points for
long-term corporate and Treasury bonds.
Gross issues of bonds offered to the public by domestic corporations amounted to nearly $2*/2 billion in December—more than
twice the reduced volume of November—and the total of such
issues in January was expected to exceed $3 billion. Most of the
new offerings in December had been from lower-rated industrial
and finance companies, but in January a number of highly rated
industrial companies were also offering new issues, apparently to
take advantage of the still relatively favorable interest rates. In
addition, several utility companies announced intentions to advance-refund or to call bonds issued in 1969 and 1970 when interest
rates on such obligations had been substantially higher.
Although the volume of new State and local government bond
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FOMC Policy Actions
offerings dropped in December, it was large for the fourth quarter
as a whole. Declines in rates on municipal bonds to relatively low
levels in the fourth quarter had encouraged State and local governments to pre-refund higher-cost issues, to accelerate offerings that
had been scheduled for later dates, and to continue reducing their
reliance on short-term issues. In 1976 the volume of new issues
of State and local government bonds was nearly 15 per cent larger
than in 1975—the previous record year—while the volume of
short-term financing declined.
The U.S. Treasury had raised $4 billion of new money in the
5 weeks since the December FOMC meeting, and it was expected
to raise a larger amount in the 4 weeks following this meeting.
The terms of the Treasury's mid-February refunding were due to
be announced on January 26. Of the issues maturing in mid-February, only $2.1 billion were held by the public, and the Treasury
was expected to take that occasion to raise several billion dollars
of new money.
In primary mortgage markets, rates on new commitments for
conventional home loans declined in December and early January.
In secondary mortgage markets, rates declined during December
by more than in the primary markets, but they turned up in early
January along with yields on other market securities.
It appeared likely that over-all demands for funds in securities
markets would continue to be sizable during the months just ahead.
Cash borrowing by the U.S. Treasury and Federal agencies combined was expected to remain large. Bond issues by business
corporations and State and local governments seemed likely to
continue heavy, partly because of widespread expectations that
interest rates would be advancing later in the year. At the same
time, however, it appeared likely that institutional investors would
continue to have a sizable volume of funds available for investment
in bonds.
In the discussion of the economic situation at this meeting,
members of the Committee agreed that the outlook for growth in
real output of goods and services had strengthened. Attention was
called to the recent surge in retail sales—and the resulting improvement in inventory positions—and to the increasing strength
in housing starts. It was suggested that, as a consequence of recent
developments, business fixed investment was likely to increase
FOMC Policy Actions
167
more during the coming year than had been expected heretofore
and that expansion in over-all economic activity might well accelerate to a relatively rapid pace. It was also observed, however,
that even if growth in real GNP during 1977 were significantly
greater than projected by the staff, rates of resource use in the
fourth quarter of the year still would not appear to be excessive;
indeed, unemployment would still be relatively high. Because of
the character of the fiscal measures in prospect and for other
reasons, one or two members remarked that the rate of expansion
in economic activity in 1977 was likely to be uneven.
Although Committee members in general now held a more
favorable view of the economic situation and outlook than they
had a month or two ago, attention was called to a number of
problems. For one, the severity of the winter weather and its impact
on the availability of fuels for industrial use posed a threat to output
and employment in some parts of the country. Even though the
unemployment rate was still unacceptably high, current and
prospective rates of inflation also remained a source of major
concern.
A measure of concern was also provoked by certain aspects of
the Federal budget, after incorporation of assumptions about the
new administration's fiscal proposals. It was noted that the highemployment deficit was projected to increase substantially in calendar 1977—to the highest level in relation to GNP since 1976—
and that relatively large high-employment deficits tended to tighten
financial markets and to exert upward pressures on interest rates.
Should intermediate- and long-term interest rates rise significantly
during 1977, it was observed, expansion in business fixed investment might well be less than would seem desirable. Concern also
was expressed that the proposed second phase of the 2-year package
of fiscal measures might overstimulate economic activity at a late
stage in the expansion, as had happened at times in the past.
At this meeting the Committee reviewed its 12-month ranges
for growth in the monetary aggregates. In early November the
Committee had specified the following ranges for growth over the
period from the third quarter of 1976 to the third quarter of 1977:
M-l, Al/i to 6V2 per cent; M-2, IVi to 10 per cent; and M-3, 9
to 1Vh per cent. The associated range for growth in the bank credit
proxy was 5 to 8 per cent. The ranges being considered at this
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FOMC Policy Actions
meeting were for the period from the fourth quarter of 1976 to
the fourth quarter of 1977.
In commenting on the ranges for growth in the monetary aggregates over the period from the fourth quarter of 1976 to the fourth
quarter of 1977, most members concurred in a suggestion that the
existing range for M-l be retained and that the lower limits of
the ranges for M-2 and M-3 be reduced by Vi of a percentage
point. Several of these members indicated that they would also
be agreeable to retaining the existing ranges for all three monetary
aggregates.
In connection with the proposal favored by most members, it
was noted that M-2 had increased 10.9 per cent over the course
of 1976, compared with an average yearly rise of 8.3 per cent
in the preceding decade; and that M-3 had increased 12.4 per cent
over 1976, compared with an average yearly rise of 8.8 per cent
in the preceding 10 years. Growth of the broader measures of
money over 1976 had been unusually rapid in relation to growth
of M-l. In large part this reflected ongoing changes in financial
markets that reduced reliance on demand deposits for transactions
purposes; it also reflected the attractiveness of interest rates paid
on time and savings deposits in relation to rates on market instruments.
It was also noted that growth rates of M-2 and M-3 from the
third to the fourth quarter of 1976 had exceeded the ranges adopted
by the Committee in early November. For the period ahead,
therefore, the ranges favored by most members would imply a
moderation of growth in these aggregates.
Several members of the Committee suggested that in the period
ahead a significant slowing of growth in the time and savings
deposits included in the broader aggregates was likely to develop.
They noted that some banks and thrift institutions already had
reduced the rates they were offering on such deposits and had taken
other steps to slow inflows. Moreover, in 1976 growth in M-2
and M-3 had been sustained by shifts of funds from outstanding
market securities to time and savings deposits, and the effect of
such stock adjustments was likely to be less important in 1977.
Thus, growth rates of the broader aggregates seemed likely to slow
both in absolute terms and in relation to growth of M-l.
The downward adjustments of the lower limits of the projected
FOMC Policy Actions
169
ranges for M-2 and M-3 reflected this possibility. They also
reflected the Committee's intention to continue to move gradually
toward longer-run rates of monetary expansion consistent with
general price stability. In this connection, it was noted that since
April 1975, when 1-year growth ranges were first established for
the monetary aggregates, the Committee had taken a number of
small steps in pursuit of that objective. It was observed that the
Committee ought to continue doing so in order to re-establish a
foundation for economic stability over the longer term. At the same
time, however, it was suggested that retaining the existing range
for M-l at this time would be consistent with efforts to accelerate
the pace of economic expansion and to reduce unemployment from
its unduly high rate.
One member suggested a variation of the proposal concurred
in by most members: V2 of a percentage point reduction in the
upper, rather than in the lower, limits of the ranges for M-2 and
M-3 along with retention of the existing range for M-l. Another
member, noting the influence of innovations in financial markets,
expressed the view that for some time the Committee's longer-run
ranges for M-2 and M-3 had not been consistent with its range
for M-l; therefore he suggested reducing the range for M-l to
4 to 6 per cent and making small upward adjustments in the ranges
for M-2 and M-3, leaving the ranges for the broader aggregates
still well below the rates of growth from the third to the fourth
quarter of 1976. Against the suggestion for a reduction in the range
for M-l, it was observed that the staff projections of nominal GNP
in combination with growth of M-l within the existing range
implied a sizable rise in the income velocity of M-l in 1977, even
after allowance for further contributions to the rise in velocity from
financial innovations.
At the conclusion of its discussion the Committee arrived at a
consensus calling for retention of the existing range for M-l and
reductions of Vi of a percentage point in the lower limits of the
ranges for M-2 and M-3. The ranges thus were AV2 to &h per
cent for M-l, 7 to 10 per cent for M-2, and 8V2 to 11 V2 per cent
for M-3. The associated range for the rate of growth in the bank
credit proxy was 7 to 10 per cent. It was agreed that the longer-run
ranges, as well as the particular aggregates for which such ranges
were specified, would be subject to review and modification at
170 FOMC Policy Actions
subsequent meetings. It also was understood that short-run factors
might cause growth rates from month to month to fall outside the
ranges contemplated for the year ahead.
The Committee adopted the following ranges for rates of growth
in monetary aggregates for the period from the fourth quarter of
1976 to the fourth quarter of 1977: M-l, 4!/2 to 61/2 per cent; M-2,
7 to 10 per cent; and M-3, 8V2 to 11 Vi per cent.
Votes for this action: Messrs. Burns, Volcker,
Balles, Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly, Partee, Wallich, and Winn. Votes
against this action: None.
As to policy for the period immediately ahead, members differed
little in their preferences for ranges of growth in the monetary
aggregates over the January-February period. For M-l, most
members favored a range of 3 to 7 per cent; a number of members
preferred Vh to lxh per cent, and one suggested 4 to 7 per cent.
For M-2, most members favored a range of 7 to 11 per cent, while
some preferred IVi to IP/2 per cent.
Differences of view were somewhat greater concerning the range
for the Federal funds rate. A number of members preferred a
relatively narrow range, one of V2 or 5/s per cent, centered on the
prevailing level of 45/s per cent or on 43A per cent—in large part
because, in their view, financial markets at present were in a
sensitive state. Other members preferred a wider range centered
on a rate of 4% per cent—specifically, 4V4 to 5lA per cent—because
they believed that additional leeway for System operations should
be provided in the event that over the January-February period
growth in the aggregates appeared to be deviating significantly from
the rates now expected.
One member suggested that the Committee give greater weight
than usual to money market conditions in conducting open market
operations in the period until the next meeting—as it had decided
to do at its December meeting—because of the uncertainties associated with projections of growth in monetary aggregates around
the year-end. However, most members preferred to have operating
decisions in the period ahead based primarily on the behavior of
the monetary aggregates.
At the conclusion of the discussion the Committee decided to
FOMC Policy Actions
171
seek bank reserve and money market conditions consistent with
moderate growth in monetary aggregates over the period ahead.
Specifically, the Committee concluded that growth in M-\ and M-2
over the January-February period at annual rates within ranges of
3 to 7 per cent and 7 to 11 per cent, respectively, would be
appropriate. It was understood that in assessing the behavior of
the aggregates, the Manager should continue to give approximately
equal weight to the behavior of M-l and M-2.
It was agreed that until the next meeting the weekly-average
Federal funds rate might be expected to vary in an orderly way
within a range of 4lA to 5 per cent. It was also agreed that early
in the inter-meeting period the Manager should aim for a Federal
funds rate in the area of 4% to 43A per cent, with specific operating
decisions to depend in part on the state of securities markets. As
customary, it was understood that the Chairman might call upon
the Committee to consider the need for supplementary instructions
before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that growth
in real output of goods and services slowed somewhat further in
the fourth quarter, mainly because of a sharp decline in the rate
of inventory accumulation. In December retail sales increased
sharply, following strong gains in the preceding 2 months. Industrial
production and total employment rose further, and the unemployment rate declined from 8.1 to 7.9 per cent. The wholesale price
index for all commodities rose substantially, reflecting a sharp
increase in average prices of farm products and foods; the rise in
average prices of industrial commodities slowed, owing largely to
declines in prices of fuels. The advance in the index of average
wage rates over recent months has remained below the rapid rate
of increase during 1975.
The average value of the dollar against leading foreign currencies
declined in December but has since recovered somewhat. The pound
sterling strengthened following negotiation of an IMF standby arrangement and of a medium-term facility to offset reductions in
official sterling balances. In November the U.S. foreign trade deficit
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FOMC Policy Actions
increased, bringing the October-November average deficit to about
the third-quarter rate.
M-l, which was unchanged in November, expanded appreciably
in December; from the third to the fourth quarter growth in M-l
was moderate. Inflows of the time and savings deposits included
in M-2 and M-3 were almost as large in December as in November,
and growth in these broader aggregates was substantial. Interest
rates changed little in late December but recently have moved up.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster financial conditions that
will encourage continued economic expansion while resisting inflationary pressures and contributing to a sustainable pattern of international transactions.
To implement this policy, while taking account of developments
in domestic and international financial markets, the Committee seeks
to achieve bank reserve and money market conditions consistent
with moderate growth in monetary aggregates over the period ahead.
Votes for this action: Messrs. Burns, Volcker,
Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly,
Partee, Wallich, and Winn. Vote against this action:
Mr. Balles.
Mr. Balles dissented from this action for the following reasons.
In view of recent financial market innovations, he believed that
the course of real GNP and prices now bore a closer relationship
to the behavior of M-2 than to that of M-l. Therefore, he was
concerned about the fact that growth in M-2 had been exceeding
the Committee's longer-run range and about the consequent implications for future inflation. Accordingly, he thought that in the
period ahead the System should aim initially for a Federal funds
rate of about 4% per cent and should be prepared to aim over
the course of the period for a rate as high as 5lA per cent if the
aggregates, especially M-2, appeared to be growing at rates significantly higher than the longer-run ranges.
2.
Agreements in Connection with Credit Facility
Relating to Official Sterling Balances
For some time prior to this meeting discussions had been under
way among representatives of central banks of the Group of Ten
FOMC Policy Actions
173
countries and Switzerland in regard to a medium-term standby
credit facility relating to official sterling balances for the Bank of
England. Concurrently, officials of the U.S. Treasury Department
and the Federal Reserve System had been considering arrangements
for U.S. participation in such a facility. As announced on January
10, an agreement in principle for a $3 billion facility was reached
at a meeting in Basle, Switzerland, by representatives of the Bank
for International Settlements (BIS), the Bank of England, and a
number of other central banks, including the Federal Reserve. The
U.S. share was $1 billion, to be provided through the Federal
Reserve System and the U.S. Treasury's Exchange Stabilization
Fund (ESF). At this meeting the Committee ratified the agreement
reached in Basle and arrangements made with the Treasury Department for Federal Reserve-Treasury participation.
The objective of the Basle agreement was to help the United
Kingdom achieve an orderly reduction in the reserve currency role
of sterling and thus to avoid the kind of disturbances to the
international monetary system that had occurred at times in the
past as a result of fluctuations in official sterling balances. In
general, the agreement provided for the extension of a $3 billion
facility to the Bank of England by the BIS, with backing, as
necessary, by the other participants, for a period of 2 years—and
for a third year if mutually agreed upon by the participants. For
its part, the United Kingdom agreed to reduce official sterling
balances to working levels over the "drawdown" period. In exchange for official holdings of sterling, it would offer negotiable
bonds denominated in currencies other than sterling and having
maturities of 5 to 10 years. The Bank of England would be entitled
to draw on the credit facility to the extent necessary to finance
reductions in official sterling balances other than those associated
with sales of foreign currency bonds. Repayments would begin
at the end of the "drawdown" period and would be completed
within the succeeding 4 years.
It was understood that eligibility to draw on the standby credit
facility would be conditional on continuing eligibility of the United
Kingdom to draw on the $3.9 billion credit recently negotiated
with the International Monetary Fund (IMF). The facility could
also be suspended if the United Kingdom were not making reasonable efforts to achieve reductions in official sterling balances; the
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FOMC Policy Actions
Managing Director of the IMF was being asked to assist in making
a determination on this score.
With respect to U.S. participation, the Federal Reserve and the
Treasury had agreed that if the United States were required to
provide financing to the BIS in support of the standby facility,
the funds would be provided initially by the Federal Reserve
through its existing swap arrangement with the BIS, taking the
form of a usual 3-month swap, subject to three renewals. Should
such financing be required continuously for more than one year,
however, it would subsequently be provided by the Treasury, acting
through the Exchange Stabilization Fund. Risk associated with such
financing, whether provided by the Federal Reserve or the ESF,
was to be borne equally by the two.
Votes for ratification of these agreements: Messrs.
Burns, Volcker, Balles, Black, Coldwell, Gardner,
Jackson, Kimbrel, Lilly, Partee, Wallich, and Winn.
Votes against ratification: None.
3.
Agreement to "Warehouse" Currencies
for the Exchange Stabilization Fund
At this meeting the Committee agreed to a suggestion by the
Treasury that the Federal Reserve undertake to "warehouse"
foreign currencies held by the ESF—that is, to make spot purchases of foreign currencies from the ESF and simultaneously to
make forward sales of the same currencies to the ESF—if that
should prove necessary to enable the ESF to deal with potential
liquidity strains. Specifically, the Committee agreed that the
Federal Reserve would be prepared, if requested by the Treasury,
to warehouse up to Sl 1 ^ billion of eligible foreign currencies, of
which half would be for periods of up to 12 months and half for
periods of up to 6 months.
In the discussion it was noted that such warehousing operations
had proved useful from time to time in the past, on occasions
when the resources of the ESF had been inadequate to meet all
the demands on them. It was also noted that, while the present
agreement to warehouse currencies did not have a specific terminal
date, it would be subject to review by the Committee at its
FOMC Policy Actions
175
organizational meeting each March in connection with the regular
review of all outstanding authorizations. The members concurred
in an observation that no modifications in the warehousing arrangement were likely to be proposed at the next organizational meeting,
which was only 2 months away, but that the Committee could
decide to reconsider the arrangement at a subsequent organizational
meeting.
Votes to approve the warehousing arrangement:
Messrs. Burns, Volcker, Balles, Black, Coldwell,
Gardner, Jackson, Kimbrel, Lilly, Partee, Wallich,
and Winn. Votes to disapprove: None.
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FOMC Policy Actions
MEETING HELD ON FEBRUARY 15, 1977
1. Domestic Policy Directive
Growth in real output of goods and services had slowed to an
annual rate of 3.0 per cent in the fourth quarter of 1976—from
3.9 per cent in the third quarter and 4.5 per cent in the second—
according to preliminary estimates of the Commerce Department.
However, the pace of growth had accelerated as the quarter progressed. The information reviewed at this meeting suggested underlying strength in economic activity, although activity in January
and early February had been affected by the unusually severe
weather.
The index of industrial production had risen appreciably in
November and December, to some extent in recovery from strikes.
The index fell in January because of the severe winter weather
and also, after midmonth, because of shortages of natural gas for
industrial uses. Decreases in output were widespread among durable
and nondurable manufacturing industries, and coal mining was
curtailed sharply. However, electric and gas utilities expanded
production to meet increased demand.
Retail sales had expanded \3A per cent in November and about
4 per cent in December. In January, according to the advance
report, sales declined 2 per cent, reflecting decreases for most types
of stores apparently because of the weather.
The number of new domestic automobiles sold in the first 20
days of January appeared to have held near the annual rate of 9V3
million recorded in December, when sales were stimulated to some
extent by recovery from the strike that had limited output and sales
earlier. However, sales fell sharply in the latter part of January,
and for the month as a whole the annual rate was about S3A million.
Labor market surveys completed by mid-January indicated that
employment had continued to expand. In the survey of payroll
employment in nonfarm establishments, gains were reported in
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177
two-thirds of the industries covered, and the total rose substantially
for the third consecutive month. By the time of the survey,
however, the severe weather had already induced a reduction in
employment in construction and a shortening in the length of the
average workweek in manufacturing. In the household survey, the
unemployment rate was reported to have fallen from 7.8 per cent
in December to 7.3 per cent in January. Much of the decline
reflected a drop in the number of persons seeking work, which
may have been caused in part by the weather.
Personal income had expanded vigorously in the last 2 months
of 1976; from the third quarter to the fourth it rose at an annual
rate of about 11 per cent. This sizable gain reflected a rebound
in manufacturing payrolls after termination of strikes, a recovery
in farm income, an increase in Federal pay scales, and the disbursement by corporations of unusually large year-end dividends.
Indicators of residential construction activity had remained strong
in the closing months of 1976. In December private housing starts
rose sharply to an annual rate of more than 1.9 million units, the
highest since the autumn of 1973. The rise was broadly based by
region. For the fourth quarter as a whole starts were at an annual
rate of about 1.8 million units, up 15 per cent from the third quarter.
Starts of multifamily units gained more than 30 per cent from the
third quarter to the fourth, reflecting not only a substantial increase
in starts of units covered under Federally subsidized programs but
also a large rise in units not so subsidized.
Businesses were planning to spend 11.3 per cent more for plant
and equipment in 1977 than in 1976, according to the Department
of Commerce annual survey conducted in December. New orders
for nondefense capital goods in December recovered a part of the
sharp decline recorded in November. Contract awards for commercial and industrial buildings—measured in terms of floor space—
also had declined sharply in November and then in December
recovered a part of the loss.
The staff projections, like those of a month earlier, incorporated
assumptions that rebates of Federal income taxes and one-time
payments to recipients of social security would be disbursed in
the second quarter; that both personal income taxes and corporate
taxes would be reduced; and that Federal spending for job-creating
programs would be expanded. The projections continued to suggest
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FOMC Policy Actions
that real GNP would grow at a substantially higher rate in the
first half of 1977 than it had in the second half of 1976. As to
the first quarter, it was still anticipated that growth in domestic
final purchases of goods and services in real terms would be
relatively well sustained, despite the severe winter weather, but
the rebound in growth in real GNP was now expected to be
considerably less than had been anticipated a month earlier. The
projections now suggested that the rate of business inventory
accumulation would decline further in the first quarter and that
imports, specifically of fuels, would rise more than had been
anticipated.
It was expected that the weather-induced output losses of the
first quarter would soon be made up; for the second quarter, the
projections suggested that real final sales would grow at a rapid
rate and that business inventory investment would increase. It was
anticipated that real GNP would grow at a relatively good rate
in the second half of 1977. The projections still suggested that
the rate of increase in the fixed-weighted price index for gross
business product would change relatively little during this year.
Wage increases provided for in the first year of major collective
bargaining agreements negotiated during 1976 were somewhat more
moderate than those negotiated in 1975. Moreover, the index of
average hourly earnings for private nonfarm production workers
advanced 6% per cent over the 12 months of 1976, compared with
almost 8 per cent during the previous year. In January 1977 the
index rose sharply; however, the sharpness of the rise reflected
marked increases in the indexes for the construction and service
sectors, where rates of change from month to month have been
volatile.
The wholesale price index for all commodities rose 0.5 per cent
in January, almost the same as the average increase in the last
3 months of 1976. Average prices of industrial commodities rose
a little more than in December but less than in the preceding 3
months. Increases were again widespread among industrial commodity groups; as in December, however, a decline was reported
for the fuel and power group, reflecting some price reductions that
actually had occurred a month or two earlier. Average prices of
farm products and foods also rose, but the increase was relatively
small.
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179
The consumer price index rose 0.4 per cent in December,
resulting in an increase of 4.8 per cent over the 12 months of
1976; during 1975 the index had risen 7.0 per cent. Average retail
prices of foods changed little during 1976, in contrast with a rise
of 6.5 per cent over the previous year. Average prices of other
commodities and of services rose about 5 and 7 per cent, respectively, compared with increases of about 6 and 8 per cent in 1975.
The average value of the dollar rose somewhat against leading
foreign currencies between mid-January and mid-February, with
most of the rise occurring in the early part of the period. The
value of the dollar increased against most continental European
currencies and against the Canadian dollar but declined against the
Japanese yen. The pound sterling was subjected to strong upward
pressure in reaction to the international agreements concluded in
early January to provide the United Kingdom with substantial funds
to finance possible future intervention in support of the sterling
exchange rate. However, the pound did not rise against the dollar,
mainly as a result of exchange market intervention by the Bank
of England. The Mexican peso, which had been trading steadily
at 5.0 U.S. cents since early December, fell abruptly on January
20 to 4.3 cents; later, it gradually recovered to 4.5 cents.
The U.S. foreign trade deficit increased further in December,
and the deficit on an international accounts basis was a little larger
in the fourth quarter than in the third. For all of 1976 the trade
balance was in deficit by almost $10 billion, whereas for 1975
it had been in surplus by $9 billion.
Total credit at U.S. commercial banks increased considerably
in January, following a small rise in December. Data for both
months, however, were distorted by special influences—particularly a
substantial increase in bank holdings of bankers acceptances late
in 1976 that was largely reversed in January. Over the 2 months
together, growth of total bank credit—although somewhat above
the rather slow pace in the first half of 1976—was significantly
below the rates in both the third quarter and the October-November
period. Growth of business loans—excluding bankers acceptances—slowed sharply from the rate in the October-November
period, and at the same time banks shifted from substantial acquisition to moderate liquidation of securities other than U.S. Treasury
issues.
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FOMC Policy Actions
In the December-January period the outstanding volume of
commercial paper issued by nonfinancial corporations rose sharply,
after having changed little over the preceding 2 months. Nevertheless, the combined total of nonfinancial commercial paper and
business loans at banks (excluding bankers acceptances) grew
somewhat less in the latter 2-month period than in the earlier one,
when business needs for financing had apparently been augmented
to some extent by involuntary accumulation of inventories.
The narrowly defined money stock (M-l), which had grown at
an annual rate of about 8 per cent in December, slowed to a rate
of about Al/i per cent in January. Although the month-to-month
expansion in M-l recently had been erratic, the average annual
rate of growth over the 6 months ending in January was about
5l/i per cent.1
Growth in M-2 and M-3 slowed appreciably in January from
the rapid rates evident in December and in the fourth quarter. At
banks and thrift institutions, inflows of the time and savings deposits
included in the broader aggregates slowed somewhat, apparently
because of reductions in interest rates paid on these deposits by
some banks and thrift institutions and a rise in rates on competing
market securities.
At its January meeting, the Committee had agreed that early
in the inter-meeting period the Manager of the System Open Market
Account should aim for a Federal funds rate in the area of 45/s
to 43A per cent and that afterwards the weekly-average Federal
funds rate might be expected to vary in an orderly way within
a range of AlA to 5 per cent. Throughout the inter-meeting period
incoming data suggested that growth in both M-l and M-2 over
the January-February period would be well within the ranges that
had been specified by the Committee. Accordingly, the Manager
continued to direct operations toward maintaining the Federal funds
rate in the area of 4% to 43A per cent.
Market interest rates—which had risen abruptly after the turn
of the year—rose somewhat further in the weeks just after the
Revised measures of monetary aggregates, reflecting new benchmark data for
deposits at nonmember banks and revised seasonal factors, were published on
February 17, 1977. On the basis of the revised figures, the annual rate of growth
in M-l in January and also over the 6 months ending in January was about 53A
per cent.
FOMC Policy Actions
181
mid-January meeting of the Committee, partly in reaction to the
Treasury's announcement of the terms of its mid-February refunding and of cash needs during the first quarter. Later, however,
rates backed down to about their mid-January levels. At their levels
in mid-February, market interest rates in general were significantly
above their December lows, but they were still a little lower than
at mid-November.
In the 4 weeks since the January FOMC meeting, the U.S.
Treasury had raised $6.5 billion of new cash, including $3.8 billion
raised in connection with the mid-February refinancing. New issues
in the refinancing included $3.0 billion of 3-year notes, $2.0 billion
of 7-year notes, and $750 million of 30-year bonds. The over-all
size of the offerings was near the upper limit of market expectations.
However, investor interest in the new issues proved to be considerable.
In the market for new corporate bonds, the volume of publicly
offered new issues in January was not quite so large as had been
expected because increased interest rates had prompted the postponement or cancellation of several issues. Nevertheless, the January volume was substantially above the monthly average in the
fourth quarter of 1976. Offerings of new long-term securities by
State and local governments rose sharply in January to $3.4
billion—a record for the month. About $500 million of this supply
was attributable to the issuance of bonds in advance refundings,
and about $700 million represented financing by municipal utilities.
During January yields rose in secondary mortgage markets along
with those in other markets, but interest rates on new commitments
for conventional home loans edged off somewhat further. At the
end of December outstanding mortgage commitments at savings
and loan associations had reached another new high, even though
mortgage takedowns during the month had remained substantial.
At its January meeting the Committee had agreed that from the
fourth quarter of 1976 to the fourth quarter of 1977, average rates
of growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-l, AVi
to 6V2 per cent; M-2, 7 to 10 per cent; and M-3, 8V2 to IP/2
per cent. The associated range for growth in the bank credit proxy
was 7 to 10 per cent. It was agreed that the longer-term ranges,
as well as the particular aggregates for which such ranges were
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FOMC Policy Actions
specified, would be subject to review and modification at subsequent
meetings. It also was understood that short-run factors might cause
growth rates from month to month to fall outside the ranges
contemplated for annual periods.
In their discussion of recent economic developments and prospects, members of the Committee agreed that the underlying
situation was strong and that the losses in output, hours of work,
and income resulting from the weather would soon be made up.
Most members agreed in general with the staff projections suggesting that growth in real GNP would accelerate to a rapid pace in
the second quarter—reflecting not only the recovery from the
weather-induced losses but also the disbursement of tax rebates
and related payments—and then would continue at a relatively good
rate throughout the second half of the year.
However, one or two members expressed concern that the
weather disturbance and the tax rebates might cause large swings
in business inventory investment and therefore in total GNP. In
this connection, it was suggested that more attention should be
paid to the behavior of final sales than to that of total output.
Despite the broad consensus on the outlook, several members
called attention to actual and possible developments that might
cause real GNP to deviate from the projected path. It was observed,
for example, that severe weather—while having temporary effects
on output, inventories, and incomes much like those of a major
strike—would also transfer purchasing power from consumers to
sellers of fuels, who most likely had a lower propensity to spend.
Partly because of the high fuel bills, it was suggested, the tax
rebates and related payments might have less impact on consumer
spending than one might have expected on the basis of the 1975
experience with rebates.
Looking to the latter part of 1977 and into 1978, some questions
were raised about the adequacy of industrial capacity. In this
connection, attention was called to the recent revisions in the
Federal Reserve estimates of the rate of capacity utilization in
manufacturing in the 1971-76 period. Concern was expressed that
the margin of unused plant capacity that could be drawn into
production might be low in relation to the amount of unemployed
labor. It was also observed that rates of capacity utilization varied
considerably among industries and that during business expansions
FOMC Policy Actions
183
bottlenecks begin to spread through the industrial system long
before over-all measures of capacity utilization reach relatively high
levels.
It was suggested that the rise in prices might become more rapid
as activity expanded during the period ahead. Historically, it was
noted, average wholesale prices of industrial commodities had
begun to rise at about the time that business activity had begun
to recover, reflecting increases in prices of raw materials. In the
current business expansion, that pattern had been superimposed
upon the longer-run trend of inflation in the economy. With respect
to the outlook for prices, it was noted also that the severe drought
in the western part of the country may sharply reduce crops of
fruits and vegetables.
One or two members of the Committee suggested that—although
economic prospects appeared to be good—businessmen seemed to
have become somewhat more uneasy in recent weeks about the
near-term effects of the adverse weather, about the longer-term
energy problem, about the possibility of imposition of some form
of price controls, about the Government's fiscal policy, and about
prospects for inflation. It was felt that this uneasy mood could
inhibit decisions to make expenditures for plant and equipment.
However, another member noted that some of the uncertainties
that had worried businessmen only a few months ago—such as
the k"pause" in growth of economic activity and the size of the
prospective increase in prices of imported oil—had been resolved.
In his opinion, businessmen would soon take a more favorable
view of the climate for capital investment. Still another member
expressed concern about the possibility that business capital investment would rise too strongly at a late stage in the business
expansion.
As to policy for the period immediately ahead, Committee
members in general advocated continuation of about the current
stance. They differed little in their preferences for ranges of growth
in the monetary aggregates over the February-March period. For
M-l, the members endorsed a range of 3 to 7 per cent, although
one indicated a mild preference for a range of V/i to IV2 per cent.
For M-2, many members favored a range of 7 to 11 per cent.
However, some advocated a slightly lower range—6 to 10 per
cent—because M-2 had grown over recent months at a rate that
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FOMC Policy Actions
was high relative to the Committee's longer-run range for that
aggregate.
Almost all members favored directing operations initially toward
the objective of maintaining the Federal funds rate in the area of
4% to 4% per cent. However, they differed somewhat in their
preferences for the upper and lower limits of the inter-meeting
range. The largest number of members preferred to continue the
range of 4lA to 5 per cent that had been specified at the January
meeting. Some favored ranges of 4lA to 5lA per cent or 4lA to
5lA per cent, because they believed that additional leeway for
System operations should be provided in the event that growth
in the aggregates over the February-March period appeared to be
significantly faster than now expected.
At the conclusion of the discussion the Committee decided that
growth in M-1 and M-2 over the February-March period at annual
rates within ranges of 3 to 7 per cent and 6!/2 to 10!/2 per cent,
respectively, would be appropriate. It was understood that in
assessing the behavior of the aggregates, the Manager should
continue to give approximately equal weight to the behavior of
MA and M-2.
In the judgment of the Committee, such growth rates of the
aggregates were likely to be associated with a weekly-average
Federal funds rate in the area of 4% to 4%. per cent. The Committee
agreed that if growth rates of the aggregates over the 2-month period
appeared to be deviating significantly from the midpoints of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate should be modified in an orderly fashion within
a range of 4lA to 5 per cent. As customary, it was understood
that the Chairman might call upon the Committee to consider the
need for supplementary instructions before the next scheduled
meeting if significant inconsistencies appeared to be developing
among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests underlying
strength in economic activity, although industrial production and
retail sales were held down in January by the effects of unusually
severe weather. Housing starts rose sharply in December, and labor
FOMC Policy Actions
185
market surveys completed by mid-January indicated a further rise
in employment and a decline in the unemployment rate from 7.8
to 7.3 per cent. The wholesale price index for all commodities
continued to rise, reflecting increases in the averages both for farm
products and foods and for industrial commodities. The index of
average wage rates rose sharply in January as a result of marked
increases in the volatile construction and service sectors.
The average value of the dollar against leading foreign currencies
has risen somewhat over the past month. In December the U.S.
foreign trade deficit increased further; in the fourth quarter as a
whole the deficit was a little larger than in the third quarter.
M-l, which had expanded appreciably in December, grew at a
moderate pace in January. Growth in M-2 and M-3 also moderated.
At banks and thrift institutions, inflows of time and savings deposits
other than large-denomination CD's slowed somewhat. Interest rates
have changed relatively little on balance since mid-January.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster bank reserve and other
financial conditions that will encourage continued economic expansion, while resisting inflationary pressures and contributing to a
sustainable pattern of international transactions.
At its meeting on January 18, 1977, the Committee agreed that
growth of M-l, M-2, and M-3 within ranges of 4Vi to 6V2 per
cent, 7 to 10 per cent, and &V2 to 1 1 V2 per cent, respectively, from
the fourth quarter of 1976 to the fourth quarter of 1977 appears
to be consistent with these objectives. These ranges are subject to
reconsideration at any time as conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-l and M-2 on a path believed to be reasonably consistent with
the longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the February-March period to be within the ranges of 3 to
7 per cent for M-l and 6V2 to 10]/2 per cent for M-2. In the judgment
of the Committee such growth rates are likely to be associated with
a weekly average Federal funds rate of about 4% to 43A per cent.
If, giving approximately equal weight to M-l and M-2, it appears
that growth rates over the 2-month period will deviate significantly
from the midpoints of the indicated ranges, the operational objective
for the Federal funds rate shall be modified in an orderly fashion
within a range of 4lA to 5 per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
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FOMC Policy Actions
inconsistent, the Manager is promptly to notify the Chairman who
will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Balles, Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly, Partee, Wallich, and Winn. Votes
against this action: None.
2. Statement of Policy Regarding
the Government in the Sunshine Act
From time to time at recent meetings the Committee had discussed
the applicability of the Government in the Sunshine Act to its
meetings. At this meeting the Committee concurred in an opinion
of counsel that the act would not apply because the Committee
did not come within the definition of "agency" contained in the
act. The Committee further agreed that its present procedures and
disclosure policy were already conducted in accordance with the
intent and spirit of the act and that its current practices in that
regard would be continued.
After reaching these judgments, the Committee approved the
following statement of policy:
On September 13, 1976, there was enacted into law the Government in the Sunshine Act, Pub. L. No. 94-409, 90 Stat. 1241
("Sunshine Act"), established for the purpose of providing the
public with the "fullest practicable information regarding the decisionmaking processes of the Federal Government . . . while protecting the rights of individuals and the ability of the Government
to carry out its responsibilities."2 The Sunshine Act applies only
to those Federal agencies that are defined in Section 552(e) of Title
5 of the United States Code and "headed by a collegial body
composed of two or more individual members, a majority of whom
are appointed to such position by the President with the advice and
consent of the Senate, and any subdivision thereof authorized to
act on behalf of the agency." 3
The Federal Open Market Committee ("FOMC") is a separate
Government in the Sunshine Act, Public Law 94-409, §2, 90 Stat. 1241 (1976).
3
Ibid., §3(a), 1241.
FOMC Policy Actions
187
and independent statutory body within the Federal Reserve System.
In no respect is it an agent or "subdivision" of the Board. It was
originally established by the Banking Act of 1933 and restructured
in its present form by the Banking Act of 1935 and subsequent
legislation in 1942 (generally see 12 U.S.C. §263(a)). The FOMC's
membership is composed of the seven members of the Board of
Governors of the Federal Reserve System ("Board of Governors")
and five representatives of the Federal Reserve Banks who are
selected annually in accordance with the procedures set forth in
Section 12A of the Federal Reserve Act, 12 U.S.C. §263(a).
Members of the Board of Governors serve in an ex officio capacity
on the FOMC by reason of their appointment as Members of the
Board of Governors, not as a result of an appointment "to such
position" (the FOMC) by the President. Representatives of the
Reserve Banks serve on the FOMC not as a result of an appointment
"to such position" by the President, but rather by virtue of their
positions with the Reserve Banks and their selection pursuant to
Section 12A of the Federal Reserve Act. It is clear therefore that
the FOMC does not fall within the scope of an "agency" or
"subdivision" as defined in the Sunshine Act and consequently is
not subject to the provisions of that Act.
As explained below, the Act would not require the FOMC to
hold its meetings in open session even if the FOMC were covered
by the Act. However, despite the conclusion reached that the
Sunshine Act does not apply to the FOMC, the FOMC has determined that its procedures and timing of public disclosure already
are conducted in accordance with the spirit of the Sunshine Act,
as that Act would apply to deliberations of the nature engaged in
by the FOMC.
In the foregoing regard, the FOMC has noted that while the Act
calls generally for open meetings of multi-member Federal agencies,
10 specific exemptions from the open meeting requirement are
provided to assure the ability of the Government to carry out its
responsibilities. Among the exemptions provided is that which
authorizes any agency operating under the Act to conduct closed
meetings where the subject of a meeting involves information "the
premature disclosure of which would—in the case of an agency
which regulates currencies, securities, commodities, or financial
institutions, be likely to lead to significant financial speculation in
currencies, securities, or commodities."4
4
Ibid., 1242.
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FOMC Policy Actions
As to meetings closed under such exemption, the Act requires
the maintenance of either a transcript, electronic recording or minutes and sets forth specified, detailed requirements as to the contents
and timing of disclosure of certain portions or all of such minutes.
The Act permits the withholding from the public of the minutes
where disclosure would be likely to produce adverse consequences
of the nature described in the relevant exemptions.
The FOMC has reviewed the agenda of its monthly meetings
for the past three years and has determined that all such meetings
could have been closed pursuant to the exemption dealing with
financial speculation or other exemptions set forth in the Sunshine
Act. The FOMC has further determined that virtually all of its
substantive deliberations could have been preserved pursuant to the
Act's minutes requirements and that such minutes could similarly
have been protected against premature disclosure under the provisions of the Act.
The FOMC's deliberations are currently reported by means of
a document entitled "Record of Policy Actions" which is released
to the public approximately one month after the meeting to which
it relates. The Record of Policy Actions complies with the Act's
minutes requirements in that it contains a full and accurate report
of all matters of policy discussed and views presented, clearly sets
forth all policy actions taken by the FOMC and the reasons therefor,
and includes the votes by individual members on each policy action.
The timing of release of the Record of Policy Actions is fully
consistent with the Act's provisions assuring against premature
release of any item of discussion in an agency's minutes that contains
information of a sensitive financial nature. In fact, by releasing the
comprehensive Record of Policy Actions to the public approximately
a month after each meeting, the FOMC exceeds the publication
requirements that would be mandated by the letter of the Sunshine
Act.
Recognizing the congressional purpose underlying enactment of
the Sunshine Act, the FOMC has determined to continue its current
practice and timing of public disclosures in the conviction that its
operations thus conducted are consistent with the intent and spirit
of the Sunshine Act.
Votes for this action: Messrs. Burns, Volcker,
Balles, Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly, Partee, Wallich, and Winn. Votes
against this action: None.
FOMC Policy Actions
189
3. Amendment to
Rules Regarding Availability of Information
At this meeting, the Committee approved an amendment, effective
March 12, 1977, to Section 271.6(a) of its rules regarding availability of information to implement an amendment to the Freedom
of Information Act effected by the Government in the Sunshine
Act. After incorporating this amendment the Section read as follows:
§271.6 Information not Disclosed
Except as may be authorized by the Committee, information of
the Committee that is not available to the public through other
sources will not be published or made available for inspection,
examination, or copying by any person if such information
(a) is specifically exempted from disclosure by statute (other than section
552b of Title 5 United States Code), provided that such statute (A) requires
that the matters be withheld from the public in such a manner as to leave
no discretion on the issue, or (B) establishes particular criteria for withholding or refers to particular types of matters to be withheld; or is
specifically authorized under criteria established by an executive order to
be kept secret in the interest of national defense or foreign policy and
is in fact properly classified pursuant to such executive order.
Votes for this action: Messrs. Burns, Volcker,
Balles, Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly, Partee, Wallich, and Winn. Votes
against this action: None.
4. Revision of Guidelines for
Operations in Federal Agency Issues
At this meeting the Committee amended number 4 of the guidelines
for the conduct of System operations in Federal agency issues to
take account of the operations of the Federal Financing Bank. The
change, which was effective immediately, limits Federal Reserve
purchases of Federal agency securities to issues of those agencies
that are not eligible to borrow funds from the Federal Financing
Bank, which began operations in mid-1974. Securities of the Bank
itself are eligible for purchase by the System, although none is
outstanding at present. Securities of Government-sponsored agencies—such as the Federal home loan banks, the Federal National
190
FOMC Policy Actions
Mortgage Association, Federal land banks, Federal intermediate
credit banks, and the banks for cooperatives—will continue to be
eligible for System purchase under the new rules.
As amended, guideline number 4 read as follows:
Purchases will be limited to fully taxable issues, not eligible for
purchase by the Federal Financing Bank, for which there is an active
secondary market. Purchases will also be limited to issues outstanding in amounts of $300 million or over in cases where the obligations
have a maturity of five years or less at the time of issuance, and
to issues outstanding in amounts of $200 million or over in cases
where the securities have a maturity of more than five years at the
time of issuance.
Votes for this action: Messrs. Burns, Volcker,
Balles, Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly, Partee, Wallich, and Winn. Votes
against this action: None.
FOMC Policy Actions
191
MEETING HELD ON MARCH 15, 1977
1. Domestic Policy Directive
The information reviewed at this meeting suggested that growth
in real output of goods and services in the first quarter of 1977
had increased from the pace in the fourth quarter of 1976—now
indicated by revised estimates of the Commerce Department to have
been at an annual rate of 2.4 per cent, compared with 3.9 per
cent in the third quarter and 4.5 per cent in the second. The rise
in average prices—as measured by the fixed-weighted index for
gross domestic business product—appeared to have been faster than
the annual rate of 4.9 per cent estimated for the fourth quarter
of last year, in part because of the adverse effects of severe winter
weather on prices of foods.
Staff projections suggested that real GNP would grow at a
considerably better rate in the current quarter than had appeared
likely a month earlier. The rate of inventory investment—which
had fallen sharply in the fourth quarter of 1976, according to the
revised estimates—was now expected to increase, whereas a month
earlier it had been projected to decline further. Moreover, the gain
in business fixed investment was now anticipated to be larger. On
the other hand, the new projections suggested less growth in
residential construction and in government purchases of goods and
services.
The staff projections for subsequent quarters, like those of a
month earlier, incorporated assumptions that rebates of Federal
income taxes and one-time payments to recipients of social security
would be disbursed in the second quarter; that both personal income
taxes and corporate taxes would be reduced; and that Federal
spending for job-creating programs would be expanded. Reflecting
these assumptions as well as expectations of continuing recovery
from the effects of the severe weather, real GNP was projected
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FOMC Policy Actions
to grow at a rapid rate in the second quarter and at a more
moderate—but still rather substantial—pace in succeeding quarters.
It was expected that the fixed-weighted price index for gross
business product would rise less rapidly than in the first quarter.
During February economic activity rebounded following the
disruptions caused by the severe winter weather and shortages of
natural gas. The index of industrial production for the month as
a whole rose 1 per cent and recovered to about the December
level—reflecting widespread gains among consumer goods, business equipment, and industrial materials.
Retail sales also rebounded in February, recovering almost to
the advanced level reached in December. The number of new
automobiles sold was at an annual rate of about \03A million,
compared with 10V2 million in January and about 11 million in
December; during those 3 months sales were higher than for any
other 3-month period in the current business expansion.
Payroll employment in nonfarm establishments expanded considerably further in February, even though plant shutdowns and
energy-related layoffs were still numerous in the week ending
February 12—the reference week in the month for the labor market
surveys. Increases in employment were reported by three-fifths of
the industries in the establishment survey. Employment in manufacturing was unchanged, after having expanded appreciably over
the month ending in early January, but the average workweek
increased much more than it had declined in January. In the
household survey, the unemployment rate rose from 7.3 to 7.5
per cent, as the civilian labor force more than recovered its decrease
in January; however, the rate remained below the 7.8 per cent
of December.
Personal income increased little in January, following 3 months
of sizable gains. The slowing of growth was attributable to three
main causes: a weather-related loss of wages and salaries; a drop
in disbursements of corporate dividends from an unusually large
December volume; and an increase in deductions for social security
taxes levied on employees. For February, the labor market surveys
and other information suggested a strong gain in over-all personal
income.
Indicators of residential construction had been strong in the
closing months of 1976, but activity was curtailed in January by
FOMC Policy Actions
193
the severe weather, especially in the Northeast and North Central
regions of the country. In January private housing starts were more
than one-fifth below the advanced average for the fourth quarter,
and according to estimates of the Bureau of the Census, residential
construction outlays were nearly one-tenth below the December
level. At the same time, however, sales of new and existing houses
remained strong, mortgage commitments outstanding at savings and
loan associations at the end of January were close to the record
high level of a month earlier, and through the end of 1976 rental
markets continued to tighten in most areas.
Businesses were planning to spend 11.7 per cent more for plant
and equipment in 1977 than in 1976—according to the latest
Department of Commerce survey, conducted in late January and
early February. The Department's first survey for 1977, conducted
in December, had suggested a rise of 11.3 per cent. Current
indicators suggested improvement in business demands for fixed
capital. New orders for nondefense capital goods rose substantially
more in December than had been estimated earlier, and a further
modest increase was reported for January. Contract awards for
commercial and industrial buildings—measured in terms of floor
space—declined somewhat in January, but they were still slightly
above the monthly average for the fourth quarter of 1976.
The index of average hourly earnings for private nonfarm production workers was essentially unchanged in February, after
having risen sharply in January. Over the first 2 months of 1977,
the index advanced at an annual rate of about 53A per cent,
compared with a rise of about 7 per cent over the 12 months of
1976.
The wholesale price index for all commodities rose 0.9 per cent
in February, compared with an average increase of about 0.6 per
cent in the preceding 5 months. Average prices of farm products
and foods rose sharply in February, in part because of the effects
of the cold weather on supplies of fresh fruits and vegetables and
of drought on prospective supplies of grains and cotton. The price
index for industrial commodities continued upward at about the
average pace of recent months, reflecting mainly a sizable increase
in the index for fuels and power following decreases in the preceding 2 months. The advance was especially large for natural gas;
because of a 2-month lag in reporting natural gas prices, the
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FOMC Policy Actions
February index reflected increases that had been effected last
December.
The consumer price index rose 0.8 per cent in January, compared
with 0.4 per cent in December and also with 0.4 per cent on the
average during the second half of 1976. Retail prices of foods
rose substantially, even though the prices in the index were recorded
early in January and did not show in full the effects of the bad
weather. Among nonfood items, increases were reported for used
automobiles, fuel oil, medical care services, property taxes, and
water and sewage rates.
The average value of the U.S. dollar against leading foreign
currencies, on a trade-weighted basis, changed little over the period
between the February and March meetings of the Committee,
continuing the relative stability that dated from April 1976. In the
latest 4-week period it appreciated against the Canadian dollar,
the Italian lira, and the Swiss franc and depreciated against the
Japanese yen and the currencies associated in the European
"snake" arrangement.
The U.S. foreign deficit increased further in January to a record
rate. Exports declined a little from the rate in the fourth quarter
of 1976 because shipments of coal and perhaps of other commodities were slowed by the weather, and exports of wheat were reduced
by expectations of ample supplies; exports of other agricultural
commodities expanded. Imports were up substantially from the
fourth-quarter rate, reflecting increases for iron and steel products
and a number of finished industrial products. Imports of foods also
expanded, owing to price increases for coffee and cocoa.
Total credit at U.S. commercial banks rose more in February
than in any other month since the summer of 1974. Acquisitions
of U.S. Treasury securities were especially large, holdings of other
securities rose somewhat for the first time since November, and
total loans continued to expand.
Business demands for short-term credit strengthened further in
February, both at banks and in the commercial paper market, but
business financing in the capital market slowed. Over the January-February period the combined total of business loans at banks
(excluding bankers acceptances) and the outstanding volume of
commercial paper issued by nonfinancial corporations expanded at
an annual rate of about 16^2 per cent, compared with a rate of
FOMC Policy Actions
195
7 per cent in the fourth quarter of 1976 and a small decline over
the preceding three quarters. In the most recent period, business
demands for short-term credit may have been swelled temporarily
by the weather-induced disruptions to production and distribution
and by "bridge" financing associated with advance refundings of
some high-yielding issues of corporate bonds.
Growth in the narrowly defined money stock (M-l) slowed
sharply to an annual rate of a little less than 1 per cent in February
from the revised rate of about 5!/2 per cent in January. Nevertheless,
M-l had grown at an annual rate of about 5 per cent over the
latest 6 months and by about 53A per cent over the past year.
Expansion in M-2 and M-3 also slowed sharply in February—to
annual rates of about 6!/2 and 8% per cent, respectively, from rates
of about 914 and 1 1 !4 per cent in January. In addition to the
weakness of growth of M-l, flows into savings and small-denomination time deposits at both banks and nonbank thrift institutions
continued to moderate. Over the 6 months ending in February,
M-2 and M-3 grew at annual rates of about 11 and 13 per cent,
respectively.
The continuing slowdown in growth of savings and small-denomination time deposits at banks and other thrift institutions was
attributable in part to reductions in interest rates offered on these
deposits by some institutions and to the firming of market interest
rates after the turn of the year. In addition, deposit inflows may
have been adversely affected by the weather-related reductions in
wage and salary payments and by increases in fuel bills of households.
At its February meeting the Committee had decided that growth
in M-l and M-2 over the February-March period at annual rates
within ranges of 3 to 7 per cent and 6 ^ to lO1/^ per cent,
respectively, would be appropriate, and it had judged that such
growth rates were likely to be associated with a weekly-average
Federal funds rate in the area of 45/s to 4% per cent. The Committee
also had agreed that if growth rates of the aggregates over the
2-month period appeared to be deviating significantly from the
midpoints of the indicated ranges, the operational objective for the
weekly-average Federal funds rate should be modified in an orderly
fashion within a range of 4lA to 5 per cent.
Throughout the interval since the February meeting, the Manager
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FOMC Policy Actions
of the System Open Market Account had continued to aim for
a Federal funds rate in the area of 4% to 4% per cent. In the
early weeks of the interval, incoming data had suggested that
growth in both M-l and M-2 over the February-March period
would be close to the midpoints of the specified ranges. Estimates
of the 2-month growth rates subsequently were revised downward,
but they remained reasonably well within their specified ranges.
Short-term market interest rates in general changed little during
the inter-meeting period, in part because of the continued relative
stability in the Federal funds rate and in part because money market
participants inferred—on the basis of the behavior of the aggregates—that a near-term rise in the funds rate was unlikely. However, yields on most longer-term bonds edged higher, apparently
in response to signs that economic activity was rebounding from
the weather-induced slowdown more vigorously than had been
anticipated and also to greater apprehension about prospects for
the rate of inflation engendered in part by the price indexes released
during the period.
In February the U.S. Government borrowed $9.1 billion of new
money from the public, including $7.5 billion through auctions
of marketable notes and bonds. No additional market financing
occurred during the first half of March, but a 2-year note auction
involving $450 million of new money had been announced for
later in the month. In congressional testimony Treasury officials
reported a sizable downward revision in their estimate of near-term
cash needs based on evidence of a continuing substantial shortfall
of Federal spending from projected levels.
In the corporate bond market the volume of new securities offered
publicly in February was less than half that in each of the two
preceding months. Some potential issuers, particularly those with
higher bond ratings, had apparently been discouraged by the January rise in bond yields. In addition, underwriters reported that
some lesser-rated corporations were electing to place debt issues
privately rather than publicly—an option that was apparently facilitated by the continued availability of a large supply of investable
funds at life insurance companies.
Offerings of new long-term State and local government securities
rose to an estimated volume of about $3 billion in February—a
record for the month and about 15 per cent above the volume sold
FOMC Policy Actions
197
in February 1976. A significant part of this supply was attributable
to the issuance of bonds in advance of refundings of issues bearing
higher interest rates. To preserve the tax-exempt status of such
new bonds under current Treasury regulations, many of the issuers
place the proceeds in special Treasury obligations until the existing
State and local issues are called. Accordingly, these financings
accounted for a large proportion of the sales of nonmarketable
securities by the Treasury.
Yields in secondary mortgage markets increased a little during
February along with bond yields, but interest rates on new commitments for conventional home mortgages continued to edge
down. Takedowns of mortgages by savings and loan associations
slowed during January, probably due in part to the weather, but
the volume was still relatively large.
It appeared likely that over-all credit demands would remain
strong in the period immediately ahead. The forward calendars of
new issues suggested that offerings of corporate bonds would rise
substantially in March from the reduced level in February and that
offerings of State and local government bonds would continue to
be large. In addition, the Treasury was expected to raise a sizable
amount of new money during the period up to the mid-April date
for payment of taxes, although a significant share of the required
funds was expected to be raised through short-term instruments.
It appeared likely that business demands for bank credit would
remain moderately strong but that the over-all expansion in outstanding business loans might be held down for a time by repayments with proceeds from capital market financings.
At its January meeting the Committee had agreed that from the
fourth quarter of 1976 to the fourth quarter of 1977, average rates
of growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-l, 4l/i
to 614 per cent; M-2, 7 to 10 per cent; and M-3, 8V2 to 11 xh
per cent. The associated range for growth in the bank credit proxy
was 7 to 10 per cent. It was agreed that the longer-term ranges,
as well as the particular aggregates for which such ranges were
specified, would be subject to review and modification at subsequent
meetings. It also was understood that short-run factors might cause
growth rates from month to month to fall outside the ranges
contemplated for annual periods.
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FOMC Policy Actions
In the discussion of the economic situation at this meeting,
members of the Committee were in general agreement with the
staff projection that real GNP would expand at a rapid rate in the
second quarter of 1977 and at a more moderate, but still rather
substantial, rate in subsequent quarters. However, one member
expressed the opinion that the strength in the outlook derived from
factors other than the expected fiscal policy measures; in his view,
the stimulative effects of those measures would be largely offset
over the longer run by their tendency to raise interest rates and
to increase inflationary expectations. Another member reported that
in some parts of the West economic prospects were viewed with
pessimism as a result not only of declines in prices of some farm
products and increases in farm costs but also of the severe winter
and drought.
One or two members expressed the belief that the behavior of
real GNP during the second half might differ somewhat from that
portrayed by the staff projections: specifically, expansion might
be somewhat more rapid than that projected for the third quarter
but then might taper off. Another member suggested that throughout
the second half of the year the pace of economic activity might
be stronger than projected by the staff, reflecting a larger rise in
business investment in both fixed capital and inventories, stimulated
in part by growing confidence in the economic outlook. Moreover,
he thought that some of the shortfall in Federal expenditures that
had developed in the first 2 months of 1977 might well be made
up in the months ahead.
Several members expressed concern about the recent and
prospective behavior of prices. It was noted that over the past few
months price increases had been relatively large for a number of
commodities, and that the extent to which increases seemed to
be spreading among industrial materials might well be intensifying
upward pressures on prices of industrial products in general. Moreover, businessmen appeared to have become more concerned about
inflation within the past month or so.
One member noted that large increases over recent months in
prices for some commodities—such as coffee, cocoa, and fuels—
reflected special problems having little to do with more general
influences on the behavior of prices. With respect to the influence
of aggregate demand, he noted that the substantial margin of unused
FOMC Policy Actions
199
capacity and the high rate of unemployment at this time should
tend to limit the rate of increase in wage rates and in the broad
measures of prices.
It was observed during the discussion that, given the longer-run
ranges for growth in the monetary aggregates adopted at the January
meeting, the projected rates of increase in nominal GNP implied
a rise in the income velocity of money that was large for this
stage of a business expansion. In that connection it was noted that
significant upward pressures on interest rates might develop later
in the year, particularly if prices should rise more rapidly than
projected or if inflationary expectations should strengthen. On the
other hand, one member remarked that, while interest rates played
a role, the predominant determinant of velocity changes was the
state of confidence. On the basis of his judgment that confidence
was improving, he thought it was likely that the rate of increase
in velocity would be quite high. Another member observed that
in almost every business expansion since World War II, the rate
of increase in velocity had reached a primary peak, then dropped
back before reaccelerating to a secondary peak not quite so high
as the first one.
As to policy for the period immediately ahead, members of the
Committee did not differ greatly in their preferences for ranges
of growth for the monetary aggregates over the March-April period.
It was suggested that the forces that had contributed to particularly
slow growth in the monetary aggregates in February might be
reversed and might contribute to rapid growth in March, and that
such a development should not necessarily cause concern. It was
also observed that the upward momentum of economic activity in
the weeks ahead would tend to expand demands for transactions
balances and thus to exert some upward pressure on growth rates
for the monetary aggregates. For M-1, most members favored a
range of 4J/2 to 8V2 per cent; some sentiment was expressed for
ranges of 4 to 8 per cent and 4 to 9 per cent. For M-2, most
members favored a range of 7 to 11 per cent, but some preferences
were expressed for 6V2 to IOV2 per cent and 6 to 10 per cent.
The members in general favored directing initial operations
during the coming inter-meeting interval toward the objective of
maintaining the Federal funds rate in the area of 45/s to 4% per
cent. A few members suggested that the Federal funds rate should
200
FOMC Policy Actions
be permitted to drift up over coming weeks to 43A or 4% per cent
even if the aggregates appeared to be growing at rates near the
midpoints of their specified ranges, but the majority did not favor
this course. The members also differed somewhat with respect to
the degree of leeway that should be provided for System operations
during the inter-meeting period in the event that growth in the
aggregates appeared to be deviating significantly from the midpoints
of the specified ranges. The largest number of members preferred
to specify an inter-meeting range for the Federal funds rate of 4lA
to 5lA per cent; a few favored retaining the range of 4lA to 5
per cent that had been specified at the preceding two meetings;
and some sentiment was expressed for a range of 4!/2 to 5lA per
cent.
At the conclusion of the discussion the Committee decided that
growth in M-l and M-2 over the March-April period at annual
rates within ranges of 4!/2 to 8V2 per cent and 7 to 11 per cent,
respectively, would be appropriate. It was understood that in
assessing the behavior of the aggregates, the Manager should
continue to give approximately equal weight to the behavior of
M-l and M-2.
In the judgment of the Committee, such growth rates of the
aggregates were likely to be associated with a weekly-average
Federal funds rate in the area of 4% to 4% per cent. The Committee
agreed that if growth rates of the aggregates over the 2-month period
appeared to be deviating significantly from the midpoints of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate should be modified in an orderly fashion within
a range of AlA to 5lA per cent. As customary, it was understood
that the Chairman might call upon the Committee to consider the
need for supplementary instructions before the next scheduled
meeting if significant inconsistencies appeared to be developing
among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that growth
in real output of goods and services has increased in the current
quarter from the reduced pace in the fourth quarter of 1976. In
February industrial output and retail sales expanded substantially
after being held down for a time by the effects of unusually severe
FOMC Policy Actions
201
weather. Employment rose considerably further; the unemployment
rate increased somewhat to 7.5 per cent—as the labor force more
than recovered the decline of January—but it remained below the
7.8 per cent of December. The wholesale price index for all
commodities rose substantially in February, reflecting large increases
for farm products and foods and for fuels and power. The index
of average wage rates rose more moderately over the first 2 months
of 1977 than it had on the average during 1976.
The average value of the dollar against leading foreign currencies
has changed little over the past month. In January the U.S. foreign
trade deficit increased further; exports were down a little from the
fourth-quarter rate and imports were substantially higher.
Growth in M-l slowed sharply in February from the moderate
pace in January. At banks and thrift institutions, inflows of time
and savings deposits other than large-denomination CD's continued
to slacken. Business demands for short-term credit appear to have
strengthened further in early 1977. Since mid-February short-term
market interest rates have changed little on balance, but most
longer-term rates have edged higher.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster bank reserve and other
financial conditions that will encourage continued economic expansion, while resisting inflationary pressures and contributing to a
sustainable pattern of international transactions.
At its meeting on January 18, 1977, the Committee agreed that
growth of M-l, M-2, and M-3 within ranges of 4V£ to 6Vi per
cent, 7 to 10 per cent, and 8V£ to 11 Vi per cent, respectively, from
the fourth quarter of 1976 to the fourth quarter of 1977 appears
to be consistent with these objectives. These ranges are subject to
reconsideration at any time as conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-l and M-2 on a path believed to be reasonably consistent with
the longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the March-April period to be within the ranges of AV2 to 8V2
per cent for M-l and 7 to 11 per cent for M-2. In the judgment
of the Committee such growth rates are likely to be associated with
a weekly-average Federal funds rate of about 4% to 4% per cent.
If, giving approximately equal weight to M-l and M-2, it appears
that growth rates over the 2-month period will deviate significantly
from the midpoints of the indicated ranges, the operational objective
for the Federal funds rate shall be modified in an orderly fashion
within a range of 4lA to 5lA per cent.
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FOMC Policy Actions
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who
will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against
this action: None.
2. Authorization for
Domestic Open Market Operations
At this meeting the Committee amended, effective immediately,
paragraph l(b) of the authorization for domestic open market
operations, relating to outright purchases and sales of bankers
acceptances. The words "when appropriate" were added at the
beginning of the paragraph and the dollar limit on holdings of
bankers acceptances specified at the end of the paragraph was
reduced from $1 billion to $100 million.
As amended, paragraph l(b) read as follows:
(b) When appropriate, to buy or sell in the open market, from
or to acceptance dealers and foreign accounts maintained at the
Federal Reserve Bank of New York, on a cash, regular, or deferred
delivery basis, for the account of the Federal Reserve Bank of New
York at market discount rates, prime bankers acceptances with
maturities of up to nine months at the time of acceptance that (1)
arise out of the current shipment of goods between countries or
within the United States, or (2) arise out of the storage within the
United States of goods under contract of sale or expected to move
into the channels of trade within a reasonable time and that are
secured throughout their life by a warehouse receipt or similar
document conveying title to the underlying goods; provided that
the aggregate amount of bankers acceptances held at any one time
shall not exceed $100 million;
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against
this action: None.
FOMC Policy Actions
203
This action reflected a decision by the Committee that the System
should permit its existing holdings of bankers acceptances to mature
and that it should no longer purchase these instruments outright
under ordinary circumstances. It was noted that present System
holdings were in excess of the newly established limit of $100
million, but it was anticipated that maturities within the next 2
months would reduce holdings below that level. The Committee
also agreed that the Federal Reserve should remain an active
participant in the market for bankers acceptances by continuing
to make with dealers repurchase agreements that are secured by
bankers acceptances and by continuing to serve as agent in buying
and selling acceptances for the accounts of foreign central banks.
In taking this action, the Committee noted that the market for
bankers acceptances was well developed and efficient and no longer
in need of support through Federal Reserve participation. Also,
outright purchases and sales of acceptances had not been of
sufficient size to contribute materially to the needed volume of open
market operations in recent years. However, repurchase agreements
in acceptances had been a useful tool in meeting short-term needs
for bank reserves.
3. Review of Continuing Authorizations
This being the first meeting of the Federal Open Market Committee
following the election of new members from the Federal Reserve
Banks to serve for the year beginning March 1, 1977, the Committee followed its customary practice of reviewing all of its continuing
authorizations and directives. The Committee reaffirmed the paragraphs of the authorization for domestic open market operations
not affected by the preceding action, the authorization for foreign
currency operations, and the foreign currency directive, in the forms
in which they were presently outstanding. The Committee also
reaffirmed the procedural instructions with respect to proposed or
ongoing operations under the foreign currency documents and the
special authorization relating to System obligations in Swiss francs,
in the forms adopted effective December 28, 1976.
Votes for these actions: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against
these actions: None.
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FOMC Policy Actions
In reviewing the authorization for domestic open market operations, the Committee took special note of paragraph 3, which
authorizes the Reserve Banks to engage in the lending of U.S.
Government securities held in the System Open Market Account
under such instructions as the Committee might specify from time
to time. That paragraph had been added to the authorization on
October 7, 1969, on the basis of a judgment by the Committee
that in the existing circumstances such lending of securities was
reasonably necessary to the effective conduct of open market
operations and to the effectuation of open market policies, and
on the understanding that the authorization would be reviewed
periodically. At this meeting the Committee concurred in the
judgment of the Manager that the lending activity in question
remained reasonably necessary and that, accordingly, the authorization should remain in effect subject to periodic review.
