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'Report
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1988
Board of Governors of the Federal Reserve System
Letter ofTransmittal
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., May 15, 1989
THE SPEAKER OF
THE HOUSE OF REPRESENTATIVES
Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleased
to submit the Seventy-Fifth Annual Report of the Board of Governors of the Federal
Reserve System.
This report covers operations of the Board during calendar year 1988.
Sincerely,
Alan Greenspan, Chairman
Contents
Part 1
Monetary Policy and
the U.S. Economy in 1988
3 INTRODUCTION
5
5
7
8
9
10
THE ECONOMY IN 1988
The household sector
The business sector
The government sector
The labor markets
Price developments
12
12
15
16
MONETARY POLICY AND FINANCIAL MARKETS IN 1988
Monetary policy in 1988
Monetary aggregates
Credit market developments
19
20
22
24
INTERNATIONAL DEVELOPMENTS
Foreign economies
U.S. international transactions
Foreign currency operations
25 MONETARY POLICY REPORTS TO THE CONGRESS
25 Report on February 23, 1988
41 Report on July 13,1988
Part 2
63
63
63
64
65
65
65
67
68
Recordsy Operations, and Organization
RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
Regulation C (Home Mortgage Disclosure)
Regulation D (Reserve Requirements of Depository Institutions)
Regulation K (International Banking Operations)
Regulation T (Credit by Brokers and Dealers)
Regulation Y (Bank Holding Companies and Change in Bank Control)
Regulation CC (Availability of Funds and Collection of Checks)
Policy statements
1988 discount rates
73 RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
73 Authorization for domestic open market operations
75 Domestic policy directive
76 Authorization for foreign currency operations
78 Foreign currency directive
78 Meeting held on February 9-10, 1988
89 Meeting held on March 29, 1988
97 Meeting held on May 17, 1988
104 Meeting held on June 29-30, 1988
114 Meeting held on August 16, 1988
121 Meeting held on September 20, 1988
126 Meeting held on November 1, 1988
134 Meeting held on December 13-14, 1988
143
143
147
148
149
151
152
153
154
155
156
158
CONSUMER AND COMMUNITY AFFAIRS
Regulatory matters
Community affairs
Examination procedures
Compliance with consumer regulations
Economic effect of the Electronic Funds Transfer Act
Complaints against state member banks
Unregulated practices
Community Reinvestment Act
Consumer Advisory Council
Testimony and legislative recommendations
Recommendations of other agencies
159
159
159
160
LITIGATION
Bank holding companies—antitrust action
Bank Holding Company Act—review of Board actions
Other litigation involving challenges to Board procedures and regulations
163
163
164
164
165
165
166
166
LEGISLATION ENACTED
Omnibus Trade and Competitiveness Act of 1988
Management Interlocks Revision Act of 1988
Anti-Drug Abuse Act of 1988
Fair Credit and Charge Card Disclosure Act of 1988
Home Equity Loan Consumer Protection Act of 1988
Women's Business Ownership Act of 1988
Housing and Community Development Act of 1987
167
168
168
172
174
178
179
182
BANKING SUPERVISION AND REGULATION
Risk-based capital
Supervision for safety and soundness
Supervisory policy
Regulation of the U.S. banking structure
International activities of U. S. banking organizations
Enforcement of other laws and regulations
Federal Reserve membership
183
183
183
183
184
184
184
REGULATORY SIMPLIFICATION
Availability of information
Home mortgage disclosure
Debt-equity swaps
Issuance of foreign currency deposits
OTC margin bond
Efforts to assist regulatory compliance
185 FEDERAL RESERVE BANKS
185 Regulation CC
186 Other developments in the pricing of Federal Reserve services
and in the payments mechanism
189 Examinations
189 Income and expenses
190 Federal Reserve Bank premises
191 Holdings of securities and loans
191 Volume of operations
191 Financial statements for priced services
197 BOARD OF GOVERNORS FINANCIAL STATEMENTS
203 STATISTICAL TABLES
204
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1988
206 2. Statement of condition of each Federal Reserve Bank, December 31,1988andl987
210 3. Federal Reserve open market transactions ,1988
212 4. Federal Reserve Bank holdings of U. S. Treasury and federal agency securities,
December 31, 1986-88
213 5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1988
214 6. Income and expenses of Federal Reserve Banks,1988
218 7. Income and expenses of Federal Reserve Banks, 1914-88
222 8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1988
223 9. Operations in principal departments of Federal Reserve Banks, 1985-88
224 10. Federal Reserve Bank interest rates, December 31, 1988
225 11. Reserve requirements of depository institutions
226 12. Initial margin requirements under Regulations T, U, G, and X
227 13. Principal assets and liabilities and number of insured commercial banks,
by class of bank, June 30, 1988 and 1987
228 14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-88, and month-end 1988
232 15. Changes in number of banking offices in the United States ,1988
233 16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1988
241
242
244
245
246
247
248
FEDERAL RESERVE DIRECTORIES AND MEETINGS
Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Advisory Council
Consumer Advisory Council
Thrift Institutions Advisory Council
Officers of Federal Reserve Banks, Branches, and Offices
271 INDEX
280 MAPS OF THE FEDERAL RESERVE SYSTEM
Parti
Monetary Policy and
the U S. Economy in 1988
Introduction
Overall, 1988 was another year of
progress for the U.S. economy, with
further substantial increases in output
and employment and a significant improvement in the balance of trade. Although the dramatic stock market break
of October 1987 seemed to slow real
activity for a time around the start of
1988, the underlying strength of the economy soon showed through, and apart
from losses of farm output caused by the
drought, growth proceeded at a relatively
strong pace throughout the year.
Inflation remained in check during
1988. Even so, developments were a bit
worrisome as, for a second year, increases in prices were somewhat larger
than in earlier years of the expansion.
Part of the pressure on prices in 1988
came in the food area and reflected the
influence of the drought. However, with
labor markets tightening, the rise of
wages and total hourly compensation
quickened and affected prices more
generally.
Federal Reserve policy mirrored the
changing economic circumstances of
1988. Early in the year, as in late 1987,
the Federal Reserve sought to limit
repercussions from the plunge in stock
prices and, in particular, to guard against
the possibility of a significant contraction in business activity. Pressures
on the reserve positions of depository
institutions were eased a bit further in
early 1988, and interest rates edged
down for a time, extending the declines
NOTE. This discussion of economic and financial
developments in 1988 is adapted from the Monetary
Policy Report to the Congress Pursuant to the Full
Employment and Balanced Growth Act of 1978
(Board of Governors, February 1989).
that had begun in October of 1987.
Growth of M2 and M3 was fairly rapid
during this period, nearly reaching the
upper bounds of the annual target ranges
established by the Federal Open Market
Committee.
As it became clear in the spring of
1988 that the economy still was strong,
the focus of Federal Reserve policy
shifted. For much of the year, the rapid
growth of spending and a continued
tightening of markets for labor and
products caused concern about a worsening of inflation. A sharp upswing in real
net exports of goods and services that had
begun in 1987 continued into 1988; while
this upturn was a welcome and necessary
part of the adjustment of the U.S. economy toward a better balance in its external
accounts, it also intensified the demands
on U.S. producers at a time when the
utilization of domestic labor and capital
already was quite high. Accommodating
the improvement in our external position
while limiting the risk of heightened
inflation required restraint on the growth
of domestic demand.
The shift by the Federal Reserve
toward restraint was reflected in a tightening of the reserve market that began in
late March and continued, in several
steps, into 1989. Short-term market
interest rates moved up during this period, influenced both by the System's
tightening and the strength of the economy, and the Board of Governors approved a Vi percentage point increase in
the discount rate in August, to 6Vi
percent. Growth of M2 moderated after
the spring and ended the year just below
the middle of the 1988 target range. The
growth of M3 also ebbed over the last
two quarters of the year as the needs of
Introduction
banks and thrifts to fund credit expansion
slackened.
Short-term interest rates at the end of
1988 were about 2Vi percentage points
higher than they were early in the spring.
Long-term interest rates, by contrast,
changed little on net over that same
period; and the stock market moved up
fairly steadily over the course of the year,
recovering more than a third of the losses
of the previous October. These favorable
trends in the bond and stock markets, in
the face of rising short-term interest rates,
suggested that investors maintained a
relatively optimistic view of the long-run
prospects for the U.S. economy.
If that optimism is, in fact, to be
justified by events, then both private
citizens and the government must continue to work to correct economic imbalances that remain and to address new
challenges. In the private sector, business
and labor are in the process of adjusting
to a world economy that has become far
more competitive than it was over much
of the postwar period, and only part of
that adjustment was accomplished in
1988. Further progress will demand a
continuing commitment on the part of
U.S. firms to capitalize on the enhanced
competitiveness resulting from the depreciation of the dollar since 1985. That
commitment must take the form not only
of continued cost control and price restraint but also of more intense efforts at
marketing abroad and investment in new
capacity where constraints are visible.
Failure on these counts would almost
certainly leave the U. S. economy considerably less well off over the long haul.
Government policy can encourage
businesses to make the longer-range
commitments needed to bring about
better balance in the economy and to
foster longer-run growth. A monetary
policy directed steadfastly at movement
toward price stability is an essential
ingredient for promoting sustainable
growth. But also crucial is further
progress toward balance in the federal
budget, along the lines specified in the
Gramm-Rudman-Hollings legislation.
In that regard, any steps taken now to
ensure continuing progress toward appropriate fiscal restraint over the longer
term would likely have a particularly
salutary effect on the expectations of
businesses and investors and would
thereby enhance considerably the longrun prospects for noninflationary
growth.
•
The Economy in 1988
The U.S. economy completed a sixth
year of expansion in 1988. Real gross
national product rose about 2% percent
over the course of the year, the number of
jobs increased more than 3Vi million,
and the unemployment rate remained on
a downward course, closing the year at
5.3 percent, its lowest level in 14 years.1
Progress also was made toward restoring
external balance, as the merchandise
trade deficit fell sharply.
The year began on a note of uncertainty. The sharp break in the stock
market in the fall of 1987 had raised
concern that the economy might falter,
and some signs of weakness did emerge
around the start of 1988. By early spring,
however, it became clear that the expansion still had considerable vigor, particularly from rising exports and a boom in
capital spending. Households, meanwhile, adjusted fairly readily to the loss
of wealth in the stock market, and consumer spending rose at a strong pace
throughout the year. Toward the end of
the year, net exports and capital spending
softened, but there was enough impetus
from other sectors to keep real GNP on a
firm upward course.
The rate of inflation, which had picked
up in 1987, remained somewhat higher in
1988 than in earlier years. The step-up in
1987 had resulted mainly from a rebound
in the price of oil and the passthrough of
higher prices for imports. In 1988, by
contrast, extra price pressures reflected
the effect of drought on the price of food
and, more generally, a widespread pickup
in labor costs in the domestic economy.
1. Except where noted, percent changes are over
the four quarters of the year indicated.
The rise in real GNP in 1988 would
have been about 3Vi percent but for a
severe drought, one of the worst of this
century, which caused huge losses of
farm output. These losses accounted for
most of the slowdown in GNP growth
that occurred after the first quarter of
1988. Fortunately, inventories of farm
products had been sizable coming into
1988, and a drawdown of stocks helped
to buffer households and others from the
disruption to output. Within the farm
sector, the drought strained the finances
of some producers, but the financial
condition of many others was not seriously affected, and the sector as a whole
remained stronger fundamentally than in
thefirsthalf of the 1980s, when the boom
of the previous decade was unwinding.
In most of the nonfarm economy, the
growth of activity was robust in 1988.
Production in the manufacturing sector
increased 5Vi percent, nearly matching
the previous year's gain, and factory
employment rose sharply. Employment
also continued to grow rapidly in retail
and wholesale trade and among the
providers of business and health services. However, oil drilling activity,
which had turned up in 1987 when oil
prices were rising, weakened over 1988,
intensifying economic stresses in some
parts of the country.
The Household Sector
At the start of 1988, concern about the
possible effect of the stock market break
on the real economy centered on the
household sector. The drop in share
values had pared roughly one-half trillion
dollars from household wealth, and the
6
The Economy in 1988
Indicators of Economic Performance
Percent change, Q4 to Q4
Percent change, Q4 to Q4
Real personal income and consumption
Real GNP
Disp,.
,
Consumption expenditures
Percent of disposable income
Millions r»f unit* annual rate
Personal saving rate
Private housing starts
Single-family
1.0
0.5
Multifamily
Billions of 1982 dollars
Percent change, Q4 to Q4
Real business fixed investment
Changes in real business inventories
30
60
Structure 5
1
Producers durable equipment
•
•
.
u
1986
- 0
30
Percent
Percent change, Q4 to Q4
•
GNP fixed-weight price index
1988
The data are seasonally adjusted. The unemployment
data are from the Department of Labor; the rest are from
LLull
10
Civilian unemployment rate
1984
ii
30
1984
1986
the Department of Commerce,
1988
The Economy in 1988
degree to which spending would be cut in
response to this loss of wealth was not
clear.
In the event, the loss of wealth may
indeed have trimmed consumer demand.
The personal saving rate rose after the
crash, and over the next year it was on
average about 1 percentage point higher
than in the year preceding the crash. But
with exports and capital investment booming, the growth of jobs and real incomes
remained strong in 1988, and the uncertainties spawned by the crash soon gave
way to renewed optimism among households. Thus, after the initial jump in the
saving rate, real consumption expenditures grew at about the same pace as the
trend in real after-tax income; the rise
over the year was about 3 % percent.
Consumer spending for durable goods
was brisk in 1988. The unit sales of light
trucks and vans surged in 1988, maintaining the exceptional strength that has been
evident during the current expansion,
and the sales of domestically produced
automobiles moved up a bit from the
1987 pace. Among the household durables, real outlays for furniture and
appliances, which had slowed in 1987,
increased 7 percent during 1988, renewing the strength that had been evident
over the 1983-86 period.
Real residential investment fell slightly
in thefirsthalf of 1988; but it turned up in
the second half and by the fourth quarter
was a little above the level of a year
earlier. Starts of multifamily housing
units, which had slumped in 1987, fell
further in the first quarter of 1988 and
then flattened out over the remainder of
the year. In the single-family sector, starts
declined somewhat in the first half of
1988 but then rebounded; activity in the
fourth quarter was the highest since the
third quarter of 1987. By historical
standards, these swings in single-family
starts were relatively mild; indeed, in
comparison with the boom and bust
7
cycles of the 1970s and early 1980s,
activity in the single-family market was
stable over the entire period from 1983 to
1988. Nonetheless, total housing starts in
1988 were down sharply from earlier
years of the expansion because of the big
drop in construction of multifamily units.
The Business Sector
Virtually all indicators of business activity exhibited strength in 1988. Business
sales, in nominal terms, rose 9 percent
over the year. Hiring was brisk in most
sectors, and operating rates rose further;
in the industrial sector, capacity utilization at the end of 1988 was at its highest
level since 1979. Corporate profits remained healthy.
A surge in spending for business
equipment that had begun in 1987 extended through the first half of 1988,
when outlays grew in real terms at an
annual rate of about 20 percent. The
surge was led by sizable investment in
high-technology items - computers, communication equipment, and the like—but
outlays for other types of equipment also
were strong. The rise in equipment
spending slowed after midyear, and some
weakness became evident toward the end
of the year. At year-end, however, most
indicators suggested that the underlying
trend in equipment spending still was
positive.
Business spending for new construction declined in 1988, reversing the
moderate increase of the previous year.
Commercial construction, the biggest
item in the total, continued to be restrained in 1988 by the big overhang of
vacancies that grew out of the building
boom of the mid-1980s. Gas and oil
drilling, following the lead of oil prices,
fell back from the pace of late 1987, but
remained above the lows of 1986. Construction of buildings for industrial use
was little changed over 1988; although
8
The Economy in 1988
capacity utilization was high in manufacturing, many producers appeared to be
limiting their needs for additional space
by shifting toward technologies that use
more compact equipment, by economizing on inventories, or by conserving on
space in other ways.
Inventory investment, which had been
sizable in late 1987, moderated in 1988,
and with sales on an upward trajectory,
stock overhangs were not a problem for
most businesses. In manufacturing,
stocks grew more rapidly in 1988 than
they have in recent years, but much of the
accumulation was in industries in which
orders and shipments also were generally
strong; the ratio of inventories to sales
for all of manufacturing moved down
during the year from the already low
levels of late 1987. In retail trade,
concern about a possible overhang of the
stocks of nondurables eased during the
year, and stocks at year-end did not
appear to be burdensome. By contrast,
auto dealers' stocks rose sharply in the
fourth quarter; at the end of the year, auto
manufacturers seemed likely to turn
toward enhanced sales incentives and,
perhaps, a lower assembly rate in an
effort to pare inventories. For all of
manufacturing and trade combined, the
ratio of inventories to sales varied little
over the course of 1988 and was near the
lower end of the range in which it had
been since the business expansion began.
flected a drought-induced reduction in
the farm inventories owned or financed
by the Commodity Credit Corporation
(CCC), a reduction that is counted as a
negative federal purchase. Excluding this
inventory swing, federal purchases were
down about 1 percent over the year—the
first decline since 1976. Over the eight
years preceding 1988, real federal purchases other than those of the CCC had
risen at an average pace of nearly 5
percent, considerably faster than the
growth of real GNP. The downturn in
1988 reflected cuts in the defense area;
other non-CCC federal purchases rose
somewhat over the year.
On a budget basis, total federal outlays,
which are almost three times as great as
Government Surpluses and Deficits
Billions of dollars
Federal government
State and local government
20
10
The Government Sector
Budgetary constraints limited the growth
of government purchases in 1988, both at
the federal level and among many state
and local governments. The federal government's purchases of goods and services—the part of federal spending that
adds directly to GNP - fell 3 Vi percent in
real terms from the fourth quarter of
1987 to the fourth quarter of 1988.
Roughly two-thirds of the decline re
10
1984
1986
1988
The data on the federal government are for fiscal years.
They are on a budget basis and come from the Department
of the Treasury.
The data on state and local governments are for operating and capital accounts. They are on a national income
accounts basis and come from the Department of
Commerce.
The Economy in 1988
federal purchases alone, were up 6
percent for fiscal 1988 as a whole.
Entitlements, demands on deposit
insurance agencies, and net interest
payments all rose. Meanwhile, the
growth of federal receipts slowed in
1988 from the rapid pace of the previous
year. Receipts from social security taxes
rose more than 10 percent, in part
because of a rate increase in January
1988, The growth in receipts from
personal income taxes slowed, however,
as increases in employment and nominal
incomes were offset by final reductions
in income tax rates legislated in 1986.
The federal budget deficit in fiscal year
1988 was $155 billion, slightly above
the level of the previous year.
The purchases of goods and services
by state and local governments rose close
to 3 Vi percent in real terms over the four
quarters of 1988, more than in 1987 but
less than the average rate of growth over
the preceding three years. Spending for
construction was little changed for 1988
as a whole, although some pickup was
evident in the fourth quarter. Employment in the state and local sector increased 350,000 during 1988; a large
share of the rise was among the teachers
and other school workers needed to meet
the growth in the number of elementary
students.
summer, employment expanded strongly
throughout the year.
The continued rise in employment last
year led to a tightening of labor markets
and called attention to limits on the
potential growth of the supply of labor
and of output. Growth of the workingage population has slowed in the 1980s,
and the increase during 1988 was the
smallest annual rise in more than two
decades. This slowing of population
growth in the 1980s has led in turn to a
more moderate rate of growth in the
labor force, even as the rate of labor force
participation, especially for adult women,
has continued to rise. A big boost to
output during the expansion has come
from the hiring of unemployed workers;
however, with the unemployment rate at
less than 5V4 percent at the end of 1988,
the labor force was more fully utilized
Labor Market Conditions
Net change, millions of persons, Q4 to Q4
Nonfarm payroll employment
Total—]
4
f—|
IUn LAI L
+
— 0
Manufacturing—^
i
Percent change, Dec. to Dec.
The Labor Markets
The rise in the number of jobs during
1988 was somewhat above that of 1987
and brought the total increase in payroll
employment since late 1982 to about
18^2 million. Virtually all parts of the
economy shared in last year's gain.
Manufacturing jobs rose 400,000; construction employment was up 300,000;
close to 1 million new jobs were created
in retail and wholesale trade; and service
employment grew by 1.3 million jobs.
Except for a brief slowdown in the
Employment cost index
Total compensation
llllll
1984
1986
1988
Payroll employment covers the total nonfarm sector; the
employment cost index is for private industry, excluding
farm and household workers. The data are from the
Department of Labor.
10
The Economy in 1988
than at any time in the last decade and a
half.
The tightening of labor markets in
1988 was associated with a pickup in the
rise of wages and labor costs. The
employment cost index for wages and
salaries in the private nonfarm sector
increased a bit more than 4 percent over
the year—almost 1 percentage point more
than in 1987. The pickup was most
pronounced among white collar workers
and in the service-producing industries.
The cost of benefits provided to employees rose 63A percent over the year, nearly
twice the increase of 1987; the rise
reflected both the hike in the payroll tax at
the start of 1988 and a surge in the cost of
health benefits. Total compensation per
hour—wages and salaries plus benefits —
rose nearly 5 percent over the four
quarters of 1988, after two years in which
the annual increases had been in the
neighborhood of 3 VA percent.
Productivity gains slackened somewhat in 1988. The rise in output per hour
in the nonfarm business sector over the
four quarters of the year was only 0.7
percent—about xh percentage point below the average over this decade. This
slippage in productivity growth in 1988,
combined with the faster rate of increase
in hourly compensation, resulted in a 4
percent rise in unit labor costs in the nonfarm business sector over the four quarters of 1988—well above the average rate
of increase during the previousfiveyears.
Price Developments
The broader measures of prices — including the GNP price measures, the producer
price index, and the consumer price index
(the latter two measured from December
to December)—all showed inflation to be
in a range of 4 to AVi percent in 1988.
Except for the CPI, which had moved up
at a 4Vfe percent rate in 1987, these
measures showed some acceleration from
the previous year, and all of them—
including the CPI-rose more rapidly
than in earlier years of the expansion. In
contrast to 1987, when the indexes were
boosted by a rebound in energy prices
and rising prices for imports, the inflationary pressures in 1988 were augmented by larger increases in labor costs
in the U.S. economy and the drought's
influence on agricultural prices.
The drought's effects on retail food
prices appeared quickly, with increases
on a wide variety of items evident by
summer. Over the year as a whole, the
increase in consumer food prices was 5 lA
percent—about 2 percentage points above
the average of the preceding five years.
Prices
Percent change, Dec. to Dec.
Producer finished goods
i:
Consumer
• •••II
Consumer excluding food and energy
Services less energy
Commodities less
food and energy
1IUU
1984
1986
The data are from the Department of Labor.
1988
The Economy in 1988
Energy prices at the consumer level,
particularly for oil and gasoline, had
risen sharply in 1987 but were little
changed in 1988-a pattern that resulted
mainly from the continued gyrations in
world oil markets. The price of crude oil
moved lower for much of 1988 as the
efforts of OPEC to restrain production
unraveled. In late 1988, however, a new
agreement by OPEC to limit production,
coupled with production shortfalls in
non-OPEC countries and higher-thanexpected oil consumption, caused spot
prices to rise sharply once again, back
toward the upper end of the range in
which they generally have been since the
summer of 1986.
Price increases for goods and services
other than food and energy were larger in
1988 than in 1987. The pickup, while
fairly moderate, was widespread and
probably reflected, in large part, the
acceleration in hourly compensation and
unit labor costs. By contrast, the pressures from rising import prices appeared
to be a bit less pronounced than in 1987.
Even so, higher prices for imports probably were an influence in some areas; the
retail prices of apparel, for example, rose
nearly 5 percent for the second year in a
row. The price increases for industrial
commodities slowed in 1988 after steep
increases during 1987; by most measures, however, the year-to-year rate of
rise in these prices remained somewhat
above that of inflation in general. The
producer prices of intermediate inputs,
excluding food and energy, rose more
than 7 percent during 1988, reflecting the
high levels of capacity utilization in a
number of industries, as well as the
tightening of labor markets.
•
11
12
Monetary Policy and Financial Markets in 1988
In 1988, as in other recent years, the
Federal Reserve maintained a flexible
approach to monetary targeting by responding to emerging conditions in the
economy and in financial markets as well
as to growth of the monetary aggregates
themselves.
Early in the year, when the potential
for fallout from the stock market crash
still was an overriding concern, monetary policy was eased, augmenting
policy moves that had been taken in the
fourth quarter of 1987. But as it became
clear that the economy still was strong
and that the potential for heightened
inflation was increasing, the Federal
Open Market Committee tightened
reserve conditions in a series of steps
beginning in the spring and continuing
into 1989.
Before the tightening began, the monetary aggregates had been running close
to the top of their 1988 growth ranges;
but growth of the aggregates slowed after
the spring, and they closed the year in the
middle portions of their 1988 target
ranges.
In the credit markets the growth of
domestic nonfinancial debt in 1988 was
slightly below that of 1987 and noticeably
slower than in previous years of the
expansion. Even so, debt continued to
grow faster than nominal GNP, largely
reflecting the continued heavy demands
of the federal government and the increased financing needs of corporations.
With the overall economy still quite
healthy in 1988, the incidence of financial
stress among households and nonfinancial businesses was not widespread.
However, in the financial sector, the
problems of the thrift institutions
worsened.
Monetary Policy in 1988
During the early months of 1988, the
Federal Open Market Committee sought
to counter any economic weakness that
could result from the stock market break
and to ensure the smooth functioning of
domestic financial markets. In the real
economy, sales had softened late in 1987,
and inventories had risen sharply. Coupled with some softening in labor market
indicators early in 1988, these data
seemed to point toward a greater risk of
cumulative weakening in real activity. In
addition, the financial markets remained
somewhat unsettled during this period,
and the Federal Reserve placed special
emphasis on monitoring domestic financial markets for signs of any new distress.
Against this backdrop, reserve conditions
were eased slightly in early February,
contributing to reductions in short- and
long-term interest rates.
By early spring, however, the incoming economic data were suggesting that
the real economy, rather than weakening,
actually was still moving ahead with
considerable momentum. Bond yields
increased during this period, as the
indications of economic strength contradicted the earlier market forecasts of a
slowing economy and raised concerns
about an uptrend in inflation. Because of
the increased risk for higher wage and
price inflation—and in the context of
rapid growth in M2 and M3 - the Federal
Reserve firmed reserve conditions in a
series of steps beginning in March and
culminating in early August, when the
discount rate was hiked Vi percentage
point, to 6!/2 percent. These moves
brought about substantial increases in
short-term interest rates; but they were
Monetary Policy and Financial Markets
accompanied by only small increases in
Treasury bond yields, as investors viewed
Federal Reserve actions as heading off a
long-term acceleration of inflation. The
upturn in short-term interest rates, coupled with more optimistic expectations of
future inflation, also helped boost the
foreign exchange value of the dollar
during this period.
In late summer and early autumn, some
indicators suggested that economic
growth might have started to moderate.
13
In view of the policy restraint already in
place—which was being reflected in a
slower rate of growth in the monetary
aggregates—the Federal Open Market
Committee postponed any further action
pending more information on the course
of the economy. The foreign exchange
value of the dollar declined through much
of the autumn, partly in response to a rise
in foreign interest rates relative to those
in the United States and partly in response
to investors' concern over the lack of
Interest Rates
Long-term
A-rated utility bonds
Recently offered
U.S. government bonds
State and local government bonds
1984
1985
1986
All the data are monthly averages.
The federal funds rate is from the Federal Reserve.
The rate for three-month Treasury bills is the market rate
on three-month issues on a discounted basis and is from the
Department of the Treasury.
The rate for conventional mortgages is the weighted
average for 30-year fixed-rate mortgages with level
payments at savings and loan associations and is from the
Federal Home Loan Mortage Corporation.
1987
1988
1989
The rate for A-rated utility bonds is the weighted average
for recently offered 30-year investment-grade bonds adjusted to an A-rated basis by the Federal Reserve.
The rate for U. S. government bonds is their market yield
adjusted to 30-year constant maturity by the Treasury.
The rate for state and local government bonds is a Bond
Buyer index based on 25 issues of 30-year revenue bonds of
mixed quality.
14
Monetary Policy and Financial Markets
progress in reducing the U.S. federal
budget deficit and a slower rate of improvement in the U.S. trade deficit.
Inlate fall, data suggested thatprevious
monetary restraint had not been sufficient
to relieve the potential for higher inflation, and the Federal Open Market Com-
mittee resumed a tightening of reserve
conditions that began in November and
extended into the new year. As a result,
short-term market interest rates rose. In
contrast, bond yields continued to fluctuate narrowly, signaling the market's
continued confidence that inflationary
Reserves, Money Stock, and Debt Aggregates
Annual rate of change based on seasonally adjusted data unless otherwise noted, in percent'
1987
Item
1986
1987
Q4
Depository institution reserves
Total
Nonborrowed
Required
Monetary base 3
1988
1988
Ql
Q2
Q3
Q4
2
Concepts of money 4
Ml
Currency and travelers checks
Demand deposits
Other checkable deposits
M2
Non-Mi component
MMDAs (n.s.a.), savings, and smalldemonimation time deposits
General-purpose and broker/dealer
money market mutual fund
assets (n.s.a.)
Overnight RPs and Eurodollars (n.s.a.)
M3
Non-M2 components
Large-denomination time deposits
Institution-only money market mutual
fund assets (n.s.a.)
Term RPs (n.s.a.)
Term Eurodollars (n.s.a.)
Domestic nonfinancial sector debt.
Federal
Nonfederal
19.8
21.7
19.9
9.8
6.0
6.1
6.1
7.9
3.2
.7
3.2
7.0
2.5
2.4
1.4
8.2
3.5
1.5
2.9
8.1
5.8
-6.5
7.2
7.4
4.3 - . 7
2.5
5.3
4.0 - 1 . 4
6.7
5.0
15.6
7.5
11.7
29.4
6.4
8.6
-.8
13.8
4.3
8.0
-1.2
7.7
5.0
9.8
1.1
5.7
3.2
9.5
-4.7
7.1
6.4
7.9
1.1
11.0
5.2
2.3
7.2
6.7
.4 - 1 . 8
8.7
3.3
9.3
7.3
4.2
3.5
5.2
5.5
4.9
4.9
6.1
7.1
6.9
7.1
3.8
3.3
3.6
4.1
6.0
3.2
5.8
3.8
7.9
7.2
3.9
3.6
17.4
16.0
5.8
4.3
7.5
-5.8
11.8
9.2
19.5
-14.0
3.2
2.6
-2.9
-3.3
9.8
-8.8
9.1
8.2
1.7
5.7
11.8
9.3
6.4
10.7
11.0
6.4
12.1
13.8
6.7
9.1
8.5
7.2
8.3
9.1
5.8
13.4
13.4
5.1
10.5
11.3
32.1
31.7
4.3
2.9
33.2
13.9
-.7
15.0
14.5
19.9
.9
11.2
44.3
7.5
-22.7
-30.8 -23.3
13.0
28.4
20.1
47.7
11.1
8.3
13.1
13.3
14.7
12.9
9.8
9.0
10.0
8.7
8.1
8.9
9.9
7.6
10.7
8.0
8.0
8.0
1. Changes are calculated from the average amounts
outstanding in each quarter. Annual changes are measured
from Q4 to Q4.
2. Data on reserves and the monetary base incorporate
adjustments for discontinuities associated with regulatory
changes in reserve requirements.
3. The monetary base consists of total reserves plus the
currency component of the money stock plus, for institutions not having required reserve balances, the excess of
current vault cash over the amount applied to satisfy
current reserve requirements.
4. Ml consists of currency; travelers checks of nonbank
issuers; demand deposits at all commercial banks other
than those due to depository institutions, the U.S. government, and foreign banks and official institutions, less cash
items in the process of collection and Federal Reserve
float; and other checkable deposits, which consist of
negotiable orders of withdrawal and automatic transfer
service accounts at depository institutions, credit union
8.6
8.3
8.7
8.4
7.1
8.8
8.8
8.0
9.0
share draft accounts, and demand deposits at thrift
institutions. M2 is Ml plus money market deposit accounts
(MMDAs); savings and small-denomination time deposits
at all depository institutions (including retail repurchase
agreements), from which have been subtracted all individual retirement accounts (IRAs) and Keogh accounts at
commercial banks and thrift institutions; taxable and taxexempt general-purpose and broker/dealer money market
mutual funds, excluding IRAs and Keogh accounts;
wholesale overnight and continuing-contract repurchase
agreements (RPs) issued by commercial banks; and
overnight Eurodollars issued to U.S. residents by foreign
branches of U.S. banks worldwide. M3 is M2 plus largedenomination time deposits at all depository institutions;
assets of institution-only money market mutual funds;
wholesale term RPs issued by commercial banks and thrift
institutions; and term Eurodollars held by U. S. residents in
Canada and the United Kingdom and at foreign branches of
U.S. banks elsewhere.
Monetary Policy and Financial Markets
15
pressures would be contained. This con- Monetary Aggregates, Nonfinancial
fidence, together with the firming of Sector Debt, and Reserves
Billions of dollars
policy, contributed to a renewed strengthM2
ening of the foreign exchange value of
the dollar toward the end of the year.
8% 3 2 0 °
Range
;
Monetary Aggregates
M2 expanded 5 lA percent over the four
quarters of 1988, a rate just below the
middle of its 4-to-8 percent target range.
Although demands for M2 were supported by strong growth in income and
spending, they were reduced by increases
in its opportunity cost—that is, the difference between market interest rates and
the yields on M2-type instruments. Early
in the year, the opportunity cost of
holding M2 had declined in response to
decreases in market interest rates in late
1987 and early 1988 relative to deposit
rates. The lower opportunity cost led to
strong growth in M2 and a decline in its
velocity-the ratio of nominal GNP to
M2 - in thefirstquarter. But after March,
deposit rates lagged behind the rise in
market rates, and the velocity of M2
increased; over the year, the rise in
velocity was close to 2 percent.
The response of offering rates on deposit accounts to changes in market rates
was especially sluggish in the last part of
1988. One reason for this sluggishness
may have been regulatory pressure on
thrifts and the closing of many insolvent
institutions, which often had been overly
aggressive in pricing deposits. The extent
to which thrifts were offering higher rates
than banks on small time deposits was
greatly reduced during this period, and
partly as a consequence, growth of retail
deposits was much stronger at banks than
at thrifts.
The patterns of change in deposit rates
and market interest rates also affected the
composition of M2 growth during 1988.
During the first half of 1988, liquid retail
deposits (such as interest-bearing check
"~I%
Actual
1
i
i
i
t
i
i
i
l
i
l
3100
3000
2900
t
i
!
i
3900
3700
_L i
i
i
i
i
i.
i
i
i
Total domestic nonfinancial debt
9200
8800
8400
Ml
810
780
750
i
i
I
i
i
'
i
i
i
i
i
i
i
i
1
Reserves
62
Total
60
58
Nonborrowed
56
I
1987
i
i
i
i
i
j
i
i
1988
The ranges adopted by the FOMC for the monetary
aggregates and for total debt of the domestic nonfinancial
sector were for the period from 1987:4 to 1988:4.
The reserve aggregates have been adjusted to remove
discontinuities associated with changes in reserve requirements. Nonborrowed reserves include extended credit.
The difference between these two measures is adjustment
and seasonal borrowing.
16
Monetary Policy and Financial Markets
ing accounts) expanded at a strong pace,
largely reflecting increases in their relative attractiveness stemming from declines in market interest rates and, to a
lesser extent, in rates on small time deposits. However, the growth of these
deposits slowed markedly over the last
half of 1988, following the reversal in the
pattern of interest rate movements.
Growth in small time deposits was particularly robust throughout 1988. Their
expansion in the early months of the year
may have resulted, in part, from shifts in
household investment preferences away
from stocks and toward the safety of
these savings instruments. Later, rising
yields on small time deposits relative to
those on more liquid deposits led households to shift funds from the latter
accounts to the former.
M3 grew 6 Vi percent last year, placing
it slightly above the midpoint of its 4-to-8
percent target range. This increase from
a 5% percent growth rate in 1987 reflected a modest pickup in the issuance of
managed liabilities in M3 to fund credit
expansion at banks and thrift institutions.
M3 followed a trajectory near the upper
end of its target range in the first half of
1988, but moderated thereafter in association with slowing credit growth at
depository institutions. For the year,
large time deposits and other managed
liabilities included in M3 but not in M2
grew rapidly, as inflows into M2-type
deposits were insufficient for banks to
finance their desired pace of asset expansion. This was particularly true in the
second half of the year, when M2 growth
moderated.
To some extent, the pickup in M3
growth last year also reflected a greater
reliance by banks on managed liabilities
included in M3 than on non-money-stock
instruments, such as bank borrowings
from overseas branches. In contrast, as
in other recent years, thrift institutions'
heavy use of Federal Home Loan Bank
advances—which are not included in
M3—had a moderating effect on the
growth ofM3 in 1988.
At AlA percent, Ml growth last year
was down more than 2 percentage points
from its rate in 1987. Growth of interestbearing checking accounts moderated,
while demand deposits continued running
off. As in recent years, the growth of Ml
displayed great sensitivity to changes in
market rates of interest. Households
shifted savings balances between NOW
accounts and those M2 components, such
as small time deposits, whose yields
responded to increases in market rates
much more quickly than those on NOW
accounts. Because substitutions of this
type are internalized within M2, M2 has
displayed less sensitivity to interest rates
than has Ml in this decade. Demand
deposits are the other component of Ml
highly sensitive to interest rates; they
declined again in 1988, partly reflecting
increases in their opportunity costs and
declines in compensating balances. Compensating balances, funds that businesses
must hold in non-interest-bearing accounts to compensate banks for services,
fall when interest rates rise.
Credit Market Developments
The debt of domestic nonfinancial sectors
increased nearly 8% percent during
1988, placing it near the midpoint of the
Federal Open Market Committee's monitoring range of 7 to 11 percent and
somewhat below the 93A percent rise of
the previous year. The growth of federal
debt slowed a little from the 1987 pace.
In addition, the expansion in nonfederal
debt moderated as state and local governments trimmed debt issuance and as
households expanded their mortgage debt
at a less robust pace in response to higher
mortgage rates. Growth of business debt
picked up a bit from its 1987 pace, with
short-term debt growing faster than long-
Monetary Policy and Financial Markets
term debt. Corporate borrowing was
particularly strong, reflecting increased
externalfinancingneeds for capital investment and for mergers, buyouts, and stock
repurchases. Overall, the expansion of
debt in the nonfinancial sectors in 1988
was well below the pace of the mid-1980s
but still exceeded the growth of nominal
GNR
With the economy growing strongly
and the financial markets settling down
after their initial skittishness following
the stock market break, evidence of
financial stress among businesses and
households was not widely apparent in
1988. Nevertheless, financial developments in certain markets and sectors
warranted the attention of policymakers.
Of particular note were the worsening
condition of the thrift industry, the need
to achieve sounder capitalization of commercial banking organizations, and the
rising indebtedness of businesses involved in restructuring activity.
As the year wore on, the dimensions of
the problems facing the thrift industry
became clearer. The losses of the industry
declined somewhat during the second
half of the year, but this relative improvement appeared largely to reflect the
assistance provided to more than 200
institutions by the Federal Savings and
Loan Insurance Corporation. For the
year as a whole, the industry's losses
exceeded $12 billion.
The turmoil in the thrift industry has
not noticeably disrupted mortgage activity. In part, the development of a deep
secondary mortgage market has separated the origination of loans from the
need to fund them. For this reason, the
base of mortgage credit has been broadened in recent years, making the provision of mortgages far less dependent on
the condition of any one type of financial
institution or on the regional supply of
loanable funds. During the 1980s the
share of home mortgage credit held in
17
securitized form has increased from
about one-tenth to more than one-third.
The spread between interest rates on
fixed-rate mortgages, which have an
average life of roughly 10 years, and
yields on 10-year Treasury notes did not
change appreciably over 1988, which
also indicates that the mortgage markets
continued functioning well despite the
problems of many savings and loan
associations.
In contrast to those of the thrift industry, profits of U.S. commercial banks
were reasonably strong in 1988, even
after excluding the one-time jump in
fourth quarter earnings associated with
the resumption of debt payments by
Brazil. Moreover, most large moneycenter banks with a significant amount of
loans to developing countries have continued to build capital, which provides a
cushion against default losses. Efforts to
raise equity gained force from the agreement by bank supervisory authorities of
major industrial countries to set more
stringent, risk-based standards of capital
adequacy. These standards, to be fully
phased in by 1992, place a greater
emphasis on equity capital, take into
account the off-balance-sheet activities
of banks, and provide a more uniform
regulatory treatment of banks based in
different countries.
In 1988, as in 1987, banks lent considerable sums to finance mergers and
leveraged buyouts. Although banks have
reported that these loans have had a lower
rate of loss than all other business loans
combined, and although LBO borrowers
typically obtain some insurance against
higher loan rates, concern remains about
bank exposure to losses in the event of an
adverse turn in business conditions. For
this reason, the Federal Reserve is monitoring closely the developments in this
area; in particular, it has revised its bank
examination guidelines to ensure that
loans from member banks used to finance
18
Monetary Policy and Financial Markets
buyouts and other highly levered corporate restructurings meet prudent credit
standards.
Leveraged buyouts and other mergers
and restructurings led to a record pace of
net equity retirements by nonfinancial
corporations in 1988. Despite the large
volume of this activity in recent years,
the overall corporate debt-to-equity ratio
is not out of line with observations since
the early 1970s, a stability that reflects
the increased market valuation of equities
since the early 1980s.
Much of thefinancialrestructuring of
recent years has been a response to
fundamental economic factors; it may
impose a discipline on corporate management, which in turn can stimulate efforts
to improve productivity. Nevertheless,
heavy commitments of cash flow to
service debt reduce a firm's ability to
cope with stresses or industry-specific
shocks. To some extent, the substitution
of debt for equity is motivated by simple
tax-saving considerations, such as the
full deduction for interest payments and
the double taxation of dividends. For
these reasons, reforming the corporate
tax system should be a component of
public policy in addressing this difficult
issue.
•
19
International Developments
Economic growth in 10 major foreign adjustment process. The dollar recovered
industrial countries continued strong at a somewhat in December on the basis of
3 lA percent pace over the four quarters of further tightening by the Federal Re1988. Growth in non-OPEC developing serve. On balance, the dollar appreciated
countries averaged about 4 percent in about V/i percent in nominal terms,
1988, nearly the same as in the previous December to December, against a
year. Some progress toward the adjust- weighted average of the currencies of the
ment of external imbalances among ma- foreign Group-of-10 (G-10) countries.
jor industrial countries was achieved. The dollar appreciated substantially
Real net exports by the United States against continental European currencies,
(national income accounts, 1982 dollars) while declining moderately against the
rose $20 billion, contributing nearly Vi Japanese yen and more against the Canapercentage point to the rise in gross dian dollar. When adjusted for relative
national product. Nearly all of this in- consumer price levels, the dollar apprecrease in real net exports was in the first ciated somewhat more than in nominal
half of the year, however, as the rate of terms, as the U.S. inflation rate exceeded
growth of domestic demand picked up in the weighted average inflation rate of
the second half while it slowed in several other major industrial countries.
of the major foreign countries. In nominal
terms the U.S. trade deficit declined to
$127 billion for 1988, $33 billion less Exchange Value of the Dollar
than in 1987. The current account deficit and Interest Rate Differential
totaled $135 billion, a $19 billion im- Percentage points Ratio scale. March 1973 = 100
provement from the previous year.
The dollar moved over a considerable
range in exchange markets during 1988,
but on a weighted average basis, its net
change over the year was fairly small.
After recovering from its year-end 1987
lows, the dollar fluctuated narrowly until
mid-April, when it began to appreciate
Long-term
— 80
real interest
sharply. The dollar rose from mid-April
rate differential
to late August, at first under the influence
U.S. minus foreign
of Federal Reserve monetary tightening
and subsequently of monthly trade re1975
1980
1985
1988
ports that brightened the market's outlook
The exhange value of the U.S. dollar is its weighted
for U.S. external adjustment. The dollar average exchange value against currencies of other Group
held fairly steady through September; of 10 (G-10) industrial countries using 1972-76 total trade
adjusted by relative consumer prices.
then it declined in October and November weights
The differential is the rate on long-term U.S. government
with a reversal of market perceptions of bonds minus the rate on comparable foreign securities,
relative monetary stances among major both adjusted for expected inflation estimated by a 36centered moving average of actual inflation or by
countries and with trade reports that month
staff forecasts where needed.
seemed to suggest a stalling of the
All the data are quarterly.
20
International Developments
Central bank interventions, frequently
concerted pursuant to G-7 understandings on exchange market arrangements,
sought to limit the extremes of the dollar's
movements, and gross official purchases
and sales of dollars were quite large
during the year. Net intervention purchases of dollars by 14 major central
banks were quite small, however,
amounting to only about $2 billion, in
sharp contrast to the 1987 total of $100
billion by these same central banks. U.S.
intervention, alone, amounted to net sales
of a little more than $1 billion for the
combined accounts of the Federal Reserve and of the Exchange Stabilization
Fund of the Treasury.
centage points in 1988 amid increases in
wage pressure, and unemployment in
both Germany and Italy also moved
lower. After registering a sharp decline
in the previous year, the Canadian unemployment rate edged down further in
1988 to a low level for that economy.
Japanese unemployment rates remained
in a very low range—even falling slightly
during the year—amid additional signs
that Japanese labor markets were tight.
Unemployment rates in most other industrial countries were about unchanged.
GNP, Demand, and Prices
Percent change from previous year
Gross national product
Foreign Economies
Strong economic growth in the major
foreign industrial countries continued in
1988, although some signs of slowing
were evident near year-end. Real growth
in Japan was particularly noteworthy,
with significant strength in both exports
and virtually all major components of
private demand. Germany and the related
economies of continental Europe expanded somewhat less rapidly, though
still at rates above most expectations, as
the investment boom of the previous year
carried over into 1988. In the United
Kingdom, rapid growth was supported
primarily by a surge in both consumption
and investment. In Canada, strong investment expenditures sustained vigorous
activity during the first half of the year,
with some evidence of slower growth
emerging in later months.
Unemployment rates in foreign industrial economies continued to move downward on average. Although unemployment levels in many instances still were
high by historical standards, signs of
labor market tightness were evident in
some countries. Unemployment in the
United Kingdom declined about 2 per
Constant prices
10
Total domestic demand
Constant prices
10
Consumer price index
Foreign
United States
1984
1986
1988
Foreign data are multilaterally weighted averages for the
(G-10) countries, using 1972-76 total trade weights, and
are from foreign official sources.
Data for the United States are from the Departments of
Commerce and Labor.
The GNP and domestic demand data are quarterly: the
consumer price data are monthly.
International Developments
Monetary conditions were generally
easier early in the year in the wake of the
October 1987 stock market crash, but
economic activity proved more robust
than expected. As the year wore on,
indications of increased inflationary pressure prompted authorities in many countries to tighten monetary conditions.
Increases in inflation rates were relatively
small in most countries, with the conspicuous exception of the United Kingdom,
but signs of a pick-up in some other
countries emerged toward the end of the
year. U.K. authorities engineered a sharp
increase in short-term interest rates after
mid-year as the rate of inflation in that
country moved above 6 percent.
Despite the general shift to less accommodative monetary stances as 1988 progressed, monetary growth exceeded official targets in several countries during
the year. Key money aggregates in both
Germany and the United Kingdom came
in above target ranges; money growth in
Japan remained quite rapid but was a bit
belowits 1987 pace. Fiscal policy abroad,
as gauged by cyclically adjusted budget
deficits calculated by the Organization
for Economic Cooperation and Development, was broadly neutral in its impact
on aggregate demand.
The combined current account surplus
of the foreign G-10 countries declined
about $30 billion in 1988, with much of
the change attributable to a significant
deterioration in the U.K. current account
position. Germany, among the countries
with large surpluses, maintained a strong
volume of exports, and had a current
account surplus that was little changed on
balance. In Japan, the growth of imports
rose, and the current account surplus
contracted by $7.5 billion, but export
volume also remained strong, and the
pace of external adjustment seemed to
slow toward year-end.
The combined current account surplus
of the newly industrializing economies of
21
Asia, which had been increasing for
several years, fell more than $3 billion in
1988, apparently having peaked in 1987
at $31 billion. The $8 billion decline in
Taiwan's surplus more than accounted
for the decline in the surplus of this
group; imports to Taiwan surged as a
result of exchange rate appreciation, the
liberalization of import restrictions, and
increased official imports of gold.
The current account deficit of OPEC
countries increased $10 billion in 1988,
to $15 billion. Oil export revenues declined somewhat, with the effect of lower
oil prices more than offsetting higher
export volumes. The combined current
account balance of non-OPEC developing countries in 1988 fell about $8 billion,
to a $3 billion deficit in 1988. The trade
surplus of this group fell $4 billion, to
$15 billion. Rising prices of manufactures and commodities and rising volumes contributed to the growth of trade
in non-OPEC developing countries. Imports expanded significantly for the second year in a row.
The current account deficit of the
heavily indebted countries targeted by
the U.S. debt initiative announced by
Secretary of the Treasury Baker in 1985
was roughly unchanged from a year
earlier, at about $9 billion. The trade
surplus of this group expanded nearly $4
billion in 1988, to about $30 billion.
Brazil posted a record trade surplus of
about $19 billion.
Economic progress in the heavily
indebted developing countries continued
to be uneven in 1988. Several countries
(Chile, Colombia, Morocco, and the
Philippines) continued to achieve good
rates of economic growth, while economic activity in other countries stagnated. Brazil, which had interrupted
some interest payments to banks in
February 1987, normalized its relations
with the international community in
1988. A stand-by agreement with the
22
International Developments
International Monetary Fund, a $62
billion rescheduling package, and $5.2
billion in new loans enabled Brazil to
clear all its arrears to banks. Chile
continued to make progress in managing
its external debts in 1988 through buybacks, conversions, and debt for equity
swaps, thereby reducing its external debt
to banks further in 1988. Argentina, on
the other hand, began in 1988 to incur
significant interest arrearages to banks.
During 1988, Mexico implemented a
sustained adjustment program aimed at
inflation control, fiscal consolidation, and
structural transformation of its external
sector. In support of these policies, the
U.S. Treasury and the Federal Reserve
announced in October 1988 that they
were prepared to develop a short-term
bridge loan of up to $3.5 billion pending
Mexico's development of loan programs
with the World Bank and the IMF. Early
in 1989, however, Mexico indicated that
it would not need this facility.
current account deficit for 1988 was $ 135
billion, down from $154 billion in 1987.
The rise in the value of merchandise
exports in 1988 largely reflected a strong
increase in the volume of nonagricultural
exports, which rose almost 20 percent
over the four quarters of 1988, a rate only
a bit below that over the preceding four
quarters. Much of the rise in U. S. exports
appeared to be associated with an improvement in the price competitiveness
of U.S. products, resulting from the
earlier depreciation of the dollar and
the continued good performance of productivity and unit labor costs in U.S.
manufacturing.
U.S. International Trade
Billions of dollars
Balances
current account
U.S. International Transactions
The U.S. merchandise trade and current
account deficits fell substantially in 1988.
A $70 billion increase in merchandise
exports and a $37 billion increase in
merchandise imports yielded a trade
deficit of $127 billion for the year,
compared with a deficit of $ 160 billion in
1987. Meanwhile, a $15 billion decline
in net receipts on service transactions
mainly reflected a reversal of capital
gains on the stock of U.S. direct investment abroad as the 1987 depreciation of
the dollar was followed by a small
appreciation in 1988. Excluding the
influence of capital gains and losses, net
services improved by $3 billion in 1988
as increases in operating income from
U.S. direct investment income abroad
and receipts from other services were not
quite offset by rising payments to foreigners on their portfolio investments. The
^—*s-
100
Merchandise trade
Ratio scale, billions of 1982 dollars
Merchandise trade
450
300
Total exports
1
i
i
L
150
Ratio scale, 1982 = 100
GNP fixed-weight price index
no
• mports
1984
1986
1988
The data are quarterly, seasonally adjusted at annual
rates, and arefromthe Department of Commerce.
International Developments
Demand for U.S. exports was also
supported by fairly strong economic
growth in the rest of the world. The
growth in export volume was spread over
most major categories of trade and was
especially strong in capital goods (particularly computers and computer parts).
Although the fourth-quarter volume of
agricultural exports was about the same
in 1988 as in 1987, increased deliveries
in the first half of 1988 (particularly to the
Soviet Union) raised the total for the year
8 percent above that for 1987. Prices rose
because of the drought, and the value of
agricultural exports in 1988 was 30
percent higher than in 1987.
The increase in the value of merchandise imports over the four quarters of
23
1988 reflected developments on pricing
and volume. Significant price rises were
recorded for industrial supplies (excluding oil), and smaller rises were
recorded for consumer goods, automotive products, and various categories of
machinery. However, prices of some
items, notably oil and computers, fell and
thereby held down significantly the increase in the implicit deflator for imports
in the national income accounts. On a
fixed-weight basis, non-oil import prices
rose 7.4 percent. Most of the increase in
the volume of non-oil imports was concentrated in capital goods, especially
computers and computer parts. Excluding computers and parts, the volume of
non-oil imports increased 1 percent.
U.S. International Transactionsl
Billions of dollars, seasonally adjusted
Quarter
Year
1987
Transaction
1988
1987
1988
Q4
Ql
Q2
Q3
Q4
-154
-160
250
410
20
42
-21
-1
-13
-135
-127
320
446
3
31
-28
2
-14
-34
-41
68
109
13
19
-6
*
-4
-37
-35
75
110
-33
-29
82
111
-1
6
-7
-3
-34
-30
79
110
-2
5
-7
1
-3
-32
-32
84
116
5
12
-7
*
-4
Private capital flows
Bank-related capital, net (outflows, - )
U.S. net purchases ( - ) of foreign securities
Foreign net purchases (+) of U.S. Treasury securities ..
Foreign net purchases of U.S. corporate bonds
Foreign net purchases of U.S. corporate stock
U.S. direct investment abroad
Foreign direct investment in United States
Other corporate capital flows, net
47
-4
-8
27
15
-44
42
5
21
-7
20
28
-1
-20
42
-3
6
-2
-4
7
3
*
-7
7
2
41
18
2
5
9
1
1
13
-7
17
1
-2
3
7
1
-5
14
2
-3
4
9
-2
-9
13
n.a.
Foreign official assets in United States (increase, + ) . .
45
39
20
-3
11
U.S. official reserve assets, net (increase, - )
9
-4
4
2
-7
2
U.S. government foreign credits and other claims, net
1
4
1
-1
-1
2
3
18
0
18
17
0
17
16
3
13
4
4
0
-13
24
-5
29
1
5
-4
Current account
Merchandise trade balance
Exports
Imports
Investment income, net
Direct investment, net
Portfolio investment, net
Other services (including military transactions)
Unilateral transfers, private and government
Total discrepancy
Seasonal adjustment discrepancy
Statistical discrepancy
1. Details may not add to totals because of rounding.
•Less than $500 million absolute value.
7
-6
-8
20
12
25
-10
1
-3
SOURCE. Department of Commerce, Bureau of Economic Analysis.
24
International Developments
The value of oil imports declined in
1988 as a decline in price more than offset
an increase in volume. The price of oil
dropped about $5 per barrel during 1988,
reaching a low point of $12.90 per barrel
in the fourth quarter. The average price
of oil in 1988 was about $14.40 per
barrel, less than the 1987 average, $17.33
per barrel, and well below the range
recorded during the 1980-1985 period,
$25-$35 per barrel. Oil prices declined
during 1988 in response to OPEC oil
production in excess of quotas. In an
accord reached in December, however,
OPEC agreed to limit production, and
spot prices moved up sharply. The volume of U.S. oil imports rose from an
average of 7.4 million barrels per day in
the first three quarters of the year to
almost 8 million barrels per day in the
fourth quarter in response to the earlier
price decline. Oil imports in 1987 had
averaged 6.8 million barrels per day.
The substantial U.S. current account
deficit in 1988 ($135 billion) was balanced by recorded net capital inflows of
$119 billion and a statistical discrepancy
of $17 billion. These net capital inflows
brought the officially recorded U.S. net
indebtedness to foreigners to about $500
billion at the end of 1988, though this is
probably overstated if full account were
taken of current market values of U.S.
direct investment assets abroad.
Official reserve holders, both U.S. and
foreign, accounted for a large part of the
recorded capital inflow in 1988 ($35
billion). The bulk of the foreign official
inflows of $39 billion were invested in
U.S. Treasury securities. Increases in
reserves held in the United States were
particularly large for certain smaller
industrial countries and newly industrialized countries. Reserve holdings in the
United States by the G-10 countries also
increased; this change largely reflected
the shifting of dollar investments from
the Euromarkets and the accumulation of
interest earnings rather than exchange
market intervention during 1988.
Private capital inflows were also large
($75 billion) and were mainly accounted
for by securities transactions. Private
foreigners purchased, net, $20 billion in
U.S. Treasury securities in 1988, in
contrast to $8 billion in net sales in 1987.
Private foreign purchases of U.S. corporate bonds were substantial, as in 1987,
but there were small net sales of U.S.
corporate stocks.
Recorded U.S. direct investment
abroad fell in 1988, in part because of the
effect of currency translation oh reinvested earnings and also because of the
sale of assets by petroleum companies.
Acquisitions of European companies by
U.S. investors accelerated sharply in
anticipation of the 1992 unification of the
European market, but they were of far
smaller scale than foreign acquisitions of
U.S. companies.
Foreign Currency Operations
Intervention sales of dollars against
marks by U.S. authorities exceeded their
purchases of dollars against yen. Of the
net intervention total of $1,039 million
sold, $600 million was for the Federal
Reserve System account. The System
realized profits of $435 million from its
intervention transactions. The rise in the
value of the dollar against foreign currencies over the year resulted in translation losses of $1,121 million on System
holdings of foreign currencies. At yearend the value of those balances, primarily
marks, was $9,129 million. The System
added to its balances of foreign currencies during the year through purchases
against dollars from other official institutions. The only activity in the Federal Reserve's Reciprocal Currency (Swap) Network was a drawing of $700 million by
the Bank of Mexico in August, a drawing completely repaid in September.
•
25
Monetary Policy Reports to the Congress
Given below are reports submitted to the
Congress by the Federal Reserve on
February 23, 1988, and July 13, 1988,
pursuant to the Full Employment and
Balanced Growth Act of 1978.
Report on February 23,1988
Monetary Policy and the Economic
Outlook for 1988
The national economy has scored major
gains in the past year. Growth of real
gross national product at 3% percent
over the four quarters of 1987 outstripped
most expectations, and the unemployment rate dropped below 6 percent for
the first time in this decade. With such
sectors as agriculture, mining, and manufacturing benefiting considerably from
an improved competitive position internationally, the expansion of the economy
was better balanced than in 1985-86.
Wage increases remained moderate and
contributed to favorable cost trends in
many sectors; however, a rebound in oil
prices, coupled with the effects of the
dollar's decline on the prices of imported
goods generally, pushed the rate of price
inflation back up to the 4 percent range by
most measures.
At times last year, soaring commodity
prices and sharp declines in the dollar and
bond prices signaled the possibility of
greater inflationary dangers. With the
economy moving toward higher levels of
resource utilization, the Federal Reserve
had to be especially alert to these and
other indications of pressures that might
have led to a significant departure from
the longer-run trend toward price stability. In these circumstances, monetary
policy was characterized by a tendency
toward greater restraint through last
October; this was reflected in a moderate
rise in money market interest rates, which
in turn damped growth of the monetary
aggregates. While M3 grew at a pace
equal to the lower bound of the range set
for the year by the Federal Open Market
Committee, M2 fell short of its range.
After the plunge in the stock market in
October, the System focused its efforts
primarily on ensuring adequate liquidity
in the economy, and since that time
interest rates have reversed a good part of
the rise that occurred earlier in 1987.
However, conditions in financial markets have yet to return fully to "normal,"
and the edginess of participants continues
to be reflected in volatility and fairly
sizable risk premia. Moreover, there
have been some signs of weakness in the
economy recently. In particular, the
fourth quarter of 1987 was marked by a
sharp rise in inventories in a few sectors,
and there were indications of a slackening
in labor demand early this year. Against
this backdrop, the system eased a bit
further the pressures on reserve positions
of depository institutions in the past
several weeks.
But while the Federal Reserve has had
to be responsive to the risks of an economic downturn, it has not lost sight of
the potential influence of policy actions
on longer-term trends in the economy.
The United States is in the process of an
important readjustment in the balance of
economic activity, after a period of
several years in which growth of domestic spending outstripped the pace of
domestic production. Over that span, the
trade balance moved into deep deficit,
and the nation began to amass a huge net
external debt. It is important to allow
26
Monetary Policy Reports
room for a significant improvement in
our trade balance, especially given that
high rates of capacity utilization and low
unemployment evident in many segments
of industry suggest the need for added
care in maintaining progress toward price
stability.
These considerations underlay the
decisions of the Federal Open Market
Committee when it met earlier this month
to chart its monetary policy strategy for
1988. Such considerations also must be
kept in the forefront as decisionmakers
elsewhere in the government set policy.
In particular, continuing fiscal restraint
is crucial if we are to free up resources to
finance productivity-enhancing private
investment while bringing about an improved pattern of international transactions. Moreover, additional efforts at
bringing greater coherence to policies
domestically and internationally will
promote greater stability in financial
markets and greater internal and external
balance to the economy.
Ranges of Growth for Monetary
and Debt Aggregates
Percent change, fourth quarter to fourth quarter
Aggregate
M2
M3
Debt
1988
1987
4to8
4to8
7toll
5*4 to 8 V4
51/2 t o g i / 2
8toll
were to exhibit renewed strength and
interest rates were to increase further in
the second half of the year, continued
slow money expansion might be appropriate. Rates did move upward again in
the late summer, including an increase of
Vi percentage point in the discount rate
to counter potential inflation. M2 growth
did in fact fall substantially short of the
Committee's range, at 4 percent for the
year, while M3 growth, at 5Vi percent,
was at the lower end of its range.
The velocity of M2 has exhibited a
substantial short-run sensitivity to movements in market rates of interest. Although deregulation has made it possible
for institutions to keep rates on deposits
in line with market interest rates, in
Monetary Policy Plans for 1988
Decisions regarding the ranges for money practice the adjustment of rates on many
and credit growth in 1988 were shaped in instruments has been sluggish. In addipart by the experience of 1987. Last tion, savers seemingly have become more
February, the FOMC established annual attuned to alternative investment opportarget ranges of 5Vi to %Vi percent for tunities, responding strongly to changes
both M2 and M3; both aggregates had in relative returns. As a result, the
increased more than 9 percent in 1986, sensitivity of money to movements in
but slower growth was expected to be market interest rates seems to have
consistent with the Committee's goal of increased since deregulation. In 1987, as
sustaining business expansion while rates rose, savers had incentives to favor
maintaining long-run progress toward market instruments, and their response
held down the growth of M2, and to a
price stability.
The deceleration proved sharper than lesser extent M3, resulting in increases in
anticipated, and in July, the Committee their velocities. This outcome was in
stated that growth for the year around the marked contrast to 1986, when falling
lower ends of these ranges, or even below interest rates and inflation were reflected
them, might be acceptable in certain in faster money growth and substantial
circumstances; velocity had increased in declines in velocity.
For 1988, the Committee set ranges of
the first half of the year partly under the
influence of rising interest rates, and the 4 to 8 percent for growth of M2 and M3.
Committee agreed that if inflation forces Expansion of money within these ranges,
Monetary Policy Reports
whose midpoints are one percentage
point lower than those of the ranges for
last year, would be expected to support
economic growth at a pace that is consistent with continued external adjustment
and progress over time toward price
stability. In light of the experience of
recent years, which have been marked by
large swings in velocity, the ranges were
widened somewhat. Institutional change
is a source of continuing "noise" in the
relationship of money growth to economic activity; in addition, there clearly
is a strong, systematic sensitivity of
velocity to changes in market rates of
interest. This sensitivity means that even
small changes in rates occasioned by
variations in spending or prices can have
sizable effects on the quantity of money
the public wishes to hold. Combined with
an uncertain outlook for the economy and
inflation, this implies that wider ranges
are needed to encompass possible outcomes for monetary growth consistent
with satisfactory economic performance
in 1988. Thus, while the Committee at
this time expects that growth of M2 and
M3 will be around the middle of their
ranges, the outcome could differ if significant changes in interest rates are required
to counter unanticipated weakness in
aggregate demand or an intensification of
inflation. In carrying out policy, the
Committee will continue to assess the
behavior of the aggregates in light of
information about the pace of business
expansion and the source and strength of
price pressures, with attention to the
performance of the dollar on foreign
exchange markets and other indicators of
the impact of monetary policy.
The Committee will continue to monitor the growth of debt in 1988. The
expansion of the debt of domestic nonfinancial sectors is expected to slow somewhat from the 9!/2 percent pace of 1987,
to around the middle portion of a 7 to 11
percent range. Growth of debt, however,
27
appears likely to outpace that of income,
as it has for the past several years;
although the debt of governmental units
may not grow as rapidly as it did last
year, continued rapid expansion of private debt is probable, unless the current
tide of corporate restructurings ebbs.
The Committee decided not to establish a range for M1 in 1988. It is especially
difficult to anticipate the relationship
between growth in this aggregate and the
performance of the economy. The character of this aggregate had been affected
more than the broader monetary aggregates by deregulation, because it now
contains a large volume of interestearning accounts that serve as savings as
well as transactions vehicles. The rates
on these accounts have proven especially
slow to respond to market rates, and
inflows to these accounts are very sensitive to differentials in interest returns.
Because flows into and out of NOW
accounts frequently involve other retail
deposits, they do not greatly affect M2 or
M3, but do result in sizable variations in
Ml growth. Moreover, demand deposits, which have demonstrated increased
sensitivity to rate movements in recent
years, also are being affected by evolving
practices in payments for bank services
and in business cash management.
Economic Projections
As table 2 indicates, the uncertainties
attending the present economic situation
are reflected in a considerable range of
forecasts among Committee members
and other Reserve Bank presidents. However, the central-tendency ranges shown
encompass the vast majority of forecasts
and point to growth in real GNP of 2 to
2Vi percent in 1988.
This pace of activity would be expected
to generate appreciable gains in employment over the year—about in line with
labor force growth—and the civilian
unemployment rate is projected to change
28
Monetary Policy Reports
Economic Projections for 1988
Percent
FOMC members and other
FRB Presidents
Measure
Range
GNP, change from fourth quarter to fourth quarter
Nominal
Real
Implicit deflator
Unemployment rate, average level in the fourth
quarter
little on balance between now and the end
of 1988. Prices, as measured by the
implicit price deflator for GNP, are
expected to rise 314 to 3% percent, not
appreciably different from the pace last
year; consumer prices likely will increase
a little faster than the deflator. The
central-tendency forecasts encompass the
administration's projections for real GNP,
but are a bit more optimistic on prospects
for price inflation.
Higher real net exports of goods and
service are expected to provide a major
impetus to U.S. economic activity in
1988. As reflected by the rapid growth of
real exports of goods and services of
more than 15 percent last year, the
international competitiveness of U.S.
producers has improved significantly. By
and large, U.S. manufacturers have let
the foreign currency prices of their
products decline with the depreciation of
the dollar, achieving enhanced profitability through greater volume and aggressive efforts to increase efficiency and
control costs. This enhanced competitiveness is expected to provide a further
boost to export growth this year, while
the increases in the relative prices of
foreign goods apparently now in train
should curb import growth. As a result,
some improvement in the nation's current
account balance is anticipated this year.
In contrast, domestic demand is expected to remain relatively subdued in
4to6 1 / 2
V4to3
2Vi to 4
Central
tendency
2to2V4
5% to6
Administration
6.4
2.4
3.9
5.8 1
1988, as the economy moves toward a
better balance between domestic spending and domestic production. Consumer
demand probably will be damped to a
degree by the loss of household wealth
associated with the decline in stock prices
last fall. Some increase in personal saving
would be beneficial to the economy, as it
would aid investment and help reduce
our dependence on foreign capital. However, a severe retrenchment by consumers could have a significant deflationary
effect; fortunately, the indications from
surveys of household attitudes are that
the sharp drop in confidence that occurred
immediately after the October shock has
been substantially reversed. Housing
activity should pick up some in coming
months as a result of the recent decline in
mortgage rates. In addition, business
spending on plant and equipment should
be buttressed by the desire to build upon
the progress made in regaining international competitiveness and by already
high levels of capacity utilization in a
number of major industries.
Although real GNP should rise moderately for the year as a whole, the pattern
of growth may be uneven over time. An
adjustment to the runup in inventories
that occurred in the fourth quarter of
1987 could produce relatively slow output growth during the first part of the
year. Such an adjustment appears in
process in the auto sector, in light of
Monetary Policy Reports
domestic automakers' current assembly
schedules; there may also be similar
patterns in a few other sectors, but at this
time there are no signs that deep cutbacks
in production will be necessary.
Although no significant change is
anticipated in the overall pace of inflation
this year, the primary source of the rise in
prices is likely to change. Assuming
relative stability in world oil prices,
domestic energy prices should increase
only a bit this year after their sharp
rebound in 1987. However, prices of
non-oil imports likely will continue to
rise substantially further in the wake of
the decline in the foreign exchange value
of the dollar in 1987, providing continuing impetus to domestic inflation. This
impulse to prices associated with the
dollar's depreciation is an unavoidable
component of the process of correcting
external imbalance, as an increase in the
relative price of foreign goods encourages exports and discourages imports.
However, if we are to maintain and
extend the progress made in the 1980s
toward price stability, it is crucial that
business and labor continue to exercise
restraint in price and wage behavior. The
forecasts of the FOMC members and
other Reserve Bank presidents anticipate
that such a pattern will persist through
this year. It is important, too, that the
Congress remain mindful of the effects of
legislation on the cost structure of American industry.
The forecasts of the Federal Reserve
policymakers also assume further
progress in reducing the federal budget
deficit. Continuing evidence of fiscal
restraint is viewed as crucial in maintaining financial conditions that are conducive to balanced growth and to an
improved pattern of international transactions. It is critical, in that regard, that
the package of deficit-reduction measures
agreed to in December for 1988 and 1989
be fully implemented.
29
The Performance of the Economy
During the Past Year
The economy completed a fifth consecutive year of expansion in 1987, with real
gross national product increasing about
VA percent over the four quarters of the
year.l The overall growth in output not
only was greater than in 1986, but was
better balanced across industries and
regions of the country. In addition, the
rise in activity supported a net gain of
more than three million jobs last year,
and the civilian unemployment rate stood
at 5.8 percent in January of this year,
nearly a percentage point below its yearago level.
Virtually all broad measures of inflation—after dropping sharply in 1986—
rebounded in 1987 to about the pace seen
in 1984 and 1985. In large part, the
pattern of price movements over the past
two years reflected developments in oil
markets, where prices rebounded last
year after a sharp drop in 1986. However, prices also rose sharply for some
imported consumer goods and, at the
producer level, for a number of industrial
commodities. In contrast, wage trends
remained restrained last year, although
tightening labor markets and the faster
pace of inflation stemmed the pattern of
wage deceleration evident in previous
years.
As suggested above, a number of
sectors that had been depressed in recent
years began to show signs of improvement in 1987. The turnaround was most
pronounced in manufacturing, where
production and employment, especially
in capital goods and industrial materials
industries, picked up sharply, in response
both to stronger orders from abroad and
to higher levels of capital spending by
domestic producers. However, improve1. Except where noted, all percent changes are
from the fourth quarter of the previous year to the
fourth quarter of the year indicated.
30
Monetary Policy Reports
ment also was apparent in the domestic
energy sector, where, in response to the
partial recovery in oil prices, oil drilling
retraced a small part of its earlier precipitous decline, and in agriculture, where
higher exports and continued federal
support boosted farm income and helped
bring about somefirmingin land prices.
In addition, the composition of activity
moved toward a better balance between
domestic spending and domestic production. Weak consumer spending reduced
the growth of domestic demand in 1987,
while domestic production was supported
by the increased international competitiveness of U. S. industry as the continued
improvement in productivity in manufacturing and the moderate pace of increase
in labor compensation permitted U.S.
firms to lower the foreign currency prices
of their goods while expanding profits.
Indeed, much of the improvement in
economic conditions last year could be
traced to the effects of this increased
competitiveness on the volume of imports
and exports. Nevertheless, the combination of a substantial increase in the value
of oil imports and rising prices of non-oil
imports more than offset an improvement
in real net exports, and the nominal trade
deficit widened to almost $160 billion in
1987. In addition, a further erosion of net
income on investments and other service
transactions pushed the current account
deficit above $160 billion.
Although economic activity rose at a
brisk pace for 1987 as a whole, the
October stock market crash added substantial uncertainty to the prospects for
continued economic growth at year-end.
The sharp drop in stock prices reduced
household wealth considerably, raising
the possibility of a further slowing in
consumer spending, domestic business
investment, and housing construction. It
is too early to assess what the ultimate
economic effect of the stock market
decline will be, but that effect likely will
be offset at least in part by the decline in
interest rates since the crash.
The External Sector
The dollar depreciated by 14 percent in
nominal terms over the course of 1987
relative to a trade-weighted average of
the currencies of the other G-10 countries, leaving the dollar by the end of the
year at a level almost 45 percent below its
February 1985 peak and close to its 1980
low. Although consumer prices in the
United States rose somewhat more rapidly on average than in major foreign
countries, the depreciation of the dollar
was almost as great in real terms. However, the dollar fell only about 6V2
percent in real terms over the year against
an average of eight leading developing
countries. The decline in the exchange
value of the dollar was resisted by
substantial official intervention purchases
of dollars and an apparent movement of
differentials in long-term real interest
rates between the United States and major
foreign countries in favor of the dollar.
Nonetheless, some depreciation in the
dollar evidently was seen by participants
in foreign exchange markets as a necessary element in the adjustment of the
huge U.S. current account deficit.
The U.S. merchandise trade deficit
widened for 1987 as a whole, but leveled
off on balance in the latter part of the
year. The volume of imports increased,
reflecting a moderate expansion in both
oil and non-oil imports. Moreover, nonoil import prices moved up further in
response to the continuing decline in the
dollar through 1987, and, with oil prices
also up sharply, imports rose substantially in value terms. Higher imports
were matched, to a large extent, by
merchandise exports, which also grew
briskly in 1987. Most of this growth was
in real terms, as prices of most exports
increased only moderately in the face of
the substantial decline in the dollar, and
Monetary Policy Reports
prices of a few important products, such
as computers, continued to decline.
Moreover, the expansion of foreign sales
last year was broadly based. Shipments
abroad of capital goods showed particular
strength, and the volume of agricultural
exports also rose, as grain sales to the
Soviet Union and China increased and as
foreign soybean production dropped off.
Economic expansion abroad strengthened only slightly in 1987, providing
only limited support for the improvement
in the U.S. trade position. In the other
industrial countries, economic activity
picked up somewhat by the middle of the
year after a slow start, but on average real
GNP grew less than 3 percent over the
year. Outside of the industrial countries,
real economic growth was uneven and on
average tended to slow from its pace in
1986. Activity expanded at a rapid rate in
the newly industrialized countries of
Asia, but slowed in Latin America, with
a sharp decline in Brazilian growth more
than offsetting a small expansion in
Mexico. In the OPEC countries, output
fell as oil export volumes were constrained in an effort to raise oil prices.
The Household Sector
Spending by households, which had been
a major contributor to growth in past
years, slowed considerably in 1987. Real
consumer spending rose less than 1
percent last year, after a 4 percent gain in
1986. In large part, the cutback in
spending reflected smaller increases in
real disposable income. Substantial employment growth and increases in farm
and interest income fueled continued
gains in nominal incomes, but a pickup in
consumer price inflation eroded much of
that rise and reduced real income growth
to about 2 percent last year, versus 3Vi
percent in 1986. Moreover, although the
rise in stock prices added further to
household wealth through August and
supported consumption, the subsequent
31
stock market decline returned equity
wealth to 1986 levels.
In general, consumers cut back their
expenditures for both durable and nondurable goods, while spending on services
continued to increase at about the pace of
recent years. Within the durables category, sales of new cars fell from 11V4
million units in 1986 to about 10 lA
million units last year. Some of that
dropoff can be traced to an especially
slow pace of sales in early 1987, as
consumers shifted automobile purchases
into 1986 to take advantage first of major
sales incentives and then of the sales tax
deduction available only under the old
tax law. Nevertheless, domestic auto
sales were relatively sluggish throughout
last year, despite the availability much of
the time of special incentive programs on
a wide range of models.
Associated with the more cautious
spending patterns of consumers in 1987
was a slowing in household debt accumulation. Consumer installment debt decelerated sharply as households apparently
limited their borrowing because of high
debt burdens and shifted toward home
equity loans in response to the reduced
incentive, under the new tax law, to
finance expenditures with nonmortgage
credit. And, despite the growing popularity of home equity loans, growth of mortgage debt also slowed last year as interest
rates moved higher. Evidence as to the
ability of consumers to service their
existing liabilities in 1987 was mixed.
Delinquency rates for mortgage loans
fell somewhat, but delinquency rates for
consumer loans changed little over the
year while loan charge-offs rose.
Housing activity in 1987 was damped
by the upward movement in mortgage
rates, continued high multifamily vacancy rates, and changes in the tax law.
Total housing starts were 1.62 million
for the year as a whole, about 10 percent
below the 1986 total and the lowest in five
32
Monetary Policy Reports
years. Single-family homebuilding began
the year at a brisk pace, but weakened
considerably as conventional mortgage
interest rates rose beginning in April,
reaching about 11 Vi percent for fixedrate loans by mid-October. Although
interest rates on mortgages have dropped
substantially since then, the stimulative
impact of that change on housing demand
may have been offset thus far by stock
market losses and reduced consumer
confidence. In the multifamily market,
activity also weakened over the past year,
as near record-high vacancy rates on
rental units and tax-law changes that
reduced the profitability of rental housing
continued to deter building in that sector.
energy sector in response to higher oil
prices. In particular, oil and gas drilling
was up more than 20 percent over the
year after having dropped by 40 percent
in 1986. Outside of the energy area,
spending on structures was flat, after
falling nearly 9 percent in 1986. Producers were somewhat less reluctant to
expand industrial plant facilities owing to
the substantial rise in industrial production, while office construction, although
down a bit last year, held up surprisingly
well in view of the very high vacancy
rates that have persisted in recent years.
Business inventory investment generally moved in line with sales over most of
1987, but a sharp accumulation of stocks
in the fourth quarter suggested the possibility of excess inventory levels at some
The Business Sector
Business spending on plant and equip- retailers. In manufacturing, inventories
ment rose about 3 % percent in real terms changed little on balance over the first
in 1987. In large part, investment spend- half of the year, but rose considerably in
ing was associated with the overall pickup the second half as activity picked up.
in economic activity. However, financial Stockbuilding was most evident in capital
conditions also were conducive to spend- goods industries, where orders and shiping, with cash flows strong and the costs ments strengthened substantially, as proof external capital fairly attractive ducers added supplies in anticipation of
higher production levels. In the retail
through much of the year.
For equipment, the year began on the trade sector, inventories of goods other
weak side, with first-quarter spending than automobiles also rose over the year,
down sharply after firms shifted expendi- pushing the inventory-sales ratio to a
tures into late 1986 to take advantage of relatively high level by December. The
the favorable treatment of investment accumulation was most pronounced for
under the depreciation provisions of the home goods such as furniture and appliold tax law. However, investment in ances and for apparel. At auto dealers,
equipment rebounded sharply in the stocks generally rose in 1987, and, at
second and third quarters of last year. year-end, supplies appeared to be well
Much of the strength was in the computer above desired levels despite the prevaand other office equipment area, where lence of special incentive programs and
expenditures picked up in 1987 after production cutbacks late in the year.
essentially no growth in 1986. In conBefore-tax profits of nonfinancial cortrast, spending on industrial equipment porations increased substantially last
was not especially brisk despite the strong year. Profits were especially strong in
gains in manufacturing production.
manufacturing, where the volume of
Outlays for nonresidential structures shipments picked up and firming prices
also turned up last year after a sharp drop and good cost control contributed to
in 1986. Much of the turnaround in improved margins. In other industries,
spending reflected an improvement in the before-tax profits were little changed
Monetary Policy Reports
from 1986 levels. However, after-tax
profits fell a bit on an annual average
basis last year for the sector as a whole,
as increases in corporate tax liabilities
associated with the new tax laws more
than offset the overall rise in profits.
The Government Sector
Last year, there was significant progress
toward reducing federal budget deficits.
The FY1987 deficit, at $150 billion, was
about a third lower than the record level
of the previous year, and the administration and Congress reached agreement on
deficit reduction actions totaling more
than $30 billion in FY1988 and about $46
billion in FY1989. However, a number
of factors that raised receipts and lowered
outlays in FY1987 are not likely to be
repeated, and—absent further legislative
action—deficits could expand again unless there are particularly favorable economic circumstances.
About half the deficit reduction could
be traced to these one-time factors, as
tax-reform effects boosted revenues, and
asset sales and changes in the timing of
certain payments reduced outlays. The
remainder of the reduction in the deficit
reflected strong revenue growth and a
very small underlying rise in outlays.
The economic expansion boosted receipts, while, on the outlay side, lower
interest rates in FY1987 offset some of
the increase in interest payments associated with the rise in the size of the national
debt. In addition, the improvement in the
farm sector reduced agricultural support
payments, and lower inflation in 1986
held down cost-of-living adjustments for
many entitlements. Spending restraint
also had a noticeable effect: the rise in
military spending slowed, and cuts in
discretionary programs reduced outlays
for education, energy, and intergovernmental assistance.
The state and local sector recorded a
sizable deficit in its operating and capital
33
accounts (which exclude social insurance
funds), as expenditures expanded more
rapidly than receipts. Many states took
action in early 1987 to deal with eroding
fiscal positions. About half of the states
cut their budgets last year and two-thirds
raised taxes, with many of the budget
adjustments in energy and farm states.
However, pressing needs to expand and
upgrade schools, highways, and correctional institutions continue to squeeze
many state and local budgets.
Labor Markets
Employment increased 3 million over the
12 months of 1987, as the pickup in
economic activity led employers to add
workers at a brisk pace. In contrast to
prior years, when the labor market was
characterized by sharp disparities across
sectors, the strengthening in hiring in
1987 was widespread by industry. In
manufacturing, employment edged up
over thefirsthalf of the year and then rose
substantially in the second half in response to the sharp gains in industrial
production. Moreover, the expansion of
jobs in the trade, service, and finance
industries remained sizable during most
of 1987, although hiring in trade and
finance apparently slowed somewhat in
the latter part of the year in the wake of
sluggish consumer spending and the stock
market crash.
The demand for labor considerably
outpaced increases in labor supply, and
the civilian unemployment rate dropped
nearly 1 percentage point over the year to
5 % percent at year-end—the lowest level
since 1979. The jobless rate for adult
men moved down to about 4 Vi percent by
the end of last year, reflecting strong
growth in the industrial sector. The rate
for adult women fell to around 4%
percent early in the year, but changed
little in the second half.
As the unemployment rate dropped
sharply, wage increases, which had been
34
Monetary Policy Reports
decelerating for several years, leveled
out; however, they showed little signs of
acceleration last year. Hourly compensation, as measured by the employment
cost index, advanced 3 lA percent in the
12 months ended December, about the
same pace as in 1986. The moderate rise
in compensation, which was fairly widespread across industries and occupations,
occurred despite a substantial pickup in
consumer price inflation. As a result, real
hourly compensation fell last year and
has averaged only about a Vi percent
increase annually since 1984.
Unit labor costs in the nonfarm business sector rose only VA percent last
year, after a 2 percent increase in 1986.
The continued restraint in labor costs
primarily reflected moderate compensation growth, as productivity gains for the
sector as a whole have improved little
from the sluggish pace of the 1970s. In
contrast, manufacturers apparently have
made significant progress in increasing
efficiency and streamlining operations,
and output per hour in this sector rose
nearly 3 Vi percent in 1987. This advance
in manufacturing productivity, coupled
with continued slow growth in manufacturing wages, continued to put downward
pressure on factory unit labor costs last
year.
while the producer price index, which
includes only prices of domestically
produced goods, rose 2lA percent over
the year, after dropping 2*4 percent in
1986.
The overall rise in energy prices in
1987 reflected both a sharp rebound in
prices early last year and an additional
runup in prices around midyear. Spot
prices for West Texas Intermediate crude
oil (the benchmark crude oil in the United
States) rose $3 per barrel in January of
last year to about $18.50 per barrel in
response to lower OPEC production
levels. Tensions in the Persian Gulf
boosted prices further during the summer
to a high of around $20 per barrel in early
August. Precautionary stockbuilding during this period, coupled with higher levels
of production by OPEC and the absence
of any major disturbance in the Gulf,
subsequently helped put downward pressure on crude oil prices, and oil prices
since late last summer have retreated to
about $17 per barrel. Retail prices for
gasoline and home heating oil closely
followed movements in crude oil prices,
rising around 20 percent through August
and then falling somewhat in the latter
part of the year. In contrast, prices for
natural gas and electricity were down or
little changed last year, reflecting a
further adjustment to the net decline in oil
prices since 1985.
Outside of the energy area, price
Price Developments
Inflation rebounded in 1987, largely increases for goods picked up last year,
reflecting higher energy prices and con- while prices for nonenergy services rose
tinued price hikes for imported goods. about AVi percent, a bit less than in 1986.
Thefixed-weightedprice index for GNP A jump in used car prices accounted for
increased about 4 percent for the year as a much of the acceleration in goods prices,
whole, after a 2lA percent rise in 1986. but further increases in import prices
The consumer price and producer price associated with the falling exchange value
indexes suggested an even sharper accel- of the dollar also were evident in 1987.
eration in prices over 1987, owing to the As a result, retail prices for many items
greater importance of energy in those with high import proportions, such as
indexes. The consumer price index was women's and girls' apparel, photographic
up AVi percent in the 12 months ended equipment, and toys and music equipDecember, after a 1 percent rise in 1986, ment, posted notable increases last year.
Monetary Policy Reports
Prices for many industrial commodities also rose considerably over the
course of 1987. In addition to the increase
in crude oil prices, copper prices more
than doubled last year, and steel scrap
prices were up 36 percent by year-end.
To some extent, the sharp rise in commodity prices reflects the influence of
dollar depreciation on markets for internationally traded goods. However, temporary supply shortages for some industrial metals and the firming in U.S.
industrial activity undoubtedly also had
an important influence on commodity
markets. In the agricultural sector, grain
prices fell early in 1987 as farmers sold
large amounts of grain received through
government programs, but rebounded in
the latter part of the year as exports
picked up in response to the falling dollar.
