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1989

Board of Governors of the Federal Reserve System



This publication is available from Publications Services, Board of Governors of the Federal
Reserve System, Washington, DC 20551.




Letter of Transmittal

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM

Washington, D.C., May 7, 1990

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-Sixth Annual Report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1989.

Sincerely,

Chairman




Contents
Part 1

Monetary Policy and
the U. S. Economy in 1989

3 INTRODUCTION
5
5
7
9
9
11

THE ECONOMY IN 1989
The household sector
The business sector
The government sector
The labor markets
Price developments

13
13
16
17

MONETARY POLICY AND FINANCIAL MARKETS IN 1989
The implementation of monetary policy in 1989
The monetary aggregates
Credit markets in 1989

19
20
22
25

INTERNATIONAL DEVELOPMENTS
Foreign economies
U.S. international transactions
Foreign currency operations

27 MONETARY POLICY REPORTS TO THE CONGRESS
27 Report on February 21,1989
41 Report on July 20,1989




Part 2

59
59
59
60
60
61
62
63
64
65
66

Records, Operations,
and Organization

RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
Regulation B (Equal Credit Opportunity)
Regulation C (Home Mortgage Disclosure)
Regulation D (Reserve Requirements of Depository Institutions)
Regulation H (Membership of State Banking Institutions in the Federal Reserve System)
Regulation Y (Bank Holding Companies and Change in Bank Control)
and Rules Regarding Delegation of Authority
Regulation Z (Truth in Lending)
Regulation CC (Availability of Funds and Collection of Checks)
Rules Regarding Delegation of Authority
Policy statements
1989 discount rates

71 RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
71 Authorization for domestic open market operations
73 Domestic policy directive
74 Authorization for foreign currency operations
75 Foreign currency directive
76 Meeting held on February 7-8,1989
85 Meeting held on March 28, 1989
92 Meeting held on May 16, 1989
99 Meeting held on July 5-6, 1989
109 Meeting held on August 22, 1989
118 Meeting held on October 3, 1989
124 Meeting held on November 14, 1989
131 Meeting held on December 18-19,1989
141
141
145
145
146
148
149

CONSUMER AND COMMUNITY AFFAIRS
Regulatory matters
Community affairs
Examination procedures
Compliance with consumer regulations
Economic effect of the Electronic Fund Transfer Act
Complaints about state member banks




150
151
153
156

CONSUMER AND COMMUNITY AFFAIRS-Continued
Unregulated practices
Consumer Advisory Council
Testimony and legislative recommendations
Recommendations of other agencies

157
157
157
158
159

LITIGATION
Bank holding companies—antitrust action
Bank Holding Company Act - review of Board actions
Other litigation involving challenges to Board procedures and regulations
Other actions

161
161
162
164
164
164

LEGISLATION ENACTED
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
Title II
Title III
Title VI
Title IX

167
169
170
174
177
181
182
185

BANKING SUPERVISION AND REGULATION
Scope of supervisory and regulatory responsibilities
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

187
187
187
187
188
188

REGULATORY SIMPLIFICATION
Community reinvestment
Elimination of tandem restrictions
Home mortgage disclosure
Equal credit opportunity
Security devices and procedures

189
189
191
192
192
193
193
193

FEDERAL RESERVE BANKS
Developments in Federal Reserve services
Examinations
Income and expenses
Federal Reserve Bank premises
Holdings of securities and loans
Volume of operations
Financial statements for priced services




199 BOARD OP GOVERNORS FINANCIAL STATEMENTS
205 STATISTICAL TABLES
206 1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31,1989
208 2. Statement of condition of each Federal Reserve Bank, December 31,1989 and 1988
212 3. Federal Reserve open market transactions, 1989
214 4. Federal Reserve Bank holdings of U. S. Treasury and federal agency securities,
December 31,1987-89
215 5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1989
216 6. Income and expenses of Federal Reserve Banks, 1989
220 7. Income and expenses of Federal Reserve Banks, 1914-89
224 8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31,1989
225 9. Operations in principal departments of Federal Reserve Banks, 1986-89
226 10. Federal Reserve Bank interest rates, December 31,1989
227 11. Reserve requirements of depository institutions
228 12. Initial margin requirements under Regulations T, U, G, and X
229 13. Principal assets and liabilities and number of insured commercial banks,
by class of bank, June 30,1989 and 1988
230 14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-89, and month-end 1989
234 15. Changes in number of banking offices in the United States ,1989
235 16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1989
245
246
248
249
250
251
252

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

275 INDEX
284 MAPS OF I HE FEDERAL RESERVE SYSTEM




Parti
Monetary Policy and
the US. Economy in 1989




Introduction
The U.S. economy in 1989 recorded its
seventh consecutive year of expansion.
Although growth was slower than in
either of the preceding two years, it was
sufficient to support the creation of 2lA
million jobs and to hold the unemployment rate steady at 5 lA percent, the lowest
reading since the early 1970s. Inflation
remained undesirably high, but the pace
was less than many analysts had predicted, with softness in the prices of
imported goods helping to offset persistent domestic cost pressures. On the
external front, the trade and current
account deficits shrank further in 1989.
In 1989, monetary policy was tailored
to the changing contours of the economic
expansion and to shifting perceptions of
the potential for inflation. Early in the
year, the economy still was strong, and
inflation appeared to be on the rise; to
prevent the pressures on wages and prices
from building, the Federal Reserve extended the tightening of money market
conditions that had begun in early 1988.
A rise in market rates of interest relative
to those on deposit accounts restrained
the growth of the monetary aggregates;
additional restraint came in April and
May, when unexpectedly large tax payments drained liquid balances. By May,
M2 and M3 lay below the lower bounds
of the annual target ranges established by
the Federal Open Market Committee.
Through the spring, risks of an imminent acceleration in inflation seemed to
diminish somewhat. Pressures on indusNOTE . This discussion of economic and financial
developments in 1989 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 1990).



trial capacity began to moderate slightly
during this period, commodity prices
leveled off, and the dollar strengthened
on exchange markets, all of which reinforced signals conveyed by the weakness
in the monetary aggregates. In June the
FOMC began a series of steps—undertaken with care to avoid excessive inflationary stimulus—that trimmed IVi percentage points from short-term interest
rates by year-end. Longer-term interest
rates moved down by a like amount,
influenced both by the System's easing
and a moderate reduction in inflation
expectations.
Growth of M2 rebounded in the second
half of 1989 to end the year at about the
midpoint of the 1989 target range. Growth
of M3, however, remained around the
lower end of its range; a contraction of
the thrift industry, which was prompted
by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989,
reduced the needs of thrifts to tap M3
sources of funds. The shrinkage of the
thrift industry's assets led to a rechanneling of funds in mortgage markets but
appeared to have little effect on overall
credit availability. In total, growth in the
outstanding debt of the nonfinancial
sector was only a bit slower in the second
half of the year than in the first half, and
the level of debt ended the year close to
the midpoint of the 1989 monitoring
range established by the FOMC.
On the whole, the adjustments that the
Federal Reserve undertook in 1989 were
more in the nature of a midcourse correction than of a fundamental shift in policy.
The basic goals and strategies of the
System remained unchanged from those
of previous years. The ultimate goal of
monetary policy continued to be that of

76th Annual Report, 1989
ensuring price stability so as to promote
the maximum sustainable rate of economic growth. Similarly, the strategy for
moving toward that goal still was that of
restraining growth in money and aggregate demand by enough to establish a
clear downward tilt to the trend of
inflation and inflation expectations while
avoiding a recession.
Viewed in the context of those longerrun goals and strategies, the performance
of the economy in 1989 seemed satisfactory in many broad respects. At the same
time, however, the year's events underscored the formidable challenges that
still lay ahead if the ultimate goals of
price stability and sustained economic
growth are to be realized. While inflation
in 1989 was no higher than in the previous
year, neither was there any progress made
toward the goal of reduced inflation over
time. Indeed, the underlying rate of
inflation held stubbornly around the 4 to
4lA percent mark, about the same range
in which it had been in previous years of
the expansion. Clearly, seeking gains
against inflation while maintaining the
expansion would remain a central part of
economic strategy into the 1990s.
Another essential part of economic
policy as a new decade begins is to move
further toward a lowering of federal
budget deficits. In that regard, the federal
budget deficit in 1989, while smaller than
those of the mid-1980s, remained far too
large for an economy in the neighborhood
of full employment. Such deficits seem
almost certain to affect long-run economic performance adversely. In particular, the deficits likely have cut into
national saving and investment in recent
years and have limited the expansion and
upgrading of the stock of productive
capital. It is that stock, together with the
skills and innovativeness of the labor
force, that ultimately will determine the
standard of living of the population over
the long run. The need for lowered



deficits —and perhaps even surpluses —
becomes even more compelling when
viewed in the context of current demographic trends: saving and investment
are needed now to ensure a productive
economy that can support a rapidly
growing population of retirees two or
three decades down the road. International developments also seem to reinforce the case for deficit reduction, as the
rebuilding of Eastern European economies is likely to put still greater demands
on the limited flow of world saving in the
coming decade.
•

The Economy in 1989
Real gross national product grew 2Vi
percent over the four quarters of 1989;
the rise was 2 percent if adjustment is
made for the recovery in farm output
from the drought losses of 1988. By
either measure, growth was significantly
slower than in 1987 and 1988; in those
two years, however, the pace of expansion had been unsustainably rapid and
had pushed activity to a point at which
inflationary strains were beginning to
emerge. As growth slowed over the
course of 1989, the pressures on resource
utilization eased somewhat, particularly
in the industrial sector. Nonetheless, the
overall unemployment rate remained at
5.3 percent, the lowest reading since
1973; and inflation, as measured by the
consumer price index, remained at 4 &
V
percent despite the restraining influence
of a dollar that was strong for much of the
year.
The deceleration in business activity in
1989 reflected, to some degree, a tightening of monetary conditions; this tightening, which had begun in early 1988 and
extended into early 1989, was undertaken
with a view toward damping the inflation
forces. Partly as a consequence of the
tightening, the U.S. dollar appreciated in
the foreign exchange markets from early
1988 through mid-1989 and contributed
to a slackening of the growth of foreign
demand for U.S. products. At the same
time, domestic demand also slowed,
more for goods than for services.
Producers of goods, facing slower
growth of demand in both the domestic
and foreign markets, shifted to a lower
rate of growth in activity than that of the
two previous years. The rise in industrial
production was a bit more than 1 percent
in 1989; it had been 6V4 percent in 1987



and 4Vi percent in 1988. Employment in
manufacturing, after increasing a total of
90,000 over the first three months of
1989, declined 190,000 over the remainder of the year.
The rate of inflation was about the
same in 1989 as it had been in the
preceding two years. While the appreciation of the U.S. dollar through the first
half of the year helped to hold down the
prices of imported goods, the high level
of resource utilization continued to exert
pressure on wages and prices. In that
regard, the moderation in the expansion
of real activity during 1989 was a necessary development in establishing an economic environment more conducive to
progress over time toward price stability.

The Household Sector
Household spending softened significantly in 1989 as the demand for motor
vehicles and housing weakened markedly. Real consumer spending on goods
and services increased 2 & percent over
V
the four quarters of 1989, VA percentage
points less than in 1988. Growth in real
disposable income also slowed last year
but, for a second year, outstripped growth
in spending; as a result, the personal
saving rate increased to 5 Vi percent in the
fourth quarter of 1989.
The slackening in consumer demand
was concentrated in goods rather than
services. Real spending on durables,
which had jumped 8 percent in 1988, was
about unchanged over the four quarters
of 1989; the sharp slowing mainly reflected a slump in purchases of motor
vehicles. Spending on nondurable goods
also decelerated, increasing only 1 percent in 1989 after a 2 percent advance in

6

76th Annual Report, 1989

Indicators of Economic Performance
Percent change, Q4 to Q4
Real GNP

Percent change, Q4 to Q4
Real personal income and consumption

Drought-adjusted

6

6

Millions of units, annual rate

Percent of disposable income

Private housing starts

Personal saving rate

Multifamily

Percent change, Q4 to Q4
Real business fixed investment

Billions of 1982 dollars, annual rate
Changes in real business inventories

30

Total nonfarm

90

20

60

10
-j-

10
Percent
Civilian unemployment rate

1985

1987

1989
The data are seasonally adjusted. The unemployment
data are from the Department of Labor; the rest are from




30

l

0

+
0

Percent change, Q4 to Q4
GNP fixed-weight price index

II

1985
1987
the Department of Commerce,

1989

The Economy in 1989
1988. By contrast, real consumer spending for services continued to rise rapidly.
Among the service categories, outlays
for medical care increased 7 lA percent in
real terms last year; the sustained rapid
growth in these outlays in recent years
has raised their share of total consumption expenditures to 11 percent—a larger
share than is spent on any major category
except food and shelter. Outlays for
other services rose V/i percent in 1989,
with sizable increases in a number of
categories.
Sluggishness of autombile sales was
evident when 1989 began, and it persisted
through much of the year. In total, the
sales of cars and light trucks fell more
than 34 million units in 1989, to 14 Vi
million. The weakness of sales was most
pronounced during the fourth quarter.
Third-quarter clearance sales on 1989model cars had led buyers to advance the
timing of their purchases but apparently
did not raise overall demand appreciably.
Sales thus fell back in the fourth quarter.
This decline was exacerbated by a relatively large increase in sticker prices on
1990-model cars; although part of the
price increase reflected the inclusion of
additional equipment—notably the addition of passive restraint systems to many
models—consumers nevertheless reacted
adversely. Beyond these influences,
longer-run factors appear to have damped
the demand for autos and light trucks
during 1989; in particular, the robust
pace of sales earlier in the expansion
seems to have satisfied demand that had
been pent up during the recessionary
period of the early 1980s. The rebuilding
of the motor vehicle stock suggests that
future sales may be aligned more closely
with pure replacement needs than was the
case through much of the 1980s.
Real spending on residential construction fell 7 percent over the four quarters
of 1989. Construction was pressured
throughout 1989 by the overbuilding that



occurred in some locales earlier in the
decade. Vacancy rates remained especially high for multifamily rental and
condominium units, and the starts of
multifamily units fell for the fourth year
in a row. In addition, high prices for
houses appeared to be restraining demand
in some regions in which price increases
had been especially large over the course
of several years.
Mortgage interest rates declined more
than a percentage point, on net, between
the spring of 1989 and the end of the year,
helping to arrest the contraction in housing activity; however, the response to the
easing in rates appears to have been
muted somewhat by a reduction in the
availability of construction credit, likely
reflecting, in part, the tightening of
regulatory standards in the thrift industry
and the closing of a number of insolvent
institutions. Exceptionally cold weather
also hampered building late in the year.

The Business Sector
Business fixed investment, adjusted for
inflation, changed little on net during the
second half of 1989 after surging at an
annual rate of 734 percent during the first
half. Although competitive pressures
forced many firms to continue seeking
efficiency gains through capital investment, the deceleration in overall economic growth made the need for capacity
expansion less urgent, and shrinking
profits reduced the availability of internal
finance.
Spending on equipment moved up
briskly during thefirsthalf of 1989; gains
in outlays were particularly notable for
information processing equipment—
computers, photocopiers, telecommunications devices, and the like. However,
in the second half of the year equipment
outlays leveled off; growth in the information processing category slowed
sharply, and spending in most other cate-

8

76th Annual Report, 1989

gories was either flat or down. Business
purchases of motor vehicles, in particular, dropped sharply in the fourth quarter.
Spending on aircraft, which had been
very strong over the first three quarters of
1989, also was down in the final quarter
as the strike at Boeing curbed production
and shipments. In an exception to the
pattern of second-half softness, outlays
for agricultural machinery moved up
smartly through year-end, buoyed by the
substantial improvement in the financial
health of the farm sector over the past few
years. Overall, business spending on
equipment increased 5 lA percent in real
terms over the four quarters of 1989 —
about 2 percentage points below the pace
of 1988.
Business spending for new construction, which had dropped 3Vi percent in
real terms in 1988, edged down further in
1989. Commercial construction, which
includes office buildings, remained especially weak; vacancy rates for office space
persisted at high levels in many areas,
lowering prospective returns on new
investment. Outlays for drilling and
mining, which had dropped 20 percent
over the four quarters of 1988, moved
down further in the first quarter of 1989;
later in the year, drilling activity revived
in response to a higher level of crude oil
prices. The industrial sector was the most
Corporate Profits after Taxes
Percent of gross domestic product

1985

1987

1989

Profits of nonfinancial corporations from domestic
operations, with adjustments for inventory valuation and
capital consumption.




notable exception to the overall pattern of
weakness in heavy construction: Real
outlays for new industrial facilities increased 10 percent in 1989, largely
because of construction that had been
planned in 1987 and 1988, when capacity
in many basic industries tightened substantially and profitability was improving
sharply.
The slowdown in investment spending
during the second half of 1989 likely was
exacerbated by the deterioration in corporate cash flow. Before-tax operating
profits of nonfinancial corporations
dropped 17 V2 percent from the fourth
quarter of 1988 to the fourth quarter of
1989; measured as a share of the value of
gross domestic output, the pre-tax profits
of nonfinancial corporations averaged
13A percent in 1989, the lowest reading
since 1982. Fundamentally, this squeeze
on profits arose from increased pressures
from labor and materials costs at a time
when domestic and international markets
had become highly competitive and aggregate demand was being restrained.
Inventory investment in the nonfarm
business sector totaled $18 billion in real
terms in 1989, a slower pace of accumulation than in 1988. Some of the buildup
in stocks took place in industries where
orders and shipments were generally
strong—aircraft, for example. Inventories in some other sectors became
uncomfortably heavy at times and precipitated adjustments in orders and production. The clearest area of inventory
imbalance at the end of 1989 was at auto
dealers, where stocks of domestically
produced automobiles were at 1.7 million
units in December—almost three months'
supply at the sluggish sales pace of the
fourth quarter. In response, the domestic
automakers implemented a new round of
sales incentives and cut sharply the
planned assembly rate for thefirstquarter
of 1990. Elsewhere in the retail sector,
inventories moved up substantially rela-

The Economy in 1989
tive to sales at general merchandise
outlets. Overall, though, most sectors of
the economy adjusted fairly promptly to
the deceleration in sales in 1989 and
appeared to have avoided being caught
with large holdings of unwanted stocks.

The Government Sector
Federal purchases of goods and services —the part of federal spending that is
counted in GNP—fell 3 percent in real
terms over the four quarters of 1989.
Reductions in the stock of farm products
owned or financed by the Commodity
Credit Corporation—negative purchases,
Government Surpluses and Deficits
Billions of dollars
Federal government

r~ o

100

200

State and local government
20

ll

10

20
30

1985

1989

The data on the federal government are for fiscal years.
They are on a unified 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.




9

in effect-accounted for about one-third
of the decline. Lower defense purchases
made up most of the remainder. Nondefense purchases excluding those of the
CCC were down slightly in real terms
from the fourth quarter of 1988 to the
fourth quarter of 1989; increases in such
areas as the space program and drug
interdiction were more than offset by
general budgetary restraint that imposed
real declines on most other discretionary
programs.
In terms of the unified budget, the
federal deficit in fiscal year 1989 was
$152 billion, slightly smaller than in
1988. Growth in total federal outlays,
which includes transfer payments and
interest costs as well as purchases of
goods and services, picked up a bit in
fiscal year 1989. Outlays were boosted at
the end of the fiscal year by the initial $9
billion of spending by the Resolution
Trust Corporation. On the revenue side,
growth in federal receipts increased in
fiscal 1989. Income tax payments by
individuals jumped, and corporate and
social security tax payments also rose
strongly.
Purchases of goods and services at the
state and local level rose 3 percent in real
terms over the four quarters of 1989, a
rise similar to the increases in each of the
two preceding years. Spending for educational buildings increased, and employment in the state and local sector rose
350,000 over the year, a change driven
partly by a rise in hiring by schools. The
budgetary position of the state and local
sector deteriorated further over the four
quarters of 1989, as the annualized deficit
of operating and capital accounts, which
excludes social insurance funds, increased $18 billion.

Labor Markets
Employment growth slowed in the second half of 1989; nonetheless, nonfarm

10

76th Annual Report, 1989

payrolls increased nearly 2Vi million
during the year. The bulk of this expansion was in the service-producing sector.
By contrast, the manufacturing sector
lost 100,000 jobs. These cutbacks were
more than accounted for by declines in
the durable goods industries, which were
affected by the slump in auto sales, the
second-half sluggishness in capital spending, and the effects of a stronger dollar on
exports and imports.
Despite the slowdown in the creation
of new jobs, the overall balance of supply
and demand in the labor market changed
little over the year and, on the whole,
gave a sense of continued tightness. The
civilian unemployment rate, which had
dropped sharply in 1987 and 1988, closed
out 1989 at 5.3 percent—unchanged from
the level of a year earlier. Other indicators
gave a similar picture: The number of
"discouraged" workers—those who say
they would re-enter the labor force if they
Labor Market Conditions
Net change, millions of persons, Q4 to Q4
Nonfarm payroll employment

Manufactu
Percent change, Dec. to Dec.
Employment cost index
Total compensation

111
1985

1987

1989

The data are from the Department of Labor. The
employment cost index is for private industry, excluding
farm and household workers.




thought they could find a job—declined
in 1989, as did the number of workers
who accepted part-time employment
when they would have preferred fulltime. The proportion of the civilian
population with jobs reached an historic
high.
The tightness of labor markets and the
persistence—according to surveys —of
inflation expectations in the 4 to 5 percent
range kept pressure on labor costs. The
employment cost index for wages and
salaries in nonfarm private industry
increased 4VA percent over the twelve
months of 1989, about the same as the
rise during 1988. Benefit costs in 1989
continued to rise more rapidly than wages
and salaries, with health insurance costs
remaining a major factor; nonetheless,
the rate of growth in overall benefit costs
slowed, in part because of a smaller
increase in social security taxes than in
1988. Total compensation, which includes both benefits and wages and
salaries, rose 43A percent during 1989.
Growth of compensation in the service
producing sector—at 5 percent—continued to outpace the gain in the goodsproducing sector by about 3A percentage
point.
Productivity gains were lackluster in
1989, a phenomenon typical of a slowing
economy. Output per hour in the private
nonfarm business sector increased only
Vi percent over the four quarters of the
year— 1 percentage point below the rate
of increase in 1988. In the manufacturing
sector, productivity gains during the first
half of 1989 kept pace with the 1988
average of 3 percent; in the second half,
however, productivity growth slowed a
little, to an annual rate of 2 percent.
Reflecting both the sharp increase in
hourly compensation and the slowing in
productivity, unit labor costs in private
nonfarm industry rose 4% percent over
the four quarters of 1989—the largest
increase since 1982.

The Economy in 1989

Price Developments
Inflation in consumer prices remained in
the neighborhood of 4V2 percent for the
third year in a row. Although some relief
came in the form of stable import prices,
the continued pressures on domestic
resources, particularly in the labor markets, precluded any easing of overall
price increases. During the first half of
the year, inflation was boosted temporarily by a sharp runup in energy prices
and a carry-over from 1988 of droughtrelated increases in food prices. However, inflation in food prices slowed
during the summer, and a drop in energy
prices in the second half retraced about a

Pric
Percent change, Q4 to Q4
Producer finished goods

# 0

Consumer

Consumer excluding food and energy

1• » 11
1985

1987

1989

Consumer prices are for all urban consumers. The data
are from the Department of Labor.




11

third of the earlier run-up. The effect of
import prices in holding down inflation
also was more apparent in the second half
of the year than in the first half.
Food prices increased 5Vi percent at
the retail level over the year, slightly
more than in 1988, when a number of
crops were severely damaged by drought.
A poor wheat crop in 1989 and a shortfall
in dairy production were among the
factors that prevented food prices from
decelerating. In addition, increases in
demand, including sharp increases in
exports of some foods, also appear to
have played a role, as did continued
increases in the costs of food processing
and marketing. In December, a hard
freeze hurt fruit and vegetable crops in
Florida and Texas and sent prices soaring
as a new year began.
Consumer energy prices surged 16
percent at an annual rate during the first
six months of 1989, but fell at a 5 percent
rate in the second half. During the first
half, increases in the cost of crude oil
drove up retail energy prices. In addition,
the introduction of tighter standards
governing the composition of gasoline
during summer months boosted summer
gasoline prices. Later on in the year,
gasoline prices eased considerably, reflecting the passthrough of lower prices
for crude oil and the expiration of the
summertime standards. Taking the twelve
months of 1989 as a whole, the increase
in retail energy prices came to a bit more
than 5 percent. At year-end, heating oil
prices were surging in response to increased demands and supply disruptions
caused by December's unusually cold
weather. Crude oil prices at the end of
1989 had moved up to around their
highest levels since the big price collapse
of 1986.
The rise in the consumer price index
for items other than food and energy was
almost Al/i percent in 1989, about the
same as in 1988. Developments in this

12

76th Annual Report, 1989

category likely would have been less
favorable had the dollar not been appreciating in foreign exchange markets
through the first half of 1989. The prices
of consumer commodities excluding food
and energy decelerated sharply, and this
slowdown was particularly marked for
some categories where import penetration is high, including apparel and recreational equipment. In contrast to goods
prices, the prices of nonenergy services - which make up half of the overall
consumer price index—increased 5lA
percent in 1989, slightly more than in
1988. The pickup in this category was led
by rents, medical services, and entertainment services.
At the producer level, prices of finished goods increased IVi percent at an
annual rate during the first half of 1989 almost twice the pace of 1988-but
slowed to an annual rate of 2 Vi percent in
the second half. Sectoral developments
that affected the prices of finished goods
at the producer level were similar to
those that affected consumer prices. At
earlier stages of processing, the index for
intermediate materials excluding food
and energy, abroad indicator of trends in
materials prices, decelerated sharply
during the first half of the year, and then
edged down in the second half. Over the
four quarters of 1989, this index registered a net increase of only 1 percent,
compared with a rise of more than 7
percent in 1988; the deceleration appears
to have reflected a relaxation of earlier
pressures on capacity in the primary
processing industries, along with the
influence of the rise in dollar exchange




rates through the first half of 1989. These
same factors also caused the prices of
industrial commodities to weaken as the
year progressed; price declines were
especially sharp for some primary metals, such as copper, aluminum, and steel
scrap. At year-end, however, prices of
industrial commodities appeared to be
stabilizing.
•

13

Monetary Policy and Financial Markets in 1989
In 1989, the Federal Reserve continued a
policy aimed at containing and ultimately
eliminating inflation while providing
support for economic expansion. In
implementing that policy, the Federal
Open Market Committee maintained a
flexible approach to monetary targeting,
responding to emerging conditions in
the economy and financial markets as
well as to the growth of the monetary
aggregates relative to their established
target ranges.

The Implementation
of Monetary Policy in 1989
In the opening months of 1989, the Federal Open Market Committee extended
the move toward restraint that it had
begun almost a year earlier. Policy
actions in January and February restrained the availability of reserves,
raised the discount rate, and prompted a
further increase of 34 percentage point
in short-term market interest rates.
Longer- term rates, however, moved up
only moderately; the tightening apparently had been widely anticipated and
was viewed as a welcome step toward
helping to avoid an escalation in underlying inflation. Real short-term interest
rates—nominal rates adjusted for expected price inflation—likely moved
higher in early 1989 but remained below
peak levels earlier in the expansion. The
tightening of policy and the related
increases in interest rates contributed to a
strengthening of the foreign exchange
value of the dollar in early 1989. Growth
of the monetary aggregates slowed during this period as the additional policy
restraint reinforced the effects of actions
taken in 1988.



In the spring, the incoming data on
activity, along with the strength of the
dollar, suggested that the risk of accelerating inflation was beginning to lessen a
bit. Consequently, the Committee refrained from further tightening, and in
June it began to ease the pressures on
reserve markets. Interest rates fell sharply
during the second quarter, at both the
short and long ends of the maturity
spectrum. By mid-year, most long-term
nominal interest rates were down as much
as 1 percentage point from their March
peaks; the yield on the bellwether thirtyyear Treasury bond fell to about 8 percent
by the end of June. The decline in interest
rates outstripped the reduction in most
measures of investors' inflation expectations, so that estimated real interest rates
also fell from their levels of earlier in the
year. These declines in nominal and real
interest rates, however, were not accompanied by declines in the foreign exchange value of the dollar. Rather, because of better-than-expected trade
reports in late spring, and political turmoil abroad, the dollar strengthened
further.
In July, when the FOMC met for its
semiannual review of the growth ranges
for money and credit, M2 and M3 lay at,
or a bit beneath, the lower bounds of
their target cones. This weakness,
together with the information on prices
and real activity, led the Committee to
ease reserve positions further. While
taking such action, the Committee also
reaffirmed the existing 1989 target
ranges for the monetary and debt
aggregates and tentatively established
those same ranges for 1990; it was
thought that such ranges likely would
encompass money growth at a pace

14

76th Annual Report, 1989

needed to foster further economic
expansion and moderation of price
pressures in 1990.
Longer-term interest rates moved
down a bit further shortly after midyear, but then turned up later in the
summer. During this period, incoming
information hinted at the possibility
of renewed inflation pressures; with
growth in the monetary aggregates
rebounding, the Committee therefore
kept reserve conditions about unchanged

pending clearer signals of the economy
and of prices.
In early autumn, evidence of a further
slowing in the pace of economic activity
began to accumulate. Beginning in October the FOMC reduced pressures on
reserve markets in three separate steps;
the moves nudged the federal funds rate
down to around 8 XA percent by year-end,
about Wi percentage points below its
level when the tightening of policy had
ceased in February. Over those ten

Interest Rates
Percent per year
Short-term

Long-term

U.S. government bonds

1984

1985

State and local government bonds

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 thirty-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 thirty-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 thirty-year constant maturity by the Treasury.
The rate for state and local government bonds is a Bond
Buyer index based on twenty-five issues of thirty-year
revenue bonds of mixed quality.

Monetary Policy and Financial Markets
months, other short- and long-term nominal interest rates fell about 1 to VA
percentage points. Reflecting some reduction in inflation anticipations over the
same period, estimated short- and
long-term real interest rates fell somewhat less than nominal rates, dropping

15

probably about Vi to 3A percentage point.
Still, most measures of short- and longterm real interest rates remained well
above their trough levels of 1986 and
1987—levels that had preceded rapid
growth in the economy and a buildup of
inflationary pressures.

Reserves, Money Stock, and Debt Aggregates
Annual rate of change based on seasonally adjusted data unless otherwise noted, in percentx
1989
Item

1986

1987

1988

1989
Ql

Q2

Q3

Q4

Depository institution reserves2
Total
Nonborrowed
Required
Monetary base 3

18.2
20.0
18.3
9.5

4.7
4.8
4.8
7.6

2.8
.2
2.7
6.9

-1.5
1.7
-1.4
3.4

-3.1
1.2
-3.2
4.4

-8.7
-10.2
-7.7
1.7

.6
8.7
.5
3.2

5.1
7.2
5.0
4.0

Concepts of money 4
Ml
Currency and travelers checks .
Demand deposits
Other checkable deposits

15.5
7.4
11.6
29.2

6.3
8.7
-.9
13.7

4.3
8.1
-1.3
7.6

.6
4.8
-2.8
1.0

-.1
6.6
-4.5
-.6

-4.4
4.3
-7.5
-7.7

1.8
3.8
-.5
2.5

5.1
4.0
1.1
9.8

9.3
7.3

4.3
3.6

5.2
5.5

4.6
5.9

2.3
3.2

1.6
3.7

6.9
8.7

7.1
7.7

5.9

3.2

5.7

3.7

2.4

5.6

5.2

17.4
16.3

5.9
7.0

7.7
-5.0

29.8
-9.2

18.0
3.4

23.0
-25.4

37.6
-2.9

29.5
-12.5

9.1
8.1
1.8

5.8
12.0
9.3

6.3
10.6
11.6

3.2
-1.5
4.2

3.9
9.6
11.4

3.2
9.1
13.5

3.9
-6.8
-1.3

1.8
-17.3
-6.7

32.3
32.0
4.3

3.0
36.7
14.1

-.6
14.7
11.1

17.1
-16.1
-22.5

.3
9.6
-2.2

25.2
36.6
3.8 -29.9
-20.2 -33.3

3.3
-49.0
-41.8

13.2
14.6
12.7

9.9
9.0
10.2

9.1
8.0
9.4

8.0
7.4
8.1

8.2
7.7
8.3

M2
Non-Mi component
MMDAs, savings, and smalldemonimation time deposits
General-purpose and broker/dealer
money market mutual fund assets
Overnight RPs and Eurodollars (n.s.a.)....
M3
Non-M2 components
Large-denomination time deposits
Institution-only money market mutual
fund assets
Term RPs (n.s.a.)
Term Eurodollars (n.s.a.)
Domestic nonfinancial sector debt .
Federal
Nonfederal

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




7.7
6.9
7.9

7.2
4.7
7.9

7.9
9.5
7.4

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 thrift
institutions; and overnight Eurodollars issued to U.S.
residents by foreign branches of U.S. banks worldwide.
M3 is M2 plus large-denomination 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.

16

76th Annual Report, 1989

The Monetary Aggregates
Growth in M2 was uneven over 1989,
with marked weakness in the first part of
the year giving way to robust growth
Monetary Aggregates, Nonfinancial
Sector Debt, and Reserves
Trillions of dollars

4.1
3.9

Total domestic nonfinancial debt

9.1

Billions of dollars
Ml
.

800
770

Reserves
62
Total
60
58
1988

1989

The ranges were adopted by the FOMC for the period
from 1988:4 to 1989:4.
Reserves have been adjusted to remove discontinuities
associated with changes in reserve requirements. Nonborrowed reserves include extended credit; the difference
between total and nonborrowed reserves is used to meet
seasonal and adjustment needs.




thereafter. All told, the rise in M2 over
the year amounted to 4Vi percent, down
from growth of 5 XA percent in 1988; the
1989 figure was about at the midpoint of
the annual target range of 3 to 7 percent.
The slowing from 1988 reflected some
moderation in nominal income growth as
well as the pattern of interest rates and
associated opportunity costs of holding
money; with regard to the latter, the
lagged effects of increased interest rates
and rising opportunity costs in 1988 and
early 1989 outweighted the effects of the
subsequent, smaller reversal.
Compositional shifts within M2 in
1989 reflected the pattern of interest rate
movements over the year, an unexpectedly large volume of tax payments in the
spring, and a flow of funds out of thrift
institution deposits and into other instruments. Early in the year, rising market
interest rates buoyed the growth of smalldenomination time deposits at the expense of more liquid deposits, the rates
on which adjusted only sluggishly to the
market's upward movements. The jump
in tax payments, which came in April and
May, added to the weakness in liquid
instruments in those months. However,
as market interest rates fell, liquid instruments gained in favor, and their rate of
growth rebounded; replenishment of the
accounts that had been drawn down to
pay taxes added to the stronger growth of
liquid deposits.
The swings in interest rates and opportunity costs in 1989 had an especially
strong effect on the Ml component of
M2. From the fourth quarter of 1988 to
May of 1989, Ml declined at an annual
rate of about 2lh percent. Then, from
May to December, M1 growth rebounded
to a 4 percent rate, boosted by the
cumulating effects of falling interest rates
and the tax-related replenishment of
liquid balances. The rise in Ml over the
four quarters of the year was only Vi
percent; it had grown AlA percent in

Monetary Policy and Financial Markets
1988. Ml velocity continued the upward
trend that resumed in 1987, increasing in
the first three quarters before edging
down in the fourth quarter of 1989.
The composition of M2 also was
affected in 1989 by developments in the
thrift industry, which led to a shift of
deposits from those institutions to commercial banks and money fund shares.
The shift stemmed, in part, from regulatory pressures that brought down the
interest rates paid by some excessively
aggressive thrifts. In addition, beginning
in August, the newly created Resolution
Trust Corporation (RTC) directed some
of its funds toward paying down highcost deposits at some thrifts; it also began
a program of closing insolvent thrifts and
selling their deposits to other institutions—for the most part, banks. On
balance, the weak growth of retail deposits at thrifts appears to have been
about offset by the shift into commercial
banks and money market mutual funds,
leaving M2 little affected overall.
M3 growth in 1989 was driven largely,
as usual, by the funding needs of banks
and thrifts; however, the special circumstances of the restructuring of the thrift
industry lessened the reliability of M3 as
a barometer of monetary policy pressures. Banks' funding needs exhibited
continued expansion in 1989 as growth of
bank credit was only slightly below the
1988 rise of 7% percent. By contrast,
credit at thrift institutions, which rose
6*4 percent in 1988, declined on balance
in 1989. This weakness in thrift credit
stemmed directly from the shrinkage of
assets at SAIF-insured savings and loan
institutions; the other thrifts—credit
unions and mutual savings banks—expanded their balance sheets in 1989. In
addition, the funds paid out by the RTC
to thrift institutions and to banks that
acquired thrift deposits were a direct
substitute for other sources of funds. As a
result, thrifts lessened their reliance on



17

managed liabilities, as evidenced by the
16 percent decline over the year in the
sum of large time deposits and RPs at
thrifts. Money market mutual funds that
are open only to institutions were bolstered by a yield advantage, as fund
returns lagged behind declining market
interest rates; these funds provided the
major source of growth for the non-M2
component of M3. On balance, the
effects of the thrift restructuring dominated the movements in M3, and the
rebound in M2 in the second half of 1989
did not show through to this broader
aggregate. Thus, M3 continued to hug
the lower bound of its 3 lh to 7 Vi percent
target cone; it closed the year 3 lA percent
above its level in the fourth quarter of
1988. The velocity of M3 increased 3
percent in 1989, VA percentage points
faster than the growth in M2 velocity and
its largest annual rise in twenty years.

Credit Markets in 1989
Aggregate debt of the domestic nonfinancial sectors grew at a fairly steady pace
over 1989, averaging 8 percent, a rate
near the midpoint of the FOMC monitoring range of 6 V to \Wi percent. This rise
4
in debt was about 1 percentage point less
than the increase recorded in 1988 and
was several percentage points below the
exceptionally rapid increases of the mid1980s. Nonetheless, debt growth once
again exceeded the growth of nominal
GNP, which was 6V2 percent in 1989.
Federal sector debt grew IVi percent,
about xh percentage point less than in
1988. Debt growth outside the federal
sector amounted to 8 percent, 1 XA percentage points less than in 1988. Households
accounted for the bulk of this easing in
the growth of nonfederal debt: Mortgage
credit slowed in line with the reduced
pace of housing activity, and consumer
credit growth, though volatile from month
to month, was less than in 1988. The

18

76th Annual Report, 1989

growth of nonfinancial business debt
slipped further below the extremely rapid
rates of the mid-1980s. Corporate restructuring continued to be a major factor
buoying business borrowing, although
such activity showed distinct signs of
slowing late in the year as lenders became
more cautious, and the use of debt to
retire equity ebbed.
In the mortgage markets, the downsizing of the thrift industry apparently
had little effect on either the cost or
availability of home mortgages in 1989.
The spread between the rate on primary
fixed-rate mortgages and the rate on tenyear Treasury notes rose somewhat early
in the year but thereafter remained relatively stable. And the gap in mortgage
lending associated with the shrinking of
thrift assets was largely filled by increased activity on the part of other
institutions, notably diversified lenders,
who acted in part through other intermediaries such as federally sponsored agencies. Nonetheless, some shrinkage of
credit available for acquisition, development, and construction appeared to follow from FIRREA-imposed limits on
loans by thrifts to single borrowers,
though the reduction in funds available
for these purposes probably also reflected
problems in some residential real estate
markets.
The second half of 1989 was marked
by indications of increased financial
stress among certain classes of borrowers, with implications for the profitability of lenders, including commercial
banks. During this period, delinquency
rates on closed-end consumer loans at
commercial banks and auto loans at
"captive" auto finance companies were
close to historically high levels. The
delinquency and charge-off rates for real
estate loans at commercial banks as a
whole were only slightly higher in 1989
than in the previous year. Still, problem
real estate loans continued to be a drag on



the profitability of banks in Texas, Oklahoma, and Louisiana; and in the second
half, such loans emerged as a serious
problem for banks in New England. By
contrast, smaller, agriculturally oriented
banks continued to recover from the
distressed conditions of the mid-1980s.
As in 1988, agricultural banks charged
off loans at well below the national rate,
and their nonperforming assets represented a smaller portion of their loans
than that for the country as a whole.
The upswing in the profitability of
insured commercial banks that began in
1988 only extended through thefirsthalf
of 1989. A slowing in the buildup of
loan-loss provisions, along with improvements in interest-rate margins, contributed to thefirst-halfgains. In the second
half, profits eroded. Several money center banks sharply boosted their loss
provisions on loans to developing countries, while evidence of rising delinquency rates on real estate and consumer
loans gave evidence of a somewhat more
extensive weakening in loan quality.
Although these developments might
foster a more cautious attitude toward
granting credit to riskier borrowers, it
seemed unlikely at the end of 1989 that
the availability of credit had been reduced
in a more general way that could materially impede the ongoing economic
expansion.
•

19

International Developments
Economic growth in foreign industrial
countries was again quite robust in 1989,
with real GNP in ten major countries
increasing by about V/i percent on a
weighted average basis. In non-OPEC
developing countries, real GNP grew 3
percent on average, though economic
performance among this group of countries was mixed. Progress on adjustment
of major external imbalances was uneven
in 1989. The deficit in the U.S. current
account narrowed by about $21 billion,
to $106 billion for the year as a whole.
Japan's current account surplus declined
about $20 billion, and the surplus of the
newly industrialized Asian economies
declined substantially further. But Germany's huge surplus increased significantly, and the already large deficits of
Canada and the United Kingdom also
grew.
The dollar appreciated sharply against
nearly all major foreign currencies during
the first half of 1989, propelled by
monetary policy restraint in the United
States and favorable trade figures that
suggested further progress in narrowing
U.S. external deficits. Political events in

Japan and China also contributed to the
dollar's strength. In the summer, however, the Federal Reserve's easing of
monetary policy contrasted sharply with
a further tightening of monetary policy
abroad, particularly in Germany, and the
dollar moved off its highs. Nevertheless,
by the time of the September meeting of
the Group of 7 (G-7), the dollar was still
relatively firm. The G-7 statement indicated that officials "considered the rise in
recent months of the dollar inconsistent
with longer run economic fundamentals."
The dollar moved somewhat lower in the
wake of the subsequent coordinated
intervention and of increases in official
interest rates in Europe and Japan.
Through the rest of the year, especially

Exchange Value of the Dollar
and Interest Rate Differential
Percentage points

Exchange Value of the Dollar
against Selected Currencies
December 1988 = 100

Ratio scale, March 1973 = 100

Long-term
real interest
rate differential1
2 -

U.S. minus foreign

120
1975
110

100
Canadian dollar

1989
Foreign currency units per dollar. The data are monthly.




1980

1985

1989

The exhange value of the U.S. dollar is its weighted
average exchange value against currencies of other Group
of 10 (G-10) industrial countries using 1972-76 total trade
weights adjusted by relative consumer prices.
The differential is the rate on long-term U.S. government
bonds minus the rate on comparable foreign securities,
both adjusted for expected inflation estimated by a thirtysix-month centered moving average of actual consumer
price inflation or by staff forecasts where needed.
All the data are quarterly.

20

76th Annual Report, 1989

November and December, the dollar
declined sharply against the mark and
related European currencies as political
developments in Eastern Europe accelerated, with their favorable implications
for the economy of West Germany. The
dollar remained firm against the yen,
however, despite further monetary easing
in the United States and higher interest
rates in Japan. The yen's generalized
weakness appeared to be importantly
influenced by uncertainties over the
political outlook in Japan.
Over the year as a whole, the dollar
appreciated 3V4 percent (December to
December) against a weighted average of
the other G-10 currencies; it appreciated
16 percent against the yen and 14 percent
against sterling while depreciating 1
percent against the mark and 3 percent
against the Canadian dollar. When adjusted for relative consumer price levels,
the dollar appreciated somewhat more
than in nominal terms, on average, as the
U.S. inflation rate again exceeded that of
a weighted average of other major industrial countries.
Official intervention in the exchange
markets by fourteen major countries,
frequently pursuant to G-7 understandings, amounted to net sales of $77 billion,
of which a little more than $22 billion
was by U.S. authorities.

Foreign Economies
Economic growth continued strong on
average in the foreign industrial countries
in 1989, but significant differences
emerged among countries during the
year. Demand in Japan was again supported by robust private investment that
offset weaker real net exports. Investment
demand also remained buoyant in Germany, where net exports continued to be
an important source of strength. Signs of
adjustment to slower rates of growth
were more apparent in Canada and the



United Kingdom, where inflationary
pressures have been severe and where
monetary tightening was undertaken
earlier than in other foreign industrial
countries. Growth slipped noticeably in
both countries as the contribution from
interest-sensitive demand components in
the United Kingdom softened and the
Canadian external sector weakened in
response to a stronger Canadian dollar.
Unemployment rates continued to
move down during 1989 in most foreign
industrial countries, with some signs of
levelling off near year-end. The unemGNP, Demand, and Prices
Percent change from previous year
Gross national product
Constant prices

United States

Total domestic demand
Constant prices

Consumer price index

1985

1987

1989

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 data for GNP and domestic demand are quarterly:
the data for consumer prices are monthly.

International Developments
ployment rate in the United Kingdom fell
more than \lh percentage points to below
6 percent, and the German unemployment rate fell more than lA percentage
point to less than 8 percent. Smaller
declines were recorded in Canada and
France, while the unemployment rate
was about unchanged in Japan and Italy.
Signs of increasing labor-market tightness in some countries, especially Japan
and Germany, raised concerns about
possible upward pressure on wages as
key labor-market negotiations approached in early 1990.
Monetary conditions were tightened in
most foreign industrial countries during
the year, as inflation was more persistent
than had been expected and demand
continued to press on capacity. Several
factors, including tax changes and weakness in some currencies, added to upward
pressures on prices in the first half. U.K.
authorities continued to tighten last year
following significant increases in interest
rates in 1988; the 1989 year-over-year
rate of inflation moved up to 7 Vi percent.
As inflation in Japan and Germany moved
up in the first half to more than 3 percent,
those two countries (and others in the
European Monetary System) raised official rates several times. Although the
growth of monetary aggregates in some
countries accelerated slightly in 1989, it
was steady in most cases and key aggregates stayed within target ranges. The
stance of fiscal policy, as measured by
cyclically adjusted budget deficits calculated by the Organisation for Economic
Co-operation and Development, was
more restrictive—notably so in Germany
and Japan, where new indirect taxes
were introduced.
The combined current account surplus of the foreign G-10 industrial countries contracted by more than $40 billion
in 1989, with half that change produced by a narrowing of the Japanese
external surplus to about $57 billion.



21

Larger deficits in the United Kingdom,
Canada, and Italy also contributed to the
smaller overall surplus. Strong demand
for German exports, however, caused
the German current account surplus to
widen by about $4 billion, to nearly $53
billion.
The combined current account deficit
of developing countries in 1989 declined
about $4 billion, to $12 billion. The
volume of trade grew briskly for these
countries in 1989, with imports expanding strongly for the third year in a row.
Among subgroups of developing countries, the newly industrialized economies
(NIEs) of Asia showed a large reduction
in their combined current account surplus. The surplus of the four Asian
NIEs—Taiwan, Korea, Hong Kong, and
Singapore—fell from about $29 billion
in 1988 to $22 billion in 1989, with most
of the adjustment taking place in Korea.
The reduction in the combined surplus of
the NIEs in 1989 is attributable to the
lagged effects of currency appreciation,
large wage increases, slower growth in
major export markets, strike-related
production shortfalls in Korea, and the
liberalization of import restrictions in
Taiwan and Korea.
The current account deficit of a group
of fourteen heavily indebted developing
countries increased about $3 billion in
1989. An increase in the trade surplus of
this group was more than offset by an
increase in interest payments.
Economic performance in the larger
heavily indebted countries continued to
be mixed in 1989. Growth in Mexico
accelerated to about 3 percent despite
continued progress in reducing inflation.
Inflation accelerated to extremely high
levels in Argentina and Brazil; gross
domestic product fell sharply in Argentina and increased only slightly in Brazil.
Argentina's stabilization effort was intensified when President Menem took office
in July, but by year-end the program was

22

76th Annual Report, 1989

in the midst of substantial alteration.
Venezuela began implementing an adj ustment program early in the year. The
short-term effect of the program was a
recession combined with a spurt in the
general price level that was due to
changes in administered prices and devaluation. However, by the end of the
year, inflation was on a downward trend
and the external current account had been
significantly adjusted.
In March 1989, Treasury Secretary
Brady called for a revitalization of the
debt strategy toward heavily indebted
developing countries. He stressed the
crucial role of policy reforms to achieve
growth, and he recognized the need for
voluntary reductions in debt and debt
service, with the International Monetary
Fund and the World Bank providing
financial support for such operations.
During 1989, financing packages based
on the Brady framework were agreed
upon for Mexico, the Philippines, and
Costa Rica. The packages for Mexico
and the Philippines were completed in
early 1990.

Exports rose 10 percent during the
four quarters of 1989, a bit more than
half the pace of the preceding four
quarters. All of the increase was in
quantity; the average price of exports
was little changed, held down by the rise
in the dollar and relatively small increases
in the domestic prices of goods that are
exported. The growth in exports reflected
the strong growth in income abroad and
the continuing positive effects of the
decline in the dollar through the end of
1987. Most of the advance in exports was
in the first half of the year; growth slowed
substantially in the second half, as the
rise in the dollar through mid-year began
to depress U.S. price competitiveness. In

U.S. International Trade
Billions of dollars
Balances

100
Merchandise trade

U.S. International Transactions
The U.S. merchandise trade and current
account deficits narrowed further in
1989. A $43 billion increase in merchandise exports and a $29 billion increase in
merchandise imports yielded a trade
deficit of $113 billion for the year,
compared with $127 billion in 1988. The
current account balance moved about in
line with the trade balance, as net transactions in services and other transfers
remained in rough overall balance. A
substantial increase in net payments of
portfolio income to foreigners, associated with the growing U.S. net international indebtedness, was about offset by
the continued advance in receipts of U. S.
net direct investment income, excluding
capital gains and losses.



Ratio Scale, billions of 1982 dollars
Merchandise trade

_^_

Ratio scale, 1982 = 100
GNP fixed-weight price index
120
110
100
Total exports
1985

1987

1989

The data are quarterly, seasonally adjusted at annual
rates, and are from the Department of Commerce.

International Developments
addition, a strike at Boeing caused a
sharp drop in aircraft shipments during
the fourth quarter.
The expansion of exports during 1989
was broadly based both across commodity categories and across regions of the
world. Shipments of capital goods and
industrial supplies, which together account for about two-thirds of total export
volume, scored healthy gains in 1989. In
addition, the quantity of agricultural
exports rose 10 percent between the
fourth quarter of 1988 and the fourth
quarter of 1989, reflecting strong demand

23

in the Soviet Union and China. Agricultural shipments expanded only half as
fast in value terms, however, as prices
fell from their drought-induced highs of
1988.
Merchandise imports rose 4V6 percent
in value and slightly more in quantity
during 1989, as the average price of
imports fell slightly. A sharp increase in
the price of oil imports largely offset
moderate declines in the prices of other
imports. Prices of non-oil imports fell
1 percent over the first three quarterslargely because of the rise in the dollar

U.S. International Transactions ]
Billions of dollars, seasonally adjusted
Quarter
Year
Transaction

1988

1989

1988
Current account
Published
Excluding capital gains and losses
Merchandise trade balance
Exports
Imports
Investment income
Published
Excluding capital gains and losses
Direct investment
Published, net
Capital gains and losses, net
Excluding capital gains and losses
Portfolio investment, net
Other services (including military transactions)
Unilateral transfers, private and government

1989

Q4

Ql

Q2

Q3

Q4

-127
-126
-127
319
446

-106
-104
-113
362
475

-29
-33
-32
84
116

-30
-27
-28
88
116

-32
-27
-28
91
119

-23
-26
-29
91
119

-21
-25
-29
92
121

2
3

1
3

4
1

-2
1

-6
-1

3
0

7
3

32

36
-2
38
-35
21

13
4
9
-8
4
-5

6
-3
9
-8
4
-3

3
-5
8
-9
4
-3

12
3
9
-9
6
-3

15
4
11
-9
6
-4

32
1
-3
5
9
-2
-9
23
7

24
-9
-3
9
9
*
-5
19
5

17
6
-6
2
6
4
-5
13
-3

19
5
-10
13
6
5
-10
12
-1

27
9
-4
6
12
-1
-12
16
0

11

8

-5

2

-4

-12

-6

33
-3
36

-3
-5
2

33
-29
13
-15

Private capital flows, net
Bank-related capital, net (outflows, - )
U.S. net purchases ( - ) of foreign securities
Foreign net purchases (+) of U.S. Treasury securities ..
Foreign net purchases of U.S. corporate bonds
Foreign net purchases of U.S. corporate stock
U.S. direct investment abroad
Foreign direct investment in United States
Other corporate capital flows, net

99
14
-8
20
27
-1
-18
58
5

Foreign official assets in United States (increase, + ) . .

39

U.S. official reserve assets, net (increase, - )

-4

U.S. government foreign credits and other claims, net
Total discrepancy
Seasonal adjustment discrepancy
Statistical discrepancy
1. Details may not sum to totals because of rounding.
•Less than $500 million absolute value.




3
-11
*
-11

-14

11
-23
29
33
7
-32
61
1
7
-25
1
35
*
35

3

1
4
—3

4
-23

-7
-3

1

1

-19

12

4
5
-1

SOURCE. Department of Commerce, Bureau of Economic Analysis.

24

76th Annual Report, 1989

during 1989 and substantial declines in
world prices of several basic commodities-and recovered moderately in the
fourth quarter under the influence of the
declining dollar.
The growth in the volume of non-oil
imports was not as broadly based across
commodity categories. Capital goods
grew particularly strongly, largely reflecting the relative strength of domestic
spending for computers and other information processing equipment. Imports
of consumer goods also increased over
the four quarters of the year, but imports
of industrial supplies were damped by the
slowing of industrial production in the
United States. Part of the overall increase
in non-oil imports was likely in response
to the substantial decline in the relative
price of such imports earlier in the
year.
The value of oil imports increased
sharply in 1989. Prices rebounded from
their sharp decline the year before, and
the quantity imported advanced as well.
The price of imported oil rose $5 per
barrel during 1989, to a level of just
above $ 17 per barrel in the fourth quarter.
The rebound in oil prices followed
OPECs agreement at the end of 1988 to
limit supplies; it was helped along by a
downtrend in U. S. output and disruptions
to supply caused by accidents in the
North Sea and Alaska. Some unusually
cold weather and further disruptions to
supply during December 1989 and January 1990 moved spot prices another $1 to
$2 per barrel above their 1988 fourthquarter average. The volume of U.S. oil
imports (seasonally adjusted) rose from
an average of about IVi million barrels
per day (mbd) in during 1988 to nearly
8*4 mbd in the second half of 1989,
partly reflecting reduced U.S. production. Imports supplied nearly half of total
U.S. oil consumption during 1989.
The U.S. current account deficit was
balanced by recorded net capital inflows



of $71 billion and a statistical discrepancy
of $35 billion. Adding the recorded net
capital inflows to the previously published U.S. net investment position suggests that the position at the end of 1989
reached around negative $600 billion.
However, because of serious valuation
problems with direct investment assets, it
is likely that U.S. net indebtedness is
overstated in the published data. Despite
the large recorded negative position,
U.S. investors earned about as much on
their investments abroad as foreigners
earned on their investments in the United
States in 1989.
The large statistical discrepancy in
1989 casts doubt on the accuracy of the
data in both the current and capital
accounts. The wide swings in the discrepancy from quarter to quarter suggest that
part of the problem may be in the timing
of the recording of transactions. For
example, the fiscal year used in reports
by direct investors may not coincide
exactly with the calendar year, or the
counterpart to end-of-period "window
dressing" by banks may not be recorded
in the same quarter. In any case, the large
size of the statistical discrepancy in 1989
is troublesome.
Holders of foreign official reserves
added to their investments in the United
States in 1989: Holdings by the G-10
countries were reduced by intervention
sales of dollars to counter downward
pressure on the foreign exchange value
of their currencies, but that movement
was more than balanced by the increase
in holdings of other countries. The United
States significantly increased its holdings
of foreign currencies as it tried to limit
the appreciation of the dollar.
Recorded net private capital inflows
were almost as large in 1989 as they were
in 1988. Securities transactions accounted for the largest part of the inflow.
Net purchases of U.S. government securities by private foreigners reached record

International Developments
levels, as did net purchases of U.S.
government agency securities (included
with corporate bonds). Net purchases of
U.S. corporate bonds (largely Eurobonds) were also substantial. Foreigners
added to their holdings of U. S. corporate
stocks, and U.S. residents added to their
holdings of foreign stocks and bonds.
Direct investment by foreigners in the
United States continued at near-record
levels in 1989, spurred by large mergers
and acquisitions involving foreign entities. U.S. directinvestmentabroadpicked
up from the depressed 1988 level, probably reflecting in part the increase in
capital expenditures by affiliates abroad.

Foreign Currency Operations
U.S. monetary authorities intervened in
the exchange markets on 97 of the year's
260 business days. All of the interventions involved selling U.S. dollars against
foreign currencies. Total purchases of
foreign currencies amounted to $22,056
million equivalent, of which $10,926
million equivalent was Japanese yen and
$11,131 million equivalent was German
marks.
Of the total intervention, $11,078
million was for the account of the Federal
Reserve System. In addition, the System
warehoused $7,000 million equivalent of
foreign currencies for the Treasury's
Exchange Stabilization Fund (ESF).
Under this warehousing arrangement,
the System purchased the foreign currency at the spot price and simultaneously
sold it forward with the ESF. The System
realized no profits or losses on intervention in 1989, but recorded a net translation gain of $1,272 million on its foreign
currency position as the gain on marks
far exceeded a small loss on yen. At
year-end, the value of the System's gross
foreign currency balances, including
those warehoused for the ESF, was



25

$31,333 million equivalent, predominantly marks and yen.
The only activity in the Federal Reserve's Reciprocal Currency (Swap) network involved a drawing on September
25 by the Bank of Mexico of $784.1
million, including $84.1 million on a
new special swap arrangement, The
drawing was part of a multilateral bridge
loan pending completion of Mexico's new
refinancing package and was fully repaid
by February 1990.
-

27

Monetary Policy Reports to the Congress
Given below are reports submitted to the
Congress on February 21 and July 20,
1989, pursuant to the Full Employment
and Balanced Growth Act of 1978.

Report on February 21,1989
Monetary Policy and the Economic
Outlook for 1989
Overall, 1988 was another year of
progress for the U.S. economy, marked
by further substantial increases in output
and employment and by a significant
improvement in the balance of trade. The
dramatic stock-market break of October
1987 did seem to affect real activity for a
time, but 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 1988.
Moreover, the sizable employment gains
in January of this year suggest that the
economy entered 1989 with considerable
forward momentum.
Inflation has remained in check into
the seventh year of the expansion. Even
so, developments during 1988 were a
little worrying, as, for a second year,
increases in prices were somewhat larger
than they were 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,
there also was a quickening in the rise of
wages and total hourly compensation,
which 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 that had
begun in October 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
(FOMC).
As it became clear in the spring that the
economy still was strong, the focus of
Federal Reserve policy shifted. For much
of the year, there was heightened concern
about the potential for increased inflation, largely reflecting rapid growth of
spending and a continued tightening of
labor and product markets. 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 reserve market conditions 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 Sys-

28

76th Annual Report, 1989

tern's tightening and by the strength of the
economy, and the discount rate was
raised in August, to its current level of
6V2 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, as the needs of
banks and thrift institutions to fund credit
expansion slackened.
At present, short-term interest rates
are about 2V2 percentage points higher
than they were early last spring. Longterm interest rates, by contrast, have
changed little, on net, over that same
period; although these rates turned up in
the spring of 1988, they leveled off over
the summer and edged down in the fall,
even as short-term rates were continuing
to rise. This behavior of bond yields
seems to have reflected a lowering of
market expectations of long-run inflation.

M3 — signalling the Committee's determination to resist any upward tendencies in
inflation in the coming year and to
promote progress toward price stability
over the long run. The monitoring range
for the growth of domestic nonfinancial
debt for 1989 was set at 6V4 to \0Vi
percent, which also is lower than that of
last year.
In recognition of the degree to which
the relationship between the monetary
aggregates and economic performance
has varied in this decade, the Committee
retained the spread of 4 percentage points
between the upper and lower ends of the
growth ranges that it adopted in 1988.
Despite the deregulation of deposit interest rates, M2 velocity has remained very
sensitive to changes in market interest
rates over periods as long as a year or
more. Depository institutions have been
slow to adjust some of their offering
rates, causing substantial changes over
the short and intermediate term in the
Monetary Policy for 1989
relative attractiveness to savers of deThe commitment by the Federal Reserve posits versus market instruments. In these
to contain inflationary pressures is circumstances, it is difficult to specify in
reflected in the FOMC's decisions to advance a narrow range for the approprilower the ranges for monetary and credit ate growth of M2 and the other aggregates
expansion this year. The Committee has in the coming year; such growth will
set a range of 3 to 7 percent for M2 depend on the forces affecting the econgrowth during 1989 and a range of 3 Vi to omy and prices and on the response of
7 Vi percent for M3, reaffirming the target depository institutions to any changes in
ranges established tentatively in June market interest rates, both of which are
1988. These ranges were reduced from
subject to a substantial degree of uncerthose for 1988—a full percentage point
tainty. Moreover, in 1989, the behavior
for M2 and one-half percentage point for
of M2 and M3 also could be influenced
by the resolution of problems in the thrift
industry, depending, in part, on how
Ranges of Growth for Monetary
pricing practices of these institutions
and Credit Aggregates
change, on the reactions of retail and
Percentage change1
wholesale depositors in these institutions,
and on the extent of any restraints on the
1987
1988
Aggregate
1989
growth of assets of savings and loan
4to8
3to7
SViXoVh
M2
associations.
4to8
M3
5% to 8%
3% to 7%
7toll
M2 and M3 are now around the lower
Debt ...
8toll
6Vi to 10%
ends of their 1989 ranges. This slow
1. From average of the fourth quarter of the preceding
growth and the accompanying rise in
year to average of the fourth quarter of the year indicated.




Monetary Policy Reports
velocity reflect the continuing effects of
recent increases in market interest rates.
In light of the slow adjustment of deposit
rates, velocity could continue to increase,
with growth in these monetary aggregates
in the lower halves of their ranges. Given
the uncertainties about the relation of
movements in the aggregates to prices
and output, the Committee agreed that in
implementing policy, they would need to
assess, in addition to the behavior of
money, indicators of inflationary pressures and economic growth, as well as
developments in financial and foreign
exchange markets.
The Committee will continue to monitor the growth of domestic debt in 1989.
The expansion of the debt of nonfinancial
sectors may slow a little from the 8%
percent pace of 1988, although it is
expected once again to exceed the pace of
growth in nominal income. The growth
of debt could be importantly affected by
corporate financial behavior. The expansion of private debt has been boosted in
recent years by the substitution of debt
for equity in connection with leveraged
buyouts and other corporate restructurings, and business borrowing is likely to
be especially sizable in the early part of
this year, owing to the recent heavy
volume of such activity. The federal
government, once again, will be placing
heavy demands on credit markets, financing its continuing deficit.

29

Economic Projections
In general, the Committee members,
including the nonvoting Reserve Bank
presidents, anticipate that real gross
national product will grow moderately in
1989, that prices will rise at a pace similar
to, or perhaps slightly above, that of
1988, and that the unemployment rate
will remain near its recent level-the
lowest in a decade and a half. On balance,
the FOMC members anticipate a little
less real growth and a somewhat higher
rate of inflation than does the administration, but the differences are not large.
Members of the Committee believe
that the progress of the economy in 1989
will be determined in large measure by
developments on the inflation front.
Although special factors, such as the
drought, contributed to price increases
last year, there also have been troubling
indications—most notably in recent wage
trends—that inflationary pressures have
become more widespread and, potentially, more deeply rooted.
Given the tightening actions taken by
the Federal Reserve over the past year
and the policy of continued restraint on
aggregate demand expressed in the monetary targets for 1989, the members of
the Committee anticipate that, if there is
any further acceleration of prices from
the 1988 pace, it will be quite limited.
The majority of the Committee members
expect that the consumer price index will

Economic Projections for 1989
Percent
FOMC members and other FRB presidents
Item

1988 actual
Range

Central tendency

Change, fourth quarter to fourth quarter
Nominal GNP
RealGNP
Consumer price index ]

7.0
2.7
4.3

5teto8%
VhioVA
Vhto5Vi

6V4to7V4
2V 2 to3
41/2to5

Average level in the fourth quarter
Civilian unemployment rate

5.3

5 to 6

5Hto5Vi

1. All urban consumers (CPI-U).




30

76th Annual Report, 1989

rise about 4V2 to 5 percent this year. This
would be a slightly larger increase than in
1988, and thus would represent something of a setback relative to the Committee's disinflationary objective. However,
in light of the tautness of markets and the
current momentum of wages and prices,
these members viewed such a projection
as realistic in the context of a prudent
effort to restore price stability over time.
It should be noted, however, that some
members expect a rise in prices that is
significantly below the central-tendency
range; in their view this far more desirable outcome couldflowfrom the dollar's
recent firmness, which will damp the
pressures from rising import prices, and
from the recognition by business and
labor that restraint is needed to preserve
gains in international competitiveness.
A particular uncertainty in the inflation
outlook for 1989 centers on the prospects
for food prices. FOMC members generally assume that a return to more normal
weather conditions this year, together
with an increase in acres planted, will
lead to a sharp rebound in crop production, in which case food prices might help
to temper overall inflation. However,
because stocks of some key agricultural
commodities have been reduced to low
levels, there also is risk that another year
of drought could generate strong upward
pressures on prices. In the energy area,
consumer prices could rise sharply early
this year, responding to the runup in oil
prices around the end of 1988; nonetheless, world oil supplies still look ample,
and members of the Committee are
assuming that energy prices will increase
only moderately over 1989 as a whole.
With respect to real GNP, the centraltendency forecast of the Committee
members is for a rise of about 2Vi to 3
percent in 1989, about the same as in
1988. However, this forecast incorporates a working assumption that increased
farm output will add around two-thirds of



a percentage point to the growth of GNP,
similar to the amount that the drought
pared from growth in 1988. Excluding
this swing in farm output, the centraltendency forecast is for considerably
slower growth of real output than last
year's gain, excluding drought losses, of
more than 3 percent.
Although the economy clearly has
entered 1989 on a strong note—even
discounting the transitory influence of
unusually mild weather in many parts of
the country—the members feel that
growth soon will move to a lower trajectory, owing both to the general influence
of monetary restraint and to a number of
sector-specific trends. In the business
sector, the boom in capital outlays that
was evident in the first half of 1988 has
since abated, and surveys of plans for
1989 point to moderate gains in overall
plant and equipment spending. Government purchases are expected to be held
down by budgetary constraints; defense
purchases, in particular, have been trending lower under the influence of cutbacks
in real spending authority. Recent increases in mortgage rates likely portend
some slackening in the pace of homebuilding, and the growth of consumption
expenditures also should begin to taper
off from the rapid pace of 1988, as a
slowing of expansion elsewhere in the
economy damps the growth of real disposable income.
With regard to the external sector, real
net exports of goods and services declined
over the second half of 1988, but most
members of the Committee expect some
improvement in the months ahead. However, substantial further progress in
external adjustment will require 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 re-

Monetary Policy Reports
straint, 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 do much to
encourage businesses to make the longerrange 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 one critical
ingredient. But also crucial is action to
bring about further progress toward
balance in the federal budget. The Committee has assumed that Gramm-Rudman-Hollings targets will be adhered to
in the fiscal 1990 budget process; but the
creation of an environment favorable for
economic growth with stable prices requires that fiscal policies be put in place
to produce the prescribed budget results
in the out-years as well.
The Performance of the Economy
in 1988
The U.S. economy completed a sixth
year of expansion in 1988. Real gross
national product rose about 234 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.
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, coming
in particular from rising exports and a



31

boom in capital spending. Households,
meanwhile, adjusted fairly readily to the
loss of stock market wealth, 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
inflation in 1987 had resulted mainly
from a rebound in the price of oil and the
pass-through of higher prices for imports. This past year, by contrast, extra
price pressures reflected the impact of
drought on the price of food and, more
generally, a widespread pickup in labor
costs in the domestic economy.
The rise in real GNP last year would
have exceeded 3 percent but for a severe
drought, one of the worst of this century,
that 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 remains stronger
fundamentally than in the first half 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 5 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. How-

32

76th Annual Report, 1989

ever, oil drilling, which had turned up in
1987, when oil prices were rising, experienced renewed weakness in 1988,
intensifying economic stresses in some
parts of the country.
The External Sector
The U.S. external accounts showed considerable improvement during 1988. On
a balance of payments basis, the deficit
on merchandise trade fell from an annual
rate of $165 billion in the fourth quarter
of 1987 to around $120 billion in the
second quarter of 1988 and, on average,
remained at that lower level in the second
half of the year. Over the four quarters of
last year, the value of exports rose more
than 20 percent; adjusted for inflation,
the increase was around 15 percent.
Much of the strength in exports, which
was concentrated in the first half of the
year, appeared to be associated with an
improvement in the price competitiveness of U.S. products resulting from an
earlier depreciation of the dollar, as well
as with efforts at cost control and increases in productivity among domestic
producers. Demand for exports also was
supported by surprisingly strong economic growth in other industrial countries. The growth in real export volume
was spread over most categories of trade;
gains were particularly large for capital
goods (especially computers and computer parts), automotive products, and
consumer goods. The volume of agricultural exports for 1988 was up 9 percent
from that for 1987, despite declines in the
second half of the year; the value of these
exports was boosted further by the
drought-induced rise in crop prices.
The value of merchandise imports,
other than oil, rose about 7 percent during
1988. The volume of non-oil imports
increased about 2 percent. This rise was
concentrated mainly in the capital goods
area; volume was down for other major
categories of imports. The prices of



imported industrial supplies (excluding
oil) rose significantly in 1988; smaller
increases were recorded for consumer
goods, automotive products, and various
machinery categories. However, price
declines for oil and computers held the
overall increase in import prices below
that of 1987; on a fixed-weight basis, the
rise in non-oil import prices during 1988
was 7 XA percent. The value of oil imports
declined last year, as an increase in
physical volume was more than offset by
the decline in price.
For the first three quarters of 1988, the
current account showed a cumulative
deficit of $102 billion, which was balanced by recorded net capital inflows of
$88 billion and a statistical discrepancy
of $14 billion. Foreign official assets in
the United States increased $28 billion on
net (this rise included about $30 billion,
on net, of official purchases of U.S.
government securities). Net inflows
through banks were $21 billion. Excluding banking flows, assets held in the
United States by private foreigners increased $68 billion on net; purchases of
U.S. government securities were sizable
(in contrast to net sales in 1987), and
direct investment by foreigners in the
United States remained near record levels . Excluding bank flows, the assets held
abroad by private U.S. residents increased $26 billion. These recorded
capital flows during the first three quarters of 1988, plus the likely net inflows in
the fourth quarter, brought the recorded
U.S. net indebtedness to foreigners to
almost $500 billion at the end of 1988.
The foreign exchange value of the
U.S. dollar, which had fallen sharply
from early 1985 through the end of
1987, has shown wide fluctuations in the
subsequent period. Measured against the
other G-10 currencies, the dollar currently is up somewhat, on net, from its
end-of-1987 low. However, it has declined in real (price-adjusted) terms

Monetary Policy Reports
against the currencies of our major
trading partners among the developing
countries, especially South Korea, Mexico, and Brazil.
From mid-April to late August of last
year, the dollar rose sharply, on average,
against the currencies of the other industrial countries, reflecting the influences
of Federal Reserve monetary tightening
and monthly trade reports that brightened
the market's assessment of the outlook
for U.S. external adjustment. When
measured against a weighted average of
the other G-10 currencies, the appreciation during that period was more than 15
percent. After holding steady through
September, the dollar then declined
sharply in October and November; market perceptions appeared to shift during
that period toward a view that monetary
restraint in other countries had increased
relative to that in the United States, and
incoming trade data suggested a stalling
of the adjustment process. Since November, the dollar has again risen, partly in
response to further tightening actions by
the Federal Reserve.
Measured against the G-10 currencies, the dollar currently is about 7
percent above its December 1987 level.
If adjustment is made for changes in
relative prices, the resulting real
appreciation is somewhat greater, as
inflation in the United States has
exceeded the weighted average of the
inflation rates of the other major
industrial countries.
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 half a trillion
dollars from household wealth, and
the degree to which spending would be
cut in response to this loss of wealth
was not clear.



33

In the event, the loss of wealth may
indeed have left an imprint on consumer
demand. The personal saving rate did
rise after the crash and, over the next
year, averaged about a 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, one-time jump in the saving
rate, real consumption expenditures grew
at about the same pace as the trend in
after-tax income; the rise over the year
was about 3 Vi percent.
Consumer spending for big-ticket
items was brisk in 1988. The unit sales of
domestically produced automobiles
moved up a bit from the 1987 pace, and
the sales of light trucks and vans, which
have more than doubled since the expansion began in 1983, reached another new
high. Adjusted for inflation, total consumer spending for motor vehicles increased 6 Vi percent over the four quarters
of the year. Among the household durables, real outlays for furniture and
appliances, which had slowed in 1987,
moved up IVi 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, but
then flattened out over the remainder of
the year; vacancy rates for multifamily
dwellings remain high in many areas and
are likely to hold down new construction
of these units for some time. In the singlefamily sector, starts edged down through
the first three quarters of 1988, but
rebounded toward year-end to the highest

34

76th Annual Report, 1989

levels since the fall of 1987. By historical
standards, these swings in single-family
starts during 1988 were relatively mild;
indeed, from a longer-term perspective,
the past six years have been an unusually
stable period in the single-family market,
in sharp contrast to the boom-and-bust
cycles of the 1970s and early 1980s.
Total housing starts, of course, have
fallen sharply since 1986 because of the
steep decline 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 business equipment spending 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 hightechnology items—computers, communication equipment, and the like—but
outlays for other types of equipment also
were strong. After midyear, the rise in
equipment spending slowed, and some
weakness became evident toward the end
of the year. However, most reports from
the field suggest that the underlying trend
in equipment spending still is pointing
firmly upward.
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 a little 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 capacity utilization is high
in manufacturing, many producers also
appear 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 had 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 a bit during
the year, as the ratio of stocks to sales in
that sector edged gradually lower from a
February high. By contrast, auto dealers'
stocks rose sharply in the fourth quarter,
and auto manufacturers have enhanced
sales incentives and moved to 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 has been since the business
expansion began.
The Government Sector
Budgetary constraints have led to a
slowing of government purchases, both
at the federal level and among state and
local governments. The federal government's purchases of goods and services—
the part of federal spending that adds
directly to the gross national product—

Monetary Policy Reports
fell 4 percent in real terms from the
fourth quarter of 1987 to the fourth
quarter of 1988. Roughly half of the
decline reflected 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 2 percent over the
year—the first decline since 1976. Over
the eight years that preceded 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
federal purchases alone, continued to
rise infiscalyear 1988, but at a somewhat
slower rate than in most previous years.
There were further increases in entitlements, greater demands on deposit insurance agencies, and increases in net interest payments. 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 of 1988. However,
growth in receipts from personal income
taxes slowed, as increases in employment
and nominal incomes were offset by final
reductions in income tax rates legislated
under the 1986 tax reforms. The federal
budget deficit in fiscal year 1988 was
$155 billion, slightly above the level of
the previous year.
The real purchases of goods and services by state and local governments rose
3 percent over the four quarters of 1988,
a little more than in 1987 but less than the
average rate of growth over the preceding
three years. Spending for construction,
which had risen rapidly in the mid


35

1980s, was little changed during 1988 as
a whole, although some pickup was
evident in the fourth quarter. Employment in the state and local sector continued to rise during 1988, reflecting, in
part, the increased demands for teachers
and other school workers associated with
growth in the number of elementary
students.
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
18V2 million. Virtually all parts of the
economy shared in last year's gain. The
number of jobs in manufacturing increased 400,000; employment in construction was up 300,000. Close to a
million new jobs were created in retail
and wholesale trade, and 1.3 million
were added in services. Except for a brief
slowdown in the summer, the growth of
jobs was strong 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 putting unemployed workers back
on the job; now, however, with the
unemployment rate at less than 5Vi
percent, the labor force is more fully
utilized 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

36

76th Annual Report, 1989

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 a percentage point more
than in 1987. The pickup was most
pronounced among white collar workers
and in the service-producing industries,
where unemployment rates currently are
the lowest. The cost of benefits provided
to employees rose 6% 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 XA 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 half a 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 previous five
years.

a rebound in energy prices and rising
prices for imports, the inflationary pressures this past year 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 appeared quickly
at the retail level in the summer, as price
increases picked up for a wide variety of
consumer foods. By late autumn, however, the impact of the drought on food
prices began to dissipate, and inflation in
the food sector returned to a more moderate path. The increase in consumer
food prices over the year as a whole was
5VA percent-about 2 percentage points
above the average of the preceding five
years. Prices in 1989 will be sensitive to
weather developments over the spring
and summer. In the past, major droughts
in the United States have been one-year
events, often separated in time by several
good growing seasons, and most agricultural observers have been assuming that
farm output will rebound in 1989, thereby
restraining the prices of farm crops.
Currently, however, dry conditions still
prevail in some important growing regions, and crop prices could rise abruptly
if moisture supplies are deficient in
coming months.
Energy prices were little changed at
the consumer level during 1988 after a
sharp rise in 1987 - a pattern that resulted
mainly from the continued gyrations in
world oil markets. The price of oil, which
Price Developments
The broader measures of prices - includ- had risen sharply in 1987, moved lower
ing the GNP price measures, the producer for much of 1988, as the efforts of OPEC
price index, and the consumer price to restrain production unraveled. In late
index-all indicate that inflation was in a 1988, a new agreement by OPEC to limit
range of 4 to AVi percent in 1988. Except production, coupled with higher-thanfor the CPI, which had moved up into this expected oil consumption and production
range in 1987, these measures showed shortfalls in non-OPEC countries, caused
some acceleration last year, and all of prices to rise sharply once again; howthem—including the CPI—rose more ever, despite these fluctuations, prices
rapidly than they did in the first four have not made any sustained departure
years of the expansion. In contrast to from the range in which they generally
1987, when the indexes were boosted by have been since the summer of 1986.