FOMC Policy Actions
205
MEETING HELD ON APRIL 19, 1977
Domestic Policy Directive
The information reviewed at this meeting suggested that growth
in real output of goods and services in the first quarter of 1977
had increased from the pace in the fourth quarter of 1976—now
indicated by revised estimates of the Commerce Department to have
been at an annual rate of 2.6 per cent, compared with 3.9 per
cent in the third quarter and 4.5 per cent in the second. The rise
in average prices—as measured by the fixed-weighted index for
gross domestic business product—appeared to have been appreciably faster than the annual rate of 4.9 per cent estimated for the
fourth quarter of last year, in part because of the adverse effects
of severe winter weather on prices of foods.
According to staff estimates, growth in real GNP had been at
a slightly higher rate in the first quarter than had been projected
a month earlier. It now appeared that the expansion in consumer
purchases of goods and services was substantially stronger than
had been anticipated; that the gain in business outlays for equipment
was larger; and that the rebound in business inventory investment
from the sharply reduced rate in the fourth quarter of 1976 was
greater. On the other hand, growth in construction outlays slowed
somewhat more than had been expected, and the deterioration in
net exports was more pronounced.
The staff projections for subsequent quarters incorporated revised
assumptions for fiscal policy, as a result of the President's announcement on April 14 of changes in his package of measures
designed to stimulate growth in economic activity. The revised
assumptions excluded rebates of Federal income taxes and related
payments and any increase in the business investment tax credit.
It was still assumed that personal income taxes would be reduced
and that Federal spending for job-creating programs and for public
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FOMC Policy Actions
works would be expanded. No assumptions were made with respect
to the administration's energy program, which was to be the subject
of an address by the President to the Congress on April 20.
Growth in real GNP over the next few quarters was still projected
to be substantial, reflecting strength in consumer demands and
expansion of business investment in both fixed capital and inventories. The projections continued to suggest that the rise in the
fixed-weighted price index for gross business product would be
less rapid in the quarters immediately ahead than in the first quarter,
when it had accelerated because of the adverse effects of severe
weather. Upward price pressures over the next several quarters were
nonetheless expected to be somewhat greater than had been anticipated earlier, partly because of further deterioration in the outlook
for prices of some foods and partly because of the prospect of
another increase in the minimum wage soon after midyear.
In March economic activity continued to gain in strength. Industrial production—which had risen 1 per cent in February, recovering
to the December level—expanded about 1 xh per cent further in
March. About one-third of the gain was attributable to a substantial
rise in production of motor vehicles, but increases in output were
widespread among other types of consumer durable goods and
business equipment and among construction supplies and materials.
For the first quarter as a whole, industrial production expanded
almost twice as much as in the preceding quarter, despite the
adverse effects of the weather in January and early February.
Rates of capacity utilization rose in March to about 82 per cent
in manufacturing as a whole and to about 81 per cent in the
materials-producing industries. However, these utilization rates
were still 6 and 10 percentage points, respectively, below the peaks
in the previous business expansion, when capacity constraints in
a number of materials-producing industries limited growth in output.
Private housing starts, following their weather-related drop in
January, rebounded in February and rose sharply further in March
to an annual rate of about 2.1 million units—the highest rate in
nearly 4 years. For the first quarter as a whole, starts about equaled
the total for the fourth quarter of 1976 and remained more than
one-tenth above that for the third quarter.
Developments in the labor market in recent months reflected
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207
the strengthening in economic activity. Payroll employment in
nonfarm establishments rose sharply in March, after having increased considerably in each of the preceding 4 months. Employment gains in March were widespread by industry and were
particularly large in the manufacturing, construction, and serviceproducing industries. The labor force also increased sharply further
in March; nevertheless, the unemployment rate declined from 7.5
to 7.3 per cent, returning to the January level.
Personal income, which had changed little in January, rose
substantially in February. The rise was concentrated in wage and
salary disbursements and for the most part reflected further gains
in employment and recovery in the average length of the workweek
from the adverse effects of the weather in January. The gain in
employment in March suggested that wage and salary payments
continued to grow at a rapid pace.
Expansion in retail sales had been quite strong recently. Sales
for February had been revised upward, and in March they rose
substantially further, reflecting widespread increases among types
of retail outlets.
Sales of new domestic and foreign automobiles surged upward
in March to an annual rate of about 12V4 million units, compared
with rates of about 10% million in February and 10 million in
the fourth quarter of 1976. The rate in March was the highest
since the spring of 1973, and it suggested improvement in consumer
confidence and a strong underlying demand for automobiles stemming in part from postponed replacement needs. The gains were
impressive for foreign as well as for domestic models; sales of
foreign models reached a new record annual rate of 2 million units.
Business capital outlays appeared to have strengthened in the
first 2 months of 1977, although much of the improvement reflected
recovery in shipments of trucks, automobiles, and farm equipment
from the effects of strikes in the fourth quarter of 1976. The value
of private nonresidential construction put in place rebounded in
February, but it remained below the peak attained last September.
New orders for nondefense capital goods—which, according to
revised data, had risen somewhat more in January than had been
reported earlier—declined in February. However, the average for
the 2 months was significantly higher than the monthly average
for the fourth quarter of 1976. Unfilled orders for such goods edged
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FOMC Policy Actions
up over the January-February period. Contract awards for commercial and industrial buildings—measured in terms of floor
space—declined in February, and the average for the first 2 months
of 1977 was unchanged from that for the fourth quarter of 1976.
The Commerce Department had reported in mid-March that businesses were planning to spend 11.7 per cent more for plant and
equipment in 1977 than in 1976.
The index of average hourly earnings for private nonfarm production workers rose at an annual rate of about 5 per cent in March.
Indexes for January and February had been revised upward appreciably, however, with the result that the rise over the 3 months
was at an annual rate of IV2 per cent—somewhat faster than the
pace during 1976. Much of the acceleration in the first quarter
was attributable to an increase in the minimum wage at the
beginning of 1977, which had affected rates of pay in the service
and trade industries in particular.
The wholesale price index—which had risen 0.9 per cent in
February, after having increased 0.6 per cent on the average in
the preceding 5 months—rose 1.1 per cent in March, the largest
monthly increase since late 1975. Average prices of farm products
and foods rose 2.1 per cent in March, reflecting especially sharp
increases for coffee, cocoa, tea, soybeans, fresh fruits and vegetables, and sugar. Average prices of industrial commodities rose 0.8
per cent—somewhat more than in the immediately preceding
months—reflecting large increases for metals and metal products,
transportation equipment, textiles and apparel, and fuels and power.
The consumer price index went up 1.0 per cent in February,
compared with 0.8 per cent in January and with 0.4 per cent on
the average during the second half of 1976. Retail prices of foods
rose sharply in February, led by increases in fresh fruits and
vegetables and coffee. Among nonfood items, substantial increases
were reported for fuel oil, gasoline, and used cars.
The average value of the dollar against leading foreign currencies
had declined about Vi per cent since mid-March, returning to about
its level at the beginning of the year. The depreciation of the dollar
in the recent period was accounted for mainly by an appreciation
of the Japanese yen, which rose 4 per cent in response to intensified
demands for that currency. Demands also intensified for the U.K.
pound, but exchange market intervention by the Bank of England
FOMC Policy Actions
209
kept the pound from appreciating. The average value of the currencies associated in the European "snake" arrangement changed little
against the dollar.
The U.S. foreign trade deficit remained large in February, and
the average for the first 2 months of the year was sharply higher
than that for the fourth quarter of 1976. In the January-February
period, as compared with the fourth quarter, the value of imports
of foods rose sharply—as more coffee entered the country at higher
prices—and imports of a variety of other consumer goods increased.
The over-all value of exports declined slightly; exports of agricultural commodities were sustained—as their average unit values
advanced while the physical quantity declined—but exports of other
goods declined somewhat. Since the middle of 1976 exports of
nonagricultural commodities had shown little net growth, reflecting
sluggishness in the economies of other major industrial countries.
At U.S. banks, growth in total credit was somewhat less rapid
in March than in February. Total loans expanded at an accelerated
pace, but holdings of Treasury securities increased much less than
in February and holdings of other securities declined. Over the
first quarter, expansion in total bank credit was greater than in
any other quarter in 2Vi years.
Business credit demands remained generally strong. Business
loans at banks rose during March at about the average rate for
the preceding 5 months. At the same time the outstanding volume
of commercial paper issued by nonfinancial corporations declined,
as such corporations relied to a greater extent than in other recent
months on internal sources of funds and on the proceeds of the
sizable amount of securities sold in the capital market during the
month.
The narrowly defined money stock (M-l), which had increased
little in February, rose at an annual rate of about 6 per cent in
March. From the fourth quarter of 1976 to the first quarter of 1977,
M-l grew at a rate of about 43A per cent. Weekly data suggested
that M-l had expanded substantially in early April.
Reflecting the pick-up in growth of M-l, the annual rate of
growth in M-2 increased to about 8!4 per cent in March from about
634 per cent in February. Inflows to banks of time and savings
deposits other than large-denomination CD's continued to slacken
in March, mainly because of a contraction in savings deposits held
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FOMC Policy Actions
by State and local governments. Inflows of deposits to nonbank
thrift institutions also continued to slow, but the rate of growth
in M-3 edged up. From the fourth quarter of 1976 to the first
quarter of 1977, M-2 and M-3 grew at rates of about 9l/i and
11 per cent, respectively.
At its March meeting the Committee had decided that growth
in M-1 and M-2 over the March-April period at annual rates within
ranges of 4Vi to SVi per cent and 7 to 11 per cent, respectively,
would be appropriate. It had judged that these growth rates were
likely to be associated with a weekly-average Federal funds rate
in the area of 4% to 4% per cent. The Committee had agreed
that if growth rates in the aggregates over the 2-month period
appeared to be deviating significantly from the midpoints of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate should be modified in an orderly fashion within
a range of AVA to 5VA per cent.
Over most of the interval between the March and April meetings,
incoming data suggested that the 2-month growth rates for M-l
and M-2 would be well within their respective ranges. Consequently, the Manager of the System Open Market Account continued to aim for a Federal funds rate in the area of 4% to 43A per
cent. Near the end of the period, however, it appeared that growth
in M-l would exceed the upper limit of its 2-month range and
that growth in M-2 would be in the upper part of its range. In
those circumstances, the Manager aimed for a Federal funds rate
of around 43A per cent.
Market interest rates changed little over most of the inter-meeting
period, but they generally moved lower late in the period when
the President's intention to drop the tax rebates and related payments from his fiscal program became known. Yields on mediumterm Treasury notes declined more than other rates, because market
participants had anticipated that most of the Treasury borrowing
in the second quarter to finance the rebates and related payments
would follow the pattern of recent borrowings and would be
concentrated in the medium-term area.
The Treasury raised $3.7 billion of new money in securities
markets during March, largely through sales of 2- and 4-year notes.
For the first quarter as a whole, the Treasury sold $14 billion of
marketable securities—considerably less than the $20 billion to $23
FOMC Policy Actions
211
billion it had projected in January. The difference was attributable
to several factors: The Federal deficit in the first quarter was not
so large as had been anticipated, chiefly because of a shortfall in
outlays; the Treasury sold substantially more nonmarketable securities than had been expected—primarily to State and local
governments undertaking advance refundings of their own securities; and the Treasury had drawn down its cash balance to a level
at the end of March that was $3 billion below the amount projected
in late January. In early April the Treasury sold $4.5 billion of
short-dated cash-management bills in order to bridge a low point
in its cash balance prior to the mid-April date for tax payments.
In the corporate bond market the volume of new securities offered
publicly expanded more than seasonally during March, reflecting
large offerings by utilities—for the most part telephone companies.
For the first quarter of 1977 as a whole, however, offerings were
about the same as those for the final quarter of 1976 and were
below those for the first quarter of that year.
In the market for State and local government bonds, offerings
of new issues reached a record of $4 billion in March, and the
total for the first quarter substantially exceeded offerings in the
final quarter of 1976. In March, however, investment interest from
property-casualty insurance companies and from investment companies remained substantial, and yields on tax-exempt securities
moved lower during the month and in early April, even before
the withdrawal of the proposed rebate of Federal taxes. About
one-third of the new issues in March were associated with advance
refundings.
Interest rates on new commitments for primary conventional
home mortgages at savings and loan associations rose somewhat
during March and early April from recent lows in late February
and early March, as demands for mortgages remained strong. In
February outstanding commitments of savings and loan associations
to acquire mortgage loans had returned to record levels after having
edged down a little in January. Over the past two quarters the
ratio of commitments to total cash inflows at these institutions had
risen noticeably.
For the period immediately ahead, the principal new factor in
the outlook for credit demands was the prospective shift in the
position of the U.S. Treasury from a sizable net borrower to a
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FOMC Policy Actions
temporary repayer of debt. At the same time, however, business
demands for credit were still expected to expand as a result of
continuing improvement in economic activity. Projections of consumer expenditures implied a continued high rate of growth in
consumer credit outstanding, and expansion of mortgage debt was
anticipated to remain large. State and local government borrowing
was also expected to remain sizable.
In the discussion of the economy at this meeting, it was suggested
that for some time the situation in general had been strengthening,
and that—in the light of the housing starts figures for March, which
had been released just the day before—residential construction
activity might prove to be even stronger than had been projected
by the staff. It was emphasized that developments were taking place
in the sphere of governmental economic policy that could have
important consequences for the course of economic activity and
prices—including the recent changes in the administration's fiscal
policy proposals, the President's announcement on April 15 of a
series of measures aimed at controlling and reducing inflation, and
the energy program to be presented to the Congress on the day
after this meeting.
With respect to the consequences of the changes in fiscal policy,
it was suggested that elimination of the proposal to raise the
investment tax credit from 10 to 12 per cent was not of much
significance, because an increase of 2 percentage points would have
at best only a small effect on business fixed investment—especially
in view of the rate at which prices of plant and equipment were
rising. Insofar as an increase in the tax credit would add to
investment outlays, the effect of its elimination was likely to be
offset by another consequence of the changes in fiscal policy
proposals: the favorable effect on interest rates to be expected from
the reduction in the prospective Federal deficit. It was observed
that business investment also would be encouraged by one of the
measures proposed to reduce the rate of inflation—specifically, the
development of procedures to speed up the issuance of construction
permits by government agencies.
Withdrawal of the proposal for tax rebates was thought to be
of considerable significance. Some members expected that this
change, especially in conjunction with the measures aimed at
reducing inflation, would contribute to improvement in business
FOMC Policy Actions
213
and consumer confidence and in that way would add strength to
the economic outlook.
The details of the energy program had not yet been announced,
but its probable major features had already been described in the
press. It was observed that the program was extensive and complex;
that its effects were difficult to appraise; and that uncertainties
would be heightened during the long period that was likely to be
consumed in legislating the actual measures. Although the need
for such a program appeared clear, the suggestion was made that
it could have some negative consequences for economic activity
in the short run—chiefly, perhaps, if uncertainties led to a dampening of growth in business capital investment—and that over time
it would tend to exert some upward pressure on prices.
Attention was drawn to other potentially troublesome aspects
of the developing economic situation. Thus, one member commented that growth in nominal GNP over the quarters ahead at
the rate indicated in the staff projections—which did not take the
energy program into account—might well be accompanied by
considerable strain in financial markets. Another member suggested
that the economic expansion had become unbalanced in the sense
that growth in business fixed investment had lagged that in other
major sectors of demand. The question was raised whether in this
expansion—in contrast with earlier ones—an acceleration in business capital outlays might not be delayed until capacity utilization
reached a relatively high rate and shortages were developing. With
respect to the degree of balance during this upswing, it was also
pointed out that net exports had deteriorated sharply since 1975
and had exerted a drag on the expansion in over-all activity in
this country.
At this meeting the Committee reviewed its 12-month ranges
for growth in the monetary aggregates. At its January meeting the
Committee had specified the following ranges for growth over the
period from the fourth quarter of 1976 to the fourth quarter of
1977: M-l, 4V2 to 6Vz per cent; M-2, 7 to 10 per cent; and M-3,
SV2 to 1 \Vi per cent. The associated range for growth in the bank
credit proxy was 7 to 10 per cent. The ranges being considered
at this meeting were for the period from the first quarter of 1977
to the first quarter of 1978.
In the discussion of the ranges for growth in the aggregates over
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FOMC Policy Actions
the year ahead, members of the Committee were almost unanimous
in believing that a reduction of some kind would be appropriate
at this time as another step toward the ultimate objective of
achieving longer-run rates of monetary expansion consistent with
general price stability. However, opinions differed as to the specific
reduction to be made.
In advocating a further reduction in the longer-run ranges for
monetary growth, a few members noted that the economic situation
had strengthened over recent months and that less stimulus from
monetary policy was required now, even though the administration's proposals for fiscal stimulus had been scaled down. At the
same time, it was observed, inflationary forces appeared to have
increased. One member expressed the view that advances in prices
attributable to exogenous forces—such as an increase in the price
of oil—should not be fully accommodated in establishing appropriate rates of monetary growth; but neither should they be wholly
unaccommodated because that could create a high degree of monetary stringency.
In the current circumstances, it was observed, a further step in
the gradual process of reducing the longer-run ranges would make
a useful contribution to rebuilding confidence in economic prospects. It was suggested, moreover, that continuation of that process
would be consistent with the President's announced objective of
achieving a 2-percentage-point reduction in the rate of inflation
by the end of 1979.
In support of some reduction in the longer-run ranges, it was
noted that from the first quarter of 1976 to the first quarter of 1977
growth in M-l—at 6.2 per cent—was more rapid than in any
four-quarter period since April 1975 when the Committee had
begun to adopt 1-year ranges, and that rates of growth for Af-2
and M-3 had been relatively high as well. Over the most recent
two quarters, growth in M-l—at an annual rate of about 5% per
cent—had been well within its range, but growth in both M-2 and
M-3 had been above the upper limits of their ranges.
Partly because of the uncertainties associated with the energy
program, there was little sentiment for making more than small
reductions in the longer-run ranges at this time. Most members
were inclined to favor retaining the existing 4Vi to 6lA per cent
range for M-l while reducing the upper limit—in some cases, both
FOMC Policy Actions
215
limits—of the ranges for M-2 and M-3 by V2 of a percentage point.
In this connection, it was noted that growth in the interest-bearing
deposits included in M-2 and M-3 had slackened in recent months.
However, there also was some sentiment for reducing the lower
limit of the range for M-l by Vi of a percentage point—either
alone or in combination with some reduction in the ranges for M-2
and M-3.
At the conclusion of its discussion the Committee arrived at a
consensus calling for retention of the existing range for M-l and
reductions of V2 of a percentage point in the upper limits of the
ranges for M-2 and M-3. The ranges thus were 4Vi to 6V2 per
cent for M-l, 7 to 9Vi per cent for M-2, and 8V2 to 11 per cent
for M-3. The associated range for the rate of growth in the bank
credit proxy was 7 to 10 per cent. It was agreed that the longer-run
ranges, as well as the particular aggregates for which such ranges
were specified, would be subject to review and modification at
subsequent meetings. It was also understood that short-run factors
might cause growth rates from month to month to fall outside the
ranges contemplated for the year ahead.
The Committee adopted the following ranges for rates of growth
in monetary aggregates for the period from the first quarter of 1977
to the first quarter of 1978: M-l, AV2 to 6^2 per cent; M-2, 7 to
9l/i per cent; and M-3, 8!/2 to 11 per cent.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Roos, and Wallich. Vote against this action:
Mr. Partee.
Mr. Partee—although he agreed in principle with the longer-term
objective of reducing the ranges—dissented from this action because he opposed any adjustment at this particular juncture. He
noted that the administration had just withdrawn its proposal for
the tax rebate; that the forthcoming energy program, by raising
the price structure, might tend to dampen economic expansion;
and that very large increases in the velocity of the various monetary
aggregates would have to occur over the next year if nominal GNP
were to grow at the rate projected by the staff and good progress
were thus to be made in reducing unemployment.
As to policy for the period immediately ahead, the Committee
216
FOMC Policy Actions
members were willing to tolerate growth in the monetary aggregates
over the April-May period within ranges that were higher than
those adopted for the year ahead because of the expectation that
the forces contributing to rapid expansion in M-l in early April
would prove to be transitory and that the bulge in growth for the
month as a whole would for the most part be offset by slower
growth later on.
Members of the Committee did not differ greatly in their preferences for ranges of growth for the monetary aggregates over the
April-May period. For M-l, most of them favored a range of 6
to 10 per cent, but a number expressed a preference for a slightly
lower range—specifically, 5Vz to 9xh per cent. For M-2, most
members favored a range of 8 to 12 per cent; a few preferred
IVi to WVi per cent.
Almost all of the members favored directing operations initially
toward the objective of maintaining the Federal funds rate at its
current level of about 4% per cent, but one or two members
suggested that initial operations be directed toward achieving a
slightly higher rate. With respect to the degree of leeway for
operations during the inter-meeting period in the event that the
aggregates appeared to be deviating significantly from the midpoints
of the specified ranges, almost all of the members preferred to
specify a range for the funds rate of AV2 to 5lA per cent. However,
one expressed a preference for a range of 4V4 to 5XA per cent and
another for Axh to 5l/z per cent. The member who proposed the
latter range also advocated directing operations toward moving the
funds rate slowly toward 5 per cent even if the aggregates appeared
to be growing at rates near the midpoints of their specified ranges,
primarily because he thought that the recent acceleration in growth
of M l might reflect fundamental forces to a greater extent than
was generally assumed.
At the conclusion of the discussion the Committee decided that
growth in M-1 and M-2 over the April-May period at annual rates
within ranges of 6 to 10 per cent and 8 to 12 per cent, respectively,
would be appropriate. It was understood that in assessing the
behavior of the aggregates, the Manager should continue to give
approximately equal weight to the behavior of M-l and M-2.
In the judgment of the Committee, such growth rates of the
aggregates were likely to be associated with a weekly-average
FOMC Policy Actions
217
Federal funds rate of about 4% per cent. The Committee agreed
that if growth rates of the aggregates over the 2-month period
appeared to be deviating significantly from the midpoints of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate should be modified in an orderly fashion within
a range of AV2 to 5XA per cent. As customary, it was understood
that the Chairman might call upon the Committee to consider the
need for supplementary instructions before the next scheduled
meeting if significant inconsistencies appeared to be developing
among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that growth
in real output of goods and services increased in the first quarter
from the reduced pace in the fourth quarter of 1976. In March
industrial output, retail sales, and employment expanded substantially further. Although the labor force also increased sharply, the
unemployment rate declined from 7.5 to 7.3 per cent. The wholesale
price index for all commodities again rose substantially; increases
were particularly sharp among farm products and foods, and there
were sizable advances for many industrial commodities. The index
of average wage rates rose in the first quarter of 1977 at a somewhat
faster pace than it had on the average during 1976, reflecting largely
an increase in the minimum wage.
The average value of the dollar against leading foreign currencies
has declined somewhat over the past month, returning to about the
level at the beginning of the year. Demand for the Japanese yen
and the U.K. pound intensified. The U.S. foreign trade deficit
continued large in February.
M-1 grew at a moderate pace in March but increased substantially
in early April. At banks and thrift institutions, inflows of time and
savings deposits other than large-denomination CD's continued to
slacken in March. Market interest rates declined considerably in
mid-April, after having changed little since mid-March.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster bank reserve and other
financial conditions that will encourage continued economic expansion, while resisting inflationary pressures and contributing to a
sustainable pattern of international transactions.
Growth in M-1, M-2, and M-3 within ranges of 4xh to 6V2 per
cent, 7 to 9V£ per cent, and 8V2 to 1 1 per cent, respectively, from
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FOMC Policy Actions
the first quarter of 1977 to the first quarter of 1978 appears to
be consistent with these objectives. These ranges are subject to
reconsideration at any time as conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-l and M-2 on a path believed to be reasonably consistent with
the longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the April-May period to be within the ranges of 6 to 10 per
cent for M-l and 8 to 12 per cent for M-2. In the judgment of
the Committee such growth rates are likely to be associated with
a weekly-average Federal funds rate of about 43A per cent. If, giving
approximately equal weight to M-l and M-2, it appears that growth
rates over the 2-month period will deviate significantly from the
midpoints of the indicated ranges, the operational objective for the
Federal funds rate shall be modified in an orderly fashion within
a range of 4Vz to 5lA per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who
will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against
this action: None.
Subsequent to the meeting, on May 5, nearly final estimates
indicated that in April M-l had grown at a record annual rate of
19.4 per cent and that M-2 had grown at the substantial rate of
13.0 per cent. For the April-May period staff projections suggested
that the annual rate of growth in M-l would be well above the
upper limit of the 6 to 10 per cent range specified by the Committee
in the next-to-last paragraph of the domestic policy directive issued
at the April meeting. Growth in M-2 for the 2-month period was
projected to be close to the midpoint of the Committee's range
of 8 to 12 per cent for that aggregate.
The Federal funds rate had averaged 5.15 per cent in the
statement week ended May 4, about 40 basis points above the
average for the preceding 3 weeks. The Manager of the System
Open Market Account was currently aiming at a funds rate of 5lA
FOMC Policy Actions
219
per cent, the upper limit of the inter-meeting range specified in
the directive.
Against that background, Chairman Burns recommended on May
5 that the upper limit of the range for the Federal funds rate be
increased to 5l/i per cent, on the understanding that the Manager
would use the additional leeway only if new data becoming available before the meeting scheduled for May 17 suggested that the
aggregates were strengthening significantly further on balance.
On May 6, 1977, the Committee modified the inter-meeting range
for the Federal funds rate specified in the next-to-last paragraph
of the domestic policy directive issued on April 19, 1977, by
increasing the upper limit from 5lA to 5Vi per cent.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Morris,
Partee, Roos, Wallich, and Winn. Votes against this
action: None. Absent and not voting: Mr. Mayo.
(Mr. Winn voted as alternate for Mr. Mayo.)
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FOMC Policy Actions
MEETING HELD ON MAY 17, 1977
Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services—which had increased at an annual rate of 5.2
per cent in the first quarter, according to preliminary estimates of
the Commerce Department—was expanding at a rapid pace in the
current quarter. The rise in average prices—as measured by the
fixed-weighted price index for gross domestic business product—
appeared to have slowed somewhat from the annual rate of 6.8 per
cent estimated for the first quarter.
According to staff estimates, real output was growing at a
significantly faster pace in the current quarter than had been
projected a month earlier. It now appeared that the expansion in
consumer purchases of goods and services would be considerably
stronger than had been anticipated, although still not so strong as in
the first quarter; that the gain in business fixed investment would be
larger than had been expected and that the recovery in net exports of
goods and services would be greater, following a much larger decline
in the first quarter than had been estimated a month ago.
The staff projections for the second half of 1977 differed little from
those made just before the previous meeting, which had incorporated assumptions about Federal fiscal measures that were later
enacted or funded. Specifically, the assumptions included the increase in the standard deduction for personal income taxes passed
by the Congress on May 16 and the expansion in outlays for public
service employment, for local public works, and for countercyclical
revenue sharing.
Growth in real GNP for the second half was projected to be
substantial, although not so rapid as in the second quarter. It was
anticipated that increases in Federal purchases of goods and services would be larger; that expansion of business investment would
FOMC Policy Actions
221
remain relatively strong; and that investment in inventories would
accelerate. At the same time, however, it was expected that growth
in consumption expenditures would slow somewhat further; that the
pace of the expansion in residential construction would moderate;
and that net exports of goods and services would change relatively
little from the second-quarter level.
In April, expansion in economic activity remained vigorous.
Industrial production rose by 0.8 per cent, following a gain of 1.4 per
cent in March. Relatively large increases in output were widespread
among both final products and materials. However, assemblies of
automobiles declined somewhat, both because of strikes at a few
motor vehicle plants and because of efforts to reduce the excessive inventories of small-model cars.
The rate of capacity utilization in April remained at 82 per cent for
manufacturing as a whole and increased from 81 to 82 per cent for
the materials-producing industries. These utilization rates were
about 6 and 10 percentage points, respectively, below the peaks in
the previous business expansion, when capacity restraints in a
number of materials-producing industries limited growth in output
and contributed to upward pressures on prices.
The number of private housing units started in April had not been
made public by the time of this meeting. In March, as reported just
before the last meeting, starts had risen sharply further to an annual
rate of about 2.1 million units—the highest rate in nearly 4 years. For
the first quarter as a whole, starts were about the same as for the
fourth quarter of 1976 and more than one-tenth above the total for
the third quarter. Sales of new and existing homes combined
remained vigorous in March, and nonbank thrift institutions continued to supply a substantial volume of mortgage credit with little
change in interest rates, despite reduced inflows of deposits.
Developments in labor markets continued to reflect the strength in
economic activity. Payroll employment in nonfarm establishments
expanded considerably in April, after a sharp rise in March; the
increase since December—amounting to 1.3 million persons—was
unusually large for a 4-month period. The unemployment rate
declined further in April, by 0.3 of a percentage point, to 7.0 per
cent. During the second half of 1976 the rate had fluctuated between
7.8 and 8.0 per cent.
Growth in total personal income accelerated to an annual rate of
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FOMC Policy Actions
20 per cent in March from about 17 per cent in February, reflecting
in large measure faster expansion in private wage and salary
payments. The employment statistics suggested that wage and
salary payments continued to grow in April, although at a less rapid
pace than in the two preceding months.
Consumer demands remained strong. In April total retail sales
held at the advanced level reached in March and were 2lA per cent
above the monthly average for the first quarter. Sales of new
automobiles declined somewhat, after having surged upward in
March. However, sales of other consumer items rose by about 1 per
cent, equaling the gain in the preceding month.
New orders for nondefense capital goods rose as much in March
as they had declined in February, and for the first quarter as a whole
they were up about 6 per cent from the preceding quarter. Unfilled
orders for such goods edged up during the first quarter. Contract
awards for commercial and industrial buildings—measured in terms
of floor space—shot upward in March, and the total for the first
quarter was SVi per cent above that for the preceding quarter. A
private survey, conducted in late March and early April, indicated
that businesses were planning to spend significantly more for plant
and equipment in 1977 than had been shown by surveys taken in
February and in the autumn of 1976.
The index of average hourly earnings for private nonfarm production workers rose at an annual rate of 6.8 per cent in April, about the
same as the average increase during 1976; over the first quarter the
rise had accelerated to a rate of 7.3 per cent, in large part because of
an increase in the minimum wage at the beginning of 1977. Major
collective bargaining settlements in the first quarter provided for
first-year increases in wages averaging 7.6 per cent, compared with
an average of 8.4 per cent for the first-year adjustments under
contracts negotiated during 1976. However, compensation per hour
for all persons in the nonfarm business sector of the economy rose at
an annual rate of about 10 per cent in the first quarter, up from 7 per
cent in the preceding quarter and from an average of about 8 per cent
over the four quarters of 1976. The rise reflected not only the
increase in the minimum wage but also an increase in taxes on
employers for social security and unemployment insurance.
The wholesale price index rose 1.1 per cent in April, marking the
third consecutive month of increases of about 1.0 per cent. The
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223
index had risen 0.5 per cent on the average during the 6 months
ending in January. The acceleration in the latest 3 months was
attributable to sharp increases in prices of farm products and foods.
At the same time, however, there were sizable advances among
industrial commodities; the average for such commodities rose 2.0
per cent over the 3-month period.
The consumer price index increased 0.6 per cent in March—less
than in January and February but still somewhat more than the
average during the second half of 1976. In March price increases
averaged 0.6 per cent for foods, 0.4 per cent for nonfood commodities, and 0.8 per cent for services.
The average value of the dollar against leading foreign currencies
changed little on balance over the inter-meeting period. The dollar
rose against the Japanese yen, but it declined against the currencies
associated in the European "snake" arrangement. The change in the
dollar/yen rate reflected a sharp decline in short-term interest rates
in Japan and market reaction to a decision by the U.S. Customs
Court requiring the imposition of countervailing duties on imports of
electronic products from Japan. Despite its recent weakening, the
yen was nearly 6 per cent higher against the dollar than it had been at
the end of 1976.
The U.S. foreign trade deficit, already large in January and
February, was still larger in March. The deficit for the first quarter
as a whole was almost twice that for the final quarter of 1976, as
imports rose 10 per cent and exports were virtually unchanged.
Among imports, increases in the first quarter were largest for fuels,
foods, automobiles from Canada, and consumer durable goods other
than autos. The net outflow on bank-reported capital transactions
declined sharply in the first quarter.
At U.S. banks, growth in total credit accelerated during April
from the already brisk pace of the first quarter. All major loan
categories expanded significantly further, and holdings of taxexempt securities increased sharply for the first time since
November. A sizable part of bank acquisitions of such securities
consisted of tax-anticipation notes—particularly those issued by
New York State—but banks in most areas of the country increased
their holdings of long- as well as of short-term municipal issues.
Bank holdings of U.S. Government securities declined.
In April the strength in business credit at banks was concentrated
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at smaller institutions. The relative weakness of business loan
demand at large banks apparently reflected a preference of large
corporations to cover their increased requirements for short-term
financing at the lower interest costs prevailing in the commercial
paper market. As a result, commercial paper issued by such
corporations rose by the largest amount in 2Vi years.
Growth in the narrowly defined money stock (M-l) accelerated to
a record annual rate of nearly 20 per cent in April. Temporary
influences contributed to this rapid growth, and data for early May
indicated some shrinkage in money balances. In addition, however,
the rapid expansion in economic activity appeared to have been
raising transactions demands for money. Over the 12 months ending
in April, M-l grew about 6Vz per cent.
Inflows of the time and savings deposits included in M-2 and M-3
continued to moderate in April. However, the large increase in M-l
produced a marked acceleration of growth in the broader aggregates
in that month. Over the 12 months ending in April, M-2 grew about
W/2 per cent and M-3 about \2lA per cent.
At its April meeting the Committee had decided that growth, in
M-l and M-2 in the April-May period at annual rates within ranges of
6 to 10 per cent and 8 to 12 per cent, respectively, would be
appropriate. It had judged that these growth rates were likely to be
associated with a weekly-average Federal funds rate of about 43A per
cent. The Committee had agreed that if growth rates in the aggregates over the 2-month period appeared to be deviating significantly
from the midpoints of the indicated ranges, the operational objective
for the weekly-average Federal funds rate should be modified in an
orderly fashion within a range of AVi to 5lA per cent.
Data that had become available in the days immediately after the
April meeting suggested that over the April-May period both M-l
and M-2 would grow at rates well within their specified ranges,
although it appeared that growth in April would be strong. Accordingly, the Manager of the System Open Market Account sought to
maintain the Federal funds rate at about 43A per cent or a shade
higher. By late April, however, incoming data suggested that over
the 2-month period M-1 was likely to grow at a rate considerably
above the upper limit of its specified range and that M-2 was likely to
grow at a rate close to the midpoint of its range. In those circumstances System operations in late April and early May were
FOMC Policy Actions
225
conducted with a view to raising the Federal funds rate toward 5lA
per cent, the upper limit of its specified range.
On May 6 the Committee voted to increase the upper limit of the
range for the Federal funds rate from 5lA to 5Vi per cent, with the
understanding that the Manager would use the additional leeway
only if new data becoming available before May 17, the date for this
meeting, suggested that the aggregates were strengthening significantly further on balance. Such additional strength did not develop
in that period, and the Manager continued to aim for a funds rate of
around 5lA per cent. In the final days of the period, the rate actually
fluctuated between 5lA and 5% per cent.
Short-term market interest rates rose generally by Vi to 5/& of a
percentage point during the inter-meeting period. The rate on
3-month commercial paper rose from 4% to 5% per cent, and near
the end of the period most major banks increased their prime interest
rate on business loans from 6lA to 6V2 per cent. Upward pressures on
short-term rates were tempered by a significant reduction during the
period in the outstanding volume of Treasury bills.
Yields also rose somewhat in the longer-term markets, but—as in
the short-term markets—upward pressures were moderated by
Treasury operations. In its mid-May refinancing the Treasury reduced its outstanding debt by about $400 million. Moreover, it
announced that it planned to reduce the debt by an additional $450
million when $2.0 billion of 2-year notes matured later in the month.
In the corporate bond market, rate pressures were tempered by a
significant drop in public offerings of new issues in April. Private
placements of corporate issues were estimated to have remained
large, but insurance companies continued to bid aggressively for
privately placed securities. Bond offerings by State and local
governments also were large in April.
Net mortgage lending during the first quarter of 1977 was near the
record rate of the previous quarter, and the volume apparently
remained large in April. Issues of GNMA-guaranteed, mortgagebacked securities in April were close to the strong pace of the first
quarter, and mortgage loans outstanding at commercial banks also
continued to grow at a rapid rate. In March, the latest month for
which data were available, mortgage commitments outstanding at
savings and loan associations rose further to another new high.
Average interest rates on new commitments for conventional home
226
FOMC Policy Actions
mortgages continued to edge higher in April, and yields in the
secondary mortgage market for FHA/VA loans changed little on
balance over the month.
It appeared likely that the Treasury would be able to make
additional reductions in the volume of bills outstanding over the rest
of the current quarter but that it would need to raise a large volume
of new money later in the year. At the same time, business demands
for credit—especially for short-term credit—were expected to remain relatively large as a result of continuing improvement in
economic activity. Projections of consumer expenditures implied a
sustained high rate of growth in consumer credit and mortgage debt.
At its April meeting the Committee had agreed that from the first
quarter of 1977 to the first quarter of 1978 average rates of growth in
the monetary aggregates within the following ranges appeared to be
consistent with broad economic aims: M-\, 4V4 to 6V2 per cent; Af-2,
7 to 9Vi per cent; and M-3, W2 to 11 per cent. The associated range
for growth in the bank credit proxy was 7 to 10 per cent. It was
agreed that the longer-term ranges, as well as the particular aggregates for which such ranges were specified, would be subject to
review and modification at subsequent meetings. It also was understood that short-run factors might cause growth rates from month to
month to fall outside the ranges contemplated for annual periods.
With respect to the economic situation and outlook, members of
the Committee generally were of the view that the expansion in
business activity was quite strong. In particular, they expected
over-all growth to remain substantial for a number of quarters
ahead.
While not disagreeing with that view, a few members indicated
that they would not exclude the possibility that growth in output
would prove to be slower than generally expected. Two of these
members focused on the possibility that a slowing of growth in
consumption expenditures might be accompanied by inadequate
expansion in other sectors. Specifically, it was suggested that
substantial increases in business investment in fixed capital and
inventories were not assured in the current business expansion,
which was now in its third year and rather old by historical
standards. It was also noted in this context that, according to
statistics released a day or two ago, the level of inventories at the
end of March had been higher than assumed, and that in the spring of
FOMC Policy Actions
227
1976 inventory demands had weakened rather promptly after the rise
in retail sales had slowed. One member expressed concern that inventory demands might be unsustainably high in the quarters immediately ahead, leading first to relatively rapid growth in over-all
activity and then to a slowing down.
Other members felt that if anything the probabilities favored
expansion at a faster rather than at a slower rate than generally
expected. It was suggested that business confidence in the outlook
for economic activity appeared to have increased considerably. One
member expressed the opinion that there was nothing particularly
abnormal about the current business expansion, despite the pick-up
in the rate of increase in prices and the existence of various
uncertainties.
The recent acceleration in the rate of price rise was a source of
concern. One member remarked that the sustainability of the
expansion could be threatened by intensified upward pressures on
labor costs and prices. The observation was made that the administration's proposals for increases in social security taxes on employers beginning in 1979 would raise unit labor costs substantially.
It was felt that the prospects of such increases—especially in
conjunction with certain features of the proposed energy policy—
had contributed to business uncertainties.
It was reported in the discussion that there had been a considerable volume of speculation in real estate in some parts of the
country, accompanied by rapidly rising prices. While speculation
was described as being greatest in residential properties on the West
Coast—with turnovers at rising prices financed by credit from banks
and savings and loan associations—it was also reported to be
occurring in farmland in some other areas of the country. It was
observed that, heretofore, the present business expansion had been
free of the sort of speculation that had the potential to cause
problems later on.
As to policy for the period immediately ahead, members of the
Committee thought that relatively slow growth in monetary aggregates over the May-June period would be appropriate in order to
compensate at least in part for the exceptionally rapid growth in
April. In considering the ranges of growth to be specified for the
2-month period, they took account of a staff analysis that suggested
that the extremely large expansion in M-\ in April appeared to have
228
FOMC Policy Actions
raised the money stock sufficiently to accommodate much of the
public's need for additional transactions balances in the second
quarter and, consequently, that monetary growth was likely to be
slow.
The members did not differ a great deal in their preferences for
ranges of growth in the monetary aggregates over the May-June
period. For M-l, most of them favored a range of 0 to 4 per cent
for the annual rate of growth over the 2-month period. Some
sentiment was expressed for slightly different ranges: -1 to 4 per
cent, 0 to 5 per cent, and 1 to 5 per cent. For Af-2, most members
favored a range of either 3 to 7 per cent or 4 to 8 per cent, but those
who favored the wider ranges for M-l preferred comparably wider
ranges for M-2.
Differences of view were somewhat greater concerning the Federal funds rate, and they turned in large part on the degree of leeway
that should be provided for operations during the inter-meeting
period in the event that the aggregates appeared to be deviating
significantly from the midpoints of the specified ranges. In view of
the rapid monetary growth in April, several members suggested that
it would be desirable in the coming period to avoid any significant
decline in the weekly-average Federal funds rate from its current
level of 5lA to 5% per cent even if growth in the aggregates appeared
to be significantly below the midpoints of the specified ranges. Other
members were prepared to accept a decline in the funds rate to 5 per
cent under those circumstances.
Most Committee members did not wish to see a rise in the
weekly-average Federal funds rate above 5% per cent during the
inter-meeting period—at least not without further consultation. In
addition to advocating an upper limit of 5% per cent for the
inter-meeting range, these members generally favored maintaining
the funds rate at the outset of the period in the area of 5lA to 5% per
cent or permitting it to rise only slightly. In support of constraining
the upper limit to 5% per cent, it was suggested that a further rise of
50 to 60 basis points—roughly the magnitude of the increase since
the April meeting—was likely to have more significant repercussions
on financial markets and that considerable uncertainty existed about
the underlying strength of the monetary aggregates. A few members
of the Committee suggested an upper limit of 6 per cent for the funds
rate range and an initial objective of 5Vi or 55/s per cent, because they
FOMC Policy Actions
229
viewed the economic situation as quite strong and they thought such
a course would be helpful in restraining excessive growth in the
aggregates later on.
At the conclusion of the discussion the Committee decided that
growth in M-\ and M-2 over the May-June period at annual rates
within ranges of 0 to 4 per cent and V/i to IVi per cent, respectively,
would be appropriate. It was understood that in assessing the
behavior of the aggregates, the Manager should continue to give
approximately equal weight to the behavior of M-\ and M-2.
In the judgment of the Committee, such growth rates of the
aggregates were likely to be associated with a weekly-average
Federal funds rate of about 5% per cent. The Committee agreed that
if growth rates of the aggregates over the 2-month period appeared
to be deviating significantly from the midpoints of the indicated
ranges, the operational objective for the weekly-average Federal
funds rate should be modified in an orderly fashion within a range of
5lA to 5% per cent. As customary, it was understood that the
Chairman might call upon the Committee to consider the need for
supplementary instructions before the next scheduled meeting if
significant inconsistencies appeared to be developing among the
Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services is growing at a rapid rate in the current quarter.
In April industrial output and employment continued to expand at a
substantial pace, and the unemployment rate declined from 7.3 to 7.0
per cent. Total retail sales remained at the advanced level reached in
March. The wholesale price index for all commodities rose substantially in April for the third consecutive month; increases again were
particularly sharp among farm products and foods, and they remained
sizable for industrial commodities.
The average value of the dollar against leading foreign currencies
has changed little on balance over the past month. The U.S. foreign
trade deficit widened further in March; for the first quarter as a whole
the deficit was twice as large as for the preceding quarter.
The increase in A/-1, which had been moderate in the first quarter,
was exceptionally large in April. Inflows of the time and savings
deposits included in the broader aggregates were slower than earlier in
the year, but because of the rapid expansion in M-1, growth in M-2 and
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FOMC Policy Actions
Af-3 accelerated. Business short-term borrowing expanded sharply
while corporate financing in the capital markets was reduced. Market
interest rates have risen in recent weeks.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and help
resist inflationary pressures, while contributing to a sustainable pattern of international transactions.
At its meeting on April 19, 1977, the Committee agreed that growth
of Af-1, Af-2, and Af-3 within ranges of AVi to 6Vi per cent, 7 to 9Vi per
cent, and Wi to 11 per cent, respectively, from the first quarter of 1977
to the first quarter of 1978 appears to be consistent with these
objectives. These ranges are subject to reconsideration at any time as
conditions warrant.
The Committee seeks to encourage near-term rates of growth inM-1
and Af-2 on a path believed to be reasonably consistent with the
longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the May-June period to be within the ranges of 0 to 4 per cent for
Af-1 and W2 to IVi per cent for Af-2. In the judgment of the Committee
such growth rates are likely to be associated with a weekly average
Federal funds rate of about 53/s per cent. If, giving approximately
equal weight to Af-1 and Af-2, it appears that growth rates over the
2-month period will deviate significantly from the midpoints of the
indicated ranges, the operational objective for the Federal funds rate
shall be modified in an orderly fashion within a range of 5lA to 53A
per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against this
action: None,
FOMC Policy Actions
231
MEETING HELD ON JUNE 21, 1977
Domestic Policy Directive
The information reviewed at this meeting suggested that growth in
real output of goods and services in the current quarter had been
close to the pace in the first quarter, now indicated by revised
estimates of the Commerce Department to have been at an annual
rate of 6.9 per cent. The rise in average prices—as measured by the
fixed-weighted price index for gross domestic business product—
appeared to have been somewhat faster than the annual rate of 6.5
per cent estimated for the first quarter, owing in large part to
substantial increases in prices of foods. Staff projections suggested
that in the second half of 1977 and in early 1978 the rate of growth in
real GNP would be fairly rapid, although significantly less so than in
the first half of this year. The projections also suggested that the rate
of increase in prices would moderate from that in the first half but
would remain comparatively high.
In the current quarter, according to staff estimates, growth in
personal consumption expenditures had slowed somewhat from the
high rate in the first quarter. The expansion in business fixed
investment also had moderated—from an especially rapid pace in
the first quarter induced by recovery from strikes. On the other
hand, residential construction activity had expanded sharply in the
current quarter, after having been adversely affected in the first
quarter by severe winter weather; State and local government
purchases of goods and services had turned up; and business
inventory investment had increased moderately further.
Staff projections for the second half of the year suggested that
growth in consumption expenditures would slow somewhat further
and that the pace of expansion in residential construction would
moderate. At the same time, however, it was expected that increases in Federal purchases of goods and services would be
substantial; that growth in State and local government purchases
would be sustained at a high rate; that expansion of business
232
FOMC Policy Actions
investment would remain relatively strong; and that the rate of
inventory accumulation would continue to increase.
In May economic activity continued to expand at a rapid pace.
Industrial production rose by 1.1 per cent, following gains of 1.5 per
cent and 0.8 per cent in March and April, respectively. As in other
recent months, increases in output were widespread among both
final products and materials; such increases were especially large for
business equipment and for some durable goods materials. However, assemblies of automobiles declined slightly for the second
consecutive month.
Rates of capacity utilization rose in May to about 83 per cent both
for manufacturing as a whole and for the materials-producing
industries. These utilization rates were significantly above those of
last autumn and winter, but they remained well below the peaks in
the previous business expansion when capacity constraints in a
number of materials-producing industries limited growth in output
and contributed to upward pressures on prices.
Private housing starts—which had risen sharply in March to an
annual rate of 2.1 million—were at a rate of about 1.9 million in both
April and May. At that level, starts were about 10 per cent above the
average for both the first quarter of 1977 and the fourth quarter of
1976. Mortgage lending activity had remained strong in recent
months. At savings and loan associations, outstanding commitments
to acquire mortgage loans reached a new high in April—the latest
month for which data were available—and holdings of mortgage
loans increased by a record amount during the month.
Developments in labor markets continued to reflect the strength in
economic activity. Payroll employment in nonfarm establishments
increased by 190,000 persons in May—bringing the cumulative
increase in the first 5 months of the year to almost 1.5 million, about
one-third of which was in manufacturing. The unemployment rate
edged down from 7.0 to 6.9 per cent. During the second half of 1976
it had fluctuated between 7.8 and 8.0 per cent.
Personal income expanded considerably less in April and May
than in the preceding 2 months when increases had been especially
large owing to the rebound in wage and salary payments from the
weather-reduced level in January and to disbursements by the
Federal Government of earned-income credits to low-income
families. Wage and salary payments rose about 1 per cent in both
FOMC Policy Actions
233
April and May, close to the average monthly increase for the first
quarter.
Gains in employment and income continued to strengthen consumer demands. In May total retail sales increased further to a level
about VA per cent above the monthly average for the first quarter.
Sales of new automobiles—at a relatively high annual rate of 11.7
million units—were unchanged from April and were moderately
above the first-quarter pace. Sales of foreign models, at an annual
rate of 2.6 million units in May, set a record for the third successive
month. Data available for domestic models indicated an appreciable
rise in sales in the first 10 days of June.
Data reflecting business commitments to spend for certain kinds
of plant and equipment suggested a vigorous expansion in outlays
over the near term. New orders for nondefense capital goods rose
nearly 2 per cent further in April, and the average for the first 4
months of the year was about 6Vi per cent above the average for the
last 3 months of 1976. Unfilled orders for such goods at the end of
April were 3 per cent above the level at the end of 1976. Contract
awards for commercial and industrial buildings—measured in terms
of floor space—declined in April, but the March-April average was
sharply above the averages for the first 2 months of the year and for
the last 3 months of 1976.
However, the latest Commerce Department survey of business
plans, taken in May, suggested that in the third and fourth quarters
of the year increases in spending for plant and equipment would be
small and perhaps no more than the rise in prices for such goods.
The survey suggested that for 1977 as a whole, businesses would
spend 12.3 per cent more than in 1976, only 0.6 of a percentage point
above the year-to-year increase suggested by the survey taken in
February.
The index of average hourly earnings for private nonfarm production workers—which had advanced at an annual rate of 7.6 per cent
in April, according to revised data—rose at a rate of 5.7 per cent in
May. Over the first quarter the index had increased at a rate of 7.4
per cent, including the effects of the January increase in the
minimum wage. In addition, labor costs had been raised in the first
quarter by an increase in taxes on employers for social security and
unemployment insurance.
The rise in the wholesale price index slowed to 0.4 per cent in May
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FOMC Policy Actions
from about 1.0 per cent in each of the preceding 3 months. Average
prices for farm products declined in May while those for processed
foods rose further, and the average for the two groups changed little
following 3 months of large increases. In May average prices of
industrial commodities also rose less than in the immediately
preceding months; increases continued to be substantial for fuels
and power and were larger than in the preceding months for
machinery and equipment, but prices of scrap metals and some other
materials either declined or rose less rapidly than earlier.
The consumer price index rose 0.8 per cent in April, and the
average increase over the first 4 months of the year also was 0.8 per
cent—considerably larger than the average increase during the
second half of 1976. Average prices of foods jumped 1.5 per cent in
April, reflecting relatively large increases in almost all categories.
Over the first 4 months of the year, food prices rose 5 per cent, after
having changed little on balance over the 12 months of 1976. It was
reported during the course of this meeting that the consumer price
index for May—which had just been released—was 0.6 per cent
above the index for April.
The U.S. foreign trade deficit, which had increased sharply in
each month of the first quarter, was about the same in April as in
March (estimated on the international accounts basis). Over the 5
weeks between the May and June meetings of the Committee, the
average value of the dollar against leading foreign currencies had
changed little on balance—despite the publication in late May of the
U.S. trade deficit for April, which was larger than had been
expected. The impact on exchange rates of the large deficit was
moderated in part by declines in interest rates abroad relative to
those in the United States. On balance over the 5-week period,
moreover, foreign central banks purchased dollars in the exchange
markets.
At U.S. banks, growth in total credit slowed somewhat in May
from the relatively rapid pace of April, but the rate was close to the
average for the January-April period. The slowing of growth in May
was attributable almost entirely to a drop in the expansion of
business loans to less than half the high rate of April. Over the first 5
months of the year, growth in business loans (excluding bankers
acceptances) was substantially faster than over the fourth quarter of
1976.
FOMC Policy Actions
235
The narrowly defined money stock (M-l) increased at an annual
rate of only 1.1 per cent in May, after having grown at a record rate
of nearly 20 per cent in April. Typically, in recent years rapid
monetary growth in one month has been followed by slow growth for
a month or two. For April and May combined, growth was at an
annual rate of 10.4 per cent, compared with a rate of 4.8 per cent in
the first quarter.1
Growth in the more broadly defined measures of money (M-2 and
M-3) also slowed sharply in May—to annual rates of 4.6 and 6.9 per
cent, respectively—mainly as a result of the slowing in M-l.
However, inflows of the time and savings deposits included in M-2
continued to slacken in response to earlier increases in market
interest rates relative to offering rates on deposits. Inflows to
nonbank thrift institutions, on the other hand, remained at about the
pace of recent months. Over the first 5 months of 1977, M-2 grew at
an annual rate of 8.3 per cent; and M-3, at a rate of 9.6 per cent.2
At its May meeting the Committee had decided that growth in M-1
and M-2 in the May-June period at annual rates within ranges of 0 to
4 per cent and W2 to IVi per cent, respectively, would be appropriate. It had judged that these growth rates were likely to be
associated with a weekly-average Federal funds rate of about 5% per
cent. The Committee had agreed that if growth rates in the aggregates over the 2-month period appeared to be deviating significantly
from the midpoints of the indicated ranges, the operational objective
for the weekly-average Federal funds rate should be modified in an
orderly fashion within a range of 5lA to 53A per cent.
In the days immediately preceding the May meeting the Manager
of the System Open Market Account had aimed for a Federal funds
rate of around 5V4 per cent, and the rate actually had fluctuated
between 5V4 and 5% per cent. In the days just after the meeting the
Manager began to implement the Committee's directive by seeking a
weekly-average rate of 5% per cent for Federal funds. Throughout
Revised measures of the monetary aggregates, reflecting new benchmark data for
deposits at nonmember banks, were published on June 23, 1977. On the basis of these
revised figures, the annual rate of growth in M-l was 0.8 per cent in May; 19.4 per cent
in April; and 4.2 per cent in the first quarter.
2
Revised figures for M-2 and M-3, respectively, were 4.7 and 7.1 per cent for May,
and 8.7 and 9.8 per cent for the first 5 months of 1977.
236
FOMC Policy Actions
the inter-meeting period, incoming data suggested that over the
May-June period M-\ and M-2 on the average would grow at rates
well within the specified ranges. Accordingly, the Manager continued to aim for a weekly-average funds rate of about 5% per cent,
and the rate remained close to that level during the period.
Short-term market rates changed little on balance over the intermeeting period. Rates rose somewhat early in the period, but later
they fell back partly in response to the steadiness of the Federal
funds rate and to the indications of slow monetary growth after the
April surge. In addition, demands for short-term credit by State and
local governments as well as by businesses moderated, and the
Treasury continued to redeem bills in its regular auctions. In late
May most major banks raised their prime rate on business loans
from 6V2 to 6% per cent, but one of these banks later cut the rate
back to 6V2 per cent.
Bond yields declined 10 to 20 basis points over the inter-meeting
period, in part because short-term rates did not rise as market
participants had expected. In addition, the volume of public offerings of new corporate bonds declined in May and appeared likely to
be much lower for the second quarter as a whole than for the first
quarter. Moreover, the Federal budget registered a surplus during
the second quarter, permitting not only a decrease in the volume of
Treasury bills outstanding but also a reduction in offerings of new
bonds. Offerings of new State and local government bonds rose to a
record volume in May and appeared likely to be much larger for the
second quarter than for the first. However, demands for tax-exempt
bonds remained strong.
The volume of mortgage lending remained large in May, at
commercial banks as well as at savings and loan associations.
Moreover, issues of GNMA-guaranteed, mortgage-backed securities and net mortgage acquisitions by FNMA were considerably
above the average for the first 4 months of the year. Average interest
rates on new commitments for conventional home mortgages continued to edge higher in May, and in the secondary mortgage market
yields in FNMA commitments auctions also rose slightly further.
At its April meeting the Committee had agreed that from the first
quarter of 1977 to the first quarter of 1978 average rates of growth in
the monetary aggregates within the following ranges appeared to be
consistent with broad economic aims: M-1, AY2 to 6V2 per cent; M-2,7
FOMC Policy Actions
237
to W2 per cent; and M-3, SV2 to 11 per cent. The associated range for
growth in the bank credit proxy was 7 to 10 per cent. It was agreed that
the longer-term ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings. It also was understood that short-run
factors might cause growth rates from month to month to fall outside
the ranges contemplated for annual periods.
In the discussion of the economic situation and outlook, the
suggestion was made that it was reasonable to expect growth in real
GNP for a number of quarters ahead to be fairly rapid, although less
rapid than in the current quarter. Members differed somewhat in the
emphasis placed on the favorable versus the unfavorable elements in
the outlook for prices and costs.
It was observed that the expansion in personal consumption
expenditures was likely to slow—and the rate of personal saving to
increase—as consumer purchases of new automobiles leveled off or
declined following their large gains in recent quarters. It was also
observed, however, that strength in other sectors should be sufficient
to sustain over-all expansion at a reasonably good rate. Specifically, it
was suggested that the outlook for State and local government
purchases of goods and services had strengthened because of higher
tax revenues and enlarged transfers of funds from the Federal
Government resulting from recent legislation; that expansion in
business fixed investment in the second half of the year was likely to
be stronger than portrayed by the latest Commerce Department
survey; and that, in association with the expansion in fixed investment, business inventory investment would continue to increase.
Several members reported that businessmen were disturbed by an
atmosphere of uncertainty about Government policies and
regulations—in particular, those affecting taxes, energy, and environmental pollution. Moreover, businessmen were reported to be
deeply concerned about inflation. In contrast with earlier times,
inflation was now viewed as a cause of deterioration in profits, in part
because of sharp increases in wage rates and in prices of raw materials
and in part because of the taxation of profits that to some degree were
unreal. Such considerations were seen as retarding the expansion in
business fixed investment—which so far had been slower than might
have been expected on the basis of earlier business expansions. Some
members observed that business confidence nevertheless has been
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FOMC Policy Actions
improving and that the behavior of new orders for nondefense capital
goods and of other indicators pointed to continuing expansion in
outlays for plant and equipment.
It was also suggested that confidence has been enhanced by System
policies—specifically, by the promptness with which open market
operations during the period between the April and May meetings
responded to the April surge in monetary growth. The magnitude of
recent declines in yields on long-term bonds was cited as partial
evidence for this view.
In the discussion of the outlook for prices, it was observed that the
second-quarter acceleration in the over-all measures was attributable
in large part to substantial increases in prices of farm products, which
had been influenced more by the severe winter weather and the
early-spring drought than the initial estimates indicated they would
be. It was noted that in the past few months supply prospects had
improved considerably for both grains and meats. It was noted also
that prices of a number of basic industrial materials had declined over
the past 2 months.
With respect to wages and costs, the recent behavior of the index of
average hourly earnings for private nonfarm production workers was
described as an indication that the rise in labor costs per unit of output
had not been accelerating, and it was noted that this was a favorable
development for the present stage of the business expansion. On the
other hand, there had been some pick-up during the past year in the
rate of increase in the broader measure of compensation per manhour
in the private business sector. It was suggested, moreover, that the
accelerated increase in the consumer price index during the first 4
months of 1977 may well be reflected in the pace of wage advances
later on, that a rapid rate of inflation by itself tended to reduce
industry's resistance to granting large wage increases, and that the
rate of gain in productivity was likely to slow.
In considering policy for the period immediately ahead, the
members of the Committee took account of the likelihood that growth
in M-l would remain relatively slow in June—continuing to respond
to the April surge—but that growth from the first to the second
quarter would nevertheless exceed the Committee's longer-run range
for that aggregate. In July, according to staff analysis, expansion of
M-l was likely to be magnified by a purely technical factor—namely,
distribution of social security checks earlier in the month than usual,
FOMC Policy Actions
239
thereby causing demand deposits to be larger than they otherwise
would be over the 3-day weekend including July 4.
The members differed little in their preferences for the ranges to be
specified for the annual rates of growth in the monetary aggregates
over the June-July period. For M-l, sentiment initially was about
equally divided between ranges of 2Vi to 6Vi per cent and 3 to 7 per
cent; the midpoint of each range was somewhat below the midpoint of
the Committee's longer-run range for growth in that aggregate.
However, after some discussion of the extent to which growth in M-l
in the second quarter was likely to exceed its longer-run range,
sentiment in favor of the lower of the two ranges prevailed. For M-2,
most members favored a range of 6 to 10 per cent, but sentiment was
also expressed for a range of 5Vi to 9lA per cent.
Most members favored giving greater weight than usual to money
market conditions in conducting open market operations in the period
until the next meeting because of uncertainty about M-l growth rates
in the near term. However, a number of the members expressed a
preference for continuing to have operating decisions in the period
ahead based primarily on the behavior of the monetary aggregates.
Almost all members favored directing operations—at least
initially—toward maintaining the Federal funds rate at about its
prevailing level of 5% per cent. Most of them advocated retaining the
inter-meeting range for the funds rate of 5lA to 53A per cent that had
been specified at the May meeting, but sentiment was also expressed
for a range of 5 to 53A per cent. One of the members who expressed a
preference for continuing to base operations primarily on the
behavior of the aggregates favored a range of 5 ^ to 6lA per cent for the
funds rate.
At the conclusion of the discussion the Committee decided that
operations in the period immediately ahead should be directed toward
maintaining about the prevailing money market conditions, as
represented by a weekly-average Federal funds rate of 5% per cent.
With respect to the annual rates of growth in M-1 and M-2 over the
June-July period, the Committee specified ranges of 2Vi to 6V2 per
cent and 6 to 10 per cent, respectively. The members agreed that if
growth in the aggregates should appear to approach or move beyond
the limits of the specified ranges, with approximately equal weight
given to M-l and M-2, the operational objective for the weeklyaverage Federal funds rate should be varied in an orderly fashion
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FOMC Policy Actions
within a range of 5V4 to 5% per cent. As customary, it was understood
that the Chairman might call upon the Committee to consider the need
for supplementary instructions before the next scheduled meeting if
significant inconsistencies appeared to be developing among the
Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output of
goods and services has grown in the current quarter at about the rapid
rate of the first quarter. In May industrial output and employment
continued to expand at a substantial pace, and the unemployment rate
edged down from 7.0 to 6.9 per cent. Total retail sales increased from
the advanced March-April level. The rise in the wholesale price index
for all commodities slowed substantially in May, as average prices of
farm products and foods changed little after having increased sharply
for three consecutive months; average prices of industrial commodities
also rose less than in other recent months.
The average value of the dollar against leading foreign currencies has
changed little on balance over the past month. The U.S. foreign trade
deficit was nearly as large in April as in March.
M-\ increased only slightly in May, after rising at an exceptionally
rapid rate in April. Reflecting mainly the behavior of Af-1, growth in
M-2 andM-3 also slowed sharply. Inflows to banks of time and savings
deposits other than large-denomination CD's continued to slacken, but
inflows to nonbank thrift institutions remained sizable. Business
short-term borrowing moderated from the sharply increased pace of
April, and corporate borrowing in the capital markets was reduced
further. Short-term market interest rates have changed little on balance
in recent weeks, while longer-term yields have declined.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and help
resist inflationary pressures, while contributing to a sustainable pattern
of international transactions.
At its meeting on April 19, 1977, the Committee agreed that growth of
M-1, M-2, andM-3 within ranges of AVi to 6V2 per cent, 7 to 9Vi per cent,
and 8Vi to 11 per cent, respectively, from the first quarter of 1977 to the
first quarter of 1978 appears to be consistent with these objectives.
These ranges are subject to reconsideration at any time as conditions
warrant.
At this time, the Committee seeks to maintain about the prevailing
FOMC Policy Actions
241
money market conditions during the period immediately ahead,
provided that monetary aggregates appear to be growing at approximately the rates currently expected, which are believed to be on a path
reasonably consistent with the longer-run ranges for monetary aggregates cited in the preceding paragraph. Specifically, the Committee
seeks to maintain the weekly-average Federal funds rate at about 5%
per cent, so long as Af-1 and Af-2 appear to be growing over the
June-July period at annual rates within ranges of 2Vi to 6Vi per cent and
6 to 10 per cent, respectively. If, giving approximately equal weight to
Af-1 and Af-2, it appears that growth rates over the 2-month period are
approaching or moving beyond the limits of the indicated ranges, the
operational objective for the weekly-average Federal funds rate shall
be modified in an orderly fashion within a range of 5V4 to 53A per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Gardner, Guffey, Jackson, Lilly, Mayo, Morris, Partee, Roos, and Wallich. Vote against this action: Mr.
Cold well.
Mr. Coldwell dissented from this action because he favored a funds
rate range of 5 to 5% per cent, in order to provide more leeway for a
reduction should the rates of growth in Af -1 and Af-2 appear to be near
or below the lower limits of their specified ranges for the June-July
period. This preference reflected his views that the April bulge in Af-1
had been caused largely by special factors, that the projections of the
aggregates for the June-July period were highly uncertain, and that
realization of the staff projection for growth in nominal GNP would
involve very large increases in the velocity of money.
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FOMC Policy Actions
MEETING HELD ON JULY 19, 1977
Domestic Policy Directive
The information reviewed at this meeting suggested that growth in
real output of goods and services in the second quarter had been
close to the pace in the first quarter, indicated by estimates of the
Commerce Department to have been at an annual rate of 6.9 per
cent. The rise in average prices—as measured by the fixed-weighted
price index for gross domestic business product—appeared to have
been somewhat faster than the annual rate of 6.5 per cent estimated
for the first quarter, owing in large part to substantial increases in
prices of foods. Staff projections suggested that the rate of growth in
real GNP would be less rapid in the second half of 1977 than in the
first and that it would slow somewhat further into 1978. The
projections also suggested that the rate of increase in prices would
moderate from that in the first half but would remain high.
In the second quarter, according to the latest staff estimates for
the expenditure components of real GNP, growth in personal consumption expenditures had slowed appreciably from the high rate in
the first quarter. Moreover, expansion in business fixed investment
had been substantially below the rapid pace in the first quarter,
reflecting recovery from strikes. On the other hand, residential
construction activity had expanded very sharply, in part because of
recovery from the effects of severe winter weather in the first
quarter; State and local government purchases of goods and services
had turned up; and the rate of business inventory accumulation had
increased considerably further.