Monetary Policy and Financial
Markets in 1987
In 1987, the Federal Reserve continued
to face the difficult task of charting policy
in an environment in which considerable
uncertainties clouded the relationship
between the behavior of the monetary
aggregates and the performance of the
economy. As a result, while the Federal
Open Market Committee set targets for
some of the monetary aggregates, it was
deemed necessary to maintain a flexible
approach in conducting its operations,
looking at a broad range of information in
judging when or if to adjust its basic
instruments—reserve availability and the
discount rate—in response to deviations
in monetary growth from expected rates.
Such factors as the pace of business
expansion, the strength of inflation and
inflation expectations, and developments
in exchange markets played a major role
in governing the System's actions, and in
light of the behavior of these other
factors, growth in the targeted aggre
35
gates, M2 and M3, was permitted to run
at or below the established ranges.
During episodes beginning in the
spring and then again in late summer, the
dollar came under sustained downward
pressure and inflationary expectations
appeared to be on the rise, partially in
response to the dollar's weak performance. With the economy expanding at
rates sufficient to produce rising rates of
resource utilization, the FOMC sought
some firming of pressures on reserve
positions and increased the discount rate
in September. When stock prices collapsed in mid-October, the resulting
turmoil required that the focus of policy
be on ensuring the liquidity of the financial system. Over the remainder of the
year, emphasis in the conduct of open
market operations shifted toward maintenance of steady and somewhat easier
money market conditions to promote a
return of stability to financial markets
generally and to cushion the effects of the
stock market decline on the economy.
Behavior of Money and Credit
M2 increased only 4 percent in 1987,
well below both the lower bound of its
5Vi to 8!/2 percent annual growth range
and its more than 9 percent rate of
expansion over the preceding two years.
The velocity of this aggregate picked up
substantially, reversing a portion of the
sharp decline that occurred in 1985-86.
The rise in velocity may have reflected in
part a number of special factors affecting
the public's demand for M2 balances in
1987, including a much-reduced rate of
saving out of income and a preference for
drawing upon liquid assets—rather than
using consumer credit—to finance purchases, the latter in the wake of tax
reform measures reducing deducibility
of nonmortgage interest payments. However, much of the pickup in velocity
appears attributable to increases in the
competing returns on other assets, which
36
Monetary Policy Reports
raised the opportunity costs associated
with holding M2 balances.
The widening gap between market
rates and offering rates was most pronounced for the more liquid retail deposits, where rates are changed very
infrequently. Early in the year, opportunity costs on these accounts were still low
and inflows were large. As market rates
rose, though, yields on these accounts
became increasingly less attractive and
growth slowed; by late in the year, there
were net monthly outflows from both
savings and NOW accounts. Also, money
market deposit accounts declined, for the
first year since this component of M2 was
introduced in late 1982. Expansion of
money marketmutual funds was sluggish.
In contrast to the very liquid retail
deposits, small time deposits expanded in
1987, after two years of zero or negative
growth. Depository institutions tend to
keep the offering rates on these deposits
fairly well in line with market alternatives
of about the same maturity. With
intermediate-term rates rising more than
short rates in 1987, the spread between
yields on small time instruments and
those on more liquid retail accounts
widened considerably, providing depositors with an incentive to shift funds into
small time deposits from the more liquid
retail instruments.
M3 was stronger than M2 over the
year, expanding 5V2 percent and ending
the year at the bottom of its 5Vi to SV2
percent annual growth range. Its faster
growth reflected heavy reliance by depository institutions on large time deposits
and on certain other instruments included
in M3 but not in M2. Both commercial
banks and thrift institutions stepped up
their issuance of wholesale managed
liabilities to fund more asset growth than
could be accommodated by greatly reduced inflows of core deposits. Even so,
M3 growth was subdued relative to prior
years, reflecting in part reduced overall
needs for funds as asset expansion at
banks and thrifts slowed. In addition,
banks relied heavily on managed liabilities obtained from non-M3 sources,
especially funds borrowed from their foreign branches.
Growth of Ml slowed to 6*4 percent
from the very rapid 15 V2 percent increase
posted the previous year, owing to a
small decline in demand deposits and a
sharply lower expansion of other checkable deposits. The velocity of Ml increased slightly, after a record postwar
decline a year earlier. The sharp slowing
of growth and the abrupt turnabout in its
velocity are indicative of the increased
sensitivity to movements in market interest rates that has emerged for Ml in
recent years. As suggested by its comparatively larger deceleration in 1987, Ml
now appears to have a greater sensitivity
to changes in interest rates than the
broader aggregates.
In large measure, the greater sensitivity of Ml reflects the increasing share of
other checkable deposits. Because NOW
accounts pay explicit interest, they serve
as an attractive savings vehicle as well as
a transactions account. The available
information suggests that owners of
NOW accounts are quite sensitive to
changes in opportunity costs, shifting
savings balances between these accounts
and other, less liquid retail deposits. At
the beginning of 1987, market interest
rates were very close to NOW account
rates, and with the opportunity cost so
low, depositors apparently placed unusually large amounts of interest-sensitive
funds in these accounts; as market rates
rose during 1987, these funds evidently
were shifted out of NOW accounts in
search of higher yields.
The abrupt weakening of demand deposits after two years of rapid expansion
suggests that this component of Ml also
is sensitive to interest rates. Higher
market interest rates obviously provide
Monetary Policy Reports
Growth of Money and Debtl
Percent change at annual rate
Period
Fourth quarter to
fourth quarter
1979 .
1980 .
1981
1982
1983
1984
1985 .
1986
1987
Quarterly growth
1987: 1
2
3
4
M2
M3
Debt of
domestic
nonfinancial
sectors
7.7
8.2
7.5
8.9
5.2
9.3
(2.5) 2
8.7
9.1
10.2
12.1
5.3
7.6
12.0
8.9
(12.9) 3
15.6
9.4
6.2
4.0
10.4
9.5
12.3
12.3
9.6
10.0
9.9
9.8
10.4
7.7
8.9
11.3
14.2
13.3
9.1
5.4
13.2
9.6
6.5
4.7
4.5
5.6
10.5
8.7
8.1
9.7
Ml
13.2
6.6
.8
3.9
6.5
2.6
2.8
4.0
1. Ml, M2, and M3 incorporate effects of benchmark
and seasonal adjustment revisions made in February 1988.
Certain technical redefinitions affecting only Ml were
made at the same time.
2. Ml figure in parentheses is adjusted for shifts to
NOW accounts in 1981.
3. Ml figure in parentheses is the annualized growth
rate from the second to the fourth quarter of 1985.
incentives to economize on balances that
earn no interest. Higher rates also permit
business firms to reduce the amount of
balances held with banks as compensation for services provided but not paid for
with fees; because banks can earn greater
returns by investing these funds when
rates are higher, they reduce the balance
requirements commensurately. Substantial amounts of demand deposits are held
under compensating balance arrangements, which helps to explain a high
interest elasticity for demand deposits.
Over time, though, there has been a
gradual movement toward the substitution of explicit fees for compensating
balances, and some reports indicate that
such shifts may have accelerated in late
1987, thereby contributing to the steep
declines in demand deposits near yearend. Higher mortgage rates also may
have contributed to weakness in demand
37
deposits in 1987 by slowing the pace of
mortgage refinancing—an activity that
tends to boost demand deposits temporarily because the amount being prepaid
on an old mortgage often is placed in
escrow for a time in a demand deposit
account.
The collapse of equity prices boosted
the average level of all the aggregates a
bit in the fourth quarter, but M1 was most
noticeably affected. Demand deposits
rose sharply around the time of the crash,
reflecting the increased volume of financial transactions arising from the surge in
trading activity. Other checkable deposits also registered sizable inflows, as
some funds withdrawn from the stock
market probably were placed initially in
these accounts. Outside of Ml, sizable
amounts of funds were transferred from
equity mutual funds into money market
mutual funds, which are included in M2.
The boost to the aggregates was concentrated in late October and proved temporary, with deposits receding over the
month of November.
The debt of domestic nonfinancial
sectors grew 9 Vi percent last year, ending
the year at the middle of the Committee's
monitoring range of 8 to 11 percent. Debt
expansion moderated considerably from
the 13 VA pace of the two previous years,
but still rose faster than income. Federal
debt growth slowed in 1987, as some
progress was made in reducing the federal deficit. Borrowing by state and local
governments fell substantially, partly
reflecting the damping effect of higher
borrowing costs and the availability of
unspent funds from earlier financings. In
the household sector, overall growth of
indebtedness slowed. Sluggish spending
and shifts toward greater reliance on
home equity lines of credit, in response
to the effects of tax reform in reducing
deducibility of interest payments on
consumer debt, held down use of consumer credit. However, a brisk pace of
38
Monetary Policy Reports
home sales over most of the year helped
sustain the growth of mortgage debt at
about the elevated pace of 1986. Despite
some widening last year of the gap
between internally generated funds and
capital expenditures, business borrowing
diminished in both short- and long-term
markets. However, businesses continued
to retire equity last year through mergers,
buyouts, and share repurchases, and the
credit needed to finance these retirements boosted the expansion of business
indebtedness.
Implementation of Monetary Policy
During the first half of 1987, monetary
policy was carried out in an atmosphere
of increasing concerns about the course
of inflation, arising in part from heavy
downward pressure on the dollar. Growth
of the economy was bringing about
noticeable increases in resource utilization, and inflation was picking up, reflecting the effect of a weaker dollar on import
prices as well as a rebound of oil prices
from low 1986 levels. When the dollar
came under heavy pressure in late March,
previously tranquil credit markets began
to exhibit concern about the effect that
declines of the dollar would have on
prices. Long-term interest rates, in particular, moved up strongly. In conjunction with some easing moves abroad, the
Federal Reserve sought somewhat greater
restraint in the provision of reserves to
the banking system. Initially, this action
produced further increases in interest
rates, but subsequently, financial pressures eased somewhat. In response to
reductions in interest rates abroad, to
someflatteningin commodity prices, and
to better news on the U.S. trade deficit,
the dollar firmed and there was a broad
decline in interest rates, with long-term
rates falling somewhat more than shortterm rates.
When the FOMC met in July to review
its growth ranges for money and credit,
all of the monetary aggregates had decelerated considerably. The weakness in
monetary growth did not reflect any
evident weakness in the economy, however; rather, the slower money growth,
and accompanying strengthening in velocity, appeared largely attributable to
the rise in market rates of interest fostered
in part by the Federal Reserve's response
to adverse developments with respect to
the dollar and inflation. The Committee
decided to reaffirm its 1987 growth
ranges for M2 and M3; in doing so, it
anticipated some pickup in the growth of
M2 over the remainder of the year, but it
indicated that growth for all of 1987 near
or even below the bottom of the target
ranges might be acceptable for both
aggregates, depending on the behavior of
their velocities and other financial and
economic developments, notably the
evolving strength of inflationary pressures. The Committee also decided not to
set a target range for Ml, given the
unpredictability of the behavior of this
aggregate relative to economic activity.
For a short time after the July meeting,
the dollar rose further but, with the
release of trade data in mid-August that
disappointed market participants, the
dollar again came under substantial downward pressure. Long-term bond yields
moved up sharply, as the dollar's weakness against a backdrop of strength in the
economy spurred concerns about inflation and possible firming of monetary
policy. Interest rates in short-term markets also increased, but by lesser amounts.
In light of the potential for greater
inflationary pressures, in part related to
weakness in the dollar, the Federal
Reserve sought to reduce marginally the
availability of reserves through open
market operations; it also raised its
discount rate Vi percentage point in early
September to 6 percent. After the discount rate action, interest rates rose
further, especially in short-term markets.
Monetary Policy Reports
Stock prices, which had reached very
high levels relative to earnings and had
been falling since mid-August, plunged
on October 19 in chaotic trading. The
stock market drop prompted a marked
decline in interest rates as investors
sought refuge in the perceived safety of
fixed-income assets, especially Treasury
securities. Although most stock indexes
recovered somewhat in the wake of the
crash, financial markets remained turbulent, with bond and equity prices fluctuating widely.
In a financial environment of extraordinary turmoil and apparent fragility, the
Federal Reserve shifted the emphasis in
the conduct of open market transactions
to providing reserves generously to ensure that adequate liquidity would be
available to meet any unusual needs.
Nonborrowed reserves grew rapidly in
late October to accommodate both a large
increase in reserves required against
surging transactions deposits and an
enlarged demand for excess reserves. An
easing of pressures on reserve positions
also took place which, along with some
diminution of inflation expectations, led
to a partial reversal of earlier increases in
interest rates. These actions helped to
calm the financial markets, although
conditions remained somewhat unsettled
over the rest of the year.
Early in 1988, as incoming data suggested that economic expansion over the
first part of the year might be weak, bond
rates dropped substantially and the Federal Reserve sought some slight additional easing in desired pressures on
reserve positions. Better trade news
bolstered confidence in the dollar, and
the monetary aggregates showed signs of
renewed strength.
Other Developments in Financial Markets
Despite the slower growth of debt and the
overall strength of the economy last
year, there still were some signs of strain
39
and financial fragility in portions of the
economy.
The nonfinancial corporate sector remained highly leveraged and thus potentially vulnerable to adverse changes in
the economic and financial environment.
A combination of strong debt issuance
and massive net equity retirements
boosted the aggregate debt-equity ratio
of these corporations, measured at market values at year-end, after a two-year
decline resulting from increases in stock
prices. Moreover, higher interest rates
along with additional debt boosted borrowing costs, keeping the net interestcoverage ratio at about the very low
levels recorded during the last recession.
Reflecting the weakening of the finances
of some corporations, the pace of downgradings of corporate debt remained very
high in 1987, and a record $9 billion of
rated corporate bonds were placed in
default.
The household sector also exhibited a
few signs of strain on personal finances.
As noted previously, the pace of expansion of total household debt slowed last
year, likely reflecting reduced deductibility of consumer interest under the new
tax code and weaker consumer spending.
However, the growth of household debt
still outstripped that of disposable income, and the ratio of debt to income
reached new highs. For some individuals , the strains posed by high debt burdens
apparently remain quite severe, as the
number of personal bankruptcies has
been growing rapidly over the last three
years and setting new records. On the
other hand, recent declines in the delinquency rate on mortgage debt have
brought this indicator of financial stress
more into line with historical standards.
The banking industry was under some
continuing stress in 1987, primarily
reflecting well-publicized difficulties with
energy and developing country loans, but
in some parts of the country with agricul-
40
Monetary Policy Reports
tural and real estate loans as well. Although most banks continue to be healthy
and enjoy reasonable profits, souring
energy and agricultural loans in recent
years have led to record numbers of bank
closings, principally of smaller banks in
the midwestern and southwestern portions of the country; however, problems
with the quality of agricultural loans
appear to be diminishing as the agricultural sector shows signs of improvement.
Provisioning by large banks for losses
on troubled loan portfolios led to record
losses in 1987 for the banking industry
and to substantial declines in the book
value of shareholder equity of affected
banks. Doubts regarding the ultimate
collectibility of loans to some heavily
indebted developing countries weighed
down the stock prices of many large
banks in 1987, but investor reaction to
the second-quarter decision to make
provisions for substantial losses was
generally positive, and at the time share
prices rose for many banks taking this
step. Difficulties persisted over the year
in making progress in handling the economic and financial problems of many of
the developing countries, and in the
fourth quarter a number of large banks
announced additional provisioning for
losses on such debt and, in some instances, write-offs of problem loans.
After several years of improvement,
the financial condition of the thrift industry deteriorated in 1987. Aggregate earnings declined, with losses posted in the
second and third quarters as a result of
heavy provisions for losses on assets,
including a one-time write-off of accumulated insurance payments prepaid to the
Federal Savings and Loan Insurance
Corporation (FSLIC).2 However, as has
2. In March 1987, the General Accounting
Office declared the FSLIC was insolvent because it
would be unable to meet all its future obligations on
insured deposits at failed but not yet closed
been true for some years now, the
aggregate condition of the industry
masked extremes among individual
thrifts. Many thrifts are well capitalized
and quite profitable, but severe problems
with asset quality have left a substantial
minority insolvent and suffering massive
operating losses that are steadily worsening. Prior to the passage in 1987 of
legislation authorizing a recapitalization,
the FSLIC had been unable to take
effective remedial action with respect to
these insolvent institutions, owing to the
inadequacy of its resources. Under the
terms of the recapitalization plan approved as part of the Competitive Banking Equality Act, the newly-created
Financing Corporation has begun raising
the funds needed by the FSLIC through
issuance of long-term debt.
The stock market collapse gave very
clear warning of the vulnerability of
important elements of the financial system to sudden shocks. Although only a
few small securities firms failed, the
market turbulence produced significant
problems for traders, specialists, and
market makers on the stock exchanges;
and, more generally, financial markets
gave evidence of fragility and instability
that have not entirely disappeared even
yet. Under the circumstances, it is essential that the reexamination of our market
mechanisms and regulatory systems go
forward, to identify any actions that
might be needed to safeguard the strength
of our capital markets and lower the risks
of economic disruption.
institutions. The Financial Standards Accounting
Board then ruled that the prepaid assessments,
which were assets on the balance sheets of individual thrift institutions, had to be written off immediately. The FSLIC recapitalization plan included in
the Competitive Equality Banking Act of 1987
provides that the affected thrifts will recover the
amount of this writeoff over the next five years as
new funds are raised for FSLIC.
Monetary Policy Reports
Report on July 13,1988
41
ment to achieving price stability over
time, the Federal Open Market Committee
(FOMC) in February lowered its
Monetary Policy and the Economic
1988
target growth ranges for M2 and
Outlook for 1988 and 1989
M3 to 4 to 8 percent.
At the beginning of the year, the
The economy continued to expand rapidly in the first half of 1988, displaying conduct of monetary policy was
impressive resilience in the wake of last complicated by exceptional uncertainty
fall's stock market break. Especially about the state of the economy. Some
encouraging has been the fact that the signs of weakness had begun to emerge,
expansion in activity this year has been seemingly lending support to the widely
propelled largely by rising exports and held view that economic activity would
business investment, which bodes well falter after the stock market break. In
for the restoration of better balance in the particular, inventories had accumulated
at a rapid rate in the fourth quarter of
economy.
With the industrial sector continuing 1987, producing some overhang of
to enjoy greater growth, capacity utiliza- stocks at the retail level. Moreover,
tion rates have crept higher. At the same other indicators suggested that the rate
time, the civilian unemployment rate has of increase in labor demand had
declined since year-end, and the average slackened. At the same time, financial
of 5 Vi percent in the second quarter was markets seemed to be somewhat fragile,
the lowest in nearly 15 years. Despite the as conditions had not yet returned to
tightening of labor markets, wage in- normal following the plunge in stock
creases to date have been notably re- prices. The Federal Reserve thus was
strained, on balance, helping to contain faced with the challenge of countering
cost pressures in many sectors. Most the apparent near-term weakness of the
measures of price inflation among fin- economy, while taking account of the
ished goods and services also have shown longer-range need to ensure that growth
little if any pickup, although basic com- in domestic demand would not become
modity prices have risen considerably, excessive.
In this situation, and with the dollar
most recently reflecting the effects of
firming on foreign exchange markets,
drought on agricultural markets.
During the first half of the year, the the Committee loosened slightly further
Federal Reserve continued to direct its the easier reserve conditions that had
policies toward providing monetary and been adopted following the stock market
financial conditions that would foster plunge. Market interest rates edged
price stability over time, promote sustain- down, which —in conjunction with
able economic growth, and contribute to earlier declines in rates—helped lift M2
an improved pattern of international and M3 to near the top of their 1988
transactions. It was recognized that target ranges and resulted in a modest
progress toward these goals in 1988 fall in their velocities (the ratio of
would require relatively slow growth of nominal GNP to the money supply)
domestic demand, which would allow during the first quarter. Given the risk
the economy to accommodate rising that economic activity was weakening,
external demands on U.S. producers as well as the still unsettled conditions in
without generating overall inflationary financial markets, the Committee
pressures. Consistent with continued viewed the more rapid growth in money
external adjustment and with its commit- as appropriate.
42
Monetary Policy Reports
By early spring, however, the bulk of
the incoming data indicated that business
activity had, in fact, remained robust.
Additional information available later in
the second quarter confirmed the
strength of the economy, and high and
rising levels of resource utilization
pointed to a greater potential for a
buildup of inflationary pressures. The
costs of allowing inflation to reintensify
were seen as quite high, based on the
experience of the early 1980s, when the
reversal of the inflation process led
unavoidably to sizable losses in output
and to an extended period of high
unemployment.
Against this backdrop, the Committee
tightened reserve conditions somewhat
in a series of moves beginning in late
March. Market interest rates responded
to the strength in the economy and to the
Federal Reserve's actions by moving
upward. Over the past four months, most
short-term interest rates have increased
around 1 percentage point on balance.
Long-term rates generally rose substantially through late May, but have declined
a little on net since then. The better
performance of the bond market recently
has occurred at a time when investor
sentiment toward investment in dollardenominated assets has been buoyed by
better trade statistics and may also have
reflected favorable market response to
the Federal Reserve's demonstrated resolve tofightinflation.
Despite the Committee's tightening
actions, M2 and M3 continued to expand
rapidly through April, in response to
earlier decreases in interest rates and to a
bulge in transactions balances associated
with unusually large individual tax payments. As the tax-related surge unwound
and the influence of higher interest rates
began to be felt, the two broad aggregates
grew at a reduced pace in May and June,
and ended thefirsthalf of the year in the
upper halves of their target ranges.
Monetary Plans for the Remainder
of 1988 and for 1989
At its meeting last month, the Federal
Open Market Committee agreed to retain
the target growth ranges of 4 to 8 percent
for M2 and M3, measured from the
fourth quarter of 1987 to the fourth
quarter of 1988. In addition, the Committee retained the monitoring range of 7 to
11 percent for the debt of domestic
nonfinancial sectors and again set no
range for M1. Recognizing the variability
of the relationship of these measures to
the performance of the economy, the
Committee agreed that operating decisions would continue to be made not only
in light of the behavior of the monetary
aggregates, but also with due regard to
developments in the economy and financial markets, including attention to the
sources and extent of price pressures and
to the performance of the dollar in foreign exchange markets.
In the absence of any significant economic and financial disturbances, the
Committee expected growth in M2 to
moderate over the remainder of the year,
placing the aggregate around the middle
of its target range at year-end. Growth in
M3 this year is expected to exceed that of
M2 but to remain comfortably within its
range, on the assumption that asset
expansion at depository institutions
would remain fairly robust in the second
half. The debt of domestic nonfinancial
sectors is expected to remain near the
middle of its monitoring range, which
would put its growth for the year around
the slowest annual pace registered in the
past decade.
For 1989, the Committee set, on a
tentative basis, target growth ranges of 3
to 7 percent for M2 and 3 Vi to 7 Vi percent
for M3, measured from the fourth quarter
of 1988 to the fourth quarter of 1989; the
monitoring range over the same period
for domestic debt was set at 6^2 to IOV2
Monetary Policy Reports
Ranges of Growth for Monetary
and Credit Aggregates
Percent change, fourth quarter to fourth quarter
Aggregate
M2
M3
Debt
1987
1988
5%to8V4
5% to 8%
8 to 11
4to8
4 to 8
7 to 11
Provisional for
1989
3to7
3V4to7%
6% to 10%
percent (table 1). Although uncertain
about how strong the economy might be
over the coming year or so, the Committee recognized that, given the current
high levels of resource utilization, it was
necessary to be particularly attentive to
inflationary risks. An acceleration of
inflation could undermine the sustainability of the economic expansion and the
international competitive position of U. S.
producers. The lower ranges tentatively
adopted for 1989 were believed consistent with a monetary policy that would
curb any tendency for inflation to worsen
and would contribute over time to the
restoration of price stability. However,
the Committee also noted that developments over the next half year could alter
substantially the rates of money growth
needed to foster satisfactory economic
performance in 1989 and beyond. Consequently, it stressed the provisional nature
of its decision and the possibility that the
ranges for 1989 might need to be adjusted
when they are reviewed early next year.
The Committee again decided not to
set a range for Ml, given the sharp
swings in its velocity in recent years,
resulting in part from its increased sensitivity to movements in market interest
rates since deposits were deregulated. In
considering narrow monetary measures,
the Committee also has discussed whether
the monetary base could play a useful
role in the conduct of policy. This
measure comprises the major monetary
liabilities of the Federal Reserve System—currency in the hands of the public
and reserves of depository institutions
43
and represents, in a sense, the "base" of
the broader monetary aggregates.1 The
Committee decided against establishing
a range for the monetary base because it
seemed unlikely to provide a more reliable guide for policy than the aggregates
for which ranges already are established.
Although the base has been less variable
in relation to economic activity and prices
than Ml, its velocity nonetheless has
fluctuated appreciably and rather unpredictably from year to year.
Economic Projections
As is indicated in table 2, the central
tendency of the forecasts of Committee
members and nonvoting Reserve Bank
presidents—premised on the monetary
policy objectives outlined above—is for
growth in real GNP of 2 % to 3 percent in
1988, with a modest slowing of expansion
in 1989. Such a pace of growth likely
would generate employment gains sufficient to hold the civilian unemployment
rate close to its average second-quarter
level of 5 Vi percent. Prices, as measured
by the implicit deflator for GNP, are
generally expected to rise 3 to 3 3A percent
over the four quarters of 1988, similar to
last year's rate of advance. For 1989,
projections of the increase in the GNP
deflator are of course more uncertain,
and the central-tendency range widens to
3 to 4 V6 percent.
The administration forecast for 1988 is
quite similar to the central tendency of
forecasts of FOMC members and nonvoting presidents. For 1989, the administration is projecting stronger growth of real
output than indicated by the FOMC
forecasts, but its expectation for inflation
is in the middle of the range of FOMC
forecasts. The administration's projection of nominal GNP in both years is
around the upper end of the central1. The characteristics of the base and its behavior
are discussed in detail in the appendix to this report.
44
Monetary Policy Reports
Economic Projections for 1988 and 1989
Percent
Measure
FOMC members and
nonvoting FRB presidents
Range
Administration
Central tendency
1988
Change, from fourth quarter to
fourth quarter
Nominal GNP
RealGNP
Implicit deflator for GNP
4to7
lto3V4
2% to 4
5% to 6%
2% to 3
3 to 3%
6.6
3.0
3.5
Civilian unemployment rate, average
level in the fourth quarter
5*4 to 6*4
5*4 to5%
5.5
1989
Change, from fourth quarter to
fourth quarter
Nominal GNP
Real GNP . . .
Implicit deflator for GNP
4 to 7*4
Ito3
2to5
Civilian unemployment rate, average
level in the fourth quarter
5to7
tendency ranges and within the full
ranges, suggesting that the administration's economic forecast and the FOMC's
monetary ranges are broadly compatible.
Continued improvement in the external
sector is expected to provide the main
impetus to U.S. economic growth over
the next year and a half. Real exports of
goods should remain on a strong upward
path, reflecting the improved competitive
position of U.S. producers. At the same
time, the growth of real imports is likely
to be restrained, owing to the lagged
effects of the depreciation of the dollar
through the end of last year. This continued shrinkage of the real trade deficit is
expected to be sufficient to generate some
reduction in the nation's deficit on current
account during 1988 and a further decline
in 1989.In contrast to the boost provided
by the external sector, domestic demand
is projected to remain relatively subdued.
Consumer spending, in particular, has
been on a sluggish growth trend since late
1986, and that pattern seems likely to
persist. Moreover, in an environment of
5to7
2to2y2
3 to 4*4
5y 2 to6
7.1
3.3
3.7
5.3
more moderate growth of overall activity, economy-wide spending on new plant
and equipment may not rise as swiftly as
it has on average over the past year. Even
so, within manufacturing, improved
profitability and higher capacity utilization have stimulated a healthy pickup in
capital spending, which should continue
for some time.The performance of the
interest-sensitive sectors, most notably
homebuilding and business investment,
will be influenced considerably by the
extent to which the federal government is
competing for available supplies of credit.
Accordingly, continuedfiscalrestraint is
essential if we are to free up resources to
support private investment. In this regard, the budget summit agreement
reached last December was a favorable
first step, and the Federal Open Market
Committee members and other Reserve
Bank presidents have assumed that the
necessary legislative action will be taken
to implement the agreement. There is a
clear need for further initiatives to deal
with the out-year deficits, which remain
Monetary Policy Reports
distressingly large; financial events later
this year and in 1989 could be substantially affected by the developments in the
fiscal arena. Although little change is
expected in the overall pace of inflation
this year, as compared with 1987, the
sources of actual and potential price
pressure appear to have changed. In
1987, a rebound in oil prices was a major
factor boosting the general price level;
assuming that world oil prices remain
fairly stable, domestic energy prices
should not be a significant inflationary
force in 1988-89. Labor markets have
tightened considerably since last year,
however, and most measures of wage
and compensation rates have firmed.
Although the overall rate of industrial
capacity utilization is not high by historical standards, plants are being used very
intensively in some materials-producing
sectors; sharply rising materials prices
have raised costs for manufacturers
generally. Food prices also have been a
less favorable element in the inflation
picture recently, and are likely to experience some further acceleration as a
consequence of drought conditions; however, it is important to recognize the
temporary nature of this phenomenon,
which should have no lasting effect on
overall inflation so long as it does not
become embedded in wage trends.
For 1989, the FOMC central-tendency
range for the GNP deflator widens on the
upper end, suggesting the possibility of a
pickup in inflation from the pace this
year. However, this apparent acceleration of prices largely reflects the arithmetic implication of an eccentric movement in the deflator for GNP in the first
quarter of this year. Shifts in the composition of output caused the deflator to rise
at an annual rate of less than 1 Vi percent
during that quarter; these shifts are not
expected to be so noticeable in coming
quarters. The view that inflation next
year will not differ significantly from the
45
pace anticipated over the final three
quarters of 1988 reflects the expectation
that business and labor—recognizing the
realities of a highly competitive international marketplace—will continue to
exercise restraint in setting prices and
wages.
The Performance of the Economy
During the First Half of 1988
The economy continued to expand briskly
in the first part of 1988. Activity was
boosted by strength in capital spending
and growth in foreign demand for U.S.
goods. The rise in overall output during
the first six months of this year supported
the addition of about 1 % million jobs to
nonfarm payrolls, and the civilian unemployment rate, which had trended down
throughout 1987, dropped somewhat
further since the beginning of the year to
an average level of 5 Vi percent in the
second quarter.
Despite the greater tightness in labor
markets and the higher rates of capacity
utilization now prevailing in some industries, tendencies toward additional inflation have been limited. Prices of materials
and components have risen sharply, but
for finished goods there are only hints of
price acceleration outside the food sector.
Wages, on the whole, have continued to
be fairly well behaved, suggesting a
recognition on the parts of labor and
management of the need to maintain
competitive cost structures.
The continued resurgence of manufacturing has been one of the most notable
economic developments this year. During the first five months of 1988, industrial production expanded at nearly a 4
percent annual rate, and the rate of
capacity utilization for total manufacturing rose Vi percentage point between
December and May to just over 83
percent, the highest level during the
1980s. Owing to these advances in
46
Monetary Policy Reports
production, manufacturers have embarked on substantial programs to invest
in plant and equipment, pacing an
economy-wide pickup in the rate of
capital spending. The better balance of
expansion also has been visible in agriculture, although the upturn in that sector
has been jeopardized by recent drought
conditions.
The improvements in manufacturing
and agriculture are, in part, reflections of
a broader adjustment of the U. S. external
position. The combination of a lower
dollar and domestic cost containment has
translated into a marked turnaround in
real net exports. That process also has
been aided by stronger economic growth
in other large industrial countries.
The External Sector
After having trended downward for
nearly three years, the dollar appreciated
substantially over the first half of 1988
against most major foreign currencies.
The dollar rose sharply at the beginning
of the year, responding in part to coordinated central bank intervention. In
recent months, sentiment toward the
dollar appears to have improved, owing
largely to the release of better-thanexpected trade reports and to firming
actions by the Federal Reserve.
The U.S. merchandise trade deficit for
the first quarter was $144 billion at a
seasonally adjusted annual rate, substantially below the figures for the fourth
quarter and for 1987 as a whole. In April,
the trade deficit narrowed further. Exports have continued to expand rapidly,
while import growth has slowed considerably. The strong growth of exports can
be attributed primarily to the increased
price competitiveness of U.S. goods,
which reflects the decline of the dollar in
recent years and the tight control over
production costs exercised by domestic
firms. This growth of exports continues
to be broadly based, and foreign sales
have been particularly strong for industrial machinery and for computing equipment. On the import side, the volume of
purchases rose less than 1 percent in the
first quarter and apparently declined in
April. Imports of consumer goods excluding autos were essentially unchanged in
thefirstquarter, continuing the pattern of
1987, while auto imports fell somewhat.
In contrast, imports of capital goods rose
considerably, stimulated by the surge in
equipment outlays by domestic firms.
Economic expansion abroad has continued at a moderate pace, on balance, so
far this year, providing some support for
an improved U.S. trade position. Activity
increased sharply in the major foreign
industrial countries in early 1988, while
growth in the smaller industrial nations
remained subdued. In the newly industrialized countries of Asia, economic activity continued to expand rapidly. In contrast, growth slowed in Latin America,
primarily due to a sharp deceleration of
activity in Brazil. In the OPEC countries,
activity appears to have stabilized in
1988, after a decline in 1987, as higher
volumes of oil exports have offset the
effects on government revenues of a slight
softening in prices.
The Household Sector
Consumer spending showed some vigor
in early 1988, after declining in the fourth
quarter of last year. Real outlays increased at a 3 % percent annual rate in the
first quarter, as purchases of motor
vehicles bounced back with the expansion
of manufacturers' incentive programs,
outlays for other durable goods were
strong, and expenditures on services
continued to post appreciable gains. Data
for April and May suggest, however, that
the growth of consumer spending slowed
from the rapidfirst-quarterrate.
The buoyancy of consumer spending
early this year can be traced to robust
income growth. Real disposable personal
Monetary Policy Reports
income rose at a 5 percent annual rate, on
average, during the fourth quarter of
1987 and the first quarter of 1988,
substantially above the 2 percent rate
posted for 1987 as a whole. However,
disposable income growth appears to
have slowed considerably in the second
quarter, as a result of a spurt in nonwithheld tax payments and a slower pace of
employment gains.
Although the pace of consumer spending thus far this year has been stronger
than many expected, the stock market
break probably did exert some restraining
effect. This is evident in the personal
saving rate, which has averaged 4Vi
percent for the seven months after Octob e r - 1 percentage point above the average level during the first three quarters of
1987. While most households experienced little direct loss of wealth from the
stock market decline, the startling dimensions of the event obviously affected
consumer sentiment last fall. With each
passing month, however, confidence has
grown and helped to sustain the growth
of spending.
Residential construction was weak
during the first half of 1988. Total
housing starts averaged about 1 Vi million
units at an annual rate through May,
almost 9 percent below the 1987 total. In
the multifamily sector, building declined
from the already depressed 1987 level.
Starts in this sector have been falling
since the end of 1985, as near-record
vacancy rates and changes in the tax laws
have reduced the incentive to build new
units. In the single-family sector, building has fluctuated from month to month,
influenced by movements in interest rates
and perhaps by weather; on balance, the
average level of starts through May was
roughly 6 percent below the 1987 pace.
The Business Sector
Business fixed investment advanced
sharply in thefirstquarter of 1988, owing
47
to a large increase in purchases of equipment. In recent months, spending appears
to have remained near the high firstquarter level. Surveys of capital spending
plans, taken this spring, point to appreciable growth in investment outlays over
the second half of 1988.
Real outlays for computing equipment
jumped at more than a 90 percent annual
rate in the first quarter, but fell back
considerably in subsequent months.
Smoothing through this volatility, it
appears that demand for such equipment
has emerged from the lull that prevailed
during 1986 and the first half of 1987,
when excess computing capacity—as
well as concerns about the usefulness of
available software—limited purchases.
Outlays for other types of equipment also
have been strong, on balance, since the
turn of the year, largely reflecting the
buoyancy of overall economic activity.
In particular, with utilization rates now at
elevated levels in many manufacturing
industries, equipment investments have
been an attractive way of removing
bottlenecks and achieving a relatively
rapid improvement in effective capacity.
Although the data for May showed a
surprising jump in nonresidential construction activity, real outlays in this
sector were sluggish overall during the
firstfivemonths of the year. Commercial
construction, the largest part of this
aggregate, continues to be restrained by
an overhang of vacant space. In addition,
oil and gas drilling, which was up more
than 20 percent in 1987, has changed
little since last fall, owing in large part to
the general weakness of petroleum prices
over this period. Industrial construction,
in contrast, has risen briskly in recent
months. Nonetheless, even here, the
picture is cloudy. Although capacity
utilization is high in a number of sectors,
manufacturers apparently remain cautious about making the large, long-range
commitments involved in building new
48
Monetary Policy Reports
plants, and new contracts for industrial
construction actually have trended down
since the beginning of the year, after
rising in 1987.
The pace of business inventory investment moderated somewhat during the
first four months of 1988, reducing the
concern about excessive stocks that had
arisen earlier this year. This concern had
focused on the retail sector, where inventories at auto dealers and at certain outlets
for nondurable goods (primarily general
merchandise and apparel stores) appeared high relative to sales at year-end.
By cutting production early in the year
and offering a variety of sales incentives,
automakers have been able to bring their
inventories into better alignment with
sales. In contrast, inventory-to-sales
ratios for nondurable retail goods continue to hover at levels that are high by
historical standards. At the manufacturing level, inventory positions through
May appeared fairly lean in general,
given the pace of shipments. Much of the
recent building of factory stocks has been
in industries where market demand has
been robust, such as aircraft, machinery,
chemicals, and paper.
Before-tax economic profits of nonfinancial corporations continued to be
strong in thefirstquarter, with manufacturing firms posting substantial gains.
After-tax profits also rose noticeably, as
the maximum tax rate on corporate
profits was reduced from 40 to 34 percent,
a change mandated by the Tax Reform
Act of 1986. Owing to the strong growth
of profits, the internal cash flow of
nonfinancial corporations has increased
considerably since mid-1987, reversing
the slide of the previous year.
The Government Sector
In real terms, federal government purchases of goods and services—which add
directly to GNP and account for about
one-third of total federal expenditures—
fell during thefirstquarter and appear to
have remained relatively weak in recent
months. This dropoff reflects the winding
down of some major defense procurement programs, restraint on domestic
discretionary spending, and net reductions in farm inventories held by the
Commodity Credit Corporation. However, on a budget basis, total outlays have
been growing rapidly, owing to continued increases in entitlements, greater
demands on deposit insurance agencies,
and increasing net interest payments.
Meanwhile, growth of federal government revenue has slowed compared with
the sharp increase in FY1987. Although
tax receipts have been pushed up by the
robust gains in income and by an increase
in the payroll tax rate, this upward
impetus to revenue has been tempered by
the final reductions in income tax rates
from the reforms enacted in 1986. In
contrast to its effects this year, tax reform
had provided a substantial boost to revenues in FY1987. On balance, it is quite
possible that the budget deficit this year
will exceed the $150 billion shortfall
recorded last year.
The state and local sector continues to
operate under budgetary pressure, as
operating and capital accounts (which
exclude social insurance funds) have been
in deficit for the past year and a half. In
the first quarter of 1988, this combined
deficit stood at $9 billion, similar to the
shortfall recorded during 1987. Many
states have acted to curb this fiscal
erosion, using a combination of tax
hikes—primarily sales and excise taxes—
and budget cuts. As a result, the growth
of real spending slowed considerably in
the first quarter, reflecting a sharp decrease in construction outlays. This was
the third such decline in the past four
quarters, and this downtrend in construction activity has occurred despite continuing needs to expand and upgrade the
basic infrastructure.
Monetary Policy Reports
Labor Markets
Early in the year, incoming data seemed
to signal some weakening of labor demand. Initial claims for unemployment
insurance, which had trended up during
the final months of 1987, rose even
further just after the turn of the year.
Moreover, the first report on nonfarm
payroll employment for January showed
the smallest monthly increase since mid1986. Taken together, these indicators
conveyed a picture of deterioration in the
labor market. However, as subsequent
data were released, it became clear that
the underlying pattern of labor demand
had, in fact, remained healthy. Claims
for unemployment insurance dropped
back to relatively low levels and the
anemic employment gains for January
were revised up substantially. Moreover,
since January, nonfarm payroll employment has advanced more than 300,000 at
a monthly rate, somewhat above the
average increase in 1987. Although the
gains have been concentrated in the
service-producing sector, manufacturing
has posted an average monthly increase
of about 30,000 jobs thus far this year,
with the largest advances in the machinery and metals industries.
The combination of strong gains in
employment and slower growth of the
labor force over the first half of 1988
lowered the civilian jobless rate to 5.3
percent in June from 5.8 percent at the
end of last year. Jobless rates fell for a
broad spectrum of demographic groups
over thefirsthalf of the year, and the June
rate of unemployment represents the
lowest monthly figure since mid-1974.
The June level, however, may be artificially low, owing to the difficulty of
adjusting for seasonal swings in employment at the end of the school year.
As the unemployment rate dropped
last year, compensation increases, which
had been moderating for several years,
leveled out. In the early part of this year,
49
there were some signs of an acceleration
in labor costs. Hourly compensation, as
measured by the employment cost index,
advanced nearly 4 percent between the
first quarter of 1987 and the first quarter
of this year, about 34 percentage point
more than in the previous 12-month
period. Although this pickup was related
in large part to the strength of labor
demand, it was exacerbated by the rise in
the payroll tax rate that took effect on
January 1. By sector, the sharpest uptick
in compensation rates occurred in manufacturing, where increases in production
have led to a firming in labor demand.
This pattern stands in contrast to trends in
the early 1980s, when pay gains in
manufacturing lagged far behind those in
the service-producing sector.
Since 1980, output per hour in the
nonfarm business sector has risen at an
average l!/2 percent annual rate. Although this rate is somewhat above the
sluggish pace of the 1970s, it remains far
below the advances registered earlier in
the postwar period. In contrast, productivity gains in manufacturing have been
quite rapid in recent years. The firstquarter rise in factory output per hour
was nearly 3 percent at an annual rate, in
line with the average increase registered
during 1986 and 1987; these productivity
advances have continued to hold down
unit labor costs, which fell Vi percent
over the year ended in the first quarter of
1988.
Price Developments
Upward pressures on prices appear to
have grown stronger this year, reflecting
the lagged effects of the earlier
depreciation of the dollar, as well as
tighter markets for labor, industrial
materials, and farm output. Energy
prices, in contrast, have been restrained
this year, on balance, and have provided
some offset to these pressures. For the
most part, signs of higher inflation have
50
Monetary Policy Reports
been confined to price indicators for
commodities and intermediate goods,
which have posted sharp increases. The
consumer price index-a measure of
inflation for finished goods and services—showed no acceleration during
the first five months of 1988, rising at
the 4!/2 percent annual rate registered for
1987 as a whole.
In the energy sector, spot prices for
crude oil plummeted after OPEC failed
last December to reach a credible agreement to limit production. The contract
price for West Texas Intermediate (the
benchmark crude oil in the United States)
fell from about $18 per barrel in December to about $16 per barrel in March.
Reflecting these developments, retail
prices for gasoline fell considerably in
thefirstquarter. During March and April,
prices for crude oil drifted up and, in
response, consumer energy prices rebounded in April and May. More recently, however, crude oil prices have
receded again, as OPEC's June meeting
adjourned without an agreement on production cuts.
In the agricultural sector, tighter crop
inventories and stronger grain exports
pushed up farm-level prices early in
1988. In addition, prices for grains and
soybeans recently have surged in
commodity markets, owing to the
drought in major growing regions. It
now appears likely that retail food prices
will accelerate in coming months and
exert some upward pressure on aggregate consumer price inflation.
Excluding food and energy, prices at
the consumer level rose at about an
annual rate of about 4% percent during
the first five months of this year.
Consumer price inflation has remained
at this relatively high rate partly because
of continued increases in import prices
spurred by the earlier depreciation of the
dollar. Particularly noteworthy has been
a jump in clothing prices, which have
been affected not only by the dollar's
movement, but by quotas on apparel
imports. In the service area, medical
care costs have continued to rise rapidly.
At earlier stages of processing, inflation appears to have picked up for a wide
range of items. On commodity markets,
prices of crude industrial materials have
remained on an upward course this year,
although the price hikes have been less
pervasive than in 1987. Reflecting, in
part, these developments, the producer
price index for intermediate materials
other than food and energy rose at an
annual rate of nearly 8 percent over the
firstfivemonths of this year, up from the
5 percent pace registered last year. Price
increases have been especially large for
materials used by producers of metals,
chemicals, paper, and plastic, where
output has been strong or capacity utilization rates high.
The upward movement of intermediate
goods prices relative to finished goods
prices at the producer level has been quite
substantial. Although divergences in the
two series, such as the one that has arisen
over the past year, are not unprecedented,
disparities typically have not persisted
for long. Historical evidence indicates
that higher materials costs, on average,
pass through rather quickly into finished
goods prices. In the recent period, the
effect of the sharp rise in materials prices
may have been cushioned by restraint on
unit labor costs, by the spreading of
overhead costs over larger sales volumes,
and, perhaps, by efforts to save on or
substitute away from higher cost materials. Nonetheless, past experience suggests that, even if there may not be a
significant delayed pass-through in coming months, the risks of an acceleration in
finished goods prices would be considerable if the pressures on materials prices
do not ease soon.
Monetary Policy Reports
Monetary Policy and Financial
Developments during the First
Half of 1988
The Federal Open Market Committee
has sought monetary and financial conditions that promote price stability over
time, support sustainable economic
growth, and contribute to an improved
pattern of international transactions. To
this end, the Committee at its February
meeting established target ranges, measured as growth rates from the fourth
quarter of 1987 to the fourth quarter of
1988, of 4 to 8 percent for both M2 and
M3. It also set a monitoring range of 7 to
11 percent for the growth of domestic
nonfinancial debt and chose, once again,
not to stipulate a range for Ml growth.
The 1988 target ranges for M2 and M3
represented reductions from last year's
ranges of 5Vi to SV2 percent for both
aggregates and resulted in a lowering of
the midpoint of the target ranges by 1 full
percentage point.
In widening the target ranges for M2
and M3, the Committee cited the high
degree of variability in the relationship
between money and aggregate demand
that had appeared in recent years. As a
result of this development, which
stemmed largely from an increased sensitivity of money growth to interest rate
changes, it was believed that a wider
range of monetary growth rates could be
compatible with satisfactory outcomes
for the economy. At the time of the
February FOMC meeting, broader
ranges seemed particularly appropriate
in light of the uncertain outlook for
spending. More specifically, the eventual
effects on domestic demand of the October stock market plunge and the subsequent drop in interest rates remained
unclear. Ml had become even more
interest sensitive, and it had varied more
widely relative to GNP than had the
51
broad aggregates, thus making it even
more difficult to interpret; consequently,
the Committee decided against establishing a target range for this aggregate.
In setting a monitoring range for
domestic nonfinancial sector debt, the
Committee anticipated that debt growth
would slow in 1988, owing to less
government borrowing. Nonetheless, the
rate of expansion of domestic debt was
expected to exceed that of income. As
was the case for the monetary aggregates,
considerable uncertainty surrounded the
prospects for debt growth, leading the
Committee to widen the monitoring range
by dropping the lower limit 1 percentage
point from the previous year's rate.
During thefirstpartof 1988, monetary
policy was conducted against a backdrop
of data suggesting some weakness in the
economic expansion. Reflecting concern
about the outlook for economic growth,
the Committee moved in January to ease
slightly the degree of pressure on reserve
positions. On balance, interest rates fell
during January and February, which, in
conjunction with rate declines that followed the stock market drop in October, contributed to a pickup in M2 and
M3 growth over the first quarter of the
year.
As information suggesting greater economic strength and an increased potential
for a buildup of inflationary pressures
became available in March and in subsequent months, and with M2 and M3
running near the upper ends of their
growth ranges, the Committee moved, in
several steps, to tighten reserve pressures. Owing to the force of credit
demands and the Federal Reserve's less
accommodative posture, interest rates
rose on balance over those months. Late
in the second quarter, growth in the
aggregates moderated, leaving both well
within their target ranges as the first half
of 1988 ended.
52
Monetary Policy Reports
Growth of Money and Debt
Percent change at annual rate
Period
Fourth quarter to
fourth quarter
1979 .
1980
1981
1982
1983
1984
1985
1986
1987
Ml
M2
M3
Debt of
domestic
nonfinancial
sectors
7.7
7.5
5.2
(2.5)»
8.7
10.2
5.3
12.0
15.6
6.2
8.2
8.9
9.3
10.4
9.5
12.3
12.3
9.6
10.0
9.1
12.1
7.6
8.9
9.4
4.0
9.9
9.8
10.4
7.7
9.1
5.4
8.9
11.3
14.2
13.3
13.3
9.6
1987:4 to 1988:2 e ...
5.0
7.4
7.1
8.5
1987:4 to June 1988e
5.1
7.1
7.0
8.5
13.2
6.6
.8
3.9
3.8
6.1
6.5
2.7
2.8
3.9
6.7
7.9
6.5
4.6
4.5
5.4
7.0
7.1
10.5
8.6
7.9
10.1
8.4
8.3
Quarterly average
1987: 1
2
3
4
1988: 1
2e
1. Ml figure in parentheses is adjusted for shifts to
NOW accounts in 1981.
e estimated
Behavior of Money and Credit
From the fourth quarter of 1987 through
June 1988, M2 increased at about a 7
percent annual rate, a noticeable increase
over its 1987 rate of 4 percent (table 3).
The faster growth can be attributed
primarily to the lagged reaction of the
public's demand for M2 balances to
decreases in market interest rates relative
to deposit rates that occurred in late 1987
and early 1988. In the second quarter of
1988, however, the "opportunity cost" of
holding M2 reversed its downward trend,
and growth in M2 moderated toward the
end of the period. Also contributing to
the May-June slowdown was the runoff
of an unusually large, tax-related buildup
of transactions balances that inflated both
Ml and M2 in April. On balance, M2
velocity is estimated to have declined
slightly over the first half of the year,
in contrast to its upward movement in
1987 when market interest rates and the
opportunity cost of M2 were generally
increasing.
A number of the components of M2
contributed to its strengthening in the
first half of the year. After declining
steadily over the last half of 1987, liquid
retail deposits—the sum of other checkable deposits, savings deposits, and
money market deposit accounts—registered a solid gain over the first half of
1988, as reductions in market interest
rates during the winter combined with
the slow adjustment of rates on these
deposits to increase their relative attractiveness. Growth in small time deposits
also was particularly strong, as was that
in M2-type money market mutual fund
assets early in the year. Falling market
interest rates, coupled with slow adjustment of returns on fund assets, provided
money funds with a rate advantage in the
first quarter, thereby leading to higher
asset growth. Rising market rates of
interest and the apparent use of money
funds to pay taxes, however, significantly
slowed their growth in the second quarter.
M3 growth increased in thefirsthalf of
1988 to a 7 percent rate, following a 5Vi
percent increase in 1987. Credit expansion at banks and thrift institutions, which
heavily influences the overall behavior of
M3, remained at roughly the same pace
as last year, but it was financed to a
greater extent over the first half of the
year by liabilities included in M3. In particular, inflows to banks from their foreign branches and borrowings by savings
and loans from Federal Home Loan
Banks, which are not included in M3,
dropped off sharply compared with 1987.
Ml grew at a 5 percent rate during the
first half of the year, which although
below the 6 lA percent rate for all of 1987,
was higher than its growth in the second
half of last year. The sluggish growth of
Ml, especially in comparison to that of
M2 and M3, owed entirely to weakness
Monetary Policy Reports
in demand deposits, which have been
declining over the past year and a half. In
contrast, growth in currency and other
checkable deposits was robust.
Domestic nonfinancial debt grew at a
rate of SV2 percent rate from the fourth
quarter of 1987 to June, according to
estimates based on partial data. Debt
growth in the first half represented a
slowdown from last year's rate of 9*/2
percent and a substantial decline from the
rate of expansion of 13 lA percent in 1985
and 1986. Nonetheless, debt continued to
grow faster than nominal GNP. Reflecting the effects of smaller federal deficits
during the calendar year, growth in federal debt slowed from last year's pace and
remained at a rate well below that recorded over most of the 1980s. Nonfederal debt also expanded at a somewhat
slower rate, as the growth of the debt of
households and state and local governments declined modestly. In the household sector, a falloff in mortgage borrowing associated with weaker housing
expenditures offset a pickup in consumer
credit. Business borrowing expanded at
roughly the same pace as in 1987, with
rising interest rates in the second quarter
causing firms to shift more of their
borrowing to short-term instruments.
Implementation of Monetary Policy
In conducting monetary policy, the Federal Reserve directed its operations during thefirstthree months of 1988 at either
maintaining or easing slightly the degree
of reserve pressure that had prevailed
since the October stock market collapse.
Thereafter, the System moved in several
steps to firm reserve positions.
The early months of 1988 were marked
by widespread concern that the economic
expansion might be faltering. Data available in January and February pointed
toward a weakening in domestic final
demand, as evidenced by a substantial
buildup of inventories in the fourth
53
quarter of 1987 and some softening in
labor market data. At the same time,
inflationary pressures and expectations
appeared to have diminished somewhat,
and after coming under pressure in late
December, the dollar first rebounded
and then stabilized against most major
currencies.
In these circumstances, the Committee
moved in late January to ease slightly the
pressure on bank reserve positions. The
provision of nonborrowed reserves
through open market operations was
increased, the level of discount window
borrowing declined, and the federal funds
rate edged downward. Other market
interest rates declined as well; in spite
of lower interest rates, the dollar was
relatively stable against most major
currencies.
The downward trend for most market
interest rates came to an end in late
February and early March, when incoming information indicated that the economy was considerably stronger than it
was earlier thought to be, and in light of
emerging pressures on industrial capacity
and labor markets, the risks of a pickup in
inflation appeared to have risen. In this
environment, monetary policy began in
late March to become less accommodative. The restraint in policy was aimed at
moderating potential inflationary pressures by damping domestic demand in
order to facilitate a shift of resources to
the external sector. As information pointing to substantial economic strength
became available in April and May, and
with the monetary aggregates growing at
rates near the upper end of their target
ranges, the Committee moved again to
apply slightly greater pressure on reserve
positions. Reflecting both the System's
actions and market concerns about inflation, market interest rates moved higher.
Since late May, however, long-term
interest rates have fallen on balance,
despite further increases in short-term
54
Monetary Policy Reports
interest rates. The resulting narrowing of
the spread between long- and short-term
rates apparently reflects some lessening
of concerns about inflation, brought
about in part by the firmer monetary
policy. Long-term yields also have benefited recently from the upward movement
of the dollar against most major currencies, as the trade balance has continued to improve. The change in attitude
toward the dollar apparently has encouraged investments in relatively high yielding dollar assets.
In the aftermath of the stock market
crash last October, the Committee modified the System's procedures by placing
greater emphasis on money market conditions and less on bank reserve positions
in carrying out day-to-day open market
operations. In doing so, it was neither the
Committee's intention to alter its operating procedures permanently nor to ignore
bank reserve positions completely.
Rather, the thrust of the modification was
to permit greater flexibility in System
operations in light of the volatility and
fragility characterizing financial markets
at that time. During this period, it was
considered important to assure the markets of the System's intention to provide
adequate liquidity, and it was feared that
significant variation in money market
conditions could add to the unusual
uncertainties already in the markets.
As markets exhibited signs of increased stability this year, the Committee
responded by gradually placing greater
emphasis on reserve positions in conducting System operations, allowing money
markets to respond more sensitively to
changing economic circumstances. The
transition back to the pre-October approach was completed in the spring.
Other Financial Developments
The collapse of equity prices last October
heightened public concerns about the
volatility of stock prices and the fragility
of financial institutions and markets.
These concerns became the subject of
studies by a presidential commission,
governmental agencies, and the securities industry. Recommendations from
these groups and from a follow-up presidential working group focused on ways
to avoid excessive stock price volatility
and to strengthen the ability of markets
and related systems to deal with large
price movements. Progress has been
made in this regard, with steps having
been taken by market participants to
address some of the problems revealed
by the market break in clearing and
settlement systems. Additional steps have
been taken to coordinate trading halts
triggered by extreme price moves and to
strengthen capital positions of specialists
and other market makers.
In considering the possibility of future
regulatory action in this sphere, it is
noteworthy that the stock market break
has not been followed by any major
aftershocks. In part, this reflects the basic
resilience in this period of the economy
and financial markets. In addition, it
attests to the general adequacy of the
current regulatory framework and monetary policy institutions in cushioning
financial disturbances, so that they do not
spread to the economy as a whole. Thus,
while the additional steps initiated by
private entities to strengthen market
mechanisms certainly are desirable, a
major extension of the governmental
regulatory apparatus does not seem necessary.
The banking industry also has been the
subject of considerable concern, arising
from its well-publicized difficulties with
energy, agricultural, real estate, and
developing country loans. These problems have been highlighted by the many
bank closings and the rescue by bank
regulators of several large banks. As a
result of large banks choosing to make
sizable increases in loan-loss reserves,
Monetary Policy Reports
profits reported by the banking industry
as a whole in 1987 were down nearly 80
percent from 1986. Despite these difficulties, some bright spots emerged last
year, especially the improved performance of agricultural banks. It is important to note, however, that throughout
this period of stress in the industry, the
commercial banking system has continued to play its crucial role as a provider of
credit to the economy.
The savings and loan industry continues to be under financial stress. Although
the majority of savings and loans are
healthy and reasonably profitable, the
industry as a whole reported enormous
losses in 1987 and in the first quarter of
1988. Roughly one-sixth of the institutions are insolvent when evaluated in
accordance with generally accepted accounting principles, and their aggregate
losses increased in 1987 and in the first
quarter of 1988. The prospects for the
recovery of the insolvent institutions are
not bright, implying that the Federal
Savings and Loan Insurance Corporation
(FSLIC) will be required either to liquidate them or to assist in their absorption
by stronger institutions.
The deterioration of the savings and
loan industry has affected the financial
condition of FSLIC, whose net worth
became more deeply negative in 1987.
Congress approved a plan last year
providing nearly $11 billion to recapitalize FSLIC. This action has helped FSLIC
liquidate several large and especially
troubled savings and loans, but concerns
persist in the market that the total available new capital may fall short of that
needed for FSLIC to deal fully with the
problem institutions.
The difficulties of many individual
depository institutions have been associated, in most cases, with specific types of
loans or certain regions and countries.
However, concerns have been expressed
more generally about the financial health
55
of households and businesses - especially
about the ability of these sectors to service
their debts if interest rates were to rise
sharply or business conditions were to
weaken significantly.
With regard to households, the rapid
growth of their debt during the current
economic expansion has outstripped that
of disposable income. The ratio of household sector indebtedness to income is at
an all-time high. Recent information also
shows a rising level of personal bankruptcies and a relatively high level of delinquencies on certain types of consumer
loans.
Although these developments suggest
that debt burdens may be difficult for
some households to manage, other evidence indicates that most households are
able to meet their debt obligations reasonably well. The trend toward longer
repayment schedules has held down debtservice payments. The increased use of
adjustable-rate mortgages has made the
financial positions of many households
more vulnerable to increases in interest
rates; however, at the same time, deposit
deregulation has meant that household
interest income is more responsive to
changes in rates. Furthermore, for the
sector as a whole, assets have risen more
rapidly than debt, implying increases in
household net worth. Indeed, survey
information indicates that many families
with consumer debt have substantial
amounts of financial assets that could be
tapped to meet debt-service obligations
in the event that incomes proved to be
inadequate.
Like households, businesses have
added greatly to their indebtedness in
recent years. Many companies have
dramatically increased their leverage
through debt-financed merger, buyout,
and share retirement activity. Reflecting
heavier debt loads, the bite that interest
payments take out of corporate cash flow
is near historically high levels for the
56
Monetary Policy Reports
nonfinancial corporate sector as a whole.
A downturn in earnings would place
serious debt-servicing strains on many
individual firms. In addition, heavy
reliance on floating-rate loans and shortterm debt obligations has rendered many
firms vulnerable to a significant rise in
borrowing costs. In reflection of this
situation, downgradings of corporate
debt have continued to exceed upgradings
by a large margin.
Firms would not have been able to
assume these greater financial exposures
were it not for receptive attitudes among
lenders and equity investors. Companies
engaging in restructurings that have
involved the addition of massive amounts
of debt to their balance sheets have been
rewarded with sizable runups in their
share prices; this is reflected in the
absence of an uptrend during the 1980s in
the market-value based "debt/equity"
measure. Moreover, lenders are exacting
relatively small risk premiums on debt
obligations incurred by firms, as reflected, for example, in the spreads
between yields on high-grade corporate
bonds and Treasury securities or even
those for below-investment-grade "junk"
bonds. Nonetheless, our financial history
provides numerous reminders of the
fragility of this type of situation: last fall,
for example, when confidence was jolted
by the stock market break, yield spreads
widened dramatically, and the availability of new credit to riskier borrowers was
sharply curtailed.
Appendix: The Monetary Base
In recent years, the monetary base has
received increased attention as the behavior of other monetary aggregates-especially Ml - h a s diverged from historical
patterns. In part, the appeal of the base
has resulted from the notion that it may
have a reasonably stable relationship with
nominal spending. In addition, it is
perceived as being more directly under
the control of the Federal Reserve than
are the broader aggregates. This appendix reviews the historical and analytical
characteristics of the monetary base. It
discusses its definition, its relation to
income and other economic variables,
and its control by the Federal Reserve.
Concepts, Definitions, and Measurement
The monetary base consists of currency
in the hands of the nonbank public and
reserves held by depository institutions—
both reserves required to be held against
deposits and the additional, "excess"
reserves that depository institutions
choose to hold. Because reserve requirements are substantially higher for transactions deposits (that is, checkable deposits) than for nontransactions deposits,
the bulk of required reserves—about
three-quarters—is related to transactions
deposits. In turn, transactions deposits
consist primarily of demand deposits and
other checkable deposits, which are the
principal components of the narrow
monetary aggregate M l . Thus, both
through its currency component and its
reserves component, the monetary base
is closely related to M l . The links
between the monetary base and broader
measures of money, such as M2 and M3,
are much looser because most savingstype instruments in these measures either
are not reservable or have a much lower
reserve requirement applied to them.
Moreover, currency accounts for an even
smaller share—on the order of 5 percent—of these aggregates.
Looking at the base as currency and
reserves focuses on the monetary liabilities of the Federal Reserve—frequently
referred to as the "uses" of the base.2
Alternatively, the base can be measured
from its "sources" in the Federal Reserve
2. Technically, the base also encompasses a
relatively small amount of U. S. Treasury liabilities.
Monetary Policy Reports
balance sheet, the assets held by the System less its nonmonetary liabilities. The
two concepts are identical if all components are measured contemporaneously.
There are two publicly available measures of the monetary base. One, corresponding to the uses concept, is constructed by the Board and the other, a
sources concept, is produced by the Federal Reserve Bank of St. Louis. Besides
the difference in accounting approach,
which affects the treatment of vault cash
used to meet reserve requirements, the
two measures differ in the method of
adjustment for changes in reserve requirements and in the method of seasonal
adjustment.
The Board measure constructs the base
from the currency component of the
money stock (currency held by the nonbank public) (76 percent), total reserves
(lagged vault cash, up to required reserves, plus reserve deposits at the Federal Reserve banks) (23 percent), and a
third component that includes current
surplus vault cash held at depository
institutions plus service-related balances
(1 percent).3
The St. Louis measure, consistent with
its sources concept, comprises Federal
Reserve credit—holdings of U. S. government securities, discounts and advances,
Federal Reserve float, and other Federal
Reserve assets—plus other sources, including the gold stock, special drawing
rights and Treasury currency outstanding. It subtracts several categories of
liabilities, namely, Treasury and foreign deposits at the Federal Reserve,
3. "Vault cash" included in total reserves is
lagged four weeks, which reflects its use to meet
reserve requirements."Surplus vault cash" is bank
holdings of currency in excess of required reserves.
"Service-related balances" comprise other balances
held by depository institutions at the Federal
Reserve, including required clearing balances and
adjustments to compensate for Federal Reserve
float.
57
Treasury holdings of coin and currency, and certain miscellaneous items.
Implicitly, all vault cash is treated
contemporaneously.4
The St. Louis and Board measures of
the monetary base have moved together
over time, though the St. Louis measure
generally lies above the Board measure,
reflecting differences in techniques for
adjustment of breaks caused by changes
in reserve requirements. In terms of
growth rates, the two series track each
other closely.
Growth of the monetary base has been
much smoother on average than that of
the other monetary aggregates.5 In large
measure, the smooth growth of the base
can be attributed to its large currency
component, which over long periods of
time has expanded in a relatively stable
fashion. Between 1959 and 1987, the
average quarter-to-quarter fluctuation of
growth in currency in circulation was
less than one-fifth of the quarterly fluctuation in growth of total reserve balances.
While growth in the base has been
relatively smooth, its longer-run pattern
has not differed markedly from that of
other narrow aggregates. Specifically,
4. There are two other differences between the
Board base and the St. Louis base concerning
seasonal adjustment and adjustments for changes in
reserve requirements. St. Louis seasonally adjusts
the whole base directly after adding a reserve
adjustment magnitude (RAM) to account for regulatory changes in reserve requirements as well as
changes in composition of deposits. For the Board
measure, currency, total reserves, and the residual
component are seasonally adjusted separately, after
applying to the reserves and residual components
certain break adjustment factors, and finally the
components are summed. The Board's break adjustment method is intended to adjust only for regulatory changes in reserve requirements.
5. This and subsequent mentions of the monetary
base refer specifically to the Board measure of the
base but, in view of the close relationship between
the two measures, should apply nearly as well to the
series produced by the Federal Reserve Bank of St.
Louis.
58
Monetary Policy Reports
the velocity of the monetary base has
behaved similarly to Mi's velocity, with
a pronounced break in the 1980sfromits
earlier behavior. Between 1960 and
1980, the velocities of the base, Ml-A
(currency plus demand deposits), and
Ml all rose, in part reflecting the effects
on money demand of the generally rising
trend of interest rates. Fluctuations of
base velocity around its trend during the
1960s and 1970s were comparable with
those of the other aggregates. And, in the
1980s, velocity of the base and Ml
declined both absolutely and relative to
the earlier trend as deregulation and
falling market interest rates encouraged a
large volume of funds to move into
transaction deposits.
Statistical methods of relating growth
in income to past growth rates in the base
produce results that echo this pattern of
velocity behavior. When these relationships are estimated using data through
1980, they make substantial errors in
predicting nominal GNP in subsequent
years, much as do equations involving
other aggregates—especially the narrow
aggregates. Techniques that allow for a
break in behavior in the early 1980s make
somewhat smaller but still large errors in
the 1980s and leave unanswered questions about the potential for additional
shifts in the relationships.
An examination of the demand properties of the base can shed light on the
determinants of the behavior of its velocity and the errors made in predicting
GNP. The demand for the base is derived
from demands for its components, currency and reserves. The demand for
reserves, in turn, depends on demands
for excess reserves and for reservable
deposits—primarily the transactions deposits that are included in Ml but also
some that are not in that aggregate,
such as interbank and U.S. government
deposits and certain time and savings
deposits.
Analysis by the Board's staff has found
that the demand for the base has substantial interest sensitivity, mainly reflecting
the interest sensitivity of demand deposits and other checkable deposits.6 This
interest responsiveness, together with the
drop in interest rates during the 1980s,
helps to explain the turnaround in base
velocity, much as it explains the movements in the velocities of other monetary
aggregates—especially Ml—in recent
years. However, the base probably is less
interest sensitive than are the other monetary aggregates, because of the importance of the currency component, which
does not respond very much to changes in
interest rates. This implies that efforts to
control the base to predetermined target
ranges could involve very wide swings in
interest rates. Whether those fluctuations
would be beneficial to the economy
depends in part on the stability of the
demand relationship. If the demand for
the base is relatively stable, the interest
rate movements would tend to stabilize
GNP in the face of disturbances to
spending. But if base demand tends to
move unpredictably, the interest rate
movements associated with controlling
the base would tend to destabilize GNP.
Over long periods of time, the demand
for the base appears to be fairly predictable, especially compared with Ml-A
and Ml. Movements in transactions deposits, especially demand deposits, often
have been somewhat erratic, tending to
loosen the relationships of Ml-A and Ml
with GNP, but their effects on base
demand are muted by the fractional
nature of reserve requirements. Another
6. An estimated demand equation for the base
was derived from the Board staffs standard models
of demand for currency and demand for required
reserves on transactions accounts in Ml only.
Demands for other components of reserves were
not explicitly modeled, as the effects of these
components on required reserves are relatively
small.
Monetary Policy Reports
factor contributing to the relative stability
of the demand for the base is that
unpredictable movements in transaction
deposits at times have tended to offset
unexplained changes in currency, perhaps owing to substitution between currency and demand deposits. However,
there is considerable variability in the
relationship of the base to income and
other variables over periods of a year or
less—and evidence suggests that at least
over these shorter periods it is no more
stable than M2.
In considering the past and prospective
degree of stability of demand for the
base, attention must be directed to its
largest component, currency. Analysts
have noted the extraordinarily large
volume of dollar currency outstanding
relative to measured U.S. economic
activity or the number of households.
Although available data are inadequate to
determine even approximate magnitudes,
it seems likely that a substantial part of
U.S. currency is being employed in
support of activity that is not reflected in
U.S. GNP—in particular, activity outside
our borders. Especially to the extent this
activity and the currency to support it
move independently of U.S. GNP, this
would tend to reduce the usefulness of the
base as an indicator or target.
Not only is it difficult to account fully
for the level of currency outstanding, but
growth occasionally has been at variance
with expectations, despite the relatively
stable long-run relationship with measured income. For example, in the past
year and a half, growth of currency has
been roughly twice as rapid as would be
expected on the basis of historical experience, judging by the Board staffs
quarterly econometric model, with no
obvious explanation for the strength.
Controllability of the Monetary Base
For the most part, the Federal Reserve
historically has supplied the monetary
59
base to accommodate its demand. This
has been a consistent policy with regard
to demands for currency. With respect to
reserves, the interactions have been more
complex. Except in the early 1980s,
reactions to deviations of reserves from
expectations have been quite indirect.
Any increases or decreases in the demand
for reserves have been completely accommodated in the short-run. However, over
time persistent deviations in money (and
implicitly reserves) from objectives have
prompted adjustments in monetary policy
when those deviations were judged likely
to be associated with unwelcome developments in the economy.
Even in the period from late 1979
through late 1982, when the Federal
Reserve used nonborrowed reserves as
an operating target to achieve goals for
money growth over time, total reserves
were not closely controlled because
borrowed reserves adjusted in response
to deviations in money growth from
objectives.
Because of the remaining two-day lag
between the ends of the reserve computation and reserve maintenance periods,
control of total reserves or the monetary
base would need to be indirect, working
through the effects of changes in interest
rates on the demand for the components
of the base in the short run. In this
respect, control of the base is achieved in
the same way as for the broader aggregates. It is likely that the base, or for that
matter any of the broader aggregates,
could be controlled reasonably well over
a span of several quarters—a period that
would be meaningful in terms of the
effects of monetary policy. However, the
degree of interest rate volatility under
base targeting could be quite substantial,
especially in the short to intermediate
run. Changes in the quantity of the base
demanded that caused the base to deviate
from its target would need to be offset in
the short run mainly by changes in
60
Monetary Policy Reports
reserves (given the low interest sensitivity of currency demand), which would
have multiple effects on the quantity of
money.
•
Part 2
Records, Operations,
and Organization
63
Record of Policy Actions
of the Board of Governors
Regulation C
(Home Mortgage Disclosure)
August 3, 1988—Revision and
Adoption of New Reporting Forms
The Board revised Regulation C to implement recent amendments to the Home
Mortgage Disclosure Act and to clarify
the regulatory language.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger,1 and Messrs.
Angell, Heller, and Kelley.
Early this year, the Congress amended
the Home Mortgage Disclosure Act of
1975, expanded its coverage, and made it
permanent. The act requires institutions
that have more than $10 million in assets
and that operate in a metropolitan statistical area to disclose annually certain
detailed information about their home
mortgage lending. The recent amendments expanded the coverage of the act to
include savings and loan service corporations and mortgage banking subsidiaries
of bank and savings and loan holding
companies. Accordingly, the Board revised the implementing regulation and
the related reporting forms and instructions and clarified the language of the
regulation.
The revisions were effective September 19,1988, except that after January 1,
1989, the provisions governing the definition of loans for home improvement
1. On this and subsequent pages, footnote 1
indicates there was a vacancy on the Board when
this action was taken.
and home purchase will include loans
related to mobile and manufactured
homes.
Regulation D
(Reserve Requirements
of Depository Institutions)
November 29, 1988 - Amendments
The Board amended Regulation D to
increase the amount of transaction
balances to which the lower reserve
requirement applies and to increase the
amount of reservable liabilities subject
to a zero percent reserve requirement.
Votes for these actions: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, Kelley, and LaWare.
Under the Monetary Control Act of
1980, depository institutions, Edge and
agreement corporations, and U.S.
agencies and branches of foreign banks
are subject to reserve requirements set
by the Board. Initially, the Board set
reserve requirements at 3 percent of an
institution's first $25 million in transaction balances, and 12 percent on
balances above that level. The act directs
the Board to adjust the amount subject to
the lower reserve requirement annually
to reflect changes in transaction balances
nationwide. By the beginning of 1988,
this amount was $40.5 million. Recent
growth in such balances warranted an
increase of $1 million. The Board,
therefore, amended Regulation D to
increase to $41.5 million the amount of
transaction account balances to which
the lower reserve requirement applies.
64
Board Policy Actions
The Garn-St Germain Depository
Institutions Act of 1982 established a
zero percent reserve requirement on the
first $2 million of an institution's reservable liabilities. It also provided for annual
adjustments to that exemption based on
deposit growth nationwide. Recent
growth in deposits warranted an increase
from $3.2 million to $3.4 million in the
amount subject to a zero percent reserve
requirement, and the Board amended
Regulation D accordingly.
The amendments are effective beginning December 20, 1988.
the swap must be held by the holding
company or a subsidiary and not by the
bank; and (4) the shares must be divested
within five years after the acquisition,
unless the Board grants an extension for
up to five additional years.
The Board decided to amend the regulation further to provide additional flexibility in making debt-equity investments.
Under the new rules, the investment must
be made by the holding company or its
subsidiary, and not by the bank. The
other conditions are as follows: (1) A
U.S. holding company may acquire up to
40 percent of the equity, including voting
shares, of a privately owned company. If
Regulation K (International
the organization acquires more than 25
Banking Operations)
percent, there must be another investor
holding a larger block of shares. (2) A
February 3, 1988—Amendment
holding company that holds more than 20
The Board amended Regulation K, effec- percent of a company's equity may not
tive February 24, 1988, to liberalize the finance more than one-half of the comconditions under which bank holding pany's borrowing needs. (3) The organicompanies may make debt-for-equity zation may hold the investment for the
lesser of 15 years or up to 2 years after the
swaps.
country cancels restrictions on the repaVotes for this action: Messrs. Greenspan triation of investments. This divestiture
and Johnson, Ms. Seger, and Messrs. period also applies to investments made
Angell, Heller, and Kelley. (Governor under the earlier amendment.
Angell abstained from voting
on the review
The Board also revised its general
of general consent limits.)l
consent procedures for foreign investIn August 1987 the Board amended ments made under debt-equity swaps.
Regulation K to permit U.S. banking Under the regulation's general consent
organizations to make certain invest- rules, a bank holding company may
ments abroad using debt-for-equity invest up to $15 million in a company, or
swaps. (Swaps are useful primarily in a 5 percent of the capital and surplus of the
country that has restricted or prohibited company, whichever is smaller, without
foreign creditors from expatriating its first seeking Board approval. For larger
currency.) That amendment allowed a investments, a bank must notify the Board
U.S. bank holding company to acquire of its intentions and may proceed with the
up to 100 percent of the shares of a acquisition if the Board has not indicated
nonfinancial company in a swap, pro- its disapproval within 45 days. A majority
vided the following conditions were met: of Board members believed that a more
(1) the company must be in the process of liberal general consent provision was
being transferred from public to private appropriate, and they agreed, Governor
ownership; (2) the company must be Angell abstaining, to establish the cutoff
located in a country that is heavily for making investments under this amendindebted; (3) the shares acquired through ment without Board approval at $15
Board Policy Actions
million or 1 percent of the investing
organization's equity capital, whichever
is greater.
Regulation T
(Credit by Brokers and Dealers)
August 10, 1988—Amendments
The Board amended Regulation T, effective September 15,1988, to make certain
foreign debt securities eligible for margin
credit.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger,l and Messrs.
Angell, Heller, and Kelley.'
The Board revised the definition in
Regulation T of over-the-counter margin
bonds to include long-term nonconvertible debt securities issued by foreign
governments or supranational entities.
The amendment allows brokers and
dealers to extend margin credit on longterm debt securities issued or guaranteed
as a general obligation by a foreign
sovereign, its entities, or a supranational
organization, if there is available for the
obligation an explicit or implicit rating,
in one of the two highest categories, by a
nationally recognized statistical rating
service.
Regulation Y
(Bank Holding Companies and
Change in Bank Control)
September 6, 1988—Amendments
The Board amended Regulation Y to
implement the Competitive Equality
Banking Act of 1987.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, and Kelley. Absent and not
voting: Mr. LaWare.
65
The Competitive Equality Banking
Act, which revised the definition of
"bank" in the Bank Holding Company
Act to include any institution whose deposits are insured by the Federal Deposit
Insurance Corporation, precludes the
formation of new FDIC-insured nonbank
banks. The act permits a nonbanking
company that controlled a nonbank bank
on March 5, 1987, to retain it, without
being treated as a bank holding company,
provided certain conditions are met.
Those conditions generally restrict the
ability of nonbank banks: to commence
new activities or engage in new crossmarketing activities with affiliates after
March 5, 1987; to permit overdrafts by
or incur overdrafts for affiliates at a
Reserve Bank; or to expand their assets
by more than 7 percent during any 12month period after August 10,1988. The
act also prohibits the parent company
from acquiring more than 5 percent of an
additional bank after the 1987 cutoff date.
Regulation CC (Availability of
Funds and Collection of Checks)
May 11, 1988-Adoption
The Board adopted Regulation CC, effective September 1, 1988, to carry out the
requirements of the Expedited Funds
Availability Act of 1987.
Votes for this action: Messrs. Greenspan,
Johnson, Angell, and Kelley. Votes against
this action: Ms. Seger and Mr. Heller.1
The act and the regulation impose new
requirements for more prompt processing of checks. Banks and other depository
institutions now must make funds deposited in transaction accounts available on a
specified schedule; disclose their availability schedules to customers; and
promptly pay interest on funds deposited
in accounts. In general, banks must make
66
Board Policy Actions
funds available for withdrawal within
three business days of deposit, if the
check is deposited in a local bank. (A
depository bank is determined to be local
if it is located in the same Federal Reserve
check processing region as the paying
bank.) Proceeds from nonlocal checks
must be made available within seven
business days of deposit. In addition,
certain types of checks, such as Treasury
checks, state and local government
checks, and cashier's checks, must be
available for withdrawal the next business day after deposit. Under certain
exceptions specified in the regulation, a
bank is permitted to place longer holds on
a check.
The regulation also includes rules to
expedite the collection and return of
checks by requiring paying banks to
return checks promptly, by authorizing
direct returns, and by expanding the
requirements governing notices of
nonpayment of checks written for
amounts above $ 2 , 5 0 0 . The rules
requiring the prompt collection of
checks will help reduce the risk that
banks might incur when making funds
available within the schedules mandated
by the regulation.
In addition to rules regarding the
availability of funds and the return of
checks, the regulation also includes
endorsement standards that allow banks
to identify more easily the depository
banks to which returned checks or notices
of nonpayment should be sent.
Governors Seger and Heller opposed
adoption of the regulation because they
believed it was too burdensome relative
to the benefit that consumers would
derive from it. Governor Seger was
concerned about the regulatory burden
on smaller institutions. Governor Heller
believed that the burden of the rulemaking was excessive relative to the benefits
that consumers would derive. He thought
that the benefits would be small and that
some consumers might even be adversely
affected by the new rules.
August 10, 1988-Interim rules
October 19, 1988-Final rules
The Board adopted interim rules for
Regulation CC to implement a recent
court ruling relating to payable-through
checks.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell and Kelley. Vote against this action:
Mr. Heller.1
The Board amended Regulation CC to
adopt the rules in final form.
Votes for this action: Mr. Greenspan, Ms.
Seger, and Messrs. Angell, Heller, Kelley,
and LaWare. Votes against: None. Absent
and not voting: Mr. Johnson.
In May the Board adopted Regulation
CC, effective September 1, 1988, to
implement the Expedited Funds Availability Act. One provision of the regulation had held that a bank check or credit
union share draft written on an account at
one institution but payable through another institution would be considered
local or nonlocal depending on the location of the institution through which the
check would be paid. A court decision in
July, however, found that that provision
was inconsistent with the definition of
originating depository institution in the
act. The court ruled that the location of
the institution on which the check was
written—and not the bank through which
the check would be paid-should determine whether an item was local or
nonlocal.
Because the regulation would become
effective shortly after the court's ruling,
the Board adopted interim amendments
in August to comply with the ruling and
at the same time sought public comment
Board Policy Actions
on the amendments. The interim amendments revised several definitions, and
also required certain banks and credit
unions to amend their disclosure statements. Governor Heller dissented from
this action, for the same reason he had
dissented when the Board adopted Regulation CC, because he believed the regulatory burden imposed was excessive
relative to the benefit consumers would
derive.
In October, the Board amended the
regulation to adopt the rules in final form,
with certain technical revisions. In addition, based on comments received on the
interim rules, the Board sought comment
on further refinements to the regulation
that would ease possible operational
difficulties and reduce the risks resulting
from the revised rule.
Policy Statements
April 20, 1988-The Selection of
Securities Dealers and Unsuitable
Investment Practices
The Board issued a supervisory policy
statement, effective immediately, regarding a bank's selection of securities
dealers and the investment practices
considered inappropriate for its investment portfolio.
Votes for this action: Mr. Greenspan, Ms.
Seger, and Messrs. Angell, Heller, and
Kelley. Absent and not voting: Mr.
Johnson.1
The Federal Financial Institutions Examination Council had recommended
that the member agencies issue a joint
policy statement to advise depository
institutions of trading practices that are
considered inappropriate when used for
the purchase and sale of securities held in
an institution's investment portfolio. The
statement advises institutions of consid
67
erations in selecting a securities dealer
and indicates that management should
evaluate the condition of securities firms
with which they do business. The statement also describes several types of
securities with volatile prices and highrisk characteristics that might be unsuitable for an institution's investment portfolio, especially if those securities are
held in significant amounts.
December 16, 1988-Risk-Based
Capital Standards and
Implementation Guidelines for U.S.
Banks and Bank Holding Companies
The Board adopted a new framework for
the assessment of capital adequacy and
issued guidelines for the application of its
standards to U.S. banking organizations.
Votes for this action: Messrs. Greenspan,
Johnson, Angell, Heller, Kelley, and
LaWare. Votes against this action: None.
Absent and not voting: Ms. Seger.
In late 1987, U.S. bank regulators
began working with bank supervisors
abroad to develop a new framework for
assessing bank capital. U.S. regulators
and supervisors in eleven other industrialized countries were seeking a uniform
capital standard that not only would
permit comparisons among banking organizations from different countries but
also would be more sensitive to risk
factors, including off-balance-sheet risk
exposures. After many months of deliberations, the supervisors developed a
framework that will permit greater comparability in the measurement and assessment of capital internationally. Also, it
will reduce competitive inequities that
arise from differences in supervisory
treatment among nations.
The new capital framework provides a
common definition of the core capital
elements that constitute tier I capital, as
68
Board Policy Actions
well as certain other supplementary
capital elements that constitute tier II. In
addition, the risks associated with particular types of assets and off-balance-sheet
items (which are converted into balance
sheet equivalents) are factored into the
capital framework by assigning such
claims to one of five broad risk categories
that have weights ranging from zero to
100 percent. The new standards encourage banking organizations that do business internationally to strengthen their
capital positions.
Banking organizations having capital
ratios below the minimum established by
the new framework are encouraged to
strengthen their capital positions as soon
as possible. The three U.S. bank regulators expect to begin applying the capital
framework in mid-March 1989. The
transitional minimum standards for all
U.S. banks and bank holding companies
will become effective at the end of 1990,
and final standards will take effect at the
end of 1992.
Governor Seger, who was absent when
the standards were adopted, had indicated
her opposition to the framework during
an earlier discussion of risk-based capital. Governor Seger opposed the standards primarily because of the credit
allocation aspects of the risk weights
assigned to the various categories of
assets and the capital requirements for
certain activities. Also, because of the
expediency of developing an international standard, she feared that the consequences of assigning those assets to
particular risk categories might not have
been assessed sufficiently. In addition,
she did not think the standards should be
applied to bank holding companies.
1988 Discount Rates
The Board approved one change in the
basic discount rate during 1988, an
increase in August from 6 to 6V2 percent.
During the year the Board also voted at
four meetings to disapprove requests for
increases or decreases submitted by
individual Federal Reserve Banks. In
April, the Board decided not to renew its
temporary, simplified seasonal credit
program.
The reasons for the Board's decisions
are reviewed below. Those decisions
were made in the context of the policy
actions of the Federal Open Market
Committee and the related economic and
financial developments that are covered
in more detail elsewhere in this REPORT.
A listing of the Board's actions on the
discount rate during 1988, including the
votes on those actions, follows this
review.
Actions on the Basic Discount Rate
During the first three months of the year,
the Board discussed but took no action on
a request, renewed biweekly, from one
Federal Reserve Bank to reduce the basic
discount rate by Vi percentage point; the
proposed reduction was lowered to lA
percentage point late in the first quarter.
Some easing of reserve conditions had
been sought through open market operations in late January and early February,
but the Board felt that business and
financial developments did not warrant
an accompanying reduction in the discount rate. Later in the quarter indications of a stronger economic expansion
than was anticipated earlier in conjunction with faster growth of the monetary
aggregates reinforced the Board's view
that the discount rate should not be
reduced.
On April 4 the Board turned down the
still pending request to reduce the discount rate by lA percentage point. This
action followed a decision in late March
by the Federal Open Market Committee
to increase slightly the degree of pressure
on reserve positions because of growing
Board Policy Actions
concerns that the expansion might gather
excessive and inflationary momentum.
During the latter part of April, the Board
discussed but took no action on requests
from two Federal Reserve Banks calling
respectively for an increase and for a
decrease of lA percentage point in the
basic discount rate.
