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Report
\O
1991
Board of Governors of the Federal Reserve System
This publication is available from Publications Services, Mail Stop 138, Board of Governors
of the Federal Reserve System, Washington, DC 20551.
Letter of Transmitted
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., April 15, 1992
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-Eighth Annual Report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1991.
Sincerely,
Chairman
Contents
Part 1
3
7
8
10
12
14
16
Monetary Policy and
the U.S. Economy in 1991
INTRODUCTION
THE ECONOMY IN 1991
The household sector
The business sector
The government sector
Labor markets
Price developments
19 MONETARY POLICY AND FINANCIAL MARKETS IN 1991
20 The implementation of monetary policy
23 Monetary and credit flows
31 INTERNATIONAL DEVELOPMENTS
32 Foreign economies
35 U.S. international transactions
38 Foreign currency operations
39 MONETARY POLICY REPORTS TO THE CONGRESS
39 Report on February 20, 1991
62 Report on July 16, 1991
Part 2
Records, Operations,
and Organization
87 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
87 Regulation D (Reserve Requirements of Depository Institutions)
88 Regulation G (Securities Credit by Persons other than Banks, Brokers, or Dealers)
and Regulation T (Credit by Brokers and Dealers)
88 Regulation G (Securities Credit by Persons other than Banks, Brokers, or Dealers)
and Regulation U (Credit by Banks for the Purpose of Purchasing or Carrying
Margin Stocks)
88 Regulation H (Membership of State Banking Institutions in the Federal
Reserve System) and Regulation K (International Banking Operations)
89 Regulation H (Membership of State Banking Institutions in the Federal
Reserve System) and Regulation Y (Bank Holding Companies and
Change in Bank Control)
89 Regulation K (International Banking Operations)
90 Regulation P (Minimum Security Devices and Procedures for Federal Reserve Banks
and State Member Banks)
90 Regulation BB (Community Reinvestment Act)
91 Regulation CC (Availability of Funds and Collection of Checks)
92 Policy statements and other actions
92 Rule regarding delegation of authority
92 1991 discount rates
97
97
99
100
101
102
113
120
128
138
147
154
163
RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
Authorization for domestic open market operations
Domestic policy directive
Authorization for foreign currency operations
Foreign currency directive
Meeting held on February 5-6, 1991
Meeting held on March 26, 1991
Meeting held on May 14, 1991
Meeting held on July 2-3, 1991
Meeting held on August 20, 1991
Meeting held on October 1, 1991
Meeting held on November 5, 1991
Meeting held on December 17, 1991
173
173
178
179
180
184
185
187
187
188
190
191
CONSUMER AND COMMUNITY AFFAIRS
Regulatory matters
Community affairs
FFIEC activities
Compliance with consumer regulations
Economic effects of the Electronic Fund Transfer Act
Utility of the new HMDA data
Complaints about state member banks
Unregulated practices
Consumer Advisory Council
Testimony and legislative recommendations
Recommendations of other agencies
193
193
193
194
195
LITIGATION
Bank holding companies—antitrust action
Bank Holding Company Act—review of Board actions
Litigation under the Financial Institutions Supervisory Act
Other actions
197 LEGISLATION ENACTED
197 Federal Deposit Insurance Corporation Improvements Act of 1991
205
206
212
217
220
221
224
BANKING SUPERVISION AND REGULATION
Scope of responsibilities for supervision and regulation
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
225 REGULATORY SIMPLIFICATION
225 Minimum security devices and procedures
225 International banking
226 Applications by bank holding companies to conduct nonbanking activities
227 FEDERAL RESERVE BANKS
227 Other developments in Federal Reserve services
230 Examinations
230 Income and expenses
231 Holdings of securities and loans
231 Volume of operations
231 Federal Reserve Bank premises
233 Financial statements for priced services
237
BOARD OF GOVERNORS FINANCIAL STATEMENTS
243
244
STATISTICAL TABLES
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1991
2. Statement of condition of each Federal Reserve Bank,
December 31, 1991 and 1990
3. Federal Reserve open market transactions, 1991
4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities,
December 31, 1989-91
5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1991
6. Income and expenses of Federal Reserve Banks, 1991
7. Income and expenses of Federal Reserve Banks, 1914-91
8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1991
9. Operations in principal departments of Federal Reserve Banks, 1988-91
10. Federal Reserve Bank interest rates, December 31, 1991
11. Reserve requirements of depository institutions
12. Initial margin requirements under Regulations T, U, G, and X
13. Principal assets and liabilities and number of insured commercial banks,
by class of bank, June 30, 1991 and 1990
14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-91, and month-end 1991
15. Changes in number of banking offices in the United States, 1991
16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1991
246
250
252
253
254
258
262
263
264
265
266
267
268
274
275
289
290
292
293
294
295
296
297
298
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
Conferences of chairmen, presidents, and first vice presidents
Directors
319
INDEX
326
MAPS OF THE FEDERAL RESERVE SYSTEM
Parti
Monetary Policy and
the US. Economy in 1991
Introduction
The year 1991 started with the economy
in recession. Output fell sharply in the
first quarter, and unemployment continued to climb. By early spring, activity
had bottomed out, and for a few months
recovery seemed to be taking hold in a
fashion roughly typical of that seen in
the very early phases of previous postwar expansions. But as the year wore
on, the incipient recovery lost its momentum. Consumer spending turned
down after mid-summer, and business
and household sentiment began to erode.
Inventories at wholesale and retail trade
establishments began to increase relative to sales, inducing a new outbreak of
production adjustments and layoffs that
continued through year-end. Growth of
the economy—as measured by its gross
domestic product—came almost to a
standstill in the fourth quarter, and the
gain over the year as a whole was less
than V2 percent.
By contrast, the inflation picture
brightened considerably in 1991. After
accelerating moderately in 1989 and
1990, the rate of price increase turned
down in the first half of 1991, and by the
end of the year an underlying trend toward disinflation seemed to have become well-established in the labor and
product markets. The consumer price
index excluding food and energy—
a widely accepted measure of core
inflation—rose 4.4 percent in 1991,
after an increase of more than 5 percent in 1990. Labor costs also slowed,
NOTE. The discussion here and in the following
two chapters is adapted from Monetary Policy
Report to the Congress Pursuant to the Full Employment and Balanced Growth Act of 1978
(Board of Governors, February 1992).
as did various measures of inflation
expectations.
At the start of 1991 the Federal Reserve already had moved to ease money
market conditions in response to the
weakening of the economy in the latter
part of 1990, and a further progressive
easing took place during the first several
months of 1991. Then, with the stance
of policy seemingly conducive to supporting the upturn in activity that began
in the spring, a more neutral money
market posture was maintained through
the spring and early summer.
The Federal Reserve resumed its easing of money market conditions in the
second half of 1991 against the backdrop of flagging economic activity, diminishing inflationary pressures, and a
weakening of the broader monetary
aggregates—M2 and M3. The federal
funds rate fell from 5% percent in July
to 4 percent by year-end, and most other
short-term rates followed suit. The discount rate also was reduced over this
period, from 5*/2 percent to 3Vi percent,
the lowest rate in nearly thirty years.
Long-term interest rates, which had
failed to respond to declines in money
market rates in the early months of the
year, came down significantly in the latter part of 1991, partly in response to the
easing in inflationary expectations.
The faltering of the recovery process
in the second half of 1991 apparently
resulted from the convergence of a variety of forces. Burdened by heavy debts
and weak asset values—particularly in
real estate—households and corporations
restrained spending. In addition, financial intermediaries, chastened by their
negative experience with earlier loans,
became more hesitant to extend new
78th Annual Report, 1991
credit; the resultant tightening of lending standards deepened the decline in
economic activity early in the year and
inhibited the subsequent recovery. In the
government sector, where deficits remained large at the federal level as well
as in many state and local jurisdictions,
efforts to curb spending and increase
revenues constituted a further drag on
aggregate demand.
The sluggishness of spending in 1991
was accompanied by a striking slowdown in the growth of credit. The volume of outstanding debt in the domestic
nonfinancial sector increased AlA percent in 1991, roughly half the average
pace of the three previous years. Excluding federal government debt, which continued to climb briskly, the growth of
nonfinancial sector debt over the year
was 2J/2 percent, the smallest rise in
decades. Households, nonfinancial businesses, and state and local governments
all retrenched in order to buttress deterioratingfinancialpositions.
At the end of 1991, the speed with
which the monetary easing might translate effectively into increases in production and employment was still a matter
of considerable uncertainty. The low
level of consumer confidence evident at
year-end seemed likely to exert a negative influence on near-term activity. In
addition, severe structural problems still
were evident in some sectors. Most notably, the persistent overhang of vacant
space in office and other commercial
buildings appeared certain to inhibit new
construction in that sector for some
time, and the budgetary constraints that
had capped government spending in
1991 seemed likely to linger.
At the same time, however, some
strong positive forces also were evident.
With interest rates down sharply in
1991, households and businesses took
the opportunity to refinance mortgages
and to replace other existing debt with
new, lower-cost credit. Lower interest
rates also contributed to an increase in
stock prices, which induced firms to
boost equity issuance, pay down debt,
and thereby strengthen their balance
sheets. Through such adjustments,
households and businesses were becoming better positioned at year-end to begin providing more active support to the
economic recovery. In addition, financial institutions had made considerable
progress in strengthening their balance
sheets; this strengthening will augment
the ability of these institutions to lend
and could reduce demands on the federal safety net.
At year-end the nation also had reason to be guardedly optimistic about the
ability of American firms to compete in
the world economy. The real exports of
goods and services registered another
solid gain in 1991 despite a further
slowing in the growth of foreign industrial economies; the merchandise trade
deficit for the year was the smallest
since 1983. Cost restraint in manufacturing, associated in part with rapid productivity gains, has enabled U.S. producers to move more aggressively into
foreign markets in recent years. That
cost restraint and productivity gain will
need to be maintained, of course, if
domestic producers are to remain at the
forefront of a rapidly changing world
economy.
Our ability to compete in the world
arena—and an improved economy more
generally—also will require a shift over
time toward higher rates of saving and
investment. The rates of personal and
corporate saving have been extremely
low over the past decade; at the same
time, rapid growth of the stock of federal debt has imposed heavy demands
on the limited amount of saving that was
available. The result has been a higher
level of real interest rates than there
would have been otherwise. Growth of
Introduction
the real capital stock, upon which our
future incomes depend, has thereby been
stunted. A sustained reduction in the
size of the federal budget deficit continues to be the most certain way to boost
total saving and bring about an easing of
the pressure on long-term rates.
Monetary policy also can contribute
positively to the long-run performance
of the economy, by providing the noninflationary setting in which saving and
investment are most likely to flourish. In
that regard, it is encouraging that core
inflation is slowing—at the end of 1991
it seemed headed for the lowest pace in
a generation. Preserving that gain
against inflation while helping to lift the
economy solidly into sustained expansion is the challenge that monetary policy will have in 1992 and beyond.
•
The Economy in 1991
The year began with the U.S. economy
in the midst of recession. Activity had
contracted sharply after the jump in oil
prices that followed Iraq's invasion of
Kuwait in August 1990, and the weakness continued into the first quarter of
1991, bringing further reductions in production and employment. By spring,
however, economic data indicated that
the decline in activity had bottomed out.
The rapid conclusion of the Persian Gulf
war boosted consumer confidence, and
tangible support for an increase in
household spending was coming from
falling oil prices and the cumulative
effects of declining interest rates. Construction of single-family homes had already turned up noticeably by April, and
consumer spending posted a moderate
rise in the second quarter. Although
businesses continued to liquidate inventories at a fairly rapid pace, industrial
production grew steadily from April
through July, and payroll employment
turned up.
But the economic pickup that
emerged in the spring failed to develop
momentum. The thrust to domestic demand initiated by the end of the Gulf
war dissipated during the summer, and
although growth of the economy was
positive in the second half of 1991, it
was much slower than the pace seen
in the comparable phase of previous
recoveries.
The absence of a more robust recovery likely reflected the drag on aggregate demand from some longer-term
economic and financial adjustments. For
example, imbalances long evident in the
commercial and multifamily construction sectors damped enthusiasm for new
projects, and difficulties in the financial
sector continued to restrain credit availability. Such influences undoubtedly
muted the stimulus that normally would
have been forthcoming from the decline
in interest rates. The fiscal restraint evident at all levels of government weighed
on aggregate demand in a way not typically observed in previous economic
cycles. Significant restructurings of
operations in a number of sectors had
the effect of retarding employment and
income growth, at least in the short
run. And concerns about debt-servicing
burdens as well as about economic
prospects made businesses and consumers reluctant to borrow or increase
spending.
Despite their cautious planning, some
businesses experienced inventory backups over late summer and fall, necessitating another round of production adjustments. Industrial production edged
down in the fourth quarter, and the
Real GDP
Percentage change, annual rate
1989
1990
1991
The data are preliminary, seasonally adjusted, and
come from the Department of Commerce.
8
78th Annual Report, 1991
growth of real gross domestic product
came almost to a halt. In the labor market, layoffs increased once again, and
the civilian unemployment rate rose, to
7.1 percent by year-end.
Inflation slowed in 1991. Consumer
prices rose 3 percent over the year, only
half the increase posted during 1990. In
part, the slowing of inflation was a result of the plunge in oil prices early in
1991; consumer energy prices fell
sharply in the first quarter and closed the
year IVi percent below their level at the
end of 1990. Food price inflation also
moderated considerably in 1991; in
total, food prices were up only 2 percent
at retail, after three years of increases in
excess of 5 percent.
Even apart from food and energy, inflation shifted to a downward trend in
1991. To be sure, there were sizable
increases in the CPI excluding food and
energy early in the year, as higher federal excise taxes and lagged effects of
the sharp rise in energy prices boosted
prices for a variety of goods and services. But, with the subsequent reversal
in oil prices and no further major tax
hikes, price pressures began to ease in
the spring. In the second half of 1991,
the CPI excluding food and energy rose
less than 4 percent at an annual rate, a
pace well below the 5 percent rate for
1990.
Labor cost pressures also diminished
in 1991, although substantial increases
in health care expenses remained a problem for employers. As measured by the
employment cost index, nominal compensation per hour rose about AV2 percent over 1991, an increase somewhat
less than those recorded in each of the
three previous years.
incomes, real consumer spending rose
just Vi percent in 1991. After declining
early in the year, spending picked up
in the spring and early summer; but
thereafter, it weakened once more, restrained by the failure of the recovery
to take hold and households' concerns
about their financial prospects and debt
burdens.
The weakness in consumer spending
over the year was particularly evident
for durable goods. Motor vehicle sales
in 1991, at 12V4 million units, were the
lowest since 1983, and outlays for other
durable goods were down slightly over
the year, after a decline of 1 x/i percent in
1990. Spending on nondurable goods
also declined in 1991; expenditures were
down sharply in the fourth quarter, especially for apparel. The outlays for services continued to trend up at a pace
similar to that of the two previous years;
however, growth of spending was much
slower than in earlier years of the long
expansion of the 1980s.
The sluggishness of consumer spending in 1991—particularly the steep decline in outlays for durable goods—was
likely related in part to the efforts of
households to strengthen their balance
Real Income and Consumption
Percentage change, annual rate
Disposable personal income
Personal consumption expenditures
The Household Sector
1989
With household finances adversely
affected by job losses and declining real
1990
1991
The data are preliminary, seasonally adjusted, and
come from the Department of Commerce.
The Economy in 1991
sheets. Household debt burdens rose
substantially during the 1980s, when
consumers stepped up spending on
motor vehicles and other consumer
durables; often, these purchases were
financed with credit. In some parts of
the nation, this spending boom spread to
residential real estate as well; the associated borrowing, which was often predicated on expectations of rapidly rising
family incomes, added further to the
financing burdens of households. As income growth weakened in 1990 and
1991, consumers struggled to meet the
monthly obligations on their accumulated debt, and they apparently deferred
some discretionary spending in the
process.
Renewed pessimism on the part of
households also may have contributed
to their reluctance to step up spending
over the latter part of 1991. Consumer
confidence, which was quite low at the
beginning of the year, rose markedly
upon the conclusion of the Gulf war.
However, as the anticipated recovery in
the economy failed to materialize and as
announcements of layoffs resumed, confidence turned down again, falling especially sharply toward the end of the year.
Concerns about longer-run economic
prospects seemed to be contributing to
this heightened sense of anxiety among
households.
Households' real outlays for residential investment declined in the first quarter, then rose over the remainder of the
year. Impetus for this rise in spending
came from a reduction in mortgage rates
to their lowest levels since the 1970s.
Sales of new and existing single-family
homes rose over the year, with the
pickup in demand reportedly especially
pronounced from first-time buyers. With
the strengthening in demand, the excess
supply of unsold new homes diminished
in 1991, and after dropping sharply in
January, housing starts staged a moderate recovery over the remainder of the
year. The pace of single-family housing
starts in the fourth quarter was up
18 percent from a year earlier.
All told, however, single-family housing construction in 1991 was below that
of 1990, and it was down sharply from
the pace seen during the economic expansion of the 1980s. Moreover, despite
the upturn in activity after January, the
single-family housing market remained
softer than would have been expected
given the levels of mortgage rates and
Private Housing Starts
Millions of units, annual rate
Personal Saving
Percent of disposable income
Single-family
0.5
1987
1989
1991
The data are preliminary, seasonally adjusted, and
come from the Department of Commerce.
1987
1989
1991
The data are seasonally adjusted and are from the
Department of Commerce.
10
78th Annual Report, 1991
the rising number of consumers in their
prime homebuying years. More than
likely, this shortfall was a reflection of
the restraint on demand exerted by weak
income growth and by concerns about
employment prospects. However, continued lender caution about granting
loans for land acquisition and construction reportedly damped the construction of single-family housing in some
locales.
In the multifamily housing market, an
excess supply of vacant units and restraints on credit availability continued
to depress construction in 1991. Starts
of multifamily units fell about 30 percent over the year, and the annual total
was the lowest since the 1950s. There
were numerous reports of restrictive
lending practices damping activity in
this sector. But the more prominent factor retarding new construction probably
was the continued excess supply. With
vacancy rates for rental units exceptionally high and rents soft, the economic
viability of new projects remained questionable in many areas. Under these
circumstances, activity in this segment
of the market seemed unlikely to show
appreciable improvement in the near
term.
By the spring, inventories generally
were better aligned with sales, and operating profits, while still low, had turned
up. As a result, the improvement in
aggregate demand in the second quarter
was accompanied by an increase in business output, and industrial production
rose, on average, 0.7 percent per month
over the four-month period starting
in April. Even so, businesses remained
relatively cautious, and inventory levels
continued to decline through midyear.
In late summer, final demand slackened, and after seven months of decline,
business inventories rose appreciably
from September through December.
The rise in inventories was centered
in wholesale and retail trade, and
inventory-sales ratios in those sectors
moved into ranges that appeared undesirably high in light of carrying costs
and expected sales. The efforts of retailers and wholesalers to restore better
inventory balance led, in turn, to cuts in
manufacturing output toward the end of
the year. By December, factory production had dropped back almost to its level
Corporate Profits before Taxes
Percent of gross domestic product
The Business Sector
At the start of 1991, businesses were
striving to adjust to the cyclical contraction in demand for their products and to
the surge in energy costs during the
preceding half year. With profit margins
down sharply and inventory imbalances
emerging in a number of sectors, businesses reduced production and employment substantially between October
1990 and March 1991. Cutbacks were
especially sharp in the motor vehicle
sector over that period, although output
of most other types of goods and materials turned down as well.
1987
1989
1991
Profits of nonfinancial corporations from domestic
operations, with adjustments for inventory valuation and
capital consumption, divided by GDP of nonfinancial
corporate sector.
The Economy in 1991
11
of a year earlier, and the operating rate
in industry was back down to near the
lows of the previous spring.
Business investment in fixed capital
fell 7V2 percent in real terms over the
four quarters of 1991. As is typical during recessions, spending was inhibited
by weak profits, a rise in excess capacity, and uncertainty regarding the outlook for sales. However, investment outlays last year also were depressed by a
desire of many businesses to reduce debt
burdens and by a continued oversupply
of office and other commercial space.
Real spending for equipment fell
4 percent over 1991; outlays plunged in
the first quarter and showed only limited
improvement on net over the remainder
of the year. The main exception to the
pattern of weakness was investment
spending for computers; driven by new
product introductions and by the substantial price cuts offered by computer
manufacturers, these outlays rose, in real
terms, at an annual rate of more than
40 percent in the second half of the year.
In contrast, business investment in other
types of equipment generally declined,
on balance, over the course of 1991.
Outlays for industrial equipment
dropped sharply in 1991 as excess capacity limited expansion in the manufacturing sector, and business purchases of
motor vehicles also fell, on net. In addition, domestic orders for commercial
aircraft plunged after midyear, as a number of domestic airlines trimmed investment plans. Although the large backlog
of unfilled aircraft orders that still remained at year-end seemed likely to sustain production and shipments for some
time, the slackening of new orders suggests that the growth surge in this sector
may have run its course.
Nonresidential construction plummeted nearly 15 percent in real terms
over the four quarters of 1991. The contraction was broadly based. Spending
for industrial structures fell during the
course of the year as low rates of capacity utilization curtailed plans for new
factory construction; and petroleum
drilling activity dropped sharply in
response to the decline in oil prices. But
the largest declines in outlays, by far,
were those for office buildings and other
commercial structures. Here, the fundamental problem in 1991 continued to be
Changes in Real Business Inventories
Billions of 1987 dollars, annual rate
Industrial Production
Index, 1987 = 100
li
30
li
i
15
+
0
105
15
100
30
1989
1990
Total nonfarm sector. The data are preliminary, seasonally adjusted, and come from the Department of
Commerce.
95
1991
1985
1987
1989
1991
12
78th Annual Report, 1991
the overhang of vacant space from an
earlier period of extensive overbuilding;
for example, despite steep cutbacks in
new construction in recent years, the
vacancy rate for office buildings nationwide was still close to 20 percent at the
end of the 1991.
With vacancies remaining so high, the
prices of existing commercial properties
weakened; the loans against those properties also lost value, a factor that contributed heavily to the substantial stress
that was evident in the financial sector
in 1991. Lenders, in turn, were reluctant
to finance acquisitions of commercial
properties; this lack of liquidity compounded the difficulties of adjustment
in the commercial real estate market.
In the market for office buildings, all
of the indicators of construction activity remained strikingly negative at
the end of 1991. For other commercial
structures—primarily shopping centers
and warehouses—the outlook seemed
slightly less downbeat, with the data on
new contracts and building permits suggesting that the steepest declines may
have already occurred.
Federal banking regulators took a
number of steps in 1991 to ensure that
Real Business Fixed Investment
Percentage change, annual rate
Producers' durable equipment
i
f
Structures
1989
1990
10
1
10
20
1991
The data are preliminary, seasonally adjusted, and
come from the Department of Commerce.
supervisory pressures would not unduly
restrict real estate lending. For example,
the agencies addressed issues relating to
accounting and appraisal to make sure
that illiquid real estate exposures were
being evaluated sensibly and consistently. And they issued guidance
to examiners—and simultaneously
to bankers—emphasizing that banks
should not be criticized for renewing
loans to creditworthy borrowers whose
real estate collateral had fallen in
value—even when the banks need to
build up capital or reduce loan concentrations over time. However, with so
adverse a supply-demand imbalance in
the property market, lenders understandably remained reluctant to bear the risks
of real estate exposures.
The Government Sector
Budgetary pressures were widespread in
the government sector in 1991. At the
federal level, the unified budget deficit
increased to $269 billion in fiscal year
1991, up $48 billion from the 1990 deficit. In large part, the rise in the deficit
was attributable to the slowdown in
economic activity, which reduced tax
receipts and added to outlays for
income-support programs such as unemployment insurance and food stamps.
However, as in 1990, the fiscal 1991
deficit also was affected by special factors: A pickup in net outlays for deposit
insurance added to the deficit, while
one-time contributions from our allies to
defray the costs of Operations Desert
Shield and Desert Storm reduced it. Excluding deposit insurance and these foreign contributions, the 1991 deficit totaled $246 billion.
On the revenue side, federal tax receipts rose just 2 percent in fiscal 1991,
the smallest increase in many years. The
slowing in receipts stemmed largely
from weak growth of nominal income;
The Economy in 1991
indeed, personal income tax payments
in 1991, which accounted for nearly half
of total receipts, were about the same as
in 1990 despite changes in tax provisions that were projected to raise
$16 billion in new revenues.
Meanwhile, federal spending rose
nearly 6 percent in fiscal 1991. Part of
this increase resulted from the slightly
more rapid pace at which the Resolution
Trust Corporation resolved insolvent
thrift institutions. In contrast, outlays
were reduced in fiscal 1991 by allied
contributions to the Defense Cooperation Account. These contributions,
Government Surpluses and Deficits
Billions of dollars
200
State and local government
1985
1987
1989
1991
The data on the federal government are for fiscal years.
They are on a unified budget basis and are from the
Department of the Treasury.
The data on state and local governments are preliminary. The are for operating and capital accounts on a
national income accounts basis and are from the Department of Commerce.
13
which are scored as negative outlays in
the budget accounts, exceeded the outlays made in 1991 for U.S. involvement
in the conflict; the excess will be applied
to the replacement of munitions in 1992
and beyond. Excluding deposit insurance and the contributions of allies, outlays rose about 9 percent in fiscal 1991.
Spending for health programs continued
to rise rapidly, elevated by large increases in health care costs and outlays
for medicaid. Among other outlays for
entitlements, those for social security
and other income-support programs,
which together account for one-third of
total federal spending, rose more than
11 percent in fiscal 1991; the jump was
related to substantial increases in the
number of beneficiaries. Interest payments on the federal debt also continued
to rise in fiscal 1991, but at a slower
pace than in the previous fiscal year; the
effect of a further big rise in the volume
of federal debt outstanding was partially
offset by declines in interest rates.
Federal purchases of goods and services, the portion of federal spending
that is included directly in GDP, fell
3V2 percent in real terms over the four
quarters of 1991. Defense purchases
jumped sharply early in the year to support operations in the Persian Gulf, but
declined substantially over the remainder of the year as the effects of scheduled cuts in defense outlays were augmented by a dropoff in purchases for
Desert Storm; on net, real defense purchases were down about AVi percent. In
contrast, nondefense purchases changed
little in 1991; increases in law enforcement, space exploration, and health
research offset a drawdown in inventories held by the Commodity Credit
Corporation.
The fiscal position of state and local
governments, which had deteriorated
sharply in 1990, remained poor in 1991.
The deficit in the combined operating
14
78th Annual Report, 1991
and capital accounts (excluding social pattern continued into 1991, with noninsurance funds) narrowed to $34 bil- farm payroll employment down sharply
lion in the third quarter from a high of
nearly $47 billion in the fourth quarter
of 1990; the shrinkage represented the
first major improvement since 1984, Labor Market Conditions
when the state and local budget surplus
Net change, millions of jobs, annual rate
peaked. Even so, relative to GDP, the
Private nonfarm payroll employment
deficit remained quite high on a historical basis.
The credit quality of state and local
government debt continued to deteriorate last year. For example, one rating
agency downgraded the general obligation debt of eight states. Most of these
rating changes were the direct result of
budgetary imbalances.
The poor fiscal position of states and
localities led to both severe restraints on
Percent, quarterly average
spending and sizable tax hikes. Overall,
real purchases of goods and services by
Civilian unemployment rate
state and local governments edged down
over the four quarters of 1991 after
seven years of sustained increases. In
nominal terms, total expenditures by
these governments were up AV2 percent,
only about one-half the average pace of
previous years. Receipts rose an estimated 7 percent in 1991; numerous
jurisdictions imposed a variety of new
tax measures, and federal aid to state
and local governments—especially for
Percentage change, Dec. to Dec.
medicaid—increased substantially.
Employment cost index
Nonetheless, many states and localities
Total compensation
continued to report revenue shortfalls
and spending overruns, probably setting
the stage for another round of budgetbalancing measures.
.illlhi,
Labor Markets
Labor market conditions generally deteriorated in 1991, and the unemployment
rate rose above 7 percent by the end of
the year, the highest level since 1986.
Employers had moved quickly to shed
workers when the recession took hold
during the second half of 1990, and this
Illlll
1987
1989
1991
The employment cost index is for private industry
excluding farms and households. The data are from the
Department of Labor.
The Economy in 1991
over the first four months of the year.
Economic conditions improved in the
spring, and labor demand turned up for
a time. But the subsequent weakening
in activity in the late summer led to a
renewed bout of layoffs that largely
retraced the job gains recorded during
the spring and summer. In December,
payroll employment was 0.7 percent
below the level of a year earlier.
The net job losses of 1991 were widespread by industry and reflected both the
cyclical weakness in labor demand associated with the recession and more fundamental efforts by many businesses to
restructure operations and permanently
reduce the size of their work force. Employment in manufacturing, which began to decline in 1989, fell about
450,000 in 1991; most of the losses were
in the durable goods sector. Construction employment also fell in 1991; the
continued rapid contraction in commercial building more than offset gains
associated with the moderate recovery
in residential housing demand. In the
finance, insurance, and real estate sector,
efforts to restructure existing operations
and to downsize workforce levels led to
job losses in 1991—a divergence from
the pattern of continued hiring in that
sector during most previous recessions.
Employment in trade establishments
also fell substantially over the year,
pushed down by the weakness in consumer spending and the high degree of
financial distress among retailers. In
contrast, employment in services increased, on net, over the year, as steady
gains in health services more than offset
sluggish hiring in the more cyclically
sensitive business and personal service
industries.
The unemployment rate at the end of
1991 was up nearly 2 percentage points
from its level of mid-1990, when the
recession had not yet begun. The distribution of job losses over that interval
15
was especially wide when compared
with experience during previous episodes of rising unemployment. Increases
in unemployment were broadly based
across regions, industries, and occupations, and permanent layoffs appeared to
constitute an unusually large proportion
of the rise in joblessness.
Nonetheless, the rise in the jobless
rate was less than in most previous episodes of increasing unemployment, in
large part because growth of the labor
force was unusually slow. The labor
force participation rate at the end of
1991 was about Vi percentage point
below its average during the first half
of 1990. This decline in participation
appeared to stem partly from cyclical
influences: The number of discouraged
workers rose in 1991, and sizable
increases were reported in the number
of retirees, perhaps reflecting to some
extent a spate of early retirement programs. However, the weak labor force
growth of recent years may also represent a downshift in the trend rate of
increase in labor supply that—if not offset by productivity gains—could translate into a reduction in the trend rate of
growth of the economy's potential.
But at the same time, it also is possible that the recent sluggishness in labor
force participation is a harbinger of
more favorable longer-run developments. In particular, the number of individuals who have left the labor force in
order to attend school has risen sharply
in recent years. Although that increase
may, to some degree, reflect declining
opportunity costs associated with poor
job prospects, recognition of the longerterm decline in relative wages among
lower-skilled workers may also have
played a role. As students reenter the
labor force upon completion of their
schooling, their increased skills should
boost labor productivity and potential
output in future years.
16
78th Annual Report, 1991
Efforts to increase labor productivity
have also intensified in the business
community. If the aforementioned plans
to reorganize corporate structures and to
downsize the labor force requirements
of existing operations are successful, the
possible outcome is a significant improvement in the productivity trend,
much as occurred in the manufacturing
sector after the considerable compression of manufacturing organizations in
the early 1980s.
With layoffs widespread and the unemployment rate rising throughout the
year, the upward pressures on wages
that had intensified between 1987 and
mid-1990 diminished somewhat in
1991. As measured by the employment
cost index, the twelve-month rate of
change in hourly compensation for private nonfarm workers slowed from more
than 5 percent in the first half of 1990
to 4Vi percent by the end of 1991. The
wage and salary component of hourly
compensation, which rose 3 percent at
an annual rate over the second half of
1991, exhibited the most deceleration.
The rate of rise in employer costs for
benefits also decelerated after mid-1990,
but the increases continued to be much
greater than those for wages alone. Expenses for health insurance continued to
soar in 1991, despite considerable effort
on the part of employers to control costs
by negotiating directly with providers
and by increasing workers' share of
health expenditures. Employer premiums for workers' compensation insurance also rose sharply last year, reflecting both a swelling in the number of
claims and the rapid pace of inflation in
medical care.
a rise of 6 percent in 1990. A sharp
swing in energy prices accounted for a
major part of this deceleration. However, the elements of a more fundamental diminution of inflation were in place:
Labor cost increases moderated; expectations of inflation eased; and upward
pressures from import prices and industrial raw material prices were virtually
absent during the year.
Energy prices dropped sharply in
1991, mirroring the changes in oil prices
over the year. The sequence of events in
the Middle East caused the posted price
of West Texas Intermediate crude oil to
Prices
Percentage change, Dec. to Dec.
Consumer excluding food and energy
Price Developments
A significant slowing of inflation
emerged in 1991. The consumer price
index rose 3 percent over the year, after
1987
1989
1991
Consumer prices are for all urban consumers. The data
are seasonally adjusted and are from the Department of
Labor.
The Economy in 1991
fall from a peak of about $39 per barrel
in October 1990 to less than $20 by
February 1991; as a result, the CPI for
energy fell 30 percent at an annual rate
in the first quarter. Oil prices subsequently held near the $20 level, but gasoline prices firmed somewhat during the
summer as reduced imports and domestic refinery problems led to some tightness in inventories. However, these
forces were offset by declines in natural
gas and electricity rates, and energy
prices changed little, on balance, in the
second and third quarters. Some upward
price pressures surfaced again in the fall
as crude oil prices moved up in response
to concerns about oil supplies from the
Soviet Union. After October, however,
oil prices retreated again; at year-end,
prices in the spot markets were down to
less than $20 per barrel.
The CPI for food rose just 2 percent
over 1991, well below the increases of
5 to 5V2 percent observed in the three
previous years. In part, the subdued pace
of food price inflation reflected an
increased supply of livestock products.
Beef production turned up last year in
response to the strong prices that
prevailed in the preceding few years,
and supplies of pork and poultry rose
sharply; in response, meat and poultry
prices fell about 2 percent over the year.
The deceleration in food prices also extended to food groups in which prices
are influenced more by the cost of nonfarm inputs than by supply conditions in
agriculture; for example, the increase in
1991 in the price of food away from
home was the smallest since 1964. Elsewhere, there were large but temporary
monthly hikes in prices for fruits and
vegetables; adverse weather conditions
boosted these prices for a while in the
first half of the year, and prices of some
fresh vegetables jumped toward the end
of the year because of the whitefly infestation in California.
17
The consumer price index for items
other than food and energy rose AV2 percent in 1991, about 3A percentage point
less than in 1990. The index was
boosted early in 1991 by increases in
federal excise taxes on cigarettes and
alcoholic beverages and by an increase
in postal rates. Price increases in early
1991 also were enlarged by the
passthrough of the rise in energy prices
into a wide range of nonenergy goods
and services. However, the subsequent
decline in energy prices soon spread to
the nonenergy sector, and except for a
period in the summer when there was
some bunching of price increases, the
remainder of the year saw a significant
easing of core inflation.
Prices for nonenergy services decelerated considerably last year, rising
4Vi percent after an increase of 6 percent in 1990. Reflecting weak real estate
markets, rent increases slowed sharply,
with both tenants' rent and owners'
equivalent rent up less than 4 percent
over the year. The drop in interest rates
in 1991 pushed down auto financing
costs more than 7 percent. And, after a
brief spurt early in the year, airfares
receded as energy costs fell and as the
weak economy cut into demand; toward
year-end, however, airfares turned up
again as hard-pressed carriers sought to
improve their finances. Elsewhere in the
services category, the prices for medical
care services rose 8 percent over the
year, and tuition costs and other school
fees were up nearly 10 percent.
The CPI for commodities excluding
food and energy rose 4 percent in 1991,
about Vi percentage point faster than in
1990. In large part, the more rapid rate
of inflation in this category was a result
of the aforementioned hike in excise
taxes. In addition, the prices of new and
used cars rose more than in 1990, despite weak sales. By contrast, a slowing
in price increases was evident for a
18
78th Annual Report, 1991
number of other goods, notably apparel
and personal-care items.
The easing of inflationary pressures at
the factory level was even more striking
than at the retail level. The producer
price index for finished goods edged
down in 1991 after three years of increases that averaged 5 percent per year.
As was true at retail, falling prices for
energy and food accounted for much of
the overall deceleration. But even apart
from food and energy, producer prices
slowed to a 3 percent pace in 1991.
Prices for intermediate materials excluding food and energy fell 3A percent over
the year, reflecting declines in fuel and
petroleum feedstock costs, an easing of
wage pressures, and weak demand. The
spot prices of industrial commodities
declined gradually over most of 1991,
after dropping sharply in the fourth
quarter of 1990.
•
19
Monetary Policy and Financial Markets in 1991
The principal objective of monetary policy in 1991 was to help lay the groundwork for a sustainable expansion without sacrificing the progress against
inflation that had already been set in
motion. The Federal Reserve eased
money market conditions during the
year amid signs of continued sluggish
economic activity, weak growth in the
broader monetary and credit aggregates,
and diminishing inflationary pressures.
A more generous provision of reserves
through open market operations, coupled with five separate reductions in the
discount rate brought the federal funds
rate and most other short-term interest
rates down about 3 percentage points
over the course of the year. At year-end,
the discount rate stood at its lowest level
in nearly thirty years, and the federal
funds rate was down to 4 percent, its
lowest sustained level since the 1960s.
With the actions taken in 1991 building
on earlier easings, the federal funds rate
at year-end was also nearly 6 percentage
points below its most recent peak, in the
spring of 1989.
The faltering of the economic recovery in the second half of 1991 resulted
in some measure from an unusually cautious approach to credit on the part of
both borrowers and lenders. Efforts by
debt-burdened households and businesses to pare debt in order to strengthen
balance sheets that had been strained
by the general slowdown in income and
by declines in property values exerted
further damping effects on credit demands and on aggregate spending.
Faced with deteriorating asset values
and pressures on capital positions, depository institutions and other lenders
maintained tighter lending standards and
were somewhat hesitant to extend credit.
The more circumspect attitude toward
credit and spending on the part of borrowers and financial intermediaries was
manifest in the behavior of the aggregate debt of domestic nonfinancial
sectors, which grew at a rate near the
bottom of the Federal Open Market
Committee's monitoring range despite
burgeoning U.S. Treasury borrowing.
Not only was overall credit growth subdued, but credit flows continued to be
rechanneled away from depository institutions, reflecting the more restrictive
lending standards at banks and thrift institutions as well as efforts by borrowers
to make greater use of longer-term debt
and equity in order to strengthen their
balance sheets. Partly as a result, the
Short-Term Interest Rates
Percent
14
Treasury bills
Three-month
1983
1985
1987
1989
1991
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 coupon-equivalent basis
and is from the Department of the Treasury.
20
78th Annual Report, 1991
monetary aggregates M2 and M3 also
finished the year near the bottoms of
their target ranges.
To prevent these forces from stifling
the recovery, the Federal Reserve eased
money market conditions aggressively
in the latter part of the year. In light of
weak aggregate demand and reduced
inflationary potential, long-term interest
rates—which had largely failed to respond to monetary easings earlier in the
year—came down substantially toward
the end of 1991. This decline prompted
a flood of mortgage refinancings and
additional corporate and municipal
bond offerings, which helped reduce the
financing burdens of nonfederal sectors.
Lower interest rates also contributed to
a major stock market rally, which induced firms to boost equity issuance and
pay down debt, partially reversing the
trend of the 1980s toward increased
leverage that had severely stretched corporate balance sheets.
On the whole, the nation made considerable progress in strengthening its
balance sheet in 1991. Less reliance on
debt, greater use of equity, and lower
financing costs have helped ease debtservicing burdens for many financially
troubled households and corporations.
Although the trend toward deleveraging
exerted a restraining effect on aggregate
spending in 1991, it should help, over
time, to put consumers, firms, and financial intermediaries on a sounder financial footing and pave the way for
healthy, sustainable economic growth.
The Implementation
of Monetary Policy
The Federal Reserve eased money market conditions several times in the first
few months of 1991, extending the
series of easing moves initiated in the
latter stages of 1990. Against a backdrop of further declines in economic
activity, abating price pressures, and
continuing credit restraint by banks and
other financial intermediaries, a more
expansive open market posture was
adopted in conjunction with two Vi percentage point reductions in the discount
rate. The easing engendered a decline of
125 basis points in the federal funds rate
over the first four months of the year.
Short-term Treasury rates generally followed suit, and banks reduced the prime
rate, in three increments of 50 basis
points each, to 8V2 percent.
Long-term interest rates, by contrast,
were roughly unchanged on balance
over the first few months of the year. At
first, these rates fell somewhat in response to the continued downturn in
economic activity and declining energy
prices, especially in light of initial successes in the Gulf war that ensured an
unimpeded flow of oil. Success in the
initial phases of the war also prompted a
brief dip in the exchange value of the
dollar, as safe-haven demands that had
been propping up the dollar's value in
Long-Term Interest Rates
Percent
10
I
1983
I
I
1985
I
I
1987
I
I
1989
I
I
1991
The data are monthly averages.
The rate for conventional mortgages is the weighted
average for thirty-year fixed-rate mortgages with level
payments at major financial institutions and is from the
Federal Home Loan Mortgage Corporation.
The rate for U.S. government bonds is their market
yield adjusted to thirty-year constant maturity by the
Treasury.
Monetary Policy and Financial Markets
the face of falling interest rates in the
United States dissipated.
In March, bond yields drifted up on
the post-war rebound in consumer confi-
21
dence and on other evidence, particularly from the housing industry, that an
economic upturn was at hand. The improving outlook for recovery also con-
Reserves, Money Stock, and Debt Aggregates
Annual rate of change based on seasonally adjusted data unless otherwise noted, in percent'
1991
Item
1988
1989
1990
Year
Depository institution reserves2
Total
Nonborrowed
Required
Monetary base 3
Concepts of money 4
Ml
Currency and travelers checks .
Demand deposits
Other checkable deposits
M2
Non-Mi components
MMDAs, savings, and smalldenomimation 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
Q2
Q3
Q4
2.7
2.3
2.6
7.1
-.4
-.1
-.1
3.9
2.2
2.3
1.8
9.3
8.9
9.2
9.5
8.3
9.1
9.1
4.5
13.3
3.0
3.6
8.9
4.2
7.4
5.6
7.9
6.6
15.3
17.6
15.5
8.4
4.3
8.1
-1.3
7.6
.6
4.6
-2.9
1.0
4.2
11.1
-.6
3.5
8.0
8.0
3.4
12.4
5.3
13.2
-3.8
7.0
7.4
3.8
4.8
12.8
7.5
6.4
2.6
12.9
11.0
7.7
10.0
15.0
5.2
5.6
4.8
6.2
4.0
3.7
2.9
1.4
3.7
3.2
4.4
3.3
-1.1
2.6
.7
5.8
3.9
2.8
1.0
2.4
3.0
-.2
-1.0
8.2
-5.3
30.6
-8.5
11.2
3.4
4.4
-7.5
16.9
-41.8
7.5
-10.6
-3.6
-14.6
-3.2
40.3
6.4
10.8
11.7
3.6
-.9
4.3
1.7
-7.2
-10.6
1.3
-5.5
-11.7
3.4
2.0
-4.5
1.8
-9.7
-10.6
-1.2
-9.8
-15.0
1.2
-4.9
-18.9
.5
14.7
11.0
17.8
-13.3
-23.2
21.8
-12.4
-13.7
33.4
-21.6
-9.9
43.0
-31.2
6.3
28.9
-27.8
-35.3
11.4
-11.5
-2.5
37.0
-23.6
-8.3
9.4
7.9
9.9
8.2
7.3
8.5
7.0
10.3
6.1
4.5
11.2
2.4
4.4
10.4
2.6
4.2
6.8
3.4
4.7
13.9
1.9
4.3
12.2
1.7
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 without required reserve balances, the excess
of current vault cash over the amount applied to satisfy
current reserve requirements.
4. Ml consists of currency in circulation excluding
vault cash; 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 share draft accounts,
and demand deposits at thrift institutions. M2 is Ml plus
Ql
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 tax-exempt generalpurpose 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
net of money fund holdings; and overnight Eurodollars
issued to U.S. residents by foreign branches of U.S. banks
worldwide net of money fund holdings. M3 is M2 plus
large-denomination time deposits at all depository institutions other than those due to money stock issuers; assets
of institution-only money market mutual funds; wholesale term RPs issued by commercial banks and thrift
institutions net of money fund holdings; and term Eurodollars held by U.S. residents in Canada and the United
Kingdom and at foreign branches of U.S. banks elsewhere
net of money fund holdings.
22
78th Annual Report, 1991
tributed to a narrowing of risk premiums
on private securities, especially on
below-investment-grade issues; the premiums had reached high levels in January. The debt and equity instruments of
banks performed especially well over
this period, responding to lower shortterm interest rates and the likelihood
that an economic rebound would help
limit the deterioration in their loan portfolios. The dollar's slide in foreign exchange markets was reversed by moderate official support for the dollar, better
prospects for a U.S. economic recovery,
a rise in U.S. long-term interest rates
relative to those abroad, and concerns
about an uncertain economic and political situation overseas, especially in the
Soviet Union.
As evidence of a nascent economic
recovery cumulated through the remainder of the spring and into early summer,
interest rates and the dollar continued to
firm, and quality spreads narrowed further. Although the increases in rates during this period were most pronounced at
the long end of the maturity spectrum,
short-term rates backed up a bit as well,
as prospects for additional monetary
easings faded. Indeed, with the pace of
economic activity apparently quickening, and with the broader monetary aggregates near the middle of their target
ranges, the Federal Reserve held money
market conditions steady—the stimulus
in train seemed sufficient to support an
upturn in aggregate spending.
As the summer passed, however, the
strength and durability of the recovery
appeared less assured. Aggregate spending, production, and employment began
to falter, easing wage and price pressures. In addition, the broader monetary
aggregates suddenly weakened dramatically, with M2 coming to a virtual standstill and M3 actually declining in the
third quarter. The softness in the aggregates was symptomatic of a warier ap
proach to spending and borrowing on
the part of households and corporations,
whose balance sheet problems were exacerbated by the stagnant economy. In
addition, credit standards at financial
intermediaries remained restrictive, and
spreads between loan and deposit rates
remained high by historical standards,
reinforcing households' inclinations to
pay down debt rather than to accumulate
assets.
To help ensure that these forces did
not imperil the recovery, the Federal
Reserve moved to ease money market
conditions further. Pressures on reserve
positions were reduced slightly in August and again in September, with the
latter move accompanied by a reduction
of 50 basis points in the discount rate.
With the economic climate remaining
stagnant, price pressures subdued, and
the broader monetary aggregates still
mired near the bottoms of their target
ranges, the System's easing moves became more aggressive in the fourth
quarter, culminating in a reduction of
1 percentage point in the discount rate
on December 20. All told, these moves
combined to drive the federal funds rate
down from 53/4 percent in July to 4 percent by year-end. Most other shortterm market interest rates declined by
similar magnitudes, and the prime rate
was reduced by 2 percentage points, to
6V2 percent.
The decline in short-term interest
rates, in combination with flagging economic activity, prospects for lower inflation, and depressed credit demands, contributed to bringing long-term interest
rates down significantly in the latter part
of 1991. The rate for the thirty-year
Treasury bond dropped about 1 percentage point over the second half of the
year, and mortgage interest rates tumbled to their lowest levels in many years.
Declining interest rates prompted a spate
of mortgage refinancings, corporate and
Monetary Policy and Financial Markets
municipal bond offerings, and a major
stock market rally, which propelled most
indexes to record highs. Although monetary growth bounced back a bit in the
fourth quarter, both M2 and M3 remained near the lower ends of their respective growth cones. The dollar,
which had begun to lose ground in foreign exchange markets in the summer—
when the weakness in money and credit
raised the specter of additional easings
of U.S. monetary policy—depreciated
further in the fourth quarter as the economic situation deteriorated and as the
pace of policy easings quickened. Rising interest rates in Germany also put
downward pressure on the foreign exchange value of the dollar.
Monetary and Credit Flows
Patterns of credit usage and financial
intermediation, which began to shift
even before the onset of the economic
downturn, continued to evolve in 1991,
distorting traditional relationships between overall economic activity and the
monetary and credit aggregates.
23
These changes were evident in the
behavior of the aggregate debt of nonfinancial sectors, which expanded
4 Vi percent in 1991, leaving this aggregate at the bottom of its monitoring
range. Robust growth in federal government debt, owing to the economic
downturn and to additional outlays for
federal deposit insurance, masked an
even weaker picture for nonfederal debt.
Households, nonfinancial corporations,
and state and local governments accumulated debt at an anemic 2!/2 percent
rate in 1991, the slowest advance in
decades and smaller even than the sluggish growth rate of nominal GDP.
The small rise in nonfederal debt
velocity in 1991 ran counter to the pattern seen in the 1980s, when the accumulation of debt vastly outstripped
growth in nominal GDP. The rapid
buildup of debt in the 1980s was likely a
result of the deregulation of interest
rates and the emergence of various
financial innovations; these changes
Velocity of Domestic Nonfinancial Debt
Ratio scale
Nonfederal
Total Domestic Nonfinancial Debt
Trillions of dollars
Actual
0.8
11.5
0.6
11.0
Range
10.5
1960
1990
1991
The range was adopted by the FOMC for the period
from 1990:4 to 1991:4.
1970
1980
1990
The velocity of debt is the ratio of gross domestic
product, measured in current dollars, to the stock of debt.
The data are quarterly averages.
24
78th Annual Report, 1991
combined to lower the cost of borrowing to households and businesses and
spawned a surge in leveraging activity.
Greater debt burdens may also have
been accumulated under the assumption
that the growth of nominal income
would be sustained at the elevated pace
of the mid-1980s and that the prices of
assets purchased with credit would continue to climb.
In recent years, however, asset values
and income growth have fallen short of
these expectations. In particular, depressed commercial and residential real
estate values, coupled with slower income growth, have eroded the net worth
of some borrowers and have severely
strained the ability of highly leveraged
households and corporations to service
debt. These difficulties, in turn, have
affected the strength of the financial intermediaries that extended the credit. In
an effort to bolster depleted capital positions, reduce financing burdens, and
shore up weakened balance sheets, both
borrowers and lenders have adopted a
more chary attitude toward additional
credit.
The more cautious approach to leverage has interacted with the sluggish pace
of economic activity to restrain borrowing across nearly all sectors of the economy. Nonfinancial business sector debt,
held in check by the decline in financing
needs associated with weak aggregate
demand and by efforts of debt-laden
firms to restructure their balance sheets,
was virtually unchanged in 1991.
Taking advantage of a buoyant stock
market, particularly in the latter part of
the year, corporations turned to equity
financing; net equity issuance for the
year was positive for thefirsttime since
1983, and the ratio of the book value of
nonfinancial corporate debt to equity,
which had soared in the 1980s amid a
flurry of corporate restructurings, actually turned down in 1991. Firms also
took advantage of lower interest rates
to refinance higher-rate long-term bonds
and to reduce uncertainty about their
future financing burdens by substituting long-term debt for short-term
borrowing.
Overall, the mixture of less debt,
more equity, and lower interest rates had
a salubrious effect on the financial positions of many firms. Indeed, the ratio of
interest payments to cash flow for all
nonfinancial firms declined in 1991, reversing some of the run-up seen in the
late 1980s. In keeping with an improvingfinancialpicture and prospects of an
economic rebound, quality spreads on
corporate issues narrowed considerably
from their peaks in early 1991, especially on below-investment-grade securities. In addition, downgradings of corporate bonds dropped sharply in the
third and fourth quarters, although
they still ran higher than the pace of
upgrades.
Deleveraging was also evident in the
household sector in 1991. Consumer
credit declined as households reined in
expenditures, curbed their accumulation
of financial assets, and pared existing
debt burdens. Households took advantage of declining interest rates, particularly in the fourth quarter, by refinancing
outstanding mortgages; they also substituted home equity loans for installment
debt and other consumer credit that carried higher financing costs and was no
longer tax deductible. By reducing their
net accumulation of debt and refinancing a substantial volume of their remaining borrowings at lower rates, households were able to ease their financing
burdens; the ratio of scheduled debt payments to disposable personal income
turned down, reversing a little of the
sharp rise seen in that ratio in the 1980s.
Even so, loan delinquency rates rose
through much of 1991, albeit to levels
not out of line with what was seen in
Monetary Policy and Financial Markets
previous cyclical downturns. On the
other side of the ledger, many households with net creditor positions saw
their interest incomes decline last year.
Faced with intensifying budgetary
pressures and numerous downgradings,
state and local governments also put
only limited net demands on credit markets in 1991. The outstanding debt of
this sector grew only 3 percent over the
year, the smallest increase in more than
a decade. Gross issuance of municipal
bonds was substantial, however, as
states and localities moved to refinance
debt at lower rates.
Efforts by borrowers to restructure
balance sheets by substituting long-term
debt and equity for short-term debt have
affected the channels through which
debt flows; these channels also have
been altered by the more restrictive
Changes in Debt of
the Domestic Nonfinancial Sector
and in Depository Credit
Percent
Debt
1960
1970
1980
1990
Domestic nonfinancial debt covers borrowing by
households, farm businesses, nonfarm noncorporate businesses, corporate nonfinancial businesses, state and local
governments, and the federal government.
Depository credit is the sum of credit market funds
advanced by savings institutions and commercial banks.
The percentage changes are four-quarter moving averages. They are calculated by first subtracting the level at
the end of the previous quarter from the level at the end of
a given quarter (flow) and dividing by the level at the end
of the previous quarter. The quarterly percentage rates are
then used in computing four-quarter moving averages.
25
credit standards of some lenders and the
closing and shrinkage of troubled thrift
institutions. Of these changes, the most
notable was a major rerouting of credit
flows away from depository institutions.
The decline in recent years in the importance of depository institutions, when
measured by the credit they book relative to the total debt of nonfinancial
sectors, has been striking, and the trend
was extended in 1991. The thrift industry continued to contract as the direct
result of Resolution Trust Corporation
(RTC) resolutions as well as the retrenchment of marginally capitalized institutions. In addition, commercial banks
cut back on their net credit extensions.
The rise in bank credit over the year was
about 4 percent, not even enough to
offset the continued runoff at thrift institutions. Weakness was particularly evident in bank lending, which shrank
l
A percent last year; banks' holdings
of government securities, by contrast,
expanded at a rapid clip.
Although the shifting composition of
bank asset flows in 1991 was reminiscent of patterns seen in previous periods
of languid economic activity, the magnitude of the downturn in loan growth was
more pronounced than the usual experience. Apparently, loan growth was
depressed not only by reduced credit
demands but by a more restrained bank
lending posture as well. Faced with deterioration in the quality of their assets,
higher deposit insurance premiums, and
more stringent requirements for capital,
banks retrenched, adopting a more cautious attitude regarding credit extensions. Concerns about capital, especially
in light of rising loan delinquency rates
and mounting loan loss provisions, induced many banks to continue tightening lending standards through the early
part of 1991 and to maintain fairly restrictive standards over the balance of
the year.
26
78th Annual Report, 1991
A more prudent approach to capitalization and lending decisions was, in the
main, a positive development that ultimately will result in strengthened balance sheets for the nation's depository
institutions. Reflecting this improved
outlook, prices of outstanding bank debt
and equity increased markedly from
their lows in late 1990 and early 1991
and outperformed broader market indexes. Bank profits, benefitting from
wide spreads between loan rates and
deposit rates, also showed improvement
relative to the depressed levels of recent
years. However, profits remained low by
broader historical standards.
Depository retrenchment appears to
have had some restraining effects on
aggregate borrowing in 1991. Of course,
in some areas, much of the credit formerly extended by banks and thrift institutions was supplanted by supplies from
other intermediaries and by credit advanced directly through securities markets, at little if any additional cost to
borrowers. For example, growing markets for securitized loans largely filled
the vacuum created by depository restraint in the areas of residential mortgage and consumer lending. Similarly,
many large businesses turned to stock
and bond markets to meet credit needs
and to restructure balance sheets, reducing their reliance on banks as well. Both
banks and thrift institutions, however,
have cut back on other types of lending
that can be rechanneled less easily; these
types included construction and nonresidential real estate loans, loans to highly
leveraged and lower-rated borrowers,
and loans to small and medium-sized
businesses. Other financial intermediaries, including life insurance companies,
were afflicted by some of the same balance sheet problems plaguing depository institutions and also curbed their
lending to these sectors. As a result of
the pullback in credit supplies, these
borrowers faced somewhat more stringent borrowing terms than they would
have otherwise.
In 1991, as in 1990, the retrenchment
of banks and thrift institutions and the
associated redirection of credit flows
away from depository institutions had
profound effects on the broad monetary
aggregates and their traditional relationships with aggregate economic activity.
M3, which comprises most of the liabilities used by banks and thrift institutions
Stock of M3
Trillions of dollars
Velocity of M3
Ratio scale
4.1
1960
1970
1980
1990
The velocity of M3 is the ratio of gross domestic
product, measured in current dollars, to the stock of M3.
The data are quarterly averages.
1990
1991
The range was adopted by the FOMC for the period
1990:4 to 1991:4.
Monetary Policy and Financial Markets
to fund credit expansion, was the aggregate most affected by the reduced importance of depository credit in funding
spending. The velocity of M3, which
declined through much of the 1980s,
has more recently been on an uptrend
that continued in 1991. M3 rose only
\lA percent over the year, a rate of
growth that was well below that of nominal GDP and near the bottom of the M3
target range.
In the first few months of the year,
M3 showed surprising strength, boosted
in part by a firming of its M2 component, which benefited from declining interest rates. The most important single
factor contributing to strong M3 growth
in the early part of 1991, however, was
the rebirth of the market for certificates
of deposit called Yankee CDs—large
time deposits issued by foreign banks in
the United States. After the 3 percent
reserve requirement against nonpersonal
time deposits and net Euroborrowings
was lifted at the end of 1990, foreign
banks showed a distinct preference for
funding with such instruments rather
than borrowing from their overseas affiliates or in the federal funds or RP markets. By contrast, domestic depository
institutions were faced with high and
rising U.S. deposit insurance premiums
27
and exhibited no inclination to alter their
funding strategies in favor of large time
deposits.
The surge in issuance of Yankee CDs,
which totaled nearly $40 billion over the
first quarter, began to taper off a bit as
the year progressed, revealing the underlying weakness in M3. After slowing
somewhat in the second quarter, this
aggregate contracted at an annual rate of
1 VA percent in the third quarter, reflecting feeble loan demand in a tepid economy as well as the restructuring of depository institutions. The RTC played a
direct role in damping M3 growth by
taking assets formerly held by thrift institutions and funded with M3 deposits
onto its own books and financing them
with Treasury securities. Although M3
rebounded a bit in the fourth quarter, in
line with some firming of bank credit,
its growth remained subdued.
The effects of depository restructuring on M2 remained imperfectly understood at the end of 1991. In the past, the
velocity of M2 had tended to move in
tandem with changes in a simple measure of the opportunity cost of holding
this aggregate—in tandem, that is, with
Stock of M2
Trillions of dollars
6.5%
Velocity of M2 and Opportunity Cost of M2
Ratio scale
Ratio scale
3.5
3.4
3.3
I
I
1979
I
I
I
I
I
I
1983
I
I
1987
I
I
I
1991
The velocity of M2 is the ratio of gross domestic
product, measured in current dollars, to the stock of M2.
The opportunity cost of M2 is a two-quarter moving
average of the three-month Treasury bill rate less the
weighted average return on assets included in M2.
i
1990
i
i
i
i
i
i
i
i
i
i
1991
The range was adopted by the FOMC for the period
from 1990:4 to 1991:4.
28
78th Annual Report, 1991
changes in the returns on alternative
short-term investments relative to those
available on assets included in M2.
Typically, when the opportunity cost of
holding M2 declined as decreases in
money market interest rates outpaced
drops in yields on deposits, holdings
of M2 would strengthen relative to
expenditures—and the velocity of M2
would drop.
In recent years, however, this relationship appears to have broken down, with
the velocity of M2 holding up despite a
steep, persistent drop in this measure of
its opportunity cost. The breakdown was
particularly evident in 1991, when M2
expanded a bit less than nominal GDP
despite a significant decline in measured
opportunity costs. M2 finished the year
near the bottom of its target range; its
rise was much weaker than would have
been expected on the basis of historical
relationships among income, interest
rates, and the public's appetite for
monetary assets.
In the early months of 1991, M2
growth accelerated somewhat from its
lackluster pace of late 1990. Narrowing
opportunity costs generated substantial
inflows to liquid deposits, particularly
those in Ml, and these inflows more
than offset continued runoffs in small
CDs. Money growth also was temporarily boosted by strong foreign demands for U.S. currency as a safe haven
during the crisis in the Persian Gulf.
Through May, growth of M2 remained
broadly consistent with changes in income and opportunity costs and left the
aggregate near the middle of its target
range.
M2 began to slow in June, however,
and it stalled in the third quarter despite
expansion in nominal income and further declines in M2 opportunity costs.
Growth of M2 then resumed in the
fourth quarter because of additional declines in opportunity costs and the re
sulting surge in transactions deposits.
But even so, the overall inflows to M2
remained fairly weak, and the aggregate
ended the year only a little above the
bottom of its target range.
Although the unusual behavior of M2
relative to income and opportunity costs
is not fully understood, it surely was
related to the restructuring of financial
flows and to the downsizing of the banking system. With inflows of M2 deposits
apparently tending to be more than sufficient to fund weak depository credit
growth, banks and thrift institutions
seem to have pursued additional retail
deposits less aggressively than in the
past. Although rates offered on these
deposits did not, until very late, fall
unusually rapidly in response to declining market interest rates, depository institutions seem to have acted in other
ways to reduce the cost of funds, including adjustments in advertising and marketing strategies that would not show up
in traditional measures of opportunity
costs. In addition, by keeping deposit
rates low relative to loan rates, partly in
an attempt to bolster profit margins
while shrinking their balance sheets, depository institutions provided households with a greater incentive to finance
Stock of Ml
Billions of dollars
890
860
830
i
i
1990
I
i
i
i
i
i
i
1991
i
i
i
i
Monetary Policy and Financial Markets
spending by holding down the accumulation of M2 assets rather than by taking
on new debt. This incentive likely reinforced the impetus to borrowing restraint stemming from household concerns about their own balance sheets.
The slowdown in M2 growth, particularly in the third quarter of 1991, also
appears to have been related to the configuration of returns on financial assets.
Yields on small time deposits and
money market mutual funds largely
tracked the downward path of market
interest rates, falling to their lowest levels since the deregulation of deposit
rates and prompting significant outflows
from these components of M2. Although
some of these funds shifted into the
liquid deposit components of M2—
whose offering rates responded slowly,
as they normally do, to the declines in
Velocities of M2 and M1
Ratio scale
M2
2.0
4.0
1960
1970
1980
1990
The velocity of the monetary aggregate is the ratio of
gross domestic product, measured in current dollars,
to the stock of the aggregate. The data are quarterly
averages.
29
market interest rates—a portion of these
funds appear to have left the aggregate.
The primary lure seems to have been the
stock and bond markets, which offered
higher returns, in part because of the
steep upward slope of the yield curve.
Indeed, inflows to stock and bond mutual funds were robust throughout 1991,
especially after midyear, when investors
seemed particularly intent on reaching
for higher yields by lengthening the
maturity of their portfolios. Depository
institutions, faced with weak loan demand and pressures on capital positions,
seemed disinclined to compete aggressively for these funds by offering competitive rates on longer-term CDs.
The rapid pace of activity by the Resolution Trust Corporation also likely depressed M2 growth in the third quarter
of 1991, as it did throughout the year.
The abrogation of existing retail CD
contracts and the disruption of longstanding depositor relationships often attending resolutions of failed thrift institutions may have encouraged investors
to reshape their portfolios, substituting
nonmonetary financial assets for M2
deposits.
Despite sluggish income growth, Ml
expanded 8 percent in 1991, the swiftest
advance since 1986. Unlike M2, this
aggregate responded to declining market interest rates about as expected given
historical relationships. Ml was boosted
by large inflows to NOW accounts,
whose offering rates responded very
slowly, until the end of the year, to
declining market interest rates. Falling
rates also brought new life to demand
deposits, as compensating balances to
pay for bank services surged. Demand
deposits likely benefited as well from
the pickup in mortgage refinancings,
because the proceeds from mortgage
prepayments are sometimes housed temporarily in demand accounts. Rapid
growth in currency, derived in part from
30
78th Annual Report, 1991
continued strong foreign demands, also
contributed to the strength in Ml, as
well as in the monetary base, which
increased SV4 percent last year.