Monetary Policy Reports
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 past
year's acceleration in hourly compensation and unit labor costs in the domestic
economy. 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 has 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.

37

ing threat of inflationary pressures, as the
economic expansion remained strong and
margins of available labor and productive
capacity dwindled. To head off a potential
acceleration of inflation, the Federal
Open Market Committee tightened reserve conditions in a series of steps
beginning in the spring and extending
into 1989. The monetary aggregates were
running close to the upper ends of their
growth ranges before the tightening
actions, but subsequently slowed, and
they closed the year in the middle portions
of their ranges.

Implementation of Monetary Policy
During the early months of last year, the
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. Indicators of aggregate demand
suggested that there was a risk of weakness in the economy that warranted some
easing of monetary policy. In addition,
special emphasis was placed on monitoring domestic financial markets for signs
of any new distress and on being alert to
Monetary Policy and Financial
the need to alter the provision of reserves
Developments during 1988
quickly in response to any trouble.
During 1988, Federal Reserve policy Against this backdrop, reserve conditions
continued to be characterized by a flexi- were eased slightly in early February,
ble approach to monetary targeting, with contributing to reductions in short- and
System actions responding to emerging long-term interest rates.
Throughout the spring, incoming ecoconditions in the economy and in financial markets, as well as to growth of the nomic data suggested that the economy
monetary aggregates. This approach has had overcome the effects of lower equity
been necessitated by the short-run vari- prices on confidence and spending. This
ability in the relation of these aggregates information indicated that the economy
to economic performance, owing prima- was expanding at a rate that threatened
rily to their sizable response to changing progress toward long-run price stability.
interest rates, in addition to spending. In Bond yields increased during this period,
the early months of last year, monetary as indications of economic strength conpolicy was eased in light of incoming data tradicted the earlier market forecasts of a
suggesting a weakening in the economic general slowdown and raised concerns
expansion and the possibility of further about an uptrend in inflation. Based on
financial market disruptions. Subsequent evidence of a greater potential for higher
information, however, suggested a grow- wage and price inflation and in the context



38

76th Annual Report, 1989

of rapid growth in M2 and M3, the
Federal Reserve firmed reserve conditions further in a series of steps beginning
in March and culminating in early August
with hike of a one-half percentage point
in the discount rate. These moves brought
about substantial increases in short-term
interest rates, but were 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, helped boost the foreign exchange value of the dollar during this
period.
In view of the policy restraint already
in place, which was being reflected in
slowing growth in the monetary aggregates, and some signs that economic
growth may have been moderating, the
Committee postponed any further action
over the late summer and early fall,
awaiting further information on the
course of the economy. During October
and November, the foreign exchange
value of the dollar declined, partly in
response to a rise in foreign interest rates
relative to U.S. market interest rates and
to investor concern over the lack of
progress in reducing the U.S. federal
budget deficit and the slowing improvement in the U.S. trade deficit.
In late fall, incoming data suggested
that previous monetary restraint had not
been sufficient to relieve the potential for
higher inflation, and the Committee
resumed tightening reserve conditions in
a series of moves beginning in November
and extending into the new year. As a
result of these measures, short-term
market interest rates rose. In contrast,
bond yields continued to fluctuate narrowly, signaling the market's continued
confidence that inflationary pressures
would be contained. This confidence,
together with the firming of policy,



contributed to a strengthening of the foreign exchange value of the dollar.
Behavior of Money and Credit
M2 expanded 5.3 percent last year, just
below the middle of its target range of 4
to 8 percent. 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 M2type instruments. Early in the year,
opportunity costs had declined in
response to decreases in market interest
rates relative to deposit rates in late 1987
and early 1988, leading to strong growth
in M2 and a decline in its velocity—the
ratio of nominal GNP to M2-during the
first quarter. But as market interest rates

Growth of Money and Debt l
Percentage change 2

Period

Fourth quarter to
fourth quarter
1979
1980
. . . .
1981
1982
1983
1984
1985
1986
1987
1988
Quarter to quarter
(annual rate)
1988: 1
2
3
4

Ml

M2

M3

Debt of
domestic
nonfinancial
sectors

7.7
7.4
5.2
(2.5) 3
8.7
10.2
5.3
12.0
(13.0) 4
15.6
6.4
4.3

8.2
9.0
9.3

10.4
9.6
12.3

12.3
9.6
10.0

9.1
12.1
7.7
8.9

9.9
9.8
10.5
7.7

9.0
11.3
14.2
13.2

9.3
4.2
5.3

9.1
5.7
6.2

13.3
9.8
8.7

3.2
6.4
5.2
2.4

6.2
6.9
3.8
3.8

6.8
7.2
5.5
4.9

8.2
8.7
8.6
8.4

1. Ml, M2, and M3 incorporate effects of benchmark
and seasonal adjustment revisions made in February 1989.
2. From average of the preceding period to average of
the period indicated.
3. Adjusted for shifts to NOW accounts in 1981.
4. The annualized growth rate from the second quarter
to the fourth quarter of 1985.

Monetary Policy Reports
moved upward after March and deposit
rates lagged behind, the velocity
reversed, and it rose 1.7 percent for all
of 1988. The response of offering rates
was especially sluggish in the last part of
1988. One reason may have been
regulatory pressure on thrift institutions
and the closing of many insolvent
institutions, which often had been overly
aggressive in pricing deposits. The
extent to which thrift institutions were
offering higher rates than banks on small
time deposits was greatly reduced, and
partly as a consequence, growth of retail
deposits was much stronger at banks
than at those institutions.
The growth of the components of M2
also responded to changes in deposit
rates and market interest rates. Yields
on liquid deposits —interest-bearing
checking deposits, savings deposits, and
money market deposit accounts —
changed very little over the year. During
the first half of 1988, liquid retail deposits 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.
Their growth slowed markedly over
the last half of 1988, following the
reversal in the pattern of interest rate
movements. Growth in small-denomination time deposits was particularly
robust throughout 1988. Expansion in
the early months of the year may have
resulted, in part, from shifts in household investment preferences away from
stocks 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 liquid deposits to smalldenomination time deposit accounts.
M3 grew 6.2 percent last year, placing
it slightly above the midpoint of its target
range of 4 to 8 percent. This increase
from a 5.8 percent growth in 1987



39

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 and thrift institutions 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, M3 growth last
year was bolstered compared with 1987
by a greater reliance by banks on
managed liabilities included in M3 than
on nonmoney stock instruments, such
as bank borrowings from overseas
branches. In contrast, as in recent years,
the heavy use of Federal Home Loan
Bank advances by thrift institutions—
which are not included in M3—has had a
moderating effect on M3 growth.
At 4.3 percent, Ml growth last year
was down more than 2 percentage points
from 1987. Growth of interest-bearing
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, the other highly interestsensitive component of Ml, again declined in 1988, partly reflecting increases
in their opportunity costs and declines in

40

76th Annual Report, 1989

compensating balances. The amount of
such balances that businesses must hold
in these non-interest-bearing accounts to
compensate banks for services falls when
interest rates rise.
The debt of domestic nonfinancial
sectors expanded nearly 8% percent
during 1988, down from 9 percent in
1987, placing it near the midpoint of the
Committee's monitoring range of 7 to 11
percent. Although debt expansion was
well below the pace of the mid-1980s, it
still exceeded nominal GNP growth. Federal debt grew marginally faster last year
than in 1987. Expansion in nonfederal
debtmoderated, 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 the 1987 pace, with
short-term debt growing faster than longterm debt. Corporate borrowing was
particularly strong, reflecting increased
externalfinancingneeds for capital investments and for mergers, buyouts, and
stock repurchases.
Other Financial Developments
Although the economy continued to grow
at a strong pace last year and the financial
markets recovered from their skittishness
following the stock market break of 1987,
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. Although industry losses
eased in the third quarter from their
record levels in thefirsthalf of 1988, this
development appears largely to have



reflected FSLIC-assistance transactions
during the third quarter, rather than a
significant underlying improvement in
earnings.
Despite the turmoil in the thrift industry, there has been no noticeable disruption of 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 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 securitized form has increased
from about 10 percent to more than onethird. The spread between interest rates
onfixed-ratemortgages, which have an
average life of roughly ten years, and
yields on ten-year Treasury notes did not
change appreciably over 1988, which
also implies that the mortgage markets
continued functioning well despite the
problems of many savings and loan
associations.
In contrast to the thrift industry,
preliminary data indicate that U.S.
commercial bank profits were reasonably strong in 1988, even after
abstracting from the one-time jump in
earnings in the fourth quarter associated
with the resumption of Brazilian debt
payments. Moreover, most large
money-center banks with a significant
amount of loans to developing countries
have continued to build capital, which
provides a cushion against default
losses. Giving added impetus to efforts
to raise equity was 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

Monetary Policy Reports
account the off-balance-sheet activities
of banks, and provide a more uniform
regulatory treatment of banks based in
different countries.
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 closely
monitoring developments in this area and
has just revised its bank examination
guidelines to ensure that member bank
loans used to finance buyouts and other
highly leveraged 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, reflecting increased
market valuation of equities since the
early 1980s. Much of the recent financial
restructuring 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.



41

Report on July 20,1989
Monetary Policy and the Economic
Outlook for 1989 and 1990
As 1989 began, a reduction in inflationary pressures appeared essential if the
ongoing economic expansion was to be
sustained. Monetary policy during 1988
had been directed toward reducing the
risks of an escalation of inflation and
inflation expectations, but at the time of
the Board's report to the Congress in
February of this year, success in that
effort seemed far from assured.
Indeed, among the data reported in the
early part of 1989 were very lafge
increases in the producer and consumer
price indexes, reflecting not only the
effects of run-ups in oil and agricultural
commodity prices, but also broader
inflationary developments, including unfavorable trends in unit labor costs over
the preceding year. Under the circumstances, with pressures on productive
resources still intense, monetary policy
was tightened further. Reserve availability was curtailed through open market
operations, and the discount rate was
raised Vi percentage point in late February. In response to these policy actions
and to expectations that additional tightening moves might be needed, market
interest rates climbed throughout the first
quarter, and money growth was subdued.
Over the course of the second quarter,
several indicators suggested the emergence of conditions that were more
conducive to a future easing of inflationary pressures. Growth of the monetary
aggregates weakened further, with M2
running noticeably below its target range
for the year. Aggregate demand for goods
and services moderated, reducing somewhat the strains on productive resources,
especially in the industrial sector of the
economy. The dollar exhibited considerable strength in the foreign exchange

42

76th Annual Report, 1989

markets, portending a direct reduction in
price pressures and slower growth in
demands on domestic production capacity. Although the unemployment rate
remained essentially unchanged in the
neighborhood of 5 lA percent—the lowest
level since the early 1970s—trends in
wages and total compensation showed
little, if any, further step-up, reflecting at
least in part an awareness among workers
and management of the need to contain
costs in a highly competitive world economy. Meanwhile, prices of actively
traded industrial commodities leveled
out, enhancing the prospects forabroader
slackening in the pace of inflation.
In this environment, interest rates
turned down during the spring, as financial market participants responded not
only to the better outlook for inflation
but also in anticipation of an easing
of monetary restraint by the Federal
Reserve. The System began to provide reserves slightly more generously
through open market operations at the
beginning of June and took an additional
small easing step in early July. This
helped bring about a further decline in
market rates of interest, which by midJuly generally had more than retraced the
increases that had occurred earlier in the
year. Most short-term interest rates were
down about Vi percentage point from
their December levels, while long-term
rates had fallen as much as 1 percentage
point on balance.
Ranges of Growth for Monetary
and Credit Aggregates
Percentage changex
Aggregate
M2
M3
Debt

1988
4to8
4to8
7 to 11

1989

Provisional
ranges
for 1990

3to7
3to7
31/2t0 71/2
31/2to71/2
6V2 to 10% 6V2 to 10V4

1. From average of the fourth quarter of the preceding
year to average of the fourth quarter of the year indicated.




Monetary Objectives
for 1989 and 1990
In February, the Federal Open Market
Committee specified a range for M2
growth in 1989 that was a full percentage
point below that of 1988 and ranges for
M3 and debt that were V2 percentage
point below those of the previous year.
This was the third consecutive year in
which the ranges had been lowered. At
the same time, the Committee recognized
that, in light of the continuing uncertainty
regarding the shorter-term relation between monetary growth and changes in
income and spending, a variety of indicators of inflation pressures and economic
activity as well as the behavior of the
aggregates would have to be considered
in determining policy.
In February, the Committee had anticipated relatively slow money growth over
the first half of the year because of the
effects of the firming of policy through
late 1988 and into 1989. In addition to the
influence of the higher interest rates on
desired holdings of money, however,
several special factors —including the
difficulties of the thrift industry and a
drawdown of liquid assets to meet unusually large individual tax payments —
appear to have further reduced money
balances in the first half. These factors
contributed to a substantial rise in velocity, the ratio of nominal GNP to the stock
of money.
By June, money growth had picked
up. Nonetheless, M2 ended the quarter
just 2 percent at an annual rate above the
fourth quarter of last year, compared
with its annual growth range of 3 to 7
percent. In June, M3 was at the lower end
of its annual range of 3 V2 to 7 V2 percent.
The rate of expansion of domestic nonfinancial sector debt also slowed in the first
half of this year compared with 1988,
though by less than the monetary aggregates; debt has grown about 8 percent so

Monetary Policy Reports
far this year, near the middle of its
monitoring range of 6V2 to IOV2 percent.
At its meeting earlier this month, the
Committee agreed to retain the current
ranges for growth of money and debt in
1989. The Committee anticipates that by
the fourth quarter all three aggregates
will be well within those ranges. The
more rapid growth in M2 and M3 already
evident since mid-May is expected to
extend through the second half. The
recent declines in short-term market
interest rates have made M2 holdings
more attractive, tending to offset the
restraining effects on M2 of previous
increases of interest rates. With M2
expansion likely also to be boosted by a
further replenishing of liquid balances
depleted by tax payments, this aggregate
is expected to grow a little faster than
nominal GNP in the second half, bringing
it into the lower portion of its annual
growth range. The faster growth of M2
should show through at least in part to a
quickening in M3 growth over the second
half of the year, so that this aggregate
would move into the middle part of its
range. Domestic nonfinancial debt is
likely to remain in the middle portion of
its range through year-end.
For 1990, the Committee provisionally decided to use, for all three aggregates, the same growth ranges in force
for 1989. The Committee recognized
that the economic and financial outlook
over the next year and a half is uncertain;
in particular, it is unclear at this juncture
whether the velocities of M2 and M3 are
more likely to trend higher or lower next
year. Although the Committee's initial
assessment is that growth of money and
credit through 1990 within the bounds of
the reduced ranges of this year likely
would foster the slower inflation and
sustained real economic expansion that it
is seeking, it will reevaluate the ranges
next February in light of the unfolding
economic and financial situation. The



43

outlook for spending, prices, and financial markets in 1990 should have clarified
somewhat by then, as should the influence on monetary expansion of the ongoing resolution of thrift industry problems.
For the long term, the Committee recognized that ultimate attainment of price
stability will require that the ranges for
money and credit growth be reduced
further in future years.
Economic Projections for 1989 and 1990
Voting members of the Committee and
other Reserve Bank presidents believe
that the monetary ranges specified are
consistent with some progress in reducing inflation, which likely will be associated in the near term with continuation of
a slower pace of economic growth. The
central tendency of the forecasts is for
increases in real GNP of 2 to 1 V2 percent
in 1989 and of 1 Vi to 2 percent in 1990.
The expected easing of pressures on
resources should contribute to a damping
of inflation in 1990, although the Board
members and Bank presidents also are
anticipating some near-term relief from
the special problems that boosted prices
in the first half of this year. Larger crops
later this year should result in more
favorable behavior of food prices, and
the recent peaking of crude oil prices
suggests the likelihood of some softening
in consumer energy prices. Thus, retail
inflation should be considerably slower
over the remainder of this year, and the
central tendency of consumer price index
forecasts for 1989 as a whole is 5 to 5V£
percent—compared with the rate of more
than 6 percent observed through May.
The forecasts for the CPI in 1990 center
on 4Vi to 5 percent.
The Administration's economic forecast, presented in connection with its
mid-session update of the budget outlook,
does not differ greatly from the projections of the FOMC members. Nominal
GNP is near the upper ends of the central-

44

76th Annual Report, 1989

tendency ranges of the FOMC for 1989
and 1990, but with a more favorable mix
of real output versus inflation, especially
in 1990. There appears to be no basic
inconsistency between the policy objectives of the Federal Reserve and the
economic forecast of the Administration;
indeed, the Administration has indicated
that it shares the view that the maintenance of anti-inflationary monetary policy is a precondition for healthy economic expansion.
In an environment of relatively slow
overall growth, such as is expected by the
FOMC members, some industries and
regions are likely to experience setbacks;
but major imbalances that could threaten
the continuation of the economic expansion are not anticipated. In the household
sector, growth of consumer purchases
has been sluggish and may remain so for
a while. Residential construction activity
should pick up some in coming months,
in response to the recent decline of mort-

gage rates, although an overhang of
supply in some locales could damp the
recovery. Surveys of business plans
suggest that capital spending will post
further gains over the remainder of 1989,
but some moderation from first-half
growth rates is to be expected in light of
declining levels of capacity use and the
recent weakening in corporate profits.
Spending on equipment is likely to continue to be buoyed by the desire to
modernize industrial facilities so as to
enhance efficiency and meet intense
competition here and abroad.
The external sector represents an area
of considerable uncertainty in the economic outlook for the next year and a
half. Real net exports of goods and services increased earlier this year, but
improvements may be more difficult to
achieve in the period ahead as the effects
of past depreciation of the dollar wear off
and are offset by those associated with the
more recent appreciation. In addition,

Economic Projections for 1989 and 1990
Percent
FOMC voting members and
other FRB presidents

Measure

Range

Administration

Central tendency
1989

Change, fourth quarter to fourth quarter
Nominal GNP
Real GNP
Consumer price index1

5to7%
l%to2H
1
4 /2to5%

6to7
2to2V4
5 to 5%

7.1
2.7
4.9

5 to 6

Around 5 V
4

5.3

Average level in the fourth quarter
Unemployment rate 2

1990
Change, fourth quarter to fourth quarter
Nominal GNP
Real GNP
Consumer price index1

4Kto7tt
lto2 1 / 2
3to5%

Average level in the fourth quarter
Unemployment rate 2
1. For the Federal Reserve, all urban consumers
(CPI-U); for the Administration, urban wage earners and
clerical workers (CPI-W).




5 to6!£

5% to 6%
lV2to2
4% to5

6.8
2.6
4.1

5% to6

5.4

2. For the Federal Resrve, percent of civilian labor
force; for the Administration, percent of total labor force,
including armed forces residing in the United States.

Monetary Policy Reports
the path of exports will depend importantly on economic growth abroad, which
may slow as a result of policy actions
taken by some of our major trading
partners to offset mounting inflationary
pressures. Ultimately, achievement of
the adjustment needed in the external
sector will depend not only on governmental policies that foster macroeconomic stability, but also on the determination of U.S. firms to meet foreign
competition through application of stringent cost controls and intensified marketing efforts abroad.
A key ingredient in maintaining a
healthy pace of economic expansion is
further progress in reducing the federal
budget deficit. Since 1983, the deficit has
fallen relative to GNP from more than 6
percent to around 3 percent, but it remains
large by historical standards. Taking the
actions required to meet the Gramm-Rudman-Hollings targets on schedule will
foster confidence in the U.S. economy,
particularly among financial market participants. At the same time, reduced
demands by the federal government for
credit will free up the available supply to
interest-sensitive private sectors, such as
housing and business investment. The
Committee thus views as highly encouraging the commitments expressed by the
Congress and the Administration to begin
soon to address the problems of meeting
the fiscal 1991 budget target.

45

Inflation rose in the first half of 1989,
but most of the increase appears to have
resulted from transitory events. In particular, energy prices increased sharply, as
the rise in crude oil prices between
November 1988 and May 1989 was
passed through, and food prices surged
as the agriculture sector continued to
experience adverse supply developments. Outside food and energy, the
rate of inflation has, on average, remained at about its 1988 pace, even in the
face of relatively high levels of resource
utilization.
This apparent stability of underlying
price trends is attributable in part to the
appreciation of the dollar on exchange
markets. So far in 1989, prices of imported goods other than oil have been
virtually flat on average, restraining
increases in the prices of domestically
produced items. In addition, despite the
tightest labor markets in some time, wage
trends have been fairly stable, helping to
limit the acceleration in unit labor costs
during a period in which productivity has
weakened.

The External Sector
Developments in foreign exchange
markets have played an important role in
shaping events in the domestic economy
in recent years. After depreciating over
most of the period from 1985 to late
1987, the foreign exchange value of the
dollar in terms of other G-10 currencies
changed little, on net, in 1988, as a
The Performance of the Economy
decline in the final few months reversed
during the First Half of 1989
much of the increase that had occurred
After two years of rapid expansion, eco- earlier in the year. In December the
nomic activity decelerated substantially dollar began to rebound, and it rose
in the first half of 1989. Even at this more substantially through mid-June before
moderate pace of growth, however, job dropping back somewhat. The apcreation was considerable—nearly Wi preciation of the dollar through the first
million between December and June— half of 1989 was frequently met
and the civilian unemployment rate, by concerted intervention sales of
fluctuating around 5 lA percent, remained dollars by U.S. and foreign monetary
itl the lowest range since the early 1970s. authorities.




46

76th Annual Report, 1989

During December, and in the first
quarter of this year, the dollar rose in
response to perceptions of a relative
tightening of U.S. monetary policy.
Reports of somewhat higher rates of
inflation and news about the strength of
the economy contributed to expectations
that Federal Reserve policy would be
tightened still further. There was a brief
pause in the dollar's rise after the Group
of Seven finance ministers and central
bank governors stated in April that a
further rise in the dollar that undermined
the adjustment process would be counterproductive.
In May and early June, the dollar
appreciated significantly on balance,
even though interest rates on nondollar
assets rose relative to those on dollardenominated instruments. Sentiment in
favor of the dollar was, perhaps, partly a
response to concerns about political
events abroad, but the data on the U.S.
trade balance, which were better than
expected, also may have played a role.
For a while, the dollar's rise appeared to
be associated with expectations of capital
gains on U.S. stocks and bonds. Since
mid-June, the dollar has retraced much
of its second-quarter rise, under the
influence of increasing interest rates
abroad, declines in dollar rates, and some
easing of demands for dollar assets after
the initial response to political uncertainties in certain other countries.
Measured in terms of a trade-weighted
average of the other G-10 currencies, the
dollar is about 8 percent higher than it
was in December 1988 and about 12
percent higher than it was in December
1987. After adjustment for changes in
relative price levels, the appreciation of
the dollar has been larger because U.S.
inflation has remained above the average
for the other G-10 countries. Meanwhile,
the currencies of South Korea and Taiwan
have risen moderately against the dollar
so far in 1989.



In most of the other industrial countries, economic growth has been strong.
The resulting very high rates of capacity
utilization and the diminishing slack in
labor markets, together with higher
world oil prices and special factors, have
spurred an appreciable pickup in inflation
abroad in recent quarters. Policymakers
in many foreign industrial countries have
responded by raising official interest
rates. Growth of the newly industrializing economies in Asia has slowed recently, though the rates remain relatively
high. In contrast, developing countries
that are burdened with large external
debts have continued to struggle to
achieve sustained economic growth.
The U.S. merchandise trade deficit in
the first quarter was $110 billion at a
seasonally adjusted annual rate, significantly better than the figure for the fourth
quarter and that for 1988 as a whole. In
thefirsttwo months of the second quarter,
the trade deficit was essentially unchanged from the first-quarter pace.
Exports have continued to expand this
year, although not so rapidly as in 1988.
Export gains have been broadly based,
with notable increases for agricultural
goods, industrial supplies, capital goods,
and consumer goods. Meanwhile, imports have increased moderately; in fact,
in April and May imports of products
other than petroleum averaged less than
1 percent above their fourth-quarter rate.
Notable decreases were recorded in
imports of consumer goods and automotive products. So far in 1989, the value of
oil imports has risen sharply, as higher
prices for petroleum and petroleum products were accompanied by a small increase in physical volume. The further
improvement in the U. S. trade balance in
the first five months of this year reflects
several factors, most importantly the
strength of economic activity abroad, the
slower growth of U.S. activity, the
continuing, if diminished, benefit for

Monetary Policy Reports
U.S. price competitiveness from the
depreciation of the dollar through the end
of 1987, and the restraint that the recent
rise in the dollar placed on prices of
non-oil imports.
The current account deficit widened in
the first quarter to $123 billion. The
increase from the fourth-quarter rate was
more than accounted for by capital losses
on assets denominated in foreign currencies resulting from the dollar's appreciation. Setting aside those losses, the
current account balance in the first quarter showed a deficit of $108 billion, an
improvement of about $22 billion from
the previous quarter. Nearly all of this
improvement resulted from the narrowing of the trade deficit. Preliminary
information on capital transactions in the
early months of 1989 suggests an increase
in net private foreign purchases of U.S.
Treasury securities and corporate bonds
and substantial foreign direct investment
in the United States.
The improvement in real net exports
accounted for nearly half of the overall
rise in the GNP during the first quarter,
more than reversing its negative contribution in the fourth quarter. The contribution to GNP growth in the second
quarter probably was negligible, however, as real net exports may have begun
to be depressed by the loss in U.S. price
competitiveness associated with the cumulative rise in the dollar since the end of
1987.
The Household Sector
Much of the slowing in overall economic
growth in the first half of 1989 reflected a
deceleration in consumer spending. The
slump in demand was fairly broad, encompassing a variety of durable and nondurable goods. Despite the widespread
availability of special financing deals and
other incentives, sales of motor vehicles
in the first half were about 6 percent
below the pace of 1988 as a whole. A



47

weakening in purchases of furniture and
appliances likely was related in part to
the drop in home sales.
Consumption slowed against a backdrop of strong income growth in the
early part of the year, although weaker
income growth was evident in the
spring. Personal income gains in the
first quarter were accentuated by the
assumption of the national income
accountants that the income of farm
proprietors would return to normal
levels over the year, after the droughtinduced reductions in 1988. With hiring down in the spring, increases in
wages and salaries softened noticeably,
showing virtually no growth in real
terms. Also, growth of the nonwage
components of personal income was
weaker on balance in the second quarter.
The personal saving rate has been on a
distinct upswing since reaching a fortyyear low in mid-1987. Several explanations have been propounded for the recent
rise, among them the lower level of
household net worth relative to income
since the stock market break of 1987,
higher costs of consumer credit (especially in after-tax terms, because of the
phase-down of interest deductibility), and
concerns about a potential softening of
the economy. Whatever the cause, households appear to have adopted a more
cautious spending stance, though it also
should be noted that the personal saving
rate has remained below the norms of the
1960s and 1970s.
Residential construction declined over
the first half in response to the rise in
interest rates and to earlier overbuilding
in some markets. The more recent drop
in rates, which began in May, likely will
be reflected in some improvement in
construction over the summer and fall.
Total housing starts, at an average annual rate of 1.44 million units through
May, were down 3 lA percent from their
1988 pace.

48

76th Annual Report, 1989

Starts in the single-family sector averaged about 1 million units at an annual
rate between March and May, a period
relatively free from the weather-related
distortions that affected construction in
January and February. Interest rates on
fixed-rate mortgages rose above 11 percent for the first time since 1985, with
part of the rise attributable to investor
concerns about sizable future liquidations
of mortgage assets by troubled thrift
institutions. Also, rates on adjustablerate mortgages rose nearly a full percentage point during the early months of
1989, as discounting of initial interest
rates on ARMs was reduced. In recent
years, relatively low initial terms on
ARMs led an increasing number of
households to favor this instrument for
home purchases. Since their highs in the
spring, interest rates on ARMs have
fallen more than Vi of a percentage point,
while fixed-rate mortgage rates have
dropped about \lA percentage points.
Meanwhile, multifamily starts fell
further in the first half of the year from
the already low level recorded in 1988.
Multifamily housing production has
been limited by an overhang of vacant
rental units. Moreover, building in this
sector continues to reflect the effects of
the Tax Reform Act of 1986, which,
by curtailing many of the financial
advantages associated with investment
in rental housing, sharply reduced its
after-tax profitability.
The Business Sector
In contrast to the household sector,
business capital spending strengthened in
early 1989, responding in part to high
levels of capacity utilization in the United
States and to international pressures to
lower costs. In the first quarter of 1989,
real business fixed investment rose at an
annual rate of IVi percent, and such
spending appears to have increased substantially further in the second quarter.



The gain in investment has occurred in
the equipment category. Particularly
noteworthy in the first quarter was a
sharp rise in outlays for industrial machinery. Increases in that area, which includes
spending for fabricated metal products,
engines, turbines, and a variety of other
types of industrial apparatus, have been
exceptionally strong since mid-1987.
Spending for high-technology equipment
also has been robust. Computer outlays
decelerated during the second half of
1988, possibly reflecting some hesitation
on the part of potential purchasers in
response to the rapid pace of new product
announcements; but spending was up
considerably in the first quarter, and
another gain appears in train for the
second quarter.
High levels of factory utilization apparently have spurred a rise in industrial
building in recent quarters. Outlays for
construction of office and other commercial buildings also rose earlier this year,
although the level of total spending on
commercial structures remained below
that of the 1985-86 period, depressed by
excess space in many areas. And, while
the rise in energy prices led to some
increase in oil and gas drilling in the
spring, the level of activity remained
very low compared with that of the early
1980s.
Inventory investment slowed over the
first five months of 1989, as businesses
adjusted with apparent promptness to the
more moderate expansion of final demand . Inventory buildups by manufacturers have been concentrated in the aircraft
and other capital goods industries, where
production has risen and order backlogs
are large. In contrast, in the retail sector,
automobile inventories rose sharply in
thefirstquarter and have remained high.
In an effort to reduce the overhang before
introducing new models in the fall,
carmakers have lowered factory assembly rates and have enhanced sales incen-

Monetary Policy Reports
tives. Qualitative reports have suggested
that stocks at some other retailers also
may have risen above desired levels,
although most firms appear to have been
following cautious inventory policies,
and problems of excess stocks seem to be
limited.
In the first quarter of 1989, before-tax
economic profits of nonfinancial corporations declined, in part because unit
labor costs increased as sales growth
slowed and productivity deteriorated.
The drop in profits was spread over most
types of businesses; the largest decline
was in the manufacturing sector, which
had especially strong gains in both 1987
and 1988. Meanwhile, corporate tax
liabilities edged up in the first quarter,
owing in part to higher profits generated
from the rise in prices of inventories. The
combination of lower operating profits
and higher tax liabilities reduced the
internal cash flow of nonfinancial
corporations.
The Government Sector
In the first quarter, real federal purchases of goods and services, the
part of federal outlays that is counted
directly in GNP, were virtually unchanged. Such purchases are dominated by defense; nominal spending
authority in this area has been virtually
flat since 1985, and procurement of
some major new weapon systems is
winding down. As a result, real military
purchases have fallen and in the first
quarter were nearly 5 percent below
the mid-1987 peak. The decline in
defense spending has been partially
offset by increases in other federal
purchases. Inventories held by the
Commodity Credit Corporation edged
down further in the first quarter, but
the rate of decline has been slowing (on
a seasonally adjusted basis) since the
middle of last year as the effects of
last summer's drought have dissipated.



49

Spending for the space program and for
tax and immigration enforcement also
has risen.
On a unified budget basis, total nominal outlays for the fiscal year through
May were more than 6 percent above the
comparable year-earlier total. Spending
related to the thrift institution problem
spiked at year-end 1988 and then dropped
sharply in the first half of this year. On
the other hand, growth has continued in
entitlement spending (principally Medicare and Social Security) and in net
interest outlays.
Federal receipts have grown even
more rapidly than outlays, buoyed by
increases in employment and income. In
addition, there was an extraordinary
spurt in nonwithheld tax collections in
April and May, the sources of which are
at this point uncertain. Some possible
explanations relate to the Tax Reform
Act of 1986 and include greater-thananticipated effects from its basebroadening provisions and a shifting of
income from earlier years into 1988,
when the reduction in personal tax rates
was fully phased in. In addition, realizations of taxable capital gains may have
been hefty last year because of the large
number of corporate mergers and leveraged buyouts. All told, receipts thus far
in 1989 are 10 percent above year-earlier
levels, and the Administration now
projects that the total budget deficit for
FY1989 will be $148 billion, compared
withthe$155billionrecordedinFY1988.
Real purchases of goods and services
by state and local governments have been
on a moderate uptrend this year. Outlays
for personnel and construction in the
education and law enforcement areas
have been subject to considerable upward
pressure. Some other expenditures have
risen because of federal mandates, especially those in recent health legislation.
As in the federal sector, growth of state
and local outlays has been tempered by

50

76th Annual Report, 1989

budgetary pressures; excluding retirement trust funds, which are running a
large surplus, the sector had a deficit of
about $17 billion at an annual rate in the
first quarter. Revenue experience was
favorable this spring, however, as a
significant number of states reported
personal income tax receipts that were
larger than expected.
Labor Markets
Job growth was substantial over the first
half of 1989, though it slowed in the
spring. In the first quarter, additions to
nonfarm payrolls averaged 264,000 a
month, about the same pace seen over the
previous two years. By spring, hiring
had begun to slow, and payroll employment growth dropped back to 200,000
per month in the second quarter as a
whole. Even at this reduced rate, however, job gains were larger than are likely
to be sustained, given the underlying
trend in labor force growth. Manufacturing employment declined in the second
quarter, while the number of construction
jobs was about unchanged. Growth of
employment moderated in the serviceproducing sectors, where advances have
been the largest over the course of this
business expansion.
The moderation in the growth of the
demand for labor in the second quarter
did not lead to any appreciable reduction
in labor market tightness. The unemployment rate has fluctuated between 5.0 and
5.4 percent thus far this year; in June it
stood at 5.3 percent. Although many
Americans remain involuntarily unemployed, the difficulty of matching workers with jobs—given considerations of
skill and location—is much greater than
it was earlier in the expansion.
By at least one aggregate measure, the
rate of increase in wages seems to have
leveled off in recent quarters. Average
hourly earnings of production and nonsupervisory workers accelerated from late



1986 through mid-1988; since then the
rate of increase has flattened out, and in
June earnings were up 3 % percent from a
year earlier. The employment cost index
for wages and salaries in the private
nonfarm sector, a broader measure of
wages that is available only through
March, indicated some easing of wage
trends in the goods-producing sector;
however, in the service-producing industries, the trend remained sharply upward.
The cost of benefits provided to employees in the goods and services sectors rose
slightly faster than wages over the year
ended in March, and total compensation
per hour—wages and salaries plus benefits - was up 4 Vi percent over that period,
in the same range as the 12-month
increases recorded in the preceding three
quarters.
Productivity performance has deteriorated somewhat in recent quarters. In
some instances, higher levels of production have forced firms to use less efficient
capital and to employ less skilled labor.
Output per hour in the nonfarm business
sector was down in the first quarter, and
virtually unchanged on a four-quarter
basis. With the sizable increases in
compensation over the same period, unit
labor costs accelerated to a 514 percent
annual rate, the largest year-over-year
increase since late 1982. In manufacturing, the rise in unit labor costs in the year
ended in the first quarter was about 1
percent; unit costs had declined earlier in
the business expansion. This step-up in
unit labor costs reflects a slackening in
the improvement of factory productivity;
compensation increases have remained
moderate.
Price Developments
Inflation increased sharply in early 1989,
reflecting higher costs for food and
energy. The consumer price index for all
items, a broad-based measure for finished goods and services, rose at an

Monetary Policy Reports
annual rate of more than 6 percent
through May, compared with the pace of
AVi percent in 1987 and 1988. The
producer price index for finished goods
recorded an even more pronounced acceleration, owing to the greater importance
of food and energy in that index. However, the underlying inflation trend has
not deteriorated: Excluding food and
energy, inflation at the retail level has
been running at a rate of around 434
percent, about the same as in 1988.
Energy prices began rising sharply
last November, after the OPEC nations
agreed to limit crude oil production.
Subsequently, temporary supply disruptions in Alaska and in the North Sea
added to price pressures. The posted
price of West Texas Intermediate, the
U.S. benchmark for crude oil, jumped
from about $13 per barrel in November
to over $19 in early May. As a result,
energy prices at the producer level
soared, and consumer energy prices rose
nearly 25 percent at an annual rate
between December and May. More
recently, posted prices of crude oil have
remained between $19 and $20 per
barrel.
Increases in retail food prices were
large in the first half of 1989, in part
reflecting the lingering effects of last
summer's drought and additional damage
to some crops this year. From the beginning of the year through May, the rise in
the CPI for food was close to 8 percent at
an annual rate. Although drought curtailed the winter wheat crop for 1989,
total crop acreage has expanded, and
overall production should rebound this
year if weather conditions are satisfactory. In addition, meat supplies seem
likely to hold fairly steady over the
second half of this year. Thus, pressures
from the supply side should not be a big
factor in the food price outlook.
Excluding food and energy, prices for
commodities at the consumer level have



51

risen at a rate slightly lower than that
recorded for 1988. A marked diminution
of increases in non-oil import prices
associated with the appreciation of the
dollar apparently has restrained the prices
of many goods, notably apparel and a
variety of household items. In contrast,
inflation in the service sector has increased, especially in labor-intensive services, such as medical care, entertainment, and public transportation.
At early stages of processing, prices of
goods have risen little or declined in
recent months. Prices for many crude
industrial commodities, which had
climbed sharply in 1987 and 1988 with
the expansion of factory output, have
softened this year. This in turn has helped
hold down the increase in prices at the
intermediate level of production; the
producer price index for intermediate
materials, excluding foods and energy,
was unchanged on net in the second
quarter.
Monetary Policy and Financial
Developments during the First
Half of 1989
In conducting monetary policy over the
first half of the year, the Federal Open
Market Committee continued its effort to
foster long-run price stability, so as to
build a base for sustainable expansion of
the economy. In again reducing the
ranges for money and debt growth at its
February meeting, the Committee recognized that restraint on the expansion of
money and credit would be needed to
promote this goal.
At the same time, the Committee
realized that considerable uncertainty
remained about the behavior of the
monetary aggregates. Relatively wide
monetary ranges—4 percentage points in
breadth—were retained, in part to take
account of the substantial interest rate
sensitivity of money demand over hori-

52

76th Annual Report, 1989

zons of as long as a year and of the
unpredictable effects on money demand
of the resolution of the crisis in the thrift
industry. Moreover, in these circumstances, the Committee recognized that,
in addition to the behavior of the monetary aggregates, a variety of indicators of
inflationary pressures and the course of
economic activity would have to be taken
into account in shaping policy over 1989.
The Implementation of Monetary Policy
As noted previously, developments early
in 1989 suggested that a worrisome risk
remained that inflation was picking up
and could become more deeply embedded in the economy. Wage and benefit
costs had accelerated in 1988, and the
readings for the consumer and producer
price indexes were troubling. Extending
the move toward restraint that began
almost a year earlier, the Federal Reserve
increased reserve market pressures at the
start of this year and again in midFebruary. On February 24 the discount
rate was raised Vi percentage point to 7
percent.
These policy actions were accompanied by marked increases, of about a
percentage point, in most short-term
interest rates. Yields on long-term securities also moved up, but by considerably
less than short-term rates. The foreign
exchange value of the dollar strengthened
as interest rates in the United States rose
relative to those abroad. Money growth
slowed: Ml was roughly flat in the first
quarter, and M2 and M3 decelerated
from already reduced rates in the second
half of 1988.
By spring, the outlook for spending
and prices had become more mixed.
Employment growth still looked strong;
indicators of capital spending suggested
a rebound from the fourth quarter of
1988; and prices continued to advance
rapidly. But consumer demand appeared
to have moderated; industrial production



was weakening; and the behavior of
commodity prices and some other indicators of potential price trends suggested
that inflationary momentum might begin
to wane. In view of the uncertainties
surrounding the outlook and taking into
account the subdued pace of money
growth, the Committee left reserve market conditions unchanged through the
middle of the second quarter.
Many interest rates began to move off
their March highs early in the second
quarter as indications mounted of moderation in the pace of economic activity and
in underlying price pressures. With the
passing weeks, a considerable weakening
in housing activity became evident, and
incoming data showed employment to be
expanding at a noticeably slower rate.
Market expectations of some additional
tightening of monetary policy shifted to
anticipations of an easing. The ensuing
decline in interest rates did not, however,
prompt a drop in the foreign exchange
value of the dollar. Instead, the dollar
appreciated further over this period, in
part because of political uncertainties
abroad and in part because of data on the
U.S. trade balance that were better than
expected. The dollar also may have
gained support for a while from expectations that the rallies in U.S. securities
markets would continue. The monetary
aggregates weakened further in April
and early May, reflecting the drawdown
of liquid balances to make personal tax
payments that were larger than expected.
In May, M2 fell to the lower edge of the
parallel band associated with its annual
target range, and M3 slipped just below
the bottom of its growth cone.
The FOMC eased policy slightly at the
beginning of June and again in early July.
The federal funds rate moved down about
Vi percentage point in two steps to around
9lA percent. Evidence that the more
moderate pace of economic activity was
persisting, indicators of the behavior of

Monetary Policy Reports
wages and sensitive prices, and the
weakness of the monetary aggregates all
were consistent with a prospective ebbing
of inflationary pressures. Moreover, the
dollar was appreciably above year-end
levels, which could be expected to have
favorable effects in restraining inflation.
While inflation remained a concern, an
intensification of price pressures did not
appear to be a present danger, and the
risks of cumulating weakness in the economy had increased.
Although the easing steps were largely
expected, most short-term interest rates
continued downward in anticipation of
further monetary policy actions, more
than offsetting their first-quarter rise.
The bond market rallied further, leaving
long-term rates by mid-July down Vi to 1
percentage point on balance from late1988 levels. Stock prices continued their
brisk upward movement, reaching postOctober 1987 highs. The value of the
dollar also moved down somewhat in late
June and dropped further in early July; it
retraced most of its rise during the second
quarter, although remaining well above
its level at year-end 1988.
The Behavior of the Monetary Aggregates
Growth of the monetary aggregates was
quite sluggish over the first half of 1989,
reflecting the effects of increases through
March in market interest rates relative to
returns on monetary assets, some depositor concern over the problems of the
thrift industry, and large tax payments by
individuals. From the fourth quarter of
1988 through June, M2 edged up at an
annual rate of only 2 percent, markedly
below last year's pace of 5 lA percent. M2
velocity rose sharply through the second
quarter.
The deceleration of M2 in the first
quarter stemmed largely from a combination of continued increases in market
interest rates and unusually slow upward
adjustment of rates paid on retail de


53

posits. Yields on NOW accounts moved
up only about 10 basis points over the
year ended in March, while those on
other liquid deposits — savings and Money
Market Deposit Accounts (MMDAs) —
rose about lA and 1 percentage point
respectively; many short-term market
rates increased more than 3 percentage
points over the same period. Rates on
small time accounts increased much more
than those on the more liquid retail deposits, but they too failed to keep up with
the rise in market yields.
Some of the sluggishness in the adjustment of returns on retail deposits over
this period may have reflected continued
regulatory pressures on thrift institutions
to moderate their pricing of deposits, as
well as the closing last year of some
insolvent institutions with aggressive
pricing policies. More broadly, the slow
upward adjustment of deposit rates,
especially on accounts without fixed

Growth of Money and Debt
Percentage change

Period

Fourth quarter to
fourth quarter
1979
1980 ...
1981
1982
1983
1984
1985
1986
1987
1988
Quarter to quarter
(annual rate)
1989: 1
2

Ml

M2

M3

Debt of
domestic
nonfinancial
sectors

7.7
7.4
5.2
(2.5) 2
8.7
10.2
5.3
12.0
15.6
6.4
4.3

8.2
9.0
9.3

10.4
9.6
12.3

12.3
9.6
10.0

9.1
12.1
7.7
8.9
9.3
4.2
5.2

9.9
9.8
10.5
7.7
9.1
5.7
6.2

9.0
11.3
14.2
13.2
13.4
9.8
8.9

1.9
1.3

3.7
3.1

-0.4
-5.5

8.2
7.4 e

1. From average of the preceding period to average of
the period indicated.
2. Adjusted for shifts to NOW accounts in 1981.
e Estimated

54

76th Annual Report, 1989

terms—NOW accounts, MMDAs, and
savings deposits-also reflected the continued evolution of pricing strategies by
depository institutions in the deregulated
environment. By concentrating upward
rate adjustments in small time deposits
and offering more sophisticated account
structures, in which larger balances
receive higher rates, institutions found
that they could retain the bulk of their
funds while minimizing the effects of
higher market rates on their overall
interest expense.
Nonetheless, as yields on market instruments became increasingly attractive
relative to those on deposits over the first
quarter, some funds were redirected to
instruments not included in the monetary
aggregates. Noncompetitive tenders for
Treasury bills and notes, a rough indicator of the extent to which individual
investors are increasing their holdings of
Treasury securities, surged early in the
year and remained strong through March.
The increase in demand for Treasury
securities was greater than would have
been expected from interest rate movements alone, suggesting that depositors'
nervousness about the problems of the
thrift industry were playing a role too.
Although the President submitted to the
Congress a comprehensive plan for resolving the industry's difficulties early in
the year, and gave assurances that the
U.S. government would back insured
deposits fully, FSLIC-insured thrift institutions experienced large outflows of
deposits throughout the first quarter.
These outflows apparently depressed
overall M2 growth somewhat during
that period, but the bulk of the funds
likely remained within the aggregate.
Commercial banks experienced relatively strong growth in core deposits, and
M2-type money market mutual funds,
whose rates adjust relatively quickly to
changes in market interest rates, saw
sizable inflows of funds.



The increased opportunity costs of the
first part of the year continued to damp
money growth into the second quarter,
but, in addition, liquid balances were
drawn down to meet large April tax
payments. Nonwithheld personal tax
payments were $16 billion greater this
April than last. The tax-related effect was
manifested in a sharp drop in the liquid
components of M2 in late April and into
May as the payments continued to clear.
Transaction accounts posted large declines, outflows of savings and MMDA
balances accelerated, and inflows to
money market mutual funds paused.
Balances began to bounce back in late
May, however, as depositors started to
rebuild their holdings of monetary assets;
and in June, M2 grew at an annual rate of
634 percent.
Also contributing to the rebound in
holdings of money balances after midMay were declines in opportunity costs
as market interest rates headed down.
Yields on small time deposits lagged this
move, and returns on these deposits at
times exceeded those on market instruments. Demand for Treasury securities
through noncompetitive tenders fell back,
and growth in small time deposits, already robust, jumped to an annual rate of
more than 20 percent for the quarter.
Yields on small time deposits at thrift
institutions responded somewhat more
slowly than those at banks to the downturn
in market interest rates, and growth of
these deposits at thrift institutions surged.
Largely because of this strength in small
time accounts, and because the most
anxious depositors probably had already
moved their funds elsewhere, overall
deposit balances at FSLIC-insured thrift
institutions stabilized in the second
quarter.
M3 grew at an annual rate of 3Vi
percent from the fourth quarter of last
year to June, placing it at the lower bound
of its target range. In the first quarter,

Monetary Policy Reports
expansion of M3 was subject to offsetting
forces. It was bolstered somewhat by
bank funding needs generated by strong
demand for business loans. Added demand for commercial and industrial loans
stemmed both from merger-related financings and from shifts to short-term borrowing by businesses facing rising longterm interest rates and investor concerns
about "event risk"—the possibility that a
firm's debt obligations would be significantly downgraded in a corporate buyout
or restructuring. Acting to damp M3
growth over the first quarter, however,
was heavy reliance by thrift institutions
on Federal Home Loan Bank advances
and other borrowings, which are not
included in the money stock. M3 growth
edged down a bit in the second quarter
with some easing of bank credit demands
and strong growth in government deposits—also not included in the money
stock—resulting from the large volume
of tax payments. By June, however, M3
had rebounded as tax effects unwound.
Reflecting interest rate and tax-related
effects, Ml declined at an annual rate of
3!/2 percent from the fourth quarter of
1988 to June. Balances in other checkable
deposits, which had moved down a little
over thefirstquarter in response to higher
opportunity costs, dropped substantially
in late April and early May as the tax
payments cleared. Demand deposits also
declined on balance over the first half of
the year, because opportunity costs increased and because the balances businesses are required to hold to compensate
their banks for services fell. After changes
in market rates of interest, banks often
adjust with a lag the "earnings credit"
rates used to determine the level of
required compensating balances; thus,
downward adjustments to compensating
balances can continue for some time after
market rates have stopped rising. The
large personal tax payments also affected
householddemand-depositbalances.Late



55

in the quarter, however, both demand
and other checkable deposits began to
increase, perhaps as some of the earlier
influences started to be reversed with the
drop in market interest rates over the
second quarter.
Credit Flows
The aggregate debt of domestic nonfinancial sectors expanded at an annual rate of
close to 8 percent over thefirsthalf of this
year, near the midpoint of its monitoring
range and down somewhat from its 1988
pace. The growth of federal sector debt
slowed as tax receipts surged. Expansion
of the debt of nonfederal sectors also
moderated, partly in response to higher
levels of market interest rates over much
of the first half of the year. Household
borrowing in mortgage markets slowed
as increases in lending rates damped
housing demand, while the pace of
consumer borrowing slackened along
with the deceleration in consumption
spending.
Mortgage lending by thrift institutions
did not appear to be unusually weak in the
first few months of 1989, given the
prevailing interest rates. These institutions coped with weak deposit flows by
running off cash and investments and,
through the first quarter, stepping up
borrowing from the Federal Home Loan
Banks. Despite signs of a reduction in
mortgage lending activity by these institutions in the second quarter, the overall
availability of housing credit did not
appear to be significantly impaired.
Spreads between rates on both fixedrate mortgages and mortgage-backed
securities and rates on Treasury instruments of comparable maturity did widen
over the first six months of the year, with
some market participants reportedly fearing that large-scale liquidations of
mortgage-backed securities by troubled
thrift institutions could adversely affect
the market for those instruments. How-

56

76th Annual Report, 1989

ever, the widening also may have reflected other developments: a general
increase in uncertainty about movements
in long-term interest rates (and therefore
about prospective prepayments), and the
flattening of the yield curve, which
discouraged issuance of derivative mortgage instruments and thus reduced demand for the underlying mortgagebacked securities.
Total borrowing by nonfinancial businesses in the first half of the year was
close to its 1988 pace. Credit demands
continued to be buoyed by sizable mergerrelated financing in the first quarter, and
an apparent pickup in capital expenditures increased business borrowing in the
second quarter even as credit demands
related to mergers and restructurings,
while still strong, eased a bit. Because of
investor fear of event risk triggered by
the RJR-Nabisco acquisition in late 1988
as well as higher long-term rates through
much of the period, corporate borrowing
was concentrated in short-maturity vehicles. Commercial paper issuance surged
during thefirsthalf of the year; businesses
also relied on bank loans, albeit to a
lesser extent. In response to investor
concerns about event risk, many firms
issued bonds with relatively short maturities of one tofiveyears, or they brought
issues to market with straight puts or with
so-called poison puts—covenants designed to protect against negative effects
on bondholders from future restructurings. Toward the end of the second
quarter, with the introduction of these
protections and the decline in rates, longterm financing in the corporate bond
market was on the upswing.
Net issuance of tax-exempt securities
by state and local governments fell
sharply over most of the first half of
1989. Investor demand for tax-exempt
securities remained strong and, with
diminished supply, the ratio of taxexempt to taxable yields fell to its lowest



level since 1984. This ratio rose somewhat late in the second quarter, when the
decline in long-term interest rates began
to bring forth an increase in refunding
activity and a pickup of issuance of bonds
to raise new capital.
m

Part 2
Records, Operations,
and Organization




59

Record ofPolicy Actions
of the Board of Governors
from businesses with higher revenues are
subject to the regulation's modified notice
requirements and recordkeeping rules.
In addition, the revisions eliminate an
November 22, 1989-Amendments
exception that had permitted creditors to
The Board amended Regulation B, effec- make inquiries about the marital status of
tive April 1, 1990, to implement recent an applicant for business credit and an
changes in the Equal Credit Opportunity exception concerning the reporting of
Act relating to business credit.
credit information.
Although Governor Angell supported
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs. the revisions to Regulation B, he preAngell and LaWare. Absent and not voting: ferred defining small businesses as those
Mr.Kelley.1
having annual gross revenues of $500,000
or less. He believed that business credit
The Women's Business Ownership Act applicants with revenues greater than
of 1988 amended the Equal Credit Op- that amount have enough alternatives for
portunity Act to provide small business credit that discrimination would not be as
owners who borrow with the same rights much a factor in credit decisions.
and protection under the act as are
The amendments are effective Decemafforded consumers. The legislation had ber 8, 1989; compliance is not mandabeen enacted in response to a perception tory, however, until April 1, 1990.
by women that they were being discriminated against in obtaining business
credit. The act requires creditors to give Regulation C
written notice to business applicants of (Home Mortgage Disclosure)
their right to obtain a written explanation
of a credit denial. Also, creditors are December 6, 1989—Revision
required to retain records relating to The Board revised Regulation C, effecbusiness credit applications for at least a tive January 1,1990, to implement recent
year.
amendments to the Home Mortgage
The amendments to Regulation B Disclosure Act that expanded coverage
implement the statutory requirements and and required additional disclosure of
define a small business as a firm that had certain residential lending data.
gross revenues of $1 million or less in the
preceding fiscal year. The amendments
Votes for this action: Messrs. Greenspan
require that creditors provide written
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, and LaWare.1
notices and retain records on applications
involving small businesses. Applications
The Home Mortgage Disclosure Act
requires covered lenders in metropolitan
1. Throughout this chapter, note 1 indicates that
a vacancy existed on the Board when the action was statistical areas to disclose annually the
taken.
amount of their mortgage and home

Regulation B
(Equal Credit Opportunity)




60

76th Annual Report, 1989

improvement lending, and to indicate by
census tract or by county the location of
loans originated or purchased. The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 amended the
Home Mortgage Disclosure Act by (1)
extending coverage to all types of mortgage lenders, including those not affiliated with a depository institution or a
holding company; (2) requiring disclosure of information on the disposition of
loan applications, in addition to the
information on loan originations and
purchases; (3) requiring disclosure of
data on the race, gender, and income of
borrowers and applicants; and (4) requiring disclosure of information on those
who acquire loans sold by an institution.
The Board revised Regulation C to
implement these changes. In addition,
the Board adopted a new loan application
register form to facilitate compliance
with the disclosure requirements. Under
the new register format, institutions are
required to record loan applications,
loans made, and loans purchased. The
first set of reports using the new format is
due March 31, 1991.

Regulation D
(Reserve Requirements
of Depository Institutions)
December 6, 1989-Amendment
The Board amended Regulation D to
decrease the amount of transaction balances to which the lower reserve requirement applies.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, 1
and Messrs.
Angell, 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 deposit balances
and at 12 percent of balances above that
level. The act directs the Board to adjust
annually the amount subject to the lower
reserve requirement to reflect changes in
transaction balances nationwide. By the
beginning of 1989, the amount was $41.5
million. Recent declines in transaction
balances warranted a decrease of $1.1
million. The Board, therefore, amended
Regulation D to decrease to $40.4 million
the amount of transaction balances to
which the lower reserve requirement
applies. The amendment is effective with
the reserve computation period beginning
December 26, 1989, for institutions that
report weekly; and December 19, 1989,
for institutions that report quarterly.
The Garn-St Germain Depository
Institutions Act of 1982 established a
zero percent reserve requirement on the
first $2 million of an institution's reservable liabilities. The act also provides for
annual adjustments to that exemption
based on deposit growth nationwide.
Because of the lack of growth in deposits
this year, no adjustment was made to the
exemption.

Regulation H
(Membership of State Banking
Institutions in the Federal
Reserve System)
February 3, 1989—Amendment
The Board amended Regulation H, effective April 1, 1989, to improve public
access to financial information about the
condition of state member banks and
U.S. agencies and branches of foreign
banks.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, Kelley, and LaWare.

Board Policy Actions
The amendment to Regulation H requires that member banks make available
to shareholders and to the public, upon
request, one free copy of their year-end
reports of condition and of income for the
preceding two years, or alternatively,
reports containing information equivalent to the data provided in the year-end
statements. Agencies and branches of
foreign banks are required to provide,
upon request, free copies of three specified schedules from their year-end reports. After the effective date of the
amendment, covered institutions must
provide the year-end statements no later
than April 1 of the following year and
must notify shareholders and the public
when the information becomes available.

61

authorized member banks to invest in
those funds.

Regulation Y
(Bank Holding Companies and
Change in Bank Control) and
Rules Regarding Delegation of
Authority
August 24, 1989—Amendments
The Board amended Regulation Y, effective October 10, 1989, to permit bank
holding companies to acquire savings
associations. The Board amended its
Delegation Rules, effective September
18,1989, to delegate authority to approve
the acquisition of a failing savings institution to a senior Board officer.

February 10, 1989—Interpretation
Effective February 17, 1989, the Board
issued an interpretation of Regulation H
that conditionally authorizes member
banks to purchase stock of certain investment companies.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, and LaWare. Absent and
not voting: Mr. Kelley.

The interpretation of Regulation H
permits state member banks to purchase
the stock of an investment company that
invests in obligations of the U.S. Treasury, federal agencies, states and municipalities, corporate debt instruments, or
certain other securities. Investment in
these companies is permissible if the
investment portfolio of the investment
company or mutual fund in which the
member bank would invest consists entirely of securities that the bank could
acquire directly itself. Because this
authorization includes investment in
money market mutual funds, the Board
also rescinded an interpretation that had



Votes for these actions: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, and LaWare.1
The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989
amended the Bank Holding Company
Act to allow holding companies to acquire
healthy and failed or failing savings
associations. The Board revised Regulation Y to permit the acquisition of a
savings association in any state, without
regard to whether the bank holding company may operate a subsidiary bank in
that state. The amendments do not impose
branching restrictions or operating limitations on savings associations; the institutions, however, are required to confine
their activities to those activities that are
permissible for bank holding companies
under the Bank Holding Company Act.
The revisions to the Rules Regarding
Delegation of Authority authorize the
Staff Director of the Division of Banking
Supervision and Regulation to approve
applications to acquire a savings association if expeditious action is needed to

62

76th Annual Report, 1989

prevent the failure of that institution. The
Staff Director currently has delegated
authority to approve applications to
acquire failing banks.

Regulation Z
(Truth in Lending)
March 30,1989-Amendments
The Board amended Regulation Z to
implement the Fair Credit and Charge
Card Disclosure Act of 1988.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, and LaWare. Absent and
not voting: Mr. Heller.
The act and the amendments require
that issuers of credit cards and charge
cards provide specific information on
application forms and solicitations. The
required information, such as annual
percentage rate, annual fee, and any
grace period, must be included on all
application forms in tabular form,
including those provided in magazines
or catalogs. The amendments also
include rules for direct-mail applications
and telephone solicitations. Card issuers
that impose an annual fee must provide
disclosures before the annual renewal of
the card. If a card issuer that provides
credit insurance decides to change
insurance carriers, it must disclose to
consumers any substantial increase in
rates or decrease in coverage that will
result from the change.
The amendments are effective April
3, 1989, with compliance optional until
August 31, 1989. Compliance with the
provisions pertaining to disclosures
required for applications and solicitations made available to the general
public is optional until November 29,
1989.



May 3 1 , 1 9 8 9 - Amendments
The Board amended Regulation Z to
implement the Home Equity Loan Consumer Protection Act of 1988.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, Kelley, and LaWare.
The Home Equity Protection Act was
enacted to ensure that borrowers who
pledge their homes as collateral for a line
of credit have received adequate information about the terms of the home-equity
plan before they consummate the agreement. The legislation and the Board's
implementing rules specify the types of
disclosures that creditors must provide
and stipulate that the information must be
disclosed when an application for a homeequity loan is provided to a consumer.
The information, which must be provided
along with the loan application, includes
the following: payment terms and an
example of the payments; fees imposed
to open or use the line of credit; and an
estimate of any fees imposed by third
parties. If the loan carries a variable
interest-rate feature, the creditor must
disclose that fact and indicate the index
used to determine the rate and the frequency of changes in the rate. Besides
those disclosures, creditors also must
provide a brochure describing the general features of home equity plans. The
Board has developed a sample brochure
that meets this requirement.
In addition to the expanded disclosure
requirements, the act and the amendments establish substantive limits on
home equity plans. The act limits, for
example, a creditor's ability to terminate
a plan or accelerate payment on an outstanding balance. Also, plans with a
variable-rate feature must be based on
a publicly available index outside the
creditor's control.

Board Policy Actions

63

withdrawn. The problem has become
more acute since passage of the Expedited
Funds Availability Act because the act
requires banks to make available for
withdrawal on the next business day after
deposit the proceeds of certain types of
Regulation CC
deposits, including cashier's checks,
(Availability of Funds and
teller's checks, and checks drawn on a
Collection of Checks)
Federal Reserve Bank or a Federal Home
Loan Bank.
March 30,1989—Amendments and
The Board's policy statement urges
Policy Statement
institutions that issue official checks to
The Board adopted amendments to Reg- take steps to minimize delays in the
ulation CC that were technical or clarify- collection and return of checks. In taking
ing in nature and issued a policy statement this action, the Board indicated that the
to discourage delayed disbursement policy statement was issued in lieu of
practices.
more formal regulatory action and that
the Board would monitor delayed disVotes for these actions: Messrs. Greenspan bursement practices to determine whether
and Johnson, Ms. Seger, and Messrs.
Angell, Kelley, and LaWare. Absent and institutions are complying with the voluntary system. If delayed disbursement
not voting: Mr. Heller.
practices continue, the Board will seek
The Board amended the regulation and regulatory remedies.
the related official commentary to clarify
and refine the regulation, which was
adopted in mid-1988 to implement the July 26, 1989-Amendment
Expedited Funds Availability Act. The
changes are designed to remove ambigu- The Board amended provisions in Regities and to facilitate compliance. The ulation CC relating to payable-through
amendments are effective April 10,1989, checks.
except for the provisions governing
Votes for this action: Messrs. Greenspan
agencies of foreign banks and the changes
and Johnson, Ms. Seger, and Messrs.
to Appendix A, which are effective
Angell and Kelley. Absent and not voting:
August 10, 1989.
Messrs. Heller and LaWare.
In a related action, the Board issued a
When the Board adopted Regulation
policy statement to discourage certain
abuses of the check collection system, CC last year to implement the Expedited
particularly delayed disbursement prac- Funds Availability Act of 1988, it had
tices. An institution that engages in included a provision stipulating that a
delayed disbursement practices issues bank check or a credit union share draft
checks drawn on an institution located in that was written on an account at one
an area remote from the payee. Delayed institution but payable through another
disbursement practices increase the time institution would be considered local or
required to collect and return a check, as nonlocal depending on the location of the
well as processing and transportation institution through which the check would
costs. The practice also increases the be paid. Subsequently, a court deterlikelihood that a check will not be re- mined that that provision was inconsistent
turned until after the funds have been with the act. The court's ruling indicated
The amendments are effective June 7,
1989; compliance is optional, however,
until November 7, 1989.




64

76th Annual Report, 1989

that payable-through checks should be
treated as local or nonlocal depending on
the location of the institution on which a
check is written, not on the location of the
bank through which the check is paid.
The Board, therefore, made two revisions to Regulation CC to reflect the
court's decision. Effective February 1,
1991, payable-through checks are required to identify conspicuously the
name, location, andfirstfour digits of the
routing number of the bank on which a
check is written, and include the words
"payable through," followed by the name
and location of the payable-through bank.
The regulation also was revised to provide that the risk of loss for the return of a
payable-through check will be placed on
the bank on which a check is written,
when the return of such a check takes
longer than would have been required if
the check had been returned expeditiously by the bank on which it was
written. The latter revision is effective
February 1,1990.

Other Actions
In July the Board issued its 1989 report
to the Congress on the effects of the
Expedited Funds Availability Act and
Regulation CC on consumers and depository institutions. The report also
recommended ways to facilitate compliance with the act, to reduce the risk
of fraud in accepting checks that must
be given next-day availability, and to
clarify the Board's authority to allocate
liability for violations of subpart C of
Regulation CC.
In October the Board issued its second
report to the Congress on deposits at
nonproprietary automated teller machines (ATMs). The report recommended that the Congress amend the
Expedited Funds Availability Act to treat
deposits at nonproprietary ATMs under



the permanent schedule in the same
manner as they are treated under the
temporary schedule. Such an amendment
would help ensure that deposit-taking at
nonproprietary ATMs is not restricted or
discontinued by those banks that believe
they need the flexibility to place longer
holds on these deposits to limit their risk
exposure.
In December the Board issued for
public comment proposed technical and
clarifying amendments to Regulation CC
and an amendment to shorten the maximum time allowed for sending a notice of
nonpayment to the bank thatfirstreceived
the check. In December the Board also
issued for comment a proposed determination of preemption regarding a California law on funds availability. No final
action was taken on these proposals in
1989.
The Board continued to evaluate comments received on its April 1988 proposal
regarding same-day payment. The proposal would require paying banks that
receive checks by 2:00 p.m. from a
private collecting bank to pay for the
checks on the same day without charging
a presentment fee. An advisory group
representing commercial banks, savings
and loan institutions, credit unions, check
clearinghouses, Federal Reserve Banks,
and corporate cash managers has provided information on alternatives to the
proposal that would address concerns of
thecommenters.

Rules Regarding Delegation
of Authority
February 15, 1989—Amendment
The Board amended its rules to delegate
authority to the Reserve Banks to permit,
under certain conditions, interlocking
directorates for diversified savings and
loan holding companies.

Board Policy Actions
Votes for this action: Messrs. Greenspan,
Johnson, Angell, and Heller. Absent and
not voting: Ms. Seger, Mr. Kelley, and Mr.
LaWare.

The Depository Institutions Management Interlocks Act authorizes the Board
to determine whether a request by a
diversified savings and loan holding company to maintain an interlocking director
relationship with a state member bank or
bank holding company satisfies the requirements of the act. The Board decided
to delegate authority to make such determinations to the Reserve Banks, after
consultation with the Board's General
Counsel. The amendment to the rule is
effective March 10, 1989.

Policy Statements
February 10, 1989—Revisions to
the CRA Information Statement
The Board authorized issuance of a
revised Community Reinvestment Act
(CRA) statement to provide guidance
regarding the policies and procedures the
agencies will apply when assessing an
institution's compliance record.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, and Messrs.
Angell, Heller, and LaWare. Absent and
not voting: Mr. Kelley.

The Community Reinvestment Act of
1977 directs federal bank regulatory
agencies to assess during examinations
an institution's record of helping to meet
the credit needs of the entire community
it serves, including the low- and
moderate-income neighborhoods. Institutions are required to prepare public
statements describing the communities
they serve and the product lines offered.
The act also requires regulatory agencies
to take an institution's CRA record into
account when evaluating applications;



65

private citizens and community groups
are encouraged to comment on an institution's compliance with the act.
The Board, along with the Comptroller
of the Currency, the Federal Deposit
Insurance Corporation, and the Federal
Home Loan Bank Board, issued a joint
policy statement, effective March 21,
1989, to provide insured financial institutions and the public with guidance regarding the requirements of the act and the
criteria the agencies will use when evaluating an institution's compliance record
during the applications process. The
statement, which revises the information
statement adopted in 1980, reflects the
agencies' experience during the past ten
years in administering the act.
The joint policy statement encourages
institutions to expand their CRA statements to include information regarding
their record of meeting community credit
needs so that the CRA statements can be
used as the basis for comment by community groups. The policy statement also
encourages public comment on an institution's CRA performance before an
application is filed so that any issues or
problems can be addressed more effectively. The statement also describes such
matters as the role of private meetings
between financial institutions and community groups in the applications process
and the agencies' policies regarding
private agreements. In addition, the
statement indicates the elements of a
CRA program that the agencies have
found to be effective.

May 31, 1989—Risk Reduction
Measures for Payments System
Networks
The Board issued three policy statements,
effective June 15, 1989, dealing with
measures to reduce the risks associated
with certain types of transactions on
large-dollar wire transfer systems.

66

76th Annual Report, 1989

Votes for these actions: Messrs. Greenspan over each night. The rate of interest on
and Johnson, Ms. Seger, and Messrs. such credit, however, is negotiated daily
Angell, Heller, Kelley, and LaWare.
by the two parties. Continuing contracts
are similar to rollovers except that the
The Board issued three policy state- principal amount might vary from day to
ments and proposed several other actions day. Use of these two measures reduces
in connection with an overall plan for the amount of funds transferred over
reducing risks on both public and private Fedwire and minimizes the possibility of
wire transfer systems. The first state- overdrafts by eliminating the time lag
ment, dealing with private book-entry between payment of borrowings and
securities systems, establishes principles receipt of credit.
for reducing risks on certain deliveryagainst-payment securities systems. Such
1989 Discount Rates
systems settle transactions for their participants by transferring securities and The Board approved one change in the
the related payment obligations on the basic discount rate during 1989, an
books of either a clearing corporation or increase in late February from 6V2 pera depository institution, and arrange for cent to 7 percent. The Board had voted at
final settlement of the funds position on a a meeting in mid-January to disapprove
net basis at the end of the day. The policy requests for a similar increase; it took no
statement indicates that private transfer other votes during the year to approve or
systems should adopt safeguards for deny requests for changes in the basic
timely settlement that are commensurate discount rate. The reasons for the Board's
with the risk of failure. Such safeguards decisions are reviewed below. Those
could include liquidity arrangements to decisions were made in the context of the
enable a system to make settlement policy actions of the Federal Open Marpayments at the end of the day and ket Committee and the general economic
measures to ensure that transfers can be andfinancialdevelopments that are covered in more detail elsewhere in this
reversed.
The second policy statement provides REPORT. A list of Board members' votes
guidance for offshore clearing systems on discount rate actions during 1989
that settle, directly or indirectly, in follows this review.
dollars on Fedwire (die Federal Reserve's
wire transfer system) or on the interbank
payments system of the New York Auto- Actions on the Basic Discount Rate
mated Clearing House Association. The In mid-January the Board disapproved
statement was issued on an interim basis, requests from seven Federal Reserve
pending completion of a study and issu- Banks to increase the basic rate from
ance of recommendations by the Bank for 6x/2 percent—the level in effect since
International Settlements.
August9,1988—to7percent. Inreaching
The third policy statement encourages its decision, the Board took account of
the prudential use of rollovers and con- the concerns about inflation expressed by
tinuing contracts to reduce the risk of Reserve Bank directors but concluded
overdrafts of an institution's account on that the earlier tightening of monetary
Fedwire. Rollovers are overnight credit policy through open market operations,
transactions between two banks. Under including relatively recent firming acsuch an arrangement, the amount of the tions in mid-December and at the start of
principal does not change and is rolled 1989, had fostered an appropriate degree



Board Policy Actions
of monetary restraint, at least for the
moment. That restraint was being felt in
part through upward pressure on the
dollar, which could intensify if the discount rate were raised.
In mid-February, monetary policy was
tightened somewhat further through open
market operations, and on February 24
the Board approved an increase of Vi
percentage point in the basic rate, to 7
percent. In taking this action, Board
members noted that the business expansion continued to display considerable
momentum and that there were related
perceptions that inflationary pressures
might be worsening. The members recognized that the full effects of earlier
policy tightening actions had not yet been
felt and that higher interest rates could
have adverse short-run effects on interestsensitive sectors of the economy, including many problem thrift depository
institutions. Nonetheless, a majority
concluded that the balance of considerations made an increase in the basic rate
desirable in order to implement in a
visible way the System's continuing
commitment to the fight against inflation; given the strength of the expansion,
they felt that an increase of Vi percentage
point would not incur an unacceptable
risk to the continued growth of the
economy.
No further requests for a change in the
discount rate were received from Federal
Reserve Banks until well into the second
quarter. During this period, signs began
to accumulate that some easing of inflationary pressures might be in prospect:
overall spending on goods and services
appeared to be expanding more slowly,
monetary growth weakened appreciably,
the dollar strengthened in foreign exchange markets, and prices of actively
traded commodities leveled out. In this
environment, interest rates turned down.
In the latter part of May, the Federal
Reserve Bank of Dallas requested a



67

reduction of lA percentage point in the
basic rate; subsequently the proposed
reduction was increased to Vi percentage
point. The Board reviewed but took no
action on these requests. The Board
members increasingly came to believe
that some lessening in the degree of
monetary restraint was desirable, but
they also took into account the easing of
reserve pressures through open market
operations that was initiated in early June.
Over the summer months, additional
easing of monetary policy was implemented through open market operations,
and no action was taken on renewed
requests by the Dallas Bank to lower the
discount rate. As the summer progressed,
indicators of business conditions pointed
to some pickup in the economic expansion, and monetary growth accelerated to
a relatively rapid pace. While many
Board members believed that the risks to
the economy continued to be tilted toward
slower growth over time, they generally
concluded that under prevailing circumstances the decisions of the Federal Open
Market Committee to lessen pressures on
reserve positions should not be reinforced
by a reduction in the discount rate.
By the latter part of September, indicators of business conditions had become
more mixed, and the Federal Reserve
Banks of Chicago and Dallas proposed a
reduction of Vi percentage point in the
basic rate. The directors at those Banks
saw increased risks of a weaker economy
and an improved outlook for reduced
inflation. All of the other Reserve Banks
preferred not to change the current rate.
The Board reviewed but took no action
on the proposed reductions. Most of the
Board members acknowledged that the
risks of a recession might have risen, but
they continued to view sustained, moderate growth of the economy as a reasonable
expectation for the next several quarters.
Key measures of inflation indicated that
prices had risen more slowly since mid-

68

76th Annual Report, 1989

year, in part because of sharp reductions
in energy prices, but data on labor
compensation suggested no significant
change in prevailing trends. Some members expressed concern that under current
circumstances a cut in the discount rate
would communicate a misleading signal
regarding the System's commitment to an
anti-inflationary policy.
From early November through yearend, the Board reviewed but took no
action on renewed requests by the
Dallas Bank to lower the discount rate by
Vi percentage point. The Board took
account of indications of considerable
slowing in overall economic growth in
the fourth quarter but noted that some of
the softening appeared to be related to
temporary factors that seemed likely to
be reversed. At the direction of the Federal Open Market Committee, some
further easing of monetary policy was
implemented in October and thefirstpart
of November and again in the latter part
of December; growth of the monetary
aggregates remained relatively strong in
this period and the dollar was weak in
foreign exchange markets. Against that
background, the Board members agreed
that the discount rate should not be
changed.
Structure of Discount Rates
The basic discount rate is the rate charged
on loans to depository institutions for
short-term adjustment credit and for
credit extended under the seasonal program; under the latter program, loans
may be provided for periods longer than
those permitted under adjustment credit
to assist smaller institutions in meeting
regular needs arising from certain seasonal movements in their deposits and
loans.
A higher, flexible rate may be charged
on extended-credit loans (for other than
seasonal purposes) to depository institu


tions that are under sustained liquidity
pressure and are not able to secure funds
on reasonable terms from other sources.
Theflexiblerate is somewhat higher than
the market rates to which it is linked but is
always at least 50 basis points above the
basic discount rate. The flexible rate is
adjusted periodically, subject to Board
approval. Thefirst30 days of borrowing
on extended credit may be at the basic
rate, but further borrowings ordinarily
are charged theflexiblerate. The highest
rate applicable to any credit extended to
depository institutions will be assessed
on exceptionally large adjustment-credit
loans that arise from computer breakdowns or other operating problems,
unless the difficulty clearly is beyond the
reasonable control of the borrowing
institution; under the current structure,
that rate is theflexiblerate.
At the end of 1989, the structure of
discount rates was as follows: a basic rate
of 7 percent for short-term adjustment
credit and for credit under the seasonal
program and aflexiblerate of 8.9 percent.
During 1989 the flexible rate ranged
from a high of 10.5 percent to a low of
8.9 percent.
Board Votes
on the Basic Discount Rate
Under the provisions of the Federal
Reserve Act, the boards of directors of
the Federal Reserve Banks are required
to establish rates on loans to depository
institutions at least every fourteen days
and to submit such rates to the Board of
Governors for review and determination.
Reserve Bank actions on the discount rate
include requests to renew the formula for
calculating the flexible rate on extended
credit. The votes of the Board of Governors listed below involved changes in the
basic discount rate. Votes relating to the
reestablishment of existing rates or the
updating of market-related rates under

Board Policy Actions
the extended credit program are not
shown. All votes during 1989 were
unanimous except for the vote on February 24.
January 17,1989
The Board disapproved actions taken on
the dates indicated by the directors of the
following Federal Reserve Banks to raise
the basic discount rate from 6Vi percent
to 7 percent: Boston and New York on
January 5; Cleveland, Richmond, Minneapolis, and San Francisco on January
12; and Atlanta on January 13.
Votes for this action: Messrs. Greenspan
and Johnson, Ms. Seger, Messrs. Angell,
Heller, Kelley, and Laware. Votes against
this action: None.
February 24,1989
Effective February 24, 1989, the Board
approved actions taken by the directors
of the Federal Reserve Banks of Boston,
New York, Philadelphia, Cleveland,
Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, and San Francisco to raise the basic discount rate from
6V2 percent to 7 percent.
Votes for this action: Messrs. Greenspan,
Johnson, Angell, Heller, Kelley, and
LaWare. Vote against this action: Ms.
Seger.
Ms. Seger dissented because monetary
policy had already been tightened considerably by the Federal Open Market
Committee and she wanted to allow more
time to assess the effects on the economy,
which would occur only with a lag.
Effective February 27,1989, the Board
approved a similar action taken by the
directors of the Federal Reserve Bank of
Dallas.
•




69

71

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
1989, 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 1989 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 1989. 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, 1989
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary to

72

76th Annual Report, 1989

carry out the most recent domestic policy
directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal
Financing Bank, and securities that are direct
obligations of, or fully guaranteed as to
principal and interest by, any agency of the
United States in the open market, from or to
securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash,
regular, or deferred delivery basis, for the
System Open Market Account at market
prices, and, for such Account, to exchange
maturing U.S. Government and Federal
agency securities with the Treasury or the
individual agencies or to allow them to mature
without replacement; provided that the aggregate amount of U. S. Government and Federal
agency securities held in such Account (including forward commitments) at the close of
business on the day of a meeting of the
Committee at which action is taken with
respect to a domestic policy directive shall not
be increased or decreased by more than $6.0
billion during the period commencing with
the opening of business on the day following
such meeting and ending with the close of
business on the day of the next such meeting;
(b) When appropriate, to buy or sell in
the open market, from or to acceptance
dealers and foreign accounts maintained at
the Federal Reserve Bank of New York, on a
cash, regular, or deferred delivery basis, for
the account of the Federal Reserve Bank of
New York at market discount rates, prime
bankers acceptances with maturities of up to
nine months at the time of acceptance that (1)
arise out of the current shipment of goods
between countries or within the United States,
or (2) arise out of the storage within the
United States of goods under contract of sale
or expected to move into the channels of trade
within a reasonable time and that are secured
throughout their life by a warehouse receipt
or similar document conveying title to the
underlying goods; provided 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 conditions imposed on purchases and sales of
securities in paragraph l(c), repurchase
agreements in U.S. Government and agency
securities, and to arrange corresponding sale
and repurchase agreements between its own
account and foreign and international accounts maintained at the Bank. Transactions
undertaken with such accounts under the
provisions of this paragraph may provide for
a service fee when appropriate.