In May and June a growing number of
Federal Reserve Banks submitted requests for increases of W or Vi percentage
point in the basic rate. The proposed
increases were seen by the Banks as a
desirable complement to the gradual
tightening of monetary policy that had
been implemented through open market
operations since late March. On July 5
the Board disapproved pending requests
from seven Banks to raise the basic rate
by Vi percentage point. In the Board's
judgment, current economic and financial developments, including upward
pressures on the dollar in foreign exchange markets, argued on balance
against a near-term increase in the discount rate. The Board recognized that
prospective developments might call for
a higher rate subsequently, but felt that
denying rather than taking no action on
the pending increases would serve the
usefal purpose of communicating the
Board's current thinking to the Federal
Reserve Banks.
On August 9 the Board approved an
increase of Vi percentage point in the
basic discount rate to a level of 6V2
percent. Recent economic statistics, notably on the employment situation in
July, suggested a stronger economy than
previously appeared to be evolving. In
these circumstances the Board concluded
that an increase in the discount rate would
usefully complement earlier moves to
tighten monetary policy through open
market operations in order to reduce
inflationary pressures. In reaching its
decision the Board also took into account
the substantial rise in short-term interest
69
rates that had occurred over the course of
recent months and the resulting increase
in the spread between such rates and the
discount rate. An increase in the discount
rate was expected to result in firmer
conditions in money markets without
widening the spread further.
Subsequently, on September 6 and
October 17, the Board disapproved requests from one Federal Reserve Bank to
raise the discount rate by a further Vi
percentage point. In the Board's view,
the increasing degree of monetary restraint that had been implemented since
early spring and some recent indications
that the rate of economic growth might be
slowing argued against approval of the
proposed increase, pending an evaluation
of farther economic developments.
Toward the end of the year, incoming
information suggested that the economic
expansion retained considerable momentum and that inflationary pressures remained substantial. Indeed, the risks
appeared to have increased that such
pressures would intensify in the absence
of farther monetary tightening. Against
this background, the Federal Open Market Committee adjusted its operations
toward a greater degree of reserve pressure in late fall and a growing number of
Federal Reserve Banks, totaling seven by
the second half of December, proposed
increases of Vi percentage point—or in
one case a fall percentage point—in the
basic discount rate.
The Board reviewed but took no action
on the proposed increases. In the Board's
view, economic and financial developments might warrant a higher discount
rate later, but an immediate increase
could have unintended repercussions
under prevailing conditions in domestic
and international financial markets. In
particular, it might convey a misleading
impression of the extent of the System's
policy tightening intentions and generate
an undesired degree of upward pressure
70
Board Policy Actions
on domestic interest rates and on the
value of the dollar in foreign exchange
markets.
Termination of Temporary Seasonal
Credit Program
On April 4, 1988, the Board decided to
discontinue its temporary seasonal credit
program. This program was originally
approved and implemented in 1985,
when financial conditions in the agricultural sector were deteriorating substantially, and renewed for each of the
following two years. Its purpose was to
make funds available at the discount
window to agricultural banks that were
experiencing exceptionally strong loan
demands in those unusual circumstances.
The program was designed to complement the longstanding regular seasonal
credit program and thereby to help ensure
that small- and medium-size banks did
not face liquidity constraints in their
efforts to accommodate their farm borrowers over the planting and production
cycle. The Board agreed not to renew the
program in light of the improved outlook
for the agricultural sector and the relatively small use of the program.
liquidity pressure and that are not able to
secure similar credit on reasonable terms
from other sources. The flexible rate is
related to market rates and is adjusted
periodically, subject to Board approval.
At the discretion of the lending Federal
Reserve Bank, the first 30 days of borrowing on extended credit may be at the
basic rate, but any further borrowings
are charged the higher flexible rate. The
highest rate applicable to any credit
extended to a depository institution will
be charged on exceptionally large
adjustment-credit loans that arise from
computer breakdowns or other operating
problems, unless the operating problem
clearly is beyond the reasonable control
of the borrowing institution; under the
current rate structure that rate is the
flexible rate.
As of December 31, 1988, the structure of discount rates was as follows: a
basic rate of 6Vi percent for short-term
adjustment credit and for credit under the
seasonal program, and a flexible rate of
9.55 percent. During 1988 the flexible
rate ranged from a low of 7.10 percent
early in the year to a high of 9.55 percent
at year-end.
Structure of Discount Rates
Board Votes
The basic discount rate is the rate charged
on loans to depository institutions for
short-term adjustment credit. The basic
rate also applies to the seasonal credit
program; under that program, credit may
be provided for periods longer than those
permitted under adjustment credit to
assist smaller institutions in meeting
regular needs arising from certain seasonal movements in their deposits and
loans.
A higher, flexible rate may be charged
on loans made over extended periods for
other than seasonal purposes to depository institutions that are under sustained
Under the provisions of the Federal
Reserve Act, the boards of directors of
Federal Reserve Banks are required to
establish rates on loans to depository
institutions at least every 14 days and to
submit such rates to the Board of Governors for review and determination. Reserve Bank actions on the discount rate
include requests to renew the formula for
calculating the flexible rate on extended
credit. The Board votes listed below are
those that involved changes in the basic
discount rate and termination of the
temporary simplified seasonal credit
program. Votes relating to the reestab-
Board Policy Actions
lishment of existing rates or the updating
of market-related rates under the extended credit program are not shown. All
votes during 1988 were unanimous.
Votes on the Basic Discount Rate
April 4,1988. The Board disapproved
an action taken by the directors of the
Federal Reserve Bank of Dallas on March
24 to reduce the basic discount rate from
6 to 5% percent.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger,1 and Messrs.
Angell, Heller, and Kelley.
July 5, 1988. The Board disapproved
actions taken on the following dates by
the directors of the following Federal
Reserve Banks to increase the basic
discount rate from 6 to 6*/2 percent:
Philadelphia, Cleveland, Richmond, Chicago, and St. Louis on June 23; Atlanta
on June 24; and New York on June 30.
Votes for this action: Mr. Greenspan, Ms.
Seger, and Messrs. Angell and Heller.
Absent and1 not voting: Messrs. Johnson
and Kelley.
August 9, 1988. Effective August 9,
1988, the Board approved actions taken
by the directors of the Federal Reserve
Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, St.
Louis, Minneapolis, Kansas City, and
San Francisco to increase the basic
discount rate from 6 to 6^2 percent.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger,l and Messrs.
Angell, Heller, and Kelley.
The Board subsequently approved similar actions taken by the directors of the
Federal Reserve Bank of Chicago, effective August 10, and by the directors of the
Federal Reserve Bank of Dallas, effective
August 11, 1988.
71
September 6y 1988. The Board disapproved an action taken by the directors of
the Federal Reserve Bank of Cleveland
on August 25 to increase the basic
discount rate from 6x/2 to 7 percent.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, and Kelley. Absent and not
voting: Mr. LaWare.
October 17, 1988. The Board disapproved an action taken by the directors of
the Federal Reserve Bank of Cleveland
on October 13 to increase the basic
discount rate from 6Vi to 7 percent.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, Kelley, and LaWare.
Vote on the Temporary Seasonal
Credit Program
On April 4, 1988, the Board voted to
terminate the temporary, simplified seasonal credit program for small and
medium-size banks that lend to agricultural borrowers.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, and Kelley.l
73
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.
The pages that follow contain entries
relating to the policy actions at the
meetings of the Federal Open Market
Committee held during the calendar year
1988, including the votes on the policy
decisions made at those meetings as well
as a resume of the basis for the decisions.
The summary descriptions of economic
and financial conditions are based on the
information that was available to the
Committee at the time of the meetings,
rather than on data as they may have been
revised later.
It will be noted from the record of
policy actions that in some cases the
decisions were made by unanimous vote
and that in other cases dissents were
recorded. The fact that a decision in
favor of a general policy was by a large
majority, or even that it was by unanimous vote, does not necessarily mean
that all members of the Committee were
equally agreed as to the reasons for the
particular decision or as to the precise
operations in the open market that were
called for to implement the general
policy.
During 1988 the policy record for each
meeting was released a few days after the
next regularly scheduled meeting and
was subsequently published in the Federal Reserve Bulletin.
Policy directives of the Federal Open
Market Committee are issued to the Federal Reserve Bank of New York as the
Bank selected by the Committee to execute transactions for the System Open
Market Account. In the area of domestic
open market activities, the Federal Reserve Bank of New York operates under
two separate directives from the Open
Market Committee: an Authorization for
Domestic Open Market Operations and a
Domestic Policy Directive. (A new Domestic Policy Directive is adopted at
each regularly scheduled meeting.) In the
foreign currency area, the Committee
operates under an Authorization for Foreign Currency Operations and a Foreign
Currency Directive. These four instruments are shown below in the form in
which they were in effect at the beginning
of 1988. Changes in the instruments
during the year are reported in the records
for the individual meetings.
Authorization for Domestic
Open Market Operations
In Effect January 1, 1988
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary to
74
FOMC Policy Actions
carry out the most recent domestic policy
directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal
Financing Bank, and securities that are direct
obligations of, or fully guaranteed as to
principal and interest by, any agency of the
United States in the open market, from or to
securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the
System Open Market Account at market
prices, and, for such Account, to exchange
maturing U.S. Government and Federal
agency securities with the Treasury or the
individual agencies or to allow them to mature
without replacement; provided that the aggregate amount of U. S. Government and Federal
agency securities held in such Account (including forward commitments) at the close of
business on the day of a meeting of the
Committee at which action is taken with
respect to a domestic policy directive shall not
be increased or decreased by more than $6.0
billion during the period commencing with
the opening of business on the day following
such meeting and ending with the close of
business on the day of the next such meeting;l
(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
1. Pursuant to an action taken by the Committee
at its meeting on Dec. 15-16, 1987, the limit on
changes between Committee meetings in System
Account holdings of U.S. government and federal
agency securities was set at $9.0 billion for the
period through the close of business on Feb. 10,
1988, at which time the limit reverted to $6.0
billion.
underlying goods; provided that the aggregate
amount of bankers acceptances held at any
one time shall not exceed $100 million;
(c) To buy U.S. Government securities,
obligations that are direct obligations of, or
fully guaranteed as to principal and interest
by, any agency of the United States, and
prime bankers acceptances of the types authorized for purchase under l(b) above, from
dealers for the account of the Federal Reserve
Bank of New York under agreements for
repurchase of such securities, obligations, or
acceptances in 15 calendar days or less, at
rates that, unless otherwise expressly authorized by the Committee, shall be determined
by competitive bidding, after applying reasonable limitations on the volume of agreements
with individual dealers; provided that in the
event Government securities or agency issues
covered by any such agreement are not
repurchased by the dealer pursuant to the
agreement or a renewal thereof, they shall be
sold in the market or transferred to the System
Open Market Account; and provided further
that in the event bankers acceptances covered
by any such agreement are not repurchased by
the seller, they shall continue to be held by the
Federal Reserve Bank or shall be sold in the
open market.
2. In order to ensure the effective conduct
of open market operations, the Federal Open
Market Committee authorizes and directs the
Federal Reserve Banks to lend U.S. Government securities held in the System Open
Market Account to Government securities
dealers and to banks participating in Government securities clearing arrangements conducted through a Federal Reserve Bank, under
such instructions as the Committee may
specify from time to time.
3. In order to ensure the effective conduct
of open market operations, while assisting in
the provision of short-term investments for
foreign and international accounts maintained
at the Federal Reserve Bank of New York, the
Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New
York (a) for System Open Market Account, to
sell U.S. Government securities to such foreign and international accounts on the bases
set forth in paragraph l(a) under agreements
providing for the resale by such accounts of
those securities within 15 calendar days on
terms comparable to those available on such
transactions in the market; and (b) for New
York Bank account, when appropriate, to
undertake with dealers, subject to the condi-
FOMC Policy Actions
tions imposed on purchases and sales of
securities in paragraph l(c), repurchase
agreements in U.S. Government and agency
securities, and to arrange corresponding sale
and repurchase agreements between its own
account and foreign and international accounts maintained at the Bank. Transactions
undertaken with such accounts under the
provisions of this paragraph may provide for
a service fee when appropriate.
Domestic Policy Directive
In Effect January 1, 19882
The economic information reviewed at this
meeting largely reflected the influence of
developments that were under way before the
financial disturbances of mid-October. The
extent to which those disturbances would
affect the economy remained uncertain.
Information available for the current quarter
suggested that the expansion in economic
activity was moderating from a brisk pace in
the third quarter. Total nonfarm payroll
employment rose strongly further over
October and November, with the manufacturing sector recording relatively large
gains. The civilian unemployment rate, at
5.9 percent in November, remained close to
its level since mid-year. Industrial
production also increased considerably
further over October and November,
following sizable advances since late spring.
Retail sales edged up in November after two
months of substantial declines. Recent
indicators of business capital spending
suggested modest further growth after a
surge in the third quarter. Housing starts rose
somewhat in November, after slowing in
October, but were little changed from the
average pace in the second and third
quarters. The nominal U.S. merchandise
trade deficit in October appeared to have
deteriorated substantially from the average
rate in the third quarter. The rise in broad
measures of prices and wages in recent
months generally has been close to that
experienced earlier in the year.
Financial markets remained somewhat
unsettled. Stock and bond prices continued to
fluctuate over a relatively wide range during
2. Adopted by the Committee at its meeting on
Dec. 15-16, 1987.
75
the period since the previous Committee
meeting on November 3. On balance, share
prices fell somewhat further in this period.
Changes in long-term yields were mixed while
short-term interest rates rose, especially on
short-maturity private market instruments.
The trade-weighted foreign exchange value
of the dollar in terms of the other G-10
currencies declined considerably further.
The monetary aggregates weakened in
November after strengthening in October in
conjunction with a temporary surge in demands for transaction balances and other
liquid assets in the latter part of that month.
For 1987 through November, expansion of
M2 fell somewhat further below the lower
end of the range established by the Committee
for the year, while growth of M3 remained
around the lower end of its range. Growth of
Ml was close to that of nominal GNP for the
year to date and expansion in total domestic
nonfinancial debt remained well within the
Committee's monitoring range for the year.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster reasonable price stability over time,
promote growth in output on a sustainable
basis, and contribute to an improved pattern
of international transactions. In furtherance
of these objectives, the Committee agreed at
its meeting in July to reaffirm the ranges
established in February for growth of 5 Vi to
8V2 percent for both M2 and M3 measured
from the fourth quarter of 1986 to the fourth
quarter of 1987. The Committee agreed that
growth in these aggregates around the lower
ends of their ranges might be appropriate in
light of developments with respect to velocity
and signs of the potential for some strengthening in underlying inflationary pressures,
provided that economic activity was expanding at an acceptable pace. The monitoring
range for growth in total domestic nonfinancial debt set in February for the year was left
unchanged at 8 to 11 percent.
For 1988, the Committee agreed in July on
tentative ranges of monetary growth, measured from the fourth quarter of 1987 to the
fourth quarter of 1988, of 5 to 8 percent for
both M2 and M3. The Committee provisionally set the associated range for growth in total
domestic nonfinancial debt at IVi to lO
percent.
With respect to M l , the Committee
recognized that, based on experience, the
behavior of that aggregate must be judged
in the light of other evidence relating to
76
FOMC Policy Actions
economic activity and prices; fluctuations in
Ml have become much more sensitive in
recent years to changes in interest rates,
among other factors. Because of this
sensitivity, which had been reflected in a
sharp slowing of the decline in Ml velocity
over the first half of the year, the Committee
again decided at the July meeting not to
establish a specific target for growth in Ml
over the remainder of 1987 and no tentative
range was set for 1988. The appropriateness
of changes in Ml this year would continue to
be evaluated in the light of the behavior of its
velocity, developments in the economy and
financial markets, and the nature of emerging
price pressures. The Committee welcomed
substantially slower growth of Ml in 1987
than in 1986 in the context of continuing
economic expansion and some evidence of
greater inflationary pressures. The Committee indicated in July that in reaching
operational decisions over the balance of the
year it would take account of growth in Ml
in the light of circumstances then prevailing.
The issues involved with establishing a target
for Ml will be carefully reappraised at the
beginning of 1988.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. The Committee recognizes
that still sensitive conditions in financial
markets and uncertainties in the economic
outlook may continue to call for a special
degree of flexibility in open market
operations. Taking account of conditions in
financial markets, somewhat lesser reserve
restraint or somewhat greater reserve
restraint would be acceptable depending on
the strength of the business expansion,
indications of inflationary pressures,
developments in foreign exchange markets,
as well as the behavior of the monetary
aggregates. The contemplated reserve
conditions are expected to be consistent with
growth in M2 and M3 over the period from
November through March at annual rates of
about 5 percent and 6 percent, respectively.
Over the same period, growth in Ml is
expected to remain relatively limited. The
Chairman may call for Committee consultation if it appears to the Manager for
Domestic Operations that reserve conditions
during the period before the next meeting are
likely to be associated with a federal funds
rate persistently outside a range of 4 to 8
percent.
At the conclusion of a telephone meeting on January 5, 1988, the Committee
voted to change the operational paragraph of its directive to read as follows:
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. The Committee agrees that
the passing of time and the year-end should
permit further progress toward restoring a
normal approach to open market operations,
although still sensitive conditions in financial
markets and uncertainties in the economic
outlook may continue to call for some
flexibility in operations. Taking account of
conditions in financial markets, somewhat
lesser reserve restraint or somewhat greater
reserve restraint would be acceptable
depending on the strength of the business
expansion, indications of inflationary
pressures, developments in foreign exchange
markets, as well as the behavior of the
monetary aggregates. The contemplated
reserve conditions are expected to be
consistent with growth in M2 and M3 over
the period from November through March at
annual rates of about 5 percent and 6 percent,
respectively. Over the same period, growth
in Ml is expected to remain relatively
limited. The Chairman may call for
Committee consultation if it appears to the
Manager for Domestic Operations that
reserve conditions during the period before
the next meeting are likely to be associated
with a federal funds rate persistently outside
a range of 4 to 8 percent.
Authorization for Foreign
Currency Operations
In Effect January 1, 1988
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
FOMC Policy Actions
transfers through spot or forward transactions
on the open market at home and abroad,
including transactions with the U. S. Treasury,
with the U.S. Exchange Stabilization Fund
established by Section 10 of the Gold Reserve
Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial
institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have
outstanding forward contracts to receive or to
deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to
permit foreign banks to draw dollars under
the reciprocal currency arrangements listed
in paragraph 2 below, provided that drawings
by either party to any such arrangement shall
be fully liquidated within 12 months after any
amount outstanding at that time was first
drawn, unless the Committee, because of
exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position
in all foreign currencies not exceeding $12.0
billion. For this purpose, the overall open
position in all foreign currencies is defined as
the sum (disregarding signs) of net positions
in individual currencies. The net position in a
single foreign currency is defined as holdings
of balances in that currency, plus outstanding
contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with
due regard to sign.
2. 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
77
Amount
(millions of
dollars equivalent)
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
700
500
250
300
4,000
600
1,250
Any changes in the terms of existing swap
arrangements, and the proposed terms of any
new arrangements that may be authorized,
shall be referred for review and approval to
the Committee.
3. All transactions in foreign currencies
undertaken under paragraph 1(A) above
shall, unless otherwise expressly authorized
by the Committee, be at prevailing market
rates. For the purpose of providing an investment return on System holdings of foreign
currencies, or for the purpose of adjusting
interest rates paid or received in connection
with swap drawings, transactions with foreign central banks may be undertaken at
non-market exchange rates.
4. It shall be the normal practice to arrange
with foreign central banks for the coordination
of foreign currency transactions. In making
operating arrangements with foreign central
banks on System holdings of foreign currencies, the Federal Reserve Bank of New
York shall not commit itself to maintain any
specific balance, unless authorized by the
Federal Open Market Committee. Any agreements or understandings concerning the
administration of the accounts maintained by
the Federal Reserve Bank of New York with
the foreign banks designated by the Board of
Governors under Section 214.5 of Regulation
N shall be referred for review and approval to
the Committee.
5. Foreign currency holdings shall be
invested insofar as practicable, considering
needs for minimum working balances. Such
investments shall be in liquid form, and
generally have no more than 12 months
remaining to maturity. When appropriate in
78
FOMC Policy Actions
connection with arrangements to provide
investment facilities for foreign currency
holdings, U.S. Government securities may be
purchased from foreign central banks under
agreements for repurchase of such securities
within 30 calendar days.
6. All operations undertaken pursuant to
the preceding paragraphs shall be reported
promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman
and Vice Chairman of the Committee, the
Vice Chairman of the Board of Governors,
and such other member of the Board as the
Chairman may designate (or in the absence of
members of the Board serving on the Subcommittee, other Board Members designated by
the Chairman as alternates, and in the absence
of the Vice Chairman of the Committee, his
alternate). Meetings of the Subcommittee
shall be called at the request of any member,
or at the request of the Manager for Foreign
Operations, for the purposes of reviewing
recent or contemplated operations and of
consulting with the Manager on other matters
relating to his responsibilities. At the request
of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the
Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee,
to enter into any needed agreement or understanding with the Secretary of the Treasury
about the division of responsibility for foreign
currency operations between the System and
the Treasury;
B. To keep the Secretary of the Treasury
fully advised concerning System foreign currency operations, and to consult with the
Secretary on policy matters relating to foreign
currency operations;
C. From time to time, to transmit appropriate reports and information to the National
Advisory Council on International Monetary
and Financial Policies.
8. Staff officers of the Committee are
authorized to transmit pertinent information
on System foreign currency operations to
appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for
System Account in accordance with paragraph 3 G(l) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.
Foreign Currency Directive
In Effect January 1, 1988
1. System operations in foreign currencies
shall generally be directed at countering
disorderly market conditions, provided that
market exchange rates for the U.S. dollar
reflect actions and behavior consistent with
the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency
("swap") arrangements with selected foreign
central banks and with the Bank for International Settlements.
C. Cooperate in other respects with
central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of
probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular
currencies, and to facilitate operations of the
Exchange Stabilization Fund.
C. For such other purposes as may be
expressly authorized by 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 IMF Article IV.
Meeting Held on
February 9-10,1988
Domestic Policy Directive
The information reviewed at this meeting
indicated that economic activity continued to expand rapidly in the fourth
quarter, although gains in output appeared to have moderated around yearend. Over the quarter as a whole, manufacturing output recorded a sizable further
increase, supported by continued strong
demands for exports. Domesticfinalsales
FOMC Policy Actions
weakened, however, with consumption
outlays and business fixed investment
declining, and much of the rise in production apparently went into inventories.
The rate of inflation was held down late in
the year by declines in energy prices,
while wage trends showed little change.
Industrial production rose considerably over the fourth quarter, but the
increase slowed in November and moderated further in December. Output of
consumer goods, which changed little in
both months, was held down by reductions in automobile assemblies. Also,
output of business equipment edged
lower after substantial growth over the
summer and early autumn. Nonfarm
payroll employment grew at a brisk pace
in the fourth quarter, but slowed substantially in January. In manufacturing,
employment gains moderated in January
as sizable increases in a few industries
were partly offset by layoffs elsewhere.
In contrast to the payroll survey, total
employment as measured by the household survey was up sharply in January,
bringing the rise over the past four
months into line with the advance in
payroll employment. The growth in the
labor force about matched the rise in
household employment in January, and
the civilian unemployment rate was unchanged at 5.8 percent.
Consumer spending remained sluggish
in recent months. Excluding motor vehicles, real outlays on goods and services
were essentially unchanged during the
last three months of 1987. Sales of new
automobiles improved after incentives
were reintroduced in mid-November, but
dealer inventories remained high. With
consumer spending weak and growth in
disposable income stronger in the fourth
quarter, the saving rate rose considerably
to 4.9 percent.
Housing starts fell to an annual rate of
1.37 million units in December, reflecting a sharp drop in the multifamily sector
79
after a surge in November and some
decline in the single-family area. Sales of
new and existing homes also decreased in
late 1987. For the fourth quarter as a
whole, total starts were down appreciably
from their averages in the previous two
quarters.
Business fixed investment fell somewhat in the fourth quarter, after an
exceptionally large rise in the previous
quarter. Spending on informationprocessing equipment, which earlier had
grown rapidly, appeared to slow, and
business purchases of motor vehicles
declined. At the same time, expenditures
for industrial equipment continued to
expand as did spending for nonresidential
construction, including sizable increases
in outlays for office structures and other
commercial buildings. New orders for
nondefense capital goods, excluding
aircraft, were little changed in the fourth
quarter, after appreciable gains earlier in
the year, while new building commitments continued to increase.
Inventory investment rose strongly in
October and November. The increase
was concentrated in the trade sector,
particularly at automobile dealers and
merchant wholesalers. Stocks at nonauto retailers also continued to expand at
a faster rate than sales, especially at
general merchandise, apparel, and furniture stores. In contrast, manufacturers'
inventories remained low relative to
shipments.
Increases in consumer prices moderated in late 1987, reflecting £ decline in
retail energy prices in response to earlier
decreases in crude oil prices. The consumer price index was up only slightly in
December, when prices of consumer
goods also were held down by extensive
markdowns on holiday merchandise and
by the latest round of incentives for
automobile sales. At the producer level,
prices of finished goods fell somewhat in
late 1987. Hourly compensation in the
80
FOMC Policy Actions
private nonfarm sector increased at a
moderate pace over recent months, little
changed from earlier trends.
The nominal deficit in U.S. merchandise trade was estimated to have increased
slightly over October and November
from the average rate in the third quarter,
but in real terms the trade deficit as
measured in the GNP accounts appeared
to have narrowed further. Nonagricultural exports rose somewhat over the first
two months of the quarter, but agricultural exports fell slightly. Non-oil imports rose considerably in the OctoberNovember period from the third-quarter
pace, with the increases widespread. Oil
imports, however, fell somewhat as both
price and volume declined. The increases
in prices of exports and of non-oil imports
accelerated in the fourth quarter to rates
experienced in the first two quarters of
1987, reversing the slower increases in
the third quarter. Recent indicators of
economic performance in major foreign
industrial nations were mixed, after
strong growth of real GNP in most of
those countries in the third quarter of
1987. Data continued to suggest relatively vigorous growth in Japan, the
United Kingdom, and Canada. In contrast, expansion appeared to have slowed
during the fourth quarter in Germany,
France, and Italy.
The weighted-average foreign exchange value of the dollar in terms of the
other G-10 currencies increased about 3
percent over the period since the December meeting. The dollar rose about IV2
percent in terms of the yen and about 4
percent in terms of the mark during the
intermeeting period. Early in the period,
the dollar fell sharply owing to heightened concerns about prospects for adjustment of U.S. external imbalances and
reports that G-7 authorities no longer
supported the Louvre accord. The G-7
authorities released a statement in late
December reaffirming the objectives and
economic policy commitments of the
Louvre accord, and the dollar retraced its
decline in early January when heavy
intervention by central banks associated
with the G-7 statement became particularly visible. The dollar strengthened
further in mid-January following the
release of better-than-expected data for
the U.S. trade balance in November.
At its meeting on December 15-16,
1987, and its meeting via telephone
conference on January 5, 1988, the
Committee adopted directives that called
for maintaining the existing degree of
pressure on reserve positions. In December, the Committee recognized that still
sensitive conditions in financial markets
and uncertainties in the economic outlook
might continue to require a special degree
of flexibility in the conduct of open
market operations. In early January, the
Committee agreed that the passing of
time and of year-end pressures in the
money market should permit further
progress toward restoring a normal approach to open market operations. At the
same time the members recognized that
some flexibility might continue to be
needed in the conduct of operations. At
both meetings, the Committee decided
that, taking account of conditions in
financial markets, somewhat lesser or
somewhat greater reserve restraint would
be acceptable depending on the strength
of the business expansion, indications of
inflationary pressures, developments in
the foreign exchange markets, as well as
the behavior of the monetary aggregates.
The intermeeting range for the federal
funds rate was left unchanged at 4 to 8
percent.
Over the course of the intermeeting
period and especially after early January,
the conduct of open market operations
involved placing more emphasis on reserve positions and correspondingly less
on influencing money market conditions on a day-to-day basis. Even so,
FOMC Policy Actions
adjustments in the provision of reserves
were made on a number of occasions
during the intermeeting period in light of
unusual developments affecting reserve
and money market conditions. Those
developments included heavy borrowing
over the four-day New Year's weekend
and sizable borrowing subsequently
stemming from a data processing problem at a large bank. In the ensuing reserve
maintenance period, demands for discount credit were very limited. In late
January and early February, with incoming data suggesting some weakening in
the economic expansion and in the context of a more stable dollar in foreign
exchange markets, some easing was
sought in the degree of pressure on
reserve positions. Thus far in the current
maintenance period, borrowing had remained relatively low. Total reserves
contracted in December, reflecting continued weakness in transactions deposits,
but rebounded strongly in January as
most categories of reservable deposits
grew rapidly and excess reserves also
increased.
The federal funds rate averaged 6.82
percent over the three complete reserve
maintenance periods since the December
meeting; in recent days, the rate moved
down toward 6!/2 percent. Year-end
pressures in the money market were
much milder than most market participants had expected, partly because of a
greatly reduced need for ftinds compared
with that a year earlier, more planning in
advance by banks and others, and a
relatively generous provision of reserves.
With the easing of concerns about yearend pressures, rates on private money
market instruments fell sharply in late
December. Yields on Treasury securities
of all maturities and on longer-term debt
of private borrowers changed little on
balance over the first several weeks of the
intermeeting period. More recently, such
rates declined as the dollar tended to
81
stabilize and economic data were viewed
as pointing to a softer economy, more
subdued inflation, and easier monetary
policy. Early in February, banks lowered their prime rate. Broad indexes of
stock prices increased somewhat on
balance since mid-December, though
price fluctuations were relatively large
on occasion.
Preliminary data showed that money
growth rebounded strongly in January
after the marked weakening in November
and December. For 1987 as a whole, M2
expanded at a rate well below the 5Vi
percent lower boundary of the target
range that the Committee had established
for the year. M3 growth was at the lower
end of its range. Ml grew sharply in
January, after declining in late 1987.
Demand deposits were particularly weak
in late 1987, possibly reflecting in part
incentives to adjust compensating balances downward before year-end, but
other checkable deposits also fell in
November and December without a
corresponding increase in other M2 deposits. The strengthening of money
growth in January was spread widely
over various components of the monetary
aggregates and appeared to be related in
part to the general decline in interest rates
since mid-October.l
1. These growth rates and all subsequent data on
the monetary aggregates reflect annual benchmarks
and seasonal factors as published on February 11,
1988.
The monetary aggregates are defined as follows:
Ml comprises demand deposits at commercial
banks and thrift institutions, currency in circulation,
travelers checks of nonbank issuers, negotiable
order of withdrawal (NOW) and automatic transfer
service (ATS) accounts at banks and thrift institutions, and credit union share draft accounts. M2
contains Ml and savings and small-denomination
time deposits (including money market deposit
accounts (MMDAs) at all depository institutions,
overnight repurchase agreements (RPs) at commercial banks, overnight Eurodollars held at foreign
branches of U. S. banks by U. S. residents other than
82
FOMC Policy Actions
The staff projection for economic
activity continued to suggest relatively
sluggish growth in output in the first half
of 1988 and a pickup later in the year.
This pattern primarily reflected variations in the growth of inventories. A
sharp slowing in the pace of investment
in nonfarm inventories, notably automobile inventories, was expected early in
the year following the buildup in the
fourth quarter. Final domestic demand
was projected to expand sluggishly in
1988, given an erosion in the growth of
real income associated in part with higher
import prices and a moderately restraining fiscal policy. Over 1988 as a whole,
the primary impetus to growth was
anticipated to come from further strong
demand for U.S. exports. Prices were
projected to rise at a moderate rate during
the year. Prices of nonpetroleum imports
were believed likely to increase substantially, but the price of imported petroleum
was assumed to rise only slowly. Nominal
gains in compensation were expected to
pick up, as wage demands responded to
increases in consumer prices. With unemployment rates remaining near
current levels, however, labor market
conditions were not expected to put
much additional pressure on wage rates,
especially in light of uncertainties about
the economic outlook and continuing
efforts by businesses to improve
competitiveness.
In the Committee's discussion, members emphasized that the economic outlook was subject to a great deal of
uncertainty under prevailing circumstances. They noted that it was especially
than those restricted to institutions). M3 is M2 plus
large-denomination time deposits at all depository
institutions, large-denomination term RPs at commercial banks and savings and loan associations,
institution-only money market mutual funds, and
term Eurodollars held by U.S. residents in Canada
and the United Kingdom and at foreign branches of
U.S. banks elsewhere.
difficult to evaluate the outlook for an
economy that appeared to be in transition
from a consumer-driven to an exportdriven expansion. Another area of uncertainty related to the decline in equity
prices. The latter did not appear to have
had a substantial impact on consumer or
business spending to date, judging from
currently available data, but more repercussions might be felt later. In addition,
financial markets, including the foreign
exchanges, were still relatively sensitive,
and many financial institutions had been
weakened by serious debt repayment
difficulties among their domestic and foreign borrowers. Several members commented that the staff projection remained
a reasonable expectation but that the risks
of a different outcome were substantial.
Others saw somewhat greater or somewhat lesser economic growth as more
likely for the year ahead. The members
generally agreed, however, that the major
risks to the economy over the longer run
appeared to be in the direction of more
inflation.
In conformance with the usual practice
at meetings when the Committee considers its long-run objectives for monetary
growth, the members of the Committee
and the Federal Reserve Bank presidents
not currently serving as members had
prepared specific projections of economic activity, the rate of unemployment, and the overall level of prices. For
the period from the fourth quarter of
1987 to the fourth quarter of 1988, the
forecasts for growth of real GNP had a
central tendency of 2 to 2 Vi percent and a
full range of Vi to 3 percent. Forecasts of
nominal GNP centered on growth rates
of 5 VA to 6 percent and ranged from 4 to
6 Vi percent. Estimates of the civilian rate
of unemployment in the fourth quarter of
1988 were concentrated in a range of 5 %
to 6 percent with a full range of 5 xh to 6 3A
percent. With regard to the rate of
inflation, as indexed by the GNP
FOMC Policy Actions
deflator, the projections centered on rates
of 3 V4 to 3 3/4 percent and had an overall
range of 2x/i to 4 percent for the year. In
making these forecasts, the members
took account of the Committee's objectives for monetary growth in 1988. They
also assumed that future fluctuations in
the foreign exchange value of the dollar
would not be of sufficient magnitude to
have any significant effect on the
projections.
In their assessment of specific developments bearing on the economic outlook,
members gave considerable attention to
the recent buildup of inventories and the
related possibility of some correction
that would tend to depress overall growth
in business activity during thefirsthalf of
the year. Several believed that the adjustment in inventories might be relatively
limited and economic growth in the first
half somewhat stronger than projected by
the staff, especially in light of the strength
of orders for capital goods on the books
of manufacturing firms. Others anticipated a sharper inventory correction but
one that would probably be over by midyear. The outlook for the second half was
particularly uncertain, and views differed
regarding the likelihood and potential
strength of a rebound. Conditions in
financial markets would have an important influence on business conditions and
any major new disturbances in those
markets could have a negative effect on
both consumer and business spending.
Some members could see few signs in the
domestic economy that pointed to a
resurgence in business activity later in
the year. Other members viewed the
prospects as more promising, and some
did not rule out the possibility that the
expansion might in fact tend to be more
vigorous than was desirable in a period
when increasing domestic production
needed to be diverted to export markets.
All of the members agreed that the rate of
economic expansion over the next several
83
quarters would depend to a substantial
extent on the rate of improvement in the
nation's balance of trade.
In the discussion of the outlook for
trade, a number of members observed
that sizable further gains in exports were
a reasonable expectation, but the rate of
increase would probably diminish from
the very rapid pace in recent quarters.
Among the factors tending to inhibit
export growth, they cited the possibility
that expansion in major industrial nations, as a group, might be relatively
limited. On balance, while the extent of
the improvement in trade was uncertain
and might well prove to be relatively
slow and uneven, most members saw
favorable prospects for continuing gains
of appreciable magnitude over the year
ahead.
Turning to the outlook for inflation,
the members generally agreed that the
risks over time were in the direction of
greater inflation. They emphasized that
relatively rapid growth in overall demands, including that for exports, could
trigger inflationary pressures in a period
when the utilization of productive resources was already relatively high and
comparatively little leeway appeared to
exist for growth in excess of the moderate
pace projected by most members. The
recent behavior of broad price indexes
did not suggest any acceleration in the
overall rate of inflation, but several
members saw evidence in local economies that price pressures might be intensifying. Business contacts were reporting
that some firms were successful in selective efforts to pass through rising costs by
raising product prices. And, in one view,
the behavior of key commodity prices
raised concern about more inflation.
Some members also indicated that rising
import prices were tending to put upward
pressure on competing products that were
manufactured domestically. In general,
increases in wages remained moderate,
84
FOMC Policy Actions
but members expressed concern that,
given the reduced level of unemployment, rising prices would tend to be
translated into higher wages at some
point. It was noted that the key to
avoiding both more inflation or a recession in a period of major adjustments in
the trade balance would be the difficult
task of maintaining restrained growth in
domestic demands over an extended
period.
Against that background the Committee at this meeting completed the review,
begun at the meeting in December, of the
ranges for growth in the monetary and
debt aggregates in 1988; those ranges
had been established on a tentative basis
in July 1987 in keeping with the requirements of the Full Employment and Balanced Growth Act of 1978 (the
Humphrey-Hawkins Act). The tentative
ranges included growth of 5 to 8 percent
for both M2 and M3 for the period from
the fourth quarter of 1987 to the fourth
quarter of 1988. A monitoring range of 8
to 11 percent had been set on a provisional
basis for growth of total domestic nonfinancial debt in 1988. With regard to
Ml, the Committee had decided in July
not to set a tentative range for 1988 but to
reappraise at this meeting the issues
relating to the establishment and use of
such a target.
All of the members favored some
reduction in the ranges for growth of M2
and M3 in 1988. Such a reduction would
help to focus attention on the need for
relatively restrained expansion in domestic demand to accommodate the adjustment in the nation's external accounts and
would underscore the Committee's commitment to achieving reasonable price
stability over time. However, given their
differing assessments of the risks to the
business expansion and of the prospective
relationship of monetary growth to satisfactory economic performance, members
expressed some divergence of views with
regard to how much the ranges should be
reduced. Several indicated a preference
for confirming the ranges for 1988 that
the Committee had established on a
tentative basis in July. Those ranges
involved reductions of Vi percentage
point from 1987. Others favored lower
ranges with midpoints that were reduced
by a full percentage point. The latter
included a proposal, which received
considerable support, for wider ranges of
4 to 8 percent for both M2 and M3. The
members noted that monetary expansion
in 1988 at rates around the midpoints of
the ranges under consideration, which
they generally viewed as a reasonable
expectation, would represent some acceleration from the relatively modest expansion in 1987, especially in the case of
M2.
Further discussion focused on the
desirability of widening the ranges for
growth of the broader aggregates to 4 to 8
percent. Such a range was deemed to be
warranted by the experience of recent
years when more marked variability had
emerged in the relationship between
monetary expansion and ultimate policy
objectives such as prices and output.
That variability stemmed from a number
of sources, but prominent among them
was the course of interest rates; a level of
rates consistent with satisfactory economic performance would depend on the
underlying strength of demands in the
economy and on emerging price pressures. In that context, an uncertain
outlook for the economy and inflation
suggested to several members the need
for somewhat wider ranges than had been
used in the past. A range of 4 percentage
points would provide more room for
appropriate policy responses to unanticipated economic and financial developments and would encompass more fully
the possible outcomes for monetary
growth that might prove consistent with
acceptable economic performance in
FOMC Policy Actions
1988. Some members expressed reservations about the desirability of wider
ranges. They acknowledged that ranges
of 4 percentage points might reflect more
adequately the various uncertainties that
were involved, but they were concerned
that widening the ranges could be viewed
as a further retreat from effective monetary targeting. Moreover, the narrower
ranges imposed a desirable discipline by
requiring a more prompt reappraisal of
policy as their limits were approached or
exceeded.
The members also considered proposals for using a different base than the
actual fourth quarter level of the aggregates as the starting point for the 1988
ranges. In support of this view, some
members argued that the depressed levels
of the aggregates in late 1987, which may
have reflected in part some special factors, together with the reduced ranges
under consideration implied a quite substantial lowering of the Committee's
objectives for monetary growth. Several
members were opposed to a change in the
Committee's procedures, especially on
an ad hoc basis. A number expressed
their willingness to consider at a later
time proposals for a regularized procedure that would take account of overshoots or of shortfalls in the previous
year. Others believed that it would be
preferable to adjust the new ranges
themselves each year, rather than the
base, if the Committee concluded that it
was desirable to compensate for excessive or inadequate monetary growth in
the previous year.
No member supported the reestablishmentof a target range for Ml in 1988, but
a few favored the use of a monitoring
range for this aggregate. The behavior of
Ml had become highly sensitive to
changes in interest rates, among other
factors, in recent years, as reflected in
sharp swings in its velocity. It remained
particularly difficult to interpret the
85
relationship between growth in Ml and
the performance of the economy. In light
of its unpredictable behavior, a narrow
range for Ml could easily trigger an
inappropriate response of monetary policy to unexpected developments in the
economy. On the other hand, a range
wide enough to reasonably encompass
possible acceptable growth in Ml over
the year would be of little use in guiding
the conduct of monetary policy or in
communicating the Committee's policy
intentions to the public.
The members anticipated some further
slowing in the growth of nonfinancial
debt in 1988, following a marked slowdown in 1987, but the rate of growth this
year appeared likely to remain well above
that of nominal GNP. A key factor
bearing on the outlook for debt expansion
was the expectation of some reduction in
government borrowing. However, as in
the case of the monetary aggregates,
considerable uncertainty surrounded the
prospects for debt growth in 1988 and
Committee members endorsed a proposal
to widen the monitoring range for total
domestic nonfinancial debt to 7 to 11
percent, a reduction of 1 percentage point
from the lower limit of the 1987 range.
At the conclusion of the Committee's
consideration of the ranges for 1988, all
of the members indicated that they could
support ranges of 4 to 8 percent for
growth in both M2 and M3 for the year.
No range was established for Ml for the
year, while the monitoring range for
growth in total domestic nonfinancial
debt was set at 7 to 11 percent. In keeping
with the Committee's usual procedures
under the Humphrey-Hawkins Act, the
ranges would be reviewed at midyear, or
sooner if deemed necessary. It was
understood that in carrying out policy the
Committee would continue to judge the
behavior of the monetary aggregates
against the background of developments
in the economy and financial markets,
86
FOMC Policy Actions
including attention to the sources and
extent of price pressures in the economy,
the performance of the dollar in foreign
exchange markets, and other indicators
of the impact of monetary policy.
The following paragraphs relating to
the 1988 ranges were approved for the
domestic policy directive:
mentation faced the special challenge of
balancing the risks of a potentially softer
economy over the nearer term while also
remaining positioned to achieve the
Committee's anti-inflationary objectives
over the longer run. Accordingly, despite
shadings of opinion, the members were
in broad agreement that any substantial
change in policy, in either direction, was
The Federal Open Market Committee seeks not warranted under prevailing ecomonetary and financial conditions that will nomic andfinancialconditions. A tightfoster reasonable price stability over time,
promote growth in output on a sustainable ening move would not be appropriate at a
basis, and contribute to an improved pattern time when the expansion was showing
of international transactions. In furtherance some signs of slackening, and against
of these objectives, the Committee at this this background such a policy course
meeting established growth ranges of 4 to 8
percent for both M2 and M3, measured from might well have a disruptive impact on
the fourth quarter of 1987 to the fourth quarter financial markets, which remained someof 1988. The monitoring range for growth in what fragile. On the other side, policy
total domestic nonfinancial debt was set at 7 to should not overreact to recent indications
11 percent for the year.
of a more sluggish business expansion
With respect to Ml, the Committee again
because
any policy easing now would
decided not to establish a specific target for
1988. The behavior of this aggregate in tend to have its major impact later in the
relation to economic activity and prices has year when, in the view of many members,
become very sensitive to changes in interest a stronger economic expansion was likely
rates, among other factors, as evidenced by to emerge. Moreover, while the dollar
sharp swings in its velocity in recent years.
Consequentiy, the appropriateness of changes had tended to stabilize recently in the
in Ml this year will continue to be evaluated foreign exchange markets, members
in the light of the behavior of its velocity, were concerned that appreciable further
developments in the economy and financial easing, especially if it was seen as leading
markets, and the nature of emerging price
to a lower discount rate, could have
pressures.
highly adverse repercussions on the
Votes for this action: Messrs. Greenspan, dollar. It might also have unsettling
Corrigan, Angell, Boehne, Boykin, Heller, effects onfinancialmarkets more generJohnson, Keehn, and Kelley, Ms. Seger,
and Mr. Stern. Votes against this action: ally if it was not viewed by market
participants as warranted by substantial
None.
new evidence of a weaker economy. The
In the Committee's discussion of policy slight easing that had already been underimplementation for the period immedi- taken did not appear to put significant
ately ahead, all of the members indicated downward pressure on the dollar and it
that they favored or could accept a provided greater assurance that the exdirective that called for maintaining the pected strengthening of the business
slightly reduced degree of pressure on expansion would in fact materialize later
reserve positions that had been sought in the year.
recently. While some members exIn the course of the Committee's dispressed reservations about that easing, a cussion, members referred to the rebound
few indicated a preference for easing in the growth of M2 and M3 in January,
marginally further. Members commented but they noted that the stronger growth
during the discussion that policy imple- needed to be viewed in relation to the
FOMC Policy Actions
weakness in late 1987. According to a
staff analysis prepared for this meeting,
expansion in M2 and M3 could be
expected to strengthen a little over the
balance of the first quarter from the
average pace in December and January,
assuming unchanged conditions of reserve availability. More generally, somewhat faster growth was projected in the
current quarter than had occurred in the
second half of 1987, as increased demands for money balances in response to
the decline in interest rates since midOctober more than offset the expected
effects of slower income growth. The
growth in Ml might also strengthen over
thefirstquarter, but the near-term behavior of this aggregate remained subject to a
high degree of uncertainty.
During this meeting further consideration was given to the Committee's
operating procedures. In keeping with
the Committee's decision in early January, continuing progress had been made
toward restoring the Committee's previous focus on reserve positions in the
day-to-day implementation of policy. At
this meeting the members expressed
differing views about whether that process should now be completed. Several
felt that the approach originally adopted
at a time of crisis infinancialmarkets was
no longer warranted, even in attenuated
form, and that the previous approach to
reserve management provided a better
basis for guiding the conduct of monetary
policy because it allowed greater scope
for changes in supply and demand forces
to be reflected in the money market. On
the other hand, a majority of the members
preferred to retain for now a directive
that called for some flexibility in the
approach to open market operations.
These members emphasized that financial market conditions still exhibited
some degree of fragility and, against the
background of substantial uncertainty in
the economic outlook, unanticipated
87
developments might well continue to
warrant occasional departures from the
focus on reserve objectives for the purpose of moderating temporary fluctuations in money market conditions. A
number of these members also commented on the need forflexibilitybecause
a relatively normal or predictable relationship between the provision of reserves and money market conditions had
not yet emerged.
The members expressed some shadings of opinion with regard to possible
adjustments in policy during the intermeeting period. A majority felt that there
should be no presumptions about the
likely direction of any such adjustments,
especially in light of the consensus at this
meeting for maintaining reserve conditions that were consistent with the slight
easing that had been sought since late
January. Some members believed, however, that policy implementation should
be especially alert to developments that
might point to somewhat easier reserve
conditions, particularly because of the
risks that they saw of a weaker economy
than was currently projected. In the view
of some members, further easing might
also be appropriate if monetary growth
fell appreciably short of current expectations. Several members cautioned that
any decision to ease should take careful
account of the potential impact on the
dollar in foreign exchange markets.
While the dollar had tended to stabilize
recently, it could be vulnerable to a
further decline.
At the conclusion of the Committee's
discussion, all of the members indicated
their acceptance of a directive that called
for maintaining the slightly easier degree
of reserve pressure that had been sought
recently. With regard to the Committee's
operating procedures, a majority endorsed the view that some flexibility
might continue to be needed in the
conduct of open market operations in
88
FOMC Policy Actions
light of the still somewhat unsettled
conditions in financial markets, the uncertainties in the relationship between
reserve and money market conditions,
and the substantial risks of unanticipated
economic and financial developments.
Taking account of conditions in financial
markets, the members indicated that
somewhat less or somewhat more reserve
restraint would be acceptable, depending
on the strength of the business expansion,
indications of inflation, the performance
of the dollar in foreign exchange markets,
with consideration also given to the
behavior of the monetary aggregates.
The reserve conditions contemplated by
the Committee were expected to be
consistent with growth in both M2 and
M3 over the four-month period from
November through March at annual rates
of about 6 to 7 percent. Because of the
unusual uncertainty relating to the behavior of M1 and in keeping with the decision
not to set a longer-run target for this
aggregate, the Committee decided not to
indicate any expectation regarding its
growth over the months ahead. The
members agreed that the intermeeting
range for the federal funds rate, which
provides one mechanism for initiating
consultation of the Committee when its
boundaries are persistently exceeded,
should be left unchanged at 4 to 8 percent.
At the conclusion of the meeting the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
indicated that economic activity continued to
expand rapidly in the fourth quarter but that
the advance reflected a build-up in inventories
as domestic final demands weakened. The
growth in output appeared to have slowed
around year-end. Total nonfarm payroll
employment rose much less in January than
on average over the previous three months;
the manufacturing sector also recorded reduced employment growth in January. The
civilian unemployment rate, at 5.8 percent in
January, was unchanged from December.
Growth in industrial production moderated
further in December. Retail sales picked up in
December, buoyed by improved auto sales,
but remained below levels reached during the
summer. Indicators of business capital spending were mixed late in the year. Housing
starts fell markedly in December, and were
down somewhat on balance in the fourth
quarter from the average pace in the second
and third quarters. The nominal U.S. merchandise trade deficit declined substantially in
November. For October and November combined, the deficit rose slightly from the
average rate in the third quarter, but in real
terms the deficit was estimated to have
narrowed further. The rise in consumer prices
slowed and producer prices fell in late 1987,
reflecting declines in energy prices; wage
trends have shown little change in recent
months.
Most interest rates were down substantially
on balance since the Committee's meeting in
mid-December. In the Treasury securities
market, long-term yields fell considerably
more than short-term rates. Broad indexes of
stock prices rose somewhat on balance over
the intermeeting period in still relatively
volatile trading. The trade-weighted foreign
exchange value of the dollar in terms of the
other G-10 currencies declined further in the
second half of December but recovered after
the turn of the year and has increased moderately on balance since the December meeting.
Growth of M2 and M3 strengthened substantially in January after slowing over November and December. For 1987 as a whole,
expansion of M2 fell considerably below the
lower end of the range established by the
Committee for the year, while growth of M3
was at the lower end of its range. Growth of
Ml surged in January following two months
of declines. For the year 1987, Ml growth
was marginally below that of nominal GNP,
and expansion in total domestic nonfinancial
debt was at the midpoint of the Committee's
monitoring range for the year.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster reasonable price stability over time,
promote growth in output on a sustainable
basis, and contribute to an improved pattern
of international transactions. In furtherance
of these objectives, the Committee at this
meeting established growth ranges of 4 to 8
percent for both M2 and M3, measured from
the fourth quarter of 1987 to the fourth quarter
FOMC Policy Actions
of 1988. The monitoring range for growth in
total domestic nonfinancial debt was set at 7 to
11 percent for the year.
With respect to Ml, the Committee again
decided not to establish a specific target for
1988. The behavior of this aggregate in
relation to economic activity and prices has
become very sensitive to changes in interest
rates, among other factors, as evidenced by
sharp swings in its velocity in recent years.
Consequently, the appropriateness of changes
in Ml this year will continue to be evaluated
in the light of the behavior of its velocity,
developments in the economy and financial
markets, and the nature of emerging price
pressures.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the slightly reduced degree of pressure on reserve positions sought in recent
days. The Committee agrees that the current
more normal approach to open market operations remains appropriate; still sensitive
conditions infinancialmarkets and uncertainties in the economic outlook may continue to
call for some flexibility in operations. Taking
account of conditions in financial markets,
somewhat lesser reserve restraint or somewhat greater reserve restraint would be
acceptable depending on the strength of the
business expansion, indications of inflationary pressures, developments in foreign exchange markets, as well as the behavior of the
monetary aggregates. The contemplated reserve conditions are expected to be consistent
with growth in both M2 and M3 over the
period from November through March at
annual rates of about 6 to 7 percent. The
Chairman may call for Committee consultation if it appears to the Manager for Domestic
Operations that reserve conditions during the
period before the next meeting are likely to be
associated with a federal funds rate persistently outside a range of 4 to 8 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Boehne, Boykin, Heller,
Johnson, Keehn, and Kelley, Ms. Seger,
and Mr. Stern. Votes against this action:
None.
Meeting Held on
March 29,1988
1. Domestic Policy Directive
The information reviewed at this meeting
suggested that economic activity was
89
continuing to expand in the current
quarter, although the rate of growth was
down somewhat from the rapid pace in
the fourth quarter. The moderation
reflected a considerable slowing in the
pace of inventory investment. However,
domestic final sales seemed to have
picked up sharply in the first quarter;
business capital expenditures apparently
increased substantially and consumer
spending also strengthened, buoyed by
higher sales of motor vehicles. The rate
of inflation had remained relatively
restrained over the course of recent
months and wage trends had shown little
change.
Growth in industrial production moderated in January and February from a
rapid pace in late 1987. After a surge in
the second half of 1987, the output of
materials edged down. Also, auto assemblies and the production of consumer
home goods dropped below their late
1987 levels, apparently reflecting in part
an effort to trim or to moderate the growth
in inventories. In contrast, the production
of business equipment remained quite
strong, with gains in nearly all categories. Capacity utilization rates were at
relatively high levels in a number of
industries. Gains in total nonfarm payroll
employment continued strong over the
January-February period, led by the
service and retail trade sectors. In manufacturing, employment gains were
smaller in January and February than
during the second half of 1987. The
unemployment rate edged down to 5.7
percent in February, its lowest level since
mid-1979.
Increased demand for motor vehicles
produced a rebound in consumer spending early in the year. That demand
appeared to be bolstered by sales incentives programs, strong income growth,
and rising consumer confidence. Excluding motor vehicles, nominal retail sales
were essentially flat since November,
90
FOMC Policy Actions
and the saving rate was well above its
average for the year preceding the break
in the stock market.
Housing activity picked up in February
but still was slightly below its fourthquarter pace. While sales of new and
existing homes continued to decline in
January, housing starts rose to an annual
rate of 1.49 million units in February,
with growth stronger in the single-family
sector than in the multifamily area.
Available information suggested that
businessfixedinvestment was increasing
rapidly since late last year, led by large
gains in equipment spending. Data on
shipments indicated a surge in spending
on information-processing equipment.
Increases in other equipment categories
were smaller but were widespread.
Spending on nonresidential structures
was relatively weak in early 1988. Inventory investment apparently slowed in the
first quarter, reflecting the strength in
sales of motor vehicles combined with
cutbacks in their production.
The nominal U.S. merchandise trade
deficit in January was significantly below
the fourth-quarter average, although
essentially unchanged from December.
Non-oil imports and nonagricultural
exports both fell noticeably from their
December levels. The current account
deficit had narrowed in the fourth quarter,
but the improvement was more than
accounted for by a sharp increase in
capital gains stemming from the depreciation of the dollar and the related revaluation in the book value of direct U.S.
investments abroad denominated in foreign currencies. On average, economic
growth in major foreign industrial countries continued strong in the fourth quarter and early this year, though it slowed
somewhat from the rapid third-quarter
pace. Growth was particularly robust in
Canada and Japan.
Increases in consumer prices remained
relatively moderate in early 1988, reflect
ing the impact of declining energy prices
and a relatively small rise in food prices.
At the producer level, prices of finished
goods fell slightly in February after
fluctuating irregularly in other recent
months, largely because of swings in
food prices. Commodity prices registered mixed changes during the first
quarter. The index of hourly earnings
was unchanged in February after increasing in January, and on balance it rose
roughly in line with the pace in 1987.
At its meeting on February 9-10,
1988, the Committee had adopted a
directive that called for maintaining the
slightly reduced degree of pressure on
reserve positions that had been sought
since late January. These reserve conditions were expected to be consistent with
growth in both M2 and M3 at annual rates
of about 6 to 7 percent over the period
from November through March. With
regard to operating procedures, the Committee had agreed that the more normal
approach to operations implemented
especially since the year-end, which emphasized the provision of reserves rather
than money market conditions, remained
generally appropriate. Nonetheless, it
was understood that some flexibility
might continue to be needed in the conduct of operations in light of the still
somewhat unsettled conditions in financial markets, the uncertainties in the
relationship between reserve and money
market conditions, and the substantial
risks of unanticipated economic and
financial developments. Taking account
of conditions in financial markets, the
members had decided that somewhat
less or somewhat more reserve restraint would be acceptable, depending
on the strength of the business expansion, indications of inflationary pressures, developments in foreign exchange markets, and the behavior of the
monetary aggregates. The intermeeting
range for the federal funds rate had
FOMC Policy Actions
been left unchanged at 4 to 8 percent.
As contemplated at the February meeting, primary emphasis was placed on
achieving reserve objectives during the
intermeeting period, although slightly
greater than normal attention continued
to be given to developments in the money
market. In the three reserve maintenance
periods ending March 23, adjustment
plus seasonal borrowing averaged $238
million. Growth in M2 and M3 remained
relatively robust in February and apparently also in March following a rebound
in January. Since November both aggregates had expanded at an annual rate of
about 7 percent. Growth in Ml slowed
considerably over the intermeeting period from a very rapid pace in January.
With transaction deposits expanding at a
relatively sluggish pace on balance and
excess reserves declining, total reserves
advanced at a modest rate during the
intermeeting period.
The federal funds rate averaged 6.59
percent for the three full reserve maintenance periods since the February meeting, close to the rate prevailing around
the time of that meeting but below the
average in January. Most other interest
rates rose somewhat on balance during
the intermeeting period. The largest
increases were in bond markets and they
appeared to have been prompted by
evidence of more strength in the economy than had been anticipated. Broad
indexes of stock prices rose somewhat
over the period, but price swings remained sizable on occasion.
Through most of the period since the
February meeting the dollar fluctuated in
a relatively narrow range. However, it
came under downward pressure late in
the period following reports suggesting
stronger than anticipated growth in U.S.
domestic demand that raised questions
about the pace of adjustment in the U.S.
trade balance. Over the intermeeting
period the dollar declined 2 lA percent on
91
a weighted-average basis in relation to
the other G-10 currencies. The net decline was largely accounted for by a 4
percent depreciation in terms of the
pound and 2 percent in terms of the
Canadian dollar and the yen, while the
mark and other EMS currencies remained
little changed in relation to the dollar.
The staff projection prepared for today's meeting suggested more strength in
business activity this year than had been
forecast earlier. The faster growth was
expected to be associated with little
change in the unemployment rate from
current levels. And while the projection
for 1989 now indicated a somewhat
reduced rate of growth, higher levels of
capacity utilization over the projection
period as a whole were associated with
marginally higher rates of inflation by
late 1988 and for the year 1989. A key
adjustment in the forecast was stronger
investment spending. The staff continued
to anticipate that the external sector
would make a substantial positive contribution to business activity in 1988 and
1989.
In the Committee's discussion of the
economic situation and outlook, the
members generally agreed that the information available since the February
meeting pointed to a stronger expansion
in business activity than they had anticipated earlier. Unfortunately, recent developments in the view of several members also increased the risks of more
pressures on productive resources and
more inflation. A number of members
noted that the revised staff forecast was in
line with their own projections, and some
also indicated that any deviations were
likely to be in the direction of somewhat
faster expansion and even higher rates of
inflation. A number of other members
did not disagree that the risks had shifted
and that concerns about a recession had
receded, but they also referred to areas of
weakness in the economy that implied the
92
FOMC Policy Actions
potential for relatively moderate growth
without adding to price pressures.
In the course of the Committee's discussion, members referred to high or
improving levels of business activity in
many parts of the country, albeit from
depressed levels in some areas or sectors
of the economy. Manufacturing was
exhibiting particular strength across the
nation. Despite some increasing pressures on manufacturing capacity, business executives generally appeared to
remain cautious in their plans for new
production facilities, apparently reflecting their uncertainties about the outlook
for sales growth in both domestic and
export markets. However, some businesses were reported to be in the process
of reappraising their capacity needs, and
with demands for business equipment
relatively strong, a number of members
concluded that appreciable further growth
was likely in overall business-fixed investment. The members differed to some
extent in their views on the outlook for
consumer spending and business inventory accumulation, but they generally
expected at least moderate growth in total
domestic final demands.
In the view of some members any
strengthening in domestic demand could
well give rise to pressures on resources
as net exports continued to expand. The
outlook for trade remained subject to
considerable uncertainty, but further
improvement in the trade balance was
nonetheless a reasonable prospect. That
prospect was supported by reports from
businesses of their increased ability to
compete internationally. A number of
members again commented that long-run
adjustment in the trade balance would
require a period of relatively moderate
growth in domestic purchases as more
production was directed to export markets.
Turning to the outlook for inflation,
some members reported that an increas
ing number of business contacts were
expressing concern about the prospects
for prices and wages. On the positive
side, while some deterioration seemed to
have occurred recently, inflationary expectations appeared to have diminished
on balance since the stock market crash
in October. Moreover, aggregate measures of prices and wages had not yet
shown any sustained tendency to accelerate. This could indicate that some leeway
remained in the economy before a more
serious inflation problem emerged. Inflation developments did not depend solely
on rates of capacity use but on the overall
inflationary and financial climate and on
expectations about policy responses to
inflation. In particular, responses to
rising capacity constraints might be
reduced or delayed in light of the downtrend in inflation since the early 1980s.
Nonetheless, most members agreed that
the risks of more inflation stemming from
increased pressures on capacity had
increased and represented a key challenge for policymakers. In a still limited
number of manufacturing industries,
relatively high capacity utilization rates
were being reflected in sizable price
increases for some metals and other
business products, increasing lead times
in filling certain orders, and some precautionary ordering in anticipation of
future needs. While there was little
evidence thus far that the added price
pressures extended to finished products
or that overall business buying and
inventory patterns were being significantly affected, the economy might well
be near the point where faster growth in
business activity would induce a higher
rate of inflation, and in the view of several
members, there was a potential for a
sharp escalation in prices. Members were
particularly concerned that any tendency
for greater price pressures to become
imbedded in more rapid wage increases
would make achievement of the ultimate
FOMC Policy Actions
objective of price stability considerably
more difficult.
In further comments some members
noted that an assessment of the economic
outlook was complicated by the continuing risks associated with the troubled
status of a number offinancialinstitutions
and the still somewhat unsettled conditions in financial markets, as evidenced
in part by occasionally sharp movements
in stock prices. Some members believed
that speculative attitudes had intensified
recently as reflected for example in
increases in corporate merger, acquisition, and commercial construction activities that typically involved heavy use of
debt financing. Such a development was
surprising so soon after the October 1987
disturbances in financial markets, and
still growing debt burdens served to
increase the vulnerability of the economy
to adverse developments. Some members
also expressed considerable concern
about the outlook for the dollar, which
had been under downward pressure in the
foreign exchange markets. A sizable
further decline in the dollar, while it
might have favorable implications for the
U.S. trade balance, would tend to raise
domestic prices and could adversely
affect the nation's ability to continue to
finance a massive trade deficit, with
disruptive effects on domestic financial
markets and the domestic economy.
At its meeting in February the Committee had agreed on policy objectives that
called for monetary growth ranges of 4 to
8 percent for both M2 and M3 for the
period from the fourth quarter of 1987 to
the fourth quarter of 1988. The associated
range for growth in total domestic nonfinancial debt was set at 7 to 11 percent.
The Committee decided not to establish a
numerical target for Ml growth; instead,
the appropriateness of changes in Ml
would be evaluated during the year in the
light of the behavior of Ml velocity,
developments in the economy and finan
93
cial markets, and the nature of emerging
price pressures.
In the Committee's discussion of policy
implementation for the intermeeting
period ahead, nearly all the members
favored some increase in the degree of
pressure on reserve positions. Most
indicated a preference for only a slight
move toward restraint, at least at this
time, but a few urged somewhat greater
tightening. Several commented that a
stronger economic outlook in the context
of already high capacity utilization rates
in a number of industries required timely
action to help prevent the business expansion from gathering excessive and unsustainable momentum that would lead to
higher inflation. A policy response under
emerging circumstances would also serve
to confirm the System's commitment to
achieving price stability over time and
might help to avert an aggravation of
inflationary expectations. Moreover, action at this time might preclude the need
for more substantial tightening later.
While they favored a slight increase in
reserve pressures, a number of members
stressed that monetary policy should not
overreact to recent developments. The
firming should proceed with caution in
light of the prevailing uncertainties in the
economic outlook and the current absence of evidence in broad measures of
prices and wages that rates of inflation
were already rising. Other factors cited
in favor of a cautious approach included
the persisting problems or incomplete
recovery in some sectors of the economy
and areas of the country, the still sensitive
conditions in financial markets, and the
troubled status of many financial institutions. In the view of one member, underlying demands in the economy were not
likely to be sufficiently robust to pose a
threat of greater inflation, and so prospective economic and financial conditions
did not warrant any tightening of reserve
conditions.
94
FOMC Policy Actions
In the course of the Committee's discussion, somemembers noted that growth
of the broader monetary aggregates had
remained fairly rapid in February and
March. According to a staff analysis, the
reserve conditions favored by most members were likely to be associated with
some slowing in the expansion of those
aggregates, assuming a typically sluggish
adjustment of offering rates on retail deposits to changes in short-term market
rates. Even so, the analysis suggested
that for the year through June growth of
both M2 and M3 would still be appreciably above the midpoints of the Committee's ranges for 1988. Some members
observed that the near-term outlook for
monetary growth was subject to more
uncertainty than usual because the impact
of new tax laws on mid-April tax payments and related deposit balances could
not be fully anticipated. Some concern
was expressed regarding the inflationary
potential of the recent rates of growth in
the broader monetary aggregates, and
one member commented that under
prevailing circumstances significantly
stronger than expected expansion in those
aggregates should be resisted, especially
expansion that brought the cumulative
growth of M2 and M3 to levels above the
Committee's ranges by midyear.
During this meeting the Committee
reviewed its operating procedures at
some length, including the relative merits
of focusing primarily on money market
conditions or on a specified degree of
reserve pressure in the day-to-day conduct of monetary policy. The considerable emphasis on stabilizing money market conditions in the period after the
October collapse of the stock market had
given way increasingly to the earlier
concentration on achieving reserve position objectives, especially since the yearend. Nonetheless, in keeping with the
Committee's instructions as reaffirmed at
the February meeting, open market oper
ations had continued to be conducted
with some degree of flexibility that
involved occasional departures from a
normal focus on targeting reserve positions and slightly greater than usual
attention to money market conditions. In
today's discussion a few members indicated that they favored paying greater
attention to money market conditions in
the normal course of conducting open
market operations. It was noted in support of this view that money market
interest rates were a key variable for
transmitting monetary policy to financial
markets and the economy, and that the
variability in those rates that sometimes
accompanied the pursuit of a given
degree of pressure on reserve positions
injected an unneeded element of uncertainty in the decisions of market participants. However, most members were in
favor of either retaining the existing
emphasis on reserve pressures or completing the process of reinstating the
previous approach to reserve management. Short-run variability in money
market interest rates was not seen as
detracting from the functioning of the
market or the implementation of policy
since market participants were well aware
of the System's procedures, and such
fluctuations could reflect important shifts
in market expectations or underlying
conditions of supply and demand for
reserves and credit. The shifts would be
masked if the Federal Reserve were to
focus more closely on money market
conditions in its day-to-day conduct of
open market operations. Even so, a
majority of the members felt that the
uncertain economic outlook and still
sensitive conditions infinancialmarkets
warranted some continuing flexibility in
the conduct of open market operations.
In the Committee's consideration of
possible adjustments in policy implementation during the intermeeting period,
some members felt that the risks of more
FOMC Policy Actions
inflation argued for giving particular
attention to developments that might call
for somewhat tighter reserve conditions.
A majority of the members believed,
however, that there should be no presumption about the likely direction of
intermeeting adjustments, if any, in the
implementation of policy. While these
members generally agreed that the economic risks were in the direction of more
inflation, they preferred not to weight the
directive toward possible further tightening in light of thefirmingthat was already
contemplated at this meeting and the
considerable uncertainties that they saw
in the economic and financial outlook.
One member proposed placing more
emphasis on the behavior of the monetary
aggregates as a factor that might trigger
some firming during the intermeeting
period, but other members preferred the
current emphasis, partly because any
surge in money growth over the weeks
ahead might reflect temporary developments related to mid-April tax payments.
Some consideration was given during the
discussion to an upward adjustment in the
intermeeting range for the federal funds
rate, especially since federal funds could
trade well into the upper half of the
Committee's range following the decision
made at today's meeting. However, the
members concluded that increasing the
range under current circumstances could
be misread as implying a greater move
toward restraint than the Committee
intended.
At the conclusion of the Committee's
discussion, all but one of the members
indicated their acceptance of a directive
that called for a slight increase in the
degree of pressure on reserve positions.
With regard to the Committee's operating
procedures, a majority continued to
endorse the view that some flexibility
might be desirable in the day-to-day
conduct of open market operations in
light of the still somewhat unsettled
95
conditions in financial markets and the
uncertainties surrounding the economic
outlook. Taking account of conditions in
financial markets, the members indicated
that somewhat greater or somewhat lesser
reserve restraint would be acceptable
depending on the strength of the business
expansion, indications of inflation, the
performance of the dollar in foreign
exchange markets, and the behavior of
the monetary aggregates. The reserve
conditions contemplated by the Committee were expected to be consistent with
growth in both M2 and M3 over the
period from March through June at
annual rates of about 6 to 7 percent. As at
previous meetings, the Committee decided not to indicate any expectation
regarding the growth of Ml over the
months ahead. The members agreed that
the intermeeting range for the federal
funds rate, which provides one mechanism for initiating consultation of the
Committee when its boundaries are persistently exceeded, should be left unchanged at 4 to 8 percent.
At the conclusion of the meeting the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
suggests some moderation in the expansion of
economic activity in the current quarter from
the rapid pace in the fourth quarter; the
continuing expansion has been supported by a
sharp pickup in domestic final sales while the
accumulation of inventories appears to have
slowed. Total nonfarm payroll employment
rose substantially over the first two months of
the year, although employment growth slowed
somewhat in the manufacturing sector. The
civilian unemployment rate fell slightly to 5.7
percent in February. Growth in industrial
production moderated in early 1988 from a
brisk pace during the second half of 1987.
Consumer spending strengthened in January
and February, buoyed by higher sales of
motor vehicles. Indicators of business capital
spending pointed to substantial gains in the
first quarter. Housing starts rebounded in
96
FOMC Policy Actions
February but were still somewhat below the
reduced fourth-quarter average. The nominal
U.S. merchandise trade deficit changed little
in January and was significantly below the
fourth-quarter average. In recent months the
rise in consumer and producer prices has been
relatively modest on balance, reflecting developments in food and energy prices, and wage
trends have shown little change.
Most interest rates were up somewhat on
balance since the Committee's meeting in
February, with the largest increases concentrated in bond markets. The trade-weighted
foreign exchange value of the dollar in terms
of the other G-10 currencies fluctuated in a
relatively narrow range over most of the
intermeeting period, but declined somewhat
in recent days.
After strengthening in January, growth of
M2 and M3 remained relatively robust in
February and in thefirstpart of March. Thus
far this year expansion of these two aggregates
appears to have been in the upper portion of
the ranges established by the Committee for
1988. Ml has grown moderately on balance
since the fourth quarter. Expansion in total
domestic nonfinancial debt appears to be
continuing at a pace close to that in 1987.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability over time, promote
growth in output on a sustainable basis, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee at its meeting in
February established growth ranges of 4 to 8
percent for both M2 and M3, measured from
the fourth quarter of 1987 to the fourth quarter
of 1988. The monitoring range for growth in
total domestic nonfinancial debt was set at 7 to
11 percent for the year.
With respect to M1, the Committee decided
in February not to establish a specific target
for 1988. The behavior of this aggregate in
relation to economic activity and prices has
become very sensitive to changes in interest
rates, among other factors, as evidenced by
sharp swings in its velocity in recent years.
Consequently, the appropriateness of changes
in Ml this year will continue to be evaluated
in the light of the behavior of its velocity,
developments in the economy and financial
markets, and the nature of emerging price
pressures.
In the implementation of policy for the
immediate future, the Committee seeks to
increase slightly the degree of pressure on
reserve positions. The Committee agrees that
the current more normal approach to open
market operations remains appropriate; still
sensitive conditions infinancialmarkets and
uncertainties in the economic outlook may
continue to call for some flexibility in operations. Taking account of conditions in financial markets, somewhat greater reserve restraint or somewhat lesser reserve restraint
would be acceptable depending on the strength
of the business expansion, indications of
inflationary pressures, developments in foreign exchange markets, as well as the behavior
of the monetary aggregates. The contemplated reserve conditions are expected to be
consistent with growth in M2 and M3 over the
period from March through June at annual
rates of about 6 to 7 percent. The Chairman
may call for Committee consultation if it
appears to the Manager for Domestic Operations that reserve conditions during the period
before the next meeting are likely to be
associated with a federal funds rate persistently outside a range of 4 to 8 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Heller,
Hoskins, Johnson, Kelley, and Parry. Vote
against this action: Ms. Seger.
Ms. Seger dissented because she did not
believe that economic and financial developments warranted any tightening of
reserve conditions. She did not see a
significant risk of more inflationary pressures on productive resources stemming
from prospective demands in domestic
and export markets. She remained concerned about the downside risks in the
economy, the fragility in financial markets, especially the stock market, and the
weakened condition of many depository
institutions.
2. Authorization for Domestic
Open Market Operations
The Committee approved a temporary
increase of $4 billion, to a level of $10
billion, in the limit between Committee
meetings on changes in System Account
holdings of U. S. government and federal
FOMC Policy Actions
agency securities specified in paragraph
l(a) of the Authorization for Domestic
Open Market Operations. The increase
was effective for the intermeeting period
starting March 30,1988, and ending with
the close of business on May 17,1988.
97
sured by the household survey was up
very sharply in April, and the civilian
unemployment rate declined 0.2 percentage point to a level of 5.4 percent; that
level was down appreciably since the
start of the year and was the lowest since
1974.
Votes for this action: Messrs. Greenspan,
Growth in industrial production picked
Corrigan, Angell, Black, Forrestal, Heller, up considerably in April from a reduced
Hoskins, Johnson, Kelley, and Parry and
Ms. Seger. Votes against this action: None. pace earlier in the year. Auto assemblies
posted large gains, and the output of
This action was taken on the recommen- business equipment remained exceptiondation of the Manager for Domestic ally strong. Capacity utilization rates in
Operations. The Manager advised that manufacturing and mining and in the
the normal leeway of $6 billion probably production of industrial materials inwould not be sufficient to accommodate creased appreciably in April and on
desirable increases in System Account balance have risen substantially over the
holdings of securities during the inter- past several quarters to relatively high
meeting period. Those increases would levels.
Consumer spending for durables and
supply reserves to help offset very large
reserve drains stemming mainly form a services was strong in the first quarter.
short-term rise in Treasury balances at Retail sales, as revised, showed substanthe Federal Reserve Banks associated tial gains in February and March but fell
in April. Auto sales declined somewhat
with mid-April tax payments.
in April, apparently reflecting reduced
sales incentives, but household spending
on other durables and on services reMeeting Held on
mained strong. Outlays on nondurable
May 17,1988
goods continued sluggish.
A surge in business fixed investment
Domestic Policy Directive
during the first quarter reflected large
The information reviewed at this meeting gains in spending on informationsuggested continuing strength in the eco- processing and other equipment. New
nomic expansion, supported by strong orders for nondefense capital goods
sales in both domestic and export mar- softened recently, but order backlogs
kets, and relatively high utilization levels were still high and suggested that output
of labor and capital resources. In this would remain at an advanced level in the
setting, consumer and producer prices current quarter. Spending on structures
have risen more rapidly recently. In declined in the first quarter, and forward
addition, labor costs increased substan- commitments for nonresidential building
were essentially flat in nominal terms.
tially in the first quarter.
Nonfarm payroll employment contin- While inventories of motor vehicles
ued to increase in April, though at a more declined during the first quarter, nonmoderate pace than in other recent auto inventory investment remained close
months. The rise included sizable growth to the high rate of the fourth quarter.
in the manufacturing sector and was Sales of new and existing homes inaccompanied by a sharp increase in the creased late in the first quarter. After
average workweek. Employment as mea- showing weakness early in the year,
98
FOMC Policy Actions
housing starts picked up to a 1.55 million
annual rate in March, a level marginally above that in the fourth quarter but
still appreciably below that in earlier
quarters.
The U.S. merchandise trade deficit
declined substantially in both nominal
and real terms in thefirstquarter. Exports
reached a record level; oil imports fell,
but non-oil imports continued to expand.
Indicators of economic activity in the
major foreign industrial countries during
the first months of 1988 showed continued strength in Japan and, on balance, in
Europe as well.
The consumer price index increased
substantially in March, despite a limited
rise in retail food prices and flat retail
energy prices. At the producer level,
prices of finished goods rose rapidly in
March and April, largely reflecting increases in the food and energy sectors.
Prices of intermediate goods advanced
considerably further in both months,
continuing their uptrend of the past year
and a half that has coincided with increased capacity utilization rates. Commodity prices strengthened recently after
registering mixed changes in the first
quarter. Broad measures of labor costs
indicated a substantial advance in the first
quarter, in part because of a rise in payroll
taxes.
Dollar exchange rates moved within a
narrow range during most of the intermeeting period, with uncertainties regarding U.S. trade and price performance apparently offset by indications of
U.S. monetary tightening; also, weakness at the time of the release of the
February trade data was met by concerted
central bank intervention. On a weightedaverage basis, the dollar appreciated
slightly on balance in relation to the other
G-10 currencies until late in the period; it
strengthened with respect to the mark
and weakened slightly with respect to the
pound and the yen. The dollar then
appreciated about 1 percent on the morning of the May 17 meeting in response to
news of the improved U.S. trade deficit
in March.
At its meeting in February the Committee agreed on policy objectives that called
for monetary growth ranges of 4 to 8
percent for both M2 and M3 for the
period from the fourth quarter of 1987 to
the fourth quarter of 1988. The associated
range for growth in total domestic nonfinancial debt was set at 7 to 11 percent.
The Committee decided not to establish a
numerical target for Ml growth; instead,
the appropriateness of changes in Ml
would be evaluated during the year in the
light of the behavior of Ml velocity,
developments in the economy and financial markets, and the nature of emerging
price pressures.
At its previous meeting on March 29,
the Committee adopted a directive calling
for a slight increase in the degree of
pressure on reserve positions. These
reserve conditions were expected to be
consistent with growth in both M2 and
M3 at annual rates of about 6 to 7 percent
over the period from March through
June. Taking account of conditions in
financial markets, the members agreed
that somewhat greater or somewhat lesser
reserve restraint would be acceptable,
depending on the strength of the business
expansion, indications of inflationary
pressures, developments in foreign exchange markets, and the behavior of the
monetary aggregates. The intermeeting
range for the federal funds rate was left
unchanged at 4 to 8 percent.
Some slight firming of reserve conditions was implemented immediately after
the March meeting. In the two reserve
maintenance periods ending April 20,
adjustment plus seasonal borrowing rose
to an average of about $330 million; in
the subsequent period ending May 4,
borrowing averaged about $440 million,
reflecting the impact of a tax-related
FOMC Policy Actions
bulge in Treasury deposits at the Federal
Reserve Banks that affected reserve
market conditions and complicated the
management of reserves. More recently,
open market operations were adjusted
toward the implementation of further
slight firming in reserve conditions in
relation to what had been sought earlier
in the period. This action was taken in
light of information that indicated considerable strength in the economy and a
related increase in concerns about the
potential for greater inflation. Growth of
M2 and M3 for the year to date was at
rates in the upper portions of the Committee's ranges for 1988. Monetary growth
was boosted in April by a temporary
buildup in transaction balances associated with very large tax payments by
individuals. Although preliminary data
for early May indicated substantial weakness of money growth, the cumulative
expansion of the broad aggregates remained relatively high in their annual
ranges. Total and nonborrowed reserves
rose at rapid rates in April in conjunction
with the increase in required reserves
against transaction deposits.
The firming of reserve conditions was
reflected in a rise in the federal funds rate
from around 6 Vi percent at the time of the
March meeting to around 7 percent most
recently. Other short-term rates also rose
about Vi percentage point over the intermeeting period, while yields on Treasury
and corporate bonds increased somewhat
less. Banks raised their prime lending
rate from 8 xh to 9 percent during the first
half of May. Broad indexes of stock
prices changed little on balance over the
period.
The staff projection reviewed at this
meeting suggested that the economy had
considerable underlying strength, reflecting both an improving trade balance and
continuing momentum in domestic demands. With unemployment already a
little lower, and capacity utilization a
99
little higher, than had been anticipated,
the risks of higher rates of price and wage
inflation had increased. The actual course
of the economy would depend in part on
how these developments affected financial markets. Pressures in those markets
could restrain domestic final demands.
Relatively sluggish growth in such demands, along with indications of overstocking in the retail sector, would
encourage a reduced rate of inventory
investment. Growth in business fixed
investment was projected to slow substantially, and federal purchases, in constant
dollar terms, were expected to be weak.
Under such circumstances, while prices
and wages might rise somewhat more
rapidly in the quarters ahead, reflecting
the effects of the lower dollar on market
prices and reduced margins of unutilized
production resources, the extent and
duration of any pickup of inflation might
be limited.
In the Committee's discussion of the
outlook for economic activity and
prices, the members focused on the
strong performance of the economy in
recent months, and, in the context of
diminishing margins of unused labor
and other production resources, they
expressed considerable concern about
the potential for higher rates of inflation
in the year ahead. Members referred to
widespread evidence of strength in the
manufacturing sector and to indications
that many firms were producing at very
high levels of capacity use. Manufacturing was continuing to benefit
from the nation's improved ability to
compete internationally as a result of the
depreciated dollar, and strength in
manufacturing was feeding through to
other related sectors of the economy. On
the negative side, members referred to
indications that inventories were higher
than desired in some industries, notably
at the retail level, and some saw a
relatively weak outlook for construe-
100 FOMC Policy Actions
tion, both residential and nonresidential.
Weaknesses in the financial sectors of
the economy and relatively heavy debt
burdens also increased the downside
risks in the economy. But, on balance,
while some slowing from the current
rate of expansion was a reasonable
expectation, the risks were on the side of
faster-than-desired growth and more
inflationary pressures. Some members
observed that in these circumstances
fiscal restraint, especially if supplemented by measures to reduce the
inflationary consequences of many
government programs, could greatly
facilitate the effort to control inflation
while encouraging sustained economic
expansion.
Turning to the outlook for inflation,
members reported rising costs of materials and other manufacturing inputs. With
profit margins under more pressure,
numerousfirmswere looking for opportunities to pass on rising costs, and there
were reports of some increase in successful efforts by businesses to raise prices,
especially on crude and intermediate
producer goods. However, while many
specific instances of sizable price increases could be cited, broad measures of
prices, including commodity prices as a
group, did not indicate at this point that a
significant worsening had occurred in the
overall rate of inflation. Likewise, while
reports of shortages of qualified labor
were multiplying and business resistance
to higher wages seemed to be diminishing
in some areas, the members did not
currently detect any appreciable acceleration in wage rate increases. Nonetheless, several expressed concern that,
unless the expansion in overall demands
were to slow markedly from the recent
pace, which exceeded the trend growth
of potential output, a substantially higher
rate of price and wage inflation could not
be avoided in the relatively near future.
Others were less ready to conclude that
an inflationary surge might be imminent,
but they believed that the situation needed
careful watching.
In the Committee's discussion of policy
for the intermeeting period ahead, the
members generally agreed that some
further tightening of reserve conditions
was needed to counter the risks of rising
inflationary pressures in the economy. A
failure to act in timely fashion not only
would be inconsistent with the Committee's commitment to achieving price
stability over time but would in fact
compound the difficulties of accomplishing that objective. Views differed, however, regarding the desirable extent of
such firming and the appropriate timing
for its implementation. A majority favored only a slight move toward more
restraint, at least pending an evaluation
of further developments, and most of
these members preferred to delay the
tightening action for a short period. Other
members felt that current and potential
pressures on prices and wages argued
more urgently for a prompt move to
somewhat greater restraint.
The members who favored only slight
further firming, whether immediately or
after a short delay, saw a considerable
risk that an appreciable further tightening
would be unexpected so soon after the
most recentfirmingand might well have
an exaggerated impact onfinancialmarkets. Among other effects, it might give
rise to anticipations of an increase in the
discount rate, and foster unwarranted
expectations about the System's intentions. Some members also stressed the
adverse impact that any marked weakening of financial markets could have on
troubled depository institutions. In these
circumstances, marginal further tightening in the near term would provide an
appropriate balance between the need to
curb the emergence of excessive demand
pressures in the economy and the risks of
further restraint forfinancialmarkets and
FOMC Policy Actions
depository institutions. A few members
also expressed the view that the two
firming actions since late March, taken
together, already represented a significant move to greater restraint and more
time was needed to appraise their impact
on the economy before any substantial
further tightening was implemented.
Members who favored moving
promptly to a somewhat greater degree
of restraint gave more emphasis to the
risks of more inflation as demand pressures encountered labor and capacity
constraints in many industries. In this
view the System's recent firming actions
were helpful, but they did not go far
enough toward restraining the growth in
total demands to a noninflationary pace.
These members recognized that appreciable further firming could have some
adverse impact on financial markets in
the short run and on the condition of
many already weakened depository institutions. However, a prompt and somewhat stronger response to inflationary
developments at this point would have a
favorable effect on inflationary expectations, and over time also on long-term
debt markets, and would reduce the need
for greater and more disruptive tightening actions later. Some of these members
indicated that a relatively modest move
now, or in the very near future, and a
readiness to tighten further later during
the intermeeting period would constitute
an acceptable compromise, given concerns about the risks of unwarranted
reactions in the financial markets.
During the discussion members referred to a staff analysis prepared for this
meeting that concluded that expansion of
the monetary aggregates, especially Ml
and M2, was likely to moderate substantially from the pace in April. The projected slowing reflected in part a reversal
of the tax-related buildup in transaction
accounts during April, which was already
occurring, and the impact of increased
101
opportunity costs of holding money balances in response to the rise in market
interest rates. While M2 and M3 currently appeared to be growing at rates
that were consistent with the Committee's
expectations for the second quarter, their
cumulative growth thus far this year was
at rates in the upper part of the Committee's ranges. One member stressed that
any tendency for monetary growth to
exceed the ranges should be firmly resisted under prevailing circumstances.
Another commented that reduced growth,
which brought the expansion for the year
to around the middle of the Committee's
ranges, would be a desirable outcome.