•
31
International Developments
Economic growth in the major foreign
industrial economies slowed further last
year. From 1990 to 1991, real GDP in
the foreign G-10 countries on average
increased about Wi percent (fourth
quarter to fourth quarter, GNP weights),
compared with 2Vi percent in 1990.1
Canada and the United Kingdom, both
important U.S. trading partners, began
1991 in recession. The recession continued essentially unabated in the United
Kingdom; in Canada, as in the United
States, signs of a rebound appeared in
the second quarter, but growth ceased
again during the second half. Growth in
Japan and Germany was strong early in
the year; in the second half, growth
slowed sharply in Japan and was negative in Germany.
Economic growth among developing
countries was very uneven, with output
declining in the Middle East and picking
1. The Group of 10 consists of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the
United States plus Switzerland.
up in Latin America. Mexico again enjoyed solid growth, at about 4 percent.
Growth in the newly industrialized
economies of Southeast Asia remained
strong or increased.
The U.S. current account was near
balance in 1991, reflecting $42 billion in
grants from foreign governments related
to the Persian Gulf war. Even apart from
these unilateral transfers, however, the
U.S. trade and current account deficits
showed substantial reductions. U.S. merchandise exports continued to grow
strongly, as did exports of services. Net
interest payments to foreigners on portfolio investments were restrained by the
substantial further decline in U.S. interest rates during the year.
The dollar appreciated, on balance,
23/4 percent in 1991 (December to De-
Exchange Value of the Dollar
and Interest Rate Differential
Percentage points
Ratio scale, March 1973 = 100
6 -
Price-adjusted
exchange value
of the dollar
4 -
Exchange Value of the Dollar
against Selected Currencies
Long-term *
real interest"
rate differential
December 1990= 100
2 I
I
1975
Japanese yen
Canadian dollar
90
1991
Foreign currency units per dollar. The data are monthly.
I
I
I
80
U.S. minus foreign
1 1 t 1 t t 1 I 1 I I
1980
1985
1990
The exchange value of the U.S. dollar is its weighted
average exchange value against currencies of other Group
of 10 (G-10) countries using 1972-76 total trade weights
adjusted by relative consumer prices.
The interest rate 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 thirty-six-month moving average of actual consumer price inflation or by staff forecasts where needed.
The data are monthly.
32
78th Annual Report, 1991
cember) against the trade-weighted
average of the foreign G-10 currencies.
Adjusted for changes in relative consumer price levels, the dollar's appreciation was somewhat less, as consumer
price inflation in the foreign G-10 countries exceeded that in the United States
by about 1 lA percentage points.
The dollar rose steeply from midFebruary through early July, particularly
against the German mark and its partner
currencies in the European Monetary
System. The dollar was buoyed by the
allied victory in the war against Iraq and
by expectations that the decline in oil
prices and a resurgence of consumer
confidence would lead to a quick U.S.
economic recovery. Depressing the
mark were the disillusionment over the
heavy costs of German reunification, a
perception that Bundesbank monetary
policy was lagging the increase in inflationary pressures in Germany, and the
increasing turmoil in the Soviet Union.
After mid-year, however, the dollar
reversed course as evidence accumulated that the U.S. recovery was faltering and as U.S. monetary policy eased.
The mark was strengthened by the
Bundesbank's tightening of monetary
policy and by the nonviolent breakup of
the Soviet Union following the failure
of the August coup. By year-end the
dollar had retraced nearly all of its earlier rise against the mark; and it more
than retraced its rise against the yen,
which was supported by Japan's growing trade and current account surpluses.
Net intervention in the exchange markets by fifteen major foreign central
banks amounted to sales of nearly
$12 billion. U.S. monetary authorities
purchased, net, about $750 million in
the market; purchases in early February
to support the dollar exceeded sales in
March, May, and July to moderate the
dollar's rise. U.S. authorities purchased
an additional $83/4 billion directly from
foreign monetary authorities to reduce U.S. reserve balances of foreign
currencies.
Foreign Economies
Economic growth in the major foreign
industrial economies continued to slow
last year from the rapid rates posted in
the late 1980s. To some extent, deceleration was an ongoing response to tighter
monetary policies, introduced earlier,
GDP, Demand, and Prices
Percentage change from previous year
Gross domestic product
Constant prices
6
/s,^^
Foreign G-10
4
2
United States""^
+
/
I
I
I
l
/ n
-
i
Total domestic demand
Constant prices
6
3
N
I
t
I
"••" +
,_ „ f\
i
V
/
Consumer price index
1987
1989
1991
Foreign data are weighted averages for the foreign
G-10 countries using 1987-89 GNP-based purchasingpower-parity weights, and are from foreign official
sources.
Data for the United States are from the Departments of
Commerce and Labor.
For GDP and domestic demand, the data are quarterly;
for consumer prices, the data are monthly.
-
International Developments
which were designed to counter inflationary pressures and bring economic
activity to more sustainable, noninflationary levels. Declines in business confidence, the need for households and
businesses to reduce high levels of debt,
and concerns about financial fragility in
some countries also negatively affected
demand. Growth rates among the major
industrial countries varied. Pronounced
recessions in Canada and the United
Kingdom that began in 1990 extended
into 1991 with only tentative signs of
recovery after mid-year. Economic activity in Japan and Germany remained
comparatively strong, although growth
slowed during the year in those countries too. And the economic performances of France and Italy were
sluggish.
Slower growth meant that output in
most major industrial countries (with the
possible exceptions of Germany and
Japan) was below potential by year-end.
Accordingly, inflation continued to
moderate during the year, with average
CPI inflation in the foreign G-10 countries subsiding by almost 3A percentage
point (Q4 to Q4), to near 4 percent.
Particularly large reductions in inflation
were evident in Canada and the United
Kingdom; France and Japan also experienced significant reductions. Lower oil
prices and the weakening of the dollar
after midyear contributed to reduced upward pressure on prices abroad.
Labor-market developments last year
also reflected the general slowdown and
differences in cyclical positions. Unemployment rates moved up more than
2 percentage points in the United Kingdom and Canada, while unemployment
rates remained high in France and Italy.
In contrast, labor-market conditions continued to be fairly tight in Japan despite
decelerating economic activity. The unemployment rate in western Germany
fell almost 3A percentage point in 1991,
33
while employment conditions appeared
to stabilize in eastern Germany.
Money market conditions eased
during the past year in several key
countries—including Canada, Japan,
and the United Kingdom—as slower
growth and lower inflation allowed authorities to reduce short-term interest
rates. Japanese short-term rates declined
225 basis points, and the official discount rate was cut by a total of IV2 percentage points after midyear, in three
increments. Short-term rates in the
United Kingdom fell about 300 basis
points during the year, while those in
Canada dropped almost 450 basis
points, thereby narrowing the spread
against comparable U.S. maturities. In
contrast, monetary conditions tightened
in Germany as authorities remained concerned about inflationary pressures (arising in part from substantial expansion of
budgetary expenditures for unification),
and German short-term interest rates
edged up during the year. Increases in
official German interest rates (in February, August, and December) tended to
intensify exchange rate pressures against
the currencies of Germany's EMS partner countries, thereby limiting their
scope for easing monetary conditions.
Growth of the major monetary aggregates abroad generally slowed or remained sluggish. The chief exceptions
to this pattern were in Germany and
Italy.
On average, long-term interest rates
abroad declined nearly 1 percentage
point, reflecting slower economic
growth, lower inflation, and in some
cases, an easing of monetary policy. Particularly large declines occurred in Canada and France, but even in Germany
long-term rates eased, by more than
50 basis points.
In 1991 the combined current account
surplus of the foreign G-10 countries
narrowed by about $22 billion to a small
34
78th Annual Report, 1991
deficit. (About $12 billion of the change
was from net transfer payments related
to the war against Iraq.) The narrowing
of the combined deficit occurred despite
a $40 billion widening of Japan's current account surplus. Slower growth of
domestic demand, reduced oil payments,
and favorable price effects from earlier
strength of the yen contributed to the
larger Japanese surplus. In contrast, the
combined German current account position deteriorated by more than $65 billion to a deficit of $20 billion, reflecting
the effects of increased demand following unification and the relative strength
of the western German economy. Increased German demand for imports
contributed to moderate improvements
in external positions for some of Germany's main trading partners.
The combined current account position of developing countries moved
from near balance in 1990 to a deficit of
about $80 billion in 1991. The dramatic
shift from surplus to deficit in the current account of oil exporters accounted
for most of the overall decline. However, the slowdown in domestic demand
in the industrial countries led to slower
export growth in many other developing
countries and a decline in their current
account balances. Economic growth was
uneven across regions of the developing
world in 1991; output fell in the Middle
East, while activity picked up in the
Western Hemisphere after declines in
the previous year.
The current account of the group of
fourteen heavily indebted developing
countries shifted, from near balance in
1990 to a deficit of about $19 billion in
1991. Most of this shift occurred for the
oil exporting countries of the group, especially Mexico and Venezuela. Investment booms, however, also contributed
to higher imports in these two countries.
Economic activity in the heavily indebted countries picked up in 1991,
especially in the larger countries.
Mexico's growth was again about 4 percent, while output in Argentina and
Brazil expanded somewhat, after declines in 1990.
The combined current account surplus of the newly industrializing economies of Asia nearly halved in 1991, to
about $8 billion. The decline in the
overall position was more than accounted for by a large increase in
Korea's current account deficit. Korea's
imports expanded rapidly, partly because of strong domestic demand, especially investment. The surpluses of the
other economies increased slightly or
were unchanged.
Countries that had experienced debt
problems in the 1980s regained some
access to international capital markets.
In particular, Mexico and Venezuela,
which had reduced their debt to commercial banks in 1990, were successful
in issuing bonds internationally and attracting substantial equity investments
in connection with their privatizations
of state-owned companies. These two
countries, as well as Chile, provide
strong evidence that foreign and domestic investors are willing to provide resources again to formerly troubled debtors once appropriate macroeconomic
and structural policies have been implemented for a sustained period of time
and the uncertainties related to the stock
of external debt have been largely
resolved.
At the close of 1991, Brazil and Argentina, both large debtors with substantial arrears to their foreign creditors,
were in the initial stages of negotiating
with their bank creditors on packages of
debt reduction. Argentina made substantial strides toward economic stabilization in 1991, while Brazil was on the
verge of undertaking a stabilization program approved by the International
Monetary Fund in February 1992.
International Developments
U.S. International Transactions
The U.S. merchandise trade and current
account deficits narrowed substantially
in 1991. A $27 billion increase in merchandise exports and an $8 billion reduction in merchandise imports yielded
a trade deficit of $74 billion for the year,
the smallest since 1983. The improvement in the current account balance was
substantially larger, primarily because
of war-related contributions by foreign
governments. These cash contributions
to the United States were recorded as
positive government grants in the unilateral transactions component of the cur-
U.S. International Trade
Billions of dollars
Balances
f\
Current account /
/
-
+
0
'
50
\
100
^p>" ^
>^^
1
1
Merchandise trade
1
1
150
1
Ratio scale, billions of 1987 dollars
Merchandise trade
600
Total imports
2
0
Z^ ^
^^*-* ^^
.
' 400
Total exports
**—^
i
i
i
i
i
Ratio scale, 1987 = 100
GDPfixed-weightprice index
120
Non-oil imports
^
^ ^
—
. 110
—
Total exports
100
i
i
1987
i
i
1989
i
1991
The data are preliminary. They are quarterly, seasonally adjusted at annual rates, and come from the Department of Commerce.
35
rent account, and reduced the size of the
current account deficit by $42 billion in
1991. In addition, net receipts from services expanded by $10 billion in 1991
because of a strengthening of net receipts in such areas as travel, royalties
and license fees, and professional services. There was a small decline in net
receipts on U.S. direct investments
abroad and a marginal rise in net payments of portfolio income to foreigners.
Merchandise exports rose 7 percent
during the four quarters of 1991, about
the same pace recorded in the preceding
year. Export prices (mainly of industrial
supplies) declined slightly, while the
quantity grew about 9 percent.
Nearly two-thirds of the increase in
the value and quantity of exports (Q4 to
Q4) reflected strong growth in shipments of capital goods; two-thirds of
that growth was to developing countries. Despite sluggish overall economic
growth in the economies of many U.S.
trading partners, high levels of investment spending in key countries—
especially in developing countries in
Latin America and Asia—boosted U.S.
exports of capital equipment. Among
developing countries, the largest increases in capital goods exports were to
Mexico, Venezuela, Korea, and Saudi
Arabia; among industrial countries, the
largest increase was to Germany. Shipments of capital goods to both Canada
and the United Kingdom declined, reflecting the recessions in those countries. Exports of items other than capital
goods (accounting for nearly 60 percent
of total exports) grew more slowly. On
average, economic activity in the major
foreign industrial countries weakened as
the year wore on.
Despite the substantial slowing
abroad, the quantity of U.S. exports
grew appreciably over the four quarters of 1991 because of the positive influence of past gains in the price
36
78th Annual Report, 1991
competitiveness of U.S. goods. This increased competitiveness reflects a combination of the large net depreciation of
the dollar from 1985 to 1987 and increases in average foreign prices in local
currencies relative to U.S. export prices.
Merchandise imports declined 1 percent in value but rose 6 percent in
quantity in 1991 (Q4 to Q4). All of the
decrease in value resulted from the sharp
drop in prices of imported oil from the
inflated levels at the end of 1990 that
were associated with Iraq's invasion of
Kuwait. The quantity of imports excluding oil grew about 5 percent in real
terms during 1991. The decline of imports early in the year was the result of
weak U.S. domestic demand. As the
likelihood of an economic recovery in
the United States increased, imports
turned up—especially for automotive
products, computers, and consumer
goods—and continued strong into
autumn.
After rebounding in the spring and
summer, U.S. consumer spending faltered, and retailers accumulated undesired inventories. As a result, U.S.
import growth slowed in the fourth
quarter.
The quantity of oil imports, which
had plunged after the surge in oil prices
in the fall of 1990, generally moved up
through the third quarter as refiners
U.S. International Transactionsl
Billions of dollars, seasonally adjusted
Quarter
Year
Transaction
Merchandise trade, net
Exports
Imports
Services, net
Receipts
Payments
Investment income, net
Direct investment, net
Portfolio investment, net
Unilateral transfers, private and government, net
1990
1990
1991
Q4
Ql
Q2
Q3
Q4
-108
390
498
26
133
107
12
53
^1
-22
-73
417
490
36
145
109
9
51
-42
20
-27
101
128
8
36
28
6
15
-9
-9
-18
-15
104
119
9
36
27
2
13
-11
7
-21
104
125
9
38
27
2
12
-10
-3
-19
108
127
10
38
28
*
11
-11
-1
Current account balance
-92
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
-5
15
-29
1
16
-15
-33
37
Foreign official assets in United States (increase, +)
U.S. official reserve assets, net (increase, - )
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.
*In absolute value, greater than zero and less than
$500 million.
1991
2
32
-2
3
64
101
119
7
34
27
5
15
-10
17
-23
10
-18
-12
-46
17
26
9
-29
22
-5
-20
-7
-8
-2
6
-5
-4
5
-4
-10
2
-9
3
4
2
-12
4
-3
21
20
-12
-10
-9
-28
-13
13
8
7
-2
8
-3
5
9
-13
-2
8
2
-7
6
1
-4
5
-11
2
7
-2
-9
4
n.a.
-3
4
13
1
4
1
-1
6
-1
4
5
1
-1
3
-3
19
2
17
-9
4
-13
9
*
9
-4
-6
2
*
-3
64
n.a. Not available.
SOURCE. Department of Commerce, Bureau of Economic Analysis.
International Developments
moved to rebuild inventories. In the
fourth quarter, the volume of oil imports
turned down again, reflecting sluggish
U.S. activity and unseasonably warm
weather.
Prices of non-oil imports declined
slightly (Q4 to Q4), largely reflecting
worldwide declines in prices of primary
commodities and the effect of the dollar's appreciation on prices of finished
manufactures through the third quarter.
Non-oil import prices in the fourth quarter of 1991, which rose 2 percent at an
annual rate, were especially influenced
by a turnaround in prices of imported
capital and consumer goods, as well as
by higher prices of automotive products
at the beginning of a new model year.
The sharp reduction in the recorded
U.S. current account deficit in 1991 was
mirrored by changes in recorded capital
inflows and the statistical discrepancy.
The statistical discrepancy in the international accounts, which jumped to
$64 billion in 1990, declined to - $ 3 billion in 1991. There were no obvious
reasons why errors and omissions in the
recording of current account transactions would swell in 1990. The unusually large number of errors likely were
concentrated, instead, in the reporting of
capital flows. Because of the questionable data, we cannot draw any conclusions from comparisons of changes in
the pattern of recorded capital flows between 1990 and 1991.
In 1991, inflows of official capital
were matched in part by outflows of
private capital. Net foreign official inflows amounted to $21 billion despite
net intervention sales of dollars by the
G-10 countries and despite the drawdown of reserves held in the United
States by certain countries to finance
their transfers to the United States for
Operation Desert Storm. Some countries
financed their contributions to Desert
Storm in part by borrowing and liquidat
37
ing investments in the Euromarkets
rather than by drawing on their reserve
holdings in the United States, while still
others financed their payments in local
currencies.
In 1991 the net recorded private capital outflow was $18 billion, largely accounted for by a net outflow reported by
banks. Several factors probably contributed to the bank outflow: the increase
in net demand for Euromarket funds to
finance contributions to Desert Storm;
the elimination by the Federal Reserve
of certain reserve requirements in December 1990, which was followed by
increased issuance of large time deposits in the United States and reduced reliance on borrowing from abroad by some
U.S. agencies and branches of foreign
banks; and weak overall growth of U.S.
bank credit in 1991.
Securities transactions in 1991 reflected the continued internationalization of financial markets; although the
net inflow was moderate, private foreigners added substantially to their holdings of U.S. stocks and bonds, while
U.S. residents were net large-scale purchasers of foreign stocks and bonds.
Reflecting interest rate developments
that encouraged shifting from short-term
to long-term financing, issues of foreign
bonds in the United States and issues
of Eurobonds by U.S. corporations were
strong. In addition, investment funds
located in the Caribbean were very active in the market for U.S. Treasury
securities.
Capital outflows associated with U.S.
direct investment abroad remained
strong, as U.S. investors positioned
themselves to take advantage of EC
1992 and participated in privatization of
previously state-owned enterprises in
countries such as Mexico and Venezuela. In contrast, foreign direct investment in the United States remained
far below recent peaks; foreign take-
38
78th Annual Report, 1991
overs of U.S. businesses declined and
reinvested earnings were depressed by
the recession.
Foreign Currency Operations
U.S. monetary authorities intervened in
foreign exchange markets on a moderate
scale in 1991. In early February, as the
dollar reached historic lows against the
German mark, U.S. authorities (the Federal Reserve and the Treasury's Exchange Stabilization Fund) sold German
marks worth $1,336 million to support
the dollar. By March the dollar had risen
dramatically in occasionally unsettled
markets. U.S. authorities cooperated
with foreign central banks to moderate
these movements and purchased
$370 million of marks and $30 million
of yen. In May, Sweden's announcement that it would peg its currency to
the ECU rather than to a basket of currencies that included the dollar immediately led to a scramble for dollars to
rebalance portfolios; to counter the resulting disorder in the New York market, U.S. authorities purchased $50 million of marks. In early July, with the
dollar near its peak for the year, U.S.
authorities purchased $100 million of
marks in cooperation with European
central banks. On net for the year, U.S.
authorities sold $816 million of marks
and purchased $30 million of yen. All of
these market operations were split
equally for the accounts of the System
and the Treasury.
System Profits and Losses on Foreign
Currency Operations
Millions of dollars
Year
1988
1989
1990
1991
Realized
Translation
610
0
0
506
-1,121
1,204
2,139
-140
U.S. authorities also undertook a series of direct transactions directly with
foreign central banks to adjust U.S. reserve balances to prospective needs, in
the process selling $5,748.5 million of
marks and $3,000 million of yen. Of
these totals, $3,529.1 million of marks
and $1,500 million of yen were for the
System account.
During the year the Exchange Stabilization Fund repurchased $2,500 million
of marks warehoused with the System.
At year-end, $2,000 million remained
outstanding on this facility.
The System held $27,626 million of
foreign currencies at year-end, valued at
current exchange rates. Of this amount,
$2,000 million was in currencies held
under the warehousing agreement. System foreign currency holdings were
almost entirely in marks and yen.
The System realized $506 million in
profits on sales of foreign currency during 1991. It recorded a translation loss
of $140 million on balances held at
year-end. There was no activity on the
Federal Reserve swap network during
the year.
•
39
Monetary Policy Reports to the Congress
Given below are reports submitted to
the Congress on February 20 and July
16, 1991, pursuant to the Full Employment and Balanced Growth Act of 1978.
Report on February 20, 1991
Monetary Policy and the Economic
Outlook for 1991
When it reported to the Congress last
July, the Federal Reserve was anticipating that the economy would continue
to grow in the second half of 1990.
Although the first half had been far from
robust, with problems clearly evident
in some industries and regions, the
economy still was expanding and was
afflicted with neither the inventory imbalances nor the escalating inflationary
pressures that had preceded past cyclical
downturns. Indeed, it seemed at midyear
that the goal of achieving a reduction
of inflation in the context of continued
expansion might well be attainable.
But in August the economy was jolted
off course by the Iraqi invasion of
Kuwait. The surge in oil prices that followed the invasion gave additional impetus to inflation, and it also portended a
weakening of activity as the price increases cut sharply into domestic purchasing power. Uncertainties about the
course of the economy were heightened
enormously, and household and business sentiment plummeted almost overnight, a response that perhaps grew in
part out of memories of the difficult
adjustments that had followed previous
oil shocks in the 1970s. At the time of
the invasion, and on into the autumn,
sentiment also was being affected by the
considerable uncertainty that existed
regarding the course of fiscal policy.
Actual production and spending held
up for a time after the oil shock, but
started to decline in early autumn. The
production cuts reduced real incomes
still further and added to the cumulating
forces of contraction, which included a
continued shift toward greater caution
by lenders. The economy thus fell into
recession in the latter part of 1990, and,
given the further declines in employment and production that were seen in
January, that recession clearly has continued into the early part of 1991.
The secondary wage-price pressures
that many had expected to see after the
oil shock have not been much in evidence, probably because those pressures
have been countered by the softening of
aggregate demand. The underlying rate
of increase in prices began to drop back
over the last few months of 1990. In
addition, the rate of increase in nominal
wages and benefits, which already had
started to slow in the third quarter, decelerated further in the fourth quarter.
These wage and price developments,
coupled with the drop in oil prices since
mid-autumn, have given the Federal Reserve greater latitude in recent months
to focus on steps that will aid in bringing about economic recovery without
jeopardizing continued progress toward
price stability.
In fact, as it became clear that the
inflationary spillover of the oil shock
was being effectively contained, and that
an appreciable economic contraction
posed the greater risk, the Federal Reserve did ease policy markedly. Earlier
in the second half, policy already had
moved to a slightly more accommoda-
40
78th Annual Report, 1991
tive stance, first in July, to offset the
effects on the economy of apparent restraint in private credit supplies, and
again in October, when prospective reductions in federal budget deficits enabled interest rates to decline. Over the
balance of the year and into 1991,
money market rates were reduced substantially further through open market
operations and two half-point decreases
in the discount rate. In total, most shortterm rates have fallen nearly 2 percentage points since mid-1990, with most of
the decrease occurring during the last
few months, and long-term rates are
about Vi percentage point lower than
they were at midyear. Falling interest
rates have contributed to an appreciable
decline in the dollar since mid-1990.
The behavior of the monetary aggregates and credit was an important consideration in the Federal Reserve's decisions to ease policy over recent months.
M2 and M3 ended 1990 within the
ranges set by the Federal Open Market
Committee (FOMC), but they were in
the lower parts of those ranges, and their
expansion over the fourth quarter and
into early 1991 has been quite sluggish.
The sluggishness of the aggregates during this period was worrisome because
it suggested that the economy was
weaker than anticipated and because it
indicated the possibility of some undesirable restraint on future spending
through constricted credit intermediation by depository institutions. In particular, the thrift industry has been contracting, and banks, concerned about the
credit quality of borrowers and facing
pressures on capital positions, have become increasingly reluctant to lend,
raising interest margins and tightening
nonprice terms. To bolster lending incentives, the Federal Reserve in December
eliminated the reserve requirements on
nonpersonal time deposits and net Eurocurrency liabilities.
To a significant extent, however, overall credit flows have been sustained by
sources outside depositories; thus, debt
of the domestic nonfinancial sectors
grew 7 percent in 1990 and ended in the
middle of the FOMC's monitoring range
for this aggregate. The effective substitution of non-depository credit for depository credit made it possible to
achieve a greater amount of nominal
income and expenditure growth for a
given expansion of the money stock.
One facet of this process was a shifting
by the public out of assets that are included in the monetary aggregates and
into holdings of Treasury issues and
other securities. Velocity, the ratio of
nominal GNP to the money stock, exhibited surprising strength: M2 velocity
was about unchanged in 1990, even
though declines in interest rates ordinarily are associated with falling velocity, and M3 velocity registered an unusually large increase.
Monetary Policy for 1991
In considering its plans for monetary
policy for 1991, the Federal Open Market Committee focused on two objectives, consistent with the goals of the
Full Employment and Balanced Growth
Act: One was to foster an upturn in
activity and thus higher levels of employment and real income; the other was
to contain and reduce inflation over time
to maximize the efficiency of resource
allocation and long-range growth and to
minimize the capricious and inequitable
effects of inflation on the wealth of savers. The translation of these objectives
into specific ranges for money and debt
was complicated by the effects of the
ongoing restructuring of credit flows.
Again this year, a number of insolvent
thrift institutions are likely to be closed,
with many of their assets ending up at
the Resolution Trust Corporation (RTC)
Monetary Policy Reports
or disbursed to a wide variety of investors; at other thrift institutions and at
banks, restraints on lending may moderate a bit, but growth in depository credit
is likely to continue to be constrained by
pressures on capital positions. The rechanneling of credit outside depository
institutions is expected to continue to
distort the relationship of money to income, buoying the velocities of both M2
andM3.
Taking account of these effects, the
Committee decided that the ranges for
1991 that were chosen on a provisional
basis last July remain appropriate for
achieving its objectives. The ranges for
M2 and debt are Vi percentage point
below those for 1990—a further step to
ensuring that longer-run trends in money
and credit growth are moving toward
consistency with the achievement of
price stability. At the same time, they
allow for money and credit growth sufficient to support a rebound in the economy this year; moreover, the ranges
should provide ample room for any policy adjustment that may be required by
unanticipated developments in the economy or the financial sector as the year
progresses.
The M2 range for 1991 is 2J/2 to
6V2 percent. Growth in this aggregate is
expected to strengthen from the sluggish
pace of recent months, partly in lagged
response to the substantial easing of
Ranges for Growth of Monetary
and Debt Aggregatesl
Percent
Aggregate
M2
M3
Debt2
1989
3-7
61/2-101/2
1990
3-7
1-5
5-9
1991
1
2 /2-61/2
1-5
1. Change from average for fourth quarter of preceeding year to average for fourth quarter of year indicated.
Ranges for monetary aggregates are targets; range for
debt is a monitoring range.
2. Domestic nonfinancial sector.
41
money market conditions over the past
few months. While acknowledging
some uncertainty about developing
velocity relationships, Committee members stressed that M2 expansion noticeably above the lower end of the range
likely would be needed to foster a satisfactory performance of the economy in
1991.
The range of 1 to 5 percent for M3
was not reduced from that for 1990.
That range was already at an unusually
low level in recognition of the accelerated pace of the restructuring of the
thrift industry. Credit growth in 1991 is
expected to be moderate and to occur
largely outside depositories. Consequently, total funding needs of depositories are expected to be damped, keeping
the growth of M3 quite low and raising
its velocity further.
The monitoring range for nonfinancial sector debt for 1991 was set at AVi
to SV2 percent. Federal borrowing is expected to be robust, owing in part to the
RTC, and also to the effect of the weak
economy on the federal budget deficit.
By contrast, borrowing by domestic
nonfederal sectors is likely to be slow,
though still consistent with a rebound
in the economy. On the demand side of
the credit market, households and businesses appear to be returning to sounder
financial practices, seeking a healthier
balance between debt and the income
available to service it. At the same time,
restraints on the supply of credit also
may continue to play a role, with some
private borrowers facing higher interest
rates and tighter nonprice terms on
credit, in part because of the stresses
faced by many intermediaries. In that
regard, the Federal Reserve is working
with other federal regulatory agencies to
ensure that bank supervisory practices,
while prudent and fair, do not unduly
impede the flow of funds to creditworthy borrowers.
42
78th Annual Report, 1991
Economic Projections for 1991
The economic outlook is unusually difficult to assess at this time, owing not
only to the obvious uncertainties associated with the war in the Gulf, but also to
some unresolved problems in the economy. However, the members of the
Board of Governors and the presidents
of the Reserve Banks, all of whom participate in the discussions of the FOMC,
believe that the most likely outcome is
that the economy will swing back into
expansion later this year. At the same
time, they also anticipate that inflation
will be much lower in 1991 than it was
in 1990.
With regard to real gross national
product, the central tendency of the
FOMC participants' forecasts is for a
gain over the four quarters of 1991 of 3A
to IV2 percent. This is in line with the
projection of the Administration, which
anticipates an output gain of 0.9 percent.
With these GNP forecasts so similar, the
forecasts of unemployment also are
about the same: The Committee's central tendency projections fall in a range
of 6V2 to 7 percent in the fourth quarter
of 1991, a range that brackets the Administration forecast. On the other hand,
the Board members and Reserve Bank
presidents are more optimistic on average than is the Administration with regard to the prospects for reduced inflation. The central tendency range for
the CPI increase this year—3J/4 to 4
percent—compares with an Administration projection of 4.3 percent. The Administration's forecast for nominal GNP
is at the upper end of the FOMC central
tendency range and thus also would be
compatible with the FOMC's monetary
ranges.
In discussing their projections, the
Board members and Reserve Bank presidents stressed that the war introduces a
major imponderable into an outlook
that, even before, had been subject to
considerable uncertainty. The demands
of the war on the economy are not fully
clear at this point. Nor is it possible to
forecast with any precision how household and business confidence will respond to the course of events in the
Gulf. Among the significant unresolved
economic and financial problems elsewhere in the economy are those in the
real estate markets; commercial construction, in particular, still is plagued
by a large overhang of vacant space that
Economic Projections for 1991
Item
MEMO
FOMC members and
other FRB presidents
1990 actual
Range
Central tendency
Administration
Percent change,
fourth quarter to fourth quarter1
Nominal GNP
RealGNP
Consumer price index2
4.3
.3
6.3
31/2-51/2
-V2-W2
3-4V&
33/4-41/4
3
/4-l Vi
3V4-4
5.3
.9
4.3
Average level,
fourth quarter (percent)
Unemployment rate
5.9
6V4-7V2
6V2-7
6.6
1. From average for fourth quarter of 1989 to average
for fourth quarter of 1990.
2. Actual values and FOMC projections are for all
urban consumers (CPI-U); Administration projection is
for urban wage earners and clerical workers (CPI-W).
3. Actual values and FOMC projections are for civilian labor force; Administration projection is for total
labor force, including armed forces residing in the United
States.
Monetary Policy Reports
will severely limit new construction for
some time to come. On the financial
side, the overexuberance and loose lending practices of the 1980s have given
way to large losses and extreme caution
among some lenders, who may not be
able or willing at present to shift quickly
back toward more normal lending behavior. Because of these problems, the
Board members and Reserve Bank presidents perceive that, in the near term, the
risks to the economy may be skewed to
the downside.
On the other hand, some of the potential underpinnings of recovery also are
evident. For example, with the further
decline in oil prices since the start of
1991, much of the surge that followed
the Iraqi invasion of Kuwait now has
been retraced; in a reversal of the effects
seen earlier, this drop in oil prices is
taking pressure off inflation, and it also
is augmenting real purchasing power,
which will help to bolster spending.
Also working in the direction of supporting spending is the decline in interest rates since the spring of 1989. In
contrast to past business cycles, when
declines in rates usually did not come
until the economy was softening, this
decline began far in advance of the
peak in activity, and its effects on spending should begin to be felt, especially in
sectors like housing, where affordability
has been considerably enhanced over
the last year and a half. Meanwhile, the
prospects for exports, and for our
overall trade and current account
balances, continue to look favorable,
given the improved competitiveness of
U.S. producers. And, any pickup in
final demand, whether from domestic
buyers or from abroad, should translate fairly quickly into increased production, in view of the success that
businesses seem to have had in preventing a buildup of inventories in recent
months.
43
As noted above, the Board members
and Reserve Bank presidents project a
marked slowing of inflation in 1991. A
key assumption underlying these forecasts is that oil prices will hold in their
recent range, at a much lower level than
prevailed through the autumn of 1990.
The pass-through of these lower oil
prices to consumers is expected to result
in a sharp decline in retail energy prices.
In addition, increases in wages and benefits seem likely to be more moderate
this year, reducing the pressures of labor
costs on profit margins and prices. To be
sure, there are some near-term negatives
in the inflation picture: Labor expenses
are being boosted by legislated increases
in employers' contributions for social
security and by a further rise in the
minimum wage, and prices are being
affected by a rise in postal rates and
increases in various excise taxes. All
told, however, the coming year appears
likely to be one in which overall price
increases will be considerably smaller
than in 1990 and in which the downward tilt of the underlying inflation trend
should begin to stand out more clearly.
The Performance of the Economy
in 1990
When 1990 began, the economy was in
its eighth year of expansion, and it remained on a positive course into the
summer. During this period, problems
were evident in some sectors of the
economy, notably construction, where
activity was being damped by the persistence of high vacancy rates, and finance,
where a significant number of institutions were encountering difficulties that
reduced their ability or willingness to
provide credit. Overall, however, production and spending still were on a
course of expansion at midyear, and
while the rate of price increase had not
yet started to abate, there were indica-
44
78th Annual Report, 1991
tions that the groundwork for achievement of slower inflation was coming
into place without major disruption to
the economy.
Then, in early August, the Iraqi invasion of Kuwait set off a chain of events
that gave further impetus to inflation
and tilted the economy from a path of
slow growth to one of contraction. Declines in output and employment were
widespread during the remainder of
1990. Real gross national product fell at
an annual rate of about 2 percent in the
fourth quarter, and the gain over the four
quarters of the year amounted to only
0.3 percent. The civilian unemployment
rate, which had held around 5V4 percent
through the first half of the year, moved
up steadily in the second half, to 6.1 percent in December. In January of this
year, the rate edged up further, to
6.2 percent. The consumer price index
rose 6.1 percent from December of 1989
to December of 1990, the largest annual
increase in nearly a decade.
A key link in the chain of events after
midyear was a surge in the price of
crude oil, from around $20 per barrel in
the spot markets in late July to more
than $40 per barrel in early October.
That surge sent the prices of energy
products soaring, sapped household purchasing power, and put further pressures
on business profits, compounding the
squeeze brought on by rising costs and
sluggish sales. Another, less tangible
link was the enormous uncertainty about
how, and when, tensions in the Mideast
might be resolved. Symptomatic of that
uncertainty, the various indicators of
household and business sentiment remained low toward the end of 1990,
even as oil prices dropped back part of
the way from their October peaks.
While surging energy prices accounted for much of the acceleration in
inflation in 1990, they were by no means
the only source of upward price pres
sure. The year-to-year rate of increase in
the CPI excluding food and energy—
a rough indicator of basic inflation
trends—maintained a gradual upward
tilt through the first three quarters of
1990, peaking at a rate of 5.5 percent in
August and September; a slight easing
of price pressures over the balance of
1990 brought that rate back down to
5.2 percent by year-end. The year-toyear rate of increase in nominal labor
compensation, as measured by the employment cost index, also moved up in
the first half of 1990; after midyear,
however, wage pressures moderated,
and the rise in nominal compensation
over the year ended up at 4.6 percent,
slightly less than the increases recorded
in each of the two previous years.
Support for growth of real activity
continued to come from the external sector in 1990, as real exports of goods and
services rose 5 percent over the four
quarters of the year; this gain, however,
was considerably smaller than the increases seen in each of the four previous
years. Gross domestic purchases, the
broadest indicator of domestic demand,
fell about lA percentage point, on net,
over the four quarters of 1990; within
this category an increase in government
purchases was more than offset by
weakness in consumption, homebuilding, and business fixed investment, and
a swing in inventories from moderate
accumulation late in 1989 to decumulation in the fourth quarter of 1990.
As was true during much of the long
expansion of the 1980s, economic trends
in 1990 varied appreciably across different regions of the country. The New
England economy, which had been very
strong through much of the 1980s,
slumped in 1990; by year-end, unemployment rates in that region had moved
well above the national average. By contrast, the economies of many locales
with heavy concentrations of manu-
Monetary Policy Reports
factoring—especially capital goods
manufacturing—held up fairly well until the oil shock; the continued growth of
exports supported activity in those areas.
The farm economy was relatively strong
again in 1990, although some indications of softening did show up in the
second half. Energy producers benefited
from the climb in oil prices; exploration
and drilling activity was restrained,
however, by the great uncertainty regarding the future course of oil prices.
The Household Sector
In midsummer, consumer spending still
was on an uptrend, and it edged up a
little further after the oil shock, peaking
in September. But with real incomes
being dragged down by slumping employment and soaring energy prices, the
rise in spending eventually ran out of
steam. Real outlays fell at an annual rate
of 3 percent in the fourth quarter; the
quarterly drop likely would have been
greater but for tax changes that caused
some households to make purchases in
advance of the turn of the year.
The declines in real income and
spending in the latter part of the year
essentially reversed the moderate gains
made earlier. Over the year, after-tax
income was down about Vi percent in
real terms; real consumption spending
was up over the four quarters of 1990,
but only fractionally. The personal saving rate rose over the first half of the
year, but then dropped about 1 percentage point in the last two quarters. This
drop in the saving rate after midyear
was a little surprising from one perspective, in that an unprecedented plunge in
consumer attitudes between July and
October might have been expected to
generate some increase in precautionary
saving. Moreover, many households had
suffered losses of wealth because of decreases in house prices or in the value of
45
securities they held; these developments
would seem to have called for a shift
toward reduced consumption out of current income. But, while such forces may
well have been at work, they apparently
were outweighed by a tendency of
households to dip into savings in the
short run when faced with a sudden
surge in expenses for energy.
Patterns of change in the various categories of consumer spending were
mixed in 1990. Real outlays for services
continued to trend up over the year, but
at a slower pace than during most years
of the expansion; on a quarterly basis,
growth in these outlays was quite
erratic, owing largely to weather-related
volatility in gas and electric bills. Real
outlays for nondurables fell 2lA percent
over the course of the year, an unusually
large decline by historical standards.
The drop presumably was brought on in
large part by the downturn in real income over the four quarters of 1990, the
first such decline since 1974.
The real outlays for consumer durables fell 3A percent over the four quarters of 1990; they had fallen about
\Vi percent in 1989. The drop in 1990
was accounted for by a second year of
decline in the purchases of motor vehicles. Outlays for the other durables—
furniture, household equipment, and the
like—were up about Vi percent on net
over the four quarters of 1990, after
having grown at a moderate pace in
1989. These patterns of change in
spending seemed to reflect both macroeconomic forces, notably the slower
pace of real income growth after the
start of 1989, and the normal workings
of household investment cycles. With
regard to the latter, household spending
for cars, trucks, and other consumer durables over the 1983-88 period were
almost 50 percent above the average for
the six best years of the 1970s. By 1989
many households may have reached a
46
78th Annual Report, 1991
point where they were in effect "stocked
up" and therefore well positioned to
delay making new purchases if the timing currently did not seem right.
Spending for residential construction
got a transitory boost from good weather
in the first quarter of 1990, but then fell
sharply in each of the three subsequent
quarters. Over the year as a whole, residential investment outlays declined
83/4 percent in real terms; they had
dropped 7 percent in 1989.
This slump in homebuilding reflected
a variety of influences, most of which
appeared to enter on the demand side of
the equation. The downshifting of real
income growth after the start of 1989
may have led households to view their
longer-run prospects in a more cautious
light and to hold back from housing
investments that they might otherwise
have undertaken. In addition, the unwinding in some regions of the country
of real estate booms seen in the 1980s
tarnished the attractiveness of housing
as a longer-term investment. These negative developments came at a time when
housing demand already was being restrained by a much slower rate of
growth of the adult population than was
seen in the 1970s and early 1980s.
Builders cut back sharply on new
construction in 1990. The annual starts
of single-family units fell 11 percent
from their 1989 level, and starts of
multi-family units declined about
20 percent, from an already low level.
However, these reductions in starts still
were not large enough to balance the
market. The supply of unsold new
homes, measured relative to the pace of
sales, jumped sharply in the first part of
1990 and then remained high over the
rest of the year; the vacancy rate on
multifamily rental units dipped temporarily in the spring, but later bounced
back up to the high levels seen over
most of the period after 1986.
In some instances, new construction
activity was deterred in 1990 by the
difficulty that prospective builders had
in obtaining credit. Failures of thrift
institutions severed established credit
relationships for some builders, and the
thrift institutions that survived moved
toward more conservative lending policies, either out of choice or in response
to the more stringent capital requirements and lending limits mandated by
the Financial Institutions Reform, Recovery, and Enforcement Act. Banks
also were cautious about extending
credit to builders; with large volumes
of problem loans already on their
books, banks were very sensitive to the
poor conditions in many local housing
markets.
In contrast to builders, potential homebuyers did not seem to have serious
problems in obtainingfinancingin 1990;
mortgage credit remained readily available, and the spreads between mortgage
rates and the rates on other long-term
loans actually narrowed. For the most
part, consumer credit also appeared to
be readily available, as lenders exhibited
only a mild tendency to tighten standards on this generally profitable line of
business.
The Business Sector
The business sector began 1990 on a
rather shaky note. Profits had declined
during 1989, and overhangs of business
inventories had developed in the second
half of that year in some markets, notably autos. In manufacturing, production
growth had been restrained late in 1989,
and output dropped sharply in January
of 1990, led by a steep cutback in auto
assemblies. But conditions improved
over the next few months. Industrial
production rose fairly briskly, in fact,
from January into midsummer, and the
Monetary Policy Reports
drop in business profits was halted for a
time.
From August on, the business climate
was dominated by the oil shock and its
attendant uncertainties. After peaking in
September, industrial production plummeted over the last three months of
1990, and it closed out the year about
V/i percent below the level of a year
earlier. The operating rate in industry
also fell sharply over the latter part of
the year, back to where it had been in
early 1987, before capacity pressures
started developing in that year. With
volume declining and costs on the rise,
corporate profits undoubtedly went into
renewed decline in the fourth quarter
(the official data are not yet available);
for 1990 as a whole, the share of profits
in total GNP was the lowest of any year
since 1982.
Serious overhangs of business inventories were not apparent when the oil
shock hit in August, and prompt production adjustments that followed the shock
forestalled stockbuilding in the ensuing
months. Indeed, real manufacturing and
trade inventories fell slightly on net between the end of July and the end of
November. Under the circumstances,
however, these reductions clearly were
not great enough to get actual stocks
down to desired levels. In wholesale and
retail trade, sales declined sharply from
July to November, and the constantdollar ratios of inventories to sales in
these sectors moved up to levels that
were around the upper end of the ranges
seen over the past two or three years.
The inventory-sales ratio in manufacturing also edged up on net between July
and November, and manufacturers continued to cut output through the end of
1990 and into early 1991. Over 1990 as
a whole, the level of real business inventories declined about $3 billion, according to preliminary estimates. The rapid
reductions of nonfarm inventories that
47
were seen in the fourth quarter of 1990
accounted for all of that quarter's drop
in real GNP.
After registering relatively strong
gains in each year from 1987 to 1989,
business outlays for fixed investment
rose only 1 percent in real terms over
the four quarters of 1990. Spending was
affected by the squeeze on profits, the
easing of pressures on capacity, and
the heightened uncertainties regarding
the business outlook. These influences
showed through most clearly in the outlays for equipment. Real spending for
computers and other information processing equipment rose 3 percent on net
over the four quarters of 1990; growth
had averaged 15 percent per year over
the first seven years of the expansion. In
addition, outlays for industrial equipment turned down in 1990, as the deterioration of profits and the falloff in operating rates took their toll. Business
purchases of motor vehicles bounced
around from quarter to quarter, but held
in essentially the same range that they
have been in for the past several years.
By contrast, business outlays for aircraft, which have been very strong in
recent years, rose further in 1990.
Nonresidential construction declined
5 percent over the four quarters of 1990.
Weakness was concentrated mainly in
the outlays for offices and other commercial structures, which together account for about one-third of the total.
An excess supply of these structures developed in many cities during the building boom of the mid-1980s, and despite
sharp cutbacks in construction after
1985, vacancy rates remained high
through 1990. Reflecting this continued
imbalance—and the reluctance of creditors to finance new projects in this troubled sector of the economy—the indicators of future activity, such as the data
on new contracts and building permits,
continued to have a decidedly negative
48
78th Annual Report, 1991
cast through the second half of 1990.
Spending for industrial structures rose
over the first three quarters of 1990, but
fell sharply in the fourth quarter, and the
indicators of future construction continued to weaken. As noted previously, investment in oil drilling remained subdued in the second half of 1990, despite
the rise in oil prices; in some instances,
drillers may have been hampered by
shortages of experienced crews, but,
more important, the uncertainty about
whether prices would remain high
enough to justify stepped-up investment
prompted a cautious response.
The Government Sector
In the government sector, budgetary
pressures intensified in 1990. At the federal level, the rate of growth of receipts
slowed to 4.1 percent in fiscal year
1990, less than half the rate of increase
in the previous fiscal year and more than
I percentage point below the rate of
growth in nominal GNP. Meanwhile,
spending jumped 9.4 percent in fiscal
1990, and the federal budget deficit increased to $220 billion, up $67 billion
from the 1989 fiscal year and well above
the target for 1990 that had been laid out
in the Gramm-Rudman-Hollings legislation. Finding a way to get back on
track toward deficit reduction occupied
the Congress and the Administration
through much of 1990; an agreement
that was reached in October prescribed
new targets and new procedures for the
five-year period starting in the 1991
fiscal year.
Part of the slowing of receipts in the
1990 fiscal year stemmed from the
weakness in corporate profits; collections from that source fell almost
$10 billion. In addition, the growth of
tax receipts drawn from the incomes of
individuals slowed appreciably, from
II percent in 1989 to a bit less than
5 percent in 1990; this slowdown mainly
reflected the absence in 1990 of transitory factors that had led to the big jump
in these receipts in 1989. On the expenditure side of the ledger, about one-third
of the increase of $108 billion in nominal federal outlays in fiscal 1990 was
attributable to federal deposit insurance
programs; the main portion of these outlays went to honor obligations to holders of deposits in failed thrift institutions. Spending also moved up rapidly
in 1990 for entitlements. The outlays for
medicare rose 15 percent, pushed up by
continued rapid inflation in health costs
and an expansion in the number of beneficiaries. Outlays for social security and
other income security programs, which
together account for close to one-third
of total federal spending, rose about
IVi percent in fiscal 1990, a pickup from
the pace of recent years. Net interest
outlays, which now account for almost
15 percent of total spending, also continued to climb rapidly.
Federal purchases of goods and services, the portion of federal spending
that is included directly in GNP, increased 5.5 percent in real terms over
the four quarters of 1990. Excluding
changes in the inventories owned or
financed by the Commodity Credit Corporation, which tend to be very volatile,
federal purchases of goods and services
increased 4.4 percent, on net, over the
year; nondefense purchases were up
3.6 percent and defense purchases,
which had registered moderate declines
in each of the three previous years, increased 4.7 percent in 1990. The rise in
defense purchases came mainly in the
fourth quarter of the year and apparently
reflected, in part, outlays associated with
Operation Desert Shield.
The deficit in the combined operating
and capital accounts of state and local
governments (excluding social insurance funds) averaged $30 billion at an
Monetary Policy Reports
annual rate over the first three quarters
of 1990, and it appears to have widened
considerably further in the fourth quarter as the recession cut into tax receipts.
State and local budgets first moved into
deficit in late 1986, and they have
slipped further into the red in each succeeding year. At the same time, concerns have intensified about the repayment abilities of some state and local
governing units; as evidence of this, the
downgradings of state and local credit
ratings outnumbered upgradings by a
wide margin in 1990.
In an effort to strengthen their finances, many state and local governments have raised taxes in recent years.
Reflecting those increases, total state
and local receipts moved up faster than
nominal GNP both in 1989 and through
the first three quarters of 1990. In addition, spending has been scaled back
from planned levels in many cases.
Overall, however, the efforts to control
spending have collided with the growing demands for services that state and
local government traditionally have provided for such things as education, public protection, and health and income
support. Thus, while the growth of state
and local outlays has slowed from the
rate of rise seen earlier in the expansion,
it nonetheless has been running above
that of total GNP. The nominal rise in
state and local purchases of goods and
services over the four quarters of 1990
was 7.9 percent; in real terms, purchases
grew 2.5 percent over the year.
The External Sector
The merchandise trade deficit narrowed
from $115 billion in 1989 to a bit less
than $110 billion in 1990, a degree of
improvement that was smaller than that
seen in either of the two preceding
years. A surge in the price of oil imports
in the second half of the year led to a
49
jump in the value of imports. In addition, trade flows during the year were
influenced to some extent by lagged
effects of the firming of dollar exchange
rates that had taken place in the first half
of 1989. The current account balance
averaged $93 billion, at an annual rate,
during the first three quarters of 1990,
down from a total of $110 billion in
1989; the improvement in this account
was greater than that in the trade account owing to a strengthening of net
receipts from service transactions, those
involving such things as travel, education, and finance.
Measured in terms of the other Group
of Ten (G-10) currencies, the foreign
exchange value of the U.S. dollar depreciated about 12 percent from December
1989 to December 1990. This depreciation extended a decline that began in
mid-1989 and more than reversed the
earlier appreciation. Adjusted for movements in relative consumer price levels,
the dollar's decline in 1990 was slightly
less than it was in nominal terms, as
inflation in the United States exceeded
somewhat the weighted average of inflation rates in the other G-10 countries. In
real terms, the weighted-average dollar
in December 1990 was at about its low
of 1980; the huge appreciation in average exchange rates in the first half of the
1980s thus has been reversed.
The decline in the dollar in 1990 was
broadly based against the Japanese yen,
the German mark, and other European
currencies. The dollar also declined
about 10 percent against the Singapore
dollar, but it appreciated about 5 percent
against the currencies of South Korea
and Taiwan, partially reversing declines
of the preceding few years. The weakness in the dollar against the G-10 currencies over the past year reflected primarily the influence of different trends
in interest rates in the United States
and other major industrial countries.
50
78th Annual Report, 1991
Whereas U.S. short-term interest rates
trended down through the year and longterm rates were about unchanged over
the year as a whole, foreign short-term
rates rose by an average of about V2 percentage point, and foreign long-term
rates rose by an average of about 1
point. Official intervention in foreign exchange markets was small in 1990.
U.S. merchandise exports grew
IVi percent in real terms over the four
quarters of 1990, after rising about
12 percent in 1989. Merchandise exports grew rapidly in the first quarter,
boosted in part by a strong recovery of
exports of aircraft after the Boeing strike
of late 1989 ended. Over the next two
quarters, real exports changed little on
net. Growth of activity in the major U.S.
export markets slowed noticeably in the
middle of the year; outright recessions
developed in Canada and the United
Kingdom. In the fourth quarter, export
growth picked up again, probably
largely in response to the gains in U.S.
price competitiveness that took place
during the year. Export prices rose moderately during the year.
Merchandise imports excluding oil
grew only 2 percent in real terms during
1990, less than half the pace recorded in
1989. The deceleration in imports reflected the net decline in total domestic
demand in the United States during the
year. The quantity of oil imports fluctuated during the year, but was up only
slightly for the year as a whole. At an
average rate of about 8.3 million barrels
per day, oil imports accounted for
roughly half of total domestic consumption of oil in 1990. The price of imported oil surged to an average level of
nearly $30 per barrel in the fourth quarter, after havingfluctuatedin a range of
$15 to $20 per barrel for nearly two
years.
The current account deficit of $93 billion at an annual rate over thefirstthree
quarters of 1990 was matched by a recorded net capital inflow of $26 billion
and a large positive statistical discrepancy in the international accounts. Part
of the statistical discrepancy may have
reflected increased holdings of U.S. currency by foreigners responding to the
unsettled political conditions in many
parts of the world.
The recorded net inflow of capital
was more than accounted for in net
transactions reported by banks, which
were mainly for the banks' own accounts. Transactions in securities
showed a net outflow, as foreigners reduced their rate of net purchases of U.S.
corporate and Treasury bonds and actually made net sales of U.S. corporate
stocks, while the rate of U.S. net purchases of foreign securities increased.
The recorded inflow of direct investment from abroad dropped sharply from
the rates recorded in 1988 and 1989;
foreign acquisitions in the United States
remained strong, but a much greater portion were beingfinancedhere rather than
abroad. The flow of U.S. direct investment abroad picked up, in part reflecting
strong U.S. acquisitions abroad. Foreign
official assets in the United States increased $11 billion over the first three
quarters of 1990, and U.S. official holdings of assets abroad declined slightly.
Labor Markets
Payroll employment increased in each
month in thefirsthalf of 1990 and fell in
each month of the second half. The declines of July and August, however, reflected layoffs of federal workers who
had been hired temporarily to conduct
the 1990 Census. In the private nonfarm
sector, employment continued to edge
up into August and did not turn down
decisively until October. More than half
a million jobs were lost over the final
three months of the year. Over the year
Monetary Policy Reports
as a whole (December to December),
the number of jobs in the private nonfarm sector increased about 250,000 on
net, but much of that small gain was
wiped out by the further drop in employment in January of this year.
Sectoral patterns of employment
change varied considerably in 1990.
Employment in manufacturing fell about
585,000 from December of 1989 to December of 1990; losses of factory jobs
proceeded at a slow and fairly steady
pace through the first half, but then accelerated after the onset of the oil shock.
The troubled construction sector shed
roughly one- quarter of a million jobs
over the course of the year; after a
weather-related jump early in the year,
the declines went on almost without interruption through December. Employment in retail and wholesale trade was
down slightly on net over the course of
1990, as small gains through the first
seven months of the year were more
than offset by sharp declines in the
fourth quarter. The number of jobs in
the services industries increased in each
month of 1990, but the rate of gain
slowed progressively over the year;
health services was the only major area
in which hiring was going on with much
vigor at year-end.
Growth in the supply of labor was
quite subdued in 1990. The civilian
labor force increased only 0.5 percent
on a December-to-December basis, the
smallest annual gain in almost thirty
years. Part of the explanation for this
slow labor force growth is that the
working-age population has not been
growing very rapidly in recent years. In
addition, the share of the working-age
population that chose to participate in
the work force declined in 1990, by
enough to cut labor force growth to
about half of what it would have been
had the participation rate remained unchanged. The sluggishness of the labor
51
markets in 1990 no doubt discouraged
some potential entrants from seeking
jobs, as typically happens during cyclical slowdowns in the economy. Still, the
drop in participation in 1990 left some
questions regarding the future trend in
the growth of labor supply. A downshifting in the growth of labor supply, to the
extent that it is not due solely to cyclical
factors, would tend to translate one-forone into slower growth of potential output over time unless there were at the
same time an offsetting pickup in labor
productivity, of which there has been
little, if any, evidence of late.
The flatness of the unemployment rate
through the first half of 1990 brought to
seven quarters the length of time during
which the rate had held tightly around
the 5lA percent mark and extended to
nearly three years the length of time
during which the rate had been below
6 percent. Not since the first half of the
1970s had the unemployment rate been
at such low levels for so long. This
period of low unemployment, unfortunately, also was a period of sharply increased wage inflation. After rising
about 3XA percent in both 1986 and
1987, the employment cost index for
compensation, which includes the cost
of workers' benefits, as well as wages
and salaries, moved up about 43A percent in both 1988 and 1989; and in the
first half of 1990, the year-to-year rate
of increase in this measure of compensation rose still further, to 5lA percent.
Labor market tightness was not the
only factor putting pressure on wages
and compensation between the end of
1987 and the middle of 1990. The updrift in inflation caused workers to press
for nominal increases in wages and benefits that were big enough to keep real
incomes on a reasonably even keel, and
with labor in short supply, businesses
found it necessary to accede to hefty
increases to attract and keep workers.
52
78th Annual Report, 1991
The actions of government also added to
cost pressures: A further rise in social
security taxes in 1990 added 0.2 percent
to total compensation, and a boost in the
minimum wage may have added another
0.1 percent.
A marked slowing of wage pressures
emerged in the second half of 1990, and
the year-to-year rate of increase in the
employment cost index for compensation dropped back to 4.6 percent by the
end of the year. Although workers' real
incomes were battered by the surge in
energy prices during this period, attempts to regain those income losses
appear to have been overwhelmed by
the increase in labor market slack and
associated concerns about job security.
The efforts of management to contain
costs in a time of declining profits probably also were a factor helping to limit
wage increases during this period.
The performance of productivity was
subpar for a second successive year in
1990. Output per hour in the nonfarm
business sector edged down 0.1 percent
over the four quarters of the year, after
having dropped 1.6 percent in 1989.
More than likely, the behavior of productivity over this two-year period
mainly reflected typical cyclical influences, namely the tendency of firms to
adjust output faster than hours in response to a slowing of demand. Unit
labor costs increased about AV2 percent
over the four quarters of 1990, the largest annual rise since 1982.
Price Developments
All of the major price indexes—the consumer price index, the producer price
index, and the GNP price indexes—rose
faster in 1990 than they did in 1989. In
general, the increases seen in 1990 also
were the largest since those of the early
1980s. In all of the measures, the pickup
in the rate of price increase in 1990
basically reflected the effects of the oil
shock in a situation in which underlying
inflation pressures already were well entrenched. Acceleration was especially
pronounced in those indexes, such as the
CPI, that measure price change for
goods and services purchased by domestic buyers, as the surge in oil import
prices had a particularly strong effect on
these measures. By contrast, the GNP
price measures, which cover goods and
services produced domestically, exhibited a less pronounced degree of acceleration this past year.
The CPI for energy rose 18 percent
from December of 1989 to December of
1990. Although the bulk of the 1990 rise
came after the start of August, intermittent pressures had surfaced earlier in the
year. A severe bout of cold weather at
the end of 1989 cut into the inventories
of heating oil, disrupted operations at
several refineries, and caused the prices
of fuel oil and gasoline to soar. After
January, fuel oil prices fell back, but
gasoline prices remained relatively firm
into the summer as still more supply
interruptions prevented a rebuilding of
stocks.
The August invasion of Kuwait set
off another round of steep price increases. World oil production dropped
temporarily after the invasion, and the
uncertainties associated with the tensions in the Persian Gulf set off a scramble for inventories by refiners and others
seeking to guard against a possible further disruption in supplies. The price of
oil fluctuated widely in this period, but
generally maintained an upward trend
into early October. By then, however,
the losses of oil from Iraq and Kuwait
were being fully offset by increased production from other countries, and demand was weakening. As a result, oil
prices turned down and held on a
choppy downward pattern through the
end of the year, retracing about half of
Monetary Policy Reports
the runup that had occurred between
August and early October. A further
steep drop came in mid-January of 1991,
when initial successes of the coalition
forces in the Gulf war seemed to signal
a greatly diminished potential for disruption of world supplies.
The CPI for fuel oil also turned down
over the last two months of the year, but
gasoline prices again held firm, supported this time by a five cent per gallon
rise in the federal excise tax that took
effect on December 1. Over the year,
fuel oil prices increased about 30 percent at the consumer level, and gasoline
prices were up almost 37 percent. By
contrast, increases over the year in the
prices of the service fuels (natural gas
and electricity) were quite small—in the
range of Wi to 2 percent; reaction of
these prices to the oil shock apparently
was damped by ample supplies of natural gas and coal, as well as the customary lags in adjusting rate structures at
retail.
The consumer price index for food
rose 5.3 percent in 1990; this increase
was about the same as those seen in
1988 and 1989. Over the preceding few
years, food price increases had tended to
run more in the 3 to 4 percent range. To
a considerable degree, the continued
sharp increases in food prices in 1990
seemed to reflect underlying inflation
processes similar to those at work in
other sectors of the economy. In addition, prices were affected by the changing supply conditions in agriculture.
Production of beef and pork declined in
1990, and their prices at retail increased
9 percent and 17 percent respectively
over the course of the year. Dairy production, which had fallen in 1989,
turned up in 1990; but with stocks initially at low levels, the rise in production did not have a damping effect on
prices at retail until relatively late in the
year. The spell of cold weather late in
53
1989 led to a surge in the prices of
orange juice and fresh vegetables early
in 1990; toward the end of 1990, another cold snap destroyed citrus crops in
California and boosted citrus prices. By
contrast, big wheat crops here and
abroad in 1990 caused wheat prices to
plunge and led to some rebuilding of
stocks; at retail, the CPI for cereals and
bakery products slowed from an increase of ll/z percent in 1989 to one of
41/2 percent in 1990.
The CPI for nonenergy services,
which accounts for more than half of the
total CPI, rose 6 percent during 1990,
after an increase of 5.3 percent in 1989.
The prices of medical services, which
have been rising rapidly for many years,
were up 9.9 percent in 1990; they had
increased 8.6 percent in the previous
year. The cost of tuition, another category where pressures have been evident
in the CPI for some time, rose more than
8 percent in 1990, about the same as in
1989. Elsewhere in the services sector,
prices soared for public transportation
and lodging. Airlines, which were hit
hard by the surge in energy costs, raised
their fares almost 23 percent over the
year. Price increases for other forms of
public transportation were in the 6 to
7 percent range, and the CPI for out-oftown lodging advanced nearly 16 percent over the year. Increases in the costs
of many publicly provided services—
such as water and sewerage maintenance and refuse collection—also were
large in 1990; these increases probably
reflected the needs of municipalities to
raise revenue, as well as environmental
imperatives in some instances.
The CPI for commodities excluding
food and energy rose 3.4 percent in
1990, after increasing 2.7 percent in
1989. Within this category, tobacco
prices again registered a particularly
large increase, about 11 percent over the
course of the year. This increase partly
54
78th Annual Report, 1991
reflected the pass-through to consumers
of a jump in manufacturers' prices; in
addition, governments continued to view
excise taxes on tobacco products as an
attractive way to boost revenues. The
CPI for apparel was up 5 percent in
1990; apparel prices had changed little
over the course of 1989, and the 1990
rise may therefore have been, in part, an
effort to restore margins. New car prices
continued to rise, even as sales declined;
by contrast, the prices of used cars were
down a bit for a second year. The prices
of many household appliances fell in
1990, extending the gradual downward
trends seen in previous years.
Apart from energy, increases in producer prices were comparatively moderate in 1990. The producer price index
for finished goods excluding food and
energy rose 3.5 percent over the year,
about 3A percentage point less than in
either of the preceding two years. In
manufacturing, the pressures from rising
wages and soaring energy costs were
partly damped by continued rapid gains
in productivity and softening demand.
The prices of intermediate materials excluding food and energy rose 1.9 percent during 1990, the second year in a
row in which increases for that category
have been small; materials prices had
increased sharply in 1987 and 1988. The
spot prices of raw industrial commodities moved up on net in the first half of
1990, held firm through September, and
then fell rapidly in the fourth quarter as
the economy weakened; further declines
in these prices have been evident in the
early part of 1991.
Monetary and Financial
Developments during 1990
Monetary policy has been progressively
eased since mid-1990, resuming the
trend begun in 1989. The Federal Reserve has acted against the backdrop of
a weakening economy, sluggish money
growth, improved inflation prospects,
greater fiscal restraint, and indications
of tightening credit to private borrowers.
In response to the System's actions and
to developments in economic activity
and prices, short-term interest rates, as
of mid-February, were nearly 2 percentage points below those prevailing at the
time of the Board's July report to the
Congress, and long-term rates were
down about Vi percentage point.
After an initial small cut in money
market rates in July, policy was held
stable for a brief period, in light of the
sharp jump in world oil prices that occurred in the wake of the Iraqi invasion
of Kuwait. This shock implied an uncertain combination of increased prices and
reduced economic activity. The magnitude of the impact would depend on the
extent of the disruption in world oil
markets, which could not be forecast
with precision. As it became clear in the
autumn that the risks of increased inflation were fading relative to the risks of a
downturn in economic activity, the Federal Reserve moved aggressively, using
a variety of instruments. Open market
operations and a reduction of 1 percentage point in the discount rate, taken in
two steps, have brought overnight rates
down l3/4 percentage points since late
October; in addition, reserve requirements were reduced in early December
to foster easier credit conditions.