Staff projections for the second half of the year were virtually the
same as those made a month earlier. They suggested that growth in
consumption expenditures would slow somewhat further and that
the pace of expansion in residential construction would moderate.
At the same time, however, it was expected that increases in Federal
purchases of goods and services would be substantial; that growth in
FOMC Policy Actions
243
State and local government purchases would be sustained at a high
rate; that expansion of business investment would remain relatively
strong; and that the rate of inventory accumulation would rise
further, although by much less than in the first half.
In June industrial production rose 0.7 per cent, following gains of
0.7 and 1.0 per cent in April and May, respectively. Much of the
June advance was accounted for by increases in output of automotive products—following 2 months of declines—and in production of
business equipment and durable goods materials. Output of nondurable consumer goods and of nondurable goods materials changed
little. Over the period from March to June, when the over-all index
rose 2Vi per cent, output of business equipment expanded about 5
per cent and production of consumer goods about \XA per cent.
The rate of capacity utilization for the materials-producing industries remained near 83 per cent in June, compared with about 81 Vi per
cent in March. For durable goods materials and nondurable goods
materials, respectively, the rates were about 80^ and 87!^ per cent
in June, compared with 78 and 87 per cent in March.
Expansion in employment moderated in June. Payroll employment in nonfarm establishments rose by 135,000 persons, less than
half the average monthly increase in the preceding 5 months.
Employment in manufacturing—after vigorous expansion earlier in
the year—declined slightly in June, reflecting reductions in a number
of nondurable goods industries. The unemployment rate rose from
6.9 to 7.1 per cent, reflecting an increase in the number of persons
seeking part-time jobs—mainly teenagers and adult women. The
civilian labor force continued to grow at a rapid pace. Since
December 1976, when the unemployment rate was 7.8 per cent, the
civilian labor force had risen by about PA million persons. Teenagers and adult women accounted for about three-fourths of that
increase.
Personal income expanded considerably less in April and May
than in the preceding 2 months when increases had been especially
large owing to the rebound in wage and salary payments from the
weather-reduced level in January and to large increases in transfer
payments. Wage and salary payments rose about 1 per cent in both
April and May, close to the average monthly increase for the first
quarter. For June the employment statistics suggested a smaller
increase in wage and salary payments.
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FOMC Policy Actions
Retail sales in June remained at about the level reached in March;
however, the total for the second quarter was about 2 per cent above
the first-quarter level. In June sales declined at general merchandise
stores for the second consecutive month and fell sharply at apparel
stores, but they rose appreciably at furniture and appliance stores
and continued to expand at food stores. Sales of new automobiles—
at an advanced annual rate of 11.8 million units—were close to the
level of April and May and about 5 per cent above the average for
the first quarter.
The book value of inventories in manufacturing and trade rose
sharply in May, and the rate of increase over the first 2 months of the
second quarter was moderately higher than that for the first quarter.
In manufacturing, the rate of increase over the April-May period
was almost twice as fast as in the first quarter, and for nondurable
goods industries alone it was more than three times as fast.
The number of private housing units started in June had not been
made public by the time of this meeting. In April and May starts
were at an annual rate of about 1.9 million units—about 10 per cent
above the average for both the first quarter of 1977 and the fourth
quarter of 1976. Sales of new homes declined in May for the third
consecutive month and were 16 per cent below the advanced rate for
the first quarter. However, sales of existing homes rose in May to a
near-record rate that was 7 per cent above the first-quarter average.
New orders for nondefense capital goods were unchanged in May,
after having expanded about 6 per cent on balance over the
preceding 4 months. Shipments of such goods continued to change
little in May, and unfilled orders rose further to a level nearly 4 per
cent higher than at the end of 1976. Contract awards for commercial
and industrial buildings—as measured in terms of floor space—
fluctuated widely during the first 5 months of 1977, but the AprilMay average was about W2 per cent higher than the average for the
first quarter.
As had been reported before the June meeting of the Committee,
the latest Commerce Department survey of business plans suggested
that in the third and fourth quarters of 1977 increases in spending for
plant and equipment would be small—perhaps no more than the rise
in prices for such goods. According to the survey, businesses would
spend 12.3 per cent more for plant and equipment in 1977 than they
had in 1976.
FOMC Policy Actions
245
The index of average hourly earnings for private nonfarm production workers rose at an annual rate of 3.7 per cent in June. The rate
of advance over the first 6 months of 1977 was 6.7 per cent,
compared with an increase of 6.9 per cent during 1976. Over the first
half of 1977, however, relatively greater growth of employment in
higher-wage industries and an increase in hours of overtime had
resulted in a faster rate of advance in actual average hourly earnings
than in the index, which is adjusted to exclude the effects of
fluctuations in overtime in manufacturing and also the effects of
changes in the proportion of workers in high-wage and low-wage
industries.
The wholesale price index declined in June, after having risen
much less in May than in the preceding 3 months. Average prices for
farm products fell sharply further in June, and those for processed
foods also declined. As in May, average prices of industrial commodities rose appreciably less than in earlier months of 1977.
The consumer price index rose 0.6 per cent in May—a little less
than in April and the same as in March. Retail prices of foods
increased 0.7 per cent in May—about half as much as in April—
while commodities other than foods and services rose 0.4 per cent
and 0.7 per cent, respectively.
The average value of the dollar against leading foreign currencies
declined by more than 1 per cent over the inter-meeting period,
following more than a year of relative stability. Over the 4-week
period, moreover, foreign central banks intervened in the exchange
markets to purchase, on balance, a substantial amount of dollars.
The downward pressure on the dollar intensified at the end of June
when public statements by some government officials fostered
market expectations that the currencies of countries with large
surpluses in their current accounts would appreciate. Declines in the
dollar, which occurred against almost all major currencies, were
especially marked against the Japanese yen, the German mark, and
the Swiss franc.
The U.S. foreign trade deficit diminished somewhat in May from
the high average during the preceding 4 months. In May imports of
petroleum declined, and exports of agricultural commodities increased sharply, reflecting chiefly a rise in exports of soybeans.
Exports of nonagricultural commodities were virtually unchanged;
since the third quarter of 1976 they had been stable, on balance, in
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FOMC Policy Actions
association with only moderate expansion in economic activity in
major industrial countries marked by sluggishness in capital investment.
At U.S. commercial banks, growth in total credit slowed somewhat further in June and was slightly below the average for the first 5
months of the year. The slowing in June reflected declines in net
acquisitions of Treasury and other securities. Growth of real estate
loans accelerated to a near-record pace, and growth of most other
major categories of loans was substantial. However, nonbank financial institutions reduced their outstanding bank loans, as they raised
a record volume of funds in the commercial paper market.
Business credit demands—which had fallen off in May—
rebounded in June, apparently in part because of borrowing by
corporations to finance a record amount of Federal income tax
payments due at midmonth. Business loans at banks and the
outstanding volume of commercial paper issued by nonfinancial
corporations both expanded at relatively high rates. Over the first
half of the year, growth in business loans (excluding bankers
acceptances) and in outstanding commercial paper was substantially
faster than over the fourth quarter of 1976.
The narrowly defined money stock (M-1), after having risen at an
exceptionally rapid rate in April and having increased little in May,
grew at a moderate pace in June. On a quarterly-average basis, M-l
grew at an annual rate of 8.5 per cent in the second quarter,
compared with 4.2 per cent in the first quarter.
Growth in the more broadly defined measures of money (Af-2 and
M-3) also was moderate in June. Inflows to banks of the time and
savings deposits included in M-2 picked up somewhat, after having
slackened for a number of months, and inflows to nonbank thrift
institutions remained sizable. On a quarterly-average basis, M-2 and
M-3, respectively, grew at annual rates of 9.2 and 10.0 per cent in the
second quarter, compared with 9.9 and 11.3 per cent in the first
quarter.
At its June meeting the Committee had decided that operations in
the period immediately ahead should be directed toward maintaining
about the prevailing money market conditions, as represented by a
weekly-average Federal funds rate of 5% per cent, provided that
M-l and M-2 appeared to be growing over the June-July period at
annual rates within ranges of 2lA to 6V2 per cent and 6 to 10 per cent,
FOMC Policy Actions
247
respectively. Throughout the inter-meeting period, incoming data
suggested that over the June-July period M-1 and M-2 would grow at
rates within those ranges. Accordingly, the Manager of the System
Open Market Account sought to maintain the Federal funds rate
around 5% per cent.
In association with the stability in the Federal funds rate, market
interest rates in general changed little during the inter-meeting
period despite some increase in over-all credit demands. Rates on
Treasury bills edged up—although the Treasury continued to redeem bills in its regular auctions—as the market apparently began to
adjust to the anticipated near-term cessation of large redemptions.
Changes in rates on private short-term instruments and on longerterm issues were small.
Treasury public sales and redemptions of securities were about in
balance during the inter-meeting interval. For the second quarter as
a whole, the Treasury made net repayments of marketable securities
of $5 billion, in contrast with net borrowings of $14 billion during the
first quarter. It was anticipated that the Treasury would raise a
substantial amount of new money in conjunction with its mid-August
refunding of $3.3 billion of maturing securities held by the public; it
was expected that the terms of the financing would be announced on
July 27.
In the corporate bond market the volume of new securities offered
to the public increased in June, reflecting a relatively large volume of
new issues by public utilities and financial concerns. For the second
quarter as a whole, however, offerings were below the volume for
the previous quarter, and those by industrial corporations were at
the lowest level in more than 3 years.
Offerings of State and local government bonds rose to a record in
June, raising the second-quarter volume to an unprecedented $13.4
billion, following $10.7 billion in the first quarter. As in other recent
months, demands for these securities were strong from propertycasualty insurance companies, commercial banks, and individuals—
both directly and through municipal bond investment companies.
The volume of mortgage lending remained large in June at
commercial banks as well as at savings and loan associations.
Estimates for the second quarter indicated an acceleration from the
high rate for the first quarter. While issues of GNMA-guaranteed,
mortgage-backed securities declined from the strong first-quarter
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FOMC Policy Actions
pace, net acquisitions of mortgages by FNMA expanded substantially. Average interest rates on new commitments for conventional
home mortgages continued to edge higher in late June and early July,
and yields in the secondary mortgage market changed little on
balance.
In their discussion of the economic situation, members of the
Committee agreed with the general outlines of the staff projections,
which were described as presenting a fairly optimistic picture of
prospective developments. Despite the broad consensus on the
outlook, several members suggested that expansion in some sectors
of demand might prove to be less strong than expected by the staff
and that growth in real GNP was more likely to fall short of than to
exceed the projected rates.
With respect to the immediate situation, attention was called to
the rate at which inventories had accumulated in some sectors. The
view was expressed that a minor adjustment of inventories—similar
to although smaller than the one in the latter part of 1976—had been
under way for the past 2 months or so and had already affected
production and employment in nondurable goods industries. It was
observed that businesses appeared to adjust inventory imbalances
more promptly now than they had in the past; that such minor
adjustments tended to forestall the development of a need for major
adjustment; and that the adjustment that appeared to be in process
was healthy in that it would serve to make the business expansion
more sustainable. A question was raised as to whether the staff
projections for the very near term adequately reflected the adjustment in inventories that appeared to be under way.
Questions were also raised about the staff projections for sales of
new automobiles and for residential construction. It was suggested
that auto sales might be reduced from the advanced level of recent
months by two influences: one, increases in prices, not only for
domestic models but also for imports because of the substantial
appreciations of the Japanese yen and the German mark against the
dollar; and two, the high level of consumer debt. With respect to
residential construction, two members felt that the expansion in that
sector might slow sooner than projected; in support of this view, it
was suggested that the rise in prices for new homes had diminished
the ability of consumers to buy them.
Despite the questions about certain aspects of the staff pro-
FOMC Policy Actions
249
jections, a number of reasons were advanced for viewing the
prospective course of economic activity with some confidence: The
trend of retail sales was basically upward—even though sales had
leveled off on a high plateau in recent months—and the minor
inventory imbalance was being corrected; any falling off in sales of
automobiles that might develop was likely to be accompanied—as
often in the past—by more rapid growth in sales of consumer
nondurable goods; the expansion in business capital expenditures
was gaining momentum; and purchases of goods and services by
State and local governments would be a source of increasing
strength in over-all activity. It was suggested, moreover, that a
gradual slowing of growth in real GNP toward its long-term trend
was desirable as rates of resource utilization approached their
practical limits.
Although the outlook for plant and equipment expenditures was
viewed as favorable, concern was expressed that the lag in growth of
productive facilities so far in this business expansion might result in
the development of pressures against available capacity while the
unemployment rate was still relatively high. At the same time, it was
noted that economists in general believed that the unemployment rate
consistent with the goal of full employment was appreciably higher
now than it had been some years earlier. The observation was made
that the unemployment rate had remained comparatively high despite the extraordinary growth in employment so far in this business
expansion mainly because women—and to a lesser extent,
teenagers—had entered the labor force in unusually large numbers.
It was suggested that many women sought part-time jobs—in some
cases because of the effects of inflation—and that even though
businesses had been adapting to this change in the labor market, the
increase in the number of part-time jobs available had been far from
sufficient.
Some members commented on pending legislation to increase the
minimum wage. The view was expressed that an increase in the
minimum tended to raise the whole structure of wages and that it had
adverse effects on employment, particularly of teenagers, and on
prices.
Finally, some members of the Committee expressed concern
about the possible effects of developments abroad on the U.S.
economy. Specifically, they observed that in some major countries
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FOMC Policy Actions
the outlook for economic activity did not appear to be particularly
strong and that continued sluggishness abroad had adverse implications for the U.S. trade balance, already heavily in deficit.
At this meeting the Committee reviewed its 12-month ranges for
growth in the monetary aggregates. At its April meeting the Committee had specified the following ranges for growth over the period
from the first quarter of 1977 to the first quarter of 1978: M-l, AV2 to
6VS per cent; Af-2, 7 to Wi per cent; and M-3, %XA to 11 per cent. The
associated range for growth in the bank credit proxy was 7 to 10 per
cent. The ranges being considered at this meeting were for the
period from the second quarter of 1977 to the second quarter of 1978.
In the discussion of the ranges for growth in the aggregates over
the year ahead, most members of the Committee expressed the
belief that a small downward adjustment should be made. All but
one of these members supported a proposal to reduce the lower limit
of the range for M-l by Vi of a percentage point while retaining the
existing ranges for M-2 and M-3; one member favored small reductions in the ranges for M-2 and M-3 as well as the Vi-point decrease
in the lower limit of the range for M-l. Other Committee members
advocated more of a downward adjustment in the ranges; specifically, they favored a reduction of Vi of a percentage point in both
the upper and the lower limits of the range for M-l, and these
members in general favored some decrease in the ranges for M-2 and
M-3 as well.
In support of the proposal to make some downward adjustment,
several Committee members suggested that it would be desirable to
take another step in the gradual process of bringing the longer-run
ranges for growth in the monetary aggregates down to rates
compatible with general price stability. Moreover, it was observed
that the annual rate of growth in M-l from the first to the second
quarter of 1977 had exceeded the range adopted by the Committee at
its meeting in April; that despite the gradual reduction of projected
ranges of growth for the aggregates during the past 2 years, no
meaningful reduction had as yet occurred in actual rates of growth;
that the outlook for growth in real GNP was relatively good; and that
the rate of inflation had intensified somewhat during the first half of
1977.
One member of the Committee favored a reduction of x/i of a
percentage point in the upper, as well as the lower, limit of the range
FOMC Policy Actions
251
for M-1 while retaining the existing ranges for M-2 and M-3, with the
objective of realigning the ranges in view of the increasing importance
of new means of payment as substitutes for demand deposits. Other
members argued, on the other hand, that any downward adjustment
in the range for M-1 should be limited to the lower limit. It was noted
that while second-quarter growth for that aggregate had been
relatively high, growth in the first quarter had been low in relation
to the Committee's longer-run range. In view of prospective
developments—including, specifically, increases in prices attributable to such exogenous forces as increases in energy costs and in the
minimum wage—it was suggested that a reduction of Vi of a
percentage point in the upper as well as in the lower limit of the
range for M-l might run the risk of undesirable pressures in financial
markets, a principal effect of which would be to slow growth in real
GNP more than projected.
Three members of the Committee advocated a reduction of Vi of a
percentage point in both limits of the range for A/-1 and also some
reduction in the ranges for the broader monetary aggregates. Their
reasons for this position are contained in the statements of dissent
below.
At the conclusion of its discussion the Committee decided to
reduce the lower limit of the range for A/-1 by Vi of a percentage
point and to retain the existing ranges for M-2 and M-3. The ranges
thus were 4 to 6V2 per cent for M-1, 7 to 9lA per cent for M-2, and SV2
to 11 per cent for M-3. The associated range for the rate of growth in
commercial bank credit was 7 to 10 per cent.1 It was agreed that the
longer-run ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings. It was also understood that short-run
factors might cause growth rates from month to month to fall outside
the ranges contemplated for the year ahead.
The Committee adopted the following ranges for rates of growth in
monetary aggregates for the period from the second quarter of 1977 to
!
At this meeting the Committee decided to replace the bank credit proxy with a
broader measure of all commercial bank credit. In recent years the proxy—which is
based solely on data for member banks—has become increasingly less representative
of total bank credit, in part because of the growth in importance of nonmember banks
and in part because the proxy does not include certain borrowings by banks from the
nonbank public.
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FOMC Policy Actions
the second quarter of 1978: Af-1, 4 to 6V2 per cent; Af-2, 7 to 9Vi per
cent; and M-3, 8Vi to 11 per cent.
Votes for this action: Messrs. Burns, Volcker,
Gardner, Guffey, Lilly, Mayo, Morris, Partee, and
Wallich. Votes against this action: Messrs. Coldwell,
Jackson, and Roos.
Mr. Coldwell dissented from this action because he thought that
liquidity was high; that less rapid growth in real GNP was now
necessary in order to sustain the expansion later on; and that action
to reduce the rate of growth in the aggregates might lessen upward
pressures on prices, improve the U.S. foreign trade position, and
strengthen the dollar. Mr. Jackson dissented because he believed
that it was important to reduce the upper limit of the range for M-\
so that the Committee would take action to avoid a higher rate of
growth, and that it was a logical consequence of that position to
favor reductions also in the ranges for the broader aggregates. Mr.
Roos, who also dissented, held the view that the retention of the
existing upper limit of the range for M-\ following the overshoot of
growth in that aggregate from the first to the second quarter of 1977
might result in too rapid monetary growth over the five-quarter
period ending in the second quarter of 1978 and therefore lead to a
probable acceleration of the rate of inflation.
As to policy for the period immediately ahead, members of the
Committee did not differ greatly in their preferences for ranges of
growth for the monetary aggregates over the July-August period.
Most of them favored ranges of 3Vi to IVi per cent and 6V2 to lOVi
per cent for the annual rates of growth inM-1 andM-2, respectively.
One member suggested that the Committee specify somewhat wider
ranges around the same midpoints of those ranges because of
greater-than-usual uncertainty about projections of monetary
growth for the period just ahead. Also, some sentiment was expressed for slightly higher, and some for slightly lower, ranges.
All members favored a return to basing decisions for open market
operations in the period immediately ahead primarily on the behavior of the monetary aggregates. At its meeting in June the
Committee had decided to give greater weight than usual to money
market conditions in conducting operations in the period until this
meeting.
FOMC Policy Actions
253
Almost all members favored directing operations initially toward
the objective of maintaining the Federal funds rate at its current level
of 5% per cent, but a few members suggested that operations be
directed toward achieving a slightly higher rate within a short time.
With respect to the degree of leeway for operations during the
inter-meeting period should the aggregates appear to be deviating
significantly from the midpoints of the specified ranges, most
members advocated retaining the range for the Federal funds rate of
5lA to 53A per cent that had been specified at the two preceding
meetings. A few members suggested that it would be appropriate to
specify a wider range for the funds rate in association with the return
to conducting operations on the basis of the behavior of the
monetary aggregates; ranges of 5V4 to 6 per cent, 5 to 6 per cent, and
5 to 5% per cent were suggested.
At the conclusion of the discussion the Committee decided that
growth in M-\ and M-2 over the July-August period at annual rates
within ranges of V/i to IVi per cent and 6V2 to \Wi per cent,
respectively, would be appropriate. It was understood that in
assessing the behavior of the aggregates, the Manager should give
approximately equal weight to the behavior of M-\ and M-2.
In the judgment of the Committee, such growth rates of the
aggregates were likely to be associated with a weekly-average
Federal funds rate of about 5Ys per cent. The Committee agreed that
if growth rates of the aggregates over the 2-month period appeared
to be deviating significantly from the midpoints of the indicated
ranges, the operational objective for the weekly-average Federal
funds rate should be modified in an orderly fashion within a range of
5lA to 53A per cent.2 As customary, it was understood that the
Chairman might call upon the Committee to consider the need for
supplementary instructions before the next scheduled meeting if
significant inconsistencies appeared to be developing among the
Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services grew in the second quarter at about the rapid
Subsequently, as described on p. 836, the Committee modified the range by
increasing the upper limit to 6 per cent.
254
FOMC Policy Actions
rate of the first quarter. In June industrial output continued to expand
at a substantial pace. The rise in employment moderated, and the
unemployment rate edged up from 6.9 to 7.1 per cent. Total retail
sales remained at about the level reached in March; for the second
quarter as a whole, however, sales were moderately above the
first-quarter level. The wholesale price index for all commodities
declined in June, owing to sharp decreases among farm products and
foods; as in May, average prices of industrial commodities rose
appreciably less than in earlier months of 1977. The index of average
hourly earnings rose over the first half of the year at about the same
pace that it had on the average during 1976.
The average value of the dollar against leading foreign currencies
has declined more than 1 per cent over the past month; the declines
were especially marked against the Japanese, German, and Swiss
currencies. In May the U.S. foreign trade deficit diminished somewhat from the high rate in the first 4 months of the year.
Af-1, after rising at an exceptionally rapid rate in April, increased
little in May and grew at a moderate pace in June. Growth in M-2 and
M-3 also was moderate in June. Inflows to banks of time and savings
deposits included in M-2 picked up somewhat, after having slackened
for a number of months, and inflows to nonbank thrift institutions
remained sizable. Business short-term borrowing expanded sharply in
June. Market interest rates in general have changed little in recent
weeks.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and
help resist inflationary pressures, while contributing to a sustainable
pattern of international transactions.
Growth in M-1, M-2, and M-3 within ranges of 4 to 6V2 per cent, 7 to
9lA per cent, and SV2 to 11 per cent, respectively, from the second
quarter of 1977 to the second quarter of 1978 appears to be consistent
with these objectives. These ranges are subject to reconsideration at
any time as conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-l and M-2 on a path believed to be reasonably consistent with the
longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the July-August period to be within the ranges of 3Vi to IVi per
cent for M-\ and 6V2 to WV2 per cent for M-2. In the judgment of the
Committee such growth rates are likely to be associated with a
weekly-average Federal funds rate of about 53/s per cent. If, giving
FOMC Policy Actions
255
approximately equal weight to M-\ and Af-2, it appears that growth
rates over the 2-month period will deviate significantly from the
midpoints of the indicated ranges, the operational objective for the
Federal funds rate shall be modified in an orderly fashion within a
range of 5lA to 53A per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against this
action: None.
Subsequent to the meeting, on August 4, nearly final estimates
indicated that in July M-\ had grown at an annual rate of about 18^
per cent and M-2 at a rate of about 16!^ per cent. For the
July-August period staff projections suggested that the annual rates
of growth for both aggregates would be well above the upper limits
of the ranges specified by the Committee in the next-to-last paragraph of the domestic policy directive issued at the July meeting.
The Federal funds rate had averaged 5.80 per cent in the statement
week ended August 3, up from 5.45 per cent in the week ended July
27 and 5.35 per cent in the preceding 3 weeks. The Manager of the
System Open Market Account was currently aiming at a funds rate
of 53A per cent, the upper limit of the inter-meeting range specified in
the directive.
Against that background, Chairman Burns recommended on August 4 that the upper limit of the range for the Federal funds rate be
increased to 6 per cent so that the Manager might have some
additional leeway for operations, while continuing to take account of
the current Treasury financing and financial market developments.
He further recommended that this additional leeway be used very
gradually, and only in the event that the aggregates continued to
register values far beyond the Committee's objectives.
On August 5, 1977, the Committee modified the inter-meeting range
for the Federal funds rate specified in the next-to-last paragraph of the
domestic policy directive issued on July 19, 1977, by increasing the
upper limit from 53A to 6 per cent.
256
FOMC Policy Actions
Votes for this action: Messrs. Burns, Jackson,
Mayo, Morris, Partee, Roos, Wallich, Balles, and
Timlen. Votes against this action: None. Absent and
not voting: Messrs. Cold well, Gardner, Guffey,
Lilly, and Volcker. (Messrs. Balles and Timlen
voted as alternates for Messrs. Guffey and Volcker,
respectively.)
FOMC Policy Actions
257
MEETING HELD ON AUGUST 16, 1977
Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services—which had increased at an annual rate of 6.4
per cent in the second quarter, according to preliminary estimates of
the Commerce Department—was growing less rapidly in the current
quarter. At the same time the rise in average prices, as measured by
the fixed-weighted price index for gross domestic business product,
appeared to be slowing from that of the second quarter, estimated to
have been at a 7.0 per cent annual rate. Staff projections suggested
that growth in real GNP was likely to remain less rapid over the
remainder of 1977, and to slow a little further in 1978. The projections also suggested that the rate of increase in prices would
moderate from that in the first half, but would still remain high.
According to the staff projections, rising activity in a number of
sectors would contribute to a continuation of the economic expansion over the year. Growth in consumer spending, which had slowed
appreciably in the second quarter, was projected to pick up gradually. Relatively strong growth was anticipated in business capital
outlays, and inventory investment seemed likely to continue as an
expansive factor, although much less so than in the first half of 1977.
Increases in Federal purchases of goods and services were expected
to remain substantial. Spending by State and local governments was
projected to continue rising briskly, in part because of the stimulus
of expanded Federal public works and job-related grant programs.
On the negative side, slow export growth and rising imports seemed
likely to exert a drag on economic activity over much of the
projection period. And the increase in residential construction
activity was expected to level off as the period progressed.
In July industrial production rose by 0.5 per cent, a little less than
in June and roughly half of the substantial increase in May. The rate
of capacity utilization in manufacturing edged higher, to an esti-
258
FOMC Policy Actions
mated 83.7 per cent. The July rise in production reflected sizable
increases in the output of consumer durable goods and business
equipment. Production of nondurable consumer goods changed
little, and steel output declined. Auto assemblies rose slightly, but it
was expected that production schedules would be reduced more
than usual in August by the beginning of the changeover to the new
model year.
Nonfarm payroll employment expanded by more than a quarter of
a million in July, half again as much as in June, with factory jobs
rising by 70,000. According to the household survey data, however,
total employment—after increasing 2lA million between December
and June—declined in July, due to a sharp reduction in agricultural
jobs. The labor force also contracted in July, almost wholly as a
result of reduced participation by teenagers, and the unemployment
rate declined 0.2 of a percentage point, returning to the May level of
6.9 per cent.
Personal income had advanced briskly during the first half of 1977
as a result of the large gains in employment. The rise in wage and
salary payments slowed in June, but for the second quarter as a
whole the increase was the largest since the first quarter of 1976. In
July wage and salary payments apparently rose at a moderate rate,
and growth in personal income was bolstered by a cost-of-living
increase for social security recipients.
Available reports suggested that corporate profits had improved
during the second quarter. Although comprehensive data were not
yet available, the information at hand implied a second-quarter level
of corporate profits that was significantly above the relatively low
levels recorded in the third and fourth quarters of 1976 and the first
quarter of 1977. As a proportion of GNP, however, corporate profits
still remained below their longer-run average and well below previous postwar peaks.
The dollar value of retail sales had increased 0.5 per cent in July,
according to the advance report. However, data for June—which
had initially indicated no change from May—had been revised to
show a decline of 1.3 per cent. For the second quarter as a whole the
value of retail sales was now estimated to have risen 1.6 per cent,
down from the earlier estimate of 2.1 per cent. In July there were
sizable advances in sales at stores in the GAF (general merchandise,
apparel, furniture and appliance) grouping. But auto sales fell to an
FOMC Policy Actions
259
annual rate of L0.8 million units, from the near-record pace of 11.8
million units in June.
Businesses appeared to be making prompt adjustments to evidence
of developing imbalances in inventories of nondurable goods. In
June the book value of such inventories declined at both manufacturers and wholesalers—at the latter, for the second consecutive
month—following large increases earlier in the year. Inventories of
durable goods continued to rise at a relatively rapid rate at both
manufacturers and wholesalers, but the growth was about in line
with the advance in sales.
Private housing starts declined to an annual rate of about 1.8
million units in June, the latest month for which data were available.
This was close to the average rate that had prevailed since late 1976.
In the second quarter as a whole, single-family starts—at an annual
rate of 1.4 million units—were the highest for any quarter on record.
Mortgage lending activity had remained strong in recent months; the
rate of growth in mortgage debt outstanding was estimated to have
been at a record during the second quarter, and it appeared to have
risen somewhat further in July.
New orders for nondefense capital goods increased by about 5 per
cent in June. Contract awards for commercial and industrial
buildings—as measured in terms of floor space—edged off from the
high May level; for the second quarter as a whole, however, they
were 4.5 per cent above their level in the first quarter.
The index of average hourly earnings for private nonfarm production workers rose in July at an annual rate of 6V2 per cent—close to
the average rise over the preceding 18 months. Major collective
bargaining settlements in the first half of 1977 provided for first-year
wage increases averaging 8.0 per cent, compared with an average of
8.4 per cent under contracts negotiated in 1976. On the other hand,
compensation per hour in the private nonfarm business sector rose
at an annual rate of about 9.5 per cent in the first half, a little faster
than in 1976.
The wholesale price index for all commodities, which had declined in June, was about unchanged in July. Average prices for farm
products and foods—after having risen sharply in the early months
of 1977—declined for the second successive month. Average prices
for industrial commodities continued to advance but at a more
moderate pace than in the earlier months of the year.
260
FOMC Policy Actions
The consumer price index in June rose 0.6 per cent—about the
same as in the preceding 3 months. While the advance for commodities other than foods slowed to 0.2 per cent, the increases for
foods and for services edged up to 0.8 per cent.
By the time of this Committee meeting, the average value of the
dollar against leading foreign currencies had recoverd more than 1
per cent from the low reached on July 25, but it was still below its
late-June level. The strengthening of the dollar since late July
reflected reaction in the foreign exchange markets to statements by
U.S. officials indicating the importance that the United States
attaches to maintaining the strength of the dollar, and also to the
recent relative rise in interest rates on dollar-denominated assets.
The dollar appreciated most sharply against the German mark and
the Japanese yen. It depreciated against sterling, however, after
authorities in the United Kingdom elected to discontinue their
earlier policy of maintaining a target ceiling rate for sterling defined
exclusively in terms of the U.S. dollar.
The U.S. trade deficit rose sharply in June as imports rebounded
from the somewhat reduced level in May and exports declined. For
the second quarter as a whole, the trade deficit as measured in the
international accounts was at an annual rate of $31 billion.
At U.S. commercial banks, total credit expanded slightly faster in
July than in June, but the pace in July remained below the average
for the first half of the year. Holdings by banks of U.S. Treasury
securities declined sharply in July, while their holdings of other
securities increased moderately. Total loans rose more rapidly than
in any other month since last October, reflecting strength in most
major categories. However, business loans grew considerably less
than in June, when corporations had borrowed to finance an
unusually large volume of Federal income tax payments. Also, the
outstanding volume of commercial paper issued by nonfinancial
corporations declined slightly in July.
Growth in the narrowly defined money stock (M-l) accelerated to
an annual rate of about 18 per cent in July. While much of the
increase apparently was temporary, part seemed to reflect rising
transactions demands for money. For the 7 months ending with July,
M-l grew at an annual rate of nearly 8 per cent.
Growth in the more broadly defined measures of money (M-2 and
M-3) also accelerated sharply in July, to annual rates of about 17 and
FOMC Policy Actions
261
16 per cent, respectively. The high rates of expansion in these
measures were due primarily to the large increases in Af-1, but
inflows of the time and savings deposits included in M-2 and M-3
also picked up from their reduced rates in June. For the 7 months
ending with July, M-2 and M-3 grew at annual rates of 10 and 11 per
cent, respectively.
At its July meeting the Committee had decided that growth in M-1
and M-2 in the July-August period within ranges of V/i to IVi per
cent and 6V2 to KM per cent, respectively, would be appropriate. It
had judged that these growth rates were likely to be associated with
a weekly-average Federal funds rate of about 5% per cent. The
Committee had agreed that if growth rates in the aggregates over the
2-month period appeared to be deviating significantly from the
midpoints of the indicated ranges, the operational objective for
the weekly-average Federal funds rate should be modified in an
orderly fashion within a range of 5lA to 534 per cent.
Data that had become available in the days immediately following
the July meeting suggested that over the July-August period both
M-l and M-2 would grow at rates in the upper parts of their specified
ranges. These data were considered especially tentative, however,
because unusual patterns in the figures received just after the power
failure in New York City suggested that the failure might have
introduced statistical distortions. The System Account Manager,
therefore, continued to seek a Federal funds rate of about 5% per
cent. Later, however, when new data not only confirmed the initial
signs of strength but also suggested that growth in the aggregates
would be somewhat above the upper limits of the specified ranges,
System operations were directed at achieving a higher Federal funds
rate. During the statement week ending August 3, the funds rate
averaged 5.80 per cent, approximately equal to the 53A per cent
upper limit of the Committee's range.
Information that became available on August 4 suggested that the
growth rates in the aggregates in the July-August period would be
well above the ranges specified by the Committee, and on August 5
the Committee voted to increase the upper limit of the range for the
funds rate to 6 per cent. It was understood that the Manager would
use this additional leeway very gradually and only in the event that
the aggregates continued to register values far in excess of the
Committee's objectives. When such strength in the aggregates did
262
FOMC Policy Actions
persist, the Account Manager aimed at a Federal funds rate of about
6 per cent.
In markets for short- and medium-term securities, interest rates
generally rose by 3/s to Vi of a percentage point over the intermeeting period. Yields on corporate and municipal bonds, however,
showed little change over the period, and those on Treasury bonds
posted only small advances.
During the 4 weeks of the inter-meeting period the U.S. Treasury
raised about $4.0 billion of new money in securities markets,
including $3.0 billion obtained in connection with its mid-August
refinancing. Issues offered in the refinancing consisted of $3.0 billion
of 3-year notes, $2.25 billion of 7-year notes, and $1.0 billion of
(reopened) 29Vi-year bonds.
In July the volume of new publicly offered corporate bonds was
slightly larger than in June and was above the monthly average for
the second quarter. Offerings by industrial issuers—which had been
exceptionally low in June—were at their highest level since December 1976, while new issues by utilities were below their advanced
second-quarter pace. The volume of new State and local government
bonds dropped more than seasonally during July, following a record
supply of new issues both in June and for the second quarter as a
whole. The heavy volume of new municipal offerings in recent
months included a large number of advance refundings, as well as
issues offered earlier than originally planned, apparently in the
expectation that interest costs would rise later in the year.
Average prices of common stocks traded on the New York Stock
Exchange declined during the inter-meeting period—in the case of
one widely used index, to the lowest level since early 1976. Indexes
of issues traded on the American Stock Exchange and over the
counter also declined somewhat during the period, but they remained near their highest levels since 1973.
In markets for home mortgages, average interest rates on new
commitments for conventional loans were relatively stable in the
weeks just prior to this meeting, following small advances in late
June and early July. Meanwhile, yields in the secondary market for
home mortgages generally edged higher.
In the Committee's discussion of the economic situation, the
members agreed that the expansion was likely to continue for some
time. Several members suggested that the apparent moderation in
FOMC Policy Actions
263
economic growth from the rapid pace of the first half of the year was
an essentially healthy adjustment; continued expansion at the earlier
pace might well have led in time to a reacceleration of inflation and
created price distortions that would have brought the expansion to
an early end. It was observed that the economy was experiencing
few imbalances at present and that needed adjustments in business
inventories were being made promptly. The view was widespread
among members that the upward trend of business capital investment would persist and very likely would strengthen.
While the members agreed that the economic expansion was likely
to continue, they differed regarding its probable profile over the
quarters ahead. Specifically, several members thought that the rate
of economic growth was likely to be slower in the second half of
1977, and faster in the first half of 1978, than suggested by the staff
projections. With respect to the second half of 1977, these members
thought that spending on consumer goods and housing would rise
less than indicated, and they found it difficult to identify offsetting
sources of strength. For the longer run, however, they believed that
economic growth would be fostered by sustained increases in
business capital outlays and in spending by Federal and State and
local governments. It was suggested that such a pattern might well
be associated with a slower rate of price advance than that projected
by the staff.
Other members of the Committee indicated that, while they
expected more strength in the economy in the second half of 1977
than their colleagues did, they were not persuaded that the rate of
growth would rise after the turn of the year. In this connection they
identified several potential problems. One was the possibility that
the recent upcreep in unit costs of production relative to selling
prices might continue, with a consequent further narrowing of profit
margins. It was noted that when this process had developed in the
past, an economic downturn had typically occurred within 1 to 2
years. Other potential problems mentioned were the recent rapid
increase in consumer credit and the evidence of speculation in some
real estate markets. One member of the Committee, in commenting
on the erosion of profit margins, observed that businesses did not
appear to be pressing as actively as they might to hold labor costs
down, fearing the impact of strikes and assuming that inflation
would continue.
264
FOMC Policy Actions
In the discussion of the outlook for business investment, it was
noted that outlays were falling short of what might have been
expected on the basis of past cyclical expansions, even in industries
where the need for increased plant and equipment spending was
clearly evident. A number of members expressed the view that
narrow profit margins were tending to constrain investment spending. One member offered the hypothesis that a more typical increase
in such spending might continue to be delayed until profit margins
were widened by increases in product prices as capacity limits were
approached. Among other factors mentioned as inhibiting investment was the unusual degree of uncertainty prevailing in business
circles, particularly with respect to public policy on such matters as
inflation control, energy, and tax reform.
Several members of the Committee cited the recent declines in
stock prices as evidence of uncertainties about the prospects for
corporate profits. In the discussion Committee members identified
other factors they believed might help to account for some of the
weakness in stock prices. One was the restructuring of investment
portfolios being undertaken by many institutional investors to
increase emphasis on fixed-rate instruments. Another was efforts by
stockholders to realize accumulated capital gains, as a precaution
against the possible enactment of legislation limiting the special tax
treatment of capital gains.
At its July meeting the Committee had agreed that from the
second quarter of 1977 to the second quarter of 1978 average rates of
growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-l, 4 to 6Vi
per cent; M-2, 7 to 9Vi per cent; and M-3, SV2 to 11 per cent. The
associated range for the rate of growth in commercial bank credit
was 7 to 10 per cent. It was agreed that the longer-run ranges, as well
as the particular aggregates for which such ranges were specified,
would be subject to review and modification at subsequent meetings.
In considering policy for the period immediately ahead, members
of the Committee noted that growth in the monetary aggregates was
expected to slow markedly in August and September. Because of the
sharp increases in July, however, expansion in the third quarter as a
whole—particularly in M-l—would be relatively rapid. It was observed that considerably slower growth rates would be needed in
FOMC Policy Actions
265
subsequent quarters if monetary growth for the year ending with the
second quarter of 1978 was to be kept within the ranges that the
Committee had decided upon in July.
While the views of members on appropriate short-run policy did
not differ greatly, a number of members placed particular stress on
the need to resist further sizable increases in the monetary aggregates, noting that continued rapid growth would foster inflationary
expectations and weakening of confidence within the business community. Other members put more emphasis on the sizable increase
that had occurred since late April in the Federal funds rate and other
short-term interest rates, and some expressed reluctance to seek
further tightening in the money market at a time when growth in
economic activity was showing signs of moderating. These members
suggested that, in the absence of unusual behavior in the monetary
aggregates, it would be desirable to maintain relatively stable
conditions in the money market for the time being.
The members agreed that, in view of the July bulge in the
monetary aggregates, no easing of money market conditions should
be sought in the coming interval even if growth rates in the
aggregates during the August-September period appeared to be
quite low. For M-l, most members favored a growth range for the
August-September period of 0 to 5 per cent or 0 to 6 per cent; a few
preferred slightly higher ranges. ForM-2, most members favored a
range of 3 to 8 per cent.
All members of the Committee favored directing inter-meeting
operations initially toward the objective of maintaining the Federal
funds rate at about the prevailing level of 6 per cent. Views differed
somewhat with respect to the degree of leeway for operations during
the inter-meeting period in the event that the aggregates appeared to
be deviating significantly from the midpoints of the specified ranges,
but most members preferred ranges for the funds rate of 53A to 6lA
per cent or 5% to 6Vi per cent. Some members suggested that more
weight than usual should be placed on money market conditions in
the directive to be issued to the Federal Reserve Bank of New York,
but a majority preferred to continue to stress the monetary aggregates.
At the conclusion of the discussion the Committee decided that
growth in M-1 and M-2 over the August-September period at annual
rates within ranges of 0 to 5 per cent and 3 to 8 per cent,
266
FOMC Policy Actions
respectively, would be appropriate. It was understood that in
assessing the behavior of these aggregates the Manager should
continue to give approximately equal weight to the behavior of M-l
and M-2.
It was the Committee's judgment that such growth rates were
likely to be associated with a weekly-average Federal funds rate of
about 6 per cent. The members agreed that if growth rates of the
aggregates over the 2-month period appeared to be deviating significantly from the midpoints of the indicated ranges, the operational
objective for the weekly-average Federal funds rate should be
modified in an orderly fashion within a range of 5% to 6lA per cent.
As customary, it was understood that the Chairman might call upon
the Committee to consider the need for supplementary instructions
before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services is growing less rapidly in the current quarter
than in the second quarter. In July industrial output rose a little less
than in June. The rise in payroll employment in nonfarm establishments was substantial. According to the household survey data, total
nonagricultural employment was unchanged and the unemployment
rate edged down to 6.9 per cent, the same as in May. The dollar value
of total retail sales rose somewhat, after 2 months of decline. The
wholesale price index for all commodities was about unchanged in
July; average prices of farm products and foods declined sharply
further, and average prices of industrial commodities continued to rise
at a more moderate pace than in the early months of 1977. The index
of average hourly earnings has continued to advance at about the
same pace that it had on the average during 1976.
The weighted average exchange rate for the dollar against leading
foreign currencies has recovered more than 1 per cent from the low
point reached in late July. In June the U.S. foreign trade deficit rose
sharply, and the deficit was larger for the second quarter as a whole
than for the first.
The increase in .Vf-1 was exceptionally large in July. Inflows to
banks of the time and savings deposits included in the broader
monetary aggregates strengthened, and growth in M-2 and M-3 also
accelerated sharply. Business short-term borrowing moderated from
FOMC Policy Actions
267
the rapid pace in June. Interest rates on short- and intermediate-term
market instruments have risen appreciably in recent weeks, while
yields on longer-term bonds have changed little.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and
help resist inflationary pressures, while contributing to a sustainable
pattern of international transactions.
At its meeting on July 19, 1977, the Committee agreed that growth
of Af-1, M-2, and M-3 within ranges of 4 to 6V2 per cent, 7 to Wi
per cent, and SV2 to 11 per cent, respectively, from the second quarter
of 1977 to the second quarter of 1978 appears to be consistent with
these objectives. These ranges are subject to reconsideration at any
time as conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-\ and M-2 on a path believed to be reasonably consistent with the
longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the August-September period to be within the ranges of 0 to 5
per cent for M-l and 3 to 8 per cent for M-2. In the judgment of the
Committee such growth rates are likely to be associated with a weeklyaverage Federal funds rate of about 6 per cent. If, giving approximately
equal weight to M-1 and M-2, it appears that growth rates over the 2month period will deviate significantly from the midpoints of the
indicated ranges, the operational objective for the Federal funds rate
shall be modified in an orderly fashion within a range of 53A to 6!4
per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against this
action: None.
268
FOMC Policy Actions
MEETING HELD ON SEPTEMBER 20, 1977
1. Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services—which had expanded at an annual rate of 6.2
per cent in the second quarter, according to revised estimates of the
Commerce Department—had grown less rapidly in the current
quarter. The rise in average prices—as measured by the fixedweighted price index for gross domestic business product—
appeared to have slowed from that of the second quarter, now
estimated to have been at an annual rate of 7.5 per cent. Staff
projections suggested that real GNP would grow moderately over
the year ahead, although at a slightly lower rate than projected a
month earlier. The projections also suggested that the rate of
increase in prices, while below that in the first half of 1977, would
remain high.
According to staff estimates, the third-quarter slowing of growth
in real GNP was accounted for by a sharp cutback in the rate of
business inventory accumulation, following a large increase in the
second quarter, as businesses attempted to prevent an excessive
build-up of stocks. It was estimated that growth in final sales of
goods and services in real terms was about the same in the third
quarter as in the second.
Staff projections of moderate growth in real GNP over the year
ahead reflected expectations that growth in consumer spending
would pick up gradually; that expansion in business capital outlays
would be sustained; and that increases in State and local government
purchases of goods and services would remain large, in part because
of the stimulus of increased Federal public works and job-related
programs. It was still anticipated that the expansion in residential
construction activity would taper off as the period progressed and
FOMC Policy Actions
269
that slow export growth combined with a somewhat faster rise in
imports would exert a drag on domestic economic activity over
much of the year ahead.
In August industrial production declined by 0.5 per cent, about as
much as it had risen in July. A substantial part of the decline was
accounted for by curtailments in automobile assemblies and electric
utility power generation, both of which had increased sharply in
July, but decreases in output were widespread. Production of iron
ore was reduced by a strike.
Capacity utilization in manufacturing also declined in August, for
the most part reflecting decreases in the transportation equipment
and nonelectrical machinery industries. Utilization in the
materials-producing industries edged down to 82.7 per cent. This
rate was appreciably lower than at the comparable stage of other
recent business expansions, in part because of larger supplies from
foreign sources.
In association with the decrease in industrial output, employment
in manufacturing fell in August—returning to the level of May—and
the length of the average workweek declined for the second successive month. Total nonfarm payroll employment increased moderately, however, as employment outside the manufacturing sector
continued to grow. According to the household survey, total civilian
employment also rose moderately, but the labor force expanded
sharply and the unemployment rate increased 0.2 of a percentage
point to 7.1 per cent—the same level as in June. From April through
August the unemployment rate fluctuated between 6.9 and 7.1 per
cent.
The rise in personal income accelerated in July, as a result of a
cost-of-living increase in social security payments, and then slowed
in August to about the same rate as in May and June. In August total
wage and salary disbursements increased little. Disbursements
expanded substantially in government, reflecting gains in State and
local payrolls attributable to a rise in Federally sponsored public
service jobs, but declined in manufacturing and gained little in other
industries.
The dollar value of retail sales had increased 1.7 per cent in
August, according to the advance report. The August level of sales
was somewhat above the earlier peak reached in March and moderately above the average for the second quarter. Sales gains in August
270
FOMC Policy Actions
were widespread among types of outlets and were particularly
strong at furniture and appliance stores, apparel stores, and gasoline
stations. Sales of new automobiles, which had fallen in July,
recovered almost to the high rate that had prevailed throughout the
second quarter.
The adjustment in inventories proceeded in July, when the book
value of nondurable goods stocks actually declined. The increase in
the book value of total manufacturing and trade stocks was
substantially below the monthly-average increases in the first two
quarters of 1977.
Private housing starts rose appreciably in July to an annual rate of
nearly 2.1 million units and then edged down in August to a rate
slightly above 2.0 million. The average for the 2 months was 7 per
cent above the average for the second quarter, in large part because
of gains in starts of multifamily units.
The Department of Commerce survey of business plans taken in
late July and August suggested that spending for plant and equipment would be 13.3 per cent greater in 1977 than in 1976; the survey
taken in May had suggested a year-to-year gain of 12.3 per cent. The
latest survey implied average increases of somewhat less than 3 per
cent in the third and fourth quarters of the year, compared with V/i
per cent in the first two quarters.
New orders for nondefense capital goods, which had increased
about 5 per cent in June, were indicated by the partial sample
estimate to have fallen about 10 per cent in July. Much of the rise
and subsequent decline was accounted for by orders for commercial
aircraft, apparently for export. The level of new orders in July was
well below the average for the second quarter and about equal to the
average for the first quarter. Manufacturers' shipments of nondefense capital goods expanded in July, and unfilled orders for such
goods leveled off after having risen during the preceding 6 months.
Contract awards for commercial and industrial buildings—measured
in terms of floor space—declined in July and were moderately below
the average for the second quarter.
The index of average hourly earnings for private nonfarm production workers, which had increased substantially in July according to
revised data, advanced little in August. Over the first 8 months of
1977 the index rose at an annual rate of 6.8 per cent; over the 12
months of 1976 the index had risen 6.9 per cent.
FOMC Policy Actions
271
The wholesale price index for all commodities, which had declined in June and changed little in July, was about unchanged again
in August. Average prices of farm products and foods declined
sharply for the third successive month and were back down to about
the level of December 1976. Average prices of industrial commodities continued to rise at a more moderate pace than in the latter
part of 1976 and the first 4 months of 1977.
The consumer price index rose 0.4 per cent in July, considerably
less than in any month in the first half of 1977. Retail prices of foods
changed little, after having increased about 7 per cent over the
preceding 6 months. Average prices of nonfood commodities also
changed little in July, in part because of reductions for gasoline and
used cars, but prices of services continued to rise at an annual rate of
about 10 per cent.
The weighted-average exchange rate for the dollar against leading
foreign currencies recovered further over the inter-meeting period
and returned to the level of late June. During the period the Swedish
krona was devalued by 10 per cent and was withdrawn from the
European "snake" arrangement; the Norwegian and Danish kroner
were devalued by 5 per cent within that arrangement. Upward
pressure on sterling intensified, and the Bank of England intervened
in the market to maintain the exchange rate for the pound against the
dollar.
The U.S. foreign trade deficit declined in July from the record
level of June and was about equal to the average for the second
quarter. Imports of petroleum and products fell, following an
increase of about 20 per cent in June. Inflows of capital, both private
and foreign official, were sizable in July.
At U.S. commercial banks, growth in total credit accelerated
during August to a rate somewhat above the average for the first 7
months of 1977. Growth in total loans remained at the advanced
pace of July, while bank holdings of U.S. Treasury securities
declined much less than in July and holdings of other securities
continued to increase moderately. Expansion of business loans
picked up from the reduced rate in July. Outstanding commercial
paper issued by nonfinancial businesses increased in August, but by
somewhat less than it had declined in July.
Growth in the narrowly defined money stock (M-l) slowed to an
annual rate of about 5Vi per cent in August from the July rate of
272
FOMC Policy Actions
more than 18 per cent. Nevertheless, growth over the 2-month
period, at an annual rate of almost 12 per cent, was more rapid than
the advanced rate of the second quarter.
Growth in the more broadly defined measures of money, M-2 and
M-3, also slowed during August—to annual rates of 6.4 and 11.2 per
cent, respectively—mainly because of deceleration of growth in the
demand deposit and currency components common to all three
measures of money. Expansion of the bank time and savings
deposits included in the broader aggregates also slowed substantially, but inflows of deposits to nonbank thrift institutions remained
strong. Over the July-August period, M-2 and M-3 grew at annual
rates of 11.6 and 13.7 per cent, respectively.
At its August meeting the Committee had decided that during the
August-September period growth in M-l and M-2 within ranges of 0
to 5 per cent and 3 to 8 per cent, respectively, would be appropriate.
It had judged that these growth rates were likely to be associated
with a weekly-average Federal funds rate of about 6 per cent. The
Committee had agreed that if growth rates in the aggregates over the
2-month period appeared to be deviating significantly from the
midpoints of the indicated ranges, the operational objective for the
weekly-average Federal funds rate should be modified in an orderly
fashion within a range of 53A to 6lA per cent.
Data that had become available in the weeks immediately following the August FOMC meeting suggested that over the AugustSeptember period M-1 was growing at a rate in the upper half and
M-2 at a rate near the midpoint of their respective ranges. Accordingly, the System Account Manager continued to seek a Federal
funds rate of around 6 per cent. Near the end of the inter-meeting
period, growth in M-\ for the 2-month period appeared to be
exceeding the upper limit of its range and growth in M-2 appeared to
be in the upper half of its range. Therefore, the Manager sought a
firming in the Federal funds rate to around 6Vs per cent, and the rate
averaged close to that level in the 5 days just prior to this meeting of
the Committee.
During the initial weeks of the inter-meeting period, market
interest rates declined somewhat from the levels that had prevailed
in mid-August. But in early September, when it became evident that
growth in the monetary aggregates had not receded so much in
August as market participants had anticipated and that the Federal
FOMC Policy Actions
273
funds rate was remaining above 6 per cent, other market interest
rates turned up. Over the inter-meeting period, short-term rates
posted net advances ranging up to about 14 of a percentage point.
Long-term rates, however, changed little on balance. Early in the
inter-meeting period major commercial banks raised their prime rate
on business loans lA of a percentage point to 7 per cent, and in the
second week of September most of them raised the rate to 1XA per
cent.
Stock prices declined further during the inter-meeting period. Just
prior to the September meeting, several major indexes of stock
prices reached their lowest levels since the end of 1975 and early
1976.
On August 29 the Board of Governors of the Federal Reserve
System announced its approval of action by directors of five Federal
Reserve Banks raising the discount rate from 514 to 5% per cent,
effective August 30; on August 30 and September 1 increases at the
remaining Reserve Banks were approved. In announcing the approval, the Board stated that its action was intended as a technical
move for the purpose of bringing the discount rate into better
alignment with other short-term interest rates and that the action
was taken to reduce the incentive for member banks to borrow from
the Federal Reserve. Daily-average borrowings had risen from $323
million in July to $1,084 million in August; in the week ending
August 24, they had reached $1,665 million. In the week ending
September 14, daily-average borrowings were down to $337 million.
During the inter-meeting period the U.S. Treasury raised $6.3
billion of new money, including $1.5 billion in conjunction with a
regular rollover of $1.9 billion of maturing 2-year notes and $3.0
billion through a new offering in the regular cycle of 4-year
notes. Also, the Treasury sold $1.8 billion of short-dated, cashmanagement bills, which it refinanced at maturity by adding to the
regular weekly bill auctions. This marked the Treasury's first sizable
use of the bill market for new money since late 1976.
Gross offerings of new State and local government bonds increased substantially in August. Part of the large volume consisted
of offerings that had originally been scheduled for September and
then were advanced to August. Advance refunding of outstanding
municipal issues rose to a record level.
The volume of new publicly offered corporate bonds declined in
274
FOMC Policy Actions
August, in large part for seasonal reasons. As in July, the bulk of the
new offerings were from lower-rated issuers, reflecting the continuing reduction of risk premiums for such securities. Downward
pressure on risk premiums in the public market apparently reflected
some continuing spillover of funds from the private placement
market—where the supply of investable funds being provided by
insurance companies and pension funds remained large.
Growth in mortgage credit also remained strong in August.
Mortgage loans outstanding at commercial banks continued to rise at
a rapid pace, and new issues of GNMA-guaranteed, mortgagebacked securities increased further. At savings and loan associations
the record volume of mortgage commitments outstanding at the end
of July suggested that mortgage holdings had risen substantially
further. Nevertheless, the liquidity position of these associations
remained comfortable, reflecting the strong growth in deposits and
large inflows of funds from mortgage repayments.
In the Committee's discussion of the economic situation and
outlook, the members agreed—as they had at the August meeting—
that the expansion was likely to continue for some time, and most of
them expected that real GNP would grow at about the moderate
pace projected by the staff. However, some members expressed
doubts about the vigor of the expansion. One member reiterated a
view that he had expressed at the August meeting, to the effect that
growth was likely to fall short of the rate projected for the balance of
this year and then to exceed the projected rates in the first half of
1978.
It was suggested during the discussion that recent developments
bore some resemblance to those in 1976. Last year, it was recalled,
progressive diminution in the quarterly rates of growth in real GNP
had fostered concern that the expansion might be coming to an end
and had given rise to recommendations for a stimulative fiscal
program. It was noted, however, that the 1976 slowing had been
caused by an inventory adjustment; final sales of goods and services
had been strong throughout the year. It was observed that a similar
adjustment of inventories had begun in the third quarter of this year
and that once again the expansion in real final sales had been
maintained while growth in total real GNP had slowed.
In view of the continued strength in final takings, it was suggested
that the recent cutbacks in production and in employment in some
FOMC Policy Actions
275
activities were likely to be temporary. It was also observed that the
performance of the recent unemployment statistics might have been
affected by inadequate seasonal adjustments.
In the discussion, members offered reasons for expecting greater
or less strength in business activity over the next year or so than
suggested by the staff projections. Thus, some doubts were expressed that growth in consumer spending would pick up as much as
projected and, in particular, that over the year ahead sales of new
automobiles would increase further from the currently advanced
levels. These doubts were attributed in part to the surge in spending
for durable goods and the substantial rise in consumer debt that had
already occurred. It was also suggested that expansion in consumer
spending might be dampened by the adverse effect that the decline in
stock prices had had on wealth. On the other hand, it was noted that
rising real estate values had tended to increase consumers' wealth,
and that the liquidity of real estate holdings—while less than that of
market securities—had been increasing as a result of the greater ease
with which homeowners could refinance first mortgages and obtainsecond mortgages. The comment was made that many second
mortgages were being undertaken for the purpose of refinancing
outstanding instalment debt.
Some concern was expressed about the sluggishness of economic
activity in other major industrial countries, particularly in Europe,
and about its effect on net exports and thus on domestic economic
activity. However, the view was also expressed that in some major
countries the foundation for improvement in activity was being laid
by a slowing of the rise in wages and prices, a reduction of growth in
money supplies, and a strengthening of external positions.
Business fixed investment was described as a sector whose
contribution to over-all economic growth might well be greater than
projected, as businessmen responded to further growth in economic
activity and increases in capacity utilization. Moreover, business
confidence was said to have increased somewhat, although it was
still being adversely affected by uncertainties concerning Government tax and energy policies. It was suggested that the contribution
to over-all economic growth from Federal Government expenditures
also could be greater than projected.
Concern was expressed about the outlook for both unemployment
and prices. It was remarked that even if real GNP grew at a
276
FOMC Policy Actions
moderate pace over the next year, little progress would be made in
reducing the unemployment rate—which was still significantly
above the level that might be regarded as "full employment," even if
that level were judged for structural reasons to be considerably
higher than in the past. Moreover, one member observed, recent
experience had shown that high unemployment did not greatly
reduce the rate of inflation, and the staff projections did suggest
persistence of both a rapid rate of inflation and a high rate of
unemployment. To a few members, those prospects for unemployment and prices indicated that active public discussion of some form
of an incomes policy would be appropriate. Others observed that an
incomes policy both workable and likely to have fairly wide support
had not yet been devised, and also that an effort to institute such a
policy probably would have an adverse effect on business fixed
investment. One member expressed the view that the longer-run
outlook for unemployment and inflation called for a shift in the
policy mix toward a firmer monetary policy—to limit growth of
liquidity—and an easier fiscal policy.
At its July meeting the Committee had agreed that from the
second quarter of 1977 to the second quarter of 1978 average rates of
growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-\, 4 to 6Vi
per cent; M-2, 7 to 9Vi per cent; and M-3, SV2 to 11 per cent. The
associated range for the rate of growth in commercial bank credit
was 7 to 10 per cent. It was agreed that the longer-run ranges, as well
as the particular aggregates for which such ranges were specified,
would be subject to review and modification at subsequent meetings.
In their discussion at this meeting of policy for the immediate
future, Committee members differed in their views on the appropriate response to the recent rapid growth in the monetary aggregates.
It was noted that growth in M-1 and M-2 had not slowed so much in
August as had been expected and that it apparently was picking up
somewhat in September—making it likely that the rates of monetary
expansion in the third quarter would be high relative to the Committee's longer-run ranges. Some members thought that the Committee's primary objective in the period immediately ahead should be to
resist continued rapid expansion in the aggregates, in light of the
implications of such expansion for inflation and inflationary expecta-
FOMC Policy Actions
277
tions. On the other hand, some members advocated avoiding substantial increases in interest rates at present, in light of their doubts
about the economic outlook. It was also noted that the recent high
rate of growth in M-1 might represent a return to a more typical
relationship between that rate and the growth rate in nominal
GNP—following a period in which the demand for money had been
held down by changes in financial practices—and accordingly that it
might not warrant the kind of policy response that would be
appropriate under other circumstances. Most members, however,
were of the opinion that the Committee could not afford to ignore
either the uncertainties in a generally favorable economic outlook or
the recent high rates of monetary growth, and they favored finding
some middle ground.
These differences in members' views were reflected in their
preferences for operating specifications for the period immediately
ahead. For the annual rate of growth in M-\ over the SeptemberOctober period, most members favored a range with a lower limit of
2 or 3 per cent and an upper limit of 7 or 8 per cent. For M-2, most
favored a range of 4 to 8 or 4 to 9 per cent. However, one member,
who advocated maintaining relatively stable money market conditions, preferred ranges of 2 to 9 per cent for M-l and 5Vi to Wi per
cent for M-2. Another member favored a range of 0 to 5 per cent for
M-l.
With respect to the Federal funds rate, a variety of views were
expressed as to both the objective toward which operations should
be directed initially and the degree of leeway that should be provided
during the inter-meeting period in the event that the aggregates
appeared to be deviating significantly from the midpoints of the
specified ranges. Most members favored directing operations initially toward a funds rate of 61/8 per cent—the prevailing level—or
6lA per cent, but some sentiment also was expressed for a higher
initial objective. In view of the rapid monetary growth over recent
months, the members in general believed that it would be desirable
to avoid any significant decline in the weekly-average Federal funds
rate from its current level, and almost all favored 6 per cent for the
lower limit of the range. The view was expressed that a weeklyaverage Federal funds rate above 6V2 per cent should not be sought
before the Committee had had an opportunity for further consultation, and a majority favored 6V2 per cent as the upper limit for the
278
FOMC Policy Actions
range. There was, however, considerable sentiment for an upper
limit of 6% per cent.
At the conclusion of the discussion the Committee agreed that
growth in M-\ and M-2 over the September-October period at
annual rates within ranges of 2 to 7 and 4 to 8 per cent, respectively,
would be appropriate. It was understood that in assessing the
behavior of the aggregates, the Manager should give approximately
equal weight to the behavior of M-\ and M-2.
The Committee decided that operations should be directed initially toward a weekly-average Federal funds rate of 614 per cent.
The members agreed that if growth rates over the 2-month period
appeared to be deviating significantly from the midpoints of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate should be modified in an orderly fashion within a
range of 6 to 6Vi per cent. As customary, it was understood that the
Chairman might call upon the Committee to consider the need for
supplementary instructions before the next scheduled meeting if
significant inconsistencies appeared to be developing among the
Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services has grown less rapidly in the current quarter
than in the second quarter. In August industrial output declined by
about as much as it had risen in July. Employment increased
moderately but the labor force rose more and the unemployment rate
edged up to 7.1 per cent, the same as in June. The dollar value of total
retail sales, which had turned up in July, rose appreciably in August.
The wholesale price index for all commodities was about unchanged;
average prices of farm products and foods declined sharply for the
third successive month, and average prices of industrial commodities
continued to rise at a more moderate pace than in the early months of
1977. So far this year the index of average hourly earnings has
advanced at about the same pace as it had on the average during 1976.
The weighted average exchange rate for the dollar against leading
foreign currencies has recovered further in recent weeks, returning to
the level of late June. In July the U.S. foreign trade deficit was at
about the second-quarter rate, and there were sizable net inflows of
foreign private and official capital.
Growth in M-\ and M-2 slowed in August from the exceptionally
FOMC Policy Actions
279
rapid rates in July. Expansion of both demand deposits and time and
savings deposits at banks slackened. Growth in M-3 also slowed,
although inflows to nonbank thrift institutions remained strong.
Business short-term borrowing increased somewhat from the reduced
pace in July, but remained below the volume of preceding months.
Short-term interest rates, which had risen appreciably in early August, most recently have advanced somewhat further. Yields on
longer-term market securities, however, have changed little on balance in recent months. Federal Reserve discount rates were increased
from 514 to 53A per cent in late August and early September, and
member bank borrowings receded from the high levels of the latter
part of August.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and
help resist inflationary pressures, while contributing to a sustainable
pattern of international transactions.
At its meeting on July 19, 1977, the Committee agreed that growth
of M-l, M-2, and M-3 within ranges of 4 to 6V2 per cent, 7 to Wi per
cent, and 8H> to 11 per cent, respectively, from the second quarter of
1977 to the second quarter of 1978 appears to be consistent with these
objectives. These ranges are subject to reconsideration at any time as
conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-l and M-2 on a path believed to be reasonably consistent with the
longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the September-October period to be within the ranges of 2 to 7
per cent for M-l and 4 to 8 per cent for M-2. In the judgment of the
Committee such growth rates are likely to be associated with a
weekly-average Federal funds rate of about 614 per cent. If, giving
approximately equal weight to M-l and M-2, it appears that growth
rates over the 2-month period will deviate significantly from the
midpoints of the indicated ranges, the operational objective for the
Federal funds rate shall be modified in an orderly fashion within a
range of 6 to 6V2 per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Mayo, and Par-
280
FOMC Policy Actions
tee. Votes against this action: Messrs. Lilly, Morris,
Roos, and Wallich.
Messrs. Lilly and Wallich dissented from this action because it
allowed for somewhat more firming in money market conditions
than they thought was appropriate at present in view of their
judgment that the economic situation was not very strong. They also
felt that the rapid monetary growth over recent months might
represent an increase in the public's demand for money in relation to
growth in GNP of a kind that should be accommodated. Mr. Lilly
believed, in addition, that further tightening in money market
conditions would not be effective in dealing with the underlying
structural inflation.
Messrs. Morris and Roos dissented on the ground that the policy
adopted by the Committee represented an inadequate response to
the rapid rates of monetary growth over recent months, which in
their view were not compatible with a healthy economy over the
longer run. Mr. Roos felt that, if the Committee did not take action
now that would assure a reduction in the rate of growth in M-1, the
rate of inflation would accelerate and more drastic action would
need to be taken later on.