With regard to adjustments in the
degree of reserve pressure during the
intermeeting period, the slight firming
after a short interval following today's
meeting that was favored by a majority of
the members would be implemented
unless economic and financial conditions
in the period ahead were to differ markedly from current expectations. Should
unanticipated developments of that sort
occur, the Chairman would call for a
special consultation of the Committee.
On the question of any subsequent adjustment in policy, a majority believed that
policy implementation should remain
especially alert to incoming information
that might call for further firming. Given
the recent tightening of reserve conditions and the presumption that at least
marginally firmer reserve conditions
would be implemented in the intermeeting period, the members decided to raise
the intermeeting range for the federal
funds rate by 1 percentage point to 5 to 9
percent. With such an increase the average trading level expected for the federal
funds rate in the period ahead would be
aligned somewhat more symmetrically
around the middle of the range.
In further discussion most of the members indicated that they now favored
dropping from the directive the special
102
FOMC Policy Actions
reference to sensitive conditions in financial markets and the related reference to
the need for flexibility in the conduct of
open market operations. Members noted
that these references, while helpful in
describing the Committee's approach to
operations for an extended period following the October disturbances in financial
markets, no longer served a clarifying
purpose in communicating the Committee's intentions. While still somewhat
volatile, market conditions were now
closer to those prevailing prior to the
October break in the stock market, and
the Committee anticipated that the earlier
approach to open market operations
generally would be followed. A few
members felt, however, that still quite
sensitive conditions in financial markets
continued to warrant more than the usual
amount of flexibility in the conduct of
open market operations.
In advance of the discussion of longterm monetary growth ranges at its next
meeting, the Committee considered the
role that the monetary base might play in
monetary policy. One proposal was to set
fairly wide limits on quarterly fluctuations in the monetary base, but to adjust
policy promptly if the limits were
breached. The Committee also discussed
whether a range for the base comparable
to the existing ranges for M2 and M3 and
nonfinancial debt might usefully supplement the current ranges. Most members
expressed reservations about the reliability of the base as a guide to or restraint
on policy, given their questions about the
behavior of currency and reserves relative to income. However, there was sentiment for a continuing review of possible
monetary indicators of future pricetrends.
At the conclusion of the Committee's
discussion, all but two of the members
indicated that they favored or could
accept a directive that called initially for
maintaining the current degree of pressure on reserve positions. Some slight
firming would be implemented after a
short interval following today's meeting,
assuming that economic and financial
conditions remained reasonably consistent with current expectations. In particular, and in keeping with the Committee's
usual approach to policy, the conduct of
open market operations would take account of conditions in financial markets,
the strength of the business expansion,
indications of inflation, the performance
of the dollar in foreign exchange markets,
and the behavior of the monetary aggregates. Later in the intermeeting period,
some added reserve restraint would be
acceptable, or some slight lessening of
reserve pressure might be acceptable,
depending on ongoing economic and
financial developments. The contemplated reserve conditions were likely to
be associated with slower monetary
growth, but given their relatively rapid
expansion in April, M2 and M3 were still
expected to grow at the rates of 6 to 7
percent established in late March for the
period from March to June. The members
agreed that the intermeeting range for the
federal funds rate, which provides one
mechanism for initiating consultation of
the Committee when its boundaries are
persistently exceeded, should be raised
by 1 percentage point to 5 to 9 percent.
At the conclusion of the meeting the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
suggests continuing strong expansion in economic activity and rising levels of resource
utilization. In April, total nonfarm payroll
employment rose further; the increase included sizable growth in the manufacturing
sector. The civilian unemployment rate fell to
5.4 percent, down appreciably from its level
at the start of the year. Growth in industrial
production picked up considerably in April
from a reduced pace earlier in the year. Retail
sales fell appreciably last month but estimates
of sales in February and March were revised
FOMC Policy Actions
substantially higher. Indicators of business
capital spending point to substantial gains
thus far this year, notably for equipment. The
nominal U.S. merchandise trade deficit in the
first quarter was substantially smaller than
that for the fourth quarter. Consumer and
producer prices have risen more rapidly
recently following a period of relatively
modest increases. Broad measures of labor
costs indicate a substantial advance in the first
quarter, in part because of a rise in payroll
taxes.
Interest rates have risen somewhat since
the Committee's meeting on March 29. The
trade-weighted foreign exchange value of the
dollar in terms of other G-10 currencies had
increased slightly on balance over the intermeeting period prior to May 17 and jumped
following release of the March trade data.
M1 and M2 grew rapidly in April, owing in
part to a buildup in transaction balances
associated with tax payments, while M3
expanded at a slower pace than in previous
months. Through April, expansion of M2 and
M3 was in the upper portion of the ranges
established by the Committee for 1988.
Expansion in total domestic nonflnancial debt
appears to be continuing at a pace close to that
in 1987.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability over time, promote
growth in output on a sustainable basis, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee at its meeting in
February established growth ranges of 4 to 8
percent for both M2 and M3, measured from
the fourth quarter of 1987 to the fourth quarter
of 1988. The monitoring range for growth in
total domestic nonflnancial debt was set at 7 to
11 percent for the year.
With respect to M1, the Committee decided
in February not to establish a specific target
for 1988. The behavior of this aggregate in
relation to economic activity and prices has
become very sensitive to changes in interest
rates, among other factors, as evidenced by
sharp swings in its velocity in recent years.
Consequently, the appropriateness of changes
in Ml this year will continue to be evaluated
in the light of the behavior of its velocity,
developments in the economy and financial
markets, and the nature of emerging price
pressures.
In the initial implementation of policy, the
Committee seeks to maintain the existing
103
degree of pressure on reserve positions.
Taking account of conditions in financial
markets, the strength of the business expansion, indications of inflationary pressures,
developments in foreign exchange markets,
and the behavior of the monetary aggregates,
the Committee expects that a slight increase in
the degree of pressure on reserve positions
would be appropriate in the weeks ahead.
Depending on further developments in these
factors, somewhat greater reserve restraint
would, or slightly lesser reserve restraint
might, also be acceptable later in the intermeeting period. The contemplated reserve conditions are expected to be consistent with growth
in M2 and M3 over the period from March
through June at annual rates of about 6 to 7
percent. The Chairman may call for Committee consultation if it appears to the Manager
for Domestic Operations that reserve conditions during the period before the next meeting
are likely to be associated with a federal funds
rate persistently outside a range of 5 to 9
percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Heller,
Johnson, and Kelley and Ms. Seger. Votes
against this action: Messrs. Hoskins and
Parry.
Messrs. Hoskins and Parry dissented
because they favored a prompt move to a
greater degree of reserve restraint. In
their view the risks were considerable
that price and wage inflation would
accelerate from rates that were already
too high. A more substantial firming was
needed to moderate underlying pressures
and to foster reasonable progress toward
price stability. In the absence of such a
move at this time, even greater tightening
might well be required later, with attendant costs to financial markets and the
economy. Mr. Hoskins noted that the M2
and M3 aggregates were near the upper
bound of their target ranges. He also
referred to the strengthening of business
activity abroad, which had implications,
potentially, for more widespread price
pressures, and to the desirability of
increasing the credibility, and thus the
104 FOMC Policy Actions
effectiveness, of monetary policy through
timely, anti-inflationary measures. He
emphasized that monetary policy should
be directed toward a steady reduction of
inflation and not toward meeting shorterterm business cycle goals. Mr. Parry
noted that the two tightening actions in
recent weeks were of insufficient magnitude to have much effect on the economy
in the context of strengthened prospects
for growth and already tight labor
markets.
Meeting Held on
June 29-30,1988
Domestic Policy Directive
The information reviewed at this meeting
suggested that economic activity was
continuing to expand at a relatively
vigorous pace, though apparently not
quite as rapidly as earlier this year.
Growth in output was being sustained by
considerable strength in manufacturing;
the latter appeared to reflect in part a
continuing improvement in the nation's
trade balance as well as ongoing expansion in domestic demands. Various measures of prices and wages suggested some
intensification of inflation in recent
months.
Growth in nonfarm payroll employment moderated somewhat in April and
May, particularly in construction, trade,
and services. However, manufacturing
employment and the average workweek
showed continued strength. In May,
household employment fell sharply and
reversed a large gain in April. The
civilian unemployment rate rose from
5.4 percent in April to 5.6 percent in
May, but it remained slightly below the
first-quarter average.
Industrial production increased considerably in April and May. Assemblies of
motor vehicles and the production of
capital goods rose substantially in both
months. The output of materials also
strengthened over the two months, but
that of non-auto consumer goods edged
down. There were widespread increases
in capacity utilization rates in April and
May. Those rates have risen to high
levels in primary processing industries.
After increasing appreciably in the
first quarter, retail sales were little
changed on balance over April and May.
Sales of durable goods edged down from
recent advanced levels, while spending
on nondurable goods extended the sluggish pattern in evidence over the previous
two quarters. Housing starts fell to an
annual rate of 1.38 million units in May,
down from a rate of approximately 1 Vi
million units over the preceding three
months. Despite the decline, data on
building permits and home sales suggested that the pace of housing activity
was little changed.
Business fixed investment also appeared to have leveled off at a high rate
recently. Outlays for structures increased
in April, particularly in the industrial
sector, but new commitments for nonresidential construction were trending down.
While new orders for nondefense capital
goods showed little change in April and
May, the latest survey data implied
further gains in capital spending over the
second half of 1988. Nonfarm inventory
investment in April remained close to its
first-quarter pace. The buildup in stocks
continued to be sizable in manufacturing
and wholesale trade and was concentrated
in industries experiencing strong domestic and foreign demand. At the retail
level, non-auto inventory investment
slowed sharply in April, while inventories of automotive products rose somewhat after declining substantially in the
first quarter.
The U.S. merchandise trade deficit
narrowed in April on a seasonally adjusted basis, essentially reflecting a decline in imports across a wide range of
FOMC Policy Actions
commodity categories. Exports fell
slightly in April after a large increase in
March. Real economic activity expanded
strongly during the first quarter in most
of the major foreign industrial countries,
but available indicators pointed to some
slowing in the second quarter, while
inflation remained subdued.
Over April and May, the consumer
price index rose at about the average pace
of the first quarter, despite a sizable
advance in retail food and energy prices.
At the producer level, prices of finished
goods continued to increase in May at the
quickened pace of the previous two
months. Prices of a broad range of
commodities, particularly agricultural
goods, increased sharply in the past few
weeks, in part because of the effects of
the drought. The rise in average hourly
earnings of private nonfarm workers
picked up significantly in April and May.
The dollar firmed considerably in foreign exchange markets from late May
through mid-June, and it subsequently
appreciated further in the days leading up
to the Committee meeting. In relation to
other G-10 currencies, the dollar finished
the period on average about 6 percent
above its level at the time of the previous
Committee meeting on May 17. Continuing improvement in the U.S. trade balance and perceptions that inflationary
pressures would be resisted with tighter
monetary policy helped to strengthen the
dollar.
At its previous meeting in May, the
Committee adopted a directive that called
initially for maintaining the existing
degree of pressure on reserve positions.
The Committee agreed that some slight
firming would be implemented after a
short interval following this meeting,
assuming that economic and financial
conditions did not diverge significantly
from the members' expectations. In particular, the conduct of open market
operations would take account of condi
105
tions in financial markets, the strength of
the business expansion, indications of
inflation, the performance of the dollar in
foreign exchange markets, and the behavior of the monetary aggregates. Later in
the intermeeting period, some added
reserve restraint would be acceptable, or
some slight lessening of reserve pressure
might be acceptable, depending on ongoing economic and financial developments. The contemplated reserve conditions were expected to be associated with
growth in M2 and M3 at annual rates of 6
to 7 percent over the period from March
to June. The members agreed that the
intermeeting range for the federal funds
rate should be raised by 1 percentage
point to a range of 5 to 9 percent.
In accordance with the Committee's
instructions, open market operations
were directed toward a slight increase in
the degree of reserve pressure starting in
the latter part of May. In the two reserve
maintenance periods ending June 15,
adjustment plus seasonal borrowing rose
to an average of $530 million. That
average included a bulge over the Memorial Day holiday in late May. The implementation of firmer reserve conditions,
interacting with market expectations of a
tighter monetary policy and some seasonal pressures in the money market,
contributed to an increase in the federal
funds rate from about 7 percent at the
time of the May meeting to around 73/s to
IVi percent by mid-June. Subsequently,
a marginal further increase was sought in
the degree of reserve restraint. This
further adjustment in open market operations was made in the context of a flow
of economic information that suggested a
continuing risk of greater inflation and a
directive that called for evaluating new
economic data with a greater readiness to
tighten than to ease. Adjustment plus
seasonal borrowing averaged about $520
million in the reserve maintenance period
ending June 29. Federal funds traded
106 FOMC Policy Actions
mostly around IVi percent during this
period but rose to around 8 percent late in
the month with the approach of the
quarterly statement date.
Most other short-term interest rates
rose by 14 to % percentage point during
the intermeeting period. In contrast, bond
yields declined by about the same amount
over the interval. Demands for long-term
debt instruments appeared to be buoyed
by improved prospects for the dollar and
by signs that the economic expansion
might be moderating toward a more
sustainable pace in the context of perceptions that monetary policy was being
tightened in a timely manner. Broad
indexes of stock prices increased appreciably on balance over the period since
mid-May.
Growth of M2 and M3 slowed substantially in May, and Ml was about unchanged. This weaker performance reflected mainly a runoff of tax-related
balances. Based on partial data through
midmonth, growth of the monetary aggregates appeared to have rebounded in
June, though it remained below that
registered earlier in the year as increases
in market interest rates in recent months
apparently began to damp demands for
money. Expansion in total domestic
nonfinancial debt thus far this year was
estimated to have moderated somewhat
from the pace in 1987.
The staff projection prepared for this
meeting suggested that the economy
would expand at a more moderate pace in
the quarters immediately ahead. Growth
in output would be held down by the
effects of the drought on agricultural
output, a decline in automobile production, and a more restrained pace of
nonfarm inventory accumulation than
was thought to have occurred in recent
months. Over the longer run, the course
of the economy would depend to an
important extent on developments in
financial markets. To the degree that
demands were strong, in a context of an
anti-inflation monetary policy, this would
show through in pressures in those markets tending to restrain domestic spending. The staff projection continued to
anticipate a sluggish pace of consumer
spending, substantially slower growth in
business fixed investment, and subdued
housing activity; it also assumed a mildly
restrictive fiscal policy. As in earlier
projections, improvement in the trade
balance was expected to contribute substantially to continuing growth in overall
economic activity. Prices and wages were
expected to rise somewhat more rapidly
in the quarters ahead because of the
continuing effects of the dollar's depreciation on prices of non-oil imports and of
reduced margins of unutilized production
resources. Increases in food prices as a
consequence of drought conditions were
also expected to contribute to inflationary
pressures over the quarters immediately
ahead.
In the Committee's discussion of the
economic situation and outlook, the
members generally agreed that some
moderation in the rate of economic
expansion was a reasonable expectation
for the next several quarters. Indeed,
although the specific rate of economic
growth that would foster achievement of
the Committee's price stability goal could
not be anticipated with any degree of
precision, the members generally agreed
that a considerably slower rate of expansion than appeared to have occurred in
the first half of 1988 would probably be
needed, given already high utilization
rates of labor and capital resources.
Views differed, however, with regard to
the likely extent of the slowing that
might already be under way. Many
members expressed concern that, in the
absence of tighter fiscal and monetary
policies, the momentum of the economy
pointed to faster growth than would be
consistent with the Committee's objective
FOMC Policy Actions
of containing inflationary pressures over
time. Some other members gave more
emphasis to recent data that seemed to
point to more moderate economic growth.
They noted that the higher interest and
exchange rates and the slower monetary
growth that had accompanied the tightening of monetary policy over the spring
would be restraining demands over coming quarters, and they saw a lesser risk of
a significant pickup in inflation. In the
view of these members, inflation remained a major concern, but additional
information was needed to assess whether
the economy was on a course that would
lead to an intensification of price
pressures.
In keeping with the usual practice at
meetings when the Committee considers
its long-run objectives for monetary
growth, the members of the Committee
and the Federal Reserve Bank presidents
not currently serving as members prepared specific projections of growth in
real and nominal GNP, the rate of unemployment, and changes in the overall
price level. With regard to rates of
expansion in real GNP, the projections
had a central tendency of 2 3A to 3 percent
for 1988 as a whole, implying a considerable slowing over the second half of the
year; for the year 1989 the central
tendency of the projections was 2 to 2*/2
percent or close to that implied for the
second half of this year. Projections of
growth in nominal GNP centered on rates
of 53A to 6% percent for 1988 and 5 to 7
percent for 1989. The projected rates of
civilian unemployment had a central
tendency of 5lA to 5% percent for the
fourth quarter of 1988 and 5V4 to 6
percent for the fourth quarter of 1989.
With respect to the rate of inflation, as
indexed by the GNP deflator, the projections centered on rates of 3 to 3 % percent
for 1988 and 3 to 4Vi percent for 1989.
The somewhat higher midpoint of the
central tendency for 1989 overstated
107
the anticipated pickup in inflation for
technical reasons, including a shift in the
composition of output that had produced
an unusually low increase in the deflator
for the first quarter of 1988. In making
these projections the members took account of the Committee's objectives for
monetary growth established at this
meeting and assumed that thefiscalpolicy
understandings reached by the Congress
and the administration in late 1987 would
be fully implemented. The members also
assumed thatfluctuationsin the exchange
value of the dollar would not be of
sufficient magnitude to affect economic
growth and inflation materially in the
period through the end of 1989.
In their review of developments bearing on the prospects for the economy, the
members generally agreed that the outlook for consumer and business spending
pointed to slower growth in domestic
final demands over the next several
quarters, but they continued to anticipate
that further improvement in the nation's
trade balance would provide a major
impetus to sustained moderate expansion
in overall economic activity. There was
uncertainty about strength of demands in
the economy from both domestic and
foreign sources. Some recent data on
consumption and investment seemed to
suggest that demands were moderating a
bit in the second quarter; moreover, the
rise in interest rates would be damping
domestic demands over coming quarters,
and the higher dollar, if it persisted,
could restrain the pace of external adjustment. In addition, money stock growth,
taking 1987 and the first half of 1988
together, had been much less rapid than
in previous years, and this suggested
some restraint in the economy. On the
other hand, the economy seemed to have
a good deal of momentum and it was far
from clear whether the slowing, if any,
would be sufficient to relieve growing
pressures on resources. Consumption
108 FOMC Policy Actions
seemed sluggish, but restrained consumer spending was needed to allow
production resources to be shifted to
sectors that competed in international
markets. Reports from the Federal Reserve Districts suggested that the improved international competitiveness of
domestic producers continued to boost
manufacturing activity and that capital
spending to expand and modernize industry would likely continue fairly robust, if
below the extraordinary pace of the first
quarter. Economic activity abroad had
been somewhat stronger than expected,
and if that pattern continued it would tend
to boost demands on U.S. exporters.
An important uncertainty in the economic outlook, at least in the view of
some members, was the prospective
performance of inventories. A somewhat
reduced rate of inventory accumulation
was desirable to prevent an excess buildup
in relation to sales, but a surge in
inventory investment could not be ruled
out. Such a development would contribute to demand pressures and would
threaten the sustainability of the expansion . Members also noted that the drought
was having an adverse impact on agriculture in several parts of the country, but its
ultimate effects on the economy were
difficult to predict. A timely improvement in moisture conditions might yet
limit that impact for many producers.
In areas unaffected by the drought,
agricultural producers were benefiting
from higher prices of agricultural
commodities.
During the Committee's discussion,
the members focused a great deal of
attention on the outlook for prices and
wages. Specific developments, such as
rising import prices and the impact of the
drought on agricultural prices, were
contributing to inflationary pressures.
However, of more fundamental concern
to members was the possibility that
aggregate demand pressures in the econ
omy might prove excessive in relation to
available labor and capital resources,
especially given the high levels of resource utilization already prevailing. By
some measures, prices had risen somewhat more rapidly in recent months,
although any associated worsening of
inflationary expectations, at least as
reflected in certain key financial markets,
appeared to have been muted, perhaps by
favorable reactions to the System's tightening moves. With regard to wages,
some members commented that recent
wage data, on the whole, had an upward
tilt. Reports from different parts of the
country suggested that labor market
conditions were relatively taut in many,
but not all, areas, but there were few
reports of substantial acceleration in rates
of wage increases. Many business executives were expressing concern, however, about their continuing ability to
restrain demands for higher wages. For
the moment, priority in labor negotiations continued to be placed on job
security issues, and many business executives, facing domestic and foreign competition, continued to emphasize measures to increase productivity and hold
down unit labor costs.
Against the background of the Committee's views regarding the economic
outlook and in keeping with the requirements of the Full Employment and Balanced Growth Act of 1978 (the Humphrey-Hawkins Act), the Committee at this
meeting reviewed the ranges for growth
in the monetary and debt aggregates that
it had established in February for 1988
and decided on tentative ranges for
growth in those measures in 1989. The
1988 ranges included growth of 4 to 8
percent for both M2 and M3 for the
period from the fourth quarter of 1987 to
the fourth quarter of 1988. A monitoring
range of 7 to 11 percent had been set for
growth in total domestic nonfinancial
debt in 1988. For the year to date,
FOMC Policy Actions
cumulative expansion of M2 and M3 had
been in the upper portion of the ranges
established by the Committee, while
expansion in nonfinancial debt had been
around the middle of its range. With
regard to M1, the Committee had decided
in February not to set a numerical target
for 1988 but to appraise the behavior of
this monetary measure in terms of its
velocity and against the background of
developments in the economy and financial markets and the nature of emerging
price pressures.
In the Committee's review of the
ranges that had been set for 1988, all of
the members found acceptable a proposal
to retain the current ranges. The Committee took account of a staff analysis that
indicated that a moderation in the growth
of M2 over the second half of 1988,
bringing M2 expansion to around the
middle of the Committee's range for the
year, was consistent with the slower
growth of income that was both expected
and desirable. The slower M2 growth
also would reflect the impact of the rise in
market interest rates in recent months in
association with an expectation that
depository institutions characteristically
would not adjust offering rates fully on
their interest-bearing deposits or would
do so only after a considerable delay.
Growth of M3 was projected to exceed
that of M2 during the remainder of 1988,
reflecting needs to finance fairly robust
credit growth at depository institutions.
Nonetheless, the growth of M3 was
projected to remain well within the
Committee's range for the year. Growth
in total domestic nonfinancial debt was
expected to remain near the middle of its
range and thus still appreciably above the
projected expansion in nominal GNP, in
part because of a widened corporate
financing gap.
With regard to the ranges in 1989, the
members generally agreed that achievement of sustained economic expansion
109
and concurrent progress toward price
stability would require that the ranges
continue to be ratcheted down over time.
However, views differed as to how much,
if any, of this reduction should be scheduled at this time for 1989—especially in
light of the uncertainty at mid-1988 as to
what economic and financial conditions
would prevail in 1989. With deposit rate
deregulation, the aggregates had become
more interest sensitive, and it had become
increasingly difficult to anticipate very
far in advance what rates of monetary
growth would be appropriate. Many
members favored a reduction of a full
percentage point in the M2 range. They
viewed such a reduction as necessary to
constrain income growth in a period when
underlying inflation pressures could remain strong and velocity could be increasing. Most other members favored a
smaller reduction, or no reduction, in the
money growth ranges. Some anticipated
that the expansion in business activity as
1989 began might well be slower than
most members currently anticipated.
Interest rates might also be lower, thereby
tending to damp velocity. Because of
uncertainty about the outlook, there was
a risk that a part, or all, of any current
reductions might have to be reversed
when the ranges were reexamined in
February, with adverse effects in terms
of the public's perception of the System's
anti-inflation resolve. In the view of these
members, the ranges could be adjusted
downward in February, when the outlook
for 1989 would be in clearer focus. On
the other hand, one member felt that a
reduction of more than 1 percentage point
in the M2 range probably would be
needed if progress was to be made in
lowering the rate of inflation in 1989.
Despite their differing preferences and in
recognition of the possibility of revisions
next February in these tentative ranges,
all but one member indicated they could
accept a reduction of a full percentage
110 FOMC Policy Actions
point in the M2 range. This would
communicate the System's intention to
restrain any tendency for inflation to
accelerate next year and, indeed, to move
over time toward price stability. In light
of the uncertainties, the Committee decided to retain the 4-point width for all
the aggregates in 1989. Consideration
would be given to narrowing the ranges
to 3 percentage points when they were
reviewed in February.
The tentative range for M3 was reduced by Vi percentage point and left
somewhat higher than that for M2.
Growth in M3 had shown a tendency to
exceed M2 growth over time and that
pattern was expected to continue. The
range for M3 had been set above that for
M2 in a number of earlier years. The
monitoring range for expansion in total
domestic nonfinancial debt also was
lowered on a tentative basis by Vi percentage point from the range for 1988. In
the economic environment projected for
1989, growth in nonfinancial debt was
believed likely to slow a bit from the
already reduced pace now expected for
all of 1988. Even so, with business loan
demands expected to remain relatively
strong, growth in nonfinancial debt would
probably continue to exceed that of
nominal GNP by a considerable margin.
The Committee again decided not to
set a specific range for Ml for 1988 or
1989. The velocity of Ml had exhibited
sharp swings in recent years. The latter
were in part the result of the increased
sensitivity of M1 tofluctuationsin market
interest rates since the deregulation of
deposit rate ceilings. The Committee
concluded that the prospective relationships between Ml and aggregate measures of economic performance remained
too uncertain to justify reliance on this
monetary aggregate as a guide for monetary policy, at least insofar as could be
judged at this point for next year. Similarly, after Committee consideration
most members preferred not to make use
of another narrow monetary measure,
the monetary base, in guiding monetary
policy. In recent years, the base had
varied less in relation to economic activity and prices than had Ml, but its
velocity had nonethelessfluctuatedsubstantially, and sometimes unpredictably,
from year to year.
At the conclusion of this discussion,
the Committee approved for inclusion in
the domestic policy directive the following paragraphs relating to its objectives
for the broader aggregates and nonfinancial debt in 1988 and the role of Ml:
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability over time, promote
growth in output on a sustainable basis, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee reaffirmed at this
meeting the ranges it had established in
February for growth of 4 to 8 percent for both
M2 and M3, measured from the fourth quarter
of 1987 to the fourth quarter of 1988. The
monitoring range for growth in total domestic
nonfinancial debt was also maintained at 7 to
11 percent for the year.
With respect to Ml, the Committee reaffirmed its decision in February not to
establish a specific target for 1988 and also
decided not to set a tentative range for 1989.
The behavior of this aggregate will continue
to be evaluated in the light of movements in its
velocity, developments in the economy and
financial markets, and the nature of emerging
price pressures.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Heller,
Hoskins, Johnson, Kelley, and Parry and
Ms. Seger. Votes against this action: None.
The following paragraph relating to
the ranges for 1989 was approved for
inclusion in the domestic policy directive:
For 1989, the Committee agreed on tentative ranges for monetary growth, measured
from the fourth quarter of 1988 to the fourth
quarter of 1989, of 3 to 7 percent for M2 and
FOMC Policy Actions
111
3 Vi to 7 Vi percent for M3. The Committee set sure sought recently might well be interthe associated monitoring range for growth in preted as a move to an easier policy once
total domestic nonfinancial debt at 6 Vi to 101/2
percent. It was understood that all these ranges the effects of seasonal pressures on
were provisional and that they would be money market interest rates subsided. In
reviewed in early 1989 in the light of interven- present circumstances such a developing developments.
ment could have an exaggerated effect on
inflationary attitudes and thus on the
Votes for this action: Messrs. Greenspan, effectiveness of monetary policy. A slight
Corrigan, Angell, Black, Forrestal, Heller,
Hoskins, Johnson, Kelley, and Parry. Vote increase in reserve pressure would help
to maintain the general thrust of policy
against this action: Ms. Seger.
and its perception by the markets; some
Ms. Seger dissented because she pre- further tightening could be assessed as
ferred to retain—at least for now—this new data, especially pertaining to inflayear's ranges of 4 to 8 percent for growth tion pressures, became available. Other
in both M2 and M3 for 1989. The eco- members preferred a somewhat greater
nomic outlook for next year remained degree of firming immediately. They
highly uncertain at this point, and she were concerned that there were substanwas concerned about reducing the ranges tial risks that the tightening actions to
so far in advance and incurring the risk of date might not be sufficient to limit the
having to reverse that decision next expansion to a noninflationary pace, and
February. Such a reversal would create some felt that an increase in the discount
unnecessary uncertainty about the con- rate might helpfully complement open
duct of monetary policy. She recognized market operations at this juncture.
that further reductions in the M2 and M3
Some members favored steady reserve
ranges might well be needed over time to conditions. They gave more emphasis to
bring inflation under control, and she the anticipated lagged effects of earlier
would be prepared to lower those ranges policy tightening actions, and most of
early next year if economic conditions these members also interpreted recent
and prospects appeared to warrant such information as indicative of some slowing
an action at that time.
in the business expansion. They also
In the course of the Committee's dis- were concerned that any firming, howcussion of policy implementation for the ever slight, would add to existing upward
period immediately ahead, considerable pressures on the dollar. The rise in the
emphasis was given by some members to dollar already suggested monetary rethe desirability of avoiding any impres- straint in the United States, and further
sion of a reversal in what was widely upward movements might work against
perceived as the thrust of policy in recent needed adjustment of external imbalmonths toward a gradual increase in the ances . Somefirmingmight well be needed
degree of restraint. Several observed that at some point and should be reflected in a
the tightening actions of recent months directive that indicated a greater willinghad had a salutary effect on financial ness to tighten than to ease in response to
markets, and, as evidenced in part by the new data. However, economic and monperformance of the bond markets, on etary indicators in this view did not point
inflation expectations. The Committee to the need for any tightening at this time.
did not contemplate any easing of policy
According to a staff analysis prepared
in the current economic environment, for this meeting, the implementation of
and some members were concerned that unchanged or slightly firmer reserve
maintaining the degree of reserve pres- conditions was likely to be associated
112
FOMC Policy Actions
with some slowing in the growth of M l
and M2 during the months ahead, largely
reflecting the impact on deposit growth
of more attractive yields on short-term
market instruments stemming from the
recent rise in market rates. Growth in M3
might be better maintained as banks and
thrift institutions continued to finance
still sizable expansion in credit demands
through issuance of managed liabilities.
In these circumstances, cumulative
growth in both M2 and M3 through
September would be expected to remain
in the upper halves of the Committee's
1988 ranges, albeit with M2 declining
toward the midpoint of its range.
With regard to possible changes in the
degree of reserve pressure during the
intermeeting period, all of the members
agreed that operations should be adjusted
more readily toward further tightening
than toward some easing. However,
those who preferred no change in the
degree of reserve restraint, at least for
now, also thought that the directive
should incorporate such a presumption
only if there were no immediate tightening. The relatively long span between
meetings and the importance of the
forthcoming data to an assessment of the
evolving economic and price outlook,
might well require consideration of intermeeting adjustments in the stance of open
market operations in coming weeks. In
addition, developments in financial markets, especially the foreign exchange
market, could have an important effect
on the timing of policy actions in the near
term, and such developments would need
to be reviewed carefully. The members
generally endorsed a suggestion to give
particular weight to incoming information bearing on the outlook for inflation
during the intermeeting period, though
the usual attention should also continue
to be given to the strength of the economic expansion, conditions in domestic and foreign exchange markets, and
the growth of the monetary aggregates.
At the conclusion of the Committee's
discussion, a majority of the members
indicated that they preferred or could
accept a directive that called for a slight
increase in the degree of pressure on
reserve positions. The members indicated that somewhat greater reserve
restraint would be acceptable, or slightly
lesser reserve restraint might be acceptable, depending on indications of inflationary pressures, the strength of the
business expansion, developments in foreign exchange and domestic financial
markets, and the behavior of the monetary aggregates. The reserve conditions
contemplated by the Committee were
expected to be consistent with growth in
M2 and M3 at annual rates of about 5Vi
and 7 percent respectively over the threemonth period from June through September. In keeping with its decision on the
longer-run ranges, the Committee decided not to indicate any expectations
regarding the growth of M l over the
months immediately ahead. The members agreed that the intermeeting range
for the federal funds rate, which provides
one mechanism for initiating consultation
of the Committee when its boundaries are
persistently exceeded, should be left
unchanged at 5 to 9 percent.
At the conclusion of the meeting the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
suggests that economic activity has continued
to expand at a fairly vigorous pace. Growth in
total nonfarm payroll employment moderated
somewhat in April and May. The civilian
unemployment rate rose to 5.6 percent in
May, a level just below its average in the first
quarter. Industrial production advanced considerably in April and May. Retail sales were
little changed on balance over the two months
after rising appreciably in the first quarter.
Available data indicate that business capital
spending has remained at the high level
FOMC Policy Actions
reached in the first quarter. Housing starts fell
sharply in May, but other indicators suggested
little change in the pace of recent housing
activity. The nominal U.S. merchandise trade
deficit declined substantially in April, as
imports dropped sharply and exports were
essentially unchanged. Most measures indicate that prices and wages have risen somewhat more rapidly in recent months. Prices of
a broad range of commodities, particularly
agricultural goods, have increased sharply in
the past few weeks.
Short-term interest rates have risen since
the Committee's meeting on May 17, while
bond yields have moved lower. The tradeweighted foreign exchange value of the dollar
in terms of the other G-10 currencies appreciated considerably over the intermeeting
period.
Expansion of M2 and M3 slowed considerably in May and Ml was about unchanged,
but data available for June suggested some
pickup in monetary growth. From a fourthquarter base, M2 and M3 have grown at rates
in the upper portion of the ranges established
by the Committee for 1988. Expansion in
total domestic nonfinancial debt for the year
thus far appears to be at a pace somewhat
below that in 1987.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability over time, promote
growth in output on a sustainable basis, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee reaffirmed at this
meeting the ranges it had established in
February for growth of 4 to 8 percent for both
M2 and M3, measured from the fourth quarter
of 1987 to the fourth quarter of 1988. The
monitoring range for growth in total domestic
nonfinancial debt was also maintained at 7 to
11 percent for the year.
For 1989, the Committee agreed on tentative ranges for monetary growth, measured
from the fourth quarter of 1988 to the fourth
quarter of 1989, of 3 to 7 percent for M2 and
3 Vi to 7 Vi percent for M3. The Committee set
the associated monitoring range for growth in
total domestic nonfinancial £ebt at 6Vi to lOVi
percent. It was understood that all these ranges
were provisional and that they would be
reviewed in early 1989 in the light of intervening developments.
With respect to Ml, the Committee reaffirmed its decision in February not to
establish a specific target for 1988 and also
113
decided not to set a tentative range for 1989.
The behavior of this aggregate will continue
to be evaluated in the light of movements in its
velocity, developments in the economy and
financial markets, and the nature of emerging
price pressures.
In the implementation of policy for the
immediate future, the Committee seeks to
increase slightly the existing degree of
pressure on reserve positions. Taking
account of indications of inflationary
pressures, the strength of the business
expansion, developments in foreign exchange and domestic financial markets, and
the behavior of the monetary aggregates,
somewhat greater reserve restraint would, or
slightly lesser reserve restraint might, be
acceptable in the intermeeting period. The
contemplated reserve conditions are
expected to be consistent with growth in M2
and M3 over the period from June through
September at annual rates of about 5 V2 and 7
percent, respectively. The Chairman may
call for Committee consultation if it appears
to the Manager for Domestic Operations that
reserve conditions during the period before
the next meeting are likely to be associated
with a federal funds rate persistently outside
a range of 5 to 9 percent.
Votes for the paragraph on short-term
policy i m p l e m e n t a t i o n : M e s s r s .
Greenspan, Corrigan, Black, Forrestal,
Heller, Hoskins, Johnson, and Parry.
Votes against: Messrs. Angell and Kelley
and Ms. Seger.
Messrs. Angell and Kelley and Ms. Seger
dissented because they preferred to direct
policy toward maintaining unchanged
conditions of reserve availability. They
did not rule out the possible need for
some firming later during the intermeeting period, subject to a review of developments by the Committee.
Mr. Angell indicated that he
supported a continued slowing in the
growth of the monetary aggregates that
was directed toward price level stability
over time. In his view, while longerrun developments in prices remained
somewhat uncertain, recent information
114 FOMC Policy Actions
from exchange rate and commodity
markets, as well as the monetary
aggregates, called for a pause in the
process of continuous tightening in order
to gain additional insight regarding the
effects of previous actions. In addition,
the dollar had been under substantial
upward pressure, which had prompted
central bank intervention. He felt that
the exchange rate objectives implied in
dollar sales would be frustrated by the
double sterilization of reserves implied
by monetary tightening. He wanted to
call attention to the cross purposes of
these actions.
Mr. Kelley noted that he had
supported firming actions over the past
several months, but he could not concur
with a decision to increase reserve
pressure further at this time. The economy, for the most part, was behaving
satisfactorily, with evidence that the rate
of growth in real activity might be
decelerating. He recognized and shared
the concern that inflation had the
potential to accelerate. However, there
was insufficient evidence at this time to
justify further tightening that might
foster undue slowing in economic
growth. He would be prepared to
support appropriate firming action later
should adequate evidence of increased
inflationary pressures emerge, taking
into account overall economic activity.
Ms. Seger emphasized that some
current business indicators already
pointed to a slower economic expansion.
Moreover, the full impact of the firming
of policy in recent months had not yet
materialized. In the circumstances and
also taking into account the strength of
the dollar and the absence of broad
indications of significant acceleration in
the rate of inflation, she believed that a
further increase in the degree of reserve
restraint represented an unwarranted
risk at this time to satisfactory economic
performance.
Meeting Held on
August 16,1988
Domestic Policy Directive
The information reviewed at this meeting
suggested that the economy was continuing to expand at a vigorous pace, with
manufacturing activity exhibiting particular strength. Some measures of price
inflation pointed to a pickup from recent
trends, and data on wages and total
compensation indicated that labor costs
were rising more rapidly.
Total nonfarm payroll employment
increased sharply further in June and
July. The rise included continuing rapid
expansion in the manufacturing sector,
and it was accompanied by an appreciable
increase in the workweek of production
workers. After declining considerably in
June, the civilian unemployment rate
edged up to 5.4 percent in July but
remained slightly below its average level
for the second quarter.
Industrial production rose strongly in
July after a sizable advance during the
second quarter. Production gains were
widespread but were especially pronounced for business equipment. Capital
utilization rates in manufacturing rose
further in June and July and were at
relatively high levels in primary processing industries.
Retail sales increased moderately further in July, and revised data indicated
somewhat higher retail sales in the second
quarter than had been estimated earlier.
Overall consumer spending in constant
dollar terms increased at about the same
moderate pace in the second quarter as it
had on average in the previous three
quarters; outlays for services and durable
goods posted strong gains in the quarter,
while spending for nondurable goods
declined.
Business fixed investment was now
indicated to have increased substantially
FOMC Policy Actions 115
further in the second quarter. Spending
for business equipment registered another sharp rise, paced by continued large
gains in outlays for computing equipment
An upturn in expenditures for nonresidential construction offset about half of the
drop in the previous quarter. With outlays
for consumer durables and business
equipment relatively robust, the accumulation of nonfarm business inventories
slowed markedly in the second quarter.
Housing starts were unchanged in the
quarter from their pace in thefirstquarter.
The U.S. merchandise trade deficit
declined considerably in the second
quarter to its lowest level in three years.
Exports of both agricultural and nonagricultural goods rose substantially while
non-oil imports fell after increasing
steadily since early 1985. Economic
activity appeared to have slowed in most
of the major foreign industrial countries
in the second quarter. The rate of inflation
had increased in some of those countries
in recent months, but it was still relatively
low.
Producer prices of finished goods,
which had increased at an accelerated
pace in the second quarter, rose appreciably further in July. The advance in July
included a substantial rise in prices of
consumer goods excluding food and
energy. The consumer price index, available for June, continued to suggest little
change in the rate of consumer price
inflation as declines in energy prices
tended to offset some acceleration in food
and other prices. The prices of some
basic commodities had softened recently,
in part because of the appreciation of the
dollar in foreign exchange markets.
Increases in most measures of labor costs
had picked up over the past several
months, with the acceleration occurring
in most broad industry and occupational
groupings.
In the foreign exchange markets, the
dollar rose somewhat further over the
period since the Committee meeting on
June 29-30. In relation to other G-10
currencies, the dollar was up about 2Vi
percent on average over the intermeeting
period. Indications of continuing improvement in the U.S. trade balance and
of some tightening in U.S. monetary
conditions contributed to the strength of
the dollar, but the rise in its exchange
value may have been tempered by perceptions that it would be resisted by official
actions.
At its meeting in late June, the
Committee adopted a directive calling
for a slight increase in the degree of
pressure on reserve positions. These
reserve conditions were expected to be
consistent with growth of M2 and M3 at
annual rates of about 5Vi percent and 7
percent respectively over the period
from June to September. The members
agreed that somewhat greater reserve
restraint would, or slightly lesser
reserve restraint might, be acceptable
depending on indications of inflationary
pressures, the strength of the business
expansion, developments in foreign
exchange and domestic financial markets, and the behavior of the monetary
aggregates. The intermeeting range for
the federal funds rate was left unchanged
at 5 to 9 percent.
Some slight firming of reserve conditions was implemented immediately after
the June meeting. In the reserve maintenance period ending in mid-July, adjustment plus seasonal borrowings jumped to
an average of $1.3 billion, reflecting a
surge in borrowings over the extended
July 4 weekend and another bulge associated with an unanticipated large upward
revision in required reserves late in that
maintenance period. In the two reserve
maintenance periods that followed, borrowings averaged close to $600 million,
somewhat above the level prior to the
June meeting. Over much of the intermeeting period, federal funds traded
116 FOMC Policy Actions
primarily in a range of 7 3A percent to 7 %
percent. In addition to the firming of
reserve conditions, market expectations
of further near-term monetary restraint
in response to the strength of incoming
economic data seemed to contribute to
the rise in the federal funds rate from its
average level in June. On August 9, the
discount rate was increased from 6 percent to 6 Vi percent and at the time of this
meeting federal funds were trading
around 8V& percent.
Against the background of continuing
strength in the economy, related concerns
about inflation, and thefirmingof monetary policy, most other interest rates rose
Vz to % percentage point over the intermeeting period; however, increases in
yields on corporate and municipal bonds
were more limited, reflecting reduced
supplies of new issues. Mortgage rates
rose marginally during the period. Banks
raised their prime lending rate from 9 to
9 Vi percent in mid-July and subsequently
to 10 percent in thefirstpart of August.
Broad indexes of stock prices were down
around 5 percent over the intermeeting
period.
Growth of the broader monetary aggregates, especially M2, slowed in July to
rates somewhat below the Committee's
expectations for the third quarter as a
whole. The weakness in M2 was concentrated in its volatile overnight RP and
Eurodollar components. Growth of retail
deposits in M2 remained considerably
less than in the first few months of the
year and apparently was damped by the
rise since early spring of market interest
rates and related opportunity costs of
holding such deposits. Ml continued to
expand rapidly in July, with strength
especially evident in other checkable deposits. Reflecting a surge in total reserves, the growth of the monetary base
accelerated in July.
In the light of recent economic developments, the staff projection prepared
for this meeting was revised to incorporate notably faster real growth in the
current quarter than had been anticipated
earlier. Nevertheless, the rate of expansion was still projected to moderate
considerably on balance over the next
several quarters. The effects of the
drought were expected to depress measured GNP growth in the second half of
the year, but those effects would be
reversed in thefirstpart of 1989. Growth
of final demand was projected to moderate somewhat over the year ahead. To the
extent that the current momentum in final
demand tended to be sustained but was
not accommodated by monetary policy,
pressures would be generated in financial
markets that would restrain domestic
spending. The staff projection continued
to anticipate relatively sluggish growth
of consumer spending, much slower
expansion of business fixed investment,
and subdued housing activity. The
strengthening of the dollar since late
spring might inhibit the improvement in
the nation's trade balance to some extent
in 1989, but continuing progress in
reducing the trade deficit was still expected to provide a key impetus to
sustained economic expansion. The rate
of inflation was projected by the staff to
increase somewhat over the next several
quarters, to an important extent because
of the effects of reduced margins of
unutilized labor and other production
resources.
In the Committee's discussion of the
economic situation and outlook, a number of members gave considerable emphasis to indications of ongoing strength
in the economic expansion and to the
implications of such growth for inflation
in the context of relatively full utilization
of labor and capital resources. Some
commented that the surprises in the
incoming economic information over the
course of recent weeks—indeed for the
year 1988 to date—had tended to be on
FOMC Policy Actions 117
the side of greater than projected strength.
Other members gave more weight to the
possibility that monetary tightening over
previous months—reflected in reduced
growth of the monetary aggregates,
higher interest and exchange rates, and
flat commodity prices—might already
have fostered a significant slowing of the
expansion and restraint on inflation. The
members generally anticipated at least
some moderation in the expansion from
the recent pace and viewed slower growth
as a desirable development in terms of
accommodating long-run anti-inflation
objectives, but they differed as to what
degree of policy restraint might be needed
to achieve a sustainable and noninflationary rate of economic expansion.
In their assessment of prospective
developments in key sectors of the economy, a number of members focused on
business fixed investment and business
inventory accumulation as areas of particular uncertainty. Growth in business
capital spending was expected to slow
substantially from its rapid pace earlier
this year, but a number of members
believed that the risks of a different
outcome were in the direction of unanticipated strength, particularly in light of
exceptionally high rates of capacity utilization in many industries. Tending to
support that view were a growing number
of reports from business contacts of plans
to expand or modernize production facilities. Business inventories currently appeared to be at generally acceptable
levels, as evidenced by inventory-tosales ratios, lead times on deliveries, and
reports from many business firms around
the country. Nonetheless, a surge in
inventory accumulation could not be
ruled out at this stage of the cyclical
expansion. Under prevailing economic
conditions, such a development might
well add to inflationary demand pressures
and could threaten the sustainability of
the business expansion itself.
Views with respect to the outlook for
consumer spending differed to some
extent, but the members generally anticipated relatively limited growth over the
next several quarters. One factor cited
was the impact of higher interest rates,
whose restraining effects on consumer
spending might be reflected more quickly
than earlier because of the increased use
of variable rates on consumer and mortgage loans. Some members commented
that relatively slow growth of consumer
expenditures would be desirable not only
to curb potentially inflationary expansion
of overall final demand but to facilitate
the allocation of more production resources to export markets. The rise in
mortgage interest rates was expected to
damp housing activity, and one member
emphasized that this effect might be quite
substantial.
With regard to the prospects for foreign trade, the members still expected net
exports to continue to improve, but the
extent of that improvement might be less
than previously anticipated, given the
appreciation of the dollar in recent
months. Indeed, some business contacts
competing in international markets or
preparing to enter such markets were
already expressing concern about the
potentially negative impact that the rise
in the dollar would have on their sales.
Turning to the outlook for inflation,
members noted with particular concern
that labor compensation costs were rising
at a faster rate this year. Several commented on increasing shortages of workers in their local and regional markets
and on more numerous reports of higher
wages to attract or retain workers. However, wage inflation did not appear to be
worsening in many areas, including some
where available workers were reported
to be in increasingly short supply. With
regard to price developments, recent
statistical indicators presented a mixed
picture. Producer prices offinishedgoods
118
FOMC Policy Actions
were rising more rapidly, and there were
reports from some parts of the country
that business firms were succeeding to a
greater extent than earlier in their efforts
to pass on rising costs or to raise profit
margins. On the other hand, sensitive
commodity prices, particularly for industrial materials, had been fairly steady and
a firmer dollar should relieve some of the
pressure on import prices. On balance,
however, most of the members thought
that the risks were on the side of greater
inflation over the quarters ahead.
At its meeting in late June, the Committee reviewed the basic policy objectives that it had set for growth of the
monetary and debt aggregates in 1988
and established tentative objectives for
expansion of those aggregates in 1989.
For the period from the fourth quarter of
1987 to the fourth quarter of 1988, the
Committee reaffirmed the ranges of 4 to 8
percent established in February for
growth of both M2 and M3. The monitoring range for expansion of total domestic
nonfinancial debt was left unchanged at 7
to 11 percent for 1988. On a cumulative
basis through July, M2 and M3 grew at
annual rates a little above the midpoints
of their annual ranges. Expansion of total
domestic nonfinancial debt appeared to
have moderated to a pace marginally
below the midpoint of its range. For 1989
the Committee agreed on tentative reductions to ranges of 3 to 7 percent for M2
and 3x/2 to IVi percent for M3. The
monitoring range for growth of total
domestic nonfinancial debt was reduced
to 6V2 to 10% percent for 1989. It was
understood that all the ranges for next
year were provisional and that they would
be reviewed in February 1989 in the light
of intervening developments. With respect to M1, the Committee reaffirmed in
June its earlier decision not to set a
specific target for growth in 1988 and
also decided not to establish a tentative
range for 1989.
During the Committee's discussion of
policy for the intermeeting period ahead,
nearly all the members indicated that
they preferred or could support a directive to maintain unchanged conditions of
reserve availability. In assessing the
desirability of such a policy, members
noted that the discount rate had been
raised only recently and, to date, financial
markets did not appear to have adjusted
fully to the increase. In the circumstances, several members expressed concern that further tightening at this time
through open market operations might
have unintended and unsettling effects on
financial markets. Moreover, under prevailing circumstances, further firming
might well foster some added strengthening of the dollar in foreign exchange
markets with undesirable repercussions
over time on progress in improving the
nation's foreign trade position. One member also noted that further tightening so
soon after the increase in the discount
rate would add to pressures for firmer
monetary policies abroad and thereby
heighten the risks of an upward ratcheting
of interest rates in financial markets
around the world.
While the members generally agreed
on the desirability of a steady policy for
the near term, many thought that some
further firming was likely to be needed,
perhaps relatively soon. These members
saw substantial risks that inflationary
pressures would intensify in the absence
of further fiscal and monetary restraint.
The economy had considerable momentum, and there already were indications
that cost pressures and some prices were
increasing more rapidly. In light of their
concerns, these members favored a directive that would permit operations during
the intermeeting period to be adjusted
more readily toward further tightening if
incoming information tended to confirm
the potential that they saw for increasing
inflationary pressures. While most of
FOMC Policy Actions
these members did not rule out the
possibility of some easing, one proposed
a directive that did not envisage any
move in that direction during the intermeeting period.
Other members, while they could
accept a directive that indicated a greater
willingness to tighten than to ease reserve
conditions, were less certain of the
potential need for further monetary restraint, especially in the near term. These
members emphasized that, when taken
together, the tightening actions over the
past several months represented, in their
judgment, a major policy move whose
restraining impact was not yet fully
reflected in the economy. In this view,
time was needed to observe the effects of
the earlier policy actions and thus to
reduce the risk that monetary policy
inadvertently might become too restrictive. Also, a cautious approach to further
tightening might be appropriate in light
of the fragilities that had developed in the
economy, including the vulnerability of
many financial intermediaries and the
exposure of many business and household borrowers and of some foreign
debtor countries to rising interest rates.
Other members, while not disagreeing
that debtor problems were a matter of
serious concern, nevertheless felt that
primary emphasis needed to be placed on
curbing any tendency for inflation to
gather momentum; such a development,
if allowed to proceed, would lead to even
higher interest rates and more severe
damage to exposed, interest-sensitive
borrowers, both in the United States and
abroad.
In the discussion of factors that might
trigger future monetary policy actions, a
number of members felt that the behavior
of the monetary aggregates should be
given more weight, although only a few
favored giving primary emphasis to these
measures. According to a staff analysis
prepared for this meeting, growth of both
119
M2 and M3 was likely to be appreciably
slower in the current quarter than had
been anticipated at the time of the previous meeting, given the rise in interest
rates that had occurred over the intermeeting period. Assuming no further increase
in interest rates, the cumulative expansion of M2 through September might be
around the midpoint of the Committee's
range for the year while that of M3 might
be only marginally above the midpoint of
its range. Growth of Ml also was expected to slow substantially from its
relatively rapid rates of expansion in
June and July. Members who wanted to
give the monetary aggregates greater
attention expressed satisfaction that monetary growth appeared to have slowed to
a pace deemed more consistent with
progress in reducing inflationary pressures and a sustainable expansion in economic activity over time. They also
observed that the behavior of M2 had
resumed a more predictable pattern over
the past several quarters in relation to
aggregate measures of economic performance. However, several members expressed the reservation that more time
was needed to assess the ongoing reliability of M2 as a guide for the conduct of
monetary policy. A number commented
that the major focus in policy implementation should continue to be on incoming
indications of inflationary pressures in
the economy.
In light of the increase that had occurred in the federal funds rate, including
the recent rise following the advance in
the discount rate, the members accepted
a proposal to raise the intermeeting range
for the federal funds rate by 1 percentage
point to a range of 6 to 10 percent. The
upward adjustment in the range was
intended to align its midpoint more
closely with the current average level of
the federal funds rate. The range for the
federal funds rate provides one mechanism for initiating consultation of the
120 FOMC Policy Actions
Committee when its boundaries are persistently exceeded.
At the conclusion of the Committee's
discussion, all but one member indicated
that they favored or could accept a
directive that called for maintaining the
current degree of pressure on reserve
positions. The members decided that
somewhat greater reserve restraint would
be acceptable, or slightly lesser reserve
restraint might be acceptable, over the
intermeeting period depending on indications of inflationary pressures, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated by the
Committee were expected to be consistent with growth of M2 and M3 at annual
rates of around V/i percent and 5Vi
percent respectively over the threemonth period from June to September.
The intermeeting range for the federal
funds rate was raised by 1 percentage
point to a range of 6 to 10 percent.
At the conclusion of the meeting, the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
suggests that economic activity has continued
to expand at a vigorous pace. Total nonfarm
payroll employment grew sharply further in
June and July. The civilian unemployment
rate in July, at 5.4 percent, was slightly below
its average level in the second quarter.
Industrial production advanced considerably
further in July. Growth in retail sales remained
moderate last month. Business capital spending has continued to grow rapidly. Some
measures of prices indicate a pickup from
recent trends and labor costs have risen more
rapidly in recent months..
Most interest rates have increased appreciably since the Committee's meeting on June
29-30. On August 9 the Federal Reserve
Board approved an increase in the discount
rate from 6 to 6V2 percent.
The nominal U.S. merchandise trade deficit
fell in the second quarter as exports continued
to rise and non-oil imports declined. Over the
intermeeting period, the trade-weighted foreign exchange value of the dollar appreciated
somewhat further in terms of the other G-10
currencies.
Expansion of M2 and to a lesser extent M3
slowed in July but growth of Ml remained
relatively strong. From a fourth-quarter base
through July, M2 and M3 have grown at rates
somewhat above the midpoints of the ranges
established by the Committee for 1988.
Expansion in total domestic nonfinancial debt
for the year thus far appears to be at a pace
somewhat below that in 1987.
The Federal Open Market Committee
seeks monetary andfinancialconditions that
will foster price stability over time, promote
growth in output on a sustainable basis, and
contribute to an improved pattern of
international transactions. In furtherance of
these objectives, the Committee at its
meeting in late June reaffirmed the ranges it
had established in February for growth of 4
to 8 percent for both M2 and M3, measured
from the fourth quarter of 1987 to the fourth
quarter of 1988. The monitoring range for
growth in total domestic nonfinancial debt
was also maintained at 7 to 11 percent for the
year.
For 1989, the Committee agreed on tentative ranges for monetary growth, measured
from the fourth quarter of 1988 to the fourth
quarter of 1989, of 3 to 7 percent for M2 and
3 Vi to 7 Vi percent for M3. The Committee set
the associated monitoring range for growth in
total domestic nonfinancial debt at 6 Vi to 10 Vi
percent. It was understood that all these ranges
were provisional and that they would be
reviewed in early 1989 in the light of intervening developments.
With respect to Ml, the Committee reaffirmed its decision in February not to establish
a specific target for 1988 and also decided not
to set a tentative range for 1989. The behavior
of this aggregate will continue to be evaluated
in the light of movements in its velocity,
developments in the economy and financial
markets, and the nature of emerging price
pressures.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of indications of inflationary pressures, the strength of
the business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
FOMC Policy Actions
markets, somewhat greater reserve restraint
would, or slightly lesser reserve restraint
might, be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with growth in
M2 and M3 over the period from June through
September
at annual rates of about Vh and
5!/2 percent, respectively. The Chairman may
call for Committee consultation if it appears
to the Manager for Domestic Operations that
reserve conditions during the period before
the next meeting are likely to be associated
with a federal funds rate persistently outside a
range of 6 to 10 percent.
121
but recent statistics, including data on
labor market activity, pointed on balance
to some slowing in the rate of economic
growth. Measures of price and wage
inflation showed little change from recent
trends, apart from the continuing upward
impetus to food prices stemming from
the drought.
Total nonfarm payroll employment
rose more slowly in July and August, but
gains in overall employment remained
sizable. After four months of strong
increases, manufacturing employment
Votes for this action: Messrs. Greenspan, fell slightly although some industries with
Corrigan, Angell, Black, Forrestal, Heller, strong domestic and export sales reJohnson, LaWare, and Parry and Ms.
Seger. Vote against this action: Mr. Hos- corded further increases. The civilian
unemployment rate edged up in July and
kins. Absent and not voting: Mr. Kelley.
rose somewhat further to 5.6 percent in
President Hoskins dissented because August, returning to its average level of
he preferred a policy that would give less the first half of the year.
Industrial production advanced someemphasis to near-term business conditions and exchange rate considerations what further in August after a sharp
and greater emphasis to the longer-term increase in July. Production gains were
objective of price stability. He viewed recorded for most categories although
the current rate of inflation as too high they generally were smaller than those in
relative to that objective and believed that July. Total industrial capacity utilization
the strength of final demand and associ- was little changed in August. Utilization
ated pressures on costs in the economy rates remained at relatively high levels in
suggested that inflation may be heading primary processing industries but slipped
higher. In the circumstances, he thought in manufacturing as a whole after four
further monetary restraint would be more months of increases.
Total retail sales were little changed on
consistent with the Committee's long-run
price stability objective and would in- balance in July and August. Outlays for
crease market confidence in the eventual durable goods declined in both months,
partly because of some slowing in unit
achievement of that objective.
sales of new automobiles. Sales of nondurable goods increased at a sluggish
pace.
Meeting Held on
Recent information on business capital
September 20,1988
spending suggested some moderation
from the very rapid growth in earlier
Domestic Policy Directive
months of the year. Real outlays for
The information reviewed at this meeting equipment continued to expand in July
suggested that the expansion of economic but at a pace well below that of the first
activity might be moderating from the half of the year as shipments of office and
vigorous pace experienced earlier in the computing equipment fell. Nonresidenyear. Information on output and spending tial construction activity apparently edged
in the third quarter was still fragmentary, higher in July despite farther contraction
122 FOMC Policy Actions
in oil drilling and in spending on industrial and commercial structures other than
office buildings. Inventory investment in
the manufacturing and wholesale sectors
in July evidently remained at about the
moderate second-quarter pace. Housing
starts rose in July, as multifamily construction rebounded from a reduced June
level, but single-family starts remained
close to the average pace of the first half
of the year. Sales of new and existing
homes retreated from their June pace,
which had been the highest in more than a
year.
The nominal U.S. merchandise trade
deficit fell appreciably further in July
from a considerably reduced secondquarter rate and was the lowest monthly
deficit since March 1985. Virtually all of
the improvement in July was due to a
reduction in imports. The total value of
exports was little changed from the June
level as a sharp reduction in exports of
automotive products about offset small
increases in most other major categories.
Economic activity in major foreign industrial countries slackened in the second
quarter, but expansion appeared to have
resumed in the current quarter.
Producer prices of finished goods,
propelled by farther substantial increases
in refinery prices for gasoline, registered
another large advance in August. At the
level of crude materials, producer food
prices were up sharply for the fourth
straight month, reflecting the continuing
effects of the drought. Consumer prices,
available for July, advanced at about the
second-quarter pace. Consumer food
prices surged again; and energy prices
rose further, mainly because of higher
gasoline prices. Excluding food and
energy items, consumer prices increased
at about the average pace of the preceding
12 months.
In the foreign exchange markets, the
trade-weighted value of the dollar
changed little on balance over the period
since the Committee meeting on August
16. Following that meeting, the dollar
remained under upward pressure until
late in the month when increases in
European official lending rates arrested
its climb. Following the softer U.S.
employment report for August, the dollar
moved lower in early September, but it
subsequently firmed in response to the
publication of the July merchandise trade
figures.
At its meeting in mid-August, the
Committee adopted a directive calling
for no change in the degree of pressure on
reserve positions. These reserve conditions were expected to be consistent with
growth of M2 and M3 at annual rates of
about 3V4 and 5V6 percent respectively
over the period from June through September. The members agreed that somewhat greater reserve restraint would, or
slightly lesser reserve restraint might, be
acceptable, depending on indications of
inflationary pressures, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets.
Reserve conditions remained essentially unchanged over the period since the
August meeting. Adjustment plus seasonal borrowing averaged just below
$600 million for the two reserve maintenance periods completed since the meeting, and federal funds primarily traded
near the SVs percent level prevailing at
the time of the meeting. In light of some
indications of more moderate economic
expansion, most other market interest
rates declined lA to 3/s percentage point
over the intermeeting period. Broad
indexes of stock prices were up 1 to 3
percent.
Growth of the broader monetary aggregates slowed again in August. The slower
expansion of M2 was concentrated in its
liquid deposit components and probably
continued to reflect the rise since early
FOMC Policy Actions
spring of market interest rates and related
opportunity costs of holding such deposits. Growth of Ml fell sharply in
August, as total transaction deposits
declined slightly. Reflecting a contraction
in total reserves, growth of the monetary
base slowed markedly in August.
The staff projection prepared for this
meeting incorporated somewhat slower
growth of economic activity in the current
quarter than had been projected earlier,
largely reflecting the recent softening in
the data on employment. The rate of
expansion through the end of 1989 was
expected to remain on balance below the
pace in recent quarters, with the drought
likely to contribute to an uneven quarterly
pattern of growth. To the extent that
monetary policy did not accommodate
any tendency for growth in final demand
to be sustained at a pace that threatened
more inflation, pressures would be generated in financial markets that would
restrain domestic spending. The staff
continued to project relatively limited
growth of consumer spending, considerably reduced expansion of business fixed
investment, and sluggish housing activity. The foreign sector was still expected
to make a major contribution to domestic
economic growth, even though progress
in reducing the trade deficit was thought
likely to be slower than in recent quarters.
The staff also anticipated some continuing cost pressures over the next several
quarters, reflecting the effects of rising
import prices and especially of reduced
margins of unutilized labor and other
production resources.
In the Committee's discussion of the
economic situation and outlook, members noted that the recent indications of
some moderation in the rate of economic
growth tended to reinforce their expectations of a reduced rate of economic
expansion through next year. The members welcomed the signs of somewhat
slower economic growth, given the risks
123
of higher inflation. A number were
concerned that the apparent slowing
might prove to be only a temporary pause
in a generally strong expansion or to be
inadequate to avert an intensification of
inflationary pressures without further
monetary restraint. Others, while noting
the still tentative nature of the incoming
data, interpreted recent developments in
financial markets as well as the real economy as suggesting a greater likelihood
that policy had tightened sufficiently to
put the economy on a desirable course
toward moderate growth that would
prove compatible over time with the
achievement of the Committee's antiinflationary objectives.
In the Committee's discussion of factors bearing on the economic outlook, a
number of members emphasized that, on
the whole, indicators of economic activity continued to suggest appreciable
momentum in the expansion. Recent
growth of payroll employment, while
below the average pace of the first half of
the year, was still substantial. Capital
spending exhibited few signs of weakening following a period of rapid expansion,
and sizable profits augured for continuing
growth. Likewise, new orders, notably
for exports, were holding up well, and
some greater inventory investment was
seen as a reasonable prospect, given
current low inventory-to-sales ratios. A
number of members also referred to
continuing evidence of a high level of
business activity in many parts of the
country. Indeed, in some areas and
industries, growth was being constrained
by a limited availability of labor and
other production resources. At the same
time, members noted that economic
performance remained uneven across the
country, depending on the mix of local
industries, and a few signs of moderation
could be observed even in areas that were
characterized by strong local economies.
Retail sales were lackluster in a number
124 FOMC Policy Actions
of areas, and the drought was having a
mixed impact on agriculture. The
drought's adverse effects in some parts of
the country contrasted with income gains
in other areas where producers experiencing more normal crop yields were benefitting from higher prices. On balance,
local conditions appeared consistent with
expectations of somewhat slower growth
in domestic demand.
Members continued to anticipate further improvement in the nation's trade
balance over the next several quarters.
That view was bolstered by local reports
of strength in export demands for a wide
variety of products and indications of
gains in domestic market shares by firms
in the United States. The prospective
improvement in net exports was not likely
to be as strong as in recent quarters,
however, reflecting the lagged effects of
the rise in the exchange value of the
dollar over the course of recent months.
With regard to the outlook for inflation, members generally emphasized that
the risks remained on the side of an
intensification of inflationary demand
pressures. Some favorable developments
that had tended to dampen inflation, such
as declining oil prices and a rising dollar,
might well be reversed. More fundamentally, given current utilization rates of
labor and other production resources, the
economy was probably near the point
where expansion at a rate somewhat
above the economy's trend growth potential could result in greater pressures on
wages and prices. Other members saw
lessriskof more inflation, particularly in
the context of what they viewed as the
moderating growth of the economy and
the appreciable tightening of monetary
policy over the past several months.
Consistent with this view, some noted
that inflationary expectations appeared to
have eased as evidenced, for example, by
the performance of long-term debt markets and the behavior of the dollar in
foreign exchange markets. Moreover,
industrial commodity prices had been
relatively stable for an extended period.
Reports from contacts around the nation
did not suggest much change recently in
local price and wage developments.
Capacity constraints and labor shortages
in some industries and areas continued to
be a source of inflationary pressures, but
there were few reports of outsized increases in prices or wages. Indeed, some
members noted that prices had tended to
level out or to rise more slowly in a
number of industries and indications of
faster increases in wages were limited.
At its meeting in late June the Committee reviewed the basic policy objectives
that it had set for growth of the monetary
and debt aggregates in 1988, and it
established tentative objectives for expansion of those aggregates in 1989. For the
period from the fourth quarter of 1987 to
the fourth quarterof 1988, the Committee
reaffirmed the ranges of 4 to 8 percent set
in February for growth of both M2 and
M3. The monitoring range for expansion
of total domestic nonfinancial debt in
1988 was left unchanged from its February specification of 7 to 11 percent. On a
cumulative basis through August, M2
had grown at an annual rate slightly
above, and M3 at a rate more noticeably
above, the midpoints of their annual
ranges. Expansion of total domestic
nonfinancial debt appeared to have moderated to a pace marginally below the
midpoint of its range. For 1989 the
Committee agreed on tentative reductions to ranges of 3 to 7 percent for M2
and 3V4 to IVi percent for M3. The
monitoring range for growth of total
domestic nonfinancial debt was lowered
to 6Vi to \0Vi percent for 1989. It was
understood that all the ranges for next
year were provisional and that they would
be reviewed in February 1989 in the light
of intervening developments. With respect to M1, the Committee reaffirmed in
FOMC Policy Actions 125
June its earlier decision not to set a
specific target for growth in 1988 and it
also decided not to establish a tentative
range for 1989.
In the Committee's discussion of policy
implementation for the weeks immediately ahead, all of the members agreed on
a proposal calling for an unchanged
policy stance pending an evaluation of
further economic developments. Those
who perceived the risks in the economic
outlook as still decidedly on the side of
continued strong demand and greater
inflationary pressures saw enough uncertainties in the current economic situation
to warrant a pause in the policy firming
process. Others were less persuaded that
inflationary pressures would intensify,
especially given the degree of policy
restraint that already had been implemented over the past several months. It
was noted that additional firming at this
time could have undesirable repercussions on the dollar in foreign exchange
markets and on the financial condition of
many already troubled depository institutions. Some members expressed concern
that a marked weakening in the economy,
which would become a greater risk if
policy were tightened further, would
disrupt the urgent task of reducing the
federal budget deficit.
In their consideration of a desirable
policy for the near term, the members
took account of a staff analysis, which
suggested that monetary expansion was
likely to remain relatively damped in
coming months. This outlook assumed a
continuing lagged adjustment of offering
rates on retail deposits to earlier increases
in market interest rates.
With regard to possible adjustments in
the degree of reserve pressure during the
intermeeting period, all of the members
indicated that the balance of risks in the
economy was such that they favored or
could accept a directive that would more
readily accommodate a move toward
firming than an adjustment toward easing
in the weeks ahead. Some commented
that near-term developments were not
likely to call for a policy change in this
period, while others saw a greater likelihood that intermeeting developments
would point to the desirability of some
firming. The potential need for some
easing was viewed as remote.
At the conclusion of the Committee's
discussion, all of the members approved
a directive that called for maintaining the
current degree of pressure on reserve
positions. The members decided that
somewhat greater reserve restraint would
be acceptable, or slightly lesser reserve
restraint might be acceptable, over the
intermeeting period, depending on indications of inflationary pressures, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated by the
Committee were expected to be consistent with growth of M2 and M3 at annual
rates of about 3 percent and 5 percent
respectively over the four-month period
from August to December. The members
agreed that the intermeeting range for the
federal funds rate, which provides one
mechanism for initiating consultation of
the Committee when its boundaries are
persistently exceeded, should be left
unchanged at 6 to 10 percent.
At the conclusion of the meeting, the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
suggests that the expansion in economic
activity may be moderating from the vigorous
pace earlier in the year. Total nonfarm payroll
employment grew more slowly in July and
August, though the increases in the two
months were still sizable. The civilian unemployment rate rose to 5.6 percent in August.
Industrial production advanced slightly fur-
126 FOMC Policy Actions
ther in August after a sharp increase in July.
Retail sales were flat in July and August.
Recent indicators of business capital spending
suggest some moderation ftom the especially
rapid growth in earlier months of the year.
Preliminary data for the nominal U.S. merchandise trade deficit in July showed some
further reduction from the improved secondquarter rate. The latest information on prices
suggests little if any change from recent
trends.
Most interest rates have declined somewhat
since the Committee meeting on August 16.
Over the intermeeting period, the tradeweighted foreign exchange value of the dollar
in terms of the other G-10 currencies was
about unchanged on balance.
Expansion of M2 and M3 moderated further in August. For the year through August,
M2 has grown at a rate slightly above, and M3
at a rate more noticeably above, the midpoints
of the ranges established by the Committee
for 1988. Ml was unchanged in August after
registering relatively strong growth in June
and July. Expansion of total domestic nonfinancial debt for the year thus far appears to be
at a pace somewhat below that in 1987.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability over time, promote
growth in output on a sustainable basis, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee at its meeting in
late June reaffirmed the ranges it had established in February for growth of 4 to 8 percent
for both M2 and M3, measured from the
fourth quarter of 1987 to the fourth quarter of
1988. The monitoring range for growth of
total domestic nonfinancial debt was also
maintained at 7 to 11 percent for the year.
For 1989, the Committee agreed on tentative ranges for monetary growth, measured
from the fourth quarter of 1988 to the fourth
quarter of 1989, of 3 to 7 percent for M2 and
3 Vi to 7 Vi percent for M3. The Committee set
the associated monitoring range for growth of
total domestic nonfinancial debt at 6 Vi to 10 Vi
percent. It was understood that all these ranges
were provisional and that they would be
reviewed in early 1989 in the light of intervening developments.
With respect to Ml, the Committee reaffirmed its decision in February not to establish
a specific target for 1988 and also decided not
to set a tentative range for 1989. The behavior
of this aggregate will continue to be evaluated
in the light of movements in its velocity,
developments in the economy and financial
markets, and the nature of emerging price
pressures.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of indications of inflationary pressures, the strength of
the business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, somewhat greater reserve restraint
would, or slightly lesser reserve restraint
might, be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with growth of
M2 and M3 over the period from August
through December at annual rates of about 3
and 5 percent, respectively. The Chairman
may call for Committee consultation if it
appears to the Manager for Domestic Operations that reserve conditions during the period
before the next meeting are likely to be
associated with a federal funds rate persistently outside a range of 6 to 10 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Heller,
Hoskins, Johnson, Kelley, LaWare, and
Parry and Ms. Seger. Votes against this
action: None.
Meeting Held on
November 1,1988
1. Domestic Policy Directive
The information reviewed at this meeting
indicated that the expansion in economic
activity had moderated from the vigorous
pace evident earlier in the year. Private
domestic final demand grew at an appreciably slower pace in the third quarter
than in the first half of the year; and other
recent statistics, including data on labor
market activity, also suggested some
slowing in the rate of economic expansion. Information on wage and price
developments gave no clear evidence on
balance of any change in underlying
inflation trends.
FOMC Policy Actions
Total nonfarm payroll employment
increased considerably in the third quarter, but the gains were less than those
registered in the first half. In August and
September, hiring in all major sectors
except government moderated, and employment in manufacturing declined.
Despite this broad-based slowing in the
growth of private payrolls, the civilian
unemployment rate fell to 5.4 percent in
September and has remained in a narrow
range around 5Vi percent since early
spring.
Industrial production increased only
slightly on balance in August and September after a strong surge earlier in the
summer. Output of business equipment
continued to advance fairly rapidly while
production of consumer goods was sluggish. Total industrial capacity utilization
declined slightly in September but was
still more than xh percent above the
relatively high second-quarter level.
Overall consumer spending in constant
dollar terms increased substantially on
average in the third quarter, as outlays
for services and nondurable goods
strengthened while purchases of durables
were little changed. However, retail sales
weakened in August and September,
owing partly to reduced sales of motor
vehicles.
Indicators of business capital spending
in the third quarter suggested a considerably reduced rate of expansion compared
with the first half of the year. Growth of
real outlays for business equipment
slowed sharply, as investment in
information-processing equipment decelerated. Nonresidential construction activity was weak in thefirsttwo months of the
quarter, with oil drilling and expenditures
on commercial and industrial structures
other than office buildings contracting
further. Inventory investment in the
manufacturing and wholesale sectors
picked up in July and August, but stocks
accumulated about in line with the growth
127
of sales. Retail inventories, reflecting
little further change in stocks at auto
dealers after a sharp rise in the second
quarter, increased much less rapidly.
Housing construction had been flat in
recent months; the third-quarter pace of
starts of single-family homes was unchanged from that of the previous quarter
while multifamily starts edged down.
Preliminary data for the nominal U.S.
merchandise trade deficit in August
showed a larger deficit than in July. However, the average for July and August was
slightly lower than the second-quarter
rate as exports increased more than
imports. Most of the rise in exports was
in nonagricultural goods, particularly
capital goods and consumer durables;
increased imports of consumer goods
and food outweighed a slight reduction in
the value of purchases of imported oil.
Economic activity in the major foreign
industrial economies appeared to have
rebounded somewhat in the third quarter,
following a pronounced slackening in the
second quarter.
Reflecting a decline in gasoline prices
at the refinery level, producer prices of
finished goods registered a smaller advance in September than in August; however, for the third quarter as a whole,
these prices rose more rapidly than during
the first half of the year. At the crude
materials level, producer food prices
continued to rise sharply. Consumer
prices increased at a somewhat slower
rate in September as declines in energy
prices outweighed the passthrough to the
retail level of higher wholesale food
prices. Excluding food and energy items,
consumer prices on a year-over-year
basis continued to rise at about the AVi
percent annual rate evident since late
1987. Most measures of labor costs
indicated some slowing in the rate of
increase over the summer months, after a
sharp upward movement in the second
half of 1987 and early 1988.
128 FOMC Policy Actions
In the foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies had
declined from its high level of last
summer by the time of the previous
Committee meeting on September 20.
Following the meeting, the dollar initially
fluctuated in a narrow range but later
declined appreciably in response to indications of more moderate U.S. economic
growth and to information suggesting a
slower U.S. external adjustment than the
markets had anticipated earlier.
At its meeting on September 20, the
Committee adopted a directive calling
for no change in the degree of pressure on
reserve positions. These reserve conditions were expected to be consistent with
growth of M2 and M3 at annual rates of
about 3 and 5 percent respectively over
the period from August to December.
The members agreed that somewhat
greater reserve restraint would, or
slightly lesser reserve restraint might, be
acceptable depending on indications of
inflationary pressures, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets.
Adjustment plus seasonal borrowing
fluctuated over a sizable range during the
intermeeting period, averaging about
$630 million in the two complete reserve
maintenance periods since the September
meeting. The federal funds rate rose
somewhat, with funds trading around 8 lA
percent and sometimes higher over most
of the intermeeting period. Most other
short-term interest rates edged higher,
perhaps reflecting the firmer federal
funds rate as well as increased supplies of
Treasury bills and CDs. Interest rates in
long-term debt markets declined a little
further as indications of more moderate
economic expansion and weak energy
prices apparently reduced concerns about
inflation and buoyed expectations that
money market conditions would not be
tightened substantially further. Lower
bond yields apparently contributed to
higher equity prices; some broad indexes
of stock prices had risen about 3 percent
since the September meeting.
Expansion of M2 slowed further in
September, and preliminary data suggested that growth remained quite weak
in October as earlier increases in market
interest rates and opportunity costs continued to damp demands for liquid deposit components. By contrast, after slow
growth in August and September, M3
appeared to have strengthened somewhat
in October, in association with a resumption in growth of bank credit. After
registering relatively strong expansion in
June and July, Ml had increased only
slightly on balance in recent months,
with total transactions deposits falling
marginally.
The staff projection prepared for this
meeting suggested that growth of the
nonfarm sector of the economy in the
current quarter might be near the reduced
pace of the third quarter and that expansion in 1989 was likely to remain, on
balance, well below the pace of the first
half of 1988. The effects of the drought
would continue to be reflected in an
uneven quarterly pattern of growth of
GNP, notably through the first half of
next year. To the extent that expansion of
final demand at a pace that could foster
higher inflation was not accommodated
by monetary policy, pressures would be
generated infinancialmarkets that would
restrain domestic spending. The staff
projection, which assumed a slightly
restrictive fiscal policy, continued to
indicate relatively sluggish growth of
consumer spending, sharply reduced
expansion of business fixed investment
from the pace in thefirsthalf of 1988, and
restrained housing activity. As in earlier
projections, the external sector was
expected to contribute importantly to
FOMC Policy Actions
domestic economic growth. The staff
now anticipated some marginal easing in
aggregate price increases in 1989, in
large part because recent declines in
crude oil prices portended lower energy
prices more generally. However, any
decline in inflation would be limited,
largely because of continuing pressures
stemming from still strong demands
pressing against reduced margins of
unutilized labor and other production
resources.
In the Committee's discussion of the
economic situation and outlook, members welcomed the apparent moderation
in the expansion of economic activity
toward a pace that might prove to be
more sustainable and consistent with
progress over time toward price stability.
Continuing expansion, but at a more
moderate pace than that experienced in
the first half of 1988, was viewed as a
reasonable expectation, partly in light of
the monetary policy tightening that already had been implemented this year.
There was no evidence of emerging
imbalances in key sectors of the economy
that might bring the expansion to an end,
although the outlook remained clouded
by the nation's outsized trade and federal
budget deficits and thefinancialproblems
or debt exposure of a number of depository institutions and business firms. In
the view of many of the members, the
risks of deviations from current expectations continued to be in the direction of
greater inflationary pressures. Other
members, while concerned about the
potential for inflation, felt that the economy already appeared to be on a track
consistent with no pickup in inflation and
perhaps some improvement next year.
In the course of the Committee's discussion, members noted that despite signs
of some slowing in recent months, the
expansion in business activity retained
appreciable momentum as evidenced, for
example, by order backlogs, ongoing
129
strength in business capital spending,
and noteworthy improvement in the
agricultural sector. Further improvement
in the nation's trade balance also appeared
likely, and while the gains might be more
limited than in recent quarters, they
would help to sustain domestic manufacturing activity. Consumer spending might
be supported to some extent by gains in
real incomes stemming from reduced
energy prices. By most measures, business inventories appeared to be relatively
lean and, assuming continued moderate
growth in overall final demand, further
inventory accumulation might provide a
modest fillip to the expansion over the
year ahead. On the other hand, members
also took note of the relatively sluggish
performance of retail sales recently,
notably of durable goods, and the continuing weakness of construction activity,
including housing. A review of local
business conditions continued to indicate
an uneven pattern of regional activity,
but on balance local developments tended
to confirm broader indications of further,
though reduced, growth in overall business activity.
With regard to the outlook for inflation, a critical issue in the view of many
members was whether overall demand
conditions in the economy would be
consistent with containing or reducing
inflation. A number of members expressed concern that underlying pressures on resources remained strong and
that the possibility of greater inflation
constituted the major current threat to
sustained economic expansion. One observed that the uncertainties in the outlook for inflation were compounded by
the prospect that, with production resources at or close to full capacity, even
small differences in demand pressures
could have a disproportionate effect on
the actual rate of inflation next year.
However, some members commented
that, on the whole, price and wage
130 FOMC Policy Actions
developments were more favorable than With respect to Ml, the Committee
might have been anticipated at current reaffirmed in June its earlier decision not
rates of capacity utilization. Recent to set a specific target for growth in 1988
reports from around the nation suggested and it also decided not to establish a
that inflation was not worsening in re- tentative range for 1989.
gional markets, including parts of the
In the Committee's discussion of policy
country where business activity remained implementation for the period immedirelatively robust. Indeed, there were ately ahead, the members generally
indications that prices of some business agreed that the current relatively balproducts previously in short supply now anced performance of the economy and
were showing some tendency to level off, the uncertainties surrounding the outlook
and there was little or no evidence of argued for an unchanged policy at this
faster increases in wages. Moreover, point. Some commented that the apparent
recent developments infinancialmarkets strength of underlying inflationary pressuggested some lessening of inflationary sures might require further monetary
expectations, although the latter re- restraint later, but for now they favored
mained volatile.
or could accept a steady policy course.
At its meeting in late June, the Com- Other members were more persuaded
mittee reviewed the basic policy objec- that, in the context of the recent evidence
tives that it had set for growth of the of slower economic growth, monetary
monetary and debt aggregates in 1988, policy already appeared to be on a course
and it established tentative objectives for that would promote progress in reducing
expansion of those aggregates in 1989. inflation. From the perspective of the
For the period from the fourth quarter of growth of the monetary aggregates and
1987 to the fourth quarter of 1988, the reserve as well as interest rate developCommittee reaffirmed the ranges of 4 to 8 ments, monetary policy had been fairly
percent set in February for growth of restrictive for some months and further
both M2 and M3. The monitoring range restraint needed to be approached with
for expansion of total domestic nonfinan- some caution. At the same time, memcial debt in 1988 was left unchanged from bers stressed the continuing need to
its February specification of 7 to 11 sustain the System's commitment to its
percent. For the year to date, M2 had long-run objective of controlling inflagrown at an annual rate somewhat below, tion, including the desirability of making
and M3 at a rate somewhat above, the clear that the current rate of inflation was
midpoints of their annual ranges. Expan- unacceptable.
sion of total domestic nonfinancial debt
In the course of the Committee's disappeared to have moderated to a pace cussion, the members took account of a
marginally below the midpoint of its staff analysis that concluded that the
range. For 1989 the Committee agreed maintenance of unchanged reserve conon tentative reductions to ranges of 3 to 7 ditions was likely to be associated with
percent for M2 and 3 Vi to 7 Vi percent for relatively slow monetary growth over the
M3. The monitoring range for growth of balance of the year. Some pickup in the
total domestic nonfinancial debt was growth of M2 and M3 was anticipated
lowered to 6Vi to lOVi percent for 1989. from the very sluggish performance of
It was understood that all the ranges for September and October, but further
next year were provisional and that they adjustments of asset portfolios to previwould be reviewed in February 1989 in ous increases in interest rates and opporthe light of intervening developments. tunity costs were likely to limit the rise.
FOMC Policy Actions
In addition, reductions in compensating
balances in response to earlier increases
in market interest rates were expected to
be more pronounced late in the year,
though such adjustments would have their
major impact on Ml growth. Concurrently, expansion of M3 and, to a lesser
degree, M2 might be buttressed to some
extent as banks undertook to secure funds
to underwrite a perhaps substantial portion of the initial cash needed to finance
the recent surge in merger and buyout
activities. Although members observed
that any easing of reserve conditions to
stimulate monetary growth would not be
desirable at this point, some indicated
that they would become increasingly
concerned if very weak monetary growth
were to persist in the context of sluggish
expansion in economic activity.
With regard to possible adjustments in
the degree of reserve pressure in the
intermeeting period, a majority of the
members believed that operations should
be adjusted more readily toward further
tightening than toward any easing. Some
indicated that they viewed the incorporation of such an understanding as a
key element of an acceptable directive,
given their assessment of the inflationary
risks in the economic outlook. Most of
the other members indicated that they
could accept such a directive, although
they were less inclined than they had
been previously to bias it toward further
restraint; in this view, the direction of
any potential adjustment in policy implementation was less certain than earlier,
given the recent performance of the
economy and behavior of the monetary
aggregates. One member felt that the
risks of some further weakness in the
economy were sufficiently strong that a
continued bias toward possible tightening
during the intermeeting period was not
acceptable.
At the conclusion of the Committee's
discussion, all but one member indicated
131
that they favored or could accept a
directive that called for maintaining the
current degree of pressure on reserve
conditions and that provided for remaining especially alert to potential developments that might require some firming
during the intermeeting period. Accordingly, somewhat greater reserve restraint
would be acceptable, or slightly lesser
reserve restraint might be acceptable,
over the intermeeting period depending
on indications of inflationary pressures,
the strength of the business expansion,
the behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated by the
Committee were expected to be consistent with growth of M2 and M3 at annual
rates of around 2 Vi percent and 6 percent
respectively over the three-month period
from September to December. The intermeeting range for the federal funds rate,
which provides one mechanism for initiating consultation of the Committee when
its boundaries are persistently exceeded,
was left unchanged at 6 to 10 percent.
At the conclusion of the meeting, the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
indicates that the expansion in economic
activity has moderated from the vigorous
pace earlier in the year. Total nonfarm payroll
employment grew considerably in the third
quarter but the gains were less than those
registered in the first half of the year and
employment in manufacturing declined in
August and September. The civilian unemployment rate fell to 5.4 percent in September,
remaining in the narrow range that has
prevailed since early spring. Industrial production advanced only slightly on balance in
August and September after a sharp increase
in July, while housing construction has been
flat in recent months. Consumer spending
increased substantially on average in the third
quarter but apparently slowed in recent
months. Indicators of business capital spend-
132 FOMC Policy Actions
ing suggest considerably slower expansion in
the third quarter, following very rapid growth
in the first half of the year. Preliminary data
for the nominal U.S. merchandise trade deficit
in August showed a greater deficit than in
July, but the average for July-August was
slightly less than the second-quarter rate. The
latest information on prices and wages suggests little if any change from recent trends.