In the formulation of policy in 1990,
the Federal Reserve continued to examine a variety of information bearing on
developments relating to economic activity and prices. Over the year, certain
developments in financial markets took
on special significance for the economy
and monetary policy. The cost and availability of credit was monitored in light
of indications that tightening credit supplies were constraining output to a
greater degree than was desirable. In
Monetary Policy Reports
addition, considerable attention was paid
to money stock movements, especially
in the latter part of 1990 and into 1991,
when money growth virtually stalled.
The Federal Reserve recognized that the
relation of the monetary aggregates to
broad measures of economic performance remained subject to considerable
uncertainty, but the marked sluggishness
of money growth was seen as suggesting both weak contemporaneous growth
of income and spending and the existence of constraints on the availability of
credit through depository institutions
that could adversely affect spending in
the future.
The Implementation of Monetary Policy
During the first half of 1990, the Federal
Reserve took no actions in reserve markets designed to produce changes in
money market interest rates. Federal
funds—overnight interbank loans of
immediately available funds—traded
around the %lA percent level that had
been established in December 1989,
and other short-term rates were little
changed as well. Throughout this period
economic activity continued to grow,
the unemployment rate held steady, and
there were no clear signs of abatement
in inflation.
Yields on longer-term debt instruments rose considerably during the early
months of the year, restoring the yield
curve's usual upward tilt, which had
been absent for much of 1989. This rise
in long-term rates reflected a stronger
economy than some had expected, increased concerns about inflation, and
higher foreign interest rates. As the second quarter progressed, however, bond
rates began to recede, responding to a
shift in sentiment about the strength of
the economy and the likely path of monetary policy.
Around that time, growth of the
broader monetary aggregates began to
55
slow appreciably. To a large extent, the
weakness in the aggregates was associated with a redirection of credit flows
away from depository institutions, related mainly to the ongoing restructuring of the thrift industry but also to an
apparent decrease in the willingness or
ability of banks to lend. For the most
part, the decline in depository credit was
expected to be taken up by other lenders, with minimal impact on the overall
cost and availability of credit. M3 velocity in particular was expected to be
boosted substantially in the process, and
the FOMC at its July meeting reduced
the annual target range for this aggregate by Wi percentage points. By midJuly, it was increasingly apparent that
the pullback by depositories was constricting credit supplies to some classes
of borrowers, and the Committee eased
reserve conditions to bring down interest rates slightly to offset the effects of
this tightening of credit conditions on an
already soft economy.
The invasion of Kuwait at the beginning of August fundamentally altered
the environment for monetary policy.
World oil prices soared, and a considerable measure of uncertainty was added
to the outlook for the economy, complicating the formulation of monetary policy. Business and consumer confidence
plummeted, and the adverse effects of
high oil prices on the public's spending
plans, domestic economic activity, and
inflation soon became apparent. As volatility in financial markets increased,
heightened investor preference for liquidity and safety was evident: Treasury
bill rates fell over August and September while private short-term rates
changed little; money market mutual
funds experienced large inflows, boosting growth of the monetary aggregates
late in the summer as investors apparently fled stock and bond markets; and
the ongoing decline in the foreign ex-
56
78th Annual Report, 1991
change value of the dollar was halted for
a while by safe-haven demands.
In these circumstances, the benefits of
any easing action taken to cushion the
possible effects on output in the near
term needed to be weighed against the
potential for embedding higher energy
prices in the price level and, more important, into inflationary expectations, a
reaction that ultimately would undercut
sustainable economic growth. Policy decisions were further complicated by the
fact that the military and political situation underlying the oil price shock was
sofluid;in fact, it clearly was a war-risk
premium rather than a current shortage
of supply that was maintaining a higher
price of crude oil. The possibility existed that any substantial moves in monetary policy might prove ill-advised as
circumstances changed, and it appeared
that the most constructive role monetary
policy might play, until the balance of
risks was clarified, would be to foster a
sense of stability in the very nervous
financial markets.
As it was, financial markets had to
contend not only with the Gulf crisis
during the late summer and early fall,
but also with uncertainties surrounding
the timing and extent of a reduction in
the federal budget deficit. Yields were
buffeted whenever the odds of a meaningful deficit-reduction package appeared to change. For example, Treasury bond rates fell appreciably when an
initial budget accord was hammered out
and rose when the government was
forced to shut down temporarily after
the pact failed to win congressional approval. By the end of October, longterm rates had come down again, and a
budget agreement involving a major degree of fiscal restraint over a multi-year
horizon was successfully concluded. In
light of the budget agreement, which
promised greater and more durable fiscal restraint, and with the economy weak
ening, the Federal Reserve took another
step to ease pressures on reserve
conditions.
Late in the year, indications accumulated that inflationary pressures, apart
from those closely connected to the
surge in energy prices, were easing. As
the economy softened and wage pressures also diminished, it seemed more
likely that the effects of higher oil prices
would not be built into ongoing inflation
trends. Market interest rates declined
across the maturity spectrum, although
these declines were most pronounced
for government obligations owing to
heightened concerns about credit quality, which drew investors toward highgrade assets.
Financial strains were experienced by
more and more lending institutions, as
problems emerged in many real estate
portfolios and as a growing number of
Growth of Money and Debt
Percent
Period
Annually, fourth
quarter to
fourth quarterl
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
..
Quarterly
(annual rate)3
1990:1
2
3
4
Ml
M2
M3
Debt of
domestic
nonfinancial
sector
7.4
5.4
(2.52)
8.8
10.4
5.4
12.0
15.5
6.3
4.2
.6
4.2
8.9
9.3
9.5
12.3
9.4
10.1
9.1
12.2
8.0
8.7
9.2
4.3
5.2
4.7
3.9
9.9
9.8
10.7
7.6
9.0
5.8
6.3
3.6
1.8
9.1
11.1
14.2
13.1
13.2
9.7
9.2
7.7
6.9
5.2
4.2
3.7
3.4
6.2
3.9
3.0
2.2
2.9
1.3
1.6
1.3
6.1
6.9
7.4
6.4
1. From average for fourth quarter of preceding year to
average for fourth quarter of year indicated.
2. Adjusted for shift to NOW accounts in 1981.
3. From average for preceding quarter to average for
quarter indicated.
Monetary Policy Reports
highly leveraged firms ran into trouble.
Efforts by banks and other lenders to
protect or improve their capital positions as their loan portfolios deteriorated
were reflected in widespread signs of
cutbacks in the availability of credit and
increases in its cost, especially to lessthan-prime borrowers lacking access to
securities markets. While much of the
tightening of lending standards was welcome from the standpoint of safety and
soundness, it exerted a contractionary
influence on the economy and was reflected in the slow growth in bank credit
and the broad monetary aggregates.
Against this backdrop, the Federal
Reserve undertook additional actions
designed to support the economy and to
counter the tightening in credit terms. In
mid-November, the FOMC moved to
lower money market rates through open
market operations, and in early December, the Board eliminated the 3 percent
reserve requirement on nonpersonal
time deposits and net Eurocurrency liabilities. This action was taken in response to the increased restraint on lending by commercial banks: Lower reserve
requirements reduce funding costs to depository institutions, encouraging them
to expand lending. Ultimately, the lower
funding costs are passed through as a
combination of lower rates for borrowers and higher rates offered to
depositors.
Following the reduction in reserve requirements, further actions were taken
in reserve markets to bring down shortterm interest rates. These actions included additional steps toward a more
accommodative supply of nonborrowed
reserves through open market operations and two reductions in the discount
rate—of a half point in December and of
a like amount in January. All of these
moves were made in light of further
declines in economic activity, sluggish
money and credit growth, and evidence
57
of ebbing inflation pressures. In total,
the federal funds rate has fallen about
2 percentage points from its mid-1990
level and about 3lA percentage points
from its most recent peak in mid-1989.
Under the impetus of the easing of
monetary policy and the softening of the
economy, other short-term rates also fell
significantly below mid-1990 levels by
mid-February. The drop in yields on
Treasury bills roughly paralleled that in
the federal funds rate. Banks reduced
their prime rates in two Vi percentage
point steps in early 1991, but, as a consequence of the tightening in credit supplies, prime rates remained higher than
usual relative to rates on federal funds
and other sources of funds. Rates on
commercial paper and CDs also fell less
than those on federal funds or Treasury
bills, dropping about VA percentage
points from mid-1990 levels. This widening of yield spreads was additional
evidence of investor concern about private credits, though these spreads generally remained narrow relative to those
seen in past economic downturns. However, yields on private money market
instruments were under substantial upward pressure in the weeks leading up to
year-end when the prospect of publishing financial statements led banks to attempt to hold down credit extension in
order to bolster capital ratios and led
lenders generally to intensify their focus
on asset quality. Spreads soared at times
in this period; but the Federal Reserve
injected large amounts of reserves, the
year-end passed without major dislocation, and yield spreads narrowed substantially in January.
Rates on longer-term securities came
down considerably less from their levels
in mid-1990 than those on short-term
paper. As of mid-February, the yield on
the thirty-year Treasury bond had fallen
about V2 percentage point since the middle of 1989, and those on private long-
58
78th Annual Report, 1991
term issues were down slightly less. Declines in these yields may have been
limited in part by the increased uncertainty and volatility that followed the
invasion of Kuwait. Some major stock
market indexes had reached record highs
in July, but the uncertain outlook both at
home and abroad after the invasion of
Kuwait and the slump in economic activity pushed stock prices significantly
lower in the ensuing months. Since the
war broke out in mid-January of this
year, however, stock price indexes have
moved up sharply, with some indexes
reaching new record highs in midFebruary. The foreign exchange value of
the dollar declined about 10 percent over
the second half of 1990; the dollar
turned up early this year, but fell again
in February.
Behavior of Money and Credit
M2 grew unexpectedly slowly in 1990,
about 4 percent for the year, well down
in the lower half of the FOMC's range.
After a robust first quarter, M2 growth
weakened markedly over the balance of
the year. The expansion of this aggregate was well below what the historical
relationships based on income and interest rates would suggest. The substantial
declines in interest rates from their earlier levels would ordinarily be expected
to offset to some extent the effects of the
slowdown in nominal income in the second half of the year. M2 velocity was
fairly stable through 1990, but historical
relationships suggest that velocity
should have fallen given the decline in
interest rates.
The shortfall of money growth, relative to historical patterns, probably reflected the shifting of financial flows
associated with the contraction of the
thrift industry and the increased reluctance or inability of commercial banks
to expand their balance sheets. Indeed,
the slowdown of M2 growth emerged at
about the time that RTC activity picked
up. The drop in depository credit, which
had its primary effect on the M3 aggregate, also may have damped M2 by lessening the need of commercial banks and
thrift institutions to bid for retail deposits. One indication is the apparent cutback in advertising for these deposits
during the year. And, as a result of the
diminished need for retail deposits, deposit rates were held down relative to
returns available on market instruments.
In addition, some high-rate contracts
were abrogated in the process of closing
failed thrift institutions, reducing the
attractiveness of these deposits; depositors who were dislodged from existing
relationships when thrift institutions
were closed may have reallocated their
assets in other directions.
Nevertheless, even taking account of
these factors affecting the relative attractiveness of yields on M2 assets, M2
growth remains much slower than seems
explainable, indicating an underlying reevaluation of, and shift away from, M2
assets. One factor behind such a shift
may have been concerns generated by
the publicity about savings and loan failures and about credit quality problems
at banks. To the extent that households
moved assets to money market funds,
which grew rapidly in the second half of
the year, M2 would not be affected;
however, direct purchases of market instruments would reduce M2. For example, noncompetitive tenders at Treasury
auctions have been unusually strong,
suggesting a shift toward holding these
assets directly. In addition, households
may have chosen to deplete liquid assets
instead of increasing borrowing to maintain spending in the face of higher prices
for energy products and the sudden
plunge in real income; consumer credit
growth was especially slow in the fourth
quarter.
Monetary Policy Reports
The slowdown in M2 last year would
have been even more pronounced had it
not been for the rapid expansion of currency. At 11 percent, currency growth
was more than twice its 1989 rate and
was at the most rapid yearly rate of the
postwar period. The bulk of the pickup
appears attributable to increased demands for U.S. currency outside our borders, however. Information on shipments overseas suggests that demands
for U.S. currency were particularly
heavy in areas experiencing economic
and political turmoil, especially Eastern
Europe, Latin America, and, after the
Iraqi invasion of Kuwait, the Middle
East. The faster growth of currency,
along with the effects of lower market
interest rates on incentives to hold transactions balances, boosted Ml growth
from near zero in 1989 to 4 percent in
1990. The monetary base grew SV2 percent over the year, also propelled by
strong currency growth. By contrast, the
total reserves portion of the monetary
base was about unchanged, reflecting
little net growth in reservable liabilities;
transactions deposits increased slightly,
but declines were registered in nonpersonal time deposits and net Eurodollar
borrowing (abstracting from the effects
of the reserve requirement decrease at
year-end).
M3 grew 13A percent in 1990, somewhat less than had been anticipated early
in the year. Roughly similar to the quarterly pattern of M2, M3 growth fell off
noticeably after the first quarter and
ended the year somewhat above the
lower bound of its target range. That
range itself had been lowered at midyear
by Wi percentage points amid evidence
that the drop in thrift assets was proceeding more rapidly than had been expected and that credit flows were being
directed away from depository institutions. Banks acquired a substantial
amount of deposits from thrift institu
59
tions resolved by the RTC, but, unlike in
1989, they did not use newly acquired
deposits to expand their balance sheets.
Significant loan losses in 1990 limited
the ability of banks to generate capital
internally and raised the cost of external
capital as investors reevaluated risks. At
the same time, banks were facing the
prospect of new capital standards. Banks
used the deposits they acquired from
thrift institutions to pay down other liabilities, especially large time deposits,
with the result that the shift of M2 deposits from thrift institutions to banks
contributed to sharp declines in M3
managed liabilities at banks.
Much of the difficulty in the banking
industry can be traced to problems with
commercial real estate loans. Before
the mid-1980s, developers typically arranged permanent financing for construction and land development projects,
usually from institutional investors, before obtaining initial bank financing. But
during the period of rapidly rising real
estate values in the latter 1980s, many
banks no longer required such prearranged "takeouts," and when the real
estate market cracked, those banks
found themselves holding a substantial
volume of undercollateralized loans. At
about the same time, there was a significant reevaluation of the prospects for
many of the highly leveraged transactions (HLTs) that had been undertaken
in recent years; while bank losses attributable to HLTs have not yet been significant, the virtual disappearance of the
market for new low-rated bonds has implied that many HLT loans will not be
repaid as promptly as hoped. Growing
uneasiness about banks' assets has contributed to increases in their cost of capital and, for some banks, of wholesale
funding.
Banks by and large are sound and
well capitalized, but concerns about
the strength of the industry intensified
60
78th Annual Report, 1991
Senior loan officer opinion survey, 1990-91 l
Percentage of banks reporting tighter standards for approving business loan applications
Type of bank and size of customer firm
May
August
October
January
Domestic bank
Large
Middle
Small
n.a.
58
54
36
43
34
50
48
41
35
37
32
U.S. branches and agencies of foreign banks
n.a.
61 2
72
89
1. Survey of sixty large domestically chartered banks
and eighteen U.S. branches and agencies of foreign banks.
Data are for three months ending with survey date.
throughout 1990. The General Accounting Office and the Congressional Budget
Office issued reports questioning the financial health of some large banks and
exploring the implications of possible
difficulties with those banks for the
Bank Insurance Fund. Banks had to
make large provisions for loan losses as
delinquency and loss rates rose on most
major categories of loans, but especially
on real estate loans. By mid-September,
rates on the subordinated debt obligations of some major banking institutions
had jumped appreciably as investors reevaluated the health of these organizations. Several major bank holding companies chose to redeem portions of their
outstanding auction-rate preferred stock
rather than pay sharply higher rates.
Spreads between bank and Treasury obligations widened significantly, and bank
stock prices tumbled. These price movements began to be reversed subsequently. Partly under the influence of
lower interest rates, bank stock prices
have risen substantially in 1991, reversing much, though not all, of the declines
since the summer; spreads on subordinated and other bank obligations have
narrowed over the last few months, but
remain well above their levels of last
summer.
Other financial institutions also have
encountered difficulty. Finance companies and, to a lesser extent, insurance
companies took a beating in the securi
2. For six-month period from February to August,
n.a. Not available.
ties markets beginning in September, as
investors reevaluated the holdings of
commercial real estate and HLT loans in
light of expectations of a weaker economy. Yield spreads widened significantly. Furthermore, signs of mounting
financial stress were not limited to the
financial sector last year. The number of
corporations reducing, omitting, or deferring dividends in the fourth quarter
was the highest in more than thirty
years. A record dollar amount of corporate bonds defaulted in 1990. Calculated
as a percentage of the par amount of
noninvestment grade bonds outstanding,
the default rate of 8.7 percent was the
highest in twenty years and more than
double the rate in 1989. While the number of downgradings also reached a
record high, most of the downgradings
were attributable to deteriorating conditions affecting below-investment-grade
nonfinancial corporations and, notably,
financial institutions.
Not surprisingly, banks tightened
standards and raised lending margins in
response to the rising cost of funds, capital shortages, and perceptions of greater
risk of default. In the wake of HLT
disclosure guidelines, banks instituted
management-imposed caps on their exposure to HLTs. Banks with low capital
have cut back lending, while adequately
capitalized banks—though maintaining
substantial credit growth—appeared to
be unwilling to step into the breach
Monetary Policy Reports
and increase their lending pace. Survey
responses and other information on
lending terms suggest especially severe
constraints on credit for real estate development and commercial mortgages,
but also some cutbacks for business
lending more generally. Some of these
business borrowers have limited alternative sources, and so the restriction of
credit by banks probably has reduced
their access to funds.
As a result of the tightening of credit
standards and lending terms, but also
owing importantly to the ebbing of borrowing demand as the economy turned
down, the growth of bank assets slowed
in 1990, especially in the fourth quarter.
Total loan growth fell to roughly half
its 1989 rate, with slowing evident in
business, real estate, and consumer
lending. There was, however, a strong
regional disparity in the slowdown
of bank lending, a disparity that was
visible in total bank loans as well as
in each loan category. In the Southwest, bank loans continued their pre1990 decline, while, in New England,
bank loans experienced a sharp turnaround at the beginning of 1990 from
robust growth to outright decline. New
England banks were particularly aggressive in selling loans into securities
markets, which contributed to the overall drop, as did loan write-offs. For the
rest of the country, loans continued to
grow.
The slowdown in bank credit growth
in 1990 occurred despite a pickup in
bank holdings of government securities
early in the year and the large transfers
of deposits from failed thrift institutions.
Thrift credit shrank rapidly during the
year as the RTC resolved insolvent thrift
institutions, acquiring the bulk of their
assets in the process, and as many viable
thrift institutions shed assets in an effort
to meet the new capital guidelines. The
credit contraction at depository institu
61
tions probably reduced total credit to
some extent, but by far less than one for
one. Both the secondary market in mortgages and the securitization of consumer
loans substituted to a large extent for
bank and thrift intermediation in those
sectors. Securitization alone is estimated
to have removed more than $40 billion
in consumer loans from bank balance
sheets during 1990 as banks pared their
asset totals to improve capital ratios.
Overall, the markets for home mortgages and consumer credit showed little
indication that supply conditions were a
significant factor restraining growth of
these types of credit. Spreads on both
asset-backed and mortgage-backed securities did widen a bit in the fourth
quarter, but remained well within historical ranges and appeared to have little
impact on the cost of funds to consumers. Sluggish expansion of both consumer credit and residential mortgage
borrowing in 1990 seemed to reflect
ebbing demands associated with slumping markets for housing and consumer
durable goods.
Business borrowing slackened further
in 1990, reflecting developments on
both the demand and supply sides of the
market. Although credit needs to finance
corporate restructuring diminished—as
indicated by the falloff in net equity
retirements to roughly half the pace of
the previous two years—the mismatch
between corporate capital expenditures
and internal funds increased in the second half of the year. A tightening of
credit availability for all but investmentgrade firms became increasingly evident. The pullback in lending to lowerrated borrowers was not limited to
domestic banks; it included U.S. offices
of foreign banks, which previously had
been aggressive suppliers of funds to
U.S. borrowers, as well as domestic nonbank lenders such as insurance companies. In addition, bond markets remained
62
78th Annual Report, 1991
unrecepfive to offerings of belowinvestment grade issues.
State and local governments reduced
new borrowing and retired sizable
amounts of debt that had been advancerefunded earlier, as pressures on municipal credit ratings mounted in 1990. A
significant number of local housing
issues had their ratings downgraded in
response to the slipping credit quality of
several banks and insurance companies
that provide credit enhancements. Also,
late in the year, certain municipalities
and some states found themselves paying substantially higher rates in light of
their own financial difficulties.
Growth of the debt of all domestic
nonfinancial sectors was boosted last
year by the federal government, which
borrowed in part to fund acquisitions of
thrift assets by the RTC. Borrowing for
the RTC accounted for about Vi percentage point of the 7 percent growth of
total debt in 1990. The growth of debt
has slowed over recent years, but, even
abstracting from the effects of RTC
activity, remained well in excess of last
year's expansion of nominal income.
Report on July 16, 1991
Monetary Policy and the Economic
Outlook for 1991 and 1992
When the Federal Reserve presented its
most recent monetary policy report to
the Congress, in February of this year,
the economy was still in a downswing
that had been precipitated by Iraq's invasion of Kuwait in August 1990 and
the associated spike in oil prices. To be
sure, several developments early in the
year had created conditions that promised to help foster a turnaround in the
economy: Not only had oil prices reversed most of their earlier run-up, but
monetary policy had been eased substantially in the final months of 1990
and the early part of this year. However,
the economy continued to weaken for a
time, and in the spring, policy was eased
further, with the objective of ensuring a
satisfactory recovery.
Recent evidence suggests that a
pickup in activity probably is now under
way. Much of the uncertainty that had
depressed business and consumer sentiment was removed by the successful
end of hostilities in the Persian Gulf.
The resulting increase in confidence,
combined with the boost to real purchasing power provided by the retreat in oil
prices, raised consumer spending on balance over the late winter and spring.
These same factors, as well as lower
mortgage rates, also have spurred a
gradual recovery in the housing sector.
Reflecting the stimulus from housing
and consumer demand, along with the
continued growth in U.S. exports, industrial production turned up in April and
has advanced appreciably since then; in
addition, labor demand showed signs of
stabilizing during the spring.
As anticipated earlier this year, inflation has slowed from its pace in 1990.
Retail energy prices came down substantially during thefirsthalf of the year,
and the rise in consumer food prices
moderated after several years of relatively large increases. More generally,
the softness of labor and product markets has attenuated price pressures for a
range of goods and services. This downdrift in "core" inflation was difficult to
discern earlier in the year because of a
bunching of price increases in January
and February; however, most of the significant increases in those months either
did not continue or were reversed.
The Federal Reserve's easing moves
over the first part of the year not only
were taken in light of the contraction of
economic activity and the progress in
reducing inflationary pressures, but also
were prompted by the continued slow
Monetary Policy Reports
growth of the monetary aggregates early
in the year and continuing credit restraint by banks and other intermediaries. Reserve market conditions were
held steady after April, however, as evidence began to accumulate that the
economy was on track toward recovery.
Reflecting the Federal Reserve's policy
actions and generally weak credit demands, short-term interest rates declined
appreciably during the first half of the
year. Longer-term rates, which had
moved down markedly in the final
months of 1990, were mixed over the
first half; with bond market participants
focusing on signs of an emerging recovery, Treasury bond yields rose a bit,
while rates on bonds issued by businesses fell as risk premiums narrowed
sharply. In the stock market, share prices
have registered sizable increases since
January, and broad indexes remain
within a few percent of the all-time
highs set in the spring. Meanwhile, the
value of the dollar has climbed substantially on foreign exchange markets, supported by the successful conclusion of
military operations in the Gulf, by expectations of a recovery in the U.S.
economy, and by economic developments in Germany and political difficulties in the Soviet Union.
In response to Federal Reserve easings and associated declines in shortterm interest rates, growth of both M2
and M3 strengthened somewhat during
the first half of 1991 relative to the slow
pace of the second half of 1990. M2
expanded more than nominal GNP, and
thus its velocity fell, although not as
much as might have been expected considering the decline in short-term interest rates. The continued muted response
of M2 to the easings in short-term rates
probably reflected the ongoing rerouting
of credit outside of depositories and an
effort on the part of savers to maintain
yields on their assets by turning to the
63
stock and bond markets, sometimes via
mutual funds. Growth of M3 was
boosted early in the year by strong issuance of large time deposits by U.S.
branches and agencies of foreign banks
in response to a reduction in reserve
requirements around the end of 1990. In
the second quarter, however, the expansion of M3 slowed as issuance of time
deposits at foreign banks waned, and
depository credit and associated funding
needs contracted. Through June, both
M2 and M3 had grown at rates somewhat below the midpoint of their targeted annual growth ranges.
Credit growth was slow in the first
half of the year. The federal government's borrowing requirements were
held down by reduced activity by the
Resolution Trust Corporation (RTC) and
by contributions from foreign countries
to cover the costs of Operation Desert
Storm. Growth of private-sector debt
was restrained by slack demand associated with the weakness of the economy
and by a reduced appetite for leveraging. On the latter score, a lasting shift
toward more conservative patterns of
credit use would be a fundamentally
healthy development; the excesses of
the 1980s clearly left us with problems
in our financial sector that will take
some time to resolve. In part reflecting
earlier credit losses, banks continued to
Ranges for Growth of Monetary
and Debt Aggregates1
Percent
Aggregate
M2
M3
Debt2
1990
1991
Provisional
range
for 1992
3-7
1-5
5-9
21/2-61/2
21/2-61/2
1-5
1-5
41/2-81/2
41/2-81/2
1. Change from average for fourth quarter of preceding year to average for fourth quarter of year indicated.
Ranges for monetary aggregates are targets; range for
debt is a monitoring range.
2. Domestic nonfinancial sector.
64
78th Annual Report, 1991
be cautious lenders through the first half
of 1991. However, private borrowers
who turned to securities markets found
readier access to capital as the economic
outlook brightened and risk premiums
narrowed dramatically; financial intermediaries as well as nonfinancial firms
issued large volumes of equity and
longer-term debt, making significant
progress in strengthening their balance
sheets.
Monetary Objectives
for 1991 and 1992
At its meeting earlier this month, the
FOMC reaffirmed its previously established ranges for money and credit for
1991. The target range for M2 had been
lowered in February to 2*/2 to 6V2 percent from the 3 to 7 percent range that
had been in place for 1990. To date this
year, M2 has grown at an annual rate of
a little less than 4 percent, placing it
well within the target range for 1991 as
a whole. This, in effect, leaves the Committee some room to maneuver as events
unfold in the coming months, while remaining within the annual range. The
potential need for such maneuvering
room arises in part in connection with
the significant uncertainties attending
the prospects for the velocity of M2. If,
for example, the public's demand for
M2 balances should be damped by
moves among depository institutions to
lower deposit rates (in response to earlier declines in market yields and to
higher insurance premiums), then velocity might tend to be stronger than otherwise would be the case and less M2
growth would be required to support a
given rate of GNP increase. If, on the
other hand, institutions were to become
more aggressive in bidding for loanable
funds in the retail deposit market, and
thus the public began to shift its portfolio back in favor of M2 assets, then
velocity could weaken and faster M2
growth might be required. The Committee expects that the current annual
growth range will permit it to deal with
such velocity-altering disturbances in
money supply and demand while it fosters financial conditions conducive to
moderate economic growth and further
progress toward price stability.
The 1 to 5 percent target range for M3
adopted in February took into account
an expected continued contraction in the
thrift industry and associated redirection
of credit flows away from depository
institutions. The assets of thrift institutions are expected to shrink further in
the second half of 1991, in large part
because of closures by the RTC. Issuance of large time deposits by branches
and agencies of foreign banks has moderated, but domestic banks may have a
greater appetite for funds during the second half as sound lending opportunities
increase with the projected improvement in the economy.
Even though growth of the aggregate
debt of domestic nonfinancial sectors at
midyear was at the lower end of its
current 4V2 to 8V2 percent monitoring
range, the Committee anticipates that
the debt measure will end the year well
within that range. Stronger private credit
demands are expected to arise as the
economy grows, and federal borrowing
will increase to finance stepped-up RTC
activity. However, debt growth is likely
to continue to be damped by the shift in
attitudes about leveraging.
In setting provisional ranges for 1992,
the Committee chose to carry forward
the 1991 ranges for the monetary aggregates and for debt. Recognizing that the
ranges had been reduced significantly
over the past few years, the Committee
at this time believes that expansion of
money and debt in 1992 within the current ranges probably would be consistent with consolidating and extending
Monetary Policy Reports
the gains toward lower inflation that
have been made to date, and at the same
time would provide sufficient liquidity
to support a sustainable expansion of
economic activity. The ranges will, of
course, be reevaluated next February in
light of intervening economic and financial events. The Committee will want to
update its assessment of the underlying
tendencies in the economy as well as in
the relations between money and debt
expansion and economic performance.
Although the initial indications of
money and credit ranges that are given
in July always are tentative, flexibility
seems all the more warranted in the
current circumstances, with the economy apparently at a cyclical turning
point and the financial system being buffeted by fundamental change.
Economic Projections for 1991 and 1992
The target ranges for the monetary aggregates and debt have been selected
with the objective of supporting a sound
economic expansion accompanied by
declining inflation—a pattern the Board
members and Reserve Bank presidents
generally expect to prevail over the
coming year and a half. Most forecast
that real GNP will grow 3A to 1 percent
over the four quarters of 1991; given the
decline during the first quarter, this central tendency range for 1991 as a whole
implies an appreciable pickup in activity
over the remainder of the year. The projections of growth in real GNP over the
four quarters of 1992 have a central
tendency of 2lA to 3 percent.
In appraising the near-term outlook,
the FOMC participants have placed considerable weight on the apparent absence of inventory overhangs in most
sectors. Accordingly, the recent firming
of aggregate final demand is expected to
bring a halt soon to the inventory drawdowns that persisted into the second
65
quarter. The resulting swing in the pace
of inventory investment is expected to
boost domestic production considerably
over the rest of 1991. As typically occurs in the initial stage of a recovery,
much of this rise in output is expected to
reflect gains in the productivity of existing workers, rather than a marked
pickup in employment. Thus, the Board
members and the Bank presidents
project only modest progress in reducing unemployment over the second half
of the year; the projected central tendency for the civilian jobless rate in the
fourth quarter is 63A to 7 percent.
The pace of expansion may moderate
somewhat in 1992 as the initial impetus
from the inventory swing subsides and
gains in production track the growth in
final demand more closely. The advance
in real GNP expected for 1992, though
subdued relative to that during the early
part of most previous expansions, is anticipated to reduce the margin of slack
in the economy over the year. The central tendency of the civilian unemployment rate projected for the fourth quarter of 1992 is 6lA to 6V2 percent, roughly
V2 percentage point below the level expected for the fourth quarter of this year.
Several factors lie behind the expectation of a relatively mild upswing in economic activity. In real estate markets,
the persistent overhang of vacant space
for many types of buildings, along with
continued caution on the part of lenders,
will likely limit the amount of new construction. In addition, fiscal policy will
remain moderately restrictive because of
the federal budget agreement reached
last fall and efforts by state and local
units to correct serious imbalances in
their budgets; although this fiscal restraint ultimately will strengthen the
U.S. economy by boosting domestic saving and investment, its near-term effect
will be to hold down aggregate demand.
Further, with the personal saving rate
66
78th Annual Report, 1991
already at a low level and some households saddled with heavy debt burdens,
consumer spending is projected to grow
at a relatively slow pace. Finally, the
appreciation of the dollar this year has
offset some of the previous declines in
relative prices of U.S. goods in international markets, thus limiting the contribution that can be expected from the
external sector.
By adopting policies intended to put
the economy on a path of moderate,
sustainable growth, the Board members
and Reserve Bank presidents believe
that it will be possible to achieve meaningful progress in reducing inflation
over the remainder of this year and into
1992. The central tendency of the projected rise in the total consumer price
index is 3x/4 to 33A percent over the four
quarters of 1991 and 3 to 4 percent over
1992, well below the 6VA percent rise
recorded over the four quarters of 1990.
In each of the prior three years, 198789, the CPI rose about 4!/2 percent.
The common midpoint of the forecast
ranges for CPI increases in 1991 and
1992, 3x/2 percent, masks the downtrend
in core inflation anticipated over the
next year and a half. In particular, most
of the slowing of inflation observed thus
far this year has reflected the sharp drop
in energy prices and a move toward
smaller increases in food prices; excluding food and energy, the deceleration in
the CPI so far has been relatively small.
However, with the tempering of laborcost increases now under way and the
reduced pressure on plant utilization,
core inflation is expected to recede significantly in coming quarters. As these
declines become widely perceived, expectations of inflation should moderate,
reinforcing the tendencies toward deceleration. By reducing and ultimately
eliminating the distortion to resource al-
Economic Projections for 1991 and 1992
FOMC members and
other FRB presidents
Item
Range
Administration
Central tendency
1991
l
Percent change, fourth quarter to fourth quarter
Nominal GNP
. .
Real GNP
Consumer price index2
33/4-53/4
V2-W2
3-4V2
41/2-51/4
3
/4-l
31/4-33/4
5.3
.9
4.3
Average level, fourth quarter (percent)
Unemployment rate 3
6V2-7
6 3 / 4 -7
6.6
1992
Percent change, fourth quarter to fourth quarterl
Nominal GNP
Real GNP
Consumer price index2
Average level, fourth quarter (percent)
Uunemployment rate 3
1. From average for fourth quarter of preceding year to
average for fourth quarter of year indicated.
2. FOMC projections are for all urban consumers
(CPI-U); Administration projection is for urban wage
earners and clerical workers (CPI-W).
4-63/4
2-31/2
2 / 2 -^ 1 /4
5V£-6V£
2lAr-3
3-4
7.5
3.6
3.9
6-63/4
6V4-6V2
6.5
1
3. FOMC projections are for civilian labor force; Administration projection is for total labor force, including
armed forces residing in the United States.
Monetary Policy Reports
location stemming from ongoing, generalized price increases, a monetary policy
aimed at achieving price stability over
time will enhance the economy's potential for growth and thereby will raise
standards of living.
The Administration's economic projections for 1991, presented in the budget, differ from the projections of Federal Reserve policymakers mainly with
respect to expectations for the consumer
price index. The Administration forecast, at 4.3 percent, is above the central
tendency projected by the Federal Reserve; however, recent statements by
Administration officials suggest that this
number will be lowered in the midsession update of the budget. The Administration is somewhat more optimistic than the FOMC participants about
prospects for real GNP growth in 1992;
in addition, the Administration anticipates an increase in consumer prices
next year near the upper end of the
central tendency forecast by the Federal
Reserve policymakers. This combination of output and inflation places the
Administration's forecast of nominal
GNP growth for 1992 somewhat above
the range of projections by the FOMC
participants. Given the obvious limitations on anyone's ability to forecast the
economic future, these differences certainly cannot be said to be large—and
the forecasts do have the important common feature of pointing to a relatively
moderate recovery, with inflation remaining below the average pace of the
past few years. And, in light of the uncertainties attending the behavior of the
velocities of money and credit in the
current period of flux in patterns of intermediation, there appears to be no necessary inconsistency between the Administration's economic forecast and the
FOMC's ranges for money and debt for
1991 and 1992. The FOMC, of course,
will be reviewing the prospects for the
67
economy, along with those for velocity,
when it reconsiders the 1992 target
ranges next February.
Performance of the Economy
during the First Half of 1991
Economic activity contracted appreciably this past fall and winter. Although
the economy had been sluggish during
the first half of 1990, real gross national
product registered a further increase in
the third quarter, and a substantial downturn in activity began only after the
jump in oil prices that followed Iraq's
invasion of Kuwait. With consumer and
business confidence badly shaken and
real income depressed by the higher oil
prices, employment and production declined markedly starting in October; real
GNP fell at a 1.6 percent annual rate in
the fourth quarter. The civilian unemployment rate, which had held around
the relatively low level of 5lA percent
during the first half of 1990, rose steadily over the second half, to just over
6 percent at year-end.
The downward momentum in activity
carried into the early part of 1991. Industrial production decreased through
the first quarter, and the shrinkage of
private-sector payrolls continued
through April as firms moved aggressively to reduce inventories and trim
labor costs in response to the weakening
of final demand. However, much of the
negative impetus to activity was reversed by the cumulative drop in oil
prices that occurred between October
and February and by the boost in confidence that accompanied the swift and
successful conclusion of the Persian
Gulf war. These events, combined with
a considerable easing of monetary policy, set the stage for a recovery, and a
few sectors of the economy actually hit
bottom quite early in the year. Notably,
construction of single-family homes,
68
78th Annual Report, 1991
which in past recessions turned up
before the economy as a whole, reached
its low point in January, as did real
consumer spending and real personal
income.
Recently, further evidence has
emerged to indicate that economic activity, in the aggregate, stabilized or began
to move up during the second quarter of
1991. Much of this evidence is to be
found in developments in the labor market. Initial claims for unemployment
insurance—an indicator of the pace of
job loss—have fallen from their high
level in March; employment on nonfarm
payrolls edged up, on balance, over May
and June after ten months of decline;
and the length of the average workweek
increased noticeably in May and June.
In addition, industrial production advanced in April, May, and June, with the
gains being propelled initially by increased output of motor vehicles and
parts. Although these indicators are subject to revision and thus should be read
with considerable caution, the weight of
the available evidence points in the direction of economic recovery.
The magnitude and length of the recent recession still are not known with
certainty, but the decline in real GNP
appears to have been considerably
smaller than the average decline during
the previous post-World War II recessions; for the industrial sector alone,
production dropped 5 percent between
the peak in September 1990 and the low
point in March 1991, compared with an
average falloff of nearly 10 percent during previous recessions. The recent contraction also seems to have been relatively short by historical standards.
Aggregate job losses, however, were
close to the average in previous recessions, suggesting that firms cut payrolls
vigorously in light of the fairly shallow
drop in real activity. The resulting rise
in the unemployment rate, though, was
damped relative to that during earlier
contractions, as unusually slow growth
of the labor force held down the number
of job seekers; the unemployment rate
in June of this year, 7 percent, was about
3
A percentage point below the average
jobless rate at the end of previous
recessions.
Consumer price inflation, which exceeded 6 percent last year, slowed to a
23/4 percent annual rate over the first
five months of 1991. Consumer energy
prices fell sharply early this year after
soaring during the second half of 1990.
In addition, the rate of increase in food
prices has retreated this year from the
pace registered during the preceding
three years.
Apart from food and energy, price
increases were large early in the year
but have been more moderate in recent
months. In January and February, prices
were boosted by hikes in federal excise
taxes and postal rates and by the
passthrough of the energy price increases in 1990 to a wide range of goods
and services. With no further increases
in these federal charges and the reversal
of energy prices beginning to show
through to other items, the CPI excluding food and energy rose much more
slowly over the three months ended in
May. On balance, over the first five
months of 1991, this portion of the CPI
increased a bit more than 5 percent at an
annual rate, about lh percentage point
below the trend rate of increase as of
last summer. In part, the recent headway
made on inflation reflects the reduction
in labor-cost pressures that accompanied the rise in unemployment. As measured by the employment cost index,
compensation per hour increased at an
average annual rate of 4V4 percent over
the second half of 1990 and the first
quarter of this year, compared with the
5VA percent (annual rate) rise over the
first half of 1990.
Monetary Policy Reports
69
motor vehicles had risen about 8 percent
The Household Sector
Consumer spending was an area of nota- from the depressed January level; sepable weakness last fall and early this year, rate data on unit sales of new cars and
largely in response to a substantial de- light trucks suggest that further gains
cline in real income; purchasing power were registered in June.
was cut initially by the jump in oil
During late 1990 and early this year,
prices, but it continued to fall even after total consumer outlays fell more sharply
oil prices were in retreat, reflecting the than they had in most previous postwar
ongoing declines in employment. Real recessions. The steepness of the drop
consumer outlays dropped sharply be- this time mainly reflects the unusual
tween September and January; the weakness in several components of inmonthly pattern of spending was dis- come out of which the propensity to
torted to a degree by tax changes that consume is high. Most important, nomicaused some households to shift pur- nal wages and salaries fell more during
chases from early 1991 into late 1990. this recession than would have been exAll told, real consumer spending fell at pected given the magnitude of the dea IV2 percent annual rate in the first cline in nominal GNP, as firms moved
quarter, after a 3V2 percent (annual rate) aggressively to control costs by trimdecline in the fourth quarter of 1990. ming payrolls. In addition, because the
However, in February, real income percentage of unemployed persons returned up and consumer confidence re- ceiving unemployment insurance benebounded late in the month with the end fits declined during the 1980s, total
of the Gulf war; both developments bol- payments to job losers were less than
stered consumer spending. As a result of during earlier downturns. The weakness
the spending gains that began in Febru- in these components of nominal income
ary, the average level of outlays in April was compounded, in real terms, by the
and May stood considerably above the spurt in energy prices.
first-quarter average.
Although consumers cut back spendAmong the major components of con- ing, they cushioned some of the effect of
sumer spending, outlays for motor vehi- weak income by reducing their savings.
cles and other durable goods were cut After averaging about 5 percent over the
back sharply as the recession unfolded. first half of 1990, the personal saving
Indeed, between the third quarter of rate dropped to 4.2 percent in the third
1990 and the first quarter of this year, quarter and remained at that level
real consumer outlays for motor vehi- through the first quarter of this year. The
cles fell at a 23 percent annual rate; the decline in the saving rate occurred deresulting level of such outlays in the first spite some deterioration, on net, in
quarter was the lowest recorded since wealth positions during the second half
1984. Substantial cuts also were made in of 1990, which reflected the softening of
purchases of nondurable goods. In con- house prices and losses in the stock martrast, consumer outlays for services ket. The average level of the saving rate
trended up at a pace only slightly below dropped another notch in the spring, to
that registered during the first three about 33/4 percent. The bounceback in
quarters of 1990. Since the January the stock market and the improvement
trough in total consumer outlays, pur- in confidence may have contributed to
chases of both durable and nondurable the decline in saving, but the explanagoods have turned up. In particular, as tion also could involve the reduction in
of May, real consumer purchases of personal interest income associated with
70
78th Annual Report, 1991
the lowering of short-term interest rates
between last fall and this spring. Historically, consumer spending has been
rather insensitive to movements in interest income, so that a decline in such
income causes the saving rate to fall in
the short run. That said, the saving rate
is now at the lowest level since late
1987, and it would not be surprising if,
in the near term, gains in consumer
spending lagged increases in income as
households worked to rebuild net worth.
The recession placed some strains on
household finances, as indicated by the
increase in delinquency rates for all
types of consumer loans during the first
quarter. By far the sharpest rise was for
credit card debt; in fact, the first-quarter
delinquency rate was close to the highest on record. This jump partly reflects
the relaxation of credit standards by major card issuers in recent years; at the
same time, relatively low risk borrowers
who have access to home equity lines of
credit evidently have reduced their reliance on credit cards. Because of the
resulting deterioration in the quality of
the pool of credit card users, the rise in
delinquencies for this type of debt probably overstates the degree of stress in
the household sector as a whole. For
other types of consumer loans, the firstquarter delinquency rates were not out
of line with those typically seen during
recessions, despite the currently high
level of debt relative to disposable income. Apparently, the rise in asset values during the 1980s left most households with sufficient wherewithal to
cover the expanded level of debt. Thus,
although the recession has weakened the
financial position of the household sector, the situation does not appear worse
than that at the end of other downturns.
Residential construction activity,
which had been trending lower since
1986, slumped further in the second half
of 1990. However, the market for single
family homes bottomed out in January
of this year and has staged a mild recovery since then, spurred by a firming of
demand. Several factors account for the
pickup in demand, including the decline
in home prices to more affordable levels
in a number of markets, improved prospects for employment and income, and
some reduction in mortgage rates from
those prevailing in the middle of last
year. Recent survey results show a more
favorable attitude toward homebuying
among consumers than at any other time
since 1988. Reflecting this shift in sentiment, sales of existing homes have risen
substantially from their low in January.
Although sales of new homes have been
less impressive, the higher level prevailing since February has reduced considerably the inventory of unsold new
homes relative to sales; in response,
home builders have boosted production
to satisfy consumer demand. Despite
continued lender caution about granting
land-acquisition and construction loans,
the quantity of financing available appears sufficient, on balance, to support a
further recovery in this sector.
In contrast, the market for multifamily housing has continued to weaken this
year. Starts in May were at the lowest
monthly level since the 1950s. Moreover, even with the greatly reduced pace
of new construction in recent years, the
vacancy rate for multifamily units has
remained exceptionally high. Given current conditions in the market, both lenders and potential investors recognize that
the number of viable projects is quite
limited.
The Business Sector
During the latter part of 1990 and the
first quarter of this year, the business
sector experienced considerable stress.
Demand for business output was depressed both by the loss of domestic
Monetary Policy Reports
purchasing power and by the enormous
uncertainties created by the situation in
the Persian Gulf. In response to the
slump in demand, industrial production
turned downward last October; it continued to fall through March. In most industries, the combination of plummeting
sales and rising energy prices caused
profit margins, which were already slim,
to shrink further during the second half
of 1990. In the first quarter of 1991,
before-tax profits from current operations of U.S. corporations edged down
from the low fourth-quarter level.
An unusual feature of the recent recession was the speed with which producers cut output to avoid a buildup of
inventories. The promptness of this adjustment likely reflected a combination
of factors. The downturn in final demand was widely anticipated, and some
producers cut output preemptively rather
than risk being saddled with excessive
stocks. In addition, improved systems
for monitoring and controlling inventories, which have been installed in recent
years, enabled firms to react quickly to
signs of slowing demand. Further, the
relatively heavy debt burdens in the corporate sector created substantial financial pressures for many firms and focused attention on the need to cut costs.
Accordingly, inventories were run off
at a rapid clip beginning late last summer. Automakers slashed production
and inventories particularly aggressively; domestic output of motor vehicles in the first quarter of 1991 was
nearly 30 percent below that in the third
quarter of 1990. The resulting drawdown of inventories at auto dealers accounted for fully one-half of the total
liquidation of nonfarm stocks during the
fourth quarter and the first quarter. Despite production cutbacks by the automakers and other producers, the
inventory-to-sales ratio for total manufacturing and trade moved up through
71
January. However, by May, the ratio had
retraced most of the run-up that began
with the onset of the recession, reflecting the continued liquidation of stocks
and an upturn in sales.
Inventories in most industries appear
now to be reasonably well aligned with
sales, and output has begun to rise with
the expansion of final demand. After
reaching a trough in March, industrial
production expanded over the next three
months at an annual rate of more than
7 percent; although stronger output of
motor vehicles and parts accounted for
most of the increase early in the second
quarter, the gains in recent months
have been more widespread. Orders
for a range of manufactured goods
firmed in April and May, pointing to a
further pickup in production during the
summer.
Business spending for fixed investment was flat in real terms during the
fourth quarter of last year and dropped
sharply during the first quarter of this
year. Several factors worked to reduce
outlays, including the easing of pressures on capacity, the diminished level
of cash flow, and the general atmosphere of uncertainty related to events in
the Persian Gulf. Real spending for
equipment plunged during the first quarter; measured in percentage terms, the
decline was the sharpest quarterly falloff
recorded in nearly eleven years. Reflecting the difficulties in the manufacturing sector, real spending for industrial
equipment dropped at an annual rate of
more than 20 percent, after smaller
declines during the preceding five quarters. Real business outlays for motor
vehicles were cut at nearly a 35 percent
annual rate in the first quarter, sinking to the lowest level since mid-1983.
Purchases of computers and other
information-processing equipment also
were scaled back during the first quarter,
and outlays for aircraft edged down,
72
78th Annual Report, 1991
after jumping 60 percent over the preceding year.
The pace of nonresidential construction fell substantially during the fourth
quarter of 1990 and the first quarter of
1991. The decline was broad-based,
with the steepest contraction for office
and other commercial buildings. Activity in this sector actually peaked in 1985
and has trended lower since then in response to persistently high vacancy rates
and the removal of important tax benefits. In the industrial sector, the rate of
plant construction has been damped by
the emergence of substantial excess
capacity in a number of major industries. Petroleum drilling activity, which
moved up a bit late last year, retreated
during the first quarter with the price
declines for crude oil and natural gas;
data on drilling rigs in use indicate a
further weakening of activity during the
second quarter.
Business spending for new equipment
typically does not turn up until several
months after the end of a recession, and
the lag for construction outlays is often
substantially longer. As yet, there is little sign of a rebound in spending for
either equipment or nonresidential structures. Nonetheless, shipments of industrial equipment and other nondefense
capital goods—a coincident indicator of
equipment spending—have stabilized in
recent months. Similarly, although vacancy rates for commercial buildings remain high, the steepest declines in total
nonresidential construction activity may
be over; in April and May, the average
level of activity was about unchanged
from the first-quarter average, and the
downtrend in forward-looking indicators, such as construction contracts and
permits, has slowed considerably.
The Government Sector
The federal budget deficit over the first
eight months of fiscal year 1991 was
$175 billion, compared with a $151 billion deficit during the same part of fiscal
year 1990. The deficit during the current
fiscal year has been boosted considerably by the slowdown in economic
activity, and this cyclical increase has
masked the fiscal restraint imposed by
last autumn's budget agreement. On the
revenue side, federal tax receipts have
been held down by the anemic growth
of nominal income since last fall; indeed, personal income tax payments so
far this fiscal year are little changed
from the payments made during the
same period a year earlier. The slowdown in activity also has raised the deficit by increasing outlays for incomesupport programs such as unemployment insurance, food stamps, and Medicaid. These effects of the contraction
have been offset, to some degree, by the
easing of short-term interest rates, which
has restrained the growth of interest payments on the federal debt.
Although the deficit has increased
during the current fiscal year, the increase has been far smaller than that
projected roughly six months ago. At
that time, the Administration and the
Congressional Budget Office both estimated that the deficit for fiscal year
1991 would top $300 billion. Two developments have caused the 1991 deficit
to be lower than was expected, though
neither one indicates any fundamental
improvement in the budget situation.
First, cash contributions from our allies
in Operation Desert Storm have exceeded the outlays made to date for U.S.
involvement in the Persian Gulf. The
contributions not yet spent will be used
to pay for the replacement of munitions
into fiscal 1992 and beyond. Second,
federal outlays related to deposit insurance were well below expectations during the first quarter, mainly reflecting
the slow pace at which insolvent thrift
institutions were resolved. The activities
Monetary Policy Reports
73
of the RTC during that period appar- reflects an expansion of services largely
ently were hindered, in part, by a lack of related to rapid growth in public school
funding; legislation providing additional enrollments, prison populations, and
funding was enacted in late March, and Medicaid expenses.
During the past year, state and local
the RTC has scheduled more rapid resogovernments moved to address their
lutions over the rest of the year.
Federal purchases of goods and ser- mounting fiscal difficulties. Many govvices, the part of federal spending that is ernments trimmed outlays relative to
included directly in GNP, rose 5lA per- earlier trends. Between the first quarter
cent in real terms over the four quarters of 1990 and the first quarter of 1991,
of 1990. This increase reflected the real purchases by state and local governfourth-quarter rise in defense purchases ments rose only about 1 percent, well
to support operations in the Persian below the 3x/2 percent annual rate of
Gulf, as well as increases over the year increase averaged over 1985-89. Morein such nondefense programs as law en- over, last year several states instituted
forcement, space exploration, and health broad-based hikes in personal income
research. In the first quarter of 1991, and sales taxes. Looking ahead, state
real defense purchases moved above the budgets for fiscal year 1992—which
already high fourth-quarter level, while began on July 1 for all but four states—
nondefense purchases fell somewhat on generally mandate significant further
net, pushed down by sales of oil from cost-cutting from earlier plans. On balthe Strategic Petroleum Reserve. Over ance, these budgets point to a weak picthe rest of 1991, fiscal policy likely will ture for real state and local purchases
be a restraining influence on the econ- over the current calendar year. Suppleomy because of the spending limits and menting this restraint on spending, many
tax increases mandated by last fall's new budgets include a second wave of
major tax increases.
budget agreement.
The fiscal position of state and local
governments has remained extremely The External Sector
weak in recent quarters. The deficit in Over the first half of 1991, the foreign
operating and capital accounts (that is, exchange value of the dollar appreciated
the deficit excluding social insurance about 15 percent, on balance, in terms of
funds) stood above $40 billion at an the currencies of the other Group of Ten
annual rate in both the fourth quarter of (G-10) countries. The net appreciation
1990 and the first quarter of 1991, after over this period reversed about twoholding at a $30 billion rate for a year. thirds of the decline in the dollar that
The recent increase in the state and local had occurred between the middle of
deficit reflects, for the most part, a cycli- 1989 and the end of 1990.
In early January, the dollar was
cal shortfall in tax receipts. However,
this cyclical effect overlays structural boosted by investors seeking a safe
imbalances that have been growing for haven against the backdrop of growing
some time. Since mid-1986, when the tensions in the Persian Gulf. However,
sector's accounts (excluding social in- once the Allied bombing campaign comsurance) were roughly in balance, out- menced and was perceived as going
lays have risen from about 13x/2 percent well, part of the safe-haven demand for
of nominal GNP to I4l/z percent while dollars evaporated, and the currency rerevenues have held fairly steady relative sumed its earlier decline. Between midto GNP. The rise in the spending share January and early February, the dollar
74
78th Annual Report, 1991
fell about 4 percent against the currencies of the other G-10 countries. During
this period, U.S. monetary authorities
joined with foreign central banks to support the dollar. Subsequently, the dollar
surged through the end of March,
largely reflecting the quick end of the
war and the resulting expectation of an
early rebound in the U.S. economy. The
sharp run-up prompted official sales of
dollars during March and April, mainly
by European authorities. After dropping
back a bit, the value of the dollar rose
again in June on the accumulation of
evidence suggesting that the U.S. recession had ended.
On a bilateral basis, the dollar this
year has appreciated about 20 percent
against the German mark and by similar
amounts against the European currencies associated with the mark. The
weakness of these currencies partly reflects economic difficulties in Germany
and the spillover effects of the turmoil in
the Soviet Union and Yugoslavia. In
contrast, the dollar has appreciated
much less against the currencies of most
of our other major trading partners. So
far this year, the dollar has risen less
than 5 percent, on balance, against the
Japanese yen and has changed even less
against the currencies of Canada, Korea,
Singapore, and Taiwan.
The overall strengthening of the dollar this year has acted to restrain prices
for non-oil imports. Over the first quarter of 1991, these prices rose at a
2J/2 percent annual rate, less than half
the rate of increase between June and
December of 1990; non-oil import
prices then fell during April and May,
more than reversing the entire firstquarter rise. The price of imported oil,
which surged between August and October of last year, has since retraced most
of the rise induced by the Iraqi invasion
of Kuwait. Taken together, these two
developments have contributed signifi
cantly to the restraint on domestic
inflation.
Real merchandise imports declined in
the first quarter to a level about 5 percent below that in the third quarter of
1990, with the drop largely reflecting
the weakness in domestic demand. Import volumes fell in the first quarter for a
wide range of non-oil products, including consumer goods, motor vehicles,
and industrial supplies. Preliminary data
for April show some increase in non-oil
imports, a pattern that is likely to continue with the apparent firming of
domestic activity. The quantity of oil
imports—which plunged after the spurt
in oil prices last summer and remained
relatively low early this year—has
moved back up in recent months, reflecting efforts to rebuild U.S. petroleum
inventories.
Merchandise exports continued to
move higher through the spring, a factor
that clearly tempered the output loss in
manufacturing after the oil shock last
year. In real terms, merchandise exports
rose at a 10 percent annual rate between
the third quarter of 1990 and the first
quarter of this year, led by increased
sales of computers, other capital goods,
and industrial materials. Preliminary
data indicate that merchandise exports
rose again in April. The competitive position of U.S. companies has benefited,
at least until quite recently, from the
substantial drop in the dollar over 1990
and the latter part of 1989. However,
recessions in the economies of some of
our major trading partners, especially
Canada and the United Kingdom, have
offset part of the stimulus to U.S. exports provided by the rapid economic
growth in such countries as Germany,
Japan, and Mexico.
The merchandise trade deficit narrowed to $74 billion (at an annual rate)
in the first quarter of 1991, compared
with $111 billion in the fourth quarter of
Monetary Policy Reports
1990; the first-quarter deficit was the
smallest since mid-1983. The current account actually recorded a $41 billion
(annual rate) surplus in the first quarter,
a sharp improvement over the $94 billion deficit in the fourth quarter of 1990.
Most of this improvement reflected unilateral transfers associated with Operation Desert Storm: The fourth-quarter
deficit was boosted by a grant from the
U.S. government to Egypt for the purpose of repaying outstanding loans,
while cash payments to the United
States from our coalition partners surged
in the first quarter. Excluding these cash
contributions and the special grant to
Egypt, the current account moved from
a deficit of $83 billion in the fourth
quarter to a deficit of $50 billion in the
first quarter.
A small net capital inflow was recorded in the first quarter of 1991, as an
increase in foreign official holdings of
reserve assets in the United States more
than offset a net outflow of private capital. Within the private-sector accounts,
there was a substantial capital outflow in
the first quarter associated with U.S. direct investment abroad, the bulk of
which was in the countries of the European Community; at the same time, capital inflows related to foreign direct investment in the United States fell to a
low level. Increasingly, multinational
firms have raised funds in the United
States to finance direct investment here
and elsewhere, taking advantage of the
low U.S. interest rates relative to those
in other industrial nations. With regard
to other private transactions, banks reported a small net capital inflow in the
first quarter, and net purchases of U.S.
securities by private foreigners about
matched U.S. net purchases of foreign
securities.
The net capital inflow during the first
quarter, when combined with the surplus
on current account, implies a large nega
75
tive statistical discrepancy in the international accounts. Nearly as large a discrepancy in the opposite direction was
registered in the fourth quarter of last
year. These wide swings in the statistical
discrepancy, along with the huge size of
the discrepancy for 1990 as a whole,
cast doubt on the accuracy of both the
capital account and current account data
used in the U.S. international accounts
and highlight the need to improve these
data.
Labor Markets
Labor demand appears to have stabilized after contracting sharply during the
latter part of 1990 and the early part of
this year. Employment on private nonfarm payrolls peaked last June, edged
lower through September, and then fell
substantially in each month from October through April. However, the most
recent data show that payrolls expanded
slightly on balance over May and June,
and survey results suggest that firms intend to increase employment further in
the third quarter.
The cumulative decline in private
nonfarm employment through April was
slightly more than IV2 million jobs,
roughly a 1.7 percent drop. Although
that percentage decline is close to the
average in the other recessions after
World War II, three industries had abnormally large job losses: construction;
retail and wholesale trade; and finance,
insurance, and real estate. The steep decline in construction employment likely
reflected the unusually sharp falloff in
office and other commercial construction, which compounded the normal
cyclical contraction in residential building. In the trade sector, employment was
depressed by the sizable decline in consumer spending and the high degree of
financial distress among retailers, some
of whom were burdened with heavy
debt-servicing costs as a result of lever-
76
78th Annual Report, 1991
aged buyouts. Employment in finance,
insurance, and real estate—which continued to rise during past recessions—
edged lower this time, reflecting the
shakeout in the financial sector and spillovers from the slump in real estate markets. In contrast, the decline in manufacturing payrolls was somewhat smaller
than in previous contractions, largely
because the drop in industrial production was relatively shallow. Employment in the services industries continued to trend up during late 1990 and
early 1991, as it had in previous recessions, supported entirely by gains in
health services.
Although the size of the drop in private nonfarm payroll employment was
similar to that in previous contractions,
the decline in real GNP during the current episode was relatively small. This
contrast confirms the widespread impression that firms shed workers to an
unusual degree during the recent downturn. At the same time, the rise in
the civilian unemployment rate from
5.5 percent in July 1990 to 7 percent this
June was not particularly large relative
to the decline in real GNP. Apparently,
an unusual proportion of people who
lost jobs subsequently dropped out of
the labor force and thus were no longer
counted as unemployed. In addition, the
muted rise in unemployment and laborforce size during recent quarters may be
part of a longer-term deceleration in
the rate at which women—especially
younger women—have entered the labor
market. For this latter group, there has
been a shift toward additional school
attendance and toward staying at home
to care for young children. By reducing
the number of new job seekers at a
time when jobs were quite hard to
find, this shift held down the rate of
unemployment.
A variety of indicators suggest that
labor demand has stabilized in recent
months. Perhaps the earliest signal of
this improvement was provided by the
data on initial claims, which peaked at a
weekly rate of 535,000 in March and
then dropped back to about 470,000 in
April; the pace of weekly claims has
since moved considerably lower. Employment on private nonfarm payrolls
rose in May, the first increase since the
middle of 1990. Although part of this
gain was reversed in June, firms continued to lengthen the average workweek
of their employees. This pattern of cautious hiring combined with an extension
of the workweek is common in the early
stage of a recovery; given the expenses
associated with hiring and firing, such a
strategy is a natural response to uncertainty about the strength and duration of
the pickup in demand. A separate measure of employment, derived from a survey of households, also suggests that
labor demand has stabilized; the number
of persons reporting themselves as employed was about flat, on balance, over
the second quarter, after falling sharply
over the three preceding quarters. Although the civilian unemployment rate
did continue to inch up over the second
quarter, this increase is not too surprising, as the jobless rate often increases
during the first several months of a recovery. With the brightening of employment prospects, job seekers enter the
labor force at an increasing rate, raising
unemployment until hiring accelerates
enough to outstrip the growth in labor
supply.
The slack opened up in labor markets
since last summer has helped damp the
rate of increase in labor costs, which
had trended higher between the end of
1987 and the middle of 1990. As indicated by the employment cost index
(ECI), increases in compensation per
hour for private industry workers accelerated from 3VA percent during 1987 to
about a 5lA percent annual rate during
Monetary Policy Reports
the first half of 1990; this measure of
labor costs covers both wages and payments for worker benefits. The most recent ECI data show that compensation
costs rose at an average annual rate of
AlA percent over the second half of 1990
and the first quarter of 1991, a full percentage point below the peak rate recorded early last year. Although this
slowing of labor-cost inflation was apparent in both wages and benefits, the
latter component of compensation decelerated the most sharply, reflecting declines in nonproduction bonuses and
pension contributions per hour of work.
However, employer costs for insurance,
mainly for health insurance premiums,
continued to rise at close to double-digit
rates.
Output per hour in the nonfarm business sector was essentially flat, on balance, over the year ended in the first
quarter of 1991, after declining during
1989 and the early part of 1990. This
pattern differed somewhat from the
usual cyclical experience. Typically,
productivity continues to rise until
shortly before the business-cycle peak,
then turns down and falls sharply
through the early part of the ensuing
recession. Productivity during this episode declined well before the cyclical
peak last summer, as output growth
slowed, and firms continued to hire at a
relatively rapid pace. However, as demand softened at the peak, firms began
to trim payrolls, and this pruning continued in an aggressive fashion through the
recession; as a result, output per hour
was better maintained during the
1990-91 contraction than during previous downturns. In manufacturing, where
competitive pressures have been particularly intense, the process of cutting payrolls began well before the onset of
recession, and this early action allowed
productivity gains to remain robust over
the year leading up to the contraction.
77
Although productivity in manufacturing
turned down during the recession, the
continued cutting of factory jobs kept
the drop in output per hour relatively
small by historical standards.
Price Developments
Inflation pressures have eased somewhat this year. Most of last year's spike
in energy prices has been retraced, and
the rate of increase in food prices has
slowed. In addition, the margin of slack
in labor and product markets that
emerged during the recession is placing
downward pressure on price increases
for other goods and services; this trend
toward slower "core" inflation, however, was obscured early in the year by a
number of price increases that either
were one-time events or have since been
reversed.