FOMC Policy Actions

Domestic Policy Directive
In Effect January 1, 19891
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 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 have risen since 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 nonflnancial 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.

1. Adopted by the Committee at its meeting on
Dec. 13-14, 1988.



73

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 nonflnancial 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 nonflnancial debt at 6 xh 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
6V2 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.

74

76th Annual Report, 1989

Authorization for Foreign
Currency Operations
In Effect January 1, 1989
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, for System Open Market
Account, to the extent necessary to carry out
the Committee's foreign currency directive
and express authorizations by the Committee
pursuant thereto, and in conformity with such
procedural instructions as the Committee may
issue from time to time:
A. To purchase and sell the following
foreign currencies in the form of cable
transfers through spot or forward transactions
on the open market at home and abroad,
including transactions with the U. S. 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

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

FOMC Policy Actions
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
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;



75

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
toappropriate 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, 1989
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;

76

76th Annual Report, 1989

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 7-8,1989
Domestic Policy Directive
The information reviewed at this meeting
suggested that, apart from the direct
effects of the drought, economic activity
had continued to expand at a fairly
vigorous pace. The latest information on
prices indicated little change in the rate of
inflation from recent trends, while labor
costs had continued to accelerate.
After strong gains in the fourth quarter,
total nonfarm payroll employment rose
sharply in January. Although some of the
strength may have reflected such temporary factors as unusually mild winter
weather, job gains were widespread; in
manufacturing, sizable increases were
registered in nonelectrical machinery,
transportation equipment, and food processing . The civilian unemployment rate,
at 5.4 percent, remained in the lower part
of the range that had prevailed since the
early spring of last year.
Industrial production rose appreciably
further in December and January, with
gains continuing at about the robust pace
experienced in 1988 as a whole. Output
of consumer goods advanced strongly,
despite a somewhat slower pace of automobile assemblies over the two months,
and production of business equipment
picked up a bit. Total industrial capacity
utilization moved higher, owing to a
sizable jump in the utilization of manufacturing capacity to the highest level
since 1979. Housing starts declined
somewhat in December but were up
substantially on balance for the fourth
quarter as a whole, largely because of a



strengthening in single-family construction. Multifamily starts have remained
relatively flat in recent months.
Consumer spending was up considerably in the fourth quarter, capping a
strong year. Spending on household
durables rose vigorously in the quarter;
and outlays for services again advanced
at a rapid pace, reflecting big increases in
expenditures for medical care, airline
travel, and recreation. Consumption of
nondurables advanced further, after a
steep rise the previous quarter, while
purchases of motor vehicles were little
changed over the quarter as a whole.
Indicators of business capital spending
suggested some weakening in recent
months from the rapid increases evident
earlier in 1988. Real outlays for business
fixed investment were estimated to have
fallen somewhat in the fourth quarter.
Softness was fairly widespread among
various types of equipment, but the most
pronounced weakness was in office and
computing equipment. Nonresidential
construction activity picked up in December but was estimated to have been about
flat on balance for the quarter; oil drilling
and expenditures on commercial buildings other than offices declined further.
Inventory investment in the manufacturing sector in the fourth quarter was little
changed from the third-quarter pace, with
much of the accumulation continuing to
occur in durable goods industries where
demand had been strong. At the retail
level, increases in nonautomobile inventories generally kept pace with the growth
in sales.
Excluding food and energy, producer
prices of finished goods rose sharply in
December, the rise reflecting large increases for tobacco products, women's
apparel, and passenger cars. Prices for
intermediate materials again increased
substantially in November and December. The most notable hikes occurred in
industries such as metals, chemicals, and

FOMC Policy Actions
paper products in which capacity utilization has been high. Consumer prices,
reflecting more favorable developments
in the food, energy, and apparel components, rose at a somewhat slower pace in
November and December. Excluding
food and energy, consumer prices rose in
the fourth quarter at about the rate
observed over 1988 as a whole. Reflecting tighter market conditions, wages and
salaries, and labor costs more generally,
advanced at a faster pace in the fourth
quarter than was observed a year earlier.
The nominal U.S. merchandise trade
deficit was slightly larger on average in
October and November than it was in the
third quarter. The value of imports rose
as a sharp rise in the value of non-oil
imports, especially from industrial countries, outweighed a drop in the value of
oil imports resulting from a decline in oil
prices. Increases were widespread across
trade categories but were paced by a
rebound in imports of passenger cars
from somewhat depressed levels in the
third quarter. The value of exports was
little changed as a decline in agricultural
exports offset a rise in nonagricultural
products.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies rose substantially over the intermeeting period and
nearly reversed its decline of October
and November. Despite the release of
data indicating U.S. trade deficits that
were larger than expected for October
and November, the dollar climbed persistently from early December in response
to perceptions of a relative tightening of
monetary policy in the United States;
short-term interest rate differentials
moved in favor of the dollar relative to
the yen.
At its meeting on December 13-14,
the Committee adopted a directive calling
for some immediate increase in the
degree of pressure on reserve positions,



11

with some further tightening to be implemented at the start of 1989 if economic
andfinancialconditions remained consistent with the Committee's expectations.
These reserve conditions were expected
to be associated with growth of M2 and
M3 at annual rates of about 3 percent and
6V2 percent respectively over the period
from November through March. 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.1
In accordance with the Committee's
instructions, a firming of reserve supply
conditions was carried out in two stages
over the intermeeting period, although
operations were complicated by continuing uncertainty about the relationship
between borrowing and money market
1. These growth rates and all subsequent data on
the monetary aggregates reflect annual benchmarks
and seasonal factors as published on February 9,
1989.
The monetary aggregates are defined as follows:
Ml comprises demand deposits at commercial
banks and thrift institutions, currency in circulation,
travelers checks of nonbank issuers, negotiable
order of withdrawal (NOW) and automatic transfer
service (ATS) accounts at banks and thrift institutions, and credit union share draft accounts. M2
contains Ml and savings and small-denomination
time deposits (including money market deposit
accounts (MMDAs) at all depository institutions,
overnight repurchase agreements (RPs) at commercial banks, overnight Eurodollars held at foreign
branches of U. S. banks by U. S. residents other than
banks, and money market mutual fund shares other
than those restricted to institutions). M3 is M2 plus
large-denomination time deposits at all depository
institutions, large-denomination term RPs at commercial banks and savings and loan associations,
institution-only money market mutual funds, and
term Euro-dollars held by U. S. residents in Canada
and the United Kingdom and at foreign branches of
U.S. banks elsewhere.

78

76th Annual Report, 1989

conditions. In the circumstances, open
market operations continued to be conducted with a special degree of flexibility.
Adjustment plus seasonal borrowing
averaged somewhat more than $500
million over the period, but such borrowing fluctuated over a wide range, including a typical bulge around the year-end.
The federal funds rate rose from around
SV2 percent to a little above 9 percent
during the intermeeting period.
Changes in other short-term market
rates were mixed over the intermeeting
period. Treasury bill rates rose somewhat
on balance, although less than the federal
funds rate, while rates on private market
instruments were generally unchanged to
slightly lower. To some extent, the
firming of monetary policy had been
anticipated; in addition, private rates in
particular were affected by the passing of
year-end pressures. Bond yields declined
somewhat, apparently influenced in part
by the favorable effect of actual and
anticipated monetary restraint on inflationary expectations. Major indexes of
stock prices rose considerably over the
intermeeting period.
Growth of the broader monetary aggregates weakened appreciably in January,
especially M2, which apparently declined slightly after a moderate increase
in December. The behavior of these
aggregates appeared to reflect recent
increases in short-term market rates,
which in turn widened the opportunity
costs of holding deposits. Those costs
were accentuated by slower-than-usual
adjustments in offering rates by depository institutions on most of their retail
deposits. Also, needs for deposits to fund
credit growth were damped in this period.
On average in December and January,
growth of M2 was slightly below Committee expectations and that of M3 considerably below. Ml changed little on
balance over the two months. For the
year 1988, M2 expanded at a rate a little



below and M3 at a rate around the
midpoint of the Committee's ranges.
Growth of total domestic nonfinancial
debt moderated in 1988 to a pace around
the midpoint of the Committee's monitoring range.
The staff projections prepared for this
meeting suggested that the expansion was
likely to moderate in 1989 from the pace
in 1988, although the adjustments related
to the assumed end of the drought would
be reflected in relatively strong measured
growth in the first quarter. To the extent
that expansion of final demand tended to
remain at a pace that could foster higher
inflation but was not accommodated by
monetary policy, pressures would be
generated infinancialmarkets that would
restrain domestic spending. The staff
continued to project slower growth in
consumer spending, sharply reduced
expansion of business fixed investment,
and some decline in housing construction. Foreign trade was expected to make
a smaller contribution to growth in
domestic output than in 1988. The staff
anticipated somewhat faster increases in
consumer prices and also some further
cost pressures over the year ahead,
especially because of reduced margins of
unutilized labor and other production
resources.
In the Committee's discussion of the
economic situation and outlook, members commented that the expansion in
business activity was generally well
balanced and that continuing growth was
a reasonable expectation for the year
ahead. Nearly all the members believed
that the risks remained on the side of
greater inflation and that the Federal
Reserve would need to stay especially
alert to inflationary developments. However, views differed to some extent with
regard to the likely strength of the
expansion and the degree of inflationary
risk. Several members stressed that, in
the absence of some further monetary

FOMC Policy Actions
restraint, economic growth was likely to
continue at a rate that would foster greater
pressures on already strained production
resources and induce more inflation.
Other members gave more weight to
indications of possible slowing in the
expansion and to the possibility that the
substantial restraint applied over the past
year might be sufficient to foster sustainable expansion without increased inflationary pressures. The members agreed
that the chances for satisfactory economic performance over time would be
greatly enhanced by progress in reducing
the federal budget deficit in order to
contain domestic demands and to facilitate the process of adjustment in the
nation's external balance.
In conformance with the usual practice
at meetings when the Committee considers its long-term 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 inflation for the year 1989.
The central tendency of these forecasts
pointed to somewhat slower expansion
and somewhat greater inflation than had
occurred in 1988. For the period from the
fourth quarter of 1988 to the fourth
quarter of 1989, the forecasts for growth
of real GNP had a central tendency of 2 Vi
to 3 percent and a full range of 1 Vi to 3 lA
percent. Forecasts of nominal GNP centered on growth rates of 6V2 to IVi
percent and ranged from 5Vi to 8Vi
percent. Estimates of the civilian rate of
unemployment in the fourth quarter of
1989 were concentrated in a range of 5 lA
to 5 Vi percent with a full range of 5 to 6
percent. The projected increase in the
consumer price index centered on rates
of AVi to 5 percent and had an overall
range of 3 Vi to 5 Vi percent for the year.
In making these forecasts, the members
took account of the Committee's policy of



79

continuing restraint on aggregate demand
to resist any increase in inflation pressures and foster price stability over time.
They also assumed that normal weather
conditions and a rise in acreage under
cultivation this year would increase farm
output and add around 2h of a percentage
point to the growth of GNP, an amount
similar to the reduction in GNP that
resulted from the drought in 1988. Excluding this swing in farm output, the
central tendency of the forecasts implied
considerably slower growth in output
than in 1988. Finally, the forecasts
assumed that fluctuations in the foreign
exchange value of the dollar would not be
of sufficient magnitude to have a significant effect on the economy or prices.
In the Committee's discussion of developments bearing on the economic outlook, a number of members stressed that
the economy had a good deal of momentum and that there was little or no current
evidence of a potential slowdown or
downturn in the expansion. Indeed, some
recent data, including those on employment and consumer spending, could be
viewed as consistent with some strengthening of the expansion in recent months.
Reports from around the country suggested a high level of business activity in
many parts of the nation and at least
modest improvement in some previously
depressed areas. On the whole, growth in
production was being well maintained,
buttressed by continuing expansion in
exports. Other members saw a greater
potential for some softening in the rate of
economic growth. They referred to sectors of relative weakness in the economy,
including energy, nonresidential construction, and housing. With regard to
the outlook for capital expenditures,
many firms were investing in new equipment to improve their efficiency in competitive markets, but they generally
continued to hold back on investments to
expand production facilities. More gen-

80

76th Annual Report, 1989

erally, a number of members emphasized
that the behavior of money, whose growth
had been relatively damped for an extended period and was likely to remain so
in 1989 under the Committee's targets,
probably was consistent with only limited
strength in spending.
A key element in the outlook for
business was the extent of the improvement in the nation's external trade balance. The members generally expected
further gains, at least over the year ahead,
but several observed that these might be
considerably smaller than in 1988, given
the behavior of the dollar over the past
year and assuming a steady dollar in the
future. Such an outcome could have the
advantage of helping to moderate potential inflationary demand pressures in the
economy but at the cost and the risks
associated with a continuing need to
finance massive external deficits. It also
was noted that substantial improvement
in the trade balance at a time of increasing
pressure on productive resources would
require the expansion in domestic demand to slow sufficiently—perhaps more
than was currently anticipated—to permit
added production for exports.
Turning to the outlook for inflation,
several members expressed concern that,
with margins of unused labor and capital
relatively low, any slowing in the growth
of overall demands now in train might be
inadequate to prevent some rise in the
underlying rate of inflation, much less to
permit progress to be made in bringing
inflation down. In this view the economy's current momentum in association
with a reduced availability of production
resources clearly biased the economic
risks toward greater inflation. A number
of these members expressed particular
concern about recent indications of higher
labor costs, which might augur escalating
inflationary pressures. Other members
saw a lesser risk that inflation would
intensify, at least in the absence of



unfavorable developments such as a
second year of drought conditions, a
sharp upturn in energy prices, or a
substantial decline in the foreign exchange value of the dollar. It was difficult
to judge the point at which added pressures on production resources might be
translated into stronger inflationary pressures, but several members observed that
despite relatively vigorous economic
growth the impact on the overall rate of
inflation had been less than they might
have anticipated earlier. Promising factors in the inflation outlook included the
continuation of strong competitive pressures, notably competition from abroad
that tended to inhibit efforts to raise
prices, restrained monetary growth, and
generally favorable inflationary expectations as evidenced by developments in
financial markets. In one view, commodity prices, while still affected by the
impact of the drought, might be signalling
at least tentatively a downturn in the
overall rate of inflation.
Against the background of the members' views regarding the economic outlook and in keeping with the requirements
of the Full Employment and Balanced
Growth Act of 1978 (the HumphreyHawkins Act), the Committee at this
meeting reviewed the ranges of growth
for the monetary and debt aggregates that
had been established on a tentative basis
in late June 1988 for the year 1989. The
tentative range for M2 had been reduced
by 1 percentage point to 3 to 7 percent
and that for M3 by xh percentage point to
3 Vi to 7 Vi percent for 1989. The monitoring range for growth of total domestic
nonfinancial debt had been lowered by
Vi percentage point to 6 Vi to 10 Vi percent
for the year. The Committee had decided
in June not to establish any range for M1.
In the Committee's discussion, a majority of the members indicated that they
were in favor of affirming the reduced
ranges that had been set on a tentative

FOMC Policy Actions
basis in mid-1988, while the remaining
members expressed a preference for
some further reductions. Members who
supported the tentative ranges believed
that they were fully consistent with
progress toward price level stability.
Indeed, the reduction of a full percentage
point in the M2 range was larger than
usual and would convey in this view an
appropriately strong signal of the System's commitment to an anti-inflationary
policy. This lower range encompassed
money growth that was fully consistent
under likely economic and financial
conditions with continued expansion of
spending but at the somewhat slower
pace needed to contain inflationary pressures. A number of members also commented that the tentative ranges would
provide more room in subsequent years
for continuing the desirable policy of
gradually lowering the monetary growth
targets to noninflationary levels while
also reducing the possibility that unanticipated economic or financial developments might require those targets to be
raised on a temporary basis. Even though
temporarily higher ranges might be consistent with progress toward price stability, a decision to raise the ranges could be
misinterpreted as a weakening of the
System's anti-inflationary resolve.
Other members believed that further
reductions in the ranges would provide
greater assurance of encompassing the
potential policy responses and associated
monetary growth that might be needed to
resist inflationary pressures over the year
ahead, should they prove to be especially
strong. Such reductions would underscore the Committee's commitment to its
longer-run objective of price stability,
since achieving that objective would
require lower money growth at some
point than was indicated by the middle of
the tentative ranges. Lower ranges for
the broader aggregates would have midpoints that were more clearly below



81

actual growth in 1988 and given the slow
growth thus far this year, especially in the
case of M2, would improve the prospects
that expansion for the year would approximate the midpoints. Moreover, the upper
ends of the tentative ranges, while below
those for 1988, nonetheless remained
appreciably higher than the rates of
monetary growth that were likely to be
consistent with price stability over time.
The Committee agreed on the desirability of retaining the relatively wide spread
of 4 percentage points between the upper
and the lower ends of the growth ranges
for M2 and M3. These ranges were
initially widened in 1988 in recognition
of the uncertain outlook for financial
markets and the economy and the extent
to which the relationship between monetary growth and economic performance
had varied over an extended period. In
particular, the growth of M2 and its
velocity had remained very sensitive to
fluctuations in interest rates, reflecting in
turn a tendency of depository institutions
to adjust only sluggishly their offering
rates on many types of deposit accounts.
In these circumstances and against the
background of the multiplicity of largely
unpredictable factors affecting the economy and interest rates, the appropriate
rate of monetary growth remained subject
to considerable uncertainty and could not
be projected within narrow ranges with
any degree of confidence. An additional
uncertainty in 1989 would be the impact
of developments affecting thrift depository institutions as seriousfinancialproblems at many of those institutions moved
toward resolution under the aegis of new
government programs. The behavior of
M2 and M3 was likely to be affected by
such developments, but there was only
limited basis in prior experience to gauge
the extent of the impact.
The members found acceptable the
tentative reduction of Vi percentage
point in the monitoring range for total

82

76th Annual Report, 1989

domestic nonfinancial debt in 1989. As
in several previous years, growth of
total debt was expected to exceed that of
nominal GNR The members anticipated
that the federal government would
continue to place heavy demands on
credit markets to finance its large
ongoing deficits. In addition, the expansion of business borrowing would
probably continue to be boosted by a
widening financing gap and by the
substitution of debt for equity in conjunction with leveraged buyouts and
other corporate restructuring activities.
Growth of household debt might moderate somewhat, reflecting the effect of
increases in interest rates in 1988 on
mortgage debt and of reduced expansion
in consumer credit in association with a
smaller rise in outlays on consumer
durables over the year.
In keeping with the Committee's tentative decision in late June, no member
proposed the inclusion of Ml among the
monetary target ranges. The Committee
continued to view the prospective relationship between Ml and aggregate measures of economic activity as too unpredictable to warrant reliance on this
monetary measure as a guide for the
conduct of monetary policy.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they favored or could
accept the ranges for 1989 that had been
established on a tentative basis in late
June 1988. Against the background of the
uncertainties that continued to surround
the relationship between monetary
growth and broad measures of economic
performance, most of the members endorsed a proposal to make explicit in the
directive the Committee's procedure in
recent years of evaluating money growth
in the conduct of policy in light of the
behavior of other indicators, including
inflationary pressures, the strength of the
business expansion, and developments in



domestic financial and foreign exchange
markets.
At the conclusion of this discussion,
the Committee approved for inclusion in
the domestic policy directive the following paragraph relating to its longer-run
policy for 1989:
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives,
the Committee at this meeting reaffirmed its
decision of late June to lower the ranges for
growth of M2 and M3 to 3 to 7 percent and 3 xh
to IVi percent, respectively, measured from
the fourth quarter of 1988 to the fourth quarter
of 1989. The monitoring range for growth of
total domestic nonfinancial debt was set at 6 Vi
to ICM/2 percent for the year. The behavior of
the monetary aggregates will continue to be
evaluated in the light of movements in their
velocities, developments in the economy and
financial markets, and progress toward price
level stability.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Heller,
Johnson, Kelley, LaWare, and Parry and
Ms. Seger. Vote against this action: Mr.
Hoskins.

Mr. Hoskins dissented because he preferred lower ranges for the year. In his
view satisfactory progress in reducing
the underlying rate of inflation would
require a degree of restraint over the year
that would be likely to result in money
growth at the low end of the tentative
ranges, and he believed that the ranges
adopted should be more closely centered
on that possible outcome. He also felt
that lower ranges were desirable at this
time to underscore the System's determination to pursue an anti-inflationary
policy.
In the Committee's discussion of policy
implementation for the period until the
next meeting, a majority of the members

FOMC Policy Actions
indicated a preference for maintaining
unchanged conditions of reserve availability, at least initially, following today's
meeting. Further monetary restraint
might be desirable in the near future,
perhaps during the intermeeting period.
However, recent information had given a
somewhat mixed picture of economic
and price developments, and these members preferred to wait for further confirmation of inflationary pressures before
additional firming of monetary policy
was undertaken. Appreciable policy tightening had been implemented only recently and the impact would be felt only
after a considerable lag. Monetary policy
was now fairly restrictive, as evidenced
for example by relatively high real rates
of interest, a slightly inverted yield curve,
and the slow growth of the monetary
aggregates. The credibility of the System's anti-inflationary policy was quite
high. Some members expressed concern
that higher interest rates would exacerbate the financial difficulties of many
thrift depository institutions, weaken
heavily indebted firms, and in the context
of a strong dollar possibly lead to an
undesired upward ratcheting of interest
rates in world financial markets. It also
was noted that further tightening should
be approached with special caution when
the dollar was under upward pressure in
the foreign exchange markets.
Other members indicated a preference
for some immediate firming of monetary
policy in light of their concerns about
current and prospective inflationary pressures in the economy. In this view
delaying further tightening would only
worsen such pressures and could greatly
increase the difficulty and ultimate cost
of achieving the Committee's antiinflationary objectives. Moreover, while
higher interest rates could have adverse
effects on interest-sensitive sectors of the
economy, a failure to arrest and to reverse
inflation would lead to even higher inter


83

est rates and greater damage over time.
Some concern also was expressed that
maintenance of steady reserve conditions
might disappoint market expectations,
with adverse repercussions in present
circumstances on the credibility of the
System's anti-inflationary policy and thus
on inflationary expectations. Should too
much restraint later prove to have been
applied, it could be reversed more readily
and with less lasting implications for
economic performance than too little
restraint, which would tend to embed
inflation and inflationary expectations in
the economic structure.
A number of members observed that
the relatively slow monetary expansion
that had been experienced in recent
months—and indeed on balance for some
two years-portended restraint on prices
and was a welcome development. A staff
forecast suggested that money growth
was likely to remain damped over coming
months, with both M2 and M3 growing
at the lower end of the Committee's 1989
ranges. In the view of a number of
members, this might be acceptable or
even desirable depending on the extent of
inflationary pressures being experienced
in the economy. At the same time some
members cautioned that a persistent
shortfall from the ranges might be a cause
for concern.
In the Committee's discussion of possible intermeeting adjustments in the
degree of reserve restraint, members
generally felt that there should be a clear
presumption of some further firming if
the incoming information tended to confirm expectations of growing inflationary
pressures. Indeed, several members indicated that such a presumption would
enable them to accept a directive that
called for no immediate change in the
degree of reserve pressure. Some members expressed the view that developments in foreign exchange markets might
have an important bearing on the timing

84

76th Annual Report, 1989

or even the desirability of any firming in
the period ahead. More generally, the
Committee agreed that consideration
would need to be given to the usual range
of factors that might call for a change in
policy implementation, including the
possibility that some easing might be
warranted under certain conditions. For
the immediate future, however, several
stressed that any perceptions that monetary policy might be easing should be
resisted.
At the conclusion of the Committee's
discussion, all but two members indicated
that they favored or could accept a
directive that called for maintaining the
current degree of pressure on reserve
conditions and for remaining 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 percent
and 3V2 percent respectively over the
three-month period from December to
March. It was understood that operations
would continue to be conducted with
some flexibility in light of the persisting
uncertainty in the relationship between
the demand for borrowed reserves and
the federal funds rate. 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 7 to 11 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, apart from the direct effects of
the drought, economic activity has continued
to expand at a fairly vigorous pace. After
strong gains in the fourth quarter, total
nonfarm payroll employment rose sharply in
January, including a sizable increase in
manufacturing. The civilian unemployment
rate, at 5.4 percent in January, remained in
the lower part of the range that has prevailed
since the early spring of last year. Industrial
production rose appreciably further in December and January. Housing starts declined
somewhat in December but were up substantially on balance in the fourth quarter. Consumer spending advanced considerably in the
fourth quarter, in part reflecting stronger sales
of durable goods. Indicators of business
capital spending suggest some weakening in
recent months. The nominal U.S. merchandise trade deficit was slightly larger on
average in October and November than in the
third quarter. The latest information on prices
suggests little change from recent trends,
while wages have tended to accelerate.
The federal funds rate and Treasury bill
rates have risen since the Committee meeting
in mid-December; other short-term interest
rates are generally unchanged to somewhat
lower. Bond yields have declined somewhat.
In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies rose substantially over
the intermeeting period.
M2 and M3 weakened appreciably in
January, especially M2. For the year 1988,
M2 expanded at a rate a little below, and M3
at a rate around, the midpoint of the ranges
established by the Committee. M1 has changed
little on balance over the past several months;
it grew about 4 lA percent in 1988. Expansion
of total domestic nonfinancial debt appears to
have moderated somewhat in 1988 to a pace
around the midpoint of the Committee's
monitoring range for the year.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives,
the Committee at this meeting reaffirmed its
decision of late June to lower the ranges for

FOMC Policy Actions

85

growth of M2 and M3 to 3 to 7 percent and 3 lh pressures, thereby increasing the diffito IVi percent, respectively, measured from culty of achieving the Committee's antithe fourth quarter of 1988 to the fourth quarter inflationary objectives and leading to
of 1989. The monitoring range for growth of
total domestic nonfinancial debt was set at 6 Vi even higher interest rates over time.
to \0Vi percent for the year. The behavior of
the monetary aggregates will continue to be
evaluated in the light of movements in their Meeting Held on
March 28,1989
velocities, developments in the economy and
financial markets, and progress toward price
level stability.
1. Domestic Policy Directive
In the implementation of policy for the
immediate future, the Committee seeks to Information reviewed at this meeting
maintain the existing degree of pressure on suggested that activity in the nonfarm
reserve positions. Taking account of indica- economy expanded appreciably further
tions of inflationary pressures, the strength of
the business expansion, the behavior of the in the first quarter. Gains in jobs and
monetary aggregates, and developments in personal income were sizable in the first
foreign exchange and domestic financial two months of the year. The available
markets, somewhat greater reserve restraint indicators on domestic demand presented
would, or slightly lesser reserve restraint a mixed picture, but preliminary data for
might, be acceptable in the intermeeting
period. The contemplated reserve conditions January suggested some improvement in
are expected to be consistent with growth of the external sector. The latest price data
M2 and M3 over the period from December indicated some pickup in inflation from
through March at annual rates of about 2 and recent trends, only in part reflecting
3 Vi percent, respectively. The Chairman may jumps in food and energy prices.
call for Committee consultation if it appears
Total nonfarm payroll employment
to the Manager for Domestic Operations that
reserve conditions during the period before rose markedly further in January and
the next meeting are likely to be associated February after strong gains in the fourth
with a federal funds rate persistently outside a quarter. The rise was paced by continuing
range of 7 to 11 percent.
steady advances in service-producing
Votes for the paragraph on short-term
policy implementation: Messrs. Greenspan, Corrigan, Angell, Black, Forrestal,
Heller, Johnson, Kelley, and LaWare and
Ms. Seger. Votes against this action:
Messrs. Hoskins and Parry.

Messrs. Hoskins and Parry dissented
because they believed that a prompt move
to greater monetary restraint was needed.
Mr Hoskins felt that additional restraint
was desirable to put policy on a course
that would lead toward longer-run price
stability. Mr. Parry emphasized that
inflationary pressures appeared to be
intensifying as the economy had grown to
a level in excess of its long-run, noninflationary potential. Both believed that any
delay in implementing more restraint
probably would aggravate inflationary



industries. Appreciable increases in factory and construction jobs also were
recorded over the two months, but unusually mild winter weather contributed to a
bunching of construction employment
gains in January followed by some retrenchment in February. The civilian
unemployment rate fell to 5.1 percent in
February.
Industrial production was unchanged
in February after rising considerably over
the previous several months. A reduced
rate of automobile assemblies and weakness in the output of materials contributed
to the leveling of industrial activity. In
other areas, production gains were well
maintained for consumer goods, and the
output of business equipment rose rapidly
following weakness in the fourth quarter.
Total industrial capacity utilization edged

86

76th Annual Report, 1989

down in February. Despite appreciable
drops in utilization rates in primary
metals, petroleum products, and paper,
these industries continued to operate at
relatively high levels. In manufacturing,
the operating rate moderated a bit but
remained high. After a weather-related
surge in January, housing starts fell in
February to a level somewhat below their
average in the fourth quarter.
Growth in consumer spending moderated in January and February. Purchases
of cars and light trucks fell back considerably, and the unusually warm weather
held down expenditures on heating bills.
Outlays for goods other than motor
vehicles changed little, while purchases
of nonenergy services posted another
sizable rise.
Indicators of business capital spending
suggested a rebound from a decline in the
fourth quarter. Shipments of nondefense
capital goods excluding aircraft were well
above the fourth-quarter level in January
and February. Nonresidential construction activity rose strongly for a second
month in January, with gains recorded in
almost all categories of building. Petroleum drilling, which declined through
much of last year, appeared to be stabilizing. Inventory investment in the
manufacturing sector picked up in early
1989. Much of the rise was recorded in
the aircraft industry, where work-inprogress inventories were growing in
reflection of booming production, and in
nonelectrical machinery, where computer demand had flattened out in the
fourth quarter. At the retail level, the
pace of non-auto inventory investment
generally remained in line with the
pattern of sales.
Producer prices of finished goods rose
sharply in both January and February,
mostly reflecting higher prices for food
and energy, but prices of a broad range of
other finished goods also increased at a
faster rate. Among intermediate materi


als, prices continued to rise at a substantial pace. Excluding food and energy,
consumer prices advanced in January
and February at a rate a shade above the
average for 1988. Revised data for labor
costs in the fourth quarter and the limited
data available for early 1989 continued to
suggest that these costs remained under
upward pressure.
After a considerable increase in the
fourth quarter of last year, the nominal
U.S. merchandise trade deficit narrowed
in January, according to preliminary
estimates. The value of imports declined
substantially, reflecting an apparent reversal of the strong rise in non-oil imports
that had occurred in the fourth quarter.
The value of exports also declined, but by
less than that for imports, with decreases
recorded in almost all major trade categories. Economic growth slackened in
most of the major foreign industrial
nations in the fourth quarter, but data
available so far in 1989 did not indicate
further slowing.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies rose somewhat
on balance over the intermeeting period.
The dollar was under downward pressure
through most of February, partly in
response to unexpectedly large increases
in U.S. price indexes. After the Federal
Reserve Board approved an increase in
the discount rate on February 24, the
dollar rebounded as U.S. short-term
interest rates rose relative to key foreign
interest rates.
At its meeting on February 7-8, the
Committee adopted a directive calling
for no immediate change in the degree of
pressure on reserve positions. It was
agreed that policy would be tightened
promptly if incoming information tended
to confirm expectations of growing inflationary pressures. The contemplated
reserve conditions were expected to be
consistent with growth of M2 and M3 at

FOMC Policy Actions

87

annual rates of about 2 and 3 Vi percent more than the increase in the federal
respectively over the period from Decem- funds rate, and the prime rate was raised
in two steps of Vi percentage point. Rates
ber through March.
In the context of incoming data tending on Treasury bills moved up appreciably
to reinforce earlier evidence of mounting less, at a time when there was no overall
inflation, the Manager for Domestic growth in the size of the weekly auctions
Operations adjusted the provision of and the supply available for competitive
reserves in mid-February to incorporate awards was reduced by substantial retail
a higher level of adjustment plus seasonal demand through noncompetitive tenders.
borrowing. Subsequently, on February In longer-term debt markets, yields gen24, the Board approved an increase in the erally were up about lh to Vi percentage
discount rate from 6V2 percent to 7 point, but yields on fixed-rate mortgages
percent. The federal funds rate moved up rose somewhat more. Major indexes of
stock prices declined somewhat over the
from about 9 to 9 V% percent at the time of
the February meeting to an average a intermeeting period.
little above 93A percent from late FebruAfter weakening appreciably in January to late March.
ary, growth of M2 and M3 strengthened
The uncertainties about the relation- in February and was estimated to have
ship between borrowing and the federal picked up farther in March. On balance,
funds rate that had complicated open however, the expansion of both aggremarket operations for many months gates had remained quite subdued this
persisted during the intermeeting period. year, apparently reflecting increases in
Adjustment plus seasonal borrowing short-term market rates that had widened
continued to fall considerably short of the opportunity costs of holding deposits.
expectations in relation to the federal In addition, the outflows of funds and
funds rate and, as contemplated by the other adjustments associated with the
Committee, operations continued to be problems of financially troubled thrift
implemented with some flexibility. In depository institutions probably reduced
light of accumulating indications of slightly the growth of the broader moneadditional weakness in borrowing de- tary aggregates. On average in the first
mands relative to earlier patterns, the quarter, growth of M2 was a little below
borrowing assumption was adjusted the Committee's earlier expectations,
downward in the maintenance period while that of M3 was close to expectabeginning March 9. This technical adjust- tions. The levels of M2 and M3 in March
ment was made to bring the assumed were estimated to be respectively, a little
level of borrowing in line with recent below and a little above the lower bounds
experience and with desired overall of the Committee's 1989 ranges for those
conditions in reserve markets. Adjust- aggregates. Ml apparently declined on
ment plus seasonal borrowing averaged balance in the first quarter, while total
about $450 million in the three reserve domestic nonfinancial debt grew at a rate
maintenance periods ending during the near the midpoint of the Committee's
monitoring range for the year.
intermeeting interval.
The tightening of monetary policy
The staff projections prepared for this
along with growing market concerns meeting suggested that the expansion in
about inflation led to sizable increases in the nonfarm economy was likely to
interest rates during this period. In short- moderate appreciably during 1989. The
term markets, rates on most private issues projections assumed that the drought had
rose nearly 1 percentage point, somewhat ended and that normal growing condi


88

76th Annual Report, 1989

tions would prevail in agriculture this
year. The staff anticipated somewhat
faster increases in consumer prices and
further cost pressures over the year
ahead, especially because of reduced
margins of unutilized labor and other
production resources. A monetary policy
to contain inflation necessarily would
involve slower growth of overall demand
and an easing of pressures on resources;
to the extent the strength in demand were
to persist, such a policy could imply
additional pressures infinancialmarkets.
On that basis, the staff projected slower
growth in consumer spending and in
business fixed investment than had occurred in 1988 and some decline in
housing construction. Foreign trade was
expected to make a smaller contribution
to growth in domestic output than it did in
1988. It was assumed that fiscal policy
would become somewhat more restrictive over the year.
In the Committee's discussion of the
economic situation and outlook, members focused on recent indicators of
business activity that pointed at least
tentatively to some moderation in the rate
of economic growth. The members
agreed that the extent and possible duration of any slowing in the expansion were
subject to a great deal of uncertainty, and
that more time was needed to assess
whether recent developments augured
for a sustained period of reduced expansion. The most recent softening in some
of the economic data reflected at least in
part a normal adjustment to unusual,
weather-related strength at the start of the
year and thus did not provide a firm basis
for concluding that more than a pause,
such as often occurs during an expansion,
might be involved. Indeed, in the view of
many members, the economy retained
considerable momentum and there was a
substantial risk that without further policy
action the expansion might not slow
sufficiently to relieve inflationary pres


sures . Others believed that policy already
might have been tightened sufficiently to
contain price pressures in 1989 and to
permit progress to be made over time in
bringing inflation under control. In addition to the indications of possible moderation in the expansion, these members
pointed to the sluggish growth of the
monetary aggregates and to the recent
increases in interest rates and in the
exchange value of the dollar as consistent
with a less robust economy and a less
inflationary environment over time.
In their review of specific developments bearing on the economic outlook,
members reported that the expansion
continued to display considerable vigor
in many regions of the country, while at
least modest overall improvement was
occurring in some previously depressed
areas. At the same time, many business
contacts around the country provided
indications of marginally less ebullient
business conditions or business expectations . Manufacturing continued to bolster
economic activity in many regions and
was in turn buttressed by sales in export
markets. Another positive factor was the
apparent absence of excessive inventories in most industries relative to current
sales. Some members referred to strength
in the agricultural sector, although concerns about drought conditions were
growing in some regions. With regard to
developments pointing to reduced economic expansion, several members referred to signs that the growth in consumer spending had moderated, but it
also was noted that the recent softness in
the major automobile component had
followed a spurt in late 1988 and might be
reversed later. Some slowing in the
growth of consumer spending was
deemed to be desirable to assure satisfactory economic performance, given the
need to ease inflationary pressures on
labor and capital resources while accommodating continuing gains in exports. In

FOMC Policy Actions
addition, the rise in mortgage rates
together with reduced investor demand
had dimmed the outlook for housing,
although unusual weather early this year
made developments in this sector of the
economy especially difficult to assess.
Prospects for business investment were
tempered by ongoing indications of weak
construction activity in many areas and
by some softness in new orders for
business equipment. However, overall
spending on business equipment was
being well maintained and some rebound
in total business fixed investment appeared likely after the slowdown in the
latter part of 1988. On the whole, the
expansion, while apparently moderating,
showed few signs of the kinds of imbalances that might lead to substantial or
cumulative weakening.
The members recognized that the
appreciation of the dollar over the past
year, a byproduct of reliance on monetary
policy to resist inflationary pressures,
would help to damp price increases. On
the other hand, a stronger dollar implied
slower progress in reducing the nation's
trade deficit. Nonetheless, many domestic industries remained competitive in
world markets at current dollar exchange
rates, and further growth in exports was
seen as a reasonable expectation, at least
over the quarters immediately ahead.
As at earlier meetings, the members
gave considerable attention to the outlook
for inflation. Recent large increases in
key price indexes were disappointing, if
not entirely unexpected, and depending
on the performance of the volatile food
and energy sectors, the rate of inflation
might well remain relatively high over
the near term. Labor market conditions
remained tight in many areas, especially
for skilled workers, and many business
contacts reported pressures on both labor
and nonlabor costs. There also were
indications that businesses were finding
it less difficult to pass on rising costs by



89

increasing prices, although efforts to
meet competitive pressures by curbing
costs were continuing. At the same time,
historical experience suggested that a
sustained pickup of inflation was unlikely
in light of the reduced rate of money
growth that had been experienced for an
extended period, especially if such
growth were to continue to be relatively
restrained.
In the Committee's discussion of policy
implementation for the intermeeting
period ahead, a majority of the members
expressed a clear preference for maintaining unchanged conditions of reserve
availability. They emphasized the uncertainties surrounding the current business
outlook and the desirability of waiting to
see if the tentative indications of some
slowing in the expansion signaled the
start of a sustained period of slower
economic growth and reduced inflationary pressures. Because of the usual lags
in the impact of monetary policy on the
economy and prices, the full effect of the
firming in 1988 had not yet been felt,
much less the effect of the substantial
further policy tightening this year. Other
members, while willing to accept an
unchanged policy for now, preferred an
immediate move to further restraint.
They gave more weight to the possibility
that the current slowing of the expansion
might be inadequate to restrain inflationary pressures, and they felt that additional
restraint should be implemented promptly
to provide better assurance that sufficient
monetary restraint was in place.
Most members endorsed the view that,
in the absence of unexpected developments, policy implementation should
resist any perceptions that monetary
policy might be easing. A number also
commented that they would not oppose
some further small rise in money market
interest rates. More generally, a majority
of the members felt that policy implementation over the intermeeting period should

90

76th Annual Report, 1989

be adjusted more readily and promptly
toward greater restraint than toward ease.
Some who preferred an immediate move
to more restraint indicated that such an
understanding would make an unchanged
policy acceptable to them at this time.
Other members preferred not to bias the
approach to intermeeting adjustments
although all but one could accept an
asymmetric directive. A number of
members urged caution in implementing
any policy change; in particular, they
wanted to avoid reacting to a single new
piece of information and preferred instead to wait for evidence to accumulate
on the possible need for a further tightening of policy.
The members took account of a staff
projection that indicated that with unchanged reserve conditions, expansion
of M2 and M3 was likely to remain
subdued during the second quarter, although such growth probably would be
somewhat faster than in the current
quarter. The expansion in these monetary
aggregates was likely to continue to be
held back by the relatively slow adjustment of offering rates on liquid deposit
accounts in response to the increases that
had occurred in market interest rates.
Additionally, developments at thrift
institutions might continue to depress
growth of the broad aggregates, but
probably by less than in the first quarter,
assuming no new developments that
aggravated depositor concerns. On a
cumulative basis from the fourth quarter
to June, the projection implied expansion
of M2 at a rate just below the lower bound
of the Committee's 3 to 7 percent range
for the year, while expansion of M3
would be in the lower half of the Committee's V/i to IVi percent range. A number
of members stressed that slow monetary
growth was a desirable development in
current circumstances, but some also
expressed concern that the slowing could
be overdone.



In light of the tightening of reserve
conditions that had occurred since the
February meeting and the related increase in the federal funds rate, the
members decided to raise the intermeeting range for the federal funds rate 1
percentage point to 8 to 12 percent. Such
an increase implied that the expected
federal funds rate would average closer
to the middle of the range. That range
provides one mechanism for initiating
consultation of the 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 and that provided for
giving particular weight to potential
developments that might require some
firming during the intermeeting period.
Accordingly, some added reserve restraint would be acceptable, or some
slight lessening of reserve pressure
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 3 percent and 5 percent
respectively over the three-month period
from March to June. It was understood
that operations would continue to be
conducted with some flexibility in light
of the persisting uncertainty in the
relationship between the demand for
borrowed reserves and the federal funds
rate.
At the conclusion of the meeting, the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:

FOMC Policy Actions
The information reviewed at this meeting
suggests that activity in the nonfarm economy has expanded appreciably further in
the current quarter. After strong gains in
the fourth quarter, total nonfarm payroll
employment rose markedly further in
January and February. The civilian unemployment rate fell considerably to 5.1 percent
in February. Industrial production was
unchanged in February after rising substantially over the previous several months.
After a weather-related surge in January,
housing starts fell in February to a level
somewhat below their average in the fourth
quarter. Growth in consumer spending
moderated in January and February. Recent
indicators of business capital spending
suggest a rebound after a decline in the
fourth quarter. The nominal U.S. merchandise trade deficit was larger in the
fourth quarter than in the third quarter; the
preliminary estimate of the deficit for
January was smaller than the average for the
fourth quarter. The latest information on
prices suggests some pickup in inflation from
recent trends.
Interest rates in both short- and long-term
markets have risen considerably since the
Committee meeting in early February. On
February 24 the Federal Reserve Board
approved an increase in the discount rate
from 6V2 to 7 percent. In foreign exchange
markets, the trade-weighted value of the
dollar in terms of the other G-10 currencies
rose somewhat on balance over the intermeeting period.
Growth of M2 and M3 strengthened in
February and apparently picked up further in
March; over the first quarter such expansion
was about in line with Committee expectations. Ml appears to have declined marginally
since December.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international
transactions. In furtherance of these objectives, the Committee at its meeting in
February established ranges for growth of
M2 and M3 of 3 to 7 percent and 3l/i to IV2
percent, respectively, measured from the
fourth quarter of 1988 to the fourth quarter
of 1989. The monitoring range for growth of
total domestic nonfinancial debt was set at
6!/2 to 10!/2 percent for the year. The
behavior of the monetary aggregates will



91

continue to be evaluated in the light of
movements in their velocities, developments
in the economy and financial markets, and
progress toward price level stability.
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 March through June 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 8 to 12 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Heller,
Johnson, Keehn, Kelley, LaWare, Melzer,
and Syron. Vote against this action: Ms.
Seger.
Ms. Seger supported the decision to
keep policy unchanged in the period
immediately ahead, but she could not
accept a directive that allowed intermeeting adjustments to be made more
readily in a firming than in an easing
direction as new information became
available. The lagged effects of the
substantial tightening that had been
implemented earlier coupled with
current indications of slower economic
growth suggested that policy already
had been tightened enough to lead to
lower inflation over time. Under current
circumstances, further firming carried
substantial risks to interest-sensitive
sectors of the economy, the level of the
dollar in foreign exchange markets, and
the continued growth of the economy.

92

76th Annual Report, 1989

2. Authorization for Domestic
Open Market Operations
Effective March 29,1989, the Committee
approved a temporary increase of $2
billion, to $8 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 May 16, 1989.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Heller, Johnson,
Keehn, Kelley, LaWare, and Melzer, Ms.
Seger, and Mr. Syron. 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
might not be sufficient over the intermeeting period because of seasonal increases
in currency in circulation and in required
reserves and a large rise in Treasury
balances at the Federal Reserve Banks
after the tax payment date in mid-April.

Meeting Held on
May 16,1989
1. Domestic Policy Directive
Information reviewed at this meeting
suggested that the rate of economic
expansion had slowed in recent months.
Job gains had diminished noticeably in
March and April, and industrial production was growing more slowly than in
1988. On the demand side, growth in
consumer spending appeared to have
slackened, and housing activity had
weakened considerably. Broad measures



of prices had risen somewhat more
rapidly in 1989, with a significant contribution from sharp increases in energy
prices. Year-over-year increases in labor
costs appeared to be continuing on an
upward trend but at a more gradual rate.
Gains in total nonfarm payroll employment moderated substantially in March
and April from the rate recorded over the
previous six months. Much of the MarchApril increase occurred in the services
industry, where employment continued
to expand at about the 1988 pace. In
April, job growth slackened at wholesale
and retail trade establishments, and factory employment remained a bit lower
than its January level. Although new
claims for unemployment insurance continued low, the civilian unemployment
rate rose from 5.0 percent in March to
5.3 percent in April.
Industrial production increased in
April after declining on balance over the
preceding two months. The April pickup
reflected a sizable rise in motor vehicle
assemblies after a weak first quarter as
well as a retracing of the March decline in
output of other consumer goods. Production of business equipment continued to
rise in April at about the strong firstquarter pace. Total industrial capacity
utilization rose in April but remained
below its January level. Operating rates
in manufacturing edged up despite a
further decline in capacity utilization in
primary processing industries.
Growth in consumer spending had
slowed considerably this year from the
pace in 1988. A reduction in growth of
spending for services along with smaller
outlays for durable goods, notably motor
vehicles, more than offset a pickup in
expenditures for nondurable goods. In
April, enhanced manufacturer incentives
spurred spending on motor vehicles and
boosted retail sales after aflatMarch, but
outlays on other durable goods remained
weak. After a sizable rise in the second

FOMC Policy Actions
half of 1988, housing starts weakened
sharply this year. In April, a substantial
drop in starts of multifamily units brought
overall housing starts to their lowest level
since December 1982.
By contrast, recent indicators of business capital spending showed a rebound
in early 1989 after a decline in the fourth
quarter. Shipments of nondefense capital
goods excluding aircraft picked up
sharply in the first quarter; among the
major components, computers posted a
sizable increase after a sharp fourthquarter decline, and only business purchases of motor vehicles evidenced weakness . Nonresidential construction activity
rebounded sharply in March from a
February decline, and petroleum drilling
turned up, apparently in response to
increases in oil prices. In the first quarter,
inventory investment in the manufacturing sector continued at about the average
1988 pace; a substantial part of this
accumulation was in stocks of work-inprocess in the aircraft industry where
new orders and production remained on a
distinct uptrend. The overall inventory to-shipments ratio had changed little from
the year-end level. At the retail level,
inventory-sales ratios edged up as a result
not only of further accumulations in the
automotive area but also of some rise in
apparel and general merchandise stocks.
After rising sharply in the first two
months of the year, producer prices of
finished goods advanced at a substantially
less rapid pace in March and April. The
April increase reflected another large
jump in energy prices; prices of consumer
foods turned down, partially reversing
their sizable first-quarter increase, and
prices of other finished goods were little
changed. At the intermediate and the
crude materials levels, the April price
increases were attributable entirely to the
surge in energy prices. Both food and
energy prices contributed to the rise in
consumer prices in March. Nevertheless,



93

excluding these components, consumer
prices advanced at a slightly faster rate in
the first quarter of 1989 than in the fourth
quarter of 1988. The year over-year
increase in this measure of consumer
prices had edged up only marginally since
the beginning of the year, a pattern also
evident in broad measures of labor
compensation.
The nominal U.S. merchandise trade
deficit widened somewhat in February,
but the average deficit for January and
February together was smaller than that
for the fourth quarter. Exports for the
January- February period were well
above their fourth-quarter level; much of
the increase occurred in agricultural
products. Imports advanced considerably
less, as declines in automotive products,
consumer goods, and foods nearly offset
increases in oil, industrial supplies, and
capital goods. Available indicators suggested that the pace of economic growth
and inflation had increased on balance in
the major foreign industrial countries in
early 1989.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies rose further on
balance over the intermeeting period.
The dollar declined early in the period as
market participants perceived central
bank authorities as actively seeking a
lower dollar. Despite some continued
narrowing of short-term interest rate
differentials between dollar-denominated
assets and both mark and yen assets, the
dollar subsequently rebounded; market
concerns about political uncertainties in
Germany and Japan apparently were a
factor in the rise.
At its meeting on March 28, the
Committee adopted a directive that called
for no immediate change in the degree of
pressure on reserve positions but that
provided for giving particular weight to
potential developments that might require
some firming during the intermeeting

94

76th Annual Report, 1989

period. An unchanged availability of
reserves over the period was expected to
be consistent with the growth of M2 and
M3 over the period from March through
June at annual rates of about 3 percent
and 5 percent respectively. It was 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 stable
over the intermeeting interval following
the March meeting, except that stronger
than-anticipated federal tax revenues and
related reserve flows associated with the
April tax date contributed for a time to
slightly firmer reserve markets. In the
reserve maintenance periods completed
since the March meeting, adjustment plus
seasonal borrowing averaged $565 million while federal funds generally traded
around 9% percent or a little below.
With incoming information suggesting
a more moderate pace of economic
expansion, other market interest rates
declined over the intermeeting period.
Rates on short- and intermediate-term
U.S. Treasury issues dropped almost
1 percentage point, and those on private
money market instruments fell somewhat
less. Yields generally were down 25 to
50 basis points in long-term debt markets,
and major indexes of stock prices rose
substantially.
M2 and M3 grew more sluggishly in
April than had been anticipated, as substantial deposit outflows began after midmonth and continued into early May.
Declines in transaction and other liquid
balances were associated primarily with
outsized personal tax payments and a
shortfall in tax refunds. Growth of the
broader monetary aggregates also continued to be restrained by the effects of the



earlier rise in market interest rates, which
had substantially increased the opportunity costs of holding deposits. Through
April, expansion of M2 had been at a rate
well below the Committee's range for the
year, while growth of M3 had been in the
lower portion of its range. Reflecting the
persisting weakness in transactions balances in 1989, Ml was below its average
level in the fourth quarter of 1988.
Growth in total domestic nonfinancial
debt slowed somewhat in April, damped
by strong tax revenues that reduced the
Treasury's financing needs and by a
virtual halt in refundings of state and
local obligations owing to the earlier
climb in interest rates.
The staff projection prepared for this
meeting suggested that the expansion of
the nonfarm economy over the remainder
of 1989 was likely to be at a pace
somewhat below that officially reported
for the first quarter. The projection
continued to assume that the drought had
ended and that normal agricultural growing conditions would prevail. The staff
anticipated that, with margins of unutilized labor and other production resources remaining relatively low, most
measures of prices and labor costs would
increase at somewhat faster rates in 1989
than in 1988. A monetary policy to
contain inflation would involve slow
growth of overall demand and an easing
of pressures on labor and capital resources ; to the extent that strength in final
demands were to persist, such a policy
would imply additional pressures in
financial markets. The staff projected
sluggish consumer outlays for goods and
services and further weakness in housing
construction over the remainder of 1989.
The contribution of foreign trade to
growth was likely to be limited, and fiscal
policy was expected to be moderately
restrictive. Growth in business capital
spending, particularly for equipment
purchases, was expected to moderate

FOMC Policy Actions
over the rest of the year from its vigorous
first-quarter pace.
In the Committee's discussion of the
economic situation and outlook, members focused on accumulating indications
that the expansion in business activity
was slowing to a pace that they generally
viewed as more sustainable and more
consistent with reducing inflation pressures over time. The apparent slowing in
the growth of domestic consumer demand
would tend to make more domestic
resources available for the production of
export goods and the expansion of domestic capital. There was little evidence at
this point of the kinds of imbalances that
normally signal a downturn in economic
activity, but some members expressed
concern that a cumulative slowing of the
business expansion could not be ruled
out, especially since the effects of earlier
policy tightening actions had not been
felt fully. In this regard, the extended
weakness in monetary growth, at a time
of slowing economic expansion, was a
worrisome development. The latest information on prices and wages was cited as
encouraging, possibly indicating that the
underlying rate of inflation might be
leveling out, although it was still undesirably high.
In the course of the Committee's discussion, members observed that the
broad indications of slower but continuing business expansion were supported
by reports on regional economic developments. While conditions varied across
the country, overall activity appeared to
be advancing in most regions, though
evidence of slower growth was apparent
in some of them. Retail sales had flattened
out in a number of areas. The weakness
in sales was more widespread and pronounced in the case of motor vehicles,
particularly after taking account of incentive programs introduced recently by auto
manufacturers. Consumer spending was
not likely to increase rapidly over coming



95

quarters but should be sustained at a
moderate pace by a high level of employment and further expansion in personal
incomes. Housing construction was depressed in many areas, and this sector of
the economy was not expected to make
much, if any, net contribution to the
expansion this year, at least on the
assumption of unchanged financial conditions in mortgage markets. Business
fixed investment presented a mixed picture by industry but, in the context of
high capacity utilization rates and strong
pressures to cut costs, further overall
growth was viewed as a reasonable
prospect following the sharp pickup in
thefirstquarter. Conditions in agriculture
were described as favorable in most parts
of the nation, though some areas were
still affected by drought conditions.
Outside the motor vehicles sector, inventories displayed few signs of the imbalances that usually presage a downturn in
production; some of the recent build-up
involved work-in-process inventories in
industries such as commercial aircraft
that had firm order backlogs. Gains in net
exports had contributed importantly to
continued expansion over recent quarters. While further progress in reducing
the nation's trade deficit was anticipated,
some members emphasized the potentially adverse implications of a strengthening dollar for the nation's trade balance
and domestic economic growth. On the
whole, the economic expansion appeared
to be stabilizing at a reduced but sustainable pace that tended to reflect both
capacity constraints in some industries
and some slowing in the growth of overall
domestic demand.
With regard to the outlook for prices
and wages, a number of members emphasized that inflationary pressures were still
firmly rooted in the economy and that the
rate of inflation might well remain unacceptably high for an extended period.
However, the slowdown in economic

96

76th Annual Report, 1989

growth should tend to moderate pressures
on costs over time, and the most recent
information on prices and wages had
been encouraging. In addition, the overall outlook for agricultural production
this year had favorable implications for
food prices, and the recent strength of the
dollar augured well for domestic inflation, albeit at the cost of reduced export
opportunities. With respect to wages,
some members commented that recent
patterns were better than they had expected, given the persistence of tight
labor markets in many areas and the low
rate of unemployment for the nation as a
whole. However, reference also was
made to indications of greater militancy
on the part of labor in some parts of the
country and to a recent labor settlement
that could have inflationary implications.
On balance, in the context of slowing
economic expansion, several members
noted that the risks to the economy
apparently had become less one-sided,
having shifted from a strong potential for
greater inflation to more equally weighted
risks of higher inflation and a substantial
shortfall in economic growth.
Turning to the conduct of monetary
policy, nearly all of the members endorsed a proposal to maintain unchanged
conditions of reserve availability, at least
initially in the intermeeting period. There
was considerable uncertainty as to
whether monetary conditions were sufficiently restrictive to foster lower rates of
inflation or had become so tight as to
cause an even greater slowing in the
expansion than might be needed to relieve
inflation pressures. In the circumstances,
most members viewed a steady policy as
offering the best promise at this point of
being associated with thefinancialmarket
conditions and monetary growth rates
that would support an appropriately
restrained rate of economic expansion to
accommodate the Committee's antiinflationary objectives. Given current



uncertainties, further developments
would need to be evaluated carefully and
might well call for some adjustment of
policy, in either direction, before the
next meeting of the Committee.
In the course of their discussion, the
members took account of a staff analysis
that indicated that unchanged reserve
conditions were likely to be associated
with some rebound in the growth of the
monetary aggregates during the intermeeting period. Earlier increases in
market interest rates in the context of
typically sluggish adjustments of offering
rates on relatively liquid consumer-type
deposits had fostered slow growth in M2
and to a lesser extent in M3, while
demand deposits had declined appreciably on balance since year-end. In recent
weeks, transaction and other liquid accounts had been depressed further in
conjunction with larger-than-expected
tax payments and atypically small tax
refunds. The staff analysis postulated
some replenishment of tax depleted deposits and a lessening impact from earlier
increases in market rates on interestsensitive deposit accounts, although there
was as yet little evidence of a rebound.
In the light of indications of slower
growth in business activity and sluggish
monetary expansion that had left M2 well
below the lower bound of its annual
growth cone and M3 near the lower limit
of its annual range, members attached
considerable importance to the need for
an upturn in monetary growth. Indeed,
the behavior of the monetary aggregates
would need to be monitored with special
care over the weeks ahead, and a failure
of monetary growth to revive during this
period might well signal some further
weakening in the business expansion and
warrant a special consultation of the
Committee. A pickup in M2 would be
needed fairly soon to give some assurance
that this aggregate was on a track that
would bring it within the Committee's

FOMC Policy Actions
range for the year. In one view the
monetary aggregates already were sufficiently weak to justify some immediate
easing of reserve conditions in order to
improve the prospects that adequate
monetary growth would occur to sustain
the economic expansion. Other members
preferred a more cautious approach, in
part to avert the potential need for, and
resulting market unsettlement that would
be associated with, a subsequent reversal
of the easing, particularly if special
factors depressing recent monetary
growth were reversed.
With respect to possible adjustments
in monetary policy during the intermeeting period ahead, a majority of the
members supported a directive that would
make an easing or a tightening of policy
equally likely, depending on economic
and financial developments and the behavior of the monetary aggregates. However, one member preferred a directive
that was tilted toward ease in order to
help assure a prompt policy response if
monetary growth did not rebound relatively soon. Other members indicated a
preference for retaining the previous
intermeeting instruction that tilted more
toward tightening than toward easing.
Persisting inflationary pressures and, in
this view, the still tentative indications of
a slower business expansion argued for a
continuing bias toward restraint. Some
members were concerned that, under
prevailing circumstances, a move to a
symmetrical directive could be misinterpreted, when published, as a lessening of
the Committee's commitment to an antiinflationary policy.
During the Committee's discussion,
consideration was given to the technical
relationship between the level of adjustment plus seasonal borrowing and that of
the federal funds rate. In comparison
with experience in earlier years, borrowing had been low for some time in relation
to the federal funds rate. However, the



97

shortfall appeared to have diminished in
recent weeks—largely because of a surge
in seasonal borrowing-and, according
to a staff analysis, unchanged reserve
conditions over the upcoming intermeeting period might encompass somewhat
higher average borrowing. In light of the
persisting uncertainties in the relationship between borrowing and the federal
funds rate, the members accepted the
need for continued flexibility in the
conduct of open market operations.
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 initially for
no change in the degree of pressure on
reserve positions. Some firming or some
easing of reserve conditions would be
acceptable during 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 \xh and
4 percent respectively over the threemonth 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 left unchanged at 8 to 12
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 rate of economic growth has
slowed in recent months. Gains in total
nonfarm payroll employment moderated substantially in March and April, and employment in manufacturing was about unchanged

98

76th Annual Report, 1989

over the two months. The civilian unemployment rate rose considerably to 5.3 percent in
April. Industrial production increased in April
after declining on balance in the preceding
two months. Growth in consumer spending
has slowed considerably in recent months.
Housing starts declined further in April.
Recent indicators of business capital spending
show a rebound after a decline in the fourth
quarter. The nominal U.S. merchandise trade
deficit was smaller on average in January and
February than in the fourth quarter. Broad
measures of prices have risen somewhat more
rapidly in 1989, with a significant contribution
from sharp increases in energy prices.
Interest rates have declined considerably
since the Committee meeting in late March.
In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies rose further on balance
over the intermeeting period.
Growth of M2 and M3 was sluggish in
April, primarily because of a sizable decline
in transactions balances. Through April,
expansion of M2 has been at a rate below the
Committee's range for the year, while growth
of M3 has been in the lower portion of its
range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives,
the Committee at its meeting in February
established ranges for growth of M2 and M3
of 3 to 7 percent and 3V2 to 7*/2 percent,
respectively, measured from the fourth quarter of 1988 to the fourth quarter of 1989. The
monitoring range for growth of total domestic
nonfinancial debt was set at 6!/2 to 10 Vi
percent for the year. The behavior of the
monetary aggregates will continue to be
evaluated in the light of movements in their
velocities, developments in the economy and
financial markets, and progress toward price
level stability.
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
or somewhat lesser reserve restraint would be



acceptable in the intermeeting period. The
contemplated reserve conditions are expected
to be consistent with growth of M2 and M3
over the period from March through June at
annual rates of about IV2 and 4 percent,
respectively. The Chairman may call for
Committee consultation if it appears to the
Manager for Domestic Operations that reserve conditions during the period before the
next meeting are likely to be associated with a
federal funds rate persistently outside a range
of 8 to 12 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Heller, Johnson,
Keehn, Kelley, and LaWare, Ms. Seger,
and Mr. Syron. Vote against this action:
Mr. Melzer.
Mr. Melzer dissented because he favored an immediate move to slightly less
pressure on reserve positions. While
inflation was currently too high and might
move even higher in the short run, he felt
that the monetary policy restraint of the
past two years would eventually reduce
inflationary pressures. In addition, he
was concerned that the very restrictive
monetary policy of recent quarters, evidenced by extremely sluggish growth of
reserves, the monetary base, and the
monetary aggregates, heightened the
risks of a recession unless the policy were
to be reversed soon. In the event of a
recession, a policy response aimed at a
quick recovery could make the longerterm goal of price stability even more
difficult to attain.

2. Foreign Currency Authorization
At this meeting the Committee approved
an increase in the limit on holdings of
foreign currencies in the System Open
Market Account. Paragraph ID of the
Committee's Authorization for Foreign
Currency Operations permitted the Federal Reserve Bank of New York, for the
System Open Market Account, to maintain an overall open position in all foreign

FOMC Policy Actions

99

Recent data on production and spending
suggested a fairly consistent pattern of
weakness in housing and in consumer
goods, notably motor vehicles. Running
counter to that trend was a further sizable
increase in spending for business equipment following a strong first quarter; in
addition, the trade deficit had narrowed
further. Broad measures of prices continued to rise more rapidly than in 1988,
reflecting sharp upward pressures on
energy and food prices. There had been
no discernible step-up in the pace of wage
Votes for this action: Messrs. Greenspan, inflation, however, even though levels of
Corrigan, Angell, Guffey, Heller, Johnson, labor utilization remained relatively high.
Keehn, Kelley, and Melzer, Ms. Seger, and
Growth in total nonfarm payrolls modMr. Syron. Vote against this action: Mr.
erated substantially in recent months
LaWare.
from the pace of the previous two years.
Mr. LaWare dissented because he Employment in manufacturing and conwanted to convey his skepticism about struction fell in May and on balance had
the effectiveness of sterilized intervention changed little in both sectors since Januin foreign exchange markets. He did not ary. Job growth in services was relatively
object to the specific transactions that had weak in May, judged by recent standards,
been conducted recently.
as gains in trade and business services
Following the meeting the dollar re- were small. Despite the slower pace of
mained under strong upward pressure payroll growth this year, the factory
that was resisted through very large workweek remained high by historical
additional System purchases of foreign standards in May, and initial claims for
currencies. Effective June 14, 1989, the unemployment insurance had increased
Committee approved a further increase only slightly through mid-June. The
to $18.0 billion in the limit on System civilian unemployment rate, at 5.2 perholdings of foreign currencies under cent in May, stayed close to its average
Paragraph ID of the Authorization for level in earlier months of the year.
Foreign Currency Operations.
Industrial production increased on
balance in April and May at about the
Votes for this action: Messrs. Greenspan, reduced rate experienced earlier in the
Corrigan, Angell, Guffey, Heller, Johnson,
Keehn, Kelley, LaWare, and Melzer, Ms. year. Assemblies of motor vehicles,
Seger, and Mr. Syron. Votes against this which had turned up in April, fell appreciably in May. Production of consumer
action: None.
goods other than automobiles also softened in May, and output of construction
Meeting Held on
supplies registered a decline for the
July 5-6,1989
fourth consecutive month. Production of
business equipment excluding automo1. Domestic Policy Directive
biles continued to advance strongly in
The information reviewed at this meeting April and May, partly as a result of a
tended to confirm earlier indications that surge in the manufacture of computers
economic growth had slowed this year. but also owing to gains for a variety of
currencies not exceeding $12.0 billion.
System holdings of such currencies had
risen rapidly this year and totaled nearly
$11 billion, based on historical costs. In
light of the potential for further System
acquisitions of foreign currencies in
coordination with similar transactions by
the U.S. Treasury and in cooperation
with foreign monetary authorities, the
Committee agreed to raise the limit in
Paragraph ID of the Authorization to
$15.0 billion, effective immediately.




100 76th Annual Report, 1989
other types of equipment, particularly
capital goods for manufacturing industries. Total industrial capacity utilization
retraced its April rise in May but remained well above its relatively high
level of a year ago. Operating rates in
manufacturing slipped farther in May for
primary processing industries, while
those for advanced processing industries
were sustained at the already high levels
evident in earlier months of the year.
Despite considerable gains in real
disposable income in recent quarters, the
sluggish growth in consumer spending
that had emerged earlier in 1989 continued into the second quarter. In May, a
decline in expenditures was led by a
reduction in outlays for motor vehicles,
although spending also was flat or down
for a broad range of other goods, both
durable and nondurable. In contrast to
outlays on goods, growth in purchases of
services was well maintained. Housing
starts declined slightly further in May, as
single-family starts slipped back to their
weak level of March. Starts of multifamily units were little changed in May from
the seven-year low recorded in April.
Home sales had fallen this year.
Recent indicators of business capital
spending suggested a further substantial
increase in the second quarter after a
strong first quarter. Shipments of nondefense capital goods advanced sharply in
April, with solid gains for most broad
categories, and remained high in May.
Nonresidential construction activity had
changed little in recent quarters although
industrial structures put in place strengthened somewhat, perhaps reflecting sustained high levels of factory utilization in
some industries. Inventory investment
by manufacturers continued in April at
about the first-quarter pace and such
inventories remained in line with shipments. Much of the increase in factory
inventories was concentrated in work-inprocess stocks in the aircraft industry,



where production had been strong. In the
retail sector, dealer stocks of automobiles
remained high, and inventories at other
retail establishments had risen a bit
relative to sales, measured on a constantdollar basis, but there were only limited
indications of excess stocks in the nonautomotive segments of retailing.
The nominal U.S. merchandise trade
deficit narrowed in April from a firstquarter average that was the smallest in
four years. Exports strengthened a little
in April when a decline in sales of
agricultural products from their high
March levels was outweighed by increases in most other major trade categories, especially industrial supplies and
machinery. Appreciable declines in imports of automotive products, machinery,
and foods more than offset a rise in oil
imports. Available data suggested some
slowing recently in the growth of economic activity in the major foreign
industrial countries following robust
expansion in the first quarter; inflation
rates had moved up in most of those
countries.
Continuing a pattern of sharp increases
this year, producer prices of finished
goods were up substantially further in
May. The May rise was led by further
advances in prices of food and energy
products, but prices of nonfood, nonenergy goods also rose after being about
unchanged in April. In April and May,
increases in prices of most materials were
noticeably smaller than those registered
for finished goods. The consumer price
index rose sharply further in April and
May. Over the first five months of the
year consumer prices increased at a faster
rate than in 1988; however, excluding
food and energy, the rate of increase in
these prices differed little from last year's
pace, partly because of the damping
effect of the appreciation of the dollar on
the prices of a broad range of imported
goods. Recent data for labor compensa-

FOMC Policy Actions
tion indicated that year-over-year increases in average hourly earnings of
production and nonsupervisory workers
remained near the average pace evident
since mid-1988.
In foreign exchange markets, the
dollar recorded significant gains against
most of the other G-10 currencies in the
weeks after the Committee meeting on
May 16; in mid-June, the dollar reached
a two and one-half year high against
the mark and a one and one-half year
high against the yen. Smaller-thananticipated trade deficits announced for
March and April, political events in
China and Japan, and expectations of
capital gains in U.S. bond and equity
markets appeared to have helped trigger
buying pressure at a time of narrowing
differentials between interest rates in the
United States and abroad. The dollar
subsequently fell back sharply in often
volatile trading, its weighted-average
value in terms of the other G-10 currencies more than retracing the earlier
rise. The decline in the value of the
dollar occurred largely in the absence of
significant new economic developments
or clear indications of a reassessment
of economic fundamentals by market
participants.
At its meeting on May 16, the Committee adopted a directive calling for no
immediate change in the degree of pressure on reserve positions. The Committee
agreed that somewhat greater or somewhat lesser reserve restraint would 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. This policy stance was expected to
be consistent with growth of M2 and M3
at annual rates of around Wi and 4 percent respectively over the period from
March through June.



101

Immediately after the Committee meeting, the Manager for Domestic Operations directed operations toward maintaining the existing degree of pressure on
reserve positions. A technical upward
revision was made to the assumed level
of adjustment plus seasonal borrowing to
bring it in line with desired overall
conditions in reserve markets; this revision resulted from the recent, unusual
strength of seasonal borrowing that perhaps was associated with heavier demands for crop production loans at a time
of weak deposit growth at agricultural
banks. Later in the intermeeting period, a
variety of developments began to suggest
that a slackening in inflation pressures
might be in prospect as indications of
slower economic expansion continued to
accumulate, monetary growth remained
sluggish, and the dollar climbed further.
In these circumstances, the Manager for
Domestic Operations acted in early June
to reduce somewhat the degree of pressures on reserve positions. Adjustment
plus seasonal borrowing averaged about
$550 million over the three full reserve
maintenance periods completed since the
May 16 meeting, while the federal funds
rate moved down about lA percentage
point to 9Vi percent or slightly higher
more recently.
Other market interest rates also fell
over the intermeeting period in response
to indications of a continuing softness in
the economy and a better outlook for
inflation as well as to the easing of
monetary policy. Short-term market rates
dropped 25 to 70 basis points, and the
prime rate was lowered Vi percentage
point to 11 percent in early June. In
long-term debt markets, yields on Treasury coupon issues dropped 70 to 90
basis points. Stock prices rallied through
much of the intermeeting period, and
major indexes reached new post-1987crash highs before giving up most of
those gains.