Interest rates in long-term debt markets
have declined a little further since the Committee meeting on September 20, while rates
in short-term markets have edged higher. The
trade-weighted foreign exchange value of the
dollar in terms of the other G-10 currencies
declined appreciably over the intermeeting
period from the high level of last summer.
Expansion of M2 has slowed considerably
in recent months; growth of M3 moderated in
August and September but appears to have
strengthened somewhat in October. Thus far
this year, M2 has grown at a rate somewhat
below, and M3 at a rate somewhat above, the
midpoint of the ranges established by the
Committee for 1988. Ml has increased only
slightly on balance in recent months after
registering relatively strong growth in June
and July. Expansion of total domestic nonfinancial debt for the year thus far appears to be
at a pace somewhat below that in 1987.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability over time, promote
growth in output on a sustainable basis, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee at its meeting in
late June reaffirmed the ranges it had established in February for growth of 4 to 8 percent
for both M2 and M3, measured from the
fourth quarter of 1987 to the fourth quarter of
1988. The monitoring range for growth of
total domestic nonfinancial debt was also
maintained at 7 to 11 percent for the year.
For 1989, the Committee agreed on tentative ranges for monetary growth, measured
from the fourth quarter of 1988 to the fourth
quarter of 1989, of 3 to 7 percent for M2 and
3 Vi to 7 Vi percent for M3. The Committee set
the associated monitoring range for growth of
total domestic nonfinancial debt at 6 Vi to 10 Vi
percent. It was understood that all these ranges
were provisional and that they would be
reviewed in early 1989 in the light of intervening developments.
With respect to Ml, the Committee reaffirmed its decision in February not to
establish a specific target for 1988 and also
decided not to set a tentative range for 1989.
The behavior of this aggregate will continue
to be evaluated in the light of movements in its
velocity, developments in the economy and
financial markets, and the nature of emerging
price pressures.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of indications of inflationary pressures, the strength of
the business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, somewhat greater reserve restraint
would, or slightly lesser reserve restraint
might, be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with growth of
M2 and M3 over the period from September
through December at annual rates of about
2Vi and 6 percent, respectively. The Chairman may call for Committee consultation if it
appears to the Manager for Domestic Operations that reserve conditions during the period
before the next meeting are likely to be
associated with a federal funds rate persistently outside a range of 6 to 10 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Heller,
Hoskins, Johnson, Kelley, LaWare, and
Parry. Vote against this action: Ms. Seger.
Ms. Seger indicated that while an
unchanged policy was acceptable to her
at this point, she did not want to bias the
directive toward potential tightening. In
her view current indications of slower
economic growth and the lagged effects
of earlier policy tightening actions pointed
to relatively slow expansion and reduced
inflationary pressures over the year
ahead. In these circumstances, she would
not want to react more promptly or
vigorously to indications of greater
strength or price pressures in the economy, which might well prove to be
temporary, than to evidence of a weakening economy.
In the period following the Committee
meeting on November 1, it became
FOMC Policy Actions
increasingly evident in the implementation of policy that depository institutions
had reduced their demands on the discount window; in this period, a significantly lower level of adjustment plus
seasonal borrowing was being associated
with a slightly higher federal funds rate
than had been anticipated at the time of
the meeting. To take account of this
change in behavior, but also in light of
recent information suggesting that the
economic expansion retained considerable strength, the Manager for Domestic
Operations adjusted the reserve paths to
incorporate a lower level of borrowing,
with the expectation that federal funds
would continue to trade in the slightly
higher range that had prevailed recently.
This adjustment in open market operations was discussed with the Committee
on November 22, 1988. The members
agreed that the factors relating to the
apparent change in the relationship between borrowing and the federal funds
rate, and the broader implications for the
conduct of open market operations, would
be reviewed further at the December
meeting.
2. Authorization for Domestic
Open Market Operations
Effective November 2, 1988, the Committee approved a temporary increase of
$4 billion, to $10 billion, in the limit
between Committee meetings on changes
in System Account holdings of U.S.
government and federal agency securities
that is specified in paragraph l(a) of the
Authorization for Domestic Open Market
Operations. The increase was effective
for the intermeeting period ending with
the close of business on December 14,
1988.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Heller,
133
Hoskins, Johnson, Kelley, LaWare, and
Parry and Ms. Seger. Votes against this
action: None.
This action was taken on the recommendation of the Manager for Domestic
Operations. The Manager had advised
that the usual leeway of $6 billion for
changes in System Account holdings
would probably not be sufficient over the
intermeeting period because of seasonal
increases in currency in circulation and
in required reserves.
3. Change in Terms of Certain
Members to Calendar-Year Basis
The Committee amended its "Rules of
Organization" to advance from March 1
to January 1 of each year the start of the
terms of office of the Federal Reserve
Bank presidents who serve one-year
terms as Committee members or alternate
members. The change will be effective
starting with the calendar year 1990.
Because the Committee's objectives for
monetary growth are established on a
calendar-year basis, the Committee believed that it would be appropriate to
have all the members responsible for
carrying out those objectives during the
year participate in the vote to establish
them at the start of the year. The Committee emphasized that this change was
essentially procedural in nature, given
the continuity of its decisionmaking
process. The Full Employment and Balanced Growth Act of 1978 requires that
the Committee's monetary growth objectives for the calendar year be transmitted
to the Congress by February 20 of each
year.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Heller,
Hoskins, Johnson, Kelley, LaWare, and
Parry and Ms. Seger. Votes against this
action: None.
134 FOMC Policy Actions
Meeting Held on
December 13-14,1988
Domestic Policy Directive
Information on employment and production reviewed at this meeting suggested
that, apart from the direct effects of the
drought, economic activity had continued
to expand at a vigorous pace although
some measures of demand, available on a
less current basis, still indicated more
moderate growth. Recent price data
showed a fairly stable inflation rate,
partly because of the favorable effects of
earlier oil price declines, while labor cost
measures continued to indicate some
acceleration from a year earlier.
Total nonfarm payroll employment
rose sharply in October and November.
Following declines in late summer, gains
in manufacturing employment were large
in both months, with particularly sizable
increases recorded in the machinery,
electrical equipment, and lumber industries. Employment in service industries
picked up significantly in November from
the reduced pace of expansion in previous
months. The civilian unemployment rate
edged up to 5.4 percent in November but
remained in the lower part of the narrow
range that had prevailed since early
spring.
Industrial production advanced considerably further in October and November
after a strong third quarter. Output of
consumer goods continued to increase,
on balance, at a fairly vigorous pace, and
production of materials posted another
solid gain in November. Output of business equipment also increased in November, but revised data indicated that such
growth had moderated appreciably in
recent months. Total industrial capacity
utilization edged up further in November, and the operating rate in manufacturing reached its highest level since July
1979.
Growth of overall consumer spending
had moderated somewhat in recent
months. Spending for nondurables had
been sluggish in September and October,
while outlays for durable goods had
declined, mainly because of reduced
purchases of cars. On the other hand,
preliminary data for total retail sales in
November indicated a strong advance
following a large, upward-revised increase in October.
Indicators of business capital spending
suggested a substantially slower rate of
expansion in October than earlier in the
year. Shipments of nondefense capital
goods were little changed, reflecting a
fairly broad-based deceleration. Nonresidential construction edged down a little
further, as petroleum drilling fell again
and expenditures on commercial structures other than office buildings declined.
Inventory investment in the manufacturing and wholesale sectors in the third
quarter remained about in line with the
growth of sales. In the retail sector, a
buildup in inventories in the third quarter
largely reflected additions to stocks by
auto dealers; the expansion of nonauto
stocks remained broadly in line with
sales. Housing starts strengthened in
October after changing little on balance
over the previous several months.
Excluding food and energy, producer
prices of finished goods were unchanged
in October after a sizable increase in
September. At the consumer level, retail
food prices eased in October and energy
prices were little changed, but prices of
other goods and services increased faster
on balance than in preceding months.
On a year-over-year basis, consumer
prices continued to rise at about the 4x/2
percent annual rate evident since late
1987. The limited data available for
labor costs in the fourth quarter
suggested that increases in these costs
continued to exceed those of a year
earlier.
FOMC Policy Actions
Preliminary data for the nominal U.S.
merchandise trade deficit in October
showed a slightly smaller deficit than in
September. The value of total imports
fell, with declines recorded in capital
goods, consumer goods, and oil. Exports
also declined in October owing to lower
agricultural sales abroad. Boosted by
higher aircraft shipments, nonagricultural exports were unchanged from their
September level. Economic activity accelerated or remained strong in most of
the major foreign industrial countries in
the third quarter but appeared to have
slowed somewhat in the fourth quarter.
In the foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies had
declined about 2lh percent on balance
over the period since the Committee
meeting on November 1, bringing it to a
level 8 percent below its peak of last
August. Following a brief respite in the
week before the U. S. elections, the dollar
was under downward pressure over most
of the intermeeting period. However, the
dollar firmed somewhat near the end of
the period, as prospects were seen to be
increasing for further reductions in the
federal deficit and a tightening of monetary policy.
At its meeting on November 1, the
Committee adopted a directive calling
for no immediate change in the degree of
pressure on reserve positions. These
reserve conditions were expected to be
consistent with growth of M2 and M3 at
annual rates of about 2Vi and 6 percent
respectively over the period from September to December. The members agreed
that somewhat greater reserve restraint
would, or slightly lesser reserve restraint
might, be acceptable depending on indications of inflationary pressures, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets.
135
In the course of implementing policy
following the November meeting, it
became increasingly evident that a
slightly higher federal funds rate than
that anticipated at the time of the meeting
was associated with a substantially lower
volume of adjustment plus seasonal borrowing; for reasons that remained unclear, depository institutions exhibited a
reduced willingness to come to the discount window. To take account of this
change in borrowing behavior, and
against a backdrop of recent information
suggesting that the economic expansion
retained considerable vigor and potential
for price pressures, the Manager for
Domestic Operations adjusted the reserve
paths on November 22 to incorporate a
lower level of borrowings, with the
expectation that federal funds would
continue trading in the slightly higher
range that had prevailed recently. Over
the intermeeting period, the federal funds
rate rose nearly lA percentage point to
around 8J/2 percent. Other short-term
market interest rates generally advanced
by more than the federal funds rate over
the intermeeting period, as expectations
of a tighter monetary policy were stimulated by higher world oil prices, renewed
weakness of the dollar, and the release of
strong domestic economic data. The
prime rate was increased 50 basis points.
Rates in long-term debt markets also rose
on balance, although by appreciably less
than short-term rates. Stock prices fell
over the first half of the intermeeting
period, but most indexes rebounded
subsequently to nearly their values at the
time of the November 1 meeting.
Growth of the broader monetary aggregates strengthened in November from the
relatively sluggish rates of expansion
recorded in previous months, especially
for M2. The acceleration in M2 reflected
strong expansion in its liquid retail
components. M3 growth picked up somewhat less, as bank credit growth and
136 FOMC Policy Actions
associated funding needs remained moderate . On average in October and November, growth of M2 had been somewhat
faster, and that of M3 slightly faster, than
the Committee expected at the time of the
previous meeting. With demand deposits
running off again, Ml, which had increased only slightly on balance since
midsummer, was virtually unchanged in
November.
The staff projection prepared for this
meeting suggested that, after adjustment
for the effects of the drought, economic
growth in the current quarter might be
near the vigorous pace of the third quarter
but that expansion in 1989 was likely to
moderate on balance. However, to the
extent that expansion of final demand at a
pace that could foster higher inflation
was not accommodated by monetary
policy, pressures would be generated in
financial markets that would tend to
restrain domestic spending. The staff
continued to project some slowing in the
growth of consumer spending, sharply
reduced expansion of business fixed
investment, and sluggish housing activity. Foreign trade was expected to make
an important contribution to growth in
domestic output, despite some damping
effects from the dollar appreciation that
had occurred earlier in 1988 and somewhat slower growth abroad. The staff
also anticipated some continuing cost
pressures over the next several quarters,
especially owing to reduced margins of
unutilized labor and other production
resources.
In the Committee's discussion- of the
economic situation and outlook, the
members focused on indications of continuing strength in the economic expansion. While some signs of prospective
slowing in the expansion remained in
evidence, recent data on employment
and production suggested that the economy retained considerable momentum.
A number of members commented that
business activity had remained more
robust than had seemed likely earlier,
and many expressed concern that continued expansion at a relatively rapid pace
raised the risk that inflation would intensify, given already high rates of capacity
utilization in many industries and tight
labor markets in many parts of the
country. On balance, while somewhat
more moderate growth continued to be
viewed as a reasonable expectation for
1989, most members interpreted recent
developments as suggesting that, in the
absence of some added policy restraint,
any moderation in the expansion might
well prove to be insufficient to forestall a
pickup in inflation, much less to permit
progress to be made in reducing inflation
over time. At the same time, some
members cautioned that the risk of a
recession stemming from a substantial
tightening of policy should not be overlooked; in addition to job and output
losses, a recession could impede progress
in bringing the federal budget into balance and could have severe repercussions
on the viability of highly leveraged borrowers and many depository institutions.
In their review of developments bearing on the economic outlook, members
took account of indications that overall
domestic demands were being well maintained, including some recent strength in
retail sales, and that exports remained on
a clear uptrend. High levels of activity
continued to characterize business conditions in many areas. Manufacturing was
benefiting from growing export markets
and the substitution of domestic products
for higher-priced imports; moreover,
many domestic producers had not yet
exploited potential markets abroad. There
were indications of some softening in
business fixed investment, including a
moderation of growth in outlays for
equipment and reduced construction
activity in a number of areas, notably
those most affected by weak energy
FOMC Policy Actions 137
markets and previous overbuilding.
Nonetheless, business contacts suggested
that overall investment spending would
continue to benefit from ongoing efforts
in many industries to modernize or
expand production facilities. With regard
to housing construction, members reported somewhat depressed conditions in
a number of areas, but the latest statistics
for the nation as a whole were on the firm
side of recent trends.
In the course of the Committee's discussion, members gave a good deal of
attention to the outlook for inflation. On
the positive side, inflationary expectations did not appear to be worsening, as
evidenced for example by the stability of
long-term bond markets, and strong
competitive pressures were encouraging
business firms to persist in their efforts to
hold down costs. Such competition continued to make it difficult for many
businesses to pass on increasing costs
through higher prices and tended to
harden business resistance to demands
for higher wages. With regard to labor
costs, reports from local areas suggested
that non wage components were rising at
a faster rate than wages but that large
increases in the latter still were infrequent
despite some shortages of labor.
While the members saw no clear
evidence in current aggregate measures
of prices that the overall rate of inflation
was worsening, key indicators of labor
compensation suggested some uptrend
and many members commented that the
risks were in the direction of greater
inflation, given the apparent growth of
the economy at a pace above its long-run
potential together with the relatively full
employment of production resources.
These risks would be heightened if the
dollar were to decline significantly from
current levels. Commodity prices appeared to have leveled off, but they
showed little sign of reversing earlier
increases, which themselves might not
yet have been passed through fully to
consumer prices. Of particular concern
was the prospect that, in the absence of a
timely move to restraint, greater inflation
would become embedded in the economy, especially in the labor-cost structure. A new wage-price spiral would then
be very difficult to avoid and the critical
task of bringing inflation under control
would be prolonged and much more
disruptive. A worsening of inflationary
pressures and inflation expectations, if
unchecked, eventually would foster
higher interest rates and would lead to
growing imbalances and distortions in
the economy and almost certainly to a
downturn at some point in overall economic activity.
At its meeting in late June, the Committee reviewed its basic policy objectives for growth of the monetary and debt
aggregates in 1988 and established tentative objectives for expansion of those
aggregates in 1989. For the period from
the fourth quarter of 1987 to the fourth
quarter of 1988, the Committee reaffirmed the ranges of 4 to 8 percent that it
had set in February for growth of both
M2 and M3. The monitoring range for
expansion of total domestic nonfinancial
debt in 1988 was left unchanged from its
February specification of 7 to 11 percent.
For the year through November, M2
grew at an annual rate a little below, and
M3 at a rate a little above, the midpoint of
their annual ranges. Expansion of total
domestic nonfinancial debt appeared to
have moderated to a pace somewhat
below the midpoint of its range. For 1989
the Committee agreed in June on tentative
reductions to ranges of 3 to 7 percent for
M2 and 3% to IVi percent for M3. The
monitoring range for growth of total
domestic nonfinancial debt was lowered
to 6V2 to 10V4 percent for 1989. It was
understood that all the ranges for next
year were provisional and that they would
be reviewed in February 1989 in the light
138 FOMC Policy Actions
of intervening developments. With respect to Ml, the Committee reaffirmed in
June its earlier decision not to set a
specific target for growth in 1988, and it
also decided not to establish a tentative
range for 1989.
In the Committee's discussion of policy
for the near term, nearly all the members
supported a proposal mat called for an
immediate increase in the degree of
reserve pressure to be followed by some
further tightening at the start of 1989
unless incoming evidence on the behavior
of prices, the performance of the economy, or conditions in financial markets
differed greatly from current expectations. The appropriate degree of reserve
restraint also would be reevaluated in the
event of an increase in the discount rate.
While the members recognized that the
degree of monetary restraint could be
overdone, they generally felt that the
risks of a downturn stemming from the
limited tightening under consideration
were extremely small and needed to be
accepted in light of what they perceived
as the much greater threat of a recession
if inflation were allowed to intensify.
Expressing a differing view, one member
commented that further restraint was
undesirable in light of that member's
expectation that economic growth over
the next several quarters was likely to be
at a pace consistent with progress against
inflation.
While all but one member agreed on
the need for some further monetary
restraint, views differed to some extent
with regard to the appropriate degree and
timing of such restraint. A number of
members indicated a preference for a
stronger immediate move to greater
restraint, given their perception of the
urgency of countering inflation expectations and inflationary pressures in the
economy. Other members did not disagree that inflation was a serious problem, but they preferred a more gradual
approach to further restraint in order to
minimize potential market disturbances,
especially around the year-end, and to
facilitate adjustments to rising interest
rates. It also was suggested that more
marked tightening at this time could have
the unintended effect of fostering an
escalation of interest rates in world
markets, with especially undesirable
effects on many less developed debtor
nations.
In the discussion of adjustments in the
provision of reserves through open market operations, many members commented on how a possible increase in the
discount rate might interact with such
operations. Several favored the implementation of a tighter policy through the
discount rate in order to signal more
clearly than through a gradual tightening
of reserve conditions the System's ongoing commitment to an anti-inflationary
policy. Other members expressed concern that, under immediately prevailing
circumstances, an increase in the discount rate might have exaggerated repercussions on domestic and international
financial markets. The Committee concluded that in the event of an increase in
the discount rate during the intermeeting
period the members would need to consult regarding the implications for the
conduct of open market operations.
In the course of the Committee's discussion, the members took account of a
staff analysis, which suggested that monetary growth was likely to remain relatively restrained in the months immediately ahead, especially if reserve
conditions were tightened. An increase
in the degree of reserve restraint in line
with that contemplated by the Committee
would reduce growth of M2 somewhat
from its recent pace, assuming a typically
delayed adjustment in deposit rates to
rising short-term market interest rates,
while growth of M3 would continue at a
somewhat higher rate than that of M2.
FOMC Policy Actions
Several members observed that restrained monetary growth would continue to be desirable, and some expressed
concern that in the absence of some
tightening of reserve conditions such
growth might accelerate, with inflationary implications under foreseeable economic conditions. On the other hand, in
light of the limited growth in the monetary
base and reserves in the past several
months, some other members cautioned
that sharp additional restraint on reserve
provision could have an undesirably
restraining effect on monetary growth
and the economy.
With regard to the proposed move
toward further monetary restraint shortly
after the year-end, it was understood that
such firming would be implemented
unless emerging economic and financial
conditions were to differ markedly from
current expectations. Should unanticipated developments of that kind occur or
should the Board of Governors approve
an increase in the discount rate during the
intermeeting period, the Chairman would
call for a special consultation of the
Committee. On the question of any
additional adjustment in policy, the members generally agreed that policy implementation should remain especially alert
to incoming information that might call
for further firming beyond that already
contemplated. In light of the tightening
of reserve conditions after today's meeting and the presumption that some further
monetary restraint would be implemented later during the intermeeting
period, the members decided to raise the
intermeeting range for the federal funds
rate by 1 percentage point to 7 to 11
percent. With such an increase, federal
funds would be expected to trade at rates
averaging closer to the middle of the
range. That range provides one mechanism for initiating consultation of the
Committee when its boundaries are persistently exceeded.
139
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they favored or could
accept a directive that called for some
immediate firming of reserve conditions,
with some further tightening to be implemented at the start of 1989, assuming that
economic and financial conditions remained reasonably consistent with current expectations. In keeping with the
Committee's usual approach to policy,
the conduct of open market operations
would be subject to further adjustment
during the intermeeting period based on
indications of inflationary pressures, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. Depending on such developments, some added
reserve restraint would be acceptable, or
some slight lessening of reserve pressure
might be acceptable. The reserve conditions contemplated at this meeting were
expected to be consistent with growth of
M2 and M3 at annual rates of around 3
percent and 6 Vi percent respectively over
the four-month period from November
1988 to March 1989.
At the conclusion of the meeting, the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
suggests that, apart from the direct effects of
the drought, economic activity has continued
to expand at a vigorous pace. Total nonfarm
payroll employment rose sharply in October
and November, with sizable increases indicated in manufacturing after declines in late
summer. The civilian unemployment rate, at
5.4 percent in November, remained in the
lower part of the range that has prevailed
since early spring. Industrial production
advanced considerably in October and November. Housing starts turned up in October
after changing little on balance over the
previous several months. Growth in consumer
spending has been somewhat more moderate
140 FOMC Policy Actions
in recent months, and indicators of business
capital spending suggest a substantially slower
rate of expansion than earlier in the year. The
nominal U.S. merchandise trade deficit narrowed further in the third quarter. Preliminary
data for October indicate a small decline from
the revised deficit for September. The latest
information on prices and wages suggests
little if any change from recent trends.
Interest rates haverisensince the Committee meeting on November 1, with appreciable
increases occurring in short-term markets. In
foreign exchange markets, the trade-weighted
value of the dollar in terms of the other G-10
currencies declined significantly further on
balance over the intermeeting period.
Expansion of M2 and M3 strengthened in
November from relatively slow rates of
growth in previous months, especially in the
case of M2. Thus far this year, M2 has grown
at a rate a little below, and M3 at a rate a little
above, the midpoint of the ranges established
by the Committee for 1988. Ml has increased
only slightly on balance over the past several
months, bringing growth so far this year to 4
percent. Expansion of total domestic nonfinancial debt for the year thus far appears to be
at a pace somewhat below that in 1987 and
around the midpoint of the Committee's
monitoring range for 1988.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability over time, promote
growth in output on a sustainable basis, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee at its meeting in
late June reaffirmed the ranges it had established in February for growth of 4 to 8 percent
for both M2 and M3, measured from the
fourth quarter of 1987 to the fourth quarter of
1988. The monitoring range for growth of
total domestic nonfinancial debt was also
maintained at 7 to 11 percent for the year.
For 1989, the Committee agreed on tentative ranges for monetary growth, measured
from the fourth quarter of 1988 to the fourth
quarter of 1989, of 3 to 7 percent for M2 and
3 Vi to 7 Vi percent for M3. The Committee set
the associated monitoring range for growth of
total domestic nonfinancial debt at 6 Vi to 10 Vi
percent. It was understood that all these ranges
were provisional and that they would be
reviewed in early 1989 in the light of intervening developments.
With respect to Ml, the Committee reaffirmed its decision in February not to
establish a specific target for 1988 and also
decided not to set a tentative range for 1989.
The behavior of this aggregate will continue
to be evaluated in the light of movements in its
velocity, developments in the economy and
financial markets, and the nature of emerging
price pressures.
In the implementation of policy for the
immediate future, the Committee seeks to
increase somewhat the existing degree of
pressure on reserve positions. Taking account
of indications of inflationary pressures, the
strength of the business expansion, the behavior of the monetary aggregates, and developments in foreign exchange and domestic
financial markets, somewhat greater reserve
restraint would, or slightly lesser reserve
restraint might, be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with growth
of M2 and M3 over the period from November
through March at annual rates of about 3 and
6lh percent, respectively. The Chairman may
call for Committee consultation if it appears
to the Manager for Domestic Operations that
reserve conditions during the period before
the next meeting are likely to be associated
with a federal funds rate persistently outside a
range of 7 to 11 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal,
Heller, Hoskins, Johnson, Kelley,
LaWare, and Parry. Vote against this
action: Ms. Seger.
Ms. Seger dissented because she
viewed current business indicators as
already pointing on balance to slower
economic expansion, and in the circumstances she did not feel that any added
monetary restraint was needed to foster
economic conditions consistent with
progress in reducing inflationary pressures. In the context of already restrained
monetary growth, she was concerned
that a further increase in the degree of
reserve pressure would pose unnecessary
risks to interest-sensitive sectors of the
economy and ultimately to the sustainability of the expansion itself. She expressed particular concern that the higher
interest rates implied by greater monetary
FOMC Policy Actions
restraint would aggravate the condition
of financially troubled thrift institutions.
At this meeting the Committee reviewed its current procedure for implementing open market operations against
the background of a marked change over
recent months in the relationship between
the level of adjustment plus seasonal
borrowing and the federal funds rate.
The current procedure of focusing on the
degree of reserve restraint, as indexed by
borrowed reserves, had been implemented with some flexibility in recent
weeks in light of the substantial shortfall
of borrowing in relation to expectations.
The policy results had been satisfactory,
but some members proposed that consideration be given to focusing more directly
on the federal funds rate in carrying out
open market operations, particularly if
uncertainty about the borrowing-federal
funds relationship were to persist. Others
felt that despite its drawbacks, the current
procedure had a number of advantages,
including that of allowing greater scope
for market forces to determine shortterm interest rates. The Committee concluded that no changes in the current
procedure were needed at this time, but
thatflexibilitywould remain important in
accomplishing Committee objectives under changing circumstances.
•
141
143
Consumer and Community Affairs
In 1988 the Federal Reserve Board used
its rulewriting and enforcement authority
to maintain statutory protections for
consumers while easing regulatory burdens. This chapter examines the activities
of the Federal Reserve System in support
of those goals.
Regulatory Matters
The Board issued Regulation CC to carry
out the Expedited Funds Availability Act
and revised Regulation C to implement
statutory amendments that expanded the
coverage of the Home Mortgage Disclosure Act and made the law permanent.
The Board also proposed amendments to
Regulation Z to implement the Fair
Credit and Charge Card Disclosure Act
of 1988, which provides that credit and
charge card issuers must give consumers
information about their plans earlier than
currently required. In addition, the Board
prepared regulations concerning home
equity lines of credit to implement the
Home Equity Loan Consumer Protection
Act of 1988. In other matters, the Board
reviewed the paperwork burden associated with several regulations in keeping
with the Paperwork Reduction Act and
issued four new publications for consumers: one to explain the provisions of the
Expedited Funds Availability Act and a
set of three pamphlets to clarify the
mortgage-application process.
Regulation CC
(Expedited Funds Availability)
In May the Board issued Regulation CC,
effective September 1, 1988, to implement the Expedited Funds Availability
Act. The act and regulation address
delayed access to deposits and require,
among other things, that depository
institutions make funds deposited into
accounts available within specified time
periods. Banks and other depository
institutions must give next-day availability, subject to certain conditions, for
electronic payments, Treasury checks,
postal money orders, state and local
government checks, and checks written
on the same institution where the check is
being deposited. For next-day availability, deposits may have to be made in
person to a teller or the depositor may
have to use a special deposit slip made
available by the institution.
The period within which institutions
must make other check deposits available
for withdrawal depends on whether a
check is considered local or nonlocal in
relation to the institution where it was
deposited. A local check is one deposited
in an institution located in the same Federal Reserve check processing region as
the institution on which the check was
written. In the case of a nonlocal check,
the two institutions are located in different processing regions.
Funds must be made available by the
third business day after deposit for local
checks and by the seventh day after deposit for nonlocal checks. After September 1,1990, these deposits must be made
available sooner: by the second business
day for local checks and by the fifth
business day for nonlocal checks.
Institutions may invoke exceptions to
the time periods in the law when handling
new accounts, redeposited checks, emergency conditions, deposits exceeding
$5,000 in any one day, accounts that have
been repeatedly overdrawn, and checks
that the institution has reasonable cause
144 Consumer and Community Affairs
to believe will not be paid. In such cases
the institution must notify the customer
of the longer delay and indicate when the
funds will be available.
Regulation CC requires depository
institutions to disclose their specific
policies on funds availability and to notify
customers of a change in policy. An
institution must give disclosures to new
customers before opening an account and
to anyone who asks for the information.
A brief notice is required at all locations
where an institution's employees accept
deposits, at automated teller machines,
and on all deposit slips printed with the
customer's name and account number.
Regulation CC includes model forms and
clauses to help institutions make the
required disclosures. To facilitate compliance, the Board in June released a
Special Notice summarizing the requirements of the regulation.
In September the Board issued a pamphlet for consumers that explains the
provisions of the act, "Making Deposits:
When Will Your Money Be Available?"
It outlines the availability schedule by
type of deposit, lists the circumstances
under which an institution may delay
customers' funds beyond the normal
limits, states the disclosure requirements,
demonstrates endorsement procedures,
and provides information on how to
resolve errors.
To qualify for an exemption, the state
must have a law that protects consumers
at least as well as the corresponding
federal provision. In the case of California, the Board granted the exemption
after determining that the law with respect to a special notice given to cosigners
is substantially equivalent to the federal
law and that the state administers and
enforces its laws effectively.
Regulation C
(Home Mortgage Disclosure)
In August the Board revised Regulation
C to incorporate amendments to the
Home Mortgage Disclosure Act. The act
applies to institutions with more than $10
million in assets and offices in metropolitan areas; it requires disclosure, and a
geographic listing, of originations and
purchases of home mortgage and home
improvement loans.
The amendments, enacted by the Congress in February 1988, expand the
coverage of the act to mortgage-banking
subsidiaries of bank and thrift-institution
holding companies and to savings and
loan service corporations that originate
or purchase mortgage loans. The act
previously applied only to depository
institutions and their majority-owned
subsidiaries. The newly covered institutions will report data for loan originations
and purchases made after August 19,
1988, in keeping with an amendment
adopted by the Congress in November
Regulation AA
1988. Without that amendment, institu(Credit Practices Rule)
tions would have been required to report
In July the Board granted a request from data for the entire calendar year.
Following an in-depth review through
the State of California for an exemption
from the cosigner provisions of Regula- the Board's Regulatory Review Section,
tion AA (Credit Practices Rule) for state- the Board revised the text of Regulation
chartered institutions. That rule prohibits C to improve its clarity and expanded
banks from using certain remedies to the instructions for the reporting form.
enforce consumer credit obligations and These changes should make it easier for
from "pyramiding" late charges; it also financial institutions to comply with the
regulation.
affords special protections to cosigners.
Consumer and Community Affairs
The Board also amended the regulation
to require that institutions disclose loan
data related to the purchase or improvement of mobile and manufactured homes.
Until now, such loans were reported only
if these dwellings were treated as real
estate under state law. This change
became effective January 1, 1989.
Regulation B
(Equal Credit Opportunity)
In November the Board determined that
the Equal Credit Opportunity Act
(ECOA) and Regulation B preempt a
portion of New York law because of the
latter's inconsistency with the federal
law. ECOA and Regulation B prohibit
discrimination in any credit transaction
on the basis of race, color, national
origin, and other specified characteristics
of the applicant. But to allow creditors to
target a segment of the population that
finds it difficult to obtain credit, such as
an ethnic minority, the act and regulation
allow creditors to offer special-purpose
credit and to consider one or more
characteristics of applicants for such
credit (such as race or national origin).
Because creditors under New York law
could in no circumstance take any of the
specified characteristics into account,
they were in effect barred from offering
special-purpose credit programs. As of
November 11, 1988, the state of New
York may not prohibit special-purpose
credit programs or related inquiries that
are permissible under federal law.
The Women's Business Ownership Act
of 1988, signed into law in October,
amends ECOA requirements applicable
to business credit transactions. Although
business credit has always been covered
by ECOA and Regulation B, the regulatory requirements for retaining records
and for notice of adverse action have
differed from those applicable to consumer credit. The amendments will re
145
quire creditors to keep records of a
business application for at least one year
and to notify business credit applicants,
in writing, that they are entitled to a
statement of reasons when they are turned
down for credit. The Board will issue
proposed amendments to Regulation B in
early 1989. The changed requirements
will take effect when the revisions to
Regulation B are published in final form.
Regulation Z
(Truth in Lending):
Adjustable-Rate Mortgages
A revision to Regulation Z regarding
disclosures for adjustable-rate mortgages (ARMs) became effective in
October. The amendment, adopted in
December 1987, requires creditors to
give consumers more detailed information about the variable-rate feature of
closed-end mortgages with maturities
longer than one year. The amendment,
which applies to mortgages secured by
the consumer's principal dwelling,
requires creditors to give a description
of the terms of the mortgage. The
amendment also requires creditors to
give borrowers historical data on
changes in the index to show the
potential effect on monthly payments.
ARM disclosures must be given when
the consumer gets an application form
or before the consumer pays a nonrefundable fee, whichever is earlier.
An educational booklet describing
the characteristics and risks related
to ARMs must accompany these
disclosures.
To provide guidance to creditors about
the required ARM disclosures, the Board
in September published a special update
to the staff commentary. This official
commentary applies to, and interprets,
the requirements of Regulaption Z and is
a substitute for individual interpretations.
146 Consumer and Community Affairs
Regulation Z:
Credit Card Disclosures
In December the Board proposed to
amend Regulation Z to require that
consumers be given earlier disclosures
about credit and charge card plans.
Under the proposed amendments, which
implement the Fair Credit and Charge
Card Disclosure Act, issuers that offer
cards to consumers by direct-mail
solicitation must disclose the annual
percentage rate, annual fees, transaction
charges, grace periods, and the method
used to calculate the balance on which
the finance charge is computed.
Previously, these disclosures could be
made later, when the card was issued.
Special rules will apply to disclosures in
telephone solicitations and to application
forms placed in retail establishments and
in magazines.
Card issuers that charge fees for renewing an account must notify the consumer
at least 30 days before the renewal
payment is due. The notice must include
the date when the card will expire if not
renewed by the consumer; the cost (including membership fees) for continued
use of the card; and information on how
the consumer may close the account and
avoid paying any fees.
The proposed changes also address
credit insurance. A card issuer that
changes insurance providers must give
cardholders advance notice and the opportunity to cancel the insurance. The
card issuer also must inform consumers
of any increase in rate or substantial
decrease in coverage that may result from
the change.
Regulation Z:
Home Equity Lines of Credit
The Home Equity Loan Consumer Protection Act of 1988, signed into law in
November, adds extensive requirements
for disclosures to be given at the time
consumers receive an application form
for home equity lines of credit and revises
the rules for advertising such credit. The
law further mandates certain consumer
protections applicable to these programs.
For example, it limits a creditor's ability
to terminate the line of credit and accelerate any outstanding balance or to
change the terms once a plan has been
opened. The Board will issue proposed
amendments to the regulation in early
1989.
The Board is also preparing a pamphlet
for consumers that describes the features
of home equity lines of credit, how they
work, and how they compare with other
types of credit programs. This pamphlet,
or one substantially similar, must be
given to consumers along with creditors'
disclosures.
Regulation Z:
Determination of Preemption
In February the Board determined that
federal law preempts a provision of
an Indiana statute that is inconsistent
with the disclosure requirements of
Regulation Z. Indiana law requires loan
brokers to give disclosures to potential
borrowers and mandates that their fees
and charges be included in calculating the finance charge and annual
percentage rate. Under Regulation Z,
charges for services provided by third
parties, such as loan brokers, are not
finance charges if the creditor does not
require the services or does not retain
the fees. The Board preempted the
Indiana provision because it uses the
same wording as that used in the federal
law to refer to the disclosure of an
amount that is different from the amount
to be disclosed under federal law. The
preemption took effect on October 1,
1988.
Consumer and Community Affairs 147
The bulk of the disclosures imposed by
the Board's regulations are mandated by,
In 1988 the Board continued to offer legal or are needed to carry out the intent of,
interpretations and guidance through the underlying legislation. The requireupdates to the official staff commentaries ments were already reduced significantly
on Regulation B (Equal Credit Opportu- in recent years through the Board's own
nity), Regulation E (Electronic Fund regulatory review program and through
Transfers), and Regulation Z (Truth in previous reviews for paperwork reducLending). These commentaries, pub- tion. Following the latest review, the
lished by April 1 each year, help financial Board concluded that few opportunities
institutions and others apply the regula- exist for further reducing the paperwork
tions to specific situations.
burden in the absence of congressional
The Board published an update, effec- action.
tive August 1, to its staff guidelines on the
Credit Practices Rule. The guidelines
answer questions from banks about the Community Affairs
rule and are updated periodically.
The Community Affairs Program of the
Federal Reserve System took a major
step in 1988 when the presidents of the 12
Mortgage Brochures
Reserve Banks formally established a
In response to a congressional request, Community Affairs subcommittee within
the Federal Reserve Board and the Fed- their Conference of Presidents. The
eral Home Loan Bank Board in June subcommittee will keep the presidents
published three brochures to improve informed of current issues relating to
consumer understanding of the mortgage community development and the Comapplication process. These brochures— munity Reinvestment Act.
A major focus of the Community
on refinancings, lock-ins, and closing
Affairs
Program, described by the Board
costs—were prepared in consultation
with trade and consumer groups and with at hearings in March before the Senate
Committee on Banking, Housing and
other government agencies.
Urban Affairs, is to develop expertise in
safe, sound, and thoughtful community
development lending and then to share
Reduction of Paperwork Burden
that expertise with member banks and
In May the Board reviewed the paper- others. During the year, staff members of
work burden associated with five regula- the Community Affairs Program kept
tions —Regulation BB (Community Rein- themselves up to date on the latest
vestment), Regulation Z (Truth in strategies and programs (such as tax
Lending), Regulation E (Electronic Fund credits for low-income housing and the
Transfers), Regulation B (Equal Credit use of new secondary market entities and
Opportunity), and Regulation M (Con- techniques) by attending more than 125
sumer Leasing)—and one statute, the seminars and workshops. The CommuRight to Financial Privacy Act. As re- nity Affairs Officers from the Reserve
quired by the Office of Management and Banks and staff members from the Board
Budget under the Paperwork Reduction also took part in week-long training
Act, the Board conducts these reviews sessions on methods that can help lenders
periodically for the possible reduction of and community members form productive partnerships.
regulatory requirements.
Interpretations
148 Consumer and Community Affairs
The Reserve Banks conducted 78
educational programs, many of them in
conjunction with the Federal Home Loan
Banks, the Department of Housing and
Urban Development, and the Small Business Administration. Partnerships between banks and their communities, of
the types explored at these conferences,
are needed to address adequately the
country's economic development. Many
banks—from small and rural communities as well as from more metropolitan
areas—have responded in a positive way
to the information provided by the Reserve Banks' Community Affairs Officers.
Participation by financial institutions
in community development takes a variety of forms. A number of California
banks formed a consortium to address
low-income housing needs. To coordinate their involvement in community
development, lenders formed councils in
Camden, New Jersey; in Harrisburg,
Pennsylvania; and in Wilmington, Delaware. In Boston, financial institutions
began an assessment of housing needs. In
cooperation with Board staff members,
the Economic Development Administration is encouraging banks and bank
holding companies throughout the country to form community development
corporations.
In 1988 the Reserve Banks also used
community profiles, educational pamphlets, and newsletters to help banks,
holding companies, and others address
the economic development of their communities. The Federal Reserve Bank of
Chicago inaugurated a community affairs
newsletter, bringing to five the number
now published by the System. These
publications highlight emerging issues in
community development and present
case studies of successful programs that
involve cooperation between banks and
their communities.
In 1988, staff members of the Federal
Reserve made 135 speeches at the request
of conference sponsors as diverse as the
National League of Cities, the American
Bankers Association, and National People's Action. Through these speeches as
well as through seminars, conferences,
and other meetings, Community Affairs
staff members reached an estimated
13,000 people on the subject of community development.
Examination Procedures
Amendments to Regulation Z that took
effect in October 1988 require creditors
to give consumers more detailed information about closed-end mortgages with
variable rates. To ensure compliance by
state member banks, the Board developed
objectives, procedures, and a checklist
for the compliance examination dealing
with such mortgages. The other federal
agencies that supervise financial institutions expect to adopt similar procedures.
Member agencies of the Federal Financial Institutions Examination Council
(FFIEC)-the Board, the Federal Deposit Insurance Corporation, the Federal
Home Loan Bank Board, the Office of the
Comptroller of the Currency, and the
National Credit Union Administration—
developed interagency examination procedures for Regulation CC (Expedited
Funds Availability). The FFIEC also
conducted and videotaped a training
session for examiners, providing an
overview that focuses on the schedules
for availability of funds, disclosure requirements, and examination procedures. The videotape and a written
"Course for Financial Institution Examiners" is available to compliance examiners of thefivefinancialregulators.
The Federal Reserve continues to
conduct separate examinations to monitor
compliance with consumer protection
laws and regulations and to monitor
performance under the Community Reinvestment Act. State member banks are
Consumer and Community Affairs
examined at intervals determined by their
own performance records. The longest
interval between examinations, for banks
with the best records of performance, is
24 months. Banks with poor performance
records are examined as frequently as
every 6 months.
The Federal Deposit Insurance Corporation reports that it changed the frequency of its compliance examinations in
July 1988. The agency will examine
banks with a poor record of performance
every 12 months and banks with better
records every 24 months. It has increased
its staff of examiners, and as a result
expects the number of compliance examinations completed in 1989 to increase by
30 percent. During 1988 the agency
reorganized its compliance function in
Washington, centralizing the responsibility for consumer compliance in the Office
of Consumer Affairs.
The Federal Home Loan Bank Board
has created a Division of Compliance
Programs within the Office of Regulatory Activities to be responsible for
consumer compliance examinations.
The board adopted a Compliance Policy
Statement in June 1988, urging savings
and loan associations that are system
members to develop sound internal
compliance programs; the agency also
distributed a manual, "Compliance: A
Self-Assessment Guide," to all member
institutions.
Compliance with Consumer
Regulations
Data from the five federal agencies that
supervise financial institutions and from
other federal supervisory agencies indicate that compliance with the Truth in
Lending Act and the Equal Credit Opportunity Act declined somewhat from 1987
levels, while compliance with the Electronic Fund Transfer Act remained substantially the same. This section summa
149
rizes data gathered from the agencies for
the reporting period July 1,1987, to June
30,1988. i
Truth in Lending Act
(Regulation Z)
Taken together, the five financial regulatory agencies report that 46 percent of all
examined institutions were in full compliance with Regulation Z, down from 54
percent in 1987. Of the five agencies, the
Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Board
noted declines in compliance, while the
Federal Home Loan Bank Board
(FHLBB) and the National Credit Union
Administration (NCUA) reported levels
of compliance similar to those for the
1987 reporting period. Data from the
Board, the OCC, and the NCUA (the
agencies that provide frequency ranges)
indicate that among the institutions not in
full compliance, 78 percent had no more
than five violations, an improvement over
the 51 percent reported in that range for
1987.
The most frequent violations involved
the failure to give accurate disclosures of
the annual percentage rate; the number,
amounts, and timing of payments scheduled to repay the obligation; the finance
charge; the itemization of the amount
financed; and the amount financed.
The FDIC issued one cease-and-desist
order and the Board entered into one
formal written agreement involving violations of Regulation Z. Under the Interagency Enforcement Policy on Regulation Z, a total of 279 institutions
supervised by the Board, the FDIC, the
1. The federal agencies that regulate financial
institutions do not use the same method to compile
information on compliance; however, the data
support the general conclusions presented here.
150 Consumer and Community Affairs
FHLBB, and the OCC reimbursed approximately $2 million to 23,419 accounts, compared with $1.2 million
reimbursed to 10,507 accounts during
the 1987 reporting period.
The Federal Trade Commission (FTC)
continued its compliance program to
enforce the credit-advertising requirements of Regulation Z, with an emphasis
on advertisers of credit for the purchase
of real estate and automobiles. Most companies contacted by the FTC promptly
brought their advertising programs into
compliance.
In conjunction with the National Association of Attorneys General, the FTC
has also continued its enforcement program against fraud in telemarketing and
other fraud involving charges to credit
cards. Two actions were brought in federal district court, alleging violations of
the Truth in Lending requirements for
prompt notification of returns and crediting of refunds on credit card accounts.
The FTC issued a new pamphlet,
"Home Equity Credit Lines." A checklist
assists consumers in comparing different
home equity loan programs. The FTC
also published "Choosing and Using
Credit Cards," which offers guidance on
how to shop for a credit card and explains
the consumer protections provided under
federal law.
The Department of Transportation
reported a satisfactory level of compliance with the Truth in Lending Act by
foreign and domestic carriers under its
jurisdiction. As the result of consumer
inquiries investigated by its Consumer
Affairs Division, the department entered
into a consent order with an air carrier
that included provisions relating to the
act.
The other agencies that enforce the
act—the Packers and Stockyards Administration of the Department of Agriculture and the Farm Credit Administration-reported satisfactory levels of
compliance among the entities they
supervise.
Equal Credit Opportunity Act
(Regulation B)
Among the institutions they examine, the
five financial regulatory agencies reported a decline in the overall level of
compliance with Regulation B. The number of institutions that had no violations
declined from 74 percent in 1987 to 67
percent for the 1988 reporting period.
The Board, the OCC, and the NCUA (the
three agencies that collect data on the
frequency of violations) report that 78
percent of the institutions not in full
compliance had fewer than five violations. The most frequent violations involved the failure to meet the following
requirements:
• Notify the applicant of the action
taken within 30 days after the creditor
receives a complete application.
• Provide a written notice of adverse
action that contains the information required by the regulation.
• Request information for monitoring
purposes about race or national origin
and sex on applications involving the
purchase or refinancing of a primary
residence.
• Note the race or national origin and
sex, based on the lender's visual observation, if an applicant chooses not to
provide that information.
• Provide the specific reasons for
credit denials and other adverse action.
The FTC continued an investigative
program in which testers pose as credit
applicants to monitor compliance with
ECO A. Four finance companies were
found to have practices that violate
ECOA, leading FTC staff to recommend
enforcement actions.
The other agencies that enforce the
act—the Department of Transportation,
the Farm Credit Administration, the
Consumer and Community Affairs
Interstate Commerce Commission, the
Small Business Administration, the Securities and Exchange Commission, and
the Packers and Stockyards Administration—report substantial compliance
among the entities they supervise.
Electronic Funds Transfer Act
(Regulation E)
The five financial regulatory agencies
report that 88 percent of examined institutions were in full compliance with
Regulation E, a decline from last year's
90 percent. The four most frequent
violations involved the failure to give the
following disclosures:
• A periodic notice of the procedures
for resolving alleged errors.
• A written statement outlining the
terms and conditions of the EFT service.
• A periodic statement for each
monthly cycle in which an EFT occurred.
• A summary of the consumer's liability for unauthorized transfers.
The fifth most frequent violation involved the failure promptly to investigate
errors alleged by consumers and to
inform them of the results of the investigation in a timely manner.
The other agencies that enforce the
act—the Federal Trade Commission and
the Securities and Exchange Commission—report a satisfactory level of compliance among the entities they supervise.
Economic Effect of the Electronic
Funds Transfer Act
In accordance with statutory requirements, the Board monitors the effects of
the Electronic Funds Transfer Act on the
costs and benefits of EFT services to
financial institutions and consumers.
During 1988, the economic effect of the
act broadened as more financial institutions offered EFT services and as more
consumers used them. About two-thirds
151
of the depository institutions in the United
States provide EFT services that are
covered by the requirements of the act
and Regulation E.
Demand for EFT services has continued to grow. Consumers gained greater
access to EFT services through the
expansion of shared ATM systems. More
than 86 percent of ATMs in the United
States now participate in shared systems.
Excluding balance inquiries, about 5
billion transactions were conducted at the
82,000 installed machines in the country.
The number of point-of-sale (POS)
systems has also grown rapidly, though
these machines still handle a relatively
small share of total EFT transactions.
The number of merchant terminals capable of supporting direct-debit POS transactions grew about 12 percent in 1988,
from 38,800 to 43,400 terminals. POS
terminals handled about 55 million transactions during 1988.
Each year, more consumers are electing to receive pay or government transfers by electronic direct deposit, and
more corporations are offering direct deposit. In the public sector, about half of
social security recipients receive monthly
benefits electronically; and the number
of military personnel who receive payroll
and other benefits by automated direct
deposit continues to grow. The Internal
Revenue Service offers electronic deposit of income tax refunds to individuals
who file their returns electronically.
The benefits to consumers from the
Electronic Fund Transfer Act are difficult to measure because they cannot be
isolated from protections that would have
been provided in the absence of regulation. Statistics from examination reports
do not suggest widespread violation of
the consumer rights established by the
act.
Data from the Board's Consumer Complaint Control System show no serious
consumers problems with electronic
152 Consumer and Community Affairs
transactions. In 1988, 51 of the 2,196
complaints processed involved electronic
transactions; of the 51, the Federal
Reserve System forwarded the 23 complaints that did not pertain to state member banks to other agencies for resolution.
None of the remaining 28 involved a
violation of the regulation.
Because the costs of industry practices
that would have evolved in the absence of
statutory requirements are unknown, the
incremental costs associated with the act,
like the benefits, are difficult to quantify.
But the compliance cost of an electronic
transaction is probably not high enough
to compromise its cost advantage over a
check-based transaction.
As EFT systems mature, as transaction
volume builds, and as start-up costs for
compliance are amortized, compliance
costs imposed by the act, per transfer and
per dollar of transferred funds, will likely
decline.
Complaints against
State Member Banks
In 1988 the Federal Reserve received
2,196 complaints: 1,832 by mail, 356 by
telephone, and 8 in person. The Federal
Reserve investigated and resolved the
796 that were against state member banks
(see accompanying table). The Board
also received 184 written inquiries concerning consumer credit laws and banking practices. In responding to these
complaints and inquiries, staff members
of the Board and the Reserve Banks gave
specific explanations of laws, regulations , and banking practices and provided
printed materials on the general issues.
To evaluate compliance with System
policies, the Board's Division of Consumer and Community Affairs regularly
reviews a sample of the complaints
handled by the Reserve Banks. The Board
uses follow-up questionnaires to gauge,
through the perceptions of complainants,
how well the System handles cases.
Consumers returned 44 percent of these
questionnaires. Approximately 80 percent of the respondents found the explanations clear and understandable; 75
percent were satisfied with the promptness of handling; 95 percent said they
were treated courteously by Federal
Reserve staff; 90 percent reported that
they would contact the Federal Reserve
again if they had other problems with
banks; and 75 percent found the resolu-
Consumer Complaints Received by the Federal Reserve System, by Subject, 1988
Subject
State member
banks
Other
lenders1
lotai
Regulation B (Equal Credit Opportunity)
Regulation E (Electronic Fund Transfers)
Regulation M (Consumer Leasing)
Regulation Q (Interest on Deposits)
Regulation Z (Truth in Lending)
Regulation BB (Community Reinvestment)
Regulation CC (Expedited Funds Availability).
Fair Credit Reporting Act
Fair Debt Collection Practices Act
Fair Housing Act
Municipal Securities Dealer Regulation
Transfer agents
Unregulated bank practices
Other2
86
28
3
41
157
0
1
12
10
1
0
2
455
0
52
23
3
47
316
1
30
83
24
3
3
1
706
108
138
51
6
88
473
1
31
95
34
4
3
3
1,161
108
Total.
796
1,400
2,196
1. Referred by the Federal Reserve to the appropriate
agencies.
2. Primarily miscellaneous complaints against business
entities.
Consumer and Community Affairs
tion of their complaint acceptable. Many
complaints involved practices that, although of concern to consumers, are
permissible practices. Thus, a greater
percentage of the respondents were satisfied with the System's handling of their
complaint than with its resolution.
A second table summarizes the nature
and resolution of the 796 complaints
against state member banks. About 52
percent involved loan functions: 11 percent alleged discrimination on a prohibited basis, and 41 percent concerned
credit denial on nonprohibited bases
153
(such as length of residency) and other
unregulated lending practices (such as
release or use of credit information).
About 26 percent involved disputes concerning interest on deposits and general
practices concerning deposit accounts.
Unregulated Practices
In 1988 the Board continued to monitor,
under section 18(f) of the Federal Trade
Commission Act, complaints about banking practices that are not subject to
existing regulations to focus on those that
Consumer Complaints Received by the Federal Reserve System,
by Function and Resolution, 1988
Type of complaint
Type of resolution
Complaints about state
member banks
Number
Percent
Complaints about state
member banks, by type
Insufficient informationl
Information furnished to
complainant2
Bank legally correct
No accommodation
Accommodation made 3
Clerical error, corrected
Factual dispute4
Bank violation, resolved5
Possible bank violation,
unresolved6
Customer error
Pending, December 31
Total
Loan function
Deposit
function
Electronic
fund
transfers
329
41
205
26
28
4
9
1
138
17
6
7
1
1
9
Discrimination
Other
796
100
87
11
27
3
Trust
services
Other
89
9
46
21
0
0
13
277
66
153
41
18
43
10
5
2
4
107
31
70
15
10
73
12
47
12
2
14
0
5
2
2
4
0
0
1
0
36
13
26
9
0
2
21
102
0
1
10
1
3
40
7
24
0
0
4
0
0
3
1
10
21
Complaints referred
to other agencies7
1,400
56
644
294
23
16
367
Total, all complaints
2,196
143
973
499
51
25
505
1. The staff has been unable, after follow-up correspondence with the consumer, to obtain sufficient information
to process the complaint.
2. When it appears that the complainant does not
understand the law and that there has been no violation on
the part of the bank, the Federal Reserve System explains
the law in question and provides the complainant with other
pertinent information.
3. In these cases the bank appears to be legally correct
but has chosen to make an accommodation.
4. These cases involve factual disputes not resolvable
by the Federal Reserve System and contractual disputes
0
that can be resolved only by the courts. Consumers wishing
to pursue the matter may be advised to seek legal counsel or
legal aid or to use small claims court.
5. In these cases a bank appears to have violated a law or
regulation and has taken corrective measures voluntarily
or as indicated by the Federal Reserve System.
6. When a bank appears to have violated a law or
regulation, customers are advised to seek civil remedy
through the courts. Cases that appear to involve criminal
irregularity are referred to the appropriate law enforcement
agency.
7. Complaints about nonmember institutions.
154 Consumer and Community Affairs
may be unfair or deceptive. Three categories each accounted for 5 percent of the
1,161 complaints: improper crediting of
deposits to accounts (59), credit denial
based on credit history (58), and miscellaneous other practices (57). Complaints
about improper crediting of deposits
usually involved cases in which a customer held more than one account and the
teller inadvertently credited funds to the
wrong account. Many of the complaints
about credit denials based on credit
history indicated that the applicant underestimated the importance lenders give to
a poor credit history or a lack of borrowing experience when considering the
applicant's creditworthiness. The third
category covered a wide range of practices, such as merchants' minimumcharge requirements on credit cards, the
number of points charged on a mortgage
loan, or a lender's failure to close on a
mortgage loan by the agreed settlement
date.
Community Reinvestment Act
The Community Reinvestment Act
(CRA) requires the Board to encourage
institutions under its jurisdiction to help
meet the credit needs of their communities, including the needs of low- and
moderate-income neighborhoods, in a
manner consistent with safe and sound
practices. The Board assesses the CRA
record of state member banks during
regular examinations, and takes CRA
performance into account when acting on
applications filed by state member banks
and bank holding companies. The Board
may withhold approval of certain applications if the CRA record of the institution is not satisfactory.
The CRA program of the Federal
Reserve consists of a compliance examination program, a community affairs
program, and a program for analysis of
CRA performance in connection with
applications of banks and bank holding
companies.
Examiners trained in consumer regulation and CRA issues carry out the
compliance program; they conduct examinations and produce reports dealing
exclusively with these issues. During the
1988 reporting period (July 1, 1987,
through June 30,1988), Federal Reserve
personnel examined 569 state member
banks for compliance with the CRA.
During these examinations, banks are
counseled on ways to improve CRA
performance, including techniques for
more active involvement in community
economic development.
The number of CRA protests and the
increased complexity of protests involving interstate acquisitions have resulted
in a greater emphasis on the applications
process in recent years. To achieve a fair
and equitable settlement of CRA issues
arising during the application process,
the Board carefully considers all relevant
facts from the parties involved. The
Board scrutinizes the CRA records,
which may reflect problems for an
applicant, whether or not a protest has
been filed. In this process the Board often
has obtained commitments for future
improvement. When CRA issues arise,
the Federal Reserve also provides a
forum for protestants and applicants that
wish to discuss their concerns privately
and narrow differences caused by
misunderstandings.
The number of applications of state
member banks or bank holding companies protested because of CRA performance declined from the record high of
1987. In calendar year 1988, 31 applications were protested, compared with 36
in 1987. But the Board also handled 20
other applications in which adverse CRA
ratings were at issue, compared with 15
such cases during 1987. In the protested
cases, 6 protests were withdrawn following resolution of differences between
Consumer and Community Affairs
applicants and protestants. In 9 other
instances, applications were approved
after the applicant made commitments to
the Board to improve its CRA performance. By year-end the Board had
approved 27 of the 31 applications; the
other 4 applications were still pending.
Consumer Advisory Council
The Consumer Advisory Council (C AC)
met in March, July, and October to advise
the Board on its responsibilities under the
consumer credit protection laws and
discuss other issues relating to financial
services to consumers. The CAC has 30
members from consumer groups, financial institutions, academia, and government. Its meetings are open to the public.
At the March meeting, the CAC considered proposed legislation for improved disclosures to consumers and for
restrictions on credit features of home
equity lines of credit. The CAC reviewed
a December 1987 Board proposal that
would have required earlier and additional Truth in Lending disclosures for
these plans. The council urged the Board
to move expeditiously in developing a
final rule, though CAC members also
recognized the need for protections for
consumers (such as rate indexes that can
be verified by the consumer through an
outside source) that could be provided
only by legislative action. The CAC
recommended amending Regulation Z to
provide a 90-day notice period (instead
of the current 15 days) for a change in
terms affecting an outstanding balance in
a home equity line.
In March the CAC considered the
Board's proposed rules implementing the
Expedited Funds Availability Act. Several bankers expressed concern about a
provision that mandates next-day availability without exception for government
and cashier's checks, citing the risk of
fraud on large-dollar items. The act
155
removes from mandated schedules certain items such as large-dollar deposits or
checks the institution has reason to
believe will not be paid; a majority of
council members wanted the Board to
seek statutory authority to extend the
exceptions to all checks, including government and cashier's checks. Consumer
and community representatives, noting
that many low-income individuals desperately need next-day availability, opposed
applying the exceptions to government
checks.
Also in March the CAC recommended
that the Board support legislation allowing banks, thrift institutions, and credit
unions to sell insurance if they met
certain conditions designed to protect
consumers. These conditions would include legal protections against linking
insurance sales to credit extensions,
clear and understandable product disclosures, access to insurance and banking
products that are affordable to low- and
moderate-income persons, "at-cost"
government-check-cashing services for
noncustomers, and public disclosure of
the CRA rating of an institution that
applies for insurance powers. Six CAC
members, representing both industry and
consumer perspectives, opposed the
recommendation.
At the July meeting the CAC considered the potential effects of a legislative
proposal requiring banks to cash government checks for nondepositors for a small
fee. Members were agreed that recipients
of public-assistance and social-security
checks should be able to cash those
checks at a reasonable cost, but the
members differed over the best way to
accomplish this objective. Industry representatives, concerned about the potential for fraud and about the new direct and
indirect costs for institutions under the
proposed legislation, thought reliance on
electronic fund transfer systems would
be a better solution: direct deposit of
156 Consumer and Community Affairs
funds would minimize the potential for
fraud, and the use of automated teller
machines would provide convenience for
recipients. Consumer representatives
pointed out that only a small percentage
of families with incomes under $10,000
currently use automated teller machines.
In July the CAC considered alternatives to accommodate communities deprived of local banking services when a
bank branch shuts down. The alternatives
included community development credit
unions (chartered around a geographic
bond) and community development banks
(designed to provide financial services
and economic development in low- and
moderate-income communities). The
CAC also reviewed programs undertaken
by banks and by the banking trade groups
to develop alternative banking services.
The CAC supported the concept that
banks should give advance notice to the
community when they decide to close a
branch and urged the Board to publicize
alternatives for communities lacking
regular banking services.
In October the CAC considered disclosure rules on traditional second-mortgage
transactions in the context of the new
rules for early disclosure of terms on
home equity lines of credit. Members
suggested earlier disclosure of the credit
costs, repayment terms, and risks associated in the more traditional closed-end
transactions that involve second mortgages; the disclosures for these transactions are now given at settlement. Legalaid attorneys and state government
officials believe that with earlier disclosures, consumers would be more likely
to avoid the less advantageous programs.
Members from small banks were against
the idea of having to provide additional
disclosures because their institutions are
not part of the problem being described.
Also in October, the CAC considered
whether the information given on savings
accounts enables depositors to check that
the interest received matches the rate
advertised. The CAC generally endorsed
the concept that depositors should have
the information necessary to verify interest, though some members expressed
concern about costs if institutions had to
give a great deal of complicated data to
consumers.
In 1988 the CAC also considered the
following issues:
• Legislative proposals to amend the
CRA.
• The Federal Reserve's implementation of CRA recommendations that were
made by the CAC in 1983.
• Newspaper articles describing wide
disparities in the practices of banks
with respect to lending in predominantly white and predominantly minority
neighborhoods.
• Regulatory issues that affect small
financial institutions.
• The trend toward restructuring
within the financial services industry.
• The exportation, by national banks,
of interest rates and other charges across
state lines.
Testimony and Legislative
Recommendations
In 1988 the Board testified before the
Congress and made recommendations
concerning the Community Reinvestment Act, government check cashing
and basic banking, and expedited funds
availability.
Community Reinvestment Act
The Board testified twice before the
Senate Committee on Banking, Housing,
and Urban Development concerning the
Community Reinvestment Act. At oversight hearings in March the Board reported on the Federal Reserve's CRA
program, which integrates compliance
examinations, a strong community affairs
Consumer and Community Affairs
program, and a program for analysis of
banks' CRA performance in deciding
applications by banks and bank holding
companies (see the section above on the
CRA).
The Board's testimony in September
provided comment on proposed amendments to the CRA in a comprehensive
banking bill. While the Board recognizes
that improvements in the implementation
of the CRA can be made, it believes the
current CRA requirements are fundamentally sound and workable, and it opposed
major revisions. Any modification must
be tailored carefully to preserve the
balance between the needs of local communities and the safe and sound operation
of banks and should not raise administrative obstacles that may tend to erase gains
already achieved by the CRA. The Board
believes that changes to the CRA should
focus on two major criticisms: the lack of
opportunity for individuals and community groups to contribute to the evaluation
of the CRA performance of institutions,
and that high CRA ratings may be given
too readily.
The Board suggested some ways that
would enable the public to participate in
CRA assessments. Institutions could
provide, in their annual public statement
on the CRA, a discussion of the efforts
they have made to meet their CRA
responsibilities. Members of the public
could then comment to the institution and
to regulators on the institution's performance. In addition, federal regulators
could publish every two years or so an
evaluation of the CRA record of each
financial institution. This evaluation
would give the basis for the regulatory
agency's analysis of an institution's CRA
performance. The public could be invited
to comment on this evaluation as well;
and the agency would take these comments into account in reviewing applications by the institution. This approach
would facilitate regular, meaningful, and
157
effective communication among banks,
communities, and regulators about the
community's needs and an institution's
record of accomplishment in meeting its
CRA responsibilities.
Government Check Cashing and
Basic Banking
The Board's testimony in September
before the Senate banking committee also
covered legislative proposals to impose
new requirements for government-check
cashing and basic banking services. The
Board opposes the requirement that financial institutions cash government checks
for nondepositors at a specified price.
Electronic alternatives present a better
long-term solution to problems in this
area than focusing exclusively on check
cashing; the processing cost would be
much lower and the fee charged an
individual to make cash available would
probably be smaller than for cashing a
check. Federal, state, and local agencies
could arrange to transfer benefit payments electronically to depository institutions that agree to participate in a
voluntary program, for example.
The Board does not support requiring
that institutions offer basic transaction
accounts at a regulated price. Any mandatory arrangement would be inflexible,
the Board believes, and fee requirements
would be extremely difficult to implement
in regulations. In light of these problems,
and the fact that as many as 50 percent of
all financial institutions already offer
basic banking services, the Board favors
encouraging voluntary efforts by financial institutions to offer basic low-cost
accounts—without mandating a specific
program of services and fees.
Expedited Funds Availability
The Expedited Funds Availability Act
generally authorizes financial institutions
158 Consumer and Community Affairs
to impose holds for longer than the
normal times under specific, limited
circumstances. But these exceptions are
not authorized for some checks on which
the act requires next-day availability—
Treasury and cashier's checks, for example. The Board supports amending the
act to make the special exceptions applicable to all checks to reduce the risk of
fraud.
The Board opposes the legislative
codification of a recent court decision
requiring that credit union share drafts
payable through a bank be treated as local
or nonlocal based on the location of the
credit union (rather than the location of
the bank). The Board believes this approach increases the risk associated with
accepting these drafts for deposit and
also makes it difficult for consumers to
understand when the proceeds of credit
union drafts are available for withdrawal.
The Board recommended that the Congress amend the act to treat a draft as
local or nonlocal based on the location of
the payable-through bank.
Recommendations of Other
Agencies
Each year the Board asks those agencies
that have enforcement responsibilities
under Regulations B, E, and Z for
recommended changes to the regulations
or the underlying statutes.
The FDIC has recommended amending ECOA to prohibit discrimination on
the basis of handicap, a change that would
bring it into conformity with recent
amendments to the Fair Housing Act.
The FDIC also recommends amending
ECOA to clarify congressional intent
with respect to age discrimination. ECOA
bars creditors from discriminating on the
basis of age regardless of whether an
applicant is young or old. But it allows
creditors to take age into account in credit
scoring systems that are "demonstrably
and statistically sound." The FDIC reports that the largest volume of ECOArelated complaints involve credit card
applications where "age" or "age group"
has been cited as a reason for denial of
credit. To eliminate the confusion inherent in the act's provisions, the FDIC
recommends that the reference to "age"
be replaced by the term "elderly age,"
and suggests defining elderly to mean 62
years or older, as in Regulation B.
•
159
Litigation
During 1988 the Board of Governors was
named in 44 pending lawsuits, compared
with 47 in 1987. Of the 13 new lawsuits
filed in 1988,6 raised questions under the
Bank Holding Company Act, compared
with 12 in 1987. As of December 31,
1988,23 cases were pending, 15 of which
involved questions under the Bank Holding Company Act.
Bank Holding Companies—
Antitrust Action
In 1988 no bank holding company acquisitions or mergers that had been approved
by the Board were challenged by the
Department of Justice under antitrust
laws, and no such cases were pending
from previous years.
Bank Holding Company Act—
Review of Board Actions
In Independent Community Bankers Association of South Dakota v. Board of
Governors, No. 85-1496 (D.C. Circuit,
filed August 7, 1985), petitioners sought
review of a Board order dated July 12,
1985, which approved the application of
First City Bancorporation of Texas to
acquire a nationally chartered credit card
bank in South Dakota (Federal Reserve
Bulletin, vol. 71, September 1985, p.
716). In an opinion dated June 5, 1987,
the Court of Appeals affirmed the Board's
order (820 F.2d 428). On January 11,
1988, the Supreme Court denied a petition for certiorari (108 S. Ct. 695).
In CBC, Inc. v. Board of Governors,
No 86-1001 (10th Circuit, filed January
2, 1986) petitioner seeks review of the
Board's amendment to Regulation Y
requiring certified financial statements in
annual reports for bank holding companies with assets of $150 million or
more (50 Fed. Reg. 50,950, December
13, 1985. The Board's order was upheld
by the Court of Appeals (855 F.2d 688).
A petition for certiorari in the Supreme
Court is pending (No. 88-1109).
In Independent Community Bankers
Association of South Dakota v. Board of
Governors, No. 86-5373 (8th Circuit,
filed October 3, 1986), the Court of
Appeals (838 F.2d 969) overturned the
Board order dated September 15, 1986,
approving the application of Michigan
National Corporation to acquire a nationally chartered credit card bank in South
Dakota (Federal Reserve Bulletin, vol.
72, November 1986, p. 792). On February 17, 1988, however, the provisions in
the South Dakota statute that were challenged in this case were repealed.
In Lewis v. Board of Governors, Nos.
87-3455 and 87-3545 (1 lth Circuit, filed
June 25, 1987), petitioner seeks review
of Board orders dated May 29,1987, and
July 1, 1987, approving applications of
Chemical New York Corporation and of
Manufacturers National Corporation to
expand activities of trust company subsidiaries in Florida (Federal Reserve
Bulletin, vol. 73, July 1987, p. 609, and
September, p. 735). The cases have been
stayed pending the resolution of proceedings in a related case in the same judicial
circuit.
In Chase Manhattan Corporation v.
Board of Governors, No. 87-1333 (D.C.
Circuit, filed July 20, 1987), petitioner
seeks review of a Board order dated July
17, 1987, conditionally approving the
application of Chase Manhattan Corporation to underwrite and deal in mortgagerelated securities to a limited extent (Fed-
160 Litigation
eral Reserve Bulletin, vol. 73, September
1987, p. 729). The case is pending.
In National Association of Casualty
and Surety Agents et al. v. Board of
Governors, Nos. 87-1354 and 87-1355
(D.C. Circuit, filed July 29, 1987) the
Court of Appeals (856 F.2d 282) upheld
Board orders dated June 29, 1987, and
July 2,1987, permitting Sovran Financial
Corporation and MNC Financial, Inc.,
to retain insurance agency activities (Federal Reserve Bulletin, vol. 73, September
1987, p. 744 and p. 740, respectively).
On December 2, 1988, a petition for
rehearing and rehearing en bane was
denied. Several other cases involved
petitions for review of similar Board
orders. The petitions for review in these
cases were denied by court orders dated
January 19, 1989. These cases are as
follows: National Association of Casualty and Surety Agents et al. v. Board of
Governors, No. 88-1001 (D.C. Circuit,
filed January 4, 1988), No. 88-1270
(D.C. Circuit, filed April 7, 1988), No.
87-1644 (D.C. Circuit, filed November
14, 1987), No. 87-1801 (D.C. Circuit
filed December 21, 1987), No. 88-1206
(D.C. Circuit,filedMarch 18,1988) and
No. 88-1245 (D.C. Circuit, filed March
30, 1988); and Independent Insurance
Agents of America, Inc., et al. v. Board
of Governors, No. 87-1686 (D.C. Circuit, filed November 19,1987).
In Board of Trade of Chicago et al. v.
Board of Governors, No. 87-2389 (7th
Circuit,filedSeptember 1,1987) petitioners sought review of a Board order dated
August 5, 1987, approving the application of Security Pacific Corporation to
engage in brokerage clearing and other
services through wholly owned subsidiaries (Federal Reserve Bulletin, vol.
73, October 1987, p. 815). On January
20,1988, the case was dismissed as moot
by joint stipulation.
In Citicorp v. Board of Governors,
No. 87-1475 (D.C. Circuit, filedSeptem
ber 9, 1987), petitioner sought review of
a Board order dated August 10, 1987,
denying petitioner relief from certain
conditions on prior approvals of acquisitions of thrift institutions. The case was
dismissed on January 29, 1988.
In Independent Insurance Agents of
America, Inc. v. Board of Governors,
No. 87-4118 (2nd Circuit, filed September 17, 1987), petitioner sought review
of a Board order dated September 10,
1987, granted at the request of Merchants
National Corporation, determining that
nonbanking prohibitions of the Bank
Holding Company Act do not apply to
activities of banks (Federal Reserve
Bulletin, vol. 73, November 1987, p.
876). The Board order was vacated on
January 26, 1988, on the basis of a
congressional moratorium (838 F.2d
627), and thus, no further judicial proceedings have been taken.
In Irving Bank Corporation v. Board
of Governors, No. 88-1176 (D.C. Circuit, filed March 1, 1988), the Court of
Appeals (845 F.2d 1035) upheld a Board
order approving the application of the
Bank of New York Company, Inc., to
acquire Irving Bank Corporation (Federal Reserve Bulletin, vol. 74, April
1988, p. 257).
In American Land Title Association v.
Board of Governors, No. 88-1872 (D.C.
Circuit, filed December 16, 1988) petitioner seeks review of a Board order
dated November 17,1988, approving the
application by First Wisconsin Corporation to acquire a company engaged in
title insurance agency activities (Federal
Reserve Bulletin, vol. 75, January 1989,
p. 31). The case is pending.
Other Litigation Involving
Challenges to Board Procedures
and Regulations
In 1988, 15 actions were taken, were
pending, or were dismissed under the
Litigation
161
Financial Institutions Supervisory Act
and the Glass-Steagall Act.
1988) plaintiff seeks to enjoin an enforcement proceeding. The case is pending.
Financial Institutions
Supervisory Act
Glass-Steagall Act
In Adams et al. v. Board of Governors,
No. 87-5311MN (8th Circuit, filed July
13, 1987), the Court of Appeals (855
F.2d 1336) on August 31,1988, affirmed
the decision of a district court (659
F.Supp. 948) holding that the Board did
not violate the Right To Financial Privacy
Act when it reviewed and copied plaintiffs' records at a national bank.
In Northeast Bancorp, Inc. v. Board of
Governors, No. 87-1365 (D.C. Circuit,
filedJuly31,1987), the Court of Appeals
(849 F.2d 1499) denied a petition for
review of the Board determination that
an officer and director who consents to be
removed from a national bank is also
barred from serving in a holding
company.
In Anonymous Bank v. Board of
Governors, No. 87-1661 (S.D. Fla.,
filed September 4, 1987), a case placed
under seal by court order, plaintiffs
sought to set aside a Board order suspending a bank director and officer from a
state member bank. A motion to dismiss
the case as moot is pending.
In Stoddard v. Board of Governors,
No. 88-1148 (D.C. Circuit, filed February 25,1988) petitioner seeks review of a
Board order removing petitioner from
the positions of director and officer of the
Michigan National Bank of Detroit. The
case is pending.
In Bonilla v. Board of Governors, No.
88-1464 (7th Circuit, filed March 11,
1988) petitioner seeks review of a Board
order prohibiting petitioner from participation in the conduct of the affairs of any
insured bank or bank holding company.
The case is pending.
In MCorp v. Board of Governors, No.
88-2693 (N.D. Texas, filed October 28,
In Securities Industry Association v.
Board of Governors, No. 86-1412 (D.C.
Circuit, filed July 14, 1986) petitioner
sought review of a Board order dated
June 13,1986, approving National Westminster Bank's acquisition of a company
offering investment advice and securities
brokerage (FederalReserve Bulletin, vol.
72, August 1986, p. 584). On July 7,
1987, the Court of Appeals upheld the
Board'sorder (821 F.2d810). OnJanuary
11, 1988, the Supreme Court denied a
petition for certiorari (108 S. Ct. 697).
In Securities Industry Association v.
Board of Governors, No. 87-1169 (D.C.
Circuit, filed April 17, 1987), the Court
of Appeals (847 F.2d 890) upheld a Board
order dated March 18, 1987, approving
the application by Chase Manhattan
Corporation to underwrite and deal in
commercial paper to a limited extent
(Federal Reserve Bulletin, vol. 73, May
1987, p. 367).
In Securities Industry Association v.
Board of Governors etal, No. 87-4041,
(2nd Circuit, filed May 1, 1987), petitioner sought review of Board orders
dated April 30 and May 18, 1987,
authorizing various bank holding companies to underwrite and deal in certain
securities to a limited extent through a
securities subsidiary (Federal Reserve
Bulletin, vol. 73, June 1987, p. 473, and
July 1987, p. 607). On February 8,1988,
the Court of Appeals upheld the Board's
order in substantial part (839 F.2d 47). A
petition for certiorari was denied by the
Supreme Court on June 13,1988 (108 S.
Ct. 2830). Several other cases that involve similar petitions for review were
withdrawn after final disposition of this
case by the Supreme Court. These cases
are as follows: Securities Industry Asso-
162 Litigation
elation v. Board of Governors, Nos.
87-4091 and 87-4093 (2nd Circuit, filed
July 1,1987), No. 87-4095 (2nd Circuit,
filed July 15, 1987), No. 87-4115 (2nd
Circuit, filed September 9, 1987), No.
87-4135 (2nd Circuit, filed October 8,
1987), and No. 87-4161 (2nd Circuit,
filed December 24, 1987).
In Cohen v. Board of Governors, No.
88-1061 (D. New Jersey, filed March 7,
1988) plaintiff seeks to require disclosure
of documents under the Freedom of
Information Act.
In Fidata Trust Company New York v.
Board of Governors, No. 88-4846 (D.
New Jersey, filed November 9, 1988)
plaintiff seeks to enjoin the Board from
disclosing certain documents involved in
Other Actions
the Cohen case. Both actions are pending.
In Credit Union National Association,
In Melcher v. Federal Open Market
Committee, No. 84-1335 (D. D.C., filed Inc., etal. v. Board of Governors, No.
April 30, 1984), plaintiff challenged the 88-1295 (D. D . C , filed May 13,1988)a
constitutionality of the methods used to district court invalidated certain chalselect certain members of the Federal lenged provisions of the Board's RegulaOpen Market Committee. On December tion CC relating to the treatment of credit
18, 1987, the Court of Appeals held the union share drafts under the Expedited
complaint should be dismissed on grounds Funds Availability Act (53 Fed. Reg.
of equitable discretion (836 F.2d 561). A 19,372, May 27, 1988) by order dated
petition for certiorari in the Supreme July 28, 1988.
Court was denied on June 6,1988 (108 S.
In White v. Board of Governors, No.
Ct. 2034).
88-623 (D. Nevada, filed July 29, 1988)
In Jenkins etal. v. Board ofGovernors, plaintiff alleges discriminatory practices
No. 87-1336 (D.C. Circuit, filed July under the Age Discrimination In Employ•
18,1986) the Court of Appeals dismissed ment Act. The case is pending.
the petition for review of the Board order
granting application for membership in
the Federal Reserve System on June 2,
1988.
In Brown v. United States Congress et
al., No. 87-5586 (9th Circuit, filed
March 2, 1987), plaintiff appealed the
dismissal of his complaint seeking damages for alleged discrimination in home
financing and mandatory injunction regarding the Board's monetary policy. The
appeal was dismissed on March 8,1988.
In Barrett v. Greenspan, No. 87-2280
(D. D . C , filed August 17, 1987), an
action to enjoin an alleged discriminatory
practice, was dismissed on July 8, 1988.
In Teichgraeber v. Board of Governors, 87-2505-0 (D. Kans., filed October 16,1987), plaintiff seeks to require
disclosure of certain documents under
the Freedom of Information Act. The
case is pending.
163
Legislation Enacted
In 1988 the Congress passed the following legislation directly affecting the
Federal Reserve or the institutions it
regulates.
Omnibus Trade and
Competitiveness Act of 1988
Public Law 100-418, the Omnibus Trade
and Competitiveness Act of 1988, was
enacted on August 23, 1988. Title III of
the act addresses international financial
policy and is summarized here.
Subtitle A of title III, the Exchange
Rate and International Economic Policy
Coordination Act of 1988, states policy
goals for negotiations by the President
and imposes new reporting requirements
on the Secretary of the Treasury concerning the international coordination of economic and exchange rate policies. Subtitle A also amends the Federal Reserve
Act to require that the Board include an
analysis of the impact of the dollar
exchange rate on the economy in the
Board's yearly report to the Congress on
economic development.
Subtitle B of title III, the International
Debt Management Act of 1988, contains
congressional findings and provisions
concerning the debt of developing countries. It also expesses the sense of the
Congress that federal regulators give
banks wide latitude in negotiating reductions of principal and interest with sovereign debtors. Subtitle B also declares that
it is the intent of the Congress (1) that
federal agencies regulating depository
institutions allow maximum flexibility in
applying generally accepted accounting
principles in determining the asset value
and effects of restructured loans to heavily
indebted sovereign borrowers; (2) that
these federal agencies require depository
institutions with substantial loans to
heavily indebted sovereign borrowers to
recapitalize as appropriate to maintain
adequate ratios of capital to assets; and
(3) that the federal agencies ensure that
depository institutions establish appropriate levels of reserves against loan
losses.
Subtitle B further requires the federal
banking agencies to submit data to the
Congress annually concerning loan-loss
exposure, reduction of risks associated
with such exposure, the relationship
between bank lending activity in heavily
indebted foreign countries and U.S.
exports to these countries and ways to
encourage such lending, responses of
regulatory authorities in other countries
to international debt problems, and steps
taken by heavily indebted countries to
alleviate debt-servicing problems. The
Board, together with the Comptroller of
the Currency and the Federal Deposit
Insurance Corporation are also required
to submit a report analyzing regulatory
and accounting obstacles to various forms
of debt restructuring.
Subtitle E of title III, the Export
Trading Company Act Amendments of
1988, amends the Bank Holding Company Act of 1956. The amendments
establish standards for determining
whether a company may be considered to
be operated principally for the purposes
of exporting goods and services produced
in the United States. The amendments
also prohibit the Board from proscribing
a proposed investment in an export
trading company solely on the basis of
the leverage ratios of the company unless
the asset-to-equity ratio is projected to be
greater than 20 to 1. The amendments
164 Legislation Enacted
limit the circumstances under which the
Board may limit the maximum dollar
value of the inventory of an export trading
company.
Subtitle F of title III, the Primary
Dealers Act of 1988, provides that
neither the Board nor the Federal
Reserve Bank of New York may
designate or continue a prior designation
of a foreign person as a primary dealer
in government debt securities unless that
person's country affords U.S. companies
the same opportunities in the underwriting and distribution of government
debt securities as are afforded domestic
companies in that country. Designations
made before July 31, 1987, are
excepted; also excepted are previously
designated primary dealers acquired by
a foreign person prior to that date if the
Federal Reserve Bank was notified
before the acquisition. Exceptions are
also made for citizens of countries that
were negotiating or had in force as of
January 1, 1987, a bilateral free trade
agreement with the United States.
Subtitle G of title III, the Financial
Reports Act of 1988, requires the
Treasury, in conjunction with the Board
and a number of other federal agencies,
to report to the Congress on the home
countries of foreign financial-service
institutions doing business in the United
States and on the types of financial services offered by persons from these
countries. The report must also include
information concerning the extent to
which such countries deny national
treatment to U.S. financial-service
institutions, on efforts to eliminate
discrimination, and on discussions
authorized by subtitle G to reduce
barriers to trade in financial services.
The subtitle also requires the Board to
report on issues concerning the
treatment of loan loss reserves as part of
banks' primary capital for regulatory
purposes.
Management Interlocks Revision
Act of 1988
P.L. 100-650, the Management Interlocks Revision Act of 1988, enacted on
November 10,1988, amends the Depository Institution Management Interlocks
Act. The 1988 act amends the definition
of "affiliate" to allow companies to be
considered affiliates if 25 percent or more
of the voting stock in each company is
beneficially owned by common shareholders. Previously, at least 50 percent
of the voting stock had to be commonly
owned for companies to be considered
affiliates. Because affiliated companies
are allowed to have management interlocks, the amendment will allow companies that are more loosely related to
have directors and managers in common.
The new law makes the following
additional provisions:
• Creates an exception for failed or
failing depository institutions acquired
by another depository institution or by
the holding company of a depository
institution.
• Creates a limited exception for
directors in diversified savings and loan
holding companies.
• Excludes advisory or honorary directors in depository institutions with
assets of less than $100 million from
coverage by the act.
• Extends for an additionalfiveyears,
to November 10, 1993, the grandfathering clause for interlocks that existed in
1978.
Anti-Drug Abuse Act of 1988
P.L. 100-690, the Anti-Drug Abuse Act
of 1988, enacted on November 18,1988,
includes amendments to the Right to
Financial Privacy Act of 1978. Among
other provisions, the amendments exempt agencies or departments of the
United States from the procedures estab-
Legislation Enacted
lished for the transfer of financial records
under the Right to Financial Privacy Act,
enabling such organizations to more
easily transfer financial records to the
attorney general.
To be transferred, records must have
been obtained in the exercise of supervisory or regulatory functions and be
believed to be relevant to a violation of
federal criminal law. A similar exemption will allow financial institutions or
supervisory agencies to provide law
enforcement officials more easily with
the records of directors, officers, employees, controlling shareholders, and certain
borrowers when the records are relevant
to suspected crimes against financial
institutions by such insiders.
Fair Credit and Charge Card
Disclosure Act of 1988
P.L. 100-583, the FairCreditand Charge
Card Disclosure Act of 1988, enacted on
November 3, 1988, amends the Truth in
Lending Act to require that applications
or solicitations for credit or charge cards
disclose annual percentage rates, fees
and charges, grace periods for payments,
and methods used to calculate balances,
as well as additional disclosures when
renewal fees are due and when the credit
insurer is changed.
The amendments require the Board to
adopt implementing regulations, to collect information on the price and availability of credit cards, and to report to
the Congress within one year on the
profitability of credit card operations and
on the effect of the amendments on
profitability.
Home Equity Loan Consumer
Protection Act of 1988
The Congress enacted P.L. 100-709, the
Home Equity Loan Consumer Protection
Act of 1988, on November 23,1988. The
165
act amends the Truth in Lending Act to
establish additional requirements for
disclosures, advertising, and other aspects aspects of home equity lines of
credit. The amendments require that
applications for such credit disclose
certain information including payment
terms, the annual percentage rate of
interest charged, the calculation of variable interest rates, maximum interest
rates, and the timing of changes in rates.
The amendments address the timing
and form of the disclosures with regard to
solicitations or applications and require
the information to be provided again at
the time the home equity account is
opened. The amendments also require
certain disclosures in any advertisements
related to home equity lines of credit and
prohibits the use of misleading terms in
such advertising.
Under the new provisions, the creditor
must not be able to control the index to
which a variable interest rate is linked.
The act prohibits creditors from unilaterally terminating a credit line and requiring immediate payment except in the
event of fraud, default by the debtor, or
other action by the debtor that adversely
affects the creditor's security interest.
The amendments also limit the circumstances under which the creditor
may unilaterally change the terms of the
credit agreement. Impositions of nonrefundable fees are also limited, and the
amendments provide that consumers may
obtain a refund of fees under certain
circumstances.
The amendments require the Board to
develop educational materials for consumers of home equity lines of credit and
to report to the Congress on whether the
use of terms such as "annual percentage
rate" for different types of credit lines
mislead consumers attempting to compare credit plans. The act requires the
Board to develop regulations to implement the amendments.