2. Authorization for
Domestic Open Market Operations
On September 30, 1977, Committee members voted to increase from
$2 billion to $3 billion the limit on Federal Reserve Bank holdings of
special short-term certificates of indebtedness purchased directly
from the Treasury, specified in paragraph 2 of the authorization for
domestic open market operations, effective immediately.
Votes for this action: Messrs. Burns, Coldwell,
Gardner, Guffey, Jackson, Lilly, Mayo, Partee,
Roos, Wallich, Eastburn, and Timlen. Votes against
this action: None. (Messrs. Eastburn and Timlen
voted as alternates for Messrs. Morris and Volcker,
respectively.)
This action was taken on the recommendation of Chairman Burns.
The Chairman had advised the Committee that the current temporary debt ceiling of $700 billion would expire at midnight on
September 30, 1977; that unless congressional action to extend the
FOMC Policy Actions
281
temporary ceiling were completed before that time, the ceiling
would revert to its permanent level of $400 billion; and that under
the temporary ceiling, the Treasury had leeway to borrow an
additional amount between $2 billion and $3 billion and had requested that the System stand ready to purchase that day directly
from the Treasury such amounts of special short-term certificates of
indebtedness as the Treasury might be able to issue under the
temporary ceiling.
282
FOMC Policy Actions
MEETING HELD ON OCTOBER 17-18, 1977
1. Domestic Policy Directive
The information reviewed at this meeting suggested that growth in
real output of goods and services in the third quarter had slowed
from the pace in the second quarter, estimated by the Commerce
Department to have been at an annual rate of 6.2 per cent. The rise
in average prices—as measured by the fixed-weighted price index
for gross domestic business product—appeared to have moderated
appreciably from that of the second quarter, estimated to have been
at an annual rate of 7.5 per cent. Staff projections suggested that
growth in real GNP would pick up in the fourth quarter and would
continue at a moderate, although slightly diminishing, pace in 1978.
It was also expected that the rate of increase in prices, while less
than that in the first half of 1977, would remain high.
According to staff estimates, the third-quarter slowing of growth
in real GNP was attributable mainly to a reduction in the rate of
business inventory accumulation, following a large increase in the
second quarter, as businesses attempted to prevent an excessive
build-up of stocks. It was estimated that growth in final sales of
goods and services in real terms had been about the same in the third
quarter as in the second.
Staff projections of growth in real GNP over the year ahead
reflected expectations that expansion in business capital outlays
would be sustained; that increases in State and local government
purchases of goods and services would remain large, in part because
of the stimulus of increased Federal public works and job-related
programs; and that growth in consumer spending would be moderate. It was still anticipated that the expansion in residential construction activity would taper off as the period progressed and that
exports of goods and services would continue to exceed imports by a
sizable, but not an increasing, amount.
FOMC Policy Actions
283
In September industrial production expanded 0.4 per cent, returning to the level reached in July. About one-third of the September
rise was attributable to gains in copper and coal mining following the
end of strikes, but small increases in output were widespread.
Production of steel declined, and automobile assemblies were about
unchanged at a relatively high rate. From the second quarter to the
third, total industrial production advanced 1.2 per cent, about half as
much as from the first quarter to the second.
Capacity utilization in manufacturing in September remained at
the August level of 82.9 per cent. In the materials-producing
industries, utilization changed little, and at 82.8 per cent for both
September and the third quarter as a whole, it remained appreciably
lower than at the comparable stage of other recent business expansions.
Total nonfarm payroll employment expanded substantially in
September, reflecting in large part continuation of strong growth in
the service-producing sector—specifically, in services, retail trade,
and State and local government. Payroll employment in manufacturing increased too, recovering most of the decrease of August, but the
length of the average workweek of production workers declined for
the third consecutive month—reaching 40.0 hours, compared with
40.5 in June. Total employment, as measured by the survey of
households, also increased substantially in September. The civilian
labor force rose somewhat less than total employment, as a sizable
increase in the number of women in the labor force was offset in part
by decreases in the number of adult men and of teenagers, and the
unemployment rate edged down 0.2 of a percentage point to 6.9 per
cent. From April through September the unemployment rate had
fluctuated between 6.9 and 7.1 per cent.
The size of the gain in employment in September suggested an
increase in the pace of expansion in wage and salary disbursements.
In August such disbursements had increased little.
The dollar value of retail sales had declined 1.2 per cent in
September, according to the advance report, after having increased
2.3 per cent over the preceding 2 months. From the second quarter
to the third the value of sales had risen 0.3 per cent, considerably
less than the rise from the first quarter to the second and, most
likely, less than the increase in average prices of the goods and
services sold. Unit sales of new autos—domestic and foreign
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models—declined more than 10 per cent, but the weakness may
have been caused by the lateness of the changeover to 1978 models
for some domestic makes and by reduced inventories of both foreign
cars and 1977 domestic models.
Expansion in the book value of business inventories accelerated in
August, after having slowed sharply further in July, but it was still
slightly less rapid than the monthly-average rise in the first half of
1977. The build-up of stocks at retail stores was somewhat faster
than in July and considerably more rapid than the average increase
during the preceding 6 months, reflecting exceptionally high rates of
accumulation both at durable goods stores other than automobile
dealerships and at nondurable goods stores. In manufacturing, on
the other hand, accumulation slowed further in August; in both
durable goods and nondurable goods industries, the rate of accumulation was less than that over the first 6 months of the year.
As had been reported before the September meeting of the
Committee, private housing starts were at an annual rate of slightly
more than 2.0 million units in August, almost as much as in July. The
average for the 2 months was 7 per cent above the average for the
second quarter, reflecting in large part gains in starts of multifamily
units.
The latest Department of Commerce survey of business plans,
taken in late July and August and published in early September,
suggested that spending for plant and equipment would be 13.3 per
cent greater in 1977 than in 1976. The survey implied somewhat less
expansion in spending in the second half of the year than in the first
half.
Manufacturers' new orders for nondefense capital goods picked
up somewhat in August after having declined sharply in July; the
average for the 2 months was well below that for the second quarter
and about equal to that for the first quarter. However, the machinery
component of such orders—generally a better indicator of underlying trends in demand for business equipment—was at an appreciably
higher rate in July-August than in the second quarter. Over-all
shipments of nondefense capital goods continued to expand in
August, and unfilled orders for such goods edged down. Contract
awards for commercial and industrial buildings—measured in terms
of floor space—rose sharply in August, and the July-August average
was about 8 per cent above the average for the second quarter.
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The index of average hourly earnings for private nonfarm production workers advanced at a moderate pace in September. Over the
first 9 months of 1977 the index had risen at an annual rate of about 7
per cent, the same as the increase over the 12 months of 1976.
The wholesale price index for all commodities, which had declined in June and then had shown little change in July and August,
rose moderately in September. Average prices of farm products and
foods changed little following 3 months of large decreases, and
prices of industrial commodities rose more than in the immediately
preceding months. Among industrial commodities, sizable increases
were recorded for lumber and wood products, certain fuels, some
types of machinery, and roofing and insulation materials.
The consumer price index in August, as in July, rose considerably
less than in any month of the first half of 1977. Retail prices of foods
changed little over the July-August period, after having risen about
6V2 per cent over the preceding 6 months. The increase in prices of
nonfood commodities was relatively small in September for the third
consecutive month, and the rise in prices of services was significantly less than the average increase in the preceding 7 months.
In foreign exchange markets, pressure on the dollar emerged at
the end of September—following 2 months of recovery from the
depreciation that had occurred in early summer—in reaction mainly
to statements by U.S. Government officials concerning the large
deficits in both foreign trade and the current accounts that were in
prospect for 1977 and were projected for 1978. From late September
to mid-October the trade-weighted average value of the dollar
depreciated about W2 per cent, reflecting declines against all major
currencies except the Canadian dollar; the largest declines were
against the Japanese yen and the Swiss franc. Over the period,
moreover, foreign central banks intervened in the exchange markets
to purchase a substantial amount of dollars.
The U.S. foreign trade deficit widened in August. The monthlyaverage deficit for July and August was somewhat greater than that
for the second quarter.
At U.S. commercial banks, growth in total credit was small in
September following substantial expansion in the preceding 2
months. In September bank holdings of U.S. Treasury securities
declined considerably further. Total loans expanded, but by less
than in July and August. Real estate loans continued to grow at a
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rapid pace, but business loans increased less than in any month
earlier in the year.
The small increase in business loans at banks in September was
accompanied by a decrease of about the same amount in the
outstanding volume of commercial paper issued by nonfinancial
corporations. For the third quarter as a whole, business credit
expansion through these two sources slowed to an annual rate of 6
per cent—the lowest since the summer of 1976.
The narrowly defined money stock (M-l) grew at an annual rate of
7% per cent in September, up from the August pace of 5Vi per cent.
Data for early October suggested further acceleration. M-l grew at
an annual rate of 9lA per cent from the second quarter to the third,
and by about 11A per cent from the third quarter of 1976 to the third
quarter of 1977.
Growth in the more broadly defined measures of money, M-2 and
M-3, also stepped up in September—to annual rates of 8 and 12 per
cent, respectively, from rates of about 6V2 and WVi per cent in
August. These more rapid rates resulted almost entirely from the
acceleration of expansion in the demand deposit and currency
components common to all three measures of money. Expansion in
the time and savings deposit component of M-2 changed little in
September from the reduced rate of August; and inflows of deposits
at nonbank thrift institutions, included in M-3, remained near the
strong pace of August. From the third quarter of 1976 to the third
quarter of 1977, M-2 and M-3 grew about 11 and \2Vi per cent,
respectively.
At its September meeting the Committee had decided that during
the September-October period growth in M-l and M-2 within ranges
of 2 to 7 per cent and 4 to 8 per cent, respectively, would be
appropriate. The Committee had established 6 to 6V2 per cent as the
range for variation in the weekly-average Federal funds rate for the
period until the next meeting. The 6V4 per cent midpoint of the range
was slightly above the rate of 6V6 per cent prevailing in the days just
before that meeting. The Committee had agreed that if growth rates
in the aggregates over the 2-month period appeared to be deviating
significantly from the midpoints of their ranges, the operational
objective for the weekly-average Federal funds rate should be
modified in an orderly fashion within its indicated range.
In accordance with the Committee's decision, the Manager of the
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287
System Open Market Account began immediately after the September meeting to seek bank reserve conditions consistent with a Federal
funds rate of around 6lA per cent. Data that were becoming available
at the same time suggested that over the September-October period
M-l and M-2 would grow at rates at or above the upper limits of the
ranges specified by the Committee, and the estimates of these
growth rates were raised further on the basis of the data that became
available in subsequent weeks. Therefore, the Manager sought a
gradual firming in the Federal funds rate to 6Vi per cent, the upper
limit of its specified range. In the three business days prior to this
meeting of the Committee, the funds rate averaged 6l/i per cent.
Interest rates in securities markets also rose during the intermeeting period. Increases ranged from 30 to 65 basis points in
markets for short-term securities and up to 20 basis points in
markets for long-term instruments. Major banks raised the rate on
loans to prime business borrowers from 11A to IVi per cent.
As market rates of interest rose, member bank borrowings at
Federal Reserve Banks expanded. In the 5 days preceding the
Committee meeting, borrowings averaged nearly $1.6 billion, up
from a daily average of $337 million in the statement week ending
September 14.
Stock prices drifted down further over the inter-meeting period,
and several major indexes of stock prices reached their lowest levels
since the end of 1975. The reduced prices of common stocks, in
combination with a record number of dividend increases announced
so far this year, raised the average yield of dividends to an unusually
high level by historical standards.
The U.S. Treasury raised $3.3 billion of new money during the
inter-meeting period. For the third quarter as a whole, its cash
borrowing totaled $17 billion—excluding $2.5 billion of temporary
borrowing from the Federal Reserve System at the end of the
quarter. Of the $17 billion, $2.8 billion was provided through sales of
special nonmarketable Treasury securities to State and local governments that were making temporary investments of the proceeds
from advance refundings.
Gross offerings of new bonds by State and local governments
remained substantial in September, reflecting a continued large
volume of advance refundings. Primarily because of such refundings, State and local government offerings of long-term securities in
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the first 9 months of 1977 exceeded the record volume of sales in all
of 1976.
Gross public offerings of corporate bonds remained strong both in
September and in the third quarter as a whole. Total external
financing by nonfinancial corporations in the third quarter appeared
to have been substantially greater than the gap between capital
outlays and internally generated funds. In those circumstances, such
a large volume of financing suggested that some firms were encouraged by the levels of prevailing yields to borrow in advance of their
current needs. The proceeds of such borrowings may have been
used to enlarge holdings of liquid assets as well as to reduce
short-term debt.
Growth in mortgage credit in September apparently remained near
the strong pace registered earlier in the third quarter. Expansion in
mortgage loans at commercial banks slightly exceeded the sizable
July-August average, and new issues of GNMA-guaranteed,
mortgage-backed securities were down only moderately from the
August record volume. At savings and loan associations, outstanding mortgage loan commitments had risen appreciably in August to a
new record level. At the same time, inflows of funds to these
institutions during September were apparently sufficient to permit
them to acquire a sizable volume of spot loans in addition to
financing takedowns of outstanding mortgage commitments.
In the Committee's discussion of the economic situation, the
members agreed that the expansion in activity was likely to continue
for some time to come. They differed, however, in their assessments
of the prospective vigor of the expansion. Most indicated no
disagreement with the staff projections suggesting that growth in real
GNP would pick up in the fourth quarter and would continue at a
moderate—if slightly diminishing—pace in 1978, although the view
was expressed that uncertainties about the current situation and
outlook had increased in recent months. One of the members
suggested that the private economy had demonstrated great vitality
since the start of the current business upswing, as evidenced by
growth of nearly 7 million persons in total employment. He believed
that the expansion could well pick up speed again if the tax
proposals being developed by the administration were practical and
included, in particular, measures designed to foster a higher rate of
business capital expenditures. Another member who regarded the
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289
staff projections as reasonable nevertheless thought that any deviation was more likely to be in the direction of shortfalls. A third
member felt that the economy had not displayed any significant
weaknesses and that its performance was likely to be as favorable
as, or more favorable than, that projected by the staff.
On the other hand, several members felt that the performance of
the economy was likely to be less favorable than projected and,
consequently, that there might be little further progress in reducing
the rate of unemployment from its high level. One of these members
observed that the projections for a number of sectors of activity
appeared to be on the high side and that shortfalls were likely to
occur in at least some cases. Another of these members suggested,
however, that a rate of growth in real GNP of less than 5 per
cent—which was being widely forecast on the assumption of the
existing fiscal policy—was likely to lead to some new measures of
fiscal stimulus, although uncertainty existed about the amount of
time required to legislate new measures and about their probable
effectiveness. Another member expressed the view that, compared
with the staff projections, growth was likely to be weaker in the
fourth quarter of 1977, to be stronger in the first half of 1978, and to
be weaker again in the second half of 1978.
Members differed somewhat in their appraisals of the outlook for
major categories of expenditures. With respect to business fixed
investment, little disagreement was expressed with the staff projection that expansion would be sustained over the year ahead. It was
observed that new orders for machinery had been strong; that a
revival in large-scale industrial and commercial building projects had
begun earlier this year; and that new businesses were being formed
at an increasing rate. However, the view was also expressed that
business confidence had deteriorated somewhat—owing to the
rather indifferent performance of profits, to the decline in stock
prices, and to widespread uncertainty concerning a number of
Government policies—and it was noted that some private surveys of
plans for 1978 did not suggest any great strength in business capital
spending. Concerning inventories, it was observed that businesses
were likely to continue pursuing conservative policies, that the
recent increase in stocks at retail stores had occurred as sales had
leveled off, and that any appreciable increase in inventory investment in the period ahead might reflect involuntary accumulation and
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thus be indicative of weakness rather than strength in the over-all
situation.
Several members expressed skepticism concerning the staff projection of some further expansion in housing starts from recent
levels and of somewhat higher starts in 1978 as a whole than in 1977.
In that connection, it was suggested that starts might be limited by
supplies of insulating and other building materials as much as by any
easing in demands. On the other hand, the view was expressed that
certain factors affecting starts of multifamily units had become more
favorable and that increases in such starts might sustain the total,
although it was recognized that on the average less construction
activity was involved in multifamily than in single-family units. With
respect to financing, it was observed that the availability of funds for
mortgages remained good. Moreover, it was suggested that thrift
institutions apparently had become less exposed than in the past to
diversions in savings flows in response to higher market rates of
interest, mainly reflecting a lengthening in the maturity structure of
their liabilities.
A few members viewed the staff projection of moderate growth in
real consumer spending as optimistic. One of these expressed doubt
that purchases of new automobiles would increase further from the
advanced rate of the past year or so. Another observed that
expansion in disposable income was likely to fall short of that
required to validate the projection, especially if, as widely expected,
the savings rate recovered from the reduced levels of recent
quarters.
Some members expressed doubt about the expansion in exports
projected for the year ahead, which was large enough in real terms to
offset the projected rise in imports; thus they viewed the foreign
trade sector as a source of weakness in prospects for growth in total
real GNP. Concern was also expressed that at some point continuation of a large current-account deficit could have adverse psychological effects in exchange markets, although it was recognized that the
deficit could be financed without repercussions—especially if relative interest rates remained favorable and price performance in the
United States did not deteriorate. One member suggested that even
if interest rate relationships were not especially favorable, capital
might still flow in because of improving profits of U.S. enterprises.
It was suggested that the performance of prices could be some-
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291
what better than that portrayed by the staff projection. Specifically,
it was thought that further improvement in supplies of foodstuffs
might result in continued downward pressure on prices, and that
worldwide demands for industrial raw materials were unlikely to be
strong enough to drive their prices up to any significant degree. It
was also noted, however, that the underlying rate of inflation
remained high and that the rate of increase in unit labor costs in the
private business sector of the economy was unlikely to be reduced in
the coming year. One member indicated concern about the structural inflation that appeared to have a life of its own; he referred
specifically to the increase in the salary structure for Federal
employees that had taken effect in early October, to recent increases
in wage rates in the private sector, to pending legislation raising the
minimum wage, and to pressures for import quotas. The judgment
was expressed that the administration apparently was not being
effective in pursuing its anti-inflation policy.
Finally in the discussion of the economic situation, it was reported
that declines in prices of agricultural commodities had led to
declines in prices of farmland in a few States for the first time in
many years. It was noted, moreover, that banks were finding it
necessary to restructure an increasing number of loans to finance
agricultural operations because of the farmers' inability to repay
them on time.
At this meeting the Committee reviewed its 12-month ranges for
growth in the monetary aggregates. At its July meeting the Committee had specified the following ranges for growth over the period
from the second quarter of 1977 to the second quarter of 1978: M-\, 4
to 6 ^ per cent; M-2, 7 to 9Vi per cent; and M-3, SV2 to 11 per cent.
The associated range for growth in commercial bank credit was 7 to
10 per cent. The ranges being considered at this meeting were for the
period from the third quarter of 1977 to the third quarter of 1978.
In the discussion of the appropriate ranges for growth in the
monetary aggregates over the year ahead, it was suggested that the
Committee make clear its continuing determination to bring the
ranges down gradually to levels compatible with general price
stability, while at the same time assuring that growth in the
aggregates would be sufficient to facilitate an orderly expansion of
economic activity. In such a framework it was further suggested that
the Committee indicate that its basic goal was to contribute to the
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satisfactory performance of the economy and that it would not
sacrifice or compromise that goal in the interest of seeking to attain
pre-determined rates of monetary growth.
In the discussion, attention was drawn to the behavior of the
monetary aggregates and to certain developments in financial markets. Specifically, it was noted that over the year from the third
quarter of 1976 to the third quarter of 1977 growth in M-l had
exceeded by a sizable margin the upper limit of the range that the
Committee had set at its meeting in early November 1976, whereas
on other recent occasions when the Committee had reconsidered its
longer-run ranges it could look back to periods of a year when
growth in M-l had fallen within, or below the lower limit of, its
range. Growth in M-2 and M-3 over the year to the third quarter of
1977 also had exceeded the upper limits of the ranges adopted in
early November 1976, and growth in all three aggregates over the
period had exceeded their longer-run ranges for the first time since
the Committee had begun to adopt such ranges. However, it was
also noted that, although growth in M-l had been at a faster rate in
the first 9 months of 1977 than during 1976, growth in M-2 and M-3
had been slower; and that M-l had begun to grow rapidly only over
the two most recent quarters.
With respect to financial market developments, it was noted that
short-term interest rates in general had risen about 200 basis points
since the beginning of the year—with a substantial part of that rise
having occurred in the third quarter. However, it was pointed out,
long-term rates had not changed much on balance since the beginning of the year, although they had increased somewhat in recent
weeks. Also, the decline in stock prices was interpreted as signaling
that investors were uneasy about the profitability of corporations
and about the performance of the economy.
Uncertainty was expressed about the underlying causes of the
expansion of the demand for money (narrowly defined) in the second
and third quarters and about the implications of that expansion for
policy. It was suggested that various changes in financial technology
that had been resulting in substitution of income-earning deposits for
demand deposits had become less powerful and, consequently, that
increasing demands for transactions balances in the latest two
quarters had had a greater effect on growth in M-l. One member
suggested that the demand for money had also been raised recently
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293
by increased uncertainty of various kinds—about conditions in the
job market, about prices of securities, about foreign exchange rates,
and about other elements in the economic situation—and that this
had contributed to the apparent decline in the income velocity of
M-l in the third quarter. In his view, however, the decline in
velocity more fundamentally reflected the sluggishness of economic
expansion in the third quarter, and a pick-up in the pace of
expansion once again might be accompanied by a sharp rise in
velocity.
Because of the uncertainty about the underlying causes of the
recent expansion in the demand for M-l and about the prospects for
its velocity, some members indicated that they now had less
confidence in the behavior of the monetary aggregates as guides to
monetary policy than they might have had earlier. It was felt,
moreover, that those uncertainties made it particularly important to
emphasize that the Committee's basic goal was to contribute to the
satisfactory performance of the economy rather than to pursue
pre-determined rates of monetary growth.
In commenting on the ranges for growth in the monetary aggregates over the period from the third quarter of 1977 to the third
quarter of 1978, most members concurred in the view that the
objective of continuing the gradual process of bringing the longerrun ranges for growth in the monetary aggregates down to rates
compatible with general price stability would best be served at this
time by retaining the existing range of 4 to 6V2 per cent for M-l and
making some reduction in the ranges for M-2 and M-3. Proposals to
achieve the latter included reducing the upper limits of the ranges by
V2 of a percentage point, reducing the lower as well as the upper
limits by that amount, and reducing both limits by 1 percentage
point.
In support of the proposal to make some downward adjustment in
the ranges for M-2 and M-3, several members observed that the rise
in short-term interest rates that had already occurred would tend to
reduce flows of funds into time and savings deposits (exclusive of
money market CD's), so in the period ahead growth in M-2 and M-3
was likely to slow in relation to growth in M-l. However, it was
expected that flows into the thrift accounts would still be substantial
and would be consonant with the maintenance of a high rate of
residential construction activity.
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Several reasons were advanced for retaining the existing range for
M-l. It was suggested that any change in that range at this time
would imply a degree of knowledge that, in view of the changes that
were taking place in the demand for money, was not present. The
observation was also made that until it became clear that the recent
slowing in economic growth would not proceed further, the Committee should avoid making any change in the range for M-l that might
be construed as a measure of tightening. One member expressed the
view that if changes in financial technology were in fact having less
effect on the demand for money than they had for some time, the
existing range for M-l now would represent a somewhat more
restrictive policy than it had before. And it was suggested that any
reduction in the upper limit of the range for M-l following the
excessive rates of growth over the past two quarters might be
interpreted as implying an aggressive policy for the short run or as
implying policy objectives that were not attainable.
Some sentiment was expressed for reducing the upper limit of the
range for M-l by Vi of a percentage point. It was suggested that, in
view of the magnitude of recent4 'overshoots" in growth of M-l, such a
reduction would underscore the System's determination to work
gradually toward a rate of growth consistent with general price
stability and thus might have a positive effect on economic activity
by tending to encourage business and consumer spending.
Two members advocated some widening of the longer-run range
for M-l because of uncertainty about changes in the demand for
money and, thus, about the income velocity of M-l; it was noted that
at times in the past the Committee had adopted ranges as wide as 3
percentage points. One of these members expressed the view that
even if the rise in velocity picked up again in the period ahead, it was
unlikely to be as rapid as it had been earlier, and he recommended
raising the upper limit of the range for M-l by Vi of a percentage
point. At the same time, he recommended a reduction of a full
percentage point in the lower limit of the range. The other member
advocated an increase of Vi of a percentage point in the upper limit
of the range for M-l and no change in the lower limit; he also
advocated a widening of the ranges for M-2 and M-3.
At the conclusion of its discussion the Committee decided to
retain the existing range for M-l and to reduce both the upper and
lower limits of the ranges for M-2 and M-3 by Vi of a percentage
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295
point. Thus the new ranges, which applied to the period from the
third quarter of 1977 to the third quarter of 1978, were 4 to 6Vi per
cent for M-l, 6V£ to 9 per cent for M-2, and 8 to lOVi per cent for
M-3. The associated range for growth in commercial bank credit was
7 to 10 per cent. It was agreed that the longer-run ranges, as well as
the particular aggregates for which such ranges were specified,
would be subject to review and modification at subsequent meetings. It was also understood that short-run factors might cause
growth rates from month to month to fall outside the ranges
contemplated for the year ahead.
The Committee adopted the following ranges for rates of growth in
monetary aggregates for the period from the third quarter of 1977 to the
third quarter of 1978: M-l, 4 to bVi per cent; M-2, dVi to 9 per cent; and
M-3, 8 to \Wi per cent.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, and Roos. Vote against this action:
Mr. Wallich.
Mr. Wallich dissented from this action because—believing that
abnormal gains in the income velocity of M-l had come to an end, at
least temporarily—he preferred to raise the upper limit of the range
for M-l to 7 per cent. At the same time, he would have widened the
range by reducing the lower limit to 3 per cent.
As to policy for the period immediately ahead, members of the
Committee were in relatively close agreement with respect to their
preferences for ranges of growth for the monetary aggregates over
the October-November period. Most of them favored ranges of 3 to
8 per cent and 5Vi to 9Vi per cent for the annual rates of growth in
M-l and M-2, respectively. A few members indicated that slightly
lower growth ranges would also be acceptable.
Somewhat greater differences of view were expressed concerning
the Federal funds rate. A number of members favored directing
operations initially toward maintaining the current rate of around 6V2
per cent, but some preferred to raise the rate to around 65/s per cent
and one felt that a prompt move to 63A per cent was needed.
Differing views were also indicated with regard to the amount of
leeway that should be provided in conducting operations during the
inter-meeting period as new information became available on the
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performance of the monetary aggregates. The members were agreed
that little or no decline in the Federal funds rate should be contemplated under foreseeable circumstances, but views were divided with respect to the upper limit that should be set for the rate;
several members recommended a ceiling of 6% per cent while others
preferred a ceiling of 7 per cent. Some members in favor of the lower
ceiling indicated that they would be prepared to accept a higher rate
if the performance of the economy and the monetary aggregates
during the inter-meeting period differed significantly from their
expectations.
A majority of the members were in favor of giving greater weight
than usual to money market conditions in conducting open market
operations in the period until the next meeting. In that connection
some cited the uncertain implications of the growth of the monetary
aggregates in recent months. However, a number of members
expressed a preference for continuing to have operating decisions in
the period ahead based primarily on the behavior of the monetary
aggregates; in their view such operations should be adjusted
promptly if the aggregates appeared to be deviating significantly
from the midpoints of the specified ranges.
At the conclusion of the discussion the Committee decided that
operations in the period immediately ahead should be directed
toward maintaining prevailing money market conditions, as represented by a weekly-average Federal funds rate of about 6V2 per cent.
However, the members agreed that if growth in the aggregates
should appear to approach or move beyond the limits of their
specified ranges, the operational objective for the weekly-average
Federal funds rate should be varied in an orderly fashion within a
range of GA to 6% per cent. With respect to the annual rates of
growth in M-\ and M-2 over the October-November period, the
Committee specified ranges of 3 to 8 per cent and 5Vi to 9Vi per cent,
respectively. It was also agreed that in assessing the behavior of the
aggregates, the Manager should give approximately equal weight to
the behavior of M-l and M-2.
As customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
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297
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that growth in
real output of goods and services slowed in the third quarter, mainly
because of a reduction in the rate of inventory accumulation. In
September industrial production expanded, returning to about the
level reached in July, and employment increased substantially. The
unemployment rate edged down to 6.9 per cent, but remained near the
level prevailing since April. The dollar value of total retail sales
declined after having risen appreciably in July and August. The
wholesale price index for all commodities, which had declined on
balance since May, advanced in September; average prices of farm
products and foods changed little following 3 months of sharp
decreases, and average prices of industrial commodities rose more
than in the immediately preceding months. So far this year the index
of average hourly earnings has advanced at about the same pace as it
had on the average during 1976.
Pressure on the dollar in foreign exchange markets emerged at the
end of September, and the dollar has declined against most major
foreign currencies and particularly against the Japanese yen. In
August the U.S. foreign trade deficit widened; the July-August
average was somewhat above the second-quarter rate.
M-\ and M-2 expanded somewhat more in September than in
August, and increased substantially further in early October. Inflows
to banks of time and savings deposits increased little in September
from the reduced rate in August, while inflows to nonbank thrift
institutions remained strong. Short-term interest rates have risen
further in recent weeks, and yields on longer-term market securities
have increased.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and
help resist inflationary pressures, while contributing to a sustainable
pattern of international transactions.
Growth of M-1, M-2, and M-3 within ranges of 4 to 6V2 per cent, 6V2
to 9 per cent, and 8 to KM per cent, respectively, from the third
quarter of 1977 to the third quarter of 1978 appears to be consistent
with these objectives. These ranges are subject to reconsideration at
any time as conditions warrant.
At this time, the Committee seeks to maintain about the prevailing
money market conditions during the period immediately ahead,
provided that monetary aggregates appear to be growing at approximately the rates currently expected, which are believed to be on a
path reasonably consistent with the longer-run ranges for monetary
aggregates cited in the preceding paragraph. Specifically, the Committee seeks to maintain the weekly-average Federal funds rate at about
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FOMC Policy Actions
6V2 per cent, so long as M-\ and A/-2 appear to be growing over the
October-November period at annual rates within ranges of 3 to 8 per
cent and 5l/i to 9Vi per cent, respectively. If, giving approximately
equal weight to M-\ and Af-2, it appears that growth rates over the
2-month period are approaching or moving beyond the limits of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate shall be modified in an orderly fashion within a
range of 6!4 to 63A per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Partee, Roos, and Wallich. Vote against this action:
Mr. Morris.
Mr. Morris dissented from this action because he was convinced
that the Committee should take more aggressive action to curb
excessive growth in the monetary aggregates, which in his opinion
would not be conducive to a healthy, long-term expansion in the
economy. He also believed that short-term interest rates could rise
somewhat further without significantly damaging short-term prospects for economic activity.
2. Authorization for
Domestic Open Market Operations
Committee members voted to reduce from $3 billion to $2 billion the
limit on Federal Reserve Bank holdings of special short-term
certificates of indebtedness purchased directly from the Treasury,
specified in paragraph 2 of the authorization for domestic open
market operations, effective immediately.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against this
action: None.
This action was taken on the recommendation of Chairman Burns.
On September 30, 1977, when the temporary debt ceiling was due to
FOMC Policy Actions
299
expire at midnight, Committee members had voted to raise the limit
on System holdings of directly purchased certificates of indebtedness from $2 billion to $3 billion, and the Treasury had issued a $2.5
billion certificate to the Federal Reserve Bank of New York. The
Treasury had retired the certificate on October 4, following approval
of legislation increasing the debt ceiling, and the need for the higher
limit had passed.
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FOMC Policy Actions
MEETING HELD ON NOVEMBER 15, 1977
Domestic Policy Directive
The information reviewed at this meeting suggested that growth in
real output of goods and services—which had slowed to an annual
rate of 3.8 per cent in the third quarter, according to preliminary
estimates of the Commerce Department—was picking up in the
current quarter. At the same time the rise in average prices, as
measured by the fixed-weighted price index for gross domestic business product, appeared to be stepping up somewhat from
the annual rate of 5.2 per cent estimated for the third quarter. Staff
projections suggested that growth in real GNP would continue at a
moderate, although gradually diminishing, pace throughout 1978. It
was also expected that the rate of increase in prices would remain
high.
The staff estimate of a pick-up in growth of real GNP in the
current quarter was attributable to expectations of accelerated
expansion in final sales of goods and services, reflecting indications
of renewed strength in consumer spending for both durable and
nondurable goods, in business fixed investment, and in residential
construction. It was anticipated that business inventory accumulation would remain near the rate of the second and third
quarters.
The staff projections of growth in real GNP during the year
ahead reflected expectations that the expansion in business capital
outlays would be sustained; that growth in consumer spending
would remain moderate; that increases in State and local government purchases of goods and services would continue to be sizable;
that the expansion in residential construction activity would taper
off as the period progressed; and that the rise in Federal purchases
of goods and services would be smaller than over the past year.
The projections implied a gradual further decline in the unemployment rate over the year ahead.
FOMC Policy Actions
301
In October industrial production expanded 0.3 per cent, almost
the same as in September, owing in part to an increase in automobile assemblies and to a large rise in coal output after the
striking miners had returned to work. Capacity utilization in manufacturing was estimated to have remained at about 83 per cent; in
both the materials-producing and the advanced processing industries, utilization rates were close to their levels in the second and
third quarters. For the former group of industries, the rate was
about 10 percentage points below the high reached in the preceding
period of business expansion.
Total nonfarm payroll employment expanded in October, although by considerably less than in September. Growth in employment in the service-producing industries slowed; in manufacturing both employment and the length of the average workweek of
production workers changed little. Total employment, as measured
by the survey of households, also increased less than in September,
and the unemployment rate edged up from 6.9 to 7.0 per cent.
From April through October the unemployment rate had fluctuated
between 6.9 and 7.1 per cent.
The pace of expansion in wage and salary disbursements and in
total personal income picked up in September, the latest month for
which data were available. In the third quarter as a whole, the gain
in total personal income in current dollars was less than that in the
first two quarters of 1977, but in real terms it was about equal to
the average gain in the first two quarters.
The dollar value of retail sales had risen 1.8 per cent in October,
according to the advance report. Moreover, sales estimates for
August and September were revised upward substantially—
resulting in an increase of 1.5 per cent from the second to the third
quarter, rather than the 0.3 per cent that had been reported earlier.
Unit sales of new autos—domestic and foreign models—rose
about 5 per cent in October, after having declined more than 10 per
cent in September. At an annual rate of 10.9 million units, the level
of sales in October was the same as in the third quarter but
somewhat less than in the second quarter.
Private housing starts were at an annual rate of slightly more
than 2 million units in September, virtually unchanged from August. For the third quarter as a whole, starts were almost 8 per cent
more than for the second quarter and at the highest level since
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FOMC Policy Actions
1973. Nearly three-fourths of the gain in the third quarter was
accounted for by starts of multifamily units.
The latest Department of Commerce survey of business plans,
taken in late July and August and published in early September,
suggested that spending for plant and equipment would be 13.3 per
cent greater in 1977 than in 1976 and that the expansion in spending
would be somewhat less in the second half of the year than in the
first half. Private surveys suggested a somewhat smaller increase in
capital outlays in 1978 than in 1977.
Manufacturers' new orders for nondefense capital goods advanced sharply in September, bringing the total for the third
quarter up to the second-quarter level. The machinery component
of such orders—generally a better indicator of underlying trends in
demand for business equipment—expanded about 5 per cent in the
third quarter. At the same time contract awards for commercial and
industrial buildings—measured in terms of floor space—rose about
10 per cent to a level 30 per cent higher than in the third quarter of
1976.
The index of average hourly earnings for private nonfarm production workers advanced at a fast pace in October. The rate of
increase over the first 10 months of the year was about 8 per cent,
compared with a rise of about 7 per cent over the 12 months of
1976.
The wholesale price index for all commodities, which had turned
up in September after 3 months of little change, rose sharply in
October. Average prices of farm products and foods advanced
appreciably, after having declined over the preceding 4 months.
The rise in average prices of industrial commodities in October was
a little less than in September but about equal to the rate of
increase over the past year.
In September the consumer price index rose at an annual rate of
about 4 per cent, the same as over the preceding 2 months but
considerably less than during the first half of 1977. From June to
September retail prices of foods increased only about 0.4 per cent,
in contrast with a rise of nearly 7 per cent over the first 6 months of
the year. The rise in average prices of commodities other than
foods and of services also slowed during the third quarter.
The trade-weighted value of the dollar—which had declined
about Wi per cent from late September to mid-October—
FOMC Policy Actions
303
depreciated about 1 per cent further over the period to midNovember, reflecting mainly appreciation of the Japanese yen, of
the Swiss franc, and of the U.K. pound. Over the period,
moreover, foreign central banks purchased a substantial amount of
dollars, even though on October 31 the U.K. authorities allowed
the pound to float upward. The downward pressure on the dollar
was associated with continuing concern about the deficit in the
U.S. current account, especially as compared with the surpluses in
the current accounts of several other industrial countries.
The U.S. foreign trade deficit declined somewhat in September,
reflecting a sharp increase in exports that was attributable in large
part to temporary factors—specifically, anticipation of the strike by
longshoremen that began on October 1 and a rebound in shipments
of coal from a strike-depressed level in August. For the third
quarter as a whole, the deficit was about the same as for the second
quarter.
At U.S. commercial banks, growth in total credit accelerated in
October from the relatively slow pace recorded in September. The
pick-up reflected a vigorous expansion in bank lending that was
offset only in part by a further reduction in holdings of Treasury
securities.
Growth in business loans at banks was especially strong in
October, following little change in September. To some extent the
monthly changes appeared to reflect a shift in the seasonal pattern
that had not yet been captured in adjustment factors; the average
increase over the 2 months represented a continuation of relatively
strong growth. The outstanding volume of commercial paper issued
by nonfinancial corporations declined in October by the same
amount that it had in September. Nevertheless, business credit
expansion through these two sources was brisk over the 2-month
period.
Growth in the narrowly defined money stock (M-l) accelerated
in October to an annual rate of 12 per cent. However, data for early
November suggested a sharp slowing of growth.
Growth in M-2 also picked up during October and then slowed
again in early November. In October expansion in the total of
interest-bearing deposits included in M-2 was maintained at about
its September pace, although the key components of this total
showed divergent changes. Inflows of savings deposits to banks
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FOMC Policy Actions
slowed appreciably as yields on competitive market securities rose
further above the ceiling rate on savings deposits, and the rate of
expansion in small-denomination time deposits changed little.
However, the rate of expansion accelerated for nonnegotiable,
large-denomination time deposits, which are not subject to interest
rate ceilings. In association with the increase in loan demand,
banks also expanded the outstanding volume of negotiable, largedenomination CD's (not included in M-2) by the largest amount for
any month in nearly 3 years.
Growth in M-3 changed little in October. Inflows of funds to
nonbank thrift institutions slowed somewhat from the strong pace
of the preceding 2 months, offsetting the effect on M-3 of the
acceleration of the expansion in M-1.
At its October meeting the Committee had decided that operations in the period immediately ahead should be directed toward
maintaining about the prevailing money market conditions, as
represented by a weekly-average Federal funds rate of 6Vi per cent,
provided that M-l and M-2 appeared to be growing over the
October-November period at annual rates within ranges of 3 to 8
and 5lA to 9Vi per cent, respectively. However, the members also
had agreed that if growth in the aggregates appeared to approach or
move beyond the limits of their specified ranges, the operational
objective for the weekly-average Federal funds rate should be
varied in an orderly fashion within a range of 614 to 63A per cent.
Immediately following the meeting, incoming data had suggested
that over the October-November period M-l and M-2 would grow
at rates within their specified ranges. Accordingly, the Manager of
the System Open Market Account sought to maintain the Federal
funds rate at around 6Vi per cent. In late October, however,
additional data suggested that M-l and M-2 were growing at rates
approaching or moving beyond the upper limits of their ranges.
Therefore, the Manager sought a slight firming in the funds rate.
Still later, available data again suggested that growth in both
aggregates would be within the ranges; hence the Manager's objective for the funds rate was returned to 6V2 per cent. During the
inter-meeting period the funds rate generally fluctuated between
6V2 and 6% per cent, and it was at the lower rate in the last few
business days before this meeting of the Committee.
Fluctuations in other market interest rates were larger than those
FOMC Policy Actions
305
in the funds rate, owing chiefly to changes in the perceptions of
market professionals concerning the probable course of monetary
policy. But on balance over the period, changes in interest rates
were quite small; short- and medium-term rates generally declined
a little, and changes in bond yields were mixed. In late October
most large commercial banks raised the rate on loans to prime
business borrowers from IVi to 7% per cent. A few major banks,
located chiefly on the west coast, held their prime rate at IVi per
cent.
On October 25 the Board of Governors announced its approval
of actions by directors of all 12 Federal Reserve Banks raising the
discount rate from 5% to 6 per cent, effective October 26. In
announcing the approval, the Board stated that the action was
taken in recognition of increases that had occurred in other shortterm interest rates and that it would bring the discount rate into
closer alignment with short-term rates generally. The Board also
stated that the increase would reduce the incentive for member
banks to borrow from the Federal Reserve. Member bank borrowing had increased to a daily average of more than $1.8 billion during
the week ending October 19, compared with an average of $337
million 5 weeks earlier. In the week ending November 9, dailyaverage borrowings were down to $887 million.
Major indexes of stock prices declined to new lows for 1977
during the initial weeks of the inter-meeting period, but then rallied
in early November. At the time of the November meeting the
indexes were about 5 per cent above their 1977 lows.
In November, in connection with its quarterly refinancing, the
U.S. Treasury refunded $2.4 billion of maturing debt held by the
public; sold $4.1 billion of additional securities to the general public
for cash; and sold $700 million of new securities directly to foreign
central banks for cash. Securities issued to the public in this
operation included $3.3 billion of 3-year notes, sold at an average
yield of 7.24 per cent; $2.0 billion of 10-year notes, sold at an
average yield of 7.69 per cent; and $1.3 billion of 30-year bonds,
sold at an average yield of 7.94 per cent. At the time that plans for
the November refinancing were announced, the Treasury reported
that its cash-borrowing needs in the fourth quarter were expected
to total $18% billion.
Gross public bond offerings by nonfinancial corporations de-
306
FOMC Policy Actions
clined in October. However, the total volume of new corporate
bond issues was sustained by unusually large offerings by financial
firms, including several large issues of mortgage-backed bonds.
In October the volume of mortgage lending apparently remained
close to its unprecedented third-quarter pace. The increase in
mortgage loans at commercial banks was almost as large as the
record monthly-average gain in the third quarter; and net acquisitions of mortgage loans at savings and loan associations were
probably about maintained, even though inflows of deposits to
these institutions slowed somewhat. Outstanding mortgage commitments of the associations had risen to a record level at the end
of September, and in October these institutions increased their
reliance on borrowings from the Federal home loan banks and on
the sale of mortgage-backed bonds. Between mid-October and
mid-November the average interest rate on new commitments for
conventional home mortgages at savings and loan associations
changed little.
In the Committee's discussion of the economic situation, the
members agreed that the staff projections—suggesting that growth
in real GNP would continue at a moderate, although gradually
diminishing, pace throughout 1978—were reasonable. There were,
however, some shadings of view about prospects for the economy.
Two members suggested that the outlook was potentially
stronger than that implied by the staffs projections. One of these
members remarked that some of the uncertainties that had plagued
this business expansion were being cleared up. In his judgment a
reasonably good fourth quarter, which he was inclined to expect,
could have a favorable influence on business and consumer attitudes; and that development, in turn, could affect business activity in 1978. The other member observed that there was a real
possibility that 1978 would prove to be a very good year, particularly if administration statements were of a kind that tended to
strengthen business confidence. In a related comment, another
member observed that business decisions were being influenced by
uncertainty generated not only by Federal tax and energy policies
but also by expectations of further inflation.
Two members expressed the view that while the staff projections
were not unreasonable, any deviations from them were more likely
to be in the direction of shortfalls than of overshoots—particularly
FOMC Policy Actions
307
in the latter part of the projection period. One of these members
remarked that economic policy-makers, including the Federal Reserve, would need to act if any marked slowing in the rate of
economic growth appeared likely to develop. However, in his
judgment it was too early to reach such a conclusion. In this
connection, he noted that there seemed to have been a general
tendency among economic forecasters in recent years to underestimate growth rates by progressively larger amounts for more
distant periods. The other member who thought the staffs projections were on the high side of the range of possibilities observed
that there was ample time for new developments to lead to improved prospects for the second half of 1978. At the moment,
however, he did not find such developments to be clearly in
prospect.
It was noted during the discussion that, according to projections
of the Federal budget on a "high employment" basis, fiscal policy
would move from a highly stimulative stance in the second half of
1977 to approximate neutrality by the end of 1978, unless some new
fiscal initiatives were undertaken. It was also noted that sustained
growth in spending by State and local governments was likely to
contribute to the strength of the expansion, but that the foreign
trade sector would probably be a source of weakness.
It was suggested that prospects for business capital spending
were a key element in the economic outlook. One member observed that the underlying need for additions to capacity might
soon have an increasing impact on spending for plant and
equipment—a greater impact than implied by the recent private
surveys of business spending plans—especially if proposals for
reductions in taxes should prove to be reasonable and if business
confidence should improve. Another member remarked that
enough time had elapsed since the culmination of the recession in
early 1975 for businessmen to conclude that profit opportunities
had been neglected and for them to become more willing to take
risks on longer-term commitments. This member added, however,
that he expected uncertainties to persist throughout 1978, in part
because of a bulge in the rate of inflation early in the year that in
his opinion would be produced mainly by recent and prospective
Federal legislation.
Other comments about the outlook included the observation by
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FOMC Policy Actions
one member that the rate of economic growth projected by the staff
for late 1978, although somewhat below the rates projected for
earlier in the year, was still quite satisfactory. Another member
remarked that he expected the growth rate to be lower in the first
quarter of 1978 and higher in the second quarter than the staffs
projections suggested. In his judgment it was too early to arrive at
any firm view about prospects for the second half of next year.
At its October meeting the Committee had agreed that from the
third quarter of 1977 to the third quarter of 1978 average rates of
growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: Af-1, 4 to 6Vi
per cent; M-2, 6Vi to 9 per cent; and M-3, 8 to lOVi per cent. The
associated range for the rate of growth in commercial bank credit
was 7 to 10 per cent. It was agreed that the longer-run ranges, as
well as the particular aggregates for which such ranges were
specified, would be subject to review and modification at subsequent meetings.
In the discussion of policy for the period immediately ahead,
members noted that growth in the monetary aggregates appeared to
be slowing sharply in November. It was observed that for a number
of reasons growth rates for December were particularly difficult to
project, but even if they also proved to be low, two consecutive
months of slow growth would be acceptable in view of the rapid
monetary expansion of recent months. The comment was made
that the sharp slowing in early November suggested that the
aggregates might grow at reasonably satisfactory rates over the
November-December period, assuming continuation of a Federal
funds rate at about its current level. Many members indicated that
they would like to maintain stable conditions in the money market
for a time and that they were willing to accept a rate of growth in
M-l over the November-December period within a somewhat
wider range than usual, encompassing relatively low growth.
Most members expressed a preference for continuing to give
greater weight than usual to money market conditions in conducting open market operations in the period until the next meeting of
the Committee. However, a number of members were in favor of
basing operating decisions primarily on the behavior of the monetary aggregates.
The members did not differ greatly in their preferences for
FOMC Policy Actions
309
operating specifications for the period immediately ahead. Most
members favored a range of 1 to 6 or 1 to 7 per cent for the annual
rate of growth in M-l over the November-December period and a
range of 5 to 9 per cent, or a slightly lower one, for growth in M-2.
With respect to M-l, some sentiment was also expressed for a
range of 2 to 7 per cent. And one member suggested a range of 2Vi
to IVi per cent because he was concerned that the velocity of M-l
would not tend to increase so much in the period ahead as he
thought was implied by the lower range.
With respect to the Federal funds rate, almost all members
favored an operating range of 614 to 63A per cent for the period until
the next meeting. However, one member who preferred to base
decisions for operations primarily on the behavior of the monetary
aggregates suggested a wider range, one of 6 to 7 per cent.
At the conclusion of the discussion the Committee decided that
operations in the period immediately ahead should be directed
toward maintenance of prevailing money market conditions, as
represented by the current level of the Federal funds rate. However, the members agreed that if growth in the aggregates should
appear to approach or move beyond the limits of their specified
ranges, the operational objective for the weekly-average Federal
funds rate should be varied in an orderly fashion within a range of
6lA to 63A per cent. With respect to the annual rates of growth in
M-l and M-2 over the November-December period, the Committee specified ranges of 1 to 7 per cent and 5 to 9 per cent,
respectively. It was also agreed that in assessing the behavior of
the aggregates, the Manager should give approximately equal
weight to the behavior of M-l and M-2.
As customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's various
objectives.
The following domestic policy directive was issued to the Fed
eral Reserve Bank of New York:
The information reviewed at this meeting suggests that growth in
real output of goods and services is picking up in the current quarter
from the reduced pace in the third quarter. The dollar value of total
retail sales, which had been unchanged in September, rose substan-
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FOMC Policy Actions
tially in October. Industrial production and employment increased
somewhat. The unemployment rate, at 7.0 per cent, remained in the
narrow range prevailing since April. The wholesale price index for
all commodities rose sharply in October, as average prices of farm
products and foods increased after having declined appreciably over
the preceding 4 months. Prices of industrial commodities rose at
about the average rate of the preceding 12 months. The index of
average hourly earnings increased sharply in September and has
advanced at a somewhat faster pace so far this year than it had on
the average during 1976.
The trade-weighted value of the dollar against major foreign currencies has declined further since mid-October. In September the
U.S. foreign trade deficit was reduced somewhat, in part as a result
of temporary factors.
M-\ and M-2 increased substantially in October, but growth
slowed sharply in early November. In October inflows to banks of
the total of savings deposits and small-denomination time deposits
fell off, but banks expanded the outstanding volume of largedenomination CD's substantially as credit demands strengthened.
Inflows to nonbank thrift institutions slowed somewhat in October
from the strong pace of the preceding 2 months. Following a substantial rise in member bank borrowings, Federal Reserve discount
rates were increased from 53A to 6 per cent in late October. Market
interest rates have fluctuated moderately since mid-October and
most recently have tended to decline.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster bank reserve and other
financial conditions that will encourage continued economic expansion and help resist inflationary pressures, while contributing to a
sustainable pattern of international transactions.
At its meeting on October 18, 1977, the Committee agreed that
growth of A/-1, M-2, and M-3 within ranges of 4 to 6V2 per cent, 6V2
to 9 per cent, and 8 to W/2 per cent, respectively, from the third
quarter of 1977 to the third quarter of 1978 appears to be consistent
with these objectives. These ranges are subject to reconsideration at
any time as conditions warrant.
At this time, the Committee seeks to maintain about the prevailing
money market conditions during the period immediately ahead,
provided that monetary aggregates appear to be growing at approximately the rates currently expected, which are believed to be on a
path reasonably consistent with the longer-run ranges for monetary
aggregates cited in the preceding paragraph. Specifically, the Committee seeks to maintain the weekly-average Federal funds rate at
about the current level, so long as M-\ and M-2 appear to be growing
over the November-December period at annual rates within ranges
of 1 to 7 per cent and 5 to 9 per cent, respectively. If, giving
approximately equal weight to M-\ and M-2, it appears that growth
FOMC Policy Actions
311
rates over the 2-month period are approaching or moving beyond the
limits of the indicated ranges, the operational objective for the
weekly-average Federal funds rate shall be modified in an orderly
fashion within a range of 6!4 to 63A per cent.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who
will then decide whether the situation calls for supplementary instructions from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, Roos, and Wallich. Votes against
this action: None.
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FOMC Policy Actions
MEETING HELD ON DECEMBER 19-20, 1977
1. Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services was growing in the current quarter at about the
third-quarter pace, which the Commerce Department had revised
upward appreciably to an annual rate of 4.7 per cent. At the same
time the rise in average prices, as measured by the fixed-weighted
price index for gross domestic business product, appeared to be
stepping up somewhat from an annual rate of 5.1 per cent estimated
for the third quarter. Staff projections for the year ahead, which
were based on assumptions that did not include reductions in
Federal income taxes, differed little from those prepared just before
the November meeting of the Committee; they suggested that real
GNP would continue to grow at a moderate, although gradually
diminishing, pace throughout 1978. It was also expected that the rate
of increase in prices would remain high and that the unemployment
rate would decline gradually.
The staff estimate of continued growth of real GNP in the current
quarter at about the third-quarter pace was attributable to expectations of substantially greater expansion in final sales of goods and
services in combination with a decline in the rate of business
inventory accumulation. With respect to final sales, there were
indications of considerable strength in consumer spending for both
durable and nondurable goods and in residential construction. It was
anticipated, moreover, that growth in business fixed investment
would pick up from the reduced rate in the third quarter.
The staff projections for the year ahead reflected expectations
that, in real terms, the expansion in business capital outlays would be
relatively strong; the growth in consumer spending would remain
moderate; the increases in State and local government purchases of
goods and services would continue to be sizable; the expansion in
residential construction activity would taper off as the period
FOMC Policy Actions
313
progressed; and the rise in Federal purchases of goods and services
would be smaller than over the past year.
In November industrial production expanded 0.5 per cent, compared with 0.3 per cent in October and 0.4 per cent in September.
Increases in output were widespread in November, but automobile
assemblies were reduced. Capacity utilization in manufacturing was
estimated to have remained at about 83 per cent; in both the
materials-producing and the advanced processing industries, utilization rates were close to their levels in the second and third quarters.
For the materials-producing industries, the rate was about 10
percentage points below the high reached in the previous period of
business expansion.
Nonfarm payroll employment rose substantially in November. In
particular, gains were large in services and finance, trade, and State
and local government. Employment in manufacturing advanced
moderately, and the average workweek edged up further to 40.5
hours, the same as in June. The increase in total employment, as
measured by the survey of households, was particularly large. The
rise in the civilian labor force also was substantial, however, and the
unemployment rate, at 6.9 per cent, remained in the narrow range
prevailing since April.
The pace of expansion in personal income had increased sharply
to an annual rate of more than 16 per cent in October and then
slowed to a rate of about 11 per cent in November, according to
statistics released since the Committee's meeting in mid-November.
In October growth in wage and salary payments had been augmented by raises in pay for Federal civilian and military personnel.
Farm income—bolstered by increased price supports for grains and
sugar—advanced in both October and November, after having
declined for a half year.
The dollar value of retail sales had risen 1.5 per cent in November
according to the advance report. Moreover, the estimate of sales for
October had been revised upward substantially and was 2.7 per cent
above the September level. As a consequence, the average for the
first 2 months of the fourth quarter was up almost 4 per cent from the
monthly average for the third quarter. Increases in total sales from
one quarter to the next had not been that large since the fourth
quarter of 1976.
Although the total value of retail sales advanced in November,
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FOMC Policy Actions
unit sales of new domestic and foreign autos declined about 5 per
cent. Unit sales appeared to have been trending downward since
spring. In October and November the average rate was nearly 10 per
cent below that in the second quarter.
Private housing starts rose substantially in October to an annual
rate of more than 2.2 million units—the highest monthly rate since
the current upswing began in early 1975—and then edged down in
November to a rate of about 2.1 million units. The average for the 2
months was 5 per cent higher than that for the third quarter.
The latest Department of Commerce survey of business spending
plans, taken in late October and November, suggested that spending
for plant and equipment would expand at an annual rate of 5.8 per
cent in the fourth quarter of 1977 and at rates of 11.4 and 10.2 per
cent in the first and second quarters of 1978, respectively. The
survey also indicated that such spending would be 13.7 per cent
greater in 1977 as a whole than in 1976; the preceding survey of the
Department of Commerce had indicated a year-to-year gain of 13.3
per cent.
Manufacturers' new orders for nondefense capital goods, which
had advanced sharply in September, increased somewhat further in
October to a level SV2 per cent above the monthly average for the
third quarter. Contract awards for commercial and industrial
buildings—measured in terms of floor space—in October were close
to the average for the third quarter, which was up about 10 per cent
from the average for the preceding quarter and 30 per cent from that
for the third quarter of 1976.
The index of average hourly earnings for private nonfarm production workers increased relatively little in November following a
sharp rise in October. The rate of increase over the first 11 months of
1977 was about IVi per cent, compared with a rise of about 7 per cent
over the 12 months of 1976.
The wholesale price index for all commodities rose sharply in
November for the second successive month. Average prices of farm
products and foods, which had advanced 1.3 per cent in October,
increased 2.3 per cent further to a level 4.8 per cent higher than in
November 1976. For industrial commodities, the rise slowed to 0.4
per cent from 0.6 per cent in October and 0.8 per cent in September.
Over the 12 months ending in November, the increase in the
industrial commodity average was 6.5 per cent.
FOMC Policy Actions
315
The consumer price index rose 0.3 per cent in October, marking
the fourth consecutive month of moderate increases. From June to
October retail prices of foods advanced only about 0.5 per cent, in
contrast with a rise of nearly 7 per cent over the first 6 months of the
year. The rise in average prices of commodities other than foods
continued in October at about the reduced pace of the third quarter,
and the advance in prices of services slowed somewhat.
The dollar had been under considerable selling pressure in foreign
exchange markets throughout the inter-meeting period, and its
trade-weighted value had declined more than 3 per cent further even
though central banks purchased a substantial amount of dollars. All
major currencies rose against the dollar over the period, and appreciations amounted to 9 per cent for the Swiss franc, 6 per cent for the
German mark, and 2 per cent for the Japanese yen. The persistent
pressure on the dollar reflected uncertainty about U.S. economic
policies, especially with respect to energy, as well as continuing
concern in the markets about the deficit in U.S. foreign trade and
about the weakness in economic activity in other industrial countries
relative to that in the United States.
The U.S. foreign trade deficit increased sharply in October.
However, the widening of the deficit was attributable to the 2-month
dock strike that was terminated at the end of November. Because of
statistical procedures, the strike depressed recorded exports more
than recorded imports.
At U.S. commercial banks, expansion of total credit in November
was close to the fast pace in October. Bank loans continued to grow
at a rapid rate, and the strength was broadly distributed among
major loan categories. As in October, banks reduced their holdings
of Treasury securities somewhat more than they added to their
holdings of other securities.
Commercial banks in the aggregate financed the November increase in loans entirely through managed liabilities. Negotiable CD's
at weekly reporting member banks increased $4.5 billion over the
month, and other large time deposits not subject to rate ceilings
expanded $5.0 billion. The total increase of $9.5 billion for the month
was a record for large-denomination time deposits.
The narrowly defined money stock (M-l) contracted slightly in
November, following a large increase in October. For October and
November combined, growth in M-l was at an annual rate of 5 per
316
FOMC Policy Actions
cent, and for the 11 months ending with November, it was at an
annual rate of about 1XA per cent.
Growth in M-2 slowed to an annual rate of AVi per cent in
November. The increase in the interest-bearing component was
concentrated in the large-denomination time deposits that are not
subject to interest rate ceilings. The total of savings deposits and
small-denomination time deposits, which are subject to rate ceilings,
declined slightly. Throughout November rate ceilings on all but the
longest maturities of bank time accounts were significantly below
the yields available on competing market securities. Over the first 11
months of 1977, M-2 grew at an annual rate of about 9lA per cent.
At nonbank thrift institutions, inflows of funds slowed further in
November. Growth in M-3 was reduced to an annual rate of about
11A per cent, from 12V£ per cent in October. Over the first 11 months
of the year M-3 grew at an annual rate of about 11!4 per cent.
At its November meeting the Committee had decided that operations in the period immediatey ahead should be directed toward
maintaining about the prevailing money market conditions, provided
that monetary aggregates appeared to be growing at approximately
the rates then expected. Specifically, the Committee sought to
maintain the weekly-average Federal funds rate at about its current
level—which was 6Vi per cent—so long as M-1 and M-2 appeared to
be growing over the November-December period at annual rates
within ranges of 1 to 7 per cent and 5 to 9 per cent, respectively.
However, the members also had agreed that if growth in the
aggregates appeared to approach or move beyond the limits of their
specified ranges, the operational objective for the weekly-average
Federal funds rate should be varied in an orderly fashion within a
range of 6lA to 6% per cent.
Throughout the period between the November and December
meetings, incoming data suggested that growth in M-l and M-2
would be well within the ranges that had been specified by the
Committee. Accordingly, the Manager of the System Open Market
Account sought to maintain reserve conditions consistent with a
Federal funds rate of 6V2 per cent.
In association with the stability in the Federal funds rate, shortterm market interest rates changed little during the inter-meeting
period, although a minor realignment in relationships occurred.
Rates on Treasury bills declined, reflecting in large part substantial
FOMC Policy Actions
317
foreign purchases of such securities, while yields on private shortterm instruments edged up. Rates on longer-term securities rose
somewhat during the period.
The U.S. Treasury raised $10.2 billion of new money during the
inter-meeting period, including $1.3 billion in its regular weekly bill
auctions, $3.0 billion through 139-day, cash-management bills, and
$5.9 billion through 1-year bills and 2- and 4-year notes. Moreover,
the Treasury planned to auction $3 billion of 2-year notes on the
Wednesday after this meeting and $1.5 billion of 15-year bonds in the
following week.
Gross public offerings of corporate bonds in November were close
to the October volume, and private placements of bonds were
estimated to have remained large. Total gross issues of corporate
securities increased as stock offerings—primarily by public utility
firms—reached the highest level in nearly 2 years.
Gross offerings of new bonds by State and local governments
declined somewhat more than seasonally in November. Advance
refundings accounted for about one-fifth of the November total—the
same proportion that had prevailed during the first 10 months of the
year—although the volume was apparently reduced by a Treasury
announcement on November 5 of an intention to issue new regulations restricting certain types of advance refunding issues. Demands
for municipal securities continued to be strong from commercial
banks, from property-casualty insurance companies, and from individuals through municipal bond investment companies.
The volume of mortgage lending in November apparently remained near the record pace of other recent months. The increase in
mortgage loans at commercial banks was larger than in October and
near the high monthly-average gain in the third quarter. Outstanding
mortgage commitments at savings and loan associations rose to a
new record in October. In November these institutions apparently
maintained a high level of mortgage lending activity, and they
continued to float additional issues of mortgage-backed bonds and to
increase their borrowings from the Federal home loan banks. By
month-end, outstanding advances from those banks had reached
their highest level since early 1975. The average interest rate on new
commitments for conventional home mortgages at savings and
loan associations changed little in late November and early December.
318
FOMC Policy Actions
In the Committee's discussion of the economic situation, the
members were in agreement that the expansion in activity was likely
to continue throughout the year ahead. A number of members
expressed the view that growth in real GNP during 1978 would be as
strong as or stronger than that suggested by the staff projections.
Other members foresaw substantial strength for the period immediately ahead—in response to the recent pick-up in final sales and
consequent adjustment of inventory positions—but less strength
later in 1978. It was noted, however, that the administration was
planning to propose a substantial reduction in taxes on individual
and business incomes in the new year, and that such reductions—
depending upon their nature and timing—could have a significant
effect on the course of activity.
Although the prospective reductions in taxes were seen as supportive of the rate of expansion in over-all activity, there was some
concern about their implications for the mix of policies affecting
aggregate demand and, consequently, for business fixed investment
over the longer term. It was observed that long-term interest rates
were relatively low, after allowing for the prevailing rate of increase
in prices; but it was also observed that enlarged deficits in the
Federal budget might be accompanied by increases in interest rates
as the year progressed. It was suggested, moreover, that the rate of
inflation could prove to be higher than expected and could, therefore, hamper the progress of the expansion.
As at other recent meetings, members expressed different assessments of the outlook for business capital spending. A few felt
that expansion in such spending would be at least as strong as
suggested by the staff projections—which, in turn, were stronger
than implied by the surveys of expenditures for the early part of
1978. One of these members suggested that, in a variety of ways, the
recent decline in the value of the dollar against other major currencies had increased the attractiveness of investment in industrial
facilities in the United States. On the other hand, some members felt
that the staff projections of capital outlays were on the optimistic
side. In the opinion of one of these, manufacturers had been able to
achieve new efficiencies in their production facilities, which added
significantly to capacity without requiring large expenditures for
additional structures.
With respect to the housing market, it was suggested that a
FOMC Policy Actions
319
number of forces were at work that might make activity in 1978 fall
short of the rates projected by the staff. On the other hand, the
thought was expressed that demands might continue to be buoyed
by consumer perceptions of homeownership as an effective hedge
against inflation.
One member suggested that the expansion in residential construction activity had been sustained at a fast pace, despite the high and
rising prices for housing, by such temporary influences as the rapid
increase in homeowners' equity and a backlog of demands accumulated earlier during a period of reduced construction activity, whose
force might now be spent; consequently, demands for housing in the
period ahead might be more closely related to such fundamental
factors as family formation and growth in disposable income. It was
suggested also that construction activity in some areas might be
impeded by elements of the Government's energy program and by
moratoria on new hook-ups for utilities, although building activity
in the inner cities might be stimulated.
A few members expressed doubts that the demand for automobiles would measure up to the staff projections, which
suggested that sales would be sustained in 1978 at about the fast pace
of 1977. The observation was made that sizable cutbacks in assemblies, should they be made necessary by slippage in sales, might
not be effected until the spring. It was also suggested, however, that
some decline in the rate of sales was a reasonable expectation and,
in view of the excessive expansion in consumer credit recently, a
welcome development.
In commenting on unemployment, one member questioned
whether the over-all rate might not be about as low as could be
expected, given the rapid growth in the labor force. He suggested
that the high rate of unemployment was a structural problem that
could not be solved with monetary policy instruments; in his view,
growth in real GNP at any rate above the longer-run average would
be satisfactory. Another member observed that a particularly
troublesome aspect of the situation was that the large increase in
employment during the current business expansion had not lowered
the unemployment rate for blacks, especially for black teenagers. It
was observed that the increase in the minimum wage that would
become effective at the beginning of the new year would contribute
to that problem, and it was suggested that in the coming year serious
320
FOMC Policy Actions
attention might again be given to proposals for a youth differential in
the minimum wage.