The Iraqi invasion of Kuwait last August precipitated a sharp rise in oil prices
that carried through to early October. At
that point, the posted price of West
Texas Intermediate oil, the benchmark
for U.S. crude prices, reached nearly
$40 per barrel, more than double the
$16 price prevailing just three months
earlier. Then, between October and February, virtually all of this price spike
unwound, chiefly as a result of two developments. Saudi Arabia and other oil
producers boosted output to offset the
embargo on Iraq and Kuwait, and the
Allied forces demonstrated that they
could prevent significant disruptions to
supply. In addition, prices were damped
by the slowdown in economic activity in
the United States and other industrial
nations. After the end of hostilities in
February, OPEC sought to bolster prices
by trimming production. This effort
proved to be largely successful: The
posted price of West Texas Intermediate
firmed to $20 per barrel in April and has
changed little on balance since then.
78
78th Annual Report, 1991
Energy prices for consumers have fol- creases over 1989 and 1990. The decellowed the movements in world oil prices eration in food prices this year would
since last summer. The CPI for energy have been somewhat greater but for a
peaked in November 1990 at a level 15 series of adverse weather developments
percent above that in July and then fell that have raised prices for fresh fruits
sharply through the first quarter of this and vegetables; given the short producyear. By April, the decline in crude oil tion cycles for many of these products,
prices had been fully passed through to the recent price increases should be
energy prices at the retail level. In May, reversed, at least in part, in coming
consumer energy prices edged back up, months.
mainly reflecting price increases for gasThe consumer price index for items
oline, the largest component of the CPI other than food and energy rose sharply
for energy. Gasoline demand this spring during January and February, but the
apparently was stronger than refiners jumps in those months reflected a numhad expected, and inventories fell to ex- ber of one-time or transitory increases.
ceptionally low levels. Along with the Higher federal excise taxes on cigarettes
tight inventory situation, retail gasoline and alcoholic beverages went into effect,
prices may have been boosted by the raising consumer prices for both items;
mandatory switch to cleaner—and more these tax hikes supplemented the inexpensive—gasoline before the summer creases in sales and excise taxes that a
driving season. However, as of early number of states have imposed over the
June, gasoline inventories had moved past year. Postal rates also were raised
back into the normal seasonal range, and 16 percent in February. Apparel prices
survey data suggest that pump prices climbed at double-digit annual rates in
softened during the second half of June both January and February, mainly beand into early July.
cause of the earlier-than-usual introducIncreases in consumer food prices this tion of spring clothing lines, which was
year have slowed from the 5lA to not anticipated by the seasonal adjust5Vi percent range that prevailed over the ment factors used by the Bureau of
preceding three years. During the first Labor Statistics. More generally, the
five months of 1991, the CPI for food spurt in oil prices last fall spilled over
rose at only a 3VA percent annual rate, through early 1991 to prices for a wide
held down in large part by price declines range of non-energy goods and services;
for dairy products and by roughly stable this pass-through occurred via higher
prices on balance for meat, poultry, and shipping costs and price hikes for
eggs. Following the typical pattern in petroleum-based components. However,
agricultural cycles, prices for these live- each of these factors boosting inflation
stock products have been damped by an proved to be short-lived. After the large
expansion of supply that was itself increases in January and February, the
spurred by the relatively high prices of CPI excluding food and energy rose at
recent years. In addition, price increases just a 2lA percent annual rate between
have been muted for many foods for February and May. Apparel prices dewhich labor and other nonfarm inputs clined over this period, and airfares—
represent a large share of total cost. For which are quite sensitive to changes in
example, the prices of food consumed oil prices—fell 10 percent (not an anaway from home rose at a 3lA percent nual rate).
annual rate over the first five months of
The uneven pace of inflation this year
1991, down from the 4l/i percent in- has tended to obscure trends in the gen
Monetary Policy Reports
eral level of retail prices. Nonetheless,
there is little doubt that the underlying
pace of inflation has moderated since
last year. The twelve-month change in
the CPI excluding food and energy—
which held around 4Vi percent throughout 1988, 1989, and the early part of
1990—moved up to about 5^2 percent
in August 1990. By May of this year, the
twelve-month change in this index had
fallen back to 5.1 percent. This figure
slightly overstates the trend rate of inflation because it includes the increases in
federal excise taxes and postal rates earlier this year; in addition, the passthrough of lower energy prices to nonenergy items probably was not complete
as of May. Adjusting for both these factors would put the twelve-month change
in the CPI excluding food and energy a
bit below 5 percent.
Price developments at earlier stages
of processing have been favorable this
year, reflecting the easing of capacity
pressures and price declines for petrochemical products. The producer price
index for finished goods excluding food
and energy rose at a 3Vi percent annual
rate over the first six months of 1991, a
bit below the pace in 1990. Prices for
intermediate materials excluding food
and energy fell about IV2 percent at an
annual rate between December and
June. Spot prices of raw industrial commodities plunged late last year with the
downturn in economic activity, and
these prices moved down somewhat further on balance over the first half of
1991.
Monetary and Financial
Developments during the First
Half of 1991
The progressive easing of money market conditions initiated last fall as the
economy weakened continued through
much of the first half of 1991. Since the
79
end of last year, open market operations,
in combination with two cuts of Vi percentage point in the discount rate, have
reduced the federal funds rate from
7 percent to 53/4 percent—the lowest
level in well over a decade. These
moves followed a number of easings in
the final months of 1990, including a
V2 point reduction in the discount rate in
December, that already had brought the
federal funds rate down about 1 percentage point. As a consequence of these
and earlier actions, the federal funds rate
has declined 4 percentage points from
its most recent peak in the spring of
1989.
The policy easings this year were undertaken to foster a turnaround in the
economy and to help ensure a satisfactory expansion. They were prompted by
evidence that the economy was declining further and that inflationary pressures were abating; early in the year,
continuing weakness in the monetary
aggregates and further restraint on credit
availability, especially at banks, also
were important indications of the need
for additional policy easing. Policy actions led to a strengthening of money
growth over the first half from the slow
pace of earlier quarters, and both M2
and M3 in June were in the middle
portions of their annual target ranges.
The debt aggregate, by contrast, expanded at the lower end of its monitoring range throughout the first half, held
down by sluggish spending and also by
a cautious attitude toward additional
debt by both borrowers and lenders. As
the monetary aggregates accelerated and
signs accumulated that the economy was
bottoming out, the pace of policy easings slowed, and the last such move was
made at the end of April.
Despite the drop in short-term interest
rates, long-term rates were mixed, on
balance, over the first half of the year. In
the wake of the rapid conclusion of the
80
78th Annual Report, 1991
Gulf war, expectations became widespread that there would be a strengthening in aggregate demand, and this
tended to push yields on Treasury bonds
a little higher and contributed to an increase in the foreign exchange value of
the dollar. With the brighter outlook for
the economy, however, the risk entailed
in holding private obligations was seen
as considerably reduced, and yields on
corporate bonds fell and stock prices
rose. However, substantial loan losses
continued to afflict many financial intermediaries, and these institutions maintained cautious attitudes toward extending new loans; the caution was reflected
in wide spreads of lending rates over
borrowing rates and more stringent nonprice terms on credit.
Implementation of Monetary Policy
The Federal Reserve adjusted policy in
three separate steps during the first quarter of the year, extending the series of
moves initiated during the final months
of 1990. Amid signs of continuing steep
declines in economic activity and abating inflation pressures, the Federal Reserve eased reserve provision through
open market operations in January and
again in early March, leading to a decline in the federal funds rate of a quarter point each time, and reduced the
discount rate Vi percentage point on
February 1, resulting in a similar-sized
decline in the federal funds rate.1 The
1. The federal funds rate came under some
upward pressure during much of January, as reduced levels of required reserve balances at Federal Reserve Banks complicated commercial
banks' reserve management. Required reserves
were low partly because of the effects of the cut in
reserve requirements on nonpersonal deposits in
December and partly because of seasonal variations. For some banks, balances held in accounts
at Reserve Banks threatened to fall below prudent
clearing levels. To avoid overnight overdrafts,
banks markedly raised holdings of excess reserves
monetary aggregates were very weak in
January, and while strengthening considerably in February and early March,
remained on a moderate growth track,
especially taking into consideration the
lack of expansion late in 1990.
Other short-term rates generally fell
about a percentage point over this period. The commercial bank prime loan
rate was reduced V2 percentage point in
early January in lagged response to earlier declines in short-term rates. The
drop apparently had been delayed as
banks attempted to hold down loan
growth as 1990 drew to a close, bolstering their capital positions in response to
market concerns and the initial phase-in
of risk-based capital requirements. The
prime rate was reduced again after
the cut in the discount rate in early
February.
Longer-term rates also fell, on balance, over the first two months of the
year, under the influence of monetary
easings and prospects for lower inflation, especially when it became clear
that the Gulf war would not interrupt oil
supplies. Initial success in the Persian
Gulf also led briefly to weakness of the
dollar in foreign exchange markets, as
safe-haven demands that had been
boosting its value since late 1990, in the
face of a substantial easing of U.S. monetary policy, evaporated.
In March, however, long-term market
rates began to firm, reflecting the rebound in consumer confidence and ini-
and borrowed sporadically at the discount window. But with maintained balances still low relative to clearing needs, the volatility of the federal
funds rate increased. As banks became more accustomed to operating with lower levels of required reserves and as these reserves subsequently
rose for seasonal reasons, reserve management
problems eased, and the volatility of the federal
funds rate diminished. The upward pressures on
the funds rate in January did not show through to
other short-term rates.
Monetary Policy Reports
tial indications of a turnaround in the
housing market, which were seen as
pointing to a somewhat shorter and
milder recession than many had previously feared. Rate increases on private
instruments were muted, though, as risk
premiums began to shrink in response to
brightening prospects for a recovery.
These gains extended even to belowinvestment-grade bonds, and growing
optimism was reflected as well in a
strong stock market in February and
into March. The debt and equity instruments of banks generally outperformed
broader indexes over this period, as the
market apparently expected banks' earnings to be bolstered by lower short-term
interest rates and the deterioration in the
Growth of Money and Debt
Percent
Ml
M2
M3
Debt of
domestic
nonfinancial
sector
7.4
5.4
(2.52)
8.8
10.4
5.4
12.0
15.5
6.3
4.2
.6
4.2
8.9
9.3
9.5
12.3
9.4
10.1
9.1
12.2
8.0
8.7
9.2
4.3
5.2
4.7
3.8
9.9
9.8
10.7
7.6
9.0
5.8
6.3
3.6
1.7
9.1
11.1
14.2
13.1
13.2
9.7
9.2
7.7
6.7
Semiannually
(annual rate)3
1991:1
6.7
4.0
2.9
4.5 e
Quarterly
(annual rate)4
1991 1
2
5.9
7.4
3.4
4.6
4.0
1.8
4.8
4.2 e
Period
Annually, fourth
quarter to
fourth quarterx
1980
1981
1982
1983.
1984
1985
1986
1987
1988
1989
1990
1. From average for fourth quarter of preceding year to
average for fourth quarter of year indicated.
2. Adjusted for shift to NOW accounts in 1981.
3. From average for fourth quarter of 1990 to average
for second quarter of 1991.
4. From average for preceding quarter to average for
quarter indicated.
e Partially estimated.
81
quality of their loan portfolios to be
limited as the anticipated economic
recovery materialized. Better prospects
for a U.S. economic recovery about coincided with a turn toward more pessimism about the economic outlook
abroad. As a result, the exchange value
of the dollar reversed, and the dollar
began to appreciate sharply.
In the wake of the successful Gulf
war and in view of initial signs that the
System's earlier easing actions had begun to take hold, the FOMC concluded
at its meeting in late March that the risks
to the economy had become more
evenly balanced. Accordingly, the Committee decided to end the formal tilt
toward ease that it had adopted in mid1990, when slowing money growth and
tightening credit availability aroused
concerns that financial conditions might
be placing greater-than-anticipated restraint on economic activity. Under the
previous instructions, the FOMC's directive to the domestic trading desk at
the Federal Reserve Bank of New York
had stipulated that possible adjustments
to reserve pressures between Committee
meetings would be more responsive to
unanticipated signs of economic weakness and abating price pressures than to
unexpected evidence of strength. The
directive issued at the March meeting
restored symmetry to these instructions
concerning intermeeting adjustments.
Interest rates generally declined during April, mainly at the short end,
reflecting market participants' disappointment that the response to earlier
monetary easings and to the rebound in
consumer confidence they had expected
had yet to show through in measures of
economic activity. At the same time,
with evidence also continuing to point
to a further abatement of inflation, particularly as reflected in wage behavior,
the Federal Reserve at the end of April
reduced the discount rate another V2 per-
82
78th Annual Report, 1991
centage point, allowing about half that
amount to show through to money market rates. As was the case in February,
this action was followed by a V2 percentage point decline in the bank prime rate.
Despite further monetary ease, the dollar continued to rally on foreign exchange markets, in part boosted by political developments abroad, particularly
in the Soviet Union, and potential economic difficulties in Germany.
Market interest rates were little
changed until early June, when they rose
in response to the release of data on
employment and retail sales for May
that strongly suggested the trough of the
recession had been reached, or at least
was close at hand. The ensuing rise in
interest rates was particularly sharp at
the long end of the Treasury market. As
signs of the recovery grew more distinct
and interest rates firmed, the dollar
strengthened further, and by June it had
retraced all its declines of late 1990 and
early 1991. On balance, Treasury bond
yields rose almost lA percentage point
over the first half of 1991, while yields
on investment-grade corporates were
down close to V2 percentage point.
Monetary and Credit Flows
Despite the continuing weakness in economic activity, expansion of the monetary aggregates in the first half of 1991
picked up from the lackluster pace of
late 1990, and M2 and M3 grew at annual rates of 33/4 and 2lA percent respectively, from the fourth quarter of last
year through June. M2 growth increased
as policy actions reduced short-term
market interest rates relative to returns
that could be earned on assets in this
aggregate (a decline in the "opportunity
cost" of holding M2). As a consequence, expansion of M2 exceeded the
growth of nominal GNP. However, the
growth in M2 (and decline in its veloc
ity) was smaller than would have been
expected on the basis of past relationships with income, interest rates, and
opportunity costs. This shortfall of M2
growth from historical patterns followed
an even greater discrepancy in 1990.
The tepid response of M2 to declines
in interest rates may partly reflect reduced funding needs at depositories associated with weak credit growth. As
discussed below, commercial bank
credit expanded sluggishly over the first
half of 1991, and thrift institution balance sheets continued to contract. In
these circumstances, depositories may
well have been less aggressive in supplying retail deposits; although rates on
these deposits do not appear on the surface to have fallen unusually rapidly,
institutions may have acted in other
ways to reduce the cost of funds, including adjusting advertising and marketing
strategies. On the demand side, growth
in M2 appears to have been held down
early in the year by the public's concerns about depository institutions; purchases of Treasury securities through
noncompetitive tenders were especially
heavy in January. As the turnaround in
the economy seemed in prospect, bank
access to both deposit and capital markets improved greatly. Later, in the second quarter, a slowdown in M2 growth
appeared to be partly related to the developing configuration of returns on assets. Maturing small time deposits could
be rolled over only at much lower rates
at the same time the steep upward slope
of the yield curve seemed to offer an
opportunity to preserve high yields by
moving into capital market instruments.
For example, expansion of stock and
bond mutual funds was quite strong over
the second quarter. In addition, with returns on M2 assets falling steeply relative to rates charged on loans, households had a greater incentive to finance
spending by holding down the accumu-
Monetary Policy Reports
lation of M2 assets rather than by taking
on new debt.
The decline in market interest rates
also promoted a marked shift in the
composition of M2 toward its liquid
household deposit components—other
checkable deposits, money market deposit accounts, and savings deposits. As
is typically the case, offering rates on
these deposits adjusted very slowly to
the drop in market rates. As their opportunity costs declined, these deposits accelerated, expanding at double-digit
rates over the first half. Small time deposits, by contrast, contracted over the
period as some of the proceeds of maturing instruments evidently were shifted
into liquid components of M2 and depositors hesitated to commit currently
generated savings at available time deposit rates. The strength in other checkable deposits contributed to a strong
first-half advance in Ml. In the first
quarter, this aggregate also was boosted
by a surge in currency stemming from
rising demand abroad, particularly the
Middle East. Reflecting the strength in
currency and in other checkable deposits, the monetary base expanded over the
first half at an 8V2 percent annual rate,
more than twice the pace of M2.
Growth of M3 over the first half of
1991 was concentrated in the early
months of the year, when it received a
considerable boost from heavy issuance
of large time deposits by U.S. branches
and agencies of foreign banks. The issuance of these "Yankee CDs" resulted
from the reduction in December of the
reserve requirement on nonpersonal
time deposits and net Eurocurrency deposits from 3 percent to zero. Previously, branches and agencies had been
able to borrow a limited volume of
funds from their head offices without
becoming subject to reserve requirements. With Yankee CDs apparently an
inherently cheaper source of funds, in
83
stitutions that had been able to fund
additional asset expansion through
reserve-free borrowing from their head
offices began to pay down these advances with funds raised in the CD market. Some foreign banks also tapped the
CD market to advance funds to affiliates
abroad and to pay down other nondeposit liabilities. Domestic banks and
thrift institutions, in contrast, ran off
large time deposits in the first quarter as
core deposit inflows were more than
adequate to fund asset growth. The
strength of M3 in the first quarter also
reflected strong growth of money market mutual funds. The relative attractiveness of these funds tends to rise when
market rates are falling, as fund owners
receive returns based on average portfolio yields, which decline only as fund
holdings mature and must be replaced
with lower-yielding instruments.
M3 was about flat between March
and June. Shifts of foreign bank liabilities toward large time deposits slowed,
large time deposits at domestic depositories ran off more rapidly with a contraction of their credit, and money funds
decelerated as their yields came into line
with market rates.
Bank credit expanded very slowly
during the first half of 1991 and was
concentrated in acquisitions of securities, particularly Treasury and agency
securities. As in 1990, the recent
strength in acquisitions of these securities is due in part to their favorable
treatment under risk-based capital requirements. Mainly, however, it reflects
the impact on loan growth of weaker
spending by potential borrowers and
continued lending restraint by banks. A
substantial proportion of bank lending
officers, citing heightened uncertainties
about the economy and, in many cases,
weak capital positions, reported implementing still more restrictive lending
policies in a Federal Reserve survey
84
78th Annual Report, 1991
conducted early in 1991. Evidence of
tightening continued into May, although
the percentage of surveyed banks that
reported additional tightening declined,
perhaps in part because of the more
favorable market environment that had
developed from earlier in the year and
that had allowed banks to issue large
volumes of debt and equity.
The asset-quality problems that
dogged banks in 1990 continued to crop
up in the first half of 1991. Available
data on delinquency rates show further
increases in the first quarter, for both
commercial real estate and other business credits and also for consumer loans.
At midyear, when a number of large
banks announced surprisingly large loan
losses and depressed profits, some of the
gains that banks had made in debt and
equity markets were reversed.
The contraction in depository credit
was not fully reflected in the growth of
total debt of nonfinancial sectors. As
occurred last year, credit advanced
through securities markets and by other
intermediaries met an unusually high
proportion of credit needs. Banks themselves continued to sell consumer loans
and mortgages into securities markets to
hold down asset growth and to bolster
capital ratios; through these sales, the
cost and availability of funds to households has been largely insulated from
the possible effects of bank restraint on
credit. In addition, businesses turned to
long-term securities markets to meet
credit needs and to restructure balance
sheets, reducing their reliance on banks
as well.
Overall, the debt of domestic nonfinancial sectors increased at about a
AV2 percent annual rate over the first
half of 1991. This was likely a bit above
the rate of expansion of nominal GNP,
though by considerably less than on
average over the previous decade, as
both borrowers and lenders apparently
have been adopting more cautious attitudes toward additional debt. Businesses, for example, stepped up new
equity issuance and greatly reduced the
retirement of existing equity in corporate restructurings. These activities, together with the decline in financing
needs associated with falling inventories
and fixed investment, held down growth
of business sector debt to a 2 percent
annual rate in the first half. With some
consumers also attempting to reduce
high debt loads, growth of consumer
credit was weak as well. Lower mortgage rates and stronger home sales
helped maintain growth of residential
mortgages. States and municipalities,
facing continuing downgrades and the
need to cut back expenditures, put fairly
limited net demands on the credit markets in the first half of this year. Federal
government debt growth in the first
quarter was held down by the slow pace
of RTC activity and the receipt of contributions from foreign governments of
payments related to the Gulf war; government debt issuance picked up sharply
in the second quarter, however.
•
Part 2
Records, Operations,
and Organization
87
Record of Policy Actions
of the Board of Governors
Regulation D (Reserve
Requirements of Depository
Institutions)
April 5, 1991—Amendments
The Board approved certain technical
amendments to Regulation D, effective
April 24, 1991.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, and Mullins.1
The changes approved for Regulation
D include a simpler definition of "savings deposit," amendments to the provisions governing reserve deficiencies,
and several clarifications, corrections,
and conforming changes.
November 21, 1991—Amendments
The Board amended Regulation D to
increase the amount of transaction balances to which the lower reserve requirement applies and to increase the
amount of reservable liabilities subject
to a zero percent reserve requirement.
Votes for these actions: Messrs. Greenspan, Angell, Kelley, and LaWare. Absent
and not voting: Mr. Mullins.l
Under the Monetary Control Act of
1980, depository institutions, Edge Act
1. Throughout this chapter, note 1 indicates that
two vacancies existed on the Board when the
action was taken.
corporations and agreement corporations, and U.S. agencies and branches of
foreign banks are subject to reserve
requirements set by the Board. Initially, the Board set reserve requirements at 3 percent of an institution's
first $25 million in transaction balances
and 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 1991, that amount was
$41.1 million. Recent increases in transaction balances warranted an increase
of $1.1 million. The Board therefore
amended Regulation D to increase to
$42.2 million the amount of transaction
balances to which the lower reserve requirement applies.
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; by
the beginning of 1991, that amount had
been increased to $3.4 million. Recent
growth in deposits warranted an increase
to $3.6 million in the amount of deposits
subject to a zero percent reserve requirement, and the Board amended Regulation D accordingly.
The amendments are effective with
the reserve computation period beginning December 24, 1991, for institutions that report weekly; and December 17, 1991, for institutions that report
quarterly.
88
78th Annual Report, 1991
Regulation G (Securities Credit by
Persons other than Banks, Brokers,
or Dealers) and Regulation T
(Credit by Brokers and Dealers)
September 4, 1991—Amendments
The Board amended Regulations G and
T, effective October 11, 1991, to allow
clearing agencies to accept deposits of
margin securities in satisfaction of margin obligations.
Votes for these actions: Messrs. Greenspan,
Mullins, Angell, Kelley, and LaWare.l
The amendments to Regulations G
and T exclude from the limitations of
the margin rules any margin security
deposited with clearing agencies regulated by the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC),
provided that those deposits are made in
connection with (1) the issuance, guarantee, or clearance of any security, including options on a security, certificates of deposit, securities index, or
foreign currency; or (2) the guarantee of
contracts for the purchase or sale of a
commodity for future delivery or options on such contracts. These amendments eliminate the need for clearing
agencies to register or be regulated under the Board's regulations if those
agencies comply with the rules of the
CFTC or the SEC.
Regulation G (Securities Credit by
Persons other than Banks, Brokers,
or Dealers) and Regulation U
(Credit by Banks for the Purpose
of Purchasing or Carrying Margin
Stocks)
September 4, 1991—Amendments
and Interpretations
The Board amended Regulations G and
U, effective October 11, 1991, to permit
transfers between lenders of purpose
loans secured by margin stock under
certain conditions.
The Board issued an interpretation,
effective October 11, 1991, of the applicability of the single-credit rule and of
the restrictions on withdrawal of collateral to the purchase of loan participations by lenders with other outstanding
purpose credit to the same borrower.
Votes for these actions: Messrs. Greenspan,
Mullins, Angell, Kelley, and LaWare.l
The amendments permit banks and
lenders subject to Regulation G to transfer purpose loans secured by margin
stock on the same basis as transfers between two banks or two lenders subject
to the same regulation. The amendments
also describe the terms under which the
transfer of a loan that is in compliance
with the Board's margin regulations
would be permitted. The interpretation
describes the circumstances under which
lenders or banks that acquire a loan by
transfer (for example, through the purchase of a loan participation) would not
be required, under the single-credit rule,
to aggregate that loan with other purpose credit from the same borrower.
Regulation H (Membership of
State Banking Institutions in the
Federal Reserve System) and
Regulation K (International
Banking Operations)
October 23, 1991—Interpretations
The Board issued an interpretation of
Regulation H, effective November 25,
1991, to require that state member banks
obtain Board approval before engaging
in certain commodity swaps and other
commodity- or equity-linked transactions. The Board also issued a similar
interpretation concerning commodity
swaps under Regulation K applicable to
Board Policy Actions
89
the overseas activities of bank holding
companies and subsidiaries of Edge Act
corporations.
ber 8,1991, to implement modifications,
clarifications, and technical revisions to
the risk-based capital guidelines.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and LaWare.l
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and LaWare. *
Recently, banking organizations have
shown increased interest in engaging in
commodity-linked transactions; that is,
transactions in which a portion of the
return is linked to the price of a particular commodity, equity security, or an
index of commodity or equity prices.
The Board's interpretations indicate that
engaging in such activities generally
would constitute a change in the general
character of a bank's business. The interpretations require that state member
banks seeking to begin or to continue
engaging in these activities obtain the
Board's approval. The Board's approval
is not required, however, if the transactions are linked to commodities that
banks are permitted to hold directly, if
the bank engages in the transactions on
a perfectly matched basis, or if only the
interest portion of the contract is linked
to a commodity.
It was expected that the approval process would be simple. It was intended
primarily so that the Board could ensure
that only well-capitalized institutions,
with experienced management, sound
operating procedures, and adequate
controls could engage in commodity- or
equity-linked transactions.
The modifications to the guidelines
concerned the treatment of certain assets
sold with recourse, the redemption of
perpetual preferred stock, the treatment
of supervisory goodwill in the definition
of capital, and the treatment of claims
on certain central banks.
Regulation H (Membership of
State Banking Institutions in the
Federal Reserve System) and
Regulation Y (Bank Holding
Companies and Change in Bank
Control)
August 21, 1991—Amendments
The Board approved amendments to
Regulations H and Y, effective Novem
Regulation K (International
Banking Operations)
March 27, 1991—Revision
The Board revised Regulation K to permit U.S. banking organizations to expand the scope of their international
activities.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Mullins. Votes
against this action: Mr. Angell.l
Besides making technical and clarifying changes, the Board also revised Regulation K to (1) expand the authority of
institutions to underwrite and deal in
equity securities abroad, (2) increase the
dollar limits under which U.S. banking
organizations may make investments
abroad without first notifying the Board,
(3) clarify the portfolio investment authority under which U.S. organizations
may make limited equity investments in
any type of company abroad, (4) permit
Edge Act corporations to provide domestic banking services to foreign persons and governments, (5) permit U.S.
banking organizations to engage in futures commission merchant activities
and insurance underwriting, (6) change
the conditions under which organizations may make debt-for-equity swaps,
90
78th Annual Report, 1991
(7) authorize exemptions from the standards, on a case-by-case basis, for qualifying foreign banking organizations, and
(8) require Edge Act corporations to
maintain a risk-based capital level of at
least 10 percent.
Governor Angell dissented from this
action because he thought that revisions
to Regulation K should be part of a
more general effort to reform the U.S.
banking system. He believed that competitive equity would be achieved only
when all banking organizations in the
United States operated under U.S. banking laws and not as branches of foreign
companies, and when U.S. banks operated abroad through a separate entity
isolated from the protection of the U.S.
safety net.
The revisions were effective May 27,
1991, except for certain provisions dealing with investment procedures and requirements abroad, which were effective
immediately.
Regulation P (Minimum Security
Devices and Procedures for Federal
Reserve Banks and State Member
Banks)
March 6, 1991—Revision
The Board revised Regulation P, effective May 1,1991, to simplify and update
it.
Votes for this action: Ms. Seger and
Messrs. Angell, LaWare, and Mullins. Absent and not voting: Messrs. Greenspan
and Kelley.2
The Board revised Regulation P as
part of its ongoing effort to improve its
2. Throughout this chapter, note 2 indicates that
one vacancy existed on the Board when the action
was taken.
regulations. The revisions update and
simplify the rules, eliminate obsolete
references and technical requirements,
and delete references to reports no
longer required.
Regulation BB (Community
Reinvestment Act)
April 22, 1991—Amendments
The Board amended Regulation BB, effective July 11,1991, to adopt final rules
regarding public access to Community
Reinvestment Act (CRA) ratings.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, and Mullins.l
Provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 amended the CRA to
provide for written evaluations of an
institution's record of meeting the credit
needs of the community it serves and to
require that those evaluations include
findings and conclusions for each of the
assessment factors specified for measuring CRA performance. The act requires
that supervisory agencies replace the
current five-tiered numerical rating system with a four-tiered descriptive system for assessing CRA performance. It
also requires public disclosure of both
the written evaluation and the rating assigned for any CRA examination begun
after July 1, 1990. In addition, the written evaluations must contain the institution's rating and a description of the
basis for the rating.
Last year, the Board, along with the
other supervisory agencies, proposed a
temporary rule to implement these
requirements, effective July 1, 1990.
Subsequently, the Board adopted the
rule in final form with only minor
modifications.
Board Policy Actions
Regulation CC (Availability of
Funds and Collection of Checks)
February 19, 1991—Amendments
The Board adopted final amendments to
Regulation CC to extend the availability
schedule for deposits at nonproprietary
automated teller machines (ATMs) for a
two-year period.
Votes for these actions: Mr. Greenspan,
Ms. Seger, and Messrs.
Angell, Kelley,
LaWare, and Mullins.2
The Board amended Regulation CC
to conform the regulation to amendments made to the Expedited Funds
Availability Act. The amendments extended for two years the availability
schedules for deposits at nonproprietary
ATMs. The amendments to the act were
signed into law on November 28, 1990,
with a retroactive effective date of September 1, 1990. The Board adopted
these conforming changes to Regulation
CC on an interim basis on December 5,
1990, and requested comment on the
interim rule pending adoption of a final
rule.
The amendments provide that, from
September 1, 1990, through November
27, 1992, an institution may treat all
deposits made by its customers at a nonproprietary ATM as if the deposits were
nonlocal checks under the permanent
schedule (provide funds availability not
later than the fifth business day after the
banking day of deposit). Effective November 28, 1992, deposits of cash,
"next-day" checks, and local checks at
a nonproprietary ATM must be made
available by the second business day
after the banking day of deposit, and
nonlocal checks deposited at a nonproprietary ATM must be made available
by the fifth business day after the banking day of deposit.
91
In December 1991 the Congress
adopted an amendment to the act to
make the special treatment of deposits at
nonproprietary ATMs permanent (section 227 of the Federal Deposit Insurance Corporation Improvement Act of
1991, enacted December 19, 1991). It
was expected that in early 1992 the
Board would propose for comment conforming amendments to Regulation CC
and revisions to its commentary.
Other Actions
In January the Board issued for public
comment a proposed amendment to
Regulation CC to provide for same-day
settlement for checks presented by
private-sector presenting banks. Under
the proposal, if specified conditions are
met, paying banks would be required to
settle for checks presented by privatesector presenting banks on the day of
presentment without the imposition of
presentment fees. The proposal provided
for an 8:00 a.m. (local time of the paying bank) presentment deadline for
same-day settlement for checks presented by private-sector presenting
banks. The presenting bank must deliver
the checks to a location, designated by
the paying bank, in the same check processing region as that designated by the
routing number encoded on the check.
In March the Board also requested comment on proposed services that the Federal Reserve Banks could offer in a
same-day settlement environment. No
final action was taken on these proposals in 1991.
In September the Board issued its
final report to the Congress on the Expedited Funds Availability Act and Regulation CC. The report summarized actions and activities of the Federal
Reserve that have been taken since the
Board's March 1990 report. It summarized Board actions affecting Regulation
92
78th Annual Report, 1991
CC, described Federal Reserve initiatives to improve the check collection
and return system, and highlighted
available data on compliance by banks
with the act and Regulation CC. The
report also included legislative recommendations to reduce bank risks of
check fraud resulting from provisions of
the act and to facilitate compliance with
the act's requirements.
Policy Statements
and Other Actions
November 21, 1991—Supervisory
Policy on Securities Activities
The Board, along with the other member
agencies on the Federal Financial Institutions Examination Council, issued a
supervisory policy statement, effective
February 10, 1992, regarding inappropriate securities activities by depository
institutions.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, and LaWare. Absent and
not voting: Mr. Mullins.l
The policy statement revises a statement adopted in 1988 by the Board, the
Federal Deposit Insurance Corporation,
and the Office of the Comptroller of the
Currency. The new statement provides
depository institutions with guidance in
three broad areas: (1) procedures to be
used in selecting a securities dealer,
(2) trading activities and sales practices
that are unsuitable when conducted in
an investment portfolio, and (3) certain
mortgage securities with high risk that
are not suitable investments for most
institutions. In addition, the revised
policy statement suggests several tests
to help institutions identify those
mortgage-backed securities with high
risk.
Rules Regarding Delegation of
Authority
February 21, 1991—Amendment
The Board amended its Delegation
Rules, effective February 28, 1991, to
allow certain System officials to approve certain types of mergers.
Votes for this action: Mr. Greenspan, Ms.
Seger, and Messrs. Angell, Kelley, and
LaWare. Absent and not voting: Mr.
Mullins.2
The Board revised its rules to delegate to the Reserve Banks and to the
Staff Director of the Division of Banking Supervision and Regulation, in consultation with the General Counsel,
authority to approve the merger of a
savings association owned by a bank
holding company with a bank owned
by the same holding company, under
the conditions specified in the Oakar
amendment to the Financial Institutions
Reform, Recovery, and Enforcement
Act of 1989.
1991 Discount Rates
During 1991 the Board approved five
reductions in the basic discount rate;
these actions lowered the rate from
6!/2 percent at the start of the year to
V/i percent by year-end. None of the
Federal Reserve Banks requested an increase in the basic rate during the year.
The Board approved numerous changes,
including increases and decreases, in the
flexible rate on extended credit; that rate
is adjusted on the basis of a marketrelated formula.
The reasons for the Board's decisions
are reviewed below. The decisions were
made in the context of the policy actions
of the Federal Open Market Committee
(FOMC) and the related economic and
financial developments that are covered
Board Policy Actions
in more detail elsewhere in this REPORT.
A listing of the Board's actions on the
basic discount rate during 1991, including the votes on those actions, follows
this review.
Actions on the Basic Discount Rate
The Board approved two reductions in
the basic rate during the first four
months of 1991, maintained existing
rates during the months that followed,
and approved three further reductions
in the period from mid-September to
year-end.
January-April: Basic Rate Reduced
In the early months of the year, the
economy remained in a downswing that
had begun during the summer of 1990.
Monetary policy had been eased substantially in the final months of 1990,
and the Board had approved a reduction
in the basic discount rate from 7 percent
to 6V2 percent on December 18. The
reduction had served in part to realign
the basic rate with market interest rates,
which had declined considerably.
During January 1991 the Board deferred action on requests by six of the
twelve Federal Reserve Banks to lower
the discount rate, but on February 1 the
Board approved a V2 percentage point
reduction to a level of 6 percent. The
decision was made in light of indications of further softening in economic
activity, continuing sluggish growth in
money and credit, and evidence that inflationary pressures were abating, including weakness in commodity prices.
In the weeks that followed, a variety
of developments appeared to have established the basis for a recovery in economic activity; those developments included the cumulative decline in oil
prices since their October 1990 highs,
93
the considerable easing in monetary policy over previous months, and especially the boost to confidence associated
with the rapid and successful completion of the Persian Gulf war. Consumer
spending and demand for single-family
homes strengthened.
Nonetheless, while an upturn in economic activity was widely viewed as a
reasonable expectation, indications of
weakness persisted in the economy.
Moreover, by April, growth in the
broader monetary aggregates clearly had
slowed. Against this background, an increasing number of Federal Reserve
Banks proposed reductions of V2 percentage point in the basic discount rate,
and on April 30 the Board approved
such a decrease to a level of 5Vi percent.
The action was intended in part to realign the discount rate with short-term
market interest rates, which had declined considerably further since the reduction in the discount rate on February 1.
May to August: No Changes
From late spring to midsummer, signs
of a moderate recovery in business activity multiplied. Consumer spending
registered sizable gains, and expenditures on residential construction continued to rise. Data for industrial output
and labor markets indicated that production was being stepped-up to meet
emerging demands. Until late in this
period, no Federal Reserve Bank proposed any change in the discount rate.
September to December:
Further Reductions
As the summer progressed, however,
the recovery appeared to lose momentum. The growth of money and credit
weakened markedly during the summer
months, and the cumulative expansion
94
78th Annual Report, 1991
of M2 and M3 dropped to the lowerends
of the annual ranges set by the FOMC.
In light of concerns about the ongoing
strength of the recovery and given further indications that inflationary pressures were abating, the FOMC had
eased reserve conditions slightly during
August. During the latter half of August
and early September, an increasing
number of Federal Reserve Banks submitted requests to lower the discount
rate, and on September 13 the Board
approved actions by seven Banks to
reduce the rate from 5V2 percent to
5 percent.
Subsequently, the incoming information provided increasing evidence that
the expansion in overall economic activity had stalled amid widespread indications of depressed business and
consumer confidence. On November 6,
against the background of continued
weak expansion in the money and credit
aggregates and diminishing inflationary
pressures, the Board approved a further
Vi percentage point reduction in the discount rate. This action followed a decision by the FOMC to ease reserve conditions somewhat further and served in
part to realign the discount rate with
other short-term market rates.
The FOMC implemented further easing actions during December through
open market operations, and the discount rate was reduced by a full percentage point on December 20, to a level
of 3V2 percent. These easing actions
were taken on the basis of cumulating
evidence, notably monetary and credit
conditions as well as current economic
conditions, that pointed to receding inflationary pressures. The actions, together with the ongoing effects of earlier
easing moves, were seen as likely to
have a positive effect on financial markets and as possibly supplying adequate
monetary stimulus to promote a resumption of sustainable economic growth.
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. The interest
rate charged on seasonal credit was
scheduled to be replaced by a flexible,
market-related rate starting January 9,
1992.
A flexible rate may also be charged
on extended-credit loans (for other than
seasonal purposes) to depository institutions that are under sustained liquidity
pressure and are not able to obtain funds
on reasonable terms from other sources.
The flexible rate is somewhat higher
than the market rates to which it is
linked and is always at least 50 basis
points above the basic discount rate. The
rate is adjusted periodically, subject to
Board approval. The first thirty days of
borrowing on extended credit may be at
the basic rate, but further borrowings
ordinarily are charged the flexible rate.
Exceptionally large adjustment-credit
loans that arise from computer breakdowns or other operating problems that
clearly are not beyond the reasonable
control of the borrowing institution are
assessed the highest rate applicable to
any credit extended to depository institutions; under the current structure, that
rate is the flexible rate on extended,
nonseasonal credit.
At the end of 1991 the structure of
discount rates was as follows: a basic
rate of 3V2 percent for short-term adjustment credit and for credit under the seasonal program, and a flexible rate of
4.85 percent. During 1991 the flexible
Board Policy Actions
rate ranged from a high of 7.65 percent
to a low of 4.85 percent.
Board Votes
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. Federal 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 for the updating of market-related rates under the
extended credit program are not shown.
Except as indicated in the listing below, all votes taken during 1991 were
unanimous.
Votes on the Basic Discount Rate
February 1. Effective this date, the
Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Richmond, Chicago, Kansas City, and
Dallas to reduce the basic discount rate
Vi percentage point, to 6 percent.
Votes for this action: Mr. Greenspan, Ms.
Seger, and Messrs. Kelley, LaWare, and
Mullins. Votes against this action: None.2
The Board subsequently approved
similar actions taken by the directors of
the Federal Reserve Banks of Cleveland, Minneapolis, and San Francisco,
also effective February 1; and St. Louis
and Atlanta, effective February 4.
April 30. Effective this date, the
Board approved actions taken by the
95
directors of the Federal Reserve Banks
of Boston, New York, Atlanta, Chicago,
and Dallas to reduce the basic discount
rate to 5V2 percent.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Mullins. Vote against
this action: Mr. Angell.l
Mr. Angell dissented because he
was concerned that a reduction in the
basic discount rate under current conditions could have adverse repercussions
on long-term interest rates and thus
on interest-sensitive sectors of the
economy.
The Board subsequently approved
similar actions taken by the directors of
the Federal Reserve Banks of Philadelphia, Richmond, Minneapolis, Kansas
City, and San Francisco, also effective
April 30; St. Louis, effective May 1; and
Cleveland, effective May 2.
September 13. Effective this date, the
Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, Philadelphia, Cleveland, Atlanta, Chicago, Minneapolis, and Dallas
to reduce the basic discount rate to
5 percent.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, and LaWare.
Votes
against this action: None.1
The Board subsequently approved
similar actions taken by the directors of
the Federal Reserve Banks of New
York, Richmond, Kansas City, and San
Francisco, also effective September 13;
and St. Louis, effective September 17.
November 6. Effective this date, the
Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Cleveland, Atlanta, Chicago, and Minneapolis to reduce the basic discount
rate to 4Vi percent.
96
78th Annual Report, 1991
Votes for this action: Messrs. Greenspan,
Mullins, Kelley, and LaWare. Vote against
this action: Mr. Angell.1
Mr. Angell dissented because of his
concern about the effect of the easing
action on inflation expectations and consequently on long-term interest rates. In
his view monetary policy needed to be
implemented in a way that was not perceived as a shift from a focus on pricelevel stability to a focus on short-term
economic growth.
The Board subsequently approved
similar actions taken by the directors of
the Federal Reserve Banks of Richmond, Kansas City, Dallas, and San
Francisco, also effective November 6;
and St. Louis, effective November 7.
December 19. Effective December 20
the Board approved actions taken by the
directors of the Federal Reserve Banks
of New York and Chicago to reduce the
basic discount rate to 3V2 percent.
Votes for this action: Messrs. Greenspan,
Mullins, Kelley, LaWare, and Lindsey and
Ms. Phillips. Vote against this action: Mr.
Angell.
Mr. Angell dissented because he believed that a steady policy course was
desirable after an extended period of
interest rate declines. He did not rule out
the potential need for some easing later
if warranted by the incoming information on the economy and a reversal of
the recent pickup in monetary growth.
The Board subsequently approved actions taken by the directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta,
Kansas City, Dallas, and San Francisco,
also effective December 20; Minneapolis, effective December 23; and
St. Louis, effective, December 24.
•
97
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
A N N U A L 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
1991, 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
decision.
During 1991 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 sets of instruction 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 policy instruments are shown below in the
form in which they were in effect at the
beginning of 1991. 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, 1991
1. The Federal Open Market Committee authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary
to cany 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
98
78th Annual Report, 1991
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 $8.0 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;1
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.
(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
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
1. At its meeting on Dec. 18, 1990, the Committee approved a temporary increase, to $14 billion, in the limit on changes between Committee
meetings in System Account holdings of U.S. government and federal agency securities. The limit
reverted to its regular level of $8 billion at the
close of business on Feb. 6,1991.
FOMC Policy Actions
arrange corresponding sale and repurchase
agreements between its own account and
foreign and international accounts maintained at the Bank. Transactions undertaken
with such accounts under the provisions of
this paragraph may provide for a service fee
when appropriate.
Domestic Policy Directive
In Effect January 1, 19912
The information reviewed at this meeting
suggests appreciable weakening in economic
activity. Total nonfarm payroll employment
fell sharply further in November, reflecting
widespread job losses that were especially
pronounced in manufacturing and construction; the civilian unemployment rate rose to
5.9 percent. Industrial output declined markedly in October and November, in part because of sizable cutbacks in the production
of motor vehicles. Retail sales were weak in
real terms in October and November; real
disposable income has been reduced not only
by a decrease in total hours worked but also
by the effects of higher energy prices. Advance indicators of business capital spending
point to considerable softening in investment
in coming months. Residential construction
has declined substantially further in recent
months. The nominal U.S. merchandise trade
deficit widened in October from its average
rate in the third quarter as non-oil imports
rose more sharply than exports. Increases in
consumer prices moderated in November
largely as a result of a softening in oil prices.
The latest data on labor costs suggest some
improvement from earlier trends.
Most interest rates have fallen appreciably
since the Committee meeting on November
13. In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies rose slightly on balance over the intermeeting period.
M2 was about unchanged on balance over
October and November after several months
of relatively limited expansion, while M3
declined slightly in both months. From the
fourth quarter of 1989 through November,
expansion of M2 was estimated to be in the
2. Adopted by the Committee at its meeting on
Dec. 18, 1990.
99
lower half of the Committee's range for the
year and growth of M3 near the lower end of
its range. Expansion of total domestic nonfinancial debt appears to have been near the
midpoint of its monitoring 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 range it had established in February for M2 growth of 3 to 7 percent, measured from the fourth quarter of 1989 to the
fourth quarter of 1990. The Committee in
July also retained the monitoring range of 5
to 9 percent for the year that it had set for
growth of total domestic nonfinancial debt.
With regard to M3, the Committee recognized that the ongoing restructuring of thrift
depository institutions had depressed its
growth relative to spending and total credit
more than anticipated. Taking account of the
unexpectedly strong M3 velocity, the Committee decided in July to reduce the 1990
range to 1 to 5 percent. For 1991, the Committee agreed on provisional ranges for monetary growth, measured from the fourth quarter of 1990 to the fourth quarter of 1991, of
2Vi to 6V2 percent for M2 and 1 to 5 percent
for M3. The Committee tentatively set the
associated monitoring range for growth of
total domestic nonfinancial debt at 4Vi to
SV2 percent for 1991. The behavior of the
monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their velocities, and developments in the economy
and financial markets.
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 a
possible change in the discount rate. Depending upon progress toward price stability,
trends in economic activity, the behavior of
the monetary aggregates, and developments
in foreign exchange and domestic financial
markets, slightly greater reserve restraint
might 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 November
through March at annual rates of about 4 and
1 percent, respectively.
100 78th Annual Report, 1991
Authorization for Foreign
Currency Operations
In Effect January 1, 1991
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
$25.0 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 cur
rency, 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 of foreign currency transactions. In
FOMC Policy Actions 101
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;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with
the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International
Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent information on
System foreign currency operations to appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for
System Account in accordance with paragraph 3 G(l) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.
Foreign Currency Directive
In Effect January 1, 1991
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;
102 78th Annual Report, 1991
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 5-6, 1991
1. Domestic Policy Directive
The information reviewed at this meeting suggested that economic activity had
weakened further. A persisting low level
of consumer confidence, related partly
to the uncertainties surrounding the Persian Gulf situation, and reduced real disposable incomes continued to depress
consumer demand; and business investment spending, especially for structures,
remained in a downtrend. With businesses attempting to maintain tight control over inventories as demand weakened, industrial production and nonfarm
payroll employment had declined
sharply. Broad measures of prices indicated some moderation of inflation toward the end of 1990, largely as a result
of lower energy prices. The latest data
suggested some deceleration in wages
and overall labor costs.
Total nonfarm payroll employment
fell sharply in January, and a larger drop
than previously reported was now indicated for December. The contraction in
employment in January was especially
heavy in the construction sector, only
partly reflecting unseasonably wet
weather in some sections of the country,
and widespread job losses were registered in manufacturing, notably in
durable goods. The civilian unemployment rate edged higher in January to
6.2 percent.
Industrial output declined markedly
in the fourth quarter, and partial data
suggested a further drop for January. A
sizable portion of the reduction reflected
cutbacks in the production of motor
vehicles, but output also was down in
most other industries. Declines in production were especially large for computers, construction supplies, and a wide
range of non-auto consumer durables.
Capacity utilization in manufacturing
continued to fall in December; in most
industries, operating rates were down
substantially from their recent peaks and
from their longer-run averages.
Partly reflecting lackluster sales during the holiday season, consumer spending in real terms was soft in the fourth
quarter. Outlays for goods were considerably below the levels seen earlier in
the year, and while spending for services
rose further, the fourth-quarter gain was
well below that recorded in previous
quarters. Total private housing starts declined substantially further in the fourth
quarter; sales of new homes remained
weak through year-end, and home prices
continued to slip.
Shipments of nondefense capital
goods were about unchanged in the
fourth quarter. Aircraft purchases remained at the robust third-quarter level,
while business outlays for motor vehicles dropped sharply after a third-quarter
spike in fleet sales. Outside the transportation sector, equipment spending advanced appreciably, mainly reflecting
strong increases in spending for computers. New orders for business equipment
pointed to a softening in spending for
such goods in coming months. Available
data indicated that nonresidential construction activity fell sharply in the
fourth quarter. In a period of weak sales,
total manufacturing and trade inventories, measured on a constant-cost basis,
increased a little further on balance over
October and November, and the ratio of
stocks to sales rose only slightly, reflecting strong efforts by businesses to
keep inventories in line with sales.
FOMC Policy Actions
In the October-November period,
strong exports cushioned to some extent
the drop in production and output in the
United States; nonagricultural exports
were up substantially over the thirdquarter average, with substantial increases recorded in all major trade categories except aircraft and computers.
Despite the strength in exports, the nominal U.S. merchandise trade deficit for
the two months combined was at a
higher rate than in the third quarter because of rising oil prices, which brought
a sharp increase in the value of oil imports. Growth in most major foreign
industrial countries appeared to have
slowed somewhat in the fourth quarter.
In many of these countries, lower oil
prices late in the year had brought some
moderation in consumer price inflation.
In December, a sizable decline in producer prices of finished goods more than
offset the November rise, as prices of
both food and energy products moved
sharply lower. For other finished goods,
producer prices increased in the fourth
quarter at about the moderate pace
evident in the three previous quarters.
Lower oil prices and a slowing in food
price increases also damped the rise in
consumer prices in December. Excluding the food and energy components,
consumer inflation was a little lower on
balance in November and December
than in earlier months of 1990. Total
compensation costs of private industry
workers rose more slowly in the fourth
quarter and also increased a bit less for
the year than in 1989.
At its meeting on December 18, the
Committee adopted a directive that
called for an initial slight reduction in
the degree of pressure on reserve positions and for giving particular weight to
potential developments that might require some further easing later in the
intermeeting period. To reflect the tilt
toward further easing, the directive indi
103
cated that, subsequent to the initial
move, somewhat lesser reserve restraint
would be acceptable, or slightly greater
reserve restraint might be acceptable,
during 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 Committee also noted that open
market operations might need to take
account of a possible reduction in the
discount rate early in the intermeeting
period. The contemplated reserve conditions were expected to be consistent
with expansion of M2 and M3 over the
period from November through March
at annual rates of about 4 and 1 percent
respectively.
Immediately after the Committee
meeting, the Board of Governors approved a reduction in the discount rate
from 7 to 6V2 percent; afterwards, open
market operations were directed at allowing part of this decline to show
through to short-term interest rates more
generally. Another easing step was taken
in early January in response to weak
money growth and considerable softness in the economy. Subsequently, on
February 1, the Board approved a further reduction in the discount rate to
6 percent; this action was taken in response to indications that economic activity was slackening further, growth in
money and credit continued sluggish,
and inflation pressures were abating. In
this instance, open market operations
permitted the full reduction in the discount rate to be reflected in money
market rates. Adjustment plus seasonal
borrowing fluctuated widely over the
intermeeting period; borrowing was well
above expected levels during much of
the period as banks adapted to the
phase-out of the reserve requirement on
nonpersonal time deposits and net Euro-
104 78th Annual Report, 1991
currency liabilities; the phase-out reduced required reserve balances to levels that at times proved to be insufficient
for the clearing needs of many banks.
The federal funds rate averaged
around 11A percent just before the December meeting. Late in the intermeeting period, after the two cuts in the
discount rate and the monetary easing
through open market operations, the federal funds rate averaged a little above
6VA percent. Over the intermeeting
period, however, the funds rate was unusually volatile; key factors behind this
volatility included the phase-out of
the nontransaction reserve requirement,
balance-sheet adjustments undertaken
near year-end, and some reserve projection misses near the ends of maintenance periods. Other short-term interest
rates also fell considerably over the intermeeting period; private money market
rates declined more than Treasury bill
rates, reflecting a reduction in the pronounced risk premiums that had been
built into private short-term rates ahead
of year-end. Yields in longer-term markets were unchanged to down slightly,
and broad indexes of stock prices rose
appreciably on balance over the period.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies advanced in the early part of the intermeeting period as market participants sought
a safe haven for their funds in the face
of diminishing prospects for a peaceful
settlement in the Persian Gulf region.
The dollar also was buoyed, especially
against the German mark, by market
perceptions that political conditions
were deteriorating in the Soviet Union.
The early successes of the Allied forces
in the Gulf war brought a reduction in
safe-haven demands, and the dollar began to decline in the latter half of January. After an increase in the German
Bundesbank's official lending rates and
the reduction the next day in the Federal
Reserve's discount rate, the dollar
dropped sharply. On balance, the dollar
was down somewhat over the intermeeting period.
Growth of M2 remained sluggish in
December and January, running at a
pace below the path expected by the
Committee; expansion of M3 picked up
in January from the very slow pace of
previous months. The continuing weakness in M2 despite an appreciable narrowing in opportunity costs appeared to
reflect in part heightened concerns about
the financial condition of many depository institutions in the wake of the closing of privately insured banks and credit
unions in Rhode Island and the failure
of the Bank of New England. For the
year 1990, M2 and M3 grew at rates in
the lower portions of the Committee's
ranges. Expansion of total domestic
nonfinancial debt appeared to have been
near the midpoint of its monitoring
range for the year.
The staff projection prepared for this
meeting, which was assembled against
the background of the outbreak of hostilities in the Persian Gulf region, pointed
to some further decline in economic
activity in the near term. The length and
intensity of the war was a matter of
conjecture, but the projection was based
on the assumption that the war would
end within the next few months and
would have little further effect on world
oil supplies and the level of oil prices.
The projection also assumed that constraints on the supply of credit would
persist to some degree through the rest
of the year. In the near term, concerns
emanating from the war, reduced credit
availability, and financial fragility were
expected to continue to damp consumer
and business confidence and, by depressing private domestic demand, to push
manufacturing activity still lower. Subsequently, economic growth was ex-
FOMC Policy Actions
pected to resume in association with the
support provided by further gains in
exports, the stimulative effects of sharp
declines in oil prices and short-term
interest rates, and some improvement in
consumer and business sentiment as the
war drew to a close. Increases in business orders and sales could be expected
to bring a prompt pickup in production,
given lean inventories, and with some
lag a rise in business spending for investment goods other than commercial
structures; severe problems of excess
supply were expected to inhibit any
recovery in commercial construction
for an extended period. With oil prices
lower and some added slack expected in
resource utilization, the staff projected a
slowing in the pace of increases in prices
and labor costs in coming quarters.
In the Committee's review of economic developments, members commented that the outbreak of war in the
Persian Gulf region had heightened the
already substantial uncertainties bearing
on the outlook for the economy. A relatively mild recession followed by a
moderate upturn in economic activity
was still regarded as a reasonable expectation, assuming that the war would not
be prolonged and that oil prices would
remain at substantially reduced levels.
However, the risks clearly were on the
downside, and a very sluggish recovery
or indeed a deep and relatively long
recession could not be ruled out. Business and consumer confidence, a critical
factor underlying the economic outlook,
already was quite negative and was subject to further erosion stemming from
financial strains and credit constraints in
the domestic economy as well as from
unpredictable developments in the Middle East. On the positive side, members
saw growing indications of some moderation in underlying inflation pressures;
and in light of the increasing slack in
labor and capital markets and the slower
105
growth of money over a period of years,
they believed that considerable progress
in reducing inflation was likely to be
made in the year ahead.
In conformance with the practice at
meetings when the Committee establishes its long-run ranges for growth of
the money and debt aggregates, the
Committee members and the Federal
Reserve Bank presidents not currently
serving as members had prepared projections of economic activity, the unemployment rate, and inflation for the year
1991. For the period from the fourth
quarter of 1990 to the fourth quarter of
1991, the forecasts for growth of real
GNP had a central tendency of 3A percent to IV2 percent. These forecasts
assumed an upturn in economic activity
later in the year and subsequent expansion at a pace that was consistent with
continued progress toward price stability. Estimates of the civilian rate of
unemployment in the fourth quarter of
1991 were concentrated in a range of
6x/2 percent to 7 percent. On the assumption that oil prices would remain near
their recent levels and in the context of
reduced pressures on resources, all of
the members expected a sizable decline
in the rate of inflation from the pace in
1990; as measured by the consumer
price index, the central tendency of their
projections was in a range of 3VA percent to 4 percent for the year, compared
with an actual rise of 6V4 percent in
1990. Forecasts of growth in nominal
GNP had a central tendency of 33A percent to 5VA percent.
In their comments about the prospects
for business activity, the members gave
considerable attention to the uncertainties and concerns that were exerting a
depressing effect on business and consumer confidence. The rapidly evolving
situation in the Middle East undoubtedly was contributing an element of caution to spending plans, but the problems
106 78th Annual Report, 1991
of many financial institutions and the
financial difficulties of heavily indebted
businessfirmsand individuals were adding to the generally somber economic
climate. Not only had financial problems affected attitudes, but constraints
on the availability of credit to many
borrowers with limited or no access to
alternative sources of financing were
having a retarding effect on business
activity and could limit the vigor of the
expected expansion. Many financial
problems were the legacy of financial
excesses of the past decade, notably
those associated with the financing of
speculative real estate ventures and
highly leveraged restructurings of business firms. While some progress was
being made in addressing such problems, a good deal of time undoubtedly
would be needed before many troubled
lending institutions again became important suppliers of new credit and
before many business firms were able to
access credit sufficient to support increases in spending. Suchfinancialdifficulties were likely to have continuing
effects on business and consumer attitudes and to constrain business activity
to some extent even if there were a
relatively prompt end to the hostilities in
the Middle East. Nonetheless, members
pointed to a number of promising developments bearing on the prospects for the
economy, notably the substantial declines that had occurred in interest rates,
including key long-term rates, the sharp
drop in oil prices, and the improved
competitive position of U.S. businesses
in world markets stemming from the
depreciation of the dollar. Members also
noted that despite the generally negative
sentiment in the business community
and among many consumers, the performance of the stock market, including the
shares of banking organizations, had
been surprisingly strong; while such a
development had to be interpreted with
caution in terms of its implications for
future business activity, it suggested that
many investors viewed the economic
outlook with some degree of optimism.
Turning to current and prospective
developments in different parts of the
country and sectors of the economy,
members reported further indications of
some softening in business conditions in
several regions, including areas where
business activity previously had been
relatively well maintained in comparison with national trends. Much of the
weakness tended to be concentrated in
manufacturing, primarily the production
of motor vehicles and associated inputs
and of other durable goods, and in construction. At the same time, however,
there were indications that business conditions were no longer deteriorating in
some areas and might indeed be improving somewhat with attendant gains in
local business confidence. The outbreak
of war seemed to be having little effect
thus far on overall domestic manufacturing activity, though some firms were
reported to have increased their production of defense-related goods.
The prospects for consumer spending
remained the key uncertainty in the outlook for overall economic activity. It
was unclear at this point how consumers
would respond to unfolding developments in the Middle East. There were
widespread reports that retail sales had
dropped sharply after the outbreak of
hostilities in mid-January, but that development seemed to represent at least
in part a temporary reaction associated
with the diversion of attention to the
reporting of military events. Indeed,
there were indications or at least expectations among businessmen that consumer behavior would return to a more
normal pattern, though perhaps tending
to the weak side, in the period ahead.
For the present, however, consumer sentiment clearly remained depressed, and
FOMC Policy Actions
many anxious consumers seemed unwilling, or at least reluctant, to make
discretionary purchases. As a consequence business contacts, such as those
in the motor vehicles industry, remained
concerned about the outlook for sales at
least for the nearer term. Over time, the
end of hostilities in the Middle East
would improve consumer confidence,
and the drop in oil prices, if sustained,
would have a positive effect on consumer purchasing power.
A significant rebound in consumer
spending was likely to be followed fairly
promptly by increased production of
consumer goods, given generally lean
business inventories, and with some lag
by greater output of producer equipment. At the same time, construction
activity would probably remain depressed in light of the high vacancy
rates in existing commercial structures
across the country and the weakness in
residential real estate markets in many
areas. Construction expenditures by
state and local governments also appeared likely to be restrained, given the
financial problems of many of these
governments, but members noted that
some major public works projects had
been financed or were under way in a
few areas.
Members continued to anticipate further expansion in exports stemming importantly from the nation's improved
competitive position associated with
the substantial decline in the foreign
exchange value of the dollar. Views
differed to some extent, however, with
regard to the strength and potential contribution of the export sector to domestic economic activity. Some members
stressed that relatively depressed economic conditions in a number of major
foreign industrial nations were likely to
limit U.S. exports to those countries.
Moreover, developments in the Middle
East already had curbed foreign sales of
107
some domestic goods, notably agricultural products. At the same time, many
manufacturing firms continued to report
receptive export markets, and production for such markets was helping to
offset weakness in domestic demand.
However, a substantial further decline in
the foreign exchange value of the dollar
would not be a welcome development;
such a decline, should it occur, might
well foster higher domestic bond yields
and could give rise to protectionist reactions abroad to the detriment of further
gains in U.S. exports.
With regard to the outlook for inflation, the members saw favorable prospects for considerable progress in the
year ahead. There were growing indications that the core rate of inflation would
trend down. Currently available statistics might not yet be fully capturing the
extent of the underlying improvement in
inflation, though it already was clear
that some downward adjustment was
occurring in the crucial area of wages.
With regard to future prospects, several
members stressed that the slowing in
monetary growth over a period of years
was likely to be reflected increasingly in
lower inflation. The slack in labor and
capital resources probably would have a
restraining effect on underlying inflation
pressures over the next several quarters.
Evidence of such a development included indications of strong competition
in markets for a wide range of products
and reports of adjustments in the pricing
policies of many business firms. The
members recognized that the effects of
earlier declines in the dollar on the
prices of imported goods and competing
domestic products would tend to maintain some upward pressure on the overall price level for a time; however, they
assumed for the purpose of their forecasts that there would not be any further
change in the value of the dollar of a
magnitude that would affect domestic
108 78th Annual Report, 1991
prices over the projection horizon and
that oil prices would remain near recent
lower levels.
Against the background of the members' views on the economic outlook
and in keeping with the requirements of
the Full Employment and Balanced
Growth Act of 1978 (the HumphreyHawkins Act), the Committee reviewed
the ranges for growth of the monetary
and debt aggregates in 1991 that it had
established on a tentative basis in July
1990. The tentative ranges included expansion of 2Vi percent to 6V2 percent for
M2 and 1 percent to 5 percent for M3,
measured from the fourth quarter of
1990 to the fourth quarter of 1991. The
monitoring range for growth of total domestic nonfinancial debt had been set
provisionally at AV2 percent to 8V2 percent for 1991. The ranges for M2 and
nonfinancial debt involved reductions of
V2 percentage point from those that were
reaffirmed in July for the year 1990; the
M3 range for 1990 had been lowered by
IV2 percentage points in July and no
further reduction had been made in the
tentative M3 range for 1991.
In the Committee's discussion of the
ranges for 1991, which mainly focused
on M2, most of the members indicated a
preference for affirming the ranges that
had been established on a tentative basis
in July. Insofar as could be judged under
present circumstances, the tentative
ranges offered in this view the best prospects of balancing and accommodating
the Committee's objectives of a prompt
recovery in business activity and continuing progress toward reducing inflation. Many of the members conceded
that in light of the current uncertainties
surrounding the relationship between
money growth and economic performance, somewhat higher or somewhat
lower ranges also were defensible. For
example, it was unclear to what extent
the relatively slow growth of M2 in
relation to that of nominal income,
allowing for the effects of movements in
interest rates, would persist during the
year ahead; a return to a more normal
pattern in this relationship would have a
substantial effect on the rate of M2
growth that was consistent with a satisfactory economic performance. The
Committee needed to be prepared to revise those ranges at midyear as interim
economic or financial developments
might warrant. Members also noted the
risk that market participants might misinterpret the implications of any changes
in the ranges for the conduct of monetary policy during the year. Increasing
the ranges could raise questions about
the System's commitment to its antiinflationary goals, while lowering them,
especially in the context of already weak
money growth, could lead to concerns
about the System's objective of fostering an upturn in business activity. Moreover, a reduction in the M2 range might
have to be reversed later if the behavior
of money resumed a more normal pattern in relation to income; such a reversal would interrupt the Committee's
practice of gradually reducing its growth
ranges and could have adverse repercussions on the credibility of the System's
anti-inflationary policy. Accordingly,
most of the members concluded that the
tentative range for M2, which already
incorporated a reduction from 1990,
represented an appropriately balanced
approach, based on current expectations with regard to the behavior of
velocity, to promoting the Committee's
objectives.