166 Legislation Enacted
Women's Business Ownership
Act of 1988
P.L. 100-533, the Women's Business
Ownership Act of 1988, enacted on
October 25,1988, establishes a National
Women's Business Council and amends
the Small Business Act to provide for
demonstration projects to provide services and assistance to small businesses
owned by women.
The act also amends the Equal Credit
Opportunity Act to require the Board to
prescribe regulations to improve access
to capital for small businesses owned by
women. The amendments require creditors to maintain records of business loan
applications by women and to give such
applicants notice of their right to information concerning credit denials.
Housing and Community
Development Act of 1987
P.L. 100-242, the Housing and Community Development Act of 1987, enacted
February 5,1988, makes the Home Mortgage Disclosure Act of 1975 permanent
and extends its coverage to the mortgagebanking subsidiaries of holding companies of depository institutions and to
certain savings and loan service corporations. The new law also amends several
existing statutes in order to improve the
availability of low- and moderate-income
housing in the United States.
•
167
Banking Supervision and Regulation
During 1988 the international supervision of banking organizations reached an
important milestone. Under the auspices
of the Basle Committee on Banking
Regulations and Supervisory Practices,
the Federal Reserve and the other U.S.
bank regulators reached an agreement
with the central banks and banking supervisors of 11 industrialized nations on
international guidelines for risk-based
capital standards.1 The agreement aims
for more consistent capital standards
throughout the world, thereby reducing a
source of competitive inequity among
international banking organizations. The
agreement, which the Board adopted in
December 1988, will be phased in over
the next four years.2 The risk-based
framework will introduce more sensitivity to risk factors, including off-balancesheet exposures, than the current leverage ratios provide. The standards should
also encourage banking organizations,
particularly those engaged in international activities, to strengthen their capital positions.
The guidelines constitute a major step
in fulfilling the capital mandate set forth
by the Congress in the International
Lending Supervisory Act of 1983. When
fully in place throughout the world, the
risk-based capital standard promises
support of a more stable international
banking environment.
The Board also considered numerous
proposals for expansions of banks and
1. The other U.S. regulators in the agreement
are the Federal Deposit Insurance Corporation and
the Office of the Comptroller of the Currency.
2. For a discussion of the Board's action, see the
section on policy statements in the chapter of this
REPORT on "Record of Policy Actions of the Board
of Governors."
nonbanks, the effects of which will
continue the restructuring of the geographic and product environment that
has evolved in recent years. The proposals included large interstate combinations
as well as reorganizations and acquisitions for certain Texas-based institutions
in financial difficulty. Under provisions
granted by the Congress to cover emergencies, the Board expedited its processing of applications involving failing
banks and distressed thrift institutions.
In addition, Division staff members
provided technical assistance to other
agencies in selecting an appropriate
owner for failing institutions. Through
this process, the agencies attempt to
select a bidder that will provide optimum
financial and managerial resources to the
successor institution at the lowest possible cost.
The Board also took significant steps
on the issue of securities underwriting
and dealing by banking organizations.
By way of background, the Board in 1987
approved proposals by banking organizations to underwrite and deal on a limited
basis in investment-quality commercial
paper, certain municipal revenue bonds,
conventional residential mortgage-related securities, and securitized consumer loans in a manner consistent with
the Glass-Steagall Act and the Bank
Holding Company Act. The Board limited revenues from these approved activities to no more than 5 percent of total
revenues for each organization. The
Board also required that the organizations
undertake these activities in separate
securities subsidiaries under limitations
that would insulate bank subsidiaries with
federally insured deposits from related
risks and to avoid possible conflicts of
168 Banking Supervision and Regulation
interests, unfair competition, and other
potential adverse effects.
In accordance with the provisions of
the Competitive Equality Banking Act of
1987, the Congress placed a moratorium,
until March 1, 1988, on bank holding
companies engaging in these securities
activities. Court rulings upheld the
Board's action in large part. Subsequent
to the expiration of the moratorium,
several bank holding companies applied
to the Board to underwrite and deal in a
broad range of corporate debt and equity
securities under the terms set by the
Board in 1987. After extensive deliberations, the Board approved the applications in January 1989 subject to additional
conditions. In particular, approval of
activity in equities carries a one-year
waiting period, after which the Board
will determine whether the applicants
have the managerial and operational
structure required by the Board to commence the new activity.
industrial countries. The principle objectives of the framework were greater
convergence in the measurement and
assessment of capital adequacy internationally and strengthened capital positions of major international banking
organizations.
After reviewing and incorporating
public comments, the Board of Governors approved the final risk-based capital
guidelines on December 14, 1988, for
state member banks and bank holding
companies. The Federal Deposit Insurance Corporation and the Office of the
Comptroller of the Currency issued
similar guidelines early in 1989.
The domestic guidelines adopted by
the Board establish a systematic analyticalframeworkthat (1) makes regulatory
capital requirements more sensitive to
differences in risk profiles among banking organizations, (2) takes off-balancesheet exposures into explicit account in
assessing capital adequacy, and (3) minimizes disincentives to holding liquid,
low-risk assets.
Risk-Based Capital
These guidelines consist of a definition
On March 1, 1988, the Federal Reserve of capital, a system for assigning assets
issued for public comment its proposed and off-balance-sheet items to risk categuidelines for risk-based capital based on gories, a schedule for achieving a minithe December 1987 Basle Accord. These mum risk-based capital ratio, and a
proposed guidelines superseded the pro- phase-in period that provides for transiposal on risk-based capital issued for tional arrangements. The minimum supervisory ratios reflected in the framepublic comment in February 1987.
The Basle Accord was developed by work's transitional provisions will not
the Basle Committee on Banking Regula- become effective until December 31,
tions and Supervisory Practices, which 1990. The supervisory ratios in their
consists of representatives of the central final form will take effect December 31,
banks and supervisory authorities from 1992.
12 industrial countries.3 The accord
aimed to develop a broad-based capital
framework applicable to international
Supervision for Safety
banking organizations from the major
and Soundness
3. The 11 "Group of 10" countries (Belgium,
Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States) plus Luxembourg.
The Federal Reserve conducts the following activities to ensure the safety and
soundness of financial institutions: onsite examinations and inspections, sur-
Banking Supervision and Regulation
veillance and monitoring, and enforcement and other supervisory actions.
Examinations and Inspections
The on-site review of operations is an
integral part of ensuring the safety and
soundness of financial institutions. Examinations of state member banks and Edge
corporations and inspections of bank
holding companies and their subsidiaries
entail (1) an appraisal of the quality of the
institution's assets; (2) an evaluation of
management, including internal policies,
operations, and procedures; (3) an assessment of the key financial factors of
capital, earnings, asset and liability
management, and liquidity; and (4) a
review for compliance with applicable
laws and regulations.4
State Member Banks
The Federal Reserve is the primary federal supervisor and regulator of statechartered commercial banks that are
members of the Federal Reserve System,
of which there were 1,063 at the end of
1988. These banks accounted for about 8
percent of all insured commercial banks
and about 18 percent of the assets of all
such banks.
The Federal Reserve in 1986 increased
the frequency of scheduled examinations
and inspections of state member banks
4. The Board's Division of Consumer and
Community Affairs is responsible for reviewing
compliance with consumer and civil rights laws.
This responsibility is accomplished mainly through
examinations by specially trained Reserve Bank
examiners. These regulatory responsibilities are
described in the section of this REPORT covering
consumer and community affairs. Compliance with
other statutes and regulations, which is treated in
this section, is the responsibility of the Board's
Division of Banking Supervision and Regulation
and the Reserve Banks, whose examiners check for
safety and soundness.
169
and bank holding companies. The guidelines call for state member banks to be
examined at least annually. Except for
large or troubled banks, examination by
either a Reserve Bank or state banking
agency will meet that requirement. In
1988, either the Federal Reserve or a
state banking agency examined 1,083
state member banks at least once. Altogether, the state agencies conducted 344
examinations of state member banks, and
the Federal Reserve conducted 875 examinations, some of them jointly with the
state agencies. Under policy guidelines,
Reserve Bank officials also held 348
meetings with directors of the largest
state member banks in each state and with
directors of those banks that displayed
significant weaknesses.
Bank Holding Companies
In 1988 the number of bank holding
companies increased by 31, to 6,474.
These organizations control 9,025 commercial banks, which hold approximately
91 percent of the assets of all insured
commercial banks in the United States.
Most large bank holding companies
and smaller companies with significant
nonbank assets are inspected annually
under the 1986 guidelines. Others are
inspected at least every three years or, in
the case of the smallest companies without any nonbank assets, on a sample
basis. The inspection focuses on the
operations of the parent and the nonbanking companies. The subsidiary banks are
examined by the appropriate banking
regulators. In 1988, System examiners
made 2,726 on-site inspections and 97
off-site inspections. State examiners made
49 inspections of bank holding companies. During 1988, Reserve Bank
officials held 591 meetings with directors
of the largest bank holding companies
and with those of companies displaying
significant weakness.
170 Banking Supervision and Regulation
to provide all segments of the U.S. economy with a means of financing international trade, especially exports. AnagreeUnder the Financial Institutions Superviment corporation is a company that enters
sory Act of 1966, the Board of Governors
into an agreement with the Board not to
has the authority to enter into written
exercise any power that is impermissible
agreements with, or issue cease and desist
for an Edge corporation. In 1988 the
orders against, state member banks and
Federal Reserve examined 112 Edge and
bank holding companies, and persons
agreement corporations.
associated with such organizations, that
engage in unsafe or unsound practices or
that violate applicable laws or regula- Foreign-Office Operations
tions. The Board may also assess civil of U.S. Banking Organizations
money penalties for violations of a cease- The Federal Reserve examines the interand-desist order, of the Bank Holding national operations of state member
Company Act, or of certain provisions of banks, Edge corporations, and bank
the Federal Reserve Act.
holding companies principally at the U. S.
In 1988 the Reserve Banks recom- head offices of these organizations, where
mended, and the Board's staff initiated the ultimate responsibility for their forand worked on, 144 enforcement cases eign offices lies. In addition, the Federal
that involved 287 separate actions such as Reserve conducts on-site reviews of
cease and desist orders, removals, and important foreign offices at least every
civil money penalties, most dealing with three years to supplement the results of
unsafe or unsound banking practices; of the head-office examinations. In 1988 the
these, 54 cases involving 93 actions, Federal Reserve examined 12 foreign
were completed by year-end. The Board branches of state member banks and 34
completed 6 civil money penalty actions foreign subsidiaries of Edge corporations
and assessed a total of $55,000. By and bank holding companies. In 1988 the
year-end 1988, the Board collected Federal Reserve, in coordination with
$40,000, with the remainder of the the Office of the Comptroller of the Curassessments to be paid in accordance rency, conducted extensive on-site examwith agreed-upon schedules. A descrip- inations of merchant banking activities of
tion of all formal supervisory actions U.S. banking organizations in the United
during the year and the reasons for them Kingdom and Spain. All the examinations
are available to the public in the Board's abroad were conducted with the coopertwice-yearly "Report on Formal En- ation of the supervisory authorities of the
countries in which the examinations took
forcement Actions."
place.
Enforcement Actions
and Civil Money Penalties
International Activities
The Federal Reserve is responsible for
supervising several international activities.
Edge and Agreement Corporations
Edge corporations are international banking organizations chartered by the Board
U.S. Activities of Foreign Banks
Foreign banks continue to be significant
participants in the U.S. banking system.
As of year-end 1988, 264 foreign banks
operated 457 state-licensed branches and
agencies, of which 31 are insured by the
Federal Deposit Insurance Corporation.
At year-end these foreign banks also
operated 81 branches and agencies li-
Banking Supervision and Regulation
censed by the Office of the Comptroller
of the Currency, of which 4 have FDIC
insurance. Foreign banks also directly
owned 18 Edge corporations and 9 commercial lending companies. In addition,
foreign banks held a 25 percent or greater
interest in 88 U.S. commercial banks.
Together, these foreign banks at yearend controlled approximately 20 percent
of U.S. banking assets.
The Federal Reserve has broad authority to supervise and regulate foreign
banks that engage in banking in the
United States through branches, agencies,
commercial lending companies, Edge
corporations, or banks. In exercising this
authority, the Federal Reserve relies on
examinations conducted by the appropriate federal or state regulatory agency.
Although states have primary authority
for examining state-licensed uninsured
branches and agencies, the Federal Reserve participated in the examination of
125 such offices during the past year.
Specialized Examinations
The Federal Reserve conducts specialized examinations in the following areas
of bank activity: data processing, trust
activities, dealing and brokering government securities, dealing and clearing
municipal securities, and transferring
securities.
Electronic Data Processing
Under the Interagency EDP Examination
Program, the Federal Reserve examines
the electronic data processing (EDP)
activities of state member banks, Edge
and agreement corporations, and independent centers that provide EDP services to these institutions. In 1988,
System examiners conducted 296 on-site
EDP reviews. In addition, the Federal
Reserve reviews reports of EDP examinations issued by other bank regulatory
171
agencies on organizations that provide
data-processing services to state member
banks.
Trust Activities
During 1988 the Federal Reserve conducted 215 examinations of the trust
functions of state member banks, trust
companies that are members of the Federal Reserve System, and certain foreign
and domestic trust companies that are
subsidiaries of bank holding companies.
At the end of 1988, 432 of these institutions exercised trust powers, approximately 10 percent of the total number of
institutions in the industry. These 432
institutions held about 50 percent of the
total assets administered by all such
banks, trust companies and subsidiaries.
Government Securities Dealers
and Brokers
Under the Government Securities Act of
1986, the Board is responsible for examining government securities dealer and
brokerage activities of state member
banks and of some foreign banks for
compliance with the act and with the
regulations of the Treasury Department.
Forty-three state member banks, one
branch of a foreign bank, and one
agency of a foreign bank currently have
on file with the Board notices that they
are government securities dealers or
brokers not otherwise exempt by
Treasury Department regulations.
Specialized examination procedures
relating to government securities
activities were revised by the Federal
Reserve in September 1988 in light of
regulatory amendments adopted by the
Treasury Department.
Municipal Securities Dealers
and Clearing Agents
The Securities Act Amendments of 1975
made the Board responsible for supervis-
172 Banking Supervision and Regulation
ing state member banks and bank holding
companies that act as municipal securities
dealers or as clearing agencies. In 1988
the Board examined 26 state member
banks that deal in municipal securities.
Currently 50 such banks are registered
with the Board. A clearing agency acts as
a custodian of securities involved in
transactions settled by bookkeeping entries. The four agencies registered with
the Board were examined in 1988.
Transfer Agents
System examiners conducted separate
reviews of state member banks and bank
holding companies that act as transfer
agents. Transfer agents countersign and
monitor the issuance of securities, register the transfer of securities, and exchange or convert securities. During
1988, System examiners conducted examinations of 79 of the 165 banks and
bank holding companies registered as
transfer agents with the Board.
Surveillance and Monitoring
The Federal Reserve monitors the financial condition of state member banks and
bank holding companies. The surveillance program supplements the Federal
Reserve's on-site examination program
with automated screening systems that
identify organizations with poor or deteriorating financial profiles. These automated systems use quarterly financial
statements submitted by the banking
organizations and compute numerous
financial ratios, which are then analyzed
by the staff members of the Division and
of the Reserve Banks in order to determine whether banking organizations are
potential emergency problems. The surveillance program also aids in the allocation of the System's examination resources by focusing early attention on
those banking institutions that appear to
have recently encounteredfinancialproblems. These organizations may then be
subject to accelerated examinations or
may warrant closer supervision or other
supervisory actions.
Supervisory Policy
In addition to its enactment of risk-based
capital guidelines, the Board in 1988
initiated or modified several other supervisory guidelines. The following sections
summarize the principal aspects of these
additional initiatives or changes and
review other activities carried out during
the year to enhance the supervisory
program.
Problem Loans in Agriculture
In 1987 the Congress passed the Competitive Equality Banking Act, which in part
required the three federal bank regulatory
agencies to issue regulations permitting
agricultural banks with assets of less than
$100 million to amortize losses on agricultural loans and related real or personal
property over a period not to exceed
seven years. Banks seeking to amortize
losses on qualified agricultural loans are
required to apply to their Federal Reserve
Bank for acceptance into the program,
must have capital in need of restoration,
and must haye reasonable procedures for
restoring capital to acceptable levels. At
year-end 1988, eight state member banks
were amortizing their loan losses under
the program.
In a related action, effective December
31, 1987, the Federal Financial Institutions Examination Council (FFIEC)
amended the regulatory reports for the
banks amortizing their losses. These
revised reports permit losses eligible for
deferral to be reinstated as new items in
the asset and equity sections of the
balance sheet. The resulting increases in
the capital account are treated as primary
Banking Supervision and Regulation
capital for determining the adequacy of
the bank's capital.
In 1988 the FFIEC revised the instructions for Call Reports so that transfers of
securitized agricultural mortgages, under
the Farmer Mac Program, could be
reported as sales. Otherwise these assets
would be reported as borrowings under
the general rule governing the sale of
assets with recourse.
Relations with the States
The Board has provided a total of
$300,000 to the Education Foundation of
State Bank Supervisors over the past
three years. Established by the Conference of State Bank Supervisors, the
Foundation offers technical courses to
state bank examiners. The Board also
authorized the Federal Reserve Banks to
provide scholarships to examiners employed by state banking agencies to help
them cover expenses in attending training
courses offered by the Federal Reserve
and by the FFIEC.
Accounting Standards
and Regulatory Reporting
The Board and its staff are continuing to
work on eliminating, to the extent possible, differences between regulatory reporting requirements and generally accepted accounting principles (GAAP). In
1988 the Board incorporated GAAP in its
regulatory requirements for reporting
nonrefundable loan fees. Under the auspices of the FFIEC, the Board in November 1988 issued for public comment a
proposal to require that the income from
interest rate swaps be recognized over
the life of the transaction for Call Report
purposes, in a manner analogous to that
under GAAP. This proposal would also
require that changes in the market value
173
of interest rate swaps occurring after
inception be recognized in the current
period.
Progress was made toward the adoption of regulatory reporting standards for
push down accounting and futures that
are consistent with GAAP. The Board
also adopted Financial Accounting Standards Board (FASB) Statement 95, which
replaced the statement of changes in
financial position in the FR Y-6 annual
reports filed by bank holding companies
with a statement of cash flows.
Board staff members have served on
various advisory committees of FASB
and advisors to that group's project on
financial instruments. Staff members also
provide commentary on proposals issued
by FASB and by the American Institute
of Certified Public Accountants that
affect banking organizations.
Staff Training
System staff training emphasizes analytical and supervisory themes common to
the four areas of supervision and regulation—examinations, inspections, applications, and surveillance—and stresses the
interdependence among these areas.
During 1988 the Federal Reserve
conducted fifty sessions of various
courses. The core banking program
comprised four sessions of an introductory course, eight sessions of an intermediate course, and five sessions of an
advanced course; each course lasted three
weeks. A new course presented this year,
Senior Forum for Current Regulatory
Issues, is a continuing-education seminar
for senior examiners. The other offerings
covered sixteen sessions of a course on
effective writing for banking supervision
staff, five sessions of a credit analysis
course, two sessions of a bank holding
company applications course, six sessions on bank holding company inspections, one session on cash flow and
174 Banking Supervision and Regulation
liquidity analysis, and two courses of one
session each on consumer compliance.
Also, System staff attended two courses
conducted jointly by a financial institutions regulator and the Federal Bureau of
Investigation on white-collar crime and
bank failures.
In 1988 the System participated in
111 sessions of courses offered by the
FFIEC in specialized areas of incomeproperty lending, trust department activities, off-balance-sheet risk, international
banking, electronic data processing,
activities of municipal securities dealers,
payments system risks, white-collar
crime, management training, conducting
meetings with management, and instructor training.
During 1988 the Federal Reserve
cosponsored with the World Bank two
training sessions for senior supervisors
from developing nations. Sixty-eight
representatives from twenty-nine countries attended these programs.
In 1988 the Federal Reserve trained
1,194 System employees in System
schools and 866 System employees in
schools conducted by the FFIEC and
other agencies, for a total of 2,060, in
addition to 269 students from state agencies and 117 from foreign central banks.
Federal Financial Institutions
Examination Council
During 1988 the Federal Reserve adopted
several policies recommended by the
FFIEC.5 The Board joined the other
constituent agencies of the FFIEC in
approving a policy statement concerning
5. The FFIEC consists of representatives from
the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, the
National Credit Union Administration, and the
Office of the Comptroller of the Currency.
selection of securities dealers and unsuitable investment practices. The Federal
Reserve also endorsed a FFIEC proposal
to inform financial institutions of the
risks associated with large-scale integrated systems offinancialsoftware.
In March 1988 the Federal Reserve
and other FFIEC agencies implemented
a program for the electronic transfer of
reports of condition and income by
banks. CompuServe, Inc., has been
designated collection agent for the
agencies.
The FFIEC and other agencies also
revised reporting requirements to accommodate special lending programs and to
disclose certain off-balance-sheet activities. In addition, provision has been
made to collect information on the type
of audits performed onfinancialinstitutions by independent certified public
accountants.
Regulation of
the U.S. Banking Structure
The Board administers the Bank Holding
Company Act, the Bank Merger Act, and
the Change in Bank Control Act for bank
holding companies and state member
banks. In doing so, the Federal Reserve
acts on a variety of proposals that directly
or indirectly affect the structure of U.S.
banking at the local, regional, and national levels. The Board also has primary
responsibility for regulating the international operations of domestic banking
organizations and the overall U.S. banking operations of foreign banks, whether
conducted directly through a branch or
agency or indirectly through a subsidiary
commercial lending company. In addition, the Board has established regulations for the interstate banking activities
of these foreign banks and for foreign
banks that control a U.S. subsidiary
commercial bank.
Banking Supervision and Regulation
175
Public Notice of Board Decisions
Bank Holding Company Act
Each decision by the Board that involves
a bank holding company, bank merger,
change in control, or international banking proposal is effected by an order or
announcement. Orders state the decision
along with the essential facts of the
application and the basis for the decision;
announcements state only the decision.
All orders and announcements are released immediately to the public; they are
also reported in the Board's weekly H.2
statistical release and in the monthly Federal Reserve Bulletin. Announcement of
applications and notices received by the
System but not yet acted on is made in the
H.2 release.
By law, a company must obtain the
Board's approval if it is to form a bank
holding company by acquiring control of
one or more banks. Moreover, once
formed, a bank holding company must
receive the Board's approval before
acquiring additional banks or nonbanking
companies.
In reviewing an application filed by a
bank holding company, the Board
considers factors relating to the
convenience and needs of the community to be served, the applicant's
financial and managerial resources, the
prospects of both the applicant and the
firm to be acquired, and die competitive
effects of the proposal.
In 1988 the Federal Reserve acted on
1,337 bank holding company and related
applications. The Federal Reserve System approved 400 new bank holding
companies plus 372 bank acquisitions by
existing bank holding companies and 489
requests by existing companies to acquire
nonbank firms engaged in activities
closely related to banking. Data on these
and related bank holding company decisions are shown in the accompanying
table.
Timely Processing of Applications
The Federal Reserve maintains target
dates and procedures for the processing
of applications. These target dates promote efficiency at the Board and the
Reserve Banks and reduce the burden on
applicants. The time allowed for a decision is 60 days; during 1988, about 91
percent of the decisions met this standard.
Delegation of Applications
The Board has delegated certain regulatory functions—including the authority
to approve, but not to deny, certain types
of applications—to the Reserve Banks, to
the Staff Director of the Board's Division
of Banking Supervision and Regulation,
and to the Secretary of the Board.
The delegation of responsibility for
applications permits staff members to
work more efficiently at both the Board
and the Reserve Banks by removing
routine cases from the Board's agenda.
During 1988, 89 percent of the applications were acted on under delegated
authority.
Bank Merger Act
The Bank Merger Act requires that all
proposed bank mergers be acted upon
by the appropriate federal bank
regulatory agency. If the bank surviving the merger is a state member bank,
the Federal Reserve has primary jurisdiction. Before acting on a proposed
bank merger, the Federal Reserve
considers factors relating to the community's convenience and needs, the
financial and managerial resources and
prospects of the existing and proposed
institutions, and the competitive effects
of the proposal. The Board must also
176 Banking Supervision and Regulation
Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1988
Action under authority delegated
by the Board of Governors
Proposal
Direct action
by the
Board of Governors
Approved
Formation of holding company
Merger of holding
company
Retention of
bank
Acquisition
Bank
Nonbank
Bank service
corporation
Other
Total
Denied
Staff Director of
Division of Banking
Supervision and
Regulation
Approvedl
30
0
1
5
0
0
Denied
0
0
Office
of the
Secretary
Federal
Reserve Banks
Total
Approved Approved Permitted
2
367
0
400
1
55
0
61
0
173
372
489
0
0
0
0
0
1
38
142
0
0
1
0
0
0
22
25
311
149
0
1
0
0
0
0
0
12
0
0
0
0
0
0
2
12
215
0
14
0
50
884
174
1,337
1
1
1. Two of the fourteen cases—the formation of a holding
company and the acquisition of a bank—were specifically
delegated by the Board for joint action by the office shown
and the General Counsel of the Board.
consider the views of certain other
agencies on the competitive factors
involved in the transaction.
During 1988 the Federal Reserve
approved 75 merger applications: the
Secretary of the Board approved 4 under
authority delegated by the Board, and the
Reserve Banks approved 71. As required
by law, each merger is described in this
REPORT (in table 16 of the Statistical
Tables section).
When the Office of the Comptroller of
the Currency or the Federal Deposit
Insurance Corporation has jurisdiction
over a merger, the Board is asked to
comment on the competitive factors to
assure comparable enforcement of the
antitrust provisions of the act. The Board
and those agencies have adopted standard
terminology for assessing competitive
factors in bank merger cases to assure
consistency in administering the act. On
behalf of the Board, the Reserve Banks
submitted 698 reports on competitive
factors to the OCC and the FDIC in
1988.
Change in Bank Control Act
The Change in Bank Control Act requires
persons seeking control of a bank or bank
holding company to obtain approval from
the appropriate federal banking agency
before the transaction occurs. Under the
act, the Board is responsible for reviewing changes in the control of state member
banks and of bank holding companies. In
so doing, it must review the financial
condition, competence, experience, and
integrity of the acquiring person; it must
consider the effect on thefinancialcondition of the bank or bank holding company
to be acquired; and it must determine the
effect on competition in any relevant
market.
The federal banking agencies are required to publish notice of each proposed
change in control and to invite public
comment, particularly from persons located in the markets served by the institution to be acquired. The federal banking
agencies are also required to assess the
qualifications of each person seeking
Banking Supervision and Regulation
177
control; the Board routinely makes such
a determination and verifies information
contained in the proposal. In 1988 the
Federal Reserve System acted on 198
proposed changes in control of state
member banks and bank holding companies. The Reserve Banks consented to
192 proposals, the Secretary of the Board
consented to 5 under authority delegated
by the Board, and the Board consented
tol.
writing and dealing in securities; (4)
providing management consulting services to failed savings and loan associations under the Management Consignment Program of the Federal Home Loan
Bank Board, and assisting in the disposition of assets of such failed institutions;
and (5) issuing and selling drafts and wire
transfers that are payable in foreign currencies without limitation as to their face
amount, but subject to certain limitations.
Board Policy Decisions
and Developments
in Bank-Related Activities
Proposals to Engage
in New Nonbanking Activities
At year-end 1988 the Board was considering a proposal for bank holding companies to engage in leasing transactions
in a manner consistent with expanded
national bank leasing powers authorized
by the Competitive Equality Banking Act
of 1987. At year-end the Board also was
considering a proposal for a bank holding
company to ftmction as a foreign currency options specialist on a securities
exchange.
Also pending was a proposal to rescind
an existing rule that permits bank holding
companies, through their state-chartered
bank subsidiaries, to establish or acquire
nonbank operations subsidiaries engaged
in activities that may be conducted by the
parent bank. If adopted, this proposal
would require bank holding companies to
obtain approval to acquire or retain
control of such nonbank operations subsidiaries. The Board also requested comment on a proposal to permit retention of
all or most existing operations subsidiaries without further approval.
Other rulemaking proposals were
under continuing review at year-end.
These proposals, if adopted, would permit bank holding companies to acquire
healthy thrift institutions and to engage
in real estate investment and development activities subject to appropriate
limitations.
In 1988 the Board approved several new
nonbanking activities for individual bank
holding companies. It also had under
consideration other nonbanking proposals, including one to engage in modified
leasing activities. A proposed rulemaking procedure would require Board approval for state bank affiliates of bank
holding companies to establish or acquire
operations subsidiaries. (In early 1989
the Board approved pending applications
to engage in expanded securities underwriting and dealing activities.)
Approval of Permissible
Nonbank Activities
In 1988 the Board for the first time
approved the following activities for
individual bank holding companies: (1)
providing investment advisory and research services to retail customers in
combination with securities brokerage
activities; (2) providing financial advice
to the Canadian federal and provincial
governments, such as with respect to the
issuance of their securities in the United
States; (3) engaging in private placement
of ineligible securities (for underwriting
and dealing by banks) to a limited extent
as an incidental activity related to under
178 Banking Supervision and Regulation
Applications
by State Member Banks
International Activities
of U.S. Banking Organizations
State member banks must obtain the
permission of the Board to open new
domestic branches, to make investments
in bank premises that exceed 100 percent
of capital stock, and to add to the capital
base from sales of subordinated debt.
State member banks must also give six
months' notice of their intention to withdraw from membership in the Federal
Reserve, although the Board may shorten
or eliminate the notice period in specific
cases. These matters are normally handled by the Federal Reserve Banks under
delegated authority or, in the case of
certain investments in bank premises or
proposed sales of subordinated debt, by
the Staff Director of the Board's Division
of Banking Supervision and Regulation.
The Board has several statutory responsibilities in supervising the international
operations of U.S. banking organizations . The Board must provide authorization and regulation of foreign branches of
member banks; of overseas investments
by member banks, Edge corporations,
and bank holding companies; and of
investments by bank holding companies
in export trading companies. In addition
the Board is required to charter and
regulate Edge corporations and their
investments.
Stock Repurchases
by Bank Holding Companies
A bank holding company sometimes
purchases its own shares from its shareholders. When the company borrows the
money to buy the shares, the transaction
increases the debt of the bank holding
company and simultaneously decreases
its equity. Relatively large repurchases
may undermine thefinancialcondition of
a bank holding company and its bank
subsidiaries. The Board's regulations
require holding companies to give advance notice of repurchases that retire 10
percent or more of their consolidated
equity capital. The Board may object to
stock repurchases by holding companies
that fail to meet certain standards, including the Board's capital guidelines. During
1988 the Federal Reserve reviewed 110
proposed stock repurchases by bank
holding companies, 107 of which were
acted on by the Reserve Banks on behalf
of the Board.
Foreign Branches of Member Banks
Under provisions of the Federal Reserve
Act and of Regulation K, member banks
in most cases must seek Board approval
to establish branches in foreign countries.
In reviewing proposed foreign branches,
the Board considers the requirements of
the law, the condition of the bank, and the
bank's experience in international business. In 1988 the Board approved the
opening of seven foreign branches.
By the end of 1988,147 member banks
were operating 854 branches in foreign
countries and overseas areas of the United
States; 113 national banks were operating
715 of these branches, and 34 state
member banks were operating the remaining 139 branches.
International Banking Facilities
The Board amended its Regulations D
and Q to permit the establishment of
international banking facilities (IBFs) in
the United States as of December 3,
1981. An IBF is essentially a set of asset
and liability accounts that is segregated
from the accounts of the office establishing the IBF. Deposits from, and credit
extended to, foreign residents or other
Banking Supervision and Regulation
IBFs generally can be booked at these
facilities free from domestic reserve
requirements and interest rate limitations. Subject to conditions specified by
the Board, IBFs may be established by
U.S. depository institutions, by Edge
and agreement corporations, and by U. S.
branches and agencies of foreign banks.
By the end of 1988, 532 IBFs had been
established.
179
member banks, Edge and agreement
corporations, and bank holding companies. In most cases, the applicant
requested permission to increase an
existing investment. The Board also
amended Regulation K to facilitate the
ability of bank holding companies to
engage in debt-for-equity swap transactions in certain developing countries.
Export Trading Companies
Edge and Agreement Corporations
Under sections 25 and 25(a) of the Federal Reserve Act, Edge and agreement
corporations may engage in international
banking and foreign financial transactions. These corporations, which are
usually subsidiaries of member banks,
provide their owner organizations with
the following powers: (1) they may
conduct a deposit and loan business in
states other than that of the parent,
provided that the business is strictly
related to international transactions; and
(2) their powers to make foreign investments are broader than those of member
banks because they can invest in foreign
financial organizations, such as finance
companies and leasing companies, as
well as in foreign banks. By the end of
1988, there were 112 Edge corporations,
which had 49 branches. The Board
requires each Edge corporation that is
engaged in banking to maintain a ratio of
equity to risk-assets of at least 7 percent.
Foreign Investments
Under authority of the Federal Reserve
Act and the Bank Holding Company Act,
U.S. banking organizations may engage
in activities overseas with the authorization of the Board. To a significant
extent, the Board's Regulation K permits
such investments without prior Board
review. In 1988 the Board reviewed and
permitted 71 foreign investments bv
In 1982 the Bank Export Services Act
amended Section 4 of the Bank Holding
Company Act to permit bank holding
companies, their subsidiary Edge or
agreement corporations, and bankers'
banks to invest in export trading companies, subject to certain limitations and
after Board review. The purpose was to
allow effective participation by bank
holding companies in the financing and
development of export trading companies. The Export Trading Company
Act Amendments of 1988 provide additional flexibility for bank holding companies engaging in export trading company activities. Since 1982 the Board has
acted affirmatively on notifications by 45
bank holding companies to establish
export trading companies.
Enforcement of other
Laws and Regulations
This section describes the Board's responsibilities for the enforcement of laws,
rules, and regulations other than those
specifically related to bank safety and
soundness and the integrity of the banking
structure.
Bank Secrecy Act
Through the examination process, the
Federal Reserve determines whether the
institutions it supervises are complying
with the recordkeeoine and reoortine
180 Banking Supervision and Regulation
requirements of the Currency and Foreign Transactions Reporting Act (the
Bank Secrecy Act). Among the stipulations in the act designed to combat
unlawful currency transactions is the
requirement that financial institutions
(and selected other businesses) report to
the Internal Revenue Service certain cash
transactions of more than $10,000.
During 1988 the Federal Reserve,
working in concert with the other federal
banking agencies and the federal law
enforcement community, focused its
compliance efforts toward criminal operations that conduct cash transactions
under the $10,000 threshold and also use
the banking system's wire transfer operations to launder money. The Federal
Reserve has encouraged the institutions it
supervises to report such suspicious
activities to the federal enforcement
authorities.
The Federal Reserve also supported
the Omnibus Drug Initiative Act of 1988
which, among other provisions, intensified the recordkeeping requirements of
banks that sell monetary instruments to
nondeposit customers and provided the
Secretary of the Treasury with the authority to conduct regional investigations of
money laundering.
obtained from foreign lenders by U.S.
citizens.
Brokers and dealers are examined for
compliance with Regulation T by the
Securities and Exchange Commission,
the National Association of Securities
Dealers, and the national securities exchanges. The three federal bank supervisory agencies examine banks under their
respective jurisdictions for compliance
with Regulation U.
Other lenders are examined for
compliance with Regulation G by the
Board, the National Credit Union
Administration, the Farm Credit
Administration, or the Federal Home
Loan Bank Board according to the
jurisdiction involved. At the end of 1988
there were 560 "G-lenders," of which
310 were subject to the Board's
supervision. Of these 310, 171 were
subject to regular inspection by the Federal Reserve System. During the year,
Federal Reserve examiners inspected 53
G-lenders for compliance with the Federal Reserve's margin requirements
(these lenders are inspected on either a
biennial or triennial basis, according to
the type of credit extended).
Regulations G and U in general impose
credit limits on loans whose purpose is
the purchasing or carrying of publicly
held equity securities and that are secured
by such securities.
Securities Regulation
Regulation T limits the amount of
Under the Securities Exchange Act of credit that brokers and dealers may
1934, the Board is responsible for regu- extend when securities serve as collatlating credit in certain transactions involv- eral for credit that is used to purchase or
ing the purchase or carrying of securities. carry securities. This collateral must
In fulfilling its responsibility under the consist of stocks and bonds traded on
act, the Board limits the amount of credit national securities exchanges, of certain
that may be provided by securities bro- over-the-counter stocks that the Board
kers and dealers (Regulation T), by banks designates as having characteristics
(Regulation U), and by other lenders similar to those of stocks listed on
(Regulation G). Regulation X extends national exchanges, or of bonds meeting
these credit limitations, or margin re- certain requirements.
The Division of Banking Supervision
quirements, to certain borrowers and to
certain credit extensions, such as credit and Regulation monitors the market
Banking Supervision and Regulation
activity of all over-the-counter (OTC)
stocks to determine what stocks are
subject to the Board's margin requirements. In 1988 the Board published the
resulting "List of Marginable OTC
Stocks" in February, May, August, and
November. The November list consisted
of 3,111 stocks.
In August 1988 the Board amended
Regulation T, revising the definition of
"OTC margin bond" to include certain
foreign sovereign debt securities. The
amendment permits broker-dealers to
extend good faith loan value on longterm debt securities issued or guaranteed
as a general obligation by a foreign
sovereign, its provinces, states, or cities,
or a supranational entity if there is
available an explicit or implicit rating of
the entity in one of the two highest rating
categories by a nationally recognized
statistical rating organization.
Under Section 8 of the Securities
Exchange Act, a nonmember domestic
or foreign bank may lend to brokers or
dealers posting registered securities as
collateral only if the bank has filed an
agreement with the Board that it will
comply with all the statutes, rules, and
regulations applicable to member banks
regarding credit of securities. During the
year, the Board processed three such
agreements.
In 1988 the Securities Regulation
Section of the Division of Banking Supervision and Regulation issued 65 interpretations of the margin regulations.
Those that presented sufficiently impor-
181
tant or novel issues were published in the
"Securities Credit Transactions Handbook," which is part of the Federal
Reserve Regulatory Service. These interpretations serve as a guide to the margin
regulations.
Financial Disclosure
by State Member Banks
State member banks must disclose certain
information of interest to investors,
including financial reports and proxy
statements, if they issue securities registered under the Securities Exchange Act
of 1934. The Board's financial disclosure
rules are required by statute to be substantially similar to those issued by the
Securities and Exchange Commission.
In 1988 the Board implemented a
comprehensive revision of its reporting
requirements that rescinded Regulation
F in its entirety and added a new disclosure rule as part of Regulation H. To ease
compliance, the new rule requires banks
subject to Regulation H to use the forms
prescribed by the Securities and Exchange Commission and receive annual
audits of their financial statements. Small
banks have the option of filing simplified
quarterly reports.
At the end of 1988, 37 state member
banks, most of which are of small or
medium size, were registered with the
Board under the Securities Exchange
Act. Members of the Board's staff review
the bank disclosures for compliance with
the regulation.
Loans by State Member Banks to their Executive Officers, 1987-88
Period
October 1-December 31, 1987
January 1-March 31,1988
April 1-June 30,1988
July 1-September 30, 1988
Number
Amount (dollars)
Range of interest
rates charged
(percent)
1,132
1,039
1,078
1,019
21,817,715
19,447,137
20,166,780
21,199,836
6.0-20.5
6.0-20.0
6.5-21.0
6.6-21.0
182 Banking Supervision and Regulation
Loans to Executive Officers
Under section 22(g) of the Federal Reserve Act, each state member bank must
include with each quarterly report of
condition a report of all extensions of
credit made by the bank to its executive
officers since the date of the bank's
previous report of condition. The accompanying table summarizes these data for
the last quarter of 1987 and the first three
quarters of 1988.
Federal Reserve Membership
At the end of 1988, 5,450 banks were
members of the Federal Reserve System,
a decrease of 299 from the previous year.
Member banks operated 30,391 branches
on December 31,1988, a net increase of
1,131 for the year.
Member banks accounted for 41 percent of all commercial banks in the United
States and for 65 percent of all commercial banking offices.
•
183
Regulatory Simplification
In 1978 the Board of Governors established the Regulatory Improvement
Project, in the Office of the Secretary, to
minimize the burdens imposed by regulation, to ensure that consideration is
given to minimizing the economic impact
of regulation on small business, to afford
interested parties the opportunity to
participate in designing regulations and
to comment on them, and to ensure that
regulations are written in simple and
clear language. Under the program,
Board staff members periodically review
all existing regulations for adherence to
these objectives. In 1986 the Board
reaffirmed its commitment to regulatory
improvement, renaming the project the
Regulatory Review Section and creating a subcommittee of the Board called
the Regulatory Policy and Planning
Committee.
Home Mortgage Disclosure
The Board revised its Regulation C to
incorporate the 1988 amendments to the
Home Mortgage Disclosure Act of 1975,
which permanently extended the act and
expanded its coverage to include mortgage banking subsidiaries of holding
companies of depository institutions and
savings and loan service corporations
that originate or purchase mortgage
loans. In adopting the final regulation,
the Board made some changes in its
proposed definitions to ensure that institutions already reporting under the act
would not be subject to additional reporting burdens.
In the process of this revision, obsolete
provisions were deleted, footnotes were
either incorporated or eliminated, and
the instructions to the report forms were
significantly reworked to make them
easier to follow.
Availability of Information
In the spring of 1987 the Board adopted a
revised version of its "Rules Regarding
Availability of Information." These rules
cover three broad areas: requests under
the Freedom of Information Act, handled
by the Secretary of the Board; subpoenas,
inquiries regarding law enforcement, and
similar matters, handled by the Board's
General Counsel; and the routine disclosure of supervisory activities, traditionally handled by the Staff Director of the
Board's Division of Banking Supervision
and Regulation and staff members at the
Federal Reserve Banks. This revision,
the first since the Board promulgated the
rules in 1967, incorporates many procedures developed by the staff or suggested
by the courts in the intervening years.
Debt-Equity Swaps
In August 1987 the Board liberalized
provisions to Regulation K to permit
certain investments abroad by U. S. banking organizations through swaps of debt
for equity. In February 1988 the Board
further liberalized the regulation as it
applies to debt-for-equity investments in
heavily indebted developing countries.
The new provisions permit investors
to acquire up to 40 percent of the equity
of foreign companies engaged in nonfinancial activities in the context of exchanging sovereign debt obligations for
ownership interests in the companies.
The revisions extend to 15 years the time
period that companies acquired through
the debt-for-equity conversions could be
184 Regulatory Simplification
held; the revisions also increased the
amount that organizations may invest
without giving prior notice to the Board,
to the greater of $15 million or 1 percent
of the tangible equity of the bank holding
company.
Issuance of Foreign Currency
Deposits
In light of the globalization of financial
market transactions and the continuation
of financial innovations, the Board decided that the Federal Reserve would no
longer discourage the issuance of foreign
currency deposits in the United States.
The decision will become effective on
January 1, 1990, to permit time for
financial institutions to develop the procedures for handling the reporting of
such accounts. The Board does not anticipate a significant demand for foreign
currency deposits, in part because of the
availability of competing instruments and
also because foreign currency deposits
will be subject to reserve requirements.
OTC Margin Bond
The Board amended the definition of
"OTC margin bond" in Regulation T
(Credit by Brokers and Dealers) to make
certain foreign sovereign debt securities
marginable. The amendment permits
brokers and dealers to extend "good faith"
loan value on long-term debt securities
issued as a general obligation by a foreign sovereign or supernational entity if
these securities are given one of the two
highest rating categories by a nationally
recognized statistical rating organization. The amendment gives parity to U.S.
broker-dealers with regard to banks and
foreign dealers, who already could extend such credit.
Efforts to Assist Regulatory
Compliance
The Board created a special form of
information release called a Special
Notice to assist depository institutions in
complying with the Expedited Funds
Availability Act and the rule, Regulation
CC, that implements it. The Board took
this unusual step because the law and
regulation is extremely lengthy, the time
for compliance was short, and many
financial institutions thought they were
exempt because they provided next-day
availability of funds.
One Special Notice, entitled "You Are
Affected by the Expedited Funds Availability Law" and issued in June 1988,
provided a one-page checklist of policies
and notices that institutions had to have in
place by September 1, the implementation date of the regulation. The notice
also gave step-by-step instructions on
compliance and provided sample forms
that institutions could use in complying
with the requirements for informing customers. The other Special Notice, issued
in August, addressed the new endorsement standards to be used on the back of
checks.
The Federal Reserve Banks sent the
Special Notices to all depository institutions in the United States, and the Board
provided ready-to-print copy to relevant
trade associations to facilitate their distribution of the information.
•
185
Federal Reserve Banks
The Expedited Funds Availability Act,
which requires the Federal Reserve to
ensure the prompt availability of deposited funds according to mandated
schedules and to expedite the return of
checks, was a major focus of the System's activities in 1988. The legislation,
title VI of Public Law 100-86, the
Competitive Equality Banking Act of
1987, was enacted in August 1987 and
became effective on September 1, 1988
(see also "Record of Policy Actions of the
Board of Governors" in this REPORT).
Regulation CC
In December 1987 the Board proposed
for public comment Regulation CC,
which implements the Expedited Funds
Availability Act. To better prepare the
public to comment on the Board's proposals, the Reserve Banks during January
1988 conducted more than 220 seminars
attended by about 17,000 participants
from nearly 9,000 depository institutions
to explain the provisions of the act and
the proposed regulation. The Board
received more than 1,000 comments on
the proposals. After the Board approved
the final Regulation CC in May, the
Reserve Banks conducted an additional
290 seminars attended by approximately
37,000 participants from more than
16,000 depository institutions to explain
the provisions of the regulation and the
actions banks must take to comply.
In April the Board requested comment
on a proposed concept under which banks
presented with checks before 2:00 p.m.
would be required to pay those checks
with same-day funds without imposing
presentment fees. The Board will analyze
the more than 1,100 comments it received
to determine whether to put the idea into a
formal regulatory proposal to be issued
for public comment.
Also in April the Board approved
standards to be used by depository institutions when endorsing checks during the
collection and return process (appendix
D of Regulation CC). The standard is
designed to promote clear and uniform
endorsements and to make it easier for
paying banks to return unpaid checks. In
August the Board issued a Special Notice
that clarified the endorsement requirements and discussed the consequences of
not endorsing checks in accordance with
the standard.
In June the Board requested comment
on a proposed amendment to Regulation
CC to address the delayed disbursement
of teller's checks. In comments received
on the original proposal for Regulation
CC, some banks said that the requirement
to provide next-day availability for teller's checks might be particularly unfair
because some banks issue teller's checks
drawn on remote banks. In these cases,
the bank of first deposit may be required
to make funds available for withdrawal
before it could reasonably be expected to
receive funds through the collection
process. The rule proposed in June would
permit a bank to issue an official check
drawn on another bank only if a bank of
first deposit located in the same community as the issuing bank could receive
credit for the check as early as a check
drawn on the issuing bank.
In October the Board requested comment on proposed clarifying amendments to Regulation CC designed to aid
compliance.
Under Regulation CC, the Board determines, upon the request of a state,
186 Federal Reserve Banks
bank, or other interested party, whether a
state law related to funds availability is
preempted by federal law. The Board has
issued such determinations for the laws
of California, Connecticut, Illinois,
Maine, Massachusetts, New Jersey, New
Mexico, New York, and Rhode Island,
as well as for the provision in the Uniform
Commercial Code governing the availability of cash deposits.
Other Developments in the Pricing
of Federal Reserve Services
and in the Payments Mechanism
In 1988 the Federal Reserve System as a
whole recovered 100.6 percent of its
operating expenses and imputed costs,
compared with 104.6 percent in 1987.
The reduced rate of recovery is attributable primarily to the costs of providing
new services on returned checks in
accordance with Regulation CC.
Revenue at the Reserve Banks from all
priced services totaled $801.7 million,
and costs were $796.6 million, for net
revenue of $5.2 million (see the section
on Federal Reserve Bank financial statements for priced services, at the end of
this chapter). These figures include the
income and expenses related to clearing
balances, the value of priced float, and
the PSAF (the private sector adjustment
factor-the taxes and costs of capital that
the System would have incurred if it were
a private firm).
Check Collection
The operating and imputed costs of check
collection by the Federal Reserve in 1988
were $499.0 million (see the pro forma
income statement for priced services, by
service, and note 9, at the end of this
chapter). Check operations for the year
generated $513.8 million in revenue and
a net of $10.2 million in other income and
expenses. The number of checks handled
by the Reserve Banks was 17.6 billion,
an increase of 3.6 percent from 1987.
The Board approved the implementation of new Federal Reserve services
designed to accelerate the processing of
returned checks by the Federal Reserve
Banks and thus facilitate compliance by
banks with the check return rules of
Regulation CC. The new return services,
which are explicitly priced, became
effective September 1, 1988. Returned
check fees are assessed on the paying or
returning bank depositing returned
checks with the Federal Reserve Bank.
Also on September 1, Federal Reserve
forward collection fees were reduced
because of the elimination of the return
cost component in those fees. In June the
Board approved the prices and deadlines
for the new Federal Reserve returned
check services as well as the revised
prices and deadlines for Federal Reserve
forward collection services.
In May the Board converted into
permanent services the System's pilot
programs for truncation and for the
electronic delivery of information captured through Magnetic Ink Character
Recognition (MICR). Reserve Banks will
initially provide truncation services only
to paying banks that request this service
locally; eventually the System intends to
offer a national service by truncating a
check (holding the physical check and
transmitting payment information electronically) at the first Federal Reserve
Bank to receive the check. Under the
extended MICR service, Reserve Banks
would deliver payment information by
electronic transmission or magnetic tape,
provide returned check and retrieval
service, and deliver the checks to the
paying bank several days later.
On September 1 the Reserve Banks
implemented the provisions of Regulation CC (Expedited Funds Availability
Act). The Reserve Banks also implemented new services designed to reduce
Federal Reserve Banks
the risk to depository banks from making
funds available for withdrawal more
promptly. The Reserve Banks began
serving as returning banks, as defined by
Regulation CC, and accepting returned
checks from any paying bank or returning
bank.
In order to expedite the return process,
Reserve Banks began to send returned
checks directly to the bank of first deposit, thus bypassing intermediary endorsers. The Reserve Banks began overnight processing of local returned checks
for dispatch with the forward collection
checks the next morning. Nonlocal returned checks are prepared for highspeed processing ("qualified") by the first
Federal Reserve office and dispatched to
the second Federal Reserve office the
following night. Federal Reserve offices
also accept returned checks that have
been qualified by the paying bank or prior
returning bank and dispatch them as
quickly as forward collection checks.
Because of the requirement in Regulation CC for expanded notification of
return, the Reserve Banks also began
processing notifications at the request of
the paying bank for delivery to the bank
of first deposit of any returned check for
an amount greater than $2,500.
Electronic Payments
The Federal Reserve System is conducting a strategic study of its electronic
payments services in the 1990s. One
phase of the study is an evaluation of
alternative delivery systems for electronic payments. In 1988 the Federal
Reserve issued a request for proposals to
test new technology. Concurrently, the
Reserve Banks are improving the reliability of their current operating systems.
In addition, the Federal Reserve contacted representatives of depository institutions and other users of payment services to define more precisely the future
187
business requirements for its electronic
payment services.
Automated Clearinghouse
Operating and imputed costs of providing
automated clearinghouse (ACH) services in 1988 were $38.9 million; revenues were $42.7 million. The Reserve
Banks processed 602.4 million commercial transactions in 1988, an increase of
26.8 percent over 1987.
In July 1988, operational measures
designed to reduce risk in the ACH
mechanism became effective. The measures include uniform procedures for
Reserve Banks to monitor ACH payments originated by financially weak
depository institutions; earlier deposit
deadlines for returns of ACH debit
transactions of $2,500 or more; and
uniform procedures for depository institutions to account for credit transactions
that settle on holidays or other days when
the institutions are closed.
Board staff members continued their
analysis of the proposal, offered in December 1986, to modify the procedures
for measuring daylight overdrafts and to
redefine the finality of ACH transactions.
The Board took no final action on the
proposal in 1988.
Finally, the Reserve Banks continued
to make progress in increasing the number of electronic connections to depository institutions for the delivery of ACH
transactions. The Reserve Banks deployed a new software product by which
depository institutions can gain access to
Federal Reserve services, including
ACH, through personal computers. The
product should expand the electronic
delivery of ACH transactions.
Wire Transfer of Funds
The number of wire transfers originated
during 1988 increased 5.7 percent over
188 Federal Reserve Banks
1987, to 56.3 million. Service costs
totaled $64.3 million, while revenue
amounted to $69.6 million. In 1988 the
basic fee for funds transfers was reduced
from $0.50 to $0.47.
By year-end 1988, almost all electronic
connections between Reserve Banks and
depository institutions for funds transfers
via low-volume computer terminals were
converted to standard protocols and
encrypted. The System also converted
more than one-third of its high-volume
connections by year-end.
To reduce the risk of service disruptions, the Reserve Banks completed a test
to evaluate ways to process work for each
other during a serious interruption in
operations. The results led to improvements in the reliability of Federal Reserve
electronic payment services. In November 1988 the Board approved the creation
of a contingency processing center at the
Los Angeles Branch to handle funds
transfers, securities transfers, and ACH
and accounting operations in the event of
a severe interruption of service at the
Federal Reserve Bank of San Francisco.
Federal Reserve also initiated a major
automation effort that will enable the
Board, the Reserve Banks, the Bureau of
Engraving and Printing, and the U.S.
Mint to better manage the supply of cash
through the exchange of data. The Federal Reserve also continued to work with
the Department of the Treasury to deter
the counterfeiting of U.S. currency.
Definitive Securities
and Noncash Collection
The System received $17.9 million in
revenue for definitive safekeeping and
noncash collection services in 1988; the
cost of these services was $16.7 million.
The average number of definitivesecurities issues and deposits maintained
in safekeeping accounts at the Reserve
Banks decreased 15.6 percent in 1988, to
138,000. The number of noncash collection items processed decreased 12.2
percent, to 3.3 million. Reserve Banks
continue tosearch for ways to reduce
costs as the volume of work decreases in
both the definitive safekeeping and noncash collection services.
Coin and Currency
In its coin and currency operations, the
Federal Reserve continued to focus on
the effectiveness of controls, the efficiency in processing, and the maintenance of high quality for currency in
circulation.
Priced cash services received $14.9
million in revenue in 1988; the cost of
these services was $14.2 million. In
1988, four Federal Reserve Districts
provided transportation of cash by
armored carrier and four Districts provided wrapped coin to depository
institutions.
Major undertakings in 1988 included a
determination of the optimal level of
quality for the currency distributed to the
public by Federal Reserve Banks. The
Securities and Fiscal
Agency Services
The Federal Reserve provides bookentry (computerized) securities services
for the Department of the Treasury and
for certain federally sponsored agencies,
such as the Federal National Mortgage
Association and the Federal Home Loan
Mortgage Corporation. Book-entry services for federal agency securities are
treated as a Federal Reserve priced
service; these services incurred costs of
$8.4 million and earned revenue of $8.7
million in 1988. The Federal Reserve
processed 2.2 million such transfers
during the year, an increase of 8.5 percent
from 1987.
Federal Reserve Banks 189
The Federal Reserve sells savings
bonds in its role as fiscal agent. Under a
pilot program begun in 1987 and continued in 1988, the Ohio Over-the-Counter
Savings Bonds project, all savings bonds
sold over-the-counter in Ohio are being
issued at the Pittsburgh Branch of the
Federal Reserve Bank of Cleveland rather
than at thefinancialinstitutions receiving
the applications for purchase. The data
from the pilot program indicate that
centralized issuance saves money for the
government and is acceptable to
investors.
Float
Federal Reserve float increased to a daily
average of $606 million in 1988, compared with $454 million in 1987. The
costs of all Federal Reserve float associated with priced services are recovered
each year.
Examinations
The Board's Division of Federal Reserve
Bank Operations examines the 12 Reserve Banks and their 25 Branches each
year, as required by section 21 of the
Federal Reserve Act. The results of the
audits are given to the management and directors of the respective
Banks and to the Board of Governors.
Also, to assess conformance with the
policies issued by the Federal Open
Market Committee, the division annually audits the accounts and holdings
of the Federal Reserve System Open
Market Account at the Federal Reserve
Bank of New York and the foreign currency operations conducted by that
Bank. The division furnishes copies
of these reports to the Committee.
The examination procedures used by
the division are reviewed each year
by a private firm of certified public
accountants.
Income and Expenses
The accompanying table summarizes the
income, expenses, and distribution of net
earnings of the Federal Reserve Banks
for 1988 and 1987.
Income, at $19,526 million, was 10.7
percent higher than in 1987, primarily
because of an increase of $1,808 million
in earnings on the System's holdings of
Income, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1988 and 1987l
Thousands of dollars
Item
Current income
Current expenses
Operating expenses2
Earnings credits granted
Current net income
Net addition to (deduction from) current net income
Cost of unreimbursed services to Treasury
Assessments by the Board of Governors
For expenditures of Board
For cost of currency
Net income before payments to Treasury
Dividends paid
Payments to Treasury (interest on Federal Reserve notes) .
Transferred to surplus
1. Details may not add to totals because of rounding.
2. Operating expenses include a net periodic credit for
1988
1987
19,526,431
1,205,960
1,081,685
124,276
18,320,471
-489,058
27,852
248,655
84,411
164,245
17,554,906
125,616
17,364,319
64,971
17,633,012
1,146,911
1,033,288
113,623
16,486,101
1,843,552
46,958
252,545
81,870
170,675
18,030,150
117,499
17,738,880
173,771
pension costs of $70 million in 1988 and $49 million in
1987.
190 Federal Reserve Banks
U.S. government securities. Total expenses were $1,290 million ($1,082
million in Reserve Bank operating expenses, $124 million in earnings credits
granted to depository institutions, and
$84 million in assessments for expenditures by the Board of Governors). The
cost of currency was $164 million.
Income fromfinancialservices was $657
million.
The profit and loss account showed a
net deduction of $489 million, resulting primarily from losses on assets
denominated in foreign currencies.
Statutory dividends to member banks
totaled $126 million, $8 million more
than in 1987. The rise reflected an
increase in the capital and surplus of
member banks and a consequent
increase in the paid-in capital stock of
the Reserve Banks.
Payments to the U.S. Treasury,
termed interest on Federal Reserve
notes, totaled $17,364 million, compared with $17,739 million in 1987. The
payments consist of all income after the
deduction of dividends and after the
deduction of the amount necessary to
bring the surplus of the Banks to the
level of capital paid in.
In the Statistical Tables section of this
table 6 details income and
expenses of each Federal Reserve Bank
for 1988, and table 7 shows a condensed
statement for each Bank for 1914-88. A
detailed account of the assessments and
expenditures of the Board of Governors
appears in the next chapter, "Board of
Governors Financial Statements."
REPORT,
Federal Reserve Bank Premises
During 1988 the Board of Governors
authorized purchases of property for
future expansion at the Atlanta Bank and
at the Houston Branch of the Dallas Bank.
The New York Bank initiated the design
of its new operations center and the
Minneapolis Bank completed the design
of a new building for the Helena Branch.
Construction of the new building for the
Charlotte Branch of the Richmond Bank
and the expansion of the main building of
the Chicago Bank continued. Table 8, in
the Statistical Tables section of this
REPORT, shows the cost and book value
of premises owned by the Federal Reserve Banks and Branches and of real
estate acquired for future banking-house
purposes.
Securities and Loans of Federal Reserve Banks, 1986-88
Millions of dollars, except as noted
Item and year
Average daily holdings2
1986
1987
1988
Earnings
1986
1987
1988
Average interest rate (percent)
1986
1987
1988
1. Includes federal agency obligations.
Total
U.S.
government
securitiesl
Loans
193,354
217,392
233,796
192,514
216,722
231,442
840
670
2,354
16,199
16,418
18,358
16,142
16,371
18,180
57
47
179
8.38
7.55
7.85
8.38
7.55
7.85
6.84
6.99
7.59
2. Based on holdings at opening of business.
Federal Reserve Banks 191
Holdings of Securities and Loans
Volume of Operations
As shown in the preceding table, average Table 9, in the Statistical Tables section
daily holdings of securities and loans of this REPORT, shows the volume of
during 1988 amounted to $233,796 mil- operations in the principal departments
lion, an increase of $16,404 million over of the Federal Reserve Banks for the
1987. Holdings of U.S. government years 1985-88.
securities increased $14,720 million and
loans increased $1,684 million.
From 1987 to 1988 the average rate of Financial Statements
interest on holdings of U.S. government for Priced Services
securities increased, from 7.55 percent The following tables show pro forma
to 7.85 percent; and the average rate of statements for priced services for 1988,
interest on loans increased, from 6.99 including a balance sheet, income statepercent to 7.59 percent.
ments, and a breakdown of volumes.
PRO FORMA BALANCE SHEET FOR PRICED SERVICES
1988
As of December 31
(millions)
1987
SHORT-TERM ASSETS (Note 1)
Imputed reserve requirements on clearing balances
Investment in marketable securities
Receivables
Materials and supplies
Prepaid expenses
Net items in process of collection (float)
Total short-term assets
$ 222.0
1,628.0
57.7
6.4
10.9
967.0
$ 219.6
1,610.4
58.3
4.9
6.7
67'5.7
$2,892.0
$2,575.5
LONG-TERM ASSETS (Note 2)
Premises
Furniture and equipment
Leases and leasehold improvements
Prepaid pension costs
Total long-term assets
271.8
126.1
6.1
37.4
TOTAL ASSETS
224.5
110.9
3.0
18.7
441.4
357.1
$3,333.4
$2,932.7
SHORT-TERM LIABILITIES
Clearing balances and balances arising from early credit
ofuncollected items
Short-term debt
Total short-term liabilities
$2,817.0
75.0
$2,505.7
69.9
$2,892.0
$2,575.5
LONG-TERM LIABILITIES
Obligations under capital leases
Longtermdebt
Total long-term liabilities
TOTAL LIABILITIES
1.2
128.1
1.2
107.2
129.3
3,021.3
EQUITY
312.1
TOTAL LIABILITIES AND EQUITY (Note 3)
$3,333.4
Details may not add to totals because of rounding.
The accompanying notes are an integral part of these financial statements.
108.4
2,684.0
248.7
$2,932.7
192 Federal Reserve Banks
PRO FORMA INCOME STATEMENT FOR PRICED SERVICES
For the years ending December 31
(millions)
1988
1987
INCOME (Note 4)
Services provided to depository institutions
$667.7
$649.7
EXPENSES (Note 5)
Production expenses
552.9
506.8
INCOME FROM OPERATIONS
114.8
142.9
IMPUTED COSTS (Note 6
Interest on
Interest on debt
Sales taxes
FDIC insurance
float
$ 43.4
16.2
8.4
L8
69.9
INCOME FROM OPERATIONS AFTER IMPUTED COSTS
$ 27.4
16.1
7.4
L8
52.7
44.9
90.2
OTHER ICOME AND EPENSES (Note 7)
Investment income
Earnings credits
134.0
123.0
11.0
119.1
114.1
5J)
INCOME BEFORE INCOME TAXES
55.9
95.2
IMPUTED INCOME TAXES (Note 8)
18.1
32.3
$ 37.9
$ 62.9
$ 32.7
$ 29.3
NET INCOME
MEMO
Targeted return on equity (Note 8)
Details may not add to totals because of rounding.
The accompanying notes are an integral part of these financial statements.
PRO FORMA INCOME STATEMENT FOR PRICED SERVICES, BY SERVICE
(Note 9)
For the year ending December 31, 1988 (millions)
INCOME FROM SERVICES
Total
Commercial
check
collection
Wire
transfer
and net
settlement
$69.6
$667.7
$513.8
OPERATING EXPENSES
552.9
436.6
INCOME FROM OPERATIONS . . .
114.8
IMPUTED COSTS
Commercial
ACH
Definitive
safekeeping
and
noncash
collection
Bookentry
securities
Cash
services
$42.7
$17.9
$8.7
$14.9
61.2
36.2
15.8
7.7
14.1
77.2
8.4
6.6
2.1
1.0
.8
69.9
62.4
3.1
2.7
.9
_/7
A
44.9
14.7
5.4
3.9
1.2
.3
.7
11.0
10.2
J
.3
A
J^_
A
$55.9
$24.9
INCOME FROM OPERATIONS
AFTER IMPUTED COSTS . .
OTHER INCOME AND
EXPENSES, NET
INCOME BEFORE INCOME
TAXES
$5.7
$4.2
$1.3
*Less than $500,000 in absolute value.
Details may not add to totals because of rounding.
The accompanying notes are an integral part of these financial statements.
$.3
$ .8
Federal Reserve Banks
193
REVENUE AND EXPENSES OF LOCALLY PRICED SERVICES
(Note 10)
For the year ending December 31,1988 (millions)
Total
revenue
Operating
Float
Total
cost
cost
cost
Commercial check collection
$ 31.6
$ 4.4
$ 36.0
59.6
6.9
66.4
18.7
1.1
19.8
25.4
1.7
27.0
38.7
2.9
41.6
53.3
.6
53.9
56.8
4.2
61.0
19.4
2.3
21.7
24.9
.4
25.3
29.1
1.5
30.6
30.5
2.6
33.1
44.5
5.6
50.1
Boston
NewYork
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
KansasCity
Dallas
San Francisco
$ 36.6
66.4
24.7
30.1
48.2
59.3
71.3
22.8
29.4
32.6
37.7
54.6
System total
$513.8
Boston
NewYork
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
KansasCity
Dallas
San Francisco
$
System total
$17.9
$15.8
Boston
NewYork
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
KansasCity
Dallas
San Francisco
$
.
.
.
.
.
.
.
.
.
.
.
.
System total
$14.9
$435.3
$34.2
$ .6
*
4.8
3.0
6.6
5.4
10.2
1.1
4.1
2.0
4.6
4.5
$469.6
Definitive safekeeping and noncash collection
.8
$ .7
*
$ .7
2.9
2.5
*
2.4
1.3
1.2
•
1.2
2.1
1.8
.1
1.9
.9
.9
*
.9
2.6
2.4
*
2.3
2.7
2.0
*
2.0
1.2
1.1
*
1.1
.9
1.0
*
.9
1.5
1.3
*
1.3
1.3
1.0
*
1.0
*
*
*
*
.7
*
1.6
1.9
.1
*
.5
.3
2.8
.5
*
6.5
..
..
..
..
..
..
..
..
..
..
..
. .
...
*
Cash services
...
...
...
...
...
...
...
...
...
...
...
. . .
...
*Less than $500,000 in absolute value.
Details may not add to totals because of rounding.
The accompanying notes are an integral part of these financial statements.
Net
revenue
$15.8
$
$44.2
$.1
.4
.1
.2
*
.3
.6
.1
-.1
.2
.2
*
$2.2
.7
*
1.5
1.8
.1
*
.4
.3
2.5
.5
*
6.3
*
*
*
.2
*
*
*
*
.3
*
*
.2
$14.1
$.8
194 Federal Reserve Banks
PRICED SERVICES VOLUMES
(Note 11)
Thousands of items, except as noted
1988
56,334
602,406
17,617,744
2,236
138
3,337
341
Fund transfers
Commercial ACH
Commercial checks
Securities transfers
Definitive safekeeping
Noncash collection
Cash transportation
1987
53,278
475,114
17,007,924
2,061
163
3,803
357
1986
49,900
362,557
16,225,812
1,719
165
4,312
363
Percent change
1987-88
1986-87
5.7
7.1
26.8
31.0
3.6
4.8
8.5
19.9
-15.6
-1.0
-12.2
-11.8
-4.6
-1.4
The accompanying notes are an integral part of these financial statements.
NOTES TO FEDERAL RESERVE BANK
FINANCIAL STATEMENTS
FOR PRICED SERVICES
PRO FORMA BALANCE SHEET
(1) SHORT-TERM ASSETS
The imputed reserve requirement on clearing balances and
investment in marketable securities reflect the Federal
Reserve's treatment of clearing balances maintained on
deposit with Reserve Banks by depository institutions. For
presentation of the balance sheet and the income statement,
clearing balances are reported in a manner comparable to
the way correspondent banks report compensating balances
held with them by respondent institutions. That is,
respondent balances held with a correspondent are subject
to a reserve requirement established by the Federal
Reserve. This reserve requirement must be satisfied with
either vault cash or with nonearning balances maintained at
a Reserve Bank. Following this model, clearing balances
maintained with Reserve Banks for priced service purposes are subjected to imputed reserve requirements.
Therefore, a portion of the clearing balances held with the
Federal Reserve is classified on the asset side of the balance
sheet as required reserves and is reflected in a manner
similar to vault cash and due from bank balances normally
shown on a correspondent bank's balance sheet. The
remainder of clearing balances is assumed to be available
for investment. For these purposes, the Federal Reserve
assumes that all such balances are invested in three-month
Treasury bills.
Receivables represent (1) amounts due the Reserve
Banks for priced services that have been provided to
institutions for which payment has not yet been received
and (2) that share of suspense-account and differenceaccount balances related to priced services.
The amount shown for materials and supplies represents
the inventory value of such short-term assets necessary for
the ongoing operations of priced service areas. Prepaid
expenses represent items such as salary advances and
travel advances for priced service personnel.
The account "Net items in the process of collection"
represents the amount of float as of the balance-sheet date
and is the difference between the value of items in the
process of collection-including checks, coupons, securities, wire transfers, and automated clearinghouse (ACH)
transactions—and the value of deferred-availability items.
The cost base for providing services that must be recovered
under the Monetary Control Act includes the cost of float
incurred by the Federal Reserve during the period, valued
at the federal funds rate. Conventional accounting procedures would call for the gross amount of items in the
process of collection and deferred availability items to be
included on a balance sheet. However, the gross amounts
have no implications for income or actual or imputed costs,
and inclusion of the gross amounts could lead to misinterpretations of the assets employed in the provision of priced
services that must be financed. Therefore, only the net
amount is shown. The net amount represents the assets that
involve a financing cost.
(2) LONG-TERM ASSETS
Long-term assets on the balance sheet have been
allocated to priced services with the direct determination
method, which uses the Federal Reserve's Planning and
Control System to ascertain directly the value of assets
used solely in priced services operations and to apportion
the value ofjointly used assets between priced services and
nonpriced services. Also, long-term assets include an
estimate of the assets of the Board of Governors directly
involved in the development of priced services.
Long-term assets include amounts for capital leases and
leasehold improvements and for prepaid pension costs
associated with priced services. Effective January 1,1987,
the Federal Reserve Banks implemented Financial Accounting Standards Board Statement No. 87, Employers'
Accounting for Pensions. Accordingly, the Reserve Banks
recognized a credit to expenses of $18.7 million and a
corresponding increase in this long-term asset account in
1988.
(3) LIABILITIES AND EQUITY
A matched-book capital structure has been used for those
assets that are not "self-financing" in determining liability
and equity amounts. Short-term assets are financed with
short-term debt. Long-term assets are financed with longterm debt and equity in a proportion equal to the ratio of
long-term debt to equity for the bank holding companies
used in the model for the private sector adjustment factor
(PS AF). The PS AF model uses the 25 largest bank holding
companies as a basis to impute the taxes that would have
been paid and the return on capital that would have been
provided had Federal Reserve priced services been
furnished by a private-sector firm.
Federal Reserve Banks 195
Other short-term liabilities include clearing balances
maintained at Reserve Banks and deposit balances arising
from float. Other long-term liabilities consist of obligations
on capital leases.
PRO FORMA INCOME STATEMENT
The income statement reflects income and expenses for
priced services. Included in these amounts are the imputed
costs of float, imputed financing costs, and the income
related to clearing balances.
(4) INCOME
Income represents charges to depository institutions for
priced services. This income is realized through one of two
methods: direct charges to an institution's account or
charges against accumulated earnings credits.
(5) PRODUCTION EXPENSES
Production expenses include direct, indirect, and other
general administrative expenses of the Federal Reserve
Banks for providing priced services. Also included are the
expenses of staff members of the Board of Governors
working directly on the development of priced services,
which were $1.7 million in 1988 and in 1987. The credit to
expenses resulting from implementation of FASB 87 (see
note 2) is reflected in production expenses.
(6) IMPUTED COSTS
Imputed float costs represent the value of float to be
recovered, either explicitly or through per-item fees,
during the period. Float costs include those for checks,
book-entry securities, noncash collection. ACH, and wire
transfers.
The following table depicts the daily average recovery of
float by the Federal Reserve Banks for 1988. In the table,
unrecovered float includes that generated by services to
government agencies or by other central bank services.
Float recovered through income on clearing balances
represents increased investable clearing balances as a
result of reducing imputed reserve requirements through
the use of a cash-items-in-process-of-collection deduction
for float when calculating the reserve requirement. This
income then reduces the float required to be recovered
through other means.
As-of adjustments and direct charges refer to midweek
closing float and interterritory check float, which may be
recovered from depositing institutions through adjustments
to the institution's reserve or clearing balance or by valuing
the float at the federal funds rate and billing the institution
directly.
Float recovered through per-item fees is valued at the
federal funds rate and has been added to the cost base
subject to recovery in 1988.
Total
float
Unrecovered
float
Float subject to recovery
Sources of recovery of float
Income on clearing balances
As of adjustments
Direct charges
Per-item fees
Daily average
(millions)
$931.2
55.8
875.4
105.4
325.3
121.2
323.6
Also included in imputed costs is the interest on debt
assumed necessary to finance priced service assets and the
sales taxes and FDIC insurance assessment that the Federal
Reserve would have paid had it been a private-sector firm.
These imputed costs are among the components of the
PSAF(seenote3).
(7) OTHER INCOME AND EXPENSES
Other income and expenses consist of income on clearing
balances and the cost of earnings credits granted to
depository institutions on their clearing balances. Income
on clearing balances represents the average couponequivalent yield on three-month Treasury bills applied to
the total clearing balance maintained, adjusted for the
effect of reserve requirements on clearing balances.
Expenses for earnings credits are derived by applying the
average federal funds rate to the required portion of the
clearing balances, adjusted for the net effect of reserve
requirements on clearing balances.
(8) INCOME TAXES AND RETURN ON EQUITY
Imputed income taxes are calculated at the effective tax
rate derived from the PSAF model (see note 3). The
targeted return on equity represents the after-tax rate of
return on equity that the Federal Reserve would have
earned had it been a private business firm, based on the
bank holding company model. These items are among the
components of the PSAF (see note 3).
PRO FORMA INCOME STATEMENT, BY SERVICE
(9) The income statement by service reflects revenue,
operating expenses, and imputed costs except for income
taxes. The effect of implementing FASB 87 (see note 2) is
reported only in the "total" column in this table and has not
been allocated to individual priced services.
Imputed costs include float and interest on debt, sales
taxes, and the FDIC assessment. Float costs are based on
the actual float incurred in each priced service. Other
imputed costs are allocated among priced services according to the ratio of operating costs less shipping costs in each
priced service to the total cost of all priced services less the
total shipping costs of all priced services.
Other income and expenses consist of income on clearing
balances and the cost of earnings credits for the Federal
Reserve. Because clearing balances relate directly to the
Federal Reserve's offering of priced services, the income
and cost associated with these balances are spread to each
service based on the ratio of income from each service to
total income.
Taxes and the after-tax targeted rate of return on equity,
as shown on the pro forma income statement, have not been
spread by service because these elements relate to the
organization as a whole.
REVENUE AND EXPENSES
OF LOCALLY PRICED SERVICES
(10) This table depicts the financial results for each
Reserve Bank in providing locally priced services.
Expenses related to research and development projects are
reported at the System level; the sum of expenses for the
12 Districts may not, therefore, equal the System total. The
financial results for each Reserve Bank shown here do not
include the dollars to be recovered through the PSAF and
196 Federal Reserve Banks
the net income on clearing balances. Therefore, to
reconcile net revenue by priced service shown in this table
with that shown in the preceding table, adjustments must be
made for imputed interest on debt, sales taxes, FDIC
assessment, Board expenses for priced services, and net
income on clearing balances.
PRICED SERVICES VOLUMES
(11) This table shows the number of items handled by
the Federal Reserve in its priced services operations and
the percentage changes in these numbers in recent years.
Volume for the wire transfer of funds is the number of basic
transactions originated; ACH volume is the total number
of commercial items processed; commercial check volume
reflects the total commercial checks collected, including
both processed andfine-sortitems; volume for securities
transfers is the number of basic transfers originated online; volume for definitive safekeeping is the average
number of issues or receipts maintained; noncash collection
volume is the number of items assessed fees; and cash
transportation volume is the number of armored-carrier
stops.
•
197
Board of Governors Financial Statements
The financial statements of the Board for
the years 1988 and 1987 were exam-
ined by Price Waterhouse, independent
public accountants.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Governors of the
Federal Reserve System
In our opinion, the accompanying balance sheets and the related statements of revenues and
expenses and fund balance and of cashflowspresent fairly, in all material respects, the financial
position of the Board of Governors of the Federal Reserve System at December 31,1988 and
1987, and the results of its operations and its cashflowsfor the years then ended, in conformity
with generally accepted accounting principles. These financial statements are the responsibility
of the Board's management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards and thefinancialaudit standards in Government Auditing
Standards issued by the Comptroller General. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether thefinancialstatements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in thefinancialstatements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overallfinancialstatement
presentation. We believe that our audits provide a reasonable basis for the opinion expressed
above.
Washington, D.C.
February 24, 1989
198 Board Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS
As of December 31,
1988
1987
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Stockroom and cafeteria inventories, at cost
Prepaid expenses and other assets
Total current assets
PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3)
OTHER ASSETS
$ 7,312,846
602,478
333,601
654,077
$ 7,705,996
908,883
244,963
760,903
8,903,002
9,620,745
58,487,676
63,356,924
-
Totalassets
429,357
$67,390,678
$73,407,026
$ 4,020,776
2,915,138
4,288,264
833,578
$ 4,593,746
2,547,172
4,185,226
237,951
12,057,756
11,564,095
55,332,922
61,842,931
$67,390,678
$73,407,026
LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES
Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Other liabilities (Note 4)
Total current liabilities
FUNDBALANCE
Total liabilities and fund balance
The accompanying notes are an integral part of these statements.
Board Financial Statements 199
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31,
1988
1987
BOARD OPERATING REVENUES
Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 4)
Total operating revenues
$ 84,410,500
3,460,332
87,870,832
$ 81,869,800
3,645,891
85,515,691
56,229,044
7,095,176
7,601,609
3,171,355
3,169,953
3,099,672
3,062,980
3,035,304
2,461,366
2,305,362
876,944
2,272,076
53,811,021
6,245,296
7,530,325
2,834,715
3,195,502
2,731,026
2,235,129
3,218,518
2,764,635
1,867,291
1,398,787
2,089,415
94,380,841
89,921,660
(6,510,009)
(4,405,969)
BOARD OPERATING EXPENSES
Salaries
Retirement and insurance contributions
Depreciation and losses (gains) on disposals
Travel
Utilities
Repairs and maintenance
Contractual services and professional fees
Postage and supplies
Software
Printing and binding
Equipment and facility rentals
Other expenses (Note 4)
Total operating expenses
BOARD OPERATING REVENUES (UNDER) EXPENSES
ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES
Assessments levied on Federal Reserve Banks
for currency costs
Expenses for currency printing, issuance,
retirement, shipping, and research costs
164,975,182
170,700,082
164,975,182
170,700,082
CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES
TOTAL REVENUES (UNDER) EXPENSES
FUND BALANCE, Beginning of year
FUND BALANCE, End of year
—
(6,510,009)
(4,405,969)
61,842,931
66,248,900
$ 55,332,922
$ 61,842,931
The accompanying notes are an integral part of these statements.
—
200
Board Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1988
1987
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$(6,510,009)
$(4,405,969)
7,601,609
7,530,325
324,593
429,357
103,038
1,044,021
1,279,149
288,828
390,623
2,339,211
(616,694)
5,119,660
42,608
(2,774,969)
33,334
(6,093,208)
(2,732,361)
(6,059,874)
(393,150)
(940,214)
Adjustments to reconcile net income to net cash
Depreciation and losses (gains) on disposals
Decrease in accounts receivable, inventories and prepaid expenses,
and other assets
Decrease in other non-current assets
Increase in accrued annual leave
Increase (decrease) in accounts payable, accrued payroll and related taxes,
and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of furniture and equipment
Capital expenditures
Net cash used in investing activities
NET DECREASE IN CASH
CASH BALANCE, Beginning of year
CASH BALANCE, End of year
7,705,996
8,646,210
$ 7,312,846
$ 7,705,996
The accompanying notes are an integral part of these statements.
Board Financial Statements
201
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1988 AND 1987
(1) SIGNIFICANT ACCOUNTING POLICIES
Board Operating Revenues and Expenses—Assessments
made on the Federal Reserve Banks for Board operating
expenses and capital expenditures are calculated based on
expected cash needs. These assessments, other operating
revenues, and operating expenses are recorded on the
accrual basis of accounting.
Issuance and Redemption of Federal Reserve Notes—
The Board incurs expenses and assesses the Federal
Reserve Banks for the cost of printing, issuing, shipping
and retiring Federal Reserve Notes. These assessments
and expenses are separately reported in the statements of
revenues and expenses because they are not Board
operating transactions.
Property, Buildings, and Equipment—The Board's property, buildings and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the
assets, which range from 3 to 10 years for furniture and
equipment and from 10 to 50 years for building equipment
and structures.
Other Assets - T h e Board made prepayments for computer equipment to be received in future years. In addition,
maintenance on this and other computer equipment
received during 1987 and 1988 has been prepaid through
January 1989. For 1987 OTHER ASSETS includes the
equipment prepayments and the portion of the prepaid
maintenance services which will be received in 1989. As
the equipment is received and maintenance service
provided, the furniture and equipment account and the
appropriate expense account will be charged accordingly.
Contingency Processing Center—The Board operates on
behalf of the Federal Reserve System a contingency
processing center to handle data processing requirements
during emergency situations. The Board recovers from the
Federal Reserve Banks a proportionate amount of the
operating expenses of the center in the form of fees.
(2) RETIREMENT BENEFITS
Substantially all of the Board's employees participate in
either the Retirement Plan for Employees of the Federal
Reserve System or the Civil Service Plan. The System's
Plan is a multiemployer plan which covers employees of
the Federal Reserve Banks, the Board, and the Plan
Administrative Office. Employees of the Board who
entered on duty prior to 1984 are covered by a contributory
defined benefits program under the plan. Employees of the
Board who entered on duty after 1983 are covered by a
non-contributory defined benefits program under the plan.
The Civil Service Plan is a defined contribution plan.
Contributions to the System's Plan are actuarially
determined and funded by participating employers at
amounts prescribed by the Plan's administrator. No
separate accounting is maintained of assets contributed by
the participating employers and net pension cost for the
period is the required contribution for the period. As of
January 1,1988, actuarial calculations showed that the fair
value of the assets of the System's Plan exceeded the
projected benefit obligations by 61 percent. Based on these
calculations and similar calculations performed for 1987,
it was determined that employer funding contributions
were not required for the years 1988 and 1987 and the
Board was not assessed a contribution for these years.
Excess Plan assets will continue to fund future years'
contributions.
Board contributions to the Civil Service Plan directly
match employee contributions. The Board's contributions
to the Civil Service Plan totaled $555,700 in 1988 and
$547,000 in 1987.
Employees of the Board may also participate in the
Federal Reserve System's Thrift Plan. Under the Thrift
Plan, members may contribute up to a fixed percentage of
their salary. Board contributions are based upon a fixed
percentage of each member's basic contribution and were
$1,594,000 in 1988 and $1,491,000 in 1987.
The Board also provides certain health benefits for
retired employees. The cost of providing the benefits is
recognized by expensing the insurance premiums which
were $245,400 in 1988 and $166,800 in 1987.
(3) PROPERTY, BUILDINGS, AND EQUIPMENT
The following is a summary of the components of the
Board's fixed assets, at cost, net of accumulated
depreciation.
As of December 31,
1988
1987
Land and
improvements .
Buildings
Furniture and
equipment
Less accumulated
depreciation ..
Total property,
buildings and
equipment
$
1,301,314
63,290,586
$
1,301,314
62,903,355
38,865,250
103,457,150
37,005,912
101,210,581
44,969,474
37,853,657
$ 58,487,676
$ 63,356,924
(4) OTHER REVENUES AND OTHER EXPENSES
The following are summaries of the components of
Other Revenues and Other Expenses.
For the years
ended December 31,
1988
1987
Other Revenues
Contingency
Processing
Center fees
Subscription
revenues
Miscellaneous
$1,672,667
$1,593,050
924,783
862,882
1,418,513
634,328
202 Board Financial Statements
(4) OTHER REVENUES AND OTHER EXPENSES—Cont.
Total other
revenues
Other Expenses
Subsidies and
contributions...
Tuition, registrations
and membership
fees
Cafeteria operations,
net
Miscellaneous
Total other
expenses
$3,460,332
$3,645,891
$ 697,237
$ 649,919
571,271
517,097
598,004
405,564
560,282
362,117
$2,272,076
$2,089,415
Beginning in 1988, the Board began recognizing income
from sale of publication subscriptions as revenue over the
period the publications and statistical releases are supplied
to the subscriber rather than the cash basis previously
followed. Of $1,574,783 received in 1988, $650,000
represents unearned subscription revenue which is included in other liabilities.
(5) FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL
The Board is one of the five member agencies of the
Federal Financial Institutions Examination Council (the
"Council"). During 1988 and 1987, the Board paid
$187,200 and $162,000, respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1988 and 1987.
The Board serves as custodian for the Council's cash
account. This cash is not reflected in the accompanying
financial statements. It also processes accounting transactions, including payroll for most of the Council employees,
and performs other administrative services for which the
Board was reimbursed $31,700 in each of the years 1988
and 1987.
The Board is not reimbursed for the costs of personnel
who serve on the Council and on the various task forces and
committees of the Council.
•
Statistical Tables
204 Tables
1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31, 1988 *
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
Loans and securities
Loans to depository institutions
Federal agency obligations
Bought outright
Held under repurchase agreement
U.S. Treasury securities
Bought outright
Bills
Notes
Bonds
11,059,988
5,018,000
397,593
2,171,233
6,966,477
2,100,735
112,781,960
90,950,477
29,929,395
Total bought outright
233,661,832
Held under repurchase agreement
4,760,465
Total securities
238,422,297
Total loans and securities
249,660,742
Items in process of collection
Transit items
6,943,601
Other items in process of collection
1,795,238
Total items in process of collection
Bankpremises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bankpremises
Less depreciation allowance
8,738,839
108,905
564,838
171,938
95,876
832,652
192,971
639,681
Bank premises, net
Other assets
Furniture and equipment
Less depreciation
Total furniture and equipment, net
Denominated in foreign currencies2
Interest accrued
Premium on securities
Due from Federal Deposit Insurance Corporation
Overdrafts
Prepaid expenses
Suspense account
Real estate acquired for banking-house purposes
Other
Total other assets
Totalassets
748,586
621,499
348,341
273,158
9,128,949
3,182,481
1,691,882
3,316,178
56,259
158,108
66,269
7,038
172,120
18,052,442
293,675,190
Tables 205
1.—Continued
LIABILITIES
Federal Reserve Notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks
271,492,172
41,852,740
Total Federal Reserve notes, net
229,639,432
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
39,346,294
8,656,496
346,951
Other deposits
Officers'and certified checks
International organizations
Other3
21,096
87,001
442,027
Total other deposits
Deferred credit items
550,124
7,451,424
Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other
3,335,154
50,656
44,948
28,579
Total other liabilities
3,459,337
Total liabilities
289,450,058
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts4
Total liabilities and capital accounts
1. Amounts in boldface type indicate items in the Board's
weekly statement of condition of the Federal Reserve
Banks.