In the Committee's discussion, serious concern was expressed
about the recent weakness of the dollar in foreign exchange markets.
While it was noted that depreciation of the dollar might in time
contribute to improvement in the U.S. trade balance, it was pointed
out that it contributed to the rate of inflation in this country and
weakened business confidence both here and abroad. Excessive
appreciation of foreign currencies, it was suggested, could have
adverse effects on over-all economic activity abroad and, consequently, on the U.S. trade balance. The observation was made
that the position of the dollar would be strengthened by adoption in
this country of an effective energy program, of a tax policy conducive to business investment here, and of a more effective attack on
inflation, as well as by pursuit abroad of faster rates of economic
growth.
At its October meeting the Committee had agreed that from the
third quarter of 1977 to the third quarter of 1978 average rates of
growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-l, 4 to 6Vi
per cent; M-2, 6Vi to 9 per cent; and M-3, 8 to \0l/2 per cent. The
associated range for the rate of growth in commercial bank credit
was 7 to 10 per cent. It was agreed that the longer-run ranges, as well
as the particular aggregates for which such ranges were specified,
would be subject to review and modification at subsequent meetings.
In the Committee's discussion of policy for the period immediately ahead, the members took note of the slowdown in the
growth of the monetary aggregates in recent weeks and of the
uncertainties in financial markets usually associated with the yearend. Against that background and in light of the performance of the
economy, it was observed that increases in short-term interest rates
were probably not warranted at this time. On the other hand, it was
suggested, the weakness of the dollar in foreign exchange markets
argued against declines in such rates. Accordingly, most members
were in favor of the maintenance of prevailing conditions in the
money market for the time being and of continuing to give greater
weight than usual to money market conditions in conducting open
market operations in the period until the next meeting of the
FOMC Policy Actions
321
Committee. However, some members indicated a preference for
basing operating decisions in the period ahead primarily on the
behavior of the monetary aggregates.
The members did not differ greatly in their preferences for ranges
of growth for the monetary aggregates over the December-January
period. Most of them favored ranges of 2XA to SV2 per cent and 6 to
10 per cent for the annual rates of growth in M-\ and M-2,
respectively. However, there was some sentiment for a slightly
lower and some for a slightly higher range for M-1. And one member
who preferred to base operations on the behavior of the monetary
aggregates believed that System operations should be directed
toward a firming in money market conditions if it appeared that over
the 2-month period M-\ would grow at a rate in excess of 6V2 per
cent.
At the conclusion of the discussion the Committee decided that
operations in the period immediately ahead should be directed
toward maintenance of prevailing money market conditions, as
represented by the current level of the Federal funds rate. However,
the members agreed that if growth in the aggregates should appear to
approach or move beyond the limits of their specified ranges, the
operational objective for the weekly-average Federal funds rate
should be varied in an orderly fashion within a range of 6!4 to 63A
per cent. With respect to the annual rates of growth in M-\ and M-2
over the December-January period, the Committee specified ranges
of 2Vi to SV2 per cent and 6 to 10 per cent, respectively. It was also
agreed that in assessing the behavior of the aggregates, the Manager
should give approximately equal weight to the behavior of M-l and
M-2.
The Committee decided to include in the next to last paragraph of
its directive to the Federal Reserve Bank of New York the following
sentence: "In the conduct of day-to-day operations, account shall be
taken of emerging financial market conditions, including the unsettled conditions in foreign exchange markets." This instruction was
added to provide the Manager with somewhat greater flexibility, in
part because of the Committee's view that pressures on the dollar in
foreign exchange markets might appropriately influence the nature
and timing of domestic open market operations from day to day.
As customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instruc-
322
FOMC Policy Actions
tions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services is growing in the current quarter at about the
pace in the third quarter. The dollar value of total retail sales, which
had increased sharply in October, rose considerably further in
November. Industrial production continued to expand, and employment increased substantially. However, the unemployment rate, at
6.9 per cent, remained in the narrow range prevailing since April. The
wholesale price index for all commodities rose sharply in November
for the second successive month, reflecting another large increase in
average prices of farm products and foods. However, the rise in
average prices of industrial commodities was less rapid than in the
preceding 2 months. The index of average hourly earnings has
advanced at a somewhat faster pace so far this year than it had on the
average during 1976.
The dollar has been under considerable pressure in foreign exchange markets in recent weeks, and its trade-weighted value against
major foreign currencies has declined more than 3 per cent further
since mid-November. In October the U.S. foreign trade deficit
widened sharply, primarily as a result of the dock strike at many U.S.
ports.
M-\—which had expanded substantially in October—declined
slightly in November, and M-2 increased relatively little. The total of
savings deposits and small-denomination time deposits at commercial
banks declined somewhat, but growth in large-denomination time deposits accelerated sharply further as credit demands remained strong.
Inflows to nonbank thrift institutions slowed further in November.
Market interest rates have changed relatively little since midNovember.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and
help resist inflationary pressures, while contributing to a sustainable
pattern of international transactions.
At its meeting on October 18, 1977, the Committee agreed that
growth of M-l, M-2, and M-3 within ranges of 4 to 6Vi per cent, 6Vi
to 9 per cent, and 8 to lOVi per cent, respectively, from the third
FOMC Policy Actions
323
quarter of 1977 to the third quarter of 1978 appears to be consistent
with these objectives. These ranges are subject to reconsideration at
any time as conditions warrant.
At this time, the Committee seeks to maintain about the prevailing
money market conditions during the period immediately ahead,
provided that monetary aggregates appear to be growing at approximately the rates currently expected, which are believed to be on a
path reasonably consistent with the longer-run ranges for monetary
aggregates cited in the preceding paragraph. Specifically, the Committee seeks to maintain the weekly-average Federal funds rate at about
the current level, so long as M-\ and M-2 appear to be growing over
the December-January period at annual rates within ranges of 2Vi to
%x/i per cent and 6 to 10 per cent, respectively.
If, giving approximately equal weight to M-\ and M-2, it appears
that growth rates over the 2-month period are approaching or moving
beyond the limits of the indicated ranges, the operational objective for
the weekly-average Federal funds rate shall be modified in an orderly
fashion within a range of 6!4 to 644 per cent. In the conduct of
day-to-day operations, account shall be taken of emerging financial
market conditions, including the unsettled conditions in foreign
exchange markets.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Jackson, Lilly, Mayo,
Morris, Partee, and Wallich. Vote against this action:
Mr. Roos.
Mr. Roos dissented from this action because he believed that the
upper limit of the December-January range for growth in MA
specified by the Committee allowed for the possibility of too rapid
growth in that aggregate, particularly in view of the rate at which it
had grown so far this year. In his opinion, growth in M-\ over the
December-January period at a rate in excess of Q/i per cent would
require an excessively restrictive policy later, if the Committee's
long-range growth path were to be achieved.
Subsequent to the meeting, on January 9, 1978, the Committee
voted to raise the range for the Federal funds rate to 6Vi to 7 per
324
FOMC Policy Actions
cent and to instruct the Manager to raise the rate to 63A per cent
over the next few days. This action was taken upon recommendation
of Chairman Burns.
During the preceding 2 weeks the Federal funds rate had averaged
a little over 6% per cent, or above the midpoint of the range of 6!4
to 6% per cent established at the December meeting. Year-end
money market pressures had affected the rate, but most recently the
Manager had not discouraged some rise above the midpoint of the
range in view of unsettled conditions in foreign exchange markets.
Available data had suggested that over the December-January
period M-\ and M-2 would grow at rates within the ranges specified
at the December meeting.
On January 6, just before the Chairman recommended this action,
the Board of Governors had approved action by directors of two
Federal Reserve Banks raising the discount rate from 6 to 6*/i per
cent. In announcing the increase in the discount rate, the Board had
issued the following press release:
"The recent disorder in foreign exchange markets constitutes a
threat to orderly expansion of the domestic and international economy. In view of this, the Board of Governors of the Federal
Reserve System today approved an increase in the discount rate
from 6 per cent to 6V2 per cent.
"The Board expressed the hope that the need for the increase will
prove temporary. The Board further indicated that the condition of
the domestic economy is sound and that credit supplies to sustain
economic expansion will remain ample.
"In making the change, the Board acted on requests from
directors of the Federal Reserve Banks of New York and Chicago,
increasing the discount rates of those Banks to 6V2 per cent,
effective Monday, January 9. The discount rate is the interest rate
that is charged member banks when they borrow from their district
Federal Reserve Banks."
On January 9, 1978, the Committee modified the domestic policy
directive adopted at its meeting of December 19-20, 1977, by raising
the range for the Federal funds rate to W2 to 7 per cent and by
instructing the Manager to raise the rate to 644 per cent over the next
few days.
Votes for this action: Messrs. Burns, Volcker,
Cold well, Gardner, Guffey, Mayo, Roos, and Wai-
FOMC Policy Actions
325
lich. Votes against this action: Messrs. Lilly, Morris,
and Partee. Absent and not voting: Mr. Jackson.
Messrs. Lilly, Morris, and Partee voted against this action because they did not believe that the performance of the domestic
economy justified an increase in interest rates at this time. Mr.
Morris believed, in addition, that the proper response to present
conditions in the foreign exchange markets was more aggressive
intervention, not a higher level of domestic interest rates.
2. Authorization for
Foreign Currency Operations
Paragraph ID of the Committee's authorization for foreign currency
operations authorizes the System Open Market Account to maintain
an over-all open position in all foreign currencies not exceeding $1.0
billion, unless a larger position is expressly authorized by the
Committee. On January 6, 1978, the Committee authorized an
increase in the limit to $1.5 billion. The Foreign Currency Subcommittee (consisting of Messrs. Burns, Gardner, Volcker, and Wallich)
recommended the increase of $500 million in the limit in view of the
recent scale of operations and the continuing unsettled condition of
the foreign exchange markets. It was announced on January 4, 1978,
that the Exchange Stabilization Fund of the U.S. Treasury would
henceforth be utilized actively together with the $20 billion swap
network operated by the Federal Reserve System to check speculation and to help re-establish order in the foreign exchange markets.
326
Federal Reserve Operations
in Foreign Currencies
The Federal Reserve intervened in the New York foreign exchange
market occasionally during the first three quarters of 1977, and more
actively during the last quarter, to counter disorderly market conditions. The System also operated in the market to acquire foreign currency balances, some of which were used to repay past swap indebtedness. Gross sales by the System of foreign currencies in the exchange
market during the year totaled $1,100 million equivalent, and gross
purchases totaled $530 million equivalent. In addition to these market
transactions, the System also purchased $743 million equivalent of
Swiss francs directly from the Swiss National Bank (see note to table
on the following page).
Downward pressure on the dollar built up gradually during the
year as the U.S. trade and current-account deficits began to widen
and as market participants came to expect that these deficits would
remain large in 1978. Foreign central banks purchased large amounts
of dollars during the year, especially in the fourth quarter when there
was a 6 per cent drop in the dollar's trade-weighted average value
against 10 major currencies.
During the first three quarters of the year, trading in the New York
foreign exchange market was orderly for the most part, with only
occasional periods of disorder. During the final quarter, however,
markets were frequently disorderly—as evidenced by wide bid-ask
spreads with large and abrupt movements of exchange rates.
The Federal Reserve's intervention in exchange markets in 1977
was conducted almost entirely in German marks. The System's gross
sales of marks totaled $1,096 million equivalent, $835 million of
which was financed by swap drawings on the German Federal Bank
with the remainder coming from System balances. The System's gross
purchases of marks totaled $410 million equivalent, most of which
were bought during the first three quarters for the purpose of accumulating mark balances and to repay a $15 million equivalent swap
Operations in Foreign Currencies
327
drawing on the German Federal Bank that had been outstanding at
the beginning of the year and a $35 million equivalent swap drawing
made in July.
During the year the Federal Reserve repaid $544 million equivalent on its special Swiss franc swap facility created with the Swiss
National Bank in October 1976 to facilitate repayment of swap debts
in Swiss francs that had been outstanding since August 1971. The
System purchased the required Swiss francs directly from the Swiss
National Bank against dollars and other foreign currencies (see note
to table) and in the market. These repayments reduced the outstanding Swiss franc swap obligations of the Federal Reserve to $507 million equivalent on December 31, 1977.
The System's outstanding swap debt to the German Federal Bank
at the end of 1977 was $800 million equivalent. Consequently, the
System's total outstanding swap debt at the end of the year was
$1,307 million equivalent, up $241 million equivalent from the
amount outstanding at the beginning of the year.
In February 1977 the Bank of Mexico repaid, at maturity, two
swap drawings totaling $150 million equivalent that had been made
Federal Reserve purchases and sales (—) of foreign
currencies, 1977
Millions of dollars equivalent
Currency
Ql
French francs
German marks
/ 138.8
( -46.1
Total
Q3
Q4
15.1
24.7
22.7
81.1
-1.1
114.8
-89.9
128.0
-106.2
28.7
-853.9
410.3
-1,096.1
f
28.9
/
\
186.3
-47.2
1.7
138.4
-93.2
Year
8.5
— 3.3
8.5
-3.3
Netherlands guilders...
Swiss francs
Q2
154.4
-106.2
30.6
51.4
-853.9
530.5
-1,100.5
NOTE.—Purchases and sales made directly with foreign central banks are excluded. During 1977 the
Federal Reserve purchased $743.2 million equivalent of Swiss francs directly from the Swiss National
Bank, using $542.6 million, $114.9 million equivalent of German marks, $85.3 million equivalent of
French francs, and $0.4 million equivalent of Netherlands guilders.
328
Operations in Foreign Currencies
on the Federal Reserve in November 1976. There were no swap
drawings on the Federal Reserve by foreign central banks during
1977.
During the year the System had realized losses of $146 million on
its foreign exchange transactions. Profits of $5 million associated
with transactions entered into during the current year were offset by
losses of $151 million related to the repayment of Swiss franc swap
debt outstanding since 1971.
329
Consumer Affairs
INTRODUCTION
In the field of consumer affairs the Federal Reserve during 1977
strove to increase the flow of benefits to the public from the consumer
credit protection laws. The Board of Governors—as the primary
source of consumer credit regulation and interpretation—expanded
its enforcement and educational programs over the year. At the same
time, and as a further means of helping consumers obtain the benefits
intended by the Congress, the Board gave major emphasis to simplification of the Truth in Lending Act and the Board's related
Regulation Z.
As part of its effort to increase compliance with consumer credit
protection laws the Board undertook a wide range of actions in 1977.
Because lack of understanding of the requirements of these laws appeared to be a major obstacle to full compliance, the Board instituted
a formal advisory program to assist member banks in understanding
and complying with this large, complex, and mainly new body of
law and regulation.
Enforcement and compliance actions (discussed more fully later in
this section) included:
. . Adoption of a Systemwide enforcement program (published
March 30, 1977) establishing special procedures for determining—
through both regular and special examinations—whether banks are
meeting the requirements of consumer credit protection laws applicable to banks.
. .Development, for the use of examiners, of special consumer
credit protection manuals, checklists, instructions, and special examination reports.
. .Special examination—at least once yearly at first—of each
State member bank, for compliance with consumer credit protection
laws applicable to banks.
. . Participation in the development, with other Federal regulators
of banks, credit unions, and thrift institutions, of uniform guidelines to be applied when violations of Truth in Lending are discovered.
330
Consumer Affairs
In October five Federal regulatory agencies (the Board of Governors, the Federal Deposit Insurance Corporation (FDIC), the Federal
Home Loan Bank Board (FHLBB), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC)), jointly proposed uniform enforcement guidelines. The
guidelines, on which the agencies invited public comment, were intended to "promote improved and uniform enforcement of the Truth
in Lending Act through corrective action, including reimbursement,
for borrowers who have been overcharged or otherwise harmed by
violations of the Act." Final action was pending at the year-end.
As part of this effort to encourage a uniform approach to
the enforcement by banks of consumer credit protection laws, the
Board, the FDIC, and the Office of the Comptroller conducted two
joint consumer regulation schools for examiners in 1977 and planned
at least one additional session in 1978.
Early in 1977 the Board's Division of Consumer Affairs reorganized its staff in order to handle its expanding responsibilities more
effectively. A Compliance Section was established to be responsible
for the education of a special corps of consumer credit protection
examiners, for development of specialized examination materials and
techniques, and for the review of consumer credit protection examination reports.
The Board considers education as a key means of improving general compliance with consumer legislation as it applies to banks.
To this end, the enforcement program announced March 30, 1977,
included, as one of its main objectives, help for all member banks
that want assistance in learning the requirements of these laws and
how to comply with them. Under this part of the program, personnel
of the Board and of the Reserve Banks made some 700 visits of a
day or more to individual banks, to provide instruction in how to
comply with consumer credit protection laws and regulations. In all,
approximately 900 banks—national as well as State member—
received assistance, including reviews of forms used in credit transactions, procedures in extending credit, and a general understanding
of their responsibilities under consumer laws applying to bank credit.
The response of member banks to this program was extremely favorable, and the Board plans to continue this service.
In another effort to achieve general compliance with consumer
Consumer Affairs
331
legislation affecting banks, the Board in 1977 published a number
of model forms, which, when properly used, will meet the requirements of the legislation and of the Board's related regulations.
To meet its responsibilities under the Federal Trade Commission
Improvement Act, the Board identified several areas of potential
difficulty and supplied examiners with a questionnaire to be used
during special consumer bank examinations in checking for unfair
and deceptive acts or practices by banks. The FDIC and the Comptroller of the Currency also planned to use the questionnaire in the
first quarter of 1978 to ascertain the prevalence and significance of
such practices among banks under their supervision. It is expected
that the information obtained from the questionnaire will help the
Board to assist banks in complying with the statute.
To obtain the information needed to review and evaluate its
over-all enforcement effort by the end of 1978, the Board developed a computerized program to identify common types of violations,
geographical concentrations of violations, and other violation patterns. The Board's enforcement and educational activities are expected
to result in enhanced compliance with the consumer credit protection
laws.
As a step toward simplification of the first of the consumer credit
protection laws—Truth in Lending—the Board prepared a draft bill
that was submitted to the Senate Committee on Banking, Housing and
Urban Affairs in July. The draft bill, which was prepared at the request of the committee, would simplify the act's requirements for disclosures concerning closed-end credit and would simplify and improve disclosures for open-end credit transactions. The proposed
bill would reduce the detail required to be disclosed; summarize
important information concerning the terms of transactions, such as
whether collateral was given; improve the readability of required
information by separating contract terms from other required information and by using everyday language to describe key terms (such
as defining "Finance charge" as "The dollar cost of the credit"). The
bill also proposed the development of model forms to improve compliance and proposed a series of simplifications of Truth in Lending
concepts.
The Board also initiated action on nine simplifying amendments
or interpretations of Regulation Z (Truth in Lending) in 1977. Six
332
Consumer Affairs
were adopted, and final action on three proposals was pending at the
year-end. (These items are discussed in detail later in this section.)
During 1977 the Survey Research Center of the University of
Michigan completed—under joint sponsorship of the Board, the
FDIC, and the Office of the Comptroller—a survey of consumer
opinion and consumer awareness of such key matters as the cost of
credit, annual percentage rates, finance charges, and the like. At the
year-end a full analysis of the survey results was in preparation. A
preliminary and partial analysis appears later in this report. It indicates sharply increased consumer awareness of credit costs since
Truth in Lending became law in 1969 but shows that awareness
varies with education, race, income status, and the type of credit
concerned. It is expected that the survey results will help the Congress and the Board in identifying needs for changes in the consumer
credit protection laws and regulations.
Three consumer education pamphlets—of which more than 5 million copies were printed—were distributed by the Board in 1977.
They explain the provisions of the Equal Credit Opportunity Act,
and of the Board's related Regulation B, against discrimination in
credit transactions on the basis of sex and age, and the use of incidental credit by doctors, lawyers, and small retailers. In addition,
the Board's Division of Consumer Affairs prepared a speech outline
and visual aids for use in explanatory discussions of Equal Credit
Opportunity. This material was used extensively by staff from the
Reserve Banks who spoke to groups that wanted to know more about
Equal Credit Opportunity.
TRUTH IN LENDING
This ninth Annual Report on Truth in Lending (dated January 3,
1978), highlighting the efforts to simplify the disclosure requirements
and the encouraging findings of the Consumer Awareness Survey,
is submitted to the Congress by the Board of Governors of the Federal Reserve System ("Board"). The report also includes an assessment of the extent to which compliance with the requirements of
the act is being achieved and a summary of the Board's administration of its functions under the act. It does not include any recommendations for amendments to the act since the Board submitted
comprehensive recommendations during the 1977 Truth in Lending
Consumer Affairs
333
hearings of the Senate Committee on Banking, Housing and Urban
Affairs.
Simplification of Truth in Lending
A great deal of attention has been devoted during the past year to
the need for simplification of the requirements of both the Truth in
Lending Act and Regulation Z. After an in-depth study, the Board
proposed for comment various amendments to simplify and to clarify
the current requirements of the regulation. Many of the problems
and complexities, however, arise from the statute itself and cannot
be resolved through regulatory change. Therefore, the Board in July
submitted to the Senate Committee on Banking, Housing and Urban
Affairs a draft bill to simplify the closed-end credit disclosures and,
subsequently, at the request of the committee, prepared additional
recommendations to simplify and to improve disclosures for openend credit transactions.
The Board's proposal took several different approaches to simplifying requirements under Truth in Lending. First, it reduced the detail
of the disclosures and emphasized the important cost disclosures. For
example, the components of the finance charge and of the amount
financed would not be itemized. Second, the Board recommendation
summarized the important information about terms, such as whether
the obligation was secured. Third, the recommendation improved the
method of delivering the information to consumers by requiring it
to be segregated from contract terms and from other information
required to be disclosed by State or Federal laws. Everyday language
would be used to describe the cost information, for example,
"FINANCE CHARGE (This is the dollar cost of the credit)," and
the Board would publish model forms and clauses that, if properly
completed, would insulate creditors from civil liability under the act.
Finally, the proposal contained a series of amendments to simplify
some of the concepts and to clear up various technical ambiguities
that have arisen since the late 1960's.
The Board's proposal complemented several other Truth in Lending bills that limited private civil actions to the failure to disclose
important credit terms, increased agency enforcement powers, and
made other improvements. Many of the Board's recommendations
are contained in the committee print under consideration by the
Senate Committee on Banking, Housing and Urban Affairs.
334
Consumer Affairs
New information on effectiveness
During the past year, one major survey and a lesser investigation have
been undertaken in an effort to learn more about credit use and
consumer needs, as well as to provide helpful information about
consumer awareness and the use of existing consumer credit legislation.
Consumer awareness survey. A survey of consumer opinion
was conducted in the summer of 1977 by the Survey Research
Center of the University of Michigan under the joint sponsorship
of the Board, the Federal Deposit Insurance Corporation (FDIC),
and the Comptroller of the Currency. Preliminary analysis of the
results of this survey,1 when compared with two earlier surveys conducted for the Board by Chilton Research2 in 1969 and 1970,
indicates that Truth in Lending has contributed significantly to
increased consumer awareness of credit costs, including annual percentage rates charged on various types of consumer credit. The 1977
survey, which was based on interviews with a nationwide sample of
consumers, provided information on awareness of annual percentage
rates as well as many aspects of the use of consumer credit. A full
analysis of the findings is currently being prepared, and the results
will be made available when the work is completed.
The 1969 and 1970 studies indicated that awareness of rates
increased sharply in the first 15 months after Truth in Lending went
into effect, but the 1977 study shows that there have been significant
further increases in consumer awareness over the last 8 years, as
Table 1 shows.3 As of the summer of 1977, the proportions of consumer credit users who were aware of the annual percentage rates
charged had reached 54.5 per cent for closed-end credit, 64.7 per
cent for retail revolving credit, and 71.3 per cent for bank credit
cards.
Closed-end credit. There was considerable variation in both the
level of awareness and the extent of improvement among the users
1
This preliminary analysis is based on the initial computer runs of the data,
which are subject to revision as more complete data are developed.
2
A private research company in Philadelphia, Pennsylvania, which was
under contract to the Board.
3
Awareness of annual percentage rates charged on consumer credit was
determined by comparing the survey responses with a large sample of rates
calculated from credit contracts collected by the Federal Trade Commission.
Consumer Affairs
335
1. Instalment credit: Awareness of annual percentage rates,
by type
Level of awareness
(per cent)
Type
Closed-end credit..
New automobiles.
Used automobiles
Appliances and furniture
Home improvement . . . .
Personal loans
Retail revolving credit
Bank credit cards. . .
1
1
....
Change in awareness
(percentage points)
1969
1970
1977
1969-70
14 5
17 5
7.2
11.7
15.3
20.2
35.2
26.6
38 3
43.3
17.3
35.0
43.3
49.2
55.5
63.4
54 5
70.0
38.3
44.6
66.7
54.6
64.7
71.3
23 8
25.8
10.1
23.3
28.0
29.0
20.5
36.8
1970-77
1969-77
16 2
26.7
21.0
9.6
23.4
5.4
9.2
7.9
40 0
52.5
31.1
32.9
51.4
34.4
29.5
44.7
Figures for 1977 are for durable goods and recreational goods.
SOURCE.—Robert P. Shay and Milton W. Schober, Consumer Awareness of Annual Percentage Rates
of Charge in Consumer Instalment Credit: Before and After Truth in Lending Became Effective (Washington: Technical Studies of the National Commission on Consumer Finance, Volume I, Number 1,
Government Printing Office, 1973), Tables 1 and 2; 1977 Survey of Consumer Credit.
of different types of closed-end credit. Users of credit for the purchase of new automobiles and home improvements, for example,
had the highest rates of awareness: 70.0 per cent and 66.7 per cent,
respectively. The same groups also showed the largest improvement
in awareness over the entire period since 1969, as Table 1 shows.
The lowest level of awareness and the smallest improvement were
shown by users of credit for the purchase of used automobiles. Only
38.3 per cent of the users in this group were aware of the annual
percentage rates charged.
Both the level of awareness of rates in 1977 and the extent of
improvement in awareness since mid-1969 were greater for closedend credit users with higher incomes and for those with more education, as shown in Table 2. There has, however, been significant
improvement in awareness among credit users with lower incomes
and with less formal education. Age appears to have relatively little
relationship to either the level of awareness or the extent of improvement.
Black credit users had a lower level of awareness of the annual
percentage rates charged on closed-end credit than did the other
racial groups in each of the three surveys, as shown in Table 2.
Nevertheless, there has been a fourfold improvement in the awareness of black users, from 9.4 per cent in 1969 to 38.2 per cent in
1977. Most of this increase in awareness has occurred since 1970,
336
Consumer Affairs
in contrast to the other racial groups, which showed about two-thirds
of their increase in awareness during the first 15 months after Truth
in Lending went into effect.
Awareness of annual percentage rates charged on closed-end
credit was substantially higher among customers of financial institu2. Closed-end credit: Awareness of annual percentage rates,
by education, age, income, and race/ethnic group
Level of awareness
(per cent)
Group
Change in awareness
(percentage points)
1969
1970
1977
1969-70
1970-77
1969-77
By education:
Some high school or less
High school
Some college or more
8.6
17.5
18.4
25.8
38.4
50.8
40.6
53.1
64.7
17.2
20.9
32.4
14.8
14 7
13.7
32.0
35 6
46.3
By age:
Under 3 5 . . . .
35-49
50 or more
15 1
15.2
12.8
40.0
40.9
35.7
54 6
59.0
48.6
24 9
25 7
22.9
14 6
18 1
12.9
39 5
43 8
35.8
By income: l
Less than $7,500
$7,500-$ 12,499. ..
$12,500-$ 17,499
$17 500 or more
6.5
14 7
15.6
17.7
23.9
29.3
36.6
48.3
32.0
48 7
57.1
63.8
17.4
14 6
21.0
30.6
8.1
19 4
20 5
15.5
25.5
34 0
41 5
46.1
15.1
9.4
42.5
16.2
56.5
38.2
27.4
6.8
14.0
22.0
41.4
28.8
18.4
44.4
56.6
26.0
12.2
38.2
By race:
Caucasian (non-Hispanic)....
Black (non-Hispanic)
Hispanic, American Indian,
Asian ..
1
Income categories for 1969 and 1970 were adjusted to 1977 dollars* using the consumer price index.
Slight adjustment of categories was made in 1977 to accommodate the scales used by the interviewers.
SOURCE.—Shay and Schober, op. cit., Tables 3 and 4; 1977 Survey of Consumer Credit.
3. Closed-end credit: Awareness of annual percentage rates,
by source of credit
Level of awareness
(per cent)
Change in awareness
(percentage points)
Source
Banks
Credit unions
Finance companies
Retail dealers..
....
1969
1970
1977
1969-70
1970-77
1969-77
12.8
27.8
16.7
9.4
42.0
36.1
38.7
32.8
52.2
65.8
57.8
42.0
29.2
8.3
22.0
23.4
10.2
29.7
19.1
9.2
39.4
38.0
41.1
32.6
SOURCE.—Shay and Schober, op. cit., Table 5; 1977 Survey of Consumer Credit.
Consumer Affairs
337
tions than among those who obtained their credit from retail dealers,
as shown in Table 3.
Open-end credit. The levels of awareness of annual percentage
rates charged on retail revolving credit and bank credit cards and
the changes in these levels are shown for various educational, income,
and age groups in Table 4. The level of awareness increased with
education and income in all three surveys as it did for closed-end
credit; however, the degree of improvement for revolving credit
4. Two segments of open-end credit: Awareness of annual
percentage rates, by education, income, and age group
Level of awareness
(per cent)
Change in awareness
(percentage points)
Group
1969
1970
1977
1969-70
1970-77
1969-77
Retail revolving credit
By education:
Some high school or less
High school
Some college or more
20.0
31.6
48.1
29.7
54.5
68.7
44.6
61.1
76.2
9.7
22.9
20.6
14.9
6.6
7.5
24.6
29.5
28.1
By income: l
Less than $7,500
$7 500-$ 12,499
$12,500-$17,499
$17,500 or more
19 1
28.1
37.4
42.8
27 1
43.3
57.1
64.7
41 9
55 1
59.0
77.3
8 0
15.2
19.7
21.9
14 8
11.8
1.9
12.6
22.8
27.0
21.6
34.5
By age:
Under 35
35-49
50 or more
40.3
39.3
26.7
64.8
61.6
42.3
69.0
72.8
56.1
24.5
22.3
15.6
4.2
11.2
13.8
28.7
33.5
29.4
Bank credit cards
By education:
Some high school or less
High school.
Some college or more
16.4
19.4
38.8
39.8
51 .0
77.4
51.6
65.6
80.3
23.4
31.6
38.6
11.8
14.6
2.9
35.2
46.2
41.5
By income: l
Less than $7,500
$7,500-$ 12,499
$12,500-$ 17,499
$17 500 or more
11 4
22.9
29.2
33.0
60 8
53.7
56.7
68.4
58.5
61.4
66.9
77.7
49.4
30.8
27.5
35.4
2 (2.3)
7.7
10.2
9.3
47.1
38.5
37.7
44.7
By age:
Under 35
35-49
50 or more
34.7
27.1
21.1
68.3
62.7
59.1
76.1
74.8
65.3
33.6
35.6
38.0
7.8
12.1
6.2
41.4
47.7
44.2
1
Income categories for 1969 and 1970 were adjusted to 1977 dollars, using the consumer price index.
Slight adjustment of categories was made in 1977 to accommodate the scales used by the interviewers.
2 For the period 1970-77 there was a decrease in awareness of annual percentage rates of 2.3 per cent
among consumers with incomes of less than $7,500.
SOURCE.—Shay and Schober, op. cit., Table 7; 1977 Survey of Consumer Credit.
338
Consumer Affairs
over the entire period from 1969 to 1977 varied little among the
educational groups, and only the highest income groups showed a
significantly larger increase than the other income groups. Among
the age groups, those 50 years of age and older showed a lower level
of awareness than did the lower age groups, but there was little
difference in the percentage-point increase in awareness from 1969
to 1977.
The levels of awareness of rates charged on bank credit cards in
1977 also increased with both education and income. The extent of
improvement over the entire period was significantly lower for those
with limited formal education. Differences in awareness among age
groups for bank credit cards were similar to those for retail revolving
credit.
Inquiry on rights under the Fair Credit Billing Act. In November 1977 the Board decided to undertake an inquiry to obtain
information, among other things, as to the extent to which consumers
are exercising certain rights under the Fair Credit Billing Act and
the cost to creditors of compliance with the act. The Board hopes
that the information received from this inquiry will help in assessing
the effectiveness of the act.
Compliance
There has been a significant increase in the efforts made by the
Federal Reserve System and other Federal enforcement agencies
during the past year to promote compliance with the act and the
regulation. These efforts have included specialized examinations of
financial institutions, development and distribution of comprehensive
examination manuals and checklists, and intensive training of examiners and supervisory personnel. Federal Reserve System examiners, for example, have conducted special examinations of
approximately 400 State member banks to determine compliance
with consumer credit regulations, including Truth in Lending.
Because lack of understanding of the requirements seems to be a
major obstacle to compliance, the Board has instituted a formal
advisory program to assist member banks in understanding and complying with the act's requirements. This assistance is offered in the
form of both group meetings and individual visits to banks at which
Reserve Bank personnel review forms and procedures, review meth-
Consumer Affairs
339
ods of computing annual percentage rates, and discuss other problem
areas. Approximately 770 visits, generally lasting from Vi day to
\Vi days, were made in 1977. The response of banks to this advisory
service has been extremely favorable.
Five of the Federal agencies that enforce the act with respect to
financial institutions (the Board, the Comptroller of the Currency,
the FDIC, the Federal Home Loan Bank Board, and the National
Credit Union Administration) have joined in proposing uniform
guidelines for enforcing the act's requirements. These guidelines are
intended to promote improved and uniform enforcement among
Federally regulated banks, thrift institutions, and credit unions
through corrective action, including reimbursement of borrowers who
have been overcharged or otherwise harmed by violations of the act.
The proposal identifies several of the common violations. It is hoped
that adoption and publication of uniform guidelines will focus creditors' attention on the need to comply with the regulation.
The Federal Trade Commission (FTC) undertook a pilot enforcement program concerning the advertising requirements of Regulation Z and has instituted five civil penalty cases in connection therewith. Based on the success of the program in improving compliance,
the FTC intends to extend this program to other types of violations.
Several of the enforcement agencies have significantly expanded
their programs to educate examiners about the requirements of the
act and the regulation. The Board, for example, continued its program by conducting three 2-week schools during 1977 to train 96
of its examiners as well as several representatives from other agencies
and State banking authorities.
The Board, the FDIC, and the Comptroller began conducting
joint consumer regulation schools in 1977 in addition to their own
training programs. Two sessions of the joint school, involving 64
participants from the three agencies, have been held, and another,
more extensive school is planned for early 1978. These schools, which
were instituted in response to a recommendation by the General
Accounting Office that the agencies combine their training efforts,
are conducted and taught jointly by the staffs of the agencies.
The agencies responsible for enforcing the Truth in Lending Act
have made varying assessments of the level of compliance being
achieved by creditors subject to their jurisdiction. Most of the
exempt States and several of the Federal agencies report a high level
340
Consumer Affairs
of compliance and note that most violations that have been discovered are technical in nature and result from misunderstanding,
inadvertence, or clerical error. The Federal bank regulatory agencies,
however, all noted a significant increase in the number of banks
found to be in error. For example, the FDIC noted an increase from
25.6 per cent in 1976 to 36.2 per cent in 1977, and it has issued
seven cease-and-desist orders involving Truth in Lending violations.
The Comptroller estimates that 88 per cent of all national banks
have not achieved full compliance (although most violations are
technical). The Board estimates that 72 per cent of State member
banks have failed to comply fully. (Again, many are technical errors.)
The increase in the number of banks discovered to be in violation may be attributed to a greatly enhanced examination effort
by the bank regulatory agencies during the past year rather than
to a decline in creditor compliance. The Board also anticipates
improved compliance due to increased educational and examination
efforts by the agencies, since much of the lack of compliance appears
to result from misunderstanding of the requirements of the act.
Greater emphasis on education and examinations should eliminate
much of this misunderstanding.
The FTC believes that, based on its limited review of disclosure
forms, substantial compliance remains high, but it notes several
areas that continue to be problems, such as the voluntariness of
credit life insurance, the use of open-end credit disclosures in other
than open-end credit transactions, and the failure to provide timely
disclosures and notices.
Consumer Advisory Council
The Consumer Advisory Council, established in the fall of 1976 to
advise and consult with the Board on consumer-related matters,
met four times during 1977. It considered various consumer issues,
including the Board's proposals to simplify Regulation Z, the various
bills being considered by the Congress to simplify and reform the
Truth in Lending Act, the jointly proposed uniform enforcement
guidelines, and amendments and interpretations of Regulation Z.
The Council has expressed special concern about the complexity
of the current disclosures and the need to simplify the requirements.
Those members of the Council appointed to 1-year terms in
1976 were reappointed to 3-year terms; there were three resigna-
Consumer Affairs
341
Consumer Advisory Council
Dates indicate expiration of term
Leonor K. Sullivan
Chairman
St. Louis, Missouri
12-31-78
William D. Warren
Vice Chairman
Los Angeles, California
12-31-80
Roland E. Brandel
San Francisco, California
12-31-80
Agnes H. Bryant
Detroit, Michigan
12-31-78
John G. Bull
Fort Lauderdale, Florida
12-31-79
Robert V. Bullock
Frankfort, Kentucky
12-31-80
Linda M. Cohen
Washington, D.C.
12-31-78
Robert R. Dockson
Los Angeles, California
12-31-80
Joseph F. Holt III
Oxnard, California
12-31-78
Edna DeCoursey Johnson
Baltimore, Maryland
12-31-79
Robert J. Klein
New York, New York
12-31-80
Percy W. Loy
Portland, Oregon
12-31-79
R. C. Morgan
El Paso, Texas
12-31-80
Reece A. Overcash, Jr.
Dallas, Texas
12-31-78
Raymond J. Saulnier
New York, New York
12-31-79
E. G. Schuhart
Dalhart, Texas
12-31-80
James E. Sutton
Dallas, Texas
12-31-78
Anne G. Draper
Washington, D.C.
12-31-78
Anne Gary Taylor
Alexandria, Virginia
12-31-79
Carl Felsenfeld
New York, New York
12-31-79
Richard D. Wagner
Simsbury, Connecticut
12-31-80
Marcia A. Hakala
Omaha, Nebraska
12-31-80
Richard L. Wheatley, Jr.
Stillwater, Oklahoma
12-31-78
tions from the Council during the year. A list of the members currently serving on the Council, indicating the term of each, appears
above.
342
Consumer Affairs
Administrative functions
Amendments
and interpretations of Regulation Z
Consumer leasing. The Consumer Leasing Act of 1976 and the
implementing regulations issued by the Board in October 1976
became effective on March 23, 1977. To facilitate compliance with
the regulation, in February 1977 the Board issued sample disclosure
forms and instructions for use as interpretations of Regulation Z.
The forms cover three types of leasing: open-end and closed-end
vehicle leasing and furniture leasing. The forms are disclosure statements, not lease contracts, and are designed to provide consumers
with full information regarding the terms of their leases of personal
property, as required by the Consumer Leasing Act. Lessors are not
required to use the sample forms, but lessors making proper use of
them will be considered to be in compliance with the act and the
regulation.
Simplification of Regulation Z. In May 1977 the Board proposed
for comment four simplifying revisions of Regulation Z. The proposals are intended to promote creditor compliance with the regulation as well as to eliminate what may be unnecessary information
from the Truth in Lending disclosure statement and thereby focus
consumers' attention on the more meaningful and useful cost
disclosures.
The proposals would:
Eliminate itemization of the components of the finance charge
(for example, interest, loan fees, and required credit life insurance
premiums);
Eliminate itemization of the components of the downpayment,
as, for example, "cash downpayment" and "trade-in";
Eliminate the need to itemize license, certificate of title, and
registration fees in order to exclude such fees from the finance
charge; and
Eliminate identification of the method used to calculate the
rebate of unearned finance charges if a credit obligation is prepaid, and require instead a statement of whether or not a rebate
will be made in such circumstances.
Numerous written comments on these proposals were received,
and final action is presently being considered.
Cash discounts. In July 1977 the Board amended Regulation Z
to implement the provisions of Public Law 94-222. These amend-
Consumer Affairs
343
ments to the act and the regulation augment earlier provisions providing, with certain limitations, that a discount of up to 5 per cent
may be offered to induce payment for a transaction by cash, check,
or other means not involving the use of a credit card, without considering the discount to be a finance charge. These amendments
prohibit imposing a surcharge on credit-card customers for 3 years.
They also provide that the discount shall not be considered a cost of
credit for purposes of State usury and credit disclosure laws.
Variable rates. In April 1977 the Board amended Regulation Z,
effective October 10, 1977, to require advance disclosure when
variable interest rate provisions are present in credit transactions. In
all such transactions, the amendment requires disclosure of the
fact that the annual percentage rate is subject to increase, the conditions under which the rate may increase, and the manner in which
an increase would be effected (for example, through an increase in
the payment amount or in the number of payments). In certain
transactions, primarily those involving mortgages of the customer's
home, the amendment also requires numerical examples showing
the effect an immediate increase of one-quarter of a per cent in the
rate would have on the payment amount or on the number of payments.
Spanish language disclosures. In April 1977 the Board amended
Regulation Z to permit Truth in Lending disclosures to be provided
in Spanish rather than English in the Commonwealth of Puerto
Rico. This action was based on the fact that Spanish is the traditional
and predominant language used in Puerto Rico, and it was intended
to permit creditors to provide more meaningful disclosures to customers in a more effective manner. The amendment permits, but
does not require, use of the Spanish language; furthermore, it requires
that disclosures in the English language be provided upon the customer's request.
Descriptive billing of nonsale transactions. In September 1977
the Board proposed for comment an amendment to change the
provisions of Regulation Z concerning the date to be used to describe
a cash-advance check and other nonsale credit transactions. The
proposal would permit a creditor to disclose the date on which it
debits the transaction to the account rather than the date on which
the transaction takes place or the date written on the check or other
credit instrument.
344
Consumer Affairs
If the date of debiting is used, however, the proposal provides
that a customer inquiry about the transaction, submitted in accordance with the Fair Credit Billing Act, must be handled in the manner
prescribed by that act. Further, the transaction must be treated as an
erroneously billed item, which means that the customer cannot be
charged finance charges caused by the delay in paying the amount
until the question is resolved.
The Board made the proposal to facilitate compliance by creditors
who have experienced operational difficulty in ascertaining the transaction date or the date that appears on the check or other credit
document. Final action is expected to be taken on the proposal in
the near future.
Transaction-by-transaction billing. In August 1977 the Board
issued an interpretation of Regulation Z simplifying procedures for
two-party credit-card issuers that bill customers in full on a transaction-by-transaction basis and impose no finance charges. These
issuers differ from most other credit-card issuers in that they send a
bill for each transaction rather than a cumulative statement at regular intervals. Furthermore, no finance charges are imposed and
payment is expected upon receipt of each bill. In light of these
differences, the Board determined that only certain provisions of
Regulation Z should apply to such credit-card issuers; the interpretation specifies which provisions of the regulation are applicable,
and it relieves them of the need to maintain cumulative accounts and
send periodic billing statements to their customers.
Dealer participation. In March 1977 the Board adopted an interpretation of Regulation Z stating that the amount of a dealer's participation in the finance charge on a credit purchase need not be
disclosed as a separate component of the finance charge. (Dealer
participations primarily relate to credit sales of automobiles or other
consumer durables.) At the same time, the Board withdrew an
amendment to the regulation, proposed for comment in January
1977, that would have required separate disclosure of the existence
(but not the amount) of such a dealer participation. Both of these
actions were based on the Board's belief that consumers would not
be significantly helped in shopping for credit by disclosure of the
fact that part of the finance charge might represent a dealer participation, while addition of another required disclosure would
further complicate Truth in Lending disclosure statements.
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345
Rescission in open-end credit. In December 1977 the Board published for comment a proposed amendment to Regulation Z concerning the right to rescind open-end credit transactions in which a
security interest is taken in the consumer's principal residence. The
proposals provide that consumers must be informed of their right
to cancel such credit plans and must be given a 3-day "cooling-off
period" in which to exercise that right in three instances, that is,
when the open-end credit plan is first opened, when the credit limit
is increased, and when a security interest in a home is added to an
existing credit plan.
The Board expects to take final action on the proposal early in
1978 after comments have been received.
Staff interpretations of Regulation Z. The staff of the Board
has continued to provide interpretations of Regulation Z in response
to inquiries. During 1977 more than 100 official staff interpretations
were issued, explaining and applying the requirements of the regulation to specific situations. In accordance with Section 130(f) of
the Truth in Lending Act, as amended in 1976, creditors who act
in good faith in conformity with such official staff interpretations
may not be held liable for violation of the act. In addition, the staff
has issued approximately 300 unofficial staff interpretations of the
regulation during the year.
State exemptions. No new exemptions from the requirements of
the Truth in Lending Act were granted to States in 1977. In
November 1977 the Board considered the request of the Massachusetts Commissioner of Banks to expand that State's present
exemption to include national banks, Federal savings and loan
associations, and Federal credit unions. The Board concluded that
it could not act upon the application because there was no indication
that arrangements had been made with the appropriate Federal
authorities (Comptroller of the Currency, Federal Home Loan Bank
Board, and National Credit Union Administration) to ensure effective enforcement of Massachusetts' law.
Education. Educational efforts by the various agencies responsible for Truth in Lending have continued during the past year. These
efforts have included speeches, workshops, and seminars presented
to both creditor and consumer groups, publication and dissemination
of newsletters, pamphlets, and educational materials such as con-
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Consumer Affairs
sumer credit guides, and consultation with professional educators.
In addition, both consumers and creditors have become more aware
of Truth in Lending and have come to understand it better through
the handling of individual consumer complaints and inquiries and
through the examination process. The FTC reports that its staff is currently conducting a review of both public and private sector consumer
educational materials in an effort to determine whether further
activity in this area by the Commission would be advisable.
EQUAL CREDIT OPPORTUNITY
The Board of Governors of the Federal Reserve System is pleased
to submit to the Congress (on January 26, 1978) this second Annual
Report on the Equal Credit Opportunity Act (ECOA). This Report
describes the highlights of the year, including extensive amendments
to the act, outlines the Federal Reserve System's enforcement activities, and provides the Board's assessment of the extent of compliance
on the part of State member banks. The Report also discusses the
compliance and enforcement efforts of other agencies assigned administrative responsibilities under Section 704 of the act and their
assessment of compliance on the part of creditors that they supervise.
The Report does not contain recommendations for statutory
amendments. Such recommendations, if any, will be made in the
Board's ANNUAL REPORT to the Congress.
The amendments to the ECOA and the regulations implementing
the amended act became effective in March 1977. In an effort to
mitigate many of the compliance problems that creditors had experienced under the original Regulation B, the Board published several
model application forms. As to the substantive requirements of
Regulation B, the chief problem for banks seems to be understanding
and complying with Regulation B's limits on requests for the signature of an applicant's spouse. The Board's advisory visit program
was developed to explain this provision and other provisions of the
regulation to member banks.
The Board issued four interpretations of Regulation B, and the
Board's staff issued seven official staff interpretations to clarify
technical ambiguities in the regulation.
Few lawsuits, to the Board's knowledge, were filed under the act
either by private parties or by the Department of Justice.
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347
Enforcement and assessment of compliance
As described below, the Board and the other Federal agencies substantially increased their enforcement efforts in 1977.
Federal Reserve System
1. Examination. Examination of banks is the primary means by
which the Federal Reserve System enforces the act. To improve
enforcement of Regulation B, the Board developed new examiner
manuals, checklists, instructions, and report forms. The Board also
initiated a program of special compliance examinations aimed specifically at consumer credit regulations, including Regulation B.
Since the implementation of this program, approximately 400 member
banks have undergone the special compliance examination. By April
1, 1978, one year after the revised Regulation B became effective,
nearly all member banks will have been examined for compliance
with the regulation. A copy of the examination report is reviewed
by the Board's Division of Consumer Affairs to determine the individual bank's compliance and to evaluate and improve the examination program.
To ensure that its examiners are thoroughly versed in Regulation
B, the Board conducted three 2-week training institutes in 1977.
Ninety-six System examiners and several representatives of other
Federal and State agencies attended these schools. Four more schools
are planned for 1978. In response to a General Accounting Office
recommendation, joint consumer regulation schools were initiated
by the Board, the Federal Deposit Insurance Corporation (FDIC),
and the Comptroller of the Currency to supplement their respective
training programs. Two sessions, attended by 64 participants from
the three agencies, were held. Another joint school is scheduled for
early 1978.
The Board's figures indicate that while 73 per cent of the banks
that have received special consumer examinations were not in full
compliance with Regulation B, the overwhelming majority of violations relate to the use of outdated credit applications and forms.
Most other violations involve the unlawful request for the signature
of a nonapplicant spouse, the notification requirements of Regulation
B, and the failure to request information for monitoring purposes.
During the course of consumer examinations, Reserve' Bank examiners explain the nature of any violations discovered and outline
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Consumer Affairs
the prospective corrective action necessary for compliance. All State
member banks are either in compliance at the conclusion of the
examination or have agreed to establish policies and procedures
designed to prevent recurrence of violations. Continuing emphasis
on the special consumer examination program, in conjunction with
the Board's advisory visit program, should aid achievement of full
compliance for all State member banks.
2. Advisory visit program. The Board's examination experience
indicates that a lack of familiarity with Regulation B's requirements
is the single most significant obstacle to full compliance with the
regulation. This is particularly true of smaller banks, which often
do not possess either the personnel or resources to study the regulation and develop procedures for compliance. In response to this
need and in an effort to improve compliance, the Board initiated a
voluntary advisory visit program, consisting of both group meetings
and individual visits, for ail interested member banks. In half-day
or full-day meetings with bank management, Federal Reserve Bank
personnel review the bank's forms, procedures, and policies, as well
as discuss any problems or questions that the management and
operating staff may have concerning compliance. Approximately 770
such visits were made during 1977; the total number of banks that
received assistance was higher, approximately 900, since certain meetings were attended by several banks. This program has been well
received by member banks.
3. Model forms. Prior to the revision of Regulation B, many
creditors experienced difficulty in adapting their credit application
forms to the regulation's restrictions on permissible questions. To
alleviate this problem, the Board developed five model forms for
the following types of credit: open-end, unsecured consumer credit
transactions; closed-end, secured transactions; closed-end transactions, whether unsecured or secured; credit in community property
States; and residential real estate mortgage transactions. The model
forms appear in an appendix to the regulation. While their use is
optional, proper usage by a creditor assures compliance with the
requirements of Regulation B relating to application forms. These
model forms not only should promote compliance but should reduce
the cost of compliance.
4. Consumer complaints. Another method by which the Federal
Reserve System enforces compliance with the act is the investiga-
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349
tion of consumer complaints. In the course of an investigation, an attempt is made to resolve the problem of the individual
complainant. The Board has developed a Systemwide computerized
complaint control procedure to monitor the handling of complaints
and to aid in their resolution.
From January 1, 1977, through October 31, 1977, the Federal
Reserve System received 731 complaints involving the act or Regulation B, of which approximately 40 per cent were related to State
member banks and 60 per cent to other creditors. The latter group
was handled either by referring them to the appropriate agency or
by supplying information or an explanation to the complainant.
With respect to the 293 complaints regarding State member banks,
132 investigations have been completed, 69 are still under investigation, and 92 were handled by furnishing information or an explanation. The 132 completed investigations yielded the following results:
the bank was determined to be legally correct in 83 cases; was found
to be legally correct but nevertheless reached an accommodation
with the complainant in 28 cases; was found to have made an
error, which has since been corrected, in 13 cases; was involved
in a possible violation, which has since been resolved, in 6 cases; and
was involved in a possible violation, which is still unresolved, in 2
cases.
The most common complaint (574 out of a total of 731) was
unfair denial, termination, or change in terms of credit. Not all of
these 574, however, claimed discrimination on one of the bases
prohibited in the act. For example, 159 complainants believed that
the reason for the adverse action was their credit history. Level of
income was cited by 68 as the perceived reason for the denial. On
the other hand, 42 complainants felt that marital status was the
reason for the creditor's adverse action, 41 cited discrimination because of sex, and 16 because of race, color, or national origin.
In an effort to evaluate consumer satisfaction with the Federal
Reserve's handling of complaints, the Board has sent a followup
questionnaire to those persons whose complaints were received subsequent to April 1, 1977. The questionnaire is sent to complainants
shortly after the investigation is completed. The questionnaire deals
with the acceptability of the resolution, the clarity of the explanation, the amount of time in which the complaint was handled, the
courteousness of System staff, and whether or not the consumer would
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Consumer Affairs
contact the Federal Reserve in the event of a future problem. The
Board is reviewing returns from the followup letter and the entire
procedure to determine if any changes should be made to improve
this service to the public.
5. Other compliance activities. The Board is currently conducting a survey of selected major creditors that extend open-end credit
to determine the extent to which consumers are exercising their
rights to a credit history reported separately from that of a spouse
and to a notification of specific reasons for the denial of credit. The
results should assist the Board in evaluating the effectiveness of these
requirements as well as in determining the cost of compliance.
The Board and the other financial institution regulatory agencies
are working on a uniform set of guidelines for enforcement of Regulation B, specifying corrective action that will be taken by the
appropriate agency when certain violations are discovered. The guidelines are intended to promote better and more uniform enforcement
among all Federally regulated financial institutions.
Other agencies
1. Comptroller of the Currency. The Comptroller of the Currency,
who is responsible for enforcing the act for national banks, instituted
in October 1976 a program of consumer affairs examinations. To
date, 2,859 national banks have undergone such examinations. The
examinations are conducted by specially trained examiners who have
completed a 2-week consumer school. Six such schools have been
conducted.
Enforcement of Regulation B also occurs through the resolution
of consumer complaints. From January 1, 1977, through November
30, 1977, the Comptroller received 451 complaints, the majority
of which alleged discrimination on the basis of sex or marital status.
When a violation is discovered through investigation, the bank not
only must take corrective action in the applicant's case but is
also required to establish policies and procedures to prevent future
violations.
The Comptroller's examinations reveal that 97 per cent of all
national banks were in violation of the act to some extent. However,
86 per cent of the violations appear to be technical in nature, that
is, attributable to the use of obsolete credit applications and other
forms. Most (86 per cent) of the substantive violations involve the
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351
unlawful request for the signature of a nonapplicant spouse and
the denial of separate credit to married applicants. All national
banks have taken or have promised to take prospective corrective
action when the examination has disclosed violations. The Comptroller believes that substantial compliance is achieved by national
banks after a consumer examination has occurred and the directed
corrective action taken.
2. Federal Deposit Insurance Corporation (FD1C). The FDIC,
which enforces the act for insured nonmember banks, initiated in
May 1977 a program of separate compliance examinations, conducted
by specially trained examiners, to determine compliance with consumer protection laws and regulations. Under this program, the
FDIC expects to examine each insured nonmember bank at least
once every 15 months.
From October 1, 1976, through September 30, 1977, 26.6 per cent
of the compliance examination reports indicated apparent violations,
which related primarily to the notification requirements of Regulation
B and to the provisions concerning applications, particularly the
conditions governing permissible terminology on application forms
and permissible requests for information.
During the same period, the FDIC received 291 consumer complaints alleging ECOA violations. Sex or marital status discrimination comprised the largest category, followed by consumer disagreement with the bank's reasons for taking adverse action. A thorough
inquiry is conducted to determine the merits of all discrimination
complaints. Should violations be found, the FDIC takes appropriate
action to bring the bank into compliance.
From October 1, 1976, through September 30, 1977, the FDIC's
Board approved six cease-and-desist orders involving equal credit
opportunity.
In assessing the extent of compliance with the ECOA, the FDIC
reports that the majority of violations discovered thus far relate to
form and procedure rather than substantive discrimination.
3. Federal Home Loan Bank Board (FHLBB). The FHLBB,
which enforces the act for Federally chartered savings and loan
associations, conducts regular examinations to determine compliance
with Regulation B. During late 1976 and early 1977, the FHLBB
conducted 2Vi-day training sessions in consumer law for all of its
examiners.
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Consumer Affairs
In July 1977 the FHLBB instituted a new consumer complaint
procedure. During the first 11 weeks of operation, 48 discrimination
complaints were received. Redlining was the most common type of
complaint, followed by discrimination on the bases of race and national origin, sex, or marital status. As of December 5, 1977, discrimination complaints received numbered approximately 200. Each
complaint is investigated to determine whether a violation has
occurred, and the complainant is notified of the result of the investigation.
The FHLBB believes that most savings and loan associations
wish to comply but that confusion on procedural matters as well as
extremely literal interpretations on the part of association staff often
defeat the act's purpose. Thus, most noncompliance derives from
"technical violations" and compliance is promptly obtained.
4. National Credit Union Administration (NCUA). The NCUA
enforces the act for Federally chartered credit unions. Enforcement
activities, like those of the other financial regulatory agencies, include examiner training, specialized examination procedures, and, if
a violation is discovered, appropriate followup with credit union
officials. Approximately 90 per cent of the 12,800 Federal credit
unions were examined by the year-end.
The NCUA conducts a field investigation of all written consumer
complaints and, when necessary, institutes corrective action. The
agency has received 30 complaints or requests for information, with
the largest group pertaining to discrimination on the basis of race or
national origin. The next most common complaint alleged discrimination due to factors not prohibited by existing law, followed by discrimination alleged to be based on marital status. Eight complaints
are still under investigation, but of the remainder, only two were
substantiated by objective review of the facts. In both of these cases,
corrective action was undertaken promptly and in several other
instances, subsequent loan applications by complainants were approved as a result of improved understanding between the parties.
NCUA's preliminary results indicate that 83 per cent of the credit
unions examined were in compliance at the conclusion of the examination and the remainder had agreed to take prompt corrective
actions.
5. Federal Trade Commission (FTC). The FTC enforces the act
for all creditors not subject to the jurisdiction of any of the other
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353
enforcement agencies. Potential violators of the act are identified
through several sources of information, including consumer complaints, consumer and civil rights organizations, and other enforcement agencies. When there is evidence that a violation may have
occurred, an informal inquiry is made, followed by a full investigation when warranted. During 1977 the FTC staff initiated a number
of investigations, which are expected to result in formal action in
the near future.
During the first 10 months of 1977, the FTC received 6,500
complaints and inquiries concerning equal credit opportunity. The
agency states that many complaints allege discrimination on the
basis of sex or marital status while a significant number of complaints claim discrimination based on race and age.
The FTC believes that creditors are making a good faith effort
to comply with the act and are achieving a substantial degree of
compliance. However, some evidence indicates that smaller creditors
may be less familiar with the requirements of the act and with
Regulation B than major national creditors. The FTC hopes that
this problem will be alleviated by increased creditor and consumer
educational efforts and by the deterrent effect of litigation and
administrative enforcement actions.
6. Civil Aeronautics Board (CAB). The CAB, which enforces the
act for domestic and foreign air carriers, continues to monitor industry practices through the resolution of consumer complaints,
none of which, to date, have been considered valid. Enforcement
measures include contacting the carrier or supplying information to
the consumer. On the basis of complaints received, the CAB believes that compliance within the industry is relatively good.
7. Interstate Commerce Commission (ICC). The ICC enforces
the act for regulated common carriers. In its view, common carriers
are forbidden to discriminate in the granting of credit by Section 3(1)
of the Interstate Commerce Act and by several ICC credit regulations. Thus, the ICC believes that the ECO A does not have a significant impact on the surface transportation industry.
8. U.S. Department of Agriculture (USDA). The USDA includes
agencies with responsibilities under the act. The Packers and Stockyards Administration enforces the act for creditors under its jurisdiction. Since the livestock industry characteristically operates on a
cash basis, the agency's monitoring is handled on a complaints re-
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Consumer Affairs
ceived basis, and in the event of a violation, remedial action will be
initiated. As no complaints have been received to date, the Packers
and Stockyards Administration assumes there is substantial compliance within the industry.
The Farmers Home Administration, itself a creditor, is under the
enforcement authority of the FTC. During 1977, 140 complaints
against this organization concerning the denial of loans were received
by the USDA's Office of Equal Opportunity.
9. Small Business Administration (SB A). The SB A enforces the
act for small business investment companies and, through a letter of
understanding with the FTC, with regard to other recipients of SBA
assistance and with regard to SBA program offices. During fiscal
year 1977, seven SBA program offices were reviewed and 15,954
recipient businesses were monitored for compliance, with 844 being
subjected to on-site reviews.
Six complaints were received alleging sex discrimination when
applying for loans from SBA program offices, but investigations
revealed that the complaints were unsubstantiated. No consumer
complaints alleging discrimination were received from customers or
clients of recipients of SBA assistance.
Due to the general nature of SBA recipients (small businesses)
and the lack of consumer complaints received, the SBA believes
creditors subject to its authority to be in adequate compliance.
10. Securities and Exchange Commission (SEC). The SEC enforces the act for securities brokers and dealers. The SEC reports
having received no complaints during 1977 that alleged discrimination in securities credit transactions and states that creditors subject
to its jurisdiction appear to be complying with the act and with
Regulation B.
11. Farm Credit Administration (FCA). The FCA enforces the
act for Federal land banks, Federal land bank associations, Federal
intermediate credit banks, and production credit associations. FCA
enforcement activities include regular examinations, conducted every
12 to 18 months. Such examinations in the current year have not
disclosed significant problems in the area of discrimination.
In 1977 approximately a dozen complaints were received by the
agency and reviewed for appropriate followup. In none of the nine
complaints resolved thus far was evidence disclosed of intent to
discriminate, and no known complaints have resulted in litigation.
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355
The FCA concludes that the record of compliance by farm credit
institutions appears to be good.
Consumer Advisory Council
The Consumer Advisory Council, established in late 1976 to advise
and consult with the Board on matters relating to consumer credit,
held four meetings in 1977. The Council considered such topics as
consumer education and the survey of consumers (both mentioned
on page 357).
Those members of the Council appointed to 1-year terms in 1976
were reappointed to 3-year terms in 1977, and three members
resigned during the year. A list of current Council members appears
on page 341.
Administrative functions
Interpretations and amendments of Regulation B
1. Board intepretations. On April 28, 1977, the Board adopted
two interpretations of revised Regulation B, both concerning the
possible inconsistency of California law with the act and the regulation. One interpretation, designated 202.1101, states that a law
requiring delivery of a notice explaining the obligations of a cosigner only when the signers of a consumer credit contract are not
married to each other is not inconsistent with Regulation B. The
other interpretation, designated 202.1102, states that a law requiring translation of certain consumer credit documents into Spanish
but not into other languages is not inconsistent with Regulation B.
On July 8, 1977, the Board adopted an interpretation of Regulation B, designated 202.1103, determining that State laws making
contracts enforceable against married persons at a younger age than
against unmarried persons are not inconsistent with the act.
On August 4, 1977, the Board issued an interpretation, designated 202.801, dealing with special-purpose credit programs under
Section 202.8 of the regulation. The interpretation states that a credit
program is to be considered "expressly authorized by Federal or
State law," as required for programs seeking to qualify under Section
202.8(a)(l), if it is authorized either by the terms of a Federal or
State statute, or by a regulation lawfully promulgated by the agency
administering the program. The interpretation further states that
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Consumer Affairs
participating creditors will not violate Regulation B by complying
with regulations that implement the program. Finally, the Board
stated that determinations on another of the criteria for qualification
under Section 202.8(a)(l), namely, whether particular programs
benefit an "economically disadvantaged class of persons," should be
made by the agency administering the program, not by the Board.
2. Official staff interpretations. Regulation B was amended during
1976 to implement the provisions of the 1976 amendments to the
act, which authorized the Board to empower staff members to issue
interpretations of Regulation B or the act. Creditors can rely on
such interpretations to the same extent as on formal Board interpretations. During 1977 seven official staff interpretations of Regulation
B were issued. Their subject matter includes names in which accounts may be carried, the effect of Regulation B on State loansplitting laws, the scope of the real estate credit-monitoring requirements, use of credit-scoring systems in combination with judgmental
credit evaluation methods, the application of notification and record
retention requirements to business credit, information gathering by
creditors for noncredit purposes, and whether or not adverse action
can occur at the point of sale.
Two official staff interpretations, designated EC-0007 and EC0008, are currently under reconsideration at the request of the
FTC and the Department of Justice. On October 3, 1977, the Board
issued alternative proposed amendments to Regulation B, which
would cover the same issue as interpretation EC-0008, whether or
not adverse action occurs at the point of sale. These are discussed
in greater detail in the following section of this Report.
The FTC and Justice also petitioned the Board for a change in the
procedures by which official staff interpretations are issued. They
urged the Board to allow opportunity for public comment before
official staff interpretations are issued in final form. This matter is
currently under consideration.
3. Amendments. In order to resolve the questions raised by the
requests for reconsideration of EC-0008, the Board issued alternative proposed amendments to Regulation B. Under the regulation, a
creditor, in each instance of adverse action, must either provide a
written explanation to the customer of the reason for the adverse
action or advise the customer of the right to obtain an explanation
upon request. Each proposal would amend the definition of "adverse
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357
action." The first would generally result in an affirmation of EC0008; in general, adverse action commonly would not occur when
use of an open-end credit account is denied at the point of sale. The
other proposal would generally adopt the position of the FTC and
the Justice Department; adverse action would occur at the point of
sale in many instances. Approximately 200 comments on the proposed amendments have been received, and the matter is still under
consideration.
Education
The past year has seen increased educational activity on the part
of both the Federal Reserve System and the other agencies responsible for Regulation B compliance.
Within the Federal Reserve System, educational efforts included
speeches and seminars involving consumers, creditors, school groups,
professional associations, and others. Nearly 350 of these presentations were made by staff members of the Federal Reserve Banks
during 1977 and about 60 by Board staff during the first 8 months of
the year. In addition, Board and Reserve Bank staff on several occasions participated in radio and television programs relating to equal
credit opportunity.
During 1977 the Board published two pamphlets to inform consumers of their rights under Regulation B. One deals with rights
of women under the regulation and the other with credit discrimination on the basis of age. Approximately 4.4 million copies of the
former and 2.9 million copies of the latter have been distributed.