Expressing a differing opinion, two
members indicated that they preferred a
somewhat higher range for M2, in part
to provide a better signal of the System's determination to cushion the recession and foster a quick recovery in
business activity. The midpoint of the
higher range would call for some
FOMC Policy Actions
make-up of the shortfall in M2 growth
from the midpoints of the ranges established for this aggregate in recent years.
Moreover, growth of M2 at or near the
bottom of the tentative range would pose
an unacceptable risk of inadequate monetary stimulus that could fail to cushion
possible further deterioration in the
economy. On the other hand, a preference was expressed for a somewhat
lower range to underline the System's
commitment to price stability. The midpoint of such a range would not imply a
change from the average growth of
recent years, and the upper end would
trigger a prompter policy response
should the recovery be stronger than
anticipated with potential inflationary
implications.
With regard to M3, all of the members favored adoption of the tentative
range that had been set provisionally in
July. While that range was unchanged
from that for 1990, as revised at midyear, it incorporated a substantial reduction from the M3 ranges of previous
years. The members anticipated that
growth of M3 would remain below that
of M2 as a consequence of the continuing restructuring of thrift depository institutions this year and the likelihood of
restrained growth in bank credit. However, the effect on overall credit growth
seemed likely to be attenuated by the
continuing rechanneling of credit extensions through financial markets or lenders other than depository institutions. In
the circumstances, a relatively low
range for M3 was expected to prove
consistent with the Committee's goals
for the economy.
All of the members found acceptable
the monitoring range of AV2 percent to
8V2 percent that the Committee had
established on a provisional basis for
growth of total domestic nonfinancial
debt in 1991. That range, which represented a further step in a series of annual
109
reductions, took into account the prospect that federal borrowing was likely to
be robust in 1991, owing in part to borrowing associated with outlays by the
Resolution Trust Corporation but more
generally to the likely weakness of federal revenues in a year of relatively sluggish economic activity. On the other
hand, growth in borrowing by domestic
nonfederal sectors was expected to moderate. Demands for credit would be held
down by limited expansion in domestic
spending and the increased caution on
the part of both businesses and households in taking on debt, while the terms
and conditions set by many suppliers of
credit would remain tight.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they favored or could
accept the ranges for 1991 that the
Committee had established on a tentative basis at its meeting in July 1990. In
keeping with the Committee's usual procedures under the Humphrey-Hawkins
Act, the ranges would be reviewed at
midyear, or sooner if deemed necessary,
in light of the behavior of the aggregates
and ongoing economic and financial
developments. The Committee approved
the following paragraph for inclusion in
the domestic policy directive:
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability, promote a resumption of sustainable growth in output, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee at this meeting
established ranges for growth of M2 and M3
of 2V2 to 6V2 percent and 1 to 5 percent,
respectively, measured from the fourth quarter of 1990 to the fourth quarter of 1991. The
monitoring range for growth of total domestic nonfinancial debt was set at AV2 to
%Vi percent for the year. With regard to M3,
the Committee anticipated that the ongoing
restructuring of thrift depository institutions
would continue to depress its growth relative
to spending and total credit. The behavior of
110
78th Annual Report, 1991
the monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their
velocities, and developments in the economy
andfinancialmarkets.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Keehn, Kelley,
LaWare, Mullins, Parry, and Ms. Seger.
Vote against this action: Mr. Forrestal.
Mr. Forrestal dissented because he
wanted to retain the 1990 range of 3 to
7 percent for M2 growth in 1991. He
was concerned that monetary growth in
1990 was the lowest since monetary
targeting began. Moreover, in the current recessionary environment, the 3
to 7 percent range with its somewhat
higher minimum growth rate would provide a better basis for conveying and
implementing the Committee's goals of
fostering a prompt upturn in economic
activity and subsequent expansion at a
sustained and acceptable pace. In addition, the midpoint of this range appeared
to be consistent with continued progress
toward price stability.
In the Committee's discussion of policy for the intermeeting period ahead, all
of the members endorsed a proposal to
maintain unchanged conditions in reserve markets, at least initially, following this meeting. In reaching their decision, members took into account the
considerable easing of monetary policy
that had been implemented in a series of
steps over the course of recent months,
including the reduction in the discount
rate and related decrease in money market interest rates within the last few
days. The System's policy actions, in
the context of a weakening economy
and moderating cost pressures, had induced a considerable decline in interest
rates, but sufficient time had not yet
elapsed for the effects of the lower rates
to be felt in the economy or indeed to
any measurable extent in the growth of
the monetary aggregates. A number of
members also commented on the possibility that further easing so soon after
the recent policy moves could result in
undesirable downward pressure on the
dollar in foreign exchange markets. In
these circumstances, while views differed with regard to the potential need
for further easing moves, the members
agreed that for now it was desirable
to pause and assess the course of the
economy and the effects of past policy
actions.
As they had at other recent meetings,
many of the members expressed concern about the very sluggish expansion of M2 and M3 over the past
several months. This weakness in
monetary growth in turn appeared to
be associated with the current constraints on the availability of credit from
depository institutions and the shortfalls in aggregate spending and income.
According to a staff analysis prepared
for this meeting, a steady policy course
was likely to be consistent with some
acceleration in monetary growth over
the first quarter because earlier declines
in market interest rates had reduced the
opportunity costs of holding deposit
accounts, and the staff assumed some
strengthening of aggregate spending
over the balance of the quarter. The
incomplete data available thus far
for the latter part of January tended to
support this staff analysis. The members
recognized that the short-run behavior
of these monetary measures needed to
be interpreted with caution and that
easing reserve conditions too much
would incur the risk of stimulating a
sharp rebound in monetary growth and
in inflationary pressures once the economic recovery had gathered some
momentum. Nonetheless, several members emphasized the desirability of
giving relatively high priority to achieving satisfactory rates of growth in
FOMC Policy Actions
reserves and money, especially under
prevailing economic and financial
conditions.
In the course of the Committee's consideration of possible intermeeting
adjustments to the degree of reserve
pressure, most of the members expressed a preference for continuing to
tilt the directive toward possible easing
during the weeks ahead. In this view,
the downside risks to the economy and
the potential for inadequate monetary
growth made it likely that any intermeeting adjustment would be in the direction
of easier reserve conditions. Several
members also noted that the Committee
needed to place a high premium on
avoiding any tendency for the weakness
in the economy to cumulate because
they were more concerned about the
severe consequences of a potentially
deep and prolonged recession than those
of a sharp rebound in the economy,
especially given current financial strains
and fragilities in the economy. Accordingly, the Committee should be willing
to ease in response to evidence of additional weakness in the economy and
abatement of inflationary pressures; the
need for further easing might be signaled in part by a continuing shortfall in
monetary growth. In following such a
policy, however, a number of members stressed that the Committee would
need to be prepared to tighten policy
promptly down the road in the event that
inflationary pressures should threaten
to re-emerge. A few members, while
acknowledging the potential need for
some easing, preferred not to bias the
directive in either direction. In this
view, there were considerable risks
of overreacting to indications of a
weakening economy, particularly since
conditions for a recovery in economic
activity already appeared to be in place
and weak data for the period at the start
of the Persian Gulf war might well
\\1
reflect what would prove to be a shortlived development.
At the conclusion of the Committee's
discussion, all of the members indicated
that they favored a directive that called
for maintaining the existing degree of
pressure on reserve positions. They also
noted their preference or acceptance of
a directive that gave special weight
to potential developments that might
require some easing during the intermeeting period. Accordingly, the Committee decided that slightly greater
reserve restraint might be acceptable
during the intermeeting period or somewhat lesser 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 at this meeting were
expected to be consistent with some
pickup in the growth of M2 and M3 to
annual rates of around VA percent to
4 percent over the three-month period
from December to March.
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 further weakening in economic activity. Total nonfarm payroll employment fell
sharply further in December and January,
reflecting widespread job losses that were
especially pronounced in manufacturing and
construction; the civilian unemployment rate
rose to 6.2 percent in January. Industrial
output declined markedly in the fourth quarter, in part because of sizable cutbacks in the
production of motor vehicles, and partial
data suggest a further drop in January. Consumer spending has remained soft. Advance
indicators of business capital spending point
to considerable weakness in investment in
coming months. Residential construction
has declined substantially further in recent
months. The nominal U.S. merchandise trade
112
78th Annual Report, 1991
deficit narrowed in November, as the value
of imports declined more than that of exports; the average deficit for October and
November exceeded that for the third quarter. Increases in consumer prices moderated
and producer prices changed little in November and December, largely as a result of a
softening in energy prices. The latest data
suggest some further deceleration in wages
and overall labor costs.
Short-term interest rates have fallen considerably since the Committee meeting on
December 18, while rates in longer-term
markets are unchanged to down slightly. The
Board of Governors approved a reduction in
the discount rate from 7 to 6V2 percent on
December 18 and a further reduction to
6 percent on February 1. In foreign exchange
markets, the trade-weighted value of the dollar in terms of the other G-10 currencies has
declined somewhat on balance over the intermeeting period.
Growth of M2 remained sluggish in December and January; expansion of M3
picked up in January from the very slow
pace of recent months. For the year 1990,
M2 and M3 expanded at rates in the lower
portions of the Committee's ranges for the
year. Expansion of total domestic nonfinancial debt appears to have been near the midpoint of its monitoring range for the year.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability, promote a resumption of sustainable growth in output, and
contribute to an improved pattern of international transactions. In furtherance of these
objectives, the Committee at this meeting
established ranges for growth of M2 and M3
of 2Vi to 6V2 percent and 1 to 5 percent,
respectively, measured from the fourth quarter of 1990 to the fourth quarter of 1991. The
monitoring range for growth of total domestic nonfinancial debt was set at AV2 to
8V2 percent for the year. With regard to M3,
the Committee anticipated that the ongoing
restructuring of thrift depository institutions
would continue to depress its growth relative
to spending and total credit. The behavior of
the monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their velocities, and developments in the economy
and financial markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Depending upon progress
toward price stability, trends in economic
activity, the behavior of the monetary aggregates, and developments in foreign exchange
and domestic financial markets, slightly
greater reserve restraint might or somewhat
lesser reserve restraint would be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be consistent with growth of both M2 and M3 over
the period from December through March at
annual rates of about 3Vi to 4 percent.
Votes for the paragraph on short-run policy implementation: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Keehn,
Kelley, LaWare, Mullins, Parry, and Ms.
Seger. Votes against this action: None.
2. Agreement to "Warehouse"
Foreign Currencies
At its meeting on March 27, 1990, the
Committee approved an increase, if requested by the Treasury, from $10 billion to $15 billion in the amount of
eligible foreign currencies that the System would be prepared to "warehouse"
for the Treasury and the Exchange Stabilization Fund (ESF). The purpose of
the warehousing facility is to supplement the resources of the Treasury and
the ESF for financing their purchases of
foreign currencies. System holdings of
foreign currencies under the facility had
risen to $9.0 billion, based on acquisition costs, in March 1990, but subsequent ESF repayments had reduced the
total to $4.5 billion by November 1,
1990.
At this meeting, the Committee decided to reduce the limit to $10.0 billion. Such a limit would provide an adequate cushion of unused capacity and
thus maintain operational flexibility to
respond on short notice to unanticipated
developments.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Keehn,
Kelley, LaWare, Mullins, Parry, and Ms.
Seger. Votes against this action: None.
FOMC Policy Actions
Meeting Held on
March 26, 1991
Domestic Policy Directive
The information reviewed at this meeting suggested that economic activity had
weakened further in the opening months
of the year. Production cutbacks were
evident in a wide range of industries,
and private payrolls had fallen markedly, especially in the goods-producing
sector. On the positive side, consumer
confidence had rebounded sharply since
the cease-fire in the Persian Gulf, retail
sales and housing starts had strengthened recently, and exports had continued to expand. Broad measures of prices
had slowed or contracted in January and
February, but excluding energy and food
prices, increases in those measures were
higher than in previous months. Wage
increases had moderated over the past
several months.
Total nonfarm payroll employment
fell sharply further in February. The
decline was widespread across industries but was particularly pronounced in
the durable goods segment of manufacturing. Construction employment edged
up in February after a steep drop in
January, when the weather was unusually adverse. The only major industry to
post a notable job increase was health
services. The civilian unemployment
rate rose to 6.5 percent in February.
Industrial output declined markedly
again in February, with cutbacks evident
in a wide range of industries. Production
of motor vehicles and parts slackened
after being about unchanged on balance
over the previous two months; output of
other final products continued to fall in
February, with the exception of computer equipment, which advanced for a
second month. Capacity utilization in
most major industries fell further in February; in manufacturing, operating rates
1 13
were substantially below their 1989
highs.
Shipments of nondefense capital
goods increased in February, boosted by
a sizable advance in shipments of aircraft and parts; categories other than
aircraft were down. New orders for business equipment suggested that spending
on such goods would change little in
coming months. Nonresidential construction put-in-place edged up in January from a downward-revised level for
December but remained below its weak
average for the fourth quarter. Available
data on contracts, permits, and office
vacancy rates pointed to considerable
softness in nonresidential construction
activity in coming months. Manufacturing and trade inventories rose considerably in January after little net change in
the fourth quarter. With shipments and
sales down sharply around the turn of
the year, the ratio of inventories to sales
in manufacturing and trade continued to
rise in January.
After declining considerably in previous months, retail sales turned up in
February. Sales at general merchandise,
apparel, and furniture outlets jumped in
February after posting sizable declines
over the preceding few months, and purchases of automobiles and light trucks
picked up from the very low sales pace
in January. Consumer sentiment appeared to have rebounded sharply in
early March from the low levels reached
after Iraq's invasion of Kuwait. In February, housing starts more than retraced
a sharp January decline but were still at
a low level; in particular, multifamily
construction activity remained very
weak. Available data and anecdotal
reports indicated that lower home prices
and mortgage rates were stimulating
some consumer interest in purchasing
homes.
The nominal U.S. merchandise trade
deficit increased slightly from Decem-
114 78th Annual Report, 1991
ber to January but was considerably below its average rate in the fourth quarter.
The value of exports picked up in January from the strong fourth-quarter level;
the value of imports declined considerably, mostly reflecting a drop in the
price of imported oil. Among the major
foreign industrial countries, economic
activity in the fourth quarter of 1990
expanded more slowly in Germany and
Japan, though there had been some tentative indications of a pickup in growth
early this year in both countries. By
contrast, some weakening in activity
apparently had occurred in several other
major industrial countries.
Among major components of broad
measures of inflation for January and
February, food prices rose more slowly
or declined on balance and energy prices
fell substantially further; however,
prices of items other than food and
energy rose more rapidly than in preceding months. At the producer level, this
pickup reflected in part large increases
in prices of motor vehicles. At the consumer level, increases in federal excise
taxes on some items and an unusual
bunching of price increases at the beginning of the year had boosted prices of
nonfood, non-energy goods and services; as a result, the percent change
in these prices over the twelve months
ended in February was considerably
above that for the previous twelve
months. Average hourly earnings of production or supervisory workers were little changed over January and February;
for the twelve months ended in February, these earnings had increased at a
slower pace than in the comparable
year-earlier period.
At its meeting on February 5-6, the
Committee adopted a directive that
called for maintaining the existing degree of pressure on reserve positions but
for giving special weight to potential
developments that might require some
easing during the intermeeting period.
To reflect the tilt toward easing, the
directive indicated that somewhat lesser
reserve restraint would be acceptable in
the intermeeting period, or slightly
greater reserve restraint might be acceptable, depending upon progress toward
price stability, trends in economic activity, 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 both M2 and M3 at annual
rates of around 3J/2 to 4 percent over the
period from December through March.
After the Committee meeting, open
market operations initially were directed
at maintaining the existing degree of
pressure on reserve positions; subsequently, in early March, in response to
information suggesting that economic
activity had continued to decline
through February, pressures on reserve
positions were eased slightly. Adjustment plus seasonal borrowing tended to
run at appreciably higher levels than
expected over the intermeeting period;
this seemed to reflect in part a greater
willingness of banks to seek discountwindow credit when conditions tightened in the federal funds market. In the
early part of the intermeeting period,
federal funds averaged a bit above
6lA percent, but by the time of the
March meeting the rate had dropped to
about 6 percent. The federal funds rate
was less volatile around its average
level; this evidently reflected not only
the change in attitudes toward use of the
window but also the greater experience
of banks in operating under the lower
reserve requirement ratios put in place
late last year and the rebound of required reserve balances from their
seasonal low in February.
Other short-term interest rates had
declined slightly since the Committee
FOMC Policy Actions
meeting on February 5-6; Treasury bill
rates dropped by less than rates on private instruments. In longer-term markets, rates on Treasury bonds had risen
appreciably while rates on high-grade
bonds had changed little and those on
lower-rated debt had fallen substantially.
The narrowing in spreads of private over
Treasury rates appeared to stem primarily from investor assessments of improved prospects for a recovery in U.S.
economic activity and in business earnings and thus for reduced strains on
borrowers. Stock prices moved up considerably on balance over the intermeeting period.
The trade-weighted value of the dollar in terms of the other G-10 currencies
increased very sharply over the intermeeting period. In addition to optimism
over the prospects for the U.S. economy
in the aftermath of the Persian Gulf war,
there was a growing perception by market participants that economic activity
in the major trade partners of the United
States was growing more slowly or
declining and that in consequence interest rate spreads were likely to move in
favor of dollar assets. Political difficulties in the Soviet Union also appeared to
affect the German mark adversely.
At least partly in response to earlier
declines in interest rates, growth of M2
and M3 strengthened substantially in
February, and partial data suggested appreciable further growth in March. Such
growth, which was faster than the Committee had anticipated, brought M2 up
to the middle portion of its annual range
and put M3 near the upper end of its
range. Most of the acceleration in M2
reflected rapid expansion in its liquid
retail deposit instruments. Offering rates
on these accounts had responded in typically sluggish fashion to declines in
market interest rates in recent months,
and the opportunity costs associated
with holding such deposits had nar
115
rowed accordingly. The strength in M3
reflected not only the faster growth of
M2 but also in part the efforts of some
depository institutions, in the wake of
the elimination of the reserve requirement on nontransaction accounts, to
replace federal funds and Eurodollar
borrowings with funds raised through
domestic issuance of large certificates of
deposit.
The staff projection prepared for this
meeting pointed to a turnaround in the
economy in coming months. While further declines in activity were likely in
the very near term, the rebound in business and consumer confidence following the declaration of a cease-fire in the
Persian Gulf, the positive effects of
lower oil prices on household purchasing power and of earlier declines in interest rates on housing demand, and the
additional gains expected in exports
were likely to foster an upturn in the
economy before very long. Subsequently, increases in business orders and
sales could lead to a further pickup in
production, given generally lean inventories and, with some lag, to a rise in
business spending for investment goods.
On the other hand, the reduced availability of credit and the effects of the overhang of commercial structures on commercial construction activity, along with
a moderately restrictive fiscal policy,
were expected to continue to exert some
restraint on domestic demand. Against
the background of lower oil prices and
some added slack in resource utilization,
the staff projected a slowing in the pace
of increases in prices and labor costs in
coming quarters.
In the Committee's discussion of the
economic outlook, members saw improving prospects for a recovery in business activity some time in the months
ahead, especially in light of the sharp
rebound in consumer and business sentiment since the cease-fire in the Persian
116 78th Annual Report, 1991
Gulf war. A variety of financial indicators, including the performance of the
stock and bond markets and the foreign
exchange markets, along with faster
monetary growth suggested both that an
upturn in economic activity was widely
expected and that liquidity had been
made available to support it. Thus far,
however, the surge in consumer confidence was not accompanied by appreciable evidence of stronger economic
activity, though the February data in two
key areas, retail sales and housing starts,
were positive after a period of substantial weakness. In the view of many
members, the anticipated upswing in
economic activity might be relatively
sluggish, at least in the early stages of
the recovery. Consumers and businesses
probably would remain relatively cautious in the context of continuing concerns about employment opportunities
as well as heavy debt burdens and tight
constraints on credit availability; in
addition, confidence was vulnerable to
further difficulties in thefinancialsector.
Indeed, there was some risk that the
recession could deepen considerably
further, but on balance the conditions
seemed to be in place for a turnaround
in coming months. With regard to the
outlook for inflation, members expressed disappointment about the lack
of progress in reducing its underlying
rate; however, they remained optimistic
that reduced pressures in markets for
output as well as for key inputs, indications of some moderation in wage
increases, a firmer dollar, and weaker
commodity prices all pointed to some
subsidence in inflation over coming
quarters. The slower average rate of
money growth over the course of recent
years suggested a monetary policy that
had for some time been consistent with
a gradual diminution in inflation.
In their reports on developments
around the country, members noted that
their contacts indicated a sharp rebound
in business sentiment since the last
Committee meeting, mirroring the
marked increase of consumer confidence as the Persian Gulf war drew to a
successful close. The effects of this
change in attitudes by both producers
and consumers were not yet evident in
many statistical measures of economic
activity, except perhaps in the housing sector and retail sales. Across the
nation, regional economic activity remained uneven; it was still declining in
some areas, albeit with increasing signs
that it might be stabilizing, and appeared
to have bottomed out or strengthened a
little in other parts of the country. Manufacturing activity in particular remained
depressed in many areas, notably those
that were dominated by the production
of motor vehicles and related parts.
Members commented that many businesses, especially in the construction
industry, were continuing to report difficulties in obtaining financing, but both
loan demand and the availability of
financing showed signs of improvement
in some areas.
In their review of developments in
key sectors of the economy, members
emphasized that the timing and strength
of the recovery would depend importantly on how quickly and to what extent the rebound in consumer confidence
was translated into increased consumer
spending. The performance of the consumer durables sector, notably autos,
was a key element in the outlook; while
expenditures on durable goods did not
appear to have strengthened thus far,
developments that might help to stimulate such spending included greater capital gains realized from sales of existing
homes and more demand for household
durables stemming from a possible
pickup in the construction of new
homes. Members also reported that
automobile dealers had become more
FOMC Policy Actions
optimistic in many areas. However,
many members believed that consumer
expenditures were likely to be restrained
by a combination of negative factors
that included concerns about job security and debt burdens. Moreover, the
fiscal problems of state and local governments were tending to erode consumer confidence in some parts of the
country, and associated fiscal restraint
measures would limit the growth in disposable incomes in those areas.
With regard to the outlook for business investment spending, stronger consumer expenditures in coming months
should induce more business spending
for inventories and, with some lag, for
new equipment, especially in light of the
recent improvement in business confidence. On the negative side, if a recovery in consumer spending failed to
materialize, the upturn in business confidence might well reverse. Such a development could foster a sharp drop in
business capital appropriations that in
turn would deepen and extend the recession. With regard to construction activity, members commented that problems
of overcapacity were likely to limit new
nonresidential construction for an extended period in many areas. On the
other hand, signs of renewed buyer
interest in housing were widespread, and
indeed developments in this sector of
the economy were seen by some members as the most encouraging indication
of a prospective economic recovery.
Some concern was expressed regarding
the possibility that persisting constraints
on the availability of financing to homebuilders might continue to inhibit homebuilding activity, but given the expected
strengthening in the overall economy
and the already improving capital positions of many banking institutions, a
degree of optimism seemed warranted
that such financing might become more
readily obtainable in the months ahead.
\ 17
In the view of many members, the
external sector of the economy was
likely to make only a small contribution
to the domestic expansion in coming
quarters. While continuing growth in
exports was helping to offset some of
the weakness in manufacturing, some
members referred to the possibility that
further expansion in world demand for
U.S. exports might be curtailed by
slower growth abroad related to political
uncertainties and economic developments in several nations; a partial offset
was the potential for large reconstruction expenditures by Kuwait. The recent
appreciation of the dollar also would
tend to inhibit net exports over time.
Turning to the outlook for inflation, a
number of members emphasized that recent increases in producer and consumer
prices, excluding their food and energy
components, were a disturbing development even though transitory factors
helped to account for much of those
increases. Concerns about inflation
seemed to be echoed in financial markets, judging from the recent rise in
long-term interest rates. At the same
time, however, increases in labor compensation had continued to trend down,
with relatively high unemployment levels contributing to much reduced pressures on wages in many local areas. In
circumstances characterized by strong
competitive conditions in most industries and thus widespread pressures on
prices and profit margins, many business firms continued to seek ways to
limit their labor costs. In this connection, members observed that efforts to
hold down employment levels were
likely to result in some further increases
in unemployment even after a recovery
got under way. The appreciation of the
dollar in recent months would tend with
some lag to moderate inflation pressures
over coming quarters. On balance, the
members remained optimistic about the
118 78th Annual Report, 1991
prospects for appreciable reductions in
the core rate of inflation, given their
expectations of some continuing slack
in resource use and of monetary expansion at a pace within the Committee's
ranges for the year.
In the Committee's discussion of
policy for the intermeeting period ahead,
all of the members supported a proposal
to maintain an unchanged degree of
pressure on reserve positions. The System's policy actions over the course of
recent months, including two reductions
in the discount rate, represented substantial easing on a cumulative basis and
most probably had positioned monetary
policy to contribute to a satisfactory recovery in business activity. Changing
economic and financial conditions
could, of course, lead to a reassessment,
but for now a steady policy course
seemed indicated as the stimulative
effects of earlier policy actions, the drop
in oil prices, and the rebound in confidence worked their way through the
economy. Some members observed that
the most likely direction of the next
policy move was not clear at this point
and that caution was needed before any
action was taken. Prevailing uncertainties suggesting that further easing could
not be ruled out included the possibility
that consumer spending would not
strengthen materially and that business
capital spending would continue to
weaken. However, if the economy was
indeed near its recession trough, additional easing would not be necessary
and such a move might add to inflationary pressures later. On the other
hand, while a firming of policy clearly
would be premature at this point, a number of members commented that the
Committee should be alert to the potential need to tighten reserve conditions
promptly if emerging economic and
financial conditions, including the behavior of the monetary aggregates,
threatened progress toward price
stability.
Many of the members commented
that in current economic and financial
circumstances the strengthening in M2
growth in February and March was a
welcome development following an extended period of limited expansion. The
faster growth tended to support expectations of a near-term recovery in economic activity. It also might be indicative of some rebound of public
confidence in depository institutions.
The growth of M2 for the year to date
was near the middle of the Committee's
annual range, but if the most recent rate
of M2 growth was to continue for some
time, this might signal the need to
tighten reserve conditions to forestall a
potential intensification of inflationary
pressures. However, according to a staff
analysis prepared for this meeting, monetary growth was likely to moderate
somewhat over the second quarter as the
effects of earlier declines in market
interest rates on opportunity costs and
desired money holdings tended to
dissipate. On the assumption of an unchanged degree of pressure on reserve
positions, the staff projected the cumulative expansion of M2 to be only slightly
above the midpoint of the Committee's
range at midyear.
Members expressed a range of views
regarding possible intermeeting adjustments to the degree of reserve pressures,
but a majority preferred—and all could
accept—a directive that did not contain
a bias toward tightening or easing. A
symmetric directive represented a
change from previous directives that had
been tilted toward easing since mid1990, and it was consistent with an assessment that the risks to the economy
had shifted in recent weeks and were
now more evenly balanced. Further declines in economic activity would not be
surprising—nor should they necessarily
FOMC Policy Actions
be seen as calling for additional ease,
given the lags in policy effects. Under
current circumstances, policy adjustments should be made only in the event
of particularly conclusive evidence,
which might include a significant deviation in monetary growth from current
expectations, that the recession might be
deeper or the rebound less robust than
anticipated. Other members expressed a
preference for retaining a directive that
was biased toward possible easing.
Some of these members believed that,
despite the improved prospects for a recovery, there were still marked risks of
a prolonged recession and of a weak
upturn, and in these circumstances
the Committee should react relatively
promptly to indications that the economy was not moving toward a turnaround. One member expressed a slight
preference for biasing the directive
toward restraint. In this view, the possibility of a continuing or even a deepening recession could not be ruled out, but
the greater risks were in the direction of
too much ease and of persisting or
increasing inflation; consequently, the
directive should envision any easing as
a remote prospect.
At this meeting, the interaction between changes in the discount rate, as
approved by the Board of Governors,
and open market operations, as implemented under the current operating procedures and directives of the Committee, also was discussed. The principal
issue related to the extent to which
changes in the discount rate should show
through to the federal funds rate that
would be expected in the implementation of open market operations. In recent
years, changes in the discount rate usually had been allowed to pass through
automatically to the federal funds rate;
there had been some exceptions involving instances where only partial passthroughs had been permitted and where
119
the change in the discount rate had been
intended to conform the latter to movements that had already occurred in the
federal funds rate. In general, however,
both rates had tended to move together
over time, and appropriately so, as adjustments to both policy instruments are
made in the context of the same economic and financial developments.
Members agreed that in general the
existing practice should be continued,
but that consultation among members
of the Committee would be particularly
appropriate in circumstances in which
changes in the discount rate perhaps
should not be permitted to show through
entirely to market rates, or in which
their showing through would result in
quite sizable changes in money market
rates in the period between meetings.
At the conclusion of the Committee's
discussion, all of the members indicated
that they favored a directive that called
for maintaining the existing degree of
pressure on reserve positions. The members also noted that they preferred or
could accept a directive that did not
include a presumption about the likely
direction of any intermeeting adjustments in policy. Accordingly, the Committee decided that somewhat greater
reserve restraint or somewhat lesser reserve restraint might be acceptable during the period ahead depending on
progress toward price stability, trends in
economic activity, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. The reserve conditions
contemplated at this meeting were expected to be consistent with some reduction in the growth of M2 and M3 from
their recent pace to annual rates of
around 5V2 and 3V2 percent respectively
over the three-month period from March
through June.
At the conclusion of the meeting, the
following domestic policy directive was
120 78th Annual Report, 1991
issued to the Federal Reserve Bank of
New York:
The information reviewed at this meeting
suggests that economic activity weakened
further in the opening months of 1991. In
February, total nonfarm payroll employment
fell sharply further, especially in manufacturing, and the civilian unemployment rate rose
to 6.5 percent. Industrial output also declined
markedly again in February, with cutbacks
evident in a wide range of industries. Advance indicators point to further weakness in
business fixed investment in coming months,
notably in nonresidential construction. On
the other hand, after declining considerably
in previous months, retail sales turned up in
February; consumer sentiment appears to
have rebounded sharply in recent weeks.
Housing starts jumped in February, retracing
a sizable decline in January but remaining at
a low level. The nominal U.S. merchandise
trade deficit increased somewhat in January
but was considerably below its average rate
in the fourth quarter. Energy prices fell substantially further in January and February,
but prices of other consumer goods and services rose more rapidly than in preceding
months. Wage increases have moderated in
recent months.
Short-term interest rates have declined
slightly since the Committee meeting on
February 5-6. In longer-term markets, rates
on Treasury bonds have risen appreciably,
owing at least in part to heightened expectations of a recovery in U.S. economic activity.
Risk premiums on corporate debt instruments have declined, and stock prices have
moved up considerably on balance. The
trade-weighted value of the dollar in terms
of the other G-10 currencies increased very
sharply over the intermeeting period.
Growth of M2 and M3 strengthened substantially in February, reflecting rapid expansion in liquid retail deposits; partial data
suggest appreciable further growth in March.
The Federal Open Market Committee
seeks monetary andfinancialconditions that
will foster price stability, promote a resumption of sustainable growth in output, 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 2Vi to 6V2 percent and 1 to
5 percent, respectively, measured from the
fourth quarter of 1990 to the fourth quarter
of 1991. The monitoring range for growth of
total domestic nonfinancial debt was set at
AV2 to 8V2 percent for the year. With regard
to M3, the Committee anticipated that the
ongoing restructuring of thrift depository
institutions would continue to depress its
growth relative to spending and total credit.
The behavior of the monetary aggregates
will continue to be evaluated in the light of
progress toward price level stability, movements in their velocities, and developments
in the economy andfinancialmarkets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Depending upon progress
toward price stability, trends in economic
activity, the behavior of the monetary aggregates, and developments in foreign exchange
and domestic financial markets, somewhat
greater reserve restraint or somewhat 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 5 V2 and 3V2 percent,
respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Keehn,
Kelley, LaWare, Mullins, and Parry. Votes
against this action: None.
Meeting Held on
May 14,1991
Domestic Policy Directive
The economic information reviewed at
this meeting was mixed, but on balance
it suggested that business activity might
be in the process of stabilizing after
declining in the fourth and first quarters.
Retail sales were little changed in April,
and housing markets apparently
strengthened in many areas; however,
business fixed investment remained
weak, and some liquidation of inventories seemed to be continuing. Production held steady in April. Nonfarm payroll employment continued to decline
FOMC Policy Actions
but by much less than in previous
months. Broad measures of prices and
wages pointed to moderating inflation
pressures, although a number of special
factors tended to obscure underlying
inflation trends.
Total nonfarm payroll employment
fell further in April, but the reduction
was substantially less than the declines
in the latter part of 1990 and the early
months of 1991. The job losses included
much smaller decreases in manufacturing and construction; employment in
wholesale and retail trade also continued to slide, and the loss more than
offset a further gain at service establishments. The civilian unemployment
rate declined somewhat in April to
6.6 percent.
After dropping sharply from October
through March, industrial production
was about unchanged in April. An upturn in the production of motor vehicles
provided an important boost to industrial activity, and output of other consumer durable goods also edged up.
These gains offset further declines in
the production of consumer nondurable
goods and business equipment. Industrial materials, while displaying a mixed
pattern, continued to decline as a group.
Capacity utilization rates generally fell
further in April, and operating rates for
most industry groups were at their lowest point in the current recession.
Real business fixed investment fell
sharply in the first quarter, with outlays
for both equipment and structures decreasing substantially. The plunge in
expenditures for equipment included
large declines in spending for computers, motor vehicles, and many types of
industrial equipment; in contrast, outlays for aircraft were markedly higher.
Recent data on orders received by domestic manufacturers pointed to additional cutbacks in spending for most
types of equipment. The sizable reduc
1 21
tion in first-quarter expenditures for
nonresidential structures followed an
even larger decline in the fourth quarter.
Forward-looking indicators of nonresidential construction suggested continuing weakness. Nonfarm business inventories fell substantially further in the
first quarter, largely as a result of continuing liquidation of stocks of motor
vehicles. In March, housing starts lost
part of their sharp February gain. However, more recent anecdotal reports and
surveys of homebuilders suggested that
reduced mortgage rates were continuing
to stimulate consumer interest in purchasing homes.
Retail sales, which had risen substantially in February after sizable declines
in previous months, were now indicated
to have increased somewhat further in
March and to have changed little in
April. The improvement in retail sales
was led by the durable goods category.
Unit sales of motor vehicles rose in
March but subsequently softened again
in April. After rebounding earlier, consumer sentiment was reported to have
declined slightly in April.
Producer and consumer prices
changed little in March and April, partly
because of some additional reduction in
energy prices. Excluding their food and
energy components, both producer and
consumer prices were up considerably
less in the latest two months than in
previous months. Apparently reflecting
an increase in the minimum wage, average hourly earnings rose at a faster rate
in April than in earlier months of the
year. In the first quarter, hourly compensation as measured by the employment
cost index was boosted by special factors that included an increase in the
wage bases for social security and medicare taxes.
The nominal U.S. merchandise trade
deficit narrowed in February, and for
January-February combined the deficit
122 78th Annual Report, 1991
was considerably below its average rate
in the fourth quarter. The improvement
reflected a significant decline in the
average price of oil imports, a lower
volume of non-oil imports, and further
expansion in the quantity of exports. In
the first quarter, economic activity appeared to have continued to grow at a
sluggish pace in the major foreign industrial nations as a group.
At its meeting on March 26, 1991, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that contained no presumption
regarding the likely direction of possible
intermeeting adjustments. Accordingly,
the directive indicated that somewhat
more or somewhat less pressure on
reserve positions might be appropriate
during the intermeeting period depending on progress toward price stability,
trends in economic activity, 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 some reduction in
the growth of M2 and M3 from accelerated rates in previous months to annual
rates of about 5Vi and 3V2 percent
respectively over the three-month period from March through June.
For much of the period after the Committee meeting, open market operations
were directed toward maintaining the
existing degree of pressure on reserve
positions. On April 30, in response to
indications of continuing weakness in
the economy and in the context of abating inflation pressures, the discount rate
was reduced from 6 to 5Vi percent and
part of this decline was allowed to show
through to the federal funds rate. Adjustment plus seasonal borrowing averaged
a bit above $150 million over the intermeeting period, close to expected levels.
During this period, two technical in
creases were made to assumed levels of
borrowing to reflect a normal upswing
in seasonal credit. Federal funds traded
at an average rate just below 6 percent
until late April; the rate was under
downward pressure at times from market expectations of some further easing
in monetary policy and from unanticipated reserve surpluses. After the announcement of the reduction in the
discount rate on April 30, federal funds
traded in a range around 53/4 percent.
Most short-term interest rates declined somewhat more than the federal
funds rate over the intermeeting period,
apparently reflecting reactions to indications of continued weakness in the economy as well as the easing in reserve
conditions. Banks reduced their prime
rate from 9 to 8x/2 percent in early May
after the easing of monetary policy. In
long-term debt markets, yields on Treasury bonds were little changed on balance over the period as market participants appeared to focus increasingly on
the prospects for very large Treasury
financing needs. In private-sector bond
markets, rates edged lower and risk
premia fell further after declining
sharply in February and March. Major
stock price indexes retreated from
record levels reached during April but
still rose on balance over the period.
Prices of bank debt and equities outpaced the broader indexes, in part because bank earnings for the first quarter
were not as poor as many investors had
feared.
In foreign exchange markets, the dollar tended to weaken in reaction to the
easing of U.S. monetary policy in late
April and the release of data that failed
to confirm market expectations of a
quick recovery in U.S. economic activity after the end of the Persian Gulf war.
However, some decline in short-term interest rates abroad and reactions to political developments in Germany and the
FOMC Policy Actions
Soviet Union limited the downward
pressure on the dollar. On balance, the
dollar was little changed over the period
in terms of the other G-10 currencies,
and at the time of this meeting it was
at a level well above its lows of midFebruary.
After accelerating to a relatively rapid
pace in February and March, growth of
M2 slowed appreciably in April. The
slowing was somewhat greater than had
been anticipated and appeared to be related in part to a relatively small buildup
in household deposit balances associated with a falloff in income tax payments. The expansion of M3, which
already had moderated in March, stalled
in April. Apart from the effect of
reduced M2 growth, M3 was influenced
by a runoff of large time deposits associated with contracting credit at depository institutions. For the year through
April, M2 expanded at a rate close to the
midpoint of the Committee's annual
range; M3 grew at a pace in the upper
half of the Committee's range, as the
elimination of reserve requirements on
nontransaction accounts induced some
foreign banks to shift funding into the
U.S. CD market.
The staff projection prepared for this
meeting suggested that a recovery in
economic activity was imminent and
would be fully under way by the summer months; the expansion was projected to continue through 1992. In the
context of moderate growth in consumer
spending, the recovery would be stimulated by an upturn in homebuilding
and a swing in coming months from
decumulation to accumulation of inventories. Capital expenditures were expected to strengthen over time as sales
trends improved. On balance, however,
the projection pointed to a recovery that
was less robust than most of those experienced in previous postwar cycles.
Among the factors that would tend to
123
inhibit the recovery were the effect of
unoccupied nonresidential structures on
construction activity, the absence of
further significant impetus from net
exports, and the prospect of some continued constraint on the availability of
credit. Federal fiscal policy was expected to remain moderately restrictive,
and efforts by states and localities to
cope with budgetary imbalances also
promised to exert some restraint on domestic demand. Against the background
of some persisting slack in labor and
product markets, the staff anticipated
that the underlying rate of inflation
would trend down in coming quarters.
In the Committee's discussion of the
economic situation and outlook, members commented that current business
indicators continued to provide mixed
signals of the prospects for the economy
but that a variety of developments appeared to have laid the groundwork for
a recovery. Indeed, in the view of a
number of members, the economy might
well be close to its recession trough.
Consumer spending, while disappointing to many business firms, appeared to
have been better maintained in recent
months than earlier reports had suggested, and demand for housing clearly
had picked up across the nation. Overall
spending had exceeded production by a
considerable margin since the fall of
1990, and at some point the liquidation
of inventories would end and a pickup
in production would be needed to satisfy
ongoing demand. On the financial side,
the stock market remained strong;
households and business firms were
making progress in rebuilding their
balance sheets; and the overall condition
of the banking system appeared to be
improving despite the continuing difficulties of a number of individual institutions. Negative factors included indications of relatively depressed business
sentiment; business capital spending
124 78th Annual Report, 1991
remained weak and members were concerned that additional retrenchment in
business expenditures could develop,
possibly induced by further disappointment over the level of consumer spending, that would deepen and prolong the
recession. Consumer confidence had
receded after its surge at the end of the
Persian Gulf war. Consumer and business attitudes were seen as a critical
factor bearing on the prospective performance of the economy.
Despite the uncertainties, the members generally viewed a business recovery in the months ahead as a reasonable
expectation. At the same time, while
acknowledging the unpredictability of
the economy's momentum once the recovery got under way, many questioned
the potential strength of the anticipated
expansion. Their assessment of current
conditions did not point to major sources
of stimulus to the economy, aside perhaps from residential housing. Some
members also observed that the rebuilding of balance sheets, to the extent that
it continued, might temper the initial
strength of the recovery though it would
have obviously favorable implications
for the sustainability of the recovery
over time. With regard to inflation
trends, members commented that on the
whole recent price and wage developments were encouraging and provided a
firmer basis than earlier for projections
of appreciable progress in reducing the
core rate of inflation over the next several quarters.
Reports from around the country indicated that business conditions were still
uneven. Economic activity appeared to
have weakened somewhat further in
some regions over the course of recent
months but had changed little or shown
modest gains in other parts of the nation. Relatively weak economic conditions had limited the tax revenues of
numerous state and local governments,
including many major cities, and the
imposition or the prospect of higher
taxes along with efforts to cut services
were having an unsettling influence on
business and consumer confidence in
many areas. More generally, fiscal developments, including trends in federal
spending, were expected to have a retarding effect on the nation's economy
over the balance of the year and in 1992.
Many of the members observed that
the consumer sector might well remain
relatively sluggish in the months ahead
as consumer expenditures continued to
be restrained by lagging growth in disposable incomes and by concerns about
employment prospects, debt burdens,
and the health of a number of financial
institutions. With regard to the prospects
for business capital spending, members
continued to anticipate that significant
strengthening would lag an improvement in consumer spending. In this connection, some commented that unless
tangible evidence of stronger consumer
spending began to emerge fairly soon,
already gloomy business attitudes would
be shaken further and could lead to an
additional cutback in business capital
expenditures. For now, the weakness in
investment spending appeared to reflect
in large measure a stretching out of major capital projects rather than widespread cancellations. The large issuance
of new equity and long-term debt by
business firms was being used at this
point mainly to shore up balance sheets
rather than to finance capital expenditures, but these activities implied that
business firms would be in an improved
position to finance more investment
spending later in response to a pickup in
the demand for their products and an
ongoing need to modernize production
facilities for competitive reasons. In any
event, commercial construction activity
was likely to remain depressed for an
extended period until a severe over-
FOMC Policy Actions
capacity in office space and other facilities in many parts of the country could
be worked down.
Several members commented that a
turnaround in inventory investment
could play a significant role, as it had
historically, in helping to generate a
business recovery. The members recognized that a good deal of uncertainty
typically surrounded the outlook for inventories, and it seemed especially difficult to anticipate inventory behavior in
the context of still evolving business
policies aimed at much tighter inventory
controls. Nonetheless, the general liquidation of inventories was not likely to
persist, and its termination would at
the minimum remove a major retarding
influence on economic activity, should
appreciable rebuilding of inventories fail
to materialize in the near term. Indeed,
the reduction in auto dealer inventories
since late 1990 already had caused production schedules in the motor vehicles
industry to be raised substantially for
the second quarter despite still lagging
sales. A question obviously remained
regarding the prospective strength of the
buildup in business inventories once
there were relatively firm indications of
a recovery in final demand from recession levels. In one view, a pickup in
inventory investment was likely to be a
key source of expansion in the economy.
A differing view suggested a relatively
limited role for inventories in buttressing an expansion in light of the now
widespread business practice of tighter
inventory management.
Housing construction also was cited
as a sector of the economy that might
make a significant contribution to a rebound in economic activity. Reports
from around the country already indicated a marked revival in buyer interest,
abetted by reduced mortgage rates and
lower home prices in many areas. Those
developments had greatly enhanced the
125
affordability of houses. The availability
of financing to many home builders
remained subject to some uncertainty,
but while lending institutions would
probably apply stricter credit standards
than in earlier years, the improving
financial condition of these lenders
should induce them in the context of
strengthening housing markets generally
to provide the financing that would be
needed to translate increased home sales
into more home construction.
With regard to the outlook for inflation, members indicated that they were
encouraged by recent price and wage
developments. Some observed that
greater progress had been made in recent months than they had anticipated
earlier, and many commented that more
progress in reducing the core rate of
inflation was a likely prospect over the
next several quarters. In this connection,
members reported that competitive pressures remained strong and that many
business firms found it difficult to
sustain price increases. Moreover, the
prices paid by business firms for raw
materials had tended to hold in a narrow
range, and many business contacts indicated that they did not anticipate much
change in such prices during the months
ahead. More generally, the members
continued to express confidence that the
ongoing effects of earlier monetary
policy actions and reduced monetary
growth over an extended period, together with the slack that had emerged
in labor and product markets, would
result over time in a lasting downward
adjustment in the core rate of inflation.
In addition, the appreciation of the dollar in foreign exchange markets would
tend with some lag to exert a favorable
restraining effect on prices. A number of
members cautioned, however, that a significant reduction in the core rate of
inflation was not yet assured, and some
observed that the failure of long-term
126 78th Annual Report, 1991
bond yields to adjust more fully to recessionary economic conditions and to
the substantial cumulative decline in
short-term interest rates over the course
of recent quarters might well be indicative of continued and still considerable
inflationary expectations on the part of
the public.
In the Committee's discussion of a
desirable policy for the intermeeting
period ahead, all of the members indicated their support of a proposal to
maintain an unchanged degree of pressure on reserve positions. Most also preferred to retain the current instruction in
the directive that did not bias possible
intermeeting adjustments toward ease or
toward restraint. Monetary policy appeared to be properly positioned at this
point to help implement the Committee's objectives in that it reflected an
appropriate balancing of the risks of an
overly stimulative policy that would
threaten progress against inflation versus the risks of a deepening recession or
an overly delayed recovery. A number
of members commented that some further deterioration in economic activity
could not be ruled out, and some emphasized that the costs of a substantial shortfall in economic activity from current
projections would be much greater than
those of a markedly faster expansion
than the members currently expected,
since present levels of slack in labor and
other resource use would tend to limit
the price consequences of a period of
robust economic growth. However, the
System's earlier easing actions, including the most recent reduction in the discount rate in late April and some associated easing in reserve conditions, had
provided a good deal of insurance
against cumulative further weakening in
business activity. Moreover, the System's commitment to the goal of reducing inflation argued for a cautious approach to any further easing at a time
when the economy might be close to
its recession trough. Steady progress
against inflation would foster lower interest rates in long-term debt markets
and would thus provide an added degree
of stimulus to the economy; conversely,
a resurgence in inflation would probably
induce a backup in long-term interest
rates, including mortgage rates, with adverse implications for housing markets
and the economy. Against this background, the members concluded that a
desirable policy was to take no action at
this time but to monitor carefully the
ongoing effects of the System's earlier
easing moves.
In the course of the Committee's discussion, a number of members underscored the desirability of achieving
monetary growth within the Committee's ranges for the year. According to a
staff analysis prepared for this meeting,
both M2 and M3 were likely to
strengthen over the balance of the current quarter after showing little or no
growth in April. For the quarter as a
whole, expansion of both monetary
aggregates was expected to be below the
rates projected at the time of the March
meeting, but their cumulative growth
through midyear would still be in
the middle portions of their respective
annual ranges. The members recognized
that the economy was subject to events
beyond the Committee's control, but an
appropriate rate of monetary expansion
at this stage would support the view that
policy was positioned to help prevent
substantial further weakening in business activity on the one hand while
guarding against disappointing inflation
results later on the other. Subnormal
monetary growth might be an indication
that monetary policy was still too tight,
perhaps because of the reluctance of depository institutions and other lenders to
extend credit. In that regard, it might be
especially useful in this period to scruti-
FOMC Policy Actions
nize the asset side of bank balance
sheets, notably the behavior of various
categories of loans, and other data on
debt trends in relation to typical cyclical
behavior for possible clues regarding
both the strength of credit demands and
business activity and changes in lending
practices and conditions.
Turning to possible adjustments to the
degree of reserve pressure during the
intermeeting period, all of the members
supported or could accept a symmetrical
directive in light of their current assessments of the prospects for the economy
and the behavior of the monetary aggregates. Some members emphasized that
the marked uncertainties in the current
economic situation underscored the need
for a great deal of vigilance in appraising ongoing economic developments.
Some indicated a slight preference for a
directive that was tilted toward possible
easing. These members believed that the
risks in the economy remained at least
marginally tilted toward a weaker than
projected economic performance and
that any policy adjustments in the intermeeting period were likely to be in the
direction of some easing. Should the
incoming data suggest a substantial
shortfall from expectations, monetary
policy in this view should be adjusted
promptly toward ease. In the view of a
majority of the members, however, a
symmetrical directive was warranted
because the risks to the economy were
reasonably well balanced at this point.
While incoming data on business activity might remain relatively weak over
the near term, a change in policy probably would not be called for so long as
such data did not suggest a further
cumulative decline in economic activity
but tended to confirm already available
anecdotal information and current Committee expectations.
At the conclusion of the Committee's
discussion, all of the members indicated
127
that they favored a directive that called
for maintaining the existing degree of
pressure on reserve positions. The members also noted that they preferred or
could accept a directive that did not
include a presumption about the likely
direction of any intermeeting adjustments in policy. Accordingly, the Committee decided that somewhat greater
reserve restraint or somewhat lesser
reserve restraint might be acceptable
during the period ahead depending on
progress toward price stability, trends in
economic activity, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. The reserve conditions
contemplated at this meeting were expected to be consistent with growth of
M2 and M3 at annual rates of around
4 and 2 percent respectively over the
three-month period from March through
June.
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
provides mixed signals regarding the course
of economic activity, which had weakened
appreciably further earlier in the year. Following sharp decreases in previous months,
total nonfarm payroll employment fell somewhat further in April; the civilian unemployment rate edged down to 6.6 percent. Industrial output changed little in April after
declining markedly in earlier months. Retail
sales were about unchanged in April and are
now indicated to have risen somewhat in
March. Advance indicators continue to point
to weakness in business fixed investment in
coming months. Housing starts were down
in March, partly offsetting a sizable advance
in February, but sales of new and existing
homes continued to rise. The nominal U.S.
merchandise trade deficit declined in February and its January-February rate was considerably below the average rate in the fourth
quarter. Producer and consumer prices were
little changed over March and April, partly
reflecting further reductions in energy prices.
128 78th Annual Report, 1991
Short-term interest rates have declined
since the Committee meeting on March 26,
while bond yields have changed little. The
Board of Governors approved a reduction in
the discount rate from 6 to 5Vi percent on
April 30. The trade-weighted value of the
dollar in terms of the other G-10 currencies
showed little change on balance over the
intermeeting period.
Growth of M2 and M3 weakened in April;
for the year thus far, expansion of M2 has
been at the midpoint of the Committee's
range, while growth of M3 has been in the
upper half of its range.
The Federal Open Market Committee
seeks monetary andfinancialconditions that
will foster price stability, promote a resumption of sustainable growth in output, 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 IVj. to 6V2 percent and 1 to
5 percent, respectively, measured from the
fourth quarter of 1990 to the fourth quarter
of 1991. The monitoring range for growth of
total domestic nonfinancial debt was set at
AV2 to 8^2 percent for the year. With regard
to M3, the Committee anticipated that the
ongoing restructuring of thrift depository institutions would continue to depress its
growth relative to spending and total credit.
The behavior of the monetary aggregates
will continue to be evaluated in the light of
progress toward price level stability, movements in their velocities, and developments
in the economy andfinancialmarkets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Depending upon progress
toward price stability, trends in economic
activity, the behavior of the monetary aggregates, and developments in foreign exchange
and domestic financial markets, somewhat
greater reserve restraint or somewhat 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 4 and 2 percent, respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Keehn,
Kelley, LaWare, Mullins, and Parry. Votes
against this action: None.
Meeting Held on
July 2-3, 1991
Domestic Policy Directive
The information reviewed at this meeting suggested that an upturn in economic activity had begun in recent
months. Sizable gains in consumer
spending and small increases in expenditures on residential construction appeared to be fueling a moderate rise in
domestic final demand. Although inventories were still being liquidated, data
for industrial production and labor markets indicated that output was being
stepped up to meet that demand. Excluding food and energy items, increases
in consumer prices had been small in
recent months.
Total nonfarm payroll employment
edged up in May, following nearly a
year of uninterrupted declines, and the
average workweek posted a sizable gain.
The turnaround in employment was
fairly broad-based. In manufacturing,
recalls of workers in the motor vehicles
industry more than accounted for the
overall increase, but most other manufacturing industries registered either
small job gains or greatly moderated job
losses. Employment also turned up in
the construction sector and in private
service-producing industries. The unemployment rate rose to 6.9 percent in May
but, averaged over April and May, the
unemployment rate was little changed
from its March level.
Industrial production rose in April
and May, after declining sharply earlier
in the year; the limited product data
available for June pointed toward another gain. Perhaps reflecting the pickup
in housing starts in recent months, production of construction supplies turned
up in April and May. Further advances
in assemblies of motor vehicles contributed to a slight rise in manufacturing
FOMC Policy Actions
output over the two months; in spite of
the overall increase in activity, though,
the operating rate in manufacturing
edged lower in May and remained well
below its level of a year earlier.
Real personal consumption expenditures rebounded in May from an April
decline; over the March-to-May period,
the rise in outlays outpaced gains in
personal income. In May, a sizable
increase in spending for durable goods
reflected stronger outlays for motor vehicles and higher expenditures for most
major categories of nondurable goods.
Excluding outlays for electricity associated with unusually warm weather,
spending for services increased only
modestly in May. Continuing a pattern
of gradual recovery recorded in earlier
months, housing starts rose over April
and May. In these two months, singlefamily starts strengthened further but,
with apartment vacancy rates continuing
high, multifamily construction remained
quite weak.
After declining in the first quarter of
the year, shipments of nondefense capital goods increased in both April and
May. The turnaround resulted mostly
from larger shipments of aircraft; shipments of other types of business equipment increased slightly over the two
months. Recent data on orders pointed
to some firming in the demand for business equipment. Near-record vacancy
rates for office buildings and aboveaverage vacancy rates for industrial
buildings suggested continuing weakness in nonresidential construction,
although a small increase was recorded
in April. The pace of liquidation of manufacturing and trade inventories slowed
in April from the very rapid March
rate, largely reflecting a slower rate of
reduction in stocks at auto dealers. In
May, manufacturing inventories fell
appreciably further, with drawdowns
occurring in most durable and non
129
durable categories. For most industries,
the sharp inventory corrections of recent
months along with a pickup in sales
have reduced inventory-to-sales ratios
substantially.
In April, the preliminary nominal U.S.
merchandise trade deficit widened
slightly from the revised March level;
however, the April deficit was somewhat smaller than the average for the
first quarter, which itself had registered
a sizable decrease. The value of both
exports and imports rose in April. For
exports, the increase occurred primarily
in capital goods and automotive products, but gains also were indicated for
a broad range of industrial supplies.
Increases in the value of imports were
spread among capital and consumer
goods and non-oil industrial supplies.
Recent indicators of economic activity
in the major foreign industrial countries
had been mixed; on balance, growth
seemed to have been sluggish in the
second quarter, while inflation in most
of these countries appeared to be stable
or declining.
Nonfood, nonenergy consumer prices
increased over the March through May
period at a substantially slower pace
than over the first two months of the
year. Part of the slowdown in recent
months reflected an unwinding of
large price increases that had occurred
in certain components of the index
early in the year. In May, producer
prices of finished goods firmed somewhat, largely reflecting an upturn in energy prices. Although average hourly
earnings of production or nonsupervisory workers rose at a faster rate in
April and May than in the first quarter of
the year, the increase in earnings over
the twelve months ending in May
slowed somewhat. For the twelve
months ending in March, growth in
total employer costs for compensation of private industry workers had
130 78th Annual Report, 1991
slowed from the comparable year-earlier
period.
At its meeting on May 14, 1991, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that did not contain any presumption about the likely direction of
possible intermeeting adjustments. Accordingly, the directive indicated that
somewhat more or somewhat less pressure on reserve positions might be appropriate during the intermeeting period
depending on progress toward price stability, trends in economic activity, 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 at annual rates of around
4 and 2 percent respectively over the
three-month period from March through
June.
Open market operations during the
intermeeting period were directed toward maintaining the existing degree of
pressure on reserve positions. The federal funds rate remained near 53/4 percent, while adjustment plus seasonal
borrowing tended to average a little
above assumed levels because of somewhat greater usage of adjustment credit.
Several technical changes were made to
assumed levels of borrowing to reflect
expected increases in the demand for
seasonal credit during the spring crop
planting season. Against a backdrop
of accumulating evidence that the economy was beginning to recover and
related expectations that no further
easing of monetary policy was likely in
the near term, many interest rates rose
slightly during the intermeeting period,
while most major stock price indexes
edged higher on balance.
The trade-weighted value of the dollar in terms of the other G-10 currencies
increased substantially on net over the
intermeeting period, partly in response
to news suggesting that the U.S. economy was turning upward. The dollar
rose strongly against the mark and other
European currencies, which also were
affected by political developments in
Europe.
Growth of M2 rebounded in May
from its tax-related weakness in April
but slowed again in June. Over the three
months ending with June, the expansion
of M2 fell somewhat short of Committee expectations. Inflows to the liquid
retail deposit components of M2 were
strong in the latest two months, but
small time deposits declined at an accelerating rate; depositors evidently responded to less attractive offering rates
on time deposits by shifting some funds
not only into liquid money stock components but also into bond and stock
mutual funds and other capital market
investments not included in this aggregate. M3 fell slightly in June and had
grown little since February, reflecting
continued shrinkage of the thrift industry and the weakness in bank loan
demand and therefore in overall bank
funding needs. For the year thus far,
expansion of M2 and M3 had been in
the middle portion of the Committee's
ranges.
The staff projection prepared for this
meeting suggested that economic activity was beginning to recover from the
recession and that moderate growth in
final demand accompanied by a shift in
business inventories from substantial
liquidation to modest accumulation
would lead to considerable growth over
the second half of the year. The stimulus
from the inventory swing was projected
to diminish next year and the expansion
to slow gradually to a pace consistent
with continuing moderate growth in
final demand. On balance, the early and
subsequent phases of the recovery were
FOMC Policy Actions
projected to be relatively slow by past
cyclical standards, reflecting the limited
impetus that could be expected from
some key sectors of the economy, such
as nonresidential construction where
activity would be depressed by high
vacancy rates. In addition, fiscal policy,
including the budgetary stance of state
and local governments, was projected to
remain fairly restrictive. Against the
background of continuing, albeit decreasing, slack in labor and product markets, the core rate of inflation was
expected to decline considerably over
the period through the end of 1992.
In the Committee's review of current
and prospective economic developments, the members generally agreed
that a recovery very likely was under
way, that final demand would grow
moderately for some time, and that an
end to inventory reductions would provide an impetus to production over coming quarters. A number of factors were
expected to damp the expansion, notably the budget policies of governments
at all levels and continuing weakness in
nonresidental construction. There also
were puzzling aspects to the current
situation and attendant risks to the
outlook: Commodity prices had failed to
firm in their usual pattern in the early
stages of a recovery; on the financial
side, money and credit growth had remained modest, and conditions were
still fragile in many respects. However,
it was noted that sources of strength in
an economic expansion often have been
difficult to anticipate near a cycle
trough. Moreover, while the expansion
was expected to be slower than the average for postwar business cycles, the recession had been relatively shallow, and
a moderate expansion was more likely
to be sustained for a considerable period
ahead, in large measure because it
would be consistent with containing
inflation pressures.
131
The members projected that the underlying rate of inflation would decline in
coming quarters—despite quite limited
progress thus far this year—in light of
some continuing slack in demands on
production resources and efforts by
businesses to contain costs. A number
stressed that the moderate monetary
growth over recent years suggested that
monetary policy had been positioned to
foster a reduction in inflation, and they
anticipated that the beneficial effects of
this policy would show through over the
projection period.
In keeping with the practice at meetings when the Committee considers its
long-run ranges for the money and debt
aggregates, the members of the Committee and the Federal Reserve Bank presidents not currently serving as members
provided specific projections of the
growth in real and nominal GNP, the
rate of unemployment, and the rate of
inflation for 1991 and 1992. These
projections took account of the monetary growth ranges that the Committee
reaffirmed for 1991 and established on a
tentative basis for 1992 at this meeting;
these ranges are expected to be consistent with the Committee's goal of promoting a sustained expansion in the
economy, fostered by further progress
toward price stability. Forecasts of nominal GNP converged on growth rates of
AVi to 5lA percent for 1991 and 5V2 to
6V2 percent for 1992. With regard to the
rate of expansion in real GNP, the projections had a central tendency of 3/4 to
1 percent for 1991 as a whole, implying
a sizable rebound over the balance of
the year; for the year 1992, the central
tendency of the projections was 2V4 to
3 percent. While the civilian unemployment rate was not projected to fall much
over the balance of the year, the expansion was expected to result in a decline
to a somewhat lower range of 6lA to
6!/2 percent by the fourth quarter of
132 78th Annual Report, 1991
1992. With regard to the rate of inflation
as measured by the consumer price
index, the projections had a central tendency of 3V4 to 33/4 percent for 1991 and
3 to 4 percent for 1992; because declines
in energy prices had damped the rise of
consumer prices substantially thus far in
1991, the similarity of the ranges for the
two years masked expectations of a
pronounced decline in the core rate of
inflation.
In the course of the Committee's discussion, members reported that business
conditions remained uneven across the
country, depending on the mix of local
industries, but overall economic activity
now appeared to be expanding at a
modest pace in a number of regions and
to have stabilized following earlier
declines in several other parts of the
nation. However, in some areas, notably
portions of the Northeast, business activity appeared to be weakening further.
Business sentiment remained cautious
on the whole, but many contacts were
expressing greater confidence in the
outlook for the economy and their own
industries, at least looking ahead to
1992. Agriculture was a source of
strength in many parts of the country,
although drought conditions in some
areas and excessive rains in others had
given rise to some concerns.
As has tended to occur in the early
stages of previous cyclical recoveries,
the swing in business inventories from
substantial liquidation toward accumulation was likely to play a leading role in
bolstering the expansion during the next
two or three quarters. The members
acknowledged that inventory developments were difficult to project, and
views differed to some extent regarding
the strength of the impetus that might be
forthcoming from this source over the
next few quarters. In any event, the
available data tended to confirm reports
from business contacts regarding the
absence of excessive stocks in most sectors of the economy and parts of the
country. In these circumstances, the
firming in final sales that appeared to be
under way was likely to result in a
cessation of inventory liquidation over
the nearer term and to induce an actual
buildup at some point later. It was suggested that this process already had
begun and might indeed be somewhat
ahead of earlier expectations.
While the swing in inventories was
likely to provide a substantial boost to
economic activity over the next few
quarters, some members questioned the
potential strength of ongoing factors
promoting expansion once the adjustment in inventories had largely run its
course. Growth in consumer spending
might well remain relatively restrained.
The saving rate already was low, and
the willingness or ability of many consumers to incur debt tofinanceincreased
spending would tend to be inhibited by
existing debt burdens and perhaps also
by the loss of tax deductibility on consumer loan interest. In addition, widespread publicity about the fragility of
some financial institutions and continuing concerns about employment prospects might damp consumer sentiment,
and the absence of a strong rebound in
residential construction would tend to
moderate the growth in spending on
consumer durables. On the positive side,
the favorable effects on disposable income of the earlier decline in oil prices
was being supplemented by a resumption of appreciable growth in personal
income as final sales and production
improved.