102 76th Annual Report, 1989
M2 and M3 declined in May, primarily
because of sizable reductions in transaction and other liquid deposit balances that
seemed to be related to the clearing of
unexpectedly large payments to cover
federal tax liabilities for 1988. Through
mid-June, growth of these aggregates
appeared to have rebounded in conjunction with some rebuilding of tax-depleted
balances and the declines in market
interest rates that brought some narrowing of the large opportunity costs associated with holding liquid deposits. Nonetheless, the growth of M2 for the year to
date remained below the lower end of the
Committee's annual target range. Ml
continued to contract through mid-June,
as weakness in transaction balances,
especially in demand deposits, persisted.
Domestic nonfinancial debt expanded in
May at a slightly lower rate than it did in
the first quarter.
The staff projections prepared for this
meeting suggested that growth of the
nonfarm economy over the remainder of
1989 and for 1990 was likely to be at a
pace a little lower than that estimated for
the first half of this year. The projection
continued to assume that normal agricultural growing conditions would prevail.
Although the recent strengthening of the
dollar was tending to damp import prices
and thereby domestic inflation, the staff
anticipated that, with margins of unutilized labor and other production resources still relatively low, most measures of prices and labor costs would
increase at slightly faster rates in 1989
than in 1988. Inflationary pressures were
expected to abate a bit in 1990, partly in
response to gradually mounting slack in
labor and product markets. The staff
projected that the contribution of foreign
trade to growth would be very limited, as
real export gains dropped well below the
pace of recent quarters, and that fiscal
policy would remain moderately restrictive. In view of expected meager gains in



employment and real income, consumer
spending would be sluggish through
1990. Housing activity was projected to
benefit from the recent drop in interest
rates. Relatively sluggish final demands
along with reduced capacity utilization
rates were expected to have a restraining
effect on the growth of business capital
spending.
In the Committee's discussion of current and prospective economic conditions, members focused on accumulating
indications of reduced growth in business
activity and on the implications for the
outlook for the economy and prices. The
members generally concluded that continuing expansion at a relatively slow
pace was a reasonable expectation for the
next several quarters and that the associated lessening of pressures on labor and
capital resources was likely to foster
progress in curbing inflation over time.
Members noted that the economic outlook was subject to considerable uncertainty and that substantial deviations from
current expectations might well occur.
The latest information suggested some
risk that the expansion might weaken
further, but current business conditions
provided few indications of the kinds of
imbalances and distortions that often lead
to downturns in economic activity. Some
members emphasized that a recession,
should one materialize, might be aggravated by the debt burdens or debt exposure of many business and financial
firms. At the same time, inflation remained unacceptably high and cost pressures substantial; however, in the context
of a weaker economic outlook and an
extended period of slow monetary
growth, the risks of a sustained acceleration in inflation appeared to be more
limited than they had earlier in the year.
Nonetheless, a policy designed to bring
about some reduction in underlying inflation pressures and improvement in the
nation's external accounts might be asso-

FOMC Policy Actions
ciated with relatively slow growth of
domestic spending for some time.
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 provided specific projections of growth in
real and nominal GNP, the rate of unemployment, and the rate of inflation. With
regard to the rate of expansion in real
GNP, the projections had a central tendency of 2 to 2lh percent for 1989 as a
whole, implying continuing growth at a
reduced pace in the second half of the
year; for the year 1990 the central
tendency was IV2 to 2 percent. Projections of growth in nominal GNP converged on rates of 6 to 7 percent for 1989
and 5Vi to 6% percent for 1990. The
projected rates of unemployment centered around 5Vi percent for the fourth
quarter of 1989 and 5Vi to 6 percent for
the fourth quarter of 1990. With respect
to the rate of inflation, the projections
had a central tendency for the consumer
price index of 5 to 5 V2 percent for 1989
and 4V2 to 5 percent for 1990. In making
these projections the members took account of the Committee's decisions at this
meeting with regard to the objectives for
monetary growth in 1989 and 1990. The
members assumed that progress would
be made in reducing the federal budget
deficit and that fluctuations in 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 1990.
In their review of specific developments bearing on the outlook for the
economy, members observed that growth
appeared to be slowing in many parts of
the country but that the utilization of
labor and capital resources remained high
in most regions and continued to improve
in others from relatively depressed lev


103

els. In general, business sentiment remained favorable, though the emergence
of somewhat more cautious attitudes was
detected in a number of areas and industries. With regard to specific sectors of
the economy, current data and business
contacts did not suggest any general
backup in inventories apart from motor
vehicles; however, there were some
recent reports of marginally excessive
inventories in a few nonautomotive businesses, and a further slippage in the
growth of final demand could lead to
efforts to pare inventories and production
schedules. The members generally anticipated continued overall growth in business fixed investment, though at a pace
much reduced from that experienced
earlier in the year. Nonresidential construction activity was lagging in many
areas, but the demand for business equipment remained relatively vigorous, in
part because of sales abroad. Housing
activity was weak in a number of markets,
including some that had displayed considerable vigor until recently, but the decline
in mortgage rates was believed likely
to sustain activity in this sector of the
economy.
A key element in the outlook for
overall business activity was the prospects for consumer spending; many
members saw little basis for anticipating
further slowing in the expansion of
consumer expenditures, but others were
less persuaded and some cited in particular the possibility that relatively weak
sales of motor vehicles might continue.
Foreign trade was another important
sector bearing on the economic outlook.
Some further growth in net exports was
viewed as a reasonable prospect, but the
improvement might be limited if the
dollar remained strong and growth slowed
in key economies abroad. Finally, a
number of members stressed that some
acceleration in monetary growth from
the pace in the first half of the year likely

104 76th Annual Report, 1989
was needed to help support expansion in
business activity.
Turning to the outlook for inflation,
members generally anticipated that reduced economic growth in line with the
central tendency of their forecasts would
contribute to some damping of underlying inflationary pressures by 1990. The
rate of increase in the consumer price
index might well moderate over the
balance of this year, assuming relief from
special factors that had affected food and
energy prices during the first half. In
particular, the larger farm crops that
were anticipated this year would tend to
reduce pressures on food prices, and
recent oil price developments suggested
some softening in consumer energy
prices. Other favorable developments
included generally restrained increases
in wages despite ongoing labor shortages
in many parts of the nation and, as
evidenced in part by business contacts
around the country, some apparent lessening of inflationary expectations. In
addition, commodity prices had been
subdued in recent months, supporting
indications of less intense demands in
industrial sectors and perhaps pointing to
slower increases in consumer prices in
the months ahead. On the negative side,
some members stressed that underlying
inflation pressures remained strong and,
given current levels of resource use, an
expansion in line with the forecasts of
most members might avert accelerating
inflation but was less likely to foster any
significant decline over the forecast
horizon. More generally, the members'
forecasts pointed to a rate of inflation that
was unacceptably high and that moderated only slightly over this period; moreover, the risks of some acceleration,
while small, were not negligible especially if economic growth turned out to
be appreciably faster than most members
currently anticipated, putting additional
pressure on resources.



Against the background of the Committee's views regarding prospective economic developments 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 1989 and decided on tentative ranges
for growth in those measures in 1990.
The 1989 ranges included growth of 3 to
7 percent for M2 and 3Vi to IVi percent
for M3 for the period from the fourth
quarter of 1988 to the fourth quarter of
1989. A monitoring range of 6V2 to IOV2
percent had been set for growth in total
domestic nonfinancial debt in 1989. For
the year to June, the cumulative expansion of M2 was at a rate about 1
percentage point below the Committee's
range, while that of M3 placed it at the
lower bound of its range. The expansion
in nonfinancial debt was near the middle
of its range in the first half of the year.
In the Committee's review of the
ranges for 1989, all of the members
endorsed a proposal to retain the ranges
set in February. The Committee took
account of a staff analysis that indicated
that the more rapid growth in M2 and M3
since mid-May was likely to persist over
the months ahead and that by the fourth
quarter both aggregates would be well
within the current ranges for the year.
The staff assessment incorporated the
impact of the recent declines in market
interest rates, which would tend to reduce
the opportunity costs of holding M2
balances, and also assumed that there
would be no special factors influencing
the growth of the aggregates such as
those experienced earlier in the year.
Expansion in total domestic nonfinancial
debt was projected to continue at a rate
around the middle of its range through
year-end; growth in this measure had
been trending lower in recent years but it

FOMC Policy Actions
remained at a pace appreciably above
that for nominal GNR The members
concluded that the ranges set in February
for 1989 were still consistent with the
Committee's objectives of fostering sustained expansion in economic activity
and progress toward price stability.
The ranges for 1989 represented reductions from those for 1988, and the
members agreed that restrained monetary
growth and further reductions in the
ranges would be needed over time to
achieve and maintain price stability.
Views differed, however, as to whether
the ranges for 1990 should be reduced at
this meeting.
A majority of the members indicated a
preference for extending the 1989 ranges
provisionally to 1990, subject to the usual
review next February in light of the economic andfinancialconditions prevailing
then. The outlook for next year was
uncertain, especially this far in advance.
Nonetheless, the 1989 ranges were likely
in this view to encompass monetary
growth that would foster desired economic expansion and moderation of price
pressures in 1990. This outcome could be
associated with somewhat more rapid
growth of M2 in 1990 than appeared to be
in train for 1989. Such a pickup in
monetary growth would be consistent
with expansion of nominal GNP along
the lines of the central tendency of the
members' forecasts and should be associated with only minor changes in interest
rates and hence in velocity next year.
Moreover, somewhat faster growth in
M2 might be needed next year to counter
any potential weakening tendencies that
might develop in the economy. In these
circumstances there existed a considerable risk that a reduction in the range for
M2 might have to be reversed next year
or growth in excess of the range tolerated.
Either development might be viewed as
inconsistent with the stability and predictability of policy that tended to enhance its



105

effectiveness over time. Especially in
light of the foregoing considerations, a
marginal reduction in the ranges, although it might be seen as more consistent
with the long-run objective of price
stability, would seem to imply greater
precision than was warranted by the
Committee's current ability to project
next year's developments. If small adjustments were called for, they could be
made early next year when a more firmly
based decision would be possible.
Members who preferred lower ranges
for 1990 gave a good deal of emphasis to
the desirability of continuing the Committee's policy of reducing the ranges from
year to year in order to implement anti
inflationary objectives. In this view, a
failure to reduce the ranges at least
slightly in present circumstances might
be read as an implicit acceptance of
current rates of inflation. These members
recognized the possibility that monetary
growth next year might be at the upper
end, or even above, the ranges that they
favored, especially if interest rates were
to decline farther in the interim. If economic and financial conditions early next
year suggested a need, they would be
prepared to raise the ranges at that time.
Such a decision would be made in the
light of circumstances that provided the
rationale for it and need not therefore
have the adverse consequences for inflationary expectations that some members
feared. Members who favored lower
ranges also did not want to rule out the
possibility that inflation pressures next
year might turn out to be more intense
than was currently anticipated and that
relatively limited monetary expansion
therefore might remain appropriate.
In light of the persisting uncertainties
about the relationship between monetary
expansion and ultimate policy objectives,
the members were in favor of retaining
relatively wide ranges of 4 percentage
points for M2 and M3. For many years

106 76th Annual Report, 1989
prior to 1988, the Committee had set
narrower ranges, almost uniformly of 3
percentage points, for the broader monetary aggregates and for total domestic
nonfinancial debt. Wider ranges provided
greater scope for achieving monetary
growth that was consistent with the
Committee's objectives for the economy.
In assessing appropriate rates of monetary expansion in the prevailing uncertain
environment, the Committee would continue to evaluate a wide assortment of
economic and financial indicators.
At the conclusion of this review, the
Committee approved for inclusion in the
domestic policy directive the following
statement of its objectives for growth of
the broader monetary aggregates and
nonfinancial debt for the year 1989:
The Committee reaffirmed at this meeting
the ranges it had established in February for
growth of M2 and M3 of 3 to 7 percent and 3 Vi
to IVi percent, respectively, measured from
the fourth quarter of 1988 to the fourth quarter
of 1989. The monitoring range for growth of
total domestic nonfinancial debt also was
maintained at 6 Vi to 10 Vi percent for the year.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Johnson, Keehn,
Kelley, LaWare, and Melzer, Ms. Seger,
and Mr. Syron. Votes against this action:
None. Absent and not voting: Mr. Heller.

For the year 1990, the Committee
approved for inclusion in the domestic
policy directive the following statement
regarding the ranges for growth of the
monetary aggregates and nonfinancial
debt:
For 1990, on a tentative basis, the Committee agreed to use the same ranges as in 1989
for growth in each of the monetary aggregates
and debt, measured from the fourth quarter of
1989 to the fourth quarter of 1990. The
behavior of the monetary aggregates will
continue to be evaluated in the light of
movements in their velocities, developments
in the economy and financial markets, and
progress toward price level stability.



Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Johnson, Kelley,
LaWare, and Melzer, Ms. Seger, and Mr.
Syron. Vote against: Mr. Keehn. Absent
and not voting: Mr. Heller.

Mr. Keehn dissented because he
wanted to reduce the ranges for 1990. In
his view, a reduction of the ranges for
next year would provide an important
signal of the System's continuing commitment to price stability. While the
velocity of the monetary aggregates had
been erratic recently, lower ranges for
the aggregates would encompass desirable rates of monetary growth should
more normal conditions prevail next
year. Given the uncertainty in the relationship between the monetary aggregates and economic growth, he
would, however, be prepared to adjust
the ranges early next year on the basis of
intervening developments.
In the Committee's discussion of policy
implementation for the period until the
next meeting, the members generally
agreed that recent developments suggested that some further easing of reserve
conditions would be appropriate. Nearly
all endorsed a proposal to lessen the
degree of reserve pressure marginally at
this time, but one member favored somewhat greater easing and another saw
merit in a phased lessening of reserve
pressures in the weeks ahead. Many
emphasized that current economic and
financial uncertainties called for caution
in adjusting policy at this point. In this
view, more than a slight move to less
restraint could have an undesirable effect
on inflationary expectations and, at least
in the absence of further indications of
lagging economic growth, could lead
eventually to upward pressure on longterm interest rates. Moreover, in the view
of some members, there remained some
risk that inflationary pressures would
intensify and that the easing might have
to be reversed later. Caution also was

FOMC Policy Actions
indicated in light of the prevailing sensitivity and volatility of financial markets.
Several members emphasized the need
for faster monetary growth than had been
experienced in recent months. Some
acceleration in the rate of monetary
expansion had occurred since the middle
of May, and a staff analysis suggested
that such growth was likely to continue as
the full effect of recent declines in market
interest rates was felt. On the assumption
of no further changes in interest rates, the
staff projection anticipated that cumulative M2 growth would reach the bottom
of the Committee's annual range by late
summer. However, given the uncertainties that were involved, a number of
members felt that some further easing
was desirable to improve the prospects
that monetary growth would be within
the Committee's ranges for the year, if
only in the lower part of the range in the
case of M2. A moderate pickup in
monetary growth at this time would help
assure continued expansion of the economy and possibly avoid a situation in
which a substantial weakening of the
economy would be followed by rapid
monetary growth and a marked rebound
in activity —a pattern that would be
unlikely to foster the Committee's objective of price stability over time.
Turning to the question of possible
intermeeting adjustments in the degree
of reserve restraint, a majority of the
members indicated a preference for
retaining an unbiased instruction as in
the directive for the May meeting. This
approach, in the context of the indicated
preference of the members to move
toward some immediate easing, was in
keeping with the caution about future
policy moves favored by most members.
This caution was dictated by current
uncertainties regarding the economic
outlook, the still rapid rate of inflation,
and the relatively sensitive conditions in
financial markets. Others preferred an



107

intermeeting instruction that was tilted
toward ease partly to help underscore—
in conjunction with a decision to ease—
their view that the risks were in the
direction of a shortfall in economic
growth from current expectations and
therefore that any intermeeting adjustment would very likely be in the
direction of less restraint. Indeed, in this
view a dramatic and unlikely turnaround
would be needed in the tenor of the
incoming economic information to
warrant any firming in the weeks ahead.
In light of the easing of reserve conditions in early June and the further slight
easing contemplated at this meeting, the
members decided to lower the intermeeting range for the federal funds rate by
1 percentage point to 7 to 11 percent.
Such a reduction centered the range more
closely around the federal funds rate that
was expected after this meeting. The
range for the federal funds rate provides
one mechanism for initiating consultation
of the Committee when its boundaries are
persistently exceeded.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they preferred or could
accept a directive that called for some
slight easing in the degree of pressure on
reserve positions. Some firming or some
easing of reserve conditions would be
acceptable during 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 some acceleration in
the growth of M2 and M3 to annual rates
of around 7 percent over the three-month
period from June to September.
At the end of the meeting, the following
domestic policy directive was issued to
the Federal Reserve Bank of New York:

108 76th Annual Report, 1989
The information reviewed at this meeting
tends to confirm earlier indications that economic growth has slowed this year. Gains in
total nonfarm payroll employment have
moderated substantially in recent months,
but the civilian unemployment rate, at 5.2
percent in May, remained close to its average
level in earlier months of the year. Industrial
production increased on balance in April and
May at about the reduced rate experienced
earlier in the year. Growth in consumer
spending has weakened considerably this
year. Housing starts declined slightly further
in May. Recent indicators of business capital
spending suggest a substantial additional
increase in the second quarter after a rebound
in the first quarter. The nominal U.S.
merchandise trade deficit narrowed in April
from a substantially reduced average value in
the first quarter. Broad measures of prices
have risen more rapidly this year than in
1988, reflecting sharp increases in energy
and food prices.
Interest rates have fallen since the Committee meeting on May 16, with the largest
declines generally occurring in long-term
markets. In foreign exchange markets, the
trade-weighted value of the dollar in terms of
the other G-10 currencies rose sharply earlier
in the intermeeting period but subsequently
more than retraced mat rise in often volatile
trading.
M2 and M3 declined in May, primarily
because of sizable reductions in transaction
and other liquid balances arising from the
clearing of unusually large tax payments; data
through mid-June point to a rebound in these
measures of money. Thus far this year expansion of M2 has been at a rate below the
Committee's annual range, while growth of
M3 has been around the lower bound of the
Committee's range.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international
transactions. In furtherance of these objectives, the Committee reaffirmed at this
meeting the ranges it had established in
February for growth of M2 and M3 of 3 to 7
percent and 3lA to IV2 percent, respectively,
measured from the fourth quarter of 1988 to
the fourth quarter of 1989. The monitoring
range for growth of total domestic nonfinancial debt also was maintained at 6V2 to
IOV2 percent for the year. For 1990, on a



tentative basis, the Committee agreed to use
the same ranges as in 1989 for growth in each
of the monetary aggregates and debt,
measured from the fourth quarter of 1989 to
the fourth quarter of 1990. The behavior of
the monetary aggregates will continue to be
evaluated in the light of movements in their
velocities, developments in the economy and
financial markets, and progress toward price
level stability.
In the implementation of policy for the
immediate future, the Committee seeks to
decrease slightly the existing degree of pressure on reserve positions. Taking account of
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 or somewhat lesser reserve restraint
would be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with growth of
M2 and M3 over the period from June through
September at annual rates of about 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 7 to 11
percent.
Votes for the paragraph on short-term
policy implementation: Messrs. Greenspan, Corrigan, Angell, Guffey, Johnson,
Keehn, Kelley, LaWare, Melzer, andSyron.
Vote against this action: Ms. Seger. Absent
and not voting: Mr. Heller.

Ms. Seger dissented because she felt
that somewhat greater easing was
warranted. In her view, the expansion in
business activity already had slowed
substantially and recent developments
pointed to further weakness. While a
change in monetary policy would have
little effect on the economy over the
remainder of this year, a more pronounced easing than the Committee
currently contemplated was needed to
foster financial conditions that would
support the economy in 1990 and
beyond.

FOMC Policy Actions

2. Authorization for Domestic
Open Market Operations
Effective July 7, 1989, the Committee
approved a temporary increase of $2
billion, to $8 billion, in the limit between
Committee meetings on changes in System Account holdings of U.S. government and federal agency securities
specified in paragraph l(a) of the Authorization for Domestic Open Market Operations. Subsequently, effective July 31,
1989, the Committee approved a further
increase of $2 billion, to $10 billion, in
the intermeeting limit. Both increases
applied to the period ending with the
close of business on August 22, 1989.

109

owing to further official foreign currency
transactions and smaller-than-expected
increases in currency in circulation. The
Manager anticipated that additional leeway might be necessary to meet continuing needs to absorb reserves in upcoming
reserve maintenance periods.

Meeting Held on
August 22,1989
1. Domestic Policy Directive

The information reviewed at this meeting
suggested that economic activity had
continued to expand at a moderate pace in
recent months. Job growth had remained
Votes for the action effective July 7: Messrs. sizable; and final demands, most notably
Greenspan, Corrigan, Angell, Guffey, in the consumer sector, appeared to be
Johnson, Keehn, Kelley, LaWare, and better maintained than had been indicated
Melzer, Ms. Seger, and Mr. Syron. Votes earlier. At the same time, price inflation
against this action: None. Absent and not had slowed, in large part reflecting a
voting: Mr. Heller.
retracing of price increases in the food
and energy sectors that had boosted
Votes for the action effective July 31:
Messrs. Greenspan, Angell, Boy kin, Guf- inflation rates earlier this year; wage
fey, Johnson, Keehn, Kelley, and Oltman, trends gave no signs of upward pressures.
Ms. Seger, and Mr. Syron. Votes against
Total nonfarm payroll employment
this action: None. Absent and not voting: rose appreciably further in July after a
Messrs. Heller and LaWare. (Messrs.
Boykin and Oltman voted as alternates for large advance in June. Most of the July
Messrs. Melzer and Corrigan respectively.) increase took place at service establishments and in the construction industry
The increases were approved on the where hiring had slowed during the first
recommendation of the Manager for half of the year. Employment was little
Domestic Operations. The Manager had changed in manufacturing after three
advised on July 5 that the usual leeway of months of declines; much of the recent
$6 billion for changes in System account weakness had reflected layoffs in the
holdings probably would not be sufficient automobile and electrical equipment
over the intermeeting period, partly industries. The civilian unemployment
because of expected sales of securities to rate, at 5.2 percent, remained close to its
offset large declines in balances held by average level in earlier months of the
the U.S. Treasury at the Federal Reserve year.
Banks and because of large foreign curIndustrial production edged higher in
rency transactions. On July 28, the July, offsetting the decline of the two
Manager advised that the remaining previous months and continuing the genleeway under the $8 billion limit had eral pattern of slow growth since the
been reduced to about $650 million, beginning of the year. Output of capital
mainly as a result of declines in Treasury equipment posted another strong gain in
balances at the Reserve Banks but also July. Production of motor vehicles and



110 76th Annual Report, 1989
parts declined substantially, but output of
other consumer goods continued to rise
at a moderate pace. Production of materials rebounded after declining on balance
over the first half of the year. Total
industrial capacity utilization held steady
in July at a relatively high level. In
manufacturing, despite a pickup in primary processing industries, operating
rates edged lower and were down appreciably since January.
Retail sales rose considerably in July,
and revisions for earlier months suggested that consumer spending in the
second quarter had not been as weak as
previously estimated. Purchases of nondurable goods advanced appreciably
further in July from the upward revised
levels of recent months. With a new
round of manufacturers' incentives boosting sales of motor vehicles, spending on
durable goods also increased. Housing
starts rose slightly further in July following a large gain in June. The upturn in
starts occurred in the wake of a bounceback in sales of both new and existing
homes that was associated with the
sizable decline in mortgage rates since
April.
Recent indicators of business capital
spending suggested some slowing of
growth from the substantial pace of
earlier months in the year. In June,
shipments of nondefense capital goods
increased modestly as a brisk rise in
outlays for aircraft and computers outweighed a sharp decline in spending for
other categories of producers' durable
equipment. Nonresidential construction
activity, led by stepped-up outlays for
industrial structures, advanced strongly
for a second consecutive month. Inventory investment in manufacturing and
trade slowed in June to a pace well below
the average rate of increase observed
earlier in the year. In the manufacturing
sector, inventories of most types of
finished goods rose only moderately,



while stocks of materials declined further. Inventories of work-in-process in
the aircraft industry continued to grow,
as the industry expanded production to
keep pace with mounting orders. At the
retail level, dealer stocks of automobiles
rose a bit further. Inventories at other
retail establishments also increased, but
imbalances with sales appeared to be
limited.
In June, the nominal U.S. merchandise
trade deficit narrowed considerably, and
for the second quarter as a whole it was
about unchanged from a substantially
reduced average value in the first quarter.
Exports rebounded in June as increases
in both capital and consumer goods
outweighed a further decline in sales of
agricultural goods. Imports declined
appreciably, largely because of a drop in
the value of oil imports. In the major
foreign industrial countries, economic
growth slowed significantly in the second
quarter, following exceptionally rapid
expansion in the first quarter.
Partly reflecting farther sharp declines in consumer energy prices,
producer prices of finished goods fell in
July for a second consecutive month.
Prices of finished consumer goods other
than food and energy also declined,
while prices of capital goods held steady.
Apart from food and energy, prices of
materials had fallen somewhat on
balance at the intermediate level in
recent months and had come down
markedly at the crude stage. Consumer
prices rose modestly in June after
increasing sharply in earlier months of
the year. Lower prices were registered
for gasoline, fuel oil, and electricity;
and consumer food prices rose more
slowly. Prices of consumer services
continued to advance in June at about the
rate observed over the past year and a
half. Average hourly earnings jumped in
July after showing little change in the
previous two months, and on balance the

FOMC Policy Actions
data for recent months suggested no
change in prevailing wage trends.
At its meeting on July 5-6, the Committee adopted a directive that called for
a slight reduction in the existing degree
of pressure on reserve positions. The
Committee agreed that somewhat greater
or somewhat lesser reserve restraint
would be acceptable in 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. This policy stance was
expected to be consistent with growth of
M2 and M3 over the period from June
through September at annual rates of
about 7 percent.
Immediately after the Committee meeting, the Manager for Domestic Operations conducted operations to achieve the
slight easing in reserve conditions that
the Committee had directed. At the same
time, to reflect strength in seasonal
borrowing, a small technical upward
revision was made to the assumed level
of adjustment plus seasonal borrowing.
Late in July, as incoming data continued
to portray a softer economy and some
lessening in inflationary pressures, the
Manager sought a further slight reduction
in the degree of pressure on reserve
positions. Adjustment plus seasonal borrowing averaged nearly $600 million
over the three reserve maintenance periods completed since the July 5-6 meeting, while the federal funds rate moved
down a little more than Vi percentage
point to around 9 percent.
Other market interest rates fluctuated
over a wide range during the intermeeting
interval. Early in the period, rates tended
to decline in response to weaker-thananticipated economic data and related
market expectations of further monetary
easing. Subsequently, rates rebounded
after the release of other economic indi


111

cators that were viewed as suggesting
less weakness in the expansion and
therefore a reduced likelihood of further
easing. As a result, most rates ended the
period with only modest net changes.
Treasury bill rates were up about lA
percentage point on balance, while private short-term interest rates declined by
roughly 30 basis points, and major banks
lowered their prime rate Vi percentage
point to 10V2 percent. In long-term debt
markets, yields were about unchanged to
slightly higher over the period. Most
major stock price indexes reached record
highs during the intermeeting period
before giving up part of their gains.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies moved lower
on balance through July as interest rate
differentials favorable to the dollar were
narrowing. In August, the dollar resumed
its upward climb, spurred by continued
political uncertainties abroad and a reassessment by market participants of the
outlook for U. S. interest rates in light of a
spate of new economic data. Over the
intermeeting period as a whole, the dollar
rose but at the end of the period remained
below the highs of last June.
Growth of M2 and M3 accelerated in
July and appeared to have continued at a
fairly strong pace into August, evidently
reflecting both the rebuilding of balances
drawn down to meet April tax liabilities
and the substantial narrowing of opportunity costs associated with holding liquid
deposits. Through July, expansion of M2
had been around the lower end of the
Committee's annual range, and M3 remained somewhat above the lower bound
of its range.
The staff projection prepared for this
meeting suggested that the nonfarm economy was likely to grow over the remainder of 1989 at about the pace estimated
for the first half of the year but that some
slowing of the expansion would occur in

112 76th Annual Report, 1989
1990. The projection assumed that fiscal
policy would move noticeably toward
restraint over the projection period and
that the contribution of foreign trade to
growth would be very limited, owing in
part to the earlier appreciation of the
dollar. Consumer demand was likely to
be somewhat stronger over the next
several quarters, bolstered by continued
job growth and reflecting the ongoing
effects on consumer sentiment of the
advance in stock prices this year and the
declines in interest rates since spring; in
subsequent quarters, gradually mounting
slack in labor markets would exert a
restraining effect on consumer spending.
The lower levels of interest rates also
were expected to produce some pickup in
residential construction activity. Growth
in business capital spending, although
moderating somewhat from the pace in
the first half of the year, was projected to
remain a source of strength. The recent
weakening in food and energy prices
pointed to a slower rise in consumer
prices for the next few quarters; however, with margins of unutilized labor
and other production resources still low,
the underlying trend in inflation was not
expected to improve through 1990.
In the Committee's discussion of the
economic situation and outlook, members observed that indicators of business
activity looked somewhat stronger on
balance than at the time of the July
meeting and that, despite some earlier
concerns about a progressive slowdown,
the economy appeared to be continuing to
grow at a moderate pace. Several commented that further expansion at a rate
close to that experienced recently was a
reasonable expectation for the next several quarters and would constitute a
desirable economic performance under
prevailing circumstances. A number of
members noted that there were no major
imbalances in the economy of the sort
that often lead to a recession or to a surge



in business activity. However, because of
the uncertainties that were involved, the
members differed to some extent in their
views regarding the risks of some deviation in the expansion from its present
course; some felt that those risks were
about evenly balanced or were tilted
toward some strengthening in the months
ahead; several others saw some weakening as the most likely prospect, or at least
the one that had to be guarded against
because of the broad economic and social
consequences of a downturn in economic
activity. No member anticipated a sharp
turn in the economy in either direction.
The members also differed to some
degree in their views on the outlook for
inflation. Recent developments provided
a basis for some optimism, but progress
in reducing the underlying rate of inflation would depend importantly on the
strength of the business expansion and
also on the behavior of the dollar in
foreign exchange markets.
In their discussion of specific developments bearing on the economic outlook,
members noted that consumer spending
appeared to have strengthened somewhat
in recent months, and most members
expected such spending to hold up, or
possibly to increase somewhat further, in
the months ahead. Others placed more
weight on the possibility that further
gains, if any, might be relatively limited,
in part because they expected automotive
sales to be curtailed by higher prices and
lower rebates when the new model year
began. In the housing sector, current
conditions were quite uneven across the
country, with an increasing number of
areas showing weakness, and the outlook
was clouded to an extent by the possible
effects of the disposition of properties in
conjunction with the resolution of insolvent savings and loan associations. However, recent declines in mortgage rates
would help to sustain the overall demand
for houses. Should housing markets

FOMC Policy Actions
weaken, for whatever reason, the effect
could be to depress not only construction
activity but consumption spending as
well. In the business investment sector,
current demand conditions appeared
consistent with further growth in overall
investment spending, though probably at
a much reduced pace from that experienced in the first half of the year,
especially given the likely weakness in
construction activity in many areas because of earlier overbuilding. With regard to the outlook for foreign trade,
members emphasized that the strength of
the dollar could have negative implications for the nation's trade prospects, and
several expressed the view that further
improvement in the trade balance, if any,
was likely to be limited over the next
several quarters; on the positive side,
reports suggested that export markets
remained relatively robust for many
products.
In their comments on regional business
conditions and business attitudes, members reported a somewhat mixed picture,
depending on the industries that were
involved. On balance, most parts of the
country continued to experience a high
level of business activity or at least
modest further improvement from relatively depressed conditions. However,
signs of somewhat slower growth had
become more widespread and there were
indications that business activity might
have leveled out or turned down in some
areas. Many business contacts appeared
to be more bearish on the outlook than
they had been earlier. In general, these
contacts expected the overall economy to
settle into a pattern of relatively slow
growth. Few expressed concern about a
possible decline in business activity.
In their comments on the outlook for
inflation, members noted that the behavior of key price and wage measures in
recent months was an encouraging development. From the perspective of cost



113

pressures, the prices of many materials
had increased less rapidly or had actually
declined in recent months, and increases
in labor compensation had been relatively
moderate despite still tight labor markets
in many parts of the country. While a
number of members observed that little
or no progress had been made thus far in
reducing the underlying rate of inflation,
most remained confident that the currently restrained growth in overall economic activity had established the necessary conditions for lowering inflation and
achieving the Committee's price stability
objective over time. Some anticipated
that favorable inflation results might well
emerge sooner rather than later. For some
others a troubling question remained as
to whether significant progress in reducing inflation was possible with the current
degree of pressure on production resources. In this connection, a few expressed concern that some intensification
of labor-cost pressures could not be ruled
out under current economic conditions,
and they noted in particular that there
were indications of growing labor militancy in some industries and parts of the
country. The strength of the dollar appeared to have damped inflation, but that
effect would be reversed if the dollar
were to depreciate substantially in foreign exchange markets.
Turning to the conduct of monetary
policy, all of the members supported a
proposal to maintain unchanged conditions of reserve availability at least
initially during the intermeeting period
ahead. The easing steps implemented
since early June had been appropriate in
the context of earlier indications of some
slowing in the business expansion and a
prospective lessening of inflation pressures. Partly as a consequence of the
easing in policy, growth of the monetary
aggregates had picked up, and both M2
and M3 were within the Committee's
ranges for the year. For the period ahead,

114 76th Annual Report, 1989
a steady policy course was desirable in
light of the latest evidence suggesting
that price pressures were not intensifying; in addition, the expansion appeared
to have stabilized at a moderate and
provisionally acceptable pace, and considerable uncertainty existed with regard
to the timing and direction of future
deviations from the expansion's current
momentum. Some members commented
on indications that financial markets
anticipated some further easing of monetary policy in the months ahead, if not
immediately. If such easing failed to
materialize, the result could be some
upward adjustments in interest rates that
could have an adverse impact on interestsensitive sectors of the economy such as
housing and that could place undesirable
upward pressure on the value of the
dollar in foreign exchange markets.
Despite such concerns, the members
agreed that for now an unchanged policy
offered the best prospect of fostering the
financial market conditions and the monetary growth that would accommodate
satisfactory economic performance. They
recognized that economic developments
would have to be monitored closely to
assess whether any change in policy
might be needed.
In their consideration of an appropriate
policy course, the members took account
of a staff analysis indicating that the
expansion of M2 and M3 was likely to
slow substantially from the recent pace
but to remain well within the Committee's
ranges for the year. The analysis took
note of the decline in market interest rates
over the past several months and assumed
that they would stabilize at current levels
and that the expansion of nominal income
would remain near its recent pace. The
outlook for money growth was subject to
unusual uncertainty, however, stemming
from the range of possible responses by
thrift depository institutions to the recently enacted legislation and associated



government strategy for resolving insolvent institutions. The expansion of M3
would be slowed as savings and loan
associations reduced their funding needs
by selling assets or curbing the growth of
assets; the expansion of M2 might also be
affected depending on the impact of these
developments on deposit offering rates
and related opportunity costs of holding
deposits. Any weakness in money growth
for these reasons, however, would not be
an indication of a slowing economy,
given the presumption that highly developed secondary markets would maintain
the availability of mortgage credit. Members commented that despite its recent
acceleration, monetary growth remained
damped when measured over a longer
period, suggesting a basically restrained
monetary policy. While continued monetary expansion at the recent rapid pace
clearly would be undesirable in a period
when underlying inflation was unacceptably high, a renewed shortfall in relation
to the Committee's ranges also should be
averted.
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
easing than toward any firming, and a
few indicated that they viewed the incorporation of such an understanding as a
key element of an acceptable directive.
While most members anticipated that a
steady policy course might well prove to
be appropriate for the entire intermeeting
period, any adjustment called for by
prospective developments was more
likely to be, in the majority view, in the
direction of some reduction in the degree
of reserve restraint and such an expectation should be reflected in the directive.
Most of the other members indicated that
they could accept such a directive, but
because they believed that the risks to the
economy were more evenly balanced,

FOMC Policy Actions
they favored a directive that did not
include a presumption as to the likely
direction of any intermeeting adjustments. These members also noted that
the current directive was symmetric in
form and that a bias in the new directive
toward ease might lead to a misreading of
System policy in the context of an unacceptably high rate of inflation.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they preferred or could
accept a directive that called for maintaining the current degree of pressure on
reserve positions and that provided for
giving special weight to potential developments that might require some slight
easing during the intermeeting period.
With regard to the factors that were
important in considering any intermeeting changes in reserve conditions, the
Committee continued to give primary
weight to the inflation outlook. In that
regard, they emphasized that policy
actions ought to be consistent with furthering achievement of the ultimate objective of price stability. Accordingly,
slightly greater reserve restraint might be
acceptable during the intermeeting period, while some slight lessening of
reserve pressure would be acceptable,
depending on progress toward price
stability, the strength of the business
expansion, the behavior of the monetary
aggregates, and developments in foreign
exchange and domestic financial markets. The reserve conditions contemplated by the Committee were expected
to be consistent with growth of M2 and
M3 at annual rates of around 9 percent
and around 7 percent respectively over
the three-month period from June to
September; in the case of M2, such
growth was somewhat faster than that
anticipated at the time of the July meeting.
The intermeeting range for the federal
funds rate, which provides one mechanism for initiating consultation of the



115

Committee when its boundaries are persistently exceeded, was left unchanged at
7 to 11 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 moderate pace in recent months.
In July, total nonfarm payroll employment
rose appreciably further after a large advance
in June, and the civilian unemployment rate,
at 5.2 percent, remained close to its average
level in earlier months of the year. Industrial
production edged higher in July, continuing
the slower growth observed since the beginning of the year. Retail sales have grown at a
moderate pace in recent months. Housing
starts rose slightly further in July following a
large gain in June. Recent indicators of
business capital spending suggest slower
growth after the substantial increase in the
first half of the year. The nominal U.S.
merchandise trade deficit narrowed considerably in June and for the second quarter as a
whole was about unchanged from a substantially reduced average value in the first
quarter. Partly reflecting reductions in energy
prices, increases in consumer prices moderated in June and July. The latest wage data
suggest no change in prevailing trends.
Interest rates show mixed changes on
balance since the Committee meeting on
July 5-6. In foreign exchange markets, the
trade-weighted value of the dollar in terms of
the other G-10 currencies has risen on balance
over the intermeeting period.
M2 and M3 grew markedly in July, lifting
expansion of M2 thus far this year to around
the lower end of the Committee's annual
range, and keeping M3 somewhat above the
lower bound of the Committee's range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives,
the Committee at its meeting in July reaffirmed the ranges it had established in
February for growth of M2 and M3 of 3 to 7
percent and 3V6 to IV2 percent, respectively,
measured from the fourth quarter of 1988 to
the fourth quarter of 1989. The monitoring

116 76th Annual Report, 1989
range for growth of total domestic nonfinancial debt also was maintained at 6V2 to \QVi
percent for the year. For 1990, on a tentative
basis, the Committee agreed in July to use the
same ranges as in 1989 for growth in each of
the monetary aggregates and debt, measured
from the fourth quarter of 1989 to the fourth
quarter of 1990. The behavior of the monetary
aggregates will continue to be evaluated in the
light of movements in their velocities, developments in the economy and financial markets , and progress toward price level stability.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint
might or slightly lesser reserve restraint would
be acceptable in the intermeeting period. The
contemplated reserve conditions are expected
to be consistent with growth of M2 and M3
over the period from June through September
at annual rates of about 9 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 7 to 11 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Johnson, Keehn, Kelley,
LaWare, and Melzer, Ms. Seger, and Mr.
Syron. Vote against this action: Mr. Guffey.

Mr. Guffey supported an unchanged
policy for the period ahead, but he could
not accept a directive that would allow
possible intermeeting adjustments to be
made more readily in an easing than in a
firming direction as new information
became available. In his view, the risks
to the expansion were fairly evenly
balanced and did not warrant an asymmetric directive biased toward ease, especially in light of undesirably high rates of
inflation both current and prospective.
He also noted his concern that a directive
tilted toward ease could give a misleading



indication of the weight that the Committee continued to place on achieving its
long-run price stability objective.

2. Authorization for Foreign
Currency Operations
As part of a proposed multilateral bridge
financing facility for Mexico, the Committee approved a special reciprocal currency arrangement of $125 million with
the Bank of Mexico. The new facility
supplements the regular $700 million
arrangement with the Bank of Mexico set
out in paragraph 2 of the Authorization
for Foreign Currency Operations. The
Committee delegated to Chairman Greenspan the authority to approve a drawing
on both of these arrangements by the
Bank of Mexico, subject to his determination that the appropriate terms and
conditions had been met.
Under the terms of the multilateral
facility, the Bank of Mexico may draw up
to $2 billion in short-term financing in
support of the program of the government
of Mexico for economic reform and economic growth. Participating with the
Federal Reserve in making funds available are the U.S. Treasury through its
Exchange Stabilization Fund, central
banks from the other Group of Ten
countries acting under the aegis of the
Bank for International Settlements, and
the Bank of Spain. Thefinalmaturity date
of the facility is February 15, 1990.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Johnson, Keehn,
Kelley, LaWare, and Melzer, Ms. Seger,
and Mr. Syron. Votes against this action:
None.
On September 14, 1989, the multilateral bridge financing facility became
effective, and on September 22, 1989,
Chairman Greenspan, acting under the
delegation of authority from the Committee, gave final clearance for drawings by

FOMC Policy Actions
the Bank of Mexico on the reciprocal
currency arrangements.
3. Agreement to "Warehouse"
Foreign Currencies
On September 19, 1989, the Committee
agreed to a request by the Treasury for an
increase from $5.0 billion to $ 10.0 billion
in the amount of eligible foreign currencies that the Sy stem would be prepared
to "warehouse" for the Treasury and the
Exchange Stabilization Fund (ESF). The
warehousing facility involves spot purchases of foreign currencies from the
Treasury or the ESF and simultaneous
forward sales of the same currencies at
the same exchange rate to the Treasury or
the ESF. Such transactions are authorized
under Paragraphs l.A and l.B of the
Committee's "Authorization For Foreign
Currency Operations," and the maximum
size of the facility is determined periodically by the Committee; the most recent change involved an increase from
$134 billion to $5 billion in December
1978. The proposed increase was intended to enable the ESF to finance its
continued participation in foreign currency operations.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Keehn, Kelley,
LaWare, and Melzer, Ms. Seger, and Mr.
Syron. Votes against this action: None.
Abstention: Mr. Johnson.
Effective September 25, 1989, the
Committee approved an increase from
$18 billion to $20 billion in the limit on
holdings of foreign currencies specified
in paragraph ID of the Committee's
Authorization for Foreign Currency Operations. That limit applies to the overall
open position in all foreign currencies
held in the System Open Market Account;
at the time of this action, System holdings
had reached nearly $18 billion. The
higher limit was approved in light of the



117

potential for further System acquisitions
of foreign currencies in coordination
with similar transactions by the U.S.
Treasury. In approving the increase, the
Committee took account of the views
expressed by the Finance Ministers and
Central Bank Governors of the Group of
Seven countries at their meeting on
September 23, 1989. These officials
considered the rise of the dollar in recent
months to be inconsistent with longerrun economic fundamentals, and they
agreed that a rise of the dollar above
current levels or an excessive decline
could adversely affect prospects for the
world economy. In this context, they
agreed to cooperate closely in exchange
markets.
Votes for this action: Messrs. Greenspan,
Corrigan, Guffey, Keehn, Kelley, LaWare,
and Melzer, Ms. Seger, and Mr. Syron.
Votes against this action: Messrs. Angell
and Johnson.
In dissenting from this action, Messrs.
Angell and Johnson indicated that they
could not consent to an increase in the
authorized limits for holding foreign
currencies when such authorization
facilitates exchange rate intervention
to drive the dollar lower as compared
with intervention to avoid disorderly
conditions by stabilizing or limiting
increases in the dollar exchange rate.
Intervention of the former type confuses market participants concerning the
policy commitment toward price level
stability and can contribute to disorderly
markets. It can increase inflation fears as
can be seen in decreases in long-term
bond prices and in increases in the
price of inflation-sensitive commodities.
Interest rate risk premiums also may
increase. Finally, such intervention can
work to limit flexibility in the exercise of
fundamental monetary policy options
that depend on evidence of improvement
in the future inflation environment.

118 76th Annual Report, 1989
Meeting Held on
October 3,1989
Domestic Policy Directive
The information reviewed at this meeting
suggested that economic activity continued to expand at a moderate pace in the
third quarter and that rates of resource
utilization remained at relatively high
levels. Aggregate final demand appeared
to be well sustained by a pickup in
consumption at a time of somewhat
reduced growth in business fixed investment. At the same time, price inflation
had slowed, in large part because of a
steep drop in energy costs and a continuing decline in prices of non-oil imports;
wage data evidenced no deviation from
recent trends.
Growth in total nonfarm payroll employment slowed noticeably in July and
August from the pace of the second
quarter. Nevertheless, adjusted for the
depressing effects of strike activity, job
gains remained appreciable on balance.
Hiring was brisk in construction, trade,
and services; in manufacturing industries, though, employment levels generally held steady or fell a bit, apart from
temporary fluctuations in the auto industry. The civilian unemployment rate
remained around 5 lA percent.
Industrial production rose in August,
and revisions for earlier months suggested that the expansion of production
had not been as weak as previously
estimated. Much of the August gain
reflected a rebound in automobile production after three months of decline and a
pickup in coal mining as striking coal
miners returned to work. Output of
consumer goods other than autos edged
down in August with small but widespread declines in nondurable goods.
Despite a sizable jump in operating rates
for coal mining, total industrial capacity
utilization was unchanged in August at a



relatively high level. In manufacturing,
factory utilization edged further below
its January peak, partly as a result of
additional declines in primary processing
industries, such as paper and chemicals,
where utilization had been very high.
Consumer spending rose substantially
in August, following a July increase that
was somewhat larger than the sluggish
gains of previous months. Much of the
August pickup reflected a surge in outlays
for cars and light trucks, but gains in
spending for goods and services other
than motor vehicles also appeared to be
running somewhat above the relatively
sluggish pace for the second quarter.
Housing starts in July and August were
slightly higher than their second-quarter
average, and sales of new homes picked
up noticeably in July. However, building
permits had shown no discernible trend
in recent months.
Recent indicators of business capital
spending suggested somewhat slower
growth in the third quarter after a substantial increase in the first half of the year. In
July and August, shipments of nondefense capital goods excluding aircraft
were only a little above the secondquarter level, and orders data suggested a
farther slowing in growth of spending in
coming months. In July, office building
remained a notable area of weakness in
nonresidential construction and partially
offset another strong rise in outlays for
industrial structures. Inventory investment in manufacturing moderated in
August after a sizable increase in July,
with much of the increase in both months
occurring at aircraft firms. In July, stocks
also rose markedly at manufacturers of
primary metals and of many types of
machinery; the buildup at these industries, like that at aircraft firms, was
concentrated in work-in-process. Excluding motor vehicles and aircraft, manufacturing stocks remained at relatively low
levels compared with shipments. At the

FOMC Policy Actions
retail level, increases in inventories
slowed in July and imbalances with sales
remained limited.
The nominal U.S. merchandise trade
deficit recorded a further decline in July
relative to June and to the average for the
second quarter as a whole. Exports in
July fell below their strong June level and
were little changed from the secondquarter average. While most categories
of exports fell, deliveries of civilian
aircraft increased sharply. Imports registered a further decline in July, as
decreases in most categories of non-oil
goods outweighed a small rise in the
value of oil imports. Economic growth in
the major foreign industrial countries
slowed sharply in the second quarter
from the very rapid rate of the first
quarter, but this pattern appeared to be
due largely to special factors rather than
to a slackening of the underlying pace of
activity.
Producer prices of finished goods
declined in August for the third consecutive month, reflecting a further
large drop in consumer energy prices;
for the July-August period, price
increases for nonfood, non-energy finished goods moderated from the pace
of earlier months of the year. At earlier
processing stages, prices of intermediate
materials other than food and energy
edged down further in August and had
registered little net change over the
previous six months, while prices of
crude nonfood materials other than
energy turned up after four months of
declines. Consumer prices were unchanged in August following a small
increase in July. Sharp reductions in
energy prices and smaller increases for
food items helped damp the rise in
consumer prices in July and August, but
prices for other consumer goods also
rose more slowly. Average hourly earnings slipped a little in August after a
sizable jump in the previous month, but



119

on a year-over-year basis this decline
did not indicate a change in trend.
At its meeting on August 22, the
Committee adopted a directive that called
for maintaining the current degree of
pressure on reserve positions and that
provided for giving special weight to
potential developments that might require
some slight easing during the intermeeting period. The Committee agreed that,
in furtherance of the ultimate achievement of price stability, primary weight in
considering the need for intermeeting
changes in reserve conditions would
continue to be given to the inflation
outlook. Slightly greater reserve restraint
might, or slightly lesser reserve restraint
would, be acceptable in the intermeeting
period depending on progress toward
price stability, the strength of the business
expansion, the behavior of the monetary
aggregates, and developments in foreign
exchange and domestic financial markets. The contemplated reserve conditions were expected to be consistent with
growth of M2 and M3 over the period
from June through September at annual
rates of about 9 and 7 percent respectively.
Reserve conditions remained essentially unchanged over the period since the
August meeting. Adjustment plus seasonal borrowing averaged about $550
million for the two full reserve maintenance periods since the meeting, and
federal funds traded mostly in the narrow
range around 9 percent that had prevailed
since late July. With federal funds rates
steady and economic data released over
the intermeeting period generally in line
with market expectations, other interest
rates changed little on balance over the
intermeeting period. Some softening in
interest rates took place through midSeptember, owing at least partly to a
market view that an easing of monetary
policy might be in the offing given the
strengthening dollar, but when the dollar
subsequently declined against other G-10

120 76th Annual Report, 1989
currencies, interest rates generally rebounded. Most stock market indexes
reached record highs in early September
but partially retraced their increases as
problems emerged in the "junk bond"
market for a few prominent issuers.
In foreign exchange markets, the tradeweighted value of the dollar in terms of
the other G-10 currencies rose substantially early in the intermeeting period;
better-than-expected U.S. job growth in
August and U.S. trade data for July
outweighed the effects of a slight decline
in U.S. interest rates and some increase
in rates abroad. The dollar fell sharply
after the release on September 23 of the
G-7 statement that the rise of the dollar in
recent months was inconsistent with
longer-run fundamentals, and the ensuing
coordinated central-bank intervention in
exchange markets. Also contributing to
the slippage of the dollar were growing
market expectations of some tightening
of monetary policies abroad. On balance,
the dollar depreciated somewhat over the
intermeeting period.
Growth of the monetary aggregates
slowed in August from their advanced
July rates, which likely had been boosted
by the replenishment of balances used to
pay taxes last spring; their slower growth
evidently carried over to September.
Despite its deceleration, M2 still grew
fairly briskly in August and apparently
also in September, bringing its expansion
thus far this year to somewhat above the
lower end of the Committee's annual
range. Continued rapid growth of the
retail components of M2 reflected in part
the lagged effects of earlier declines in
market interest rates. M3 increased at a
substantially reduced pace over the
August-September period, and it had
expanded for the year to date at a rate
around the lower bound of the Committee's annual range. The sluggish growth
of M3 apparently was related in part to
the declining needs of savings and loan



associations for managed-liability funds;
undercapitalized institutions were shrinking their balance sheets as a means of
complying with new, more stringent
capital standards, and insolvent institutions were receiving funds from the
Resolution Trust Corporation (RTC).
The staff projection prepared for this
meeting suggested that the nonfarm economy was likely to grow over the remainder of 1989 at about the pace estimated
for the first half of the year but that the
expansion would slow in 1990. The
projection assumed that fiscal policy
would remain moderately restrictive and
that the contribution of foreign trade to
growth would be very limited, owing in
part to the earlier appreciation of the
dollar. Consumer demand was expected
to be bolstered in the near term by
continued growth in labor income and the
positive effect on real purchasing power
of the recent slowing of price increases,
but over the rest of the projection period
steadily mounting slack in labor markets
would exert a restraining effect on real
income and consumer demand. Declines
in interest rates earlier in the year were
expected to provide some temporary
stimulus to residential construction activity over the next quarter or so. Expansion
in business capital spending was projected to moderate substantially over the
projection period from the pace in the
first half of the year as output growth
slowed, capacity pressures eased, and
profits eroded. The recent weakening in
food and energy prices pointed to a
slower rise in consumer prices for the
next few quarters; however, with margins
of unutilized labor and other production
resources still low, the underlying trend
in inflation was not expected to show
much improvement.
In the Committee's discussion of the
economic situation and outlook, members commented that current indicators
of business activity, including economic

FOMC Policy Actions
conditions in different parts of the country, presented a somewhat mixed picture.
On the whole, however, members generally viewed the evidence as pointing to
sustained expansion over the next several
quarters, though many expected economic growth to slow somewhat from its
recent pace. In assessing the chances of a
different outcome, the members did not
rule out the possibility of a slightly
stronger economic performance, but they
generally felt that the risks were tilted
toward marginally greater slowing and a
few expressed concern that a more pronounced weakening could emerge. With
regard to the outlook for inflation, many
commented that, given moderate economic growth and a sustained period of
monetary restraint, underlying inflationary pressures were likely to ease a little
over the next several quarters, but some
anticipated somewhat greater progress in
reducing inflation. Concern was expressed by some, however, that wagecost pressures might intensify. The members agreed that progress against inflation
would depend importantly on the behavior of the dollar in foreign exchange
markets; a very substantial decline in the
value of the dollar would put upward
pressure on prices and make achievement
of the Committee's price stability objective correspondingly more difficult.
With regard to developments in specific sectors of the economy, members
commented that a key uncertainty in the
business outlook related to the prospects
for capital expenditures. Growth in such
spending had slowed from a very high
rate in the first half of the year, and it was
not clear from the recent data whether
business investment was weakening further or whether its growth had stabilized
at a reduced pace. New orders for capital
equipment had softened, but order backlogs remained substantial and suggested
continued high levels of production for
many firms. On the other hand, indica


121

tions of declining business profits together with the financial difficulties of a
number of firms pointed to more restrained investment spending. The key to
actual capital spending, of course, would
be the evolving demand for goods and
services and in that regard consumer
spending, while subject to some volatility
stemming especially from purchases of
motor vehicles, was likely to continue to
provide support for sustained growth.
Business inventories, with some notable
exceptions such as stocks of motor vehicles, were reported to be at acceptable
levels and were not likely to contribute to
wide swings in production unless final
demands differed greatly from current
expectations. The members were more
uncertain about the outlook for housing
and net exports. In the housing sector,
considerable weakness had emerged in
several parts of the country, and some
members questioned whether any improvement could be expected over the
next several quarters even though interest
rates had fallen since last spring. With
regard to the prospects for foreign trade,
the dollar's appreciation this year had
retarded improvement in the trade balance and, barring a substantial real
depreciation, was expected to continue to
do so for some time. It was presumed that
fiscal policy would remain moderately
restrictive, but that there would be no
dramatic turn in the federal budget deficit
of the sort that would substantially reduce
demand pressures in the domestic economy while accommodating significant
improvement in the trade deficit.
In the Committee's discussion of the
outlook for inflation, members observed
that the recent improvement largely
reflected a number of special factors—
such as developments in the food and
energy sectors and the appreciation of the
dollar this year—that could not be projected to recur. Several saw only limited
prospects for further improvement over

122 76th Annual Report, 1989
the year ahead, given their expectations
with regard to the overall performance of
the economy and related pressures on
resources. Others felt that the behavior of
prices and wages might continue to be
better than had been expected. They
noted that reduced monetary growth over
an extended period was continuing to
restrain inflationary pressures and that
the economy also was benefiting from
ongoing cost-reducing measures induced
by strong competition in domestic and
international markets. A tendency for the
prices of many commodities and intermediate materials to soften, if only marginally, also supported a relatively optimistic
outlook for inflation. Moreover, there
was a continuing pattern of restraint in
labor settlements despite tight labor
markets in many areas. Reflecting demographic factors, upward pressures on
wages tended to be concentrated on entrylevel jobs, while pressures in many of the
more skilled job categories appeared to
have diminished in various parts of the
country. However, some members expressed concern that faster wage increases remained a threat, especially if
the economy continued to operate at
levels close to its potential.
In the Committee's discussion of monetary policy for the intermeeting period
ahead, most of the members endorsed a
proposal to maintain unchanged conditions of reserve availability and preferred
or found acceptable a suggestion to retain
the asymmetry toward ease that was
incorporated in the latest directive. While
noting that developments in the near term
might alter the economic outlook, most
members felt that prevailing conditions
in the domestic economy did not warrant
a policy change in either direction at
this time. The focus of policy continued
to be that of gradually reducing inflation
over time and a steady policy course
seemed consistent with that objective, at
least for now.



Members also were concerned that an
easing of policy so soon after the G-7
meeting would be misinterpreted as an
attempt to use monetary policy to force
the dollar lower. While the dollar was an
important factor influencing the course
of the U.S. economy and prices, monetary policy should not be used, in the
judgment of the Committee, to attain
particular levels for the foreign exchange
value of the dollar that could conflict with
domestic policy objectives. In current
circumstances, an easing might well
provoke an undesirable sharp decline in
the external value of the dollar. The
members also discussed the recent substantial intervention by G-7 and other
nations against the dollar. Some members
expressed concern that if this intervention
resulted in a sizable depreciation of the
dollar, the inflationary consequences
could be viewed as inconsistent with the
Committee's long run policy of achieving
price stability.
In further discussion of an appropriate
course for monetary policy, the Committee took account of a staff analysis that
suggested that, on the assumption of
unchanged conditions of reserve availability and steady interest rates, M2
growth would moderate somewhat over
the balance of the year from its rapid pace
in recent months; nonetheless, growth of
this aggregate would continue to be
supported to some extent by the lagged
effects of earlier declines in market
interest rates on the opportunity costs of
holding M2 balances, and on a cumulative basis M2 was projected to rise
somewhat further within the lower half
of the Committee's range for the year.
The expansion of M3 was expected to
continue to be damped, though to a
reduced extent, in the fourth quarter by
further reductions in the assets and M3
liabilities of undercapitalized thrift institutions and by RTC outlays that substituted in part for managed liabilities in

FOMC Policy Actions
M3; by year-end, this aggregate was
projected to be a little above the lower
bound of the Committee's range. The
pickup in the growth of money and
reserve aggregates since around midyear
and the projected expansion of the broad
money aggregates within the Committee's ranges for the year were cited as
welcome developments that were consistent with the Committee's overall policy
objectives.
In the Committee's consideration of
possible adjustments in the degree of
reserve pressure during the intermeeting
period, a majority of the members supported a proposal to adjust operations
more readily toward some easing than
toward any firming. In the view of these
members, the risks to the expansion were
more heavily weighted toward a shortfall
from current expectations than toward
faster growth and greater inflationary
pressures. Members who preferred a
symmetrical instruction generally saw
the risks to the economy as more evenly
balanced, and some observed that the
present dollar situation warranted extra
caution before any easing was undertaken; however, a bias toward ease would
not involve any change from the current
directive and most of these members
indicated that they could accept such an
instruction.
It was noted in further discussion that
seasonal borrowing was likely to drop in
the weeks ahead, so that a declining total
of adjustment plus seasonal borrowing
would be associated with a given degree
of reserve restraint and a given federal
funds rate. It was understood that, subject
to the Chairman's review, the necessary
technical reductions in borrowing objectives would be made during the intermeeting period.
At the conclusion of the Committee's
discussion, all but two of the members
indicated that they preferred or could
accept a directive that called for maintain


123

ing the current degree of pressure on
reserve positions and that provided for
giving particular weight to potential
developments that might require some
slight easing during the intermeeting
period. Accordingly, slightly greater
reserve restraint might be acceptable
during the intermeeting period, while
some slight lessening of reserve restraint
would be acceptable, depending on
progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated by the
Committee were expected to be consistent with growth of M2 and M3 at annual rates of around 6l/i percent and
AVi percent respectively over the threemonth 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 7 to 11 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 continued to
expand at a moderate pace in the third quarter.
In July and August, total nonfarm payroll
employment rose appreciably despite the
depressing effect of strike activity. The
civilian unemployment rate remained around
5 lA percent. Industrial production picked up
in August, mainly because of a rebound in
auto assemblies and coal mining. Consumer
spending has registered larger gains in recent
months, reflecting in part a surge in auto
sales. Housing starts in July and August were
slightly above their second-quarter average.
Indicators of business capital spending suggest somewhat slower growth in the third
quarter after the substantial increase in the
first half of the year. The nominal U.S.
merchandise trade deficit recorded a further

124

76th Annual Report, 1989

decline in July relative to June and to the
average for the second quarter as a whole.
Sharp reductions in energy prices over the
summer months damped increases in consumer prices and contributed to declines in
producer prices. The latest wage data suggest
no change in prevailing trends.
Interest rates generally show small mixed
changes on balance since the Committee
meeting on August 22. In foreign exchange
markets, the trade-weighted value of the
dollar in terms of the other G-10 currencies
fell after the release of the G-7 statement on
September 23; on balance, the dollar depreciated somewhat over the intermeeting period.
M2 grew fairly briskly in August and
evidently also in September, lifting its expansion thus far this year to somewhat above the
lower end of the Committee's annual range.
M3 grew at a substantially reduced pace in
this period, as assets of thrift institutions and
their associated funding needs apparently
contracted further; for the year to date, M3
has grown at a rate around the lower bound of
the Committee's annual range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives,
the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3 of 3 to 7 percent
and 3 Vi to 7 Vi percent, respectively, measured
from the fourth quarter of 1988 to the fourth
quarter of 1989. The monitoring range for
growth of total domestic nonfinancial debt
also was maintained at 6 Vi to 10 Vi percent for
the year. For 1990, on a tentative basis, the
Committee agreed in July to use the same
ranges as in 1989 for growth in each of the
monetary aggregates and debt, measured from
the fourth quarter of 1989 to the fourth quarter
of 1990. The behavior of the monetary
aggregates will continue to be evaluated in the
light of movements in their velocities, developments in the economy and financial markets, and progress toward price level stability.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial



markets, slightly greater reserve restraint
might or slightly lesser reserve restraint would
be acceptable in the intermeeting period. The
contemplated reserve conditions are expected
to be consistent with growth of M2 and M3
over the period from September through
December at annual rates of about 61/4 and
AVi 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, Johnson, Keehn, Kelley,
LaWare, Melzer, and Syron. Votes against
this action: Mr. Guffey and Ms. Seger.
Mr. Guffey favored an unchanged
policy for the period ahead, but he
dissented because he could not support a
directive that was biased toward easing
during the intermeeting period. He remained concerned that the rate of inflation would continue to be undesirably
high.
Ms. Seger dissented because she felt
that some easing of monetary policy was
desirable at this time. In her view developments in manufacturing, notably in the
motor vehicles sector, along with potential softness in capital expenditures,
housing construction, and exports signaled a weaker overall economy. In the
circumstances, she believed that an easier
monetary policy was needed to help
sustain the expansion and that such a
policy would be consistent with continuing progress in reducing the rate of
inflation.

Meeting Held on
November 14,1989
Domestic Policy Directive
The information reviewed at this meeting
suggested that the economy had continued to expand, though unevenly and at a

FOMC Policy Actions
somewhat slower pace than earlier in the
year. While the service-producing sector
appeared to be growing moderately,
manufacturing had been weak, owing to
sluggish demand and to strikes and other
disruptions to production. Price increases
had been smaller since midyear, but there
had been no abatement of wage inflation.
Total nonfarm payroll employment
increased appreciably in October, but its
growth had been more moderate on
balance over the past several months,
especially in the private sector. Widespread job gains were apparent in the
service-producing sector, but manufacturing payrolls declined further as a result
of continued weakness in motor vehicles
and other durable goods industries. In the
public sector, hiring by state and local
governments was robust in October and
had contributed substantially to total
employment growth over the past three
months. The civilian unemployment rate
remained within the narrow range around
5 lA percent that had prevailed since early
1989.
After three months of modest increases
on balance, industrial production was
depressed noticeably in October by strike
activity and other disruptions; adjusted
for these temporary influences, production was about unchanged. Output of
consumer goods declined as the production of appliances and motor vehicles,
particularly light trucks, fell sharply.
Production of business equipment
dropped substantially, reflecting the strike
at a major aircraft manufacturer and the
earthquake in northern California. Total
industrial capacity utilization dropped in
October, mostly because of the effects of
temporary disruptions to production.
Retail sales fell appreciably in October
from upward revised levels for August
and September, as purchases of motor
vehicles dropped sharply. Housing starts
fell further in September, and the multifamily component registered its lowest



125

level since mid-1982. For the third
quarter as a whole, starts were about
unchanged from their reduced secondquarter average.
Indicators of business capital spending
continued to suggest that growth had
moderated from its rapid pace in the first
half of the year, primarily as a result of
slower growth in outlays for information
processing equipment. Shipments of
nondefense capital goods edged lower in
September, and orders data suggested
that equipment outlays would remain
sluggish in coming months. Nonresidential construction activity also fell, largely
owing to a decline in commercial structures other than office buildings, and
construction permits continued the downtrend evident over the past few months.
The sparse data available on business
inventories for September indicated that
manufacturers' stocks had declined somewhat in that month after a sizable gain on
balance over the previous two months.
At the wholesale level, inventories fell
for a second straight month.
The nominal U.S. merchandise trade
deficit increased in August to its highest
level thus far this year, as the value of
non-oil imports surged. For July and
August combined, the value of imports—
especially of consumer goods and machinery-was somewhat above the
second-quarter level. The quantity of
imports rose even more strongly over
that two month period as import prices
declined on average. The value of exports
in the July-August period was somewhat below the level in the second
quarter; the quantity of exports rose
appreciably, but the prices received fell.
In most foreign industrial countries,
indicators of economic activity suggested
that the slower pace of the second quarter
had continued in the third quarter. In
Germany, however, industrial production had rebounded strongly from its
second-quarter decline.

126 76th Annual Report, 1989
Producer prices forfinishedgoods rose
further in October, boosted by sizable
jumps in the prices of a variety of food
products. Excluding food and energy
items, prices for finished goods were
little changed. Consumer prices rose
slightly in September after registering
little change over the previous two
months. Energy prices fell further, while
a sharp increase in apparel prices contributed to a rebound in the prices of consumer goods. The latest data on labor
compensation suggested no easing of
labor cost pressures. Average hourly
earnings jumped in October, although the
year-over-year change remained within
the range of recent experience. In the
broader-based employment cost index,
growth of wages and salaries continued
to show a persistent updrift through the
third quarter on a year-over-year basis in
most industry and occupational groupings; growth of benefits had slowed but
remained at a high rate mainly because of
rising health insurance costs.
At its meeting on October 3, the
Committee adopted a directive that called
for maintaining the existing degree of
pressure on reserve positions and that
provided for giving particular weight to
developments that might require some
slight easing during the intermeeting
period. The Committee agreed that
slightly greater reserve restraint might be
acceptable, or slightly lesser reserve
restraint would be acceptable, in the
intermeeting period depending on
progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
contemplated reserve conditions were
expected to be consistent with growth of
M2 and M3 over the period from September through December at annual rates
of about 6V2 percent and AVi percent
respectively.



After the Committee meeting, open
market operations were directed initially
toward maintaining the existing degree
of pressure on reserve positions. For a
few days after the steep drop in stock
prices on October 13, while financial
markets remained highly sensitive and
volatile, the Manager for Domestic Operations followed an accommodative
approach in supplying reserves. Around
the same time, a decision was made
under the provisions of the October 3
directive to implement a slight easing of
reserve conditions on a more permanent
basis; a further slight easing was effectuated during the first part of November.
These decisions were made in light of
information that suggested some increase
in the risk of a pronounced weakening in
the growth of business activity. To reflect
a decline in seasonal borrowing, several
technical reductions also were made
during the period in the assumed level of
adjustment plus seasonal borrowing used
in constructing the target paths for the
provision of reserves, and actual borrowing fell from about $635 million in the
first full maintenance period after the
early October meeting to around $200
million in the week prior to this meeting.
The federal funds rate declined from
slightly above 9 percent at the time of the
October meeting to around %Vi percent
more recently.
Most short- and intermediate-term
interest rates fell by amounts comparable
to the decline in the federal funds rate,
though Treasury bill rates dropped by
less as a result of disruptions and supply
pressures associated in part with delays
in debt-ceiling legislation. Yields on most
bonds andfixed-ratemortgages also fell
somewhat less than the federal funds
rate. Rates on lower-quality bonds rose
appreciably, and stock prices were considerably lower on balance in this period.
In the days following the October 13
break in stock prices, the Committee held

FOMC Policy Actions
a number of telephone conferences to
assess developments in financial markets.
At these and a subsequent consultation,
the Committee also discussed the decisions to ease reserve conditions during
the intermeeting period.
In foreign exchange markets, the tradeweighted value of the dollar in terms
of the other G-10 currencies declined
slightly further on balance over the
intermeeting period. During the first part
of the period, the dollar had appreciated
somewhat despite substantial intervention sales of dollars by central banks and
increases in official interest rates in a
number of major industrial countries.
Following the drop in stock prices in
mid-October, the dollar moved lower.
Expectations of further increases in
interest rates abroad and of lower rates in
the United States apparently contributed
to the dollar's decline.
Expansion of the monetary aggregates
picked up in October. A surge in demand
deposits in early October contributed
to considerable strength in Ml. The
effects of this acceleration were offset
to an extent by slower expansion of the
retail-type components of M2, possibly
reflecting the waning effects of earlier
declines in market interest rates on the
opportunity costs of holding liquid
savings-type deposits included in M2.
The faster growth of M3, while remaining well below that of M2, reflected
an accelerated issuance of largedenomination CDs by banks to help
finance substantially stronger expansion
of bank credit. Runoffs of assets at
capital-deficient thrift institutions and
associated declines in RPs and largedenomination CDs continued to restrain
growth of M3. For the period from the
fourth quarter of 1988 through October,
growth of M2 was within the lower half
of the Committee's annual range, while
expansion of M3 was near the lower end
of its range.



127

The staff projection prepared for this
meeting suggested that the economy was
likely to grow at a slower pace over the
next several quarters. The outlook for the
near term was clouded by uncertainties
associated with the effects of a major
hurricane, a severe earthquake, and a
strike at a large manufacturer of aircraft.
On balance, those developments were
projected to curb overall growth somewhat in the current quarter but to provide
a temporary boost in the first quarter of
next year. The projection assumed that
the budget deficit would decline moderately and that net exports would make
little contribution to domestic growth in
1990. Consumer demand was expected
to buoy the near-term expansion of the
economy, reflecting the strong growth of
the real income of consumers in recent
months and indications of a continued
high level of consumer confidence. Over
the rest of the projection period, however, steadily mounting slack in labor
markets was expected to exert a restraining effect on consumer demand. The
projection continued to indicate substantial slackening in the expansion of business capital spending from the pace in the
first half of this year. With pressures on
labor and other production resources
expected to ease only marginally, little
improvement was anticipated in the underlying trend of inflation over the next
several quarters.
In the Committee's discussion of the
economic situation and outlook, members commented that broad economic
indicators and local conditions in different parts of the country pointed on
balance to a sustained expansion in
business activity, though at a somewhat
slower pace than in recent quarters.
Views differed to some extent regarding
the risks of a different outcome, reflecting
uncertainties concerning developments
in such key sectors of the economy as
business investment and net exports and

128 76th Annual Report, 1989
in the demand for housing and consumer
durables, notably motor vehicles. While
some members regarded those risks as
about evenly balanced in both directions,
a number stressed that a period of minimal growth or even a downturn in activity
could not be ruled out; others saw greater
odds that the rate of economic growth
and levels of resource utilization might
be closer to the economy's potential.
With regard to the outlook for inflation,
several members observed that the prospects for significant progress were limited for the next several quarters, especially in light of the tendency for increases
in labor costs to remain in a relatively
high range. Other members expressed
greater confidence that appreciable
progress would be made, partly in the
context of reduced growth in economic
activity.
In their discussion of specific developments relating to the outlook for overall
business activity, members noted that
economic conditions had softened in
some parts of the country, with manufacturing tending to weaken more generally,
particularly in the automotive and
automotive-related sectors. Many business contacts appeared to be less optimistic about prospects for sales and more
cautious about investment decisions. Real
estate markets and nonresidential construction ranged from quite weak to
moderately strong in different sections of
the country. On balance, local business
conditions were characterized by steady
activity or slow growth in many regions
to continued fairly vigorous expansion in
some others.
With regard to broad indicators of
economic performance, members cited
the continuing weakness, but absence
of further deterioration, in new orders.
Order backlogs, while below earlier
highs, appeared consistent with sustained production. From a different
perspective, it was noted that com


modity prices remained high and did
not suggest a slowdown in economic
activity. Business investment was an
area of major uncertainty in the economic outlook. Developments that
could have adverse implications for
investment included a squeeze on profit
margins from rising costs, both interest
and labor expenses, on the one hand and
from competitive pressures that restrained price increases on the other. On
the foreign side, the earlier appreciation of the dollar had arrested the
improvement in the nation's trade balance, but further gains still might be
forthcoming at current dollar levels,
given expectations of relatively strong
growth in business activity in foreign
industrial countries. Such a development
would have favorable implications for
the manufacturing sector and for the
domestic expansion more generally.
Views on the outlook for inflation
differed to some extent, depending in
part on somewhat varying expectations
with regard to the level of business
activity and associated pressures on
production resources. Several members
continued to expect that, in light of the
behavior of labor costs, little or no
progress would be made in reducing
inflation over the quarters ahead, even
assuming relatively slow growth in
business activity. Labor markets might
be softening in some areas, but data on
labor compensation showed no changes
from earlier trends, and some members
remained concerned that underlying
demand conditions would be associated
with persisting upward pressures on
labor costs. Other members were more
optimistic. They noted that the behavior
of prices had been better than might
have been anticipated in recent quarters,
apparently reflecting a variety of factors
that were tending to arrest the momentum of inflation, including ongoing
efforts to hold down costs in the context

FOMC Policy Actions
of strong competition in international
and domestic markets.
In the Committee's discussion of policy
for the weeks immediately ahead, nearly
all of the members supported a proposal
to maintain unchanged conditions of
reserve availability. A majority favored
and the others could accept a related
suggestion to retain the current asymmetry toward ease that had been incorporated in recent directives. While current
indicators of economic activity suggested
a somewhat weaker expansion, most of
the members agreed that a steady policy
course was desirable at this point, especially in light of the stimulus provided by
recent easing actions, whose effects on
the economy would be felt only with
some lag. In reconciling concerns about a
cumulative weakening in the economy
against a desire for progress in the fight
against inflation, a steady policy seemed
to give reasonable prospects for achieving both sustained expansion and declining inflation. Some members commented
that these objectives could be attained
with less pressure in credit markets if the
federal budget deficit were to turn more
definitely downward.
In the course of the Committee's discussion, a number of members observed
that, as a result of the pickup in M2 over
the course of the past several months,
growth of the monetary aggregates
seemed consistent with the Committee's
long-run goals, and thus money growth
did not in itself suggest the need for any
current adjustment in reserve conditions.
According to a staff analysis prepared for
this meeting, growth of M2 was likely to
remain relatively brisk, assuming unchanged reserve conditions and steady
interest rates. Growth of this aggregate
would be buoyed by the further decline
that had occurred recently in market
interest rates and in the related opportunity costs of holding M2 balances, and
for the year as a whole M2 was likely to



129

expand at a rate just below the midpoint
of the Committee's range for 1989. M3
was projected to continue to grow at a
slower pace than M2, reflecting the
ongoing though waning effects on some
M3 components of the disposition of
assets by undercapitalized thrift institutions and the funding made available
through RTC resolutions; for the year,
the growth of M3 was projected to be
somewhat above the lower bound of the
Committee's range.
Turning to the instruction in the
directive relating to possible adjustments
in the degree of reserve pressure during
the intermeeting period, a majority of
the members expressed a preference for
retaining the existing asymmetry that
would permit any adjustments to be
made more readily toward easing than
toward firming. In this view, current
tendencies toward weakening in the
economy outweighed the sources of
strength, and some further easing might
be needed if the incoming information
on business activity suggested more
softening than most members currently
expected. In these circumstances, an
easing would be consistent with the
Committee's long-run inflation objective. Other members, who saw the
risks to the expansion as more evenly
balanced, indicated a preference for a
symmetric instruction in the directive;
however, they could accept retention of
the bias toward ease contained in the
October 3 directive. Some of these
members nonetheless stressed the
desirability of not overreacting to possible indications of slower economic
growth in the period ahead for fear of
creating financial conditions and stimulating monetary growth that would
prove to be inconsistent with the
Committee's long-run goal of price
stability. In light of these considerations and in the context of the recent
easing actions, the members generally

130

76th Annual Report, 1989

in October, reflecting a sharp drop in purchases of motor vehicles, but some upward
revisions were made for August and September. Housing starts fell further in September
and for the third quarter as a whole were about
unchanged from their reduced second-quarter
average. Indicators of business capital spending suggest slower growth after a substantial
increase in the first half of the year. The
nominal U.S. merchandise trade deficit widened in August from its July rate as non-oil
imports increased markedly. Consumer prices
have risen more slowly on balance since
midyear, partly reflecting sharp reductions in
energy prices, but the latest data on labor
compensation suggest no significant change
in prevailing trends.
Most interest rates have declined appreciably since the Committee meeting on October 3. In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies declined slightly on
balance over the intermeeting period.
M2 continued to grow fairly briskly in
October, largely reflecting strength in its Ml
and other liquid components; thus far this
year M2 has expanded at a pace somewhat
below the midpoint of the Committee's annual
range. Growth of M3 picked up in October
but has remained much more restrained than
that of M2, as assets of thrift institutions and
their associated funding needs apparently
continued to contract; for the year to date, M3
has grown at a rate around the lower bound of
the Committee's annual range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives,
the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3 of 3 to 7 percent
and 3 Vi to7 Vi percent, respectively, measured
The information reviewed at this meeting from the fourth quarter of 1988 to the fourth
suggests continuing expansion in economic quarter of 1989. The monitoring range for
activity, though at a somewhat slower pace growth of total domestic nonfinancial debt
6
than earlier in the year. Total nonfarm payroll also was maintained at 6Vi to 10 V percent for
employment increased appreciably in Octo- the year. For 1990, on a tentative basis, the
ber, but on balance its growth has been more Committee agreed in July to use the same
moderate over the past several months, ranges as in 1989 for growth in each of the
especially in the private sector. The civilian monetary aggregates and debt, measured from
unemployment rate has remained around the fourth quarter of 1989 to the fourth quarter
5 XA percent. Strike activity and other disrup- of 1990. The behavior of the monetary
tions depressed industrial production notice- aggregates will continue to be evaluated in the
ably in October. Retail sales fell appreciably light of movements in their velocities, devel-

endorsed or found acceptable a proposal
to approach with caution any further
easing in the weeks ahead.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they preferred or could
accept a directive that called for maintaining the existing degree of pressure on
reserve positions and that provided for
giving greater weight to developments
that might require some slight easing
during the intermeeting period. Accordingly, slightly greater reserve restraint
might be acceptable during the intermeeting period, while some slight easing of
reserve restraint would be acceptable,
depending on progress toward price
stability, the strength of the business
expansion, the behavior of the monetary
aggregates, and developments in foreign
exchange and domestic financial markets. The reserve conditions contemplated by the Committee were expected
to be consistent with growth of M2 and
M3 at annual rates of around 7 Vi percent
and AV2 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 7 to 11 percent.
At the conclusion of the meeting, the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:




FOMC Policy Actions
opments in the economy and financial markets, and progress toward price level stability.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Taking account of progress
toward price stability, the strength of the
business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint
might or slightly lesser reserve restraint would
be acceptable in the intermeeting period. The
contemplated reserve conditions are expected
to be consistent with growth of M2 and M3
over the period from September through
December at annual rates of about 7 Vi and 4 Vi
percent, respectively. The Chairman may call
for Committee consultation if it appears to the
Manager for Domestic Operations that reserve conditions during the period before the
next meeting are likely to be associated with a
federal funds rate persistently outside a range
of 7 to 11 percent.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Johnson, Keehn,
Kelley, LaWare, Melzer, and Syron. Vote
against this action: Ms. Seger.
Ms. Seger dissented because she felt
that a further easing of monetary policy
was needed at this time. In her view, the
persisting weakness in the manufacturing
sector, most notably in motor vehicles,
along with a likely softening in construction activity and capital expenditures
posed a substantial risk to the economy.
In these circumstances, a moderate easing of policy could help forestall a slide
into recession in the months ahead without adding to inflationary pressures.