The Board also published a pamphlet summarizing Regulation B
requirements applicable to small businesses and professionals who
extend credit with no finance charge imposed. Approximately 1
million copies of this pamphlet have been distributed. Currently
planned is a pamphlet on housing credit and a filmstrip explaining
consumer protection laws, including equal credit opportunity.
During 1977 a nationwide survey of consumers was conducted
for the Board in an effort to ascertain the extent of consumer knowledge of credit and consumer credit legislation. The results are currently being analyzed.
A number of the other enforcement agencies report similar educational efforts including slide presentations, consumer pamphlets,
journal articles, seminars, and speeches.
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Consumer Affairs
FEDERAL TRADE COMMISSION ACT
The Board of Governors of the Federal Reserve System is pleased to
submit this third Annual Report (dated March 15, 1978) to the Congress on its activity in 1977 in fulfilling its responsibilities under
Section 18(f) of the Federal Trade Commission Act. Those responsibilities are: (1) to identify unfair or deceptive banking practices and
to adopt regulations prohibiting such practices; (2) to receive and
take appropriate action upon complaints directed against State
member banks; and (3) unless certain exceptions apply, to promulgate regulations applicable to banks that are substantially similar to
rules prescribed by the Federal Trade Commission (FTC), within
60 days after such rules take effect.
Initiation of regulations by the Board
As indicated in the Board's last annual report, consumer complaints have not been found to be as useful as originally envisioned
for pinpointing those bank practices that might warrant investigation
on a larger scale. Consequently, the Board decided to canvass certain
groups and persons who might have, by virtue of their occupation or
position, a working knowledge of the banking industry's activities and
dealings with consumers.
In early 1977 the Board sent approximately 400 letters to State
agencies and legal service organizations across the country asking
them to identify banking acts or practices that appeared to be prevalent and problematical. Close to 100 responses were received,
analyzed, and discussed with representatives from the other Federal
bank regulatory agencies.
The Board, relying in large part upon those responses, identified
six bank practices that appeared to warrant further investigation.
They are:
1. Failure to disclose to new depositors the contract terms governing use of their accounts, or failure to give reasonable advance notification to existing depositors of any change in contract terms.
2. Describing checking account services as being "free" when there
are charges or preconditions to a depositor's actually receiving nocost checking.
3. Attaching, freezing, or closing a depositor's account \yithout
promptly notifying the depositor.
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359
4. Imposing, as a matter of policy, a longer waiting period than
needed for operational reasons before depositors can withdraw funds
deposited in the form of checks.
5. Describing interest paid on savings accounts as being the "highest allowed by law."
6. Indicating in writing to a loan applicant that credit life or disability insurance is optional, but implying or stating that acquisition
of such insurance is necessary for favorable consideration of the applicant's loan request.
An investigation is under way to ascertain more precisely the
nature and prevalence of these six practices. The investigation will
also focus on the basis for the practices and any consumer harm that
may be caused by them. Working in concert with the FDIC and the
Comptroller of the Currency, the Board's staff has developed a bank
survey questionnaire. Examiners from all three bank regulatory agencies are incorporating that questionnaire into their normal consumer
examinations for a 45-day period during the first quarter of 1978.
The survey should thus encompass a fairly representative sampling of
approximately 900 banks, and the data gathered should provide the
Board with a good base for further consideration of the enumerated
practices.
Consumer complaints
In 1976 the Board adopted Regulation AA, which provides guidance
as to the form complaints should take and encourages consumers to
bring any problems they might have with State member banks to the
attention of the Federal Reserve System. In 1977 a computerized
Consumer Complaint Information System for the Board and the 12
Federal Reserve Banks was placed in full operation. That system
provides a chronology of each complaint processed, as well as summaries of complaints by type and Federal Reserve district, and also
helps the Board to monitor the compliance of State member banks
with consumer protection laws.
The Federal Reserve System receives complaints and inquiries
about all areas of consumer activity. A statistical review of consumer
complaints received in 1977 appears at the bottom of page 360.
Thosefiguresindicate that the most frequently received complaints involve either Regulation B or Z, or relate to problems that are not the
subject of current regulation. The most common Regulation B com-
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Consumer Affairs
plaints alleged credit denial due to lack of credit history or poor
credit history. The most frequent type of Regulation Z complaint involved disputed amounts on open-end periodic billing statements. The
next most frequent complaints were those alleging problems with
escrow accounts maintained in connection with extensions of credit
other than open end, and those expressing problems or confusion
about the disclosure of finance charges and annual percentage rates.
The large number of complaints classified "Other" do not readily
lend themselves to discrete categorizing. Of the nearly 1,700 such
complaints shown as "Other" in the tabulation, the two most common types—that is, those involving disputes as to the amounts of
deposits made or disagreements over the balance in accounts—together comprised only 13 per cent of the total. As in 1976, a lack of
communication between consumer and bank is the cause of most
Statistical review of consumer complaints received by the
Federal Reserve System in 1977
Number
Subject area:
Regulation
Regulation
Regulation
Regulation
Regulation
Regulation
B
C
Q
T
U
Z
Fair Credit Reporting
Title VIII, Civil Rights
Transfer agents
Holder-in-due-course
Municipal
securities dealer regulation
Other 1
Total
Disposition:
Cases completed:
Regarding State member banks, and processed by System staff
Other than State member banks:
Referred
Response provided by System staff
Cases pending as of December 31:
Regarding State member banks
Other than State member banks
Total
879
2
145
1
1
582
124
3
1
13
4
1,690
3,445
787
1,711
777
144
26
3,445
1
"Other" refers primarily to complaints that could not be categorized under identifiable
consumer credit legislation administered by the Board, and includes complaints against
business entities other than financial institutions.
Consumer Affairs
361
reported problems. Frequently, an individual will contact the Board
or a Reserve Bank concerning a problem without first having attempted to resolve the difficulty at its source.
As the writer of many regulations regarding consumer credit, the
Board receives numerous general inquiries and complaints that do
not concern State member banks. If correspondence refers to an institution outside the Board's supervisory jurisdiction, the complaint
is forwarded to the appropriate agency. If the complainant fails to
name an institution, but describes a problem covered by the law, or
inquires generally about the law, the Board provides an informational
response or asks the complainant to furnish further details.
When a complainant describes a problem with a State member
bank, any necessary investigation is conducted by the local Reserve
Bank. The investigation includes gathering any necessary additional
information, determining whether the complaint is well-founded, and
taking appropriate action. The Board's staff reviews all complaints
received by the Board that are referred to the Reserve Banks, and
selectively reviews complaints filed directly with the Reserve Banks.
In September 1976 the Subcommittee on Consumer Affairs of the
House Committee on Banking, Currency and Housing issued a staff
report after having investigated the consumer complaint-handling procedures of the financial regulatory agencies. The subcommittee specifically recommended in its report that the Board "periodically evaluate
the overall efficiency of its complaint handling system and implement
changes which would improve its efficiency." Accordingly, starting
on July 11, 1977, a form followup letter was sent to those individuals
who had contacted the Board subsequent to April 1, 1977, about a
problem involving a State member bank, in order to assist the Board
in assessing the System's consumer complaint resolution efforts.
Thirty-seven per cent of the complainants responded to the letter, and
the majority of those were generally satisfied with the promptness and
courtesy afforded them. Although fewer than 50 per cent of the complainants agreed with the final resolution of their problem, more than
70 per cent indicated their willingness to contact the Federal Reserve
with future problems.
The Board is preparing a pamphlet that will explain briefly the
complaint procedure for consumer protection laws that apply to
banks. The pamphlet will contain a tear-out form that consumers can
use to bring their complaints to the appropriate agencies' attention.
362
Consumer Affairs
Issuance of substantially similar regulations
During 1977 the FTC published no new rule-making proposals under
the Federal Trade Commision Act. The Board's action on three pending proposals is described below.
Credit practices rule. This rule was originally proposed by the
FTC on April 9, 1975, and shortly thereafter the Board published
for comment a virtually identical version.
In the latter half of 1977 the FTC conducted a series of hearings
on its proposal at several locations. A member of the Board's staff
appeared and testified on the proposed rule on December 20, 1977.
The testimony consisted of two documents: a memorandum analyzing
the comments received by the Board according to type of commentator and number and substance of comments; and a second memorandum discussing possible technical problems with the rule. The
Board is awaiting further action by the FTC on the proposal.
Preservation of consumers9 claims and defenses. The FTC's
proposed amendment to the "Holder rule" would obligate lenders to
insert a specific contract provision in certain direct loan agreements.
The effect of inserting that provision would be to permit a consumer
to assert claims or defenses against a lender that may arise from
defective goods or services. During 1977 a parallel rule was prepared
that would impose upon banks requirements that are substantially
similar to those imposed upon nonbank lenders by the FTC's proposal. That draft was forwarded to the FTC's staff for review, and
was subsequently the subject of an interagency meeting and discussion.
The major changes in the parallel rule were intended to provide
banks with specific guidance as to problems that might develop in
connection with the extension of unsecured credit. In addition, the
draft would permit banks to add language to the notice explaining
that assertable claims and defenses include only those that relate to
(1) the consumer credit contract itself, (2) the transaction underlying
the contract, or (3) the goods or services purchased with the proceeds
of the contract. Most of the other revisions were intended to incorporate into the rule itself the clarifications and guidance offered by the
FTC and its staff in two interpretive statements published in 1976.
In early 1978 the Board transmitted its draft rule to the FTC for
Consumer Affairs
363
comment and is awaiting the final FTC staff report on the proposal
before acting further.
Sale of used motor vehicles. This rule, proposed by the FTC
on December 23, 1975, was also the subject of nationwide hearings
during 1977. The rule, intended primarily to impose certain disclosure requirements upon used motor vehicle dealers, also appears
to cover those bank creditors that engage in the sale of used motor
vehicles after repossession or expiration of lease. Staff comments
were transmitted to the FTC in October 1976; the Board is awaiting
releases of the reports from the staff and hearing officer of the FTC
before taking further action.
HOME MORTGAGE DISCLOSURE
Enforcement of the Home Mortgage Disclosure Act
The Board of Governors of the Federal Reserve System enforces the
Home Mortgage Disclosure Act (HMDA) of 1975, as implemented
by Regulation C, for State member banks. In 1977 the Board initiated
a program of special examinations specifically designed to determine
compliance with the consumer credit regulations, including Regulation C. During 1977 special examinations of the State member banks
subject to the HMDA revealed a high degree of compliance.
Interpretations of Regulation G
On March 31, 1977, the Board of Governors adopted two technical
interpretations of Regulation C. The act and implementing regulation
require depositary institutions subject to the act to disclose publicly
the geographic area in which they are making residential mortgage
loans.
One interpretation, designated 203.001, permits a depositary institution that is majority owned by another depository to disclose its
mortgage loan data separately from that of the parent. The other
interpretation, designated 203.002, clarifies what disclosures must
be made by depositories that were exempt from the provisions of the
act but that subsequently lose their exemption (by the extension of
a standard metropolitan statistical area (SMSA) to cover one or
more of its offices, by the growth of its assets, or by the determination
that applicable State disclosure law is not substantially similar to
364
Consumer Affairs
the Federal act). The interpretation permits a previously exempt institution that becomes subject to the act to compile mortgage lending
data by postal ZIP code areas, in lieu of Census Bureau census tracts,
for its last full fiscal year and any portion of its current fiscal year
ending prior to the loss of exemption. The same treatment was given
to depositories in the first year after Regulation C became effective on
June 28, 1976.
Exemptions from the HMDA
During 1977 the Board received one application for exemption from
the disclosure requirements of the HMDA. United Jersey Banks, a
bank holding company operating six New Jersey-chartered banks,
requested the exemption, on the ground that New Jersey law and
implementing State regulations provide for disclosures substantially
similar to those required by the HMDA and contain adequate provisions for enforcement. The exemption application was approved by
the Board on February 15, 1978, and applies to all New Jerseychartered depositary institutions that are subject to the New Jersey
act.
Section 308 study
Section 308 of the HMDA directs the Board, in consultation with the
U.S. Department of Housing and Urban Development (HUD),
to carry out a study to determine the feasibility and usefulness
of requiring depository institutions located outside standard metropolitan statistical areas . . . to make disclosures comparable to those
required by [the act].
The results of the study must be submitted to the Congress by December 31, 1978.
The Board plans to divide the study into two major parts. The first
will analyze the "usefulness" of HMDA data, and the second will
examine the "feasibility" of employing alternative geographic bases
(counties, townships, postal ZIP code areas, and census enumeration
districts) for nonmetropolitan disclosure.
In determining the usefulness of HMDA data, the Board hopes to
rely upon information gathered during the course of two other HMDA
studies—one sponsored jointly by the Federal Home Loan Bank
Consumer Affairs
365
Board and the Federal Deposit Insurance Corporation and the other
funded by HUD. The Board expects, however, to obtain additional
data from Federal bank examiner reports and possibly from industry trade associations.
In the feasibility part of the study, the Board intends to identify
the possible geographic units outside of SMSA's that could serve as
bases for disclosure, to investigate the availability and cost of geocoding materials for nonmetropolitan disclosures as well as the
convenience of using these materials, and to determine which of the
possible alternative geographic units is most familiar to the public
and which would be most effective for disclosure purposes.
366
Securities Acts
of 1975
Amendments
Pursuant to the Securities Acts Amendments of 1975 (Public Law
94-29), the Board of Governors is designated "the appropriate regulatory agency" with respect to State member banks and bank holding
companies that act as municipal securities dealers or as clearing
agencies. As of December 31, 1977, 49 State member banks, including separately identifiable departments or divisions thereof, and
one bank holding company were registered as municipal securities
dealers. Municipal securities dealer activities of 47 of these organizations subject to Federal Reserve supervision were examined in
1977.
During 1977 the Board consulted with the Municipal Securities
Rulemaking Board (MSRB) with respect to rules promulgated by
that organization, as contemplated by Section 17(c)(l) of the Securities Exchange Act of 1934. In addition, the Board, acting with the
other Federal bank regulatory agencies, adopted uniform forms
(Forms MSD-4 and MSD-5) to be filed on behalf of certain persons
associated with municipal securities dealers giving information with
respect to their professional qualifications. Under a joint agreement
with the Federal bank regulatory agencies, the computer facilities of
the National Association of Securities Dealers, Inc., are utilized to
verify, evaluate, and maintain this information.
As of December 31, 1977, four registered clearing agencies were
members of the Federal Reserve System; all were examined during
1977. These examinations are designed to determine whether the
clearing agency's activities are conducted in accordance with safe
and sound banking practices and, if they are not, to evaluate the
impact of their over-all condition and to recommend and enforce
corrective action as appropriate under the circumstances.
367
Government in the Sunshine
Under the Government in the Sunshine Act, more than a quarter of
the meetings of the Board of Governors in 1977 were entirely or partially open to the public. Items considered in the closed sessions,
pursuant to exemptions in the act, related primarily to bank and
bank holding company supervision—discussions of which generally
involve information from bank examination reports as well as commercial and financial information obtained in confidence by the
Board; information whose premature release could cause financial
speculation, such as certain monetary actions; and personnel matters.
In addition to appearing in the Federal Register, advance notices
of meetings are available to the public at the Board's Freedom of
Information and Public Affairs Offices and at the Treasury Department's press room, and copies are mailed to several public interest
groups. Notices of open meetings are also sent to the Associated
Press city wire. All notices invite the public to address inquiries to
the Board's Public Affairs Office, which is prepared to provide
details about any meeting. In the event of a change to an open
meeting when advance written notice is unlikely to be received,
media representatives who regularly attend such sessions are advised
by telephone.
Members of the public who attend open meetings are provided
with an agenda that summarizes, in detail, the issues that the Board
members will be discussing. Following each open meeting a representative of the Public Affairs Office is available for further questioning about the proceedings.
Tape recordings or minutes, as required under the act, are maintained for all meetings that are closed to the public. These materials
may be examined in the Board's Freedom of Information Office,
except for those portions that the Board has determined should be
withheld from the public under applicable exemptions.
During 1977 the Board held 114 meetings—13 were entirely open,
18 open with a portion closed, and 83 closed. Eighty-seven per cent
of the meetings involved "expedited procedures," with the items
falling under exemptions 4, 8, 9A, or 10 to the open meeting
368
Government in the Sunshine
requirements of the Sunshine Act. The reason(s) for closing the
101 meetings are indicated in the following tabulation:
Under
exemption—
6
8
9A(i)
9B
2,9A(i)
3, 8
4, 8
8,9A(i)
8, 9B
9A(i), 9B
2, 4, 8
2, 8, 9A(i)
2, 8, 9B
2, 9A(i), 9B
4, 8, 9A(i)
4, 8, 9A(ii)
4, 8, 9B
4, 8, 10
5, 8, 10
6, 8, 9A(i)
8, 9A(i), 9A(ii). . .
8, 9A(i),9B
8, 9B, 10
9A(i), 9B, 10
2,4,6,8
4, 6, 8, 9A(i)
4, 8, 9A(i), 9 B . . . .
5, 8, 9A(i), 9 B . . . .
2, 4, 8, 9B
Number of
meetings
Under
exemption—
Number of
meetings
2, 4, 8, 10
4, 6, 8, 9B
4, 8, 9A(i), 9A(ii)
4, 8, 9A(i), 10
4, 8, 9A(ii), 9B
4, 8, 9A(ii), 10
6, 8, 9A(i), 9B
8, 9A(i), 9A(ii), 9B
8, 9A(i),9B, 10
8, 9A(ii),9B, 10
2, 4, 6, 8, 9A(ii)
2, 4, 8, 9A(i),9B
2,4, 8, 9A(ii),9B
4, 5, 8, 9A(i),9B
4, 6, 8, 9A(i), 9B
4, 8, 9A(i), 9A(ii), 9B
4, 8, 9A(i), 9A(ii), 10
4, 8, 9A(i), 9B, 10
2, 3, 6, 8, 9A(i),9B
2, 4, 6, 8, 9A(i), 9A(ii)
2,4, 6, 8, 9A(i),9B
2, 6, 8, 9A(i), 9A(ii), 10
4, 5, 7, 8, 9A(ii), 10
4, 5, 8, 9A(i), 9A(ii), 9B. . . .
4, 8, 9A(i), 9A(ii), 9B, 1 0 . . .
2, 4, 5, 6, 8, 9A(i), 9B
2, 5, 7, 9A(i), 9A(ii), 9B, 10.
3,4,6,8,9A(i),9A(ii),9B, 10.
In Consumers Union of the United States, Inc. v. Board of
Governors of the Federal Reserve System, D.D.C., Civil Action
No. 77-1800 (filed October 17, 1977), Consumers Union sued the
Board of Governors following a written request for access to two
memoranda prepared for the Board by its staff in connection with
a matter that was discussed at a meeting of the Board open to public
observation under the Government in the Sunshine Act. Even though
the Board subsequently made the memoranda available in full to
Consumers Union under the Freedom of Information Act, plaintiff
sought a judicial declaration that it was also entitled to the memoranda under the Sunshine Act. On January 24, 1978, the suit was
dismissed with prejudice.
369
Legislative
Recommendations
In exercising its responsibility to advise the Congress of statutory
changes that would improve bank regulation, the performance of
the banking industry, and the conduct of monetary policy, the Board
of Governors has proposed the following recommendations:
PAYMENT OF INTEREST ON RESERVE
BALANCES—NOW ACCOUNTS
During 1976 and 1977 the Board conducted a major review of the
costs to commercial banks of Federal Reserve membership and of
the continuing withdrawal of banks from the Federal Reserve System.
The financial burden of membership—consisting of earnings foregone
by member banks on reserves held in the form of non-interest-bearing
deposits at the Federal Reserve—has resulted in banks leaving the
Federal Reserve System at an accelerating rate. The Board concluded
that this erosion of membership may be weakening both the soundness of the banking system and the Federal Reserve's control of
monetary policy and has urged that legislation be enacted to reduce
the burden of membership in order to halt the departure of banks
from the System.
More specifically, the Board recommended confirming the authority
to pay interest on required reserve balances held at Federal Reserve
Banks and authorizing a reduction in the statutory limits on reserve
requirements as part of a legislative package that includes the nationwide extension of NOW (negotiable orders of withdrawal) accounts.
Reserve requirements would be imposed on such accounts for all
depositary institutions and would be set by the Federal Reserve. The
Board not only views the components of this legislative package as
inseparable but also believes that such legislation would enhance the
soundness of the banking system, improve monetary control, and
guide in an orderly fashion the long-developing trend toward payment of interest on transaction balances.
In order to minimize the transition costs of NOW accounts to
financial institutions, the Board has recommended provisions limiting
NOW accounts to individuals, requiring that the maximum interest
rate on NOW accounts be set below the rate on savings deposits at
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Legislative Recommendations
member banks, delaying the effective date of the legislation until 1
year after enactment, and establishing a reserve requirement range
for NOW accounts that is lower than the demand deposit range.
STRENGTHENED SUPERVISORY POWERS
As a part of its continuing study of banking supervision and regulation, the Board has made a number of legislative recommendations
to the Congress designed to improve the performance of banks and
strengthen bank regulation.
The Board's recommendations include the granting of new supervisory powers authorizing the Board to—
. . Impose civil penalties for violation of (1) restrictions on bank
lending to insiders and affiliates, (2) the reserve requirement and
interest rate limitation sections of the Federal Reserve Act, (3) provisions of the Bank Holding Company Act, and (4) cease-and-desist
orders.
. . Remove or suspend directors, officers, or other persons participating in the affairs of an insured bank for gross negligence in the
operation or management of the bank or for continuing disregard for
the safety or soundness of the bank as well as personal dishonesty;
and extend the removal powers of the Board to bank holding companies and their nonbank subsidiaries.
. . Require divestiture by a bank holding company of a subsidiary
or termination of nonbanking activities whenever the continuation of
such ownership or activity threatens the safety, soundness, or stability
of a bank holding company's subsidiary bank and is inconsistent with
the law or with sound banking principles.
The proposals would also make clear that cease-and-desist orders
may be issued under the Financial Institutions Supervisory Act
directly against any director, officer, employee, agent, other person
who participates in the conduct of the affairs of a bank, without
regard to whether the bank itself is named in the proceeding; and
would make clear the Board's cease-and-desist power with respect to
officers, directors, employees, and agents of a bank holding company
and to Edge Act and agreement corporations whether or not they are
subsidiaries of a bank holding company.
The Board has also proposed further restrictions on insider loan
transactions. Loans to a bank's officers and to 10-per-cent stockholders would be aggregated with loans to companies controlled by
Legislative Recommendations
371
them in applying the limit on loans to a single borrower. Specific
approval of two-thirds of the entire board of directors would be
required, with the interested party abstaining, before a loan could
be made to a director or to a more-than-10-per-cent stockholder, or
to any company controlled by such a person when the amount of all
such loans exceeds $25,000. All loans to a bank's officers, directors,
and 10-per-cent stockholders and to companies controlled by them
would have to be made on substantially the same terms, including
interest rate and collateral, as those prevailing at the time for comparable transactions with other persons.
The proposed bill would also authorize the Board to approve the
acquisition by an out-of-State bank holding company of a troubled
large bank in certain emergency and failing bank situations in order
to avoid adverse potential impact when the failing bank is one of the
largest in a State and when the public interest would best be served
by an out-of-State acquisition.
The Board also has submitted draft legislation to establish a Federal Bank Examination Council consisting of the Comptroller of the
Currency, the Chairman of the Federal Deposit Insurance Corporation, and the Chairman of the Board of Governors. The Council
would establish uniform standards, procedures, and reporting forms
for the examination of banks to be employed by each of the Federal
banking agencies; establish and conduct schools for bank examiners;
and develop uniform reporting systems for banks, bank holding companies, and nonbank subsidiaries.
REGULATION OF FOREIGN BANKS
The Board continues to recommend legislation to regulate foreign
banks operating in the United States. In view of the dramatic rate
at which foreign banking has grown in the United States in recent
years and the increased importance of foreign banks in the functioning of U.S. money and credit markets, the Board is convinced of the
necessity for a national policy on the entry and activity of foreign
banking institutions operating in this country. The United States is
practically alone among major industrial nations in having no Federal
oversight of foreign banks within its borders.
In recommending legislation, the Board has been guided by two
public policy considerations. The first is the adherence by our Federal
Government to the principle of national treatment toward foreign
372
Legislative Recommendations
banks operating in this country. The second is the establishment of
a system of Federal supervision, regulation, and examination of
foreign bank operations that is fairly comparable to the regulation
of domestic banks.
The Board has emphasized the importance of subjecting foreign
banking operations to Federal Reserve monetary policy controls. The
Board has requested the authority to impose reserve requirements on
U.S. branches, agencies, and commercial lending companies
of foreign banking organizations having worldwide consolidated bank
assets in excess of $1 billion as well as on State-chartered banks that
are subsidiaries of such organizations. Such authority is necessary in
order not to compromise the Federal Reserve's ability to affect the
supply of money and credit in the U.S. economy. This would also
ameliorate the competitive disadvantage that Federal Reserve member banks have in competing with such foreign lenders operating in
U.S. markets.
The Board also believes that foreign bank operations should be
subject to the same interstate branching restrictions as govern domestic banks and that FDIC insurance should be mandatory for deposits
at foreign bank offices.
The Board's legislative recommendations would, in accordance
with the principle of equality of treatment, empower the Comptroller
of the Currency to license branches of foreign banks to conduct a
banking business in any State on essentially the same basis as a
national bank. Also, foreign banks would be allowed to establish
Edge Act corporations, thereby enabling them to conduct an international banking and financing business throughout the United States
on the same basis as domestic banks.
The Board has also recommended that the nonbanking prohibition
of Section 4 of the Bank Holding Company Act (12 U.S.C. 1843)
be made applicable to the U.S. operations of foreign banks. The
Board has, however, recommended that existing U.S. nonbanking
interests of foreign banks, including securities affiliates, be permanently grandfathered.
FINANCIAL TRANSACTIONS W I T H AFFILIATES
During 1976 and 1977 the Board conducted a major review of Section 23A of the Federal Reserve Act. Section 23A is designed to
Legislative Recommendations
373
protect member banks from potential abuse by restricting "non-arm'slength" financial transactions between these banks and affiliated companies. The Board's review of this statute was prompted in part by
the discovery that several relatively large banks had been adversely
affected by transactions with their affiliates.
One of the Board's major conclusions is that bank transactions
with affiliates within the legal limits set by the statute have not produced substantial instability in the banking system. At the same time,
the Board regards the present statute as inordinately complex and
poorly drafted and, therefore, believes that it should be revised. In
addition, the Board believes that the present statute contains numerous potentially dangerous "loopholes" that should be closed. Finally,
there are several ways in which the present statute appears to be
unduly restrictive and could be liberalized in a manner consistent
with maintaining a sound banking system.
Section 23A naturally lends itself to a four-part structure as
follows: (1) definition of "affiliate" for purposes of the statute, (2)
types of financial transactions covered by the statute, (3) quantitative
limitations on a bank's covered transactions with any affiliate and
with all affiliates combined, and (4) collateral requirements for bank
loans and extensions of credit to affiliates. Within this structure, the
Board recommends numerous changes to the statute. Principal among
these recommendations are those to (1) alter the treatment of sister
bank subsidiaries within a bank holding company system to allow a
holding company greater freedom to transfer funds among its subsidiary banks but disallow a bank from purchasing low-quality assets
from a sister bank subsidiary, (2) add to the definition of "affiliate"
real estate investment trusts and other such financial organizations
that are sponsored and advised by a banking organization, and (3)
expand the types of collateral permitted on bank loans and extensions
of credit to affiliates but require relatively high percentages of collateral value to loan amounts.
INTERLOCKING RELATIONSHIPS
The Board of Governors has recommended to the Congress legislation that would prohibit interlocking director or management relationships between depositary institutions of all types. Section 8 of the
Clayton Act presently prohibits interlocking relationships between a
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Legislative Recommendations
member bank and any other bank located in the same or an adjacent
community.
In the Board's judgment interlocking relationships between institutions that compete for the funds of the public involve a risk of
diminishing competition that the Board believes outweighs the reasonable expectation of benefits that might flow from such relationships.
This reasoning not only applies to relationships between commercial
banks but is equally applicable to interlocking management personnel
relationships between any institutions engaged in the business of
receiving deposits that may be in competition with each other: banks,
savings and loan associations, mutual savings banks, credit unions,
or other similar institutions.
The Board's proposed bill would apply the prohibition against
interlocks between any depositary institutions and holding companies
for depositary institutions located within the same metropolitan statistical area or within 50 miles of each other. In addition, regardless
of location, the bill prohibits any interlock between an institution
exceeding $1 billion in total assets and another exceeding $500
million in total assets.
Sufficient time would be allowed for a gradual phasing out of prohibited interlocks so that the legislation would not be unnecessarily
disruptive to institutions in their efforts to maintain qualified management and directors. The Board, moreover, would have general
regulatory authority to permit exceptions to the new requirements in
situations that would warrant special treatment.
FEDERAL RESERVE NOTES
The Board recommends revision of the Federal Reserve Act to permit
the printing of Federal Reserve notes without any designation by
district. At present, all currency bears the designation of the Federal Reserve district of original issue.
Under the Board's recommendation, issues of Federal Reserve
notes would conform to current practice under which currency circulates nationally without regard to Federal Reserve district boundaries. The change would result in a substantial saving in the printing
and distribution of currency and would also make it possible to estimate the amounts of currency that are not circulating or have been
lost or destroyed.
Legislative Recommendations
375
COLLATERAL FOR FEDERAL RESERVE NOTES
The Board also recommends that the Congress authorize the use of
U.S. Government agency securities as collateral for Federal Reserve
notes and that this collateral back all notes on a national, rather
than a district, basis. Collateral currently includes gold and special
drawing rights (SDR) certificates, eligible paper, and U.S. Treasury
securities.
At present, U.S. Government agency securities are eligible for
purchase in the open market by the Federal Reserve but they may
not be used as collateral for Federal Reserve notes. When the authority for Federal Reserve purchase of agency securities was enacted
into law, no provision was made for using such securities as collateral for Federal Reserve notes. Insofar as collateral is concerned,
there seems to be no good reason for the differing treatment of the
two types of securities. A change in the law would add flexibility to
System operations in the purchase and sale of Government securities
and would provide additional leeway for collateralizing Federal Reserve notes.
TRUTH IN LENDING ACT SIMPLIFICATION
As a result of growing concern about the complexity of Truth in
Lending, the Board launched a major effort in 1977 to recommend ways of simplifying the statute. Creditors acting in good
faith have experienced difficulty in complying with Truth in Lending
due to the complexity of the requirements. Likewise, the complexity
of the disclosures appear to have diminished their usefulness to consumers.
In July 1977 the Board submitted a draft bill to the Congress to
simplify closed-end credit disclosures and in September made additional recommendations to simplify and improve disclosures for openend credit transactions.
The Board's proposal has several major elements. It is designed to
emphasize the important cost disclosures, and it reduces the detail of
the disclosures, for example, eliminating the itemization of the components of the finance charge and of the amount financed. The most
important information on credit terms, such as annual percentage
rate, would be retained and highlighted, while some subsidiary
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Legislative Recommendations
aspects of the transactions, such as whether the obligation is secured,
would be summarized rather than presented in complete detail.
The disclosures required by Federal law would be segregated from
other matters in the contract and from other information required to
be disclosed by State law so that the Truth in Lending disclosures
would not be lost among other provisions.
The credit cost terminology would be explained in plain English
to make it more readily understandable to consumers. The Board
would be required to develop and publish model forms and clauses
that, if properly completed, would protect creditors from civil liability
under the act. The proposal also contains extensive clarifications of a
technical nature. (See Consumer Affairs, beginning on page 332.)
DISCLOSURE OF THE FOMC'S DOMESTIC
POLICY DIRECTIVE
At each of its monthly meetings the Federal Open Market Committee (FOMC) adopts a domestic policy directive that guides the conduct of operations by the Manager of the Open Market Account for
the month ahead. The directive includes ranges of tolerance that are
acceptable for short-run growth rates in certain monetary aggregates
and for changes in the Federal funds rate.
It has been the practice of the FOMC to delay the public release
of the domestic policy directive for approximately 1 month following
its adoption until it has been superseded by a new directive.
A November 1977 ruling of the Court of Appeals for the District
of Columbia would require the FOMC to make each of its directives
public immediately after the meeting at which it is adopted. The
FOMC believes that such a practice would significantly impair its
ability to discharge its statutory responsibility to carry out monetary
policy and would be substantially contrary to the national interest.
Consequently, the Federal Reserve has requested the Congress to
enact legislation that would require the deferral of any public release
of the FOMC's domestic policy directive for approximately 1 month
after the adoption of the directive, that is, until shortly after the next
meeting of the FOMC.
LOANS TO BANK EXAMINERS
Title 18 of the U.S. Code, "Crimes and Criminal Procedures," prohibits loans to a bank examiner by any bank that the examiner is
Legislative Recommendations
377
authorized to examine. For several years the Board has favored
modification of this prohibition to permit a Federally insured bank to
make a home mortgage loan to a bank examiner under appropriate
statutory safeguards. The Board also believes that a bank examiner
may experience difficulties in that he or she is prevented from obtaining other forms of bank credit, such as loans to finance the education of children, automobile loans, home improvement loans, creditcard loans, and other types of consumer credit. For that reason, the
Board favors legislation to permit loans to a bank examiner to be
made in accordance with regulations prescribed by the agency employing the examiner.
LENDING AUTHORITY OF FEDERAL RESERVE
BANKS
The Board again urges enactment of legislation that would permit
member banks to borrow from their Reserve Banks on the security
of any sound assets without paying a "penalty" rate of interest whenever technically ineligible paper is presented as collateral.
Under Section 13 of the Federal Reserve Act, Federal Reserve
Banks may extend short-term credit to member banks on their promissory notes that are secured by obligations eligible either for purchase or for discount by the Reserve Banks.
Under Section 10(b) the Reserve Banks are authorized to extend
to member banks credit secured simply by collateral viewed as satisfactory by the Reserve Banks. However, Section 10(b) also provides
that such credit extensions "shall bear interest at a rate not less than
one-half of 1 per centum per annum higher than the highest discount
rate in effect" at the Reserve Bank making the loan—except for such
advances secured by mortgages on 1- to 4-family homes. The result
is that many sound member bank loans cannot qualify as security for
Federal Reserve advances except at the penalty rate of interest prescribed in Section 10(b). This is true even though the quality of the
"ineligible" collateral may be equal to that of presently "eligible"
paper.
378
Litigation
During 1977 the Board of Governors was named in 15 additional
lawsuits, compared with 22 filed in 1976 and 20 filed in 1975. Nine
of the actions filed in 1977 raise questions under the Bank Holding
Company Act; 16 such actions were filed in 1976. As of January 31,
1978, 28 cases remained pending, 17 of which raise questions under
the Bank Holding Company Act. A brief description of each case that
is still pending or that was disposed of in 1977 follows:
BANK HOLDING COMPANIES—ANTITRUST
ACTION
In 1977 the U.S. Department of Justice filed no challenges under
the antitrust laws of the United States to acquisitions by registered
bank holding companies or bank mergers that had been previously
approved by the Board, and there are no such cases pending from
previous years.
BANK HOLDING COMPANIES—REVIEW OF
BOARD ACTIONS
In Bankers Trust New York Corporation v. Board of Governors,
No. 73-1805, filed May 25, 1973, U.S. Court of Appeals (U.S.C.A.)
for the Second Circuit, petitioner requested the court to review and
set aside a Board order (Federal Reserve Bulletin, May 1973, page
364) denying petitioner's application to engage in investment advisory activities through a newly formed subsidiary corporation in
Palm Beach, Florida. In October 1973 the court granted petitioner's
motion to hold the proceedings in abeyance pending the outcome on
appeal of a suit in the U.S. District Court (U.S.D.C.) for the Northern District of Florida challenging the constitutionality of a Florida
statute prohibiting out-of-State banking organizations from performing investment advisory services in Florida and upon which the Board
had based its order. On April 14, 1975, the U.S. Supreme Court
vacated the judgment of the district court in that suit, finding the
suit inappropriate for a three-judge court, and remanded the case
to the district court so that a new order might be entered from which
a timely appeal can be taken to the U.S.C.A. for the Fifth Circuit
Litigation
379
(421 U.S. 901). The Florida suit is still pending, and petitioner's
suit against the Board is thus in abeyance.
In Investment Company Institute v. Board of Governors, No.
74-697, filed on May 8, 1974, U.S.D.C. for the District of Columbia,
the plaintiff challenged the validity under the Glass-Steagall Act of
the Board's January 1972 amendment to Regulation Y {Federal
Register, vol. 37, page 1463) permitting bank holding companies to
engage in the business of acting as investment adviser to an investment company registered under the Investment Company Act of
1940. The district court dismissed the action on July 30, 1975, for
lack of jurisdiction (398 F. Supp. 725). On January 14, 1977, the
U.S.C.A. for the District of Columbia Circuit affirmed the district
court decision, holding that Board regulations issued pursuant to
the Bank Holding Company Act may be challenged only in the
courts of appeals, but finding nevertheless that plaintiff may file a
petition for reconsideration of the challenged regulation with the
Board and obtain judicial review thereof (551 F.2d 1270). Pursuant
to the court's order, plaintiff filed a petition for reconsideration and
rescission of that portion of the regulation at issue and, by order
dated August 31, 1977, the Board denied plaintiff's motions (Federal Reserve Bulletin, September 1977, page 856). On September 23,
1977, plaintiff filed a petition for review of the Board's order in the
U.S.C.A. for the District of Columbia Circuit (No. 77-1862).
In Alabama Association of Insurance Agents v. Board of Governors, No. 74-2981, filed July 26, 1974, U.S.C.A. for the Fifth Circuit, and Georgia Association of Independent Insurance Agents v.
Board of Governors, No. 74-3544, filed October 3, 1974, U.S.C.A.
for the Fifth Circuit, petitioners challenged the Board's orders (Federal Reserve Bulletin, August 1974, page 596, and Federal Register,
vol. 39, page 33414) permitting Southern Bancorporation, Birmingham, Alabama, and First National Holding Company, Atlanta,
Georgia, to engage in certain insurance agency activities. On June 10,
1976, the court issued a decision upholding the Board's findings
that the sale of property and casualty insurance by a bank holding
company, when related to an extension of credit, is closely related
to banking within the meaning of Section 4(c)(8) of the Bank
Holding Company Act and Section 225.4(a) of the Board's Regulation Y and that the subject applications could reasonably be expected to produce public benefits that outweigh possible adverse
effects. The court, however, determined that the sale of insurance
380
Litigation
for the holding company, the sale of insurance as a convenience for
the purchaser, and general insurance agency activities in towns of
fewer than 5,000 inhabitants are not activities closely related to
banking and, therefore, are not permissible for bank holding companies (533 F.2d 224). On petitions for rehearing by the parties,
the court, by order dated September 1, 1977 (558 F.2d 729), rejected petitioners' contentions that the sale of property and casualty
insurance in connection with extensions of credit and other financial
services should be restricted to only sales by bank subsidiaries of
bank holding companies. The court also remanded to the Board the
question of whether general insurance agency activities in towns of
fewer than 5,000 inhabitants are closely related to banking. On
November 10, 1977, petitioners filed a petition for certiorari in the
Supreme Court.
In Florida Association of Insurance Agents v. Board of Governors,
Nos. 75-3151, 75-3152, and 75-3153, filed August 12, 1975,
U.S.C.A. for the Fifth Circuit, petitioners sought judicial review of
three Board orders (Federal Register, vol. 40, pages 30869, 30872,
and 30876) approving the application of four bank holding companies to engage in certain insurance agency activities in Florida to the
extent permitted by State law. These cases were consolidated in the
Fifth Circuit with the claims brought in National Association of Insurance Agents, Inc. v. Board of Governors, Nos. 75-3342, 75-3343,
and 75-3358, U.S.C.A. for the District of Columbia Circuit, in which
the petitioner challenged the same Board orders. These cases are
currently pending before the court.
In National Computer Analysts, Inc. v. Decimus Corporation, et al.,
No. 74-1684, filed November 24, 1975, U.S.D.C. for the District of
New Jersey, the Board was joined as a defendant in an amended
complaint challenging the 1974 de novo entry by Decimus Corporation, a subsidiary of BankAmerica Corporation, San Francisco,
California, into data processing activities in the State of New Jersey.
In an order dated April 30, 1976, the court dismissed plaintiff's
claim under the Bank Holding Company Act for lack of jurisdiction.
Plaintiff appealed the court's order to the U.S.C.A. for the Third
Circuit (No. 76-2099), and that court, on May 6, 1977, affirmed the
district court's dismissal of the Board as defendant.
Two other actions have been brought with respect to the conduct
of data processing activities by BankAmerica Corporation, through
its subsidiary, Decimus Corporation, in New Jersey and neighboring
Litigation
381
States. In BankAmerica Corporation v. Board of Governors, No.
C77-1005 SW, filed May 13, 1977, BankAmerica Corporation
sought a declaratory judgment that its proposal to expand geographically, and continue to engage in, data processing activities through
the Decimus Corporation within a 500-mile radius of Piscataway,
New Jersey, had been approved by operation of law because the
Board failed to act on the proposal within the statutory 91-day
period. On July 29, 1977, the district court ruled in favor of
BankAmerica Corporation. The Board has appealed this decision to
the U.S.C.A. for the Ninth Circuit (No. 77-3485). In the second
case, BankAmerica Corporation v. Board of Governors, No. 77-2173,
filed May 25, 1977, U.S.C.A. for the Ninth Circuit, BankAmerica
Corporation sought judicial review of a Board order, dated May 20,
1977 {Federal Register, vol. 42, page 27293), providing for a hearing
with respect to its application to engage in data processing activities
through the Decimus Corporation. Both actions have been consolidated and are pending in the court of appeals.
In First Lincolnwood Corporation v. Board of Governors, No.
76-1114, filed February 5, 1976, U.S.C.A. for the Seventh Circuit,
petitioner asked the court to review the Board's order of January 9,
1976 (Federal Reserve Bulletin, February 1976, page 153), denying,
for inadequate financial resources, petitioner's application to become
a bank holding company through acquisition of the First National
Bank of Lincolnwood, Lincolnwood, Illinois. In a decision dated
December 7, 1976 (546 F.2d 718), a panel of the court affirmed the
Board's order, holding that substantial evidence supported the Board's
findings, that the Board's order was issued within 91 days from the
submission of the complete record, and that the Board complied with
its own regulations governing applications to form a bank holding
company. On petitioner's request for rehearing, the court en bane,
in a decision dated July 13, 1977 (560 F.2d 258), set aside the
Board's order, holding that under the Bank Holding Company Act
the Board's authority to deny an application to form a bank holding
company is limited to cases in which the formation would cause or
enhance adverse financial conditions in the proposed subsidiary bank.
The court found that the restructuring of bank ownership from individuals to a corporation owned by the same individuals was not
likely to have such a result and that the Board improperly denied
approval to First Lincolnwood Corporation. On December 10, 1977,
the Board filed a petition for a writ of certiorari in the Supreme Court
382
Litigation
seeking review of the decision of the Seventh Circuit (No. 77-832).
In Memphis Trust Company v. Board of Governors, No. C76-64,
filed February 19, 1976, U.S.D.C. for the Western District of Tennessee, plaintiff requested that the Board's order of April 10, 1975
(Federal Reserve Bulletin, May 1975, page 327), denying plaintiff's
application to acquire Home Owners Savings and Loan Association,
Collierville, Tennessee, be set aside. In a decision on June 4, 1976,
the court held that plaintiff's application had been approved by operation of law because the Board had not acted on the application within
91 days after the submission of the complete record to the Board
and that the district court had jurisdiction over plaintiff's suit. The
Board has appealed to the U.S.C.A. for the Sixth Circuit (No. 762183). The case is pending.
In Association of Bank Travel Bureaus, Inc. v. Board of Governors, No. 76-1186, filed February 23, 1976, U.S.C.A. for the Seventh Circuit, petitioners asked the court to review and set aside the
Board's order of January 26, 1976 (Federal Reserve Bulletin, February 1976, page 148), that found that operation of a travel agency
is not closely related to banking and therefore is not a permissible
activity for bank holding companies. On January 12, 1978, the court
denied the petition for review. The court held that the Board applied
the proper legal standard in making its decision and that its findings
with respect to the operation of travel agencies by banks are not
arbitrary, capricious, or an abuse of discretion.
In Grandview Bank and Trust Company v. Board of Governors,
No. 76-1236, filed March 25, 1976, U.S.C.A. for the Eighth Circuit,
petitioner sought review of a Board order (Federal Register, vol. 41,
page 12093) approving the application of Commerce Bancshares,
Inc., Kansas City, Missouri, to acquire Commerce Bank of Grandview, N.A., Grandview, Missouri, a proposed new bank. In a decision
dated March 2, 1977 (550 F.2d 415), the court affirmed the Board's
order, holding that the acquisition would not violate Missouri branchbanking laws, that the Board's findings with respect to lack of anticompetitive effects and financial resources and future prospects were
supported by substantial evidence, and that the Board's denial of a
hearing on the application was proper. On October 3, 1977, the
Supreme Court denied the petition for certiorari filed by petitioner
in this case, 98 S. Ct. 64.
In Farmers and Merchants Bank of Las Cruces, New Mexico v.
Litigation
383
Board of Governors, No. 76-1367, filed April 19, 1976, U.S.C.A.
for the District of Columbia Circuit, petitioner asked the court to
review and set aside the Board's order of March 29, 1976 (Federal
Reserve Bulletin, April 1976, page 373), approving the application
of First New Mexico Bancshares Corporation, Albuquerque, New
Mexico, to acquire the Bank of Las Cruces, N.A., Las Cruces, New
Mexico, a proposed new national bank. On November 7, 1977, the
court issued a decision affirming the Board's order. The court held
that the Board's failure to hold a formal hearing on the application
was not improper and that the Board's determinations on the competitive effects of the proposal and on alleged violations of the branchbanking laws of New Mexico were supported by substantial evidence.
In North Lawndale Economic Development Corporation v. Board
of Governors, No. 76-1167, filed June 25, 1976, U.S.C.A. for the
Seventh Circuit, petitioner sought judicial review of the Board's
order of June 7, 1976 (Federal Reserve Bulletin, July 1976, page
639), denying petitioner's application to become a bank holding
company through acquisition of a proposed new bank and to continue to engage in certain community development activities. On
March 31, 1977, the court of appeals issued an order vacating the
Board's order on the grounds that petitioner's application is deemed
granted as a matter of law because the Board did not act on the
application within 91 days from submission of the complete record
to the Board (553 F.2d 23). On May 3, 1977, the court denied the
Board's petition for rehearing.
In Central Wisconsin Bancshares, Inc. v. Board of Governors, No.
76-1603, filed June 25, 1976, U.S.C.A. for the Seventh Circuit,
petitioner requested the court to review and set aside an order of
the Board dated May 26, 1976 (Federal Reserve Bulletin, June 1976,
page 538), denying petitioner's application to acquire Central National Bank of Wausau, Wausau, Wisconsin. Petitioner argued that
the application was approved by operation of law because the Board
failed to act on the application within the 91-day statutory period
imposed in 12 U.S.C. Section 1842(b). The case has been submitted
to the court.
In International Bank v. Board of Governors, et ah, No. 76-1380,
filed July 23, 1976, U.S.D.C. for the District of Columbia, plaintiff
sought a declaratory judgment that plaintiff's proposed acquisition
of an impermissible nonbanking activity during the pendency of an
384
Litigation
administrative proceeding before the Board in which plaintiff was
challenging its status under the Bank Holding Company Act would
not constitute a criminal violation of the act. On January 15, 1977,
the suit was dismissed without prejudice pursuant to a stipulation by
the parties.
In First State Bank of Clute, Texas v. Board of Governors, No.
76-3073, filed July 30, 1976, U.S.C.A. for the Fifth Circuit, three
banks brought an action to review and set aside the Board's order of
July 1, 1976 (Federal Reserve Bulletin, July 1976, page 618), permitting First Freeport Corporation, Freeport, Texas, to acquire
Chemical National Bank, Clute, Texas, a proposed new bank. On
June 10, 1977, the court affirmed the Board's order (553 F.2d 950),
holding that the Board's determinations that the proposal would not
violate Texas branch-banking law and that the acquisition will have
a procompetitive impact were supported by substantial evidence.
The court also held that the Board was empowered under the Bank
Holding Company Act to approve the acquisition of a proposed, but
not yet operating, bank.
In First Security Corporation v. Board of Governors, No. 76—
1783, filed August 27, 1976, U.S.C.A. for the Tenth Circuit, petitioner asked the court to set aside the Board's order of July 30, 1976
(Federal Reserve Bulletin, August 1976, page 701), denying petitioner a further extension of time to divest First Security Savings
and Loan Association, Pocatello, Idaho, and declining to process
petitioner's application to retain the savings and loan association.
In a second case, First Security Corporation v. Board of Governors,
No. 77-1188, filed March 21, 1977, U.S.C.A. for the Tenth Circuit,
petitioner challenged a Board order dated February 22, 1977 (Federal
Reserve Bulletin, March 1977, page 287), denying the same petitioner's request for reconsideration of the Board's previous order of
July 30, 1976. The two cases were consolidated and on December
9, 1977, were dismissed on petitioner's motion.
In Michigan National Corporation v. Board of Governors, No. 762259, filed September 22, 1976, U.S.C.A. for the Sixth Circuit,
petitioner sought judicial review of the Board's order of August 24,
1976 (Federal Register, vol. 41, page 36550), denying petitioner's
application to acquire Peoples Bank and Trust Company, N.A.,
Trenton, Michigan. The suit was dismissed by the court on March
30, 1977, on petitioner's motion.
In National Automobile Dealers Association, Inc. v. Board of
Litigation
385
Governors, No. 76-2021, filed November 12, 1976, U.S.C.A. for
the District of Columbia Circuit, petitioner challenged a Board order
dated October 13, 1976 (Federal Reserve Bulletin, November 1976,
page 930), in which the Board determined that automobile leasing
is closely related to banking and made a general determination that
automobile leasing is a proper incident to banking. The Board concluded that bank holding companies may continue to conduct automobile leasing activities in a manner consistent with the Board's
personal property leasing regulation and amended its Regulation Y
to provide that such leases be on a nonoperating basis. The case is
pending before the court.
In Farmers State Bank of Crosby v. Board of Governors, No. 771039, filed January 12, 1977, U.S.C.A. for the Eighth Circuit, petitioner sought judicial review of the Board's order dated December
13, 1976 (Federal Reserve Bulletin, January 1977, page 63), approving an application by Dakota Bancorporation, Rapid City, South
Dakota, to acquire the First National Bank of Crosby, Crosby, North
Dakota. In a decision dated November 30, 1977, the court affirmed
the Board's order. The court held that there was no foundation for
petitioner's contention that the applicant made a misleading statement
in an offering circular that applicant had issued in connection with
an offering of its common stock. The court also held that the Board
had no authority or duty to approve a proposed merger of applicant's
national bank subsidiaries and thus was not required to conduct a
hearing with respect to the merger.
In First State Bank of Abilene, Texas v. Board of Governors,
No. 77-1703, filed August 5, 1977, U.S.C.A. for the District of
Columbia Circuit, petitioner asked the court to set aside the Board's
order of July 7, 1977 (Federal Reserve Bulletin, August 1977, page
744), approving the application of First International Bancshares,
Inc., Dallas, Texas, to acquire the Texas State Bank, Abilene, Texas,
a proposed new bank.
In Plaza Bank of West Port v. Board of Governors, No. 77-1730,
filed September 14, 1977, U.S.C.A. for the Eighth Circuit, petitioner
sought judicial review of a Board order dated August 15, 1977 (Federal Reserve Bulletin, September 1977, page 848), approving the
application of Manchester Financial Corporation, St. Louis, Missouri, to acquire Manchester Bank West County, Maryland Heights,
Missouri, a proposed new bank.
In Central Bank v. Board of Governors, No. 77-1937, filed Octo
386
Litigation
ber 17, 1977, U.S.C.A. for the District of Columbia Circuit, petitioner asked the court to review a September 13, 1977, determination
by the Board denying petitioner's request for a determination that
the individual organizers of the Tri-City National Bank of West
Allis, West Allis, Wisconsin, constitute a company under the Bank
Holding Company Act.
In Vickars-Henry Corporation v. Board of Governors, No. 773890, filed December 13, 1977, U.S.C.A. for the Ninth Circuit,
petitioner challenged a Board letter determination, dated November
15, 1977, that petitioner is not a bank holding company for purposes
of the Bank Holding Company Tax Act of 1976.
In Lionel J. Gelfand v. Board of Governors, No. 77-3473, filed
December 19, 1977, U.S.C.A. for the Fifth Circuit, petitioner seeks
to overturn a November 22, 1977, decision by the Federal Reserve
Bank of Chicago to extend, pursuant to Section 4(c)(2) of the Bank
Holding Company Act, for 1 year the time within which First Chicago
Corporation, Chicago, Illinois, must divest shares of Beacon Hill
Corporation acquired by First Chicago in the course of securing or
collecting a debt previously contracted in good faith.
OTHER LITIGATION INVOLVING CHALLENGES
TO BOARD PROCEDURES AND REGULATIONS
In Consumers Union of the United States, Inc., et al. v. Board of
Governors, No. 73-1766, filed September 14, 1973, U.S.D.C. for
the District of Columbia, plaintiffs brought suit under the Freedom
of Information Act to compel the Board to disclose certain data on
interest rates for consumer loans furnished to the Board by individual
banks for its composite G.10 statistical release. In June 1974 the
court ordered the Board to release all information collected in the
G.10 survey. The U.S.C.A. for the District of Columbia Circuit
remanded the case to the district court with instructions to oversee
a settlement. A settlement was reached between the parties and a
stipulation filed as to the release of future consumer data. On March
29, 1976, the district court awarded plaintiffs attorneys' fees and
other litigation costs pursuant to 5 U.S.C. Section 552(a)(4)(e), finding that plaintiffs had substantially prevailed in the case. The Board's
appeal from the award of attorneys' fees and other litigation costs
was dismissed by motion of the Government on June 9, 1977.
In Louis J. Roussel v. Board of Governors, No. 75-1044, filed
Litigation
387
April 5, 1975, U.S.D.C. for the Eastern District of Louisiana, plaintiff sought damages and an injunction against a removal action
instituted against plaintiff by the Board under the Financial Institutions Supervisory Act (12 U.S.C. Section 1818(e)(2) and (4)). The
court dismissed the request for injunctive relief following plaintiff's
resignation from the board of directors of the National American
Bank of New Orleans, New Orleans, Louisiana, and the entry of a
consent order of prohibition concerning his participation in the affairs
of that institution. Defendants subsequently filed an answer, and the
case is pending.
In Curvin Trone v. United States, No. 135-75, filed April 24,
1975, U.S. Court of Claims, plaintiff, the trustee in bankruptcy for
Westgate California Corporation, brought suit against the United States
under the fifth amendment for the taking of property without due
process of law. The amended complaint alleges that attempts of the
Federal bank regulatory agencies, including the Board and the Federal Reserve Bank of San Francisco, to prevent the failure of the
United States National Bank, San Diego, California, constitute a
taking of property without just compensation. On February 4, 1977,
the court granted defendants' motion for summary judgment because
plaintiff had failed to state a claim upon which relief could be
granted. On October 3, 1977, plaintiff's petition for certiorari was
denied by the Supreme Court.
In a second case related to the failure of the United States National Bank, San Diego, California, Roberts Farms, Inc. v. Comptroller of the Currency, et ah, No. 75-0268, filed November 20,
1975, U.S.D.C. for the Southern District of California, plaintiff sought
damages on the grounds that the Federal bank regulatory agencies
negligently supervised the bank. The case has been stayed indefinitely
pending the outcome of similar suits.
In David R. Merrill v. Federal Open Market Committee of the
Federal Reserve System, No. 75-0736, filed May 8, 1975, U.S.D.C.
for the District of Columbia, plaintiff brought suit under the Freedom
of Information Act to compel the Federal Open Market Committee
to disclose immediately records of policy actions taken by the Committee and memoranda of discussion at meetings of the Committee
in January and February 1975. By order of March 9, 1976 (413 F.
Supp. 494), the court ruled that the records of the Committee's
policy actions must be made available to the public upon adoption
and that reasonably segregable factual portions of the memoranda
388
Litigation
of discussion must also be disclosed. In addition, the court ordered
the Committee to submit to the court for in camera inspection all
portions of the discussion memoranda that the Committee wished to
withhold from plaintiff. The Committee appealed to the U.S.C.A. for
the District of Columbia Circuit the district court ruling concerning
disclosure of records of policy actions (No. 76-1379). By stipulation
of the parties, that portion of the case related to the memoranda of
discussion was dismissed by the district court on March 22, 1977.
The court of appeals issued its decision on November 10, 1977 (565
F.2d 778), affirming the ruling of the district court that the Committee's monthly policy actions, including its domestic policy directives
and tolerance ranges for the money stock and the Federal funds
rate must be publicly released upon adoption by the Committee. The
court held that the directive and tolerance ranges are not covered
by the fifth exemption of the Freedom of Information Act, which
exempts from disclosure internal memoranda not available by law
to a party other than an agency in litigation with the agency, because
these records are not predecisional records and because disclosure
would not harm the deliberative processes of the Committee. The
mandate of the court of appeals has been stayed, and the Solicitor
General is preparing to file a petition for certiorari asking the
Supreme Court to review the decision of the court of appeals.
In International Bank v. Board of Governors, No. 75—2193, filed
December 31, 1975, U.S.D.C. for the District of Columbia, plaintiff
brought suit under the Freedom of Information Act to obtain access
to certain Board records. The case was dismissed by the court without prejudice on January 21, 1977, pursuant to stipulation of the
parties.
In In Re: Franklin National Bank Securities Litigation, MDL No.
196, cases consolidated on April 22, 1977, several plaintiffs brought
actions for damages against various defendants who were connected
with the Franklin National Bank, New York, New York, which
was declared insolvent by the Comptroller of the Currency on October 8, 1974. Several defendants in these actions—the insurers
and auditors of Franklin National Bank and its parent holding company—filed, or sought to file, third-party actions against the United
States based on the alleged negligence of the banking regulatory
agencies, including the Board and the Federal Reserve Bank of New
York, in the supervision of the bank. In an opinion dated January
17, 1978, the court declined to dismiss completely the third-party
Litigation
389
actions against the United States. The court held that the United
States may be liable for alleged negligent supervision by banking regulatory agencies if the activities of these agencies with respect to the
bank substituted the agencies' decisions for those of the bank's management and induced management to rely on those decisions to the
detriment of the bank.
In a related case, Corbin v. Federal Reserve Bank of New York,
et al, No. 77-C4896, filed October 6, 1977, U.S.D.C. for the Southern District of New York, plaintiff, the trustee in bankruptcy of
Franklin National Bank's parent holding company, alleges that certain provisions in the agreement under which the Federal Deposit
Insurance Corporation (FDIC) assumed the obligation to repay
Franklin National Bank's indebtedness to the Federal Reserve Bank
of New York are inequitable and unjust. The case is pending.
In National Urban League, et al. v. Office of the Comptroller of
the Currency, et al, No. 76-0718, filed April 26, 1976, U.S.D.C.
for the District of Columbia, plaintiffs—nine civil rights organizations
and the National Association of Real Estate Brokers—filed suit
against the Board, the Comptroller of the Currency, the FDIC, and
the Federal Home Loan Bank Board, alleging that the defendant
agencies have failed to establish regulations and otherwise to enforce
the provisions of Title VIII of the Civil Rights Act of 1968, which
prohibits discrimination in home mortgage lending. The complaint
has been dismissed with respect to the other Federal agency defendants after these agencies entered into settlement agreements with the
plaintiffs. Defendant's motion to dismiss for lack of standing was
denied as to the National Urban League but sustained as to all other
plaintiffs. Plaintiff has moved for summary judgment, and the case is
pending with respect to the Board.
In Henry S. Reuss v. John J. Balles, et al, No. 76-1142, filed
June 22, 1976, U.S.D.C. for the District of Columbia, plaintiff, a
member of the U.S. House of Representatives, alleged that the provisions of the Federal Reserve Act governing the appointment of members of the Federal Open Market Committee violate the appointments
clause of the Constitution, Article II, Section 2, Clause 2. On December 22, 1976, the court dismissed the complaint for lack of standing
(73 F.R.D. 90). Plaintiff's appeal from the dismissal of the complaint
is pending before the U.S.C.A. for the District of Columbia Circuit
(No. 77-1012).
In Department of Revenue of the State of Illinois v. Olympic Sav
390
Litigation
ings and Loan Association, et al.t No. 77-L-8824, filed M y 7, 1977,
Circuit Court of Cook County, Illinois, the Board of Governors is
named as defendant in a third-party action that challenges the constitutionality of the Federal Internal Revenue Code and the issuance
of Federal Reserve notes.
In Hansen v. The National Commission on Observance of International Women's Year, No. 77-1158, filed September 21, 1977,
U.S.D.C. for the District of Idaho, plaintiff, a U.S. Congressman,
brought suit against the National Commission on Observance of International Women's Year and various Federal officials, including the
Chairman of the Board, to prevent the expenditure of Federal funds
in connection with the activities of the Commission. Defendants'
motion to dismiss for lack of standing is pending.
In Consumers Union v. Board of Governors, No. 77-1800, filed
October 17, 1977, U.S.D.C. for the District of Columbia, plaintiff
sought to compel the Board to provide access under the Government
in the Sunshine Act to internal memoranda and other materials to be
discussed at meetings of the Board that the Board has opened to public observation. Access to the memoranda sought by Consumers
Union had been granted under the Freedom of Information Act. The
parties filed a stipulation of dismissal with prejudice on January 19,
1978.
In Emch v. United States, et ah, No. 77C-677, filed November 18,
1977, U.S.D.C. for the Eastern District of Wisconsin, plaintiff, a
shareholder of the parent company of the American City Bank &
Trust Co., N.A., Milwaukee, Wisconsin, a failed bank, alleged that
the Board and other bank regulatory agencies were negligent in supervising and examining the bank. The United States filed a motion to
dismiss the complaint on January 16, 1978.
Two cases were pending in 1977 involving challenges to the Board's
employment practices. On June 29, 1977, the complaint in Darnell
Hilliard v. Arthur F. Burns, et al, No. 76-1655, filed December 8,
1976, U.S.D.C. for the District of Columbia, was dismissed. Plaintiff
has filed a notice of appeal from that decision. In Louis Hadigian
v. Board of Governors, No. 76-1694, filed September 17, 1976,
U.S.D.C. for the District of Columbia, the case has been submitted to
the court.
391
Legislation Enacted
EMERGENCY UNEMPLOYMENT COMPENSATION
EXTENSION
An Act of Congress approved April 12, 1977 (Public Law 95-19),
among other things, extended the emergency unemployment compensation program through October 31, 1977; directs that the maximum
duration of emergency benefits be limited to 13 weeks; requires that
a recipient of emergency benefits provide tangible evidence of a systematic and sustained effort to find work during any week for which
benefits are claimed; and precludes payment of emergency benefits
to persons who refuse suitable jobs.
DEPOSITORY INSTITUTIONS AMENDMENTS
An Act of Congress approved April 19, 1977 (Public Law 95-22),
among other things: re-established the flexible interest rate control
authority until December 15, 1977; allows Federally chartered credit
unions to offer 30-year mortgage loans, revolving lines of credit, and
savings certificates; and makes other changes for Federal credit
unions regarding loan limits, security for loans, reserve requirements,
and the issuance of dividends.
TAX REDUCTION AND SIMPLIFICATION ACT
An Act of Congress approved May 23, 1977 (Public Law 95-30),
among other things:
1. Provides a standard deduction of $2,200 on single-income tax
returns and $3,200 on returns filed jointly;
2. Authorizes a "new jobs" tax credit for employers of up to
$100,000 each, equal to 50 per cent of the first $4,200 of wages
paid to each additional employee hired in 1977 and 1978 over the
average number of workers on the payroll in 1976 after adjustment
to allow for 2 per cent annual growth (with the amount of an employer's deduction for wages to be reduced by the amount of such
credit);
392
Legislation Enacted
3. Extends for an additional year, through 1978, the tax credit of
$35 per individual (or 2 per cent of the first $9,000 of taxable income)
and the low-income credit for families earning less than $8,000;
4. Restores through December 31, 1976, the sick pay exclusion
eliminated by the Tax Reform Act of 1976;
5. Waives penalties and interest incurred with respect to the 1976
tax year by individuals and corporations as a result of changes made
by the 1976 act; and
6. Authorizes $435 million additional funding for Federal Work
Incentive (WIN) programs for fiscal years 1978 and 1979 and an
additional $2.25 billion for countercyclical revenue sharing with
States and localities.
DEFENSE PRODUCTION ACT EXTENSION
An Act of Congress approved June 1, 1977 (Public Law 95-37),
extends the Defense Production Act of 1950 to September 30, 1979.
Section 301 of that act is the basis for guarantees of loans for defense
production.
EXPORT ADMINISTRATION A C T AMENDMENTS
An Act of Congress approved June 22, 1977 (Public Law 95-52),
re-enacts and amends the Export Administration Act of 1969 to,
among other things, prohibit generally any U.S. person, including any
individual or corporation, and any U.S.-controlled subsidiary or
affiliate of any permanent U.S. establishment of a foreign concern
from acting or knowingly agreeing to act in compliance with a foreign
boycott of a friendly nation by—
1. Refusing or requiring another person to refuse to do business
with or in the boycotted country, or with nationals, residents, or businesses organized under the laws of the boycotted country;
2. Refusing to employ or requiring any other person to refuse to
employ or otherwise discriminating against U.S. persons on the basis
of race, religion, sex, or national origin;
3. Furnishing information regarding another person's race, religion, nationality, or national origin;
4. Paying, confirming, or otherwise implementing a letter of credit
containing boycott conditions or restrictions; or
Legislation Enacted
393
5. Furnishing information about any other person's actions with
respect to the boycotted country, its nationals, or persons known or
believed to be boycotted.