With regard to the outlook for business fixed investment, contacts around
the nation suggested that business executives remained cautious about making
capital spending commitments. Nonetheless, the recent pickup in new orders
for business equipment and a more
FOMC Policy Actions
mixed pattern in nonresidential building contract awards and permits were
promising developments that tended to
reduce earlier concerns about a possible
cumulative weakening in business investment. Among the components of
this key sector of the economy, nonresidential construction activity was
expected to remain depressed, probably
for an extended period in many localities, because of the substantial overhang
of vacant office space and other commercial facilities. Some members noted,
however, that nonresidential construction was improving in some areas, in
part as a result of public works projects.
Despite the likelihood of persisting
weakness in nonresidential construction,
overall business fixed investment was
expected to strengthen to a limited
extent once the recovery in economic
activity was more firmly established.
The outlook for residential construction was viewed as somewhat more
promising. Home sales appeared to be
on a distinct uptrend, notwithstanding
the temporary reversal in new home
sales in May, and residential construction was picking up in many areas as
housing backlogs were worked lower.
Members commented, however, that the
upswing in such construction might be
relatively subdued by past cyclical standards, reflecting fairly high vacancy
rates and the failure of mortgage rates to
decline as much as they had in previous recession periods. Continuing constraints on the availability of loans for
land acquisition and construction might
also be a factor tending to inhibit construction activity, at least currently.
With regard to the financial setting of
the economy more generally, members
noted that the distress being experienced
by some financial intermediaries was a
key source of concern and downside
risk for the economy. One could not rule
out a major deterioration in public confi
133
dence in one or more types of lenders,
which could seriously disrupt their ability or willingness to supply credit. However, that risk was likely to lessen over
time. The rebuilding of balance sheets,
including those of commercial banks,
was a promising development, and the
strength of the stock market along with
lower risk premia on debt obligations
pointed to an improving financial climate. Borrowers with direct access to
capital markets were finding abundant
credit at lower spreads. Many depository institutions apparently were continuing to pursue very cautious lending
policies, though the shift toward even
more stringent terms on loans seemed
to have abated. Overall, debt growth
appeared to be quite sluggish, with
much of the weakness concentrated
at depository institutions; this probably was contributing to the relatively
damped expansion of the monetary
aggregates around the cycle trough. The
relationship between borrowing and
spending seemed to be adjusting in ways
that were not entirely understood, but
the behavior of both debt and money
were cautionary signs that needed to be
monitored carefully.
A number of members commented
that in comparison with prior cyclical
experience the budget policies of all levels of government were likely to be relatively restrictive over the projection
horizon. At the federal level, despite
burgeoning borrowing requirements in
the near term, cutbacks in defense
spending and other efforts to curb expenditures under the budget agreement
of 1990 and to maintain that control
under procedures put in place by the
agreement, appeared to have helped put
federal spending for goods and services
on a downward path. At the state and
local level, severe budgetary problems
were being addressed in many areas by
increased taxes and restraints on spend-
134 78th Annual Report, 1991
ing. These efforts to control governmental spending were likely to be an
important factor contributing to a
subdued expansion in nonresidential
construction.
Turning to the outlook for inflation,
the members remained optimistic that
substantial progress could be made in
reducing its underlying rate over the
projection horizon. Some expressed disappointment that, while a number of
special factors had been involved, the
deceleration in consumer prices had
been very limited this year, excluding
the effects of a sharp drop in energy
prices and slower increases in food
prices. Nonetheless, the members generally believed that if the recovery tended
to unfold as they were projecting, pressures on production resources would
remain subdued and efforts to contain
labor and other business costs would
continue, especially in the context of
very competitive markets for most products. Additionally, the appreciation of
the dollar this year could be expected to
exert a damping effect on inflation. As a
trend toward lower inflation became
more pronounced and widely perceived,
the disinflationary forces in the economy would be reinforced by a moderation of inflationary expectations. An
integral part of these developments,
which several members emphasized,
was the role of restrained monetary
expansion over an extended period in
curbing underlying inflation pressures.
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 set in February for 1991, and it established on a
tentative basis ranges for growth in
those measures in 1992. The current
ranges included growth of 2Vi to
6J/2 percent for M2 and 1 to 5 percent
for M3 for the period from the fourth
quarter of 1990 to the fourth quarter
of 1991. A monitoring range of 4Vi to
8V2 percent had been set for growth in
total domestic nonfinancial debt in 1991.
In the course of the Committee's deliberations, all of the members agreed
that the ranges established for this year
remained appropriate. The members
noted that both M2 and M3 were in the
middle portions of their ranges. With
regard to developments affecting M2,
growth of nominal income had weakened over the first half of the year, but
demands for M2 balances had been bolstered by declines in market interest
rates that had brought a narrowing of the
opportunity costs associated with holding deposits. On balance, growth of this
aggregate thus far in 1991 had fallen
short of what might have been expected
on the basis of historical relationships
with nominal income and interest rates.
The reasons for the shortfalls were not
fully understood, but the continuing
redirection of credit flows away from
depository institutions and toward market channels as well as apparent investor
preferences for the higher yields offered
by longer-term investments appeared to
be contributing factors. The projected
pickup in nominal GNP growth in the
second half of the year would by itself
tend to boost the growth of M2 somewhat, but increases in velocity also were
quite possible. Any strengthening of M2
probably would be limited by some
widening of opportunity costs associated with a further decline in offering
rates on liquid deposits in lagged response to earlier declines in market
rates. Moreover, the likely persistence
of a steep yield curve could lead depositors to continue to place some maturing
time deposits in long-term market
FOMC Policy Actions
instruments that had more attractive
yields, such as bond mutual funds. Considerable uncertainty continued to surround the demand for money and the
behavior of velocity. However, in the
judgment of the Committee, it now
seemed that growth within the current range would indicate that policy
was positioned to foster a sustainable
economic expansion, and that the
4-percentage-point range provided adequate leeway for any adjustments that
might be needed in the event the
economy or monetary velocity were
to diverge substantially from their
expected paths.
Through the remainder of 1991, M3
growth also could be expected to be
boosted by the strengthening of the recovery, which was likely to stimulate
some pickup in bank credit extensions.
However, a faster pace of resolutions by
the Resolution Trust Corporation (RTC)
would tend to depress thrift credit—by
placing more thrift assets under government control or in the hands of private
nondepository institutions—and issuance of large time deposits by branches
and agencies of foreign banks could be
expected to slow from the pace earlier in
the year as more of the adjustment to the
change in relative borrowing costs
caused by the reduction in reserve requirements late last year was completed.
The members took note of a number
of factors that had tended to depress the
growth of domestic nonfinancial debt,
which had been growing at the low end
of the Committee's monitoring range.
The latter included the slower pace of
economic activity, more cautious attitudes on the part of borrowers toward
taking on debt and lenders toward extending it, and a sharply lower pace of
net equity retirements. Looking ahead,
the members anticipated that, with the
pickup in the economy, nonfinancial
debt would expand more rapidly in the
135
second half of the year. While slowing
debt growth had a number of positive
aspects for the long-run stability of the
financial markets and the economy, a
tendency for debt to drop below its current range might indicate that supply or
demand conditions were inconsistent
with a satisfactory economic expansion.
At the conclusion of this discussion,
the Committee voted to approve the following broad policy statement and to
reaffirm the 1991 ranges that it had
established in February for growth of
M2, M3, and nonfinancial debt:
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. 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
2Vi to 6J/2 percent and 1 to 5 percent, respectively, measured from the fourth quarter of
1990 to the fourth quarter of 1991. The monitoring range for growth of total domestic
nonfinancial debt also was maintained at
AVi to 8V2 percent for the year.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Keehn,
Kelley, LaWare, Mullins, and Parry. Votes
against this action: None.
In the Committee's discussion of the
ranges for 1992, most of the members
supported a proposal to extend the 1991
ranges provisionally to next year. Insofar as developments bearing on economic and financial conditions in 1992
could be anticipated at this point, these
members believed that monetary growth
within the current ranges would be
consistent with sustainable economic
expansion in the context of continuing
progress toward price stability. The
upper bounds of those ranges provided
desirable leeway for policy to resist any
tendency for the recovery to falter while
the lower ends allowed ample room for
136 78th Annual Report, 1991
policy to counter stronger-than-expected
inflationary pressures.
Several members favored a reduction
in the M2 range for next year. Such a
move would continue the trend of moving the range downward until it was
consistent with price stability. Recent
developments suggested that conditions
were favorable for making substantial
progress toward lower inflation, and
these members emphasized that it was
important for the Committee not only to
take advantage of this opportunity but to
signal its determination in this regard.
The resulting improvement in the
credibility of the Committee's antiinflationary policy and the related favorable effects on inflationary expectations
would reduce the transitional costs of
achieving price stability.
Those in favor of retaining the current
range for M2 commented that the range
had been reduced substantially in recent
years and that its midpoint already was
close to a rate consistent with price stability over time, presuming no unanticipated trend in the velocity of M2 and
some upward bias in measured inflation.
For 1992, some members were concerned that, absent a significant increase
in the velocity of M2, satisfactory nominal GNP growth—within the central
tendency of the members' forecasts—
already implied expansion of M2 in the
upper part of a 2Vi to 6V2 percent range.
A lower range might not provide sufficient flexibility to deal with an unanticipated shortfall in aggregate demand or
disturbances to still-fragile financial
markets. Uncertainties about the behavior of velocity at a time when an important restructuring of financial flows appeared to be in process, especially with
regard to the role of depository institutions, also argued for simply carrying
over the existing range. There would be
an opportunity to review the range next
February, when evidence would be in
hand about velocity in the second half of
the year and some of the uncertainties
about the strength of the recovery would
be diminished. At that time, careful
consideration would need to be given to
reducing the range, if conditions implied
that such an action was appropriate in
furthering and underscoring the System's goal of reducing inflation over
time.
At the conclusion of this discussion,
with two members dissenting, the Committee approved provisional ranges for
1992 that were unchanged from those
for 1991, and it voted to incorporate the
following statement regarding the 1992
ranges in its domestic policy directive:
For 1992, on a tentative basis, the Committee agreed to use the same ranges as in
1991 for growth in each of the monetary
aggregates and debt, measured from the
fourth quarter of 1991 to the fourth quarter
of 1992. With regard to M3, the Committee
anticipated that the ongoing restructuring of
thrift depository institutions would continue
to depress the growth of this aggregate relative to spending and total credit. The behavior of the monetary aggregates will continue
to be evaluated in the light of progress
toward price level stability, movements in
their velocities, and developments in the
economy andfinancialmarkets.
Votes for this action: Messrs. Greenspan,
Corrigan, Forrestal, Keehn, Kelley,
LaWare, Mullins, and Parry. Votes against
this action: Messrs. Angell and Black.
Messrs. Angell and Black dissented
because they preferred to reduce the M2
range for 1992 by Vi percentage point.
They pointed out that the lower range
would be centered on the average
growth of M2 in recent years and would
provide a timely signal of the Committee's continuing commitment to price
stability, thereby reinforcing and extending the progress in curbing inflation
anticipated over the next several quarters. They believed that the resulting
FOMC Policy Actions
decline in inflationary expectations
would lower the transitional costs of
achieving price stability and, by favorably affecting long-term interest rates,
would help sustain the expansion in
economic activity.
In the Committee's discussion of policy for the intermeeting period ahead, all
of the members were in favor of maintaining an unchanged degree of pressure
on reserve positions. They believed that
at this juncture an unchanged policy
course offered the greatest promise of
reconciling the Committee's goals of
sustaining the nascent business recovery
while also fostering further progress
against inflation. There were obvious
areas of uncertainty and vulnerability in
the current economic and financial situation, but developments were unlikely
to require an immediate adjustment in
reserve market conditions. For now,
monetary policy appeared to be on an
appropriate course.
The members devoted some attention
during this discussion to the relatively
sluggish growth of M2 and M3 in recent
months. Some commented that the behavior of the broader aggregates might
imply that monetary policy had not been
eased sufficiently in recent months and
therefore might not provide adequate
support to sustain the expansion. It was
noted, however, that apart from the usual
uncertainties about the relationship of
M2 and M3 to growth and spending in
the short run, the expansion of Ml and
especially of reserves and the monetary
base had been fairly robust since early
spring. Moreover, many borrowers were
meeting their financing needs through
market sources. In this situation, the
members generally concluded that the
behavior of M2 and M3, which on a
cumulative basis were still in the middle
portions of the Committee's ranges for
the year, did not call for any policy
adjustments at this point. Nonetheless,
137
continuing weak growth might require a
review of this conclusion. A staff projection prepared for this meeting indicated
that, with reserve market conditions
unchanged, somewhat faster growth in
the broader aggregates was likely to
emerge in the months ahead, induced by
greater money demands in the context
of a strengthening economy.
With regard to possible adjustments
to the degree of reserve pressure during
the intermeeting period ahead, nearly all
the members expressed a preference for
a directive that did not bias prospective
operations toward tightening or easing
but made an intermeeting adjustment, if
any, equally likely in either direction
depending on economic and financial
developments and the behavior of the
monetary aggregates. One member preferred a directive that was tilted toward
possible tightening; in this view, a
prompt response to any tendency for
inflationary conditions to re-emerge
would have a favorable effect on inflationary expectations and long-term debt
markets and might avert the need for a
more substantial policy adjustment later.
Other members agreed on the desirability of a prompt adjustment to inflationary developments, but they did not
see a special need to anticipate such an
adjustment in the period ahead.
At the conclusion of the Committee's
discussion, all of the members indicated
that they favored a directive that called
for maintaining the existing degree of
pressure on reserve positions. The members also noted that they preferred or
could accept a directive that did not
include a presumption about the likely
direction of any intermeeting adjustments in policy. Accordingly, the Committee decided that somewhat greater
reserve restraint or somewhat lesser
reserve restraint might be acceptable
during the period ahead depending on
progress toward price stability, trends in
138
78th Annual Report, 1991
1990 to the fourth quarter of 1991. The monitoring range for growth of total domestic
nonfinancial debt also was maintained at
AVi to 8V2 percent for the year. For 1992, on
a tentative basis, the Committee agreed to
use the same ranges as in 1991 for growth in
each of the monetary aggregates and debt,
measured from the fourth quarter of 1991 to
the fourth quarter of 1992. With regard to
M3, the Committee anticipated that the
ongoing restructuring of thrift depository
institutions would continue to depress the
growth of this aggregate relative to spending
and total credit. The behavior of the monetary aggregates will continue to be evaluated
in the light of progress toward price level
stability, movements in their velocities, and
developments in the economy and financial
The information reviewed at this meeting markets.
suggests that economic activity has begun to
In the implementation of policy for the
recover from the recent recession. The unem- immediate future, the Committee seeks to
ployment rate rose to 6.9 percent in May, but maintain the existing degree of pressure on
total nonfarm payroll employment edged up reserve positions. Depending upon progress
and the average workweek posted a sizable toward price stability, trends in economic
gain. Manufacturing output has risen in re- activity, the behavior of the monetary aggrecent months, led by appreciable increases in gates, and developments in foreign exchange
assemblies of motor vehicles. Consumer and domestic financial markets, somewhat
spending has been bolstered in part by an greater reserve restraint or somewhat lesser
upturn in personal income. An increase in reserve restraint might be acceptable in
orders points to a firming in demand for the intermeeting period. The contemplated
business equipment, but nonresidential con- reserve conditions are expected to be consisstruction remains weak. Housing starts rose tent with growth of M2 and M3 over the
over April and May. The nominal U.S. mer- period from June through September at
chandise trade deficit in April was somewhat annual rates of about 5Vi and 3 percent,
below the average rate in the first quarter. respectively.
Increases in consumer prices have been
small in recent months.
Votes for the paragraph on short-run polMost interest rates have risen slightly
icy implementation: Messrs. Greenspan,
since the Committee meeting on May 14.
Corrigan, Angell, Black, Forrestal, Keehn,
The trade-weighted value of the dollar in
Kelley, LaWare, Mullins, and Parry. Votes
terms of the other G-10 currencies increased
against this action: None.
substantially on balance over the intermeeting period.
M2 grew at a moderate pace over May
and June, while M3 changed little. For the
year thus far, expansion of M2 and M3 has Meeting Held on
been in the middle portion of the Commit- August 20, 1991
tee's ranges.
The Federal Open Market Committee The information reviewed at this meetseeks monetary andfinancialconditions that ing was mixed, but it suggested on
will foster price stability and promote sus- balance that economic activity was extainable growth in output. In furtherance of panding at a moderate pace. Some
these objectives, the Committee reaffirmed
strengthening in consumption expendiat this meeting the ranges it had established
in February for growth of M2 and M3 of tures, notably for motor vehicles, and in
2l/i to 6V2 percent and 1 to 5 percent, respec- single-family residential investment was
tively, measured from the fourth quarter of providing much of the impetus for the
economic activity, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. The reserve conditions
contemplated at this meeting were expected to be consistent with some
increase in the growth of M2 and M3
to annual rates of around 5Vi and 3 percent respectively over the three-month
period from June through September.
At the conclusion of the meeting, the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
FOMC Policy Actions
recovery. On the other hand, business
fixed investment was still weak, and the
runoff of business inventories was showing few signs of abating. On the supply
side, production had strengthened, particularly in manufacturing and housing,
but labor demand remained soft overall.
Increases in consumer prices had been
small in recent months, while the pace
of labor cost increases did not appear to
have slowed further.
Total nonfarm payroll employment
edged down in July, but substantial
upward revisions to data for May and
June left the July level above that for
April. Job gains were recorded in manufacturing, retail trade, and health services in July, but employment in construction and various financial service
industries continued to contract. Despite
the lower employment level and a sharp
decline in the average workweek, the
unemployment rate fell slightly to
6.8 percent in July apparently owing to
a net exit of jobless workers from the
labor force.
Led by another rise in the production
of motor vehicles, industrial production rose appreciably further in July,
although the rate of increase was a little
less than the average pace in the second
quarter. Over the period from April
through July, production retraced nearly
half of the decline that had occurred
between September of last year and
March. Total industrial capacity utilization rose for a fourth consecutive
month in July, but the overall operating
rate was still well below its longer-run
average.
Retail sales rose in July, and previously reported increases for May and
June were revised upward. Gains at automotive dealers remained strong, and
sales at general merchandise, apparel,
and furniture outlets in July more than
retraced a sharp June decline. Housing
starts continued to trend higher in
1 39
July. As had been the case thus far in
the upturn, most of the July increase
occurred in single-family units; multifamily starts edged up but remained near
the thirty-year low recorded in May.
Sales of both new and existing homes
strengthened further in June.
Business fixed investment declined
again in the second quarter as outlays
for producers durable equipment fell
modestly, and forward-looking indicators pointed to sluggishness in spending for equipment over the near term.
Reflecting in part the damping effect on
office construction of high vacancy rates
and falling property values for existing
buildings, the decline in nonresidential
construction continued in the second
quarter, and data on construction permits and contracts suggested that this
sector likely would remain weak for an
extended period. Inventory liquidation
by manufacturers and non-auto trade
establishments continued through the
second quarter, although the pace
slowed in June from the sharp declines
of April and May. The ratio of stocks to
sales at these establishments was about
unchanged.
The nominal U.S. merchandise trade
deficit narrowed somewhat in June from
the downward revised May value and
was somewhat below its rate for the
first quarter. For the second quarter,
there was substantial growth in the value
of exports, primarily resulting from
strength in machinery, commercial aircraft, and automotive products. The
value of imports edged up as increases
in foods and selected capital goods were
not quite offset by declines in oil and
automotive products. Economic activity
in the major foreign industrial countries
continued to present a mixed picture.
Tentative signs of more rapid growth
emerged in the second quarter in some
European countries, but the pace of economic activity appeared to have eased in
140 78th Annual Report, 1991
Japan and Germany from robust rates in
thefirstquarter.
Declines in the prices of food and
energy in June and July damped the rise
in consumer prices and lowered producer prices of finished goods. Excluding food and energy items, consumer
prices rose over the twelve months
ended in July at a slightly slower rate
than in the preceding twelve months. At
the producer level, prices of nonfood,
non-energy items continued to increase
in July at the very slow second-quarter
pace. Total compensation per hour for
private industry workers accelerated a
bit in the second quarter, reflecting the
effects of a sharp increase in the cost of
benefits and the upward adjustment of
the minimum wage in April.
At its meeting on July 2-3, 1991, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that did not include a presumption
about the likely direction of any intermeeting adjustments to policy. Accordingly, the Committee decided that somewhat greater or somewhat lesser reserve
restraint might be acceptable during the
intermeeting period ahead depending on
progress toward price stability, trends in
economic activity, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. The reserve conditions
contemplated at this meeting were expected to be consistent with some
increase in the growth of M2 and M3
to annual rates of around 5V2 and 3 percent respectively over the three-month
period from June through September.
Open market operations during the
intermeeting period initially were directed toward maintaining the existing
degree of pressure on reserve positions.
Subsequently, in early August, reserve
pressures were eased slightly; this action was taken against a backdrop of
indications that price pressures were
abating and the recovery was proving
to be sluggish at a time of persisting
weakness in the broad monetary aggregates. Over the course of the period, two
technical increases were made to expected levels of adjustment plus seasonal borrowing to reflect the run-up
in seasonal borrowing that usually
occurs at this time of the year. In the
three reserve maintenance periods completed since the July meeting, adjustment plus seasonal borrowing tended
to run at appreciably higher levels
than expected, owing in part to difficulties in estimating nonborrowed reserve
needs near the ends of reserve maintenance periods. The federal funds rate
averaged around 53A percent in the early
part of the intermeeting period, but
following the action to ease reserve
conditions, the rate averaged about
5 ^percent.
Other market interest rates declined
appreciably over the intermeeting period
in response to downward revisions in
market expectations about the pace of
the recovery and price pressures, the
easing of reserve conditions, and especially for short-term Treasury securities,
the uncertain outcome of the coup
attempt in the Soviet Union that had
begun a few days before the meeting.
Despite the uncertainty surrounding the
status of the recovery, interest rates on
private instruments fell as much as Treasury yields, and most major indexes of
stock market prices advanced considerably. Expectations of a slower recovery
and an easier monetary policy in the
United States contributed to a decline on
balance in the trade-weighted value of
the dollar in terms of the other G-10
currencies over the intermeeting period.
Late in the period, the coup attempt in
the Soviet Union triggered a sharp rise
in the dollar against many European
currencies.
FOMC Policy Actions
The broad monetary aggregates were
quite weak in July. After several months
of sluggish growth, M2 contracted as
expansion in transaction deposits slowed
and retail time deposits continued to run
off at a rapid rate. M3 fell further in July
as declines in M2 were augmented by
further runoffs of large time deposits.
The reasons for the weaker-thanexpected growth of the broader aggregates were not entirely understood; however, it appeared that the underlying
weakness in credit growth at depository
institutions combined with shifts of
funds out of the broader aggregates by
depositors reaching for higher yields
were contributing to the reduced growth.
For the year through July, M2 and M3
had expanded at rates near the lower
ends of the Committee's ranges.
The staff projection prepared for this
meeting indicated that the economy was
continuing to recover from the recent
recession, although somewhat slower
growth than previously anticipated was
now projected for the second half of the
year. The projection still pointed to
moderate expansion in final demand
over the next several quarters, with economic activity later this year and in the
first part of 1992 given added impetus
by a cyclical swing from substantial
liquidation to modest accumulation in
business inventories. The stimulus from
the swing in inventories was expected
to diminish during the first part of
next year, but business capital expenditures were projected to pick up as the
recovery continued. Real purchases of
goods and services by the federal government were projected to trend downward, and budgetary problems were
expected to restrain spending by state
and local governments. On balance, the
expansion in economic activity was
projected to be relatively moderate in
comparison with past cyclical experience. Persisting though diminishing
141
slack in the economy was expected to
induce a further moderation in cost pressures and an appreciable decline in the
core rate of inflation over the period
through 1992.
In the Committee's discussion of
current and prospective economic and
financial conditions, the members generally agreed that the recovery was continuing, although recent economic data
and the general tenor of the anecdotal
information suggested an uneven performance in different sectors of the economy and parts of the country. While
sustained expansion at a moderate pace
was still viewed as a reasonable expectation, many members now believed that
the risks were tilted toward the downside. These risks stemmed to an important extent from the financial side of the
economy: life insurance companies as
well as banks had become quite cautious
lenders, and the very weak recent data
on both money and credit added to concerns about financial developments. In
addition, consumer surveys and business contacts suggested some erosion in
the confidence that had built up amid the
initial signs of an economic turnaround
after the end of the Persian Gulf war.
Some members commented, however,
that the prospective sources and potential strength of the expansion were
always difficult to discern at this stage
of the recovery, and a stronger-thanprojected expansion could not be ruled
out. With regard to the outlook for inflation, members continued to anticipate a
reduction in its core rate over coming
quarters, especially following an extended period of restrained monetary
growth. However, several expressed disappointment regarding the recent behavior of labor costs and commented that
progress toward lower inflation might
be more limited, at least in the quarters
immediately ahead, than they had expected earlier.
142 78th Annual Report, 1991
Recent events in the Soviet Union
had introduced a new element of uncertainty in the economic outlook. The outcome of the coup attempt was uncertain
but, should it succeed, early market
reactions suggested the possibility of
some adverse consequences for the U.S.
economy stemming in part from a further deterioration in business and consumer confidence, an increase in the
price of oil and the value of the dollar,
and perhaps higher long-term interest
rates.
The financial sector of the domestic
economy continued to be seen as a
potential source of developments that
could hold the expansion below the forecast. Financing from a number of institutional lenders had been curtailed for
some time and did not yet show signs of
becoming more readily available; indeed, mounting difficulties for some life
insurance companies could reduce further the willingness of these lenders to
extend credit. Members also commented
that the continuing publicity given to the
weakened condition of many financial
institutions along with widespread reports of financial scandals tended to
erode confidence. Several observed that
the weakness of the monetary aggregates, while not closely correlated with
short-run economic performance, was
nonetheless a matter of increasing concern to the extent that it implied unusual
constraints on the availability of credit
and possibly a faltering economic expansion. On the positive side, the financial condition of banking institutions
appeared to be continuing to stabilize or
improve. Indeed, while banks had raised
their credit standards, bank financing
was widely reported to be readily available to creditworthy borrowers, at least
outside the real estate sector, though
bank lending continued to lag because
of weak credit demand associated in part
with inventory liquidation and because
many business firms were taking advantage of their direct access to financial
markets. In the absence of further deterioration in lender confidence, the availability of loans fromfinancialintermediaries could be expected to increase over
time and appeared likely to be adequate
to finance a moderate recovery. Nonetheless, the risks seemed to be skewed
toward the possibility of further difficulties damping credit supplies and impeding economic growth.
In the course of their discussion,
members commented on continuing
indications of mixed business conditions in different parts of the country.
They noted that economic activity
appeared to have deteriorated at least
marginally in several regions, though
the available evidence pointed on the
whole to growth in the overall economy.
Members referred to the contrast between gloomier business attitudes and
the improvement that was occurring in
some sectors of the economy, notably
industrial production and housing. Business executives seemed disappointed by
a much less vigorous rebound in demand than they had anticipated with the
end of the Persian Gulf war. In the
circumstances, they remained very cautious in managing their inventories and
reluctant to undertake major investment
projects.
Available information suggested that
inventories had declined somewhat further in recent months. As at previous
meetings, members anticipated that with
inventories at much reduced levels, the
pickup in final demand would at some
point stimulate a turnaround in inventory investment that would in turn provide an important fillip to the expansion.
Thus far, however, the evidence did
not indicate a cumulative expansionary
process involving stepped-up inventory
demand that generated growth in production, incomes, and spending and in
FOMC Policy Actions
turn stimulated further demand for inventories. Some members commented that
the relative weakness in commodity
prices was further evidence that a selfreinforcing process of that kind had not
yet emerged in the current cyclical
recovery. There was little reason to conclude, however, that a dynamic process
of that sort, which in the early stages of
past cyclical recoveries had tended to
provide the major thrust to the expansion, would fail to materialize in the
quarters ahead.
During their discussion, members
commented that retail sales appeared to
be improving at least a little in many
parts of the country but remained
quite sluggish elsewhere. An important
but geographically uneven source of
strength was the sale of motor vehicles,
though contacts in the auto industry suggested some disappointment over the
sales performance of many new models.
In general, consumers remained concerned about financial developments,
relatively heavy debt burdens, and uncertainty about employment prospects.
While further growth in consumer
spending was a likely development, various factors tending to inhibit consumer
confidence and an already low saving
rate pointed to relatively limited expansion in such spending over the quarters
ahead.
Members did not see business capital
spending as an important source of stimulus to the economy over the next few
quarters. There were continuing reports
of marked weakness in commercial construction activity, reflecting the persistence of high vacancy rates in many
parts of the country that were likely to
hold back new building for an extended
period. Nonetheless, overall nonresidential construction appeared to have bottomed out in some areas and indeed to
have edged up in others, buttressed by
expenditures on public works projects
143
by a number of state and local governments. Current spending for business
equipment was less depressed though
also indicative of considerable caution
on the part of businessmen in the context of disappointing profits and uncertain demand for their products. While a
pickup in equipment spending could be
expected to occur with some lag during
the course of the cyclical upswing, overall capital spending was likely to grow
at a relatively subdued pace unless final
demand turned out to be much stronger
than the members currently expected
and induced a major turnaround in business sentiment.
The outlook for residential construction remained more promising. Spurred
by reduced mortgage rates, sales of
homes continued on a moderate uptrend
in most areas and, indeed, represented a
bright spot in some otherwise depressed
regions such as New England. While
the construction of new housing was
still being damped by relatively high
vacancy rates and the difficulties
encountered by some builders in obtaining financing, modest strengthening in
homebuilding was occurring in many
parts of the country. The recent decline
in long-term interest rates was cited as a
further favorable factor for housing construction activity.
Turning to the outlook for the nation's trade balance, members commented that export demand had continued to grow and several expressed
optimism regarding the prospects for
further growth, including the outlook for
expanding markets in Latin America.
The trade balance would be influenced
to an important extent by the value of
the dollar in foreign exchange markets;
the latter was subject to considerable
uncertainty, especially in connection
with the events that were under way in
the Soviet Union. Those events had
raised questions about trade develop-
144 78th Annual Report, 1991
ments, notably the potential for reduced
world oil supplies and lower foreign
demand for U.S. goods, especially agricultural products. The members also
recognized that the domestic economic
expansion would have a damping effect
on the trade balance by stimulating
growth in imports.
The members anticipated that federal
government purchases of goods and services would be curtailed in line with last
year's budget agreement. They noted
that the recent developments in the
Soviet Union had raised new uncertainties about the size of cutbacks in defense
spending, which had been projected to
account for all the reduction in real federal expenditures. With regard to the
state and local governments, there continued to be widespread reports of current or expected spending cuts and
higher taxes to counter budgetary shortfalls. On balance, overall government
spending and tax policies appeared
likely to exert a somewhat negative
influence on the economic expansion.
Given a projection of some persisting
slack in labor and product markets and
following an extended period of relatively restrained monetary growth, the
members continued to anticipate appreciable progress toward lower inflation
over the period through 1992. Competitive pressures, including competition
from foreign producers, remained strong
in markets for many products, and the
decline in consumer inflation over the
course of recent months was likely to
have a favorable effect on inflationary
expectations. On the negative side, the
recent lack of progress in bringing down
the rate of increase in labor costs was a
worrisome development. While some of
the upward pressures on such costs
appeared to reflect special factors such
as the second-quarter rise in the minimum wage, a major underlying cause
was the continuing surge in the cost of
benefits, especially medical insurance.
In this situation, several members
observed that they now anticipated less
progress toward a lower core rate of
inflation over the next several quarters.
Against the background of a broad
consensus that a moderately paced
recovery with ebbing inflation probably
was under way, all of the members indicated that they preferred or could accept
a proposal to maintain an unchanged
degree of pressure on reserve positions.
In addition, a majority expressed a preference for an asymmetric directive that
was tilted toward possible easing during
the weeks ahead. Those favoring such
asymmetry felt that the risks to the
expansion were largely on the side of a
weaker-than-projected economy, and
they believed that the Federal Reserve
should react promptly to any signs that
the expansion was less robust than
desired or that monetary conditions
might be inconsistent with sustained
growth. However, they believed that an
immediate easing move would be premature because the most recent economic information, although mixed, still
suggested a moderate rate of economic
expansion and also because of the questions that were raised about how to
interpret the behavior of the monetary
aggregates. Some members marginally
favored an immediate move toward ease
because of the weakness in the broader
monetary aggregates and a sense that
such a move might bolster confidence
and better ensure a satisfactory recovery
in the months ahead. Nonetheless, they
found acceptable an initially unchanged
policy that was coupled with an instruction calling for policy implementation to
be especially alert to developments that
might require some easing during the
intermeeting period. Other members
viewed the risks to the expansion as
more evenly balanced or questioned the
extent to which further easing in the
FOMC Policy Actions
near term might stimulate monetary
growth or result in lower long-term
interest rates. Accordingly, they felt that
retaining the current symmetric directive was a preferable option. They were
concerned about the risk of responding
to what might prove to be short-lived
fluctuations in the economic data and
anecdotal information bearing on the
performance of the economy. In particular, the persistence of inflationary cost
pressures made it advisable to pause in
order to assess the implications of the
information that would become available over the next few weeks, including
data on the behavior of the monetary
aggregates. Nonetheless, given prevailing uncertainties, these members could
accept a directive that was biased toward
possible easing in the weeks ahead.
In the course of the Committee's discussion, members devoted considerable
attention to the behavior of the monetary aggregates. While the cumulative
growth of M2 and M3 for the year to
date was still within the Committee's
ranges—though near the bottom of those
ranges—the weakness in recent months,
including declines in both aggregates in
July, was seen by many members as a
disturbing development. The members
acknowledged that it was difficult to disentangle the various reasons for the unexpected shortfall in monetary growth
and thus the implications for the thrust
of monetary policy. In the context of
essentially unchanged or even declining
interest rates, there appeared to be little
import for the economy and monetary
policy to the extent that the shortfall
reflected shifts of funds out of the
broader aggregates and into nonmonetary investment instruments that provided higher interest returns, thereby
bypassing depository institutions but
tending to have little effect on the overall availability of credit. Of potentially greater concern and significance
145
for policy was the evidence that some
of the weakness of the monetary
aggregates stemmed from unusual
constraints on the amount of credit
provided by depository institutions and
implied restraint on the overall supply
of credit. The weak growth in credit
extended by depository institutions
reflected, of course, an uncertain combination of anemic demand by creditworthy borrowers and supply constraints by lending institutions. The
behavior of M2 and M3 also might be
indicative of even weaker nominal
spending than was currently recognized
and hence a monetary policy stance that
was too tight under such circumstances.
According to a staff analysis prepared
for this meeting, growth in both measures could be expected to pick up a
little over the months ahead, assuming
steady reserve conditions. The persistence in some degree of recent relationships between movements in short-term
interest rates, income, and monetary
growth would imply slower monetary
expansion than might otherwise be
expected.
In these circumstances, many members indicated that continued weakness
in M2 and M3 would be a matter of
increasing concern, especially given
questions about the strength of the economic recovery. Some favored a proposal to give greater emphasis in the
directive to the behavior of the monetary aggregates in guiding possible intermeeting adjustments in policy, at least
for the period ahead. However, a majority preferred to retain the current directive wording. In support of this view,
some commented that in recent years
the broader aggregates have been unreliable indicators of the path of the economy over the quarters immediately
ahead and thus imperfect guides for
short-run policy adjustments. Some
observed that growth in Ml and total
146
78th Annual Report, 1991
reserves had held up fairly well on balance over the past several months and
that the behavior of those measures
might be more indicative of the underlying thrust of monetary policy than that
of the broader aggregates on which the
Committee had tended to focus. Giving
the monetary aggregates more prominence in the directive could provide a
misleading indication of the adjustments
that would be made to reserve conditions in response to the behavior of the
aggregates, including aberrant fluctuations, thereby misconstruing the views
of many members.
At the conclusion of the Committee's
discussion, all of the members indicated that they could vote for a directive
that called for maintaining the existing
degree of pressure on reserve positions.
All also indicated that they preferred
or could accept a directive that included
a bias toward possible easing during the
intermeeting period. Accordingly, the
Committee decided that somewhat
greater reserve restraint might be acceptable or somewhat lesser reserve restraint
would be acceptable during the period
ahead depending on progress toward
price stability, trends in economic activity, the behavior of the monetary
aggregates, and developments in foreign
exchange and domestic financial markets. The reserve conditions contemplated at this meeting were expected
to be consistent with a resumption
in the growth of M2 and M3 during the
weeks ahead, but in light of the declines
in these aggregates since June, the
Committee now anticipated that M2
would be little changed and M3 would
be down at an annual rate of about 1 percent in the period from June through
September.
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
has been mixed, but it suggests on balance
that economic activity is expanding at a
moderate pace. The unemployment rate fell
slightly to 6.8 percent in July, but total nonfarm payroll employment edged down and
the average workweek posted a sharp decline. Industrial production rose appreciably
further in July. Consumer spending has
increased considerably in recent months, led
by sizable gains in expenditures for motor
vehicles. New orders for nondefense capital
goods point to little change in spending for
business equipment over the near term, and
nonresidential construction remains weak.
Housing starts rose further in June and July.
The nominal U.S. merchandise trade deficit
declined in June, and its average for the
second quarter was somewhat below the rate
in the first quarter. Increases in consumer
prices have been small in recent months.
Over the intermeeting period prior to
August 19, market interest rates declined
appreciably and the trade-weighted value of
the dollar in terms of the other G-10 currencies depreciated somewhat. Subsequently, in
the wake of events in the Soviet Union,
Treasury bill rates fell somewhat further and
the dollar rebounded sharply against many
European currencies.
M2 contracted in July after several months
of slow growth and M3 fell further. For the
year through July, expansion of M2 and M3
has been near the lower ends of the Committee's ranges.
The Federal Open Market Committee
seeks monetary andfinancialconditions that
will foster price stability and promote sustainable growth in output. 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 2Vi to 6V2 percent and 1 to 5 percent,
respectively, measured from the fourth quarter of 1990 to the fourth quarter of 1991. The
monitoring range for growth of total domestic nonfinancial debt also was maintained at
AVi to 8V2 percent for the year. For 1992, on
a tentative basis, the Committee agreed in
July to use the same ranges as in 1991 for
growth in each of the monetary aggregates
and debt, measured from the fourth quarter
of 1991 to the fourth quarter of 1992. With
regard to M3, the Committee anticipated that
the ongoing restructuring of thrift depository
institutions would continue to depress the
growth of this aggregate relative to spending
FOMC Policy Actions
and total credit. The behavior of the monetary aggregates will continue to be evaluated
in the light of progress toward price level
stability, movements in their velocities, and
developments in the economy and financial
markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Depending upon progress
toward price stability, trends in economic
activity, the behavior of the monetary aggregates, and developments in foreign exchange
and domestic financial markets, somewhat
greater reserve restraint might or somewhat
lesser reserve restraint would be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be consistent with a resumption of growth of M2 and
M3 in the weeks ahead; but in view of the
declines already posted since June, the Committee anticipates that M2 would be little
changed and M3 would be down at an
annual rate of about 1 percent over the
period from June through September.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Keehn,
Kelley, LaWare, Mullins, and Parry. Votes
against this action: None.
Meeting Held on
October 1, 1991
Domestic Policy Directive
The information reviewed at this meeting suggested on balance that the economy was continuing to recover from the
recession but that its performance was
uneven across sectors. Consumer spending was rising, especially for durable
goods, but businesses remained cautious
about investing in plant, equipment, or
inventories. On the production side, the
advance in manufacturing activity continued, although the recovery in housing
construction appeared to have lost some
of the momentum evident through the
spring, and little growth was occurring
in much of the service-producing sector.
The pickup in production had been
147
reflected primarily in a sizable rise in
aggregate hours worked rather than in
the number of jobs. Increases in prices
appeared to be on a gradual downtrend.
In August, total nonfarm payroll employment retraced part of a July decline
and on balance was little changed since
March. Manufacturing employment registered widespread gains in August, and
the factory workweek rose to its highest
level in nearly a year. In the private
service-producing sector, new hires in
health and business services displayed
appreciable strength, but the rest of this
sector, particularly wholesale and retail
trade, remained weak. Jobs in construction continued to decline, and employment reductions occurred in state and
local governments for a second straight
month. The civilian unemployment rate
was 6.8 percent in both July and August.
Industrial production posted a moderate further rise in August after several
months of sizable gains. Assemblies of
motor vehicles slowed in August when a
number of plants were closed temporarily for model changeovers, but output
of other consumer durables continued to
increase and that of consumer nondurables rebounded. Production of business
equipment remained weak and on balance had changed little since spring after
dropping sharply in late 1990 and early
1991. Total industrial capacity utilization edged up in August; over the course
of recent months it had retraced only a
small part of the decline that occurred
between mid-1990 and March 1991.
Operating rates in manufacturing had
recovered to a somewhat greater extent,
reflecting in part the rebound in motorvehicle assemblies.
Retail sales fell in August, mostly
because of a decline in sales of motor
vehicles. For July and August together,
nonautomotive retail sales were up considerably on balance. After increasing
appreciably since January, housing starts
148 78th Annual Report, 1991
rose only slightly further in July and
August. The number of permits for
construction of single-family homes
declined in August and was unchanged
from the second-quarter level. In the
multifamily sector, construction activity
remained near its thirty-year low. Sales
of new homes were down in July, while
sales of existing homes fell in both July
and August.
Shipments of nondefense capital
goods, measured in nominal terms, were
down on balance over July and August.
Taking into account the substantial recent declines in the prices of computing
equipment, however, real outlays for
business equipment apparently rose on
balance over the two months as reduced
spending on industrial equipment was
more than offset by increased investment in computers and, to a lesser extent, transportation equipment. Recent
data on orders and shipments of nondefense capital goods pointed to a
further small rise in real outlays for
business equipment. The value of nonresidential construction put in place in
July was substantially below the secondquarter level, reflecting the continuing
decline in office, other commercial, and
hotel construction. Available information on new contracts suggested a continuing downtrend in nonresidential
construction.
The nominal U.S. merchandise trade
deficit widened substantially in July to a
rate considerably above its average in
the second quarter. In July, the value of
imports rose sharply from a low secondquarter average; the rise was concentrated in consumer goods, automobiles,
and computers. The value of exports
changed little in July from a secondquarter level that was high compared
with other recent quarters; the improvement in exports in recent months had
been the result of the strong performance of capital goods. The pattern of
economic activity in the major foreign
industrial countries continued to be
mixed. In western Germany and Japan,
growth fell sharply in the second quarter
and apparently remained slow in the
third quarter, while economic activity
picked up in some other industrial countries in the second quarter.
Producer prices of finished goods
were unchanged over July and August
after declining on balance in earlier
months of the year. Further reductions in
food prices in August, notably prices of
fresh fruits and vegetables, offset a
rebound in the prices of finished energy
goods. Excluding food and energy, the
increase in producer prices of finished
goods in the twelve months ended in
August was little different from the rise
over the previous twelve months. At the
consumer level, increases in prices were
small in July and August because of
declines in the prices of food and energy
items. Although nonfood, non-energy
consumer prices had risen somewhat
faster in recent months, the twelvemonth change in this index had continued to edge down.
At its meeting on August 20, 1991,
the Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that also provided for giving special
weight to potential developments that
might require some further easing during the intermeeting period. Accordingly, the Committee decided that somewhat greater reserve restraint might be
acceptable or somewhat lesser reserve
restraint would be acceptable during the
intermeeting period depending on
progress toward price stability, trends in
economic activity, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. The reserve conditions
contemplated at the August meeting
were expected to be consistent with a
FOMC Policy Actions
resumption in the growth of M2 and M3
over the balance of the third quarter.
However, in view of the declines in
these aggregates that had taken place
since June, the Committee anticipated
that, over the three-month period from
June through September, M2 would be
little changed and M3 would be down at
an annual rate of about 1 percent.
Open market operations during the
intermeeting period were directed initially toward maintaining the existing
pressures on reserve positions. Subsequently, on September 13, the discount
rate was lowered by Vi percentage point
to 5 percent and part of this decline was
allowed to show through to the federal
funds rate. Two technical decreases to
expected levels of adjustment plus seasonal borrowing were made during the
intermeeting period to reflect the abatement of seasonal credit needs. Early in
the period, adjustment plus seasonal
borrowing averaged nearly $400 million. Later, in part because of the decline
in seasonal funding needs, the volume
of borrowing slipped below $350 million. The federal funds rate averaged
around 5Vi percent during the first part
of the intermeeting period, but after the
discount rate was reduced, the federal
funds rate edged down to a little above
5 ^percent.
In the period immediately after the
August 20 meeting, most other market
interest rates rose slightly, reflecting in
part the absence of an anticipated easing
of monetary policy and data indicating
that the expansion might be more robust
than expected. Treasury bill rates also
were boosted by an unwinding of the
flight to quality and liquidity that had
been prompted by the attempted coup in
the Soviet Union. In subsequent weeks,
market rates declined as incoming nonfinancial and monetary indicators were
seen by market participants as portending a sluggish expansion, reduced infla
149
tion, and an associated easing of monetary policy. The average commitment
rate on fixed-rate mortgages reached its
lowest level since 1977, and the prime
rate was reduced by lh percentage point
to 8 percent after the easing of monetary
policy in mid-September. The tradeweighted value of the dollar in terms of
the other G-10 currencies fell sharply
over the intermeeting period; much of
the drop retraced the previous run-up
associated with the attempted coup in
the Soviet Union that began shortly
before the August meeting.
After contracting in July, M2 was
about unchanged in August and September. M3 declined further in July and
August and apparently changed little in
September. Both aggregates were somewhat weaker than anticipated at the time
of the August meeting. For the year thus
far, expansion of M2 and M3 had been
at the lower ends of the Committee's
ranges.
The staff projection prepared for this
meeting pointed to a sustained recovery
in economic activity; however, because
of persisting weaknesses in some sectors of the economy the pace of the
expansion was projected to remain subdued compared with past cyclical experience and the risks of a different outcome seemed to be mostly on the
downside. Consumer spending was
expected to continue to provide much
of the impetus to the expansion, but a
swing from inventory liquidation to
modest accumulation was projected to
supply an additional boost to economic
growth during the quarters immediately
ahead. As the stimulus from the swing
in inventories began to wane during the
course of 1992, spending for business
equipment was projected to strengthen
to some extent. Housing construction
also would provide some stimulus over
the projection horizon. Further declines
in the construction of commercial struc-
150 78th Annual Report, 1991
tures were expected to inhibit the economic expansion. Additionally, real purchases of goods and services by the
federal government were assumed to be
on a mildly declining trend, and spending by many state and local governments was expected to be constrained
by severe budgetary problems. The persisting slack in labor and product markets, while diminishing over time, was
projected to restrain the rise in labor
costs and to foster some slowing in the
underlying trend of inflation.
In the Committee's review of prevailing and prospective economic developments, members observed that the
mixed nature of the recent economic
information and the uneven economic
conditions in different parts of the country made it particularly difficult to assess
the overall state of the economy. They
generally concluded that, on balance,
the evidence was consistent with a continuing though still sluggish recovery in
economic activity and that the prospects
remained favorable for a sustained expansion at a moderate pace over the next
several quarters. Many commented,
however, that the risks to the expansion
appeared to be tilted at least marginally
to the downside. Those risks were felt to
stem especially from a variety of financial strains in the economy, and several
members also indicated that they were
uneasy about the potential implications
of the ongoing weakness in broad measures of money and credit. With regard
to the outlook for inflation, many of the
members expressed confidence that the
relatively moderate rate of expansion in
economic activity that they anticipated
was likely to be associated with appreciable progress in reducing the core
rate of inflation over the next several
quarters.
In the course of the Committee's discussion, members commented that the
anecdotal reports on economic condi
tions and on business and consumer
sentiment continued to have a generally
negative tone that did not appear to be
fully consistent with the available economic statistics. To a degree, business
attitudes seemed to reflect perceptions
of little momentum in business activity
and related concerns about the outlook
for profits. On the positive side, business conditions in some areas were
contributing to some optimism, at least
among business managers whose activities tended to be limited to local markets, and the performance of the stock
market continued to provide evidence
of confidence on the part of many
investors.
Turning to the outlook for key sectors
of the economy, members noted that
despite reports of quite weak retail sales
in some parts of the country, real consumer outlays had been trending upward
on an overall basis since the early part
of the year, and in the absence of a new
adverse shock to consumer confidence,
consumers were likely to continue to
provide important support to the overall
economic expansion. However, the extent of that support might remain somewhat limited because consumer sentiment was still cautious amid concerns
about employment opportunities and
personal debt burdens. In the circumstances, retailers in many areas anticipated relatively sluggish sales during the
upcoming holiday season. In the context
of an already low saving rate, the outlook for retail sales would continue to
hinge on growth in disposable incomes
and the latter in turn would tend to
be constrained by the moderate growth
that was anticipated in overall economic
activity.
The members continued to anticipate
that a turnaround from inventory liquidation to at least modest accumulation
would stimulate the economy in the
quarters ahead. Available data and anec-
FOMC Policy Actions
dotal reports suggested that overall nonfarm business inventories had continued
to decline through July and probably
over the third quarter as a whole. With
stocks now at generally low levels, a
pickup in final demands, including expected further growth in exports, was
likely to foster some tendency to rebuild
inventories. Looking further ahead,
some concern was expressed that, once
the expected swing in inventories began
to abate next year in line with the usual
cyclical pattern, other sources of economic stimulus might not materialize to
the extent needed to support continued
economic growth at an adequate pace.
On the other hand, some members observed that both the economic statistics
and reports from business contacts were
consistent with some pickup in business
spending for equipment, which could
well strengthen further as the recovery
matured.
Residential construction also seemed
likely to provide some ongoing stimulus
to the expansion. While this sector
appeared to have lost some momentum
during the summer months, declines in
mortgage interest rates along with anticipated moderate growth in overall economic activity and incomes pointed to a
gradual uptrend in housing construction.
The prospective strength of housing
activity was viewed as likely to be tempered, however, by continuing weakness
in the multifamily market; the latter was
adversely affected by high vacancy rates
in many local areas and over time by a
slower pace of family formations.
Among the negative developments
that could be expected to limit the
strength of the overall economic expansion was the outlook for commercial
construction. Indeed, the overbuilt condition of commercial space in major
markets around the country portended
an extended period of weak activity in
this sector of the economy. There were,
151
nonetheless, anecdotal reports that sale
prices of commercial real estate might
be stabilizing in some areas and that
new and renewal lease prices were no
longer declining in some markets and
indeed might have begun to edge up.
The government sector also was seen as
likely to exert some restraint on the
overall expansion. Federal government
spending for goods and services appeared to have swung into a gradual
downtrend associated with cutbacks in
defense spending. At the same time, the
budgetary difficulties affecting many
state and local governments were likely
to continue to constrain the overall
growth in state and local government
spending.
Many of the members referred to the
potential impact of financial conditions
on the outlook for economic activity. In
some important respects, financial developments could be viewed as favorable. Financial markets were receptive
to new financing activity as evidenced
by the large volumes of stock and bond
issuance. Moreover, the balance sheets
of many financial institutions were improving; banks, for example, were making considerable efforts to increase their
capital, work out problem loans, and
rationalize their operations. On the other
hand, the balance sheets of many business firms like those of a significant
portion of households were burdened by
heavy debt loads. Furthermore, many
contacts referred to the continuing problems of small and medium-size businesses in securing financing to carry on
or expand their operations. In this regard, it was difficult to assess the extent
to which the weakness in loan extensions through financial intermediaries
reflected unwarranted constraints on
credit supplies as opposed to a lack of
demand from qualified borrowers. Reports from several parts of the country
tended to suggest that, while to some
152 78th Annual Report, 1991
extent credit standards had been tightened further this year, lenders remained
willing to provide financing to creditworthy borrowers. On balance, while
the members differed in their appraisals
of the severity and possible implications
of the financing problems of borrowers
without access tofinancialmarkets, they
agreed on the need for careful monitoring of the availability of adequate
credit to support a sustained economic
recovery.
The members continued to view the
outlook for inflation as favorable. The
moderate rate of economic expansion
anticipated over the forecast horizon
was expected to be associated with
enough slack in productive resources to
accommodate further downward adjustments in the underlying rate of inflation.
Competition from foreign producers was
likely to remain substantial in many domestic markets. Indeed, overall competitive pressures and resistance to price
increases were strong in key markets
and provided a promising setting for
progress toward price stability. From a
different perspective, a number of members observed that the lagging growth in
money, at least as measured by M2 and
M3, had favorable implications for
prices over the longer run. In particular,
it was suggested that the restrained
growth in money over recent years
would tend to foster lower inflation
while providing liquidity sufficient to
sustain a moderate rate of economic
expansion.
In the Committee's discussion of policy for the intermeeting period, all of the
members indicated that they were in
favor of maintaining an unchanged degree of pressure on reserve positions.
While the economy was subject to an
unusual array of problems and related
uncertainties, the members generally felt
that monetary policy was on the right
course under currently prevailing and
immediately forseeable economic and
financial circumstances. In particular,
insofar as could be judged at this point,
the present policy stance provided an
appropriate balance between the risks of
a faltering economic expansion and the
risks of little or no progress toward price
stability. The easing steps in recent
months and the associated declines in
interest rates, including mortgage rates,
appeared to have supplied more monetary stimulus than had yet shown
through to the economy. Several members commented, however, that the
Committee needed to remain particularly alert to indications of renewed
weakening in business activity, especially given the current financial fragilities in the economy and the likely difficulty of reviving the economy in the
event of another downturn. Other members gave somewhat more weight to the
need to avoid over-stimulating the economy; a failure to take advantage of the
apparent momentum toward lower inflation would have seriously adverse consequences on longer-term debt markets
and the outlook for sustained economic
growth. The members agreed that a
steady policy course was desirable for
now while the Committee assessed the
economy's responses to its earlier easing actions.
In the course of the Committee's discussion, the members expressed varying
degrees of concern about the continuing
weakness in the broader monetary
aggregates and overall credit growth. It
was clear that a significant restructuring
of household and business balance
sheets was occurring that partly involved adjustments to the unusually
rapid buildup of debt during the 1980s
and that such restructuring was being
reflected in the behavior of the broader
monetary aggregates. Resolutions of
insolvent thrift institutions, which in
recent months had resumed in volume,
FOMC Policy Actions
also were acting to depress M2 as well
as M3. In addition, the more liquid components of the monetary aggregates
were growing relatively strongly. Under
these circumstances, slow growth in
broader money and credit did not necessarily indicate that monetary policy was
being too restrictive by damping the
expansion of incomes or curtailing
demands for goods and services. Moreover, a staff analysis prepared for this
meeting indicated that some recovery in
the growth of these aggregates could be
expected over the balance of 1991,
assuming an unchanged degree of pressure in reserve markets. Nonetheless,
many of the members felt that the behavior of M2 and M3, whose growth for
the year to date was at the bottom of the
Committee's ranges, needed to be monitored with special care and, at least in
one view, that some further easing measures might be desirable in the near term
to improve the prospects that monetary
expansion for the year would be within
the Committee's ranges.
Turning to possible adjustments to the
degree of reserve pressure during the
intermeeting period, a majority of the
members indicated a preference for a
directive that was biased at least marginally toward easing. Such a bias was
called for in this view by the downside
risks in the economy, though a number
of these members also felt that there
should be no strong presumption that
any easing would be undertaken during
the intermeeting period ahead. The other
members indicated that they could support an asymmetric directive toward
ease though they preferred a symmetric
intermeeting instruction, especially in
the context of the further stimulus
that could be expected to result over
time from the earlier monetary easing
actions.
At the conclusion of the Committee's
discussion, all of the members indicated
153
that they favored a directive that called
for maintaining the existing degree of
pressure on reserve positions. They also
noted their preference or acceptance of
a directive that included a slight bias
toward possible easing during the intermeeting period. Accordingly, the Committee decided that slightly greater reserve restraint might be acceptable
during the intermeeting period or
slightly lesser reserve restraint would
be acceptable depending on progress
toward price stability, trends in economic activity, the behavior of the monetary aggregates, and developments in
foreign exchange and domestic financial
markets. The reserve conditions contemplated at this meeting were expected to
be consistent with growth of M2 and
M3 at annual rates of around 3 percent
and Wi percent respectively over the
three-month period from September
through December.
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
has been mixed, but it suggests on balance
that economic activity has been expanding
at a moderate pace. Total nonfarm payroll
employment changed little over July and
August, and the civilian unemployment rate
was 6.8 percent in both months. Employment in manufacturing continued to advance
in August, and industrial production posted a
further rise after several months of sizable
gains. Consumer spending increased considerably on balance in July and August. Recent
data on orders and shipments of nondefense
capital goods point to a small increase in real
outlays for business equipment, but nonresidential construction has remained weak.
Housing starts rose only slightly further in
July and August after increasing appreciably
on balance since January. The nominal U.S.
merchandise trade deficit widened substantially in July and was considerably above its
average rate in the second quarter. Increases
in consumer prices have been small in recent
154
78th Annual Report, 1991
months, owing to declines in food and
energy prices.
Most interest rates have declined further
since the Committee meeting on August 20.
The Board of Governors approved a reduction in the discount rate from 5Vi to 5 percent on September 13. The trade-weighted
value of the dollar in terms of the other G-10
currencies fell sharply over the intermeeting
period; much of the drop retraced the previous run-up associated with the attempted
coup in the Soviet Union that began shortly
before the August Committee meeting.
After contracting in July, M2 was about
unchanged in August and September. M3
declined further in July and August and is
indicated to have changed little in September. For the year thus far, expansion of M2
and M3 has been at the lower end of the
Committee's ranges.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. 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 2V2 to 6V2 percent and 1 to 5 percent,
respectively, measured from the fourth quarter of 1990 to the fourth quarter of 1991. The
monitoring range for growth of total domestic nonfinancial debt also was maintained at
4V2 to SV2 percent for the year. For 1992, on
a tentative basis, the Committee agreed in
July to use the same ranges as in 1991 for
growth in each of the monetary aggregates
and debt, measured from the fourth quarter
of 1991 to the fourth quarter of 1992. With
regard to M3, the Committee anticipated that
the ongoing restructuring of thrift depository
institutions would continue to depress the
growth of this aggregate relative to spending
and total credit. The behavior of the monetary aggregates will continue to be evaluated
in the light of progress toward price level
stability, movements in their velocities, and
developments in the economy and financial
markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. Depending upon progress
toward price stability, trends in economic
activity, 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 3 and IV2 percent,
respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Keehn,
Kelley, LaWare, Mullins, and Parry. Votes
against this action: None.
Meeting Held on
November 5,1991
1. Domestic Policy Directive
The information reviewed at this meeting suggested that economic activity had
turned sluggish after registering considerable gains around midyear. Consumer
spending for goods had been lackluster
recently, and businesses remained cautious about investing in increased production capacity or inventories. Industrial production had flattened out,
nonresidential construction had moved
sharply lower, and housing construction
had lost much of its forward momentum. Price inflation evidently remained
on a gradual downtrend.
After falling sharply in the first half
of the year, total nonfarm payroll employment rose slightly in the third quarter and was unchanged in October.
Sizable job gains in the services sector,
notably in health and business services,
were offset by losses elsewhere. Manufacturing employment declined further;
durable goods industries bore all of the
loss. Job cutbacks in construction and
retail trade were larger in October than
they had been in recent months. Also,
the small September increase in average
weekly hours worked by production or
nonsupervisory workers was reversed in
October. The civilian unemployment
rate edged back up to 6.8 percent.
FOMC Policy Actions
Industrial production was little
changed over August and September
after sizable gains in earlier months;
available data indicated that production
would remain flat in October. Sluggishness had been evident in most components of the index since July; abstracting
from the output of motor vehicles and
parts, which had been subject to wide
swings, the production of consumer
goods and construction supplies had
been rising much less rapidly since midyear while the output of business equipment had not expanded much since
reaching its low last March. Total industrial capacity utilization edged lower in
September.
Real personal consumption expenditures advanced considerably further in
the third quarter, partly reflecting a sharp
rise in purchases of motor vehicles.
However, outlays for non-auto goods
weakened in August and September, and
partial data for October suggested a
slowing in sales of motor vehicles in
that month. In addition, indicators of
consumer confidence, which had remained at subdued levels since the end
of the war in the Persian Gulf, had deteriorated significantly in October. Housing starts declined in September after
rising substantially on balance in earlier
months of this year. Sales of both new
and existing houses had dropped recently despite lower mortgage rates and
favorable price developments.
Shipments of nondefense capital
goods rose for a second straight month
in September. For the third quarter as a
whole, real business spending for computers, aircraft, and motor vehicles registered a sizable gain while outlays for
industrial machinery fell further. Recent
data on orders pointed to some further
moderate expansion in business spending for equipment in the near term. Nonresidential construction continued to
contract at a rapid rate as outlays for all
155
major types of structures, but particularly for commercial buildings, fell
sharply. Available information on new
contracts and commitments suggested
that the rate of decline for non-office
construction activity might slow in coming months.
The pace of inventory liquidation by
businesses slowed in July and August
from the substantial second-quarter rate.
Ratios of inventories to sales edged
down at manufacturing and non-auto
retail firms. In September, stocks held
by manufacturers increased.
The nominal U.S. merchandise trade
deficit widened appreciably in August.
For the July-August period, the trade
deficit was significantly larger than its
average rate in the second quarter,
reflecting a strong expansion in the
value of imports and a small reduction
in the value of exports. The increase in
imports was entirely in consumer goods
and automotive products; other major
trade categories registered small declines. Part of the drop in exports resulted from a partial reversal of a sharp
second-quarter increase in exports of
aircraft and parts. Indicators of economic activity in the major foreign
industrial countries suggested continued
weak growth on balance in the third
quarter. The rate of growth in western
Germany and Japan was considerably
slower in the second and third quarters
than earlier in the year, although capacity utilization rates remained high in
both countries. In some other major
countries, economic activity was slowly
and unevenly recovering from a period
of recession.
Producer prices of finished goods
were little changed in September; a
firming of prices of finished energy
goods was offset by lower food prices.
For finished goods other than food and
energy, producer prices had advanced
thus far in 1991 at a pace appreciably
156 78th Annual Report, 1991
below that for 1990. At the consumer
level, the September rise in prices was
larger than the increases in the prior few
months. Excluding food and energy
items, consumer prices advanced in September at the same elevated rate as in
the previous three months; however, for
1991 to date, nonfood, non-energy consumer prices had increased at a slightly
slower pace than in 1990. Total hourly
compensation for private industry workers rose at a somewhat slower rate in the
third quarter than in the first half of the
year. For the year to date, wage increases had slowed appreciably, but
benefit costs had continued their rapid
rise.
At its meeting on October 1, 1991,
the Committee adopted a directive that
called for maintaining the existing degree of pressure on reserve positions
and for giving special weight to potential developments that might require
some easing during the intermeeting
period. Accordingly, the directive indicated that slightly greater reserve restraint might be acceptable or slightly
lesser reserve restraint would be acceptable during the intermeeting period
depending on progress toward price stability, trends in economic activity, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated at this
meeting were expected to be consistent
with a resumption in the growth of both
M2 and M3; these aggregates were
expected to expand at annual rates of
around 3 percent and 1 Vi percent respectively over the three-month period from
September through December.
Over most of the intermeeting period,
open market operations were directed
toward maintaining the existing degree
of pressure on reserve positions. At the
end of October, however, a slight easing
of reserve conditions was implemented;
this action was taken in response to
signs of a weaker-than-expected economic recovery and flagging consumer
and business confidence. Just before the
intermeeting period, adjustment plus
seasonal borrowing had averaged
around $340 million. During the period,
several technical decreases were made
to expected levels of adjustment plus
seasonal borrowing to reflect the usual
autumn pattern of ebbing seasonal credit
needs. By the end of the intermeeting
period, following the slackening of seasonal funding needs and the easing of
reserve conditions, the volume of borrowing had declined to around $125 million. The federal funds rate remained
near 5VA percent during most of the
intermeeting period but slipped to about
5 percent after the easing of reserve
conditions.
Over the early weeks of the intermeeting period, other short-term interest rates
declined somewhat as market participants interpreted incoming data as indicating a sluggish economy. At the same
time, long-term rates moved considerably higher in response to the release of
disappointing statistics on consumer
prices and concerns stemming from discussions of possible measures of fiscal
stimulus that would increase the federal
deficit and borrowing needs. Subsequently, short-term rates fell further and
long-term rates retraced a portion of
their rise as markets reacted to information suggesting additional economic
weakness and reduced pressure on labor
costs, and to actual as well as prospective further easing of monetary policy.