Meeting Held on
December 18-19,1989
1. Domestic Policy Directive
The information reviewed at this meeting
suggested that economic activity was
expanding slowly in the fourth quarter,
with the moderation from earlier in the



131

year only partly attributable to strikes
and other special factors. Abstracting
from these factors, the growth of final
demands had slowed, and the effects were
especially evident in the manufacturing
sector. By contrast, growth of the service
sector appeared to be well sustained, and
overall construction activity seemed relatively firm. Broad measures of inflation
indicated that prices had risen more
slowly on balance since midyear, partly
reflecting sharp reductions in energy
prices; recent wage data suggested no
significant change in prevailing trends.
Total nonfarm payroll employment
rose appreciably in November after a
small gain in October. All of the November increase occurred at service, trade,
and financial establishments. Job losses
continued in manufacturing, especially
in motor vehicle and related industries,
but cutbacks were evident elsewhere,
notably in electrical machinery. The
civilian unemployment rate edged up to
5.4 percent in November, its highest
level since January.
Industrial production rose slightly in
November after a sizable decline in
October that resulted from strike activity
and other disruptions; adjusting for these
temporary influences, production was
down slightly, on balance, in recent
months. Output of consumer goods declined in November as production of
durables other than motor vehicles
dropped sharply further. Output of business equipment increased appreciably,
owing in part to a recovery in the
production of computers in the aftermath
of the earthquake in the San Francisco
area. Total industrial capacity utilization
slipped a bit in November and was nearly
Wi percent below its level a year earlier.
Nominal retail sales in November
partially retraced the sharp October
decline; sales for the month were little
changed from the third-quarter average,
reflecting continued weakness in motor

132 76th Annual Report, 1989
vehicles. Outside of vehicles, sales rebounded for a wide range of goods,
especially for apparel items. Housing
starts declined in November as construction of multifamily units fell back to
about the average pace that had prevailed
since April. However, for the OctoberNovember period, starts were up somewhat on average from their third-quarter
level because of a pickup in single-family
units.
Recent indicators of business capital
spending suggested a weakening in expenditures after a substantial increase
earlier in the year. Shipments of nondefense capital goods fell in October for a
second straight month. Part of the October decline stemmed from the effects of
the strike at Boeing on shipments of
aircraft; small declines were widespread
elsewhere, and a considerable drop occurred in computing equipment. The
orders data for October suggested continued weakness in equipment outlays in the
near term. Nonresidential construction
activity posted another gain, led by a
sizable increase in non-office commercial
construction; however, office vacancy
rates, construction permits, and other
indicators pointed to renewed weakness.
Total manufacturing and trade inventories rose in October at about the third
quarter pace. Accumulation of manufacturing inventories was moderate, and
stocks remained at relatively low levels
compared to shipments. Stocks at wholesalers jumped but, in relation to sales,
remained in the middle of the range that
has prevailed over the past two years.
Retail inventories fell appreciably in
October, reflecting a large decline in auto
dealers' stocks. Excluding auto dealers,
the retail inventory-sales ratio increased
in October to a level well above its range
over the past year.
The nominal U.S. merchandise trade
deficit widened appreciably in October
from an upward revised September rate.



Much of the widening reflected a sharp
increase in imports of industrial supplies,
notably paper, steel, and textiles. The
value of exports showed a small increase
for the third straight month as larger
shipments of automotive products and
other industrial goods outweighed a
substantial decline in exports of aircraft.
Indicators of economic activity in the
major foreign industrial countries suggested a mixed performance in the third
quarter, although growth remained fairly
strong on balance. Economic growth
appeared to have rebounded strongly in
Japan and, adjusted for special factors, to
have remained firm in Germany.
Producer prices for finished goods
edged down in November after sizable
increases in the previous two months
and, on balance, had risen at lower rates
since midyear. Prices of finished energy
products, especially gasoline, fell
sharply; the drop more than offset a
second month of increases in finished
food prices. Consumer prices excluding food and energy items rose a little
faster in October and November than in
other recent months. Over the OctoberNovember period, food prices were
boosted by sharp increases in dairy
products, meats, and fresh produce while
the rise in energy prices was held down
by a net decline in the price of gasoline.
Average hourly earnings slipped in
November, and the large increase initially reported for October was revised
downward. However, the results of recent collective bargaining activity suggested a continuation of the larger wage
settlements evident earlier in the year.
At its meeting on November 14, the
Committee had adopted a directive that
called for maintaining the existing degree
of pressure on reserve positions and that
provided for giving special weight to
potential developments that might require
some easing during the intermeeting
period. The availability of reserves had

FOMC Policy Actions
been eased slightly earlier in November.
With regard to the intermeeting period
ahead, the Committee had agreed that
slightly lesser reserve restraint would be
acceptable, or slightly greater reserve
restraint might be acceptable, depending
on progress toward price stability, the
strength of the business expansion, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
contemplated reserve conditions were
expected to be consistent with growth of
M2 and M3 over the period from September through December at annual rates
of about IVi percent and AVi percent
respectively.
In the period since the November
meeting, the Manager for Domestic
Operations had directed open market
transactions toward maintaining an unchanged degree of reserve availability.
Conditions in reserve markets softened
temporarily around Thanksgiving when
operations to meet seasonal reserve needs
were misread as signaling a further easing
of monetary policy. Over most of the
intermeeting period, however, federal
funds traded around %Vi percent, the
level prevailing at the time of the midNovember meeting. Adjustment plus
seasonal borrowing fell to an average of
around $150 million in the first half of
December. To reflect a continuing decline in seasonal borrowing, technical
reductions were made at the start of the
intermeeting period and in the second
week of December in the assumed level
of adjustment plus seasonal borrowing
used in constructing the target paths for
the provision of reserves.
Against the background of an unchanged monetary policy and incoming
information that generally was viewed as
consistent with expectations of continuing but slow growth in economic activity,
most market interest rates changed little
on balance over the intermeeting period.



133

Major indexes of stock prices generally
rose over the period. In foreign exchange
markets, the trade-weighted value of the
dollar in terms of the other G-10 currencies fell substantially despite some
easing of short-term interest rates in
Germany and Japan. The decline of the
dollar primarily reflected the buoyancy
of the German mark as exchange market
participants interpreted political developments in Eastern Europe as having favorable implications for the German economy. The dollar declined somewhat less
against other European currencies linked
to the mark in the European Monetary
System and was little changed against the
yen.
Growth of the broader monetary aggregates accelerated somewhat further in
November and remained robust in early
December, despite a contraction in demand deposits that resulted in considerably slower expansion of M1. The expansion of M2 continued to reflect the effects
of earlier reductions in market interest
rates and related opportunity costs, and it
seemed likely that the velocity of M2
would decline substantially further in the
fourth quarter. Assets of thrift institutions
and their associated funding needs apparently continued to contract, keeping
growth of M3 below that of M2, but the
decline seemed to be at a reduced pace
and in November M3 grew at its fastest
rate since the summer. Through November, M2 had expanded at a pace near the
midpoint of the Committee's annual range
while M3 had grown at a rate a little
above the lower bound of its annual
range.
The staff projection prepared for this
meeting continued to suggest that the
economy would expand at a reduced pace
over the next several quarters. Growth in
the first quarter was expected to rebound
from temporary disturbances to production stemming from strike activity and
natural disasters in the fourth quarter,

134 76th Annual Report, 1989
although the extent of the rebound would
be limited by further reductions in the
production of motor vehicles in the early
months of the year. Over the remainder
of 1990, a relatively moderate expansion
in consumer spending was projected to
be a key factor in sustaining overall
demand and production. Business outlays
for fixed investment also were expected
to increase, but at a much reduced pace in
an environment of slow revenue growth
and deteriorating cash flows. Housing
construction was forecast to expand at a
relatively sluggish pace over the course
of the year. The projection continued to
assume that the federal budget deficit
would decline moderately and that net
exports would make little contribution to
domestic economic growth in 1990.
Pressures on labor and other production
resources were expected to ease only
marginally and the underlying trend of
inflation was not projected to change
significantly.
In the Committee's discussion of the
economic situation and outlook, members emphasized that signs of a weaker
expansion had accumulated and that the
economy was likely to remain sluggish at
least over the near term. While most
members agreed that further economic
growth was a reasonable expectation for
the year ahead, several observed that
recent developments suggested greater
risks in the direction of a weaker economic performance. These members
expressed concern that problems in some
sectors of the economy such as motor
vehicles and commercial and residential
real estate might lead to greater caution in
credit extensions and overall spending,
especially given indications of some
deterioration in business confidence, and
to more widespread softening in the economy. Other members saw more favorable
prospects for some strengthening of the
expansion next year, though they did not
anticipate a strong rebound in economic



activity. These members recognized that
there were imbalances in the economy,
but they felt that, among other developments, prevailing patterns in orders and
production, though softening, were not
inconsistent with somewhat faster economic growth once current difficulties
such as those in the automobile industry
were worked through and the effects of
the monetary policy easing over the past
half year were felt more fully. It also was
noted that certain forward-looking indicators, including commodity prices,
monetary growth, foreign exchange
rates, and the Treasury yield curve, were
consistent with some pickup in economic
expansion next spring. With regard to the
outlook for inflation, those who believed
the risks were on the side of a weaker
economy and less pressure on production
resources generally saw favorable prospects for further progress toward price
stability next year. Some of the members
who expected a somewhat stronger economy were less optimistic about the extent
of such progress, if any, but they also
believed that there was little risk of a
pickup in the underlying rate of inflation.
In the course of the Committee's discussion, members reported more sluggish business conditions in a number of
areas and some loss of business confidence, but overall economic activity
appeared to be continuing to grow in
most, if not all, parts of the country. With
some notable exceptions, manufacturing
activity had moderated across the country, with particular weakness in the
production of motor vehicles, other
durable consumer goods, and some types
of capital equipment. Members observed
that conditions in the automobile industry
probably would continue to have a negative effect on overall economic activity in
the months ahead, and some noted that
the longer-term outlook was difficult to
predict because structural problems related to changing demand patterns ap-

FOMC Policy Actions
peared to be involved. Construction
activity also was cited as a source of
weakness in many areas, though it remained relatively robust in others. In
general, nonresidential construction
seemed likely to be damped by overcapacity in office and other commercial
structures. Overall demand for new
housing appeared to be essentially flat,
though with considerable local variations, despite earlier declines in mortgage interest rates. It was noted that the
availability of financing for the construction of housing appeared to have been
reduced by tighter supervisory regulations and some decrease in the number of
traditional institutional lenders to this
industry. In addition, the availability of
such financing appeared to have been
adversely affected by the weakness of
real estate markets in a number of areas
and the large resulting losses on loans.
On a more positive note, a number of
members commented that consumer
spending was likely to be sustained by
continuing gains in incomes and the
ample liquid assets of households that
were available to support greater spending. Consumer spending on services was
likely to continue to grow. The outlook
for retail sales was somewhat uncertain,
including at this point the still very limited
information on holiday sales, but outside
the most depressed areas retailers appeared to be relatively optimistic. The
recent depreciation of the dollar would
tend over time to boost overall demand
and economic growth. More generally,
the recent slowing in the expansion could
be attributed in part to special or temporary factors and to the lagged effects of
the tightening of monetary policy through
early 1989. On the whole, current demand conditions were not seen by most
members as suggesting a cumulative
weakening in the economy.
With regard to the outlook for inflation, the views of the members continued



135

to differ to some extent. Several anticipated that little or no progress was likely
to be made in reducing inflation over the
year ahead, in part because the effects of
the recent decline of the dollar would
tend to offset expected gains from diminished pressures on labor and other production resources. Some of these member s also expressed concern that a possible
resumption of economic growth at a pace
closer to the economy's potential, perhaps
later next year, would reverse any tendency for inflation to decline. Other
members were somewhat more optimistic about the outlook for prices and
wages. Some commented that they were
encouraged by the performance of prices
in the second half of 1989, and a number
cited the strong competition for many
products from both domestic and foreign
producers, the behavior of industrial
materials and commodity prices, and
the growth of capacity in some key
industries.
In the Committee's discussion of monetary policy for the intermeeting period
ahead, the members focused on the
possible need to ease reserve conditions
slightly further to provide greater assurance that weaknesses in demand did not
persist or deepen. The current slowdown
in economic growth was to a considerable
extent the result of the policy implemented much earlier to restrain emerging
inflation pressures, and this policy seemed
at least to have avoided an upsurge in
inflation. Over time, a further damping
of price pressures was needed if the
economy was to realize the benefits of
price stability, but that need not involve a
downturn in the economy. Several members observed that the choice between
some slight easing at this time or waiting
for additional evidence that the economy
might be weakening further was a close
one. A majority indicated that on balance
they viewed the risks of a shortfall in
economic activity as sufficiently high to

136 76th Annual Report, 1989
justify an immediate move to slightly
easier reserve conditions, and one member expressed a preference for somewhat
greater easing. In this regard, some noted
that the next several months might be a
critical period in terms of avoiding a
recession and that some modest easing at
this point might have a calming effect on
financial markets and help to boost business confidence. Given downward pressures on many prices and softness in
business conditions, some slight easing
was not likely in this view to be inconsistent with the long-run objective of price
stability or the public's perception of the
importance that the System placed on that
objective. These members recognized
that an easing of reserve pressures immediately after the meeting would make the
need for further easing less likely over
the coming intermeeting period. As a
consequence, they favored a directive
that did not contain a tilt toward less
restraint but one that gave equal weight to
potential intermeeting adjustments in
either direction.
Members who supported an unchanged
policy commented that current reserve
conditions appeared to be consistent with
ongoing expansion in business activity at
a pace that over time would serve to
moderate pressures on labor and other
production resources, and they were
concerned that further easing might
overcompensate for current weaknesses
in the economy at the cost of delaying
progress toward price stability. In current
circumstances, an easing also might
foster some concern about the System's
commitment to achieving price stability
and put undesirable downward pressure
on the dollar in the foreign exchange
markets. At the same time, these members recognized the risk of some further
weakening in the economy, and several
favored a directive that incorporated a
strong presumption that indications of
such a development would trigger a



prompt adjustment of reserve conditions.
Most of these members were willing to
accept a slight immediate move toward
easier reserve conditions but, in that case,
they doubted that any further easing
would be appropriate over the intermeeting period unless the economy, prices, or
financial developments deviated very
substantially from current expectations.
Two members indicated that they could
not accept any further easing at this time,
in part because of their concerns about
the consequences for growth of the
monetary aggregates and, more generally, for inflation expectations and inflation over time. Members referred to the
strong growth of M2 over the past several
months and took note of a staff analysis
that concluded that such growth would
remain fairly strong over months ahead if
reserve conditions stayed unchanged or
were eased slightly. Earlier declines in
short-term interest rates and typically
slow adjustments of offering rates on
M2-type deposits had tended to make
such deposits relatively more attractive
by reducing the opportunity costs of
holding them. The outlook for M3 was
subject to considerable uncertainty, but
growth of that aggregate was expected to
remain below that of M2. The extent of
the shortfall would depend in important
measure on the degree to which solvent
but capital-deficient thrift institutions
continued to reduce assets to meet new
capital requirements and on the extent of
RTC activity in resolving insolvent thrift
institutions.
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 for a slight
easing of reserve conditions. 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
depending on progress toward price

FOMC Policy Actions
stability, the strength of the business
expansion, the behavior of the monetary
aggregates, and developments in foreign
exchange and domestic financial markets. On the basis of such developments,
slightly greater or slightly lesser reserve
restraint would be acceptable during the
period ahead. The reserve conditions
contemplated at this meeting were expected to be consistent with growth of
M2 and M3 at annual rates of about 8V2
and 5V2 percent respectively over the
four-month period from November 1989
through March 1990. In light of the
easing of reserve conditions over the
course of recent months and the further
slight easing favored by a majority of the
members at this meeting, the Committee
decided to lower the intermeeting range
for the federal funds rate by 1 percentage
point to 6 to 10 percent. Such a reduction
would center the range more closely
around the average federal funds rate
that was expected to prevail after this
meeting.
At the conclusion of the Committee's
meeting, the following domestic policy
directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting
suggests that economic activity is expanding
slowly in the current quarter. Total nonfarm
payroll employment has increased at a reduced pace on average over the past several
months, with declines continuing in the
manufacturing sector. The civilian unemployment rate edged up to 5.4 percent in November. Industrial production rose slightly in
November after a decline in October resulting
from strike activity and other disruptions.
Nominal retail sales excluding motor vehicles
strengthened in November, but continued
weak sales of vehicles held total retail sales
for the month to a level that was little changed
from the third-quarter average. Housing starts
fell in November but for the OctoberNovember period were up somewhat on
average from their third-quarter level. Indicators of business capital spending suggest a
weakening in expenditures after a substantial



137

increase earlier in the year. The preliminary
data indicate that the nominal U.S. merchandise trade deficit widened appreciably in
October from an upward revised September
rate. Broad measures of inflation suggest that
prices have risen more slowly on balance
since midyear, partly reflecting sharp reductions in energy prices, but the latest data on
labor compensation suggest no significant
change in prevailing trends.
Interest rates have changed little on balance
since the Committee meeting on November
14. In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies declined substantially
over the intermeeting period, with a particularly pronounced depreciation against the
German mark and related European currencies in the last week of the period.
M2 continued to grow fairly briskly in
November, largely reflecting strength in its
retail deposit components; M2 has expanded
this year at a pace near the midpoint of the
Committee's annual range. Growth of M3
picked up in November but has remained
more restrained than that of M2, as assets of
thrift institutions and their associated funding
needs apparently continued to contract; for
the year to date, M3 has grown at a rate a little
above the lower bound of the Committee's
annual range.
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability, promote growth in
output on a sustainable basis, and contribute
to an improved pattern of international transactions. In furtherance of these objectives,
the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3 of 3 to 7 percent
and 3 Vi to 7 Vi percent, respectively, measured
from the fourth quarter of 1988 to the fourth
quarter of 1989. The monitoring range for
growth of total domestic nonfinancial debt
also was maintained at 6V2 to IOV2 percent for
the year. For 1990, on a tentative basis, the
Committee agreed in July to use the same
ranges as in 1989 for growth in each of the
monetary aggregates and debt, measured from
the fourth quarter of 1989 to the fourth quarter
of 1990. The behavior of the monetary
aggregates will continue to be evaluated in the
light of movements in their velocities, developments in the economy and financial markets , and progress toward price level stability.
In the implementation of policy for the
immediate future, the Committee seeks to

138 76th Annual Report, 1989
decrease slightly the existing degree of pressure on reserve positions. Taking account of
progress toward price stability, the strength
of the business expansion, the behavior of the
monetary aggregates, and developments in
foreign exchange and domestic financial
markets, slightly greater reserve restraint or
slightly lesser reserve restraint would be
acceptable in the intermeeting period. The
contemplated reserve conditions are expected
to be consistent with growth of M2 and M3
over the period from November through
March at annual rates of about 8 f and
Vc
5 Vi percent respectively. The Chairman may
call for Committee consultation if it appears
to the Manager for Domestic Operations that
reserve conditions during the period before
the next meeting are likely to be associated
with a federal funds rate persistently outside a
range of 6 to 10 percent.

in the fourth quarter, could raise doubts
about the System's commitment to its
objective of price stability, especially
given that the easing would further
stimulate M2 growth. Under such conditions, further easing of reserve pressures
would tend to accommodate rising prices,
foster uncertainty in financial markets,
and drive up long-term interest rates,
thereby increasing the likelihood of economic instability. Steady policy in pursuit
of price stability, using forward-looking
indicators, would reduce uncertainty
about price trends, bolster confidence in
the dollar domestically and internationally, and bring about lower interest rates
and higher economic growth.
Mr. Melzer dissented because he faVotes for this action: Messrs. Greenspan, vored an unchanged degree of reserve
Corrigan, GufFey, Johnson, Keehn, Kelley,
and LaWare, Ms. Seger, and Mr. Syron. restraint. He noted that policy had been
Votes against this action: Messrs. Angell eased considerably over the last six
and Melzer.
months in anticipation of prospective
sluggishness in the economy and that
Messrs. Angell and Melzer dissented ample liquidity was now being provided
because they did not believe that policy by the central bank. In addition, based on
should be eased. Mr. Angell was con- recent and projected growth in the moncerned that the Committee was respond- etary aggregates, he was concerned that
ing to indicators of recent weakness in long-term progress toward price stability
economic activity, a weakness that was a would be jeopardized by a more accomconsequence of somewhat cautious pol- modative short-run policy stance.
icy responses earlier. Policy decisions
should rely mainly on leading indicators,
2. Foreign Currency Authorization
including commodity prices, the exchange rate, the yield curve, and money At this meeting, the Committee approved
supply growth. Attention to such indica- an increase in the limit on holdings of
tors had served policy well in the past. foreign currencies in the System Open
During the spring and summer while the Market Account. Paragraph ID of the
dollar was appreciating and commodity Committee's Authorization for Foreign
prices, including gold, were generally Currency Operations permitted the Fedfalling, easing of reserve conditions was eral Reserve Bank of New York, for the
accompanied by the lower long-term System Open Market Account, to maininterest rates necessary to undergird tain an overall open position in all foreign
housing and other long-term invest- currencies not exceeding $20 billion,
ments. At this meeting, price-level indi- based on historical costs. System purcators were not signaling a need for chases of foreign currencies, which were
further ease. In these circumstances, an coordinated with similar transactions by
additional drop in the federal funds rate, the U.S. Treasury, had been relatively
coming after two previous easing moves limited recently, but, with the accumula


FOMC Policy Actions
tion of interest, total holdings were
approaching the $20 billion limit. The
Manager for Foreign Operations advised
that even in the absence of new market
purchases, continuing accruals of interest
would raise total holdings to the current
limit by February. The Committee agreed
to raise the limit to $21 billion, effective
immediately.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Guffey, Johnson, Keehn,
Kelley, LaWare, and Melzer, Ms. Seger,
and Mr. Syron. Votes against this action:
None.
•




139

141

Consumer and Community Affairs
The Community Reinvestment Act was
the focus of much activity during the
year. In March the Board and the other
federal financial regulatory agencies
issued a joint policy statement to guide
insured depository institutions in helping to meet the credit needs of their
local communities, including low- and
moderate-income neighborhoods. The
statement aims to turn the focus of
attention away from the applications
process as the primary means for the
public to air concerns related to the
act; it seeks instead to promote more
lasting mechanisms for outreach and
dialogue between institutions and their
communities.
According to the policy statement,
institutions should have appropriate community reinvestment policies in place,
and working well, before filing an application to expand operations. Although
commitments for future actions may be
used to address specific problems in an
otherwise satisfactory record, such commitments will not compensate for seriously deficient performance. In February
the Board underscored the importance of
an institution's current record when it
denied, in part because of deficiencies in
performance under the act, a proposal by
Continental Illinois Bancorp, Inc., of
Chicago, to acquire an Arizona bank.
The policy statement encourages institutions to develop an effective process for
ascertaining and responding to community credit needs over time and lists
examples of initiatives the agencies have
found to be effective. The statement
highlights the importance of dialogue
between financial institutions and representatives of their communities and urges
institutions to discuss in formal state


ments their record of meeting the community's needs as a way of facilitating
such communication.
Other aspects of the Board's activities
under the Community Reinvestment Act
are discussed below.
Overall, this chapter presents the
Board's implementation in 1989 of new
statutory protections for consumers
while minimizing regulatory burdens on
financial institutions, reports on the
System's examination of institutions for
compliance with consumer laws and on
the System's handling of consumer complaints, discusses the community affairs
program of the Board and Reserve
Banks, details the activities of the
Board's Consumer Advisory Council,
and reports on testimony and legislative
recommendations.

Regulatory Matters
The Board amended Regulation B to give
owners of small businesses certain rights
related to notices and recordkeeping as
required by the Women's Business Ownership Act of 1988. The Board amended
Regulation C to implement statutory
amendments that expand reporting requirements under the Home Mortgage
Disclosure Act. The Board amended
Regulation Z to implement the Fair
Credit and Charge Card Disclosure Act
of 1988, which requires credit and charge
card issuers to give consumers early
disclosures. The Board also amended
Regulation Z to implement the Home
Equity Loan Consumer Protection Act of
1988, which requires extensive new
disclosures and imposes limitations on
the terms of home equity loans. In other
matters, the Board updated advertising

142 76th Annual Report, 1989
rules and poster requirements to implement 1988 changes to the Fair Housing
Act and issued a new brochure for
consumers about home equity lines of
credit.

up to one year upon request from the
applicant.

Regulation B (Equal Credit
Opportunity): Business Credit

In December the Board adopted revisions
to Regulation C to carry out amendments
to the Home Mortgage Disclosure Act
approved by the Congress in August
1989. Previously, lenders covered by
the law reported mortgages and home
improvement loans they made or purchased by type of loan and by census
tract. Beginning January 1, 1990, covered lenders must report the following
additional material:
• Information from all applications
they receive for mortgages and home
improvement loans
• The race, sex, and income level of
applicants for mortgage or home improvement loans
• For loans that they sell, the type of
purchaser, such as the Federal National
Mortgage Association, the Federal Home
Loan Mortgage Corporation, or an affiliate of the lender.
To help institutions comply with the
law and keep their costs to a minimum,
the Board decided that institutions will
use a loan register to report data. This
approach allows institutions to provide
raw data without cross-tabulating it by
type of loan, census tract, location, and
characteristics of the applicant or borrower. Institutions will keep a running
log of the required information and at
year-end send the registers to their
supervisory agency. The Federal Financial Institutions Examination Council
(FFIEC) will prepare the disclosure
statements required by the new law and
send copies to the individual institutions,
which will in turn make them available to
the public. The FFIEC will continue to
prepare, and to make public, tables that

In November the Board amended Regulation B to implement the Women's
Business Ownership Act of 1988, which
gives owners of small businesses some of
the same rights under the Equal Credit
Opportunity Act (ECOA) that are given
to borrowers of consumer credit. Business credit has always been covered by
the ECOA and Regulation B, but the
regulatory requirements for retention of
records and for written notice of credit
denial differed significantly from those
applicable to consumer credit.
Beginning April 1, 1990, creditors of
small businesses must follow rules for
written notice that are similar to requirements for consumer transactions. A small
business is defined, for purposes of
Regulation B, as one having revenues of
$1 million or less.
Creditors will have three options for
complying with the notice requirements
regarding reasons for denial. Creditors
may give all applicants, at the time of
application, a written notice of their
right to find out the reasons if credit is
denied; they may give such notice to
rejected applicants at the time of denial;
or they may automatically give rejected
applicants the specific reasons, in
writing, upon denial.
Under the new rules, creditors will
have to keep the records used in evaluating credit applications of small businesses
for one year. For businesses with revenues greater than $1 million, creditors
must keep records for at least sixty days
after taking action on the application and



Regulation C
(Home Mortgage Disclosure)

Consumer and Community Affairs

143

plans; and prohibit certain credit terms in
home equity plans. Compliance with the
rules became mandatory on November 7,
1989.
When a lender gives a prospective
Regulation Z (Truth in Lending):
customer an application form, the lender
Credit Card Disclosures
must disclose payment terms, an example
In April the Board amended Regulation Z of the payments, fees the creditor charges
to implement the Fair Credit and Charge to open or use the plan, an estimate of
Card Disclosure Act of 1988. The amend- fees imposed by third parties such as
ments require that card issuers give appraisers, and information about any
consumers certain information early to variable-rate features. A creditor also
allow credit shopping. After August 31, must alert consumers to the circum1989, issuers that offer cards to consum- stances under which it may terminate the
ers by mail must disclose, in a table plan, prohibit additional credit extenaccompanying the application, the annual sions, or change specified terms. The
percentage rate, annual fees, transaction creditor must provide much of this inforcharges, grace periods, and the method mation again when the account is opened.
used to calculate the balance on which the
The rules spell out proper advertising
finance charge is based. Previously, these of home equity plans. If an advertisement
disclosures could be made later, when the includes any payment information, for
card was issued. Special rules apply to example, it must state certain costs such
disclosures in telephone solicitations and as points or other loan fees, the periodic
to application forms placed in retail rate used to compute the finance charge,
establishments and in magazines.
and the maximum annual percentage rate
The law requires disclosures in two for variable-rate plans. Special rules
other circumstances. First, card issuers apply to the mention of balloon payments
that impose fees to renew credit and and tax implications.
The new rules set some restrictions on
charge card accounts must give cardholders renewal notices, including a new credit terms. Lenders generally may not
set of credit disclosures. Second, card terminate a plan or unilaterally change
issuers that offer credit insurance must the loan terms except in specified circuminform their cardholders if they change stances (for example, if the consumer
insurance providers and must disclose fails to honor the contract's repayment
any accompanying increase in rate or terms or commits fraud). If the plan has a
variable-rate feature, the lender must use
decrease in coverage.
an index that is publicly available and not
under its control. Lenders must refund
Regulation Z:
all fees paid by the consumer if the
Home Equity Lines of Credit
consumer chooses to cancel because the
In June the Board amended Regulation Z terms disclosed (other than a variable
to carry out the Home Equity Loan rate) changed between the time the conConsumer Protection Act of 1988. The sumer received an application and the
new rules expand the disclosures that account was opened.
lenders must give with applications;
The Board issued a pamphlet for
require that some disclosures be given a consumers that describes the features of
second time, when an account is opened; home equity lines of credit and how they
govern the advertising of home equity compare with other types of credit proaggregate for each metropolitan statistical area the data submitted by financial
institutions.




144 76th Annual Report, 1989
grams. This pamphlet, or one substantially similar, must be given to consumers
along with the creditor's disclosures.

Community Reinvestment Act

The Community Reinvestment Act
(CRA) requires the Board to encourage
financial institutions under its jurisdiction
to help meet the credit needs of their
Regulation Z:
entire communities, including low- and
Determination of Preemption
moderate-income neighborhoods, in a
In December the Board determined that manner consistent with safe and sound
provisions of Wisconsin law that require banking practices. The Board assesses
disclosures and adjustment notices for the CRA performance of state member
certain variable-rate transactions are not banks during regular compliance examiinconsistent with Regulation Z and there- nations and takes the CRA record into
fore are not preempted. The Board con- account, along with other factors, when
cluded that a creditor could comply with acting on applications from state member
both sets of rules without violating either banks and bank holding companies. As
the state or federal law. The Board also reported at the outset of this chapter, the
concluded that Wisconsin's requirements Board in March joined the other federal
for disclosing information not covered financial regulators in issuing an interaby the federal law, or for more detailed gency policy statement to guide institudisclosures, do not contradict the federal tions in meeting their responsibilities
rules.
under the act.
The Federal Reserve System maintains
a three-faceted program for enforcing
Interpretations
and fostering better bank performance
In 1989 the Board continued to offer legal under the CRA. The components are a
interpretations and guidance on Regula- compliance examination program, distion B (Equal Credit Opportunity), Reg- semination of information on community
ulation E (Electronic Fund Transfers), development strategies and techniques to
and Regulation Z (Truth in Lending) bankers and members of the public
through official staff commentaries. Pub- through community affairs offices at the
lished by April 1 each year, these com- Reserve Banks, and analyses of CRA
mentaries help financial institutions and issues presented in bank and bank holding
others apply the regulations to specific company applications.
situations.
Federal Reserve examiners review fair
lending, community revitalization, and
other areas relevant to assessing CRA
Fair Housing Act
performance. During the 1989 reporting
In March the Board revised advertising period (July 1, 1988, through June 30,
rules and poster requirements to imple- 1989), they examined 634 state member
ment 1988 amendments to the Fair Hous- banks and, when appropriate, suggested
ing Act. Among other things, the amend- ways to improve CRA performance.
During 1989 the number of applicaments added two new categories of
protected persons: those with handicaps tions in which adverse CRA examination
and those with children under the age of ratings were at issue increased signifi18. The revised housing poster is avail- cantly. The Board received forty-two
able free of charge from each of the such cases, compared with twenty in
1988 andfifteenin 1987. But the number
Reserve Banks.



Consumer and Community Affairs
of applications protested because of CRA
performance in 1989 fell to sixteen, a
sharp decline from the record high of
thirty-six in 1987 and thirty-one in 1988.
At year-end, eleven of the protested
applications had been approved, two had
been returned to the applicant or withdrawn, and three were still pending.

Community Affairs
The Federal Reserve's Community
Affairs Program continued to emphasize
training, education, and dissemination of
information to financial institutions and
to community and government representatives about community development
lending. Increased interest in the mechanics of public-private partnerships followed the release in March of the interagency policy statement on the CRA by
the federal financial regulatory agencies.
Given the heightened emphasis on
CRA, the Board joined with the Reserve
Banks of Chicago and New York in
developing an advanced CRA training
program for System examiners in those
two districts; plans are under way to train
examiners in the other Reserve Bank
districts in 1990.
The Board coordinated two training
seminars for Community Affairs Officers
and staff of the Reserve Banks: A conference on rural economic development at
the Federal Reserve Bank of Atlanta and
a week-long seminar on communitydevelopment lending at the Baltimore
Branch of the Richmond Bank. The
Board's staff also made forty-five
speeches in 1989 before various groups.
Members of the Community Affairs
staff at the Reserve Banks provided
training for bankers and others involved
in community development in their districts. Conferences, seminars, and workshops covered a variety of topics, including the interagency policy statement on
CRA, bank holding company responsi


145

bilities in managing the CRA programs
of their deposit subsidiaries, economic
development, community development
corporations, the development of lowincome housing, and lending to small
businesses. Many sessions included participation from agencies such as the
Federal Home Loan Banks, the Federal
National Mortgage Corporation, the
Department of Housing and Urban
Development, the Small Business Administration, and the Farmers Home
Administration.
The informational brochures and papers produced under the Community
Affairs program included several new
profiles published by the Federal Reserve
Banks of Philadelphia and San Francisco
on local communities within their districts. The Federal Reserve Bank of
Minneapolis published a technical manual on community development lending,
a practical guide that takes the reader step
by step through the process of credit
analysis and decisionmaking. In addition,
six Reserve Banks now publish regular
newsletters on community development
issues in their districts.
Financial institutions continued to
express interest in forming community
development corporations (CDCs). The
Board's staff worked with the Economic
Development Administration in promoting the formation of bank and bank
holding company CDCs through technical assistance to institutions.

Compliance Examinations
The Federal Reserve System conducts
separate examinations to monitor compliance of state member banks with consumer protection laws. The Office of
Thrift Supervision (OTS) also has implemented a program of specialized compliance examinations under its Division of
Compliance Programs; and OTS districts
began using a new compliance handbook

146 76th Annual Report, 1989
and a separate schedule for compliance
examinations in April 1989.
The Office of the Comptroller of the
Currency (OCC), the Federal Deposit
Insurance Corporation (FDIC), and the
National Credit Union Administration
(NCUA) maintained their various enforcement policies and procedures to
monitor the compliance of the institutions
they supervise.

regulations declined from 1988 levels.
Information about compliance with the
Expedited Funds Availability Act, which
became effective September 1, 1988, is
reported for thefirsttime.1
Truth in Lending Act
(Regulation Z)

The Board, the FDIC, the OCC, the
OTS, and the NCUA report that 30
percent of examined institutions were in
Examination Procedures
full compliance with the regulation, down
for the CRA
from 46 percent in 1988. The OCC, the
The Financial Institutions Reform, Re- FDIC, and the OTS noted declines in
covery, and Enforcement Act of 1989 compliance, while the NCUA and the
(FIRREA) amended the Community Re- Board reported levels of compliance
investment Act in two ways. First, it similar to those of 1988. Data from the
requires agencies to disclose to the Board, the OCC, and the NCUA (the
public, for examinations that take place agencies that provide frequency of violaafter July 1, 1990, written evaluations tions) indicate that, of the financial
and performance ratings under CRA; the institutions not in full compliance, half
evaluations will state conclusions and had no more than five violations.
supporting facts for each assessment
The five most frequent violations of
factor set out in the CRA regulations. Regulation Z were the failure to disclose
Second, the act contains a new four-point properly the finance charge; the annual
rating system that replaces the agencies' percentage rate; the number, amounts,
existingfive-pointsystem.
and timing of payments scheduled to
To implement these changes, the repay the obligation; and the total of
FFIEC assembled an interagency work- payments on closed-end credit; plus
ing group of Washington and field office the failure to provide notice to consumrepresentatives. The group developed a ers entitled to rescind certain credit
uniform rating system and methods for transactions.
disclosing the CRA rating and presenting
The FDIC and the OTS issued four
the written evaluations. In December, cease-and-desist orders involving violathe FFIEC issued for public comment an tions of Regulation Z. Under the Interinteragency proposal to implement the agency Enforcement Policy on Regunew requirements.
lation Z, a total of 425 institutions
supervised by the Board, the OTS, the
FDIC, and the OCC reimbursed about
Compliance with Consumer
$8 million on 87,447 accounts during the
Regulations
1989 reporting period, compared with
This section summarizes compliance data
from the five agencies that supervise
1. The federal agencies that regulate financial
financial institutions and from other fedinstitutions do not all use the same method to
eral regulators for the reporting period compile information on compliance; however, the
July 1, 1988, to June 30, 1989. The data data support the general conclusions presented
indicate that compliance with consumer here.



Consumer and Community Affairs 147
approximately $2 million on 23,419
accounts in 1988. The increase in reimbursements is explained, in part, by one
institution's reimbursement of $3.6 million on 59,297 credit card accounts.
The Federal Trade Commission (FTC)
continued its program of voluntary compliance to enforce the credit-advertising
requirements of Regulation Z, with an
emphasis on those applicable to real
estate and automobile credit. Companies
contacted by the FTC that were not in full
compliance with the Truth in Lending
Act promptly brought their programs
into compliance.
The FTC continued its enforcement
program against certain deceptive telemarketing practices and other frauds
involving credit card charges. The agency
brought three actions in federal district
court alleging violation of the Truth in
Lending Act: The failure to disclose
finance charges and other required information, misrepresentations, and unlawful billing and crediting procedures.
To heighten consumer and creditor
awareness of the rights and responsibilities established by the act, the FTC
continues to publish educational pamphlets. This year the FTC issued a new
pamphlet entitled Choosing and Using
Credit Cards and a revised edition of
Electronic Banking. A news release
outlined provisions of the Fair Credit
Billing Act that would assist customers
with canceled airline tickets.
The Department of Transportation
(DOT) reports that theyfinda satisfactory
level of overall compliance by foreign
and domestic carriers under its jurisdiction. As a result of consumer inquiries,
the DOT entered into a formal order with
an air carrier that required prompt processing of refunds to credit card accounts.
The Farm Credit Administration
(FC A) reports that theyfinda satisfactory
level of compliance with Truth in Lending among the institutions that it super


vises. As a result of examinations and
other regulatory activities, the FCA took
formal enforcement actions against five
institutions. They are now in substantial
compliance.
The Packers and Stockyards Administration of the Department of Agriculture reports that they find a satisfactory
level of compliance among the entities
they supervise.

Equal Credit Opportunity Act
(Regulation B)
The five financial regulatory agencies
report that 60 percent of all examined
institutions were in full compliance with
Regulation B in 1989, down from 67
percent in 1988. The Board, the OCC,
and the NCUA (the three agencies that
collect data on the frequency of violations) report that 72 percent of the
institutions not in full compliance had no
more than five violations. The most
frequent violations involved the failure
of the creditor to meet the following
requirements:
• To notify the applicant of the action
taken within thirty days after receiving a
completed application
• To provide a written notice of adverse action that contains the information
specified by the regulation
• To provide the specific reasons for
credit denial and other adverse action
• To request information for monitoring purposes about race or national origin
and sex on credit applications for the
purchase or refinancing of a primary
dwelling
• To note the race or national origin
and sex, based on the lender's visual
observation, if an applicant chooses not
to provide the requested information.
The FTC continued an investigatory
program in which testers pose as credit
applicants to monitor compliance with

148 76th Annual Report, 1989
the ECO A. The FTC settled one lawsuit
involving practices that were in violation
of the ECOA and obtained consent decrees in three other cases.
As part of its educational effort, the
FTC published a manual that teaches
creditors how to comply with the notification provisions of the ECOA and the
Fair Credit Reporting Act.
The Farm Credit Administration reports that they find a satisfactory level of
compliance with the ECOA by its institutions. As a result of examinations and
other regulatory activities, the FCA took
formal enforcement actions against four
institutions. They are now in substantial
compliance with the ECOA.
The other agencies that enforce the
ECOA-the DOT, the Interstate Commerce Commission, the Small Business
Administration, the Packers and Stockyards Administration, and the Securities
and Exchange Commission (SEC) —
report that they find substantial compliance among the entities they supervise.

Electronic Fund Transfer Act
(Regulation E)
The five financial regulatory agencies
report that 84 percent of examined institutions were in full compliance with
Regulation E, a decline from the 88
percent reported last year. The five most
frequent violations of Regulation E involved the failure to give the following
disclosures:
• A written statement outlining the
terms and conditions of the EFT service
• A summary of the customer's liability for unauthorized transfers
• A summary of the customer's right
to stop payment of EFTs and the procedures for initiating a stop-payment order
• A statement for each monthly cycle
in which an EFT occurred
• A periodic notice of the procedures
for resolving alleged errors.



The other agencies responsible for
enforcing the act—the FTC and the
SEC - report that they find a satisfactory
level of compliance among the entities
they supervise.

Expedited Funds Availability Act
(Regulation CC)
The Board, the OCC, and the FDIC
report that 90 percent of examined institutions were in full compliance with the
regulation. The Board and the OCC (the
agencies that provide a breakdown of
the violation frequency) report that 78
percent of the institutions not in full
compliance had fewer than five violations. The five most frequent violations
involved the failure to meet the following
requirements:
• To provide next-day availability for
certain items
• To notify customers when placing
exception holds on their transactions
• To train employees and provide
procedures for compliance
• To post availability policies at locations where employees accept deposits
• To notify customers when placing
case-by-case holds on their transactions.

Economic Effect of the Electronic
Fund Transfer Act
In keeping with statutory requirements,
the Board monitors the effects of the
Electronic Fund Transfer Act on the costs
and benefits of EFT services to financial
institutions and consumers. During 1989
the economic effect of the act increased
because of continued growth in the
availability and use of EFT services.
About two-thirds of the depository institutions in the United States offer EFT
services and are covered by the act and
Regulation E.
Most of the nation's banks and thrifts
offer customers access to automated teller

Consumer and Community Affairs
machines. The number of installed ATMs
increased in 1989 about 6 percent, to
87,000, from 82,000 in 1988; more than
85 percent of these ATMs are part of
shared networks. In the same period, the
number of ATM transactions increased
about 4 percent, or 0.2 billion, to 5.2
billion.
Point-of-sale (POS) systems grew
more rapidly than ATM systems during
1989. The number of terminals capable
of supporting direct-debit POS transactions grew about 18 percent, from 43,400
in 1988 to 51,000 in 1989. Thevolumeof
POS transactions, however, remains
below that of ATM transactions. About
70 million POS transactions were processed in 1989.
Direct deposit accounts for a large
share of electronic payments. In the
private sector, the direct deposit of salary
and pension payments covers about 40
percent of commercial payments handled
by automated clearinghouses. In the
public sector, about half of social security
payments and two-thirds of federal salary
and retirement payments are made by
direct deposit.
The benefits to consumers from the
Electronic Fund Transfer Act are difficult to measure because they cannot be
isolated from consumer protections that
would have been provided in the absence
of regulation. Statistics from examination
reports do not suggest widespread violation of consumer rights established by
the act. In 1989, according to reports
by the federal agencies that regulate
financial institutions, about 16 percent of
institutions were not in full compliance
with the regulation. The violations primarily involved the failure of institutions
to provide one or more disclosures to
consumers.
Data from the Board's Consumer Complaint Control System do not indicate
serious consumer problems with electronic transactions. In 1989, forty-eight



149

of the complaints processed involved
electronic transactions. The Federal Reserve System forwarded nineteen, which
did not involve state member banks, to
other agencies for resolution. Of the
remaining twenty-nine, two involved a
possible violation of the regulation.
Because the industry practices that
would have evolved in the absence of
statutory requirements are unknown, the
incremental costs associated with the act
are difficult to quantify. Cost estimates
from 1981 suggest that the ongoing
compliance cost of electronic transactions was not high enough to compromise
their cost advantage over check-based
transactions. Since that time, the volume
of transactions has increased, which has
allowed financial institutions to exploit
economies of scale.
There were no revisions to Regulation
E in 1989. The Board is reviewing the
regulation for possible changes under its
Regulatory Improvement Program.

Complaints about
State Member Banks
The Board and the Federal Reserve Banks
investigate complaints against state member banks and forward to appropriate
enforcement agencies complaints that
involve other creditors or businesses. In
1989 the System received 2,146 complaints against state member banks,
nonmember banks, and other creditors
and businesses: 1,846 by mail, 294 by
telephone, and 6 in person (see the
accompanying table). The Board also
received 963 written inquiries concerning consumer credit and banking policies
and practices. In responding, the Board's
staff gave consumers brochures on the
general issues plus explanations of laws,
regulations, and banking practices specific to their complaints or inquiries.
The Board's staff continues regularly
to review the System's handling of com-

150 76th Annual Report, 1989
plaints by sending follow-up questionnaires to complainants to assess perceptions of how well the System did. In
1989, 57 percent of the complainants
returned the questionnaires. Approximately 63 percent reported that the
explanations received were clear and
understandable; 63 percent were satisfied
with the promptness in handling; 96
percent said they were treated courteously by Federal Reserve staff; 93 percent
said they would contact the Federal
Reserve again if they had another problem with a bank; and 56 percent found the
resolution of their complaints acceptable.
The proportion of those satisfied with the
outcome is lower relative to the proportion of those satisfied with the System's
handling of complaints because many of
the complaints involved practices that,
while of concern to consumers, are
permissible banking practices.
A second table summarizes the nature
and resolution of complaints filed against
state member banks in 1989, classified
according to bank functions. Of the 839
complaints received about state member
banks, 55 percent concerned loan functions: 7 percent alleged discrimination on
a prohibited basis, and 48 percent con-

cerned credit denial on nonprohibited
bases (such as length of residency) and
other unregulated lending practices (such
as release or use of credit information).
About 23 percent involved disputes about
interest on deposits and general practices
concerning deposit accounts.

Unregulated Practices
In 1989 the Board continued to monitor,
under section 18(f) of the Federal Trade
Commission Act, complaints about banking practices that are not subject to
existing regulations to focus on those that
may be unfair or deceptive. Four categories each accounted for 6 percent or
less of the 1,120 complaints: credit
denial based on credit history (sixtyeight), discrepancies in deposit accounts
(sixty- one), debt collection practices
(fifty- four), and miscellaneous other
practices (seventy). 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. Complaints about discrep-

Consumer Complaints Received by the Federal Reserve System, by Subject, 1989
Subject

State member
banks

Other
lenders1

Trtta\

loiai

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

60
29
4
41
184
0
21
23
9
0
0
1
467
0

45
19
4
48
294
5
50
67
9
2
2
1
653
108

105
48
8
89
478
5
71
90
18
2
2
2
1,120
108

Total.

839

1,307

2,146

1. Referred by the Federal Reserve to the appropriate
agencies.




2. Primarily miscellaneous complaints against business
entities.

Consumer and Community Affairs
ancies in deposit accounts usually involved cases in which consumers had
noticed errors on their savings or checking account statements. Complaints about
debt collection tactics usually involved
objections to the manner in which banks
were attempting to collect outstanding
debts. Miscellaneous complaints covered
a wide range of practices, including
merchants' minimum-charge 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.

151

Consumer Advisory Council
The Consumer Advisory Council (CAC)
met in March, June, and October to
advise the Board on its responsibilities
under the consumer credit protection
laws and to discuss other issues dealing
withfinancialservices to consumers. The
council's thirty members come from
consumer organizations, financial institutions, academia, and state government.
Council meetings are open to the public.
During the year, the council considered issues related to the Community

Consumer Complaints Received by the Federal Reserve System,
by Function and Resolution, 1989
Type of complaint
Type of resolution

Total

Loan function
Deposit
function

Electronic
fund
transfers

400
48

192
23

29
3

8
1

150
18

15

3

0

0

5

Discrimination
Complaints about state
member banks
Number
Percent
Complaints about state
member banks, by type
Insufficient information*
Information furnished to
complainant2
Bank legally correct
No accommodation
Accommodation made 3
Clerical error, corrected
Factual dispute4
Bank violation, resolved5
Possible bank violation,
unresolved6
Customer error
Pending, December 31

Other

839
100

60
7

23

0

Trust
services

Other

79

6

32

17

1

2

21

252
93
103
44
10

26
4
3
0
4

118
53
45
18
2

53
17
31
12
1

11
1
10
0
2

3
0
0
1
0

41
18
14
13
1

2
21
212

0
2
15

1
4
112

11
47

0
0
4

0
0
2

1
4
32

0

Complaints referred
to other agencies7

1,307

52

591

258

19

13

374

Total, all complaints

2,146

112

991

450

48

21

524

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




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.

152 76th Annual Report, 1989
Reinvestment Act and the Home Mortgage Disclosure Act, disclosures for
credit and deposit accounts, the restructuring of the savings and loan industry,
and consumer use of financial services,
among others. In March, CAC members
offered views on the interagency policy
statement on CRA; the statement calls
for financial institutions to implement
CRA programs, to be managed at the
highest levels of the institution, that
involve outreach and dialogue, and encourages institutions to fully document
their CRA activities. The CAC also
discussed the need for affordable housing
and received an update about media
reports of mortgage lending patterns by
banks in Atlanta and Detroit that showed
wide disparities between predominately
white and predominately minority neighborhoods. In June the council discussed
public disclosure of CRA ratings.
The council's Community Affairs
Committee looked at ways to address
community development needs by promoting partnerships among lenders, nonprofit development organizations, and
government agencies. In June the committee presented a report on community
development credit unions (CDCUs),
financial cooperatives that primarily
serve low-income communities. One
member suggested that sponsoring
CDCUs is one way that banks might meet
obligations under CRA. In October the
council passed a resolution suggesting
specific mention of CDCUs in the interagency policy statement on CRA and in
appropriate Federal Reserve programs
and publications. The policy statement
gives examples of approaches financial
institutions might take to support community development lending and the provision of other financial services. The
council asked that the Board consider
listing CDCUs as one of those examples.
In October the council also discussed
the Board's proposed revisions to Regu


lation C to implement amendments to the
Home Mortgage Disclosure Act.
During the year, the CAC considered
several issues related to disclosures given
to consumers. The council discussed the
Board's proposed amendments to Regulation Z, which require creditors to give
consumers early disclosures about home
equity lines of credit and set substantive
limits on some aspects of these plans.
The final regulation reflected council
recommendations concerning the form
and content of disclosures to consumers.
In June the council discussed proposals
for truth in savings legislation.
The council also discussed the use of
credit cards in telemarketing operations.
Consumers andfinancialinstitutions may
encounter problems when goods purchased with a credit card from telemarketers are not delivered or are of unsatisfactory quality. (The Truth in Lending
Act places certain limits on the right of
consumers to withhold payment for faulty
merchandise; for example, disputed sales
have to occur in the same state or within
100 miles of the consumer's home.)
Financial institutions face potential financial loss because they are responsible for
responding to consumer claims and possibly reversing charges to their accounts.
Banks are also at risk if they hold the
account of a merchant who engages in
fraudulent or deceptive practices. The
council passed a resolution suggesting
that the Congress hold hearings to determine whether legislative amendments to
the claims and defenses section of the
Truth in Lending Act are needed to
address telemarketing fraud. The resolution also asked that the Congress consider
both criminal and civil penalties for salesdraft laundering and telemarketing fraud.
The council received briefings on
legislative proposals to restructure the
savings and loan industry. It adopted a
resolution urging the Congress to work
immediately and cooperatively for rapid

Consumer and Community Affairs
resolution of the crisis; the resolution
also supported the timely and positive
approach of the Bush administration in
addressing this problem.
A roundtable discussion among members of the council and of the Board,
known as the "Members Forum," was
initiated this year to give council members the opportunity to offer their views
on a variety of topics. Forum discussions
focused on issues identified by the Board.
During the year, council members discussed matters such as the state of community development lending in their
cities and trends they have noticed in
consumers' use of financial services. In a
resolution, the council asked that the
Board encourage banks to refer customers to nonprofit credit-counseling services that adhere to ethical and businesslike codes of operations.

Testimony and Legislative
Recommendations
In 1989 the Board testified before Congress about truth in savings, flood insurance, the Community Reinvestment Act,
basic banking and government-check
cashing, and loan discrimination.
Truth in Savings
In May the Board testified before a
subcommittee of the House Banking,
Finance and Urban Affairs Committee
about a proposed truth in savings bill that
would require institutions to give certain
information about the terms of deposit
accounts to prospective and existing
account holders. Institutions also would
have to disclose rates and costs in advertisements and to inform account holders
of changes in account terms.
The Board supported the concept of
account disclosures but saw no compelling need for legislation. A majority of
state member banks already give disclo


153

sures, and consumer surveys conducted
by the Board show that most depositors
say the information they receive is adequate. The Board believes the bill would
add to an already heavy regulatory burden, particularly for small institutions.
The Board offered technical changes
should the Congress decide to proceed
with the bill. These include amendments
to make more meaningful to consumers
the disclosure of the interest yields on
funds deposited for less than one year and
to conform the civil liability provisions
more closely to other consumer protection statutes.

Flood Insurance
In May the Board testified before a
House Banking subcommittee on the
Federal Reserve's enforcement of the
Flood Disaster Protection Act, which
prohibits federally regulated banks and
savings and loan associations from
making loans in a designated flood
hazard area unless any improvements on
real property that secures the loan is
covered by flood insurance. The Board
reported that specially trained examiners
routinely review compliance during
regularly scheduled examinations of
state member banks. In 1988, 83 percent
of the institutions examined had no flood
insurance violations, compared with 78
percent in 1987 and 81 percent in 1986.
Among banks with violations, most had
failed to record the fact that they had
checked the need for flood insurance;
few violations involved a failure to
obtain insurance when it was required.

Community Reinvestment Act
In June the Board testified before a
subcommittee of the Senate Committee
on Banking, Housing and Urban Affairs
on legislative proposals relating to the

154 76th Annual Report, 1989
Community Reinvestment Act, and in
July about the Federal Reserve's implementation of the CRA. The Board endorsed public disclosure of CRA performance through a written summary of the
examiner's evaluation (with supporting
information) but opposed other aspects
of the proposals before the Congress.
The Board testified that, in enforcing
the CRA, it has tried to balance the
competing interests and responsibilities
of banks and community groups. The
Board outlined its CRA program, which
integrates compliance examinations, a
community affairs program, and an analysis of CRA performance in deciding
applications by banks and bank holding
companies. During CRA examinations,
examiners collect information that, taken
as a whole, represents the bank's CRA
record. As part of the community affairs
program, community affairs offices at the
Reserve Banks share their expertise in
community development financing with
banks, bank holding companies, and the
public sector through educational seminars and publications on the tools and
techniques of community development
lending. The Board also considers CRA
performance when reviewing applications for mergers, acquisitions, or
branching.
In the past, institutions often made
commitments during the application process to address weaknesses in their
records, commitments that the Board
took into account in deciding the application. About one-third of some 150 CRAprotested applications were approved
with such commitments. Under the recent
interagency policy statement on CRA,
commitments may be used to address
specific problems in an otherwise satisfactory record but generally will not
compensate for a seriously deficient
record of performance. The Board's
testimony reiterated the interagency
policy that institutions should have a



sound CRA performance before pursuing
expansion.

Basic Banking and Check Cashing
The Board testified in June before the
Senate Banking subcommittee (and in
October before a subcommittee of the
House Committee on Banking, Finance
and Urban Affairs) about legislative
proposals that would require institutions
to offer specific banking services. The
Board opposed legislation that mandates
specific services, preferring instead a
voluntary approach that lets institutions
design products to meet the specific
needs of their customers. Surveys by the
Board, the General Accounting Office,
and others support the view that basic
accounts and check-cashing services are
not so scarce as to warrant legislation.
Moreover, alternatives like electronic
delivery of government payments show
strong promise for addressing the concerns prompting the bills and should be
encouraged by the Congress.
The Board expressed the following
concerns about the bills:
• Setting fees based on an average
industry cost means that some institutions
would not recover costs while others
might exceed them. And, while financial
institutions would have to offer these
services at cost, stores and other check
cashers could continue to offer them at a
profit.
• Letting the Board suspend mandatory check cashing for certain types of
checks would not effectively minimize
fraud because of the time it takes to
discover patterns of fraud.
• A single, federally mandated banking service could inhibit the development
of different and possibly cheaper products
tailored to the special and changing needs
of low-income and elderly individuals
(for example, savings accounts with a
money-order feature, and accounts with

Consumer and Community Affairs 155
per-check fees in place of monthly maintenance charges).

Loan Discrimination
In October the Board testified before a
Senate Banking subcommittee on its
report to the Congress concerning mortgage loan discrimination. The main
points of the report, which was required
by the recent thrift legislation, are summarized below.

Profile of State Member Banks
The Board's enforcement authority is
limited to state chartered banks that are
members of the Federal Reserve System
(about 8 percent of commercial banks).
Most serve rural areas, and about 90
percent of them have total assets of less
than $500 million. They originate less
than 3 percent of all home purchase loans
and thus are not a significant presence in
the mortgage lending industry.

Detecting Loan Discrimination
To detect possible loan discrimination by
state member banks, compliance examiners make a comprehensive assessment
of lending practices, comparing the
treatment of members of a class protected
by the law with other applicants. But any
discrimination that might exist in the
financial system today is increasingly
subtle and difficult to define and substantiate. Consequently, even these extensive
examination procedures cannot totally
guarantee the absence of isolated instances of discrimination. Flexible credit
standards, the different factors used to
gauge creditworthiness, and variations in
pricing and structure that can occur for
legitimate business reasons are among
the factors that make substantiation difficult. As a result, examiners are seldom



able to make a formal finding of actual
lending discrimination. They do, however, fully explore questionable variations in lending practices with bank
personnel to assure that illegal discrimination is not taking place.
The Federal Reserve's procedures give
special guidance for handling complaints
of loan discrimination by state member
banks and authorize on-site investigations by Reserve Bank staff as needed.
But the Federal Reserve receives few
such complaints, which could mean
several things: that discrimination rarely
occurs; that discouraged loan applicants
are unaware they have been discriminated against; that they do not know their
rights under the antidiscrimination laws;
or that they do not believe it is worth
filing a complaint.
Racial Disparities
in Home Mortgage Lending
Recent studies have examined the relationship between the racial make-up of
neighborhoods and home mortgage lending in Atlanta, Boston, Cleveland, and
Detroit. The studies have found differences in lending patterns across neighborhoods but draw no definitive conclusions
about the presence or extent of racial
discrimination. Regardless of the cause,
such findings should prompt institutions
to review their product offerings in
minority neighborhoods, an action emphasized in the March 1989 interagency
policy statement on CRA.
Mortgage Lending Initiative
under Review
The Board discussed several initiatives
currently under review by the Board and
other member agencies of the FFIEC:
• Creating mortgage review boards
representing consumer groups and lenders to give rejected loan applicants a
second chance

156 76th Annual Report, 1989
• Producing educational pamphlets
for consumers and lenders to help assure
nondiscriminatory lending
• Sharing among the agencies of
information obtained from community
contacts and others to help enhance
examiners' understanding of the local
community and their ability to judge an
institution's lending efforts
• Providing banks with information
on their lending patterns to give management a more complete picture of the
bank's mortgage lending efforts
• Reviewing examination and training procedures regarding loan
discrimination.

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 to the underlying statutes. The FDIC
recommended several revisions to the
Equal Credit Opportunity Act and Regulation B.
The FDIC suggested that creditors'
denial notices include the name, address,
and telephone number of the office that
the applicant could contact for further
information about the reasons for denial
of credit. Encouraging a credit applicant
to contact the creditor for a more complete explanation of the reasons for
denial, the FDIC believes, would help
reduce the number of complaints and
inquiries to the financial regulatory
agencies.
In addition, to reduce confusion on the
part of consumers who are turned down
for credit, and to reduce the involvement
of federal regulators, the FDIC also




suggests a more detailed notice about
rights under the Fair Credit Reporting
Act.
The FDIC again recommended amending the 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. •

157

Litigation
During 1989 the Board of Governors was
named in thirty-nine pending lawsuits,
compared with forty-four in 1988. Of the
fourteen new lawsuits filed in 1989, eight
raised questions under the Bank Holding
Company Act, compared with six in
1988. As of December 31, 1989, fifteen
cases were pending, nine of which involved questions under the Bank Holding
Company Act.

Bank Holding Companies Antitrust Action
In 1989 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 CBC, Inc. v. Board of Governors, No.
86-1001 (10th Circuit, filed January 2,
1986), petitioner sought 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)
on August 30, 1988, and on March 27,
1989, the Supreme Court denied a petition for certiorari (109 S. Ct. 1568).
In Lewis v. Board of Governors, Nos.
87-3455 and 87-3545 (1 lth Circuit, filed
June 25 and August 3, 1987), petitioner
seeks review of Board orders dated May
29 and July 1, 1987, approving applications of Chemical New York Corporation



and of Manufacturers National Corporation to expand activities of trust company
subsidiaries in Florida (73 Federal
Reserve Bulletin 609 and 735). The
cases have been stayed pending Supreme
Court review of Continental Illinois
Corp. v. Lewis, 827 F.2d 1517 (11th
Cir. 1987), modified, 838 F.2d 457,
prob.juris. noted, 109S. Ct. 2446(1989).
In National Association of Casualty
and Surety Agents v. Board of Governors,
Nos. 87-1354 and 87-1355 (D.C. Circuit, filed July 29, 1987), the Court of
Appeals upheld (856 F.2d 282) Board
orders dated June 29, 1987, and July 2,
1987, permitting Sovran Financial
Corporation and MNC Financial, Inc.,
to retain insurance agency activities
(73 Federal Reserve Bulletin 672 and
740). Several other cases involved petitions for review of similar Board orders;
all were denied review by court orders
dated January 19, 1989. These cases are
as follows: National Association of
Casualty and Surety Agents v. Board of
Governors, No. 87-1644 (D.C. Circuit,
filed November 14, 1987), No. 87-1801
(D.C. Circuit,filedDecember 21,1987),
No. 88-1001 (D.C. Circuit,filedJanuary
4, 1988), No. 88-1206 (D.C. Circuit,
filed March 18, 1988), No. 88-1245
(D.C. Circuit, filed March 30, 1988),
and No. 88-1270 (D.C. Circuit, filed
April 7, 1988); and Independent Insurance Agents ofAmerica, Inc. v. Board of
Governors, No. 87-1686 (D.C. Circuit,
filed November 19, 1987). On May 30,
1989, the Supreme Court denied a petition for certiorari in these cases (109
S.Ct. 2430).
In American Land Title Association v.
Board of Governors, No. 88-1872 (D.C.
Circuit, filed December 16, 1988), peti-

158 76th Annual Report, 1989
tioner sought 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 (75 Federal
Reserve Bulletin 31). The case involved
the application of exemption G from the
prohibition on insurance activities contained in section 4(c)(8) of the Bank
Holding Company Act. The Court of
Appeals upheld the Board's order on
December 29, 1989 (892 F.2d 1059).
In Independent Insurance Agents of
America, Inc. v. Board of Governors,
No. 89-4030 (2nd Circuit, filed March
9, 1989), petitioner sought review of a
Board order dated March 3,1989, granted
at the request of Merchants National
Corporation, determining that the nonbanking prohibitions of the Bank Holding
Company Act do not apply to activities of
banks (75 Federal Reserve Bulletin 388).
The Court of Appeals upheld the Board's
order on November 29, 1989 (890 F.2d
1275). A second case raising the identical
issue, Independent Insurance Agents of
America v. Board of Governors, No.
89-4046 (2nd Circuit, filed April 6,
1989), has been held in abeyance.
In Synovus Financial Corporation v.
Board of Governors, No. 89-1394 (D.C.
Circuit, filed June 21, 1989), petitioner
seeks review of a Board order dated May
22, 1989, approving the application of
SouthTrust Corporation to acquire a
national bank in Georgia by relocating an
Alabama national bank subsidiary across
state lines pursuant to 12 U.S.C. §30
(75 Federal Reserve Bulletin 516). The
case is pending.
In Executive National Bank v. Board
of Governors, Nos. 89-4831, 89-4852
(5th Circuit, filed November 6, 1989),
petitioners sought a declaratory judgment
that a pending application for approval to
acquire the petitioner bank was deemed
approved under the Bank Holding Company Act's ninety-one day rule. The



action was dismissed on November 16,
1989.
In Babcock and Brown Holdings, Inc.
v. Board of Governors, No. 89-70518
(9th Circuit, filed November 22, 1989),
petitioners seek review of a Board order
dated October 25, 1989, in which the
Board requested the Federal Deposit
Insurance Corporation to condition deposit insurance for a proposed District
bank on Board approval of the acquisition
of control of the bank by Babcock and
Brown Holdings, Inc., a brokerage firm.
The case is pending.

Other Litigation Involving
Challenges to Board Procedures
and Regulations
In 1989, ten actions were commenced,
were pending, or were dismissed under
the Financial Institutions Supervisory Act
and the Glass-Steagall Act.
Financial Institutions
Supervisory Act
In Stoddard v. Board of Governors, No.
88-1148 (D.C. Circuit, filed February
25, 1988), the Court of Appeals (868
F.2d 1308) vacated a removal order
initiated by the Office of the Comptroller
of the Currency against a former officer
and director of Michigan National Bank,
who had resigned before the institution
of removal proceedings. Section 905 of
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) amended the statute to permit
removal actions to be brought against
nonincumbents.
In Bonilla v. Board of Governors, No.
88-1464 (7th Circuit, filed March 11,
1988), petitioner sought review of a
Board order prohibiting him from participating in the affairs of any insured bank
or bank holding company. The case was

Litigation
dismissed by stipulation on November
14, 1989.
In Van Dyke v. Board of Governors,
No. 88-5280 (8th Circuit, filed July 18,
1988), the Court of Appeals (876 F.2d
1377) affirmed the Board's removal order
against a national bank president and
director who had engaged in check kiting
involving an account in his bank.
In MCorp v. Board of Governors, No.
89-1677 (S.D. Texas, filed May 2,
1989), the district court (101 Bankr. 483)
entered a preliminary injunction against
the Board enjoining pending and future
enforcement actions against a bank
holding company that was in bankruptcy. The case is now awaiting decision
on the Board's appeal to the Fifth Circuit (No. 89-2816). A related case,
MCorp v. Board of Governors, No.
CA3-88-2693-F (N.D. Texas, filed
October 28,1988), is stayed pending the
outcome of the Fifth Circuit appeal.
In Board of Governors v. Consolidated Bancorp, No. W-89-CA251
(W.D. Texas, filed September 8, 1989),
the Board sought to enforce an administrative subpoena permitting inspection of
the records of a bank holding company in
bankruptcy. In Consolidated Bancorp v.
Board of Governors, No. AP-89-6081
(Bankr. W.D. Texas,filedSeptember 15,
1989), the bank holding company sought
to enjoin enforcement of the subpoena.
Both cases were dismissed by stipulation
on November 28, 1989.

159

(73 Federal Reserve Bulletin 729). The
cases were dismissed by stipulation on
December 28, 1989.
In Securities Industry Association v.
Board of Governors, No. 89-1127 (D.C.
Circuit, filed February 16, 1989), the
petitioner seeks review of a Board order
dated January 18, 1989, at the request of
J.P. Morgan & Co. Incorporated, The
Chase Manhattan Corporation, Bankers
Trust New York Corporation, Citicorp,
and Security Pacific Corporation, which
expanded the scope of securities that
could be underwritten and dealt in by
bank holding companies to include all
types of debt and equity securities,
subject to certain conditions (75 Federal
Reserve Bulletin 192). The case is
pending.
In Securities Industry Association v.
Board of Governors, No. 89-1730 (D.C.
Circuit, filed November 29, 1989), the
petitioner seeks review of a Board order
dated October 30, 1989, approving an
application by Bankers Trust New York
Corporation for its subsidiary to act as
agent in the placement of all types of
securities and to buy and sell all types
of securities on the order of investors as
a "riskless principal" (75 Federal Reserve
Bulletin 829). The case has been held in
abeyance pending the determination in
Securities Industry Association v. Board
of Governors, No. 89-1127, discussed
above.

Other Actions
Glass-Steagall Act
In Chase Manhattan Corporation v.
Board of Governors, Nos. 87-1333 and
87-1580 (D.C. Circuit, filed July 20,
1987), petitioner and the applicant sought
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



In Teichgraeber v. Board of Governors,
No. 87-2505-0 (D. Kansas, filed October 16, 1987), the court on March 20,
1989, granted the Board's motion for
summary judgment with respect to the
plaintiffs request for disclosure of documents under the Freedom of Information
Act.
In Cohen v. Board of Governors, No.
88-1061 (D. New Jersey, filed March 7,

160 76th Annual Report, 1989
1988), plaintiff seeks to require disclosure of documents under the Freedom
of Information Act. The case is pending.
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
the Cohen case. The case was dismissed
on January 30, 1990.
In White v. Board of Governors, No.
88-623 (D. Nevada,filedJuly 29,1988),
the plaintiff alleges discriminatory practices under the Age Discrimination in
Employment Act. The case is pending.
In First Savings Bank v. Board of
Governors, No. 89-4117 (D. South
Dakota, filed August 31, 1989), the
plaintiff sought to enjoin the Board from
granting final approval of a branch application. The case was dismissed on November 21, 1989.
In Consumers Union of U. S., Inc. v.
Board of Governors, No. 89-3008
(D.D.C. filed November 1, 1989), the
plaintiff challenges various amendments
to Regulation Z implementing the Home
Equity Loan Consumer Protection Act.
The case is pending.
•




161

Legislation Enacted
In 1989 the Congress passed a bill to
reform the structure and regulation of
savings institutions. One of the most
significant pieces of banking legislation
in recent history, the law reaches beyond
the thrift industry to affect all financial
institutions and their regulators. The
following discussion briefly summarizes
each title of the act and then describes in
more detail those with a significant
bearing on the Federal Reserve and the
institutions it regulates.

Financial Institutions Reform,
Recovery, and Enforcement
Act of 1989
Public Law 102-73, the Financial Institutions Reform, Recovery, and Enforcement Actof 1989 (FIRREA), was enacted
on August 9, 1989. Title I states the
purposes of FIRREA, which include
promoting a safe system of affordable
housing finance, improving the supervision of savings associations and the safety
and soundness of federal deposit insurance funds, and dealing expeditiously
with failed savings associations.
Title II addresses the Federal Deposit
Insurance Corporation (FDIC). The act
increases the number of members of the
Board of the FDIC from three to five. It
makes the FDIC responsible for insuring
the deposits of the savings and loan
industry and gives the FDIC certain
examination and regulatory responsibilities over thrift institutions. This title also
clarifies the FDIC's powers as conservator or receiver of failed depository institutions under its jurisdiction and further
defines the FDIC's authority to set up
new or bridge banks to receive the assets
and liabilities of failed institutions.



Title III amends the Home Owners'
Loan Act to create the Office of Thrift
Supervision (OTS) under the Department of the Treasury. This title
gives the OTS general responsibility for
the supervision and regulation of federal and state savings associations and
savings and loan holding companies.
Title III contains provisions intended to
strengthen the liquidity and capitalization of thrifts; it also restricts the
expansion of savings associations that do
not maintain a minimum of 70 percent of
their portfolios in certain assets related
to housing finance, such as home loans
or mortgage-backed securities. Title III
extends to thrifts the restrictions on
transactions with affiliates and loans to
insiders that are already applicable to
banks.
Title IV abolishes the Federal Home
Loan Bank Board and the Federal Savings
and Loan Insurance Corporation (FSLIC)
and provides for the transfer of certain
regulations, functions, and employees to
other agencies.
Title V establishes the Oversight Board
and the Resolution Trust Corporation
(RTC). The Oversight Board is to oversee
and establish policy for the RTC, which
is to act as conservator or receiver for
failing savings and loan associations that
were insured by the FSLIC before the
enactment of FIRREA. The RTC will
also liquidate the Federal Asset Disposition Association, which had been created
by Federal Home Loan Bank Board to
liquidate certain assets of failed thrifts.
Title V also establishes the Resolution
Finance Corporation (Refcorp) to provide funds to the RTC through the
issuance of bonds in an amount up to $30
billion.

162 76th Annual Report, 1989
Title VI amends the Bank Holding
Company Act to allow bank holding companies to acquire thrift institutions.
Title VII establishes the Federal
Housing Finance Board to take over the
supervision of the Federal Home Loan
Banks from the Federal Home Loan
Bank Board. This title also amends the
Federal Home Loan Bank Act to deny
advances to institutions that are not
members of a Federal Home Loan Bank
and to extend eligibility for membership
to any depository institution meeting
certain requirements for involvement
in residential mortgage lending. In
addition, title VII amends the Federal
Home Loan Mortgage Corporation Act
to restructure the Federal Home Loan
Mortgage Corporation and makes technical amendments to numerous other
federal statutes.
Through amendments to the Bank
Conservation Act, title VIII grants more
clearly articulated powers to the Comptroller of the Currency to appoint a
conservator or receiver for a national
bank; the title also extends such powers
over all other federally chartered or
federally licensed depository institution
subject to the Comptroller's supervision.
Title IX increases the civil and criminal sanctions available to federal agencies that regulate financial institutions
and otherwise enhances the powers of the
agencies to supervise and control depository institutions.
Title X orders studies of federal deposit insurance jointly by the regulatory
agencies and separately by the General
Accounting Office; it also orders the
Federal Reserve Board to study banking
services and the Comptroller of the Currency to study the safety and soundness
of government-sponsored enterprises.
Title XI amends the Federal Financial
Institutions Examination Council Act to
establish an appraisal subcommittee with
members from each of the regulatory



agencies, including the Federal Reserve,
to monitor and review state and federal
standards for appraisals made in connection with federally related transactions.
Title XI also requires each of the regulatory agencies and the RTC to develop
certain minimum appraisal standards for
use in connection with transactions by the
institutions each oversees.
Title XII creates a Credit Standards
Advisory Committee, to include the
Chairman of the Federal Reserve Board
or his designee, to recommend consistent
credit standards to be employed by all
insured depository institutions. The title
also simplifies the examination ratings
specified in the Community Reinvestment Act and requires that ratings of
institutions be made available to the
public. In addition, title XII contains
provisions concerning a General Accounting Office study of the credit union
system and compensation of employees
of federal financial regulatory agencies.
Title XIII authorizes state housing
finance agencies and nonprofit organizations to purchase mortgage-related assets
from the RTC or from institutions under
the conservatorship or receivership of
the FDIC. The agencies must invest any
profits from such purchases in low- and
moderate-income housing.
Title XIV provides a tax exemption for
RTC and Refcorp, contains provisions
relating to the taxation of transactions
involving federal financial assistance,
and requires reports and studies from the
Secretary of the Treasury.
The following summary describes in
more detail portions of titles II, III, VI,
and IX that have particular relevance to
the Federal Reserve System and to the
institutions it regulates.

Title II
Under title II, the FDIC will now insure
the deposits of savings and loan associa-

Legislation Enacted
tions as well as of banks. The title creates
two separately maintained insurance
funds within the FDIC: the Bank Insurance Fund (BIF), essentially a continuation of the FDIC's current insurance fund,
and the Savings Association Insurance
Fund (SAIF), which replaces the FSLIC
insurance fund. All institutions previously insured by the FDIC and the FSLIC
will automatically be insured by the new
units. Under the new law, the FDIC may
suspend the insurance of any insured
depository institution on 30 days' notice
rather than the 120 days' notice previously required, and under certain circumstances it may temporarily suspend the
insurance of an institution. When evaluating an institution's application for insurance, the FDIC must consider certain
financial criteria and may deny the application on the basis of those criteria.