SMALL BUSINESS ACT AND SMALL BUSINESS
INVESTMENT ACT AMENDMENTS
An Act of Congress approved August 4, 1977 (Public Law 95-89),
among other things, amends the Small Business Act and Small Business Investment Act of 1958 to provide additional Federal assistance
under such acts.
CONGRESSIONAL BUDGET RESOLUTIONS
By binding resolution adopted September 15, 1977, the Congress set
the appropriate Federal budget deficit for the fiscal year beginning
October 1, 1977, at $61.3 billion and the appropriate level of the
public debt at $775.5 billion, based on Federal outlays of $458.3
billion and revenues of $397.0 billion. The final figures replaced
targets set by an earlier resolution, adopted May 13, 1977 (Senate),
and May 17, 1977 (House).
FAIR DEBT COLLECTION PRACTICES ACT
An Act of Congress approved September 20, 1977 (Public Law
95-109), effective March 20, 1978, among other things:
1. Prohibits certain practices by debt collectors, including use of
false, deceptive, or misleading representations, intentional harassment of a debtor, and unfair or unconscionable means of collecting
or attempting to collect any debt;
2. Authorizes civil damages for intentional violation of the act;
3. Declares that violations of the act are unfair or deceptive acts
or practices, in violation of the Federal Trade Commission Act (15
U.S.C. 58); and
4. Lodges enforcement responsibility over Federally insured financial institutions with the appropriate Federal financial supervisory
agency and with the Federal Trade Commission for others engaged in
debt collection responsibilities, except that the Interstate Commerce
394
Legislation Enacted
Commission, the Civil Aeronautics Board, and the Secretary of
Agriculture are given limited enforcement authority over certain
persons within their respective regulatory jurisdictions.
INTERNATIONAL DEVELOPMENT ASSISTANCE
ACT
An Act of Congress approved October 3, 1977 (Public Law 95-118),
among other things, provides for increased participation by the
United States in the International Bank for Reconstruction and
Development, the International Development Association, the International Finance Corporation, the Asian Development Bank and the
Asian Development Fund, and the African Development Fund.
DEBT CEILING EXTENSION
An Act of Congress approved October 4, 1977 (Public Law 95-120),
temporarily increases the national debt limit by $352 billion to $752
billion through March 31, 1978. Earlier authorization (Public Law
94-334), which temporarily increased the ceiling to $700 billion, had
expired on September 30, 1977, at which time the permanent statutory debt ceiling of $400 billion became applicable.
COUNCIL ON WAGE AND PRICE STABILITY ACT
AMENDMENTS
An Act of Congress approved October 6, 1977 (Public Law 95-121),
among other things, extends the termination date of the Council on
Wage and Price Stability from September 30, 1977, to September 30,
1979; and requires the Council, in its hearings, to emphasize the
purpose of controlling inflation and to focus on the need for full
employment.
HOUSING AND COMMUNITY DEVELOPMENT ACT
An Act of Congress approved October 12, 1977 (Public Law 9 5 128), among other things, eliminates limitations on graduated rate
mortgages insurable by the Department of Housing and Urban Development and eliminates State usury restrictions on the calculation
Legislation Enacted
395
of interest on such mortgages; increases insurable mortgage limits
and decreases downpayment requirements for certain Federal Housing Administration loans; and authorizes $12.45 billion to fund additional community development block grant programs for fiscal years
1978-80.
Community Reinvestment Act—Title VIII of the Housing and
Community Development Act, among other things, requires Federal
financial supervisory agencies:
1. To require each appropriate Federal financial supervisory
agency to use its authority when examining financial institutions and
to encourage such institutions to help meet the credit needs of the
local communities in which they are chartered consistent with the
safe and sound operations of such institutions;
2. In examining Federally insured financial institutions, to assess
each lending institution's record in meeting the credit needs of its
entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operations; and to take such
records into account in its evaluation of an institution that applies for
a Federal charter, or for deposit insurance, or to establish a domestic
branch, or to relocate a home office or a branch office, or for merger,
or for approval of a holding company acquisition;
3. To promulgate regulations implementing this act to take effect
390 days following its enactment; and
4. To report annually to the Congress on actions taken to carry
out its responsibilities under this act.
EXPORT-IMPORT BANK ACT AMENDMENTS
An Act of Congress approved October 26, 1977 (Public Law 95143), among other things, urges international agreement to reduce
Government-subsidized export financing; directs that respect for
human rights by an export recipient country is a condition for that
country to receive exports supported by loans or financial guarantees;
and requires the Secretary of State to report violations of international
nuclear safeguards or detonations of nuclear devices by nonnuclear
powers to the Congress, and prohibits extensions of credit in support
of U.S. exports to any such country unless the President determines
that the national interest requires otherwise.
396
Legislation Enacted
INTEREST ON TREASURY TAX
AND LOAN DEPOSITS
An Act of Congress approved October 28, 1977 (Public Law 95147), among other things:
1. Permits the Treasury Department to earn interest on its tax
and loan deposits in private financial institutions;
2. Expands the class of institutions authorized to become tax and
loan depositories to include Federally chartered and Federally or
State insured credit unions, savings banks, and savings and loan
associations;
3. Requires congressional approval for the expenditure of more
than 25 million ounces of International Monetary Fund (IMF) gold
for the benefit of the trust fund for lesser developed countries; and
for the establishment of any additional trust fund for the benefit of
a single member or a particular segment of the membership of the
IMF;
4. Requires the President, upon the request of any congressional
committee having legislative or oversight jurisdiction over monetary
policy or the IMF, to provide that committee with any appropriate
and relevant information furnished by the IMF to the Executive;
5. Requires the President to certify to the Congress that exigent or
unique circumstances exist when a loan or credit extended to a
foreign government or entity by the Exchange Stabilization Fund
(31 U.S.C. 822a(a)) will have a maturity of more than 6 months;
6. Repeals the "Joint resolution to assure uniform value to the
coins and currencies of the United States," approved June 5, 1933
(31 U.S.C. 463)—the intended effect of repeal being to permit the
inclusion of gold and multicurrency clauses in private contracts.
FAIR LABOR STANDARDS ACT AMENDMENTS
An Act of Congress approved November 1, 1977 (Public Law 9 5 151), amends the Fair Labor Standards Act of 1938 to, among other
things, increase the hourly minimum wage of $2.30 to $2.65 in calendar year 1978, to $2.90 in 1979, to $3.10 in 1980, and to $3.35
after December 31, 1980; and increase the maximum annual sales of
small businesses exempt from Federal minimum wage requirements
Legislation Enacted
397
from $250,000 to $275,000 as of July 1, 1978, to $325,000 as of
July 1, 1980, and to $362,500 after December 31, 1981.
RENEWAL O F FEDERAL RESERVE BANKS' DIRECT
PURCHASE AUTHORITY
An Act of Congress approved November 7, 1977 (Public Law 9 5 154), amends Section 14(b) of the Federal Reserve Act (12 U.S.C.
355) to renew through April 30, 1978, the authority of Federal
Reserve Banks to purchase U.S. obligations directly from the Treasury. Such purchases are limited in aggregate amount for the 12
Reserve Banks to $5 billion.
Earlier congressional action (Public Law 95-22, approved April
19, 1977) had renewed direct purchase authority to October 31,
1978; but this authority was subsequently shortened to September 30, 1977 (Public Law 95-128, approved October 12, 1977).
FEDERAL RESERVE REFORM ACT
An Act of Congress approved November 16, 1977 (Public Law 9 5 188), among other things:
1. Extends the authority for flexible interest rate control (Regulation Q) for 1 year, until December 15, 1978;
2. Requires the Board of Governors and the Federal Open
Market Committee to maintain long-run monetary and credit aggregates commensurate with the economy's long-run potential to increase production so as to promote effectively goals of maximum
employment, stable prices, and moderate long-term interest rates;
3. Requires the Board to appear quarterly, alternately before the
House and Senate banking committees, and to testify concerning the
ranges of monetary and credit aggregates for the upcoming 12
months;
4. Prohibits discrimination on the basis of race, creed, color, sex,
or national origin in the selection of Reserve Bank directors;
5. Modifies qualifications for selection of Class B and Class C Reserve Bank directors by providing that such directors shall represent
the public and shall be chosen with due but not exclusive consideration given to the interests of agriculture, commerce, industry, services,
labor, and consumers;
398
Legislation Enacted
6. Requires Senate confirmation of the Chairman and Vice Chairman of the Board of Governors;
7. Applies Federal criminal conflict-of-interest provisions for Federal employees to Federal Reserve Bank directors, officers, and employees;
8. Amends Sections 2(a)(5)(D), 3(a), and 4(c)(2) of the Bank
Holding Company Act (12 U.S.C. 1842(a)) to authorize the Board
to extend the period, up to a maximum of 5 years, for disposition of
shares acquired by a bank or bank holding company in the course of
securing or collecting a debt previously contracted in good faith if
such an extension of time would not be detrimental to the public
interest;
9. Amends Section 3(b) of the Bank Holding Company Act to
provide for expedited Board approval of bank and bank holding
company acquisitions, consolidations, and mergers in emergency
situations or when immediate action is necessary in order to prevent
the probable failure of the bank or bank holding company involved
in the transaction; and
10. Amends Section ll(b) of the Bank Holding Company Act to
shorten the usual 30-day lag between the date of Board approval of
a transaction and the earliest date on which the approved transaction
may be consummated, by providing for immediate consummation in
the case of a failing bank or bank holding company and by providing
a 5-day lag between approval and consummation in emergency situations. In all cases, the time periods set the outside limits within which
suits may be brought to challenge the Board's action as violative of
the antitrust laws (except for violations alleged under Section 2 of the
Sherman Antitrust Act, 15 U.S.C. 2).
SECURITIES EXCHANGE ACT AMENDMENT
An Act of Congress approved December 19, 1977 (Public Law 9 5 213), amends the Securities Exchange Act of 1934 to add a new title,
the Foreign Corrupt Practices Act, which among other things, makes
it unlawful for any issuer with a class of registered securities, or which
is required to file reports under Section 15(d) of the act, or any
domestic concern, to use the mails or any means of interstate commerce in furtherance of an offer or promise to pay or payment of
Legislation Enacted
399
anything of value to any foreign official or foreign political party or
official for the purpose of influencing any act, or inducing such entity or person to use its or his influence to affect the act or decision
of a foreign government; and provides that any officer, director, employee, stockholder, or agent of a domestic concern, upon conviction
for a violation of this title, shall be personally liable for the fine.
SOCIAL SECURITY ACT AMENDMENTS
An Act of Congress approved December 20, 1977 (Public Law 9 5 216), among other things, increases the rate of tax on employees
and employers alike for social security purposes to 5.05 per cent in
1978, to 5.08 per cent in 1979-80, to 5.35 per cent in 1981, to 5.40
per cent in 1982-84, to 5.70 per cent in 1985-89, and to 6.20 per
cent after December 31, 1989; establishes maximum monthly benefit
levels for retired and disabled persons and for benefits payable to
beneficiaries of deceased persons entitled to benefits; and directs the
Secretary of Health, Education, and Welfare to undertake a study of
the coverage under social security programs, and specifically to examine the feasibility and desirability of extending social security coverage to Federal employees, State and local government employees,
and employees of nonprofit organizations who are not now covered,
and to report the results of that study to the Congress by December 30, 1979.
400
Bank and Bank Holding
Company Supervision and
Regulation by the Federal
Reserve System
DOMESTIC ACTIVITIES AND APPLICATIONS
Bank holding companies
The System meets its supervisory and regulatory responsibilities with
regard to bank holding companies through two primary functions:
1. Monitoring the operations and performance of bank holding
companies—mainly by "on-site" inspections and evaluations of reports and other information obtained from such companies.
2. Action on applications to form or expand bank holding companies.
A significant move toward more efficient performance of these two
functions occurred during 1977 as the reorganization of the Board of
Governors' Division of Banking Supervision and Regulation, initiated
in 1976, was completed. This reorganization regrouped the work of
the Division along functional lines in order to attain greater similarity
within sections and to define more sharply individual responsibilities.
All processing of bank holding company, bank merger, and international applications, for example, was placed under the responsibility of a senior Division official. Similarly, all surveillance and
legally oriented activities have been organized into individual units,
and the evaluation of research and policy matters was placed in a
separate section under its own individual leadership.
A program of intensified supervision of bank holding companies
was initiated during 1977 when a System task force developed a new
standardized Report of Bank Holding Company Inspection. The
new report, to be put into use on January 1, 1978, will subject 85
to 90 per cent of all bank holding company assets to Federal Reserve
review each year. It is designed to ensure a minimum format of infor-
Supervision and Regulation
401
mation when inspecting (1) bank holding companies with consolidated assets of more than $300 million; (2) bank holding companies with consolidated assets of less than $300 million that control
significant credit-extending nonbank subsidiaries; and (3) any other
bank holding company at the discretion of a Reserve Bank.
Most bank holding companies that are not required to report
under the new inspection procedures will continue to be subject to
inspection at least once every 3 years. For these holding companies,
all of which will have less than $300 million in consolidated assets
and have no significant credit-extending nonbank subsidiaries, an
additional standardized report will be developed.
Annual reports for 1976 were obtained from all registered bank
holding companies pursuant to the provisions of Section 5(c) of the
act. At the end of 1977, there were 2,034 bank holding companies
in operation.
Each action by the Board on an application to form a bank
holding company or to expand an existing company through acquisition of a bank or existing nonbank company is effected by an order.
Orders set forth the action taken, the voting record of the individual
Board members participating, the essential facts of record, and the
basis for the action.
Board orders with respect to applications, whether approved or
denied, are released immediately to the public and the press. Orders
are printed in full in the Federal Reserve Bulletin if they are accompanied by a concurring or dissenting statement of any kind, if they
involve the denial of a proposal, or if they involve issues of more
than routine interest. Otherwise only the names of the companies
involved are listed in the Bulletin and copies of the orders are available from the Board's offices. Actions on applications taken by the
Federal Reserve Banks on behalf of the Board under delegated
authority are also reported to the public and the press. A complete
listing of all holding company actions taken by the Board and the
Reserve Banks is provided in the Board's weekly H.2 statistical
release.
The number of applications processed in 1977 reached the highest
level in 3 years, in part it appears because of the recovering economy and the improving financial condition of many banking organizations. In addition, the owners of many primarily rural and sub-
402
Supervision and Regulation
urban banks appeared to have become more interested in benefits
afforded by the creation of bank holding company "parents."
During 1977 the System experienced its best performance to date
in the timely processing of applications. Although the Bank Holding
Company Act requires System action within 91 days of submission
of the complete record, the System measures its performance on the
basis of a stricter, self-imposed processing schedule that aims for
action within 90 days from the filing of a legally and informationally
sufficient application. Notwithstanding delays arising from protests,
pending judicial decisions, requests for updated financial data, and
similar interruptions in processing, the System met that 90-day
schedule 90 per cent of the time.
The numbers of proposals acted on during 1977 by the Board,
and under the delegated authority by the Secretary's Office and the
Federal Reserve Banks, were as shown below.
While some individual banking organizations continued to reflect
financial problems, the banking system as a whole maintained a
broad improvement in its financial health, with continued growth in
Direct action
Board *
Section
Approved
3(a)(l)
3(a)(2)
3(a)(3)
3(a)(5)
4(c)(8)
4(c)(12)
4(d)
54
1
88
4 3
2
79 (81)
Denied
Delegated authority
Secretary's
Office
Reserve Banks
Approved
Approved
16
15
101
13
9
37
•••f'2V(5)"
l""
7""
Permitted
47i
27
1
Pursuant to Section 4(a)(2) of the act, the Board also made five determinations of "indefinite
grandfather rights."
2
The number of cases acted on by the Board.
3
The number of individual companies with respect to which the Board acted. More than one company may have been included in a particular case.
Supervision and Regulation
403
assets accompanied by relatively good earnings and significantly
reduced loan losses. The volume of external financing accomplished
during 1977 by banking organizations is particularly noteworthy.
In processing applications filed under the act during 1977, the
Board continued to stress the financial soundness of bank holding
companies, giving careful consideration to the impact of individual
proposals upon the financial and managerial resources of the applicant organizations. In addition, the Board continued to emphasize
the need for positive showings of public benefits, including, for example, improved financial services to the communities served.
Competition was increased in some markets through the encouragement of de novo entry, thereby adding a new competitor to the
market, or by limiting entry to foothold, or relatively small, organizations. The Board reassessed somewhat its evaluation of the effects
of the elimination of probable future competition—competition eliminated through a relatively large market acquisition by a likely entrant
not already in the market. The Board continued to be concerned
about such effects but noted that its concern might be tempered in
certain situations. As in the past, the Board evaluated each proposal
on its own merits. When the record evidenced a significant reduction
in competition, and the public interest considerations would not, in
the Board's judgment, clearly outweigh the adverse effects, the proposal was denied.
Early in the year the Board specifically noted that on a number of
occasions it had recently been faced with difficult issues concerning
the timing of divestitures required by either statute or Board order.
In part due to the expected increase in the frequency of such situations, the Board on February 15, 1977, published a policy statement
on divestitures as guidance for those affected by such decisions. The
Board noted that affected companies should make divestitures or file
applications as early as possible within the divestiture period to permit orderly compliance with the requirements of the act, and to
allow time for securing other regulatory approvals. Divestiture plans
and progress reports should generally be submitted by affected companies in order to keep the System apprised of progress to date. The
Board stated that it was imperative that divestitures be accomplished
in a timely manner, noting that extensions—to the extent permitted
404
Supervision and Regulation
by statute—would be allowed only under compelling circumstances.
The Reserve Banks were entrusted with the responsibility for supervising and enforcing divestitures.
The Board also highlighted the following special situations. If the
transferee were indebted to the transferor, (1) divestiture would not
be complete unless a requisite control inquiry under Section 2(g)(3)
of the Bank Holding Company Act was acted upon favorably; and
(2) the divesting company could be required to place the property
with an independent trustee for divestiture by a certain date, and by
public auction if necessary.
The so-called " 10-year grandfather" divestiture deadline of December 31, 1980, is one divestiture situation in which the Board does
not have extension authority. There are approximately 350 bank
holding companies with more than 770 activities subject to the December 31, 1980, divestiture date for which appropriate System
action has not been sought. In order to avoid hardships to those
firms that wish to retain their activities and to provide for timely
System processing of their requests, on October 13, 1977, the Board
published a policy statement specifically addressing the nonextendible deadline of December 31, 1980. The Board designated June 30,
1980, as a voluntary target date for the submission of divestiture
plans and retention applications. The Board also indicated that it
would establish later a final cut-off date for the submission of such
plans and applications. Reserve Banks have been in direct communication with the affected banking organizations, and the System is
closely monitoring any developments.
Member banks
Each State member bank is subject to examination by direction of
the Board of Governors or of the Federal Reserve Bank of the district in which it is located by examiners selected or approved by the
Board. The established general policy is for the Federal Reserve
Bank to conduct at least one full examination of each State member
bank during each calendar year and to prepare a complete examination report. However, in those banks that clearly exhibit no major
unsatisfactory features in their operations and financial condition
and that have been operated prudently over time, a limited-scope
Supervision and Regulation
405
examination may be conducted for 1 year and a brief report prepared,
with a full examination to be conducted the following year. Banks
with severe problems are examined fully at least once in each calendar
year, with additional examinations during the year when considered
necessary. In some States, concurrent examinations are made in cooperation with the State banking authorities, whereas in others, independent examinations are made.1 All but 27 of the 1,027 State member banks were examined during 1977.
National banks, all of which are members of the Federal Reserve
System, are subject to examination by direction of the Board or the
Federal Reserve Banks. However, as a matter of practice, they are
not examined by either because the law charges the Comptroller of the
Currency directly with that responsibility. The Comptroller provides
reports of examination of national banks to the Board upon request,
and each Federal Reserve Bank purchases from the Comptroller
copies of reports of examination of national banks in its district.
The Board makes its reports of examination of State member
banks available to the Federal Deposit Insurance Corporation
(FDIC), and the FDIC in turn makes its reports of insured nonmember State banks available to the Board upon request. Also, upon
request, reports of examination of State member banks are made
available to the Comptroller of the Currency.
In its supervision of State member banks, the Board receives,
reviews, and analyzes reports of examination of State member banks
and coordinates and evaluates the examination and supervisory functions of the System. Similar oversight is exercised with respect to
bank holding companies, for which the Board has sole supervisory
responsibility.
The Board passes on applications for admission of State banks to
membership in the System; administers the public disclosure requirements of the Securities Exchange Act of 1934, as amended, with
respect to equity securities of State member banks within its juris1
As an experiment, the Federal Reserve Bank of Chicago assigns one examiner to accompany a full contingent of State examiners at each annual
examination of State member banks in that portion of Indiana located in the
Chicago Reserve District. The State examination report of these banks is
accepted in lieu of a Federal Reserve report.
406
Supervision and Regulation
diction under the 1934 act, and the provisions of the act giving responsibility to the Board for regulating security credit transactions;
and under provisions of the Federal Reserve Act and other statutes,
passes on applications of member banks for permission, among other
things, to (1) merge, (2) establish domestic and foreign branches,
(3) exercise expanded powers to create bank acceptances, (4) establish foreign banking and financing corporations, and (5) invest in
bank premises an amount in excess of 100 per cent of the bank's
capital stock. The Board also administers various consumer protection laws and regulations. Its policies and procedures regarding its
enforcement responsibilities with respect to State-chartered banks that
are members of the Federal Reserve System are described more fully
on pages 329-31.
By an Act of Congress, approved September 12, 1964 (Public
Law 88-593), each insured bank is required to inform the appropriate Federal banking agency of any change in ownership of the
bank and of its loans secured by 25 per cent or more of the voting
stock of an insured bank. In 1977, 17 such changes in ownership of
the outstanding voting stock of State member banks were reported
to the Reserve Banks as changes in control of these member banks.
Arrangements continue among the three Federal supervisory agencies
for appropriate exchanges of reports received by them pursuant to
the act. The Reserve Banks send copies of all reports received to
the appropriate district office of the FDIC, the Regional Administrator of National Banks of the Comptroller of the Currency, and the
State bank supervisor.
Upon receipt of reports involving changes in control of State
member banks, the Reserve Banks are under instructions to forward
such reports promptly to the Board, together with a statement either
that the new owner and management are known and acceptable to
the Reserve Bank, or that they are not known and that an investigation is being made. The findings of any investigation and the conclusions of the Reserve Bank, based on such findings, are forwarded
to the Board.
By an Act of Congress, approved July 3, 1967 (Public Law 90-44),
each member bank of the Federal Reserve System is required to
include with—but not as a part of—each report of condition and
Supervision and Regulation
407
copy thereof a report of all loans to its executive officers since the
date of submission of its previous report of condition. Data submitted by member banks during 1977, as required by law, appear
below.
Loans to executive officers
Total loans to executive officers
Number
Amount (dollars)
Range of
interest rates
charged
(per cent)
7,536
7,679
7,807
7,515
7,322
28,391,167
31,576,018
28,337,335
30,715,880
30,120,828
1-24
1-20
1-18
1-18
1-18
Period covered
(condition report dates)
July
Oct.
Jan.
Apr.
July
Oct.
1
1, 1976—Sept.
1, 1976—Dec.
1, 1977—Mar.
1, 1977—June
1, 1977—Sept.
1, 1977—Dec.
30, 1976... .
31, 1976. . . .
31, 1977....
30, 1977....
30, 1977... .
31, 1977. . . .
w
Compilation of data for condition reports of Dec. 31, 1977, has not been completed.
Federal Reserve membership
As of December 31, 1977, member banks accounted for 39 per cent
of the number of all commercial banks in the United States and for
58 per cent of all commercial banking offices, and they held approximately 73 per cent of the total deposits in such banks—the same
percentages as at the end of 1976. State member banks accounted for
10 per cent of the number of all State commercial banks in the United
States and for 28 per cent of the banking offices, and they held 39
per cent of total deposits in State commercial banks.
Of the 5,669 banks that were members of the Federal Reserve
System at the end of 1977, there were 4,655 national banks and
1,014 State banks. During the year there were net declines of 82
national and 9 State member banks. The decline in State member
banks was offset in part by the organization of 39 new national banks
and by the conversion of 5 nonmember banks to national banks. The
decrease in State member banks reflected mainly 26 withdrawals from
membership and 5 conversions to branches incident to mergers and
absorptions.
408
Supervision and Regulation
At the end of 1977 member banks were operating 22,187 branches,
facilities, and additional offices, 842 more than at the close of 1976.
During the year member banks established 1,286 de novo branches.
Detailed figures on changes in the banking structure during 1977
are shown in Table 19, pages 462 and 463.
Bank mergers
Under Section 18(c) of the Federal Deposit Insurance Act (12 U.S.C.
1828(c)), the prior written consent of the Board of Governors must
be obtained before a bank may merge, consolidate, or acquire the
assets and assume the liabilities of another bank if the resulting bank
is to be a State member bank.
In deciding whether to approve an application, the Board is required by Section 18(c) to consider the impact of the proposed
transaction on competition, the financial and managerial resources
and prospects of the existing and proposed institution, and the convenience and needs of the community to be served. The Board is
precluded from approving "any proposed merger transaction which
would result in a monopoly, or which would be in furtherance of any
combination or conspiracy to monopolize or to attempt to monopolize
the business of banking in any part of the United States." A proposed
transaction "whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or
which in any other manner would be in restraint of trade," may be
approved only if the Board is able to find that the anticompetitive
effects of the transaction would be clearly outweighed in the public
interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
Before acting on each application the Board must request reports
from the Attorney General, the Comptroller of the Currency, and
the FDIC on the competitive factors involved in each transaction.
The Board in turn responds to requests by the Comptroller or the
FDIC for reports on competitive factors involved when the resulting
bank is to be a national bank or an insured nonmember State bank.
During 1977 the Board disapproved 1 and approved 4 of these
applications and submitted 94 reports on competitive factors to the
Comptroller of the Currency and 103 to the FDIC. In addition, the
Federal Reserve Banks approved 6 merger applications on behalf of
Supervision and Regulation
409
the Board pursuant to delegated authority. As required by Section
18(c) of the Federal Deposit Insurance Act, a description of each of
the 10 applications approved by the Board or the Reserve Banks,
together with other pertinent information, is shown in Table 21,
pages 466-74.
Orders of the Board with respect to all bank merger applications,
whether approved or disapproved, are released immediately to the
press and the public. These orders set forth the factors considered,
the conclusions reached, and the vote of each Board member present.
Miscellaneous actions under delegated authority
In addition to delegating certain bank holding company and bank
merger applications, the Board of Governors has delegated to the
Reserve Banks (1) authority to approve, on behalf of the Board,
certain applications of State member banks to establish domestic
branches, to invest in bank premises, and to grant or deny a waiver
of 6 months' notice by a bank of its intention to withdraw from
membership in the Federal Reserve System, and (2) certain other
authorities.
The Board has also delegated certain authorities to the Director
of the Division of Banking Supervision and Regulation. Among other
things, the Board has delegated to the Director the authority to
furnish to the Comptroller of the Currency and the FDIC certain
reports on competitive factors under Section 18(c)(4) of the Federal
Deposit Insurance Act (12 U.S.C. 1828(c)(4)). The Director may
furnish the reports if each of the appropriate departments or divisions
of the Federal Reserve Bank and the Board are of the view that the
proposed merger either would have no adverse competitive effects or
would have only slightly adverse competitive effects, and if no member of the Board has indicated an objection prior to the forwarding
of the report to the appropriate agency. Under this authority 176
competitive factor reports were furnished.
FOREIGN ACTIVITIES AND APPLICATIONS
Foreign branches of member banks
At the end of 1977 member banks had in active operation 738
branches in 84 foreign countries and overseas areas of the United
410
Supervision and Regulation
States; 100 national banks were operating 637 of these branches, and
30 State member banks were operating 101 such branches. The
number and location of these foreign branches are shown in the
tabulation below, and the growth in the number and total assets
of foreign branches is shown in the table on page 411.
Foreign branches of member banks
Argentina
Austria
Bahamas
Bahrain
Barbados
Brunei
Belgium
Bolivia
Brazil
Canal Zone
Cayman Islands
Chile
Channel Islands
Denmark
32
1
74
5
6
3
10
4
19
2
58
1
2
3
Luxembourg
Malaysia
Mariana Islands
Marshall Islands
Mauritius
Mexico
Monaco
Netherlands
Netherlands Antilles
Nicaragua
Okinawa
Oman
Pakistan
Panama
5
5
1
1
1
5
1
6
4
4
2
2
4
33
Dominican Republic
Ecuador
Egypt
El Salvador
Fiji Islands
France
Germany
Gabon
Greece
Guam
Guatemala
Guyana
Haiti
Honduras
19
13
5
2
4
18
28
1
18
3
3
1
4
3
Paraguay
Peru
Philippines
Puerto Rico
Qatar
Romania
Saudi Arabia
Senegal
Seychelles
Singapore
Switzerland
Taiwan
Thailand
Trinidad and Tobago
5
3
10
23
1
1
2
1
1
21
9
7
2
6
Hong Kong
India
Indonesia
Ireland
Italy
Ivory Coast
Jamaica
Japan
Jordan
Kenya
Korea
Lebanon
Liberia
30
10
5
4
13
1
8
29
3
2
6
3
4
Truk Islands
United Arab Emirates
United Kingdom
Uruguay
Venezuela
Virgin Islands (U.S.)
Virgin Islands (Br.)
Yemen Arab Republic
Other (West Indies)
1
9
58
6
4
25
2
1
6
Total
738
Supervision and Regulation
411
Growth of major international operations of member banks
Number
Year ending—
Total assets (billions of dollars)
Foreign
branches
Sections
25 and 25(a)
corps.
Foreign
branches l
1971
1972
1973
577
627
699
85
92
103
55.1
72.1
108.8
5.5
6.1
6.9
1974
1975
1976
1977
732
762
2
731
738
117
116
117
122
127.3
145.3
174.5
n.a.
10.1
9.1
11.1
n.a.
Sections
25 and 25 (a)
corps.
n.a. Not available.
1
These data are derived from reports of condition that were filed at the end of the year with the
Comptroller of the Currency and the Federal Reserve System, and they differ in certain respects from
other statistical reports covering aspects of overseas branch operations. The amounts shown are net
of claims on other foreign branches of the same bank.
2
This decrease from 1975 is due primarily to the conversion of 30 branches in Colombia into subsidiaries to conform with Colombian banking laws.
Under the provisions of the Federal Reserve Act (Section 25 for
national banks and Sections 9 and 25 for State member banks), the
Board of Governors during 1977 approved 45 applications made by
member banks for permission to establish branches in foreign countries and overseas areas of the United States. During the year 31
overseas branches were opened by member banks and 24 were closed.
International corporations
At the end of 1977 six corporations were operating under agreements
with the Board of Governors pursuant to Section 25 of the Federal
Reserve Act relating to investment by member banks in the stock
of corporations engaged principally in international or foreign banking. During 1977 five of these "agreement" corporations were examined by examiners for the Board; the sixth corporation began
business during the year.
During 1977, under the provisions of Section 25(a) of the Federal
Reserve Act, the Board issued four final permits for corporations
to engage in international or foreign financial operations. In addition,
the Articles of Association were approved and preliminary permits
412
Supervision and Regulation
were issued for the formation of two other corporations, which, however, have not yet applied for final permits to begin business. At the
end of the year there were 116 corporations in active operation
under Section 25(a).
During 1977 the Board examined each of the previously existing
corporations, except for a single dormant corporation, as well as
one of the corporations that became operational during the year. Seven
of these corporations continue to operate the same 15 foreign branches
as during 1976. A table showing the growth of Section 25 and 25(a)
corporations is shown on page 411.
Other foreign applications processed
During 1977, 184 other foreign applications were processed for
action by the Board of Governors in accordance with Sections 25 and
25(a) of the Federal Reserve Act and with Sections 4(c)(9) and
4(c)(13) of the Bank Holding Company Act of 1956, as amended.
Most of these involved proposed equity investments by Section
25 and 25(a) corporations, member banks, and bank holding
companies.
SCHOOLS
In 1977 the Bank Examination School of the Board of Governors
conducted two sessions of the School for Examiners, three sessions
of the School for Assistant Examiners, one session of the School for
Trust Examiners, and two sessions of the Bank Holding Company
School. A Senior Trust Seminar was held in 1977 jointly with the
Comptroller of the Currency and the FDIC.
Since the establishment of this program, 5,899 persons have attended the various sessions. This number includes representatives
of the Federal bank supervisory agencies; the State Banking Departments of 36 States; the Treasury Department of the Commonwealth
of Puerto Rico; the Division of Banking and Insurance, the Virgin
Islands; and 28 foreign countries.
413
Condition of the
Banking System
The ANNUAL REPORT for 1976 indicated that the condition of the
banking system had improved during that year. By most traditional
measures, this trend continued during 1977, and at the year-end the
banking system, in the Board's judgment, was in good condition.
The condition of the banking system is closely linked to the condition of the U.S'. economy. It is not surprising, therefore, that the
difficult period experienced by banking in the mid-1970's coincided
with the most severe recession in several decades. Likewise, the economic recovery from that recession has led to much of the improvement in banking over the last 2 years. Real gross national product
increased 6 per cent in 1976 and about 5 per cent in 1977. This economic comeback has resulted in a decided improvement in the financial condition of many bank borrowers. It has also contributed to a
decline in bank failures in 1977 to only 6, down from 17 in 1976 and
14 in 1975.
But the improvement in the condition of the banking system is due
to more than a healthier economy. In the past several years bankers
have demonstrated a more conservative approach to lending, capital,
and liquidity than they had exhibited during the early 1970's. Moreover, bankers have been diligent in trying to work out satisfactory
solutions for the large amount of loans that became questionable during the recession.
Despite a reasonably positive picture of the condition of the banking system, problems and challenges still remain. The number of
problem banks is still large by historical standards, and the volume of
questionable loans in bank portfolios is still high. These and other
problems will continue to require the close attention of both bankers
and bank supervisors.
I N D E X E S O F BANK SOUNDNESS
One of the most important factors affecting bank soundness is the
quality of bank assets. During 1977 the amount of loans of insured
414
Condition of the Banking System
banks that were classified by bank examiners as being of questionable
quality declined by about 10 per cent, after having more than tripled
between 1973 and 1975. Moreover, the amount of assets classified by
examiners as "doubtful" and "loss"—the two most serious classifications—declined by approximately 20 per cent. The group of banks
with assets exceeding $5 billion experienced a slightly greater relative decline in classified assets than did the rest of the banking system. However, these large banks still have a much higher level of
classified assets relative to their capital than do other banks.
Other measures of bank asset quality also have shown marked
improvement. Available data indicate that nonperforming assets,
which include nonaccruing loans, renegotiated loans, and real estate
acquired in foreclosure, fell roughly 15 per cent during 1977—
despite a 13 per cent rise in total bank assets.
In one area in particular—real estate loans—banks still have too
many problem loans. Most of these loans were made during the real
estate boom of the early 1970's to finance projects that became at
least temporarily unsalable. Many banks have been forced to carry
large amounts of such loans on a nonearning basis, thereby depressing their earnings. During 1977 the demand for real estate continued
to pick up, and as projects were sold off, the quality of bank real
estate portfolios improved. However, this improvement has been
slow, and still more time and progress in certain segments of the real
estate sector will be required before these loans are worked down to
a more reasonable level.
The liquidity position of banks deteriorated sharply during the
early 1970's, culminating in a "credit crunch" in the summer of
1974. During 1975 and 1976, however, banks greatly improved their
liquidity by adding large amounts of U.S. Government securities to
their portfolios. During 1977 banks increased significantly their reliance on large time deposits and on purchases of Federal funds. In
contrast, bank holdings of securities with maturities of less than 1 year
declined slightly. Even with this over-all decline in their liquidity in
1977, banks still appear to be in a satisfactory liquidity position.
From the end of World War II through 1974, bank capital ratios
declined almost steadily. Moreover, this decline picked up momentum
during the early 1970's when rapid growth of assets, particularly
abroad, far outdistanced the growth of capital. It was during this
Condition of the Banking System
415
period that the capital ratios of some of the Nation's major banks
declined to unacceptable levels. Since 1974 capital ratios generally
have improved; they rose sharply in 1975, and then increased somewhat more in 1976 before declining moderately in 1977. A primary
factor in the moderate decline in capital ratios in 1977 was the substantial—13 per cent—growth in bank assets.
In recent years banks have relied principally on retained earnings
to build up their capital. In the aggregate, banks retain about 60 per
cent of their net income. Banks have obtained most of their external
capital financing from bank holding companies, which own almost all
of the Nation's largest banks. These holding companies in turn have
resorted largely to long-term debt issues to obtain funds. One reason
for this heavy reliance on long-term debt, at least since 1974, is that
the market values of bank holding company stock have been depressed. During 1977 the stocks of many of the Nation's largest holding companies sold at only six to eight times earnings, and many also
sold well below book value. Unfavorable market conditions make it
very costly for banking organizations to add to their equity capital
through the sale of common stock. As an alternative, several large
holding companies have resorted to issuing preferred §tock.
One of the most impressive aspects of bank performance during
1977 was the sizable rise in bank earnings. Preliminary data indicate
that net income rose about 13 per cent over the 1976 level—
about double the average annual rate of increase during the three
previous years. Several factors were primarily responsible for this
good earnings performance in 1977. First was a rapid growth in
earnings assets, with loans alone up more than 15 per cent. Second,
provisions for loan losses declined about 11 per cent, reflecting an
even sharper drop in actual net charge-ofTs. Third, the amount of
loans on which interest was not accruing was reduced significantly.
On the other hand, narrower spreads in 1977 between yields on
earnings assets and costs of funds had a negative impact on bank
earnings. For example, the spread between the prime rate, which
banks charge their best domestic customers, and the rate that banks
pay on their large certificates of deposit averaged only 1.3 percentage
points, compared with 1.7 percentage points during 1976. It also appears that banks experienced some reduction in yield spreads on their
foreign business during 1977. These reductions in spreads, both here
416
Condition of the Banking System
and abroad, are evidence of increasing competition among financial
institutions.
Perhaps the ultimate criterion for evaluating the condition of the
banking system is the state of public confidence in the safety and
soundness of banks. As is well known, public confidence is essential
for banks to carry out their primary functions effectively. Throughout
almost all of the period since World War II, confidence in banks has
remained high. However, in 1974 public confidence declined sharply.
This decline was due in part to the failure of several large banks,
particularly Franklin National Bank, as well as to the realization that
many banks had a rapidly growing amount of nonperforming loans.
While public confidence in banks cannot be measured directly, it
appears that confidence began to increase during 1975. Moreover,
this favorable trend apparently continued in 1976 and 1977.
POTENTIAL PROBLEM AREAS
Several potential problem areas for banks have recently received considerable public attention. The first area is the agricultural sector,
where net income from farm operations in 1977 was about one-third
below the prosperous years of 1973-74. This decline has been due
both to escalating costs of production and to declines in commodity
prices. In contrast to declining income, farm debt has risen about
60 per cent from $74 billion at the beginning of 1974 to $119 billion
at the beginning of 1978. With debt mounting and income falling, the
ability of farmers to service debt from farm operations has declined
markedly compared with the 1973-74 period.
These unfavorable financial trends are now being reflected in the
portfolios of banks located in the agricultural States. In recent
months these banks have experience slower repayment of loans and
increases in requests for loan extensions.
So far, problems in the agricultural sector have not had a major
adverse effect on the quality of loans held by farm banks. Moreover,
while many banks in agricultural areas now have significantly higher
loan-to-asset ratios than normal, these banks in general have not
experienced serious liquidity problems. Finally, it should be noted
that the value of farm assets, especially land, has risen sharply in
recent years. This increase should give farm-area banks added loan
protection in the form of collateral.
Condition of the Banking System
417
Another area of concern is the financial condition of New York
City. The near-default of the city in 1975, following the severe recession and the failure of several large banks, sent shock waves
throughout the financial community. Since 1975 the city has made
progress toward putting its financial house in order. However, it has
not been able to regain access to capital markets, and since 1975 it
has had to rely on the Federal Government for financial support in
the form of seasonal loans. Continuation of some form of Federal aid
beyond this June was being considered by the Congress during the
spring of 1978.
In order to determine the exposure of U.S. banks to a possible
default by New York City on its obligations, the three Federal bank
supervisory agencies early in 1978 completed a survey of the ownership of New York securities by commercial banks. The obligations
covered included those issued by New York City, by New York
State, by New York State agencies, and by the Municipal Assistance
Corporation. The institutions covered were the 954 banks that in a
1975 survey had reported holdings of New York obligations with
face value amounting to at least 20 per cent of their equity capital.
In brief, the early 1978 survey indicated that 236 of the 954
banks held New York securities amounting to between 20 and 50
per cent of capital, while 70 more held securities amounting to 50
per cent or more of capital. Institutions located in New York State
constituted the majority of banks in the latter, higher-concentration
category. New York City obligations account for only about onetenth—and Municipal Assistance Corporation obligations, less than
one-third—of the $5.5 billion of New York securities at the 306
banks with holdings amounting to 20 per cent or more of capital.
The number of banks with large holdings of New York City-related
securities has declined substantially since November 1975, but it remained sizable.
In analyzing the potential impact of a default on banks that hold
New York City securities, it is important to recognize that a default
on an obligation by a State, municipality, or related agency need not
lead to a loss on the investment amounting to all, or even a sizable
part, of the principal value. Unlike a business firm, which may not
survive a default, a governmental entity will continue to exist, its
economy will remain a source of tax revenue, and the default will
418
Condition of the Banking System
have to be cured in some manner so that the unit can regain its financial standing. Therefore, if New York City were to default on a portion of its indebtedness, investors would be more likely to suffer a temporary loss of liquidity and some loss of current earnings rather than
a permanent loss of face value of the securities held. As a consequence, a reading simply of the total holdings of New York securities
by banks greatly overstates the potential losses and the consequences
of a default on the strength of the banking system.
INTERNATIONAL ACTIVITIES
A considerable amount of attention was given to the international
activities of U.S. banks in the ANNUAL REPORT for 1976. That review focused on the elements that have contributed to the substantial expansion of the role of U.S. banks in international lending both
from offices here and through offices abroad. In the context of that
review, some concern was expressed about the rapidity with which
international loan portfolios were being expanded and the increased
risk exposure of our banks.
International lending by U.S. banks again rose substantially
in 1977. However, data indicate a slowing in the pace of that lending
compared with the previous year's. Foreign assets held at both domestic offices and foreign branches as of the year-end amounted to $236
billion, 14 per cent higher than 12 months earlier. This rate of increase was about half the size of the average growth for the three
preceding years. The slower rate of growth was most marked in lending in major financial centers and among non-oil developing countries.
As domestic demand for loans picked up during 1977, it appears
that foreign demand for credit from domestic offices slowed. Moreover, a number of countries to which U.S. banks have traditionally
been large lenders reduced their demands for international credits.
Such reductions reflected measures taken in those countries to restore a greater measure of internal financial stability and a better
balance in their external payments.
During 1977 U.S. bank supervisory authorities made considerable
progress in adding to the information available on the external lending of U.S. banks. A comprehensive report—developed jointly by the
Office of the Comptroller of the Currency, the Federal Deposit In-
Condition of the Banking System
419
surance Corporation, and the Board of Governors of the Federal
Reserve System—now obtains information from the major banks
about the country distribution of their international loan portfolios
with breakdowns by broad category of customer and by maturities.1
This information is structured to provide a better assessment of the
country risks in the banks' international credits. As such, it allows
the banking agencies to be more watchful about these risks in individual banks.
The aggregate data obtained from these reports will also furnish
valuable information to the banks in their own efforts to assess, control, and monitor their international lending. Internationally, too,
cooperative efforts among central banks and international institutions
continued in 1977 to add to the information available to commercial
banks about external borrowings and external indebtedness of the
main borrowing countries.
Several countries to which U.S. banks have made loans are having
serious economic and financial problems and are having difficulty in
servicing their external debt promptly. Also, relative to their capital and reserves some U.S. banks have a rather sizable exposure in
individual countries. These situations need careful attention by
bankers and bank supervisors alike. In 1977 the banks continued
their efforts to improve their control systems on the risks in international lending. The three Federal bank supervisory agencies, in
turn, have been working together to improve their surveillance and
analysis of the banks' international portfolios and of the ways they
are managed.
While situations and conditions in various countries are a proper
subject for concern, proper perspective must be maintained on the
country exposures of U.S. banks. Actual defaults by countries on their
external debts, public or private, have been rare in recent experience.
The risks to the banks, therefore, are less in terms of ultimate collection of credits than in terms of liquidity and income resulting from
failure of countries to service properly their external borrowings.
Another subject of concern is that interest rate spreads on international loans have narrowed and that maturities have lengthened. Concern for this aspect of a bank's international activities is prompted by
1
The report was used experimentally in June and has now been made a
semiannual report.
420
Condition of the Banking System
the facts that international earnings now constitute a substantial portion of the total earnings of our largest banks and that earnings remain the principal source by which their capital positions can be
strengthened further as needed.
IMPROVED SUPERVISION
The Federal Reserve took steps during 1977 to improve its policies
and procedures for supervising State member banks and bank holding companies. Some of these changes have resulted from problems
that had surfaced in recent years. In November 1977 the Board approved an expanded program for the inspection of large bank holding companies. The two essential elements of the program are an increased frequency of inspections and the standardization of the
inspection report.
All bank holding companies with consolidated assets in excess of
$300 million will now be inspected annually—unless nonbanking
activity and parent-company debt are considered minimal, in which
case inspections will continue to be conducted once every 3 years.
The impact of the increased frequency of inspections will be approximately to double the number of large holding companies inspected on
an annual basis and to increase the percentage of total holding company assets inspected annually from about 45 per cent in 1976 to
85 per cent when the program is fully operational.
The standardization of the report form is expected to provide a
variety of benefits, including the framework for a comprehensive
review of nonbank assets and holding company debt levels, greater
consistency, an increase in the on-site efficiency of the inspection
process, the capacity for centralized training of inspection personnel,
and the ability to allocate personnel more efficiently among the Reserve districts.
In 1977 the Board, in conjunction with the Federal Reserve Banks,
implemented a bank surveillance system that aids in the identification of actual and potential financial problems of banks. In addition,
several new bank holding company surveillance capabilities were
developed to enhance existing screening techniques, data collection
systems, and analytical reports. Recently, resources have been devoted to improving the regulatory reports used in the surveillance
Condition of the Banking System
421
process, to streamlining the reports so as to reduce reporting burden
on respondents, and to expediting the use of the data.
CONCLUSION
As indicated in this review, the condition of the U.S. banking system
generally continued to improve during 1977. However, problems and
challenges remain. In evaluating recent performance, it is important
to recognize that the banking system has had to sustain some unusual
shocks in the last few years. Pre-eminent among these was the deep
recession of 1974-75. In addition to shocks, the banking system has
had to operate in an environment that was undergoing substantial
change. One change has been the increasing integration of the world
economy, which has required banks to provide a wider range of services to their customers over a broader geographic area. Another
change has been greatly stepped-up disclosure requirements, which
have subjected banks to more intensive scrutiny by the market. A
final change has been further developments in electronic funds transfers, which has required banks to adjust certain operational procedures.
422
Federal Reserve
Banks
PAYMENTS MECHANISM DEVELOPMENTS
During 1977 the 48 Federal Reserve offices that process checks
handled more than 13.3 billion items, an increase of 8.1 per cent over
the number in 1976.
Six additional automated clearing houses (ACH's) were established
during the year, bringing the number of such facilities operated by
the Federal Reserve to 33. The volume of commercial ACH payments processed through these centers in 1977 increased substantially, with 24.5 million being cleared. A pilot test to determine the
feasibility of exchanging payments among ACH's was successfully
conducted, and in December the Board requested comment on plans
to implement a nationwide system for clearing ACH transactions. At
that time the Board also requested comment on plans to provide
nationwide settlement services to Bankwire, an association of financial
institutions that provide interbank funds transfer services.
In 1977 two more Government agency retirement programs—
those of the Veterans Administration and the Air Force—were
added to the Department of the Treasury's Direct Deposit of Federal
Recurring Payments Program. The Treasury program allows recipients of Government payments to have their benefits deposited
directly in a financial institution by electronic transfer. During 1977
more than 80.7 million electronic payments by the Treasury were
processed through Federal Reserve facilities.
In September 1977 the Board implemented a section of Regulation
J (Subpart B) that governs the handling of wire transfers of funds
by the Federal Reserve Banks.
During the year the staff of the Board of Governors continued
to provide support for the work of the National Commission on
Electronic Fund Transfers. In October the Commission submitted
its final report to the President and the Congress.
EXAMINATION
The Board's Division of Federal Reserve Bank Examinations and
Budgets examined the 12 Federal Reserve Banks and 25 branches
during 1977, as required by Section 21 of the Federal Reserve Act.
Federal Reserve Banks
423
In conjunction with the examination of the Federal Reserve Bank of
New York, the Board's examiners audited the accounts and holdings related to the System Open Market Account and the foreign
currency operations conducted by that Bank in accordance with
policies formulated by the Federal Open Market Committee and
rendered reports thereon to the Committee. The procedures followed by the Board's examiners were surveyed and appraised by a
private firm of certified public accountants, pursuant to the policy of
having such reviews made on an annual basis.
EARNINGS AND EXPENSES
The accompanying table summarizes the earnings, expenses, and
distribution of net earnings of the Federal Reserve Banks for 1977
and 1976.
Current earnings of $6,891 million in 1977 were 4 per cent higher
than in 1976. The principal changes in earnings were increases of
$332 million on U.S. Government securities and $22 million on
loans, and decreases of $23 million on acceptances and $25 million
on foreign currencies. All other earnings decreased $37 million,
reflecting the liquidation of the note due from the Federal Deposit
Insurance Corporation on the loan resulting from the closing of the
Franklin National Bank in 1974.
Current expenses were $624 million. The expenses include $5
million for depreciation on furniture and equipment, which is capitalized and charged to expenses under uniform depreciation schedules. The net book value of furniture and equipment on December
31, 1977, was $46 million compared with $26 million in the previous
year when capitalization of purchases was limited to operating equipment costing more than $10,000.
There was a $177 million net deduction in the profit and loss
account, primarily because of net realized losses of $146 million on
foreign exchange transactions and $50 million on sales of U.S. Government securities, and a nonrecurring credit of $ 18 million to establish a
deferred account for the printing costs of new currency on hand
at the beginning of the year. Under a new procedure designed to
improve inter-Bank expense comparisons, the cost of printing new
currency is being charged to expenses when new notes are paid into
circulation. The expense charges were previously timed to deliveries
of the new notes by the Bureau of Engraving and Printing.
424
Federal Reserve Banks
Statutory dividends to member banks totaled $60 million, $3
million more than in 1976. This rise reflected an increase in the
capital and surplus of member banks and a consequent increase in
the paid-in capital stock of the Federal Reserve Banks.
Payments to the Treasury as interest on Federal Reserve notes
totaled $5,937 million for the year, compared with $5,870 million in
1976. This amount consists of all net earnings after dividends and
the amount necessary to bring surplus to the level of paid-in capital.
A detailed statement of earnings and expenses of each Federal
Reserve Bank during 1977 is shown in Table 6 on pages 444 and
445, and a condensed historical statement in Table 7 on pages 446
and 447. A detailed statement of assessments and expenditures of
the Board of Governors begins on page 428.
Earnings, expenses, and distribution of net earnings of
Federal Reserve Banks, 1977 and 1976
In thousands of dollars
Item
Current earnings
Current expenses
1977
1976
6,891,318
623,860
6,623,220
606,948
6,267,458
6,016,272
Net addition or deduction (—) from current net earnings. -177,034
Assessment for expenditures of Board of Governors:
40,569
Operating expenses
6,797
Capital outlays
7,310
Current net earnings
39,247
2,581
Net earnings before payments to U.S. Treasury
6,043,058
5,981,754
Dividends paid
Payments to U.S. Treasury (interest on F.R. notes)
60,182
5,937,148
57,351
5,870,463
45,728
53,940
Transferred to surplus
FEDERAL RESERVE BANK PREMISES
During 1977 the Federal Reserve Bank of Boston occupied its new
quarters. With approval of the Board of Governors, the Baltimore
and Miami Branches acquired properties for future building sites,
and properties adjacent to the Federal Reserve Bank of Cleveland
and to the Omaha Branch were acquired for future expansion.
Federal Reserve Banks
425
Table 8 on page 448 shows the cost and book value of bank
premises owned and occupied by the Federal Reserve Banks and of
real estate acquired for banking-house purposes.
HOLDINGS OF LOANS AND SECURITIES
The accompanying table shows holdings, earnings, and average
interest rates on loans and securities of the Federal Reserve Banks
during the past 3 years.
Average daily holdings of loans and securities during 1977
amounted to $104,710 million—an increase of $7,187 million over
1976. Holdings of U.S. Government securities increased $7,168
million, loans increased $380 million, and acceptances decreased
$367 million.
The average rates of interest on holdings decreased from 6.70
to 6.56 per cent on U.S. Government securities and from 5.89 to
5.27 per cent on acceptances, and increased slightly from 5.65 to
5.68 per cent on loans.
Loans and securities oJ Reserve Banks, 1975-77
Total
Item and year
U.S.
Govt.
securities *
Loans
Acceptances
In millions of dollars
Average daily holdings: 2
1975
1976
1977.
89,442
97,523
104,710
Earnings:
1975.
1976
1977
6,149.5
6,528.2
6,859.0
88,461
96,834
104;002
195
85
465
12.5
4.8
26.4
6,081.1
6,487.8
6,820.1
786
604
237
55.9
35.6
12.5
In per cent
Average rate of interest:
1975
1976
1977
1
Includes Federal agency obligations.
6.88
6.69
6.55
6.87
6.70
6.56
2
6 41
5 65
5.68
7.11
5.89
5.27
Based on holdings at opening of business.
426
Federal Reserve Banks
LOAN GUARANTEES FOR DEFENSE PRODUCTION
Under the Defense Production Act of 1950, the Departments of the
Army, Navy, and Air Force; the Defense Logistics Agency of the
Department of Defense; the Departments of Commerce, Interior,
Agriculture, and Energy; the General Services Administration; the
National Aeronautics and Space Administration; and the Nuclear
Regulatory Commission are authorized to guarantee loans for defense production made by commercial banks and other private
financing institutions. The Federal Reserve Banks act as fiscal agents
of the guaranteeing agencies under the Board's Regulation V.
During 1977 the guaranteeing agencies authorized the issuance of
two new guarantee agreements. Loan authorizations outstanding on
December 31, 1977, totaled $3.5 million, all of which represented
outstanding loans. Of total loans outstanding, 33 per cent on the
average was guaranteed. During the year approximately $4 million
was disbursed on two guaranteed loans.
Authority for the V-loan program will terminate on September 30,
1979.
Table 16 on page 456 shows guarantee fees and maximum interest
rates applicable to Regulation V loans.
FOREIGN ACCOUNTS
Assets held for account of foreign countries at the Federal Reserve
Banks increased $28,125 million in 1977. At the end of the year such
assets amounted to $115,515 million. This amount included $379
million in dollar deposits plus the following items held in custody
by the New York Bank: $11,857 million of earmarked gold (valued
at $42.22 per fine ounce); $91,962 million of U.S. Treasury securities
(including securities payable in foreign currencies); $370 million of
bankers acceptances purchased through Federal Reserve Banks; and
$10,947 million of miscellaneous assets. The last item consists
mainly of debt securities of U.S. Federally sponsored agencies and
U.S. corporations, and dollar bonds issued by foreign countries and
international and regional organizations.
The Federal Reserve Bank of New York continued to act as
depository and fiscal agent for international and regional organizations. As fiscal agent of the United States, the Bank operated the
Exchange Stabilization Fund pursuant to authorization and instruc
Federal Reserve Banks
427
tions of the Secretary of the Treasury. Also on behalf of the Treasury
Department, it administered foreign assets control regulations pertaining to blocked assets in the United States.
VOLUME AND COST OF OPERATIONS
Table 9 on page 449 shows the volume of operations in the principal
departments of the Federal Reserve Banks for 1974-77. Table 10
on page 450 shows the cost of the larger operations of the Reserve
Banks.
The number of checks received for collection on commercial
banks rose 8 per cent to 13.3 billion, and the dollar amount rose to
$5.5 trillion. Transfers of funds through the Reserve Banks increased
18 per cent to 24.6 million transfers, or $43.2 trillion in value. The
number of pieces of paper money received and counted totaled 8.2
billion, an increase of about 2 per cent over 1976, and amounted to
$75.9 billion. The volume of coin processed increased about 4 per
cent to 16.6 billion pieces.
A new expense accounting system was initiated in 1977 to provide
for full costing of Reserve Bank services and to assist in budgeting
and monitoring the efficiency of these services. The principal services and their percentage of total Reserve Bank expenses over the
year were as follows: check clearing, 38 per cent; currency operations, 25 per cent; fiscal agency services for the U.S. Treasury and
Government agencies, 12 per cent; bank supervision and regulation,
8 per cent; and monetary and economic policy, 5 per cent.
428
Board of Governors
INCOME AND EXPENSES
The accounts of the Board for the year 1977 were audited by the
public accounting firm of Touche Ross & Co.
ACCOUNTANTS' OPINION
Board of Governors of the
Federal Reserve System
Washington, D.C.
We have examined the balance sheets of the Board of Governors of
the Federal Reserve System as of December 31, 1977 and 1976, and the
related statements of assessments and expenses and changes in financial
position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included
such tests of the accounting records and such other auditing procedures as
we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly
the financial position of the Board of Governors of the Federal Reserve
System at December 31, 1977 and 1976, and the results of its operations
and the changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.
Touche Ross & Co.
Certified Public Accountants
Washington, D.C.
February 10, 1978
Financial Statements
429
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
December 31
ASSETS
1977
1976
OPERATING F U N D :
Cash
Miscellaneous receivables and advances
Stockroom and cafeteria inventories—at cost
first-out method)
Total operating fund
$ 4,897,185
847,867
$ 4,166,901
348,019
168,368
5,913,420
168,149
4,683,069
1,255,864
49,860,720
4,479,586
4,834,267
3,342,122
63,772,559
$69,685,979
1,489,223
49,701,894
4,389,940
824,935
3,971,412
60,377,404
$65,060,473
$ 2,261,657
95,479
1,234,635
132,311
3,724,082
$ 1,073,249
137,226
1,237,969
(first-in,
PROPERTY F U N D :
Land and improvements
Buildings
Furniture and equipment
Construction-in-progress
Computer
Total property fund
LIABILITIES AND FUND BALANCES
OPERATING F U N D :
Accounts payable and accrued expenses
Income taxes withheld
Accrued payroll
Retention on construction-in-progress
Fund balance:
Balance, beginning of year
Assessments over (under) expenses
Balance, end of year
Total operating fund
2,448,444
2,234,625
(45,287)
2,189,338
5,913,420
(442,572)
2,677,197
2,234,625
4,683,069
60,377,404
7,556,266
(4,161,111)
3,395,155
63,772,559
$69,685,979
58,980,631
1,483,853
(87,080)
1,396,773
60,377,404
$65,060,473
PROPERTY F U N D :
Fund balance:
Balance, beginning of year
Additions—at cost
Disposals—at cost
Net increase
Total property fund, end of year
See notes to financial statements.
430 Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF ASSESSMENTS AND EXPENSES
Year ended December 31
ASSESSMENTS
1977
1976
$47,366,100
$41,827,700
50,543,541
46,186,376
97,909,641
88,014,076
29,021,842
5,383,462
1,040,702
607,008
613,700
1,088,676
1,670,001
789,649
371,930
380,739
836,954
271,714
372,398
119,764
26,514,723
3,819,114
927,239
481,281
344,105
812,317
1,640,745
654,517
364,280
354,481
773,623
261,608
391,692
122,187
88,876
99,303
85,488
132,519
42,756,718
37,679,919
LEVIED ON FEDERAL RESERVE BANKS:
For Board expenses and additions to property
For expenditures made on behalf of the Federal Reserve
Banks
Total assessments
EXPENSES:
For the Board:
Salaries
Retirement and insurance contributions
Travel expenses
Legal, consultant and audit fees
Contractual services
Printing and binding—net
Equipment, office space and other rentals
Telephone and telegraph
Postage and expressage
Stationery, office and other supplies
Heat, light and power
Operation of cafeteria—net
Repairs, maintenance and alterations
Books and subscriptions
System membership, Center for Latin American Monetary Studies
Miscellaneous—net
For additions to property—net of recovery on disposals
of $2,901,597 in 1977 and $13,269 in 1976
Expenditures for printing, issue and redemption of
Federal Reserve notes, paid on behalf of the Federal
Reserves Banks
Total expenses
ASSESSMENTS OVER (UNDER) EXPENSES
See notes to financial statements.
4,654,669
1,470,584
47,411,387
39,150,503
50,543,541
46,186,376
97,954,928
$
(45,287)
85,336,879
$ 2,677,197
Financial Statements
431
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF CHANGES IN FINANCIAL POSITION
Year ended December 31
1977
1976
$ (45,287)
3,395,155
1,188,408
132,311
$2,677,197
1,396,773
SOURCE OF FUNDS :
Assessments over (under) expenses
Net increase in property fund
Increase in accounts payable and accrued expenses .
Increase in retention on construction-in-progress
Increase in accrued payroll
Increase in income taxes withheld
Property fund disposals—at cost:
Land and improvements
Furniture and equipment
Computer
336,625
20,477
344,388
134,633
3,682,090
4,161,111
8,831,698
APPLICATION OF FUNDS:
Property fund additions—at cost:
Land and improvements
Buildings
Furniture and equipment
Construction-in-process
Computer
Increase in miscellaneous receivables and advances
Decrease in income taxes withheld
Decrease in accrued payroll
Increase in stockroom and cafeteria inventories
Decrease in retention on construction-in-progress ..
Decrease in accounts payable and accrued expenses
INCREASE IN CASH
87,080
87,080
4,518,152
111,029
158,826
224,279
4,009,332
3,052,800
19,929
537,291
242,086
684,547
7,556,266
1,483,853
499,848
41,747
3,334
219
278,769
13,385
76,194
20,300
8,101,414
1,872,501
$ 730,284
$2,645,651
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1977 AND 1976
SIGNIFICANT ACCOUNTING POLICIES
Assessments made by the Board on the Federal Reserve Banks for Board expenses and
additions to property are calculated based upon expected cash needs and are accrued when
assessed. Board expenses and property additions are recorded on the accrual basis of
accounting.
Assessments and expenditures made on behalf of the Federal Reserve Banks for the
printing, issue and redemption of Federal Reserve notes are recorded on the cash basis and
produce results which are not materially different from those which would have been produced on the accrual basis of accounting.
The Board does not charge depreciation as an operating expense. Property additions are
charged to expense in the operating fund in the year of acquisition; recoveries on the
disposal of property are recorded as a reduction in expense in the operating fund in the year
of disposal. When property is acquired or sold, the property accounts in the Property Fund
are increased or reduced at full cost, with a corresponding increase or decrease in the property fund balance. Becaujse of the short duration and temporary nature of the Board's leases,
leasehold improvements have not been capitalized in the Property Fund.
The Board is self-insured against loss of its buildings and furniture and equipment from
432
Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS—CONTINUED
YEARS ENDED DECEMBER 31, 1977 AND 1976
fire or other casualty. The construction-in-progress is covered by builder's risk insurance for
a portion of the cost of the work to December 31, 1977. Coverage for other customarily
insured risks, such as workmen's compensation insurance and comprehensive general liability
insurance, is carried by the Board.
CON STRUCTION -IN -PROGRESS
The construction-in-progress represents amounts expended for the renovation of the Board
Building. The costs include both building costs and costs relating to furniture and equipment. When construction and furnishings are completed in 1978, the final costs will be
allocated to the appropriate property fund accounts.
The retention on construction-in-progress as of December 31, 1977 represents amounts
withheld on contracts for the renovation and furnishing of the Board Building and landscaping of surrounding property.
BUILDING
Included in the cost of buildings is $7,209,687 relating to the cost of the North Garage
of the Martin Building. Over the next 36 years and 7 months, the Board will receive approximately $4,395,700 from the Department of Interior for the use of parking spaces in
the garage. The $10,013 monthly payment received from Interior has been offset against
miscellaneous expense.
LONG-TERM LEASES
The Board leases outside office, storage and parking space under leases expiring from
June 30, 1979 to July 31, 1980. Because the leases may generally be terminated with six
months notice commencing in 1978, at December 31, 1977, the only fixed future rental
commitment is $386,600 for 1978. Rent expense for outside office, storage, and parking
space for the years ended December 31, 1977 and 1976 was approximately $843,700 and
$799,700, respectively.
RETIREMENT PLANS
There are two major retirement programs for employees of the Board. Approximately 86%
of the employees are covered by the Federal Reserve Board Plan. All new members of the
staff who do not come directly from a position in the Government are covered by the
Plan. The second Plan, the Civil Service Retirement Plan, covers all new employees who
come directly from Government service. Employee contributions are the same under both
Plans, and benefits are similar, being based upon the Civil Service Plan.
Under the Civil Service Plan, Board contributions match employee payroll deductions
while under the Federal Reserve Plan, Board contributions are actuarially determined annually.
Additionally, employees of the Board participate in the Federal Reserve System's Thrift
Plan. Under this Plan, the Board adds a fixed percentage to allowable employee savings.
Board contributions to these Plans totalled $4,797,588 in 1977 and $3,289,038 in 1976.
CONTINGENT LIABILITIES
Litigation involving the Board generally arises from challenges to, or appeals from,
actions or proposed actions of the Board pursuant to statutory requirement or authorization.
In essence, such lawsuits seek injunctive or declaratory relief against the Board rather than
monetary awards.
At December 31, 1977, there were pending six lawsuits involving substantial monetary demands in which the Board was named as one of the defendants. Based upon realistic appraisal of the real potential for recovery and upon the Board's previous experience in suits
involving gross claims, Board counsel is of the opinion that these actions do not present
any real probability of substantial liability to the Board.
RECLASSIFICATIONS
For presentation purposes only, reclassifications have been made in certain 1976 property
fund accounts to reflect the transfer in 1977 of the costs of the North and East Parks from
buildings to land and improvements.