The prime rate remained unchanged at
8 percent over the period, but primarymarket yields on mortgages fell to their
lowest levels since 1977. Most stock
price indexes were slightly higher on
balance.
The trade-weighted value of the dollar in terms of the other G-10 currencies
FOMC Policy Actions
fluctuated in a fairly narrow range over
the intermeeting period but declined
slightly on balance. The dollar was generally higher over the first half of the
period but then weakened in response to
growing evidence of a sluggish U.S.
economy and consequent market anticipation of an easing of U.S. monetary
policy. The dollar was up a little against
the mark, in large part reflecting concerns that the Soviet Union might default on its foreign debt, much of which
is owed to or guaranteed by the German
government. The yen was strong on
balance, in part because of continuing
indications of growing Japanese trade
surpluses.
M2 expanded slowly in October after
shrinking on balance over the previous
three months. The turnaround was consistent with the Committee's expectations for the fourth quarter and reflected
in part the rapid growth in the liquiddeposit components of this monetary
aggregate. As the Committee also had
expected, the pickup in M2 showed
through to M3, which posted its first
monthly increase since May. For the
year through October, expansion of both
M2 and M3 was estimated to have been
at the lower ends of the Committee's
annual growth ranges.
The staff projection prepared for this
meeting pointed to a continuing recovery in economic activity, but recent
reports on business and consumer confidence combined with other information
had led to an appreciable markdown in
the projected rate of expansion for the
current quarter and to a lesser markdown for the first quarter of 1992. Economic growth was projected to pick up
by the spring of next year, but as in
earlier staff forecasts, it was expected
to remain subdued in comparison with
past cyclical experience and the risks
of a different outcome continued to be
seen as predominantly on the downside.
157
Increases in the construction of singlefamily housing and in business spending
for equipment, along with a shift from
inventory liquidation to limited accumulation, were expected to give impetus to
the expansion during 1992. As in earlier
forecasts, real federal government purchases were projected to fall somewhat
next year, with defense expenditures
more than accounting for the decline,
and fiscal adjustments at the state and
local levels and a continuing decline in
commercial construction were expected
to be persisting sources of restraint on
aggregate demand. Significant though
diminishing slack in labor and product
markets was projected to induce a further decline in the underlying rate of
inflation over the next several quarters.
In the Committee's discussion of current and prospective economic developments, the members commented on
widespread indications of deteriorating
business and consumer confidence and
on evidence that the recovery in business activity had weakened since early
summer. Nonetheless, despite quite negative anecdotal reports from many parts
of the country, the members generally
concluded that the available economic
data appeared consistent with continuing, albeit sluggish, expansion in overall
economic activity. Views differed to
some extent with regard to the risks to a
continuing recovery. A number of members expressed concern about the potential for some further softening, especially in light of the vulnerability of the
expansion stemming from the troubled
condition of many financial institutions
and the heavy debt burdens of numerous
business firms and individual households; other members saw the risks as
more evenly balanced and perhaps even
tilted marginally to the upside. While
the performance of the economy was
likely to remain relatively lackluster
over the nearer term and the risks of a
158 78th Annual Report, 1991
downturn would be greatest during the
next quarter or two, many of the members judged a resumption of growth next
year at a pace broadly in line with the
staff forecast to be a reasonable expectation. In this regard, some noted that
much of the stimulus from the easing in
monetary policy over the course of recent months had not yet been felt in the
economy. Many of the members emphasized that the prospects for appreciable
progress toward price stability were
quite favorable, though some expressed
reservations about the extent of the
progress that could be expected over the
forecast horizon.
Several members referred to the continuing adjustments by financial institutions and many business firms to the
financial excesses of the past decade and
the greater-than-expected downward
pressure that these adjustments appeared
to be exerting on the expansion. The
efforts to reduce debt exposure and
rebuild equity positions were necessitated by the effects on balance sheets of
the contraction in the value of a variety
of assets, notably in the structurally
troubled sectors of the economy such
as commercial real estate, and the failure of other assets to appreciate as expected. The rebuilding of balance sheets
augured well for the future financial
health and stability of the economy, but
members commented that an extended
period would be required before that
process could be completed. In the
interim, the retrenchment that was
involved implied reduced propensities
to spend and constrained growth in
business activity. One facet of the
adjustment process was greater caution
on the part of institutional lenders. Many
business borrowers continued to complain about the difficulty of obtaining credit, while institutional lenders
stressed the lack of demand from qualified borrowers.
In the course of the Committee's
review of business developments in different regions, members continued to
report uneven conditions ranging from
modest growth to some further decline
in regional activity, but business and
consumer sentiment was described as
almost universally negative. It was unclear to what extent the drop in confidence reflected the disappointing pace
of the economic recovery so far or was a
harbinger of further weakening in economic activity. Members commented
that surveys of consumer confidence
had to be viewed with caution because
they had tended in the past to be coincident rather than leading indicators of
economic activity. More generally, bearish sentiment, though perhaps more
muted, had not been an unusual occurrence in the early stages of past business
recoveries.
While the potential sources of economic stimulus were subject to uncertainty and recent developments heightened concerns that the rate of economic
expansion would remain below a desirable pace for an extended period, the
members generally anticipated that improvement in key areas of the economy,
notably certain interest-sensitive sectors
and business inventories, eventually
would provide the impetus needed to
promote at least moderate growth in
overall business activity. In the critical
area of consumer demand, members observed that consumer caution reflected
not only concerns about employment
prospects and, in the case of many
households, relatively heavy debt burdens, but also appeared to stem from
actual or perceived declines in the market value of residences. Consumer expenditures on services were continuing
to grow, though at a relatively slow
pace, but spending on goods had edged
lower over the course of recent months
and many retailers reported that they
FOMC Policy Actions
expected very weak sales during the
approaching holiday season. With
regard to the longer-term outlook for
consumer expenditures, some pickup in
interest-sensitive spending for durable
goods was seen as a likely prospect that
would have feedback effects on the
demand for inventories and production.
According to available data and reports from around the country, inventories generally appeared to be near
acceptable levels, and members continued to anticipate that a further swing
from inventory liquidation to modest
accumulation would provide some stimulus to the economy over the year ahead.
The members recognized that a number
of developments argued against a typical surge in inventory investment during
the recovery, including the now widespread practice of "just-in-time" inventory management. Nonetheless, despite
sluggish demand, the pace of inventory
liquidation appeared to have slowed in
the third quarter, and there were scattered reports of efforts by some manufacturers to increase their inventories.
The construction of new housing also
appeared likely to play a positive,
though possibly limited, role in helping
to sustain the recovery. Recent indicators of home sales and housing starts
were disappointing, but the demand for
new single-family homes would respond
over time to the declines that had
occurred in mortgage interest rates.
Some of that demand might be postponed, however, until borrowers were
persuaded that interest rates had bottomed out. On the negative side, commercial construction activity would
probably remain depressed for an extended period as excess capacity in
many parts of the country gradually was
absorbed. With regard to business
spending for new equipment, real outlays were indicated to have risen, especially for computers, and this sector
159
could be expected to provide ongoing
strength, especially once the expansion
was well under way.
In their comments concerning the outlook for inflation, members observed
that many of the recent statistical indicators and especially the anecdotal evidence from around the country provided
the basis for considerable optimism that
progress was being made toward price
stability. Developments on the financial
side, including low levels of business
and consumer borrowing and an extended period of limited monetary
growth, reinforced expectations of an
ongoing movement toward stable prices.
Members also noted that the information on wages was consistent with a
downtrend in labor costs despite still
substantial upward pressures on employee benefit costs. Some members
cautioned, however, that an appreciable
inflationary risk remained in the economy. While inflationary expectations
might well be waning, as evidenced in
part by the behavior of equity markets,
the level of long-term interest rates suggested that inflation concerns had not
disappeared.
In the Committee's discussion of an
appropriate policy for the intermeeting
period ahead, a majority of the members
indicated that they could support a proposal to ease reserve conditions slightly
at this time and to bias the directive
toward possible further easing later in
the intermeeting period. The members
recognized that monetary policy had
been eased considerably over the course
of recent months, including a decision to
reduce reserve pressures at the end of
October, and that all of the stimulus
from the earlier actions had not yet been
felt in the economy. Nonetheless, in the
view of many members further modest
easing was desirable at this point to
provide some added insurance against
the downside risks in the economy. Such
160 78th Annual Report, 1991
a policy move would help counter the
deterioration in business and consumer
confidence, and it might also encourage
some decline in longer-term interest
rates. Under current economic and
financial conditions, this easing would
pose negligible risks of deflecting inflation from its downward path. Continuing weakness in the monetary aggregates reinforced the need for easier
reserve conditions.
There was considerable discussion
regarding the possible advantages of a
somewhat stronger move at this juncture. A Vi percentage point reduction of
the discount rate was pending at several
Federal Reserve Banks, but the Board of
Governors had not yet made a decision
with regard to those proposals. It was
noted during this discussion that the
Federal Reserve had tended to implement its easing of monetary policy since
the spring of 1989 through a series of
small policy actions. That approach generally appeared to have been appropriate, but a number of members expressed
concern that further small moves would
lack the visibility that was needed in
present circumstances. If reserve pressures were to be reduced only modestly,
this action should be accompanied in
the view of many members by Board
approval of the pending discount rate
proposals to signal clearly that monetary
policy was moving against the weakening tendencies in the economy. An
accompanying reduction in the discount
rate also was seen as providing further
encouragement to a drop in the prime
rate.
Other members expressed reservations about the need for substantial easing, and two indicated that they could
not support any easing through open
market operations at this time. Some
questioned whether monetary policy
actions could have a constructive influence on business and consumer confi
dence under prevailing circumstances.
Indeed, appreciable further easing, or
any easing, would incur too much risk
of reviving inflationary concerns with
adverse consequences for longer-term
debt markets. While none of these members wanted to rule out the potential
need to ease monetary policy significantly further, they preferred to pause
and wait for additional evidence before
such action was taken, especially given
the further stimulus that could be anticipated from previous easing moves. Concern also was expressed that the Committee might not recognize the need to
reverse its course and tighten policy on
a timely basis should inflationary pressures tend to revive later.
Members noted that the expansion of
M2 appeared to have resumed in October, though at a pace that kept the aggregate only at the bottom of the Committee's range for the year. According to an
analysis prepared by the staff for this
meeting, M2 was likely to continue to
expand slowly over the balance of the
year, despite the effects of earlier policy
easing actions, and for the year as a
whole M2 growth was expected to
average close to the lower end of the
Committee's range. Some members
commented that an easing in reserve
conditions would not only improve
slightly the odds that M2 growth would
end the year within the Committee's
range but would also help to put M2 on
a desirable growth path by early next
year. While the relationship between
money growth and economic activity
was subject to substantial uncertainty in
the short run, they saw a marked advantage, in terms of the continuity of monetary policy and its credibility, for the
Committee to more aggressively foster
growth of M2 within the annual range.
With regard to possible adjustments
to the degree of reserve pressure during
the intermeeting period, most of the
FOMC Policy Actions
members who favored some immediate
easing of reserve conditions also supported a directive that remained biased
toward further easing. However, some
also indicated that if the Board were to
approve the pending proposals to reduce
the discount rate, the intermeeting
instruction should then be viewed as
symmetrical.
The members discussed at some
length the appropriate timing of the
Committee's easing action. Starting that
afternoon and continuing over the next
two days, the Treasury would be conducting its quarterly auctions of notes
and bonds. In view of this, an immediate
policy move would come as a surprise
to many participants in financial markets, although such a move shortly after
the auctions was widely anticipated.
An immediate move, even in the easing
direction, could have an adverse effect
on some Treasury market participants,
with potentially unsettling consequences
for current and future Treasury financings. The members agreed that in general it was preferable to avoid policy
moves during Treasury refundings, but
most felt that the contemplated easing
move should not be delayed for any
significant period. They concluded that,
on balance, it would be less misleading
to take action immediately rather than to
wait until the Treasury auctions were
completed later in the week. It was
noted in this connection that a prompt
easing of reserve conditions, and any
accompanying Board action to approve
a lower discount rate, would become
known to outside observers after the
auction of the shorter-term Treasury
note but before the auctions of the
intermediate- and long-term Treasury
issues.
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 an
1 61
immediate slight easing in the degree of
pressure on reserve positions. These
members also noted their acceptance of
a directive that included a bias toward
possible easing during the intermeeting
period. Accordingly, the Committee
decided that slightly greater reserve
restraint might be acceptable during the
intermeeting period or slightly lesser
reserve restraint would be acceptable
depending on progress toward price stability, trends in economic activity, the
behavior of the monetary aggregates,
and developments in foreign exchange
and domestic financial markets. The
reserve conditions contemplated at
this meeting were expected to be
consistent with growth of M2 and M3
at annual rates of around 3 percent
and 1 percent respectively over the
three-month period from September
through December.
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
portrays a sluggish economy and a marked
deterioration in business and consumer confidence. Total nonfarm payroll employment
was unchanged in October after rising
slightly over the third quarter, and the civilian unemployment rate edged back up to
6.8 percent. Industrial production has been
flat in recent months. Consumer spending
increased considerably through the summer,
in part because of a sizable rise in expenditures on motor vehicles; sales of motor vehicles slowed in October, however. Real outlays for business equipment—especially for
computers—have been rising, but nonresidential construction has continued to decline. Housing starts and home sales have
weakened recently. The nominal U.S. merchandise trade deficit in July-August was
significantly above its average rate in the
second quarter. Wage and price increases
have continued to trend downward.
Short-term interest rates have declined
somewhat further since the Committee meeting on October 1, while bond yields are
162 78th Annual Report, 1991
about unchanged to slightly higher on balance. The trade-weighted value of the dollar
in terms of the other G-10 currencies
declined on balance over the intermeeting
period.
Expansion in M2 and M3 resumed in
October, albeit at a slow pace. For the year
through October, expansion of both M2 and
M3 is estimated to have been at the lower
ends of the Committee's ranges.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. 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 2Vz to 6V2 percent and 1 to 5 percent,
respectively, measured from the fourth quarter of 1990 to the fourth quarter of 1991. The
monitoring range for growth of total domestic nonfinancial debt also was maintained at
4V2 to 8V2 percent for the year. For 1992, on
a tentative basis, the Committee agreed in
July to use the same ranges as in 1991 for
growth in each of the monetary aggregates
and debt, measured from the fourth quarter
of 1991 to the fourth quarter of 1992. With
regard to M3, the Committee anticipated that
the ongoing restructuring of thrift depository
institutions would continue to depress the
growth of this aggregate relative to spending
and total credit. The behavior of the monetary aggregates will continue to be evaluated
in the light of progress toward price level
stability, movements in their velocities, and
developments in the economy and financial
markets.
In the implementation of policy for the
immediate future, the Committee seeks to
decrease somewhat the existing degree of
pressure on reserve positions. Depending
upon progress toward price stability, trends
in economic activity, 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
3 and 1 percent, respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Black, Forrestal, Keehn,
LaWare, Mullins, and Parry. Votes against
this action: Messrs. Angell and Kelley.
Mr. Angell dissented because he was
concerned about the impact of further
easing on inflation expectations and consequently on long-term interest rates. In
his view, the prospect for a robust and
long-lasting recovery is dependent on
the completion of adjustments in business pricing practices, household savings, and balance sheets more generally.
Monetary policy actions that are perceived as a shift from a focus on pricelevel stability to one on short-term economic growth may well abort the needed
adjustments. In his view, credible pricelevel targeting would provide assurance,
particularly given the somewhat precarious short-term business outlook, that
monetary policy would act to counter
either deflation or inflation. The consequence would be to foster a considerable downward thrust in long-term
interest rates and to set the stage for
sustained expansion.
Mr. Kelley dissented because he believed that a steady policy course was
appropriate, at least for now, in the context of the ongoing stimulus that could
be anticipated from the System's earlier
easing actions. In his view, the outlook
for continuing expansion in economic
activity remained favorable, and he saw
considerable risks in further easing at
this time. In particular, he was concerned that a policy easing move would
stimulate inflation expectations with adverse implications for long-term interest
rates and the performance of interestsensitive sectors of the economy. Further, he did not believe that many of the
factors that are importantly inhibiting
economic expansion could be constructively addressed by a more accommodative position. He also feared that the
dollar would come under downward
pressure in foreign exchange markets
FOMC Policy Actions
163
being restrained by budgetary imbalances. Recently, industrial production
had fallen, and payroll employment
had dropped sharply. Wage and price
increases had continued to trend
2. Authorization for Domestic
downward.
Open Market Operations
Total nonfarm payroll employment
The Committee approved a temporary fell sharply in November after rising
increase of $2 billion, to a level of somewhat in the third quarter and
$10 billion, in the limit on changes changing little in October. Declines in
between Committee meetings in System employment were widespread: The
Account holdings of U.S. government number of manufacturing jobs decreased
and federal agency securities. The in- in November for a third straight month,
crease amended paragraph l(a) of the and further job losses were reported in
Authorization for Domestic Open Mar- construction and in wholesale and retail
ket Operations and was effective for the trade. However, the average weekly
intermeeting period ending with the hours worked by production or nonsuclose of business on December 17,1991. pervisory workers in the private nonfarm sector edged up in November,
Votes for this action: Messrs. Greenspan, and the civilian unemployment rate
Corrigan, Angell, Black, Forrestal, Keehn, remained at 6.8 percent.
Kelley, LaWare, Mullins, and Parry. Votes
Industrial production fell appreciably
against this action: None.
in November after changing little in the
previous three months. A portion of the
The Manager for Domestic OperaNovember decline reflected a sizable
tions advised the Committee that the
drop in the output of motor vehicles
current leeway of $8 billion for changes
and parts. In addition, however, the proin System Account holdings might not
duction of non-auto consumer goods
be sufficient to accommodate the potenslackened, and the output of business
tially large need to add reserves over the
equipment other than motor vehicles
intermeeting period ahead to meet an
remained near its low of last March;
anticipated seasonal bulge in currency
the latter reflected in part the persisting
in circulation and required reserves.
effects of a strike at a major producer of
industrial equipment. As in most earlier
months of the year, the production of
Meeting Held on
defense and space products declined.
December 17, 1991
With industrial output down in November, total industrial capacity utilization
Domestic Policy Directive
decreased, and declines in operating
The information reviewed at this meet- rates were widespread across industries.
ing indicated that the economy was slugReal consumer spending had been
gish and that business and consumer soft on balance in recent months, reconfidence remained depressed. Spend- flecting sluggish growth in disposable
ing for housing and business equipment incomes, weak labor-market conditions,
had been rising, but consumption expen- and depressed consumer confidence.
ditures had softened, commercial con- Nominal retail sales expanded somestruction activity was still declining, and what in November from a downward
government spending at all levels was revised level for October. The Novemwith only slight benefits for exports but
added inflation pressures in the domestic economy.
164 78th Annual Report, 1991
ber increase reflected a rebound in sales
of nondurable goods other than food and
a rise in sales at automotive dealers;
sales of durable goods other than autos
were about unchanged. Housing starts
fell in November, retracing part of a
substantial advance in October; on average, starts were appreciably higher in
October and November than in the third
quarter. Despite low mortgage interest
rates and steady house prices, sales
of single-family homes in October
remained well below their spring levels.
After changing little over the third
quarter, shipments of nondefense capital
goods registered a sharp rise in October,
reflecting a bulge in outlays for computing equipment; shipments of most other
types of business equipment remained
sluggish. Recent data on orders suggested little growth in aggregate outlays
for business equipment over the near
term. Nonresidential construction, notably of office and other commercial structures, continued to shrink in October.
The vacancy rate for office buildings
was still very high, and this along with
available information on contracts and
commitments suggested that nonresidential construction activity would remain weak for an extended period.
Business inventories turned up
sharply in September after many months
of liquidation. At the retail level, inventories rose further in October, with
nearly half of the buildup occurring at
auto dealers. The additional rise in
stocks coupled with declines in sales led
to higher inventory-to-sales ratios at
many types of retail establishments.
Aggregated over all retail establishments other than auto dealers, the ratio
of inventories to sales in October was
close to the peak posted in early 1991.
By contrast, in manufacturing, stocks
changed little in October, and the ratio
of stocks to sales decreased and nearly
reached its low of August 1990. Whole
sale inventories were up slightly in
October after a sizable decline in the
previous month; the inventory-to-sales
ratio remained in the narrow range that
had prevailed in recent months.
The nominal U.S. merchandise trade
deficit widened slightly further in September. For the third quarter, the deficit
was somewhat above its average rate
over thefirsthalf of 1991 but well below
its rate in 1990. The value of exports in
the third quarter remained close to the
record high reached in the second quarter while the value of imports increased
appreciably, with most of the rise
reflecting larger imports of automotive
products and consumer goods. The
increase in imports of consumer goods
appeared to have contributed to the substantial buildup in retail inventories in
the United States, particularly in the
month of September. The available data
on economic activity in the major foreign industrial countries provided further evidence of relatively weak growth
on balance in these countries in the third
quarter and gave few indications of a
revival in the fourth quarter. The trend
toward reduced inflation had continued
in most of the industrial countries.
Producer prices of finished goods
advanced in November at about the slow
pace recorded since midyear; over this
period, declines in food prices roughly
offset increases in energy prices. At the
consumer level, food and energy prices
jumped in November, but the increase in
the prices of nonfood, non-energy items
was about the same as that registered
since midyear and considerably below
the 1990 pace. Average hourly earnings
of production or nonsupervisory workers in the October-November period
increased at about the reduced thirdquarter rate; over the past twelve
months, average hourly earnings had
risen more slowly than in the previous
twelve-month period.
FOMC Policy Actions
At its meeting on November 5, 1991,
the Committee adopted a directive that
called for an immediate slight easing in
the degree of pressure on reserve positions and that provided for giving special weight to potential developments
that might require some additional
easing during the intermeeting period.
Accordingly, the directive indicated that
slightly greater reserve restraint might
be acceptable during the intermeeting
period or slightly lesser reserve restraint
would be acceptable depending on
progress toward price stability, trends in
economic activity, the behavior of the
monetary aggregates, and developments
in foreign exchange and domestic financial markets. The reserve conditions
contemplated under this directive were
expected to be consistent with growth of
M2 and M3 at annual rates of around
3 percent and 1 percent respectively
over the three-month period from September through December.
Immediately following the November
meeting, open market operations were
directed toward a slight easing of conditions in reserve markets; this step was
taken in conjunction with the reduction
in the discount rate from 5 to 4Vi percent approved by the Board of Governors on November 6. In early December, as economic indicators continued to
point to a faltering recovery and growth
of the broad monetary aggregates remained sluggish, an additional slight
easing of reserve conditions was carried
out. Several technical reductions were
made during the intermeeting period to
expected levels of adjustment plus seasonal borrowing to reflect the declining
usage of seasonal credit during the autumn. For most of the intermeeting interval, adjustment plus seasonal borrowing tended to run a little below expected
levels, averaging slightly more than
$100 million over the three complete
reserve maintenance periods. The fed
165
eral funds rate averaged around 43A percent over most of the period but softened to around AVi percent after the
second easing action.
Other short-term interest rates declined more than the federal funds rate
as market participants reacted to actual
and anticipated further easing steps amid
growing evidence that the economic
recovery had stalled. Expectations of
more subdued economic activity contributed to declines in yields on longerterm instruments as well. Yields on
intermediate maturity securities dropped
almost as much as short-term rates while
rates on mortgages, corporate bonds,
and long-term Treasuries fell by less.
The prime rate was reduced by Vi percentage point to IV2 percent early in the
intermeeting period. Broad stock price
indexes were down slightly.
The trade-weighted value of the dollar in terms of the other G-10 currencies
declined further on balance over the
intermeeting period. During most of the
period, signs of weakness in the U.S.
economy and the easings of U.S. monetary policy had a depressing effect on
the value of the dollar. The dollar's
depreciation was primarily against the
mark and other European currencies; the
mark was supported by reports of further increases in wage and price inflation in Germany and associated expectations that German monetary policy
would be tightened. The dollar declined
less against the Japanese yen as evidence accumulated that the Japanese
economy was slowing further and some
easing was implemented in Japanese
monetary policy.
Expansion in M2 picked up in
November from a slow pace in October.
At least in part this reflected the cumulative effect of earlier declines in shortterm market interest rates in lowering
the opportunity costs of holding liquid
deposits. The somewhat faster expan-
166 78th Annual Report, 1991
sion of M2 was consistent with the
Committee's expectations for M2
growth in the fourth quarter. The more
rapid growth of M2 showed through to a
limited extent to M3. For the year
through November, expansion of both
M2 and M3 was estimated to have been
at the lower ends of the Committee's
annual ranges.
The staff projection prepared for this
meeting pointed to a recovery in economic activity. However, a variety of
incoming information, notably indications of a depressed state of confidence,
weaker than expected consumer spending, and sluggish industrial production
suggested a pause in the recovery that
might extend into early 1992. By the
spring, the cumulative effects of declines in interest rates in recent months
would contribute to a resumption of economic growth at a moderate rate, with
the risks of a stronger or weaker trajectory for the economy being viewed as
about in balance. Increases in residential
construction, somewhat larger consumption expenditures, and some pickup in
business equipment spending were projected to provide the underpinnings for
the resumption of growth. As in earlier
forecasts, the continuing downtrend in
commercial construction and ongoing
adjustments in state and local government spending in response to budget
imbalances were expected to have a
retarding effect on aggregate demand.
At the federal level, projected declines
in defense outlays, which would be only
partially offset by higher nondefense
spending, also would be a source of
restraint, at least in the absence of new
fiscal initiatives. The substantial though
diminishing slack expected in labor and
product markets in coming quarters was
projected to induce further declines in
the underlying rate of inflation.
In the Committee's discussion of current and prospective economic develop
ments, the members focused on an evident pause in the business recovery and
its interaction with very gloomy business and consumer sentiment. A number
of factors that had been expected to
damp the expansion—including the retrenchment associated with the rebuilding of balance sheets by heavily indebted businesses and consumers and
the efforts of many firms to improve
efficiency by streamlining operations
and reducing employment—had in fact
proved to be stronger and more persistent than anticipated. The timing of a
renewed expansion in business activity
was uncertain, and a number of members commented that the economy might
well remain quite sluggish over the
months immediately ahead. Nonetheless, considerable progress in business
andfinancialrestructuring activities was
in train, and the latter, together with the
stimulus that could be expected from the
lagged effects of earlier monetary policy
easing actions, was likely to lead to a
moderate pickup in the economy later in
1992. With regard to the outlook for
inflation, many members observed
that the statistical and anecdotal evidence pointed to faster progress toward price stability than they had anticipated earlier.
As they had at earlier meetings, the
members gave considerable emphasis to
current business and consumer sentiment, which they judged to be much
more negative than under similar business and employment conditions in the
past. The underlying reasons were difficult to ascertain but probably reflected
a variety of developments, including
widespread disappointment over the
pace of the economic recovery, related
consumer concerns about employment
opportunities, and fears associated with
heavy debt burdens and the weakened
financial condition of many business and
financial institutions. The size of the
FOMC Policy Actions
federal budget deficit was adding to
those concerns, and the budgetary problems of many state and local governments were seen as likely to result in
higher taxes and spending cutbacks. On
the positive side, while the efforts to
rebuild balance sheets and to restructure
business activities were likely to continue to exert restraining effects on the
economy, such developments had favorable implications for the financial health
and the competitive strength of the economy over the longer run. Members
noted in this connection that a record
volume of equity issues was helping to
reduce balance sheet leverage and that
proceeds from large offerings of debt
securities were being used to a considerable extent to pay down short-term liabilities. The sizable decline in interest
rates over the course of recent months
was easing the debt service burdens of
many borrowers, and in a few geographic areas banking institutions were
reported to be making funds more
readily available. The stock market continued to display appreciable strength,
reflecting the drop in interest rates and
suggesting investor confidence in the
longer-run outlook for the economy.
Some members also cited the indications of reviving growth in the broader
monetary aggregates as an encouraging
if still tentative development.
Turning to developments in key sectors of the economy, the members commented that it was still too early to get a
firm indication regarding holiday spending by consumers, though retailers in
some parts of the country reported that
sales were somewhat better than they
had projected. Nonetheless, consumers
remained quite cautious nationwide, and
some members commented that consumer spending for durable goods might
well continue sluggish over the months
ahead, especially in a context of widespread consumer concerns about em
167
ployment prospects, debt burdens, and
softness in real estate prices. Some
members also observed that the saving
rate was already on the low side and that
the risks of a rise in that rate could not
be ruled out in the environment that
was likely to prevail during the months
ahead.
The members did not discern signs of
significant strengthening in business
expenditures for equipment over the
nearer term, though the output of capital
goods appeared to be on a slowly rising
trend in at least one major capitalproducing region. Nonresidential construction activity remained very weak in
most parts of the country, and high
vacancy rates suggested little prospect
for improvement in the commercial
building sector for an extended period.
On the other hand, significant improvement in housing construction was
reported in some parts of the country,
and housing activity appeared to be
holding up reasonably well on a nationwide basis. The declines that had
occurred in interest rates would tend
over time to stimulate housing and other
interest-sensitive sectors of the economy. The outlook for U.S. exports was
tempered by more sluggish business
conditions in several key countries than
had been expected earlier, but exports
would be supported by the depreciation
in the foreign exchange value of the
dollar since mid-1991.
Businesses continued to pursue cautious inventory investment policies.
Contacts in most parts of the country
described current inventories as lean,
and many retailers were prepared to
accept reduced sales rather than to add
to their inventories under prevailing
conditions, although some buildup had
occurred in recent months in association
with weak demands. While rising inventories were not likely to make a major
contribution to the anticipated recovery,
168 78th Annual Report, 1991
any significant firming in final demands
probably would be reflected fairly
promptly in increased production.
With regard to the outlook for the
government sectors, members commented that the massive size of current
federal budget deficits greatly limited
any flexibility in providing some stimulus through fiscal policy actions. It
was noted in this connection that any
legislation that was seen as significantly increasing the size of the federal
deficits over the longer run could have
adverse repercussions on long-term
interest rates and business and consumer confidence. Some members also
referred to the negative effects on confidence and spending stemming from the
budgetary difficulties of numerous state
and local governments; at least in some
areas, however, capital expenditures by
such government entities were being
accelerated by lower interest and other
costs.
The members were encouraged by
evidence that inflationary pressures
appeared to be subsiding at a faster pace
than they had anticipated earlier. Anecdotal reports suggested very competitive
conditions in producer and retail markets and favorable wage patterns. Employee benefit costs were still rising
rapidly, notably medical costs, but members cited some examples of promising
efforts on the part of medical providers
to curb the escalation in their costs. It
was suggested that the behavior of commodity prices over the past year was
consistent with an outlook for stable
producer prices. The members saw little
risk of worsening inflationary pressures
over the forecast horizon even if the
pace of the recovery proved to be somewhat more vigorous than they currently
expected; however, some stressed that it
was important for monetary policy to
sustain the downtrend in inflation over
an even longer horizon.
In the Committee's discussion of policy for the period ahead, most of the
members indicated that they favored or
could accept a directive that called for
no immediate change in the degree of
pressure on reserve positions but that
carried an especially strong presumption
that some easing in reserve conditions
would be implemented unless improvement in the economy became evident
fairly promptly or there was significant
evidence of a pickup in M2 growth in
the period immediately ahead. Separately, the Board of Governors would
need to decide how the discount rate
should be structured in order to get the
maximum benefits from any easing,
given the current state of business and
consumer confidence.
The policy discussion focused on
the need to foster a sustained, noninflationary recovery. Such an environment
would promote continuing balance sheet
adjustments and business restructurings
that would over time enhance the financial soundness and competitive strength
of the economy. For now, however,
these activities were having restraining
effects on the economy, and there were
as yet no clear indications that the recovery was resuming. While the risks of
a substantial weakening in the economy
were perhaps small, such a development
would have severe consequences for the
economy and financial institutions. In
these circumstances, many of the members believed that some further easing of
reserve conditions likely would be
called for, especially if indications of
some strengthening in the economy or
in the growth of the monetary aggregates should fail to materialize in the
near future. A number of members also
commented that against the background
of better-than-expected progress toward
price stability, a stalled recovery, and
slow monetary growth, the inflation
risks of further easing were minimal.
FOMC Policy Actions
Some members indicated that they
saw an advantage in making a more
substantial policy move at some point in
the period ahead rather than additional
limited easing actions of the sort that
had been implemented in recent years.
In this view, a larger and more visible
policy action, which generally was not
anticipated in financial markets, would
have greater effectiveness in part because it would be more likely to bolster
confidence. The level of interest rates
and money growth that would be
expected to ensue from such an action,
against the background of the substantial easing that had already been implemented, should be sufficient to foster
expansion and promote the view that
further easing would not be needed.
Other members, while not disagreeing that further easing might be desirable, nonetheless expressed reservations
about the urgency to ease in the near
term and especially the need for a sizable move. These members emphasized
that a substantial amount of easing had
been implemented over the past several
months and that to a considerable extent
the effects of such easing had not yet
shown through in the economy. A number of these members also expressed the
view that monetary policy could do little
to offset the restraining effects of the
balance sheet adjustments and business
restructuring activities that were currently under way. Moreover, a resurgence of inflation pressures as the recovery gathered strength could not be
ruled out, and too much easing in the
period immediately ahead might have
to be reversed later with unsettling
consequences.
According to a staff analysis prepared
for this meeting, M2 and M3 were likely
to continue to grow at a restrained pace
over the months ahead in light of sluggish expansion in nominal income and
very limited loan growth. A decision to
169
implement somewhat easier reserve conditions would stimulate slightly faster
monetary expansion in the early months
of next year, though the broader aggregates would probably remain appreciably below the midpoints of the tentative
ranges that the Committee had established for 1992. The members observed
that to an important extent the weakness
of the monetary aggregates appeared to
be related to developments that involved
some reduction in the intermediary role
of depository institutions and might not
have adverse implications for the overall availability of financing in the economy. Some members suggested that a
number of indicators, including the
behavior of commodity prices, the slope
of the yield curve, and trends in the
growth of reserves and narrow measures
of money, pointed to an adequate availability of liquidity in the economy.
Nonetheless, several members expressed
concern about the continuing lagging
growth in the broad measures of money,
and they felt that consideration should
be given to an easing of reserve conditions if incoming data were to suggest
that the recent pickup was not being
sustained.
In the course of the Committee's discussion, the members reviewed a proposal to amend the wording of the statement in the operational paragraph of the
directive that related to possible intermeeting adjustments to the degree of
reserve pressures. While several members expressed a slight preference for
retaining the current statement, which
contained an ordering of the factors considered by the Committee in guiding
intermeeting policy adjustments, and a
few preferred to delete the listing of
factors altogether from the sentence, all
of the members indicated that they could
support a proposed alternative. That
alternative would make clearer the Committee's focus on its long-term goals by
170
78th Annual Report, 1991
inserting a reference to those goals at
the beginning of the sentence and would
refer in a more general way to the immediate economic, financial, and monetary developments that might prompt
an intermeeting adjustment. This new
wording implied less focus in the directive itself on the ranking of the factors,
but the understandings reached at meetings regarding their relative importance
would continue to be explained fully in
the policy record. The members agreed
that the revised statement should be
reviewed every year or more often if
warranted by changing economic or
financial conditions.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they favored or could
accept a directive that would call
initially for maintaining the existing
degree of pressure on reserve positions.
The members also noted their preference or acceptance of a directive that
included a marked bias toward easing
during the intermeeting period. Accordingly, in the context of the Committee's
long-run objectives for price stability
and sustainable economic growth, and
giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint
might be acceptable or somewhat lesser
reserve restraint would be acceptable
during the intermeeting period. The
reserve conditions contemplated at this
meeting were expected to be consistent
with growth of M2 and M3 at annual
rates of around 3 percent and Wi percent respectively over the four-month
period from November through March.
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
continues to portray a sluggish economy and
a depressed state of business and consumer
confidence. Total nonfarm payroll employment fell sharply in November; however, the
average workweek in the private nonfarm
sector edged up and the civilian unemployment rate remained at 6.8 percent. Industrial
production fell in November, partly reflecting a sizable drop in motor vehicle assemblies. Consumer spending has been soft on
balance in recent months. Real outlays for
business equipment appear to be rising
slowly, and nonresidential construction has
continued to decline. Housing starts were
appreciably higher on average in October
and November than in the third quarter. The
nominal U.S. merchandise trade deficit
widened slightly further in September; the
deficit in the third quarter was substantially
larger than in the second quarter. Wage and
price increases have continued to trend
downward.
Interest rates have declined appreciably
since the Committee meeting on November
5. The Board of Governors approved a
reduction in the discount rate from 5 to
4x/2 percent on November 6. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies declined further over the intermeeting period; the dollar depreciated primarily against the mark and other European
currencies.
Expansion in M2 and M3 edged up in
November from a slow pace in October; the
slightly faster growth reflected a strengthening in the most liquid components of the
aggregates. For the year through November,
expansion of both M2 and M3 is estimated
to have been at the lower ends of the Committee's ranges.
The Federal Open Market Committee
seeks monetary andfinancialconditions that
will foster price stability and promote sustainable growth in output. 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 2Vi to 6V2 percent and 1 to 5 percent,
respectively, measured from the fourth quarter of 1990 to the fourth quarter of 1991. The
monitoring range for growth of total domestic nonfinancial debt also was maintained at
4V6 to 8V2 percent for the year. For 1992, on
a tentative basis, the Committee agreed in
July to use the same ranges as in 1991 for
growth in each of the monetary aggregates
and debt, measured from the fourth quarter
FOMC Policy Actions
of 1991 to the fourth quarter of 1992. With
regard to M3, the Committee anticipated that
the ongoing restructuring of thrift depository
institutions would continue to depress the
growth of this aggregate relative to spending
and total credit. The behavior of the monetary aggregates will continue to be evaluated
in the light of progress toward price level
stability, movements in their velocities, and
developments in the economy and financial
markets.
In the implementation of policy for the
immediate future, the Committee seeks to
maintain the existing degree of pressure on
reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and
giving careful consideration to economic,
financial, and monetary developments,
slightly greater reserve restraint might 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 November
through March at annual rates of about 3 and
1 Vi percent, respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Black, Forrestal, Keehn,
Kelley, Lindsey, Mullins, Parry, and
Ms. Phillips. Vote against this action: Mr.
LaWare.
Mr. LaWare dissented because he did
not favor the inclusion in the directive
of a strong presumption that monetary
policy would be eased further during the
intermeeting period. While future developments might call for further easing, he
preferred not to prejudge that need but
to wait and assess the effects of the
considerable easing actions undertaken
earlier. In his view, the main barrier to a
satisfactory economic performance was
a crisis in confidence that was not likely
to be alleviated by further incremental
easing. In present circumstances, a
steady policy could provide a firm signal that the downward drift in interest
rates associated with a long series of
small easing actions had come to an
end. This signal might well prove to be
1 71
beneficial to the economy as interestsensitive decisions to spend no longer
were postponed in anticipation of still
lower interest rates. He recognized that
lower interest rates could alleviate heavy
debt service burdens, but he was concerned about the effects of a further
decline in interest rates on the value of
the dollar in foreign exchange markets.
At a telephone conference on December 20, 1991, the Committee discussed
the approval by the Board of Governors
of a 1 percentage point reduction in the
discount rate, effective that day, and the
implications of that action for the implementation of the Committee's policy
with regard to the degree of pressure to
be sought in reserve markets. It was
noted during this discussion that the limited data received since the Committee's
meeting on December 17 continued to
point to a very sluggish economy. In
keeping with the Committee's decision
at its recent meeting, it was deemed
appropriate to direct open market operations toward allowing part of the reduction in the discount rate to be reflected
in the federal funds rate. Members commented that the substantial cut in the
discount rate and the accompanying
adjustment in open market operations
were likely to have a favorable effect on
financial markets and the behavior of
the monetary aggregates and in conjunction with the ongoing effects of earlier
easing actions would provide the financial basis for a resumption of sustainable economic growth. In light of the
substantial size of these actions, it would
be appropriate to view the directive as
symmetrical with regard to any further
changes in policy over the remainder of
the intermeeting period.
•
173
Consumer and Community Affairs
The Community Reinvestment Act, the
Home Mortgage Disclosure Act, and
discrimination in mortgage lending
were a major focus of activity in the
Division of Consumer and Community
Affairs during 1991. Responding to
heightened interest in the effect of
interstate banking and bank consolidation on local communities, the Board
held public meetings on two bank holding company applications. Together
with other agencies, the Board collected
and processed a voluminous amount of
HMDA data, which were made available to the public in October. The data
renewed concerns about disparities in
the rate of loan approvals among different racial groups and raised perceptions
of unlawful discrimination in mortgage
lending. In response to a resolution from
the Federal Reserve's Consumer Advisory Council, the Board explored
whether testing was a feasible enforcement tool in detecting mortgage credit
discrimination.
This chapter presents the Board's
efforts to promote fair lending and compliance with the CRA. It also presents
the Board's implementation in 1991 of
new statutory protections for consumers; reports on the examination of institutions for compliance with consumer
laws—by the Federal Reserve and other
regulatory agencies—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
congressional testimony on consumer
affairs issues.
Regulatory Matters
The Board amended Regulation C
(Home Mortgage Disclosure) to require
institutions to use 1990 census tract numbers, beginning in 1992, in reporting
data about their mortgage lending activity. The Board made a comprehensive
review of Regulation E (Electronic Fund
Transfers), and studied whether the
Electronic Fund Transfer Act should apply to electronic systems used by government agencies to deliver benefits.
The Board revised the commentary to
Regulation Z (Truth in Lending) to address issues such as renewals of home
equity lines of credit and credit card
substitution. The Board proposed
amendments to Regulation Z that would
require the lender to disclose payment
examples for each payment option offered to consumers, as well as the exact
amount of any "teaser" or discounted
interest rate. The amendments also
would allow banks to include a demand
provision in home equity loans to executive officers.
The Board amended Regulation CC
(Expedited Funds Availability) to allow
banks to hold deposits made at nonproprietary ATMs for up to five business
days, in keeping with the underlying
statute. The statutory rule, adopted for a
temporary period ending November 27,
1992, was made permanent by the Congress at year-end.
174 78th Annual Report, 1991
Regulation C
(Home Mortgage Disclosure)
Revisions to Regulation C that took
effect in 1990 expanded the information
that lenders collect about loans for home
purchase or home improvement. During
1991 the Board, the other banking agencies, and the Department of Housing
and Urban Development implemented a
new system for processing the HMDA
data submitted by more than 9,600 institutions. Regulation C generally applies
to mortgage lenders located in metropolitan areas and with assets of more than
$10 million.
In the past, HMDA reports have
focused on the geographic distribution
of mortgage loans. Lenders prepared
public disclosures that reported data by
the type of loan and the census-tract
location of the home for loans that they
made or purchased. Amendments in
1990 expanded the data collected to include the race or national origin, sex,
and income of applicants and, for loans
that the lender sells, the type of purchaser. Lenders now also report loan
applications that do not result in a loan.
These data will help the Board and
the other regulatory agencies monitor
the compliance of lenders with the
laws on fair lending and community
reinvestment.
The new HMDA reporting system
calls for lenders to provide information
about each application or loan instead of
aggregating the data by census tract.
The lenders send the data to their
respective supervisory agencies—the
Federal Reserve, the Federal Deposit
Insurance Corporation, the National
Credit Union Administration, the Office
of the Comptroller of the Currency,
the Office of Thrift Supervision, or
the Department of Housing and
Urban Development. The Federal Financial Institutions Examination Council
(FFIEC) compiles the data and prepares
HMDA disclosure statements for covered lenders.
In 1991, the FFTEC collected and tabulated the data for 1990 (almost 6.6 million records) and prepared more than
24,000 individual reports. The reports
consist of a series of tables and total
more than 1.2 million pages of data. The
tables, as many as thirty-one for each
metropolitan area in which a lender has
offices, display information about loans
purchased and about the disposition of
loan applications, all by type of loan and
geographic location of the property. For
loans sold, the tables show the type of
secondary market purchaser. The tables
also give summaries for six categories
of loan applications, showing the disposition of applications by characteristics
of the applicant (annual income, race or
national origin, and sex) and by characteristics of the neighborhood in which
the property related to the loan application is located (median family income
and percentage of the population that
belongs to a minority group).
HMDA disclosure statements are
available to the public from the lender.
The FFIEC also prepares aggregate reports that show the overall home lending picture among all reporting lenders
in each of the nation's 341 metropolitan
areas; these reports, and copies of the
individual reports, are available at a data
depository in each metropolitan area.
In addition, the FFIEC provides
edited raw data on magnetic tape, giving
community groups, researchers, and others access to a larger body of data for
analysis of lending patterns than was
possible under the old system. Because
of the massive volume of the HMDA
data, however, analysis can be complicated and time-consuming. In September the Board hosted a meeting with
community representatives to identify
ways in which the data might be com-
Consumer and Community Affairs
piled and loaded onto diskettes to make
its use on personal computers feasible
for local groups. In October the Board
and the other HMDA agencies took part
in a forum organized to explore the
feasibility of making the data available
through alternative automated means.
The expanded HMDA reports for
1990 became public in October 1991.
They received considerable attention
from the news media because of substantial differences in the dispositions of
loan applications when applicants were
categorized by race and income. In particular, the data revealed that the percentage of rejected home loan applications was much larger for black and
Hispanic applicants than for white and
Asian applicants. The data raised concerns about access to home mortgage
credit among minority applicants and
about unlawful discrimination in the
lending process. They also raised questions about the performance of lenders
in meeting their obligations under the
Community Reinvestment Act.
The HMDA data are subject to an
important limitation, however: They do
not include the wide range of financial
factors—about the applicants and the
properties they seek to purchase—that
lenders consider in evaluating loan applications. For example, the HMDA data
do not contain information about applicants' debt and asset levels, employment experience, or credit history. Thus,
it is not possible to determine from the
HMDA data alone whether individual
institutions or groups of lenders are discriminating unlawfully against minority
applicants.
Because the agencies have access to
application files and institutions' lending standards, they can largely overcome this limitation in examining lenders' actions. With the expanded data, the
agencies will be able to evaluate more
thoroughly lenders' compliance not just
175
with fair lending laws but also with
community reinvestment obligations. To
facilitate statistical analyses, the agencies are developing computer-based systems that will help them identify specific groups of applicants for whom the
application-disposition rates are significantly different from those of other
groups. They can thereby target specific
files for in-depth review.
In November the Board published
changes to Regulation C that become
applicable in January 1992. The major
change requires financial institutions to
use 1990 census tract numbers, rather
than the 1980 numbers, to identify and
report property locations. In many communities demographics have changed
dramatically since the time of the 1980
census, and use of the 1990 census tracts
will make the HMDA data more accurate and useful. The Board also amended
Regulation C to make clear that institutions are subject to civil money penalties for violations of HMDA reporting
requirements. Changes to the reporting
instructions emphasized that institutions
are expected to submit their HMDA data
in automated format (unless they report
only a small number of transactions) to
improve the accuracy and timeliness of
reports.
An article in the November 1991 Federal Reserve Bulletin described analytical studies based on the geographic data
available under the old reporting system, and it presented preliminary numbers drawn from nationwide aggregates
of the 1990 data while sounding some
cautions about the limitations of the
data.1 The article discussed potential
uses of the expanded data, with a focus
on the supervisory agencies, and took
1. See Glenn B. Canner and Dolores S. Smith,
"Home Mortgage Disclosure Act: Expanded Data
on Residential Lending," Federal Reserve Bulletin, vol. 77 (November 1991), pp. 859-84.
176 78th Annual Report, 1991
a look at an area newly covered by
HMDA—sales of home loans to the secondary mortgage market.
as an alternative to paper-based delivery. EBT offers opportunities for improving delivery to recipients, maximizing efficiency of operations, and over
time, minimizing costs for all parties.
To date, the Board has refrained from
Regulation E
covering EBT in Regulation E so as not
(Electronic Fund Transfers)
to impede pilot programs being tested
The Board began a comprehensive re- by federal and state agencies. This result
view of Regulation E, with major em- has been achieved by narrowly defining
phasis on the law's applicability to elec- what constitutes an "asset account" for
tronic systems used by government purposes of coverage.
agencies for delivery of benefits.
In prescribing rules, the Board is diRegulation E, which implements the rected by the statute to consider their
Electronic Fund Transfer Act, estab- effect on the availability of EFT services
lished rights and responsibilities for con- to different groups of consumers, parsumers and providers of electronic trans- ticularly low-income consumers. The
fer services. Among the consumer rights Board also must take into account costs
are the right to disclosure of terms and and benefits to all parties and demonconditions, to receipts and periodic strate, to the extent practicable, that the
statements, to error resolution within protection accorded consumers outspecified periods, and to limits on the weighs the costs of compliance imposed
consumer's liability for unauthorized on consumers and on the providers of
transfers. The statute's coverage extends the EFT services.
to any entity that provides EFT services
Bringing EBT under the regulation
to consumers, not just traditional finan- raises questions about who must comply
cial institutions such as banks.
and how exactly to apply the rules.
The comprehensive review is in keep- Some existing rules would be easy to
ing with Federal Reserve policy that apply to EBT; others raise significant
calls for a periodic look at Board regula- policy questions and operational probtions. It has centered on identification of lems, especially in regard to who bears
substantive changes needed because of liability for unauthorized use. An article
technological and other developments. in the April 1991 Federal Reserve BulleA rewriting of the official staff commen- tin gave an overview of the developing
tary is also under way.
interest in EBT programs among variThe Board's consideration of the ap- ous parties, described some of the pilot
plicability of Regulation E to systems programs carried out by federal and state
for electronic delivery of government agencies, and discussed regulatory and
benefits arises from a statutory mandate. other issues raised by the implementaIn the event that EFT services are of- tion of EBT programs.2
fered by nonfinancial institutions, the
To ensure adequate attention to the
statute directs the Board to ensure that potential effects of Regulation E on EBT
rights and responsibilities created by the
act are made applicable to these services. Accordingly, during 1991 the
2. John C. Wood and Dolores S. Smith, "ElecBoard examined whether Regulation E tronic
Transfer of Government Benefits," Fedought to apply to government agencies' eral Reserve Bulletin, vol. 77 (April 1991),
use of electronic benefit transfer (EBT) pp. 203-17.
Consumer and Community Affairs
systems, the Board during 1991 continued to consult with federal and state
agencies, financial institutions, the retail
food industry and other private-sector
participants in EBT systems, the Federal
Reserve's Consumer Advisory Council,
and consumer advocacy groups. The
Federal Reserve joined in discussions
with a task force assembled to facilitate
the exchange of information between
the private and public sectors, and it has
maintained close liaison with the Department of the Treasury, which is coordinating efforts among federal agencies
in promoting EBT programs.
Any regulatory proposal that results
from the review of Regulation E and
EBT programs will be published for
comment, and members of the public
will have the opportunity to give their
views.
Regulation Z
(Truth in Lending)
In December the Board proposed
amendments to Regulation Z on home
equity lines of credit. One of the proposals resolves a conflict between the home
equity rules and regulations on loans to
bank executive officers. A demand provision in loans to executive officers is
currently required by the Federal Reserve Act and Regulation O (Loans to
Executive Officers), but a demand provision is generally prohibited by the home
equity rules of Regulation Z. To resolve
the conflict, the Board proposed a limited exception in Regulation Z for transactions involving bank officers.
The balance of the proposed changes
respond to issues raised in a lawsuit
filed by Consumers Union in 1989 that
contested existing rules. The amendments would require lenders to disclose
the specific "teaser" or discounted annual percentage rate of interest and to
177
give payment examples for each payment option offered to consumers.3
Regulation CC
(Expedited Funds Availability)
In February the Board published revisions that conformed Regulation CC to
amendments to the Expedited Funds
Availability Act (EFAA). The revisions
continued—for a period extending from
September 1, 1990 through November
27, 1992—the hold schedule for deposits made at nonproprietary automated
teller machines (ATMs); the schedule
allows banks to hold such deposits for
five business days. The Federal Deposit
Insurance Corporation Improvement Act
of 1991, enacted in December, amends
the EFAA by making the Board's temporary rule permanent. The new law
also allows banks to extend holds, on an
exception basis, on checks that normally
require next-day availability and allows
one-time notices of exception holds in
certain cases. [In early 1992 the Board
proposed revisions to Regulation CC to
implement these changes.]
Interpretations
In 1991 the Board continued to offer
legal interpretations and guidance on
Regulation B (Equal Credit Opportunity), Regulation E (Electronic Fund
Transfers), and Regulation Z (Truth in
Lending) through official staff commentaries. These commentaries, intended to
help financial institutions and others apply the regulations to specific situations,
3. The U.S. District Court for the District of
Columbia ruled in favor of the Board (No. 893008, filed Nov. 1, 1989). On appeal by the plaintiff (No. 90-5156, D.C. Circuit, filed May 2,
1990), the court decided in favor of the Board on
four issues and remanded two other issues to the
Board for further consideration; the December
amendments were in response to this action.
178 78th Annual Report, 1991
are updated periodically to address significant questions that arise.
In April the Board revised the commentary to Regulation Z. The revisions
addressed a variety of issues such as
renewals of home equity lines of credit,
credit card substitution, and disclosures
for renewable balloon-payment mortgages. In the same month, the Board
revised the commentary to Regulation B
to clarify the Board's long-standing position that a notice of adverse action
need not be provided in instances when
a creditor terminates an account or takes
other action because of a current delinquency or default on the account.
In December the Board proposed another revision to the commentary on
Regulation B. The proposal addresses
the relationship between Regulations B
and C with regard to data collection on
mortgage loan applications received by
creditors through brokers or others. It
makes clear that loan brokers or other
persons do not violate Regulation B
(which limits questions about the applicant's race, national origin, and sex) if
they collect the information for a creditor that is required to comply with the
Home Mortgage Disclosure Act.
Home Mortgage Brochure
In March the Board revised an existing
consumer pamphlet, renaming it "Home
Mortgages: Understanding the Process
and Your Right to Fair Lending." The
brochure describes how to shop for a
mortgage and what to expect in the application process; it also describes some
of the laws that protect home mortgage
borrowers—in particular, those laws that
prohibit discrimination based on such
factors as race or national origin. The
brochure explains that creditors cannot
take certain personal characteristics into
account when considering a mortgage
application and provides sources for
consumers to contact if they suspect discriminatory practices.
Community Affairs
During 1991, the availability to the public offinancialinstitutions' CRA evaluations and ratings stimulated an increase
in requests for information about the
Community Reinvestment Act from
banks and from neighborhood, housing,
small business, and civil rights groups
throughout the country. Especially notable was increased interest among officials of local and state governments and
development agencies about the CRA
and about bank involvement in local
community development programs.
Community Affairs staff members at the
Board and at the Reserve Banks also
responded to a large number of requests
for information about HMDA and
banks' mortgage lending patterns after
the release of the expanded HMDA data
in October.
Community Affairs educational programs continued their strong focus on
bank and bank holding company participation in community development
financing for low- and moderate-income
housing, small and minority businesses,
and community revitalization projects.
The Board's Community Affairs staff
developed two related publications on
community development corporations
(CDCs) and investments. Community
Development Investments describes the
Federal Reserve's policies and guidelines governing approval of bank holding company CDCs and other community development equity investment
activities. A companion piece, Directory: Bank Holding Company Community Development Investments, profiles
existing CDCs and investments authorized by the Board.
The number of Community Affairs
newsletters published by the Reserve
Consumer and Community Affairs
Banks grew in 1991 with publication by
the Atlanta Reserve Bank of Partners
in Community and Economic Development. This newsletter highlights CRArelated issues and community development finance partnerships among banks,
community organizations, government
agencies, and others. It brings to nine
the number of Reserve Bank newsletters
that address community development.
During 1991, these newsletters reached
more than 37,300 financial institutions,
community organizations, local government officials, and others interested in
bank involvement in community development and reinvestment efforts.
The Philadelphia Reserve Bank published Resources for Revitalization, a
directory of selected government and
other public-private programs that
financial institutions can use to finance
affordable housing, small businesses,
and economic development. The New
York and Atlanta Reserve Banks created
computerized databases with information on community groups, governments, small businesses, and other
organizations interested in banking,
community development, and CRArelated issues.
To help educate both the public and
the banking community about CRA and
community development lending, Reserve Banks sponsored 124 Community
Affairs conferences and seminars during
1991. In addition, Community Affairs
staff members from the Board and the
Reserve Banks made more than 315
speeches and presentations at conferences, seminars, and meetings of banking, community, and other organizations
on community development, CRA, and
related topics.
Reserve Banks developed special programs on rural development issues. The
Kansas City Reserve Bank, in cooperation with state bankers associations
throughout its District, conducted more
179
than fifty seminars focused largely on
CRA and public-private partnership
programs that banks can use in financing
community development projects in
smaller communities. The Chicago Reserve Bank intensified its outreach and
education program for rural areas.
During 1991, bank interest in multibank approaches to the financing of
community development increased significantly. Community Affairs staff
members at the Atlanta and San Francisco Reserve Banks devoted resources
to assisting bankers, local governments,
and others in structuring multilender
consortiums.
A key part of the Community Affairs
program during 1991 was CRA and
community development training for
Federal Reserve consumer compliance
examiners. A session on advanced CRA
examination techniques became a permanent part of the Board's training
curriculum. Community Affairs staff
members from the Board and from
the Reserve Banks helped familiarize
System commercial examiners with the
key concepts of community development lending and the objectives of the
CRA.
FFIEC Activities
The Federal Financial Institutions Examination Council (FFIEC) is an interagency body that prescribes uniform principles, standards, and report forms for
the examination of financial institutions
by the federal supervisory agencies.
Membership consists of the Board, the
Federal Deposit Insurance Corporation,
the National Credit Union Administration, the Office of the Comptroller of
the Currency, and the Office of Thrift
Supervision.
In November the FFIEC approved a
policy statement concerning the Fair-
180 78th Annual Report, 1991
Credit Reporting Act (FCRA) that addressed prescreening by financial institutions. Credit bureaus often compile
lists of consumers who meet the specific
credit-granting criteria provided by an
institution, and institutions use these
prescreened lists to solicit consumers
for credit products. The FFIEC policy
statement noted that prescreening is permissible under the FCRA if the institution follows certain rules. Prescreening
may be conducted if the institution
makes a firm offer of credit to each
consumer who meets the prescreening
criteria. An institution may withdraw
such an offer only if a significant
change, such as foreclosure or filing for
bankruptcy, happens between the prescreen and the consumer's acceptance
of the offer.
In December the FFIEC approved a
policy statement that encourages financial institutions to analyze the geographic distribution of their lending patterns as a part of their CRA planning
process. The FFIEC emphasized that
these analyses should be reviewed by
the board of directors and appropriate
levels of management in setting an institution's CRA programs and its lending
policies.
Compliance with Consumer
Regulations
Data received from the five federal
agencies that supervise financial institutions and from other federal supervisory agencies indicate that compliance
with the Truth in Lending Act and the
Expedited Funds Availability Act declined slightly from 1990 levels and
that compliance with the Equal Credit
Opportunity Act and the Electronic
Fund Transfer Act remained essentially unchanged. This section summarizes these compliance data for the
reporting period from July 1, 1990, to
June 30, 1991.4
Truth in Lending Act
(Regulation Z)
The data from the Board, the Federal
Deposit Insurance Corporation (FDIC),
the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the
Office of Thrift Supervision (OTS) show
that, on average, 42 percent of examined
institutions were in full compliance with
Regulation Z, down slightly from
44 percent in 1990.5 The FDIC and the
NCUA showed increases in compliance,
while the Board, the OCC, and the OTS
reported declines. Some agencies were
able to provide the frequency of violations (the Board, the NCUA, the
OCC, and the OTS); these agencies indicated that of the financial institutions
examined that were not in full compliance, 53 percent had between one and
five violations (the lowest frequencycategory), up from 51 percent in 1990.
The most frequent violations of Regulation Z observed by the five regulatory
agencies were the failure to disclose accurately the finance charge, the annual
percentage rate, and the number,
amounts, and timing of payments scheduled to repay the obligation; the failure
to provide consumers with notice of
their right to rescind certain transac-
4. The federal agencies that regulate financial
institutions do not use the same method to compile
compliance data. However, the data reported to the
Board support the general conclusions presented
here.
5. The percentage of institutions in full compliance with the regulations included in this report is
calculated using a straight average of the percentage of institutions in compliance as reported by
the five financial regulatory agencies. The figures
reported for previous years were calculated using
a weighted average.
Consumer and Community Affairs
tions; and the failure to provide Truth in
Lending disclosures that accurately reflected the terms of the legal obligation.
The Board, the FDIC, and the OTS
each issued one cease and desist order
involving violations of Regulation Z.
The OTS also assessed civil money penalties against two savings associations.
The OCC issued notice of charges to
two banks for violations of Regulation
Z. One bank reimbursed customers and
the other has appealed to the U.S. Court
of Appeals. Under the Interagency Enforcement Policy on Regulation Z, a
total of 379 institutions supervised by
the Board, the FDIC, the OCC, and
the OTS refunded to customers about
$5.7 million on 26,796 accounts in 1991
compared with roughly $4.5 million on
52,344 accounts in 1990.
The Federal Trade Commission
(FTC) continued its Truth in Lending
enforcement program and obtained relief in three cases involving understated
annual percentage rates (APRs). The
FTC accepted for public comment
two consent agreements addressing understated credit costs including APRs.
The FTC also issued an order involving a nationwide mortgage lender that
disclosed understated APRs for its
adjustable-rate mortgages.
Educating consumers and businesses
about their rights and responsibilities
continued to be an integral part of the
FTC's enforcement activities. In this
effort, the FTC released a publication on
fraudulent automobile financing practices and is developing a publication on
reverse mortgages.
The Department of Transportation reported a satisfactory level of compliance
with Regulation Z by foreign and domestic carriers. Consumer inquiries that
were investigated resulted in no formal
enforcement proceedings for violations.
The Farm Credit Administration
(FCA) reported that violations had in
181
creased more than 31 percent from the
1990 reporting period. As a result of
examinations and enforcement activities, the FCA took formal enforcement
actions against four institutions for
violations of Regulation Z or Regulation
B or both. These institutions are now
in substantial compliance with the
regulations.
The Packers and Stockyards Administration of the Department of Agriculture
received no complaints and initiated
no enforcement actions. Individuals
and firms regulated by the Administration are believed to be in substantial
compliance.
Consumer Leasing
(Regulation M)
The five financial regulatory agencies
reported substantial compliance with
Regulation M, which implements the
consumer leasing provisions of the
Truth in Lending Act. More than 99
percent of examined institutions were
found to be in full compliance with the
regulation. The violations that were
noted by the agencies involved the failure to provide disclosures clearly, conspicuously, in a meaningful sequence,
and in accordance with the regulation.
Equal Credit Opportunity Act
(Regulation B)
The five financial regulatory agencies
reported that compliance with Regulation B remained similar to levels in
1990. In the 1991 reporting period,
58 percent of examined institutions were
in compliance with the ECOA compared
with 57 percent for 1990. The four agencies that were able to provide the frequency of violations (the Board, the
NCUA, the OCC, and the OTS) reported
that of the institutions examined that
were not in full compliance, 73 percent
182 78th Annual Report, 1991
had between one and five violations, a
rate similar to that for 1990. The most
frequent violations involved the failure
to take the following actions:
• Notify the applicant of the action
taken within thirty days of the date
that the creditor receives a completed
application
• Provide a written notice of adverse
action that contains a statement of the
action taken, the name and address of
the creditor, the ECOA notice, and the
name and address of the federal agency
that enforces compliance
• Provide the specific reasons for
adverse action
• Follow the prescribed form of the
ECOA notice
• Request information, for monitoring purposes, about race or national origin, sex, marital status, and age on credit
applications for the purchase or refinancing of a primary dwelling.
The Board and the FDIC each issued
one cease and desist order that addressed
violations of Regulation B.
The FTC obtained consent judgments
before litigation in two cases involving
practices in violation of the ECOA. One
other case previously filed in federal
court was resolved by a consent judgment. Litigation continues in another
case previously filed.
The FCA reported a satisfactory level
of compliance with the ECOA. As a
result of examinations and enforcement
activities, the FCA took formal enforcement actions against four institutions
for violations of Regulation Z or Regulation B or both. These institutions are
now in substantial compliance. The total
number of ECOA violations decreased
14 percent from 1990 levels. The other
agencies that enforce the ECOA—the
Department of Transportation, the
Interstate Commerce Commission, the
Small Business Administration, the
Packers and Stockyards Administration
of the Department of Agriculture, and
the Securities and Exchange Commission—reported substantial compliance among the entities they supervise.