163

and Treasury jointly) and entrance fee (to
be determined by the FDIC) to the
appropriate funds.
A bank holding company may merge a
savings association subsidiary into a subsidiary bank, subject to the approval of
the Federal Reserve Board, but the bank
must pay assessments to SAIF on deposits attributable to the savings association. In order to approve such a merger,
the Federal Reserve must consider the
size of the bank holding company in
relation to the savings association, the
nature of the transaction, and whether
applicable capital standards are met. In
addition, the thrift institution must be
deemed a bank at the time of the merger
for purposes of considering the interstate
banking provisions of the Bank Holding
Company Act and of relevant state law.

Cross-Guarantees
Conversion Transactions
Title II places a five-year moratorium on
the conversion of deposit coverage between BIF and SAIF. The FDIC may
waive the moratorim period when (1) the
conversion is in connection with the
acquisition of a SAIF member in danger
of default, if the FDIC and the RTC agree
that the benefits to SAIF or the RTC
exceed the loss of assessment income to
SAIF, or (2) the conversion occurs in
connection with the acquisition of a BIF
member in danger of default, if the FDIC
finds that the benefits to BIF outweigh the
loss of assessment income to BIF, or (3)
where the conversion does not involve a
substantial portion of the institution's deposits. Savings associations may convert
to bank charters but must remain members of SAIF for the duration of the
moratorium.
Any depository institution participating in a conversion transaction must pay
an exit fee (to be determined by the FDIC



Depository institutions shall be held
liable for any losses incurred by the
FDIC because of the default of any
commonly controlled depository institution or because of any assistance provided
to such an institution in danger of default.
The FDIC may waive this provision
under certain circumstances, and the new
law provides an exclusion for institutions
acquired in debt-collection proceedings
or in connection with certain FSLICassisted transactions.
The title clarifies and details the powers
of the FDIC as conservator or receiver,
including its powers to establish new or
bridge banks, repudiate contracts, and
transfer assets. The title also covers the
requirements for establishing a valid
claim against the FDIC as receiver or
conservator as well as procedures for the
determination and review of claims.
The title generally prohibits banking
agencies, including the Federal Reserve
Board, from allowing any insured depos-

164 76th Annual Report, 1989
itory institution under their supervision
to include any unidentifiable intangible
asset acquired after April 12, 1989, in
capital for the purpose of compliance
with capital standards.

Title III
Title III brings savings associations under
the requirements of sections 23A and
23B of the Federal Reserve Act, which
prohibit or restrict certain transactions
between member banks and their affiliates, including loans to or purchases of
securities issued by the affiliate. In addition to these restrictions, savings associations may not (1) extend credit to an
affiliate unless the affiliate engages in
activities permissible for a bank holding
company, (2) purchase or invest in securities issued by an affiliate, or (3) engage
in any affiliate transaction that the Director of OTS has chosen to restrict for
reasons of safety and soundness.
Savings associations are also now
required to comply with the restrictions
contained in section 22(h) of the Federal
Reserve Act governing extensions of
credit to executive officers, directors,
and principal shareholders.

Title VI
Title VI amends section 4 of the Bank
Holding Company Act to allow the Board
to approve acquisitions of savings associations by bank holding companies as an
activity closely related to banking.
Companies holding nonbank banks
grandfathered under the Competitive
Equity Banking Act will be allowed to
acquire, as a passive investment, up to 15
percent of the outstanding shares of
nonaffiliated banks or savings associations. Such companies may also make
passive investments subject to less stringent conditions in certain troubled sav


ings associations or savings and loan
holding companies.

Title IX
Title IX broadens the class of persons
subject to enforcement orders by any
federal financial regulatory agency. The
class now extends beyond directors,
officers, and employees to include any
"institution-affiliated party:" agents, persons required to file change-in-control
notices, controlling shareholders, shareholders that participate in the affairs of
the institution, and under certain circumstances, independent contractors.

Cease and Desist Orders
Title IX clarifies the power of federal
banking agencies to issue cease and desist
orders that require affirmative action.
The title declares that such orders can
include reimbursement, restitution, recision, or other actions the agency may
consider appropriate. Federal banking
regulators may also place limits on the
growth of an institution.
The title reduces the standard for
issuing a temporary cease and desist
order to a showing of a "significant"
rather than a "substantial" dissipation of
assets. The title also declares that a
temporary corrective cease and desist
order may be issued whenever an institution's records are so incomplete or inaccurate that determining the true financial
condition of the institution is impossible.

Removal and Prohibition
Whenever a person's conduct causes
harm to a financial institution or prejudices the interests of depositors, the federal agencies regulating financial institutions may initiate proceedings to remove
that person from any institution with

Legislation Enacted
which he or she is affiliated or to prohibit
that person from participating in the
affairs of any insured depository institution; the agencies need not quantify the
harm caused by the person in order to
initiate such proceedings.
The title intends orders to remove a
person or to prohibit participation to be
effective industry-wide. Generally, any
person under such an order is prohibited
from participating in the affairs of any
insured bank, savings association, credit
union, bank holding company or its subsidiary, foreign bank or bank holding
company, or farm credit institution, and
of certain governmental institutions. The
title allows agencies to begin enforcement
proceedings against an individual up to
six years after the person has ceased to
participate in the affairs of an institution,
and it raises the penalty for violations of
removal orders to the level of a felony
punishable with a fine of up to $1 million
and a prison term of up to five years.

Civil Money Penalties
The title expands the grounds on which a
federal bank regulatory agency may
impose civil money penalties to include
the submission of late, inaccurate, false,
or misleading reports or other information and unsafe and unsound banking
practices and, in certain cases, breaches
of fiduciary duty. The civil money penalties that may be assessed have been
arrayed in three tiers, to a maximum of
$1 million per day for violations that
knowingly or recklessly cause substantial
loss to the financial institution.
Other Provisions
Under title IX, federal banking agencies
must make all supervisory records of a
depository institution available to the
FDIC when it acts as receiver for that
institution.



165

The agencies must publish all their
formal enforcement orders, but they may
delay publication for a reasonable time
if public disclosure would seriously
threaten the safety and soundness of an
institution. In addition, the agencies must
submit annual reports to the Congress
concerning enforcement actions and other
enforcement efforts made during the
year.
Title IX gives the regulatory agencies
the authority to disapprove the appointment of directors and senior executive
officers for any depository institution or
depository institution holding company
that has been chartered or undergone a
change of control within the last two
years, or that is not in compliance within
minimum capital standards, or that is
otherwise in troubled condition.
The federal banking agencies are required to develop uniform rules and
procedures for administrative hearings
within two years of enactment of FIRREA and are required to establish a task
force to report to Congress on the desirability of delegating investigatory and
enforcement authority to regional offices
or banks.
Insured depository institutions that
engage outside auditors must give to the
auditors copies of their most recent
reports of condition and examination
reports and information concerning enforcement actions.
No insured institution may discriminate against or discharge an employee for
giving to a banking agency or federal law
enforcement agency information concerning possible violations of law by the
institution or by its officers, directors, or
employees. The regulatory agencies may
pay rewards for information that leads to
the imposition of criminal fines, or to the
restitution of funds, or to civil penalties
exceeding $50,000.
Title IX amends the Right to Financial
Privacy Act to specify that the exemption

166 76th Annual Report, 1989
in the act allowing the disclosure of bank
customer records to federal supervisory
authorities is applicable when the Federal Reserve Board is exercising its
supervisory and regulatory functions
with respect to a bank holding company,
to its subsidiary, or to any institutionaffiliated party. The amendments also
specify that the Board is exempt from the
act when exercising its authority to extend
credit.
•




167

Banking Supervision and Regulation
Substantial change occurred in the supervisory and regulatory structure of the
banking industry in the United States in
1989. Major features were the passage of
the Financial Institutions Reform, Recovery, and Enforcement Act (the savings
and loan rescue bill); final approval of
risk-based capital guidelines; new examination guidelines for highly leveraged
transactions; and the approval of new
powers for bank holding companies in
the securities field.
To address serious and widespread
problems in the nation's savings and loan
industry, the Congress passed and the
President signed the Financial Institutions Reform Recovery and Enforcement
Act (FIRREA) in August 1989. FIRREA
created the Resolution Trust Corporation
(RTC), a government agency charged
with the responsibility for resolving
insolvencies of thrift institutions, and
established arrangements for financing
the RTC. FIRREA also created the RTC
Oversight Board, a government agency
that is ultimately responsible for the
operations of the RTC. Chairman Greenspan serves as one of the cabinet-level
members of the RTC Oversight Board.
Other members include the Secretary of
the Treasury, Nicholas F. Brady, who
serves as Chairman; the Secretary of the
Department of Housing and Urban Development, Jack Kemp; and two "public"
members of the Board.
FIRREA also transferred responsibility for thrift deposit insurance from the
Federal Savings and Loan Insurance
Corporation to the Federal Deposit Insurance Corporation and transferred responsibility for the supervision of thrift
institutions from the Federal Home Loan
Banks to a new office in the Treasury



Department, the Office of Thrift Supervision. The act also set down capital
standards and other requirements for
thrift institutions and enhanced the enforcement powers of the supervisors of
federally insured depositories. Other
important provisions of FIRREA include
the establishment of a subcommittee of
the Federal Financial Institutions Examination Council charged with responsibility for establishing appraisal standards
and monitoring state licensing standards
for appraisers and the requirement that
various studies be conducted by federal
agencies on such matters as federal deposit insurance and the need for capital
requirements for government sponsored
enterprises.
Before passage of FIRREA, a large
number of insolvent thrift institutions, at
the direction of the President, were
placed in conservatorships under the
control of the Federal Deposit Insurance
Corporation. The Federal Reserve contributed several examiners to assist in
assessing the condition of these thrift
institutions before they were placed in
conservatorships. The Federal Reserve
also provided, on a temporary basis,
substantial resources in the initial staffing
of the RTC Oversight Board. Staff members of the Federal Reserve are also
participating on various boards established by FIRREA and in various studies
required by the act.
During 1989, the Federal Reserve took
several important steps relating to capital
standards for banks and bank holding
companies. Early in the year, the Board
issued final guidelines implementing the
risk-based capital framework adopted in
July 1988 by the Basle Committee on
Banking Regulations and Supervisory

168 76th Annual Report, 1989
Practices, which includes supervisory
authorities from twelve industrial countries. Known as the Basle Accord, the
risk-based capital framework encourages
international banking organizations to
strengthen their capital positions and
reduces a source of competitive inequality arising from differences in supervisory requirements among nations.
The U.S. guidelines implementing the
Accord provide a uniform capital framework applicable to all federally supervised banking organizations. The framework sets forth a definition of capital that
includes tier 1 (primarily common equity
and qualifying perpetual preferred stock
less goodwill) and total capital, which
consists of tier 1 capital plus tier 2 capital
(perpetual preferred stock not eligible to
be included in tier 1, hybrid capital
instruments, subordinated debt, limitedlife preferred stock, and loan loss reserves up to specified limits).
The guidelines also include a framework for assigning assets to one of four
broad categories based on credit risk. In
addition to on-balance-sheet assets, the
guidelines also take into account significant off-balance-sheet risk exposure.
The risk-based capital standards will
be phased in through the end of 1992. By
year-end 1990, banking organizations are
expected to meet an interim target ratio of
tier 1 capital to risk-weighted assets of
3.62 percent, and total capital to riskweighted assets of 7.25 percent. At yearend 1992, these percentages rise to 4.0
percent and 8.0 percent respectively.
The Board also published for comment
a proposed leverage standard for bank
and bank holding company capital. This
standard would supplement the riskbased capital framework, which does not
at present incorporate a comprehensive
measure of interest rate risk, by imposing
an overall limitation on the extent to
which a banking organization could
leverage its equity capital base. The



proposed standard, which would become
effective on adoption, specifies a minimum ratio of tier 1 capital to total assets
of 3 percent for organizations that have
the highest supervisory rating and no
plans to expand. Banks with lower ratings
or plans to expand would be expected to
have a ratio of at least 100 to 200 basis
points above the minimum level. This
same general stance will also apply to the
risk-based capital standards.
Besides requesting comment on the
leverage standard of 3 percent, the proposal also requests comment on a transition standard for risk-based capital under
which a banking organization could
choose to conform either to the existing
minimum capital adequacy ratios (5.5
percent primary capital and 6 percent
total capital to total assets) or to the
year-end 1990 risk-based capital standard
of 7.25 percent.
Early in the year, the Federal Reserve
issued examination guidelines for highly
leveraged transactions (HLTs). These
guidelines, which supersede those issued
in 1984, were issued because of the
increasing volume of these types of
transactions and their implications for
the quality of bank asset portfolios and
the overall level of the risk exposure of
banks. The guidelines define HLTs to
include leveraged buyouts (LBOs) and
similar transactions, including mergers
and acquisitions funded by debt that
results in high leverage. "High leverage"
was initially defined as a ratio of total
debt to total assets of 75 percent or more.
This definition was expanded in October
1989 when the Federal Deposit Insurance
Corporation (FDIC), the Office of the
Comptroller of the Currency (OCC), and
the Federal Reserve agreed on a common
definition for HLTs. As an alternative
HLT leverage criterion, the transaction
must, at least, double the subject company's liabilities and result in a leverage
ratio higher than 50 percent. In addition,

Banking Supervision and Regulation
the transaction may be designated as an
HLT by a syndication agent.
In another significant action in 1989,
the Board permitted several bank holding
companies, by order, to underwrite and
deal, on a limited basis, in all types of
corporate debt securities. The Board also
indicated that early in 1990 it would
review whether to authorize the companies to engage in underwriting and
dealing in equity securities based on a
determination by the Board that the companies have established the managerial
and operational infrastructure necessary
to exercise this authority. In granting its
permission, the Board specified that these
activities must be conducted in nonbank
subsidiaries of the companies and that the
subsidiaries must not engage principally
in underwriting and dealing in so-called
ineligible securities—securities that member banks may not underwrite or deal in
under section 16 of the Glass-Steagall
Act. The Board further specified, as it
had previously in authorizing securities
subsidiaries of bank holding companies
to underwrite and deal in other ineligible
securities, that the securities subsidiaries are to be subject to a framework
of structural and operating limitations
designed to insulate commercial bank
affiliates of the companies from the risks
associated with the activities of these
subsidiaries and to avoid conflicts of
interest and unfair competition.
In another international effort, the Federal Reserve, in conjunction with the
Basle Committee on Bank Supervision,
issued a Statement of Principles for
financial institutions designed to assist in
eliminating money laundering in the
international banking system. Efforts
continue in working with the Basle Committee toward exploring attitudes on
further supervisory convergence on such
issues as foreign exchange and interest
rate risk. Members of the staff of the
Federal Reserve worked closely with



169

enforcement authorities during the year
to resolve several problem situations
arising from the activities of branches,
agencies, representative offices, and
Edge corporations of foreign banks in the
United States.
Also, staff members of the Division
of Banking Supervision and Regulation
provided technical assistance to other
agencies throughout the year in selecting
appropriate owners for failing institutions. Through this process, the agencies
attempt to select bidders that will provide
optimal financial and managerial resources to the successor at the least cost
to the insurance funds.

Scope of Supervisory
and Regulatory Responsibilities
The Federal Reserve is the primary federal supervisor and regulator of state
chartered commercial banks that are
members of the Federal Reserve System
and of all U.S. bank holding companies.
A principal concern of the Federal Reserve in its supervision of the general
operations of these organizations is to
promote their safety and soundness and
their compliance with laws and regulations, including the Bank Secrecy Act
and consumer and civil rights laws.l The
following specialized activities of these
institutions are also reviewed: electronic
1. The Board's Division of Consumer and
Community Affairs is charged with the responsibility of coordinating the Federal Reserve's supervisory activities with regard to the compliance of
banking organizations with consumer and civil
rights laws. This supervision is accomplished
mainly through examination 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 of the Reserve Banks, whose
examiners check for safety and soundness.

170 76th Annual Report, 1989
data processing, fiduciary activities,
government securities dealing and brokering, municipal securities dealing and
clearing, and securities underwriting and
dealing through Section 20 securities
subsidiaries.
The Federal Reserve also has responsibility for the supervision of (1) all Edge
and agreement corporations (organizations chartered by the Federal Reserve
Board to provide all segments of the U. S.
economy with a means of financing
international trade, especially exporting); (2) the international operations of
state member banks and U.S. bank holding companies; and (3) the operations of
foreign banking companies in the United
States.
Through its administration of the Bank
Holding Company Act, the Bank Merger
Act, and the Change in Bank Control Act
for bank holding companies and state
member banks, the Federal Reserve also
exercises important regulatory influence
over the structure of the U.S. banking
system. The Federal Reserve is also
responsible for regulatory margin requirements on securities transactions.

Supervision for Safety
and Soundness
The Federal Reserve conducts the following activities to ensure the safety and
soundness of financial institutions: onsite examinations and inspections, surveillance and monitoring, and enforcement and other supervisory actions.

Examinations and Inspections
The on-site review of operations is an
integral part of ensuring the safety and
soundness offinancialinstitutions. Examinations of state member banks and Edge
corporations and inspections of bank
holding companies and their subsidiaries
entail (1) an appraisal of the quality of the



institution's assets; (2) an evaluation of
management, including internal policies,
operations, and procedures; (3) an assessment of the key financial factors of
capital, earnings, asset and liability
management, and liquidity; and (4) a
review for compliance with applicable
laws and regulations.
State Member Banks
At the end of 1989 there were 1,047 state
member banks. These banks represented
about 8 percent of all insured commercial
banks and accounted for about 17 percent
of their assets.
The Federal Reserve in 1986 increased
the frequency of scheduled examinations
of state member banks. The guidelines
call for state member banks to be examined at least annually either by a Reserve
Bank or by a state banking agency. Large
or troubled banks must be examined at
least annually by a Reserve Bank. Because of the reassignment of examiners
to thrift industry problems in 1989, the
examinations of several healthy, wellmanaged banks were deferred into 1990.
In 1989, 1,029 state member banks were
examined at least once either by the Federal Reserve or by a state banking agency.
Altogether, the Federal Reserve conducted 836 examinations, some of them
jointly with the state agencies. The state
agencies conducted 300 independent
examinations of state member banks.
Additionally, under policy guidelines,
Reserve Bank officials held 293 meetings
with directors of either the largest state
member banks, or those that displayed
significant weaknesses.
Bank Holding Companies
At year-end 1989 the number of bank
holding companies totaled 6,444, 30
fewer than in 1988. These organizations
control 8,846 commercial banks, which
hold approximately 92 percent of the

Banking Supervision and Regulation 111
assets of all insured commercial banks in
the United States.
Large bank holding companies and
smaller companies with significant nonbank assets are to be inspected annually
under the revised guidelines on frequency
and scope. Medium-sized companies are
inspected at least every three years. For
the smallest companies without nonbank
assets, inspections are conducted on a
sample basis. The inspection focuses on
the operations of the parent holding company and its nonbank subsidiaries. In
judging the condition of bank subsidiaries, the examination reports of the federal and state banking authorities that
have primary responsibility for their
supervision are consulted. Of the 2,247
inspections conducted in 1989, System
examiners made 2,182 on-site inspections and 169 off-site inspections. State
examiners inspected sixty-five bank holding companies, sixteen more than in
1988. Because members of the examining
staff were detailed to working with thrift
industry problems in 1989, fifty-eight
bank holding company inspections were
deferred until 1990. During 1989, Reserve Bank officials held 540 meetings
with bank holding company directorates
to discuss supervisory concerns.

Enforcement Actions
and Civil Money Penalties
In 1989, the Reserve Banks recommended, and the Board's staff initiated
and worked on, one hundred twenty-five
enforcement cases that involved two
hundred seventy-nine separate actions
such as cease-and-desist orders, removals, and prohibitions and civil money
penalties, most dealing with unsafe or
unsound banking practices and violations
of law. Of these, twenty-four cases
involving forty-two actions were completed by year-end. The Board completed



eight civil money penalty actions and
assessed a total of $3,340,000. By yearend 1989, the Board had collected
$2,240,000, with most of the remainder
of the assessments to be paid in accordance with agreed-upon schedules. A
description of all formal supervisory
actions undertaken during the year and
the reasons for them are available to the
public in the Board's twice-yearly "Report
on Formal Enforcement Actions." In
addition, in accordance with a provision
of FIRREA, all final enforcement orders
issued by the Board of Governors are
available to the public.

Specialized Examinations
The Federal Reserve conducts specialized examinations in the following
areas of bank activity: electronic data
processing, fiduciary activities, government securities dealing and brokering,
municipal securities dealing and clearing, and securities underwriting and
dealing through section 20 securities
subsidiaries.
Electronic Data Processing
Under the Interagency EDP Examination
Program, the Federal Reserve examines
the electronic data processing (EDP)
activities of state member banks, Edge
and agreement corporations, and independent centers that provide EDP services to these institutions. In 1989,
System examiners conducted 286 on-site
EDP reviews. In addition, the Federal
Reserve reviews reports of EDP examinations issued by other bank regulatory
agencies on organizations that provide
data processing services to state member
banks.
Fiduciary Activities
The Federal Reserve System has supervisory responsibility for 292 state-

172 76th Annual Report, 1989
chartered member banks that exercise
trust powers and 179 trust companies and
investment advisory companies that are
subsidiaries of bank holding companies.
These institutions hold more than $3
trillion of discretionary and nondiscretionary assets in various fiduciary
capacities.
During 1989, Federal Reserve System
examiners conducted trust examinations
of 165 state member banks and state
member trust companies and 31 inspections of bank holding company subsidiaries engaged in fiduciary activities.
The institutions examined in 1989 held
approximately $2 trillion in fiduciary
assets.
On-site examinations are essential to
ensure the safety and soundness of financial institutions that engage in fiduciary
operations. The scope of these examinations includes (1) an evaluation of management, policies, audit procedures, and
risk management; (2) an appraisal of the
quality of trust assets; (3) an assessment
of earnings; (4) a review for conflicts of
interest; and (5) a review for compliance
with laws, regulations, and general fiduciary principles.
Government Securities Dealers
and Brokers
Under the Government Securities Act
of 1986, the Board is responsible for
examining the activities of state member banks and some foreign banks that
are government securities dealers and
brokers for compliance with the act
and with the Treasury Department's
regulations. Forty-three state member
banks, three state branches of foreign
banks, and one state agency of a foreign
bank currently have on file with the
Board notices that they are government
securities dealers or brokers that are
not otherwise exempt from Treasury
Department regulations.



Municipal Securities Dealers
and Clearing Agencies
The Securities Act Amendments of 1975
made the Board responsible for supervising state member banks and bank holding
companies that act as municipal securities
dealers or as clearing agencies. In 1989
the Board examined twenty-one state
member banks that deal in municipal
securities. There are currently forty-six
such banks 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 1989.

Securities Subsidiaries
of Bank Holding Companies
Section 20 of the Banking Act of 1933,
commonly known as the Glass-Steagall
Act, prohibits the affiliation of a member
bank with a company that is "engaged
principally" in underwriting or dealing
in securities. The Board, in 1987, approved proposals by banking organizations to underwrite and deal, on a limited
basis, in specified classes of bank "ineligible" securities (that is, commercial
paper, municipal revenue bonds, conventional residential mortgage-related securities, and securitized consumer loans) in
a manner consistent with the GlassSteagall Act and the Bank Holding Company Act. At that time, the Board limited
revenues from these newly approved
activities to no more than 5 percent of
total revenues for each securities subsidiary. In January 1989, the Board
approved applications by five bank holding companies to underwrite and deal in
corporate and sovereign debt and equity
securities, in each case subject to managerial and operational infrastructure
reviews and other conditions and requirements specified by the Board. Four of
these organizations subsequently re-

Banking Supervision and Regulation
ceived authorization to underwrite and
deal in corporate and sovereign debt
securities. In September 1989, the Board
increased the revenue limit of 5 percent
previously imposed to 10 percent. Currently, twenty-two bank holding companies have section 20 subsidiaries that
have received authority to underwrite
and deal in "ineligible" securities. Specialized inspection procedures are being
developed for use in reviewing the operations of these securities subsidiaries.
Transfer Agents
Federal Reserve System examiners conduct separate reviews of state member
banks and bank holding companies that
act as transfer agents. Transfer agents
countersign and monitor the issuance of
securities, register their transfer, and
exchange or convert them. During 1989,
System examiners conducted examinations of 92 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 the state member banks
and bank holding companies on a quarterly basis. This surveillance program
supplements the Federal Reserve's onsite examination program with automated
screening systems that identify organizations with poor or deteriorating financial
profiles. These automated systems use
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 to
determine whether the organizations
have potential emerging problems that
require the commitment of examiner
resources for on-site examinations or
other appropriate supervisory responses.



173

International Activities
The Federal Reserve is responsible
for supervising several international
activities.
Edge and Agreement Corporations
Edge corporations are international banking organizations chartered by the Board
to provide all segments of the U.S. economy with a means of financing international trade, especially exports. An agreement corporation is a company that enters
into an agreement with the Board not to
exercise any power that is impermissible
for an Edge corporation. In 1989 the
Federal Reserve examined 110 Edge and
agreement corporations.
Foreign-Office Operations
of U.S. Banking Organizations
The Federal Reserve examines the international operations of state member
banks, Edge corporations, and bank
holding companies principally at their
head offices in the United States because
these offices have the ultimate responsibility for all their operations. Also, the
Federal Reserve conducts on-site reviews
of important foreign offices at least every
three years to supplement the results of
the examinations of head offices. In 1989,
the Federal Reserve examined seventeen
foreign branches of state member banks
and thirty-six foreign subsidiaries of
Edge corporations and bank holding companies. In 1989 the Federal Reserve, in
coordination with the Office of the Comptroller of the Currency, conducted extensive on-site examinations of merchant
banking activities of U.S. banking organizations in the United Kingdom and in
Australia. All the examinations abroad
were conducted with the cooperation of
the supervisory authorities of the countries in which the examinations took
place.

174 76th Annual Report, 1989
U.S. Activities of Foreign Banks
Foreign banks continue to be significant
participants in the U.S. banking system. As of year-end 1989, two hundred
sixty-three foreign banks operated four
hundred seventy-nine state-licensed
branches and agencies, of which fiftynine are insured by the Federal Deposit
Insurance Corporation. At year-end
these foreign banks also operated eightysix branches and agencies licensed by
the Office of the Comptroller of the
Currency, of which nine have FDIC
insurance. Foreign banks also directly
owned sixteen Edge corporations and
ten commercial lending companies. In
addition, foreign banks held a 25 percent
or more interest in one hundred and one
U.S. commercial banks. Together, these
foreign banks at year-end controlled
approximately 22 percent of U.S.
banking assets.
The Federal Reserve has broad
authority to supervise and regulate foreign banks that engage in banking in
the United States through branches,
agencies, commercial lending companies, Edge corporations, or banks. In
exercising this authority, the Federal
Reserve relies on examinations conducted by the appropriate federal or
state regulatory agency. Although states
have primary authority for examining
state-licensed uninsured branches and
agencies, the Federal Reserve participated in the examination of 169 such
offices during the past year.

Supervisory Policy
The following sections summarize the
principal aspects of changes in
supervisory policy. Additionally, these
sections review activities carried out
during the year to enhance the supervisory program.



FIRREA
Several provisions of FIRREA require
the Federal Reserve to initiate actions or
draft regulations to implement the law's
requirements. Some of the more important provisions in FIRREA that affect the
Federal Reserve are the following:
• Permitting bank holding companies
to acquire healthy thrift institutions
• Requiring the federal banking agencies to establish, within one year, uniform
accounting and capital standards
• Requiring the federal banking
agencies to prescribe standards for real
estate appraisals used in federally related
transactions
• Removing tandem restrictions on
the operations of bank holding companies and thrift institutions.
Members of the staff of the Federal
Reserve have begun work to comply with
FIRREA and will continue to work
toward its successful implementation for
several years. This process will include
providing staff members to certain subcommittees, such as the newly established subcommittee of the FFIEC concerning the establishment of real estate
appraisal standards.2
Highly Leveraged Transactions
As noted earlier, in 1989 the Board issued
examination guidelines for highly leveraged transactions (HLTs). Besides specifying criteria for defining HLTs, the
guidelines outline procedures to be followed by a banking organization's management and by bank examiners in assess-

2. The FFIEC consists of representatives from
the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National
Credit Union Administration, and the Office of the
Comptroller of the Currency.

Banking Supervision and Regulation
ing the effect of such transactions on the
condition of an organization. In general,
banking organizations are expected to
evaluate the adequacy and stability of the
borrower's current and prospective cash
flow under varying economic scenarios
through the following actions:
• Setting reasonable "in-house" limits
on a consolidated holding company basis
regarding exposure to individual borrowers, total exposure to all HLT borrowers, and industry concentrations resulting from HLTs
• Establishing procedures for credit
analysis, approval, and review that take
into account the high levels of debt
involved in these transactions
• Maintaining internal systems, controls, reporting procedures, and limits
• Establishing pricing policies and
practices that take account in a prudent
manner of the trade-off between risk and
return
• Avoiding any compromise of sound
banking practices in an effort to broaden
market share or to realize substantial
fees.
Examiners are responsible for reviewing the organization's operations to ensure that the foregoing policies and
procedures are in place.

Asset Securitization
A Federal Reserve System Task Force
was convened during 1989 to study the
issue of asset securitization, an increasingly popular financial tool involving the
issuance of securities by banking organizations as claims against a pool of assets
held in trust. In general, the Task Force
believed that supervisory efforts should
continue to be left to the discretion of
examiners; however, it also concluded
that particular aspects of the securitization process and the market need closer



175

scrutiny. The Task Force issued a threevolume report that includes background
and educational materials, accounting
standards, and examination guidelines.
The report, as stated in the introduction,
focused on the aspects of securitization
"indigenous to all types of securitized
assets—the motivations for the selling of
assets, the mechanics generally employed in or associated with the process,
and the potential risks and rewards of
both issuing and investing in assetbacked securities."

Problem Loans in Agriculture
The policy of forbearance introduced by
the federal banking agencies in 1986 for
banks with problem loans in the agriculture and energy sectors was continued in
1989. This policy calls for the Reserve
Banks to exercise appropriate forbearance in applying capital adequacy guidelines for banks that are essentially sound
and well managed if they demonstrate a
clear potential for restoring their capital
position over a reasonable period. At
year-end 1989, three state member
banks were under the capital forbearance
program.
The Competitive Equality Banking Act
of 1987 required the federal banking
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 must apply to their Reserve
Bank for acceptance into the program,
must have capital in need of restoration,
and must have reasonable procedures
for restoring capital to acceptable levels.
At year-end 1989, four state member
banks were under the loan loss amortization program.

176 76th Annual Report, 1989

Accounting Standards
and Regulatory Reporting
The Board and the FFIEC are continuing
to work on eliminating, to the extent
possible, differences between regulatory
reporting requirements and generally
accepted accounting principles (GAAP).
In 1989, a policy was adopted for regulatory reporting standards for push down
accounting that is consistent among federal banking agencies and with GAAP.
Also, for Call Report purposes, Financial
Accounting Standards Board (FASB)
Statement No. 96, which addresses accounting for income taxes, was accepted,
and guidance for banking organizations
in implementing this accounting standard
is being developed. Progress also was
made toward the adoption of a regulatory
reporting standard on futures contracts
that is consistent with GAAP.
Members of the Board's staff have
served on various committees of the
FASB as advisors to that group's projects
on financial instruments and consolidations. Board 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
The training of System staff members
emphasizes analytical and supervisory
themes common to the four areas of
supervision and regulation—examinations, inspections, applications, and surveillance—and stresses the interdependence among these areas.
During 1989, the Federal Reserve
conducted fifty-eight sessions of a variety
of schools: Twenty-four were held in
Washington, while thirty-four sessions
were held regionally. Core banking
courses included three sessions of an
introductory course, Banking I; four



sessions of an intermediate-level course,
Banking II (two held regionally); and
four of an advanced-level course, Banking III (one held regionally); each course
lasted three weeks. Two sessions of a
Senior Forum for Current Banking and
Regulatory Issues were also conducted.
The Senior Forum, an interactive seminar designed for commissioned examiners with at least five years' experience, is
the foundation for a continuing education
program for senior examiners and other
senior personnel assigned to System
supervision and regulation functions.
Other schools conducted included seventeen sessions of Effective Writing for
Banking Supervision Staff (fifteen held
regionally), ten sessions of a credit
analysis course (seven held regionally),
two sessions of a bank holding company
applications school, ten sessions of a
bank holding company inspection school
(nine held regionally), one basic trust and
one advanced trust school, and three
consumer compliance schools (one session of an introductory course and two
sessions of an advanced course). Also,
staff members attended four schools
conducted jointly by a financial institutions regulator and the Federal Bureau of
Investigation on bank fraud and bank
failures.
In 1989, System staff members participated in eighty-five sessions of courses
offered by the Federal Financial Institutions Examination Council (FFIEC) in
specialized areas of income property
lending, payment systems risk, whitecollar crime, international banking, trust
issues, off-balance-sheet risks, EDP technology, management training, conducting meetings with management, and
instructor training.
System staff members also participated
in ten sessions of training programs
conducted by the FDIC and OCC in
the specialized areas of activities of
municipal securities dealers, electronic

Banking Supervision and Regulation
data processing, and foreign exchange
activities.
During 1989, the Federal Reserve cosponsored with the World Bank two
training sessions for senior supervisors
from developing nations. Seventy-eight
representatives from twenty-five countries attended these programs.
Also, the Federal Reserve System
provided scholarship assistance to the
states for the training of their examiners
in Federal Reserve and FFIEC schools.
Through this program, 468 state examiners were trained: 232 in Federal Reserve
courses, 235 in FFIEC programs, and 1
in an FDIC course.
In 1989, the Federal Reserve trained
1,218 persons in System schools, 773 in
FFIEC schools and 49 in FDIC and
OCC schools, for a total of 2,040 students, including 125 representatives from
foreign central banks.
Federal Financial Institutions
Examination Council
During 1989 the Federal Reserve adopted
several policies recommended by the
FFIEC. The Board joined the other
constituent agencies of the FFIEC in
approving a revision to the Monthly
Report on Foreign Exchange Transactions (FFIEC 035) to collect data on
various financial products, such as currency options, swaps, and futures.
In connection with the risk-based
capital framework, the banking agencies
developed changes to the FFIEC Call
Report, which have been submitted to the
Office of Management and Budget for
final approval. Implementation of these
changes is planned for March 1990 and
will include a schedule of risk-based
capital information, as will the revised
schedule of off-balance-sheet transactions and positions (Schedule RC-L).
Finally, the FFIEC began a study on
recourse arrangements, including the



177

question of what constitutes a sale of
assets without recourse and the appropriate accounting treatment for such sales.
This study will continue into 1990. It is
expected that an advance notice of proposed rulemaking will be published in the
first quarter of 1990.

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 bank or Edge corporation.
In addition, the Board has established
regulations that limit the interstate banking activities of these foreign banks and
of foreign banks that control a U.S. subsidiary commercial bank.
Bank Holding Company Act
By law, a company must obtain the
Board's approval 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 financial and
managerial resources and prospects of
the applicant and the firm to be acquired,
the convenience and needs of the com-

178 76th Annual Report, 1989
munity or the public benefits, and the
competitive effects of the proposal.
In 1989 the Federal Reserve acted on
1,137 bank holding company and related
applications. The System approved 336
proposals to organize bank holding companies and denied 2; approved 266 bank
acquisitions by existing bank holding
companies and denied 1; approved 63
bank holding company merger applications and denied 1; approved 447 requests
by existing companies to acquire nonbank
firms engaged in activities closely related
to banking; and approved 21 other applications relating to bank service corporations and modifications of commitments.
Data on these and related bank holding
company decisions are shown in the
accompanying table.
Bank Merger Act
The Bank Merger Act requires that all
proposed mergers of insured depository

institutions be acted upon by the appropriate federal banking agency. If the
institution surviving the merger is a state
member bank, the Federal Reserve has
primary jurisdiction. Before acting on a
proposed merger, the Federal Reserve
considers factors relating to the financial
and managerial resources and prospects
of the existing and proposed institutions, the community's convenience and
needs, and the competitive effects of the
proposal. The Board must also consider
the views of certain other agencies on
the competitive factors involved in the
transaction.
During 1989 the Federal Reserve
System approved ninety-two merger
applications. 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, the Federal Deposit Insurance Corporation, or the Director of the

Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1989
Action under authority delegated
by the Board of Governors
Proposal

Direct action
by the
Board of Governors

Staff Director of
Division of Banking
Supervision and
Regulation

Total

Approved Approved Permitted

Total

Denied

20

2

21

0

3

311

0

338

10

1

0

0

2

51

0

64

0

0

25
117
1
3
176

1
0
0

0

0
1

3
42

0

0

0

0

0
0

14
14

224
123

0
189

267
447

0

0
14

0
2

0
0

0
0

1
0

2
19

4

23

2

33

709

190

1,137

1. These actions were specifically delegated by the
Board to the Staff Director of the Division of Banking
Supervision and Regulation and to the General Counsel of
the Board for joint action.
2. Each of these actions represented the acquisition of a




Denied

Federal
Reserve Banks

Approved
Formation of holding company
Merger of holding
company
Retention of
bank
Acquisition
Bank
Nonbank
Bank service
corporation
Other

Approved

Office
of the
Secretary

savings association that was subsequently merged into an
existing subsidiary of a bank holding company, as permitted
by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.

Banking Supervision and Regulation
Office of Thrift Supervision 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 these agencies have adopted standard
terminology for assessing competitive
factors in merger cases to assure consistency in administering the act. On behalf
of the Board, the Reserve Banks submitted 480 reports on competitive factors
to the other federal banking agencies in
1989.

Change in Bank Control Act
The Change in Bank Control Act requires
persons seeking control of a bank or of a
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 in
part the financial condition, competence,
experience, and integrity of the acquiring
person; also it must consider the effect
on the financial condition of the bank or
bank holding company to be acquired;
and it must determine the effect on
competition in any relevant market.
The appropriate 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 control; the Board routinely
makes such a determination and verifies
information contained in the proposal. In
1989 the Federal Reserve System acted
on 250 proposed changes in control of
state member banks and bank holding
companies.



179

Public Notice of Board Decisions
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. The H.2 release
also contains announcements of applications and notices that have been received
by the System but not yet acted on.

Timely Processing of Applications
The Federal Reserve maintains target
dates and procedures for the processing
of applications. This practice promotes
efficiency at the Board and at the
Reserve Banks and reduces the burden
on applicants. The time allowed for a
decision is sixty days; during 1989,
about 95 percent of the decisions met
this standard.

Delegation of Applications
The Board has delegated certain regulatory functions—including the authority
to approve, but not to deny, certain types
of applications—to the Reserve Banks, to
the Staff Director of the Board's Division
of Banking Supervision and Regulation,
and to the Secretary of the Board. The
delegation of responsibility for applications permits greater efficiency by removing routine cases from the Board's agenda.
During 1989, 90 percent of the applications were acted on under delegated
authority.

180 76th Annual Report, 1989

Board Policy Decisions
and Developments
in Bank-Related Activities
In 1989, the Board amended its rules to
permit bank holding companies to acquire healthy, as well as failed or failing,
savings associations. The Board also
approved several new financially related
nonbanking activities for individual bank
holding companies and had under consideration other nonbanking proposals.

Approval of Permissible
Nonbanking Activities
In adopting its rule enabling the acquisition of savings associations, the Board
expanded the scope of previous actions in
which it had allowed individual bank
holding companies to acquire failed or
failing thrift institutions and certain
healthy savings institutions in parts of
New England. The Board's action broadened its rules to allow bank holding companies in general to acquire savings
associations—regardless of their financial condition or location—subject to a
case-by-case evaluation of the competitive, financial, and public interest considerations of each proposal. The Board also
rescinded certain operating limitations
between bank holding companies and
their thrift subsidiaries.
The Board for the first time also
approved the following activities for
individual bank holding companies: (1)
underwriting and dealing in, on a limited
basis, corporate debt and equity securities; and (2) engaging in the private
placement of all types of securities and in
"riskless principal" transactions. The
Board's actions contained several conditions aimed at avoiding conflicts of
interest and other potential adverse effects and at ensuring the maintenance of
safe and sound operations. The Board
also deferred the effective date of the



equity underwriting authority for one
year to determine whether the proper
managerial and operational infrastructures were in place.
During 1989 the Board also increased
from 5 to 10 percent the amount of gross
revenues of a bank holding company's
underwriting subsidiary that may be
derived from securities that member
banks are prohibited from underwriting
and dealing in under the Glass-Steagall
Act. In addition, in early 1990, the Board
approved, subject to many of the same
limitations, the applications by three foreign banks to underwrite and deal in
corporate debt and equity securities in
the United States.
The Board for the first time also
approved the following activities for
individual bank holding companies: (1)
acting as a specialist in certain foreign
exchange options on a U.S. exchange
and (2) acting as an originator and
principal in interest rate swap and currency swap transactions and also for
certain swap derivative products.
Proposals to Engage
in New Nonbanking Activities
At year-end 1989, the Board was considering a proposal by a U.S. bank holding
company to engage in leasing transactions in a manner consistent with expanded national bank leasing powers
authorized by the Competitive Equality
Banking Act of 1987. The Board was also
considering proposals by several foreign
banks to engage in the private placement
of all types of securities.
Two rulemakings pertaining to bankrelated activities were pending at yearend 1989. One was a proposal to rescind
an existing rule that permits bank holding
companies to establish or acquire indirectly, through their state-chartered bank
subsidiaries, nonbank operations subsidiaries engaged in activities that may be

Banking Supervision and Regulation
conducted by the parent bank. If adopted,
this proposal would require bank holding
companies to obtain approval to acquire
or to retain control of such nonbank
operations subsidiaries. The Board had
also requested comment on a proposal to
permit retention of all or most existing
operations subsidiaries without further
action. The other proposed rulemaking
would permit bank holding companies to
engage in real estate investment activities
within certain limitations.

Applications
by State Member Banks
State member banks must obtain the
permission of the Board to open new
domestic branches, to make investments
in bank premises that exceed 100 percent
of capital stock, and to add to their capital
bases from sales of subordinated debt.
State member banks must also give six
months' notice of their intention to withdraw from membership in the Federal
Reserve System, 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.
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 larger purchases
may undermine the financial condition of
a bank holding company and its bank



181

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
1989 the Federal Reserve reviewed 111
proposed stock repurchases by bank
holding companies, all of which were
acted on by the Reserve Banks on behalf
of the Board.

International Activities
of U.S. Banking Organizations
The Board has several statutory responsibilities in supervising the international
operations of U.S. banking organizations . The Board must provide authorization and regulation of foreign branches of
member banks; of overseas investments
by member banks, Edge corporations,
and bank holding companies; and of
investments by bank holding companies
in export trading companies. The Board
is also required to charter and regulate
Edge corporations and their investments.

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 1989 the Board approved the
opening often foreign branches.
By the end of 1989,133 member banks
were operating 845 branches in foreign
countries and overseas areas of the United
States; 105 national banks were operating
724 of these branches, and 28 state

182 76th Annual Report, 1989
member banks were operating the remaining 121 branches.

engaged in banking to maintain a ratio of
equity to risk-adjusted assets of at least
7 percent.

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 credits
extended to, foreign residents or other
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 1989, 533 IBFs had been
established.
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
1989, there were 110 Edge corporations,
which had 47 branches. The Board
requires each Edge corporation that is



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 1989 the Board reviewed and permitted
forty foreign investments by member
banks, Edge and agreement corporations, and bank holding companies. In
most cases, the applicant requested
permission to increase an existing
investment.
Export Trading Companies
In 1982 the Bank Export Services Act
amended Section 4 of the Bank Holding
Company Act to permit bank holding
companies, their subsidiary Edge or
agreement corporations, and bankers'
banks to invest in export trading companies, subject to certain limitations and
after Board review. The purpose was to
allow effective participation by bank
holding companies in the financing and
development of export trading companies. The Export Trading Company
Act Amendments of 1988 provide additional flexibility for bank holding companies engaging in export trading company activities. Since 1982 the Board has
acted affirmatively on notifications by
forty-seven bank holding companies to
establish export trading companies.

Enforcement of Other
Laws and Regulations
This section describes the Board's responsibilities for the enforcement of laws,

Banking Supervision and Regulation 183
rules, and regulations other than those
specifically related to bank safety and
soundness and the integrity of the banking
structure.

Bank Secrecy Act
The Federal Reserve is responsible for
monitoring compliance with the requirements of the Currency and Foreign
Transactions Reporting Act (the Bank
Secrecy Act) by institutions it supervises.
The provisions of the Bank Secrecy Act
were designed to create records of various transactions as an aid in detecting
unlawful activity. The most important
among these recordkeeping and reporting
requirements is the filing of Currency
Transaction Reports with the Internal
Revenue Service for each transaction of
cash in excess of $10,000.
During 1989, the Federal Reserve
continued its efforts to promote compliance with the Bank Secrecy Act. In
addition to continual Bank Secrecy Act
compliance audits and the issuance of
several forward enforcement orders addressing violations of the act, the Federal
Reserve provides a quarterly report to
the Department of the Treasury that
details all violations of the Bank Secrecy
Act discovered during the examinations
of financial institutions under Federal
Reserve supervision. Also, the Federal
Reserve created a new position for an
attorney with expertise in the Bank
Secrecy Act and the investigation and
prosecution of offenses related to the act.
This individual will provide expertise in
such areas as examinations and enforcement actions under the Bank Secrecy Act
and will coordinate the Federal Reserve's
efforts in this area with those of other
federal agencies.
The Federal Reserve has supported
new regulations as promulgated by the
Department of the Treasury that create
recordkeeping requirements by financial



institutions for the purchase of monetary
instruments in excess of $3,000 and allow
for the Secretary of the Treasury to lower
the Currency Transaction Report threshold in a defined geographic area. Similarly, the Federal Reserve offered its
assistance to the Treasury Department in
developing recordkeeping requirements
for wire transfers.

Securities Regulation
Under the Securities Exchange Act of
1934, the Board is responsible for regulating credit in certain transactions involving the purchase or carrying of securities.
In fulfilling its responsibility under the
act, the Board limits the amount of credit
that may be provided by securities brokers and dealers (Regulation T), by banks
(Regulation U), and by other lenders
(Regulation G). Regulation X extends
these credit limitations, or margin requirements, to certain borrowers and to
certain credit extensions, such as credit
obtained from foreign lenders by U.S.
citizens.
Several regulatory agencies enforce
compliance with the securities credit
regulations. 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 federal banking 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 Office of Thrift
Supervision, according to the jurisdiction
involved. At the end of 1989, there were
589 "G-lenders," of which 321 were
subject to the Board's supervision. Of
these 321, 188 were subject to regular
inspection by the Federal Reserve Sys-

184 76th Annual Report, 1989
tern. During the year, Federal Reserve
examiners inspected 36 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 collateralized by such securities.
Regulation T limits the amount of credit
that brokers and dealers may extend when
securities serve as collateral for credit
that is used to purchase or carry securities . This collateral must consist of stocks
and bonds traded on national securities
exchanges, of certain over-the-counter
(OTC) stocks that the Board designates
as having characteristics similar to those
of stocks listed on national exchanges, or
of bonds meeting certain requirements.
The staff of the Federal Reserve monitors the market activity of all OTC stocks
to determine which of them are subject to
the Board's margin regulations. The
Board publishes the resulting "List of
Marginable OTC Stocks" quarterly. In
1989, the list was revised in February,
May, August, and November. The November list contained 2,893 stocks.
In the fall of 1989, the Board proposed
for public comment amendments to Regulation T to accommodate the increasing
international integration of the securities
markets. The amendments would (1)
permit certain foreign equity and debt
securities to be eligible for margin at

broker-dealers on the same basis as
domestic margin securities; (2) eliminate
the current requirement that all accounting be in U.S. dollars; (3) ease restrictions on payment for foreign securities to
accommodate the settlement practices of
the market where the trade occurs; and
(4) allow a broker-dealer subject to
Regulation T to arrange for credit on
foreign securities. Final Board action is
expected in 1990.
Under section 8 of the Securities
Exchange Act, a nonmember domestic
or foreign bank may lend to brokers or
dealers posting registered securities as
collateral only if the bank has filed an
agreement with the Board that it will
comply with all the statutes, rules, and
regulations applicable to member banks
regarding credit on securities. During
the year, the Board processed five such
agreements.
In 1989 the Securities Regulation
Section of the Board's Division of Banking Supervision and Regulation issued
seventy-six interpretations of the margin
regulations. Those that presented sufficiently important or novel issues were
published in the "Securities Credit Transactions Handbook," which is part of the
Federal Reserve Regulatory Service.
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,

Loans by State Member Banks to their Executive Officers, 1988-89
Period
October 1-December 31, 1988
January 1-March 31,1989
April 1-June 30,1989
July 1-September 30,1989




Number

Amount (dollars)

Range of interest
rates charged
(percent)

919
898
1,199
916

20,246,161
18,310,668
26,346,000
18,048,000

6.0-18.0
6.0-19.8
5.5-21.0
7.6-25.2

Banking Supervision and Regulation
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.
At the end of 1989, thirty-five state
member banks, most of which are of
small or medium size, were registered
with the Board under the Securities
Exchange Act.

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 1988 and the first three
quarters of 1989.

Federal Reserve Membership
At the end of 1989, 5,256 banks were
members of the Federal Reserve System,
a decrease of 196 from the previous year.
Member banks operated 32,898 branches
on December 31, 1989, a net increase of
1,431 for the year.
Member banks accounted for 42 percent of all commercial banks in the United
States and for 64 percent of all commercial banking offices.
•




185

187

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. 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. The
regulatory simplification function works
to ensure that the economic effect of
regulation on small business is considered, to afford interested parties the
opportunity to participate in designing
regulations and to comment on them, and
to ensure that regulations are written in
simple and clear language. Board staff
members periodically review all existing
regulations for adherence to these
objectives.

Elimination
of Tandem Restrictions
In August the Board approved an
amendment to Regulation Y that
eliminated many operating restrictions
previously required of thrift institutions
owned by bank holding companies.
Known as the Regulation Y "tandem
restrictions," the rules had prevented
cooperative ventures and had limited
operating efficiencies between thrift
and bank subsidiaries of the same holding company. Eliminating the tandem
restrictions substantially eased the acquisition of thrifts by bank holding companies as permitted by the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989, which the
President had signed earlier that month.

Home Mortgage Disclosure
Community Reinvestment
In the spring the Board issued a policy
statement in conjunction with the other
federal banking agencies to help depository institutions meet their responsibilities under the Community Reinvestment
Act (CRA). The Board's version provides guidance and clarification to banks
and bank holding companies on how to
make their CRA responsibilities part of
their day-to-day operations. The statement sets out the basic components of a
responsive CRA policy; discusses the
role of examination reports, periodic
review, and documentation by banking
agencies; and addresses the role of commitments to the Board in the applications
process (see the chapter on consumer and
community affairs for further discussion
of the policy statement).



In December the Board approved a
revised format for the collection of
data under the Home Mortgage Disclosure Act. In August, the Congress
had expanded the act's scope and
requirements for collection of data,
prompting the Board to search for ways
to meet the act's goals without unduly
increasing burdens on regulated institutions. The Board approved a loanregister approach to reporting, which
permits lenders to record the information during the course of the year
without further processing; at the end
of the year, the regulatory agencies
produce each institution's report from
the loan register submitted by the
institution. Thus, the lender is recording
more information but is freed from
creating tables and reports.

188 76th Annual Report, 1989

Equal Credit Opportunity
In December the Board amended Regulation B to reflect changes required by the
Women's Business Ownership Act of
1988, which amended the Equal Credit
Opportunity Act (ECOA). The amendments require lenders to notify business
owners of their right to the reasons for
credit denial and require lenders to retain
applications for at least one year. The
legislative history of the ECOA amendments suggest that the new provisions are
intended primarily to extend to owners of
small businesses the same information
afforded to applicants for consumer credit
and that an exemption for large businesses would be acceptable because these
firms are generally well informed about
the credit process.
The Board considered several criteria
that would exclude large firms, cover
most small businesses, and simplify
compliance with the ECOA amendments.
The Board chose annual gross revenue as
a measure of firm size because it is easy to
understand and is readily available to
both the credit applicant and the financial
institution. To further aid the efforts of
banks to comply with the amendments,
the Board's staff summarized the new
rules, described various courses of action
that creditors could take to comply, and
distributed the information to small banks
and other interested parties.

Security Devices and Procedures
In December the Board approved for
public comment a redraft of Regulation
P. Regulation P implements the Bank
Protection Act of 1968, which requires
the federal financial supervisory agencies
to establish minimum standards for the
installation, maintenance, and operation
of security devices and procedures in
banking institutions. The new draft,
prepared under the Board's regulatory



review program, deletes certain reporting requirements, eliminates the appendixes, and simplifies the rest of the
regulation. The proposed regulation highlights the security responsibilities of
boards of directors and security officers
of banks rather than the technological
factors, which become obsolete and require frequent updating. The proposal
allows management greater flexibility in
designing security programs that include
certain devices and procedures required
by the act.
•

189

Federal Reserve Banks
Developments In
Federal Reserve Services
Since it began pricing its services to
depository institutions in 1981, the Federal Reserve System has generally narrowed the year-to-year variance between
costs and revenues.1 In 1989, revenues at
the Reserve Banks from all priced services were $865.8 million, and costs
were $865.0 million, for net revenue of
$0.8 million and a recovery rate of 100.0
percent; in 1988, the System recovered
100.6 percent of its service costs. The
average rate of recovery since 1983, the
first year in which essentially all services
were priced, is 102.7percent. The results
are discussed below and presented in the
statements for priced services, at the end
of this chapter.
Check Collection
The operating and imputed costs of check
collection by the Federal Reserve in 1989
were $537.7 million (see the pro forma
income statement for priced services, by
service). Check operations for the year
generated $535.1 million in revenue and
a net of $ 14.3 million in other income and
expenses. Income from operations after
imputed costs was a negative $2.6 million, primarily because of losses sus-

1. The Monetary Control Act of 1980 requires
the Federal Reserve to price these services on the
basis of the direct costs of the services and the
indirect costs, which include overhead, the interest
on items credited before actual collection (float),
and the private sector adjustment factor (PSAF).
The PSAF represents the taxes and costs of capital
that the System would have incurred had it been a
private-sector firm.



tained by one district as a result of
implementing new services for processing returned checks. The number of
checks that the Reserve Banks handled
was 18.0 billion, an increase of 2.3
percent from 1988.
In March the Board approved revised
prices for Reserve Bank returned check
services, which became effective May 1,
1989. The action was taken in response to
declining cost recovery rates that were
primarily a function of lower-thananticipated revenue from returned checks
and higher-than-anticipated costs resulting partly from the poor quality of
qualified returned-check deposits. The
Reserve Banks began several initiatives
during the year to address the quality
issue, including developing guidelines to
improve the quality of carrier envelopes
and working with banks to reduce the
number of misdirected qualified returned
checks, improve the quality of endorsements, and reduce the reject rate of
qualified deposits.
In November the Board issued for
public comment proposed modifications
to the Reserve Banks' notice of nonpayment service. The modifications will be
adopted if the Board adopts an amendment to Regulation CC shortening the
time in which the paying bank must notify
the bank that first received the check (the
depositary bank) when returning largedollar checks.
Three Federal Reserve districts initiated pilot programs for accepting intermingled deposits of returned and forward
collection checks and for presenting
intermingled cash letters.
The Federal Reserve continued to
investigate the use of digitized image
technology in the check collection pro-

190 76th Annual Report, 1989
cess. The initial area of interest is the
processing of U.S. government checks.

Electronic Payments
Under its strategic study of electronic
payments services in the 1990s, the Federal Reserve is conducting pilot tests of
two alternative production processes.
One alternative uses fault-tolerant
processors, and the other involves improving the existing architecture to reduce redundancies and otherwise streamline operations.
The Federal Reserve also has expanded its electronic network for the
delivery of Federal Reserve services.
Standardized intelligent-terminal software was deployed in late 1988, and the
Reserve Banks have begun to implement
the software Systemwide.
Automated Clearinghouse
Operating and imputed costs of providing
automated clearinghouse (ACH) services in 1989 were $45.2 million; revenues were $48.9 million. The Reserve
Banks processed 740.6 million commercial transactions during the year, an
increase of 22.9 percent over 1988.
In February the Board published for
public comment a proposal to modify the
times at which the Federal Reserve grants
finality to receivers of ACH credit transactions, finality to originators of ACH
debit transactions, and credit for debititem adjustments. In addition, under the
proposal the Reserve Banks would advise
depository institutions when a depository
institution's inability to settle for the
payments caused payments to be reversed. An advisory group representing
commercial banks, corporations, and
clearinghouse associations has offered
information on alternatives to the proposed finality rules. The Board took no
final action on this proposal in 1989.



Wire Transfer of Funds
The number of wire transfers originated
during 1989 increased 7.7 percent over
1988, to 60.6 million. Operating and
imputed costs totaled $67.6 million, and
revenue was $76.8 million. On January
1, 1989, the basic fee for funds transfers
was increased from $0.47 to $0.50.
In June the Board announced that
surcharges would be assessed on funds
and securities transfers in 1990 for
depository institutions that have not
converted their communication links to
the System's standard protocols by April
1990, for funds transfers, and by July
1990, for securities transfers. By yearend 1989 the System had converted more
than 80 percent of its high-volume electronic connections to standard protocols.
In November the Board published for
public comment a proposal to standardize
the operating hours for Fedwire transfers
of funds and securities. The proposal
recommended establishing a uniform
deadline of 6:00 p.m. Eastern time for all
third-party transfers of funds on Fedwire
and requested comment on whether the
Federal Reserve should establish uniform
times at which Reserve Banks begin
processing funds and book-entry securities transfers. The Board took no final
action on the proposal in 1989. Federal
Reserve staff is conducting a longer-term
study to assess whether further modifications of operating hours are required by
the continuing evolution of the payments
system and financial markets.

Coin and Currency
A major activity in coin and currency
operations in 1989 was an automation
effort that enables 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 and thus better ensure

Federal Reserve Banks 191
that the currency distributed to the public
by Federal Reserve Banks is of high
quality. The Federal Reserve also continued to work with the Departments of
Treasury and Justice and with others to
deter the counterfeiting and laundering
of U.S. currency.
The revenue from priced cash services
was $14.4 million in 1989, and the cost
was $13.8 million. In 1989, four Federal
Reserve Districts provided transportation of cash by armored carrier and four
Districts provided wrapped coin to depository institutions.

Definitive Securities
and Noncash Collection
The System received $17.0 million in
revenue for definitive safekeeping and
noncash collection services in 1989; the
cost of these services was $16.4 million.
The average number of definitive securities issues and deposits maintained in
safekeeping accounts at the Reserve
Banks decreased 20.3 percent in 1989 to
110,000. The number of noncash collection items processed decreased 4.7 percent, to 3.2 million. With the declining
volumes, Reserve Banks continued to
streamline and consolidate both definitive and noncash collection operations.
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
$8.9 million and earned revenue of $10.2
million in 1989. The Federal Reserve



processed 2.5 million such transfers
during the year, an increase of 13.4
percent compared to 1988.
The Federal Reserve sells savings
bonds in its role as fiscal agent. Under a
new program called the Regional Delivery System (RDS), developed by the
Federal Reserve and the U.S. Treasury,
depository institutions will, as in the past,
receive applications from the public for
Series EE savings bonds, but the institutions will no longer issue the bonds.
Instead, the institutions will forward the
applications to a regional Federal Reserve office, which will inscribe the bonds
and deliver them. RDS, which originated
as a pilot proj ect in Ohio and was managed
by the Pittsburgh Branch of the Federal
Reserve Bank of Cleveland, is expected
to be operational in parts or all of eight
Federal Reserve Districts by the end of
1990. The Treasury expects that beginning in 1994, when the program is fully
implemented, annual savings to U.S.
taxpayers will amount to $18.5 million.
Float
Federal Reserve float increased to a daily
average of $588 million in 1989, compared with $606 million in 1988. 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 twelve
Reserve Banks and their twenty-five
Branches each year, as required by
section 21 of the Federal Reserve Act.
The results of the audits are reported to
the management and directors of the
respective Banks and to the Board of
Governors. Also, to assess conformance
with the policies issued by the Federal
Reserve System Open Market Commit-

192 76th Annual Report, 1989
tee, 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
Income of the Federal Reserve Banks
was $22,249 million in 1989 and $19,526
million in 1988 (see accompanying table).
Total expenses were $1,422 million
($1,184 million in operating expenses,
$148 million in earnings credits granted
to depository institutions, and $90 million
in assessment for expenditures by the
Board of Governors). The cost of currency was $175 million. Income from
financial services was $702 million.
The profit and loss account showed a
net addition of $1,296 million, primarily
a result of gains from the revaluation of
assets denominated in foreign currencies
to market exchange rates. Statutory

dividends to member banks totaled $130
million, $4 million more than in 1988.
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 in the
form of interest on Federal Reserve notes
totaled $21,646 million, compared with
$17,364 million in 1988. The payments
consist of all net income after the deduction of dividends and after the deduction
of the amount necessary to bring the
surplus of the Banks to the level of capital
paid-in.
In the Statistical Tables section of this
REPORT, table 6 details income and
expenses of each Federal Reserve Bank
for 1989, and table 7 shows a condensed
statement for each Bank for 1914-89. A
detailed account of the assessments and
expenditures of the Board of Governors
appears in the next chapter, "Board of
Governors Financial Statements."

Federal Reserve Bank Premises
During 1989 the Board of Governors
approved the site and the initial design
for a new building for the Dallas Bank.

Income, Expenses, and Distribution of Netl Earnings
of Federal Reserve Banks, 1989 and 1988
Thousands of dollars
Item
Current income
Current expenses
Operating expenses2
Earnings credits granted
Current net income
Net addition to (deduction from) current net income
Cost of unreimbursed services to Treasury
Assessments by the Board of Governors
For expenditures of Board
For cost of currency
Net income before payments to Treasury
Dividends paid
Payments to Treasury (interest on Federal Reserve notes) .
Transferred to surplus
1. Details may not sum to totals because of rounding.
2. Operating expenses include a net periodic credit for




1989

1988

22,249,276
1,332,161
1,184,253
147,907
20,917,115
1,295,623
41,009
264,623
89,580
175,044
21,907,105
129,885
21,646,417
130,802

19,526,431
l,205,96C
1,081,684
124,276
18,320,471
-489,058
27,852
248,656
84,411
164,245
17,554,905
125,616
17,364,319
64,971

pension costs of $47 million in 1989 and $70 million in
1988.

Federal Reserve Banks
Construction of the new operations center
for the New York Bank and of the new
building for the Helena Branch of the
Minneapolis Bank continued. Expansion
of the main building of the Chicago Bank
and construction of the new building for
the Charlotte Branch of the Richmond
Bank were completed. Vacated buildings
and property of the Charlotte Branch and
of the Los Angeles Branch were sold.
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.

193

accompanying table). From 1988 to
1989, holdings of U.S. government
securities increased $870 million and
loans decreased $1,217 million; the
average rate of interest increased from
7.85 percent to 8.64 percent on the
securities and increased from 7.59 percent to 8.70 percent on the loans.

Volume of Operations
Table 9, in the Statistical Tables section
of this REPORT, shows the volume of
operations in the principal departments
of the Federal Reserve Banks for the
years 1986-89.

Holdings of Securities and Loans

Financial Statements
for Priced Services

Average daily holdings of securities and
loans by the Federal Reserve Banks
during 1989 were $233,449 million, a
decrease of $347 million from 1988 (see

The following tables show pro forma
statements for priced services for 1989,
including a balance sheet, income statements, and a breakdown of volumes.

Securities and Loans of Federal Reserve Banks, 1987-89
Millions of dollars, except as noted
Item and year
Average daily holdings2
1987
1988
1989
Earnings
1987
1988
1989
Average interest rate (percent)
1987
1988 .
1989
1. Includes federal agency obligations.




Total

U.S.
government
securitiesl

Loans

217,392
233,796
233,449

216,722
231,442
232,312

670
2,354
1,137

16,418
18,358
20,163

16,371
18,180
20,065

47
179
99

7.55
7.85
8.64

7.55
7.85
8.64

6.99
7.59
8.70

2. Based on holdings at opening of business.

194

76th Annual Report, 1989

Pro forma balance sheet for priced services, December 31, 1989 and 1988l
Millions of dollars
Item

1989

1988

2

Short-term assets
Imputed reserve requirement on clearing balances .
Investment in marketable securities
Receivables
Materials and supplies
Prepaid expenses
Items in process of collection
Total short-term assets

203.8
1,494.2
58.2
6.4
11.1
3,652.3

201.7
1,479.3
57.7
6.4
10.9
4,283.2
6,039.2

5,426.0

3

Long-term assets
Premises
Furniture and equipment
Leases and leasehold improvements
Prepaid pension costs
Total long-term assets

289.8
123.9
6.2
52.1

271.8
126.1
6.1
37.4
472.1

Short-term liabilities
Clearing balances and balances arising from early
credit of uncollected items
Deferred availability items
Short-term debt
Total short-term liabilities
Long-term liabilities
Obligations under capital leases ..
Long-term debt
Total long-term liabilities .

441.4

5,898.0

Total assets

6,480.6

2,584.8
2,765.5
75.7

2,712.5
3,251.7
75.0
5,426.0

1.2
133.2

6,039.2
1.2
128.1

4

Total liabilities and equity .
1. Details may not sum to totals because of rounding.
2. The imputed reserve requirement on clearing
balances held at Reserve Banks by depository institutions
reflects a treatment comparable to that of compensating
balances held at correspondent banks by respondent
institutions. The reserve requirement imposed on
respondent balances must be held as vault cash or as
nonearning balances maintained at a Reserve Bank; thus, a
portion of priced services clearing balances held with the
Federal Reserve is shown as required reserves on the asset
side of the balance sheet. The remainder of clearing
balances is assumed to be invested in three-month
Treasury bills, shown as investment in marketable
securities. Receivables are (1) amounts due the Reserve
Banks for priced services and (2) the share of
suspense-account and difference-account balances related
to priced services. Materials and supplies are the inventory
value of short-term assets. Prepaid expenses include salary
advances and travel advances for priced service personnel.
Items in process of collection (CIPC) is gross Federal
Reserve CIPC stated on a basis comparable to that of a
commercial bank. It reflects adjustments for intra-System
items that would otherwise be double-counted on a
consolidated Federal Reserve balance sheet; for items
associated with nonpriced items, such as those collected
for government agencies; and for items associated with
providing fixed availability or credit before items are
received and processed. Among the costs to be recovered
under the Monetary Control Act is that of float, or net




6,168.5

337.7

Equity

129.3

5,560.4

Totalliabilities

134.4

312.1

5,898.0

6,480.6

CIPC during the period (the difference between gross
CIPC and deferred-availability items, which is the portion
of gross CIPC that involves afinancingcost), valued at the
federal funds rate.
3. Long-term assets used solely in priced services, the
priced services portion of long-term assets shared with
nonpriced services, and an estimate of the assets of the
Board of Governors used in the development of priced
services. Effective Jan. 1, 1987, the Reserve Banks
implemented Financial Accounting Standards Board
Statement No. 87, Employers' Accounting for Pensions.
Accordingly, in 1989 the Reserve Banks recognized a
credit to expenses of $14.7 million and a corresponding
increase in this asset account.
4. Under the matched-book capital structure for assets
that are not "self-financing," short-term assets are financed
with short-term debt. Long-term assets are financed with
long-term debt and equity in a proportion equal to the ratio
of long-term debt to equity for the twenty-five largest bank
holding companies, which are used in the model for the
private sector adjustment factor (PSAF). The PSAF consists of the taxes that would have been paid and the return
on capital that would have been provided had priced services been furnished by a private-sector firm. Other shortterm liabilities include clearing balances maintained at
Reserve Banks and deposit balances arising from float.
Other long-term liabilities consist of obligations on capital
leases.

Federal Reserve Banks

195

Pro forma income statement for Federal Reserve priced services,
calendar years 1989 and 1988l
Millions of dollars
1988

1989

Item
Income from services provided
to depository institutions 2 ...
Production expenses3

702.4
599.4

667.7

Income from operations

103.1

114.8

552.9

4

Imputed costs
Interest on float .
Interest on debt .
Sales taxes
FDIC insurance.

50.8
16.9
7.6
1.6

26.2

Income from operations after imputed costs .
Other income and expenses
Investment income
Earnings credits

69.9
44.9

5

163.4
147.1

16.2

134.0
123.0

11.0

42.4

37.9

32.9

Net income

18.1

33.7

6

55.9

8.7

Income before income taxes.
Imputed income taxes

76.9

43.4
16.2
8.4
1.8

32.7

MEMO

Targeted return on equity7
1. Details may not add to totals because of rounding.
2. Income for priced services is realized from direct
charges to an institution's account or from charges against
accumulated earnings credits.
3. Production expenses include direct, indirect, and
other general administrative expenses of the Reserve Banks
for priced services and the expenses of staff members of the
Board of Governors working directly on the development
of priced services, which were $1.4 million in 1989 and
$1.7 million in 1988. The credit to expenses under FASB
87 is reflected in production expenses (see the pro forma
balance sheet, note 3).
4. Interest on float is derived from the value of float to
be recovered, either explicitly or through per-item fees,
during the period. Float costs include those for checks,
book-entry securities, noncash collection, ACH, and wire
transfers.
Interest is imputed on debt assumed necessary to finance
priced service assets. The sales taxes and FDIC insurance
assessment that the Federal Reserve would have paid had it
been a private-sector firm are among the components of the
PSAF (see the pro forma balance sheet, note 4).
The following list shows the daily average recovery of
float by the Reserve Banks for 1989 in millions of dollars.
Total float
Unrecovered float
Float subject to recovery
Sources of recovery of float
Income on clearing balances
As-of adjustments
Direct charges
Per-item fees




917.2
63.7
853.5
102.4
329.5
130.7
290.9

Unrecovered float includes that generated by services to
government agencies or by other central bank services.
Float recovered through income on clearing balances is the
result of the increase in investable clearing balances; the
increase is produced by a deduction forfloatfor cash items
in process of collection, which reduces imputed reserve
require ments. The income on clearing balances reduces
the float to be recovered through other means. As-of
adjustments and direct charges are midweek closing float
and interterritory check float, which may be recovered
from depositing institutions through adjustments to the
institution's reserve or clearing balance or by valuing the
float at the federal funds rate and billing the institution
directly. Float recovered through per-item fees is valued at
the federal funds rate and has been added to the cost base
subject to recovery in 1989.
5. Investment income is on clearing balances and
represents the average coupon-equivalent yield on threemonth Treasury bills applied to the total clearing balance
maintained, adjusted for the effect of reserve requirements
on clearing balances. Expenses for earnings credits granted
to depository institutions on their clearing balances are
derived by applying the average federal funds rate to the
required portion of the clearing balances, adjusted for the
net effect of reserve requirements on clearing balances.
6. Calculated at the effective tax rate derived from the
PSAF model.
7. The after-tax rate of return on equity that the Federal
Reserve would have earned had it been a private business
firm, as derived from the PSAF model.

196

76th Annual Report, 1989

Pro forma income statement for Federal Reserve priced services, by service, 1989l
Millions of dollars

Item

Total

Commercial
check
collection

Wire
transfer
and net
settlement

Commercial
ACH

Definitive
safekeeping
and
noncash
collection

Bookentry
securities

Cash
services

Income from services

702.4

535.1

76.8

48.9

17.0

10.2

14.4

Operating expenses

599.4

468.9

63.9

42.6

15.3

8.3

13.7

[ncome from operations .

103.1

66.2

12.9

6.3

1.8

1.9

.7

Imputed costs2

76.9

68.8

3.7

2.6

1.1

.6

.1

Income from operations
after imputed costs ..

26.2

-2.6

9.2

3.7

.7

1.3

.6

Other income and
expenses, net 3

16.2

14.3

.8

.6

.2

.1

.2

[ncome before
income taxes

42.4

11.7

10.0

4.3

.9

1.4

.8

1. Details may not sum to totals because of rounding.
The effect of implementing FASB 87 (see the pro forma
balance sheet, note 3) is reported only in the "total" column
in this table and has not been allocated to individual priced
services. Taxes and the aftertax targeted rate of return on
equity, as shown on the overall pro forma income
statement, have not been allocated among services because
these elements relate to the organization as a whole.
2. Includes float, interest on debt, sales taxes, and the
FDIC assessment. Float costs are based on the actual float
incurred in each priced service. Other imputed costs are




allocated among priced services according to the ratio of
operating costs less shipping costs in each service to the
total costs of all services less the total shipping costs of all
services.
3. Income on clearing balances and the cost of earnings credits. Because clearing balances relate directly to
the Federal Reserve's offering of priced services, the
income and cost associated with these balances are
allocated to each service based on the ratio of income from
each service to total income.

Federal Reserve Banks

197

Revenue and expenses of locally priced Federal Reserve services, by District, 1989l
Millions of dollars
District

Operating

Total

Float

Total
cost

Net
revenue

Commercial check collection
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco...
System total

38.2
67.9
24.8
31.9
52.2
65.7
73.5
24.4
29.9
34.2
36.4
56.1

33.3
59.9
20.9
25.9
42.6
58.6
58.5
20.6
26.7
31.1
32.2
65.7

3.4
5.9
.5
2.4
5.3
1.4
5.4
2.7
.4
2.1
2.2
7.7

36.7
65.8
21.4
28.2
47.9
60.0
63.9
23.3
27.1
33.2
34.5
73.4

1.5
2.1
3.4
3.7
4.2
5.6
9.6
1.1
2.7
1.0
1.9
-17.3

535.1

476.0

39.4

515.5

19.6

Definitive safekeeping and noncash collection
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco...
System total

.8
2.8
1.2
2.0
.9
2.4
2.4
1.0
.8
1.3
1.4
*

.6
2.4
1.0
1.7
.8
2.4
2.1
.9
.8
1.2
1.4
*

17.0

15.3

.2
.4
.2
.3
.1

.3
*

.6
2.4
1.0
1.7
.8
2.4
2.1
.9
.8
1.2
1.7
*

*
.2
-.3
*

.3

15.6

1.4

.1

*
.3
.1

Cash services
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco...

1. Details may not sum to totals because of rounding;
also, expenses related to research and development
projects are reported at the System level, and therefore the
sum of expenses for the twelve Districts may not equal the
System total. The financial results for each Reserve Bank
shown here do not include the dollars to be recovered
through the PSAF and the net income on clearing balances.




.3
.2
2.4
.5
*

6.5
System total....

1.7
1.9
.1
*
.3
.2
2.9
.5
*

6.4

1.6
1.8
.1
*

.7
13.7
14.4
To reconcile net revenue by priced service shown in this
table with that shown in the income statement by service,
adjustments must be made for imputed interest on debt,
sales taxes, FDIC assessment, Board expenses for priced
services, and net income on clearing balances.
•Less than $50,000 in absolute value.

198

76th Annual Report, 1989

Activity in Federal Reserve priced services, calendar years 1989, 1988, and 1987l
Thousands of items, except as noted
Percent change
Service

1989

1988

1987
1989-88

Fund transfers
Commercial ACH
Commercial checks
Securities transfers
Definitive safekeeping
Noncash collection
Cash transportation

60,645
740,623
18,014,301
2,536
110
3,180
322

56,334
602,406
17,617,744
2,236
138
3,337
341

1. Activity is defined as follows: for wire transfer of
funds, the number of basic transactions originated; for
ACH, total number of commercial items processed; for
commercial checks, total number of commercial checks
collected, including both processed and fine-sort items; for




53,278
475,114
17,007,924
2,061
163
3,803
357

1988-87

7.7
22.9
2.3
13.4
-20.3
-4.7
-5.6

5.7
26.8
3.6
8.5
-15.3
-12.3
-4.5

securities, number of basic transfers originated on-line;
for definitive safekeeping, average number of issues or
receipts maintained; for noncash collection, number of
items on which fees are assessed; and for cash transportation, number of armored-carrier stops.

199

Board of Governors Financial Statements
The financial statements of the Board
were examined by the independent public

accountants Coopers &Lybrand for 1989
and Price Waterhouse for 1988.

REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Governors of the
Federal Reserve System

We have audited the accompanying balance sheet of the Board of Governors of the
Federal Reserve System (the Board) at December 31, 1989, and the related
statements of revenues and expenses and fund balance and cash flows for the year
then ended. 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 audit. The financial statements of the Board of Governors of the Federal
Reserve System for the year ended December 31, 1988, were audited by other
auditors, whose report, dated February 24, 1989, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing standards
and the financial audit standards in Government Auditing Standards issued by the
Comptroller General of the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Board of Governors of the Federal
Reserve System as of December 31,1989, and the results of its operation and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.

Washington, D.C.
February 16, 1990




200

76th Annual Report, 1989
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS
As of December 31,
1989
1988
ASSETS

CURRENT ASSETS

Cash
Accounts receivable
Stockroom and cafeteria inventories, at cost
Prepaid expenses and other assets
Total current assets

53,297,829

58,487,676
$67,390,678

$ 4,860,780
3,031,416
4,338,262
903,140

$ 4,020,776
2,915,138
4,288,264
833,578

13,133,598

12,057,756

48,838,785

Total assets

$ 7,312,846
602,478
333,601
654,077
8,903,002

$61,972,383

PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3)

$ 6,911,025
830,753
253,530
679,246
8,674,554

55,332,922

$61,972,383

$67,390,678

LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES

Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Unearned revenues and other liabilities
Total current liabilities
COMMITMENTS (Note 5)
FUNDBALANCE
Total liabilities and fund balance

The accompanying notes are an integral part of these statements.