Statistical Tables
434 Tables
1. Detailed statement of condition of all Federal Reserve
Banks combined, December 31, 1977
In thousands of dollars
ASSETS
Gold certificates on hand
Gold certificates due from U.S. Treasury
1,278
11,717,245
Total gold certificate account
Special Drawing Rights certificate account
Coin
Loans to member banks secured by—
U.S. Govt. and agency obligations
Other eligible paper
Other paper (Sec. 10(b))
11,718,523
1,250,000
281,849
233,101
29,000
2,425
264,526
Loans to others
Total loans
Acceptances:
Bought outright
Held under repurchase agreement
Federal agency obligations:
Bought outright
Held under repurchase agreement
U.S. Govt. securities:
Bought outright:
Bills
Notes
Bonds
264,526
953,597
8,003,735
451,000
41,560,485
50,513,672
8,843,761
Total bought outright
Held under repurchase agreement
100,917,918
1,901,000
Total U.S. Govt. securities
Total loans and securities
Cash items in process of collection:
Transit items
Exchanges for clearing house
Other cash items
Total cash items in process of collection
Bank premises:
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowances
Bank premises, net
Other assets:
Furniture and equipment
Less depreciation
Total furniture and equipment, net
Due from FDIC—Account closed bank
Denominated in foreign currencies
Interest accrued
Premium on securities
Real estate acquired for banking-house purposes
Suspense account
Overdrafts
All other »
Total other assets
Total assets
102,818,918
112,491,776
9,613,641
228,062
1,701,110
150,521
95,091
207,569
453,181
138,899
11,542,813
63,070
314,282
377,352
56,360
9,990
46,370
18,432
1,356,566
184,043
42,172
289,841
27,549
98,508
2,063,481
139,725,794
Tables 435
1.—Continued
LIABILITIES
F.R. notes:
Outstanding (issued to F.R. Banks)
Less: Held by issuing F.R. Banks
Total F.R. notes, net
Deposits:
Member bank reserves
U.S. Treasury—General account
Foreign
Other deposits:
Nonmember bank—Clearing accounts
Officers' and certified checks
Reserves of corporations doing foreign banking or
financing
International organizations
Secretary of Treasury special account
All other
Total other deposits
100,535,296
7,381,518
93,153,778
26,709,380
7,113,335
378,768
2,019
23,670
237,986
262,743
51,025
609,205
1,186,648
Total deposits
Deferred availability cash items
Other liabilities:
Unearned discount
Discount on securities
Sundry items payable
Suspense accounts
All other
35,388,131
7,892,267
744
1,146,046
18,200
54,745
13,879
Total other liabilities
1,233,614
Total liabilities
137,667,790
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
2
Total liabilities and capital accounts
1
2
1,029,002
1,029,002
139,725,794
Includes U.S. agency coupons in process of collection.
During the year this item includes the net earnings, expenses, profit and loss items, and accrued
dividends, which are closed out on Dec. 31; see Table 7, pp. 446 and 447.
NOTE.—Amounts in boldface type indicate items in the Board's weekly statement of condition of
the F.R. Banks.
as
2. Statement of condition of each Federal Reserve Bank, December 31,1977 and 1976
In millions of dollars
H
Boston
Total
Item
1977
1977
1976
11,718
1,250
541
62
282
11,598
1,200
1,863
364
226
40
19
7
954
196
795
8,004
451
6,794
278
374
100,918
1,901
93,268
3,753
112,494
11,542
378
New York
1976
Cleveland
Philadelphia
1977
1976
3,492
313
3,350
300
361
29
631
74
17
542
60
97
18
10
1
103
2
1
1977
1976
1977
Richmond
1976
1977
1976
ASSETS
Gold certificate account
Special Drawing Rights certif. acct
F.R. notes of other F.R. Banks1
Coin
Loans:
Secured by U.S. Govt. and agency obligations..
Other
Acceptances:
Held under repurchase agreement
Federal agency obligations:
Bought outright
.
. .
....
U.S. Govt. securities:s
Bought outright
Held under repurchase agreement
Total loans and securities
Cash items in process of collection ..
Bank premises*.
Operating equipment . . . .
.
Other assets:
Denominated in foreign currencies
All other
, A ..
934
107
13
11
2
2
40
939
103
64
46
982
113
28
992
109
204
41
13
954
196
795
314
1,889
451
1,598
278
427
377
670
560
655
545
4,715
4,310
23,819
1,901
21,937
3,753
5,384
5 174
8 448
7 690
8 250
7 486
105,110
5,099
4,625
29,117
28,560
5,826
5,553
9,120
8,250
8,918
8,031
10,128
363
25
335
106
330
106
1,450
9
1,832
17
6
342
56
207
56
2
461
23
604
24
2
1,866
72
1,351
48
18
2,046
170
2,624
1
94
6
70
4
489
44
1,289
1
104
8
114
1
138
15
114
1
155
9
122
-23
+212
139,728
133,445
6,232
6,066
Interdistrict Settlement Account
Total assets
18
641
71
103
11
-1,313
33,579
-3,763
32,025
-389
-233
-42
+216
+247
+27
6,658
6,533
10,782
10,377
12,382
10,934
LIABILITIES
F.R. notes
Deposits:
Member bank reserves
U.S. Treasury—General account
Foreign.
All other3
. . .
Total deposits....
Deferred availability cash items
Other liabilities and accrued dividends
Total liabilities..
?3 678
?1 69?
4 , 936
4 , 8?7
7 987
7, 38?
8 3?9
7,666
5 ,784
1 399
4 8?0
1 650
451
24
1 ,048
43
3?7
789
?0
68
1,448
34
763
584
11
61
1,534
174
688
891
45?
1?
34
1 ,103
1, 451
8 ,045
8 ,511
1, 389
1, 419
2 168
2 , 204
2 ,204
249
55
?86
46
991
331
1 ,041
279
183
149
62
52
361
92
549
74
1 ,625
114
131, 479
6 ,168
5, 996
33 ,045
31 ,523
6, 570
6, 447
10 608
10, ?09
1? ,272
10,826
1 ,0?9
1 ,029
983
983
3?
35
35
?,67
267
251
44
44
43
43
87
87
84
84
55
32
55
54
54
139 ,728
133, 445
6 ,232
6, 066
33 ,579
32 ,025
6, 658
6, 533
10 782
10, 377
12 ,382
10,934
100 534
89, 303
4 ,977
4 , 397
?5 ,038
,392
5 383
5, 039
8 360
7, 657
ft,897
7,936
7 ,381
3 , 709
216
184
1 ,360
700
447
212
373
275
568
270
93 ,153
85, 594
4 ,761
4 , 213
23 ,678
21 ,692
4 936
4 827
7 987
7, 382
8 ,329
7,666
11 ,713
880
11, 596
643
541
54?
60
3 ,491
3 ,350
300
631
641
933
107
939
98?
109
992
89 ,675
78, 100
4 ,400
3, 830
21 ,550
18 ,850
4 800
4 500
7 ,500
6 810
7 ,950
102 ,268
9 0 , 339
5 ,003
4 , 432
25 ,354
22 ,500
5 431
5 141
8 540
7 749
9 ,041
7,025
8,017
93 153
85, 594
4 761
?6 ,709
642
428
10
7?4
684
9
1 ,187
25, 059
10, 393
35?
2 , 113
23
35 ,389
37, 917
7 ,894
1 ,234
6 871
1, 097
137 ,670
7 ,114
379
4,
466
177
598
15
57
725
13
87
2,273
814
73
CAPITAL ACCOUNTS
Capital paid in
Surplus . . .
Other capital accounts
. . . .
Total liabilities and capital accounts
F.R. NOTE STATEMENT
F.R. notes:
Issued to F.R. Bank by F.R. Agent and outstanding
Less held by issuing Bank, and forwarded for
redemption
F.R. notes, net 4
Collateral held by F.R. Agent for notes issued to
Bank:
Gold certificate account
.
Special Drawing Rights certif. acct
U.S. Govt. securities
Total collateral
For notes see end of table.
62
313
I
2. Statement of condition of each Federal Reserve Bank, December 31,1977 and 1976—Continued
00
In millions of dollars
Atlanta
Item
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
p
IT 1
1977
1976
1977
1977
1976
1976
1977
1,736
198
1,704
190
77
36
469
53
28
599
62
285
39
7
2
1
40
2
7
7
Federal agency obligations:
Bought outright...
Held under repurchase agreement
395
364
1,282
1,088
340
277
196
U.S. Govt. securities:
Bought outright*
Held under repurchase agreement
4,982
4,996
16,166
14,936
4,283
3,803
...
5,384
5,363
17,490
16,031
4,630
.. •
1,127
14
976
14
1,367
16
1,183
16
565
13
1
151
13
110
3
259
26
213
1
74
1976
1977
1976
1977
1976
1977
1976
1 299
149
1 325
143
277
39
ASSETS
560
64
Gold certificate account
Special Drawing Rights certif. acct....
F.R. notes of other F.R. Banks 1
Coin
Loans:
Secured by U.S. Govt. and agency
obligations
.
Other
24
20
466
50
57
27
225
25
222
24
27
14
456
48
43
397
42
93
43
12
421
46
218
21
11
1
3
4
23
1
I
1
5
25
1
155
321
269
400
323
1,055
924
2,471
2,133
4,049
3,692
5,046
4,430
13,305
12,681
4,080
2,668
2,288
4,382
3,968
5,470
4,755
14,390
13,606
320
13
4
573
30
455
31
1
924
18
898
17
887
12
807
12
3
1,645
9
1,165
9
4
1
46
5
34
75
7
55
1
96
9
62
365
22
387
+13
+230
+362
+340
+290
+359
3,590
3,331
6,242
5,860
7,272
6,713
9
1
393
44
30
Acceptances:
Held under repurchase agreement
Total loans and securities...
Cash items in Drocess of collection
Bank premises
..
Operating equipment
Other assets:
Denominated in foreign currencies
All other
Interdistrict Settlement Account
-277
-220
Total assets
7,052
7,244
+89
+570
-115
6
54
+271
21,182
20,046
5,710
5,348
+1,158 +1,991
19,047
18,968
§f
LIABILITIES
F.R. notes
Deposits:
Member bank reserves
U.S. Treasury—General account
Foreign .
. .
All others
.
Total deposits
Deferred availability cash items.
Other liabilities and accrued dividends
Total liabilities
3,669
3,893
15,428
13,973
3,912
3,593
1,999
1,750
3,461
3,022
4,071
3,702
10,922
9,881
1,952
511
21
77
1,801
572
18
166
3,591
705
41
90
3,714
825
36
222
817
474
9
23
765
574
8
58
720
276
8
13
602
398
7
64
1,156
637
12
22
1,260
589
10
130
1,922
453
15
34
1,713
572
13
37
6,050
730
38
83
6,122
1,615
30
138
2,561
2,557
4,427
4,797
1,323
1,405
1,017
1,071
1,827
1,989
2,424
2,335
6,901
7,905
602
64
589
55
834
179
837
143
363
48
248
36
483
29
433
19
822
46
731
36
603
58
524
42
778
156
670
242
6,896
7,094
20,868
19,750
5,646
5,282
3,528
3,273
6,156
5,778
7,156
6,603
18,757
18,698
78
78
75
75
157
157
148
148
32
32
33
33
31
31
29
29
43
43
41
41
58
58
55
55
145
145
135
135
7,052
7,244
21,182
20,046
5,710
5,348
3,590
3,331
6,242
5,860
7,272
6,713
19,047
18,968
4 524
4 422
16 111
14 273
4,329
3,767
2 143
1 810
4,030
3 176
4 888
3 873
11,854
10,561
855
529
683
300
417
174
144
60
569
154
817
171
932
680
3,669
3,893
15,428
13,973
3,912
3,593
1,999
1,750
3,461
3,022
4,071
3,702
10,922
9,881
559
62
599
62
1,736
1,704
468
53
466
50
225
25
222
24
393
42
396
42
456
48
420
46
1,298
59
1,325
59
4,000
4,000
14,500
12,600
3,850
3,350
2,010
1,610
3,700
2,800
4,415
3,425
11,000
9,300
4,621
4,661
16,236
14,304
4,371
3,866
2,260
1,856
4,135
3,238
4,919
3,891
12,357
10,684
CAPITAL ACCOUNTS
Capital paid i n . . .
Surplus
Other capital accounts
Total liabilities and capital accounts.
F.R. NOTE STATEMENT
F.R. notes:
Issued to F.R. Bank by F.R. Agent and
outstanding.
Less held by issuing Bank, and forwarded
for redemption
F.R. notes, net 4
Collateral held by F.R. Agent for notes issued
to Bank:
Gold certificate account
Special Drawing Rights certif. acct
Acceptances
U.S. Govt. securities
Total collateral
1
Effective Jan. 1, 1977, F.R. notes of other F.R. Banks were merged into the liability
account
for F.R. notes.
2
Includes securities loaned—fully guaranteed by U.S. Govt. securities pledged with
F.R. Banks—and excludes (if any) securities sold and scheduled to be bought back under
matched sale-purchase transactions.
3 Beginning July 1973, this item includes certain deposits of domestic nonmember
banks and foreign-owned banking institutions held with member banks and redeposited
in full with F.R. Banks in connection with voluntary participation by nonmember institutions in the Federal Reserve System's program of credit restraint.
As of Dec. 12, 1974, the amount of voluntary nonmember bank and foreign-agency
and branch deposits at F.R. Banks that are associated with marginal reserves are no
longer reported. However, two amounts are reported: (1) deposits voluntarily held as
reserves by agencies and branches of foreign banks operating in the United States, and
(2)4 Euro-dollar liabilities.
Includes F.R. notes held by U.S. Treasury and by F.R. Banks other than the issuing
Bank.
NOTE.—Beginning Jan. 1, 1977, "Other cash" account was changed to "Coin," and
"Operating equipment" was transferred to "Other assets."
ft
440 Tables
3. Federal Reserve Bank holdings of U.S. Government and
Federal agency securities, December 31, 1975-77
In millions of dollars
Description
of issue
Rate of
interest
(per cent)
Treasury bonds:
1975-85
1978-83
1980—Feb
Nov
1981—Aug
1982—Feb
1984—Aug
1985—May
1986—Nov
1987-92
1988-93.
.
47 4
37 4
372
63/8
63/8
374
67s
(
1989-94
1990—Feb
May
1992—Aug
1993—Feb
1993-98
1994-99 . .
1995—Feb
1995-2000
28
372
874
774
63/4
872
/ 77 8
1 83/8
1996-2001
1998—Nov
2000-2005
2002-2007
8
37 2
87 4
/ 7%
I 77 8
31, 1976—L
30, 1976—J
31, 1976—O
15, 1976—D
30, 1976—N
31, 1976—K
15, 1977—A
28, 1977—F
31, 1977—G
30, 1977—H
15, 1977—C
May
June
July
Aug.
Aug.
Sept.
Oct.
Nov.
Nov.
Dec.
Jan.
Feb.
Feb.
Mar.
Apr.
May
31, 1977—1
30, 1977—J
31, 1977—K
15, 1977—B
31, 1977—L
30, 1977—M
31, 1977—N
15, 1977—E
30, 1977—Q
31, 1977—P
31, 1978—J
15, 1978—A
28, 1978—G
31, 1978—K
30, 1978—L
15, 1978—D
156
87
266
74
123
364
355
47
310
509
24
380
77
84
285
76
70
157
955
2
517
902
430
31
950
1,379
240
1976
156
87
261
74
123
358
334
47
310
509
24
264
77
84
155
70
157
900
70
148
830
2
286
707
455
842
341
31
864
6,725
53/4
63
8 /4
77 2
672
57 8
87 4
672
674
77 8
774
8
6
67 2
73/8
67s
93
6 /4
672
77 2
73/4
..
May 31, 1978—M
June 30, 1978—N
July 31, 1978—P
874
83/8
772
73/4
6%
774
63/8
674
83
6 /4
672
77 8
77s
77s
67s
67s
328
272
2,650
53
312
391
953
1,539
175
771
259
1975
156
87
261
74
123
364
355
47
310
509
24
352
77
84
240
67 4
57s
8
672
May 31, 1976—M
June 30, 1976—1
Aug. 15, 1976—C
Aug.
Sept.
Oct.
Nov.
Nov.
Dec.
Feb.
Feb.
Mar.
Apr.
May
1977
8,848
Total
Treasury notes:
Feb. 15, 1976—A
—F
Mar. 31, 1976—H
May 15, 1976—B
Increase or decrease (—)
during—
December 31
2,481
150
516
84
525
2,994
171
260
59
848
120
48
166
1,231
81
259
250
2,628
35
241
360
921
1,503
152
723
208
31
585
5,522
2,507
1,232
97
360
496
80
692
748
1,649
43
320
50
100
126
231
2,462
112
422
48
440
2,973
92
251
33
831
88
38
56
1,218
203
2,606
20
850
1,499
1977
1976
5
6
21
28
88
45
76
85
55
9
70
62
60
89
169
135
341
86
1,379
240
279
2,123
1,203
-2,481
-150
-516
-84
-525
-2,994
-171
-260
-59
-848
-120
-48
-166
-1,231
-81
69
22
22
18
71
31
32
36
23
48
51
-2,507
-1,232
-97
-360
-496
-80
-692
-748
-1,649
-43
-320
-50
-100
-126
-231
19
38
94
36
85
21
79
9
26
17
32
10
110
13
81
56
250
22
15
241
360
71
4
152
723
208
Tables
441
3.—Continued
Rate of
interest
(per cent)
Description
of issue
Treasury notes—Cont.
Aug. 15 1978—C
—E
Aug 31 1978—Q ..
Sept 30 1978—R ..
Oct 31 1978—S
Nov. 15 1978—B
Nov 30 1978—T
Dec 31 1978—H . .
Dec 31 1978 U
Jan 31 1979—L
Feb 15 1979—H
Feb 28 1979—M
Mar 31 1979—N
Anr 30 1979 P
May 15 1979—D
Mav 31 1979 O
June 30 1979—E .
—R
July 31 1979—S
Aug. 15, 1979—A
Aug 31 1979—T
Sept. 30 1979—F..
—U
Oct 31 1979—V
Nov 15 1979—B
K
—C
Nov 30 1979 W
Dec 31 1979 G
Feb 15 1980—G
Mar 31 1980 C
May 15 1980—A .. ..
June 30 1980—D
Aug. 15, 1980—B
H
Sent
Nov
Dec
Feb.
30
15
31
15,
Mar
Mav
June
Aue
Sent
Nov
Dec.
Feb.
May
Aug.
Nov.
Feb
Nov.
Feb.
Aug.
May
Aug
Nov.
1980 E
1980—J
1980 F
1981—A
—C
31 1981 H
15 1981 D
30 1981 J
15 1981 F
30 1981 K
15 1981—B
G
31 1981—L
15 1982—D
15, 1982—A
—E
15, 1982—B
15 1982—C . . . .
F
15 1983 A
15 1983—B
15 1984—A . .
15 1984—B
15, 1986—A
15 1986—B
15, 1987—A
Increase or decrease (—)
during—
IDecember 31
1976
1977
1976
1975
1977
629
2,549
145
346
117
2,448
143
140
352
619
2,516
6%
633
2,571
173
415
192
2,468
234
177
446
88
1,724
308
570
118
538
209
119
265
111
630
838
210
222
248
6%
7
7Va
248
890
228
362
261
107
1,452
167
5,267
288
2,427
iii
5,264
4
22
28
69
75
20
91
37
94
88
24
308
570
118
47
209
49
265
111
31
24
210
12
248
248
15
107
11
261
15
1 452
56
83/4
75/8
6%
6V4
578
6
53/4
8y8
5y4
57/8
7
57a
6
57s
77a
6Va
3
7 /4
6y8
6V4
6x/4
67a
6%
SVz
7y4
6%
6Vi
ll/i
67a
7%
93
6A
67a
7%
57s
73/a
67a
7%
63/4
7%
6%
73/4
7
7V4
6%
8
7
8V&
77a
7%
8
7
7V
4
11A
77a
8
7%
489
141
658
33
349
914
55
175
67
241
48
1,591
83
13
2,447
51
1,700
491
465
70
42
599
814
590
210
125
875
121
351
872
341
92
231
2,422
5,244
2,385
304
646
109
129
1,554
14
1,464
1,421
1,370
1,065
633
1,013
524
35
1,439
14
1,110
715
4
2,101
95
3,659
337
852
1,941
448
2,075
81
117
1
143
89
352
1,700
26
28
9
814
85
3
121
10
92
111
20
231
37
489
33
8
338
826
3
57
5
10
33
145
346
695
1 757
108
658
25
11
88
55
66
67
112
48
37
69
13
35
18
14
45
82
4
26
14
3 659
337
157
184
448
33
8
34
180
109
129
90
14
51
52
109
2,075
81
695
1,757
50,509
47,972
43,989
2 537
3,983
Treasury bills:
Due—
Within 3 mos
3-6 mos
After 6 mos
20,106
15,690
5,765
19,529
14,277
4,765
20,495
12,342
4,371
577
1 ,413
1 000
—966
1,935
394
Total
41,560
38,572
37,207
2 989
1,365
Total .
. . .
442 Tables
3. Federal Reserve Bank holdings of U.S. Government and
Federal agency securities, December 31,1975-77
In millions of dollars
1December 31
Description
of issue
Rate of
interest
(per cent)
Repurchase agreements
U.S. Govt. securities—Total.
Maturing—
Within 90 days
91 days to 1 year
1—5 years
5-10 years. . .
Over 10 years
Federal agency obligations;
Held outright:
Banks for coops
Export-Import Bank.
Fed. farm credit banks
Fed home loan banks
Fed. inter,
credit banks
Federal land banks
Farmers Home Admin.
Fed. Natl. Mort. Assn.
Govt. Natl. Mort.
Assn.—PC's
U.S. Postal Service . . .
Wash. Metro. Area
Transit Authority
General Services
Admin. .
...
Total
Held under Rp*s
Increase or decrease (—)
during—
1977
1976
1975
1977
1,901
102,819
97,021
3 753
1,217
87,934
- 1 852
5,798
2 536
9,087
25,309
32,539
27,516
10,388
7,067
26,429
25,889
30 710
9,045
4,949
25,450
21,704
30,273
6,426
4,082
-1,120
6,650
— 3 194
1,343
2,118
979
4,185
437
2 619
867
112
106
58
2,151
78
118
60
135
18
-17
1,786
1,603
34
-12
58
365
465
1,352
238
3,266
414
946
295
2,899
317
736
285
2,702
51
406
-57
367
97
210
10
197
87
37
90
37
87
37
2
0
3
0
117
117
98
0
19
14
14
12
0
2
8,004
6,794
6,072
1,210
722
451
278
118
173
160
1976
183
NOTE.—Details may not add to totals because of rounding.
4. Federal Reserve Bank holdings of special short-term Treasury certificates purchased directly from the United States,
1970-77
In millions of dollars
Date
Amount
Date
Amount
Date
1970
none
1972
Sept. 12
38
1974
Nov. 6
1971
June 8
9
10
11
12
13i
14
15
16
1
79
582
610
593
593
593
243
588
349
1973
Aug. 15
Sept. 7
8
9i
10
11
12
14
15
16i
351
73
73
73
42
485
169
319
319
319
1975
Mar. 11
12
13
14
15
16i
17
Aug. 5
6
Amount
Date
Amount
1975
131
626
1,043
315
820
820
820
832
656
965
Aug. J
12
13
15
1977
Sept. 30
Oct. 1
2i
3
474
204
543
399
481
2,500
2,500
2,500
2,500
Sunday or holiday.
NOTE.—Under authority of Section 14(b) of the Federal Reserve Act.
Throughout the period shown the interest rate paid on such securities was lA per cent below prevailing
discount rate of F.R. Bank of New York. For data for prior years, beginning with 1942, see previous
ANNUAL REPORTS. N O holdings on dates not shown.
Tables 443
5. Open market transactions of the Federal Reserve System, 1977
In millions of dolhirs
Outright transactions in U.S. Govt. securities, by maturity
(excluding matched sale—purchase transactions)
Treasury bills
Gross
purchases
Gross
purchases
Redemptions
Gross
sales
January..
February
March
April
May
June
July
August
September
October...
November....
December....
1,671
681
2,696
118
812
2,005
3,109
313
801
368
260
489
1,154
753
176
303
1,877
436
311
Total
13,738
7,241
2,535
110
Others within 1 year
Gross
sales
45
107
41
20
19
400
600
500
2,616
300
99
3,017
2,136
1-5 years
Exch.,
maturity
shifts, or
redemptions
Gross
purchases
Gross
sales
475
348
174
327
252
63
-266
374
— 1,209
478
238
2,321
320
— 2,545
1,352
623
89
317
l
— 252
-880
266
— 374
— 865
-478
-238
-1,664
-320
45
-1,267
-623
200
681
628
2,833
1,999
-6,649
Matched
sale-purchase
transactions
(U.S. Govt.
securities)
Outright transactions (cont.)
Total outright
5-10 years
Month
Gross
purchases
128
151
46
104
January
February
March
April.
May
June
July
August
September
October
November....
December....
166
Total
758
Month
Gross
sales
Over 10 years
Exch. Gross
or ma- purturity chases
shifts
517
Gross
sales
Exch. Gross
or ma- purturity chases
shifts
48
81
37
300
38
174
68
-78?
96
900
114
125
1?8
Net
change
in U.S.
Govt.
securities
Gross
purchases
Gross
sales
January.. .
February
March
April.
May.
June
July
August
September....
October
November....
December
23,820
13,853
14,368
13 397
29,308
14,748
13,973
4,397
16,700
9,578
6,472
18,071
27,573 - 2 , 8 8 7
1,702
12,921
151
14,860
3 980
11 862
30,448 - 2 , 5 7 3
4,845
11,506
15,719
-276
5,648
6,279
15,469
11,889 -10,118
4,433
1,880
6,342
18,208
707
Total
178,683
5,798
1,433
180,535
176
Federal agency obligations
Gross
purchases
346
Sales or
redemptions
4
24
36
Repurchase
agreements,
net
32
-278
77
— 23
70
-114
600
-266
-194
159
— 310
131
320
223
173
*
380
33
69
25
*
soo
753
7 ,241
Outright
19
400
600
489
1 ,154
1,565 20,898
108
Repurchase
agreements
(U.S. Govt.
securities)
313
801
368
4,110
240 .
553
3,229
797
298
2,160
681
3,167
118
812
5,526
301
1 877
436
311
-3?5
584
Redemptions
Gross
sales
Exch.
or
maturity
shifts
317
2 SOO
100
Gross
sales
Gross
purchases
24,595
22,674
30,115
32,287
28 532
36,258
27,947
45,831
39,552
48,204
56,899
32,320
22,544
23,447
30,828
32,852
27 306
36,449
27,301
46,170
39,694
44,772
57,477
35,001
4, 636 425,214 423,841
Bankers
acceptances,
net
Outright
—5
-18
-19
-51
-45
— 15
— 24
-15
*
-4
-196
Repurchase
agreements
Net
change 2
-795
- 3 969
149
1 886
— 23
50
653
4 998
-729
-3,461
528
6 305
-204
—4 020
— 247
— 801
351
6,764
-478 -10,910
248
2 260
705
8,042
159
7,143
1
Includes special certificates acquired when the Treasury borrows directly from the Federal Reserve, as
follows:
Sept., $2,500 million (redeemed in Oct.).
2
Net change in U.S. Govt. securities, Federal agency obligations, and bankers acceptances.
Less than $500,000.
Digitized for• FRASER
NOTE.—Sales, redemptions, and negative figures reduce System holdings; all other figures increase them.
http://fraser.stlouisfed.org/
Details may not add to totals because of rounding.
Federal Reserve Bank of St. Louis
5. Earnings and expenses of Federal Reserve Banks during 1977
In dollars
Item
Total
Boston
New
York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas
City
Dallas
San
Francisco
CURRENT EARNINGS
Loans
Acceptances
U.S. Govt. securities
Foreign currencies...
Ml other 1
Total....
2,519,527
2,841,197
2,762,653 1,327,143
26,417,417 1,608,613 . 5,126,395 1,880,230
835,661
521,398 2,180,210 2,723,562
2,090,828
12,461,026
12,461,026
6,820,111,327 314,728,738 1,655,796,358 364,810,999 563,140,792 541,531,105 342,040,056 1,082,419,285 283,429,041 162,186,989 270,022,214 332,863,131 907,142,619
241,272
154,532
716,943
213,291
421,625
92,336
102,008
122,233
80,505
117,519
156,692
2,798,065
379,109
51,403
53,829
28,640,003
239,831
39,152
22,667
9,815
100,608
29,529,662
255,451
59,091
36,858
20,954
6,891,317,497 316,462,026 1,702,740,725 366,823,277 564,269,128 544,580,663 344,873,482 1,085,843,394 284,887,672 163,044,343 272,379,034 335,780,243 909,633,510
CURRENT EXPENSES
Salaries
Retirement and other benefits
Fees—Directors and others..
Travel
Postage
Expressage
Telephone and telegraph
Printing and supplies
Taxes on real estate
Bank premises:
Depreciation
Maintenance and repairs..
Utilities
Rent
Furniture and equipment:
Rentals
Depreciation
Cost of F.R. currency
All other
315,176,795 21,250,802
84,308,487 5,657,063
4,322,560
280,704
7,285,166
448,729
11,601,790
542,975
59,357,444 3,553,536
11,210,563
781,240
24,778,451 1,689,583
13,846,256 3,014,444
Total*
Reimbursements and
recoveries
681,877,556 49,375,867
Net expenses
75,600,006 15,112,329
19,204,047 4,346,477
1,492,735
284,752
1,316,435
217,236
1,904,811
385,166
7,432,049 2,420,329
2,326,824
440,840
4,721,129 1,265,175
2,427,632 1,225,982
18,931,688
5,311,482
221,609
549.204
625,099
6,037,324
727,250
1,336,006
736,788
24,601,651
6,431,157
215,245
571,680
919,282
6,895,284
1,024,284
2,161,094
579,913
28,576,811
7,200,328
149,104
723,969
777,090
7,517,953
1,023,510
2,597.596
610,433
39,953,641 16,982,647 12,549,508 19,578,180 15,205,599
10,966,827 4,737,974 3,124,609 5,426,426 4,053,097
271,206
204,778
186,664
242,103
122,786
826,454
342,686
549,342
412,617
410,742
1,171,529
941,751
821,351 1,318,943
532,719
7,944,541 4,133,452 2,130,343 3,215,610 2,908,330
1,382,803
489,775
577,097
745,333
659,183
3,455,727 1,545,933
949,080 1,698,550 1,091,018
1,501,986
450,073 1,577,415
483,648
459,595
26,833,933
7,849,000
650,874
916,072
1,661,074
5,168,693
1,032,424
2,267,560
778,347
8,399,990
5,356,184
11,910,940
8,842,532
760,630
231,454
2,024,665
1,147,717
294,744
579,890
2,209,396
4,285,372
1,700,029
477,134
1,382,076
19,771
1,237,544
357,652
1,067,216
144,387
560,949
266,625
625,713
903,010
287,371
305,054
806,794
768,037
389,542
1,436,183
1,000,035
818,641
564,206
414,138
621,723
150,558
1,567,060
322,284
460,945
55,690
546,776
268,503
613,351
22,436
177,207
409,667
525,200
9,823
313,932
287,600
573,826
517,090
43,381,842
5,049,609
55,008,163
14,455,634
3,337,096
43,839
3,152,915
1,458,475
5,912,516
1,425,267
10,130,551
3,384,731
1,954,410
542,594
3,185,252
685,875
3,161,562
307,158
3,381,031
1,011,996
4,776,556
254,494
5,166,651
979,833
3,824,186
373,946
4,866,948
930,674
6,590,597
150,781
7,728,771
1,171,701
1,964,411
481,397
2,645,549
584,926
1,499,597
116,814
1,549,059
777,087
4,197,880
148,832
2,866,618
850,817
2,637,778
461,796
3,282,155
927,749
3,525,253
742,691
7,052,663
1,691,770
86,760,966 37,255,977 28,730,784 42,717,909 33,876,319
61,862,802
58,017,973
3,571,112
623,859,583 45,804,755
144,648,135 35,645,427
45,144,996 s 54,518,570 61,339,804
2,887,208
4,766,659
3,734,417
6,105,429
131,678,202 32,758,219
40,378,337
50,784,153
55,234,375
12,969,933
7,391,207
1,984,865
5,294,748
79,369,759 33,618,964 26,820,402 38,952,909 31,891,454
56,568,054
3,637,013
1,910,382
3,765,000
PROFIT AND LOSS
Current net earnings
Additions to current net
earnings
Deductions from current net
earnings:
Losses on sales of U.S.
Govt. securities
Losses on foreign exchange transactions *..
All other
Total deductions..
Net deduction from current
net earnings
6,267,457,915 270,657,271 1,571,062,523 334,065,058 523,890,791 493,796,510 289,639,107 1,006,473,635 251,268,708 136,223,941 233,426,125 303,888,790 853,065,456
20,544,148
980,011
3,740,033
2,219,531
2,262,832
1,025.154
895,543
2,237,578
1,179,409
740,277
1,343,817
1,483,426
2,436,537
49,834,399
2,335,189
11,783,644
2,648,278
4,185,456
3,966,090
2,435,910
7 994,439
2,128,689
1,232,320
2,005,460
2,511,669
6,607,255
146,384,339
1,358,872
5,269,836
17,897
37,474,391
659,297
6,294,527
11,760
12,589,053
47,345
8,051,138
28,887
11,125,210
56,562
21,957,651
97,481
4,830,683
48,767
4,245,146
28,186
6,148,142
18,558
8,197,523
151,129
20,201,039
193,003
197,577,610
7,622,922
49,917,332
8 954,565
16,821,854
12,046,115
13,617,682
30,049,571
7,008,139
5,505,652
8,172,160 10,860,321
27,001,297
177,033,463
6,642,911
46,177,299
6,735,034
15,796,700
9,783,284
12,722,139
27,811,993
5,828,730
4,765,375
6,828,343
9,376,895
24,564,760
47,366,100
1,657,000
12,048,600
2,061,800
4,057,700
2,597,200
3,624,700
7,152,500
1,562,800
1,383,100
1,978,600
2,666,700
6,575,400
Assessment for expenditures
of Board of Governors *. . .
Met earnings before payments
to U.S. Treasury
6,043,058,352 262,357,360 1,512,836,624 325,268,224 504,036,391 481,416,026 273,292,268
Dividends paid
Payments to U.S. Treasury
(interest on F.R. notes)
5,937,148,424 2631,534,575 ,482,064,725 321,384,019 496,089,262 476,974,463 266,134,984
60,182,278
1,973,285
15,319,899
2,606,405
5,142,729
3,279,713
4,604,434
971,509,142 243,877,r,178 130,075,466 224,619,182 291,845,195 821,925,296
9,144,005
1,962,681
1,777,080
2,542,017
3,411,215
8,418,815
953,289,737 242,329,047 126,158,086 219,502,415 285,415,130 804,271,981
rransferred to surplus.
Surplus, January 1
45,727,650 -3,150,500
983,274,200 35,373,000
15,452,000 1,277,800
251,256,950 42,870,600
2,804,400
84,214,250
1,161,850
53,931,900
2,552,850
75,056,700
9,075,400 -414,550 2,140,300 2,574,750 3,018,850
9,234,500
147,957,550 32,551,450 28,589,900 40,904,450 55,203,800 135,363,650
Surplus, December 31.
1,029,001,850 32,222,500
266,708,950 44,148,400
87,018,650
55,093,750
77,609,550
157,032,950 32,136,900 30,730,200 43,479,200 58,222,650 144,598,150
1
Includes earnings on note due from FDIC account Franklin National Bank. Earnings
lorn this source amounted to $63,998,374 in 19J6 and $26,186,215 in 1977.
* The total expense for Richmond has been adjusted to exclude $2,414,851, which was
allocated to the expenses of other Reserve Banks for operation of the Federal Reserve
Communication System.
1
Does not include unrealized gains and losses.
* See pp. 430-432 for additional details.
NOTE.—Details may not add to totals because of rounding.
7. Earnings and expenses of Federal Reserve Banks, 1914-77
In dollars
Current
earnings
Period or Bank
All F.R. Banks,
by years:
1914-15
1916
1917
1918
1919
Current
expenses
Net additions
or
deductions (—)
Assessment
for expenditures of
Board of
Governors
Payments to U.S. Treasury
Dividends
paid
Franchise
tax
Under
Sec. 13b
Interest on
F.R. notes
Transferred
to surplus
(Sec. 13b)
Transferred
to surplus
(Sec. 7)
2,173,252
5,217,998
16 128,339
67,584,417
102 380,583
2,018 282
2,081,722
4,921 932
10,576,892
18,744 815
5,875
-193,001
-1,386,545
-3,908,574
— 4,673,446
302,304
192,277
237,795
382,641
594,818
217,463
1,742,775
6,804,186
5,540,684
5,011,832
2 703 894
1 134 234
48,334,341
70 651 778
181 296 711
122,865,866
50,498,699
50,708,566
38,340,449
41 800,706
47,599,595
43,024,484
64,052,860
70,955,496
27,548 505
33,722,409
28,836,504
29,061,539
27,767,886
26,818 664
26,628,458
26,739,327
26,207,133
28,909,469
— 3,743,907
-6,314,796
-4,441,914
— 8,233,107
-6,191,143
— 4,823,477
-3,637,668
-2,457,792
— 5,026,029
-4,861,642
709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644
5 654,018
6,119,673
6,307,035
6,552,717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911
60 724 742
59,974 466
10,850,605
3 613 056
113,646
59 300
818,150
249,591
2,584 659
4,283,231
82 916 014
15,993 086
-659,904
2 545 513
— 3,077,962
2 473 808
8 464 426
5,044,119
21 078 899
22,535,597
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
36,424,044
29,701,279
50,018,817
49,487,318
48,902,813
42,751,959
37,900,639
41,233,135
36,261,428
38,500,665
27,533,141
26,322 110
25,562,571
28,422,677
27,869,374
30,171,545
28,194,457
27,052,234
27,186,684
27,025,391
-93,136
311,451
-1,413,192
-12,307,074
-4,430,008
-1,736,758
485,817
-1,631,274
2,232,134
2,389,555
809,585
718,554
728,810
800,160
1.372.022
1,405,898
L,679,566
1,748,380
1,724,924
1,621,464
10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462
17,308
— 2,297,724
— 7 057 694
11 020 582
— 916,855
6 510 071
607,422
352 524
2 616 352
1,862,433
4 533 977
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
43,537,805
41,380,095
52,662,704
69,305,715
104,391,829
142,209,546
150,385,033
158,655,566
304 160,818
316,536,930
27,461,466
31,123,609
36,877,718
41,129,934
46,879,564
46,376,762
54,975,323
62,753,308
69,466,518
74,235,176
11,487,697
720,636
-1,568,208
23,768,282
3,221,880
-830,007
-625,991
1,973,001
— 34,317,947
-12,122,274
1,704,011
L839.541
l|746;326
2,415,630
2,296,357
2,340,509
2,259,784
2,639,667
3 - 243.670
*,242,500
8,214,971
8,429,936
8,669,076
8,911,342
9,500,126
10,182,851
10,962,160
11,523,047
11,919,809
12,329,373
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
. .
1 134 234
2,011,418
297,667
227 448
176,625
119,524
24,579
— 60 323
27,695
102 880
67 304
—419,140
—425 653
82,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605
-54,456
— 4 333
49,602
135 003
201 150
262,133
27 708
86,772
75,223,818
166 690 356
193,145,837
17,617,358
570 513
3,554,101
40 237 362
48 409 795
81,969,625
81 467 013
8 366 350
18 522 518
21,461,770
1950
1951
1952
1953
1954
1955
1956.
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973.
1974
1975
1976
1977
275 838 994
394 656 072
456,060,260
513 037 237
438,486,040
412,487,931
595,649 092
763,347,530
742,068 150
886,226,116
77 138 071
91,373,589
100,572,489
109 415,220
105,558,331
105,865,923
115,842,696
124,306,103
131,804,455
138,232,106
36 294 117
- 2 , 1 2 7 889
1,583,988
- 1 , 0 5 8 993
-133,641
-265,456
-23,436
-7,140,914
124 175
98,247,253
3,433 700
4,095,497
4,121,602
4,099,800
4,174,600
4,194,100
5,339,800
7,507,900
5,917,200
6,470,600
13 082 992
13,864,750
14,681,788
15,558 377
16,442,236
17,711,937
18,904,897
20,080,527
21,197,452
22,721,687
196 628 858
254,873,588
291,934,634
342,567,985
276,289,457
251,740,721
401,555,581
542,708,405
524,058,650
910,649,768
1,103,385,257
941 648 170
1,048,508,335
1,151 120 060
1,343,747,303
1,559,484,027
1,908,499,896
2,190,403,752
2,764,445 943
3 373 360 559
147,348,575
155 009 475
169,481,234
179 700 557
188,740,689
195,713,790
198,379,526
209,351,250
228,152,172
259 953 236
13,874,702
3,481 628
-55,779
614 835
725,948
1,021,614
996,230
2,093,876
8,519,996
- 5 5 7 553
6,533,700
6,265,100
6,654,900
7,572 800
8,655,200
8,576,396
9,021,600
10,769,596
14,198,198
15,020 084
23,948,225
25,569 541
27,412,241
28,912 019
30,781,548
32,351,602
33,696,336
35,027,312
36,959,336
39 236 599
896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614
1,296,810,053
1,649,455,164
1,907,498,270
2,463,628,983
3,019 160 638
42,613,100
70,892,300
45,538,200
55,864 300
-465,822,800
27,053,800
18,943,500
29,851,200
30,027,250
39 432 450
3 877 218 444
3,723,369 921
3 792 334 523
5,016,769,328
6,280 090 965
6 257 936 784
6 623 220 383
6,891,317,498
300 145 586
11 441 829
344,550 798
94,266 075
379 371 852 — 49 615 790
450,705,676
-80,653,488
506 424 874
- 7 8 487 237
551 488 714 — 202 369 615
606*948*264
7 310*500
623,859,582 - 1 7 7 , 0 3 3 , 4 6 3
21,227 800
32,634,002
35,234 499
44,411,700
41,116,600
33 577 201
41,827,700
47,366,100
41 136 551
43,488,074
46,183 719
49,139,682
52,579 643
54 609 555
57,351 487
60,182,278
3,493 570 636
3,356,559,873
3,231,267,663
4,340,680,482
5,549,999 411
5,382 064 098
5,870,463,382
5,937,148,425
32,579 700
40,403,250
50,661,000
51,178,300
51,483,200
33 827 600
53,940,050
45,727,650
485,294,208
1,171,771,645
149 ,138 ,300
2,188 ,893 56,771,754,290
- 3 ,657
1,157,674,049
22,796,486
540 452,362 - 1 3 , 6 8 1 , 4 1 0
3 353 056 513
17,493,095,990 1,671,072,443 - 1 0 5 , 6 2 5 , 1 1 5 130,891,986
434 424 162
- 1 3 176 904 27,119,418
3 714 666 323
597,176,944
43,545,890
-36,330,224
5,411,489,179
4 909 189 942
610 142 316 - 1 8 716 215 25,211,176
30,962,560
3,597,100,783
606,330,198
-34,766,220
71,575,772
10,840,428,943 1,059,286,385
-67,467,138
450,848,154
16,624,472
2,611,773,212
-13,755,072
11,913,215
1,473,001,567
307,886,139
-8,983,693
19,872,709
463,816,636
-15,308,438
2,733,781,896
2 995 683 666
395 161 762 - 2 3 409 070 25,572 773
8,890,486,715
746,040,431
-52,079,571
59,207,751
59,683 319
336,080,421
72 686 672
108,764,910
57 069 791
66,191,510
162,703,365
39,955,143
28,093,282
46,897,670
58 807 648
134,837,914
7 ,111 ,395
68 006 ,?6?
5 , 5S8 ,901
4 ,84? ,447
6 ,?00 189
8 950 ,561
25 ,313 ,526
? ,755 ,6?9
5 ,202 ,900
6 ,939 ,100
560 049
7 ,697 ,341
280 ,843
2,666,597,962
369 116 14,877,518,539
3,102,208,577
722 ,406
82 ,930 4,520,503,297
172 ,493 4,130,775,721
79 , ?64 2,766,938,889
151 ,045
9,281,558,326
2,050,597,265
7 ,464
55 ,615
1,076,194,436
64 ,?13
2,133,272,654
102 083
2,429 514,816
101 ,421
7,736,073,808
135 ,411
- 4 3 3 413
290 ,661
- 9 906
— 71 ,517
5 ,491
11 ,682
- 2 6 515
64 ,874
— 8 ,674
55 ,337
- 1 7 ,089
42,317,325
303,965,521
58,478,622
100,252,443
60,973,558
82,876,090
172,361,704
37,256,528
34,607,413
47,619,150
62,500,128
154,465,567
1,171,771,645
149 ,138 ,300
. .
...
. .
. . .
Total 1 9 1 4 - 7 7 . . . .
Aggregate for each
F.R. Bank, 1914-77:
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City..
Dallas
San Francisco
Total . . .
68,023,754,729
68,023,754,729
7,882,637,932
7,882,637,932
-403,299,068
-403,299,068
485,294,208
i The $1,157,674,049 transferred to surplus was reduced by direct charges of $500,000
for charge-off on Bank premises (1927), $139,299,557 for contributions to capital of the
Federal Deposit Insurance Corporation (1934), and $3,657 net upon elimination of
2,188 ,893
56,771,754,290
21 849 490
28,320,759
46,333,735
40,336 862
35,887,775
32,709,794
53,982,682
61,603,682
59,214,569
-93,600,791
- 3 ,657 11,157,674,049
Sec. 13b surplus (1958), and was increased by $11,131,013 transferred from reserves for
contingencies (1945), leaving a balance of $1,029,001,848 on Dec. 31, 1977.
NOTE.—Details may not add to totals because of rounding.
448 Tables
8. Bank premises of Federal Reserve Banks and branches,
December 31,1977
In dollars
Cost
F.R. Bank
or branch
Building machinery and
equipment
Land
Buildings
(including
vaults) *
oston —
Annex.
20,235,047
27,840
86,749,890
89,202
44,538
Jew York
Annex
hiffalo
5,215,656
592,679
673,076
13,016,452
1,491,116
2,679,944
12,048,844
716,472
1,604,053
56,693,881
'hiladelphia...
1,369,997
:ieveland
C3 i n c i n n a t i . . . .
ittsburgh....
1,295,490
1,479,874
1,848,317
Richmond
Annex 1 . . . .
Annex 2
Baltimore
Charlotte
Net
book value
Other
real estate 2
Total
106,984,937 106,325,337
145,985
161,580
4,397,218
30,280,952
2,800,267
4,957,073
6,354,075
477,862
2,375,092
9,344,584
58,063,878
55,777,044
6,699,266
13,537,723
4,353,305
3,588,241
7,521,727
2,937,674
11,582,997
22,539,324
9,139,296
1,154,257
17,425,692
4,245,550
1,224,363
2,342,874
146,875
522,733
801,779
347,071
65,032,260
256,000
3,659,933
2,333,402
1,069,026
2,506,471
2,313
3,511,136
1,171,435
650,398
69,881,605
405,188
7,693,802
4,306,616
2,066,495
63,687,954
146,875
5,024,065
2,138,683
971,203
326,403
Atlanta
Birmingham...
Jacksonville
Annex
Nashville
New Orleans. .
1,304,755
410,775
164,004
107,925
592,342
1,557,663
6,488,356
2,000,619
1,718,157
76,236
1,474,678
2,754,271
3,558,581
1,019,618
749,369
15,842
1,141,280
1,448,181
11,351,692
3,431,012
2,631,530
200,003
3,208,300
5,760,115
6,142,087
1,576,297
1,033,605
163,450
1,585,735
3,724,845
Chicago..
Annex.
Detroit..
6,275,490
50,000
1,147,734
17,847,133
173,197
3,170,322
10,995,702
93,916
1,787,882
35,118,325
317,113
6,105,938
12,801,864
409,414
2,474,733
St. Louis
Little Rock....
Louisville
Memphis
1,675,780
800,104
700,075
1,135,623
3,886,293
2,037,868
2,859,819
4,216,382
3,058,393
1,015,628
1,159,753
2,126,755
8,620,466
3,853,600
4,719,647
7,478,760
1,853,651
2,660,881
2,475,212
5,842,925
Minneapolis...
Helena
Kansas City
Denver
Oklahoma City
Omaha
1,394,384
71,390
23,606,389
126,400
10,928,091
62,977
35,928,864
260,767
29,281,002
91,312
1,390,369
2,997,746
647,686
1,030,226
9,669,673
3,206,456
2,449,326
1,576,662
3,778,724
2,324,013
1,477,169
817,214
14,838,766
8,528,215
4,574,181
3,424,102
6,749,830
5,940,641
3,629,457
1,960,775
Dallas
El Paso
Houston
San Antonio. .
3,723,160
262,477
1,959,770
448,596
4,826,832
787,728
1,488,120
1,400,390
3,570,804
393,301
714,187
570,847
12,120,796
1,443,506
4,162,077
2,419,833
6,172,789
831,958
3,102,759
1,430,021
San Francisco..
Annex
Los Angeles...
Portland
Salt Lake City.
Seattle
684,340
247,201
1,022,695
207,380
480,222
274,772
3,818,155
124,000
4,636,416
1,678,512
2,002,130
1,941,773
1,936,512
30,000
1,740,769
649,432
707,574
1,085,244
6,439,007
401,201
7,399,880
2,535,324
3,189,926
3,301,789
1,254,055
324,081
2,872,137
1,544,268
1,816,743
1,355,304
16,626,504
95,261,060 534,628,745 377,351,505
42,172,330
Total...
69,663,992 369,703,693
1
2
3,831,490
1,634,312
3,977,150
76,059
276,274
457,973
Includes expenditures for construction at some offices pending allocation to appropriate accounts.
Includes both acquisitions for banking-house purposes and Bank premises formerly occupied and
being held pending sale.
Tables
449
9. Volume of operations in principal departments of
Federal Reserve Banks, 1974-77
Operation
1977
1976
1975
1974
Millions of pieces handled l
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled:
U.S. Govt. checks
Postal money orders
All other 3
Collection items handled:
U.S. Govt. coupons paid
All other
Issues, redemptions, and exchanges of U.S.
Govt. securities
Transfers of funds
Food stamps redeemed
8 ,186
2 ,609
16 ,563
'8,061
2,671
15,925
7 666
2 625
15 412
7 ,303
2 ,713
15 ,089
740
139
13 ,312
768
169
12,287
844
176
11 ,410
723
169
10 ,820
6
4
8
4
9
16
10
28
286
25
1 ,901
289
21
2,003
277
17
2 493
283
15
2 ,513
Amounts handled (millions of dollars)
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled:
U.S. Govt. checks
Postal money orders
All other 3
Collection items handled:
U.S. Govt. coupons paid
All other
Issues, redemptions, and exchanges of U.S.
Govt. securities
Transfers of funds
Food stamps redeemed
77,511
75,933
14,952
2,239
17,697
71,011
14,606
2,109
39,822
66,065
14,279
2,120
361,231
61,943
14,800
2,005
416,386
5,661
5,499,856
399,468
6,305
4,645,069
349,957
8,524
4,256,924
318,984
5,687
4,104,275
3,276
26,959
4,748
23,929
6,175
26,973
6,337
28,795
8,835,730
43,165,467
7,422
7,051,978
35,617,756
7,883
4,575,365
31,392,865
7,940
3,085,911
30,361,778
5,679
* Revised.
1
Packaged items handled as a single item are counted as one piece.
» Number handled (in thousands): 1977, 12; 1976, 4; 1975, 6; 1974, 35.
* Exclusive of checks drawn on the F.R. Banks.
450
Tables
10. Principal operations of Federal Reserve Banks, including
total expenses, average number of employees, and ratio of
total expense for each operation to total expenses, 1974-77
Expenses and number of employees in thousands; ratios in per cent
Operation
19771
1976
1975
1974
2
Check clearing operations:
Total expense
Ratio to total expenses
Average number of employees.
$246,981
36.2
6.5
$135,209
20.5
6.3
$130,024
21.7
7.1
$124,962
22.8
7.5
Currency function:
Total expense
Ratio to total expenses
Average number of employees..
182,875
26.8
2.2
114,036
17.3
2.3
99,306
16.6
2.4
88,486
16.1
2.6
Fiscal agency operations:
Total expense
Ratio to total expenses
Average number of employees.,
73,002
10.7
2.0
48,158
7.3
2.3
45,307
7.6
2.4
41,342
7.5
2.3
Bank supervision:
Total expense
Ratio to total expenses
Average number of employees.,
52,702
7.7
1.3
23,322
3.5
1.1
19,936
3.3
1.0
17,302
3.2
1.0
Other operations: 3
Total expense
Ratio to total expenses
Average number of employees.,
126,318
18.6
2.2
29,919
4.6
1.4
27,623
4.6
1.5
24,946
4.5
1.4
10.1
307,806
46.8
11.1
277,014
46.2
11.3
252,133
45.9
11.1
23,298
8,050
38,519
39,814
64,292
27,219
24,501
82,113
21,702
7,289
33,226
34,652
58,391
26,449
22,255
73,050
20,306
6,637
28,717
30,567
52,532
24,384
20,728
68,262
$681,878
58,018
$658,450
$599,210
$549,171
51,502
47,721
42,747
$623,860
$606,948
$551,489
$506,424
General administration and support:
Total expense
Ratio to total expenses
Average number of employees
Accounting
Auditing
Bank administration.
Data processing
Occupancy
Personnel
Protection
Other
Total expenses
Less reimbursements.
Net expenses
1
Under a new expense accounting system, certain support activities were reclassified as operations, and
all general administration and support costs were allocated to operations. See p. 427 for discussion.
2 Includes automated clearinghouse and noncash collections.
3 Includes mainly economic research and statistics, foreign operations, and lending and credit.
Tables
451
11. Number and salaries of officers and employees of Federal
Reserve Banks, December 31, 1977
President
Federal Reserve
Bank (including
branches)
Other officers
Annual Numsalary
(dollars) ber
Total
Employees
Annual
salaries
(dollars)
Number
Fulltime
Parttime
Annual
salaries
(dollars)
Number
Annual
salaries
(dollars)
. . . 77,500
110,000
66,000
45
124
37
1,496,530
5,133,900
1,209,350
1,409
4,547
1,098
147
110
62
19,161,394
65,655,509
13,527,790
1,602
4,782
1,198
20,735,424
70,899,409
14,803,140
Cleveland
Richmond
Atlanta.
74,000
64,250
83,000
40
66
63
1,270,000
2,131,600
1,982,400
1,501
2,016
2,333
43
83
63
17,029,844
22,843,524
26,249,297
1,585
2,166
2,460
18,373,844
25,039,374
28,314,697
Chicago
St. Louis
Minneapolis
90,000
69,960
55,000
60
44
30
1,986,000
1,398,013
1,017,000
2,947
1,309
866
120
60
14
35,173,010
14,975,974
10,482,260
3,128
1,414
911
37,249,010
16,443,947
11,554,260
58,000
. . 63,000
90,000
50
39
69
1,500,500
1,170,300
2,238,000
1,548
1,199
1,764
79
38
77
17,135,700
13,410,908
23,291,131
1,678
1,277
1,913
18,694,200
14,644,208
25,619,131
Boston ...
New York
Philadelphia
Kansas City
Dallas
San Francisco
Total
900,710
667 22,533,593 22,537
896 278,936,341 24,114 302,370,644
12. Federal Reserve Bank interest rates, December 31, 1977
Per cent per annum
Loans to member banks—
Federal Reserve
Bank
Under
Sees. 13
and 13a 1
S
Boston
New York
Under
Sec. 10(b) 2
Loans to all others
under last par. Sec. 13 4
Regular rate
Special rate 3
6A
7
Philadelphia....
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis....
Kansas City
Dallas
San Francisco..
i
>
61fi
>
>
<
1 Discounts of eligible paper and advances secured by such paper or by U.S. Govt. obligations or
any other obligations eligible for F.R. Bank purchase.
2 Advances secured to the satisfaction of the F.R. Bank. Advances secured by mortgages on 1- to 4family
residential property are made at the Section 13 rate.
3
Applicable to special advances described in Section 201.2(e)(2) of Regulation A.
4
Advances to individuals, partnerships, or corporations other than member banks secured by direct
obligations of, or obligations fully guaranteed as to principal and interest by, the U.S. Govt. or any
agency thereof.
452
Tables
13. Member bank reserve requirements
Per cent of deposits
Through July 13, 1966
Net demand deposits *
Effective date
Central reserve
city banks
1917—June
1936—Aug.
1937—Mar.
May
1938—Apr.
1941—Nov.
1942—Aug.
Sept.
Oct.
1948—Feb.
June
Sept.
1949—May
June
Aug.
Aug.
Aug.
Aug.
Sept.
1951—Jan.
Jan.
1953—July
1954—June
July
1958—Feb.
Mar.
Apr.
Apr.
1960—Sept.
Nov.
Dec.
1962—July
Oct.
Time deposits
(all classes
of banks)
l
21
16
1
1...
16
1
20
14
3
27
11
24, 16
5, 1
30, July 1
1
11, 16
18
25
1
11, 16
25, Feb. 1
9, 1
24, 16
29, Aug. 1
27, Mar. 1
20, Apr. 1
17
24
1
24
1
28
25, Nov. 1
13
19 Vi
223/4
26
223/4
26
24
22
20
22
24
26
24
Reserve city
banks
10
15
ioy 2
20
17 y2
20
i2y 4
14
12
14
7
3
41/2
5»/4
6
5
6
7y 2
19 V%
19
18 Vi
18
19
20
19
16
15
14
13
12
13
14
13
6
18
17 Vi
17
12
11V4
11
22
21
20
23 y2
23
22y 2
22
23
24
22
21
20
19%
19
\SVx
18
i7y a
Country
banks
6
5
5
16Va
12
i6y 2
(»)
4
July 14, 1966, through Nov. 8, 1972 (deposit intervals are in millions of dollars)
Net demand
deposits *
Effective date
l
Reserve
city banks
Time deposits «
(all classes of banks)
Other
time
Country
banks
Savings
Over
0-5
1966—July 14,21
Sept. 8, 15
Over
0-5
54
» 12
M6V4
3y2
1967—Mar. 2
Mar. 16
1968—Jan. 11, 18
1969—Apr. 17
1970—Oct. 1
1
0-5
16y2
17
t7
i7y 3
12
12y2
54
Over
5
6
3y2
12 V,
13
5
Reserves required during the period from inception of the Federal Reserve System until June 20,
1917, were not strictly comparable with later requirements; they were based on aggregate amounts of
deposits, and reserve balances with the Reserve Banks were increased in stages. When two dates are
shown, the first applies to the change at central reserve or reserve city banks and the second to the
change at country banks.
2
(a) Demand deposits subject to reserve requirements, which beginning with Aug. 23, 1935, have
been total demand deposits minus cash items in process of collection and demand balances due from
domestic banks (also minus war loan and Series E bond accounts during the period Apr. 13, 1943—
June 30, 1947).
(b) All required reserves were held on deposit with F.R. Banks June 21, 1917, until late 1959. Since
FRASER
then, member banks have also been allowed to count vault cash as reserves, as follows: country banks—
Digitized for
Tables 453
13.—Continued
Beginning Nov. $>, 1972 (deposit intervals a r e in millions of dollars)
Net demand deposits2*1
Time deposits4
Other time
0-5 , maturing
in—
Effective date
0-2
1972—Nov. 9 .
Nov. 16 .
1973—July 19
1974 Dec 12
1975—Feb. 13
Oct. 30
1976—Jan. 8 .
Dec. 30 .
IneffectDec.31,1977..
8
7%
7
7
2-10
10100
10
12
ioy2
12%
10
12
9Vi
9%
11%
11%
100-
Over
Sav-
400
400
ings
»16%
17 x / 2
S3
13
13
12%
12%
30179
days
180
days 4yrs.
or
to
4yrs. more
30179
days
180
days 4yrs.
or
to
4yrs. more
6
53
18
17V2
16%
16%
Over 5 7, maturing
in—
5
3
6
3
Legal limits—Dec. 31, 1977:
Net demand deposits:
Reserve city banks
Other banks
Time deposits
3
»2y2
3
•2%
•1
•1
3
*2Vi
6
•2%
01
Minimum Maximum
10
7
3
22
14
10
in excess of 4 and 2!/2 per cent of net demand deposits effective Dec. 1, 1959, and Aug. 25, 1960, respectively;
central reserve city and reserve city banks—in excess of 2 and 1 per cent effective Dec. 3, 1959, and, Sept. 1,
1960, respectively; all member banks were allowed to count all vault cash as reserves effective Nov. 24,1960.
2 (c) In graduated requirement schedules, each deposit interval applies to that part of the deposits of each bank.
(d) Since Oct. 16, 1969, Regulation M has required reserves against (1) net balances due from domestic offices
to their foreign branches and (2) foreign branch loans to U.S. residents; Regulation D imposes a similar requirement
against (3) borrowings from foreign banks by domestic offices of a member bank. Limited reserve-free base amounts,
originally permitted under Regulation M, were eliminated for (2) effective June 21, 1973, and for (1) and (3) they
were gradually removed until eliminated effective Mar. 14, 1974. Beginning June 21, 1973, loans aggregating $100,000
or less to any U.S. resident have been excluded from computations, as have total loans of a bank to U.S. residents
if not exceeding $1 million. The applicable reserve percentage was 10 per cent originally, was increased to 20 per cent
on Jan. 7, 1971, was reduced to 8 per cent on June 21, 1973, and was further reduced to 4 per cent effective May 22,
1975. Effective Dec. 1, 1977, the reserve required against deposits that foreign branches of U.S. banks use for lending
to U.S. residents was reduced to 1 per cent. For details, see Regulations D and M as described in Record of Policy
Actions
of the Board of Governors in previous ANNUAL REPORTS.
1
Authority of the Board of Governors to classify or reclassify cities as central reserve cities was terminated
effective
July 28, 1962.
4
Time deposits such as Christmas and vacation club accounts became subject to the same requirements as savings
deposits, effective Jan. 5, 1967. Negotiable orders of withdrawal (NOW) accounts were denned in the Board's
Regulation Q as savings deposits beginning Jan. 1, 1974.
Notes 2(b), 2(c), and 2(d) above are also relevant to time deposits.
*6 See columns above for effective date of this rate.
Effective Nov. 9,1972, a new criterion was adopted to designate reserve cities, and on the same date requirements
for reserves against net demand deposits of member banks were restructured to provide that each member bank
will maintain reserves related to the size of its net demand deposits. The new reserve city designations are as follows:
A bank having net demand deposits of more than $400 million is considered to have the character of business of a
reserve city bank, and the presence of the head office of such a bank constitutes designation of that place as a
reserve city. Cities in which there are F.R. Banks or branches are also reserve cities. Any banks, wherever located,
having net demand deposits of $400 million or less are considered to have the character of business of banks outside
of reserve cities and are permitted to maintain reserves at ratios set for banks not in reserve cities.
7
From June 21, 1973, through Dec. 11, 1974, member banks, except as noted below, were subject to a marginal
reserve requirement against increases in the aggregate of the following types of obligations: (a) outstanding time
deposits of $100,000 or more, (b) outstanding funds obtained by the bank through issuance by a bank's affiliate of
obligations subject to the existing reserve requirements on time deposits, and (c) beginning July 12, 1973, funds
from sales of finance bills. For the period June 21 through Aug. 29, 1973, (a) included only single-maturity time
deposits. The requirement applied to balances above a specified base, but was not applicable to banks having
obligations of these types aggregating less than $10 million. Including the basic requirement (5 per cent during the
entire period), requirements were: 8 per cent for (a) and (b) from June 21 through Oct. 3, 1973, and for (c) from
July 12 through Oct. 3, 1973; 11 per cent from Oct. 4 through Dec. 26, 1973; and 8 per cent from Dec. 27, 1973,
through Sept. 18, 1974. Beginning Sept. 19, the 8 per cent requirement applied to only those obligations in (a),
(b), and (c) with initial maturities of less than 120 days, and effective Dec. 12, 1974, the remaining marginal reserve
on this type of obligation issued to mature in less than 4 months, was removed. For details, see Record of Policy
Actions of the Board of Governors in 1973 and 1974 ANNUAL REPORTS.
8
The 16*>4 per cent requirement applied for 1 week, only to former reserve city banks. For other banks, the
13 per cent requirement was continued in this deposit interval.
9 FRASER
Digitized for
The average of reserves on savings and other time deposits must be at least 3 per cent, the legal minimum.
454
Tables
14. Maximum interest rates payable on time and savings
deposits
Per cent per annum
Nov. 1, 1933—July 19, 1966
Effective date
Type of deposit
Nov. 1, Feb. 1, Jan. 1, Jan. 1, Jan. 1, July 17, Nov. 24, Dec. 6,
1935
1936
1957
1933
1962
1963
1964
1965
2y2
CO
Savings deposits:
12 months or more
Less than 12 months
Postal savings deposits: x
12 months or more
Less than 12 months
Other time deposits: 2
12 months or more
6-12 months
90 days to 6 months
Less than 90 days
(30-89 days)
CO
CO CO CO
2y2
2y2
2y2
2y2
3
2Vi
3
2%
2
1
3
2y2
4
{k
{k
[k
4
} *
4
2Vi
1
4
4
July 20, 1966—June 30, 1973
Effective date
Type of deposit
July 20,
1966
Savings deposits
Other time deposits: 2
Multiple maturity: 3
30-89 days
90 days to 1 year
)
1-2 years
2 years or more
j
Single-maturity:
Less than $100,000:
30 days to 1 year....
1-2 years
2 years or more
$100,000 or more:
30-59 days
60-89 days
90-179 days
180 days to 1 year...
1 year or more
Sept. 26,
1966
Apr. 19,
1968
Jan. 21,
1970
4%
4
4
4
4
4
4
5
5
f 5
I 53/4
5
f
\
4%
5
5Vi
3
I 5 /4
1
5y2
5
53/4
6
5y2
§(44)
()
Beginning July 1, 1973
Effective date
Type of deposit
Savings deposits
Other time deposits
(multiple- and singlematurity) : 2 - 3
Less than $100,000:
30-89 days
90 days to 1 year
1-2 & years
2Vi years or more.
Minimum denomination of $1,000: 5
4-6 years
6 years or more
Governm
@FedFRASER