2. Of this amount $1,478.8 million was invested in
securities issued by foreign governments, and the balance
was invested with foreign central banks and the Bank for
International Settlements.
2,112,566
2,112,566
0
293,675,190
3. In closing out the other capital accounts at year-end,
the Reserve Bank earnings that are payable to the Treasury
are included in this account pending payment.
4. During the year, includes undistributed net income,
which is closed out on Dec. 31.
206 Tables
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1988 and 1987
Millions of Dollars
Total
Boston
Item
1988
1987
1988
1987
11,060
5,018
395
11,078
5,018
408
680
314
20
706
314
27
2,170
0
3,815
0
42
0
47
0
Federal agency obligations
Bought outright
Held under repurchase agreements
6,966
2,101
7,553
1,316
423
0
466
0
U.S. Treasury securities
Bought outrightl
Held under repurchase agreements
Total loans and securities
233,662
4,760
249,659
218,906
3,645
235,235
14,181
0
14,646
13,502
0
14,015
8,739
750
7,990
705
480
92
501
93
0
18,053
7,773
7,359
0
613
257
275
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
Acceptances held under repurchase agreements....
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies2
All other
0
0
605
-1,124
293,674
275,566
17,450
15,064
229,640
212,890
14,322
12,503
39,347
8,656
347
548
48,898
41,784
5,313
244
1,027
48,368
2,386
0
5
20
2,411
1,863
0
5
34
1,902
7,453
3,457
7,179
3,035
373
194
355
168
89,448
271,472
17,300
14,928
2,113
2,113
0
2,047
2,047
0
75
75
0
68
68
0
293,674
275,566
17,450
15,064
Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
271,492
41,852
253,313
40,423
16,862
2,540
15,123
2,620
Federal Reserve notes, net
229,640
212,890
14,322
12,503
11,060
5,018
11,078
5,018
213^(52
196J94
229,640
212,890
Interdistrict Settlement Account
Total assets
LIABILITIES
Federal Reserve notes
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits
Deferred credit items
Other liabilities and accrued dividends3
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT
Collateral for Federal Reserve notes
Gold certificate account
Special drawing right certificate account
Other eligible assets
U.S. Treasury and federal agency securities
DigitizedTotal
for FRASER
collateral
Tables
207
2.-Continued
New York
Cleveland
Philadelphia
1988
1987
1988
Richmond
1987
1988
1987
1988
1987
3,310
1,489
14
3,177
1,489
16
389
162
29
385
162
24
655
314
25
664
314
28
917
461
62
933
461
63
34
0
2,787
0
168
0
131
0
890
0
63
0
122
0
181
0
2,381
2,101
2,430
1,316
197
0
229
0
402
0
453
0
541
0
638
0
79,855
4,760
89,131
70,430
3,645
80,608
6,624
0
6,989
6,624
0
6,984
13,498
0
14,790
13,130
0
13,646
18,142
0
18,805
18,497
0
19,316
1,235
32
934
33
421
46
478
46
244
32
294
32
459
124
422
111
0
4,460
1,874
1,571
0
610
365
190
0
793
466
284
0
901
420
368
114
1,449
470
-599
-559
136
3,132
-1,736
99,785
91,151
9,116
8,035
16,294
15,864
24,861
20,358
78,077
70,471
6,655
5,706
13,704
12,987
20,096
16,550
9,199
8,656
237
310
18,402
11,653
5,313
130
438
17,534
1,777
0
7
6
1,790
1,648
0
7
28
1,683
1,894
0
8
14
1,916
2,124
0
9
42
2,175
3,836
0
9
45
3,890
2,902
0
8
61
2,971
795
1,379
875
1,189
375
90
369
83
266
178
317
159
387
242
383
226
98,653
90,069
8,910
7,841
16,064
15,638
24,615
20,130
566
566
0
541
541
0
103
103
0
97
97
0
115
115
0
113
113
0
123
123
0
114
114
0
99,785
91,151
9,116
8,035
16,294
15,864
24,861
20,358
84,057
5,980
75,709
5,238
10,019
3,364
9,048
3,342
16,071
2,367
15,192
2,205
23,687
3,591
21,052
4,502
75,077
70,471
6,655
5,706
13,704
12,987
20,096
16,550
208 Tables
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1988 and 1987-Continued
Millions of Dollars
Atlanta
Chicago
Item
1988
1987
1988
1987
ASSETS
584
203
36
596
203
37
1,394
656
44
1,383
656
31
35
0
39
0
44
0
19
0
Federal agency obligations
Bought outright
Held under repurchase agreements
325
0
335
0
846
0
876
0
U.S. Treasury securities
Bought outright l
Held under repurchase agreements
Total loans and securities
10,895
0
11,255
9,722
0
10,096
28,367
0
29,257
25,385
0
26,280
721
59
615
57
774
100
620
70
0
1,076
707
228
0
4,185
1,057
3,185
Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
Acceptances held under repurchase agreements
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies2
All other
360
1,742
-1,715
2,605
14,294
14,281
34,695
35,887
Federal Reserve notes
8,889
9,206
29,658
30,029
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits
4,189
0
13
5
4,207
3,922
0
14
52
3,988
3,413
0
19
107
3,539
4,325
0
20
145
4,490
657
149
604
121
565
387
522
324
3,902
13,919
34,149
35,365
196
196
0
181
181
0
273
273
0
261
261
0
14,294
14,281
34,695
35,887
12,528
3,639
13,288
4,082
32,902
3,244
31,890
1,861
8,889
9,206
29,658
30,029
Interdistrict Settlement Account
Total assets
LIABILITIES
Deferred credit items
Other liabilities and accrued dividends
3
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
;
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT
Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
Federal Reserve notes, net
1. Includes securities loaned-fully guaranteed by U.S.
Treasury securities pledged with Federal Reserve Banks—
and excludes securities sold and scheduled to be bought
back under matched sale-purchase transactions.
2. Valued monthly at market exchange rates.
3. Includes exchange-translation account reflecting the
monthly revaluation at market exchange rates of foreignexchange commitments.
4. Includes special investment account at the Federal
Reserve Bank of Chicago in Treasury bills maturing within
90 days.
Tables 209
2.—Continued
San Francisco
Dallas
Kansas City
Minneapolis
St. Louis
1988
1987
669
307
29
1,429
670
67
1,483
670
81
688
0
416
0
10
0
16
0
300
0
391
0
448
0
894
0
1,046
0
8,789
0
9,081
8,693
0
9,061
13,105
0
14,184
12,986
0
13,850
30,002
0
30,906
30,325
0
31,387
435
23
1,542
47
1,454
47
696
22
572
20
1,362
151
1,163
153
0
371
256
81
0
572
334
181
0
2,085
661
257
0
1,975
1,135
609
723
1,010
-3
712
-100
-2,813
6
-2,058
-3,099
9,329
8,733
5,473
4,454
12,690
11,786
15,185
16,371
34,502
33,582
847
6,942
4,124
3,043
9,758
8,380
11,664
12,312
24,846
24,761
874
0
4
8
886
1,165
0
5
21
1,191
807
0
5
2
814
848
0
5
16
869
1,122
0
6
4
1,132
1,689
0
6
31
1,726
2,401
0
13
0
2,414
2,985
0
13
56
3,054
7,449
0
21
27
7,497
6,660
0
22
103
6,785
389
91
407
77
353
48
371
45
1,507
119
1,402
108
616
173
1,170
407
1,076
378
5,339
4,328
12,516
11,616
14,867
498
157
16,021
33,920
33,000
1988
1987
1988
1987
1988
1988
1987
368
160
29
351
160
28
168
66
11
169
66
13
490
216
30
562
216
31
676
307
28
95
0
38
0
12
0
10
0
30
0
68
0
205
0
218
0
99
0
114
0
262
0
6,875
0
7,175
6,322
0
6,578
3,329
0
3,440
3,290
0
3,414
422
21
502
20
383
24
0
412
241
130
742
9,213
8,617
1987
58
58
0
58
58
0
67
67
0
63
63
0
87
87
0
85
85
0
159
159
0
175
175
0
291
291
0
291
291
0
9,329
8,733
5,473
4,454
12,690
11,786
15,185
16,371
34,502
33,582
9,425
1,578
8,804
1,862
4,928
804
4,035
992
12,204
2,446
10,963
2,583
14,640
2,976
15,582
3,540
34,169
9,323
32,357
7,596
7,847
6,942
4,124
3,043
9,758
8,380
11,664
12,312
28,846
24,761
210 Tables
3. Federal Reserve Open Market Transactions, 1988 !
Millions of dollars
Type of transaction
Jan.
Mar.
Feb.
Apr.
U.S. TREASURY SECURITIES
0
49
0
600
346
538
0
1,600
560
0
0
0
423
0
0
0
Others within 1 year
Gross purchases
Gross sales
Maturity shift
Exchanges
Redemptions
0
0
950
-754
0
0
0
1,939
-2,868
0
0
0
2,051
-2,089
0
1,092
0
868
-1,688
0
1 to 5 years
Gross purchases
Gross sales
Maturity shift
Exchanges
0
0
-840
749
0
800
-952
2,643
0
0
-2,051
2,089
3,661
0
-823
1,434
5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
0
0
-110
5
0
175
-987
150
oooo
1,017
0
-45
254
oooo
0
0
0
75
oooo
Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchanges
Redemptions
966
0
0
0
0
49
600
346
1,513
1,600
560
0
0
7,160
0
0
Matched transactions
Gross sales
Gross purchases
78,358
78,513
97,892
99,139
104,527
104,572
86,900
85,608
Repurchase agreements2
Gross purchases
Gross sales
10,591
14,237
0
0
0
0
18,696
11,088
-4,140
-1,520
605
13,476
0
0
131
0
0
21
0
0
3
0
0
120
4,042
5,357
0
0
0
0
4,243
1,447
More than 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
All maturities
Gross purchases
Gross sales
Redemptions
Net change in U.S. Treasury securities
FEDERAL AGENCY OBLIGATIONS
Outright transactions
Gross purchases
Gross sales
Redemptions
Repurchase agreements2
Gross purchases
Gross sales
Net change in agency obligations
Total net change in System Open Market Account .
1. Sales, redemptions, and negative figures reduce
holdings of the System Open Market Account; all other
figures increase such holdings. Details may not add to
totals because of rounding.
-1,446
-21
-3
2,676
-5,586
-1,541
602
16,151
2. In July 1984 the Open Market Trading Desk discontinued accepting bankers acceptances in repurchase
agreements,
*Less than $500,000 in absolute value.
Tables
211
3.-Continued
June
Sept.
Dec.
Total
oooo
515
0
0
0
1,280
0
0
0
0
0
1,646
-4,324
0
0
0
1,384
-1,826
0
0
0
1,033
-87
0
0
0
3,932
-4,296
0
0
0
1,368
-1,646
0
0
0
1,669
-916
0
0
0
5,264
-2,391
0
1,084
0
1,750
-1,703
0
2,177
0
23,853
-24,587
0
0
0
-1,102
3,724
0
0
-1,384
1,826
0
0
-997
0
0
0
-1,821
3,971
0
0
-1,368
1,646
0
0
-1,544
639
0
0
-3,088
2,091
1,824
0
-1,750
1,703
5,486
800
-17,719
22,515
0
0
-387
400
0
0
0
0
0
0
-36
87
0
0
-2,111
325
0
0
0
0
0
0
-125
276
0
0
-2,145
300
562
0
0
0
1,579
175
-5,946
1,797
0
0
-157
200
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-31
0
432
0
0
0
1,398
0
-188
275
0
0
0
515
0
0
0
0
0
1,280
0
0
375
0
0
3,599
0
0
5,028
0
0
18,863
1,563
2,200
115,287
115,115
73,708
72,966
81,979
83,464
124,875
123,220
113,886
113,384
98,804
97,897
98,618
100,680
93,650
93,584
1,168,486
1,168,143
15,871
23,478
10,520
5,334
22,978
28,164
0
0
35,800
30,191
4,715
7,727
17,867
16,463
15,575
14,815
152,614
151,498
-7,779
4,444
-3,186
-1,655
6,386
-3,544
7,064
5,721
15,871
0
0
11
0
0
67
0
0
10
ooo
Nov.
oooo
Oct.
ooo
Aug.
oooo
July
ooo
May
0
0
75
0
0
14
0
0
135
0
0
587
4,771
7,566
5,083
2,843
12,355
14,594
0
0
12,107
8,225
2,223
4,454
4,763
5,132
7,672
6,853
57,258
56,473
375
0
0
0
3,599
0
0
0
1,125
0
0
0
8,222
588
0
2,200
-2,807
2,239
-2,306
-10
3,882
-2,306
-383
683
198
-10,585
6,683
-5,492
-1,665
10,268
-5,850
6,681
6,404
16,070
212 Tables
4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 1986-88 1
Millions of dollars
Increase or
decrease ( - )
December 31
Description
U.S. Treasury securities, total
By term
l-15days 2
16-90days
91 days to 1 year
1-5 years
5-10 years
More than 10 years
1987
1986
238,422
222,551
211,316
15,871
11,235
9,935
58,448
75,236
55,326
12,568
26,909
11,364
46,112
76,827
47,512
15,313
25,424
20,480
53,611
62,239
36,469
15,451
23,066
-1,429
12,336
-1,591
7,814
-2,745
1,485
-9,117
-7,499
14,588
11,043
-138
2,358
112,782
90,950
29,929
4,760
107,691
82,973
28,242
3,645
103,775
68,126
25,724
13,691
5,091
7,977
1,687
1,115
3,916
14,848
2,518
-10,046
9,067
8,869
10,143
198
-1,274
2,271
697
1,492
3,419
1,000
189
1,561
691
1,653
3,416
1,358
189
2,704
808
1,224
3,854
1,178
374
710
6
-161
3
-358
0
-1,143
-118
428
-437
180
-185
1,997
2,251
0
0
0
130
35
2,387
0
2,294
2,251
0
0
0
200
99
2,490
0
2,486
2,252
0
0
30
236
101
2,490
0
-297
0
0
0
0
-70
-64
-103
0
-192
-1
0
0
-30
-36
-3
0
0
0
37
51
37
67
37
-51
0
-16
0
117
14
2,101
117
14
1,315
117
14
2,314
0
0
786
0
0
-998
By type ofholding
Held outright
Treasury bills 3
Treasury notes
Treasury bonds
Held under RPs
Federal agency obligations, total
By term
1-15 days 2
16-90 days
91 days to 1 year
1-5 years
5-10 years
More than 10 years
By type of holding
Held outright
Federal Farm Credit Banks
Federal Home Loan Banks
Federal Home Loan Financing Corporation
Federal Home Loan Mortgage Corporation
Federal Intermediate Credit Banks4
Federal Land Banks
Federal Home Administration
Federal National Mortgage Association
Federal National Sinking Fund
Government National Mortgage Association
participation certificates4
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
General Services Administration
Held under RPs
1. Details may not add to totals because of rounding.
2. Includes the effects of temporary transactions (repurchase agreements and matched sale-purchase agreements).
1988
1987
1988
3. Includes the effects of matched sale-purchase
agreements.
4. There were no outstanding issues as of December 31,
1988.
Tables 213
5. Number and Salaries of Officers and Employees of Federal Reserve Banks,
December 31, 1988
President
Federal Reserve
Bank (including)
Branches
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
Annual
salary
(dollars)
Other officers
Number
Number
Annual
salaries
(dollars)
171,200
198,500
147,600
137,800
150,000
163,000
177,500
149,000
133,000
146,500
142,000
171,000
51
158
55
56
81
72
88
60
44
63
59
102
3,768,326
13,326,575
4,039,300
3,828,300
5,487,900
4,907,660
5,939,360
3,769,600
2,978,700
4,201,800
3,988,800
7,089,218
1,315
3,715
1,126
1,332
1,801
2,194
2,454
1,185
979
1,605
1,522
2,376
1,887,100
889
63,325,539
21,604
Total
Employees
Fulltime
Annual
salaries
(dollars)
Number
Annual
salaries
(dollars)
306
53
87
68
142
91
28
67
142
57
45
69
38,444,344
109,593,220
29,148,656
32,013,430
42,365,154
52,162,030
64,159,321
27,954,455
25,311,846
38,686,861
38,296,827
64,714,185
1,673
3,927
1,269
1,457
2,025
2,358
2,571
1,313
1,166
1,726
1,627
2,548
42,383,870
123,118,295
33,335,556
35,979,530
48,003,054
57,232,690
70,276,181
31,873,055
28,423,546
43,035,161
42,427,627
71,974,403
1,155
562,850,329
23,660
628,062,968
Parttime
214 Tables
6. Income and Expenses of Federal Reserve Banks, 1988
Dollars
Item 1
Total
Boston
New York
Philadelphia
Cleveland
CURRENT INCOME
Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other
4,067,423
2,486,347
555,846
18,179,534,091 1,099,303,526 6,178,080,704
299,843,275
9,892,553
78,629,814
656,805,293
44,833,234
91,692,476
34,745,057
651,088
24,766,126
522,231,597
14,368,529
32,017,493
567,153
1,055,774,529
16,607,328
40,109,734
571,323
Total
19,526,431,297 1,156,217,539 6,380,785,220
571,611,487
1,114,447,833
355,503,582
1,917,148
CURRENT EXPENSES
Salaries and other personnel
expenses
Retirement and other benefits
Fees
Travel
Postage and other shipping
costs
Communications
Materials and supplies
Building expenses
Taxes on real estate
Property depreciation
Utilities
Rent
Other
Equipment
Purchases
Rentals
Depreciation
Repairs and maintenance
Earnings-credit costs
Other
Shared costs, net 3
Recoveries
Expenses capitalized4
Total
Reimbursements
Net expenses
For notes see end of table.
661,695,075
63,785,742
14,926,898
25,358,327
44,546,626
8,638,103
5,006,138
1,113,434
132,470,011
23,675,231
1,941,067
3,358,905
35,178,572
7,649,904
518,633
1,099,409
37,868,080
8,001,485
1,609,136
1,933,977
81,971,317
11,906,871
51,059,279
4,296,876
1,028,083
3,160,857
10,242,315
2,240,628
9,191,926
4,470,305
570,355
2,721,446
5,917,766
660,981
3,198,311
23,983,391
28,407,981
22,981,317
21,681,855
18,822,842
3,761,037
2,361,790
1,847,963
561,072
899,469
3,462,858
3,246,647
3,395,973
14,150,347
3,371,365
1,508,751
1,626,416
2,208,917
42,557
1,336,957
1,024,188
1,499,255
1,526,079
339,554
759,240
3,981,307
26,577,783
77,321,209
45,940,759
124,275,559
53,752,137
0
(34,276,302)
(2,452,557)
83,094
385,069
5,471,218
3,322,267
7,837,385
3,310,383
(993,205)
(8,257,005)
(113,297)
0
5,372,028
15,107,959
7,229,142
13,064,312
11,771,372
438,940
(3,624,696)
(6,370)
281,347
900,332
4,156,659
2,214,105
8,872,596
2,107,058
2,371,756
(2,531,196)
(15,058)
138,936
2,309,366
4,755,947
3,093,988
11,043,526
3,583,786
169,828
(3,238,503)
(138,544)
77,289,822
88,267,357 260,099,960
(4,697,003) (24,096,216) (15,204,424)
83,570,354 236,003,744
62,085,398
86,056,383
(9,775,070)
76,281,313
1,321,700,790
(115,740,657)
1,205,960,134
Tables 215
6. —Continued
Richmond
1,736,475
Atlanta
3,712,153
Chicago
179,483,497
St. Louis
3,662,935
Minneapolis Kansas City
2,553,425
5,393,686
Dallas
San Francisco
16,924,161
1,844,655
1,438,247,017 832,367,957 2,168,845,209 529,481,697 261,532,503 690,709,256 1,030,435,746 2,372,524,350
9,341,521 12,341,470
25,761,815
42,679,602
16,742,570 26,448,953
38,564,698
8,464,422
48,081,040
73,807,107
55,920,615 72,271,032
89,093,953 28,725,332 37,361,790 42,891,487
446,235
497,849
930,878
1,709,413
644,235
1,094,276
2,405,835
460,646
1,512,542,017 934,103,037 2,468,884,122 574,233,014 312,293,467 750,274,112 1,258,076,204 2,492,963,246
50,218,223 59,030,489
10,255,976 12,906,111
475,285 1,136,977
2,057,121 2,387,612
75,263,091 33,683,814 29,323,391 45,026,296
14,715,747 7,259,567 5,912,042 8,983,008
879,735
512,826 1,088,382
577,200
3,530,130 1,288,897 1,113,084 1,945,614
44,019,774
9,061,857
299,735
2,150,255
75,066,708
16,271,479
881,784
3,379,889
6,540,349
740,628
4,602,451
9,327,550
1,386,139
5,326,078
8,861,961
1,289,396
5,400,041
4,080,392
571,773
3,215,190
5,566,164
458,283
2,129,316
6,218,229
843,871
3,643,109
4,181,974
892,258
3,389,437
12,267,436
1,224,476
5,081,117
2,025,292
3,796,639
2,024,345
540,859
1,660,171
1,708,533
2,121,161
2,033,072
582,182
1,214,616
4,414,939
2,639,282
2,276,876
3,319,666
4,420,665
457,217
980,745
1,491,369
423,015
638,266
1,770,005
1,077,565
811,887
149,273
1,117,928
949,755
2,214,242
1,506,838
183,654
786,571
569,426
1,312,901
1,077,387
1,202,996
645,487
2,331,390
5,531,338
2,780,611
186,680
1,972,107
433,733
1,328,107
6,594,970
4,192,839
10,150,326
4,713,550
187,439
(4,534,181)
(185,148)
358,809
1,803,144
8,420,872
5,430,413
12,188,134
4,758,370
147,883
(1,922,976)
(257,126)
382,065
6,166,948
9,186,710
7,155,647
24,497,230
6,617,714
(6,408,496)
(2,338,276)
(609,606)
376,972
523,400
3,241,437
1,926,292
4,598,019
2,248,085
743,473
(1,176,488)
(94,417)
711,241
613,391
4,056,916
2,300,103
6,930,482
2,781,148
1,712,865
(695,407)
(52,158)
116,090
942,265
4,389,333
2,122,666
8,954,497
2,804,744
847,919
(756,083)
(403,391)
325,577
2,757,238
4,874,818
2,101,235
6,331,882
3,594,805
685,090
(1,485,502)
(497,970)
773,443
3,476,495
7,064,370
4,852,062
9,807,170
5,461,122
96,507
(3,715,989)
(79,472)
107,818,974 130,088,043 171,661,465 66,989,844 68,875,901 91,896,427
(7,414,075) (8,588,131) (12,412,611) (7,269,273) (3,654,226) (5,498,505)
100,404,899 121,499,912 159,248,854 59,720,571 65,221,675 86,397,922
87,490,659 154,710,723
(5,070,307) (12,060,816)
82,420,353 142,649,907
216 Tables
6. Income and Expenses of Federal Reserve Banks, 1988—Continued
Item 1
Total
Boston
New York
Philadelphia
Cleveland
6,214,326,244
509,526,088
1,038,166,519
7,264,559
990,764
8,255,323
693,204
9,075
702,280
1,369,006
6,765
1,375,771
PROFIT AND LOSS
Current net income
Additions to and deductions
from current net income
Profits on sales of U.S.
Treasury and federal
agency securities
Other additions
Total additions
Loss on foreign
exchange transactions
Other deductions
Total deductions
Net additions to or
deductions(-) from
current net income
Cost of unreimbursed Treasury
services
Assessments by Board
Board expenditures5
Cost of currency
Net income before payment to
U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)
18,320,471,163 1,072,647,185
22,741,685
87,590,510
110,332,194
1,405,315
20,824
1,426,139
(510,875,399)
(88,514,766)
(599,390,166)
(16,858,888)
(34,534)
(16,893,423)
(134,871,105)
(1,020,938)
(135,892,044)
(24,522,019)
(15,248)
(24,537,267)
(28,098,147)
(108,533)
(28,206,680)
(489,057,971)
(15,467,283)
(127,636,721)
(23,834,987)
(26,830,909)
27,852,349
1,499,201
5,038,020
2,691,151
1,924,431
84,410,500
164,244,653
2,848,500
9,688,687
22,217,800
53,879,756
4,014,300
4,421,601
4,620,100
10,064,330
17,554,905,689 1,043,143,514
6,005,553,947
474,564,049
994,726,749
4,385,524
33,109,144
6,039,635
6,811,391
17,364,318,571 1,032,070,290
5,698,704,285
462,991,264
985,705,508
125,616,018
Transferred to surplus
64,971,100
6,687,700
24,741,350
5,533,150
2,209,850
Surplus, January 1
Surplus, December 31
2,047,086,700
2,112,057,800
68,267,400
74,955,100
541,045,900
565,787,250
97,245,800
102,778,950
112,693,400
114,903,250
1. Details may not add to totals because of rounding.
2. The effect of the 1987 implementation of Financial
Accounting Standards Board Statement No. 87-Employers' Accounting for Pensions—is recorded in the Total
column only and has not been distributed to each District.
Accordingly, the sum of the Districts will not equal the
Total column for this category or for Total net expenses,
and New York will not add to current net income. The
effect of FASB 87 on the Reserve Banks was a reduction in
expenses.
3. Includes distribution of costs for projects performed
by one Bank for the benefit of one or more other Banks.
4. Includes expenses for labor and materials temporarily
capitalized and charged to activities when the products are
consumed.
5. For additional details, see the last four pages of the
preceding section: Board of Governors, Financial
Statements.
Tables 217
6.—Continued
Richmond
Atlanta
Chicago
St. Louis
Minneapolis Kansas City
Dallas
San Francisco
1,412,137,113 812,603,125 2,309,635,267 514,512,443 247,071,793 663,876,190 1,175,655,855 2,350,313,340
1,939,690
52
1,939,742
1,004,209
2,570
1,006,779
2,623,055
12,040
2,635,095
655,362
720
656,082
343,892
60,396
404,288
908,663
241
908,904
1,357,682
86,449,276
87,806,957
3,177,049
37,785
3,214,834
(28,609,022) (44,957,035) (65,392,051) (14,304,511) (15,837,137) (20,945,891) (43,935,284) (72,544,307)
(21,440) (110,768)
(35,413)
(7,363)
(58,501) (557,718) (86,461,293)
(83,017)
(28,630,462) (45,067,803) (65,427,465) (14,311,874) (15,895,639) (21,503,609) (130,396,578) (72,627,324)
(26,690,720) (44,061,024) (62,792,370) (13,655,793) (15,491,350) (20,594,705) (42,589,620) (69,412,490)
2,443,149
2,347,652
3,696,045
1,217,001
1,219,849
1,634,799
1,888,319
2,252,731
4,724,500
12,825,070
7,452,600
7,134,247
10,758,000
23,270,501
2,375,900
5,379,479
2,596,100
2,368,162
3,476,700
6,483,890
7,387,300
9,540,917
11,938,700
19,188,013
1,365,453,674 751,607,603 2,209,118,351491,884,270 225,396,332 631,686,095 1,114,249,699 2,247,521,406
7,163,926
11,283,631
16,088,003
3,495,521
4,004,145
5,127,698
10,515,965
17,591,436
1,348,753,798 725,345,821 2,181,326,998 487,948,950 217,151,037 624,448,198 1,121,027,434 2,229,845,820
9,535,950 14,978,150
113,919,900 180,789,500
123,455,850 195,767,650
11,703,350
439,800
4,241,150
2,110,200
261,303,050 58,019,850 62,604,650 84,801,500
273,006,400 58,459,650 66,845,800 86,911,700
(17,293,700)
84,150
175,324,750 291,071,000
158,031,050 291,155,150
218 Tables
7. Income and Expenses of Federal Reserve Banks, 1914-88 J
Dollars
Period, or Federal
Reserve Bank
Current
income
Net
expenses
Net additions
or
deductions ( - )
Assessments by
Board of Governors
Board
expenditures
Costs
of currency
All Banks
1914-15.
1916 . . . .
1917 . . . .
1918 . . . .
1919....
2,173,252
5,217,998
16,128,339
67,584,417
102,380,583
2,018,282
2,081,722
4,921,932
10,576,892
18,744,815
5,875
-193,001
-1,386,545
-3,908,574
-4,673,446
302,304
192,277
237,795
382,641
594,818
1920....
1921 . . . .
1922
1923 . . . .
1924
1925
1926
1927
1928
1929
181,296,711
122,865,866
50,498,699
50,708,566
38,340,449
41,800,706
47,599,595
43,024,484
64,052,860
70,955,496
27,548,505
33,722,409
28,836,504
29,061,539
27,767,886
26,818,664
24,914,037
24,894,487
25,401,233
25,810,067
-3,743,907
-6,314,796
-4,441,914
-8,233,107
-6,191,143
-4,823,477
-3,637,668
-2,456,792
-5,026,029
-4,861,642
709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644
1,714,421
1,844,840
805,900
3,099,402
1930
1931 . . . .
1932
1933
1934
1935
1936
1937
1938
1939
36,424,044
29,701,279
50,018,817
49,487,318
48,902,813
42,751,959
37,900,639
41,233,135
36,261,428
38,500,665
25,357,611
24,842,964
24,456,755
25,917,847
26,843,653
28,694,965
26,016,338
25,294,835
25,556,949
25,668,907
-93,136
311,451
-1,413,192
-12,307,074
-4,430,008
-1,736,758
485,817
-1,631,274
2,232,134
2,389,555
809,585
718,554
728,810
800,160
1,372,022
1,405,898
1,679,566
1,748,380
1,724,924
1,621,464
2,175,530
1,479,146
1,105,816
2,504,830
1,025,721
1,476,580
2,178,119
1,757,399
1,629,735
1,356,484
1940
1941
1942
1943
1944
1945
1946
1947
1948 . . . .
1949
43,537,805
41,380,095
52,662,704
69,305,715
104,391,829
142,209,546
150,385,033
158,655,566
304,160,818
316,536,930
25,950,946
28,535,547
32,051,226
35,793,816
39,659,496
41,666,453
50,493,246
58,191,428
64,280,271
67,930,860
11,487,697
720,636
-1,568,208
23,768,282
3,221,880
-830,007
-625,991
1,973,001
-34,317,947
-12,122,274
1,704,011
1,839,541
1,746,326
2,415,630
2,296,357
2,340,509
2,259,784
2,639,667
3,243,670
3,242,500
1,510,520
2,588,062
4,826,492
5,336,118
7,220,068
4,710,309
4,482,077
4,561,880
5,186,247
6,304,316
1950
1951 . . . .
1952
1953
1954
1955
1956
1957
1958
1959
275,838,994
394,656,072
456,060,260
513,037,237
438,486,040
412,487,931
595,649,092
763,347,530
742,068,150
886,226,116
69,822,227
83,792,676
92,051,063
98,493,153
99,068,436
101,158,921
110,239,520
117,931,908
125,831,215
131,848,023
36,294,117
-2,127,889
1,583,988
-1,058,993
-133,641
-265,456
-23,436
-7,140,914
124,175
98,247,253
3,433,700
4,095,497
4,121,602
4,099,800
4,174,600
4,194,100
5,339,800
7,507,900
5,917,200
6,470,600
7,315,844
7,580,913
8,521,426
10,922,067
6,489,895
4,707,002
5,603,176
6,374,195
5,973,240
6,384,083
1960 . . . .
1961 . . . .
1962
1963
1964
1965
1966
1967....
1968
1969
1,103,385,257
941,648,170
1,048,508,335
1,151,120,060
1,343,747,303
1,559,484,027
1,908,499,896
2,190,403,752
2,764,445,943
3,373,360,559
139,893,564
148,253,719
161,451,206
169,637,656
171,511,018
172,110,934
178,212,045
190,561,166
207,677,768
237,827,579
13,874,702
3,481,628
-55,779
614,835
725,948
1,021,614
996,230
2,093,876
8,519,996
-557,553
6,533,700
6,265,100
6,654,900
7,572,800
8,655,200
8,576,396
9,021,600
10,769,596
14,198,198
15,020,084
7,455,011
6,755,756
8,030,028
10,062,901
17,229,671
23,602,856
20,167,481
18,790,084
20,474,404
22,125,657
For notes see end of table.
Tables 219
7.—Continued
Payments to U.S. Treasury
Dividends
paid
Under
section 13b
Franchise
tax
Interest on
Federal Reserve
notes
Transferred
to surplus
(section 13b)
Transferred
to surplus
(section 7)
217,463
1,742,775
6,804,186
5,540,684
5,011,832
2,703,894
5.654,018
6,119,673
6,307,035
6.552.717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911
60,724,742
59,974,466
10,850,605
3.613.056
113,646
59,300
818,150
249,591
2,584,659
4,283,231
82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597
10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462
17,308
-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071
607,422
352,524
2,616,352
1,862,433
4,533,977
I,i34,234
'.
'.
1,134,234
48,334,341
70,651,778
'.
'. '. '.
2,011,418
'. '. '.
'. '. '.
291,661
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
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
75,283,818
166,690,356
193,145,837
17,617,358
570,513
3,554,101
40,327,237
48,409,795
81,969,625
81,467,013
8,366,350
18,522,518
21,461,770
13,082,992
13,864,750
14,681,788
15,558,377
16,442,236
17,711,937
18,904,897
20,080,527
21,197,452
22,721,687
196,628,858
254,873,588
291,934,634
342,567,985
276,289,457
251,740,721
401,555,581
542,708,405
524,058,650
910,649,768
21,849,490
28,320,759
46,333,735
40,336,862
35,887,775
32,709,794
53,982,682
61,603,682
59,214,569
-93,600,791
23,948,225
25.569,541
27,412,241
28,912,019
30,781,548
32,351,602
33,696,336
35,027,312
36,959,336
39,236,599
896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614
1,296,810,053
1,649,455,164
1,907,498,270
2,463,628,983
3,019,160,638
42,613,100
70,892,300
45,538,200
55,864,300
-465,822,800
27,053,800
18,943,500
29,851,200
30,027,250
39,432,450
220 Tables
7. Income and Expenses of Federal Reserve Banks, 1914-88—Continued
Dollars
Current
income
Period, or Federal
Reserve Bank
Net
expenses
Net additions
or
deductions (—)
Assessments by
Board of Governors
Board
expenditures
Costs
of currency
1970.
1971 .
1972.
1973 .
1974 .
1975 .
1976.
1977.
1978 .
1979.
3,877,218,444
3,723,369,921
3,792,334,523
5,016,769,328
6,280,090,965
6,257,936,784
6,623,220,383
6,891,317,498
8,455,309,401
10,310,148,406
276,571,876
319,608,270
347,917,112
416,879,377
476,234,586
514,358,633
558,128,811
568,851,419
592,557,841
625,168,261
11,441,829
94,266,075
(49,615,790)
(80,653,488)
(78,487,237)
(202,369,615)
7,310,500
(177,033,463)
(633,123,486)
(151,148,220)
21,227,800
32,634,002
35,234,499
44,411,700
41,116,600
33,577,201
41,827,700
47,366,100
53,321,700
50,529,700
23,573,710
24,942,528
31,454,740
33,826,299
30,190,288
37,130,081
48,819,453
55,008,163
60,059,365
68,391,270
1980.
1981 .
1982.
1983 .
1984.
12,802,319,335
15,508,349,653
16,517,385,129
16,068,362,117
18,068,820,742
18,131,982,786
17,464,528,361
17,633,011,623
19,526,431,297
718,032,836
814,190,392
926,033,957
1,023,678,474
1,102,444,454
1,127,744,490
1,156,867,714
1,146,910,699
1,205,960,134
(115,385,855)
(372,879,185)
(68,833,150)
(400,365,922)
(412,943,156)
1,301,624,294
1,975,893,356
1,796,593,9172
(516,910,320)
62,230,800
63,162,700
61,813,400
71,551,000
82,115,700
77,377,700
97,337,500
81,869,800
84,410,500
73,124,423
82,924,013
98,441,027
152,135,488
162,606,410
173,738,745
180,779,673
170,674,979
164,244,653
Total, 1914-88 .
238,510,484,581
17,741,836,222
Aggregate/or
each Bank,
1914-88
Boston
New York
Philadelphia . . . .
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco...
12,005,096,843
69,376,122,412
9,836,833,130
16,280,828,013
18,788,385,425
9,898,281,276
34,738,042,867
8,187,287,027
4,313,264,726
10,348,387,248
13,763,880,880
30,974,074,736
1,174,105,749
3,525,480,072
935,307,310
1,198,233,303
1,393,781,737
1,524,845,146
2,334,955,874
948,898,211
816,101,971
1,126,493,481
1,012,280,569
1,800,655,287
1985
1986
1987
1988
Total
.
.
.
.
238,510,484,582
55,134,542
534,167,103
86,170,618
67,205,461
92,183,673
182,174,022
226,221,946
45,150,118
66,677,954
86,680,029
209,610,258
347,868,477
45,779,286
328,683,786
62,160,518
98,122,690
66,169,276
94,744,360
180,357,672
39,683,972
37,826,415
54,354,709
82,922,773
180,179,251
114,917,920
492,365,339
90,575,610
124,358,035
185,156,576
120,997,307
275,191,342
75,231,451
34,325,191
94,968,427
116,662,362
242,761,450
17,741,836,2224 1,999,244,205 1,271,014,708 1,967,511,010
1. Details may not add to totals because of rounding.
2. For 1987 and subsequent years, includes the cost of
services provided to the Treasury by Federal Reserve
Banks for which reimbursement was not received.
3. The $2,240,750,999 transferred to surplus was
reduced by direct changes of $500,000 for charge-off on
Bank premises (1927), $139,299,557 for contributions to
1,999,244,205 1,271,014,708 1,967,511,010
capital of the Federal Deposit Insurance Corporation
(1934) and $3,657 net upon elimination of sec. 13b surplus
(1958); and was increased by transfer of $11,131,013 from
reserves for contingencies (1945), leaving a balance of
$2,112,057,800 on Dec. 31,1987.
4. See note 2, table 6.
Tables 221
7.—Continued
Payments to U.S. Treasury
Dividends
paid
Franchise
tax
Under
section 13b
Interest on
Federal Reserve
notes
Transferred
to surplus
(section 13b)
Transferred
to surplus
(section 7)
41,136,551
43,488,074
46,183,719
49,139,682
52,579,643
54,609,555
57,351,487
60,182,278
63,280,312
67,193,615
3,493,570,636
3,356,559,873
3,231,267,663
4,340,680,482
5,549,999,411
5,382,064,098
5,870,463,382
5,937,148,425
7,005,779,497
9,278,576,140
32,579,700
40,403,250
50,661,000
51,178,300
51,483,200
33,827,600
53,940,050
45,727,650
47,268,200
69,141,200
70,354,516
74,573,806
79,352,304
85,151,835
92,620,451
103,028,905
109,587,968
117,499,115
125,616,018
11,706,369,955
14,023,722,907
15,204,590,947
14,228,816,297
16,054,094,674
17,796,464,292
17,803,894,710
17,738,879,542
17,364,318,571
56,820,950
76,896,650
78,320,350
106,663,100
161,995,900
155,252,950
91,954,150
173,771,400
64,971,100
2,240,750,9993
2,160,030,490
149,138,300
2,188,893
214,977,261,822
(3,657)
89,004,996
586,093,192
116,936,323
175,777,068
108,956,701
147,368,065
298,326,916
68,733,059
60,824,362
90,002,435
131,996,042
286,011,331
7,111,395
68,006,262
5,558,901
4,842,447
6,200,189
8,950,561
25,313,526
2,755,629
5,202,900
6,939,100
560,049
7,697,341
280,843
369,116
722,406
82,930
172,493
79,264
151,045
7,464
55,615
64,213
102,083
101,421
10,543,845,860
64,355,883,827
8,594,442,847
14,618,489,864
16,990,867,850
7,982,401,044
31,561,621,600
7,033,553,602
3,354,818,340
8,971,201,935
12,466,603,395
28,503,531,658
135,411
(433,412)
290,661
(9,906)
(71,517)
5,491
11,682
(26,515)
64,874
(8,674)
55,337
(17,089)
84,049,925
603,043,821
117,109,172
128,137,043
129,335,658
201,034,190
288,335,154
63,600,278
70,723,013
91,051,650
162,308,528
301,022,567
2,160,030,491
149,138,300
2,188,893
214,977,261,822
(3,657)
2,240,750,999
222 Tables
8. Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 31,1988 l
Dollars
Acquisition costs
Federal Reserve
Bank or
Branch
Building machinery and
equipment
Net
book
value
Land
Buildings
(including
vaults)2
22,036,681
27,840
79,910,316
89,202
NEW YORK .
Annex
Buffalo
3,436,277
477,863
887,844
18,207,333
1,136,219
2,693,268
21,735,584
745,855
2,265,777
43,379,194
2,359,936
5,846,889
28,050,650
783,785
3,077,117
PHILADELPHIA.
1,876,601
52,360,437
5,903,704
60,140,742
45,902,623
CLEVELAND.
Cincinnati
Pittsburgh
1,074,281
2,246,599
1,658,376
6,478,201
13,537,723
7,235,660
6,475,744
7,528,477
3,309,063
14,028,226
23,312,798
12,203,099
8,659,744
13,080,684
9,619,998
RICHMOND.
Annex
Baltimore
Charlotte
3,912,575
522,733
6,476,114
1,902,406
55,853,002
3,725,466
26,826,903
15,484,515
14,314,313
3,924,584
3,842,189
946,943
74,079,889
8,172,784
37,145,206
18,333,865
55,450,587
3,716,505
32,591,159
16,950,727
ATLANTA..
Birmingham .
Jacksonville .
Miami
Nashville....
New Orleans.
1,202,255
3,026,988
880,258
3,717,791
592,342
3,087,693
14,035,875
1,905,770
17,486,169
11,965,974
1,474,678
2,956,411
3,558,580
1,117,797
0
2,111,664
1,274,593
1,476,257
18,796,710
6,050,555
18,366,427
17,795,429
3,341,613
7,520,362
13,342,878
4,233,201
18,366,427
14,935,299
1,415,890
4,893,900
CHICAGO .
Annex
Detroit
4,511,942
53,066
797,734
92,922,805
904,562
4,454,918
14,265,111 111,699,858
1,384,047
426,419
8,151,953
2,899,301
92,508,787
1,252,166
6,068,827
ST. LOUIS .
Little Rock .
Louisville ..
Memphis ...
700,378
1,148,492
700,075
1,135,623
11,162,871
2,082,669
2,871,372
4,216,382
5,283,870
1,003,022
1,131,238
2,126,755
17,147,118
4,234,183
4,702,685
7,478,760
10,924,792
2,551,767
2,690,444
4,750,245
MINNEAPOLIS.
Helena
1,394,384
289,619
26,664,805
104,184
7,692,189
68,689
35,751,378
462,491
21,966,834
314,549
KANSAS CITY.
Denver
Oklahoma City..
Omaha
1,798,804
3,187,962
646,386
6,534,583
9,987,268
3,422,762
2,381,207
10,989,009
8,802,665
3,505,761
2,153,371
1,401,083
20,588,737
10,116,484
5,180,963
18,924,675
16,837,800
7,570,687
4,404,446
18,194,160
DALLAS....
El Paso
Houston
San Antonio .
3,772,588
262,477
2,049,064
482,284
7,019,293
1,398,307
3,535,591
2,857,743
3,737,706
393,301
983,006
658,346
14,529,587
2,054,085
6,567,661
3,998,373
11,624,235
1,652,768
5,876,471
3,326,538
15,541,937
3,891,887
207,381
480,222
274,772
66,620,971
48,580,244
2,010,290
2,032,415
1,890,966
17,345,628
8,334,890
649,432
1,293,985
1,836,988
99,508,536
60,807,022
2,867,103
3,806,622
4,002,725
85,282,801
57,992,081
2,492,808
2,848,852
2,410,208
BOSTON.
Annex..
SAN FRANCISCO.
Los Angeles
Portland
Salt Lake City
Seattle
Total
Total
3
5,360,169 107,307,166
44,538
161,580
91,396,908
125,754
108,905,176 641,473,754 171,928,587 922,307,517 730,154,100
1. Details may not add to totals because of rounding.
2. Includes expenditures for construction at some
offices, pending allocation to appropriate accounts.
3. Excludes charge-offs of $17,698,968 before 1952.
Other
real
estate 4
1,224,363
909,313
283,753
1,376,047
149,948
2,220,765
3,094,592
9,258,780
4. Covers acquisitions for banking-house purposes and
bank premises formerly occupied and being held pending
sale.
Tables 223
9. Operations in Principal Departments of Federal Reserve Banks, 1985-8
Operation
1988
Millions of pieces (except as noted)
Loans (thousands)
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
Mother
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities1.
Transfer of funds
Food stamps redeemed
Millions of dollars
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
Mother
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities1.
Transfer of funds
Food stamps redeemed
1986
1985
22
17,580
5,910
17,137
25
16,881
5,217
19,871
19
15,408
5,584
20,461
24
14,655
5,744
19,691
547
144
17,623
568
146
17,006
585
140
16,226
592
130
15,965
186
56
2,327
191
52 r
2,210
204
50
2,216
171
45
2,322
537,952
195,647
47,184
3,684
151,323
216,151
44,907
3,517
193,424
197,516
47,842
3,088
307,856
182,095
51,081
3,226
608,307
13,189
11,789,787
610,678
12,511
11,453,158
606,029
11,103
10,546,900
538,261
9,486
9,557,753
89,516,419
160,730,050
10,748
90,056,338
152,453,528 2-r
10,322
75,447,899
125,028,070
10,475
65,866,333
109,126,369
10,915
1. Before 1988, data included book-entry securities
transfers both sent and received. To eliminate double
counting, the 1988 data include only the transfers sent.
1987
2. Before 1987, data were compiled using a different
methodology,
r = Revised.
224 Tables
10. Federal Reserve Bank Interest Rates, December 31, 1988
Loans to depository institutions
Bank
All Federal Reserve Banks..
Adjustment credit
and seasonal
credit1
6.5
1. Adjustment credit is available on a short-term basis to
help depository institutions meet temporary needs for
funds that cannot be met through reasonable alternative
sources. After May 19,1986, the highest rate established
for loans to depository institutions may be charged on
adjustment credit loans of unusual size that result from a
major operating problem at the borrower's facility.
Seasonal credit is available to help smaller depository
institutions meet regular, seasonal needs for funds that
cannot be met through special industry lenders and that
arise from a combination of expected patterns of movement
in their deposits andloans. Atemporary simplified seasonal
program established on March 8,1985, and reestablished
for 1986 and 1987 was not renewed for 1988. See sections
201.3(a) and 201.3(b)(l) of Regulation A.
2. Extended credit is available to depository institutions,
Extended credit2
First 30 days
of borrowing
After 30 days of borrowing3
6.5
9.55
if similar assistance is not reasonably availablefromother
sources, when exceptional circumstances or practices
involve only a particular institution or when an institution
is experiencing difficulties adjusting to changing market
conditions over a longer period of time.
3. For extended-credit loans outstanding more than 30
days, a flexible rate somewhat above rates on market
sources of funds ordinarily will be charged, but in no case
will the rate charged be less than the basic discount rate
plus 50 basis points. The flexible rate is reestablished on
the first business day of each two-week reserve maintenance period. At the discretion of the Federal Reserve
Bank, the time period for which the basic discount rate is
applied may be shortened. See section 201.3(b)(2) of
Regulation A.
Tables 225
11. Reserve Requirements of Depository Institutions'
Type of deposit, and
deposit interval2
Depository institution requirements
after implementation of the
Monetary Control Act
Percent of deposits
Effective date
Net transaction accounts3A
$0 million-$41.5 million
More than $41.5 million
3
12
12/20/88
12/20/88
Nonpersonal time deposits5
By original maturity
Less than 1 xh years
1 Vz years or more
3
0
10/6/83
10/6/83
Eurocurrency liabilities
All types
3
11/13/80
1. Reserve requirements in effect on Dec. 31, 1988.
Required reserves must be held in the form of deposits with
Federal Reserve Banks or vault cash. Nonmembers may
maintain reserve balances with a Federal Reserve Bank
indirectly on a pass-through basis with certain approved
institutions.
For previous reserve requirements, see earlier editions
of the ANNUAL REPORT and of the Federal Reserve Bulletin.
Under provisions of the Monetary Control Act, depository
institutions include commercial banks, mutual savings
banks, savings and loan associations, credit unions,
agencies and branches of foreign banks, and Edge
corporations.
2. The Garn-St Germain Depository Institutions Act of
1982 (Public Law 97-320) requires that $2 million of
reservable liabilities (transaction accounts, nonpersonal
time deposits, and Eurocurrency liabilities) of each
depository institution be subject to a zero percent reserve
requirement. The Board is to adjust the amount of
reservable liabilities subject to this zero percent reserve
requirement each year for the succeeding calendar year by
80 percent of the percentage increase in the total reservable
liabilities of all depository institutions, measured on an
annual basis as of June 30. No corresponding adjustment is
to be made in the event of a decrease. On Dec. 20,1988, the
exemption was raised from $3.2 million to $3.4 million. In
determining the reserve requirements of depository
institutions, the exemption shall apply in the following
order: (1) net NOW accounts (NOW accounts less
allowable deductions); (2) net other transaction accounts;
and (3) nonpersonal time deposits or Eurocurrency
liabilities starting with those with the highest reserve ratio.
With respect to NOW accounts and other transaction
accounts, the exemption applies only to such accounts that
would be subject to a 3 percent reserve requirement.
3. Transaction accounts include all deposits on which
the account holder is permitted to make withdrawals by
negotiable or transferable instruments, payment orders of
withdrawal, and telephone and preauthorized transfers in
excess of three per month for the purpose of making
payments to third persons or others. However, MMDAs
and similar accounts subject to the rules that permit no
more than six preauthorized, automatic, or other transfers
per month, of which no more than three can be checks, are
not transaction accounts (such accounts are savings deposits subject to time deposit reserve requirements).
4. The Monetary Control Act of 1980 requires that the
amount of transaction accounts against which the 3 percent
reserve requirement applies be modified annually by 80
percent of die percentage increase in transaction accounts
held by all depository institutions, determined as of June 30
each year. Effective Dec. 20, 1988, for institutions
reporting quarterly and Dec. 27, 1988, for institutions
reporting weekly, the amount was increased from $40.5
million to $41.5 million.
5. In general, nonpersonal time deposits are time deposits, including savings deposits, that are not transaction
accounts and in which a beneficial interest is held by a
depositor that is not a natural person. Also included are
certain transferable time deposits held by natural person
and certain obligations issued to depository institution
offices located outside the United States. For details, see
section 204.2 of Regulation D.
226 Tables
12. Initial Margin Requirements under Regulations T, U, G, and X 1
Percent of market value
Effective date
1934, Oct. 1 . .
1936, Feb. 1..
Apr. 1..
1937, Nov. 1 .
1945, Feb. 5 . .
July5..
1946, Jan. 2 1 .
1947, Feb. 21.
1949, Mar. 3 .
1951, Jan. 17.
1953, Feb. 20.
1955,Jan. 4 ..
Apr. 23.
1958,Jan.16.
Aug. 5 .
Oct. 16.
1960, July 2 8 .
1962, July 10.
1963, Nov. 6 .
1968, Mar. 11
June 8 . .
1970, May 6..
1971, Dec. 6..
1972, Nov. 24
1974, Jan. 3 ..
Margin
stocks
25-45
25-55
55
40
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50
1. These regulations, adopted by the Board of Governors pursuant to the Securities Exchange Act of 1934, limit
the amount of credit to purchase and carry "margin
securities" (as defined in the regulations) when such credit
is collateralized by securities. Margin requirements on
securities other than options are the difference between the
market value (100 percent) and the maximum loan value of
collateral as prescribed by the Board. Regulation T was
adopted effective Oct. 15, 1934; Regulation U, effective
May 1,1936; Regulation G, effective Mar. 11, 1968; and
Regulation X, effective Nov. 1,1971.
On Jan. 1,1977, the Board of Governors for thefirsttime
established in Regulation T the initial margin required
for writing options on securities, setting it at 30 percent of
Convertible
bonds
Short sales,
Tonly 2
50
60
50
50
50
50
50
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50
the current market value of the stock underlying the option.
On Sept. 30,1985, the Board changed the required initial
margin, allowing it to be the same as the option maintenance
margin required by the appropriate exchange or selfregulatory organization; such maintenance margin rules
must be approved by the Securities and Exchange Commission. Effective Jan. 31, 1986, the SEC approved new
maintenance margin rules, permitting margins to be the
price of the option plus 15 percent of the market value of the
stock underlying the option.
2. From Oct. 1,1934, to Oct. 31,1937, the requirement
was the margin "customarily required" by the brokers and
dealers.
Tables 227
13. Principal Assets and Liabilities and Number of Insured Commercial Banks,
by Class of Bank, June 30, 1988 and 1987l
Asset and liability items shown in millions of dollars
Member banks
Item
Total
Total
National
State
Nonmember
banks
June 30,1988
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,127,678
1,647,363
1,634,411
480,315
1,578,619
1,251,938
1,242,772
326,682
1,272,273
1,015,857
1,008,696
256,415
306,346
236,080
234,076
70,266
549,059
395,425
391,639
153,634
312,005
168,310
209,506
208,140
118,542
160,869
166,243
90,172
128,296
41,897
28,369
32,573
103,865
49,769
48,637
Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
1,987,493
59,880
583,727
1,532,856
184,226
1,442,062
52,186
434,515
1,084,780
132,593
1,158,539
36,723
343,650
886,457
102,708
283,523
15,463
90,865
198,322
29,885
545,431
7,694
149,212
448,076
51,634
13,274
5,530
4,459
1,071
7,744
Number of banks
June 30,1987
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
1,997,678
1,536,916
1,524,022
460,762
1,472,286
1,163,780
1,154,868
308,506
1,178,461
935,008
928,140
243,453
293,825
228,772
226,728
65,053
525,392
373,136
369,154
152,256
292,559
168,203
217,237
191,268
117,239
168,383
154,372
89,081
132,045
36,896
28,157
36,338
101,291
50,964
48,854
Deposits, total
Interbank
Other demand
Other time and savings
Equity capital
1,900,405
65,613
572,720
1,436,543
172,546
1,368,728
57,655
423,597
1,005,562
123,456
1,100,274
42,405
334,177
822,651
97,100
268,454
15,250
89,421
182,911
26,356
531,676
7,957
149,123
430,981
49,090
13,829
5,818
4,724
1,094
8,011
Number of banks
1. All insured commercial banks in the United States.
Details may not add to totals because of rounding.
228 Tables
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items —
Year-End 1918-88, and Month-End 1988l
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
U S. Treasury and
federal agency securities
Total
Bought
outright
Held
under
repurchase
agreement
Loans
Float2
Other
Federal
All
other 3 Reserve
assets4
Total
Gold
stock5
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 6
1918....
1919....
239
300
239
300
0
0
1,766
2,215
199
201
294
575
0
0
2,498
3,292
2,873
2,707
1,795
1,707
1920
1921
1922
1923
1924
....
....
....
....
....
287
234
436
134
540
287
234
436
80
536
0
0
0
54
4
2,687
1,144
618
723
320
119
40
78
27
52
262
146
273
355
390
0
0
0
0
0
3,355
1,563
1,405
1,238
1,302
2,639
3,373
3,642
3,957
4,212
1,709
1,842
1,958
2,009
2,025
1925
1926
1927
1928
1929
....
....
....
....
....
375
315
617
228
511
367
312
560
197
488
8
3
57
31
23
643
637
582
1,056
632
63
45
63
24
34
378
384
393
500
405
0
0
0
0
0
1,459
1,381
1,655
1,809
1,583
4,112
4,205
4,092
3,854
3,997
1,977
1,991
2,006
2,012
2,022
1930
1931
1932
1933
1934
....
....
....
....
....
739
817
1,855
2,437
2,430
686
775
1,851
2,435
2,430
43
42
4
2
0
251
638
235
98
7
21
14
15
5
372
378
41
137
21
0
0
0
0
0
1,373
1,853
2,145
2,688
2,463
4,306
4,173
4,226
4,036
8,238
2,027
2,035
2,204
2,303
2,511
1935
1936
1937
1938
1939
....
....
....
....
....
2,431
2,430
2,564
2,564
2,484
2,430
2,430
2,564
2,564
2,484
1
0
0
0
0
5
3
10
4
7
12
39
19
17
91
38
28
19
16
11
0
0
0
0
0
2T486
2,500
2,612
2,601
2,593
10,125
11,258
12,760
14,512
17,644
2,476
2,532
2,637
2,798
2,963
1 9 4 0 . . . . 2,184
1941 . . . . 2,254
1942 . . . . 6,189
1943 . . . . 11,543
1944 . . . . 18,846
2,184
2,254
6,189
11,543
18,846
0
0
0
0
0
3
3
6
5
80
80
94
471
681
815
8
10
14
10
4
0
0
0
0
0
2,274
2,361
6,679
12,239
19,745
21,995
22,737
22,726
21,938
20,619
3,087
3,247
3,648
4,094
4,131
1945 . . . .
1946....
1947 . . . .
1948 . . . .
1949 . . . .
24,252
23,350
22,559
23,333
18,885
24,252
23,350
22,559
23,333
18,885
0
0
0
0
0
249
163
85
223
78
578
580
535
541
534
2
1
1
1
2
0
0
0
0
0
15,091
24,093
23,181
24,097
19,499
20,065
20,529
22,754
24,244
24,427
4,339
4,562
4,562
4,589
4,598
1950
1951
1952
1953
1954
....
....
....
....
....
20,778
23,801
24,697
25,916
24,932
20,725
23,605
24,034
25,318
24,888
53
196
663
598
44
67
19
156
28
143
1,368
1,184
967
935
808
3
5
4
2
1
0
0
0
0
0
22,216 22,706
25,009 22,695
25,825 23,187
26,880 22,030
25,885 21,713
4,636
4,709
4,812
4,894
4,985
1955
1956
1957
1958
1959
....
....
....
....
....
24,785
24,915
24,238
26,347
26,648
24,391
24,610
23,719
26,252
26,607
394
305
519
95
41
108
50
55
64
458
1,585
1,665
1,424
1,296
1,590
29
70
66
49
75
0
0
0
0
0
26,507
26,699
25,784
27,755
28,771
21,690
21,949
22,781
20,534
19,456
5,008
5,066
5,146
5,234
5,311
1960 . . . .
1961 . . . .
1962....
1963 . . . .
1964 . . . .
27,384
28,881
30,820
33,593
37,044
26,984
30,478
28,722
33,582
36,506
400
159
342
11
538
33
130
38
63
186
1,847
2,300
2,903
2,600
2,606
74
51
110
162
94
0
0
0
0
0
29,338
31,362
33,871
36,418
39,930
17,767
16,889
15,978
15,513
15,388
5,398
5,585
5,567
5,578
5,405
20
Tables
229
14.-Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Currency
in
circulation
Treasury
cash
holdings7
Treasury
4,951
5,091
288
385
51
51
5,325
4,403
4,530
4,757
4,760
218
214
225
213
211
4,817
4,808
4,716
4,686
4,578
4,603
5,360
5,388
5,519
5,536
Member bank
Required
clearing
bal-
Other
Federal
Reserve
liaWith
bilities Federal
and
4 Reserve
capital
Banks
Other
Other
Federal
Reserve
accounts 4
96
73
25
28
118
208
0
0
0
0
57
96
11
38
51
5
12
3
4
19
18
15
26
19
20
298
285
276
275
258
0
0
0
0
0
203
201
208
202
216
16
17
18
23
29
8
46
5
6
6
21
19
21
21
24
272
293
301
348
393
211
222
272
284
3,029
19
54
8
3
121
6
79
19
4
20
22
31
24
128
169
5,882 2,566
6,543 2,376
6,550 3,619
6,856 2,706
7,598 2,409
544
244
142
923
634
29
99
172
199
397
8,732 2,213
11,160 2,215
15,410 2,193
20,499 2,303
25,307 2,375
368
867
799
579
440
Currency
and
coin9
Required 1(
Excess 10
1,636
1,890
0
0
1,585
1,822
51
68
0
0
0
0
0
1,781
1,753
1,934
1,898
2^220
0
0
0
0
0
0
1,654
0
1,884
2,161
0
99
0
14
59
0
0
0
0
0
0
0
0
0
0
2,212
2,194
2,487
2,389
2,355
0
0
0
0
0
2,256
2.250
2,424
2,430
2,428
-44
-56
63
-41
-73
375
354
355
360
241
0
0
0
0
0
0
0
0
0
0
2,471
1,961
2,509
2,729
4,096
0
0
0
0
0
2,375
1,994
1,933
1,870
2,282
96
-33
576
859
1,814
226
160
235
242
256
253
261
263
260
251
0
0
0
0
0
0
0
0
0
0
5,587
6,606
7,027
8,724
11,653
0
0
0
0
0
2,743
4,622
5,815
5,519
6,444
2,844
1,984
1,212
3,205
5,209
1,133
774
793
1,360
1,204
599
586
485
356
394
284
291
256
339
402
0
0
0
0
0
0
0
0
0
0
4,026
12,450
13,117
12,886
14,373
0
0
0
0
0
7,411
9,365
11,129
11,650
12,748
6,615
3,085
1,988
1,236
1,625
Foreign
28,515
28,952
28,868
28,224
27,600
2,287
2,272
1,336
1,325
1,312
977
393
870
1,123
821
862
508
392
642
767
446
314
569
547
750
495
607
563
590
106
0
0
0
0
0
0
0
0
0
0
15,915
16,139
17,899
20,479
16,568
0
0
0
0
0
14,457
15,577
16,400
19,277
15,550
1,458
562
1,499
1,202
1.018
27,741
29,206
30,433
30,781
30,509
1,293
1,270
1,270
761
796
668
247
389
346
563
895
526
550
423
490
565
363
455
493
441
714
746
111
839
907
0
0
0
0
0
0
0
0
0
0
17,681
20,056
19,950
20,160
18,876
0
0
0
0
0
16,509
19,667
20,520
19,397
18,618
1,172
389
-570
763
258
31,158
31,790
31,834
32,193
32,591
767
775
761
683
391
394
441
481
358
504
402
322
356
272
345
554
426
246
391
694
925
901
998
1,122
841
0
0
0
0
0
0
0
0
0
0
19,005
19,059
19,034
18,504
18,174
0
0
0
0
310
18,903
19,089
19,091
18,574
18,619
102
-30
-57
-70
-135
32,869
377
485
217
33,918
422
465
279
35,338
380
597
247
37,692
361
880
171
533
320
393
291
941
1,044
1,007
1.065
0
0
0
0
0
0
0
0
17,081
17,387
17,454
17.049
2,544
2,544
3,262
4.099
18,988
18,988
20,071
20.677
637
96
645
471
230 Tables
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items Year-End 1918-88, and Month-End 1988 ^Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
U.S. Treasury and
federal agency securities
Total
Other
Federal
All
other 3 Reserve
assets4
Gold
stock5
Bought
outright12
Held
under
repurchase
agreement
290
661
170
0
0
137
173
141
186
183
2,248
2,495
2,576
3,443
3,440
187
193
164
58
64
0
0
0
0
2,743
43,340
47,177
52,031
56,624
64,584
13,733
13,159
11,982
10,367
10,367
Loans
Float2
Total
Special
drawing
rights
certificate
account-
Treasury
currency
outstanding 6
5,575
6,317
6,784
6,795
6,852
1965....
1966 . . . .
1967....
1968 . . . .
1969 . . . .
40,768
44,316
49,150
52,937
57,154
40,478
43,655
48,980
52,937
7,154 3
1970....
1971 . . . .
1972 . . . .
1973 . . . .
1974 . . . .
62,142
70,804
71,230
80,495
85,714
62,142
69,481
71,119
80,395
84,760
0
1,323
111
100
954
335
39
1,981
1,258
299
4,261
4,343
3,974
3,099
2,001
57
261
106
68
999
1,123
1,068
1,260
1,152
3,195
67,918
76,515
78,551
86,072
92,208
10,732
10,132
10,410
11,567
11,652
400
400
400
400
400
7,147
7,710
8,313
8,716
9,253
94,124
104,093
111,274
118,591
126,167
92,789
100,062
108,922
117,374
124,507
1,335
4,031
2,352
1,217
1,660
211
25
265
1,174
1,454
3,688
2,601
3,810
6,432
6,767
1,126
991
954
587
704
3,312
3,182
2,442
4,543
5,613
102,461
110,892
118,745
131,327
140,705
11,599
11,598
11,718
11,671
11,172
500
1,200
1,250
1,300
1,800
10,218
10,810
11,331
11,831
13,083
1980 . . . .
1981 . . . .
1982 . . . .
1983 . . . .
1984 . . . .
1985 . . . .
1986....
1987....
1988 . . . .
130,592 128,038
140,348 136,863
148,837 144,544
160,795 159,203
169,627 167,612
191,248 186,025
221,459 205,454
231,420 226,459
247,489 240,628
2,554
3,485
4,293
1,592
2,015
5,223
16,005
4,961
6,861
1,809
1,601
717
918
3,577
3,060
1,565
3,815
2,170
4,467
1,762
2,735
1,605
833
988
1,261
811
1,286
776
195
1,480
418
0
0
0
0
0
8,739
9,230
9,890
8,728
12,347
15,302
17,475
15,837
18,803
146,383
153,136
63,659
172,464
186,384
210,598
241,760
251,883
269,748
11,160
11,151
11,148
11,121
11,096
11,090
11,084
11,078
11,060
2,518
3,318
4,618
4,618
4,618
4,718
5,018
5,018
5,018
13,427
13,687
13,786
15,732
16,418
17,075
17,567
18,177
18,799
1988
Jan....
Feb ...
Mar...
Apr...
May...
June...
July...
Aug...
Sept...
Oct....
Nov...
Dec...
225,834
224,293
224,895
241,045
230,460
237,144
231,651
229,986
240,524
234,405
241,086
247,489
225,834
224,293
224,895
230,642
230,460
229,718
231,651
229,986
230,764
230,157
235,803
240,628
0
0
0
10,403
0
7,426
0
0
9,490
4,248
5,283
6,861
333
336
2,311
2,590
3,304
2,464
3,650
3,237
2,154
2,275
2,328
2,170
396
897
298
371
122
259
774
659
1,199
1,690
389
1,286
0
0
0
0
0
0
0
0
0
0
0
0
15,954
14,269
15,038
16,236
14,388
14,780
16,365
17,638
18,248
19,352
18,168
18,803
242,517
239,795
242,542
260,242
248,274
254,647
252,440
251,520
261,855
257,722
261,971
269,748
11,068
11,063
11,063
11,063
11,063
11,063
11,063
11,061
11,062
11,062
11,059
11,060
5,018
5,018
5,018
5,018
5,018
5,018
5,018
5,018
5,018
5,018
5,018
5,018
18,197
18,248
18,313
18,369
18,425
18,501
18,531
18,581
18,637
18,693
18,743
18,799
1975
1976
1977
1978
1979
....
....
....
....
....
1. For a description of figures and discussion of their
significance, see Banking and Monetary Statistics,
1941-1970 (Board of Governors of the Federal Reserve
System, 1976), pp. 507-23.
2. Beginning with 1960, figures reflect a minor change
in concept; see Federal Reserve Bulletin, vol. 47 (February
1961), p. 164.
3. Principally acceptances and, until Aug. 21, 1959,
industrial loans, authority for which expired on that date.
4. For the period before Apr. 16, 1969, includes the
total of Federal Reserve capital paid in, surplus, other
capital accounts, and other liabilities and accrued dividends, less the sum of bank premises and other assets, and
was reported as "Other Federal Reserve accounts"; thereafter, "Other Federal Reserve assets" and "Other Federal
liabilities and capital" are shown separately.
Digitized Reserve
for FRASER
5. For the period before Jan. 30, 1934, includes gold
http://fraser.stlouisfed.org/
held in Federal Reserve Banks and in circulation.
Federal Reserve Bank of St. Louis
6. Includes currency and coin (other than gold) issued
directly by the Treasury. The largest components are
fractional and dollar coins. For details see "Currency and
Coin in Circulation," Treasury Bulletin.
7. Coin and paper currency held by the Treasury, as
well as any gold in excess of the gold certificates issued to
the Reserve Bank.
8. Beginning in November 1979, includes reserves of
member banks. Edge corporations, and U.S. agencies and
branches of foreign banks. Beginning on Nov. 13, 1980,
includes reserves of all depository institutions.
9. Between Dec. 1,1959, and Nov. 23,1960, part was
allowed as reserves; thereafter all was allowed.
10. Estimated through 1958. Before 1929, data were
available only on call dates (in 1920 and 1922 the call dates
were Dec. 29). Beginning on Sept. 12,1968, the amount is
based on close-of-business figures for the reserve period
two weeks before the report date.
Tables
231
14.-Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Other
Other
Federal
Reserve
accounts4
Required
clearing
balances
150
174
135
216
134
355
588
563
747
807
211
-147
-773
-1,353
0
0
0
0
0
0
1,156
2,020
1,855
2,542
2,113
148
294
325
251
418
1,233
999
840
1,41914
1,27514
0
0
0
0
0
483
460
392
240
494
7,285
10,393
7,114
4,196
4,075
353
352
379
368
429
1,090
1,357
1,187
1,256
1,412
136,829
144,774
154,908
171,935
183,796
197,488
211,995
230,205
247,649
441
443
429
479
513
550
447
454
395
3,062
4,301
5,033
3,661
5,316
9,^51
7,588
5,313
8,656
411
505
328
191
253
480
287
244
347
223,152
223,574
227,073
228,282
232,732
235,513
234,990
235,881
235,527
237,094
242,472
247,649
438
457
479
479
459
432
397
398
389
397
402
395
10,276
2,472
2,403
16,186
3,030
9,762
3,910
4,390
13,023
6,151
5,198
8,656
355
343
534
215
288
382
269
231
338
301
251
347
Currency
in
circulation
Treasury
cash
holdings7
Treasury
Foreign
42,056
44,663
47,226
50,961
53,950
760
1,176
1,344
695
596
668
416
1,123
703
1,312
57,903
61,068
66,516
72,497
79,743
431
460
345
317
185
86,547
93,717
103,811
114,645
125,600
Member bank
reserves8
CurWith
Federal rency
Reserve and
Banks
Required10
Ex-
0
0
0
0
0
18,447
19,779
21,092
21,818
22,085
4,163
4,310
4,631
4,921
5,187
22,848
24,321
25,905
27,439
28,173
-238
-232
-182
-700
-901
0
0
0
0
0
1,986
2,131
2,143
2,669
2,935
24,150
27,788
25,647
27,060
25,843
5,423
5,743
6,216
6,781
7,370
30,033
-460
32,496
1,035
32,044
98 12
35,268 -1,360
37,011 -3,798
0
0
0
0
0
0
0
0
0
0
2,968
3,063
3,292
4,275
4,957
26,052
25,158
26,870
31,152
29,792
8,036
8,628
9,421
10,538
11,429
35,197
35,461
37,615
42,694
44,217
617
781
1,033
851
867
1,041
917
1,027
548
0
0
0
0
0
0
0
0
0
0
117
436
1,013
1,126
1,490
1,812
1,687
1,605
4,671
5,261
4,990
5,392
5,952
5,940
6,088
7,129
7,683
27,456
25,111
26,053
20,413
20,693
27,141
46,295
40,097
37,742
13,654
15,576
16,666
17,821
n.a.
n.a.
n.a.
n.a.
n.a.
40,558
675
42,145 -1,442
41,391
1,328
39,179
-945
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
315
438
436
360
491
351
291
392
358
348
398
548
0
0
0
0
0
0
0
0
0
0
0
0
1,674
1,658
1,671
1,660
1,660
1,658
1,642
1,634
1,605
1,662
1,613
1,605
6,926
7,139
7,047
7,450
7,235
7,109
7,200
7,020
7,899
8,463
8,058
7,683
33,664
38,043
37,106
40,060
37,098
34,023
38,352
36,234
37,433
38,079
38,399
37,742
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
11. Beginning on Dec. 1,1966, includes federal agency
obligations held under repurchase agreements and beginning on Sept. 29, 1971, federal agency issues bought
outright.
12. Includes, beginning in 1969, securities loaned—
fully guaranteed by U.S. government securities pledged
with Federal Reserve Banks-and excludes securities sold
and scheduled to be bought back under matched salepurchase transactions.
13. Beginning with week ending Nov. 15, 1972,
includes $450 million of reserve deficiencies on which
Federal Reserve Banks are allowed to waive penalties for a
transition period in connection with bank adaptation to
Regulation J as amended, effective Nov. 9, 1972. Allowable deficiencies are as follows (beginning with first stateDigitizedment
for FRASER
week of quarter, in millions): 1973-Q1, $279; Q2,
$172; Q3, $112; Q4, $84; 1974-Q1, $67; Q2, $58. The
http://fraser.stlouisfed.org/
transition period ended with the second quarter of 1974.
Federal Reserve Bank of St. Louis
Other
Federal
Reserve
liabilities
and
capital4
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-1,103!-1,535
-1,265
-893
-2,835
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
14. For the period before July 1973, includes certain
deposits of domestic nonmember banks and foreign-owned
banking institutions held with member banks and redeposited in full with Federal Reserve Banks in connection
with voluntary participation by nonmember institutions in
the Federal Reserve System program of credit restraint.
As of Dec. 12, 1974, the amount of voluntary nonmember bank and foreign-agency and branch deposits at
Federal Reserve Banks that are associated with marginal
reserves are no longer reported. However, two amounts
are reported: (1) deposits voluntarily held as reserves by
agencies and branches of foreign banks operating in the
United States and (2) Eurodollar liabilities.
15. Adjusted to include waivers of penalties for reserve
deficiencies, in accordance with change in Board policy
effective Nov. 19, 1975.
232 Tables
15. Changes in Number of Banking Offices in the United States, 1988'
Commercial banks 2
Type of office
and change
Banks, Dec. 31,1987...
Changes during 1988
New banks
Ceased banking
operation
Banks converted
into branches
Other 4
Member
Total
Mutual
savings
banks
Nonmember
Total
Total
National
State
Insured
Noninsured3
Insured
Noninsured
14,375
14,004
5,749
4,640
1,109
7,994
261
370
1
231
228
99
69
30
129
0
3
0
-201
-201
-103
-81
-22
-95
-3
-9
0
-598
-13
-586
-27
-403
108
-344
91
-59
17
-183
-131
0
-4
-12
23
0
0
-581
-586
-299
-265
-34
-280
-7
5
0
Banks, Dec. 31,1988..
13,794
13,418
5,450
4,375
1,075
7,714
254
375
1
Branches and
additional offices,
Dec. 31,1987
47,981
45,411
29,260
23,924
5,336
16,019
132
2,565
5
1,459
1,320
775
628
147
538
7
139
0
598
-942
0
371
586
-910
-21
281
403
-604
-20
577
344
-469
-12
525
59
-135
-8
52
183
-306
-1
-272
0
0
0
-24
12
-32
21
90
0
0
0
0
1,486
1,256
1,131
1,016
115
142
-17
230
0
Net change
Changes during 1988
De novo
Banks converted
into branches
Discontinued
Sale of branch
Other 4
Net change4
Branches and
additional offices,
Dec. 31,1988
49,467 46,667 30,391 24,940
5,451
16,161
115
2,795
5
1. Preliminary. Final data will be available in the Annual
3. As of Dec. 31, 1988, includes noninsured national
Statistical Digest, 1988, forthcoming.
trust companies.
2. Includes stock savings banks and nondeposit trust
4. Includes interclass changes,
companies.
Tables 233
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1988
Columbia Bank, Avondale, Arizona, to acquire
assets and liabilities of The North American
Bank, Phoenix, Arizona
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard the
depositors of The North American Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/8/88)
Columbia Bank (Applicant) has assets of $9.4
million and The North American Bank (Bank) has
assets of $30.5 million.
The Federal Deposit Insurance Corporation
(FDIC) has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Bank.
Farmers & Merchants Bank and Trust Company, Aberdeen, South Dakota, to merge with
Bank of Cresbard, Cresbard, South Dakota
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard
depositors of Bank of Cresbard.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2/3/88)
Farmers & Merchants Bank and Trust Company
(Applicant) has assets of $94.2 million and Bank of
Cresbard (Bank) has assets of $8.9 million.
The Office of the Comptroller of the Currency
(OCC) has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Bank.
pro forma basis, Applicant's market share will be
within Department of Justice and Board guidelines.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Citizens Bank and Trust Company, Baytown,
Texas, to merge the assets and liabilities of First
American Bank & Trust of Baytown, Baytown,
Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard the
depositors of First American Bank & Trust of
Baytown.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/11/88)
Citizens Bank and Trust Company (Applicant) has
assets of $ 149.2 million and First American Bank &
Trust of Baytown (Bank) has assets of $35.7
million.
The FDIC has recommended immediate action
by the Federal Reserve System to prevent the
probable failure of Bank.
Central Bank, Hollidaysburg, Pennsylvania, to
merge the assets and liabilities of the Broad Top
City office of Mellon Bank (Central), N. A., State
College, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3/4/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/28/88)
Central Bank (Applicant) has assets of $159.8
million and the branch of Mellon Bank (Branch) has
assets of $4.1 million. Applicant and Branch
operate in the same banking market. On a pro forma
basis, Applicant's market share is within Department of Justice and Board guidelines.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(2/18/88)
Farmers State Bank of Western Illinois (Applicant)
has assets of $28.4 million and Bank of Viola
(Bank) has assets of $10.9 million. Applicant and
Bank are located in the same banking market. On a
State Bank and Trust of Colorado Springs,
Colorado Springs, Colorado, to merge the assets
and liabilities of Citizens National Bank, Colorado Springs, Colorado
Farmers State Bank of Western Illinois, New
Windsor, Illinois, to merge the assets and liabilities
0/Bank of Viola, Viola, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12/18/87)
The proposed transaction would not be significantly
adverse to competition.
234 Tables
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1988 — Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard the
depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4/21/88)
State Bank and Trust (Applicant) has assets of
$12.7 million and Citizens National Bank (Bank)
has assets of $17.6 million.
The FDIC has recommended immediate action
by the Federal Reserve System to prevent the
probable failure of Bank.
Interstate Bank North, Houston, Texas, to
acquire the assets and liabilities o/First National
Bank of Kingwood, Kingwood, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard the
depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/26/88)
Interstate Bank North (Applicant) has assets of
$37.7 million and First National Bank of Kingwood
(Bank) has assets of $16.1 million. The OCC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Bank.
Citizens Bank and Trust Company, Baytown,
Texas, to merge certain assets and liabilities of
Lone Star Bank, Baytown, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard the
depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/26/88)
Citizens Bank and Trust Company (Applicant) has
assets of $19.0 million and Lone Star Bank (Bank)
has assets of $12.1 million.
The FDIC has recommended immediate action
by the Federal Reserve System to prevent the
probable failure of Bank.
Citizens Bank, Smithville, Tennessee, to merge
with Bank of Ardmore, Ardmore, Tennessee
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2/26/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/6/88)
Citizens Bank (Applicant) has assets of $204 million
and Bank of Ardmore (Bank) has assets of $54
million. Applicant and Bank operate in the same
banking market. On a pro forma basis, Applicant's
market share will be within the Department of
Justice and Board guidelines.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
First Interstate Bank of California, Los Angeles,
California, to merge with Bank of Contra Costa,
Walnut Creek, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/29/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/16/88)
First Interstate Bank of California (Applicant) has
assets of $19.6 billion and Bank of Contra Costa
(Bank) has assets of $175.9 million. Applicant and
Bank are not located in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Irving Trust Company, New York, New York, to
acquire certain assets and liabilities of the Seoul,
South Korea, branch of Continental Illinois
National Bank and Trust Company of Chicago,
Chicago, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5/6/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/27/88)
Irving Trust Company (Applicant) has assets of
$20.5 billion and the Seoul, South Korea, branch
(Branch) has assets of $129 million. Applicant and
Bank are not located in the same banking market.
The banking factors and considerations relating
Tables
235
16.-Continued
to the convenience and needs of the community are
consistent with approval.
Beaver Trust Company, Beaver, Pennsylvania,
to acquire the assets and liabilities of branch
offices of First Seneca Bank, Butler, Pennsylvania and of Union National Bank, Pittsburgh,
Pennsylvania
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/7/88)
First Community Bank, Inc. (Applicant), has assets
of $250.6 millionand First National Bank of Grafton
(Bank) has assets of $34.0 million. Applicant and
Bank do not operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/5/88)
The proposed transaction would not be significantly
adverse to competition.
Merchants State Bank, Freeman, South Dakota,
to acquire certain assets and liabilities of Hurley
State Bank, Hurley, South Dakota
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/11/88)
Beaver Trust Company (Applicant) has assets of
$ 187 million and the branches of First Seneca Bank
and of Union National Bank (Branches) have
acquired assets of $46.8 million. Applicant and
Branches do not operate in the same banking
market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
(7/15/88)
The proposed transaction would not be significantly
adverse to competition.
Norstar Bank, Hempstead, New York, to acquire
certain assets and liabilities of three branches of
Chemical Bank, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7/22/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/30/88)
Norstar Bank (Applicant) has assets of $2.3 billion
and the branches of Chemical Bank (Branches)
have assets of $108 million. Applicant and Bank
operate in the same banking market. On a pro forma
basis, Applicant's market share is within Department of Justice and Board guidelines.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
First Community Bank, Inc., Princeton, West
Virginia, to merge with First National Bank of
Grafton, Grafton, West Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/12/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/9/88)
Merchants State Bank (Applicant) has assets of $22
million and Hurley State Bank (Branch) has assets
of $ 10 million. Applicant and Branch do not operate
in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
First Virginia Bank-South Central, Amherst,
Virginia, to merge certain assets and liabilities of
two branches of Colonial American National
Bank, Roanoke, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/9/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/4/88)
First Virginia Bank-South Central (Applicant) has
assets of $43.6 million and the branches of Colonial
American National Bank (Branches) have assets of
$2.5 million. Applicant and Branches operate in the
same banking market. On a pro forma basis,
Applicant's market share is within Department of
Justice and Board guidelines.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Isabella Bank and Trust, Mount Pleasant,
Michigan, to merge the assets and liabilities of the
Shepherd branch of Commercial National Bank
of Alma, Alma, Michigan
236 Tables
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1988-Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/21/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/24/88)
Isabella Bank and Trust (Applicant) has assets of
$154.3 million and Commercial National Bank
(Branch) has assets of $4.2 million. Applicant and
Branch do not operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Bank of Woodward, Woodward, Oklahoma, to
assume the assets and liabilities of Bank of the
Northwest, Woodward, Oklahoma
First Community Bank, Inc., Princeton, West
Virginia, to merge with Valley Bank & Trust
Company, Bluefield, West Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/4/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/29/88)
First Community Bank, Inc. (Applicant), has assets
of $283.4 million and Valley Bank & Trust Company (Bank) has assets of $15.4 million. Applicant
and Bank operate in the same banking market. On a
pro forma basis, Applicant's market share is within
Department of Justice and Board guidelines.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard
depositors of Bank of the Northwest.
State Bank of Caledonia, Caledonia, Michigan,
to acquire certain assets and deposit liabilities of
the Middleville Branch of PrimeBank, Middleville, Michigan
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/4/88)
The proposed transaction would not be significantly
adverse to competition.
(11/15/88)
Bank of Woodward (Applicant) has assets of $103
million and Bank of the Northwest (Bank) has
assets of $22 million.
The FDIC has recommended immediate action
by the Federal Reserve System to prevent the
probable failure of Bank.
First Interstate Bank of California, Los Angeles,
California, to merge with Point West Bancorp
and its banking subsidiary, Point West Bank,
both of Sacramento, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/12/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/23/88)
First Interstate Bank of California (Applicant) has
assets of $19.7 billion and Point West Bancorp
(Bank) has banking assets of $168.3 million.
Applicant and Bank are not in the same banking
market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/30/88)
State Bank of Caledonia (Applicant) has assets of
$56.9 million and the Middleville Branch (Branch)
has deposit liabilities of $8.9 million. Applicant and
Bank do not operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
First Community Bank, Forest, Virginia, to
assume deposit liabilities from three branches of
Signet Bank/Virginia, Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/28/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/9/88)
First Community Bank (Applicant) has assets of
$27 million and the branches of Signet Bank/Virginia (Branches) have assumed deposits of $48
million. Applicant and Branches do not operate in
the same banking market.
237
16.-Continued
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
The FDIC has recommended immediate action
by the Federal Reserve System to prevent the
probable failure of Bank.
Continental Bank and Trust Company, Salt
Lake City, Utah, to merge with Tracy-Collins
Bank and Trust Company, Salt Lake City, Utah
Mergers Approved Involving Wholly Owned
Subsidiaries of the Same Bank Holding
Company
SUMMARY REPORT BY THE ATTORNEY GENERAL
In each of the following cases, the Summary Report
by the Attorney General indicates that the transaction would not have a significantly adverse effect on
competition because the proposed merger is essentially a corporate reorganization. The Board of
Governors, the Federal Reserve Bank, or the
Secretary of the Board of Governors, whichever
approved the application, determined that the
competitive effects of the proposed transaction, the
financial and managerial resources and prospects of
the banks concerned, as well as the convenience
and needs of the community to be served were
consistent with approval.
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard
depositors of Tracy-Collins Bank and Trust
Company.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/23/88)
Continental Bank and Trust Company (Applicant)
has assets of $410.9 million and Tracy-Collins
Bank and Trust Company (Bank) has assets of
$213.3 million.