Board Financial Statements 201
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31,
1989
1988
BOARD OPERATING REVENUES

Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 4)
Total operating revenues

$ 89,579,700
4,474,753
94,054,453

$ 84,410,500
3,460,332
87,870,832

61,281,560
8,269,511
7,432,273
3,345,743
3,281,235
3,113,889
2,986,854
2,787,101
2,678,987
2,599,191
515,558
2,256,688

56,229,044
7,095,176
7,601,609
3,171,355
3,062,980
3,169,953
3,035,304
3,099,672
2,305,362
2,461,366
876,944
2,272,076

100,548,590

94,380,841

BOARD OPERATING EXPENSES

Salaries
Retirement and insurance contributions
Depreciation and net losses on disposals
Travel
Contractual services and professional fees
Utilities
Postage and supplies
Repairs and maintenance
Printing and binding
Software
Equipment and facility rentals
Other expenses (Note 4)
Total operating expenses
BOARD OPERATING REVENUES (UNDER) EXPENSES

(6,494,137)

(6,510,009)

ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES

Assessments levied on Federal Reserve Banks
for currency costs
Expenses for currency printing, issuance,
retirement, and shipping

174,313,207

164,975,182

174,313,207

164,975,182

CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES
TOTAL REVENUES (UNDER) EXPENSES

FUND BALANCE, Beginning of year
FUND BALANCE, End of year

—
(6,494,137)

(6,510,009)

55,332,922

61,842,931

$ 48,838,785

$ 55,332,922

The accompanying notes are an integral part of these statements.




—

202

76th Annual Report, 1989
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1989
1988

CASH FLOWS FROM OPERATING ACTIVITIES

Board operating revenues (under) expenses

$(6,494,137)

$(6,510,009)

7,432,273

7,601,609

Adjustments to reconcile operating revenues (under) expenses to net cash
provided by operating activities:
Depreciation and net losses on disposals
(Increase) decrease in accounts receivable, inventories and prepaid expenses,
and other assets
Decrease in other non-current assets
Increase in accrued annual leave
Increase in accounts payable, accrued payroll and related taxes,
and other liabilities

(173,373)
49,998

324,593
429,357
103,038

1,025,844

390,623

1,840,605

2,339,211

2,453,537
(4,695,963)

42,608
(2,774,969)

(2,242,426)

(2,732,361)

(401,821)

Net cash provided by operating activities

(393,150)

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

7,312,846

7,705,996

$6,911,025

$ 7,312,846

The accompanying notes are an integral part of these statements.




Board Financial Statements

203

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1989 AND 1988
(1) SIGNIFICANT ACCOUNTING POLICIES

Board Operating Revenues and Expenses—Assessments
made on the Federal Reserve Banks for Board operating
expenses and capital expenditures are calculated based on
expected cash needs. These assessments, other operating
revenues, and operating expenses are recorded on the
accrual basis of accounting.
Issuance and Redemption of Federal Reserve Notes—
The Board incurs expenses and assesses the Federal
Reserve Banks for the cost of printing, issuing, shipping
and retiring Federal Reserve Notes. These assessments
and expenses are separately reported in the statements of
revenues and expenses because they are not Board
operating transactions.
Property, Buildings, and Equipment—The Board's
property, buildings and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the
assets, which range from 3 to 10 years for furniture and
equipment and from 10 to 50 years for building equipment
and structures. Upon the sale or other disposition of a
depreciable asset, the cost and related accumulated
depreciation are removed from the accounts and any gain
or loss is recognized.
(2) RETIREMENT BENEFITS

Substantially all of the Board's employees participate in
either the Retirement Plan for Employees of the Federal
Reserve System or the Civil Service Plan. The System's
Plan is a multiemployer plan which covers employees of
the Federal Reserve Banks, the Board, and the Plan
Administrative Office. Employees of the Board who
entered on duty 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 1,1989, actuarial calculations showed that the fair
value of the assets of the System's Plan exceeded the
projected benefit obligations by 85 percent. Based on these
calculations and similar calculations performed for 1988,
it was determined that employer funding contributions




were not required for the years 1989 and 1988 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 $585,600 in 1989 and
$555,700 in 1988.
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
$1,751,100 in 1989 and$l,586,700 in 1988.
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 $323,800 in 1989 and $245,400 in 1988.
(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,
1989
1988
Land and
improvements .
Buildings
Furniture and
equipment
Less accumulated
depreciation .
Total property,
buildings and
equipment . . .

$

1,301,314
63,556,144

$

1,301,314
63,290,586

30,920,877
95,778,335

38,865,250
103,457,150

42,480,506

44,969,474

$ 53,297,829

$ 58,487,676

(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,
1989
1988
Other Revenues
Subscription
revenue
Contingency
Processing
Center fees
Assistance to
Federal agencies .
Miscellaneous

$1,736,244

$ 924,783

878,371

$1,672,667

551,000
1,309,138

_
862,882

204

76th Annual Report, 1989

(4) OTHER REVENUES AND OTHER EXPENSES-Cont.

Total other
revenues

$4,474,753

Other Expenses
Cafeteria operations,
net
Tuition, registrations
and membership
fees
Subsidies and
contributions...
Miscellaneous
Total other
expenses

$3,460,332

$ 654,051

$ 598,004

524,934

571,271

413,020
664,683

697,237
405,564

$2,256,688

$2,272,076

Through June 30,1989, the Board operated on behalf of
the Federal Reserve System a contingency processing
center to handle data processing requirements during
emergency situations. The Board recovered from the
Federal Reserve Banks a proportionate amount of the
operating expenses of the center in the form of fees.
Beginning on July 1, 1989, the equipment and the
responsibility for operating the center were transferred to
the Federal Reserve Bank of Richmond. Effective July 1,
1989, the Board began reimbursing the Federal Reserve
Bank of Richmond for the Board's share of the center's
operating expenses.
(5) COMMITMENTS

The Board has entered into several operating leases to
secure office, classroom and warehouse space for periods
ranging from two to five years. Minimum future rental
commitments under those operating leases having an initial
or remaining noncancelable lease term in excess of one
year at December 31, 1989, are as follows:

1990
1991
1992
1993
1994

$238,900
257,800
224,900
189,400
65,900
$976,900

Rental expenses under these operating leases were
$243,400 and $194,900 in 1989 and 1988, respectively.
(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 1989 and 1988, the Board paid
$259,780 and $187,200, respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1989 and 1988.
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 $30,300 and $31,700 for 1989 and
1988, respectively.
The Board is not reimbursed for the costs of personnel
who serve on the Council and on the various task forces and
committees of the Council.
•




Statistical Tables




206

76th Annual Report, 1989

1. Detailed Statement of Condition of All Federal Reserve Banks Combined.,
December 31, 1989l
Thousands of dollars
ASSETS

Gold certificate account
Special drawing rights certificate account
Coin
Loans and securities
Loans to depository institutions
Federal agency obligations
Bought outright
Held under repurchase agreement
U.S. Treasury securities
Bought outright
Bills
Notes
Bonds

11,059,129
8,518,000
456,342
480,585
6,524,611
525,000
104,580,590
91,381,098
30,813,595

Total bought outright

226,775,283

Held under repurchase agreement

1,592,000

Total securities

228,367,283

Total loans and securities

235,897,479

Items in process of collection
Transit items

7,309,113

Other items in process of collection

1,548,718

Total items in process of collection
Bank premises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowance

8,857,831
110,561
623,533
177,837
90,452
891,822
212,485

679,337

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




789,898
659,117
390,668
268,449
31,332,540
3,149,884
1,493,006
1,513,650
563,913
205,240
139,060
15,648
164,866
38,846,255
304,424,934

Tables 207
1. — Continued

LIABILITIES

Federal Reserve Notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks

279,664,679
37,925,546

Total Federal Reserve notes, net

241,739,133

Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts

38,326,523
6,216,516
589,487

Other deposits
Officers' and certified checks
International organizations
Other3

22,090
76,238
1,203,430

Total other deposits
Deferred credit items

1,301,758
7,771,590

Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other

2,781,906
49,054
25,811
1,137,436

Total other liabilities

3,994,207

Total liabilities

299,939,214
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 $6,960.4 million was invested in
securities issued by foreign governments, and the balance
was invested with foreign central banks and the Bank for
International Settlements.




2,242,860
2,242,860
0
304,424,934
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.

208

76th Annual Report, 1989

2. Statement of Condition of Each Federal Reserve Bank,
December 31,1989 and 1988
Millions of Dollars1
Total

Boston

Item
1989

1988

11,059
8,518
456

11,060
5,018
395

481
0

2,170
0

Federal agency obligations
Bought outright
Held under repurchase agreements

6,525
525

6,966
2,101

406
0

423
0

U. S. Treasury securities
Bought outright2
Held under repurchase agreements
Total loans and securities

226,775
1,592
235,898

233,662
4,760
249,659

14,112
0
14,523

14,181
0
14,646

8,903
790

8,739
750

470
91

480
92

31,333
7,465

9,129
8,924

1,097
311

301
312

1989

1988

ASSETS

Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other

699
531
26

680
314
20
42
0

Acceptances held under repurchase agreements

Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies3
All other
Interdistrict Settlement Account

0

0

2,705

605

304,422

293,674

20,453

17,450

241,739

229,640

17,166

14,322

38,327
6,217
590
1,298
46,430

39,347
8,656
347
548
48,898

2,510
0
5
52
2,567

2,386
0
5
20
2,411

7,773
3,994

7,453
3,457

376
178

373
194

99,935

289,448

20,286

17,300

2,243
2,243
0

2,113
2,113
0

83
83
0

75
75
0

304,423

293,674

20,453

17,450

Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank

279,665
37,926

271,492
41,852

19,741
2,575

16,862
2,540

Federal Reserve notes, net

241,739

229,640

17,166

14,322

Total assets
LIABILITIES

Federal Reserve notes
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits
Deferred credit items
Other liabilities and accrued dividends4
Total liabilities
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT

Collateral for Federal Reserve notes
Gold certificate account
Special drawing right certificate account
Other eligible assets
U.S. Treasury and federal agency securities

11,059
8,518

11,060
5,018

222*162

213*562

Total collateral

241,739

229,640


For notes see end of
http://fraser.stlouisfed.org/ tahie
Federal Reserve Bank of St. Louis

Tables 209
2.-Continued

1989

Richmond

Cleveland

Philadelphia

New York

1988

1989

1988

1989

1988

1989

1988

3,410
2,896
13

3,310
1,489
14

400
247
33

389
162
29

661
508
35

655
314
25

943
745
78

917
461
62

27
0

34
0

45
0

168
0

261
0

890
0

3
0

122
0

2,300
525

2,381
2,101

188
0

197
0

375
0

402
0

541
0

541
0

79,934
1,592
84,378

79,855
4,760
89,131

6,544
0
6,778

6,624
0
6,989

13,046
0
13,682

13,498
0
14,790

18,794
0
19,338

18,142
0
18,805

1,070
47

1,235
32

442
46

421
46

311
34

244
32

534
127

459
124

8,398
2,125

2,411
2,049

1,535
254

438
172

1,692
305

502
291

1,817
408

511
390

-928

114

862

470

1,214

-559

3,702

3,132

101,408

99,785

10,597

9,116

18,441

16,294

27,692

24,861

81,921

78,077

7,703

6,655

15,566

13,704

23,180

20,096

8,130
6,217
480
498
15,324

9,199
8,656
237
310
18,402

1,943
0
7
38
1,988

1,777
0
7
6
1,790

2,107
0
8
62
2,178

1,894
0
8
14
1,916

3,456
0
9
88
3,553

3,836
0
9
45
3,890

822
2,126

795
1,379

619
87

375
90

288
163

266
178

447
233

387
242

100,192

98,653

10,397

8,910

18,194

16,064

27,413

24,615

608
608
0

566
566
0

100
100
0

103
103
0

124
124
0

115
115
0

139
139
0

123
123
0

101,408

99,785

10,597

9,116

18,441

16,294

27,692

24,861

86,003
4,082

84,057
5,980

9,601
1,898

10,019
3,364

17,776
2,210

16,071
2,367

26,559
3,379

23,687
3,591

81,921

78,077

7,703

6,655

15,566

13,704

23,180

20,096




210

76th Annual Report, 1989

2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1989 and 1988-Continued
Millions of Dollars1

Chicago

Atlanta
Item

1989

1988

1989

1988

ASSETS

508
330
46

584
203
36

1,361
1,100
36

1,394
656
44

27
0

35
0

10
0

44
0

0

0

0

0

Federal agency obligations
Bought outright
Held under repurchase agreements

298
0

325
0

775
0

846
0

U.S. Treasury securities
Bought outright2
Held under repurchase agreements
Total loans and securities

10,358
0
10,682

10,895
0
11,255

26,940
0
27,725

28,367
0
29,257

763
59

721
59

851
110

774
100

2,914
241

803
273
360

4,042
612

1,168
3,017

1,787

-1,715

12,376

14,294

37,624

34,695

Federal Reserve notes

7,315

8,889

32,241

29,658

Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits

3,773
0
14
73
3,860

4,189
0
13
5
4,207

3,710
0
19
189
3,918

3,413
0
19
107
3,539

630
132

657
149

561
343

565
387

1,938

13,902

37,062

34,149

219
219
0

196
196
0

281
281
0

273
273
0

12,376

14,294

37,624

34,695

11,148
3,833

12,528
3,639

35,397
3,156

32,902
3,244

7,315

8,889

32,241

29,658

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 currencies3
Allother

-3,167

Interdistrict Settlement Account
Total assets
LIABILITIES

Deferred credit items
Other liabilities and accrued dividends

4

Total liabilities
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT

Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
Federal Reserve notes, net
1. Components may not add to totals because of
rounding.
2. Includes securities loaned - fully guaranteed by U. S.
Treasury securities pledged with Federal Reserve Banks and excludes securities sold and scheduled to be bought
Digitizedback FRASER
for under matched sale-purchase transactions.



3. Valued monthly at market exchange rates.
4. Includes exchange-translation account reflecting the
monthly revaluation at market exchange rates of foreignexchange commitments.

Tables 211
2. - Continued

San Francisco

Dallas

Kansas City

Minneapolis

St. Louis

1989

1988

676
307
28

1,402
922
77

1,429
670
67

28
0

688
0

0
0

10
0

262
0

274
0

391
0

796
0

894
0

9,069
0
9,345

8,789
0
9,081

9,528
0
9,829

13,105
0
14,184

27,652
0
28,447

30,002
0
30,906

383
24

1,478
52

1,542
47

754
25

696
22

1,409
150

1,362
151

283
88

1,285
202

374
198

2,350
1,736

785
1,300

4,324
1,032

1,296
679

1989

1988

1989

1988

1989

1988

370
290
30

368
160
29

198
153
12

168
66
11

494
362
30

490
216
30

613
433
39

53
0

95
0

9
0

12
0

15
0

30
0

201
0

205
0

110
0

99
0

261
0

6,982
0
7,235

6,875
0
7,175

3,818
0
3,936

3,329
0
3,440

387
23

422
21

434
27

877
153

256
156

1,003
85

1989

1988

-140

742

-405

1,010

-2,110

712

-1,511

-2,813

-2,008

-2,058

9,226

9,329

5,444

5,473

11,138

12,690

14,268

15,185

35,756

34,502

7,420

7,847

4,147

4,124

8,052

9,758

11,166

11,664

25,863

24,846

1,201
0
4
31
1,236

874
0
4
8
886

686
0
5
31
721

807
0
5
2
814

1,316
0
6
44
1,367

1,122
0
6
4
1,132

1,949
0
11
62
2,022

2,401
0
13
0
2,414

7,547
0
21
129
7,697

7,449
0
21
27
7,497

360
87

389
91

390
52

353
48

1,428
115

1,507
119

617
121

616
173

1,235
357

1,170
407

9,103

9,213

5,309

5,339

10,962

12,516

13,927

14,867

35,152

33,920

61
61
0

58
58
0

67
67
0

67
67
0

88
88
0

87
87
0

171
171
0

159
159
0

302
302
0

291
291
0

9,226

9,329

5,444

5,473

11,138

12,690

14,268

15,185

35,756

34,502

9,009
1,589

9,425
1,578

5,003
857

4,928
804

10,306
2,254

12,204
2,446

14,620
3,454

14,640
2,976

34,502
8,639

34,169
9,323

7,420

7,847

4,147

4,124

8,052

9,758

11,166

11,664

25,863

24,846




212

76th Annual Report, 1989

3. Federal Reserve Open Market Transactions, 1989]
Millions of dollars
Type of transaction

Jan.

Mar.

Feb.

Apr.

U.S. TREASURY SECURITIES

0
154
0
600

0
3,688
0
1,600

oooo

Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchanges
Redemptions

3,077
0
0
0

0
0
620
-2,703
0

0
0
5,418
-2,308
0

0
0
2,646
-2,322
0

172
0
1,657
-110
0

1 to 5 years
Gross purchases
Gross sales
Maturity shift
Exchanges

0
3
-541
2,492

0
225
-5,319
2,008

0
0
-2,646
2,322

1,436
0
-1,532
0

5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges

0
20
-79
212

0
0
-100
200

oooo

287
0
-125
110

oooo

oooo

oooo

284
0
0
0

0
177
600

0
3,913
1,600

ooo

5,255
0
0

Matched transactions
Gross sales
Gross purchases

94,204
94,252

110,393
112,472

83,677
82,821

77,349
78,259

Repurchase agreements2
Gross purchases
Gross sales

17,208
21,969

0
0

0
0

22,244
12,547

-5,489

-3,434

-856

15,863

0
0
148

0
0
40

ooo

Others within 1 year
Gross purchases
Gross sales
Maturity shift
Exchanges
Redemptions

0
0
125

8,980
11,081

0
0

0
0

7,207
3,366

-2,249

-40

0

3,716

-7,738

-3,474

-856

19,579

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.




2. In July 1984 the Open Market Trading Desk discontinued accepting bankers acceptances in repurchase
agreements.
•Less than $500,000 in absolute value.

Tables 213
3.-Continued
July

June

Aug.

Sept.

Oct.

Nov.

Dec.

Total

0
0
0
0

219
1,633
0
1,400

8,794
0
0
3,530

1,883
0
0
0

14,284
12,818
0
12,730

0
0
2,863
-3,628
0

0
0
1,828
-1,434
0

0
0
1,749
-1,073
0

0
0
4,200
-4,025
0

0
0
1,832
0
0

0
0
852
-2,678
500

155
0
3,915
-5,502
0

0
0
1,268
0
0

327
0
28,848
-25,783
500

0
75
-2,036
3,328

0
0
-1,828
1,434

0
13
-1,584
787

0
150
-3,321
3,425

0
0
-1,832
0

0
24
-758
2,552

0
0
-2,869
4,902

0
0
-1,268
0

1,436
490
-25,534
23,250

0
0
258
200

0
0
0
0

0
9
-165
286

0
0
-879
400

0
0
0
0

0
0
-95
126

0
0
-1,046
400

0
0
0
0

287
29
-2,231
1,934

0
0
-1,086
100

0
0
0
0

0
0
0
0

0
0
0
200

0
0
0
0

0
0
0
0

0
0
0
200

0
0
0
0

284
0
-1,086
600

311
396
1,200

0
571
1,200

0
5,539
2,400

0
1,084
800

0
0
0

219
1,657
1,900

8,949
0
3,530

1,883
0
0

16,617
13,337
13,230

123,029
113,041

128,139
138,141

123,373
118,221

146,611
147,228

116,502
120,144

111,430
111,893

105,696
105,243

103,077
104,827

1,323,480
1,326,542

31,419
41,117

6,203
6,203

4,961
4,961

0
0

9,396
9,396

0
0

15,350
15,350

22,737
21,145

129,518
132,688

-20,971

8,232

-13,091

-1,267

3,642

-2,875

4,966

5,225

-10,055

0
0
54

0
0
442

12,732
16,573

1,666
1,666

1,137
1,137

0
0

4,011
4,011

0
0

1,247
1,247

2,992
2,467

39,972
41,548

-3,841

0

-45

0

-54

-30

0

525

-2,018

-24,812

8,232

-13,136

-1,267

3,588

-2,905

4,966

5,750

-12,073

ooo

0
0
45

ooo

0
934
0
800

ooo

0
5,517
0
2,400

ooo

0
571
0
1,200

ooo

311
321
0
1,200

ooo

May




214

76th Annual Report, 1989

4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 1987-89 l
Millions of dollars
Increase or
decrease ( - )

December 31
Description
1989
U.S. Treasury securities, 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

1988

1987

1989

1988

228,367

238,422

222,551

-10,055

15,871

9,413
55,523
70,687
53,509
12,529
26,707

9,935
58,448
75,236
55,326
12,568
26,909

11,364
46,112
76,827
47,512
15,313
25,424

-522
-2,925
-4,549
-1,817
-39
-203

-1,429
12,336
-1,591
7,814
-2,745
1,485

104,580
91,381
30,814
1,592

112,782
90,950
29,929
4,760

107,691
82,973
28,242
3,645

-8,202
431
885
-3,168

5,091
7,977
1,687
1,115

7,050

9,067

8,869

-2,017

198

678
568
1,346
3,198
1,071
188

2,271
697
1,492
3,419
1,000
19
8

1,561
691
1,653
3,416
1,358
189

-1,593
-129
-146
-221
71
-1

710
6
-161
3
-358
0

1,630
2,251
0
0
0
130
0
2,347
0

1,997
2,251
0
0
0
130
35
2,387
0

2,294
2,251
0
0
0
200
99
2,490
0

-367
0
0
0
0
0
-35
-40
0

-297
0
0
0
0
-70
-64
-103
0

0
37

0
37

51
37

0
0

-51
0

117
1
3
525

117
14
2,101

117
14
1,315

0
-1
-1,576

0
0
786

By type of holding
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).




3. Includes the effects of matched sale-purchase
agreements.
4. There were no outstanding issues as of December 31,
1989.

Tables 215
5. Number and Salaries of Officers and Employees of Federal Reserve Banks,
December 31, 1989
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)

140,000
214,400
158,000
151,000
163,500
177,000
188,000
160,000
142,500
160,000
152,000
185,000

55
157
54
62
81
72
87
49
50
61
60
101

4,312,827
14,091,700
4,174,400
4,441,050
5,799,300
5,191,000
6,296,960
3,297,700
3,495,700
4,272,100
4,357,200
7,774,495

1,264
3,718
1,176
1,334
1,824
2,187
2,427
1,082
964
1,592
1,575
2,393

1,991,400

889

67,504,432

21,536




Total

Employees

Fulltime

Annual
salaries
(dollars)

Number

Annual
salaries
(dollars)

287
59
151
68
149
81
31
90
132
57
45
74

39,685,437
116,314,710
33,252,902
33,055,092
44,791,854
54,490,289
66,629,596
26,988,982
25,744,070
40,606,090
41,366,156
69,109,743

1,607
3,935
1,382
1,465
2,055
2,341
2,546
1,222
1,147
1,711
1,681
2,569

44,138,264
130,620,810
37,585,302
37,647,142
50,754,654
59,858,289
73,114,556
30,446,682
29,382,270
45,038,190
45,875,356
77,069,238

1,224

592,034,920

23,661

661,530,752

Parttime

216

76th Annual Report, 1989

6. Income and Expenses of Federal Reserve Banks, 1989
Dollars
Item1

Total

Boston

New York

Philadelphia

Cleveland

CURRENT INCOME

Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other

396,923,632

1,917,148

4,067,423

2,486,347

555,846

20,064,562,087
1,037,446,163
702,420,500
47,923,342

1,232,848,634
36,218,306
48,019,383
545,043

7,085,347,122
277,850,953
97,924,772
27,754,280

572,880,876
50,788,707
33,690,691
632,802

1,149,099,468
56,068,247
42,968,475
592,146

Total

22,249,275,725

1,320,201,179

7,493,515,660

659,956,484

1,251,157,967

702,343,680
103,831,827
14,425,046
27,374,825

45,741,163
9,496,360
2,467,740
1,138,712

141,549,646
26,962,994
2,566,400
4,075,861

37,168,497
8,619,597
391,970
1,328,074

40,478,835
8,732,225
2,459,927
2,052,039

82,162,042
11,104,424
54,387,876

4,368,042
1,092,675
2,900,561

10,597,656
2,279,076
9,890,886

4,583,369
543,587
3,048,591

5,755,630
607,479
3,189,798

23,301,795
30,711,596
24,831,536
21,244,887
20,394,726

3,944,075
2,411,148
2,005,864
586,314
1,014,015

3,711,959
3,475,158
3,411,492
14,574,167
4,058,080

1,646,227
1,699,726
2,568,479
36,330
1,481,866

1,111,292
1,542,938
1,654,855
370,464
683,790

4,840,730
22,961,085
80,576,559
49,828,850
147,907,312
74,323,442
3
(34,608,399)
(2,710,550)

188,451
309,916
6,614,121
3,258,749
9,605,023
3,539,209
(467,700)
(8,239,219)
(135,888)

0
4,368,470
16,404,776
7,706,126
14,270,137
11,676,508
(156,826)
(3,975,441)
(5,676)

343,646
635,181
4,440,742
2,239,597
10,190,699
5,861,309
2,026,802
(2,614,856)
(82,412)

188,811
1,521,689
5,198,600
3,326,715
11,691,875
3,430,283
170,142
(3,172,267)
(384,240)

1,436,381,379
(127,072,580)
1,332,160,712

91,839,331
(5,389,318)
86,450,013

277,441,449
(25,920,952)
251,520,497

86,157,021
(15,833,562)
70,323,459

90,610,880
(12,539,943)
78,070,937

CURRENT EXPENSES

Salaries and other personnel
expenses
Retirement and other benefits2
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.




Tables 111
6.-Continued
Richmond

1,736,475
1,624,011,524
60,079,568
62,099,088
748,780

Atlanta

3,712,153

Chicago

179,483,497

St. Louis

3,662,935

Minneapolis Kansas City

2,553,425

5,393,686

916,622,952 2,384,805,935 606,577,478 321,298,501 784,485,967
96,251,719 133,784,400 29,048,493 33,152,122 42,535,293
94,098,692 31,105,362 38,513,000 45,602,797
81,636,420
475,992
12,103,973
487,056
494,681
876,593

Dallas

16,924,161

San Francisco

1,844,655

917,443,350 2,469,140,280
143,352,190
78,316,165
78,682,950
48,078,870
2,197,113
1,014,884

1,748,551,212 1,096,973,751 2,773,052,735 674,238,536 399,612,814 876,312,278 1,256,582,936 2,699,120,173

52,953,840
11,998,717
636,654
1,973,281

64,130,085
14,701,240
1,098,638
2,313,837

78,186,918
17,149,911
590,735
3,530,894

33,756,833
7,569,598
570,863
1,441,024

31,023,681
6,647,428
1,658,271
1,382,420

47,377,576
10,340,594
463,514
2,085,543

47,485,784
9,785,998
461,428
2,366,414

82,490,822
18,520,020
1,058,906
3,686,726

6,957,585
705,776
4,929,425

9,135,271
1,258,214
5,694,784

9,181,604
1,201,722
6,125,744

3,960,198
483,147
3,235,493

5,284,518
433,394
2,264,959

5,851,122
767,454
3,714,096

4,176,386
900,296
3,943,450

12,310,661
831,604
5,450,089

2,311,403
3,686,711
2,344,676
572,323
1,809,317

1,754,300
2,473,825
2,207,438
453,156
2,174,585

2,201,064
3,927,170
2,581,138
2,405,007
4,030,790

453,113
1,054,299
1,510,575
436,211
747,074

2,358,598
1,072,098
777,746
150,599
814,002

888,129
2,327,959
1,508,910
251,039
757,024

640,369
1,402,580
1,112,086
1,192,882
730,102

2,281,266
5,637,984
3,148,277
216,395
2,094,081

472,582
1,256,814
6,877,521
4,917,125
12,053,257
4,642,494
(1,403,855)
(4,538,132)
(253,062)

396,177
1,883,428
8,301,286
6,054,119
14,584,038
5,719,186
959,965
(2,384,773)
(286,551)

152,248
622,198
1,368,026
600,223
3,319,130
3,840,206
2,274,162
2,460,865
7,371,329 11,665,008
2,929,654
3,268,273
855,455
1,784,185
(689,274)
(446,237)
(47,152)
(499,483)

524,685
2,345,039
4,752,179
2,569,296
7,743,599
4,197,168
939,560
(1,508,024)
(401,279)

1,135,318
2,945,244
8,151,967
5,415,036
15,585,106
18,694,946
337,727
(3,665,289)
(71,935)

114,904,452 142,622,248 179,899,116 69,807,210 72,982,985 98,046,505
(7,784,795) (9,350,029) (12,548,912) (7,052,269) (4,177,436) (7,165,316)
107,119,657 133,272,219 167,350,204 62,754,941 68,805,549 90,881,189

95,359,999
(6,061,211)
89,298,788

186,254,951
(13,248,837)
173,006,114




408,101
408,513
5,260,930
466,125
2,896,430
9,779,601
1,927,024
7,680,036
27,038,513
6,108,728
7,464,461
2,899,951
(6,253,459) 1,208,006
(2,128,224) (1,246,663)
(79,332)
(463,540)

218

76th Annual Report, 1989

6. Income and Expenses of Federal Reserve Banks, 1988 — Continued
Dollars
Item1

Total

Boston

New York

Philadelphia

Cleveland

20,917,115,014

1,233,751,166

7,288,688,019

589,633,025

1,173,087,030

374,603

68,403,659

PROFIT AND LOSS

Current net income
Additions to and deductions
from current net income
Profits on sales of U.S.
Treasury and federal
agency securities
Profit on foreign
exchange transactions
Other additions
Total additions
Total deductions
Net additions to or
deductions(-) from
current net income
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)

80,065,694

823,379

4,735,164

1,204,173,436
12,300,866
1,296,539,996
(917,412)

45,075,533
3,291,177
49,190,089
(1,241)

341,954,948
25,923
346,716,034
(641,832)

62,602,870
3,556
62,981,029
(15,084)

702,956
3,270
69,109,885
(1,190)

1,295,622,584

49,188,848

346,074,202

62,965,945

69,108,695

41,009,218

1,776,930

5,487,856

4,032,471

3,338,604

89,579,700
175,043,736

3,207,100
10,871,391

24,011,500
59,997,193

4,399,100
5,051,423

4,877,500
10,402,141

21,907,104,945

1,267,084,593

7,545,265,672

639,175,976

1,223,577,480

129,885,339

4,737,306

34,813,338

6,070,853

7,054,527

21,646,417,306

1,254,035,287

7,468,561,334

635,905,173

1,207,926,053

Transferred to surplus

130,802,300

8,312,000

41,891,000

(2,800,050)

8,596,900

Surplus, January 1
Surplus, December 31

2,112,057,800
2,242,860,100

74,955,100
83,267,100

565,787,250
607,678,250

102,778,950
99,978,900

114,903,250
123,500,150

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 of $46,692,855.




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 219
6.—Continued

Richmond

1,641,431,556

1208,662

Atlanta

Chicago

St. Louis

Minneapolis Kansas City

963,701,533 2,605,702,530 611,483,594 330,807,264 785,431,089

San Francisco

1,167,284,148 2,526,114,059

25,293

1,280,603

299,159

577,983

74,329,418
6,538,983
82,077,064
(53,116)

119,684,327
951,609
121,167,178
(88,491)

164,355,514 35,613,425 40,980,433
12,704
4,689
61,127
165,745,551 36,046,730 41,340,719
(6,949)
(455)
(37,427)

52,148,230
2,979
52,729,192
(38,031)

92,319,971 174,405,808
15,693
1,389,157
92,360,956 177,075,569
(1,283)
(32,315)

82,023,948

121,078,687

165,738,602

36,046,275

41,303,293

52,691,161

92,359,674

177,043,253

2,919,938

3,099,228

4,132,680

2,368,717

1,681,810

2,703,004

2,776,689

6,691,289

5,258,200
15,253,971

8,420,900
6,747,839

11,605,300
22,512,552

2,480,400
5,956,456

2,823,400
3,130,489

3,678,300
7,407,095

6,562,300
8,853,543

12,315,700
18,859,643

531,242

1,377,332

428,615

Dallas

1,700,023,395 1,066,512,253 2,733,190,600 636,724,296 364,474,858 824,333,851 1,241,451,289 2,665,290,681
7,902,912

12,610,959

16,791,352

3,611,424

4,026,093

5,224,277

9,328,249

17,714,049

1,676,145,633 1,030,846,694 2,708,899,298 629,990,373 359,912,165 817,783,874 1,219,589,590 2,636,821,832
15,974,850

23,054,600

7,499,950

3,122,500

536,000

1,325,700

12,533,450

10,754,800

123,455,850
139,430,700

195,767,650
218,822,250

273,006,400
280,506,350

58,459,650
61,582,150

66,845,800
67,382,400

86,911,700
88,237,400

158,031,050
170,564,500

291,155,150
301,909,950




220

76th Annual Report, 1989

7. Income and Expenses of Federal Reserve Banks, 1914-89 *
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

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

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

1930
1931 . .
..
1932
1933
1934
1935
1936
1937
1938
1939

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
For notes see end of table.



Tables 221
7. - Continued
Payments to U.S. Treasury
Dividends
paid

Transferred
to surplus
(section 13b)
X XU l l J X v i X

Franchise
tax

Under
section 13b

217,463
1,742,775
6,804,186
5,540,684
5,011,832

I,i34,234

'. '. '.

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

VA
V

.' .' '.

2,703,894

Interest on
Federal Reserve
notes

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

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
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

'. '. '.

. . .

X 1. C4J.lkjXW& X

v\i

1,134,234
48,334,341
70,651,778
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

17,308
2,011,418

Transferred.
to surplus
(section 7)

'. '. '.
297^667
227,448
176,625
119,524
24,579

-60^323
27,695
102,880
67,304
-419,140
-425,653

82,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605

-54,456
-4,333
49,602
135,003
201,150
262,133
27,708
86,772

75,283,818
166,690,356
193,145,837

-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
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




222

76th Annual Report, 1989

1. Income and Expenses of Federal Reserve Banks, 1914-89 — Continued

Period, or Federal
Reserve Bank

Current
income

Net
expenses

Net additions
or
deductions ( - )

Assessments by
Board of Governors
Board
expenditures

Costs
of currency

1970 ...
1971 . .
.
1972 ...
1973 ...
1974 ...
1975 ...
1976 ...
1977 ...
1978 ...
1979 ...

3,877,218,444
3,723,369,921
3,792,334,523
5,016,769,328
6,280,090,965
6,257,936,784
6,623,220,383
6,891,317,498
8,455,309,401
10,310,148,406

276,571,876
319,608,270
347,917,112
416,879,377
476,234,586
514,358,633
558,128,811
568,851,419
592,557,841
625,168,261

11,441,829
94,266,075
(49,615,790)
(80,653,488)
(78,487,237)
(202,369,615)
7,310,500
(177,033,463)
(633,123,486)
(151,148,220)

21,227,800
32,634,002
35,234,499
44,411,700
41,116,600
33,577,201
41,827,700
47,366,100
53,321,700
50,529,700

23,573,710
24,942,528
31,454,740
33,826,299
30,190,288
37,130,081
48,819,453
55,008,163
60,059,365
68,391,270

1980 .
1981 .
1982.
1983 .
1984.
1985 .
1986.

12,802,319,335
15,508,349,653
16,517,385,129
16,068,362,117
18,068,820,742
18,131,982,786
17,464,528,361
17,633,011,623
19,526,431,297
22,249,275,725

718,032,836
814,190,392
926,033,957
1,023,678,474
,102,444,454
127,744,490
,156,867,714
,146,910,699
,205,960,134
,332,160,712

(115,385,855)
(372,879,185)
(68,833,150)
(400,365,922)
(412,943,156)
1,301,624,294
1,975,893,356 2
1,796,593,917
(516,910,320)
1,295,622,583

62,230,800
63,162,700
61,813,400
71,551,000
82,115,700
77,377,700
97,337,500
81,869,800
84,410,500
89,579,700

73,124,423
82,924,013
98,441,027
152,135,488
162,606,410
173,738,745
180,779,673
170,674,979
164,244,653
175,043,736

1987 .
1988 .
1989 .
Total, 1914-89 .
Aggregatefor
each Bank,
1914-89
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco...
Total

260,759,760,307 19,073,996,934 3,294,866,788 1,360,594,408 2,142,554,746

13,325,298,022
76,869,638,072
10,496,789,614
17,531,985,980
20,536,936,637
10,995,255,027
37,511,095,602
8,861,525,563
4,712,877,540
11,224,699,526
15,020,463,816
33,673,194,909
260,759,760,307

1,260,555,762
3,777,000,569
1,005,530,769
1,276,304,240
1,500,901,394
1,658,117,365
2,502,306,078
1,011,653,152
884,907,520
1,217,374,670
1,101,579,357
1,973,661,401

19,073,996,9344 3,294,866,788

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 $2,371,553,299 transferred to surplus was
reduced by direct changes of $500,000 for charge-off on
Bank premises (1927), $139,299,557 for contributions to




104,323,390
880,241,305
149,136,563
136,314,156
174,207,621
303,252,709
391,960,548
81,196,393
107,981,247
139,371,190
301,969,932
524,911,730

48,986,386
352,695,286
66,499,618
103,000,190
71,427,476
103,195,260
191,962,972
42,164,372
40,649,815
58,033,009
89,485,073
192,494,951

125,789,311
552,362,532
95,627,033
134,760,176
200,410,547
127,745,146
297,703,894
81,187,907
37,455,680
102,375,522
125,515,905
261,621,093

1,360,594,408 2,142,554,746

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
$220,619,072 on Dec. 31, 1989.
4. See note 2, table 6.

Tables 223
7. -Continued
Payments to U.S. Treasury
Dividends
paid

Franchise
tax

Under
section 13b

Interest on
Federal Reserve
notes

Transferred
to surplus
(section 13b)

Transferred
to surplus
(section 7)

41,136,551
43,488,074
46,183,719
49,139,682
52,579,643
54,609,555
57,351,487
60,182,278
63,280,312
67,193,615

3,493,570,636
3,356,559,873
3,231,267,663
4,340,680,482
5,549,999,411
5,382,064,098
5,870,463,382
5,937,148,425
7,005,779,497
9,278,576,140

32,579,700
40,403,250
50,661,000
51,178,300
51,483,200
33,827,600
53,940,050
45,727,650
47,268,200
69,141,200

70,354,516
74,573,806
79,352,304
85,151,835
92,620,451
103,028,905
109,587,968
117,499,115
125,616,018
129,885,339

11,706,369,955
14,023,722,907
15,204,590,947
14,228,816,297
16,054,094,674
17,796,464,292
17,803,894,710
17,738,879,542
17,364,318,571
21,646,417,306

56,820,950
76,896,650
78,320,350
106,663,100
161,995,900
155,252,950
91,954,150
173,771,400
64,971,100
130,802,300
2,371,553,2993

2,289,915,830

149,138,300

2,188,893

236,623,679,128

(3,657)

93,742,302
620,906,530
123,007,176
182,831,595
116,859,613
159,979,024
315,118,268
72,344,483
64,850,455
95,226,712
141,324,291
303,725,380

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

11,797,881,147
71,824,445,161
9,230,348,020
15,826,415,917
18,667,013,483
9,013,247,738
34,270,520,898
7,663,543,975
3,714,730,505
9,788,985,809
13,686,192,985
31,140,353,490

135,411
(433,412)
290,661
(9,906)
(71,517)
5,491
11,682
(26,515)
64,874
(8,674)
55,337
(17,089)

93,361,925
644,934,821
114,309,122
136,733,943
145,310,508
224,088,790
295,835,104
66,722,778
71,259,613
92,377,350
174,841,978
311,777,367

2,289,915,830

149,138,300

2,188,893

236,623,679,128

(3,657)

2,371,553,299




224

76th Annual Report, 1989

Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 31, 1989l
Dollars
Acquisition costs
Federal Reserve
Bank or
Branch

Land

Buildings
(including
vaults)2

22,036,681
27,840

80,834,172
91,092

NEW YORK
Annex
Buffalo

3,436,277
477,863
887,844

PHILADELPHIA.
CLEVELAND.
Cincinnati
Pittsburgh

BOSTON.
Annex..

Building machinery and
equipment

Total3

Net
book
value

35,013,736
1,136,219
2,714,398

5,360,169
44,538
21,735,584
745,855
2,265,777

108,231,022 90,796,444
163,470
144,188
60,185,597 42,961,060
2,359,936
784,227
5,868,019 3,076,497

1,876,601

53,799,827

5,903,704

61,580,131 45,870,427

1,074,281
2,246,599
1,658,376

7,668,170
13,693,245
8,390,480

6,742,717
7,618,302
3,321,583

15,485,168 10,074,467
23,558,146 12,775,797
13,370,439 10,786,426

RICHMOND .
Annex
Baltimore
Charlotte

3,912,575
522,733
6,476,335
1,471,529

56,828,288
3,725,466
26,826,903
35,529,494

14,314,313
3,924,584
3,842,189
0

75,055,176 54,649,526
8,172,784 3,755,797
37,145,427 31,862,732
37,001,023 36,728,497

ATLANTA ..
Birmingham.
Jacksonville .
Miami
Nashville....
New Orleans.

1,202,255
3,031,888
1,652,056
3,717,791
592,342
3,087,693

14,762,133
1,905,770
16,259,535
11,978,362
1,474,678
3,031,265

3,564,698
1,067,791
2,418,745
2,136,599
1,434,027
1,476,257

CHICAGO .
Annex
Detroit

4,511,942 103,723,344
53,066
904,562
797,734
3,323,021

15,487,743
426,419
4,049,085

ST. LOUIS
Little Rock ,
Louisville .,
Memphis ..

700,378
1,148,492
700,075
1,135,623

11,285,257
2,116,765
2,886,531
4,435,493

5,283,870
1,003,022
1,131,238
2,128,684

17,269,505
4,268,280
4,717,844
7,699,799

MINNEAPOLIS.
Helena

1,394,384
1,595,886

26,664,805
4,676,874

7,829,924
68,689

35,889,112 21,204,551
6,341,449 6,123,035

KANSAS CITY..
Denver
Oklahoma City...
Omaha

1,798,804
3,187,962
646,386
6,534,583

19,293,282
4,096,303
2,370,331
11,053,589

8,839,833
3,577,637
2,162,878
1,401,083

29,931,919 21,515,937
10,861,902
8,272,522
5,179,594 4,254,688
18,989,255 17,952,696

DALLAS....
El Paso
Houston
San Antonio .

3,772,638
262,477
2,049,064
482,284

8,962,282
1,436,467
3,535,122
2,609,708

3,737,706
393,301
1,133,316
1,332,801

16,475,627
2,092,245
6,538,502
4,424,793

15,541,937
3,891,887
207,381
480,222
274,772

67,475,175
49,020,125
2,299,414
3,998,031
2,334,457

17,386,765
8,334,890
983,879
1,389,875
1,836,988

Other
real
estate4

SAN FRANCISCO.
Los Angeles
Portland
Salt Lake City

Seattle
Total

19,529,086
6,005,449
20,330,337
17,832,752
3,501,048
7,595,215

14,206,492
4,156,649
19,209,176
14,603,968
1,525,135
4,902,313




13,071,576
909,313
292,710

123,723,029 102,259,054
1,384,047
1,215,238
8,169,840 6,288,871
12,814,230
2,525,381
2,745,151
4,792,596
226,682
149,948

13,656,104
2,027,344
5,852,198
3,820,369

100,403,878 83,614,738
61,246,902 57,002,828
3,490,673 2,923,776
5,868,128 3,460,762
4,446,217
2,685,989

110,560,536 713,985,173 177,837,057 1,002,382,766 789,897,875

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.

1,224,363

15,874,592

4. Covers acquisitions for banking-house purposes and
bank premises formerly occupied and being held pending
sale.

Tables 225
9. Operations in Principal Departments of Federal Reserve Banks, 1986-89

Operation

1989

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
All other
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities u
Transfer of funds
Food stamps redeemed
Millions of dollars
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
All other
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities u
Transfer of fund4
Food stamps redeemed

1987

1986

22
19,857
6,319
12,668

22
17,580
5,910
17,137

25
16,881
5,217
19,871

19
15,408
5,584
20,461

541
147
18,014

547
144
17,623

568
146
17,006

585
140
16,226

40
60
2,334

186
56
2,327

191
52
2,210

204
50
2,216

229,358
246,598
59,985
1,828

537,952
195,647
47,184
3,684

151,323
216,151
44,907
3,517

193,424
197,516
47,842
3,088

635,064
14,284
12,321,576

608,307
13,189
11,789,787

610,678
12,511
11,453,158

606,029
11,103
10,546,900

98,130,603
182,575,303
11,714

89,516,419
160,730,050
10,748

90,056,338
152,453,528
10,322

75,447,899
125,028,070
10,475

1. Before 1988, data included book-entry securities
transfers both sent and received. After 1987, the data
include only the transfers sent.
2. Agents' savings bonds transactions are not included
in the 1989 data.




1988

3. Agents' savings bonds transactions, although excluded from the 1989 data, are small in dollar amounts.
4. Before 1987, funds transfer dollar volume data were
compiled using a different methodology.

226

76th Annual Report, 1989

10. Federal Reserve Bank Interest Rates, December 31, 1989

Loans to depository institutions
Bank

All Federal Reserve Banks..

Adjustment credit
and seasonal
creditl
7.0

1. Adjustment credit is available on a short-term basis to
help depository institutions meet temporary needs for
funds that cannot be met through reasonable alternative
sources. After May 19,1986, the highest rate established
for loans to depository institutions may be charged on
adjustment credit loans of unusual size that result from a
major operating problem at the borrower's facility.
Seasonal credit is available to help smaller depository
institutions meet regular, seasonal needs for funds that
cannot be met through special industry lenders and that
arise from a combination of expected patterns of movement
in their deposits and loans. See sections 201.3(a) and
201.3(b)(l) of Regulation A.
2. Extended credit is available to depository institutions,
if similar assistance is not reasonably available from other




Extended credit2
First 30 days
of borrowing

After 30 days of borrowing3

7.0

8.9

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. Theflexiblerate 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 227
11 Reserve Requ irements 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 accounts34
$0 million-$40.4 million
More than $40.4 million

3
12

12/19/89
12/19/89

Nonpersonal time deposits5
By original maturity
Less than 1 xh years
1 Vi 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, 1989.
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 the percentage change in transaction accounts
held by all depository institutions, determined as of June 30
each year. Effective Dec. 19, 1989, for institutions
reporting quarterly and Dec. 26, 1989, for institutions
reporting weekly, the amount was decreased from $41.5
million to $40.5 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.

228

76th Annual Report, 1989

12. Initial Margin Requirements under Regulations T, U, G, and X l
Percent of market value
Effective date
1934, Oct. 1 . .
1936, Feb. 1..
Apr. 1..
1937, Nov. 1 .
1945, Feb. 5 . .
July 5 ..
1946,Jan. 21 .
1947, Feb. 21.
1949, Mar. 3 .
1951, Jan. 17.
1953, Feb.20.
1955,Jan. 4 ..
Apr. 23.
1958,Jan. 16.
Aug. 5 .
Oct. 16.
1960, July 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 229
13. Principal Assets and Liabilities and Number of Insured Commercial Banks,
by Class of Bank, June 30, 1989 and 1988l
Asset and liability items shown in millions of dollars
Member banks
Item

Total
Total

National

State

Nonmember
banks

June 30,1989
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

2,259,427
1,757,409
1,743,883
502,018

1,670,844
1,327,557
1,317,868
343,287

1,356,464
1,087,994
1,080,100
268,469

314,381
239,563
237,769
74,818

588,583
429,852
426,014
158,731

341,394
160,624
216,225

229,814
113,473
168,094

183,443
85,026
134,473

46,371
28,446
33,621

111,580
47,151
48,131

Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital

2,093,121
52,659
579,742
1,650,150
202,419

1,520,354
45,443
429,729
1,176,079
146,170

1,235,203
33,406
344,286
967,559
113,775

285,151
12,037
85,443
208,520
32,395

572,767
7,216
150,013
474,071
56,250

12,874

5,306

4,270

1,036

7,568

Number of banks

June 30, 1988
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

2,130,609
1,650,128
1,637,127
480,481

1,578,755
1,252,073
1,242,918
326,682

1,272,420
1,016,003
1,008,842
256,417

306,335
236,070
234,076
70,266

551,854
398,055
394,209
153,799

311,925
168,556
209,739

207,957
118,725
160,954

166,270
90,147
128,303

41,688
28,578
32,651

103,968
49,830
48,785

Deposits, total
Interbank
Other demand
Other time and savings
Equity capital

1,990,055
59,954
583,863
1,535,293
184,490

1,442,088
52,181
434,551
1,084,794
132,574

1,158,607
36,755
343,689
886,477
102,691

283,481
15,427
90,863
198,316
29,883

547,967
7,773
149,312
450,499
51,916

13,334

5,530

4,460

1,070

7,804

Number of banks

1. All insured commercial banks in the United States.
Details may not add to totals because of rounding.




230

76th Annual Report, 1989

14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related ItemsYear-End 1918-89, and Month-End 1989l
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
3
other Reserve
assets4

Total

Gold
stock5

Special
drawing
rights
certificate
account

Treasury
currency
outstanding6

1918 . . . .
1919....

239
300

239
300

0
0

1,766
2,215

199
201

294
575

0
0

2,498
3,292

2,873
2,707

1,795
1,707

1920
1921
1922
1923
1924

....
....
....
....
....

287
234
436
134
540

287
234
436
80
536

0
0
0
54
4

2,687
1,144
618
723
320

119
40
78
27
52

262
146
273
355
390

0
0
0
0
0

3,355
1,563
1,405
1,238
1,302

2,639
3,373
3,642
3,957
4,212

1,709
1,842
1,958
2,009
2,025

1925
1926
1927
1928
1929

....
....
....
....
....

375
315
617
228
511

367
312
560
197
488

8
3
57
31
23

643
637
582
1,056
632

63
45
63
24
34

378
384
393
500
405

0
0
0
0
0

1,459
1,381
1,655
1,809
1,583

4,112
4,205
4,092
3,854
3,997

1,977
1,991
2,006
2,012
2,022

1930
1931
1932
1933
1934

....
....
....
....
....

739
817
1,855
2,437
2,430

686
775
1,851
2,435
2,430

43
42
4
2
0

251
638
235
98
7

21
20
14
15
5

372
378
41
137
21

0
0
0
0
0

1,373
1,853
2,145
2,688
2,463

4,306
4,173
4,226
4,036
8,238

2,027
2,035
2,204
2,303
2,511

1935
1936
1937
1938
1939

....
....
....
....
....

2,431
2,430
2,564
2,564
2,484

2,430
2,430
2,564
2,564
2,484

1
0
0
0
0

5
3
10
4
7

12
39
19
17
91

38
28
19
16
11

0
0
0
0
0

2,486
2,500
2,612
2,601
2,593

10,125
11,258
12,760
14,512
17,644

2,476
2,532
2,637
2,798
2,963

1940
1941
1942
1943
1944

. . . . 2,184
. . . . 2,254
. . . . 6,189
. . . . 11,543
. . . . 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


http://fraser.stlouisfed.org/ pages of table.
For notes see last two
Federal Reserve Bank of St. Louis

Tables 231
14. —Continued

Factors absorbing reserve funds

Currency
in
circulation

Deposits, other
than reserves, with
Federal Reserve Banks
Treasury
cash
holdings 7

Treasury

Foreign

Other

Other
Federal
Reserve
accounts 4

Required
clearing
balances

Other
Federal
Reserve
liaWith
bilities
Federal
and
Reserve
capital4
Banks

Currency
and

Required 10

Excess 10

0
0

1,585
1,822

51
68

0
1,654
0
1,884
2,161

0
99

1,898
2,220

0
0
0
0
0

0
14
59

0
0
0
0
0

2,256
2.250
2,424
2,430
2,428

-44
-56
63
-41
-73
-33
576
859

4,951
5,091

288
385

51
51

96
73

25
28

118
208

0
0

0
0

1,636

5,325
4,403
4,530
4,757
4,760

218

57
96
11
38
51

5
12
3
4
19

18

298

285
276
275
258

0
0
0
0

0

15
26

1,781
1,753
1,934

4,817
4,808
4,716
4,686
4,578

203
201

16
17
18
23
29

8
46
5
6

4,603
5,360
5,388
5,519
5,536

211

284
:
J,029

5,882
6,543
6,550
6,856
7,598

214
225
213

211

208
202
216

6

19
20
21
19
21
21
24

272
293
301
348

393

0
0
0

Member bank
reserves8

1,890

0

0

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

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

1,814

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

19
54
8
3
121

22
31

375

79
19
4
20

24

355

128
169

360
241

:>,566
:
>,376
:
$,619
:
>,706
:1,409

544
244

29
99

226
160

253
261

142
923
634

172
199
397

235
242
256

263
260
251

0
0
0
0
0

8,732
11,160
15,410
20,499
25,307

:>,213
:1,215
:>,193
:>,3O3
:>,375

368
867
799
579
440

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

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

895
526
550
423
490

565
363
455

714
746
111

0
0

839

907

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

493
441

0
0
0
0
0

31,158
31,790
31,834
32,193
32,591

767
775
761
683
391

394
441
481

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

-30
-57
-70
-135

32,869
33,918
35,338
37,692
39,619

377
422
380
361
612

465

217
279

597
880
820

247
171
229

533
320
393
291
321

941
1,044
1,007

0
0
0
0
0

0
0
0
0
0

17,081
17,387
17,454
17,049
18,086

2,544
2,544
3,262
4,099
4,151

18,988
18,988
20,071
20,677
21,663

637
96
645
471
574

222
272

6

389
346
563

358
504
485




354

1,065
1,036

0

96

389
-570
763
258
102

232

76th Annual Report, 1989

14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related ItemsYear-End 1918-89, and Month-End 1989 ^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
3
other 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

Special
drawing
rights
certificate
account-

13,733
13,159
11,982
10,367
10,367

Loans

Float2

Total

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

1975
1976
1977
1978
1979

....
....
....
....
....

94,124
104,093
111,274
118,591
126,167

92,789
100,062
108,922
117,374
124,507

1,335
4,031
2,352
1,217
1,660

211
25
265
1,174
1,454

3,688
2,601
3,810
6,432
6,767

1,126
991
954
587
704

3,312
3,182
2,442
4,543
5,613

102,461
110,892
118,745
131,327
140,705

11,599
11,598
11,718
11,671
11,172

500
1,200
1,250
1,300
1,800

10,218
10,810
11,331
11,831
13,083

1980 . . . .
1981 . . . .
1982 . . . .
1983 . . . .
1984"....
1985 . . . .
1986 . . . .
1987 . . . .
1988 . . . .
1989

130,592
140,348
148,837
160,795
169,627
191,248
221,459
231,420
247,489
235,417

128,038
136,863
144,544
159,203
167,612
186,025
205,454
226,459
240,628
233,300

2,554
3,485
4,293
1,592
2,015
5,223
16,005
4,961
6,861
2,117

1,809
1,601
717
918
3,577
3,060
1,565
3,815
2,170
481

4,467
1,762
2,735
1,605
833
988
1,261
811
1,286
1,093

776
195
1,480
418
0
0
0
0
0
0

8,739
9,230
9,890
8,728
12,347
15,302
17,475
15,837
18,803
39,631

146,383
153,136
63,659
172,464
186,384
210,598
241,760
251,883
269,748
276,622

11,160
11,151
11,148
11,121
11,096
11,090
11,084
11,078
11,060
11,059

2,518
3,318
4,618
4,618
4,618
4,718
5,018
5,018
5,018
8,518

13,427
13,687
13,786
15,732
16,418
17,075
17,567
18,177
18,799
19,620

1989
Jan
Feb ...
Mar...
Apr ...
May...
June...
July...
Aug...
Sept...
Oct....
Nov...
Dec ...

239,752
236,278
235,422
255,001
230,189
238,421
225,285
224,018
227,606
224,701
229,667
235,417

239,752
236,278
235,422
241,462
230,189
238,421
225,285
224,018
227,606
224,701
229,667
233,300

0
0
0
13,539
0
0
0
0
0
0
0
2,117

863
1,602
2,454
1,952
2,033
841
594
541
598
270
181
481

798
1,296
559
545
2,064
-203
351
634
501
1,471
668
1,093

0
0
0
0
0
0
0
0
0
0
0
0

19,643
19,253
19,780
21,515
22,383
29,978
32,915
31,722
35,433
38,275
36,544
39,631

261,056
258,429
258,215
279,013
256,669
269,037
259,145
256,914
264,137
264,717
267,060
276,622

11,056
11,061
11,061
11,061
11,060
11,063
11,066
11,066
11,066
11,062
11,060
11,059

5,018
5,018
5,368
5,518
8,518
8,518
8,518
8,518
8,518
8,518
8,518
8,518

18,855
18,911
18,961
19,017
19,073
19,211
19,309
19,344
19,425
19,494
19,564
19,620

1. For a description of figures and discussion of their
significance, see Banking and Monetary Statistics,
1941-1970 (Board of Governors of the Federal Reserve
System, 1976), pp. 507-23. Components may not add to
totals because of rounding.
2. Beginning with 1960, figures reflect a minor change
in concept; 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
Digitized Reserve liabilities and capital" are shown separately.
for FRASER
5. For the period before Jan. 30, 1934, includes
http://fraser.stlouisfed.org/ Banks and in circulation. gold
held in Federal Reserve

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.
1. 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 233
14.-Continued

Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks

Member bank
Other
Federal
Reserve
liaWith
bilities Federal
and
4 Reserve
capital
Banks

Required
clear-

Foreign

Other

Other
Federal
Reserve
accounts 4

668
416
1,123
703
1,312
1,156
2,020
1,855
2,542
2,113
7,285
10,393
7,114
4,196
4,075

150
174
135
216
134
148
294
325
251
418
353
352
379
368
429

211
355
-147
588
-773
563
747 -1,353
0
807
1,233
0
0
999
0
840
0
1,41914
0
1,27514
1,090
0
0
1,357
0
1,187
0
1,256
0
1,412

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
1,986
2,131
2,143
2,669
2,935
2,968
3,063
3,292
4,275
4,957

441
443
429
479
513
550
447
454
395
450

3,062
4,301
5,033
3,661
5,316
9,351
7,588
5,313
8,656
6,217

411
505
328
191
253
480
287
244
347
589

617
781
1,033
851
867
1,041
917
1,027
548
1,298

0
0
0
0
0
0
0
0
0
0

0
117
436
,013
,126
1,490
1,812
,687
1,605
1,626

412
432
457
476
488
474
451
420
440
444
445
450

11,766
6,298
4,462
22,952
5,288
12,153
5,312
6,652
13,452
13,124
5,500
6,217

279
326
351
352
429
275
371
265
326
252
307
589

390
517
380
481
524
229
236
273
318
292
311
1,298

0
0
0
0
0
0
0
0
0
0
0
0

1,589
1,595
1,671
1,667
1,616
1,616
1,592
1,611
1,630
1,623
1,638
1,626

Currency
in
circulation

Treasury
cash
holdings7

Treasury

42,056
44,663
47,226
50,961
53,950
57,903
61,068
66,516
72,497
79,743
86,547
93,717
103,811
114,645
125,600

760
1,176
1,344
695
596
431
460
345
317
185
483
460
392
240
494

136,829
144,774
154,908
171,935
183,796
197,488
211,995
230,205
247,649
260,453
239,581
240,733
242,880
243,411
247,525
249,139
248,637
249,245
247,581
249,025
253,960
260,453

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 loanedfully guaranteed by U.S. government securities pledged
with Federal Reserve Banks—and excludes securities sold
and scheduled to be bought back under matched salepurchase transactions.
13. Beginning with week ending Nov. 15, 1972,
includes $450 million of reserve deficiencies on which
Federal Reserve Banks are allowed to waive penalties for a
transition period in connection with bank adaptation to
Regulation J as amended, effective Nov. 9, 1972. Allowable deficiencies are as follows (beginning with first statement week of quarter, in millions): 1973-Ql, $279; Q2,
Digitized $172;FRASER Q4, $84; 1974-Q1, $67; Q2, $58. The
for Q3, $112;
transition period ended with the second quarter of 1974.



Currency
and

Required 10

18,447
19,779
21,092
21,818
22,085
24,150
27,788
25,647
27,060
25,843
26,052
25,158
26,870
31,152
29,792

4,163
4,310
4,631
4,921
5,187
5,423
5,743
6,216
6,781
7,370
8,036
8,628
9,421
10,538
11,429

22,848
24,321
25,905
27,439
28,173
30,033
32,496
32,044
35,268
37,011
35,197
35,461
37,615
42,694
44,217

4,671
5,261
4,990
5,392
5,952
5,940
6,088
7,129
7,683
8,486

27,456
25,111
26,053
20,413
20,693
27,141.
46,295
40,097
37,742
36,701

13,654
15,576
16,666
17,821

675
40,558
42,145 -1,442
41,391
1,328
39,179
-945

7,746
8,127
7,681
8,969
7,513
8,178
8,693
7,063
8,776
8,303
8,402
8,486

34,221
35,390
35,723
36,301
31,937
35,765
32,747
30,313
30,623
30,728
35,639
36,701

i

n.a.

Ex10,13

ftss

-238
-232
-182
-700
-901
-460
1,035
98 13
-1,360
-3,798
-1,103 15
-1,535
-1,265
-893
-2,835

i

i

n.a.

n.a.

^r

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.

234

76th Annual Report, 1989

15. Changes in Number of Banking Offices in the United States, 19891
Commercial banks 2
Type of office
and change

Member

Total
Total
Total

Banks, Dec. 31,1988...
Changes during 1989
New banks
Ceased banking
operation
Banks converted
into branches
Other4

Mutual
savings
banks

Nonmember

National

State

Insured

Noninsured3

Insured

Noninsured

13,791

13,415

5,448

4,354

1,094

7,717

250

376

0

235

233

91

72

19

110

32

2

0

-243

-243

-132

-116

-16

-93

-18

0

0

-401
-396
- 4 - 4

-163
7

-133
1

-30
6
-

-233
5
-

0

0

0
0

6

-

5

-413

-410

-197

-176

-21

-221

8

-3

0

Banks, Dec. 31,1989 ..

13,378

13,005

5,251

4,178

1,073

7,496

258

373

0

Branches and
additional offices,
Dec. 31,1988

49,519

46,713

30,384

24,942

5,442

16,218

111

2,806

0

1,770

1,678

1,096

895

201

578

4

92

0

401
-650
0
1,672

396
-581
18
1,634

203
-419
30
1,476

145
-325
21
1220

58
-94
9
256

193
-158
-12
148

0
-4
0
10

5
-69
-18
38

0
0
0
0

3,193

3,145

2,386

1,956

430

749

10

48

0

Net change

Changes during 1989
De novo .
Banks converted
into branches
Discontinued
Sale of branch
Other4
Net change4
Branches and
additional offices,
Dec. 31,1989

52,712 49,858 32,770 26,898
5,872
16,967
121
2,854
0
3. As of Dec. 31, 1988, includes noninsured national
1. Preliminary. Final data will be available in the Annual
trust companies.
Statistical Digest, 1989, forthcoming.
4. Includes interclass changes.
2. Includes stock savings banks and nondeposit trust
companies.




Tables 235
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1989
First Western Bank Custer, Custer, South
Dakota, to acquire the Hill City South Dakota
branch of Rushmore State Bank, Rapid City,
South Dakota
SUMMARY REPORT BY THE ATTORNEY GENERAL

(12/16/88)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(1/20/89)
First Western Bank Custer (Applicant) has assets of
$32 million and the Hill City Branch (Branch) has
assets of $5.6 million. Applicant and Branch
operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Central Bank, Hollidaysburg, Pennsylvania, to
acquire the Pleasant Valley and Logan Valley
branches of United States National Bank, Johnstown, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

(1/13/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/17/89)
Central Bank (Applicant) has assets of $167 million
and the two branches (Branches) have assets of
$15.7 million. Applicant and Bank operate in the
same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Crestar Bank, Richmond, Virginia, to merge
with Colonial American National Bank, Roanoke
County, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(1/13/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/14/89)
Crestar Bank (Applicant) has assets of $9.4 billion
and Colonial American National Bank (Bank) has
assets of $367 million. Applicant and Bank operate
in the same banking market.
The banking factors and considerations relating



to the convenience and needs of the community are
consistent with approval.
The Bank of Mid Jersey, Bordentown, New
Jersey, to acquire the University Plaza branch
office of Howard Savings Bank, Livingston, New
Jersey
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/17/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/17/89)
The Bank of Mid Jersey (Applicant) has assets of
$527.8 million and the University Plaza Branch
(Branch) has assets of $5.7 million. Applicant and
Branch operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Kent City State Bank, Kent City, Michigan, to
acquire the Sparta, Michigan branch office of
PrimeBank Federal Savings Bank, Grand Rapids, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/3/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/31/89)
Kent City State Bank (Applicant) has assets of
$53.6 million and the Sparta Branch (Branch) has
assets of $7.5 million. Applicant and Bank operate
in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Central Bank of Oklahoma City, Oklahoma
City, Oklahoma, to acquire certain assets and
assume liabilities o/Allied Oklahoma Bank, N. A.,
Oklahoma City, Oklahoma
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 Allied Oklahoma Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/13/89)

236

76th Annual Report, 1989

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1989-Continued
Central Bank of Oklahoma City (Applicant) has
assets of $229.3 million and Allied Oklahoma Bank
(Bank) has assets of $ 59.1 million. The OCC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Bank.

billion and the Prospect Avenue Branch (Branch)
has assets of $3.4 million. Applicant and Bank
operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.

Family Bank of Hallandale, Hallandale, Florida,
to merge with Seminole National Bank, Hollywood, Florida

Union Colony Bank, Greeley, Colorado, to merge
with Northern Bank and Trust, Ft. Collins,
Colorado

SUMMARY REPORT BY THE ATTORNEY GENERAL

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 Bank.

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 Northern Bank and Trust.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/26/89)
Family Bank (Applicant) has assets of $93.3 million
and Seminole National Bank (Bank) has assets of
$7.3 million. The OCC has recommended immediate action by the Federal Reserve System to prevent
the probable failure of Bank.

(6/15/89)
Union Colony Bank (Applicant) has assets of
$ 115.6 million and Northern Bank and Trust (Bank)
has assets of $6.2 million. The FDIC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of Bank.

Bank of Fountain Hills, Fountain Hills, Arizona,
to assume deposit liabilities of Grand Canyon
State Bank, Scottsdale, Arizona

Liberty Bank South, San Francisco, California,
to acquire certain assets and liabilities of the
Boulder Creek Branch of Pacific Western Bank,
San Jose, California

SUMMARY REPORT BY THE ATTORNEY GENERAL

No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal
Reserve System to act immediately to safeguard the
depositors of the Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(5/22/89)
Bank of Fountain Hills (Applicant) has assets of
$6.9 million and Grand Canyon State Bank (Bank)
has deposits of $12.3 million. The State has
recommended immediate action to prevent the
probable failure of the Bank.
Banco De Ponce, Ponce, Puerto Rico, to acquire
the Prospect Avenue Branch of Banco Central
S.A., New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(4/14/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(6/1/89)
Banco De Ponce (Applicant) has assets of $2.9



SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/3/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(6/16/89)
Liberty Bank (Applicant) has assets of $47 million
and the Boulder Creek Branch (Branch) has assets
of $14 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.
Texas Commerce Bank Rio Grande Valley,
Brownsville, Texas, to merge with National Bank
of Brownsville, Brownsville, 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 the National Bank of Brownsville.

Tables 237
16. -Continued

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/13/89)
Texas Commerce Bank (Applicant) has assets of
$442.2 million and National Bank of Brownsville
(Bank) has assets of $32.7 million. The Federal
Reserve System has acted immediately to prevent
the probable failure of Bank.

$360.2 million and Cherry River National Bank
(Bank) has assets of $36.8 million. Applicant and
Bank 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 Fountain Hills, Fountain Hills, Arizona,
to merge with Fidelity Bank, Scottsdale, Arizona

First Interstate Bank of California, Los Angeles,
California, to merge with Bank of Alex Brown,
Sacramento, California

SUMMARY REPORT BY THE ATTORNEY GENERAL

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 Fidelity Bank.

(5/10/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/21/89)
Bank of Fountain Hills (Applicant) has assets of
$11.8 million and Fidelity Bank (Bank) has assets
of $11.5 million. The Federal Reserve System has
acted immediately to prevent the probable failure of
Bank.

(8/1/89)
First Interstate Bank of California (Applicant) has
assets of $19.6 billion and Bank of Alex Brown
(Bank) has assets of $324 million. Applicant and
Bank operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.

BancFirst, Oklahoma City, Oklahoma, to assume
the liabilities o/The Liberty State Bank, Tahlequah, Oklahoma

Comerica Bank-Detroit, Detroit, Michigan, to
merge with Dearborn Bank and Trust Company,
Dearborn, Michigan

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

SUMMARY REPORT BY THE ATTORNEY GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(7/14/89)
The proposed transaction would not be significantly
adverse to competition.

(8/11/89)
The proposed transaction would not be significantly
adverse to competition.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/27/89)
BancFirst (Applicant) has assets of $657 million
and The Liberty State Bank (Bank) has assets of $41
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.

(9/21/89)
Comerica Bank Detroit (Applicant) has assets of
$9.1 billion and Dearborn Bank and Trust Company (Bank) has assets of $287.2 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. Manufacturers Hanover
Trust Company, New York, New York, to purchase
certain branches of Goldome, Buffalo, New York

First Community Bank, Princeton, West Virginia, to merge with Cherry River National Bank,
Richwood, West Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(7/5/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/28/89)
First Community Bank (Applicant) has assets of



SUMMARY REPORT BY THE ATTORNEY GENERAL

(4/14/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(9/26/89)
Manufacturers Hanover Trust Company (Applicant) has assets of $57 billion and the 12 branches

238

76th Annual Report, 1989

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1989 —Continued
(Branches) has assets of $1.2 billion. Applicant and
Bank operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Central Savings Bank, Sault Ste. Marie, Michigan, to acquire certain assets and liabilities of the
Main Street Branch of First of America Bank,
Northern Michigan, Cheboygan, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/1/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/3/89)
Central Savings Bank (Applicant) has assets of $68
million and The Main Street Branch (Branch) has
assets of $2.2 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.
Meridian Bank, Reading, Pennsylvania, to
merge with Hill Financial Savings Association,
Red Hill, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/12/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/13/89)
Meridian Bank (Applicant) has assets of $8.5 billion
and Hill Financial Savings Association (Bank) has
assets of $2.0 billion. Applicant and Bank operate
in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Heartland Bank, Croton, Ohio, to merge with
Lyndon Guaranty Bank of Ohio, Columbus,
Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/4/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/23/89)
Heartland Bank (Applicant) has assets of $36



million and Lyndon Guaranty Bank of Ohio (Bank)
has assets of $16 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.
CivicBank of Commerce, Oakland, California,
to merge with Meridian National Bank, Concord,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/18/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(11/9/89)
CivicBank of Commerce (Applicant) has assets of
$232 million and Meridian National Bank (Bank)
has assets of $87 million. Applicant and Bank
operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Central Bank, Hollidaysburg, Pennsylvania, to
merge with two branches of Landmark Savings
Association
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/12/89)
The proposed transaction would not be significantly
adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/6/89)
Central Bank (Applicant) has assets of $203.8
million and the two branches (Branches) have
assets of $ 17.0 million. Applicant and Bank operate
in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community are
consistent with approval.
Rapides Bank and Trust Company in Alexandria, Alexandria, Louisiana, to merge with First
Bank, Pineville, Pineville, Louisiana
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 Bank.

Tables 239
16. —Continued

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/8/89)
Rapides Bank and Trust Company (Applicant) has
assets of $415.9 million and First Bank (Bank) has
assets of $84.6 million. The State has recommended
immediate action by the Federal Reserve System to
prevent the probable failure of Bank.
Central State Bank, Elkader, Iowa, to merge with
First State Savings Bank, McGregor, Iowa
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 State Savings Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/12/89)
Central State Bank (Applicant) has assets of $44.7
million and First State Savings Bank (Bank) has
assets of $7.8 million. The FDIC has recommended

immediate action by the Federal Reserve System to
prevent the probable failure of Bank.
Mergers Approved Involving Wholly Owned
Subsidiaries of the Same Bank Holding
Company
The following transactions involve banks that are
subsidiaries of the same bank holding company. In
each case, the summary report by the Attorney
General indicates that the transaction would not
have a significantly adverse effect on competition
because the proposed merger is essentially a
corporate reorganization. The Board of Governors,
the Federal Reserve Bank, or the Secretary of the
Board of Governors, whichever approved the
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.

Institutionl

Texas Bank of Denton, Denton, Texas
Merger
Texas Bank of Weatherford, Weatherford, Texas

Assets
(millions
of dollars)

16

1/9/89

153

BancFirst and Trust Company, Oklahoma City, Oklahoma
Merger
American Bank of Commerce, McAlester, Oklahoma
Citizens State Bank, Hugo Oklahoma
City Bank, Muskogee, Oklahoma
Federal Bank and Trust Company, Shawnee, Oklahoma
First Bank & Trust Company, Sand Springs, Oklahoma
First National Bank of Guthrie, Guthrie, Oklahoma
First National Bank in Madill, Madill, Oklahoma
First National Bank of Prague, Prague, Oklahoma
First National Bank of Seminole, Seminole, Oklahoma
First National Bank, Stillwater, Oklahoma
First Oklahoma Bank and Trust Company, Sulphur, Oklahoma
Oklahoma State Bank, Konawa, Oklahoma

657

Sovran Bank, Memphis Tennessee
Merger
First National Bank, Collierville, Tennessee

303

Sovran Bank, Chattanooga, Tennessee
Merger
First Bank of Marion County, South Pittsburg, Tennessee

213




Date of
approval

2/10/89

41
26
34
239
50
45
35
40
40
93
30
22
2/16/89

54

96

3/1/89

240

76th Annual Report, 1989

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1989 - Continued
Institution *

Assets
(millions
of dollars)

Macomb County Bank, Richmond, Michigan
Merger
First State Bank of East Detroit, (Clinton Branch),
East Detroit, Michigan

54

Chemical Bank Bay Area, Bay City, Michigan
Merger
Cass City State Bank, Cass City, Michigan
Huron City Bank, Harbor Beach, Michigan
,
The Peoples State Bank of Caro, Caro, Michigan ,

28

Sovran Bank Central South, Nashville, Texas
Merger
Sovran Bank Marshall City, N.A., Lewisburg, Tennessee
First of America Bank-Northern Michigan, Cheboygan, Michigan ,
Merger
First of America-Petoskey, N. A., Petoskey, Michigan
,
First Bank of Stockton/Warren, Stockton, Illinois
Merger
First National Bank of Freeport, Freeport, Illinois
Mount Carroll National Bank, Mount Carroll, Illinois .

Date of
approval

3/23/89

6
4/17/89

18
32
37
3,200

4/26/89

76
131

5/25/89

165
40

5/31/89

152
29

First Bank/Dixon, Dixon, Illinois
Merger

56

Polo National Bank, Polo, Illinois
Lincolnway State Bank, Sterling, Illinois

34
22

First Nebraska Bank-Valley, Valley, Nebraska . . . .

78

5/31/89

6/8/89

Merger
First Nebraska Bank-Arcadia, Arcadia, Nebraska .

10

Lake Buchanan State Bank, Buchanan Dam, Texas

12

Merger
Lake Country National Bank, Burnet, Texas

6

Pioneer Bank and Trust Company, Belle Fourche, South Dakota ..
Merger
First State Bank, Buffalo, South Dakota

96

Bank of New York, New York, New York
Merger
Irving Trust Company, New York, New York
Bank of Long Island, Babylon, New York
Dutchess Bank & Trust Company, Poughkeepsie, New York
Nanuet National Bank, Nanuet, New York
Scarsdale National Bank & Trust Company, Scarsdale, New York .

23




6/8/89

6/16/89

19

21
294
299
385
498

6/29/89

Tables 241
16.-Continued

Institutionl

First of America Bank-Northern Michigan, Cheboygan, Michigan ..
Merger
First of America Bank-Grand Travers, N. A.,
Traverse City, Michigan
Norstar Bank, Hepstead, New York
Merger
First National Bank of Downsville, Downsville, New York
Crestar Bank, Richmond, Virginia
Merger
Mountain National Bank of Clifton Forge, Clifton Forge, Virginia ..

Assets
(millions
of dollars)

131

Date of
approval

6/30/89

165
2520

7/5/89

72
10,038

7/10/89

58

Sovran Bank/Central South, Nashville, Tennessee
Merger
Sovran Bank/Eastern, Oak Ridge, Tennessee
Sovran Bank/Hickman County, Centerville, Tennessee

3,221

Security Bank and Trust Company, Southgate, Michigan
Merger

1,403

8/23/89

199
39

Trenton Bank and Trust Company, Trenton, Michigan

135

Indian Head Bank and Trust Company, Portsmouth, New Hampshire.