Institutionl
First of America-Straits Area, Cheboygan, Michigan
Merger
First of American Bank, N. A., Sault Ste. Marie, Michigan
Trustcorp Bank, Toledo, Ohio
Merger
Trustcorp Co. Dayton, Dayton, Ohio
Trustcorp Company, N. A., Columbus, Ohio
Assets
(millions
of dollars)
85
1/20/88
52
2,898
1/26/88
40
Marine Bank of Champaign, Champaign, Illinois
Merger
Marine American National Bank of Champaign, Champaign, Illinois
100
Chemical Bank and Trust Company, Midland, Michigan
Merger
Chemical Bank Bay Area, Bay City, Michigan
452
Trustcorp Bank, Lenawee, Adrian Michigan
Merger
Jipson-Carter State Bank, Blissfield, Michigan
147
Old Kent Bank of Kalamazoo, Kalamazoo, Michigan
Merger
Old Kent Bank of Allegan, Allegan, Michigan
Old Kent Bank of Battle Creek, Battle Creek, Michigan
Old Kent Bank of South Haven, South Haven, Michigan
Old Kent Bank of Three Rivers, Three Rivers, Michigan
521
Date of
approval
3/18/88
89
3/18/88
9
4/15/88
31
42
41
41
32
4/22/88
238 Tables
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1988 —Continued
Institutionl
Sovran Bank/Central South, Nashville, Tennessee
Merger
Sovran Bank/Williamson County, Franklin, Tennessee
Bank One, Mansfield, Mansfield, Ohio.
Merger
Bank One, Ashland, Ashland, Ohio
(millions
of dollars)
2,700
349
United Jersey Bank, Hackensack, New Jersey
Merger
United Jersey Bank/Wood Ridge, N. A., Wood Ridge, New Jersey.
4,183
62
9/29/88
93
29
25
State Savings Bank of South Lyon, South Lyon, Michigan.
Merger
First of America Bank-Ann Arbor, Ann Arbor, Michigan .
46
9/7/88
102
1,600
First Interstate Bank of California, Los Angeles, California .
Merger
Point West Bank, Sacramento, California
8/1/88
155
First City Bank of Dallas, Dallas, Texas
Merger
First City Bank-East Dallas, Dallas, Texas
First City Bank-Market Center, N. A., Dallas, Texas
First City Bank Valley View, Dallas, Texas
First City Bank-Farmers Branch, Farmers Branch, Texas.
First City Bank of Garland, N. A., Garland, Texas
First City National in Grand Prairie, Grand Prairie, Texas.
First City Bank of Lancaster, Lancaster, Texas
First City Bank of Richardson, Richardson, Texas
First City Bank of Dallas, Dallas, Texas
Merger
First City Bank of Lewisville, Lewisville, Texas
First City Bank of Piano, N. A., Piano, Texas
7/13/88
70
4,025
Scottsdom Bank, Scottsdom, Arizona.
Merger
Thunderbird Bank, Phoenix, Arizona.
7/1/88
349
United Jersey Bank, Hackensack, New Jersey
Merger
United Jersey Bank Edgewater N. A., Englewood, New Jersey.
Landmark Bank, Fairview Heights, Illinois
Merger
Landmark Bank Edgemont, East St. Louis, Illinois .
Landmark Bank St. Clair County, OTallon, Illinois.
Landmark Bank, Mascoutah, Illinois
Date of
approval
9/29/88
105
70
135
155
134
80
83
240
10/20/88
495
52
11/16/88
315
1,500
11/22/88
131
62
19,700
168
11/23/88
Tables
239
16.-Continued
Assets
(millions
of dollars)
Institutionl
Cole Taylor Bank/Drovers, Chicago, Illinois
Merger
Cole Taylor Bank/Main, Chicago, Illinois
Cole Taylor Bank/Skokie, Skokie, Illinois
Cole Taylor Bank/Ford City, Chicago, Illinois
340
11/29/88
287
182
291
First City Bank of Dallas, Dallas, Texas
Merger
First City Bank-Central Arlington, Arlington, Texas
First City National Bank of Arlington, Arlington, Texas
First City National Bank of Colley, Colleyville, Texas
First City Bank-Forest Hill, Forest Hill, Texas
First City National Bank of Fort Worth, Fort Worth, Texas
1,500
Sovran Bank/Central South, Nashville, Tennessee
Merger
Sovran Bank/Clarksville, Clarksville, Tennessee
3,000
First Bank of Johnson City, Johnson City, Illinois
Merger
First Bank of Carbondale, Carbondale, Illinois
Date of
approval
11/29/88
87
245
55
46
75
12/13/88
135
29
12/22/88
26
1. Each proposed transaction was to be effected under
the charter of the first-named bank. The entries are in
chronological order of approval.
Mergers Approved Involving a Nonoperating
Institution with an Existing Bank
bank by the holding company, the merger would
have no effect on competition. The Board of
Governors, the Federal Reserve Bank, or the
Secretary of the Board of Governors, whichever
approved the application, determined that the
proposal would, in itself, have no adverse
competitive effects, and that the financial factors
and considerations relating to the convenience and
needs of the community were consistent with
approval.
The following transactions have no significant effect
on competition; they merely facilitate the acquisition of the voting shares of a bank or banks by a
holding company. In such cases the summary report
by the attorney general indicates that the transaction
will merely combine an existing bank with a
nonoperating institution; in consequence, and
without regard to the acquisition of the surviving
240 Tables
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1988—Continued
Assets
(millions
of dollars)2
Institutionl
The ACB Bank, Apple Creek, Ohio
Merger
Apple Creek Banking Company, Apple Creek, Ohio.
1/27/88
21
Orrstown Interim Bank, Orrstown, Pennsylvania .
Merger
Orrstown Bank, Orrstown, Pennsylvania
2/5/88
74
Commonwealth Bank, Arlington, Texas
Merger
Commonwealth Bank-Lamar, N.A., Arlington, Texas .
Norstar Bank of Callicoon, Callicoon, New York .
Merger
Norstar Bank of Upstate NY, Albany, New York..
113
94
*St. Elmo Bank, St. Elmo, Illinois
Merger
Fayette County Bank, St. Elmo, Illinois .
5/23/88
53
6/20/88
16
New Bank, Madisonville, Tennessee
Merger
Bank of Madisonville, Madisonville, Tennessee
7/29/88
86
8/18/88
Richwood Interim Bank, Richwood, Ohio
Merger
Richwood Banking Company, Richwood, Ohio .
46
Ripley Bank Merger Subsidiary, Inc., Ripley, West Virginia .
Merger
Bank of Ripley, Ripley, West Virginia
,
Ranson Interim Bank, Ranson, West Virginia
Merger
Blakeley Bank and Trust Company, Ranson, West Virginia.
Central Florida Bancshares, Inc., Maitland, Florida
Merger
First American Bank of Orange County, Maitland, Florida .
4/1/88
4/26/88
F&M Bank-Martinsburg, Martinsburg, West Virginia
Merger
Merchants and Farmers Bank
1. Each proposed transaction was to be effected under
the charter of the first-named bank. The entries are in
chronological order of approval.
Date of
approval
8/29/88
38
9/26/88
64
11/4/88
41
2. Where no assets are listed, the bank is newly
organized and not in operation,
Federal Reserve
Directories and Meetings
242 Directories and Meetings
Board of Governors of the Federal Reserve System
December 31,1988
Term expires
ALAN GREENSPAN of New York, Chairmanl
MANUEL H. JOHNSON of Virginia, Vice Chairman1
MARTHA R. SEGER of Michigan
WAYNE D. ANGELL of Kansas
H. ROBERT HELLER of California
EDWARD W. KELLEY, JR., of Texas
JOHN P. LAWARE of Massachusetts
January 31,1992
January 31,2000
January 31,1998
January 31,1994
January 31,1996
January 31,1990
January 31,2002
OFFICE OF BOARD MEMERS
OFFICE OF THE SECRETARY
JOSEPH R. COYNE, Assistant to the Board
DONALD J. WINN, Assistant to the Board
BOB STAHLY MOORE, Special Assistant
WILLIAM W. WILES, Secretary
BARBARA R. LOWREY, Associate Secretary
JAMES MCAFEE, Associate Secretary
to the Board
LEGAL DIVISION
DIVISION OF MONETARY AFFAIRS
DONALD L. KOHN, Director
DAVID E. LINDSEY, Deputy Director
BRIAN F. MADIGAN, Assistant Director
RICHARD D. PORTER, Assistant Director
NORMAND R.V. BERNARD, Special Assistant
to the Board
MICHAEL BRADFIELD, General Counsel
J. VIRGILMATTINGLY, JR., Deputy
General Counsel
RICHARD M. ASHTON, Associate
General Counsel
OLIVER IRELAND, Associate General Counsel
RICKI R. TIGERT, Assistant General Counsel
MARYELLEN A. BROWN, Assistant
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT
S. DAVID FROST, Staff Director
EDWARD T. MULRENIN, Assistant
StaffDirector
PORTIA W. THOMPSON, Equal Employment
Opportunity Programs Officer
OFFICE OF STAFF DIRECTOR FOR
FEDERAL RESERVE BANK ACTIVITIES
THEODORE E. ALLISON, StaffDirector
OFFICE OF THE EXECUTIVE
DIRECTOR FOR INFORMATION
RESOURCES MANAGEMENT
ALLEN E. BEUTEL, Executive Director
STEPHEN R. MALPHRUS, Deputy Executive
Director
1. The designations as Chairman and Vice Chairman
expire on August 10, 1991, and August 4, 1990, respectively, unless the services of these members of the Board
shall have terminated sooner.
to the General Counsel
DIVISION OF RESEARCH
AND STATISTICS
MICHAEL J. PRELL, Director
EDWARD C. ETTIN, Deputy Director
THOMAS D. SIMPSON, Associate Director
LAWRENCE SLIFMAN, Associate Director
MARTHA BETHEA, Deputy
Associate Director
PETER A. TINSLEY, Deputy
Associate Director
MYRON L. KWAST, Assistant Director
SUSAN J. LEPPER, Assistant Director
MARTHA S. SCANLON, Assistant Director
DAVID J. STOCKTON, Assistant Director
JOYCE K. ZICKLER, Assistant Director
LEVON H. GARABEDIAN, Assistant Director
(Administration)
Directories and Meetings 243
DIVISION OF INTERNATIONAL
FINANCE
DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS
EDWIN M. TRUMAN, StaffDirector
GRIFFITH L. GARWOOD, Director
LARRY J. PROMISEL, Senior
GLENN E. LONEY, Assistant Director
ELLEN MALAND, Assistant Director
DOLORES S. SMITH, Assistant Director
Associate Director
CHARLES J. SIEGMAN, Senior
Associate Director
DAVID H. HOWARD, Deputy
Associate Director
ROBERT F. GEMMILL, StaffAdviser
DONALD B. ADAMS, Assistant Director
PETER HOOPER, IE, Assistant Director
KAREN H. JOHNSON, Assistant Director
RALPH W. SMITH, JR. , Assistant Director
DIVISION OF HUMAN
RESOURCES MANAGEMENT
DAVID L. SHANNON, Director
JOHN R. WEIS, Associate Director
ANTHONY V. DIGIOIA, Assistant Director
JOSEPH H. HAYES, JR., Assistant Director
FRED HOROWITZ, Assistant Director
DIVISION OF FEDERAL RESERVE
BANK OPERATIONS
DIVISION OF SUPPORT SERVICES
CLYDE H. FARNSWORTH, JR. , Director
ROBERT E. FRAZIER, Director
DAVID L. ROBINSON, Associate Director
GEORGE M. LOPEZ, Assistant Director
DAVID L. WILLIAMS, Assistant Director
C. WILLIAM SCHLEICHER, JR., Associate
Director
CHARLES W. BENNETT, Assistant Director
JACK DENNIS, JR. , Assistant Director
EARL G. HAMILTON, Assistant Director
JOHN H. PARRISH, Assistant Director
LOUISE L. ROSEMAN, Assistant Director
FLORENCE M. YOUNG, Adviser
OFFICE OF THE CONTROLLER
GEORGE E. LIVINGSTON, Controller
STEPHEN J. CLARK, Assistant Controller
(Programs and Budgets)
DARRELL R. PAULEY, Assistant Controller
(Finance)
DIVISION OF BANKING SUPERVISION
AND REGULATION
WILLIAM TAYLOR, StaffDirector
DON E. KLINE, Associate Director
FREDERICK M. STRUBLE, Associate Director
WILLIAM A. RYBACK, Deputy Associate
Director
DIVISION OF HARDWARE AND
SOFTWARE SYSTEMS
BRUCE M. BEARDSLEY, Director
THOMAS C. JUDD, Assistant Director
ELIZABETH B. RIGGS, Assistant Director
ROBERT J. ZEMEL, Assistant Director
STEPHEN C. SCHEMERING, Deputy
Associate Director
RICHARD SPILLENKOTHEN, Deputy
Associate Director
HERBERT A. BIERN, Assistant Director
JOE M. CLEAVER, Assistant Director
DIVISION OF
APPLICATIONS DEVELOPMENT
AND STATISTICAL SERVICES
WILLIAM R. JONES, Director
ROGER T. COLE, Assistant Director
JAMES I. GARNER, Assistant Director
JAMES D. GOETZINGER, Assistant Director
MICHAEL G. MARTINSON, Assistant Director
ROBERT S. PLOTKIN, Assistant Director
SIDNEY M. SUSS AN, Assistant Director
DAY RADEBAUGH, Assistant Director
LAURA M. HOMER, Securities Credit Officer
BRENT L. BOWEN, Inspector General
RICHARD C. STEVENS, Assistant Director
PATRICIA A. WELCH, Assistant Director
OFFICE OF THE INSPECTOR GENERAL
244 Directories and Meetings
Federal Open Market Committee
December 31,1988
Members
ALAN GREENSPAN, Chairman, Board of Governors
E. GERALD CORRIGAN, Vice Chairman, President, Federal Reserve Bank of New York
WAYNE D. ANGELL, Board of Governors
ROBERT P. BLACK, President, Federal Reserve Bank of Richmond
ROBERT P. FORRESTAL, President, Federal Reserve Bank of Atlanta
H. ROBERT HELLER, Board of Governors
W. LEE HOSKINS, President, Federal Reserve Bank of Cleveland
MANUEL H. JOHNSON, Board of Governors
EDWARD W. KELLEY, JR. , Board of Governors
JOHN P. LAWARE, Board of Governors
ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco
MARTHA R. SEGER, Board of Governors
Alternate Members
ROGER GUFFEY, President, Federal Reserve Bank of Kansas City
SILAS KEEHN, President, Federal Reserve Bank of Chicago
THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis
FRANK E. MORRIS, President, Federal Reserve Bank of Boston
JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York
Officers
DONALD L. KOHN,
Secretary and Economist
NORMAND R.V. BERNARD,
Assistant Secretary
MICHAEL BRADFIELD,
General Counsel
ERNEST T. PATRIKIS,
Deputy General Counsel
MICHAEL J. PRELL,
Economist
EDWIN M. TRUMAN,
Economist
JOHN H. BEEBE,
Associate Economist
JOHN M. DAVIS,
Associate Economist
RICHARD G. DAVIS,
Associate Economist
DAVID E. LINDSEY,
Associate Economist
CHARLES J. SIEGMAN,
Associate Economist
THOMAS D. SIMPSON,
Associate Economist
LAWRENCE SLIFMAN,
Associate Economist
SHEILA L. TSCHINKEL,
Associate Economist
J. ALFRED BROADDUS, JR.,
Associate Economist
PETER D. STERNLIGHT, Managerfor Domestic Operations,
System Open Market Account
SAM Y. CROSS, Manager for Foreign Operations,
System Open Market Account
During 1988, the Federal Open Market
Committee held eight regularly scheduled
meetings (see Record of Policy Actions of the
Federal Open Market Committee in this
REPORT.)
Directories and Meetings 245
Federal Advisory Council
December 31,1988
Members
District 1 - J. TERRENCE MURRAY, President, Fleet/Norstar Financial Group, Inc., Chairman
and ChiefExecutive Officer, Fleet National Bank, Providence, Rhode Island
District 2-WILLARD C. BUTCHER, Chairman and Chief Executive Officer, The Chase
Manhattan Bank, N. A., New York, New York
District 3-SAMUEL A. MCCULLOUGH, President and Chief Executive Officer,
Meridian Bancorp, Inc., Reading, Pennsylvania
District 4-THOMAS H. O'BRIEN, President and ChiefExecutive Officer, PNC Financial Corp,
Pittsburgh, Pennsylvania
District 5 - FREDERICK DEANE, JR. , Chairman of the Board and Chief Executive Officer,
Signet Banking Corporation, Richmond, Virginia
District 6-BENNETT A. BROWN, Chairman and ChiefExecutive Officer,
Citizens and Southern Georgia Corporation and The Citizens and Southern National Bank,
Atlanta, Georgia
District 7-CHARLES T. FISHER, III, Chairman and President, National Bank of Detroit,
Detroit, Michigan
District 8-DONALD N. BRANDIN, Chairman of the Board and Chief Executive Officer,
Boatmen'sBancshares, Inc., St. Louis, Missouri
District 9 - D . H. ANKENY, JR. , Chairman and Chief Executive Officer,
First Bank System, Minneapolis, Minnesota
District 10 - F . PHILLIPS GILTNER, President, First National Bank of Omaha,
Omaha, Nebraska
District 11 — T. C. FROST, Chairman of the Board, Frost National Bank, San Antonio, Texas
District 1 2 - P A U L HAZEN, President and Chief Operating Officer, Wells Fargo and Co.,
San Francisco, California
Officers
CHARLES T. FISHER, HI, President
BENNETT A. BROWN, Vice President
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVIK, Associate Secretary
Directors
SAMUEL A. MCCULLOUGH
DONALD N. BRANDIN
The Federal Advisory Council met on Feb- the twelve Federal Reserve Districts, is
ruary 4-5, May 5-6, September 8-9, and required by law to meet in Washington at least
November 3-4, 1988. The Board of Gover- four times each year and is authorized by the
nors met with the council on February 5, May Federal Reserve Act to consult with, and
6, September 9, and November 4, 1988. The advise, the Board on all matters within the
council, which is composed of one represen- jurisdiction of the Board,
tative of the banking industry from each of
246 Directories and Meetings
Consumer Advisory Council
December 31,1988
Members
NAOMI G. ALBANESE, Former Professor of Home Economics, Greensboro, North Carolina
STEPHEN BROBECK, Executive Director, Consumer Federation of America, Washington, D.C.
EDWIN B. BROOKS, President, Security Federal Savings and Loan Association, Richmond,
Virginia
JUDITH N. BROWN, Treasurer, American Association of Retired Persons, Edina, Minnesota
MICHAEL S. CASSIDY, Senior Vice President, Chase Manhattan Bank, New York, New York
BETTY TOM CHU, Chairman, Trust Savings Bank, Arcadia, California
JERRY D. CRAFT, Senior Vice President, First National Bank of Atlanta, Atlanta, Georgia
DONALD C. DAY, President, New England Securities Corporation, Boston, Massachusetts
RICHARD B. DOBY, Financial Services Consultant, Doby and Associates, Denver, Colorado
RICHARD H. FINK, President, Citizens for a Sound Economy, Washington, D.C.
NEIL J. FOGARTY, Attorney, Hudson County Legal Services, Jersey City, New Jersey
STEPHEN GARDNER, Assistant Attorney General, State of Texas, Dallas, Texas
KENNETH A. HALL, President (South Division) First United Bank, Picayune, Mississippi
ELENA HANGGI, Director, Institute for Social Justice, Little Rock, Arkansas
ROBERT A. HESS, President and General Manager, Wright Patman Congressional Federal
Credit Union, Washington, D.C.
ROBERT J. HOBBS, Deputy Director, National Consumer Law Center, Boston, Massachusetts
RAMON E. JOHNSON, Professor ofFinance, University of Utah, Salt Lake City, Utah
ROBERT W. JOHNSON, Professor of Management andDirector, Credit Research Center, Purdue
University, West Lafayette, Indiana
A. J. KING, Chairman and Chief Executive Officer, Valley Bank of Kalispell, Kalispell,
Montana
JOHN M. KOLESAR, President, Ameritrust Development Bank, Cleveland, Ohio
ALAN B. LERNER, Senior Executive Vice President, Associates Corporation, Dallas, Texas
RICHARD L. D. MORSE, Professor ofFamily Economics, Kansas State University, Manhattan,
Kansas
WILLIAM E. ODOM, Chairman of the Board, Ford Motor Credit Company, Dearborn,
Michigan
SANDRA R. PARKER, Chairman, Banking Committee, Richmond United Neighborhoods,
Richmond, Virginia
SANDRA PHILLIPS, Executive Director, Pittsburgh Partnership for Neighborhood Development,
Pittsburgh, Pennsylvania
JANE SHULL, Director, Institute for the Study of Civic Values, Philadelphia, Pennsylvania
RALPH E. SPURGIN, President and Chief Executive Officer, Limited Credit Services, Inc.,
Columbus, Ohio
LAWRENCE WINTHROP, President, Consumer Credit Counseling Service of Oregon, Inc.,
Portland Oregon
Directories and Meetings 247
Consumer Advisory Council—Continued
Officers
STEVEN W. HAMM, Chairman
EDWARD J. WILLIAMS, Vice Chairman
The Consumer Advisory Council met with financial industry, and representatives of
members of the Board of Governors on March consumer and community interests. It was
17-18, July 14-15, and October27-28,1988. established pursuant to the 1976 amendments
The council is composed of academics, state to the Equal Credit Opportunity Act to advise
government officials, representatives of the the Board on consumer financial services.
Thrift Institutions Advisory Council
December 31,1988
Members
GERALD M. CZARNECKI, Chairman of the Board and ChiefExecutive Officer, HONFED,
Honolulu, Hawaii
ROBERT S. DUNCAN, Chairman, President, and ChiefExecutive Officer, Magnolia Federal
Bank for Savings, Hattiesburg, Mississippi
BETTY GREGG, Immediate Past President and ChiefExecutive Officer, Desert Schools Federal
Credit Union, Scottsdale, Arizona
JAMIE J. JACKSON, President, Landmark Capital, Inc., Houston, Texas
THOMAS A. KINST, President and ChiefExecutive Officer, Land of Lincoln Savings and Loan,
Hoffman Estates, Illinois
RAY MARTIN, Chairman and ChiefExecutive Officer, Coast Savings and Loan Association,
Los Angeles, California
JOE C. MORRIS, Chairman of the Board, Columbia Savings Association,
Overland Park, Kansas
JOSEPH W. MOSMILLER, Chairman and Chief Executive Officer, Loyola Federal Savings and
Loan Association, Baltimore, Maryland
JANET M. PAVLISKA, President and ChiefExecutive Officer, BankFive for Savings, Arlington,
Massachusetts
Louis H. PEPPER, Chairman and Chief Executive Officer, Washington Mutual Savings Bank,
Seattle, Washington
WILLIAM G. SCHUETT, President and ChiefExecutive Officer, Security Savings
and Loan Association, Milwaukee, Wisconsin
DONALD B. SHACKELFORD, Chairman of the Board, State Savings Bank, Columbus, Ohio
Officers
JAMIE J. JACKSON, President
The members of the Thrift Institutions Advisory Council met with the Board of Governors
on February 25, May 24, September 13, and
November 15, 1988. The council, which
is composed of representatives from credit
GERALD M. CZARNECKI, Vice President
unions, savings and loan associations, and
savings banks, consults with and advises the
Board on issues pertaining to the thrift
industry and on various other matters within
the Board's jurisdiction.
248 Directories and Meetings
Officers of Federal Reserve Banks, Branches, and Offices
December 31,1988!
BANK,
Branch, ox facility
Chairman2
Deputy Chairman
President
First Vice President
BOSTON3
George N.
Hatsopoulos
Richard N. Cooper
Frank E. Morris
Robert W.
Eisenmenger
NEW YORK 3 ....
John R. Opel
Ellen V. Futter
Mary Ann Lambertsen
E. Gerald Corrigan
James H. Oltman
PHILADELPHIA
Nevius M. Curtis
Peter A. Benoliel
Edward G. Boehne
William H. Stone, Jr.
CLEVELAND 3 ..
Charles W. Parry
John R. Miller
W. Lee Hoskins
William H.
Hendricks
Cincinnati
Pittsburgh
Owen B.Butler
James E. Haas
RICHMOND 3 ...
Robert A. Georgine
Hanne M. Merriman
Baltimore
Thomas R. Shelton
G. Alex Bernhardt
Buffalo
Charlotte
John T. Keane
Robert P. Black
Jimmie R.
Monhollon
Culpeper
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
CHICAGO 3
Detroit
ST. LOUIS
Little Rock
Louisville
Memphis
MINNEAPOLIS .
Bradley Currey, Jr.
Larry L. Prince
Roy D. Terry
E.William Nash, Jr.
Sue McCourt Cobb
Condon S. Bush
Sharon A. Perlis
Robert P. Forrestal
Jack Guynn
Robert J. Day
Marcus Alexis
Richard T. Lindgren
Silas Keehn
Daniel M. Doyle
Robert L. Virgil, Jr.
H. Edwin Trusheim
James R. Rodgers
Lois H. Gray
Sandra B. Sanderson
Thomas C. Melzer
James R. Bowen
Michael W.Wright
John A. Rollwagen
Marcia S. Anderson
Gary H. Stern
Thomas E. Gainor
Helena
Vice President
in charge of Branch
Charles A. Cerino 4
Harold J. Swart4
Robert D. McTeer, Jr.4
Albert D.
Tinkelenberg4
JohnG. Stoides4
Delmar Harrison 4
FredR.Herr 4
James D. Hawkins4
James T. Curry, III
Donald E. Nelson
Robert J. Musso
Roby L.Sloan 4
John F. Breen
Howard Wells
Paul I. Black, Jr.
Robert F.McNellis
Directories and Meetings 249
BANK,
Branch, or facility
Chairman2
Deputy Chairman
KANSAS CITY
Irvine O. Hockaday, Jr. Roger Guffey
Fred W. Lyons, Jr.
Henry R. Czerwinski
James C. Wilson
Kent M. Scott
Patience S. Latting
David J. France
Kenneth L. Morrison
Harold L. Shewmaker
Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN FRANCISCO
Los Angeles
Portland
Salt Lake City
Seattle
President
First Vice President
Bobby R. Inman
Hugh G. Robinson
Peyton Yates
Walter M. Mischer, Jr.
Robert F. McDermott
Robert H. Boykin
William H. Wallace
Robert F. Erburu
Carolyn S.
Chambers
Richard C. Seaver
Paul E. Bragdon
Don M. Wheeler
Carol A. Nygren
Robert T. Parry
Carl E. Powell
Vice President
in charge of Branch
Tony J. Salvaggio4
Sammie C. Clay
Robert Smith in 4
Thomas H. Robertson
John F. Hoover4
Thomas C. Warren5
Angelo S. Carella 4
E. Ronald Liggett4
Gerald R. Kelly 4
1. A current list of these officers appears each month in
the Federal Reserve Bulletin.
2. The Chairman of a Federal Reserve Bank, by statute,
serves as Federal Reserve Agent.
3. Additional offices of these Banks are located at
Lewiston, Maine; Windsor Locks, Connecticut; Cranford,
New Jersey; Jericho, New York; Utica at Oriskany, New
York; Columbus, Ohio; Columbia, South Carolina;
Charleston, West Virginia; Des Moines, Iowa; Indianapolis, Indiana; and Milwaukee, Wisconsin.
4. Senior Vice President.
5. Executive Vice President.
Conference of Chairmen
On November 3, 1987, the Conference
elected Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, as its
Chairman for 1988, and Robert P. Forrestal,
President of the Federal Reserve Bank of
Atlanta, as its Vice Chairman. The Conference appointed Carolyn A. Verret, of the
Federal Reserve Bank of Minneapolis, as its
Secretary, and Christopher G. Brown, of the
Federal Reserve Bank of Atlanta, as its
Assistant Secretary.
The Chairmen of the Federal Reserve Banks
are organized into the Conference of Chairmen, which meets to consider matters of
common interest and to consult with, and
advise, the Board of Governors. Such meetings, attended also by the deputy chairmen,
were held in Washington on June 1 and 2 and
November 30 and December 1, 1988.
The Executive Committee of the Conference of Chairmen during 1988 comprised
Robert J. Day, Chairman; Robert F. Erburu,
Vice Chairman; and John R. Opel, member.
On December 1, 1988, the Conference
elected its Executive Committee for 1989,
naming Robert F. Erburu as Chairman,
Bradley Currey, Jr. as Vice Chairman, and
Peter A. Benoliel as the other member.
Conference of Presidents
The presidents of the Federal Reserve Banks
are organized into the Conference of Presidents, which meets periodically to consider
matters of common interest and to consult
with, and advise, the Board of Governors.
Conference of First
Vice Presidents
The Conference of First Vice Presidents of
the Federal Reserve Banks was organized in
1969 to meet periodically for the consideration of operations and other matters.
On November 20, 1987, the Conference
elected Thomas E. Gainor, First Vice President of the Federal Reserve Bank of Minneapolis, as its Chairman for 1988, and Jack
Guynn, First Vice President of the Federal
Reserve Bank of Atlanta, as its Vice Chairman. The Conference appointed Carolyn A.
Verret, of the Federal Reserve Bank of
250 Directories and Meetings
Minneapolis, as its Secretary, and Christopher G. Brown, of the Federal Reserve Bank
of Atlanta, as its Assistant Secretary.
Directors
The following list of directors of Federal
Reserve Banks and Branches shows for each
director the class of directorship, the principal
business affiliation, and the date the term
expires. Each Federal Reserve Bank has nine
members on its board of directors: three Class
A and three Class B directors, who are elected
by the stockholding member banks, and three
Class C directors, who are appointed by the
Board of Governors of the Federal Reserve
System. Directors are chosen without discrimination as to race, creed, color, sex, or
national origin.
Class A directors represent the stockholding member banks in each Federal Reserve
District. Class B and Class C directors
represent the public and are chosen with due,
but not exclusive, consideration to the interests of agriculture, commerce, industry, services, labor, and consumers; they may not be
officers, directors, or employees of any bank
or bank holding company. In addition, Class
C directors may not be stockholders of any
bank or bank holding company.
For the election of Class A and Class B
directors, the Board of Governors classifies
the member banks of each Federal Reserve
District into three groups. Each group, which
comprises banks with similar capitalization,
elects one Class A director and one Class B
director. The Board of Governors designates
one Class C director as chairman of the board
of directors and Federal Reserve Agent of
each District Bank and appoints another Class
C director as deputy chairman.
Federal Reserve Branches have either five
or seven directors, a majority of whom are
appointed by the parent Federal Reserve
Bank; the others are appointed by the Board of
Governors. One of the directors appointed by
the Board is designated annually as chairman
of the board of that Branch in a manner
prescribed by the parent Federal Reserve
Bank.
For the name of the chairman and deputy
chairman of the board of directors of each
Reserve Bank and of the chairman of each
Branch, see the preceding table, "Officers of
Federal Reserve Banks, Branches, and
Offices."
Directories and Meetings 251
Term expires
Dec. 31
District 1-BOSTON
Class A
William C. Bullock, Jr
Joel B. Alvord
Richard D. Wardell
Class B
Matina S. Horner
Richard M. Oster
Stephen R. Levy
Class C
George N. Hatsopoulos
Richard N. Cooper
Richard L. Taylor
Former Chairman, Merrill/Northstar, Bangor,
Maine
Chairman and Chief Executive Officer, Shawmut
National Corporation, Hartford, Connecticut
President and Chief Executive Officer, National
Iron Bank of Salisbury, Salisbury,
Connecticut
President, Radcliffe College, Cambridge,
Massachusetts
President and Chief Executive Officer, Cookson
America, Inc., Providence, Rhode Island
Chairman and Chief Executive Officer, Bolt
Beranek and Newman, Inc., Cambridge,
Massachusetts
Chairman of the Board and President, Thermo
Electron Corporation, Waltham,
Massachusetts
Maurits C. Boas Professor of International
Economics, Harvard University, Cambridge,
Massachusetts
President, Taylor Properties, Inc., Boston,
Massachusetts
1988
1989
1990
1988
1989
1990
1988
1989
1990
District 2 - N E W YORK
Class A
John F. McGillicuddy
Alberto M. Paracchini
J. Kirby Fowler
Class B
Richard L. Gelb
John A. Georges
Chairman of the Board and Chief Executive
Officer, Manufacturers Hanover Trust
Company, New York, New York
Chairman of the Board and President, Banco de
Ponce, Ponce, Puerto Rico
President and Chief Executive Officer, The
Flemington National Bank and Trust
Company, Flemington, New Jersey
Chairman and Chief Executive Officer, BristolMyers Company, New York, New York
Chairman and Chief Executive Officer,
International Paper Company, New York,
New York
1988
1989
1990
1988
1989
252 Directories and Meetings
Term expires
Dec. 31
John F. Welch, Jr
Class C
Maurice R. Greenberg
John R. Opel
Ellen V. Futter
Chairman and Chief Executive Officer, GE,
Fairfield, Connecticut
1990
President and Chief Executive Officer, American
International Group, Inc., New York,
New York
Chairman of the Executive Committee,
International Business Machines Corporation,
Armonk, New York
President, Barnard College, Columbia
University, New York, New York
1988
1989
1990
BUFFALO BRANCH
Appointed by the Federal Reserve Bank
R. Carlos Carballada
President and Chief Executive Officer, Central
Trust Company, Rochester, New York
Donald I. Wickham
President, Tri-Way Farms, Inc., Stanley,
New York
Harry J. Sullivan
President, Salamanca Trust Company,
Salamanca, New York
Norman W. Sinclair
President and Chief Executive Officer, Lockport
Savings Bank, Lockport, New York
Appointed by the Board of Governors
Mary Ann Lambertsen
Vice President, Human Resources, The Quaker
Oats Company, Fisher-Price Division, East
Aurora, New York
Matthew Augustine
President and Chief Executive Officer, Eltrex
Industries, Inc., Rochester, New York
Paul E. McSweeney
Executive Vice President, United Food and
Commercial Workers, District Union
Local One, AFL-CIO, Amherst,
New York
1988
1988
1989
1990
1988
1989
1990
District 3 - PHILADELPHIA
Class A
Clarence D. McCormick
George A. Butler
Constantinos I. Costalas
President, Farmers and Merchants National
Bank, Bridgeton, New Jersey
Chairman and Chief Executive Officer, First
Pennsylvania Bank, N.A., Philadelphia,
Pennsylvania
Chief Executive Officer, Glendale National Bank
of New Jersey, Voorhees, New Jersey
1988
1989
1990
Directories and Meetings 253
Term expires
Dec. 31
Class B
Nicholas Riso
Carl E. Singley
Charles F. Seymour
Class C
NeviusM. Curtis
Peter A. Benoliel
Jane G. Pepper
Executive Vice President, AHOLD, U.S.A.,
Harrisburg, Pennsylvania
Partner, White, McClelland, and Singley,
Philadelphia, Pennsylvania
Chairman, Jackson-Cross Company,
Philadelphia, Pennsylvania
1988
1989
1990
Chairman and Chief Executive Officer,
Delmarva Power, Wilmington, Delaware
Chairman of the Board, Quaker Chemical
Corporation, Conshohocken, Pennsylvania
President, The Pennsylvania Horticultural
Society, Philadelphia, Pennsylvania
1988
Chairman and Chief Executive Officer,
First-Knox Bane Corporation, Mount Vernon,
Ohio
Chairman and Chief Executive Officer,
Huntington Bancshares Incorporated,
Columbus, Ohio
Chairman and President, First National Bank of
Nelsonville, Nelsonville, Ohio
1988
President, John W. Galbreath and Company,
Columbus, Ohio
Chairman of the Board, International Spike,
Inc., Lexington, Kentucky
President, The Limited Stores, Inc., Columbus,
Ohio
1988
Former President and Chief Operating Officer,
The Standard Oil Company (Ohio),
Cleveland, Ohio
Director and Retired Chairman and Chief
Executive Officer, Aluminum Company of
America, Pittsburgh, Pennsylvania
Partner, Burke, Haber, and Berick, Cleveland,
Ohio
1988
1989
1990
District 4-CLEVELAND
Class A
William A. Stroud
Frank Wobst
William H. May
Class B
Daniel M. Galbreath
Laban P. Jackson, Jr
Verna K. Gibson
Class C
John R. Miller
Charles W. Parry
Robert D. Storey
1989
1990
1989
1990
1989
1990
254 Directories and Meetings
Term expires
Dec. 31
CINCINNATI BRANCH
Appointed by the Federal Reserve Bank
Robert A. Hodson
President and Chief Executive Officer, 1st
Security Bank, Hillsboro, Ohio
Robert M. Duncan
President, First National Bank of Louisa,
Louisa, Kentucky
Jack W. Buchanan
President, Sphar and Company, Inc.,
Winchester, Kentucky
Jerry L.Kirby
Chairman of the Board, President, and Chief
Executive Officer, Citizens Federal Savings
and Loan Association, Dayton, Ohio
Appointed by the Board of Governors
Kate Ireland
National Chairman, Frontier Nursing Service,
Wendover, Kentucky
Owen B. Butler
Chairman of the Board (Retired), The Procter
and Gamble Company, Cincinnati, Ohio
Marvin Rosenberg
Partner, Towne Properties, Ltd., Cincinnati,
Ohio
1988
1989
1990
1990
1988
1989
1990
PITTSBURGH BRANCH
Appointed by the Federal Reserve Bank
Lawrence F. Klima
President, The First National Bank of
Pennsylvania, Erie, Pennsylvania
Thomas G. Dove
Chairman of the Executive Committee and Chief
Executive Officer, Wheeling Dollar Bank,
Wheeling, West Virginia
George A. Davidson, Jr
Chairman and Chief Executive Officer,
Consolidated Natural Gas Company,
Pittsburgh, Pennsylvania
Stephen C. Hansen
President and Chief Executive Officer, Dollar
Bank, F.S.B., Pittsburgh, Pennsylvania
Appointed by the Board of Governors
James E. Haas
President and Chief Operating Officer, National
Intergroup, Inc., Pittsburgh, Pennsylvania
Karl M. von der Hey den
Senior Vice President-Finance, and Chief
Financial Officer, H. J. Heinz Company,
Pittsburgh, Pennsylvania
Milton A. Washington
President and Chief Executive Officer,
Allegheny Housing Rehabilitation
Corporation, Pittsburgh, Pennsylvania
1988
1989
1990
1990
1988
1989
1990
Directories and Meetings 255
Term expires
Dec. 31
District 5-RICHMOND
Class A
K. Donald Menefee
Chairman of the Board and Chief Executive
Officer, Madison National Bank, and
Chairman of the Board and President, James
Madison Limited, Washington, D.C.
1988
Chester A. Duke
President and Chief Executive Officer, Marion
National Bank, Marion, South Carolina
President and Chief Executive Officer,
Wachovia Bank and Trust Company, N. A.
and The Wachovia Corporation,
Winston-Salem, North Carolina
1989
John F. McNair III
Class B
Edward H. Covell
Thomas B. Cookerly
JackC. Smith
Class C
Robert A. Georgine
Leroy T. Canoles, Jr
Hanne M. Merriman
1990
President, The Covell Company, Easton,
Maryland
President, Broadcast Division, Allbritton
Communications, Washington, D.C.
Chairman ofthe Board and Chief Executive
Officer, K-VA-T Food Stores, Inc., Grundy,
Virginia
1988
President, Building and Construction Trades
Department, AFL-CIO, Washington, D.C.
President, Kaufman and Canoles, Norfolk,
Virginia
President and Chief Executive Officer,
Honeybee, Inc., New York, New York
1988
1989
1990
1989
1990
BALTIMORE BRANCH
Appointed by the Federal Reserve Bank
H. Grant Hathaway
Chairman ofthe Board, Equitable Bank, N. A.,
Baltimore, Maryland
Joseph W. Mosmiller
Chairman of the Board, Loyola Federal Savings
and Loan Association, Baltimore, Maryland
Charles W. Hoff III
President and Chief Executive Officer, Farmers
and Mechanics National Bank, Frederick,
Maryland
Raymond V. Haysbert, Sr. ... President and Chief Executive Officer, Parks
Sausage Company, Baltimore, Maryland
Appointed by the Board of Governors
Thomas R. Shelton
President, Case Foods, Inc., Salisbury,
Maryland
1988
1988
1989
1990
1988
256 Directories and Meetings
Term expires
Dec. 31
John R. Hardesty, Jr
Gloria L. Johnson
President, Preston Energy, Inc., Kingwood,
West Virginia
Deputy Director of Administration, The
Baltimore Museum of Art, Baltimore,
Maryland
1989
1990
CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank
J. Donald Collier
President and Chief Executive Officer,
Orangeburg National Bank, Orangeburg,
South Carolina
James G. Lindley
Chairman and Chief Executive Officer, South
Carolina National Corporation, and
Chairman, President and Chief Executive
Officer, The South Carolina National Bank,
Columbia, South Carolina
John A. Hardin
Chairman of the Board and President, First
Federal Savings Bank, Rock Hill,
South Carolina
James M. Culberson, Jr
Chairman and President, The First National
Bank of Randolph County, Asheboro, North
Carolina
Appointed by the Board of Governors
G. Alex Bernhardt
President, Bernhardt Industries, Inc., Lenoir,
North Carolina
Anne M. Allen
Vice President, Allen Construction Company,
Greensboro, North Carolina
William E. Masters
President, Perception, Inc., Easley, South
Carolina
1988
1988
1989
1990
1988
1989
1990
District 6 -ATLANTA
Class A
Virgil H. Moore, Jr
Mary W. Walker
E. B. Robinson, Jr
Class B
Bernard F. Sliger
Chairman and Chief Executive Officer, First
Farmers and Merchants National Bank,
Columbia, Tennessee
Vice Chairman, The National Bank of Walton
County, Monroe, Georgia
Chairman and Chief Executive Officer, Deposit
Guaranty National Bank and Deposit
Guaranty Corporation, Jackson, Mississippi
President, Florida State University, Tallahassee,
Florida
1988
1989
1990
1988
Directories and Meetings 257
Term expires
Dec. 31
Paul W. Green
Gary J. Chouest
Class C
Larry L. Prince
Bradley Currey, Jr
Edwin A. Huston
President and Chief Executive Officer, American
Cast Iron Pipe Company, Birmingham,
Alabama
President, Edison Chouest Offshore, Inc.,
Galliano, Louisiana
President and Chief Operating Officer, Genuine
Parts Company, Atlanta, Georgia
President, Rock-Tenn Company, Norcross,
Georgia
Senior Executive Vice President-Finance, Ryder
System, Inc., Miami, Florida
1989
1990
1988
1989
1990
BIRMINGHAM BRANCH
Appointed by the Federal Reserve Bank
William F. Childress
President, First American Federal Savings and
Loan Association, Huntsville, Alabama
Milton A. Wendland
Owner-Operator, Autauga Farming Company,
Autaugaville, Alabama
John H. Newman, Jr
President and Chief Executive Officer, First
National Bank of Scottsboro, Scottsboro,
Alabama
Harry B. Brock, Jr
Chairman and Chief Executive Officer, Central
Bank of the South, Birmingham, Alabama
Appointed by the Board of Governors
Roy D. Terry
President and Chief Executive Officer, Terry
Manufacturing Company, Inc., Roanoke,
Alabama
Nelda P. Stephenson
President, Nelda Stephenson Chevrolet, Inc.,
Florence, Alabama
A. G. Trammell
President, Alabama Labor Council, AFL-CIO,
Birmingham, Alabama
1988
1988
1989
1990
1988
1989
1990
JACKSONVILLE BRANCH
Appointed by the Federal Reserve Bank
Robert R. Deison
Chairman of the Board and President, Andrew
Jackson State Savings and Loan Association,
Tallahassee, Florida
George W. Gibbs III
President, Atlantic Dry Dock Corporation,
Jacksonville, Florida
A. Bronson Thayer
Chairman and Chief Executive Officer, First
Florida Banks, Inc., Tampa, Florida
1988
1988
1989
258 Directories and Meetings
Term expires
Dec. 31
Buell G. Duncan, Jr
Chairman, President, and Chief Executive
Officer, Sun Bank, N.A., Orlando,
Florida
Appointed by the Board of Governors
E. William Nash, Jr
President, South-Central Operations, The
Prudential Insurance Company of America,
Jacksonville, Florida
Saundra H. Gray
Co-Owner, Gemini Springs Farm, DeBary,
Florida
Winnie F. Taylor
Professor of Law, University of Florida,
Gainesville, Florida
1990
1988
1989
1990
MIAMI BRANCH
Appointed by the Federal Reserve Bank
WilliamH. Losner
President and Chief Executive Officer, The First
National Bank of Homestead, Homestead,
Florida
James H. Robinson
President, Sun Bank/South Florida, N. A., Fort
Lauderdale, Florida
Robert M. Taylor
Chairman and Chief Executive Officer,
The Mariner Group, Inc., Fort Myers,
Florida
Frederick A. Teed
President and Chief Executive Officer,
Community Savings, F.A., Riviera Beach,
Florida
Appointed by the Board of Governors
Sue McCourt Cobb
Attorney, Greenberg, Traurig, Askew,
Hoffman, Lipoff, Rosen, and Quentel, PA.,
Miami, Florida
Jose L. Saumat
Chairman, Kaufman and Roberts, Inc., Miami,
Florida
Robert D. Apelgren
President, Apelgren Corporation, Pahokee,
Florida
1988
1989
1990
1990
1988
1989
1990
NASHVILLE BRANCH
Appointed by the Federal Reserve Bank
W. L. Calloway, Jr
Chairman, Quality Lawn Systems, Inc.,
Nashville, Tennessee
Shirley A. Zeitlin
President, Shirley Zeitlin and Company
Realtors, Nashville, Tennessee
James A. Rainey
Chairman, Sovran Financial Corporation/
Central South, Nashville,
Tennessee
1988
1981
198
Directories and Meetings 259
Term expires
Dec. 31
Lawrence A. Roseberry
Chairman, First National Bank and Trust
Company, Chairman and Chief Executive
Officer, First Franklin Bancshares, Inc.,
Athens, Tennessee
Appointed by the Board of Governors
Condon S. Bush
President, Bush Brothers and Company,
Dandridge, Tennessee
Patsy R. Williams
Partner, Rhyne Lumber Company, Newport,
Tennessee
Victoria B. Jackson
President and Chief Executive Officer, Diesel
Sales and Service, Inc. and Prodiesel, Inc.,
Nashville, Tennessee
1990
1988
1989
1990
NEW ORLEANS BRANCH
Appointed by the Federal Reserve Bank
Robert M. Shofstahl
President and Chief Executive Officer, Pelican
Homestead and Savings Association,
Metairie, Louisiana
Alan R. Barton
President and Chief Executive Officer,
Mississippi Power Company, Gulfport,
Mississippi
Robert S. Gaddis
President and Chief Executive Officer,
Trustmark National Bank, Laurel, Mississippi
Ronald M. Boudreaux
President and Chief Executive Officer, First
National Bank of St. Landry Parish,
Opelousas, Louisiana
Appointed by the Board of Governors
Sharon A. Perlis
President, Sharon A. Perlis, (APLC), Metairie,
Louisiana
James A. Hefner
President, Jackson State University, Jackson,
Mississippi
Caroline G. Theus
President, Ingle wood Land and Development
Company, Alexandria, Louisiana
1988
1988
1989
1990
1988
1989
1990
District 7-CHICAGO
Class A
John W. Gabbert
B. F. Backlund
Barry F. Sullivan
President and Chief Executive Officer, First of
America Bank-LaPorte, N.A., LaPorte,
Indiana
Chairman and Chief Executive Officer,
Bartonville Bank, Bartonville, Illinois
Chairman of the Board, First Chicago
Corporation, Chicago, Illinois
1988
1989
1990
260 Directories and Meetings
Term expires
Dec. 31
Class B
Max J. Naylor
PaulJ. Schierl
Edward D. Powers
Class C
Charles S. McNeer
Robert J. Day
Marcus Alexis
Farmer, Jefferson, Iowa
1988
Chairman of the Board and Chief Executive
Officer, Fort Howard Corporation, Green
Bay, Wisconsin
Chairman of the Board and Chief Executive
Officer, Mueller Company, Decatur, Illinois
1989
Chairman of the Board and Chief Executive
Officer, Wisconsin Energy Corporation,
Milwaukee, Wisconsin
Chairman and Chief Executive Officer,
USG Corporation, Chicago,
Illinois
Dean, College of Business Administration,
University of Illinois at Chicago, Chicago,
Illinois
1988
1990
1989
1990
DETROIT BRANCH
Appointed by the Federal Reserve Bank
Donald R. Mandich
Chairman and Chief Executive Officer,
Comerica Bank-Detroit, Detroit, Michigan
Ronald D. Story
Chairman and President, The Ionia County
National Bank of Ionia, Ionia,
Michigan
James A. Aliber
Chairman of the Board and Chief Executive
Officer, First Federal of Michigan, Detroit,
Michigan
Frederik G. H. Meijer
Chairman of the Board, Meijer, Incorporated,
Grand Rapids, Michigan
Appointed by the Board of Governors
Phyllis E. Peters
Director, Professional Standards Review,
Touche Ross and Company, Detroit,
Michigan
Richard T. Lindgren
Former President and Chief Executive Officer,
Cross and Trecker Corporation, Bloomfield
Hills, Michigan
Beverly Beltaire
President, P R Associates, Inc., Detroit,
Michigan
1988
1989
1990
1990
1988
1989
199(
District 8-ST. LOUIS
Class A
Vacancy
19'
Directories and Meetings 261
Term expires
Dec. 31
David W. Kemper II
Chairman and Chief Executive Officer,
Commerce Bank of St. Louis, N.A., Clayton,
Missouri, and President and Chief Executive
Officer, CommerceBancshares, Inc., Kansas
City, Missouri
1989
H. L. Hembree III
Chairman of the Executive Committee,
Merchants National Bank, Fort Smith,
Arkansas
1990
Consultant, Murphy Oil Corporation, El
Dorado, Arkansas
President, Mitchener Farms, Inc., Sumner,
Mississippi
Senior Vice President, GE Appliances, GE,
Louisville, Kentucky
1988
Class B
Robert J. Sweeney
Frank M. Mitchener, Jr
Roger W. Schipke
Class C
Robert L. Virgil, Jr
H. Edwin Trusheim
Janet McAfee Weakley
Dean, John M. Olin School of Business,
Washington University in St. Louis,
St. Louis, Missouri
Chairman and Chief Executive Officer, General
American Life Insurance Company, St. Louis,
Missouri
President, Janet McAfee, Inc., Clayton,
Missouri
1989
1990
1988
1989
1990
LITTLE ROCK BRANCH
Appointed by the Federal Reserve Bank
Robert C. Connor, Jr
President, Union National Bank of Little Rock,
Little Rock, Arkansas
Patricia M. Townsend
President, Townsend Company, Stuttgart,
Arkansas
David Armbruster
President, First America Federal Savings Bank,
Fort Smith, Arkansas
W. Wayne Hartsfield
President and Chief Executive Officer, First
National Bank, Searcy, Arkansas
Appointed by the Board of Governors
James R. Rodgers
Airport Manager, Little Rock Regional Airport,
Little Rock, Arkansas
L. Dickson Flake
President, Barnes, Quinn, Flake, and Anderson,
Inc., Little Rock, Arkansas
William E. Love
President, Sound-Craft Systems, Inc.,
Morrilton, Arkansas
1988
1989
1990
1990
1988
1989
1990
262 Directories and Meetings
Term expires
Dec. 31
LOUISVILLE BRANCH
Appointed by the Federal Reserve Bank
Allan S. Hanks
Director, The Anderson National Bank,
Lawrenceburg, Kentucky
Morton Boyd
President, First Kentucky National Corporation,
Louisville, Kentucky
Irving W. Bailey II
President and Chief Operating Officer,
Capital Holding Corporation, Louisville,
Kentucky
Wayne G. Overall, Jr
President, First Federal Savings Bank,
Elizabethtown, Kentucky
Appointed by the Board of Governors
Lois H. Gray
Chairman of the Board, James N. Gray
Construction Company, Inc., Glasgow,
Kentucky
Thomas A. Alvey
Delegate, Owensboro Council of Labor,
Owensboro, Kentucky
Raymond M. Burse
President, Kentucky State University, Frankfort,
Kentucky
1988
1989
1990
1990
1988
1989
1990
MEMPHIS BRANCH
Appointed by the Federal Reserve Bank
William H. Brandon, Jr
President, First National Bank of Phillips
County, Helena, Arkansas
Michael J. Hennessey
President, Munro and Company, Inc., Wynne,
Arkansas
Thomas M. Garrott
President and Chief Operating Officer,
National Bank of Commerce and National
Commerce Bancorporation, Memphis,
Tennessee
Larry A. Watson
Chairman of the Board and President, Liberty
Federal Savings Bank, Paris, Tennessee
Appointed by the Board of Governors
Katherine Hinds Smythe
President, Memorial Park, Inc., Memphis,
Tennessee
Sandra B. Sanderson
President and Chief Executive Officer,
Sanderson Plumbing Products, Inc.,
Columbus, Mississippi
Seymour B. Johnson
Owner, Kay Planting Company, Indianola,
Mississippi
1988
1989
1990
1990
1988
1989
1990
Directories and Meetings 263
Term expires
Dec. 31
District 9 - MINNEAPOLIS
Class A
Duane W. Ring
Charles W. Ekstrum
Joel S. Harris
Class B
Richard L. Falconer
Bruce C. Adams
Earl R. St. John, Jr
Class C
John A. Rollwagen
Michael W. Wright
Delbert W. Johnson
President, Norwest Bank La Crosse, N. A., La
Crosse, Wisconsin
President and Chief Executive Officer, First
National Bank, Philip, South Dakota
President, Yellowstone Holding Company,
Columbus, Montana
1988
1989
1990
District Manager-Finance, U.S. West
Communications, Minneapolis,
Minnesota
Partner, Triple Adams Farms, Lansford, North
Dakota
President and Owner, St. John Forest Products,
Inc., Spalding, Michigan
1988
Chairman and Chief Executive Officer,
Cray Research Inc., Minneapolis,
Minnesota
Chairman, President, and Chief Executive
Officer, Super Valu Stores, Inc., Minneapolis,
Minnesota
President and Chief Executive Officer,
Pioneer/Norelkote, Minneapolis,
Minnesota
1988
1989
1990
1989
1990
HELENA BRANCH
Appointed by the Federal Reserve Bank
Noble E. Vosburg
President and Chief Executive Officer, Pacific
Hide and Fur Corporation, Great Falls,
Montana
Robert H. Waller
President and Chief Executive Officer, First
Interstate Bank of Billings, N.A., Billings,
Montana
F. Charles Mercord
President and Managing Officer, First Federal
Savings Bank of Montana, Kalispell, Montana
Appointed by the Board of Governors
Marcia S. Anderson
President, Bridger Canyon Stallion Station, Inc.,
Bozeman, Montana
Warren H. Ross
President, Ross 8-7 Ranch, Inc., Chinook,
Montana
1988
1988
1989
1988
1989
264 Directories and Meetings
Term expires
Dec. 31
District 10-KANSAS CITY
Class A
Robert L. Hollis
Harold L. Gerhart, Jr
Roger L. Reisher
Class B
Jerry D. Geist
Richard D. Harrison
S. Dean Evans, Sr
Class C
Irvine O. Hockaday, Jr
Fred W. Lyons, Jr
Thomas E. Rodriguez
Chairman ofthe Board and Chief Executive
Officer, First National Bank and Trust
Company, Okmulgee, Oklahoma
President and Chief Executive Officer, First
National Bank, Newman Grove, Nebraska
Co-Chairman, FirstBank Holding Company of
Colorado, Lakewood, Colorado
1988
Chairman and President, Public Service
Company of New Mexico, Albuquerque,
New Mexico
Chairman and Chief Executive Officer, Fleming
Companies, Inc., Oklahoma City, Oklahoma
Partner, Evans Grain Company, Salina, Kansas
1988
President and Chief Executive Officer, Hallmark
Cards, Inc., Kansas City, Missouri
President and Chief Executive Officer, Marion
Laboratories, Inc., Kansas City, Missouri
President and General Manager, Thomas E.
Rodriguez and Associates, P.C., Aurora,
Colorado
1989
1990
1989
1990
1988
1989
1990
DENVERBRANCH
Appointed by the Federal Reserve Bank
George S. Jenks
President and Chief Executive Officer, Sunwest
Financial Services, Inc., Albuquerque,
New Mexico
W. Richard Scarlett III
President, Jackson State Bank, Jackson Hole,
Wyoming
Henry A. True III
Partner, True Companies, Casper, Wyoming
Junius F. Baxter
Chairman of the Board and Chief Executive
Officer, Bank Western, a Federal Savings
Bank, Denver, Colorado
Appointed by the Board of Governors
Anthony W. Williams
Attorney, Williams, Turner, & Holmes, PC.,
Grand Junction, Colorado
James C. Wilson
Management Consultant, Longmont, Colorado
Gilbert Sanchez
President, New Mexico Highlands University,
Las Vegas, New Mexico
1988
1988
1989
1990
1988
1989
199C
Directories and Meetings 265
Term expires
Dec. 31
OKLAHOMA CITY BRANCH
Appointed by the Federal Reserve Bank
William O. Alexander
Chairman, Continental Federal Savings and
Loan Association, Oklahoma City,
Oklahoma
W. Dean Hidy
Chairman of the Board, Triad Bank, N. A.,
Tulsa, Oklahoma
WilliamH. Crawford
Chairman and Chief Executive Officer, First
National Bank and Trust Company,
Frederick, Oklahoma
Appointed by the Board of Governors
John F. Snodgrass
President and Trustee, The Samuel Roberts
Noble Foundation, Inc., Ardmore, Oklahoma
PatienceS. Latting
Oklahoma City, Oklahoma
1988
1988
1989
1988
1989
OMAHA BRANCH
Appointed by the Federal Reserve Bank
John R. Cochran
President and Chief Executive Officer, Norwest
Bank Nebraska, N.A., Omaha, Nebraska
John T. Selzer
President, Scottsbluff National Bank and Trust
Company, Scottsbluff, Nebraska
Charles H. Thorne
Chairman of the Board, First Federal Savings
and Loan Association of Lincoln, Lincoln,
Nebraska
Appointed by the Board of Governors
Janice D. Stoney
President and Chief Executive Officer,
Northwestern Bell Telephone Company,
Omaha, Nebraska
Kenneth L. Morrison
President, Morrison Enterprises, Hastings,
Nebraska
1988
1989
1989
1988
1989
District 11-DALLAS
Class A
Charles T. Doyle
Robert G. Greer
T. C. Frost
Class B
Robert Ted Enloe III
Chairman and Chief Executive Officer, Gulf
National Bank, Texas City, Texas
Chairman of the Board, Tanglewood Bank,
N.A., Houston, Texas
Chairman of the Board, The Frost National
Bank, San Antonio, Texas
President, Lomas and Nettleton Financial
Corporation, Dallas, Texas
1988
1989
1990
1988
266 Directories and Meetings
Term expires
Dec. 31
Gary E. Wood
Robert L. Pfluger
Class C
Hugh G. Robinson
Leo E. Linbeck, Jr
Bobby R. Inman
President, Texas Research League, Austin,
Texas
Rancher, San Angelo, Texas
President, Cityplace Development Corporation,
Dallas, Texas
Chairman and Chief Executive Officer, Linbeck
Construction Corporation, Houston, Texas
Chairman of the Board and Chief Executive
Officer, Westmark Systems Inc., Austin,
Texas
1989
1990
1988
1989
1990
ELPASO BRANCH
Appointed by the Federal Reserve Bank
Humberto F. Sambrano
Partner, Urban General Contractors, Inc.,
El Paso, Texas
David L. Stone
President, The Portales National Bank, Portales,
New Mexico
Henry B. Ellis
President and Chief Credit Officer, MBank
El Paso, N.A., El Paso, Texas
Ethel Ortega Olson
Owner, NAMBE of Ruidoso, Ruidoso,
New Mexico
Appointed by the Board of Governors
Peyton Yates
President, Yates Drilling Company, Artesia,
New Mexico
Vacancy
DianaS. Natalicio
President, The University of Texas at El Paso,
El Paso, Texas
1988
1989
1990
1990
1988
1989
1990
HOUSTON BRANCH
Appointed by the Federal Reserve Bank
Jeff Austin, Jr
President, First National Bank of Jacksonville,
Jacksonville, Texas
Jenard M. Gross
President, Gross Builders, Inc., Houston, Texas
Clive Runnells
President and Director, Runnells Cattle
Company, Bay City, Texas
David E. Sheffield
Vice Chairman, Texas National Bank of
Victoria, Victoria, Texas
Appointed by the Board of Governors
Gilbert D. Gaedcke, Jr
Chairman of the Board and Chief Executive
Officer, Gaedcke Equipment Company,
Houston, Texas
1988
1989
1990
1990
1988
Directories and Meetings 267
Term expires
Dec. 31
Walter M. Mischer, Jr
Andrew L. Jefferson, Jr
President and Chief Operating Officer, The
Mischer Corporation, Houston, Texas
Attorney, Jefferson and Mims, Houston,
Texas
1989
1990
SAN ANTONIO BRANCH
Appointed by the Federal Reserve Bank
Jane Flato Smith
Investor and Rancher, San Antonio, Texas
1988
C. Ivan Wilson
1989
Robert T. Rork
Sam R. Sparks
Chairman of the Board and Chief Executive
Officer, First City Bank of Corpus Christi,
Corpus Christi, Texas
Regional Chairman, NCNB Texas, Dallas,
Texas
President, Sam R. Sparks, Inc., Progreso, Texas
Appointed by the Board of Governors
Robert F. McDermott
Chairman of the Board and President, United
Services Automobile Association, San
Antonio, Texas
Lawrence E. Jenkins
Vice President (Retired), Austin Division,
Lockheed Missiles & Space Co., Inc., Austin,
Texas
Ruben M. Garcia
Chief Executive Officer, Modern Machine Shop,
Inc., Laredo, Texas
1990
1990
1988
1989
1990
District 12-SAN FRANCISCO
Class A
Spencer F. Eccles
Rayburn S. Dezember
R. Blair Hawkes
Class B
Togo W. Tanaka
John C. Hampton
John N. Nordstrom
Chairman and Chief Executive Officer,
First Security Corporation, Salt Lake
City, Utah
Chairman of the Board and Chief Executive
Officer, Central Pacific Corporation, and
Chairman, American National Bank,
Bakersfield, California
President and Chief Executive Officer, Ireland
Bank, Malad City, Idaho
Chairman, Gramercy Enterprises, Inc.,
Los Angeles, California
President and Chief Executive Officer,
Willamina Lumber Company, Portland,
Oregon
Co-Chairman of the Board, Nordstrom, Inc.,
Seattle, Washington
1988
1989
1990
1988
1989
1990
268 Directories and Meetings
Term expires
Dec. 31
Class C
Carolyn S. Chambers
Robert F. Erburu
Cordell W. Hull
President and Chief Executive Officer,
Chambers Communications Corp., Eugene,
Oregon
Chairman of the Board and Chief Executive
Officer, The Times Mirror Company,
Los Angeles, California
Executive Vice President and Director, Bechtel
Group, Inc., San Francisco, California
1988
1989
1990
LOS ANGELES BRANCH
Appointed by the Federal Reserve Bank
Howard C. McCrady
Vice Chairman, Valley National Corporation,
Phoenix, Arizona
William L. Tooley
Chairman, Tooley and Company, Investment
Builders, Los Angeles, California
Fred D. Jensen
Chairman of the Board, President, and Chief
Executive Officer, National Bank
of Long Beach, Long Beach,
California
Ross M. Blakely
Chairman of the Executive Committee of the
Board, Coast Savings and Loan, Los Angeles,
California
Appointed by the Board of Governors
Thomas R. Brown, Jr
Chairman of the Board, Burr-Brown
Corporation, Tucson, Arizona
Yvonne Brathwaite Burke .... Partner, Jones, Day, Reavis and Pogue, Los
Angeles, California
Richard C. Seaver
Chairman, Hydril Company, Los Angeles,
California
1988
1988
1989
1990
1988
1989
1990
PORTLAND BRANCH
Appointed by the Federal Reserve Bank
Stuart H. Compton
Chairman and Chief Executive Officer, Pioneer
Trust Bank, N.A., Salem, Oregon
Wayne E. Phillips, Jr
Vice President, Phillips Ranch, Inc., Baker,
Oregon
Stephen G. Kimball
President and Chief Executive Officer,
Baker Boyer Bancorp, Walla Walla,
Washington
G. Dale Weight
Chairman of the Board and Chief Executive
Officer, Benjamin Franklin Savings and Loan
Association, Portland, Oregon
1988
1989
1990
1990
Directories and Meetings 269
Term expires
Dec. 31
Appointed by the Board of Governors
G. Johnny Parks
Former Northwest Regional Director,
International Longshoremen's and
Warehousemen's Union, Portland, Oregon
Paul E. Bragdon
Assistant to the Governor for Education, Office
of the Governor, Salem, Oregon
Sandra A. Suran
Small Business Advocate, State of Oregon,
Salem, Oregon
1988
1989
1990
SALT LAKE CITY BRANCH
Appointed by the Federal Reserve Bank
Gerald R. Christensen
Chairman and President, First Federal Savings
and Loan Association, Salt Lake City, Utah
Ronald S. Hanson
President, Zions First National Bank, Salt Lake
City, Utah
Curtis H. Eaton
President and Vice Chairman of the Board, Twin
Falls Bank and Trust Company, Twin Falls,
Idaho
Virginia P. Kelson
Management Consultant in Organization
Development, Salt Lake City, Utah
Appointed by the Board of Governors
D. N. Rose
President and Chief Executive Officer, Mountain
Fuel Supply Company, Salt Lake City, Utah
RobertN. Pratt
President and Chief Operating Officer,
Bonneville Pacific Corporation, Salt Lake
City, Utah
Don M. Wheeler
President, Wheeler Machinery Company, Salt
Lake City, Utah
1988
1989
1990
1990
1988
1989
1990
SEATTLE BRANCH
Appointed by the Federal Reserve Bank
W. W. Philip
Chairman and Chief Executive Officer, Puget
Sound Bancorp, Tacoma, Washington
H. H. Larison
President, Columbia Paint and Coatings,
Spokane, Washington
B. R. Beeksma
Chairman of the Board, InterWest Savings Bank,
Oak Harbor, Washington
WilliamS. Randall
Chairman, President and Chief Executive
Officer, First Interstate Bank of Washington,
N.A., Seattle, Washington
Appointed by the Board of Governors
Byron I. Mallott
Chief Executive Officer, Sealaska Corporation,
Juneau, Alaska
1988
1989
1990
1990
1988
270 Directories and Meetings
Term expires
Dec. 31
Carol A. Nygren
Irma Goertzen
Partner, Laventhol and Horwath, Seattle,
Washington
Hospital Administrator, University Hospital,
University of Washington, Seattle,
Washington
1989
1990
Index
273
Index
Acceptances, bankers {See Bankers
acceptances)
Accounting standards, 173
Adjustable-rate mortgages
{See Regulations: Z)
Agriculture
Loans, 172-73
Seasonal credit program, 68, 70, 71
U.S. Department of, Packers and
Stockyards Administration, 150,151
American Bankers Association, 148
American Institute of Certified Public
Accountants, 173
Anti-Drug Abuse Act of 1988, 164
Assets and liabilities
Banks, by class, 227
Board of Governors, 197-202
Federal Reserve Banks, 206-09
Audits {See Examinations, inspections,
regulations, and audits)
Availability of funds and collection of
checks {See Regulations: CC)
Balance of payments {See International
developments, review of 1988)
Bank Control Act, 176
Bankers acceptances
Authority to purchase and to enter into
repurchase agreements, 73-75
Federal Reserve Banks
Holdings, 206-09
Bank holding companies
{See also Regulations: Y)
Antitrust Action, 179
Applications by, processing and notice of
Board decisions, 174-78
Bank Merger Act, 175
Board decisions, 175, 176, 177
Change in Bank Control Act, 176
Delegation of applications, 175
Enforcement, 170
Examination, inspection,
and regulation, 169, 184
International activities, 170, 178
Legislative recommendations, 156-57
Litigation, 159-62
Number and assets, 169
Bank holding companies —
Continued
Policy statement, 67-68
Stock repurchases by, 178
Surveillance and monitoring, 172
Transfer agents, 172
Unregulated practices ,153
Bank Holding Company Act of 1956
{See also Regulations: Y)
Foreign investments, 179
Legislative recommendations and
litigation, 159, 163, 175
Regulation and compliance, 174-78
Bank Holding Companies and Change in
Bank Control {See Regulations: Y)
Bank Merger Act, 175
Banking offices, changes in number, 232
Banking supervision and regulation by
Federal Reserve System, 167-82
Bank mergers and consolidations, 233-40
Bank Secrecy Act, 179
Basic banking, 157
Basle Accord, 168
Basle Committee on Banking Regulations
and Supervisory Practices, 167-68
Board of Governors
{See also Federal Reserve System)
Cash, sources, uses, and balance
at end of 1988,197-202
Consumer Advisory Council
{See Consumer Advisory Council)
Financial statements, 197-202
Interpretations {See Interpretations)
Litigation, 159-62
Members and officers, 242-43
Policy actions {See Policy actions)
Pricing of Federal Reserve services
{See Fees)
Publications {See Publications)
Regulations {See Regulations)
Regulatory simplification, 183-84
Salaries, 213
Branch banks
Federal Reserve {See Federal Reserve
Banks, Branches)
Foreign branches of U. S. banking
organizations, 170, 178-179
274 Index
California, state exemption, 144
Call reports (See Condition statements)
Capital accounts
Banks, by class, 222
Federal Reserve Banks, 205, 206, 208
Check clearing and collection
Fees for Federal Reserve services, 66,
185-96
Float (See Float)
Volume of operations, 191, 223
Commercial banks (See also Insured
commercial banks)
Banking offices, changes in number, 232
Supervision and regulation by Federal
Reserve System, 167-82
Transfers of funds (See Transfers
of funds)
Commodity Credit Corporation, 8
Community Affairs Program, 147
Community Reinvestment Act
Examination under, 148, 154
Testimony, 156
Competitive Equality Banking Act of 1987
(See also Expedited Funds Availability
Act), 65, 168, 172, 177, 185
Comptroller of the Currency, 148, 149, 163,
168, 171, 176
CompuServe, Inc., 174
Condition statements of Federal Reserve
Banks, 204-09
Conference of State Bank Supervisors, 173
Consumer Advisory Council, 155, 246
Consumer and community affairs, 143-58
Consumer Complaint Control System, 151
Course for Financial Institution
Examiners, 148
Credit (See also Loans)
Card disclosures, 146
Equal Credit Opportunity (See Truth in
Lending Act)
Mortgages, 17, 63, 144-45,146,147,
165,166, 183
Seasonal program, 68, 70, 71
Special purpose credit programs, 145
Credit by Brokers and Dealers
(See Regulations: T)
Credit Practices Rule (See Regulations: AA)
Currency and coin services, 188
Currency and Foreign Transactions
Reporting Act (See Bank Secrecy
Act)
Definitive securities, 188
Debt-equity swaps (See also
Regulations: K), 183
Depository institutions
Checks (See Check clearing and
collection)
Interest on deposits (See Interest rates)
Reserve requirements
(See Regulations: D)
Reserves and related items, 228-31
Services to (See Fees)
Deposits
Banks, by class, 227
Checks (See Check clearing and
collection)
Federal Reserve Banks, 206-09, 228-31
Interest rates (See Interest rates)
Reserve requirements (See Reserve
requirements of depository
institutions)
Directors, Federal Reserve Banks and
Branches, list, 250-70
Discount rates at Federal Reserve Banks
(See Interest rates)
Dividends
Federal Reserve Banks, 189, 216-17,
218-21
Earnings of Federal Reserve Banks
(See also Federal Reserve Banks,
income and expenses), 189,214-21
Economy in 1988, 5-11
Business, 7, 32, 47
Foreign, 20-22, 30, 46
Government, 8, 33, 49
Households, 5, 31,46
Labor markets, 9, 33, 49
Price developments, 10, 34, 49
Economic Development
Administration, 148
Edge and agreement corporations
Examinations, 170
International activities, 170, 178, 179
Educational activities (See Training)
Education Foundation of State Bank
Supervisors, 173
Electronic data processing, 171
Electronic Funds Transfer Act
Compliance, 151
Economic effects, 151
Electronic funds transfer (See Transfers
of funds and Regulations: E)
Index 275
Equal Credit Opportunity Act
Compliance, 145
Regulation B (See Regulations: B)
Examinations, inspections, regulation,
and audits
Bank holding companies, 169
Compliance, 148, 149
Federal Reserve Banks, 185-96
International banking activities, 170, 178
Specialized, 171
State member banks, 169
Surveillance and Monitoring
program, 169, 172
Exchange Stabilization Fund, 20
Expedited Funds Availability Act, 65-67,
143-44,157-58, 162, 184
Expenses (See Income and expenses)
Export Trading Companies, 179
Fair Credit and Charge Card Disclosure
Act of 1988,146,165
Fair Housing Act, 158
Farm Credit Administration, 150, 180
Farmer Mac Program, 173
Federal Advisory Council, 245
Federal agency securities
Authority to purchase and to enter into
repurchase agreements, 73-75,
96-97,133
Federal Reserve Bank holdings and
earnings, 190, 206-12, 228-29
Federal Reserve open market
transactions, 1988, 210-11
Repurchase agreements, 73-75, 205,
206-09,210-11,212
Federal Bureau of Investigation, 174
Federal Deposit Insurance Corporation,
148, 149, 163, 168, 170, 176
Federal Financial Institutions Examination
Council, 67, 148, 172, 174
Federal Home Loan Bank Board, 147, 148,
149, 177,180
Federal National Mortgage Association, 188
Federal Open Market Committee
Examinations, 189
Meetings, 78, 89, 97, 104, 114, 121, 126,
134
Members and officers
Calendar-year membership
change, 133
List, 244
Policy actions, 73-151
Federal Reserve Act
Examinations, 189
Legislative recommendations and
litigation, 163-66
Provisions, 170
Federal Reserve Banks
Assessments for expenses of Board
of Governors, 199, 216-17, 218-21
Bank premises, 190, 204, 206-09, 222
Branches
Bank premises, 190, 199, 222
Chicago, 148
Directors, list, 250-70
St. Louis, 57
Vice presidents in charge, 248
Capital accounts, 205, 206-09
Chairmen and deputy chairmen, 248-49
Check collection, 186-87
Coin and currency service, 188
Condition statement, 204-09
Delegated authority, 175, 176
Deposits, 205, 206-09, 231
Directors, list, 250-70
Dividends paid, 189, 216-17, 219, 221
Examination or audit, 189
Income and expenses, 189, 191, 192
Interest rates, 68, 70, 224
Loans and securities, 190, 204, 206-09,
212, 214, 228, 230
Officers and employees, number and
salaries, 213
Operations, volume, 191, 194, 223
Premises, 190
Presidents and first vice presidents, 213,
248-49
Pricing of services, 186-89, 191-96,
228-29
Priced services, pro forma balance
sheet, 191
Profit and loss, 230-31
Training, 148, 173
Federal Reserve Board (See Board
of Governors)
Federal Reserve notes
Condition statement data, 206-09
Cost of issuance and redemption, 188,
199,201,216-17
Interest paid to U.S. Treasury on, 189,
192
Litigation, 159
Federal Reserve's Reciprocal Currency
(Swap) Network, 24
276 Index
Federal Reserve System (See also Board
of Governors)
Banking supervision and
regulation by, 167-82
Consumer affairs (See Consumer and
community affairs)
Foreign currency operations (See Foreign
currencies)
Maps, 280-81
Membership, 182
Training, 148, 173
Federal Savings and Loan Insurance
Corporation, 17,55
Federal Trade Commission
Act, 153
Pamphlets, 150
Fees
Federal Reserve services to depository
institutions
Automated clearinghouse service, 187
Check clearing and collection, 186
Coin and currency, 188
Electronic payments, 187
Pricing of, 186-89,214-15
Securities, 188
Wire transfers of funds, 187
Financial Accounting Standards Board, 173
Financial Institutions Supervisory Act, 161,
170
Financial markets and monetary policy,
12-18
Float (See also Check clearing and
collection), 187, 188, 189
Foreign banking and financing
(See Regulations: K)
Foreign branches of U.S. banking
organizations, 179
Foreign currencies
Authorization and directive for operations
in, and review of documents, 24, 76,
78
Deposit issuance, 184
Federal Reserve income on, 214-17
Freedom of Information Act, 183
Garn-St Germain Depository Institutions
Act of 1982,64
Glass-Steagall Act, 161,167
Gold certificate accounts of Reserve Banks
and gold stock, 206-09, 228, 230
Government check cashing, 157
Government Securities Act of 1986, 171
Home equity lines of credit, 146, 150,165
Home Equity Loan Consumer Protection
Act of 1988, 146, 165
Home Mortgage Disclosure Act of 1975
(See Regulations: C)
Housing and Community Development Act
of 1987, 166
Housing and Urban Development, U.S.
Department of, 148
Income and expenses
Board of Governors, 197-202
Federal Reserve Banks, 189-90, 192-93,
214-21
Indiana, state preemption, 146
Insured commercial banks (See also
Commercial banks)
Assets and liabilities, by class
ofbank, 227
Banking offices, changes in number, 232
Number, by class of bank, 227
Interagency Enforcement Policy, 149
Interest on deposits (See Interest rates)
Interest rates
Federal Reserve Banks
Discount rates, 1988, 68, 70
Votes, 71
Table, 224
Internal Revenue Service, 151, 180
International banking activities, 170, 178
International banking facilities, 178
International banking operations
(See Regulations: K)
International developments, review of 1988,
19,24
International Lending Supervisory Act
of 1983,167
International Monetary Fund, 22
International transactions, 22-24
Interpretations of regulations, 147
Interstate Commerce Commission, 151
Investments
Banks, by class, 227
Federal Reserve Banks, 204, 206-09
Foreign, by U.S. banking organizations,
179
State member banks, 227
Justice, U.S. Department of, 159
Labor market developments, 9-10
Index 277
Legislation enacted (See also specific act),
163-66
Legislative recommendations
Board of Governors, 156
Other agencies with enforcement
responsibilities, 158
Litigation
Bank holding companies, 159-62
Board procedures and regulations,
challenges to, 160-62
Loans (See also Credit)
Agricultural (See Agriculture)
Banks, by class, 227
Executive officers of state member
banks, 182
Federal Reserve Banks
Depository institutions, 204, 206-09,
214-17,230
Holdings and income, 190-91, 204,
206-09, 214, 228,230
Interest rates, 68, 70, 224
Mortgage, brochures, 146,147
Volume of operations, 223
Management and Budget, Office of, 147
Management Consignment Program,
FHLBB, 177
Management Interlocks Revision Act
of 1988, 164
Margin credit regulation (See Regulations: T)
Margin requirements, 226
Member banks (See also Depository
institutions and National banks)
Assets, liabilities, and capital
accounts, 227
Banking offices, changes in number, 232
Borrowings and loans (See Loans)
Foreign branches, 178
Membership in Federal Reserve
System, 182
Number, 227
Reserve requirements, 225
Reserves and related items, 228-31
State member banks
(See State member banks)
Surveillance and monitoring program,
169,172
Transfers of funds
(See Transfers of funds)
Monetary Control Act of 1980, 63
Monetary policy
es. 15-18
Monetary policy—Continued
Financial markets relative to, 12-18,
35-40
Reports to the Congress, 25-60
Review of 1988, 3-11
Mortgages
Brochures by Federal Trade
Commission, 147
Home Equity Loan Consumer Protection
Act of 1988, 165
Home mortgage disclosure, 17, 63,
144-45, 146,183
Housing and Community Development
Act of 1987, 166
Mutual savings banks, 232
National Association of Attorneys
General, 150
National Association of Securities
Dealers, 180
National banks (See also Member banks)
Assets, liabilities, and capital
accounts, 227
Banking offices, changes in number, 232
National Credit Union Administration, 148,
149, 180
National League of Cities, 148
National People's Action, 148
National Women's Business Council, 166
New York, state preemption, 145
Nonmember depository institutions
Assets and liabilities, 227
Banking offices, changes in number, 232
Number, 227
Omnibus Trade and Competitiveness Act
of 1988, 163, 180
Organization for Economic Cooperation and
Development, 21
OTC margin bond (See also
Regulations: T), 184
Over-the-counter marginable stocks, 180
Paperwork Reduction Act, 147
Payments mechanism (See Fees)
Policy actions
Board of Governors
Discount rates at Federal Reserve
Banks, 68-71
Regulations, 68-71
Statements and other artions fO f\l
278 Index
Policy actions—Continued
Federal Open Market Committee
(See also System Open Market
Account), 73-141
Presidents and vice presidents of Federal
Reserve Banks
Conferences, 249
List, 248-49
Salaries of presidents, 213
Pricing of Federal Reserve services,
185-89,191-96,214-15
Profit and loss, Federal Reserve Banks,
216-17
Publications
"Compliance: A Self Assessment
Guide," 149
Mortgage brochures, 146, 147
Real estate loans (See Mortgages)
Regulation of banking organizations
(See Banking supervision and
regulation by Federal Reserve System)
Regulations (See also Regulatory review
program)
B, Equal Credit Opportunity
Compliance, 150
New York, state preemption, 145
C, Home Mortgage Disclosure
Revision and adoption of new reporting
forms, 63
Revision to incorporate amendments
to Home Mortgage Disclosure
Act, 144, 166, 183
D, Reserve Requirements of Depository
Institutions
Amendment to increase transaction
balances, 63
E, Electronic Funds Transfer
Compliance, 151
K, International Banking Operations
Amendment to liberalize conditions
on debt-for-equity swaps, 64
T, Credit by Brokers and Dealers
Amendment, foreign debt securities
for margin credit, 65
Y, Bank Holding Companies and Change
in Bank Control
Amendment to implement Competitive
Equality Banking Act of 1987, 65
Z, Truth in Lending
Compliance, 149
Credit card disclosures, 146
Regulations—Continued
Z, Truth in Lending—Continued
Home equity lines of credit, 146
Indiana, state preemption, 146
Revision, adjustable-rate
mortgages, 145
AA, Credit Practices Rule
California, state exemption, 144,147
CC, Expedited Funds Availability
Adoption, Expedited Funds
Availability Act, 65, 143, 148
Interim rules regarding
payable-through checks, 66
Regulatory review program, 144, 147,
183-84
Regulatory Policy and Planning
Committee, 183
Regulatory simplification, 183-84
Report on Formal Enforcement Actions, 170
Repurchase agreements
Authority to purchase and
to enter into, 73-75
Bankers acceptances (See Bankers
acceptances)
Federal agency securities (See Federal
agency securities)
U.S. Treasury securities (See U.S.
Treasury securities)
Reserve requirements of depository
institutions
Regulation D (See Regulations: D)
Securities, 180
Table, 225
Reserves and related items, 228-31
Right to Financial Privacy Act, 147, 164
Risk-based capital standards, 67, 168
Rules Regarding Availability
of Information, 183
Salaries
Board of Governors, 199
Federal Reserve Banks, 213
Schools (See Training)
Seasonal credit program, 68, 70, 71
Securities (See also specific types)
Credit, 226
Dealers, policy statement, 67
Definitive, 188
Over-the-counter, 180
Regulation, 180
Securities Act Amendments of 1975,171
Securities and Exchange Commission, 151,
180,181
Index 279
Securities Exchange Act of 1934, 180, 181
Senior Forum for Current Regulatory
Issues, 173
Small Business Act, 166
Small Business Administration, 148, 151
Special drawing rights, 204, 206-09, 228,
230
State member banks
(See also Member banks)
Applications by, 175,178
Assets and liabilities, 227
Bank Control Act, 176
Bank Holding Company Act, 175
Bank Merger Act, 175
Banking offices, changes in number, 232
Board decisions, 175, 177
Calendar-year membership change, 133
Complaints against, 152
Examinations and inspections, 169, 184
Financial disclosure by, 181
Fees (See Fees)
Interest on deposits (See Interest rates)
Loans to executive officers, 182
Membership in Federal Reserve
System, 182
Mergers and consolidations (See Bank
mergers and consolidations)
Number, by class of bank, 169, 227
Reserve requirements (See Reserve
requirements of depository
institutions)
Surveillance and monitoring, 172
Transfer agents, 172
Stock market credit (See Securities credit)
Supervision of banking organizations
(See Banking supervision and
regulation by Federal Reserve System)
System Open Market Account
Authority to effect transactions in
domestic operations
Domestic Open Market Operations
Authorization for, 73-75, 96-97,
133
Domestic Policy Directive, 75, 78, 89,
97,104,114,121,126,134
Foreign Currency Directive, 78
Foreign currency operations
Authorization for, 76
Thrift Institutions Advisory Council, 247
Training, 148, 173
Transfer Agents, 172
Transfers of funds (See also Fees
and Regulations: E)
Check clearing and collection (See Check
clearing and collection)
Federal Reserve operations, volume, 191,
194, 223
Pricing of Federal Reserve services,
186-89,191-96,214
Transportation, U.S. Department of, 150
Treasury, U.S. Department of, 171
Treasury securities
Authority to buy, to enter into repurchase
agreements, and to lend, 73, 96, 133
Bank holdings, by class of bank, 227
Federal Reserve Banks
Holdings, 191, 204, 206-09, 212, 228,
230
Income, 189,214-21
Transfers by, 189
Open market transactions, 210-11
Repurchase agreements
Authorization for, 73
Board policy statement, 62, 67
Tables, 204, 206-09, 210-11, 212,
228,230
Truth in Lending Act (See Regulations: Z)
World Bank, 22, 174
Women's Business Ownership Act
of 1988, 145
FRB 1-10,000-0589
280
Maps of the Federal Reserve System
2
MINNEAPOLIS
/
12
I SAN FRANCISCO
CHICAGO •
•
10 KANSAS CITY
a
• NEW YORK
CLEVELAND °
^PHILADELPHIA
A
D WASHINGTON
RICHMOND
ST. LOUIS
8
BOSTON
6.
5
ATLANTA
DALLAS
LEGEND
Both pages
• Federal Reserve Bank city
Q Board of Governors of the Federal
Reserve System
Facing page
• Federal Reserve Branch city
— Branch boundary
NOTE
The Federal Reserve officially identifies
Districts by number and Reserve Bank
city (shown on both pages) and by letter
(shown on the facing page).
In the 12th District, the Seattle Branch
serves Alaska, and the San Francisco
Bank serves Hawaii.
The System serves commonwealths
and territories as follows: the New York
Bank serves the Commonwealth of Puerto
Rico and the U.S. Virgin Islands; the San
Francisco Bank serves American Samoa,
Guam, and the Commonwealth of the
Northern Mariana Islands. The Board of
Governors revised the boundaries of the
System most recently in August 1986.
281
4
D
5
Baltimore
Pittsburgh
Charlotte
•Cincinnati
Buffalo
BOSTON
NEW YORK
PHILADELPHIA
CLEVELAND
RICHMOND
G
• Nashville
H
Birmingham
Louisville
Detroit •
'^v—^—^
Jacksonville
• Memphis
Littl? )
Rock (
CHICAGO
ATLANTA
10
12
SAN FRANCISCO
^ ^
Omaha •
•
_ _ , Denver
I
j
I
^
jj^^^K/Km-
Jf
ihoma City
KANSAS CITY
m
ST. LOUIS
@FedFRASER