377

Merger
Indian Head National Bank, Nashua, New Hampshire
Indian Head Bank North, Littleton, New Hampshire
Dartmouth National Bank, Hanover, New Hampshire
Indian Head National Bank of Keene, Keene, New Hampshire
Fleet Bank of New Hampshire, Nashua, New Hampshire

8/30/89

976
208
175
166
3

Victoria Bank & Trust Company, Victor, Texas
Merger
Bank of Commerce Calhoun City, Point Comfort, Texas
Jackson County State Bank, Edna County, Texas

613

Chemical Bank and Trust Company, Midland, Michigan
Merger
Chemical Bank Bay Area (Saginaw Township Branch),
Bay City, Michigan

447

American Bank of St. Louis, St. Louis, Missouri
Merger
American Bank of St. Louis County, Chesterfield, Missouri

117

Liberty Bank-Oakland, Troy, Michigan
Merger
Liberty State Bank and Trust, Hamtramck, Michigan

354

Villa Grove State Bank, Villa Grove, Illinois
Merger
First National Bank of Villa Grove, Villa Grove, Illinois



8/31/89

9/25/89

9
52
10/17/89

4
10/31/89

11
11/8/89

99
24
11

11/10/89

242

76th Annual Report, 1989

16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1989 - Continued
Assets
(millions
of dollars)

Institution1

First of America Bank-Northern Michigan, Cheboygan, Michigan ...
Merger
Antrim County State Bank, Maoncelona, Michigan
Landmark Bank of Highland, Highland, Illinois
Merger
Landmark Bank of Alton, Alton, Illinois
Landmark Bank of Madison County, Glen Carbon, Illinois
Union Bank/Streator, Streator, Illinois
Merger
Union Bank/Triumph, Triumph, Illinois
Sovran Bank/Central South, Nashville, Tennessee
Merger
Sovran Bank/Chattanooga, Chattanooga, Tennessee
Sovran Bank/Greenville, Greenville, Tennessee
Sovran Bank/Memphis, Memphis, Tennessee
Sovran Bank/Tri Cities, Johnson City, Tennessee
Sovran Bank/Union City, Union City, Tennessee
1. Each proposed transaction was to be effected under
the charter of the first-named bank. The entries are in




168

Date of
approval

11/14/89

32
96

12/1/89

35
26
127

12/15/89

18
3,621
218
131
388
95
105
chronological order of approval.

12/28/89

Tables 243
16, —Continued

Mergers Approved Involving a Nonoperating
Institution with an Existing Bank
The following transactions have no significant effect
on competition; they merely facilitate the acquisition of the voting shares of a bank (or banks) by a
holding company. In such cases, the summary
report by the Attorney General indicates that the
transaction will merely combine an existing bank
with a nonoperating institution; in consequence,
and without regard to the acquisition of the

surviving bank by the holding company, the merger
would have no effect on competition. The Board of
Governors, the Federal Reserve Bank, or the
Secretary of the Board 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.

Assets
(millions
of dollars)2

Institutionl

New Byron Bank, Byron Center, Michigan
Merger
Byron Center State Bank, Byron Center, Michigan

1/19/89
118
3/7/89

1st United Interim Bank, Boca Raton, Florida
Merger
First United Bank, Boca Raton, Florida

30
3/21/89

Citizens Bank of Virginia, Arlington, Virginia
Merger
Arlington Bank, Arlington, Virginia

64
5/23/89

Romney Interim Bank Corporation,
Merger
Bank of Romney, Romney West Virginia

66

First Interim Bank of Crestview, Crestview, California
Merger
First Bank of Crestview, Crestview, California
CB Interim State Bank, Philadelphia, Pennsylvania
Merger
Constitution Bank, Philadelphia, Pennsylvania
Effingham Interim Bank, Inc., Effingham, Illinois
Merger
Effingham State Bank, Effingham, Illinois
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

8/4/89
42
11/3/89
117
12/8/89
132

2. Where no assets are listed, the bank is newly
organized and not in operation,

Federal Reserve
Directories and Meetings




246

76th Annual Report, 1989

Board of Governors of the Federal Reserve System
December 31,1989
ALAN GREENSPAN of New York, Chairman1
MANUEL H. JOHNSON of Virginia, Vice Chairmanx
MARTHA R. SEGER of Michigan
WAYNE D. ANGELL of Kansas
EDWARD W. KELLEY, JR., of Texas
JOHN P. LAWARE of Massachusetts

Term expires
January 31,1992
January 31, 2000
January 31,1998
January 31,1994
January 31,1990
January 31, 2002

OFFICE OF BOARD MEMBERS

OFFICE OF THE SECRETARY

Joseph R. Coyne, Assistant to the Board
Donald J. Winn, Assistant to the Board
Bob Stahly Moore, Special Assistant
to the Board

William W. Wiles, Secretary
Jennifer J. Johnson, Associate Secretary
Barbara R. Lowrey, Associate Secretary

DIVISION OF MONETARY AFFAIRS

J. Virgil Mattingly, Jr., General Counsel
Richard M. Ashton, Associate
General Counsel
Oliver Ireland, Associate General
Counsel
Ricki R. Tigert, Associate General Counsel
Scott G. Alvarez, Assistant General Counsel
MaryEllen A. Brown, Assistant
to the General Counsel

LEGAL DIVISION

Donald L. Kohn, Director
David E. Lindsey, Deputy Director
Brian F. Madigan, Assistant Director
Richard D. Porter, Assistant Director
Normand R.V. Bernard, Special Assistant
to the Board
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT

S. David Frost, Staff Director
Edward T. Mulrenin, Assistant
StaffDirector
Portia W. Thompson, Equal Employment
Opportunity Programs Officer
OFFICE OF STAFF DIRECTOR FOR
FEDERAL RESERVE B A N K ACTIVITIES

Theodore E. Allison, StaffDirector
OFFICE OF THE EXECUTIVE
DIRECTOR FOR INFORMATION
RESOURCES MANAGEMENT

Allen E. Beutel, Executive Director
Stephen R. Malphrus, Deputy Executive
Director

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.




DIVISION OF RESEARCH
A N D STATISTICS

Michael J. Prell, Director
Edward C. Ettin, Deputy Director
Thomas D. Simpson, Associate Director
Lawrence Slifman, Associate Director
David J. Stockton, Associate Director
Martha Bethea, Deputy
Associate Director
Peter A. Tinsley, Deputy
Associate Director
Myron L. Kwast, Assistant Director
Susan J. Lepper, Assistant Director
Patrick M. Parkinson, Assistant Director
Martha S. Scanlon, Assistant Director
Joyce K. Zickler, Assistant Director
Levon H. Garabedian, Assistant Director
(Administration)

Directories and Meetings
DIVISION OF INTERNATIONAL FINANCE

Edwin M. Truman, Staff Director
Larry J. Promisel, Senior
Associate Director
Charles J. Siegman, Senior
Associate Director
David H. Howard, Deputy
Associate Director
Robert F. Gemmill, Staff Adviser
Donald B. Adams, Assistant Director
Peter Hooper, III, Assistant Director
Karen H. Johnson, Assistant Director
Ralph W. Smith, Jr., Assistant Director
DIVISION OF FEDERAL RESERVE
BANK OPERATIONS

ClydeH. Farnsworth, Jr., Director
David L. Robinson, Associate Director
C. William Schleicher, Jr., Associate
Director
Bruce J. Summers, Associate Director2
Charles W. Bennett, Assistant Director
Jack Dennis, Jr., Assistant Director
Earl G. Hamilton, Assistant Director
John H. Parrish, Assistant Director
Louise L. Roseman, Assistant Director
Florence M. Young, Assistant Director

247

DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS

Griffith L. Garwood, Director
Glenn E. Loney, Assistant Director
Ellen Maland, Assistant Director
Dolores S. Smith, 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 SUPPORT SERVICES

Robert E. Frazier, Director
George M. Lopez, Assistant Director
David L. Williams, Assistant Director
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
Stephen C. Schemering, Deputy
Associate Director
Richard Spillenkothen, Deputy
Associate Director
Herbert A. Biern, Assistant Director
Joe M. Cleaver, Assistant Director
Roger T. Cole, Assistant Director
James I. Garner, Assistant Director
James D. Goetzinger, Assistant Director
Michael G. Martinson, Assistant Director
Robert S. Plotkin, Assistant Director
Sidney M. Sussan, Assistant Director
Laura M. Homer, Securities Credit Officer

2. On loan from Federal Reserve Bank of Richmond.




DIVISION OF HARDWARE
AND SOFTWARE SYSTEMS

Bruce M. Beardsley, Director
Day W. Radebaugh, Jr., Assistant Director
Elizabeth B. Riggs, Assistant Director
DIVISION OF
APPLICATIONS DEVELOPMENT
AND STATISTICAL SERVICES

William R. Jones, Director
Richard C. Stevens, Assistant Director
Patricia A. Welch, Assistant Director
Robert J. Zemel, Assistant Director
OFFICE OF THE INSPECTOR GENERAL

Brent L. Bo wen, Inspector General
Barry R. Snyder, Assistant Inspector General

248

76th Annual Report, 1989

Federal Open Market Committee
December 31,1989

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

ROGER GUFFEY, President, Federal Reserve Bank of Kansas City
SILAS KEEHN, President, Federal Reserve Bank of Chicago
MANUEL H. JOHNSON, Board of Governors
EDWARD W. KELLEY, JR., Board of Governors
JOHN P. LAWARE, Board of Governors

THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis
MARTHA R. SEGER, Board of Governors

RICHARD F. SYRON, President, Federal Reserve Bank of Boston

Alternate Members
EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia
ROBERT H. BOYKIN, President, Federal Reserve Bank of Dallas
W. LEE HOSKINS, President, Federal Reserve Bank of Cleveland
GARY H. STERN, President, Federal Reserve Bank of Minneapolis
JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York

Officers
DONALD L. KOHN,

Secretary and Economist
NORMAND R.V. BERNARD,

Assistant Secretary
GARY P. GILLUM,

Deputy Assistant Secretary
J. VIRGIL MATTINGLY,

General Counsel
ERNEST T. PATRIKIS,

Deputy General Counsel
MICHAEL J. PRELL,

Economist
EDWIN M. TRUMAN,

Economist
ANATOL B. BALBACH,

Associate Economist

THOMAS E. DAVIS,

Associate Economist
DAVID E. LINDSEY,

Associate Economist
ALICIA H. MUNNELL,

Associate Economist
LARRY J. PROMISEL,

Associate Economist
KARL A. SCHELD,

Associate Economist
CHARLES J. SIEGMAN,

Associate Economist
THOMAS D. SIMPSON,

Associate Economist
LAWRENCE SLIFMAN,

Associate Economist

RICHARD G. DAVIS,

Associate Economist
PETER D. STERNLIGHT, Manager for Domestic Operations,
System Open Market Account
SAM Y. CROSS, Manager for Foreign Operations,
System Open Market Account
During 1989, 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 249

Federal Advisory Council
December 31,1989

Members
District 1 - J. TERRENCE MURRAY, Chairman, President, and ChiefExecutive Officer,
Fleet/Norstar Financial Group, Inc., and 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, Chairman and Chief Executive Officer,
Meridian Bancorp, Inc., Reading, Pennsylvania
District 4-THOMAS H. O'BRIEN, Chairman, President and Chief Executive Officer,
PNC Financial Corp, Pittsburgh, Pennsylvania
District 5 - FREDERICK DEANE, JR. , Chairman of the Board and ChiefExecutive Officer,
Signet Banking Corporation, Richmond, Virginia
District 6-KENNETH L. ROBERTS, Chairman and Chief Executive Officer,
First American Corporation, Nashville, Tennessee
District 7 - B . KENNETH WEST, Chairman and ChiefExecutive Officer,
Harris Bankcorp, Inc. and Harris Trust and Savings Bank, Chicago, Illinois
District 8-DONALD N. BRANDIN, Retired Chairman of the Board,
Boatmen's Bancshares, Inc., St. Louis, Missouri
District 9-LLOYD P. JOHNSON, Chairman and Chief Executive Officer,
Norwest Corporation, Minneapolis, Minnesota
District 10-JORDAN L. HAINES, Chairman, Fourth Financial Corporation and
BANK IV Wichita, Wichita, Kansas
District 11 -JAMES E. BURT III, President and ChiefExecutive Officer,
Commercial National Bank in Shreveport, Shreveport, Louisiana
District 12-PAUL HAZEN, President and Chief Operating Officer, Wells Fargo and Co.,
San Francisco, California

Officers
DONALD N. BRANDIN, President
SAMUEL A. MCCULLOUGH, Vice President
HERBERT V. PROCHNOW, Secretary

WILLIAM J. KORSVIK, Associate Secretary

Directors
FREDERICK DEANE, JR.

PAUL HAZEN

The Federal Advisory Council met on February 2-3, May 4-5, September 7-8, and
November 2-3, 1989. The Board of Governors met with the council on February 3, May
5, September 8, and November 3,1989. The
council, which is composed of one representative of the banking industry from each of




J. TERRENCE MURRAY

the twelve Federal Reserve Districts, is
required by law to meet in Washington at least
four times each year and is authorized by the
Federal Reserve Act to consult with, and
advise, the Board on all matters within the
jurisdiction of the Board,

250

76th Annual Report, 1989

Consumer Advisory Council
December 31,1989

Members J
GEORGE H. BRAASCH, Corporate Credit Counsel, Spiegel, Inc., Oak Brook, Illinois
JUDITH N. BROWN, President, Judith N. Brown and Associates, Minneapolis, Minnesota
BETTY TOM CHU, Chairman, Trust Savings Bank, Arcadia, California
CLIFF E. COOK, Vice President, Puget Sound National Bank, Tacoma, Washington
JERRY D. CRAFT, Senior Vice President, First National Bank of Atlanta, Atlanta, Georgia
DONALD C. DAY, President, New England Securities Corporation, Boston, Massachusetts
R. B. DEAN, JR., Administrator, South Carolina National Bank, Columbia, South Carolina
RICHARD B. DOBY, Financial Services Consultant, Doby and Associates, Denver, Colorado
WILLIAM C. DUNKELBERG, Professor ofEconomics, Temple University, Philadelphia,
Pennsylvania
RICHARD H. FINK, Executive Vice President, George Mason University, Fairfax, Virginia
JAMES FLETCHER, President and Director, South Shore Bank of Chicago, Chicago, Illinois
STEPHEN GARDNER, Assistant Attorney General, State of Texas, Dallas, Texas
ELENA HANGGI, Director, Institute for Social Justice, Little Rock, Arkansas
JAMES W. HEAD, Executive Director, National Economic Development and Law Center,
Berkeley, California
ROBERT HESS, President, Wright Patman Congressional Federal Credit Union, Washington,
D.C.
RAMON E. JOHNSON, Professor of Finance, University of Utah, Salt Lake City, Utah
BARBARA KAUFMAN, Co-Director, KCBS Call for Action, San Francisco, California
A. J. KING, Chairman, Valley Bank of Kalispell, Kalispell, Montana
MICHELLE MEIER, Counsel for Government Affairs, Consumers Union, Washington, D.C.
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
LINDA K. PAGE, Director, Department of Commerce, State of Ohio, Columbus, Ohio
SANDRA PHILLIPS, Executive Director, Pittsburgh Partnership for Neighborhood Development,
Pittsburgh, Pennsylvania
VINCENT QUAYLE, Director, St. Ambrose Housing Aid Center, Baltimore, Maryland
CLIFFORD N. ROSENTHAL, Executive Director, National Federation of Community
Development Credit Unions, New York, New York
ALAN M. SILBERSTEIN, Senior Vice President, Chemical Bank, New York, New York
RALPH E. SPURGIN, President, Limited Credit Services, Inc., Columbus, Ohio
DAVID B. WARD, Consultant, Chester, New Jersey
LAWRENCE WINTHROP, President, Consumer Credit Counseling Service of Oregon, Inc.,
Portland, Oregon

1. Naomi G. Albanese, Former Professor of Home
Economics, Greensboro, North Carolina, appointed to the




council in January 1988 to a three year-term, died on
December 6,1989.

Directories and Meetings 251

Consumer Advisory Council—Continued
Officers
JUDITH N. BROWN, Chairman

WILLIAM E. ODOM, 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
30-31, June 22, and October 26, 1989. The established pursuant to the 1976 amendments
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 31,1989

Members
CHARLOTTE CHAMBERLAIN, Executive Vice President for Strategic Planning, Glendale
Federal Savings and Loan Association, Glendale, California
GERALD M. CZARNECKI, Chairman of the Board and Chief Executive Officer, HONFED,
Honolulu, Hawaii
ROBERT S. DUNCAN, Chairman, President, and ChiefExecutive Officer, Magnolia Federal
Bank for Savings, Hattiesburg, Mississippi
ADAM A. JAHNS, Chairman and President, Cragin Federal Bank for Savings, Chicago, Illinois
H. C. KLEIN, President and ChiefExecutive Officer, Little Rock Air Force Base Federal Credit
Union, Jacksonville, Arkansas
PHILIP E. LAMB, Chairman and Chief Executive Officer, Springfield Institution for Savings,
Springfield, Massachusetts
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
Louis H. PEPPER, Chairman and ChiefExecutive Officer, Washington Mutual Savings Bank,
Seattle, Washington
MARION O. SANDLER, President and Chief Executive Officer, World Savings and Loan
Association, Oakland, California
DONALD B. SHACKELFORD, Chairman of the Board, State Savings Bank, Columbus, Ohio
CHARLES B. STUZIN, Chairman, President, and Chief Executive Officer, Citizens Federal
Savings and Loan Association, Miami, Florida

Officers
GERALD M. CZARNECKI, President

The members of the Thrift Institutions Advisory Council met with the Board of Governors
on March 21, May 23, September 12, and
December 5, 1989. The council, which
is composed of representatives from credit




DONALD B. SHACKELFORD, 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.

252

76th Annual Report, 1989

Officers of Federal Reserve Banks, Branches, and Offices
December 31,1989!

BANK,
Branch, or facility

Chairman2
Deputy Chairman

President
First Vice President

BOSTON3

George N.
Hatsopoulos
Richard N. Cooper

Richard F. Syron
Robert W.
Eisenmenger

NEW YORK 3 ....

Cyrus R. Vance
Ellen V. Futter
Mary Ann Lambertsen

E. Gerald Corrigan
James H. Oltman

PHILADELPHIA

Peter A. Benoliel
Gunnar E. Sarsten

Edward G. Boehne
William H. Stone, Jr.

CLEVELAND 3 ..

Charles W. Parry
John R. Miller

W. Lee Hoskins
William H.
Hendricks

Cincinnati
Pittsburgh

Vacancy
Robert P. Bozzone

RICHMOND3 ...

Hanne M. Merriman
Leroy T. Canoles,
Jr.
Thomas R. Shelton
William E. Masters

Robert P. Black
Jimmie R.
Monhollon

Bradley Currey, Jr.
Larry L. Prince
Nelda P. Stephenson
HughM. Brown
Jose L. Saumat
Patsy R. Williams
James A. Hefner

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
L. Dickson Flake
Thomas A. Alvey
Seymour B.Johnson

Thomas C. Melzer
James R. Bowen

Michael W.Wright
John A. Rollwagen
J. Frank Gardner

Gary H. Stern
Thomas E. Gainor

Buffalo

Baltimore
Charlotte

JohnT. Keane

Culpeper
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
CHICAGO3
Detroit
ST. LOUIS
Little Rock
Louisville
Memphis
MINNEAPOLIS .
Helena




Vice President
in charge of Branch

Charles A. Cerino 4
Harold J. Swart4

Robert D. McTeer, Jr.4
Albert D.
Tinkelenberg4
JohnG. Stoides4
Donald E. Nelson
FredR.Herr 4
James D. Hawkins4
James T. Curry, III
Melvyn K. Purcell
Robert J. Musso

Roby L. Sloan4

John F. Breen
Howard Wells
Raymond Laurence

John D. Johnson

Directories and Meetings 253
BANK,
Branch, or facility

Chairman2
Deputy Chairman

President
First Vice President

KANSAS CITY

Fred W. Lyons, Jr.
Burton A. Dole, Jr.
James C. Wilson
Patience S. Latting
Kenneth L. Morrison

Roger Guffey
Henry R. Czerwinski

Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN FRANCISCO
Los Angeles
Portland
Salt Lake City
Seattle

Vice President
in charge of Branch

Kent M. Scott
David J. France
Harold L. Shewmaker

Bobby R. Inman
Robert H. Boykin
Hugh G. Robinson
William H. Wallace
Diana S. Natalicio
Andrew L. Jefferson, Jr.
Lawrence E. Jenkins

Sammie C. Clay
Robert Smith III4
Thomas H. Robertson

Robert F. Erburu
Carolyn S.
Chambers
Yvonne B. Burke
Paul E. Bragdon
Don M. Wheeler
Carol A. Nygren

Thomas C. Warren5
Angelo S. Carella4
E. Ronald Liggett4
Gerald R. Kelly 4

1. A current list of these officers appears each month in
the Federal Reserve Bulletin.
2. The Chairman of a Federal Reserve Bank, by statute,
serves as Federal Reserve Agent.
3. Additional offices of these Banks are located at
Lewiston, Maine; Windsor Locks, Connecticut; Cranford,

Conference of Chairmen
The Chairmen of the Federal Reserve Banks
are organized into the Conference of Chairmen, which meets to consider matters of
common interest and to consult with, and
advise, the Board of Governors. Such meetings, attended also by the deputy chairmen,
were held in Washington on May 31 and
June 1, and on November 29 and 30, 1989.
The Executive Committee of the Conference of Chairmen during 1989 comprised
Robert F. Erburu, Chairman; Bradley Currey,
Jr., Vice Chairman; and Peter A. Benoliel,
member.
On November 30, 1989, the Conference
elected its Executive Committee for 1990,
naming Cyrus R. Vance as Chairman, Peter
A. Benoliel as Vice Chairman, and Bobby R.
Inman as the third member.

Conference of Presidents
The presidents of the Federal Reserve Banks
are organized into the Conference of Presidents, which meets periodically to consider
matters of common interest and to consult
with, and advise, the Board of Governors.



Robert T. Parry
Carl E. Powell

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.

On October 25, 1988, the Conference
elected Robert P. Forrestal, President of the
Federal Reserve Bank of Atlanta, as its
Chairman for 1989, and Thomas C. Melzer,
President of the Federal Reserve Bank of St.
Louis, as its Vice Chairman. The Conference
appointed Christopher G. Brown, of the Federal Reserve Bank of Atlanta, as its Secretary,
and Frances E. Sibley, of the Federal Reserve
Bank of St. Louis, as its Assistant Secretary.
On December 6, 1988, the Conference
voted to establish a two-year term for the
Chairman and Vice Chairman of the Conference, beginning in 1989.

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 4, 1988, the Conference
elected Jack Guynn, First Vice President
of the Federal Reserve Bank of Atlanta, as
its Chairman for 1989, and James R.
Bo wen, First Vice President of the Federal

254 76th Annual Report, 1989
Reserve Bank of St. Louis, as its Vice
Chairman. The Conference appointed
Christopher G. Brown, of the Federal Reserve
Bank of Atlanta, as its Secretary, and Frances
E. Sibley, of the Federal Reserve Bank of St.
Louis, 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 255
Term expires
Dec. 31
DISTRICT 1-BOSTON

Class A
JoelB. Alvord
Richard D. Wardell
William H. Chadwick

Class B
Richard M. Oster
Stephen R. Levy
Edward H. Ladd
Class C
Richard N. Cooper
Richard L. Taylor
George N. Hatsopoulos

Chairman and Chief Executive Officer, Shawmut
National Corporation, Hartford, Connecticut
President and Chief Executive Officer, National
Iron Bank of Salisbury,
Salisbury, Connecticut
Vice Chairman of the Board and Chief Operating
Officer, Banknorth Group, Inc.,
Burlington, Vermont
President and Chief Executive Officer, Cookson
America, Inc., Providence, Rhode Island
Chairman and Chief Executive Officer, Bolt
Beranek and Newman, Inc.,
Cambridge, Massachusetts
President and Chief Executive Officer, Standish,
Ayer and Wood, Inc., Boston, Massachusetts
Maurits C. Boas Professor of International
Economics, Harvard University,
Cambridge, Massachusetts
President, Taylor Properties, Inc., Boston,
Massachusetts
Chairman of the Board and President,
Thermo Electron Corporation,
Waltham, Massachusetts

1989
1990
1991

1989
1990
1991

1989
1990
1991

DISTRICT 2 - N E W YORK

Class A
Alberto M. Paracchini
J. Kirby Fowler
JohnF. McGillicuddy

Class B
John A. Georges
John F. Welch, Jr




Chairman of the Board and Chief Executive
Officer, Banco de Ponce, Ponce, Puerto Rico
President and Chief Executive Officer, The
Flemington National Bank and Trust
Company, Flemington, New Jersey
Chairman ofthe Board and Chief Executive
Officer, Manufacturers Hanover Trust
Company, New York, New York
Chairman of the Board and Chief Executive
Officer, International Paper,
Purchase, New York
Chairman of the Board and Chief Executive
Officer, GE, Fairfield, Connecticut

1989
1990
1991

1989
1990

256

76th Annual Report, 1989
Term expires
Dec. 31

DISTRICT 2, Class B-Continued
RichardL. Gelb

Class C
Cyrus R. Vance
Ellen V. Futter
Maurice R. Greenberg

Chairman of the Board and Chief Executive
Officer, Bristol-Myers Squibb Company,
New York, New York

1991

Presiding Partner, Simpson Thacher & Bartlett,
New York, New York
President, Barnard College, New York, New York
President and Chief Executive Officer, American
International Group, Inc.,
New York, New York

1989
1990
1991

BUFFALO BRANCH

Appointed by the Federal Reserve Bank
Harry J. Sullivan
President, Salamanca Trust Company,
Salamanca, New York
Norman W. Sinclair
Chairman of the Board, Lockport Savings Bank,
Lockport, New York
Richard H. Popp
Operating Partner, Southview Farm, Castile,
New York
Robert G. Wilmers
Chairman of the Board and Chief Executive
Officer, Manufacturers and Traders Trust
Company, Buffalo, New York
Appointed by the Board of Governors
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
Mary Ann Lambertsen
Vice President-Human Resources and
Information Systems, Fisher-Price Division,
The Quaker Oats Company,
East Aurora, New York

1989
1990
1991
1991

1989
1990
1991

DISTRICT 3-PHILADELPHIA

Class A
George A. Butler
Constantinos I. Costalas
Gary E. Burl




Chairman and Chief Executive Officer, First
Pennsylvania Bank, N.A.,
Philadelphia, Pennsylvania
Chairman, President, and Chief Executive
Officer, Glendale National Bank
of New Jersey, Voorhees, New Jersey
President, Delaware National Bank,
Georgetown, Delaware

1989
1990
1991

Directories and Meetings 257
Term expires
Dec. 31

DISTRICT 3 - Continued
Class B
Carl E. Singley
Charles F. Seymour
Nicholas Riso
Class C
Peter A. Benoliel
Jane G. Pepper
Gunnar E. Sarsten

Attorney, Philadelphia, Pennsylvania
Chairman, Jackson-Cross Company,
Philadelphia, Pennsylvania
Executive Vice President, AHOLD, U.S.A.,
Harrisburg, Pennsylvania

1989
1990
1991

Chairman of the Board, Quaker Chemical
Corporation, Conshohocken, Pennsylvania
President, The Pennsylvania Horticultural
Society, Philadelphia, Pennsylvania
Chairman, President, and Chief Executive
Officer, United Engineers & Constructors,
Inc., Philadelphia, Pennsylvania

1989

Chairman and Chief Executive Officer,
Huntington Bancshares Incorporated,
Columbus, Ohio
Chairman and President, First National Bank
of Nelsonville, Nelsonville, Ohio
President, The Park National Bank, Newark, Ohio

1989

1990
1991

DISTRICT 4-CLEVELAND

Class A
Frank Wobst
William H. May
William T. McConnell
Class B
Laban P. Jackson, Jr
Verna K. Gibson
Douglas E. Olesen
Class C
Charles W. Parry
Robert D. Storey
John R. Miller

Chairman of the Board, Clearcreek Properties,
Lexington, Kentucky
President, The Limited Stores, Inc., Columbus,
Ohio
President and Chief Executive Officer, Battelle
Memorial Institute, Columbus, Ohio
Director and Retired Chairman and Chief
Executive Officer, Aluminum Company
of America, Pittsburgh, Pennsylvania
Partner, Burke, Haber & Berick, Cleveland,
Ohio
Former President and Chief Operating Officer,
The Standard Oil Company (Ohio),
Cleveland, Ohio

1990
1991
1989
1990
1991

1989
1990
1991

CINCINNATI BRANCH

Appointed by the Federal Reserve Bank
Robert M. Duncan
President, First National Bank of Louisa,
Louisa, Kentucky



1989

258

76th Annual Report, 1989
Term expires

Dec. 31
DISTRICT 4, CINCINNATI BRANCH,

Appointed by the Federal Reserve Bank—Continued
Jack W. Buchanan
Jerry L. Kirby
Allen L. Davis

President, Sphar and Company, Inc.,
Winchester, Kentucky
Chairman of the Board, President, and Chief
Executive Officer, Citizens Federal Savings
& Loan Assn., Dayton, Ohio
President and Chief Executive Officer,
The Provident Bank, Cincinnati, Ohio

Appointed by the Board of Governors
Owen B. Butler
Chairman of the Board (Retired), The Procter
& Gamble Company, Cincinnati, Ohio
Marvin Rosenberg
Partner, Towne Properties, Ltd., Cincinnati,
Ohio
Kate Ireland
National Chairman, Frontier Nursing Service,
Wendover, Kentucky

1990
1990
1991

1989
1990
1991

PITTSBURGH BRANCH

Appointed by the Federal Reserve Bank
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
E. James Trimarchi
President and Chief Executive Officer, First
Commonwealth Financial Corporation,
Indiana, Pennsylvania
Appointed by the Board of Governors
Robert P. Bozzone
President and Chief Operating Officer,
Allegheny Ludlum Corporation,
Pittsburgh, Pennsylvania
Milton A. Washington
President and Chief Executive Officer,
Allegheny Housing Rehabilitation
Corporation, Pittsburgh, Pennsylvania
JackB. Piatt
Chairman of the Board and President, Millcraft
Industries, Inc., Washington, Pennsylvania

1989
1990
1990
1991

1989
1990
1991

DISTRICT 5 -RICHMOND

Class A
Chester A. Duke




President and Chief Executive Officer, Marion
National Bank, Marion, South Carolina

1989

Directories and Meetings 259
Term expires
Dec. 31

DISTRICT 5, Class A - Continued
John F. McNair III

C. R. Hill, Jr

Class B
Thomas B. Cookerly
Jack C. Smith
Edward H. Covell
Class C
Leroy T. Canoles, Jr
Hanne Merriman
Anne Marie Whittemore

President and Chief Executive Officer,
Wachovia Bank & Trust Company, N. A.
and The Wachovia Corporation,
Winston-Salem, North Carolina
Chairman of the Board and President,
Merchants & Miners National Bank,
Oak Hill, West Virginia

1990

President, Cookerly Communications,
Bethesda, Maryland
Chairman of the Board and Chief Executive
Officer, K-VA-T Food Stores, Inc.,
Grundy, Virginia
President, The Covell Company, Easton,
Maryland

1989

President, Kaufman & Canoles, Norfolk,
Virginia
Retail Business Consultant, Washington, D.C.
Partner, McGuire, Woods, Battle & Boothe,
Richmond, Virginia

1991

1990
1991

1989
1990
1991

BALTIMORE BRANCH

Appointed by the Federal Reserve Bank
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
H. Grant Hathaway
Chairman of the Board, Equitable Bank, N.A.,
Baltimore, Maryland
Joseph W. Mosmiller
Chairman of the Board, Loyola Federal Savings
and Loan Association, Baltimore, Maryland
Appointed by the Board of Governors
John R. Hardesty, Jr
President, Preston Energy, Inc., Kingwood,
West Virginia
Gloria L. Johnson
Deputy Director of Administration, The
Baltimore Museum of Art,
Baltimore, Maryland
Thomas R. Shelton
President, Case Foods, Inc., Salisbury, Maryland




1989
1990
1991
1991

1989
1990
1991

260

76th Annual Report, 1989
Term expires
Dec. 31

DISTRICT 5 - Continued
CHARLOTTE BRANCH

Appointed by the Federal Reserve Bank
William McKay
President, First Federal Savings Bank,
Hendersonville, North Carolina
James M. Culberson, Jr
Chairman and President, The First National
Bank of Randolph County,
Asheboro, North Carolina
Crandall C. Bowles
President, The Springs Company, Lancaster,
South Carolina
James G. Lindley
Chairman and Chief Executive Officer, South
Carolina National Corporation; Chairman,
President, and Chief Executive Officer,
The South Carolina National Bank,
Columbia, South Carolina
Appointed by the Board of Governors
Anne M. Allen
President, Allen-Austin, Inc., Greensboro,
North Carolina
William E. Masters
President, Perception, Inc., Easley,
South Carolina
Harold D. Kingsmore
President and Chief Operating Officer,
Graniteville Company,
Graniteville, South Carolina

1989
1990
1991
1991

1989
1990
1991

DISTRICT 6-ATLANTA
Class A
Mary W. Walker
E. B. Robinson, Jr
Virgil H. Moore, Jr

Class B
Paul W. Green
Gary J. Chouest
Saundra H. Gray
Class C
Bradley Currey, Jr



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
Chairman and Chief Executive Officer, First
Farmers and Merchants National Bank,
Columbia, Tennessee

1989
1990
1991

President and Chief Executive Officer,
American Cast Iron Pipe Company,
Birmingham, Alabama
President and Chief Executive Officer, Edison
Chouest Offshore, Inc., Galliano, Louisiana
Co-Owner, Gemini Springs Farm, DeBary,
Florida

1989

President, Rock-Tenn Company, Norcross,
Georgia

1989

1990
1991

Directories and Meetings 261
Term expires

Dec. 31

DISTRICT 6, Class C-Continued
Edwin A. Huston
Larry L. Prince

Senior Executive Vice President-Finance,
Ryder System, Inc., Miami, Florida
President and Chief Executive Officer, Genuine
Parts Company, Atlanta, Georgia

1990
1991

BIRMINGHAM BRANCH

Appointed by the Federal Reserve Bank
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
Shelton E. Allred
Chairman, President, and Chief Executive
Officer, Frit Industries, Inc., Ozark, Alabama
William F. Childress
President, First American Federal Savings and
Loan Association, Huntsville, Alabama
Appointed by the Board of Governors
Nelda P. Stephenson
President, Nelda Stephenson Chevrolet, Inc.,
Florence, Alabama
A. G. Trammell
President, Alabama Labor Council, AFL-CIO,
Birmingham, Alabama
RoyD. Terry
President and Chief Executive Officer, Terry
Manufacturing Company, Inc.,
Roanoke, Alabama

1989
1990
1991
1991

1989
1990
1991

JACKSONVILLE BRANCH

Appointed by the Federal Reserve Bank
A. Bronson Thayer
Chairman and Chief Executive Officer, First
Florida Banks, Inc., Tampa, Florida
Hugh H. Jones, Jr
Chairman and Chief Executive Officer,
Barnett Bank of Jacksonville, N. A.,
Jacksonville, Florida
Perry M. Dawson
President and Chief Executive Officer,
Suncoast Schools Federal Credit Union,
Tampa, Florida
Samuel H. Vickers
President and Chief Executive Officer, Design
Containers, Inc., Jacksonville, Florida
Appointed by the Board of Governors
Lana Jane Lewis-Brent
Vice Chairman, President, and Chief Executive
Officer, Sunshine Jr. Stores, Inc.,
Panama City, Florida
Joan Dial Ruffier
Chairman, Florida Board of Regents, Orlando,
Florida
HughM. Brown
President and Chief Executive Officer, BAMSI,
Inc., Titusville, Florida



1989
1990
1991
1991

1989
1990
1991

262

76th Annual Report, 1989
Term expires
Dec. 31

DISTRICT 6-Continued
MIAMI BRANCH

Appointed by the Federal Reserve Bank
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.,
North Palm Beach, Florida
Roberto G. Blanco
Vice Chairman and Chief Financial Officer,
Republic National Bank of Miami,
Miami, Florida
Appointed by the Board of Governors
Jose L. Saumat
Chairman, Kaufman and Roberts, Inc.,
Miami, Florida
Robert D. Apelgren
President, Apelgren Corporation, Pahokee,
Florida
Dorothy C. Weaver
Vice President, Intercap Investments, Inc.,
Miami, Florida

1989
1990
1990
1991

1989
1990
1991

NASHVILLE BRANCH

Appointed by the Federal Reserve Bank
James A. Rainey
Chairman, Sovran Financial
Corporation/Central South, Nashville,
Tennessee
Vincent K. Hickam
President and Chief Executive Officer,
Executive Park National Bank,
Kingsport, Tennesse
William Baxter Lee III
Chairman and President, Southeast Services
Corporation, Knoxville, Tennessee
Edwin W. Moats, Jr
Chairman and Chief Executive Officer,
Metropolitan Federal Savings and Loan
Association, Nashville, Tennessee
Appointed by the Board of Governors
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
Shirley A. Zeitlin
President, Shirley Zeitlin & Co. Realtors,
Nashville, Tennessee




1989
1990
1991
1991

1989
1990
1991

Directories and Meetings 263
Term expires
Dec. 31

DISTRICT 6-Continued
N E W ORLEANS BRANCH

Appointed by the Federal Reserve Bank
RobertS. 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
Joel B. Bullard, Jr
President, Joe Bullard Automotive Companies,
Mobile, Alabama
Stanley S. Scott
President, Crescent Distributing Company,
Harahan, Louisiana
Appointed by the Board of Governors
James A. Hefner
President, Jackson State University, Jackson,
Mississippi
Caroline G. Theus
President, Inglewood Land and Development
Company, Alexandria, Louisiana
Andre M. Rubenstein
Chairman and Chief Executive Officer,
RubensteinBrothers, Inc.,
New Orleans, Louisiana

1989
1990
1991
1991

1989
1990
1991

DISTRICT 7 - C H I C A G O

Class A
B. F. Backlund
Barry F. Sullivan
John W. Gabbert

Class B
PaulJ. Schierl
Edward D. Powers
Max J. Naylor
Class C
Robert J. Day
Marcus Alexis




Chairman and Chief Executive Officer,
Bartonville Bank, Bartonville, Illinois
Chairman of the Board, First Chicago
Corporation, Chicago, Illinois
President and Chief Executive Officer, First of
America Bank-LaPorte, N.A.,
LaPorte, Indiana

1989

Chairman ofthe Board and Chief Executive
Officer, Fort Howard Corporation,
Green Bay, Wisconsin
President, Fire Brick Engineers, Milwaukee,
Wisconsin
President, Naylor Farms, Inc., Jefferson, Iowa

1989

Chairman and Chief Executive Officer, USG
Corporation, Chicago, Illinois
Dean, College of Business Administration,
University of Illinois at Chicago,
Chicago, Illinois

1990
1991

1990
1991
1989
1990

264 76th Annual Report, 1989
Term expires
Dec. 31

DISTRICT 7, Class C-Continued
CharlesS. McNeer

Chairman of the Board and Chief Executive
Officer, Wisconsin Energy Corporation,
Milwaukee, Wisconsin

1991

DETROIT BRANCH

Appointed by the Federal Reserve Bank
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
Robert J. Mylod
Chairman, President and Chief Executive
Officer, Michigan National Corporation,
Farmington Hills, Michigan
Appointed by the Board of Governors
Richard T. Lindgren
Birmingham, Michigan
Beverly Beltaire
President, P R Associates, Inc., Detroit,
Michigan
Phyllis E. Peters
Director, Professional Standards Review,
Deloitte & Touche, Detroit, Michigan

1989
1990
1990
1991

1989
1990
1991

DISTRICT 8 - S T . LOUIS

Class A
David W. Kemper II

H. L. Hembree III
Henry G. River, Jr

Class B
Frank M. Mitchener, Jr
Roger W. Schipke
Thomas F. McLarty III




Chairman and Chief Executive Officer,
Commerce Bank of St. Louis, N. A.,
Clayton, Missouri; and President and Chief
Executive Officer, Commerce Bancshares, Inc.,
Kansas City, Missouri
Chairman of the Executive Committee,
Merchants National Bank,
Fort Smith, Arkansas
President and Chief Executive Officer, First
National Bank in Pinckneyville,
Pinckneyville, Illinois

1989

President, Mitchener Farms, Inc., Sumner,
Mississippi
Senior Vice President, GE Appliances, GE,
Louisville, Kentucky
Chairman and Chief Executive Officer, Arkla,
Inc., Little Rock, Arkansas

1989

1990
1991

1990
1991

Directories and Meetings 265
Term expires

Dec. 31

DISTRICT 8-Continued
Class C
H. Edwin Trusheim
Janet MeAfee Weakley
Robert L. Virgil, Jr

Chairman and Chief Executive Officer,
General American Life Insurance Company,
St. Louis, Missouri
President, Janet McAfee, Inc., Clayton,
Missouri
Dean, John M. Olin School of Business,
Washington University in St. Louis,
St. Louis, Missouri

1989
1990
1991

LITTLE ROCK BRANCH

Appointed by the Federal Reserve Bank
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
Barnett Grace
President and Chief Executive Officer, First
Commercial Bank, N.A.,
Little Rock, Arkansas
Appointed by the Board of Governors
L. Dickson Flake
President, Barnes, Quinn, Flake & Anderson,
Inc., Little Rock, Arkansas
William E. Love
President, Sound-Craft Systems, Inc.,
Morrilton, Arkansas
James R. Rodgers
Airport Manager, Little Rock Regional Airport,
Little Rock, Arkansas

1989
1990
1990
1991

1989
1990
1991

LOUISVILLE BRANCH

Appointed by the Federal Reserve Bank
Morton Boyd
President, First Kentucky National Corporation,
Louisville, Kentucky
Irving W. Bailey II
Chairman, President, and Chief Executive
Officer, Capital Holding Corporation,
Louisville, Kentucky
Wayne G. Overall, Jr
President, First Federal Savings Bank,
Elizabethtown, Kentucky
Douglas M. Lester
Chairman, President, and Chief Executive
Officer, Trans Financial Bancorp, Inc.,
Bowling Green, Kentucky
Appointed by the Board of Governors
Thomas A. Alvey
Delegate, Owensboro Council of Labor,
Owensboro, Kentucky



1989
1990
1990
1991

1989

266

76th Annual Report, 1989
Term expires

Dec. 31
DISTRICT 8, LOUISVILLE BRANCH,

Appointed by the Board of Governors—Continued
Raymond M. Burse
LoisH. Gray

Partner, Wyatt, Tarrant and Combs,
Louisville, Kentucky
Chairman of the Board, James N. Gray
Construction Company, Inc.,
Glasgow, Kentucky

1990
1991

MEMPHIS BRANCH

Appointed by the Federal Reserve Bank
Michael J. Hennessey
President, Munro & 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
Ray U. Tanner
Chairman and Chief Executive Officer, Jackson
National Bank and Volunteer
Bancshares, Inc., Jackson, Tennessee
Appointed by the Board of Governors
Sandra B. Sanderson
President and Chief Executive Officer,
Sanderson Plumbing Products, Inc.,
Columbus, Mississippi
Seymour B. Johnson
Owner, Kay Planting Company, Indianola,
Mississippi
Katherine Hinds Smythe
President, Memorial Park, Inc.,
Memphis, Tennessee

1989
1990
1990
1991

1989
1990
1991

DISTRICT 9-MINNEAPOLIS

Class A
Charles W. Ekstrum
Joel S. Harris
James H. Hearon III

Class B
Bruce C. Adams
Earl R. St. John, Jr
Duane E. Dingmann




President and Chief Executive Officer, First
National Bank, Philip, South Dakota
President, Yellowstone Bank, Billings, Montana
Chairman of the Board and Chief Executive
Officer, National City Bank,
Minneapolis, Minnesota
Partner, Triple Adams Farms, Minot,
North Dakota
President, St. John Forest Products, Inc.,
Spalding, Michigan
President, Trubilt Auto Body, Inc.,
Eau Claire, Wisconsin

1989
1990
1991

1989
1990
1991

Directories and Meetings 267
Term expires
Dec. 31

DISTRICT 9-Continued
Class C
Michael W. Wright
Delbert W. Johnson
John A. Rollwagen

Chairman, President, and Chief Executive
Officer, Super Valu Stores, Inc.,
Minneapolis, Minnesota
President and Chief Executive Officer, Pioneer
Metal Finishing, Minneapolis, Minnesota
Chairman and Chief Executive Officer, Cray
Research Inc., Minneapolis, Minnesota

1989
1990
1991

HELENA BRANCH

Appointed by the Federal Reserve Bank
F. Charles Mercord
President and Managing Officer, First Federal
Savings Bank of Montana, Kalispell, Montana
Noble E. Vosburg
President and Chief Executive Officer, Pacific
Hide and Fur Corporation,
Great Falls, Montana
RobertH. Waller..
President and Chief Executive Officer, First
Interstate Bank of Billings, N. A.,
Billings, Montana
Appointed by the Board of Governors
Vacancy
J. Frank Gardner
President, Montana Resources, Inc., Butte,
Montana

1989
1990
1990

1989
1990

DISTRICT 1 0 - K A N S A S CITY

Class A
Harold L. Gerhart, Jr
Roger L. Reisher
Robert L. Hollis

Class B
Richard D. Harrison
S. Dean Evans, Sr
Frank J. Yaklich, Jr
Class C
Fred W. Lyons, Jr




President and Chief Executive Officer, First
National Bank, Newman Grove, Nebraska
Co-Chairman, FirstBank Holding Company of
Colorado, Lakewood, Colorado
Chairman of the Board and Chief Executive
Officer, First National Bank and Trust Co.,
Okmulgee, Oklahoma
Honorary Chairman, Fleming Companies, Inc.,
Oklahoma City, Oklahoma
Partner, Evans Grain Company, Salina, Kansas
President, CF & I Steel Corporation, Pueblo,
Colorado
President, Marion Merrell Dow Inc.,
Kansas City, Missouri

1989
1990
1991

1989
1990
1991

1989

268

76th Annual Report, 1989
Term expires

Dec. 31

DISTRICT 10, Class B-Continued
Thomas E. Rodriguez
Burton A. Dole, Jr

President and General Manager,
Thomas E. Rodriguez & Associates, P.C.,
Aurora, Colorado
Chairman and President, Puritan-Bennett
Corporation, Overland Park, Kansas

1990
1991

DENVER BRANCH

Appointed by the Federal Reserve Bank
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
Norman R. Corzine
President and Chief Executive Officer, First
National Bank in Albuquerque,
Albuquerque, New Mexico
W Richard Scarlett III
Chairman and Chief Executive Officer, Jackson
State Bank, Jackson Hole, Wyoming
Appointed by the Board of Governors
James C. Wilson
Management Consultant, Longmont, Colorado
Gilbert Sanchez
President, New Mexico Highlands University,
Las Vegas, New Mexico
Barbara B. Grogan
President, Western Industrial Contractors, Inc.,
Denver, Colorado

1989
1990
1991
1991

1989
1990
1991

OKLAHOMA CITY BRANCH

Appointed by the Federal Reserve Bank
William H. Crawford
Chairman and Chief Executive Officer, First
National Bank and Trust Company,
Frederick, Oklahoma
W. Dean Hidy
Chairman of the Board, Triad Bank, N. A.,
Tulsa, Oklahoma
John Wm. Laisle
President, MidFirst Savings and Loan
Association, Oklahoma City, Oklahoma
Appointed by the Board of Governors
Patience S. Latting
Oklahoma City, Oklahoma
John F Snodgrass
President and Trustee, The Samuel Roberts
Noble Foundation, Inc., Ardmore, Oklahoma

1989
1990
1990

1989
1990

OMAHA BRANCH

Appointed by the Federal Reserve Bank
John T. Selzer
President, Scottsbluff National Bank and Trust
Company, Scottsbluff, Nebraska



1989

Directories and Meetings 269
Term expires
Dec. 31
DISTRICT 10, OMAHA BRANCH,

Appointed by the Federal Reserve Bank—Continued
Charles H. Thorne
John R. Cochran

Chairman of the Board, First Federal Savings
and Loan Association of Lincoln,
Lincoln, Nebraska
President and Chief Executive Officer, Norwest
Bank Nebraska, N.A., Omaha, Nebraska

Appointed by the Board of Governors
Kenneth L. Morrison
President, Morrison Enterprises, Hastings,
Nebraska
Herman Cain
President and Chief Executive Officer,
Godfather's Pizza, Inc., Omaha, Nebraska

1989
1990

1989
1990

DISTRICT 11-DALLAS

Class A
RobertG. Greer
T. C. Frost
Charles T. Doyle

Chairman of the Board, Tanglewood Bank,
N.A., Houston, Texas
Chairman of the Board, The Frost National
Bank, San Antonio, Texas
Chairman of the Board and Chief Executive
Officer, Gulf National Bank,
Texas City, Texas

Class B
Gary E. Wood

President, Texas Research League, Austin,
Texas
Robert L. Pfluger
Rancher, San Angelo, Texas
Charles Dickie Williamson... Chairman of the Board and Chief Executive
Officer, Williamson-Dickie Manufacturing
Company, Fort Worth, Texas
Class C
Leo E. Linbeck, Jr
Bobby R. Inman
Hugh G. Robinson

Chairman of the Board and Chief Executive
Officer, Linbeck Construction Corporation,
Houston, Texas
Chairman of the Board and Chief Executive
Officer, Westmark Systems Inc.,
Austin, Texas
Chairman of the Board and Chief Executive
Officer, The Tetra Group, Inc., Dallas, Texas

1989
1990
1991

1989
1990
1991

1989
1990
1991

EL PASO BRANCH

Appointed by the Federal Reserve Bank
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



1989
1990

270

76th Annual Report, 1989
Term expires

Dec. 31
DISTRICT 11, EL PASO BRANCH,

Appointed by the Federal Reserve Bank—Continued
Ethel Ortega Olson
Humberto F. Sambrano

Owner, NAMBE of Ruidoso, Ruidoso,
New Mexico
President, SamCorp General Contractors,
El Paso, Texas

Appointed by the Board of Governors
W. Thomas Beard III
President, Leoncita Cattle Company, Alpine,
Texas
Diana S. Natalicio
President, The University of Texas at El Paso,
El Paso, Texas
Donald G. Stevens
Owner, Stevens Oil Company, Roswell,
New Mexico

1990
1991

1989
1990
1991

HOUSTON BRANCH

Appointed by the Federal Reserve Bank
Jenard M. Gross
President, Gross Builders, Inc., Houston, Texas
Clive Runnells
President and Director, Runnells Cattle
Company, Bay City, Texas
David E. Sheffield
President (Retired), First Victoria National
Bank, Victoria, Texas
Jeff Austin, Jr
President, First National Bank of Jacksonville,
Jacksonville, Texas
Appointed by the Board of Governors
Walter M. Mischer, Jr
President and Chief Operating Officer, The
Mischer Corporation, Houston, Texas
Andrew L. Jefferson, Jr
Attorney, Jefferson and Mims, Houston, Texas
Gilbert D. Gaedcke, Jr
Chairman of the Board and Chief Executive
Officer, Gaedcke Equipment Company,
Houston, Texas

1989
1990
1990
1991

1989
1990
1991

SAN ANTONIO BRANCH

Appointed by the Federal Reserve Bank
C. Ivan Wilson
Chairman of the Board, Chief Executive Officer,
and Regional Director, First City, TexasCorpus Christi, Corpus Christi, Texas
Javier Garza
Executive Vice President, The Laredo National
Bank, Laredo, Texas
Sam R. Sparks
President, Sam R. Sparks, Inc., Progreso, Texas
Jane Flato Smith
Investor and Rancher, San Antonio, Texas
Appointed by the Board of Governors
Lawrence E. Jenkins
Vice President (Retired), Lockheed Missiles
& Space Co., Inc., Austin, Texas
Scott H. Glass
President and Chief Operating Officer,
Scarbroughs, Austin, Texas



1989

1990
1990
1991
1989
1990

Directories and Meetings 271
Term expires
Dec. 31
DISTRICT 11, SAN ANTONIO BRANCH,

Appointed by the Board of Governors—Continued
Roger R. Hemminghaus

Chairman and Chief Executive Officer, Diamond
Shamrock R&M, Inc., San Antonio, Texas

1991

DISTRICT 1 2 - S A N FRANCISCO

Class A
Rayburn S. Dezember

R. Blair Hawkes
William E. B. Siart

Class B
John C. Hampton
John N. Nordstrom
William L. Tooley
Class C
Robert F. Erburu
Cordell W. Hull
Carolyn S. Chambers

Chairman of the Board and Chief Executive
Officer, Central Pacific Corporation; and
Chairman of the Board, American National
Bank, Bakersfield, California
President and Chief Executive Officer, Ireland
Bank, Malad City, Idaho
Chairman of the Board, President, and Chief
Executive Officer, First Interstate Bank of
California, Los Angeles, California
President and Chief Executive Officer,
Willamina Lumber Company,
Portland, Oregon
Co-Chairman of the Board, Nordstrom, Inc.,
Seattle, Washington
Chairman, Tooley & Company, Investment
Builders, Los Angeles, California
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
President and Chief Executive Officer,
Chambers Communications Corp.,
Eugene, Oregon

1989

1990
1991

1989
1990
1991

1989
1990
1991

Los ANGELES BRANCH

Appointed by the Federal Reserve Bank
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
Ignacio E. Lozano, Jr
Editor-in-Chief, La Opinion, Los Angeles,
California
Howard C. McCrady
Vice Chairman, Valley National Corporation,
Phoenix, Arizona



1989
1990
1991
1991

272

76th Annual Report, 1989
Term expires

Dec. 31

DISTRICT 12, Los ANGELES BRANCH-Continued

Appointed by the Board of Governors
Yvonne Brathwaite Burke .... Partner, Jones, Day, Reavis & Pogue,
Los Angeles, California
Richard C. Seaver
Chairman, Hydril Company, Los Angeles,
California
Harry W. Todd
Chairman and Chief Executive Officer, Rohr
Industries, Inc., Chula Vista, California

1989
1990
1991

PORTLAND BRANCH

Appointed by the Federal Reserve Bank
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, President, and Chief
Executive Officer, The Benjamin Franklin
Savings and Loan Association,
Portland, Oregon
Stuart H. Compton
Chairman and Chief Executive Officer, Pioneer
Trust Bank, N.A. Salem, Oregon
Appointed by the Board of Governors
Paul E. Bragdon
Assistant to the Governor for Education, Office
of the Governor, Salem, Oregon
Sandra A. Suran
Former Small Business Advocate, State of
Oregon, Lake Oswego, Oregon
William A. Hilliard
Editor, The Oregonian, Portland, Oregon

1989
1990
1990

1991

1989
1990
1991

SALT LAKE CITY BRANCH

Appointed by the Federal Reserve Bank
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 & Trust Company,
Twin Falls, Idaho
Virginia P. Kelson
Associate, Ralston & Associates, Salt Lake City,
Utah
Gerald R. Christensen
President and Chairman, First Federal Savings
Bank, Salt Lake City, Utah
Appointed by the Board of Governors
Robert N. Pratt
President and Chief Operating Officer,
Bonneville Pacific Corporation,
Salt Lake City, Utah
Don M. Wheeler
President, Wheeler Machinery Company,
Salt Lake City, Utah



1989
1990

1990
1991

1989

1990

Directories and Meetings 273
Term expires

Dec. 31
DISTRICT 12, SALT LAKE CITY BRANCH,

Appointed by the Board of Governors—Continued
D. N. Rose

President and Chief Executive Officer, Mountain
Fuel Supply Company, Salt Lake City, Utah

1991

SEATTLE BRANCH

Appointed by the Federal Reserve Bank
H. H. Larison
President, Columbia Paint & Coatings,
Spokane, Washington
B. R. Beeksma
Chairman of the Board, InterWest Savings Bank,
Oak Harbor, Washington
William S. Randall
Chairman, President and Chief Executive
Officer, First Interstate Bank of Washington,
N.A., Seattle, Washington
Robert P. Gray
President, National Bank of Alaska, Anchorage,
Alaska
Appointed by the Board of Governors
Carol A. Nygren
Partner, Laventhol & Horwath, Certified Public
Accountants, Seattle, Washington
Irma Goertzen
Goertzen & Associates, Health Care
Consultants, Seattle, Washington
Bruce R. Kennedy
Chairman and Chief Executive Officer, Alaska
Air Group, Inc., Seattle, Washington




1989
1990
1990
1991

1989
1990
1991

Index




277

Index
Acceptances, bankers (See Bankers
acceptances)
Accounting standards, 176
Agriculture
Loan problems, 175
Price developments in 1989, 11
Agriculture, U.S. Department of, Packers
and Stockyards Administration, 147,
148
American Institute of Certified Public
Accountants, 176
Assets and liabilities
Banks, by class, 229
Board of Governors, 200
Federal Reserve Banks, 208
Audits (See Examinations, inspections,
regulations, and audits)
Automated clearinghouse, fees for services,
190
Availability of funds and collection of
checks {See Regulations: CC)
Balance of payments (See International
developments, review of 1989)
Bank Conservation Act, 162
Bank for International Settlements, 66
Bank Holding Company Act of 1956 (See
also Regulations: Y)
Examinations, 172
Legislative recommendations and
litigation, 157
Regulation and compliance, 177
Bank holding companies (See also
Regulations: Y)
Applications by, processing and notice of
Board decisions, 177
Bank Merger Act, 178
Change in Bank Control Act, 179
Delegation of applications, 179
Enforcement, 171
Examinations, inspection, and regulation,
170
International activities, 173, 182
Litigation, 157
Policy statement, 71
Regulatory simplification, 187
Stock repurchases, 181



Bank holding companies —
Continued
Surveillance and monitoring, 173
Transfer agents, 173
Bank Holding Companies and Change in
Bank Control (See Regulations: Y)
Bank Insurance Fund, 163
Bank Merger Act, regulation and
compliance, 178
Bank mergers and consolidations, 235
Bank Protection Act of 1968, 188
Bank Secrecy Act, 183
Bankers acceptances, Federal Reserve
Banks, holdings, 208
Banking Act of 1933,172
Banking offices, changes in number, 234
Banking supervision and regulation by the
Federal Reserve System, 167
Basic banking and check cashing, testimony,
154
Basle Accord, 168
Basle Committee, Banking Regulations and
Supervisory Practices, 167, 169
Board of Governors (See also Federal
Reserve System)
Cash, sources, uses, and balance at end of
1989, 200
Consumer Advisory Council (See
Consumer Advisory Council)
Financial statements, 199
Interpretations (See Interpretations)
Litigation, 157
Members and officers, 245
Policy actions (See Policy actions)
Pricing of Federal Reserve services (See
Fees)
Publications (See Publications)
Regulations (See Regulations)
Regulatory simplification, 187
Salaries, 215
Testimony
Basic banking and check cashing, 154
Community Reinvestment Act, 153
Flood insurance, 153
Loan discrimination, 155
Truth in Savings, 153
Boeing strike, 23

278 76th Annual Report, 1989
Brady, Nicholas R, Secretary of the
Treasury, 22, 167
Branch banks
Federal Reserve (See Federal Reserve
Banks, Branches)
Foreign branches of U.S. banking
organizations, 173, 181
Capital accounts
Banks, by class, 224
Federal Reserve Banks, 207, 208, 210
Check clearing and collection
Fees for Federal Reserve services, 189
Float, 191
Volume of operations, 193, 225
Commercial banks (See also Insured
commercial banks), banking offices,
changes in number, 234
Commodity Credit Corporation, 9, 35, 49
Community Affairs Program, 145
Community Development Corporations,
145
Community development credit unions,
152
Community Reinvestment Act of 1977
Compliance, 144
Consumer Advisory Council, 152
Consumer affairs, 141
Regulatory simplification, 187
Revision, 65
Testimony, 153
Title XII, Financial Institutions Reform,
Recovery, and Enforcement Act,
162
Competitive Equality Banking Act of 1987
(See also Expedited Funds Availability
Act), 164, 175
Comptroller of the Currency, Office of, 65,
146, 162,168, 174,176,178
Condition statements of Federal Reserve
Banks, 206
Consumer Advisory Council, 151,250
Consumer and community affairs, 141
Credit Standards Advisory Committee, 162
Currency and Foreign Transactions
Reporting Act (See Bank Secrecy Act)
Definitive securities, 191
Depository institutions
Checks (See Check clearing and
collection)
Interest on deposits (See Interest rates)



Depository institutions —
Continued
Reserve requirements (See Regulations:
D)
Reserves and related items, 230
Services to (See Fees)
Depository Institutions Management
Interlocks Act, 65
Deposits
Banks, by class, 229
Checks (See Check clearing and
collection)
Federal Reserve Banks, 208, 230
Interest rates (See Interest rates)
Reserve requirements (See Reserve
requirements of depository
institutions)
Directors, Federal Reserve Banks and
Branches, list, 254
Discount rates at Federal Reserve Banks
(See Interest rates)
Dividends
Federal Reserve Banks, 218, 220
Earnings of Federal Reserve Banks (See
also Federal Reserve Banks, income
and expenses, 216
Economic Development Administration,
145
Economy in 1988
Business, 34
External, 32
Government, 34
Household, 33
Labor markets, 35
Price developments, 36
Economy in 1989
Business, 7, 48
External, 45
Government, 9, 49
Household, 5, 47
Labor markets, 9, 50
Price developments, 11,50
Educational activities (See Training)
Electronic Fund Transfer Act, compliance
with, 148
Engraving and Printing, U.S. Bureau of,
190
Equal Credit Opportunity Act
Compliance with, 147
Regulation B (See Regulations: B)
Regulatory simplification, 188

Index 279
Examinations, inspections, regulation, and
audits
Bank holding companies, 170
Compliance, 144, 145, 146
Enforcement actions, civil money
penalties, 171
Federal Reserve Banks, 191
International activities, 173
Specialized
Electronic data processing, 171
Fiduciary activities, 171
Government securities dealers, 172
Municipal securities dealers and
clearing agencies, 172
Securities subsidiaries of bank holding
companies, 172
Transfer agents, 173
State member banks, 145, 170
Surveillance and monitoring, 173
Exchange Stabilization Fund, 25
Expedited Funds Availability Act of 1988,
63, 64, 146
Expenses {See Income and expenses)
Fair Credit and Charge Card Disclosure
Act of 1988,62
Fair Credit Reporting Act, 148
Fair Housing Act, 144
Farm Credit Administration, 147, 148, 183
Farmers Home Administration, 145
Federal Advisory Council, 249
Federal agency securities
Federal Reserve Bank holdings and
earnings, 208, 230
Federal Reserve open market
transactions, 1989, 212
Repurchase agreements, 207, 208, 212,
214
Federal Asset Disposition Association, 161
Federal Deposit Insurance Corporation, 65,
146, 161, 162, 167, 168, 174, 176, 178
Federal Financial Institutions Examination
Council
Act, 162
Disclosure statements under Regulation
C, 142
Regulation, 177
Training courses, 176
Federal Home Loan Bank Act, 162
Federal Home Loan Bank Board, 65, 161,
162
Federal Home Loan Banks, 145



Federal Home Loan Mortgage Corporation,
162, 191
Federal Home Loan Mortgage Corporation
Act, 162
Federal Housing Finance Board, 162
Federal National Mortgage Association, 191
Federal National Mortgage Corporation,
145
Federal Open Market Committee
Meetings, 76, 85, 92, 99, 109, 118, 124,
131
Members and officers
List, 248
Policy actions, 37, 71
Federal Reserve Act, 164, 191
Federal Reserve Banks
Assessments for expenses of Board of
Governors, 218, 220
Bank premises, 206, 208, 224
Banks
Atlanta, 145
Chicago, 145, 193
Cleveland, Pittsburgh Branch, 191
Dallas, 192
Los Angeles, 193
Minneapolis, 145
Helena Branch, 193
New York, 145, 192, 193
Philadelphia, 145
Richmond
Baltimore Branch, 145
Charlotte Branch, 193
San Francisco, 145
Branches
Bank premises, 224
Directors, list, 254
Vice presidents in charge, 252
Capital accounts, 207, 208
Chairmen and deputy chairmen, 252
Check clearing and collection, 189
Condition statement, 206
Deposits, 207, 208
Directors, list, 254
Dividends paid, 218, 221, 223
Examination or audit, 191
Income and expenses, 192
Interest rates, 66, 226
Loans and securities, 206, 208, 214, 216,
230, 232
Officers and employees, number and
salaries, 215
Operations, volume, 225

280

76th Annual Report, 1989

Federal Reserve Banks—Continued
Premises, 192
Presidents and first vice presidents, 215,
252
Priced services
Developments, 189
Financial statements, 193
Pro forma balance sheet, 194
Pro forma income statement, 195
Tables, 230
Securities and loan holdings, 193
Training, 176
Federal Reserve Board (See Board of
Governors)
Federal Reserve notes
Condition statement data, 208
Cost of issuance and redemption, 203,
218
Federal Reserve System (See also Board of
Governors)
Consumer affairs (See Consumer and
community affairs)
Foreign currency operations (See Foreign
currencies)
Map, 284, 285
Training, 176
Federal Reserve System Task Force, 175
Federal Reserve's Reciprocal Currency
(Swap) network, 25
Federal Savings and Loan Insurance
Corporation, 161, 167
Federal Trade Commission, 147, 148
Federal Trade Commission Act, state
member banks, complaints against, 150
Fedwire, 66
Fees, Federal Reserve services to depository
institutions
Automated clearinghouse, 190
Check clearing and collection, 189
Coin and currency, 190
Electronic payments, 190
Pricing of, 193,216, 189
Securities, 191
Wire transfer of funds, 190
Financial Accounting Standards Board, 176
Financial Institutions Reform, Recovery,
and Enforcement Act of 1989
Bank Holding Company Act, 61
Bank supervision and regulation, 167
Cease and desist orders, 164
Civil money penalties, 165
Community Reinvestment Act, 146



Financial Institutions Reform, Recovery,
and Enforcement Act of 1989—
Continued
Conversion transactions, 163
Cross-guarantees, 163
Enacted, 161
Home Mortgage Disclosure Act, 60
Monetary policy, 3
Removal and prohibition, 164
Supervision and regulation, 174
Tandem restrictions elimination, 187
Financial Institutions Supervisory Act,
litigation, 158
Float (See also Check clearing and
collection), 19.1
Flood Disaster Protection Act, 153
Flood insurance, testimony, 153
Foreign currencies
Authorization and directive for operations
in, and review of documents, 25
Federal Reserve income on, 216
Foreign economies, 20
Garn-St Germain Depository Institutions
Act of 1982,60
General Accounting Office, 162
Glass-Steagall Act
Litigation, 159
Securities regulation, 169
Securities subsidiaries of bank holding
companies, 172
Gold certificate accounts of Reserve Banks
and gold stock, 208, 232
Government Securities Act of 1986, 172
Highly leveraged transactions, 168,174
Home Equity Loan Consumer Protection
Act of 1988
Amendment to expand the disclosures that
lenders must give with applications,
62,143
Home Mortgage Disclosure Act (See also
Regulations: C)
Consumer Advisory Council, 152
Regulatory simplification, 187
Revision to Regulation C, 59
Home Owners' Loan Act, 161
Housing and Urban Development, U.S.
Department of, 145
Income and expenses
Board of Governors, 201

Index
Income and expenses—Continued
Federal Reserve Banks, 192, 216
Insured commercial banks {See also
Commercial banks)
Assets and liabilities, by class of bank,
229
Banking offices, changes in number, 234
Number, by class of bank, 229
Interest on deposits {See Interest rates)
Interest rates
Table, 226
Interest rates, Federal Reserve Banks
Discount rates, 1989,66
Votes, 68
International banking activities ,181
International developments, review of 1989,
19
International Monetary Fund, 22
International transactions, 22
Interpretations of regulations, 61, 144
Interstate Commerce Commission, 148
Investments
Federal Reserve Banks, 206, 208
State member banks, 229
Justice, U.S. Department of, 157, 191
Kemp, Jack, Secretary, Department of
Housing and Urban Development, 167
Legislation enacted {See also specific act),
161
Legislative recommendations
Other agencies with enforcement
responsibilities, 156
Litigation
Bank holding companies, 157
Board procedures and regulations,
challenges to, 158
Financial Institutions Supervisory Act,
158
Loans
Agricultural {See Agriculture)
Banks, by class, 229
Discrimination, testimony, 155
Federal Reserve Banks
Depository institutions, 206, 208, 216,
232
Holdings and income, 206, 208, 232
Interest rates, 226
Volume of operations, 225



281

Management and Budget, U.S. Office of,
177
Margin requirements, 228
Member banks {See also Depository
institutions and National banks)
Assets, liabilities, and capital accounts,
229
Borrowings and loans {See Loans)
Banking offices, changes in number, 234
Number, 229
Reserve requirements, 227
State member banks {See State member
banks)
Surveillance and monitoring, 173
Transfers of funds {See Transfers of
funds)
Menem, [Carlos], President of Argentina,
21
Mint, U.S., 190
Monetary Control Act of 1980, 60
Monetary policy
Aggregates, 16
Credit markets, 17
Financial markets relative to, 13
Reports to the Congress, 27
Review of 1988, 37
Review of 1989, 3
Mutual savings banks, 234
National Association of Securities
Dealers, 183
National banks {See also Member banks)
Assets, liabilities, and capital accounts,
227
Banking offices, changes in number, 234
National Credit Union Administration, 146,
183
New York Automated Clearing House
Association, 66
Nonmember depository institutions
Assets and liabilities, 229
Banking offices, changes in number, 234
Number, 229
Oil, price developments in 1989,11
Organisation for Economic Co-operation
and Development, 21
Over-the-counter marginable stocks, 184
Payments mechanism {See Fees)
Payments system networks, policy
statements, 65

282

76th Annual Report, 1989

Policy actions
Board of Governors
Discount rates at Federal Reserve
Banks, 66
Regulations, 59
Statements and other actions, 63, 65
Federal Open Market Committee (See
also System Open Market Account),
71
Presidents and vice presidents of Federal
Reserve Banks
Conferences, 253
List, 252
Salaries of presidents, 215
Priced services, Federal Reserve, 189, 216
Profit and loss, Federal Reserve Banks, 218
Publications
Choosing and Using Credit Cards, 147
Electronic Banking, 147
Fair Credit Billing Act, 147
Regional Delivery System, 191
Regulation of banking organizations
Change in Bank Control Act, 179
Delegation of applications, 179
Public notice of board decisions, 179,180
State member bank applications, 181
Timely processing of applications, 179
Regulations
B, Equal Credit Opportunity
Women's Business Ownership Act of
1988, amendment, 59, 142
Women's Business Ownership Act of
1988, regulatory simplification,
188
C, Home Mortgage Disclosure
Financial Institutions Reform,
Recovery and Enforcement Act
(FIRREA), requirements, 142
Revision requiring additional
disclosure of certain residential
lending data, 59
CC, Availability of Funds and Collection
of Checks
Amendment to clarify the regulation, 63
Policy statement to discourage certain
abuses of the check collection
system, 63
D, Reserve Requirements of Depository
Institutions
Decrease in the amount of transaction
balances, 60



Regulations—Continued
H, Membership of State Banking
Institutions in the Federal Reserve
System
Amendment to improve public access
to financial information about state
banks, 60
Interpretation, 61
P, Bank Protection Act of 1968,
amendment, 188
Y, Bank Holding Companies and Change
in Bank Control
Amendment to permit bank holding
companies to acquire savings
associations, 61
Tandem restrictions elimination, 187
Z, Truth in Lending
Amendment to implement the Fair
Credit and Charge Card
Disclosure Act of 1988, 62, 143
Amendment to implement the Home
Equity Loan Consumer Protection
Act of 1988, 62,143
Preemption determination, Wisconsin
law, 144
Regulatory Improvement Project, 187
Regulatory Policy and Planning Committee,
187
Regulatory Review Section, 187
Regulatory simplification, 187
Reserve requirements of depository
institutions
Regulation D (See Regulations: D)
Table, 227
Reserves and related items, 230
Resolution Finance Corporation, 161
Resolution Trust Corporation, 9,161,167
Right to Financial Privacy Act, 165
Risk-based capital, 177
RTC Oversight Board, 161, 167
Rules Regarding Delegation of Authority
Amendment to delegate authority to a
senior Board officer to approve the
acquisition of a failing savings
institution, 61
Amendment to permit interlocking
directorates for diversified savings
and loan holding companies, 64
Salaries
Board of Governors, 201
Federal Reserve Banks, 215

Index 283
Savings Association Insurance Fund, 163
Schools (See Training)
Securities (See also specific types)
Credit, 228
Definitive, 191
Over-the-counter, 184
Regulation, 183
Services, 191
Securities Act Amendments of 1975, 172
Securities and Exchange Commission, 148,
183
Securities Exchange Act of 1934, 183
Security devices, Regulation P, 188
Senior Forum for Current Banking and
Regulatory Issues, 176
Small Business Administration, 145, 148
Special drawing rights, 206, 208, 230, 232
State member banks (See also Member
banks)
Application regulation, 181
Assets and liabilities, 229
Bank Merger Act, 178
Banking offices, changes in number, 234
Board decisions, 179, 180
Complaints against, 149
Examinations and inspections, 170
Federal Reserve membership, 185
Fees (See Fees)
Financial disclosure by, 184
Interest on deposits (See Interest rates)
Loans to executive officers, 185
Mergers and consolidations (See Bank
mergers and consolidations)
Number, by class of bank, 229
Reserve requirements (See Reserve
requirements of depository
institutions)
Stock market credit (See Securities credit)
Supervision of banking organizations (See
Banking supervision and regulation
by Federal Reserve System)
Surveillance and monitoring, 173
Transfer agents, 173
Statement of Principles, 169
Supervision
Policy, 174
Safety and soundness, 170
Scope, regulatory responsibilities, 169




System Open Market Account, authority to
effect transactions in domestic
operations
Domestic Open Market Operations
Authorization for, 71, 92, 109
Domestic Policy Directive, 73, 76, 85,
92,99,109,118,124,131
Foreign currency directive, 75
Foreign currency operations
Authorization for, 74, 98, 116, 138
Tandem restrictions, elimination, 187
Tax Reform Act of 1986, 49
Telemarketing operations, credit card use,
152
Thrift Institutions Advisory Council, 251
Thrift Supervision, Office of, 145, 167, 179,
183,161
Training, 176
Transfer agents, 173
Transfers of funds (See also Fees and
Regulations: E)
Check clearing and collection (See Check
clearing and collection)
Federal Reserve operations, volume, 225
Priced services, Federal Reserve, 216
Transportation, U.S. Department of, 147,
148
Treasury securities
Bank holdings, by class of bank, 229
Federal Reserve Banks
Holdings, 206, 208, 214, 230, 232
Income, 216
Open market transactions, 212
Repurchase agreements
Tables, 206, 208, 212, 214, 230, 232
Treasury, U.S. Department of, 183, 191,
172
Truth in Lending Act, compliance with, 146
Truth in Savings, testimony, 153
Wire transfer of funds, fees for services,
190
Women's Business Ownership Act of 1988
Equal Credit Opportunity amendment,
59, 142
Regulatory simplification, 188
World Bank, 22, 177

FRB 1-12,500-0590

284

76th Annual Report, 1989

Maps of the Federal Reserve System

1

9

Hi

l|fcv

1

MINNEAPOLIS •

%

i

7

12
10

I

&

KANSAS C I T Y H

•I •
ii
B

•

• N E W YORK
CLEVELAND "^ ' IPHILADELPHIA

CHICAGO •

• SAN FRANCISCO

BOSTON

a
•

4

g
ST. LOUIS

RICHMOND

5

8
ATLANTA

DALLAS

ALASKA

HAWAII

:;

LEGEND

Both pages
• Federal Reserve Bank city
• Board of Governors of the Federal
Reserve System

Facing page
• Federal Reserve Branch city
— Branch boundary

NOTE

The Federal Reserve officially identifies
Districts by number and Reserve Bank
city (shown on both pages) and by letter
(shown on the facing page).
In the 12th District, the Seattle Branch
serves Alaska, and the San Francisco
Bank serves Hawaii.
The System serves commonwealths
and territories as follows: the New York
Bank serves the Commonwealth of Puerto




Rico and the U.S. Virgin Islands; the San
Francisco Bank serves American Samoa,
Guam, and the Commonwealth of the
Northern Mariana Islands. The Board of
Governors revised the boundaries of the
System most recently in August 1986.

Maps of the Federal Reserve System 285
2-B

1-A

3-C

4-D
Pittsburgh

Buffalo
NJ

NY

NEW YORK

BOSTON

PHILADELPHIA

7-G

RICHMOND

CLEVELAND

8-H

Littl?
Rock
CHICAGO

ATLANTA

ST. LOUIS

9-1

MINNEAPOLIS

10-J

m

12-L

Oklahoma City
^^H

0
1

KANSAS CITY

1-K

•. c . ,
El Paso f

r^l

• Los Angeles

^ SanlfenioC S « O ,
-^VHOU
Antonio £ ^

DALLAS




SAN FRANCISCO

m

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