Electronic Fund Transfer Act
(Regulation E)
The five financial regulatory agencies
found that, at 84 percent, the level of
compliance with Regulation E remained
similar to that in 1990. The following
five rules were the most frequently violated provisions of Regulation E:
• Provide, in a timely manner, a written statement outlining the terms and
conditions of the EFT service
• Provide a summary of consumers'
liability for unauthorized EFTs
• Provide a statement for each
monthly cycle in which an EFT occurred or at least a quarterly statement if
no transfer occurred
• Provide a periodic notice of the procedures for resolving alleged errors
• Investigate and resolve alleged
errors promptly.
A cease and desist order issued by the
FDIC covered violations of Regulation
E in addition to violations of Regulations B and Z.
The Federal Trade Commission reported ongoing litigation with one
telemarketing company that allegedly
failed to obtain written authorization
from consumers for preauthorized
transfers.
Expedited Funds Availability Act
(Regulation CC)
The five financial regulatory agencies
reported that the level of compliance
with Regulation CC declined from
76 percent in the 1990 reporting period
to 73 percent. The four agencies that
were able to provide the frequency of
violations (the Board, the NCUA, the
Consumer and Community Affairs 183
OCC, and the OTS) reported that of the
institutions examined that were not in
full compliance, 76 percent had between
one and five violations. The five most
frequent violations of Regulation CC
were the failure to
• Provide next-day availability for
required items
• Provide a specific disclosure of the
availability policy followed by the institution in most cases
• Adequately train employees and
p r o v i d e p r o c e d u r e s to e n s u r e
compliance
• Post the availability policy at locations where employees accept deposits
• Provide the deposit availability
notice on preprinted deposit slips.
A cease and desist order issued by the
Board covered violations of Regulation
CC in addition to violations of Regulations B and Z.
Community Reinvestment Act
(Regulation BB)
The Community Reinvestment Act
(CRA) requires the Board to encourage
financial institutions under its jurisdiction to help meet the credit needs of
their entire communities, including lowand moderate-income neighborhoods, in
a manner consistent with safe and sound
banking practices. The Board assesses
the CRA performance of state member
banks during regular compliance examinations and takes the CRA record into
account, along with other factors, when
acting on applications from state member banks and bank holding companies.
The Federal Reserve System maintains a three-faceted program for enforcing and fostering better bank performance under the CRA:
• Examination of institutions to
assess compliance
• Dissemination of information on
community development techniques to
bankers and the public through Community Affairs offices at the Reserve Banks
• CRA analyses of the records of
banks and bank holding companies submitting an application for expansion or
reorganization.
Federal Reserve examiners review
performance in fair lending, community
revitalization, and other relevant areas
to assess CRA compliance. During the
1991 reporting period, they examined
651 state member banks for compliance
with the consumer laws, including those
that address fair lending, and examined
637 state member banks for compliance
with the CRA. When appropriate, examiners suggested ways to improve CRA
performance.
The 1991 reporting period is the first
that includes information on public CRA
ratings. Sixty-three banks received an
outstanding rating for meeting community credit needs, 516 received a satisfactory rating, 52 received a rating of
"needs to improve," and 6 received a
rating of "substantial noncompliance."
In June the Board amended Regulation
BB to clarify that state member banks
may respond to their CRA evaluations
and place their responses in the public
file but are not required to do so. In
December the Board announced that, in
keeping with an FFIEC recommendation, it will publish weekly the CRA
examination ratings of state member
banks.
During calendar year 1991, adverse
CRA ratings were at issue in thirtyone bank and bank holding company
applications received by the Federal
Reserve System, down from forty-two
in both 1990 and 1989. The number of
applications that generated protests
because of CRA performance declined
from twenty-seven in 1990 to twentyfour in 1991. Three of the protested
applications—the request of Mitsui
Taiyo Kobe Bank to convert a trust com-
184 78th Annual Report, 1991
pany into a bank, NCNB Corporation's
acquisition of C&S/Sovran Corporation,
and the merger of Chemical Banking
Corporation with Manufacturers Hanover Corporation—involved numerous
protests. In the Mitsui case, the Board
held a public hearing at which about
20 individuals and groups testified;
the application was later withdrawn.
The Board received more than 150
comments regarding the NCNB and
C&S/Sovran application, and it held
public meetings in four cities—Atlanta,
Dallas, Richmond, and Charlotte—at
which more than 100 witnesses testified;
the Board approved the application in
December. The Board approved the
Chemical-Manufacturers application in
November.
In October the Board considered a
1990 application by First Interstate
BancSystem of Montana, Inc., to merge
with Commerce BancShares of Wyoming, Inc. The application was protested
by a community organization. The
Board denied the application based
solely on deficiencies in the CRA record
of a subsidiary of First Interstate.
At year-end, eighteen protested applications had been approved and six applications were pending.
cial institutions. About two-thirds of all
depository institutions offered EFT services and were covered by the act. The
economic effect of the act increased in
1991 as a result of continued growth in
the availability and use of EFT services.
Automated teller machines are the
most widely used EFT service in the
United States. Most of the nation's
banks and thrift institutions offer ATM
services to consumers, and more than
half of all households currently have
access cards for ATMs. The availability
of ATM services has been enhanced by
the development of shared networks.
Virtually all ATM terminals in operation
today are part of one or more shared
networks. The monthly number of ATM
transactions increased about 13 percent,
from 474.9 million in 1990 to 534.9 million in 1991. Over the same period, the
number of installed ATMs rose about
3 percent.
Point-of-sale (POS) systems account
for a small fraction of all EFT transactions, but their use grew rapidly in
1991: POS volume rose 23 percent, to
19.5 million transactions per month; and
the number of POS terminals rose
28 percent, to 77,700. Direct deposit is
another widely used EFT service. More
than 40 percent of all U.S. households
receive direct deposit of funds into their
Economic Effects of the
accounts. Direct deposit is particularly
Electronic Fund Transfer Act
widespread in the public sector, with
In accordance with statutory require- about half of social security payments
ments, the Board monitors the effect of and two-thirds of federal salary and rethe Electronic Fund Transfer Act on the tirement payments made by direct decompliance costs and consumer benefits posit. Although direct deposit is less
from EFT services. In 1991, there were common in the private sector, it has
no new requirements or changes in the grown substantially in recent years.
regulation that altered the economic
The benefits to consumers from the
effect of the act.
Electronic Fund Transfer Act are diffiThe act covers a large number of cult to measure because they cannot be
accounts and financial institutions. In isolated from consumer protections that
1991, about three-fourths of all house- would have been provided in the abholds in the United States had one or sence of regulation. The available evimore EFT features on accounts at finan- dence provides no indication of serious
Consumer and Community Affairs 185
consumer problems with electronic ance costs. Thus, the regulation is not
transactions. One source of information likely to have any greater effect on EFT
on potential problems is the Board's Con- costs now than it had in 1981.
sumer Complaint Control System. In
1991, sixty-nine of the complaints proUtility of the New HMDA Data
cessed involved electronic transactions.
The Federal Reserve System forwarded The new data available under the Home
thirty-six complaints that did not involve Mortgage Disclosure Act, beginning
state member banks to other agencies with the year 1990, offer expanded opfor resolution. Of the remaining thirty- portunities for analysis of lending patthree complaints, none involved a viola- terns in metropolitan areas. The new
tion of the act or regulation.
data enhance the regulatory agencies'
The Board also obtains information ability to assess lender performance in a
about potential problems from consumer number of ways.
surveys. The University of Michigan's
Before 1990, data required by the
December 1990 Survey of Consumer Home Mortgage Disclosure Act reAttitudes contained several Board- vealed only the geographic distribution
sponsored questions about consumer of residential lending by institutions
experience with EFT. The survey results covered by the act. These data could be
suggest that EFT problems are relatively used to help evaluate the extent to which
infrequent and that the vast majority of reporting institutions were serving the
problems that do occur are resolved sat- housing needs of their local communiisfactorily. Of the households that had ties. The usefulness of the data was limaccounts with EFT features, 7.5 percent ited, however, providing little informareported experiencing EFT errors in the tion about the demand for credit arising
previous twelve months. This percent- from different geographic areas or about
age is about the same as that reported in the demand faced by individual lenders.
surveys from 1981 and 1983. In 1990,
The expanded disclosures, mandated
88.0 percent of those experiencing prob- by statutory amendments enacted in
lems complained to the institution about 1989, now include the disposition
the error, and 87.8 percent of the com- of applications—approved, denied,
plainants reported that the error was withdrawn, or files closed for
resolved to their satisfaction.
incompleteness—and the number and
The incremental costs associated with dollar amount of loan applications.
the EFTA are also difficult to quantify, These data provide specific information
again because the industry practices that on credit demand among individual
would have evolved in the absence of lenders and groups of creditors serving
statutory requirements are unknown. different neighborhoods. The informaCost estimates from 1981 suggested that tion substantially enhances the ability to
the ongoing compliance cost of an elec- evaluate the residential lending activitronic transaction was not high enough ties of covered institutions, including the
to compromise the cost advantage of conventional and FHA lending of indesuch transactions over check-based pendent mortgage companies.
transactions. Since that time, few
The expanded disclosures also will
changes have been made in the regula- help the supervisory agencies to better
tion, and an increase in transaction vol- assess the CRA performance of the instiume has allowedfinancialinstitutions to tutions they regulate. The agencies can
exploit economies of scale in compli- examine an institution's record to deter
186 78th Annual Report, 1991
mine how its lending performance compares with the record of other lenders
serving the same locality. If peer lenders
report a significantly greater number of
applications and home mortgages, the
comparison may suggest that the institution needs to focus greater attention on
determining and meeting community
credit needs, by reexamining its marketing and outreach programs and the mix
of its loan products. Alternatively, if
peer lenders also receive few applications for home loans, weak demand in
the locality might explain the lack of
lending activity. A general lack of applications may also indicate, however, that
outreach efforts and marketing among
all lenders are ineffective or inadequate
to reach the community.
The new HMDA data also can be
used to assess whether a lender has established a reasonable CRA community
delineation. Although many factors
affect a lender's choice of the primary
service area it seeks to serve, analyses
of HMDA data can help determine
whether the distribution of home loan
applications received by a lender is consistent with this geographic delineation.
If most of a lender's applications for
home purchase loans come from outside
its service area, examiners may question
why it is not receiving more applications from its delineated community and
whether the existing delineation is reasonable. The lender might need to reconsider and perhaps revise the boundaries of the area it seeks to serve.
The added data now disclosed about
loan applicants—their race or ethnic origin, sex, and income—provides an opportunity for insight into the provision
of home purchase and home improvement loans to certain categories of consumers. The agencies that supervise
depository institutions will use this information, together with data on the disposition of applications, in assessing the
fairness of the mortgage lending process. HUD also will use the data to
assess methodologies for targeting and
conducting fair lending investigations
under the Fair Housing Amendments
Act of 1988. The HMDA data alone will
not suffice for determining whether a
lender is discriminating unlawfully
against minority mortgage applicants,
principally because the data do not include the wide range of financial factors
that lenders consider in evaluating loan
applications. Because the agencies have
access to application files and institutions' lending standards, however, they
can overcome most of the limitations
when examining lenders' actions.
The data will be useful to financial
institutions in developing strategies and
programs to respond to the credit needs
of the various segments of their communities. Such analyses were not fully possible before the 1990 HMDA data became available.
The 1989 amendments to HMDA also
require lenders to report the type of secondary market purchaser for home loans
that they sell during the year. The legislative history suggests that the Congress
sought the new information to help identify any secondary market requirements
that may have a discriminatory effect on
protected groups. The HMDA data provide an opportunity for the first time to
profile, for loans covered by HMDA,
the characteristics of both the borrowers
whose loans are purchased by secondary
market entities and the neighborhoods
in which they reside. In addition, the
information permits an assessment of
the distribution of home purchase and
securitization activity of secondary market institutions. In its oversight capacity,
HUD plans to make use of the 1990 data
to assess the adequacy of secondary
market allocations for central areas of
cities and for low- and moderate-income
households.
Consumer and Community Affairs 187
Some uses of the HMDA data will
build on information available from
other sources. For example, HUD plans
to enter into research contracts that will
assess the allocation of FHA and conventional lending to a sample of metropolitan areas. This lending data will be
combined with recent information on
loan defaults linked to census tract attributes to provide a more complete
description on the volume and characteristics of areas served by FHA and
conventional lending.
Complaints about State Member
Banks
The Federal Reserve investigates complaints against state member banks, and
the Board forwards to appropriate enforcement agencies those that involve
other creditors or businesses. In 1991
the Board implemented an on-line system for tracking consumer complaints
and inquiries.
In 1991, the Federal Reserve received
2,398 complaints: 1,912 by mail, 471 by
telephone, and 15 in person. The Federal Reserve investigated and resolved
the 891 that were against state member
banks (see accompanying table). The
Board also received 282 written inquiries concerning consumer credit laws and
banking practices. In responding to
these complaints and inquiries, staff
members of the Board and of the Reserve Banks gave specific explanations
of laws, regulations, and banking practices and provided relevant printed
materials.
A second table summarizes the nature
and resolution of the 891 complaints
against state member banks. About
55 percent involved loan functions,
7 percent alleged discrimination on a
prohibited basis, and 48 percent concerned credit denial on nonprohibited
bases (such as length of residency) and
other unregulated lending practices
(such as the disclosure of the amount of
appraisal fees). About 29 percent involved disputes concerning interest on
deposits and general practices involving
deposit accounts.
Unregulated Practices
In 1991 the Board continued to monitor,
under section 18(f) of the Federal Trade
Commission Act, complaints about
Consumer Complaints Received by the Federal Reserve System, by Subject, 1991
Subject
State member
banks
Other
lenders
lotai
Regulation B (Equal Credit Opportunity)
Regulation E (Electronic Fund Transfers)
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
Flood Disaster Protection Act
Real Estate Settlement Procedures Act
Holder in due course
Unregulated practices '
59
33
18
93
1
25
12
7
0
1
1
0
641
57
36
34
259
6
53
83
13
1
0
5
1
959
116
69
52
352
7
78
95
20
1
1
6
1
1,600
Total
891
1,507
2,398
1. Complaints against nonmember institutions were
referred to the appropriate regulatory agencies.
188 78th Annual Report, 1991
banking practices that are not subject to
existing regulations to focus on those
that may be unfair or deceptive. Two
categories each accounted for 5 percent
or less of the 1,600 complaints: denial
of credit card applications based on
credit history (59) and miscellaneous
practices (74). Complaints about credit
denials based on credit history indicate
that applicants underestimate the importance lenders give to a poor credit history or a lack of borrowing experience
when assessing creditworthiness. The
miscellaneous complaints covered a
wide variety of practices, including a
lender's failure to close on a mortgage
loan by the agreed settlement date, the
amount a bank charged for an appraisal
fee, and a bank's refusal to make change
for a nondepositor.
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 on other issues dealing with
financial services to consumers. The
council's thirty members come from
consumer and community-based organizations, financial institutions, academia,
Consumer Complaints Received by the Federal Reserve System, by Function, Institution,
and Resolution, 1991
Function
Type of institution
and resolution
Loans
Total
Discrimination
Complaints about state
member banks, by type
Insufficient information l ...
Information furnished to
complainant2
Bank legally correct
No accommodation
Accommodation made 3 .
Clerical error
No correction made
Corrected
Factual dispute 4
Bank violation, resolved5 .
Matter in litigation6
Customer error
Pending, December 31
Total, state member banks .
Percent
34
Deposits
Other
Electronic
fund
transfers
Trust
services
Other
14
120
16
62
25
342
125
26
4
172
65
93
42
14
4
37
59
43
6
9
12
104
1
1
2
1
0
2
16
23
13
2
5
6
49
12
17
18
2
2
4
34
891
100
63
7
427
48
258
29
14
27
8
2
5
1
0
0
0
3
10
2
1
1
3
0
0
0
0
33
4
18
2
92
10
5
12
6
1
2
0
10
Complaints about nonmember
institutions7
1,507
68
834
351
36
11
207
Total.
2,398
131
1,261
609
69
29
299
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. The bank appears to be legally correct but has chosen to
make an accommodation.
4. Involves a factual dispute not resolvable by the Federal
Reserve System or a contractual dispute 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. The Federal Reserve determined that a state member
bank violated a law or regulation, and the bank took corrective
measures voluntarily or as indicated by the Federal Reserve.
6. Parties are seeking resolution through the courts.
7. Complaints referred to other agencies.
Consumer and Community Affairs 189
and state and local government. Council
meetings are open to the public.
In 1991 the council considered proposed banking reform, data collected
under the Home Mortgage Disclosure
Act, issues related to the feasibility of
using testers to detect racial discrimination in mortgage lending, and other
matters.
In March the council considered the
main elements of Treasury Department
recommendations for changes in the
deposit insurance system and reform of
the banking laws. Members supported
the idea of better, publicly available information on the financial condition of
institutions to help large corporate depositors and sophisticated customers to
apply market discipline to encourage
safe bank investments. Many believed,
however, that it is unrealistic to expect
the average cpnsumer to similarly use
that information in choosing depository
institutions.
Members of the council's committee
on depository and delivery systems accepted, with some reluctance, the need
for the "too-big-to-fail" doctrine as a
way to protect the integrity of the banking system. They indicated, however,
that deposit insurance premiums should
be adjusted to reflect the actual risks to
the insurance funds and that small institutions should not indirectly fund the
costs associated with preventing the
large ones from failing.
In October 1990 the council had
asked the Board for a feasibility study
on the possible use of testers to detect
unlawful discrimination in mortgage
lending. In February 1991 the Board
approved the preparation of that study
by staff members in the Divisions of
Consumer and Community Affairs and
of Research and Statistics. The study,
presented at the council's June meeting,
focused on several areas: ethical concerns expressed by Board members
about the testing technique; perceptions
about racial discrimination and its costs
in social terms; questions about the
potential effectiveness of testing in
the mortgage lending area; and cost
considerations.
The council debated the issues and
adopted a resolution recommending
that the Board, along with the other
banking agencies and the Department
of Housing and Urban Development,
fund a research project that would
define the way testing could be used to
investigate unlawful mortgage lending
practices.
The Board considered the council's
testing recommendation in September
and decided not to pursue the program. Its decision, conveyed to the
council in October, was based on
concerns about the validity of testing
in the mortgage credit area, its substantial cost, and the use of deception
by the government. The Board emphasized that, although it has chosen not to
undertake a testing project, it continues
to be concerned about the reported
disparities in mortgage lending when
applicants are grouped by race. Besides
working on more sophisticated examination procedures to detect discrimination, the Board has directed
the staff to explore other promising
methods to address discrimination issues. The Board also is planning to use
nationwide surveys to learn more about
consumer experience in seeking mortgage loans, and it is working with the
Department of Justice and other agencies in identifying ways to address fair
lending concerns.
During the year, the council also considered the following issues:
• The functioning of the new CRA
public disclosure process, focusing on
public access to the evaluations, the examination process, and the usefulness of
information contained in the evaluations
190 78th Annual Report, 1991
• Possible effects of electronic benefit transfer programs on recipients of
public assistance
• Referral practices among real estate
brokers who market and originate mortgage loans for various lenders.
A roundtable discussion among members of the council and Board members,
known as the Members Forum, gave
council members the opportunity to
offer their views on a variety of other
topics. During 1991 the council discussed matters such as the level of, and
ways to improve, consumer confidence
in the banking system and the current
availability of commercial and real
estate credit in their local markets.
Testimony and Legislative
Recommendations
The Board testified on credit card issues
and disclosures related to deposit
accounts.
Regional Evaluation of Credit Card
Holders
The Board testified in April before a
House banking subcommittee on the
manner in which financial institutions
evaluate the creditworthiness of cardholders. The hearing was prompted by a
bank credit card issuer's evaluation of
customers in a nine-state region in
which bankruptcy filings had increased
significantly. The bank applied a creditscoring model to evaluate cardholders
who had been delinquent in payments
over the previous fourteen months or
had exceeded their credit limit. The
bank then closed or reduced the credit
limit on accounts perceived to pose a
risk of loss.
The Board favored a flexible regulatory stance to allow geographic evaluation of credit card portfolios if certain
regions show signs of economic dis
tress. The Board noted that although
most institutions do not base special reviews on residency, more banks may
follow this course of action if pockets of
the country continue to decline economically. Such reviews may benefit card
issuers but may create hardship for consumers who have their credit reduced or
eliminated.
The Equal Credit Opportunity Act,
implemented by the Board's Regulation
B, prohibits creditors from discriminating against credit applicants or existing
customers because of factors such as
race, color, religion, sex, or marital
status. The law does not prohibit the
review of cardholders based on their
residency. If a creditor decides not to
grant credit to an applicant or reduces
credit to a nondelinquent consumer,
however, it must notify the consumer
and give the reasons. Furthermore, the
Fair Credit Reporting Act mandates that
if a creditor makes a negative decision
based on information contained in a
report from a credit bureau, the creditor
must so advise the consumer and furnish
the name and address of the credit
bureau. If information in the report is
incorrect, the consumer has the right to
an investigation and the correction of
any inaccuracies. The bank's practices,
on which the hearing focused, included
proper notification.
Credit and Charge Card Legislation
In October the Board testified before a
House banking subcommittee on proposed amendments to the Truth in Lending Act that would require additional
disclosures and would grant substantive
rights to consumers when creditors
change certain terms. In addition, the
Board reported on the credit card industry and gave possible reasons why credit
card interest rates have not fallen along
with the lenders' cost of funds.
Consumer and Community Affairs
The Board believes that the existing
law provides adequate disclosure to consumers on the costs associated with
credit and charge card accounts. The
Board acknowledged the value of disclosure but noted that the pending legislation would greatly burden the industry
with more compliance costs without
meaningful benefit to consumers.
Although the Truth in Lending Act is
primarily a disclosure statute, the proposed legislation sought to grant consumers a substantive right to close their
accounts and pay off existing balances
according to the original terms if the
creditor changed certain terms, such as
the annual percentage rate. The Board
believes that substantive laws of this
type remain within the domain of state
law.
The Board commented on the credit
card industry generally. In recent years,
the profitability of credit card operations
has been increasing. As profits climb, so
does competition—in the form of low or
no annual fees, increased credit limits,
the addition of special features to the
card plans, and the entry of new firms
into the market.
The Board noted the concerns of
some that credit card interest rates have
not tracked the decline of creditors' cost
of funds but observed that the interest
rate is only one component of credit
card pricing. Other components include
annual fees, grace periods, and credit
limits. When funding costs change,
creditors may choose to modify these
other components rather than the interest rate. The Board also suggested that
creditors may lack the incentive to lower
interest rates because many consumers
will not change creditors even if they
must pay more to maintain their accounts. To obtain a new credit card, a
consumer must often incur fees, expend
time and effort, and risk a rejection.
With these costs and risks in mind,
191
many consumers elect to keep their current cards and pay the higher rates.
Truth in Savings
The Board testified in May before a
House banking subcommittee on proposed truth in savings legislation that
called for depository institutions to disclose certain information about consumer deposit accounts. The Federal
Deposit Insurance Corporation Improvement Act, adopted in December, includes provisions from the earlier proposals. The new law mandates detailed
rate and fee information in advertisements and account schedules and requires depository institutions to inform
account holders when terms are
changed, all of which will allow consumers to more readily compare the
costs of deposit accounts. The Board
expects to propose rules in early 1992 to
implement the law.
Recommendations of Other
Agencies
Each year the Board asks those agencies
that have enforcement responsibilities
under Regulations B, E, M, Z, and CC
for recommended changes to the regulations or the underlying statutes. The
FDIC has recommended revising Regulation B to require a specific notice informing consumers who were denied
credit that they should contact the financial institution rather than the institution's regulatory agency if they have
questions.
•
193
Litigation
sought 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). On December 20, 1991,
the Court of Appeals held that the Board
has no authority over interstate relocations and vacated the Board's order.
Bank Holding Companies—
In Babcock and Brown Holdings, Inc.
Antitrust Actions
v. Board of Governors, No. 89-70518
(9th Circuit, filed November 22, 1989),
In United States v. First Hawaiian, Inc.,
petitioners sought review of a Board
No. 90-00904 (D. Hawaii, filed Decemorder dated October 25, 1989, in which
ber 28, 1990), the Department of Justice
the Board requested the Federal Deposit
challenged the acquisition by First HaInsurance Corporation to condition dewaiian, Inc., a Hawaiian bank holding
posit insurance for a proposed District
company, of First Interstate of Hawaii,
of Columbia bank on Board approval of
Inc., under the antitrust laws. The Board
the acquisition of control of the bank by
had approved the transaction on NovemBabcock and Brown Holdings, Inc., a
ber 30, 1990 (77 Federal Reserve Bullebrokerage firm. On April 7, 1991, the
tin 52). The case was settled.
court dismissed the case as moot (931
In United States v. Fleet/Norstar
F.2d 59).
Financial Group, Inc., No. 91-0219-P
In Kaimowitz v. Board of Governors,
(D. Maine, filed July 5, 1991), the DeNo. 90^3067 (1 lth Circuit, filed January
partment of Justice challenged the ac23, 1990), petitioner, raising issues unquisition by Fleet/Norstar Financial
der the Community Reinvestment Act,
Group, a bank holding company, of the
sought review of a Board order dated
New Bank of New England, N.A., and
December 22,1989, approving an appliNew Connecticut Bank & Trust Comcation by First Union Corporation to
pany, N.A., under the antitrust laws. The
acquire Florida National Banks (76 FedBoard had approved the transaction on
eral Reserve Bulletin 83). On August
July 1, 1991 (77 Federal Reserve Bulle27, 1991, the Court of Appeals ruled
tin 750). The case was settled.
that the petitioner lacked standing to
bring the action (940 F.2d 610).
In Citicorp v. Board of Governors,
Bank Holding Company Act—
No.
90-4124 (2nd Circuit, filed October
Review of Board Actions
4, 1990), petitioner sought review of a
In Synovus Financial Corporation v. Board order requiring Citicorp to termiBoard of Governors, No. 89-1394 (D.C. nate certain insurance activities by a
Circuit, filed June 21, 1989), petitioner nonbank subsidiary of Citicorp's subsidDuring 1991, the Board of Governors
was named in twenty-seven lawsuits, the
same number as in 1990. Eleven new
lawsuits were filed in 1991, five of
which raised questions under the Bank
Holding Company Act. As of December 31, 1991, eleven cases were pending, six of which involved questions
under the Bank Holding Company Act.
194 78th Annual Report, 1991
iary bank in Delaware (76 Federal Reserve Bulletin 977). On June 10, 1991,
the Court of Appeals vacated the
Board's order (936 F.2d 66). The petition for certiorari was denied on January
13, 1992 (No. 91-587).
In First Interstate BancSystem of
Montana, Inc. v. Board of Governors,
No. 91-1525 (D.C. Circuit, filed November 1, 1991), petitioner seeks review of a Board order dated October 7,
1991, denying on Community Reinvestment Act grounds petitioner's application under section 3 of the Bank Holding Company Act to merge with
Commerce Bancshares of Wyoming,
Inc. (77 Federal Reserve Bulletin 1007).
The case is pending.
Litigation under the Financial
Institutions Supervisory Act
In MCorp v. Board of Governors, No.
90-913 (U.S. Supreme Court, petition
for certiorari filed December 10, 1990),
the Board appealed a preliminary injunction entered by the district court enjoining pending and future enforcement
actions against a bankrupt bank holding
company (101 Bankr. 483, S.D. Texas
1989). On May 15, 1990, the Fifth Circuit Court of Appeals vacated the injunction in part and affirmed it in part
(900 F.2d 852). On December 3, 1991,
the Supreme Court affirmed the Court of
Appeals' vacating of part of the injunction and vacated the remainder of the
injunction. A related case, MCorp v.
Board of Governors (No. CA3-882693, N.D. Texas, filed October 28,
1988), has been stayed for the duration
of the preliminary injunction entered by
the Southern District of Texas in the
above case.
In Burke v. Board of Governors, No.
90-9505 (10th Circuit, filed February
27, 1990), petitioners sought review of
Board orders assessing civil money penalties and issuing orders of prohibition.
On July 31, 1991, the Court of Appeals
upheld the Board's orders (940 F.2d
1360).
In Stanley v. Board of Governors, No.
90-3183 (7th Circuit, filed October 3,
1990), petitioners sought review of a
Board order imposing civil money penalties. On August 15, 1991, the Court of
Appeals upheld the Board's order (940
F.2d 267).
In Board of Governors v. Pharaon,
No. 91-CIV-6250 (S.D. New York,
filed September 17, 1991), the Board
seeks to freeze the assets of an individual pending administrative adjudication
of a civil money penalty assessment by
the Board. On September 17 the court
issued an order temporarily restraining
the transfer or disposition of the individual's assets. The order has been extended by agreement.
In Board of Governors v. Shoaib, No.
CV 91-5152 (CD. California, filed September 24, 1991), the Board seeks to
freeze the assets of an individual pending administrative adjudication of a civil
money penalty assessment by the Board.
On October 15 the court issued a preliminary injunction restraining the transfer
or disposition of the individual's assets.
In Greenberg v. Board of Governors,
No. 91-4200 (2nd Circuit, filed November 22, 1991), the petitioner seeks review of a Board order dated October 28,
1991, prohibiting former national bank
officials from banking. The case is
pending.
In two cases filed under seal in the
U.S. District Court for the District of
Columbia, two institution-affiliated parties of a bank holding company and
state member bank applied, pursuant to
12 U.S.C. 1818(f), for a stay of suspension and prohibition orders against them
pending completion of the Board's administrative proceedings. On May 10,
Litigation 195
had been substantially justified. On
April 12, 1991, the Court of Appeals
affirmed the Board's decision on both
grounds (930 F.2d 39).
In Rutledge v. Board of Governors,
Other Actions
No. 90-7599 (11th Circuit, filed August
In White v. Board of Governors, No. 21, 1990), appellant appealed a district
88-623 (D. Nevada, filed July 29,1988), court grant of summary judgment in fathe plaintiff alleged discriminatory prac- vor of the Board in connection with his
tices under the Age Discrimination in challenge to Board and Reserve Bank
Employment Act. The case was dis- supervisory actions under several tort
theories. The Court of Appeals summissed on August 30, 1991.
In Consumers Union of U.S., Inc. v. marily affirmed the lower court on JanuBoard of Governors, No. 90-5156 (D.C. ary 17, 1991 (924 F.2d 1065).
Circuit, filed May 2, 1990), appellant
In Sibille v. Federal Reserve Bank of
appealed a district court decision grant- New York, et al, No. 90-CIV-5898
ing summary judgment for the Board in (S.D. New York, filed September 12,
connection with a challenge to various 1990), plaintiff sought review of a deamendments to Regulation Z imple- nial of a Freedom of Information Act
menting the Home Equity Loan Con- request. On July 9, 1991, the district
sumer Protection Act. On July 12, 1991, court granted the Board's motion to
the Court of Appeals affirmed the major- dismiss.
ity of the district court decision upholdIn State of Illinois v. Board of Govering the Board's regulation but remanded nors, No. 90-C-6863 (N.D. Illinois,
two issues to the Board for further ac- filed November 27, 1990), the State of
tion (938 F.2d 266).
Illinois filed suit to prevent disclosure of
In May v. Board of Governors, No. state examination reports provided to
90-1316 (D. District of Columbia, filed the Board under a confidentiality agreeJune 5, 1990), the plaintiff challenged ment. The documents were the subject
the Board's response to his requests un- of a congressional subpoena. On Deder the Freedom of Information Act and cember 28, 1990, the district court prePrivacy Act. On July 17, 1990, the dis- liminarily enjoined disclosure of the retrict court granted the Board's motion ports. The House Banking Committee
to dismiss, and plaintiff subsequently appealed (Nos. 90^3824, 91-1048) to
appealed (No. 90-5235) to the D.C. Cir- the U.S. Court of Appeals for the Sevcuit. On May 16,1991, the court granted enth Circuit. On June 25,1991, the court
the Board's motion for summary affir- dismissed the case as moot {Harris v.
mance and dismissed the appeal (946 Board of Governors, 938 F.2d 720).
In Fields v. Board of Governors, No.
F.2d 1565).
In Kuhns v. Board of Governors, No. 3:91CV7069 (N.D. Ohio, filed February
90-1398 (D.C. Circuit, filed July 30, 5, 1991), the plaintiff appeals the denial
1990), petitioner sought review of a of a request for information under the
Board order denying a request for attor- Freedom of Information Act. The case is
ney's fees under the Equal Access to pending.
Justice Act on the grounds that the petiIn Hanson v. Greenspan, No. 91tioner had failed to provide reliable fi- 1599 (District of Columbia, filed June
nancial information establishing his eli- 28, 1991), the plaintiffs sued for return
gibility and that the filing against him of funds and financial instruments alleg1991, the Court denied plaintiffs' motion for an injunction.
196 78th Annual Report, 1991
edly owned by plaintiffs. On December 6, 1991, the district court granted
motions to dismiss.
In In re Smouha, No. 91-B-13569
(Bkr. S.D. New York, filed August 2,
1991), petitioners—the provisional liquidators of BCCI Holdings (Luxembourg), S.A., and affiliated companies—
seek relief under the U.S. bankruptcy
code ancillary to foreign liquidation proceedings. On August 15,1991, the bankruptcy court issued a temporary restraining order staying certain judicial and
administrative actions, which has been
continued by consent.
In In re Subpoena Served Upon the
Board of Governors of the Federal
Reserve System, No. 91-5428 (D.C. Circuit, filed December 27, 1991), the
Board appeals from an order of the D.C.
District Court (No. 91-320) ordering the
Board to produce bank and bank holding company examination reports of the
Fleet/Norstar Financial Group that the
Board had sought to protect from disclosure on the grounds of the bank examination and deliberative process privileges. The Board had been subpoened to
produce these documents in a shareholder derivative and class action suit
pending in the U.S. District Court in
Rhode Island against the Fleet/Norstar
Financial Group. The case is pending. •
197
Legislation Enacted
In 1991 the Congress passed a bill that
requires changes in several areas of bank
regulation.
Federal Deposit Insurance
Corporation Improvements Act
of 1991
Public Law 102-242, the Federal Deposit Insurance Corporation Improvements Act of 1991 (FDICIA), was enacted on December 19, 1991. The
following discussion briefly summarizes
each of the act's five titles and describes
in more detail the portions that bear
significantly on the Federal Reserve and
the institutions it regulates.
Title I
Title I of the act addresses funding of
the Bank Insurance Fund and general
safety and soundness questions, providing for improvements in the examination and auditing of insured depository
institutions and the accounting standards
applicable to these institutions. Title I
also provides for prompt corrective action concerning any depository institution that fails to meet certain minimum
capital standards; it also generally requires the FDIC, as conservator or receiver, to seek the least-cost resolution
of failed depository institutions.
Supervisory Reforms
Under title I, insured depository institutions generally must be examined annually by their primary federal regulator.
For state-chartered institutions, state examinations may be substituted in alternate years. A depository institution with
less than $100 million in assets that is
well-capitalized and was given an outstanding rating during its last examination may be examined once every
eighteen months if control has not
changed within twelve months of the
last examination.
Title I also requires an insured depository institution with assets of more than
$150 million to have annual, independent audits, including reports on internal
controls and compliance with certain
regulatory requirements to be specified
by the FDIC. For an insured subsidiary
of a bank holding company, this requirement may be met by audits at the holding company level if the insured institutions received a CAMEL rating of 1 or 2
in its most recent examination.1
Title I removes provisions of the Federal Deposit Insurance Act that allowed
banks to become insured institutions
upon receiving a national charter or, for
state-chartered institutions, upon becoming members of the Federal Reserve
System. All depository institutions now
must apply directly to the FDIC to receive deposit insurance.
Accounting Reforms
Title I generally requires that the accounting principles applicable to the reports of insured institutions must be uniform and consistent with generally
accepted accounting principles (GAAP).
The accounting principles may depart
from this requirement if federal banking
agencies determine that the application
1. CAMEL is the acronym for a consolidated
rating gauging a depository institution's level of
capital, asset quality, management, earnings, and
liquidity.
198
78th Annual Report, 1991
of a particular principle results in financial statements and reports that do not
accurately reflect the capital of an institution or do not facilitate supervision
and prompt corrective action; alternative accounting principles prescribed by
the agencies must, however, be no less
stringent than GAAP.
Within a year of enactment of the
FDICIA, all federal banking agencies
must review all existing reporting and
regulatory requirements and modify any
that do not appropriately reflect capital
and facilitate supervision and corrective
action. Uniform accounting standards
are to be used by the agencies in determining regulatory compliance by institutions. Each agency also must develop
reporting requirements for contingent
assets and liabilities and must jointly
develop methods for supplemental disclosures of market values of assets.
Title I also requires depository institutions to provide additional reporting on
the availability of credit to small businesses and farms.
Prompt Regulatory Action
The FDICIA requires the federal banking agencies to address the financial difficulties of insured institutions with
prompt corrective action. Title I establishes categories of capitalization, with
the specific ratios to be set by the agencies, and requires successively more
stringent regulatory actions as an institution's capital deteriorates. Title I also
authorizes the appropriate federal banking agency to downgrade the categorization of an institution it believes to be
unsafe and unsound or to be engaged in
an unsafe or unsound practice.
Title I requires an undercapitalized
institution to file with its federal regulator an acceptable capital restoration plan
within a brief time after becoming
undercapitalized. Any company having
control of the undercapitalized institution must provide a limited guarantee
that the institution will comply with
the plan until it has been adequately
capitalized for four consecutive quarters. An undercapitalized institution may
not make acquisitions, establish new
branches, or engage in new lines of business unless its plan has been accepted
and the proposed action is found to be
consistent with the plan. In addition to
requiring the institution to raise additional capital, the institution's federal
banking agency may also restrict transactions with affiliates, interest rates paid,
asset growth, acceptance of interbank
deposits, or other activities of the institution; the agency may also require
changes in the institution's management
and require divestitures by the institution or its parent.
If an institution is significantly undercapitalized, or if it is undercapitalized
and has not submitted an acceptable capital plan, the appropriate federal banking
agency is required to take one or more
of the actions referred to above and may
impose additional requirements if necessary. Title I also places restrictions on
the compensation of such an institution's management.
Critically undercapitalized institutions
generally are prohibited from making
any investments, acquisitions, sales of
assets, payments on subordinated debt,
and other actions without the permission
of the FDIC. Within ninety days of the
date the institution becomes critically
undercapitalized, the appropriate federal
banking agency must appoint a conservator or receiver or, with the concurrence of the FDIC, require other action
to restore capital. If the institution is
critically undercapitalized during the
calendar quarter beginning 270 days
after the date the institution became critically undercapitalized, the agency must
appoint a conservator or receiver unless
Legislation Enacted
the agency, with the concurrence of the
FDIC, determines that the institution is
in compliance with its capital plan and
other requirements.
If either deposit insurance fund suffers a material loss with respect to an
insured institution, title I requires that
the inspector general of the institution's
federal banking agency review the supervision of the institution, report on the
cause of the loss, and recommend ways
to prevent such losses in the future.
Title I also requires federal banking
agencies to prescribe standards for operations, management, asset quality, earnings, stock valuation, and compensation
for all insured depository institutions
and depository institution holding companies. It also requires institutions and
holding companies that do not meet such
standards to submit compliance plans to
their regulators.
In order to implement the requirements for prompt corrective action,
title I significantly expands the grounds
on which a conservator or receiver may
be appointed. These provisions give the
Federal Reserve Board the authority to
appoint the FDIC as receiver for a state
member bank after consulting with the
appropriate state regulator.
Least Cost Resolution
Title I amends the Federal Deposit Insurance Act to require the FDIC to use
the least costly method to resolve its
insurance obligations with regard to an
insured institution. After 1994, title I
will prevent the FDIC from taking any
action to protect uninsured depositors or
creditors if such action will increase
costs to the insurance funds. The FDIC
may resolve its obligation to a troubled
institution without following the leastcost requirement in limited situations in
which the Secretary of the Treasury—
upon a recommendation of two-thirds
of the Federal Reserve Board and
199
two-thirds of the board of the
FDIC—determines that the FDIC's
compliance with these provisions would
result in serious adverse effects on economic conditions or financial stability
that would be avoided by the FDIC's
use of other resolution methods. The
FDIC is required to recover any additional costs incurred through special
insurance assessments.
Title I amends the Federal Reserve
Act—effective two years after the enactment of the FDICIA—to limit lending
by any Federal Reserve Bank to an
undercapitalized institution to sixty days
out of any one-hundred-twenty-day
period. An exception is provided if the
head of the appropriate federal banking
agency or the Chairman of the Federal
Reserve Board certifies that the institution is viable. The Federal Reserve may
continue lending for more than sixty
days to an undercapitalized institution
without such certification, but the Federal Reserve would be required to reimburse the FDIC for any loss in excess of
the loss that would have been incurred
had the FDIC closed the institution five
days after the institution became critically undercapitalized.
In any event, if the Federal Reserve
lends to any critically undercapitalized
institution for more than a five-day
period, the Federal Reserve will be liable to the FDIC for losses over those
that would have been incurred if the
institution had been closed at the end of
the five day period. Title I limits the
Federal Reserve's liability to the lesser
of the loss that it would have incurred
on increases in advances made after the
five-day period had the advances been
unsecured or the amount of interest received on increases in advances made
after the end of the five-day period. The
Federal Reserve is also given the authority to examine any depository institution
or depository institution affiliate in con-
200 78th Annual Report, 1991
nection with lending to the depository
institution.
Title II
Title II expands the regulation of foreign bank operations in the United
States and addresses several consumer
issues, including the Truth in Savings
Act, low-cost basic transaction accounts,
and affordable housing.
Regulation of Foreign Banks
Title II amends the International Banking Act to strengthen federal supervision, regulation, and examination of foreign bank operations in the United
States. Under the International Banking
Act, a foreign bank now must obtain the
approval of the Federal Reserve Board
before establishing a branch or an
agency or before acquiring ownership or
control of a commercial lending company. To approve such an application by
a foreign bank, the Board must determine that the foreign bank engages directly in the business of banking outside
of the United States, that it is subject to
comprehensive supervision or regulation on a consolidated basis in its home
country, and that the foreign bank has
provided adequate information to assess
the application.
The amendments permit the Board to
terminate the activities of a statechartered branch, agency, or commercial lending subsidiary of a foreign bank
if the foreign bank is not subject to
comprehensive supervision or regulation in its home country, or if it is being
operated in an unsafe and unsound manner. Title II also directs the Board to
develop and publish the criteria to be
used in evaluating the operations of any
foreign bank in the United States that
the Board has determined is not subject to comprehensive supervision or
regulation.
Title II also limits state-chartered
branches and agencies of foreign banks
to the same activities and lending limits
as those permitted federally chartered
branches and agencies, unless the Federal Reserve Board and, for insured
branches, the FDIC approve exceptions.
Further, the Board is authorized to impose conditions on the approval of federal branches and agencies by the Office
of the Comptroller of the Currency
(OCC).
Title II strengthens the Board's authority to examine any branch or agency
of a foreign bank, any commercial lending company or bank controlled by a
foreign bank, and any other office or
affiliate of a foreign bank. Title II requires foreign banks to obtain the approval of the Federal Reserve Board before establishing representative offices
in the United States. Title II also adds a
provision to the Federal Deposit Insurance Act to require anyfinancialinstitution that has extensions of credit secured
by 25 percent or more of any class of
shares of an insured depository institution to provide consolidated reports to
the insured institution's primary federal
regulator. Civil and criminal penalties
are established for violations by foreign
banks, and specific references to foreign bank operations are added in a
number of consumer and related statutory provisions.
Title II requires foreign banks that
maintain accounts with balances of less
than $100,000 to establish a banking
subsidiary and obtain deposit insurance
from the FDIC; accounts that were held
in an insured branch on the date of
FDICIA's enactment are exempted from
this requirement.
Title II requires the Board, jointly
with the Treasury, to report to the Congress on the regulatory capital standards
that apply to foreign banks operating in
the United States and to establish guide-
Legislation Enacted 201
lines to be used in comparing foreign
bank capital to the risk-based capital
and leverage requirements for United
States banks. The Board is also required
to report, jointly with the OCC, the
FDIC, and the Attorney General, as to
whether foreign banks should be required to conduct banking operations in
the United States through subsidiaries
rather than branches.
Customer and Consumer Provisions
Within one year of the enactment of the
FDICIA, the Federal Financial Institutions Examination Council is required to
review all policies and procedures used
to enforce compliance with all laws under the jurisdiction of the federal banking agencies and the Treasury and to
report to the Congress on revisions that
can be made without weakening compliance with, or enforcement of, consumer
laws and without endangering the safety
and soundness of insured institutions.
Title II amends the Equal Credit Opportunity Act to require federal agencies
to refer to the Attorney General cases in
which creditors discourage or deny loan
applications in violation of the act and
to require the reporting of individual
instances of suspected mortgage discrimination to the Department of Housing and Urban Development and to the
applicant. Lenders are required upon request to provide applicants with copies
of appraisals in connection with loans
secured by residential real property.
Title II also amends the Home Mortgage
Disclosure Act to extend its requirements to a broader range of financial
institutions.
Title II amends the Expedited Funds
Availability Act to permit deposits made
at nonproprietary automated teller machines to be treated as nonlocal checks,
thereby allowing depository institutions
to put a hold on the proceeds of the
checks until the fifth business day after
deposit. Additional amendments permit
longer holds on certain large or redeposited government or depository institution checks.
Title II also requires that a ninety-day
advance notice of the closing of any
branch of an insured depository institution be provided to the federal regulator
and customers of the institution.
Bank Enterprise Act
Title II requires the Board and the FDIC
to establish minimum requirements for
"lifeline" accounts, which provide basic
transaction services. Subject to congressional appropriations, institutions
providing such accounts may be able to
pay lowered deposit insurance premiums on funds in these accounts. Credits
against deposit insurance assessments
are also allowed for institutions increasing certain qualifying activities,
including lending to low- and moderateincome persons or enterprises in distressed communities, subject to congressional appropriations.
Whistleblower Protections
Title II provides protections for employees of depository institutions and federal
banking agencies if they report misconduct at an institution or agency, effective
retroactively to January 1, 1987. Employees that believe they had been
wrongfully discharged or discriminated
against under this provision could file
civil actions for damages or reinstatement within two years after enactment
of the FDICIA.
Truth in Savings
The Truth in Savings Act (TSA),
adopted as subtitle F of title II of the
FDICIA, provides for uniform disclosure of the rates of interest payable on
deposit accounts and the fees payable on
such accounts. All advertisements that
refer to a specific interest rate must in-
202 78th Annual Report, 1991
elude the annual percentage yield on the
account and the period during which the
annual percentage yield is in effect, as
well as any minimum balances, minimum initial deposit, fees, and early
withdrawal penalties. The TSA authorizes the Federal Reserve Board to exempt advertisements made by broadcast,
electronic media, or outdoor displays
not on the premises of the depository
institution if such disclosure would be
unnecessarily burdensome. The TSA
prohibits references to free or no-cost
accounts if minimum balances or limits
on transactions are required to avoid
fees or if any regular service fee or
transaction fee is imposed; the TSA also
generally prohibits any depository institution or deposit broker from making
any statement that is inaccurate or misleading or that misrepresents a deposit
contract.
The TSA requires each depository institution to maintain a schedule of fees,
charges, interest rates, and terms and
conditions applicable to each type of
account offered, as detailed in regulations to be established by the Board.
These schedules must be available to
any person upon request, to customers
before an account is opened, and to
holders of automatically renewable time
deposits. Notice must be given thirty
days in advance of any change in the
terms or conditions of an account that
may reduce the yield or adversely affect
the account holder.
The TSA requires that interest be calculated on the full amount of the principal in an account for each day of the
calculation period at the stated rate of
interest, and that interest begin to accrue
no later than the availability date required by the Expedited Funds Availability Act. Each depository institution
is also required to include with each
periodic statement a statement of the
annual percentage yield earned, the
amount of interest earned, the amount of
any fees or charges imposed, and the
number of days in the reporting period.
The Board is required to promulgate
regulations to implement the provisions
of the TSA within nine months of enactment of the FDICIA, with such regulations to be effective within six months
of final publication. The TSA provides
for administrative enforcement by the
appropriate federal banking agency and
civil liability for violations.
Title III
Title III places limitations on deposit
insurance, brokered deposits, real estate
lending and lending to insiders, and
the activities of FDIC-insured statechartered banks generally; it also provides penalties for false assessment reports. Title III requires the Board to
develop rules to limit the exposure of
insured depository institutions to other
depository institutions and requires studies on ownership of deposits and on
deposit insurance.
Activities
Title III restricts the acceptance of brokered deposits to institutions that are
well-capitalized or that are adequately
capitalized and have received a waiver
from the FDIC. The interest rates on
brokered deposits may not be significantly above (1) the rates paid on deposits of comparable maturity in the institution's normal market area or (2) above
national rates as determined by the
FDIC.
The FDIC is required to establish a
system of risk-based deposit insurance
premiums, which will account for the
risk to the insurance funds posed by the
types and concentrations of assets and
liabilities of an institution.
Legislation Enacted 203
A provision of title III effective one
year after enactment of the FDICIA restricts the activities of insured statechartered banks to those activities that
are permissible for national banks; the
restriction does not apply if the FDIC
determines that the activity poses no
risk to the insurance fund and that the
state bank is in compliance with applicable capital requirements. Insured state
banks generally will be prohibited from
engaging in insurance activities that are
not permissible for national banks. Insured state banks will also be prohibited
from holding any equity investment of a
type or in an amount not permitted for a
national bank, with limited exceptions,
including exceptions for certain subsidiaries and qualified housing projects.
State banks are given a period of several
years to conform existing investments.
Subsidiaries of insured state banks
may engage as principal in activities
that are not permissible for a subsidiary
of a national bank only if the activity is
approved by the FDIC and the parent
bank meets applicable capital requirements. Insurance activities that were
lawfully provided in a state as of November 21, 1991, may continue within
that state. Title insurance and savings
bank life insurance activities are grandfathered or permitted for certain insured
state banks.
Title III requires the Board and other
federal banking agencies to adopt uniform standards for real estate lending
and provides that loan evaluation standards should not require loans to be
considered nonperforming solely because the proceeds are invested in residential, commercial, or industrial property. The Board and each appropriate
federal banking agency are also required
to review capital and risk-based capital
standards biennially and to discuss the
development of comparable standards
with members of the supervisory com
mittee of the Bank for International
Settlements.
Title III amends the Federal Reserve
Act to recodify and strengthen existing
law concerning extensions of credit to
officers, directors, and principal shareholders. The provision makes applicable
to lending to directors the restrictions
that currently apply to lending to bank
officers. The provision also imposes an
aggregate limit on the total extensions
of credit to the bank's officers, directors,
and principal shareholders and their related interests. The Board is permitted to
set a higher aggregate limit for lending
by small banks when necessary to prevent the restriction of credit in a community or to permit banks to attract
directors. Insiders are prohibited from
knowingly receiving, or permitting their
related interests to receive, prohibited
extensions of credit.
Title III provides the FDIC with the
authority to take enforcement action
directly against any insured depository
institution under certain circumstances.
Title III also amends the Federal Reserve Act to add a new section 23, which
requires the Board to prescribe standards to limit the exposure of insured
depository institutions to the failure of a
large depository institution.
Deposit and Pass-through Insurance
Title III modifies the current system of
federal deposit insurance to eliminate
insurance coverage for certain bank
investment contracts held by employee
benefit plans that permit penalty-free
withdrawals. The FDIC is directed to
study the feasibility of tracking deposits
of any individual, and the Board
is directed to survey the ownership,
amounts, and types of deposits held by
individuals.
Title III prohibits the FDIC, the Federal Reserve System, and any other
agency or instrumentality of the United
204
78th Annual Report, 1991
States from making any payment for the
benefit of foreign depositors except payments by the FDIC to meet the requirements of least-cost resolution. Federal
Reserve Banks may continue to extend
credit to member banks under the provisions of the Federal Reserve Act, regardless of whether the bank has foreign
deposits.
Title III also provides for a threetiered system of penalties applicable to
insured institutions that make false reports in connection with insurance premium assessments.
Title IV
Title IV concerns payment system risk,
FDIC operations and settlement procedures, qualified thrift lenders, emergency loan guarantees, the right to financial privacy; it also mandates several
studies and reports.
Reduction of Payment System Risk
To promote efficiency and reduce systemic risk within the banking system
and financial markets, title IV validates
bilateral netting contracts between certain financial institutions and multilateral netting contracts between members
of clearing organizations. Title IV provides that netting contracts between depository institutions, brokers, dealers,
and futures commission merchants will
be enforceable even in the event of the
bankruptcy of one of the parties; the
Board is authorized to expand the coverage of this provision to include affiliates
of brokers and dealers and other financial institutions.
Miscellaneous Provisions
Title IV permits the FDIC to settle immediately all uninsured and unsecured
claims against an institution in receivership by making final payments reflecting
the FDIC's average rate of recovery.
The Board, jointly with the FDIC, the
National Credit Union Administration,
the OCC, and the Office of Thrift Supervision, is required to report to the Congress on the feasibility of payment by
the Federal Reserve Banks to the deposit insurance funds of imputed interest on reserve accounts held by insured
depository institutions.
Title IV amends the Federal Reserve
Act to permit a Federal Reserve Bank,
upon an affirmative vote of at least five
members of the Federal Reserve Board,
to provide secured lending in unusual
and exigent circumstances to individuals, partnerships, or corporations without regard to the purpose of the notes
used to secure the lending.
Under Title IV, the Board and other
appropriate federal banking agencies are
required to determine the amount of purchased mortgage servicing rights that
may be included in an institution's tangible capital, risk-based capital, and leverage limit.
Each year, the Board must collect and
publish information on the availability
of credit to small businesses, including
farms and minority-owned businesses.
Title V
Title V amends the Federal Deposit Insurance Act to allow a bank that is not
part of a bank holding company to
merge or consolidate with a savings association or acquire its assets and liabilities without payment of the entrance
and exit fees required under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989. The amendments also permit a thrift institution to
acquire a bank in the same manner. The
amendments require the filing of a bank
merger application and generally require
the Board to review applications for
mergers under the same standards applicable to other bank mergers.
•
205
Banking Supervision and Regulation
The past year was another difficult one
for the U.S. banking system, and it made
new demands on the Federal Reserve's
bank supervisory and regulatory activities. The continued weakening of commercial real estate markets, in particular,
put many banking organizations under
increased stress and kept the rate of
bank failures high. Real estate problems, sometimes compounded with exposures to heavily indebted borrowers
and to developing countries, forced
some institutions to report low or negative earnings and to take exceptional
measures to rebuild their capital bases.
Many institutions also took steps to
strengthen loan underwriting standards,
which had declined in past years. In
large part, these measures were needed
to improve the industry's performance
and to maintain a sound and responsive
banking system. In certain areas, however, they also contributed to a general
tightening of credit availability that may
have gone beyond a point of sensible
balance and produced unnecessarily
adverse effects on some creditworthy
borrowers.
In response to these developments,
the Federal Reserve Board took steps to
promote the increased availability of
credit. In addition to its monetary policy
actions, the Board—often in connection
with other federal bank regulatory
agencies—issued a series of policy
statements intended to clarify its supervisory policies, prevent excessive criticism of weak assets by examiners, and
encourage bankers to extend funds to
creditworthy borrowers.
These statements did not change the
Board's longstanding supervisory policies but rather were aimed at correcting
misunderstandings about them on the
part of both bankers and bank examiners. In general, the statements emphasized the importance of reviewing loans
in a consistent, prudent, and balanced
fashion that recognized the borrower's
willingness and capacity to repay and
the income-producing capacity of the
properties. They also emphasized the
need for banks to extend credit to sound
borrowers and to work with troubled
borrowers in resolving problems.
These lending patterns reflect only
one dimension of a financial system that
is changing rapidly in response to new
technology, regulatory initiatives, and
market pressures and innovations. The
stress and opportunities brought about
by these and other events continued to
encourage consolidation within the U.S.
banking industry. In late 1991, the Board
approved the two largest bank combinations in U.S. history. Other significant
mergers and acquisitions are pending.
The ongoing administration and continued development of the international
risk-based capital standard remained an
important element of the Federal Reserve's supervisory process. In the fall,
several changes were made to the U.S.
standard to bring it into closer conformity with interpretations of the internationally agreed Basle Accord and also to
remove certain impediments to the issuance of noncumulative perpetual preferred stock. Throughout the year, staff
also worked to develop a framework for
incorporating risks arising from interest
rate changes, foreign exchange movements, and securities trading activities
into the risk-based capital measure. One
approach for evaluating interest rate risk
was described in the August 1991 Fed-
206 78th Annual Report, 1991
eral Reserve Bulletin, and work in all of
these areas continues on an international
basis.1
During much of the year, supervisory
efforts relating to the July failure of the
Luxembourg-based Bank of Credit and
Commerce International (BCCI) required close coordination and cooperation with banking authorities worldwide.
These efforts also placed significant demands on the Federal Reserve as it
sought to minimize losses to U.S. customers and to identify abusive and unauthorized practices of the bank. Also in
the international area, the May implementation of final revisions to Regulation K (International Banking Operations) provided a basis for improving
the competitiveness of U.S. banks operating abroad.
Problems with BCCI, along with legislative initiatives proposed by the U.S.
Treasury to reform the domestic financial system, led to enactment of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). That
major legislation expanded the authority
of the Federal Reserve to regulate and
supervise foreign banks conducting
business in the United States and included numerous other provisions that
will have significant effects on supervisory and regulatory activities in future
years (see the chapter on Legislation
Enacted).
Near year-end, William Taylor, the
Staff Director of the Division of
Banking Supervision and Regulation,
resigned to become Chairman of the
Federal Deposit Insurance Corporation
(FDIC). Subsequently, the Board announced the appointment of Richard
Spillenkothen as the new director and
1. James V. Houpt and James A. Embersit, "A
Method for Evaluating Interest Rate Risk in U.S.
Commercial Banks," Federal Reserve Bulletin,
vol. 77 (August 1991), pp. 625-37.
the selection of Stephen C. Schemering
as deputy director; both have been longtime staff members in the division.
Scope of Responsibilities
for Supervision and Regulation
The Federal Reserve is the primary federal supervisor and regulator of all U.S.
bank holding companies and of statechartered commercial banks that are
members of the Federal Reserve System. In its supervision of the general
operations of these organizations, the
Federal Reserve primarily seeks to promote their safety and soundness and
their compliance with laws and regulations, including the Bank Secrecy Act
and consumer and civil rights laws.2 The
Federal Reserve also reviews the following specialized activities of these institutions: 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.
The Federal Reserve also has responsibility for the supervision of (1) all
Edge Act corporations and agreement
corporations (organizations chartered by
the Federal Reserve to provide all segments of the U.S. economy with a means
of financing international trade, espe2. The Board's Division of Consumer and
Community Affairs has the responsibility of coordinating the Federal Reserve's supervisory activities with regard to the compliance of banking
organizations with consumer and civil rights laws.
To carry out this responsibility, institutions are
examined by specially trained Reserve Bank examiners. The chapter of this REPORT covering
consumer and community affairs describes these
regulatory responsibilities. Compliance with other
statutes and regulations, which is treated in this
chapter, is the responsibility of the Board's Division of Banking Supervision and Regulation and
the Reserve Banks, whose examiners check for
safety and soundness.
Banking Supervision and Regulation 207
daily 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. In addition, the FDICIA increased the Federal
Reserve's authority over branches, agencies, commercial lending subsidiaries,
and representative offices of foreign
banks in the United States with respect
to the establishment, examination, and
termination of such offices.
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 entry into, and the
structure of, the U.S. banking system.
The Federal Reserve is also responsible
for the regulation of margin requirements on securities transactions. The
Federal Reserve coordinates its supervisory activities with other federal
and state regulatory agencies and with
the bank regulatory agencies of other
nations.
Supervision for Safety
and Soundness
To ensure the safety and soundness of
banking organizations, the Federal Reserve conducts on-site examinations and
inspections, off-site 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 of financial institutions. Examinations of state member banks and
Edge Act and agreement 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 1991 there were 982 state
member banks, 65 fewer than in 1990.
These banks represented about 8 percent
of all insured commercial banks and accounted for about 16 percent of their
assets.
The Federal Reserve in 1986 increased the frequency of scheduled examinations and inspections of state
member banks and bank holding companies. The guidelines call for state member banks to be examined at least annually by either a Reserve Bank or, if an
alternate examination agreement exists,
by a state banking agency. Large or troubled banks must be examined at least
annually by a Reserve Bank. Under
FDICIA, annual on-site examinations
are now required for all depository institutions, except well-capitalized and
well-managed institutions with assets of
less than $100 million.
Because of the reassignment in 1991
of bank examiners to address other
emerging problems in the banking industry, scheduled examinations of 21
healthy, well-managed banks were deferred into the first quarter of 1992. All
other state member banks were examined at least once in 1991. Altogether,
the Reserve Banks conducted 790 examinations (some of them jointly with state
banking departments), and state banking
departments conducted 281 independent
examinations. Also, under policy guidelines, Reserve Bank officials held 313
208 78th Annual Report, 1991
meetings with directors of large state
member banks and those that displayed
significant weaknesses.
Bank Holding Companies
At year-end 1991, the number of bank
holding companies totaled 6,441, 16
more than in 1990. These organizations
control about 8,500 commercial banks,
which hold approximately 93 percent of
the assets of all insured commercial
banks in the United States.
Large bank holding companies (generally, those with assets in excess of
$150 million) and smaller companies
with significant nonbank assets are to be
inspected annually under the guidelines
for frequency and scope of examinations. Small companies that do not
appear to be experiencing problems
are inspected on a sample basis, and
medium-sized companies that do not
appear to be experiencing problems are
inspected on a three year cycle.
The inspection focuses on the operations of the parent holding company and
its nonbank subsidiaries. In judging the
condition of subsidiary banks, Federal
Reserve examiners consult the examination reports of the federal and state
banking authorities that have primary
responsibility for supervision of these
banks. In 1991, 2,269 bank holding
companies were inspected. Federal
Reserve examiners inspected 2,145 of
them; state examiners inspected 124.
Because certain institutions require
more than one inspection per year, the
Federal Reserve made a total of 2,254
inspections in 1991, of which 142 were
off-site. Because members of the examining staff were assigned to work with
other industry problems in 1991, 53
bank holding company inspections were
deferred until 1992. During 1991, Reserve Bank officials held 524 meetings
with the boards of directors of bank
holding companies to discuss supervisory concerns.
Enforcement Actions,
Civil Money Penalties,
and Significant Criminal Referrals
In 1991 the Federal Reserve Banks recommended, and members of the Board's
staff initiated and worked on, 198 formal enforcement cases involving 449
separate actions—such as written agreements, cease and desist orders, removal
and prohibition orders, and civil money
penalties—dealing with unsafe or unsound practices and violations of law.
Of these, 54 cases involving 106 actions
were completed by year-end. In addition, the Board and several Reserve
Banks undertook the most extensive
enforcement-related investigation ever
conducted by the Federal Reserve, addressing the activities of BCCI in the
United States and other countries. As a
result of the investigation, which was
continuing at year-end, the Board in
1991 initiated 23 actions, including 6
actions seeking $257 million in civil
money penalties.
All final enforcement actions issued
by the Board and all written agreements
executed by the Reserve Banks in 1991
are available to the public. In addition to
formal enforcement actions, the Reserve
Banks initiated and worked on 297 informal enforcement actions and completed 235 of them through instruments
such as memorandums of understanding
with state member banks, bank holding
companies, and foreignfinancialinstitutions subject to the jurisdiction of the
Federal Reserve. In addition to the foregoing, the Board obtained approximately $2.7 million in restitution to, and
over $140 million in capital infusions
into, state member banks and bank holding companies through informal actions
that were taken in lieu of the issu-
Banking Supervision and Regulation 209
ance of formal enforcement orders or
agreements.
In 1991, the Division of Banking Supervision and Regulation forwarded 222
criminal referrals to the Fraud Section
of the Criminal Division of the Department of Justice for inclusion in its significant referral tracking system.
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
activities of state member banks, Edge
Act and agreement corporations, and independent centers that provide EDP services to these institutions. In 1991, Federal Reserve examiners conducted 277
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 has supervisory responsibility for institutions that hold
more than $3.1 trillion of discretionary
and nondiscretionary assets in various
fiduciary capacities. This group of institutions includes 316 state chartered
member banks and trust companies and
80 trust companies and investment advi
sory companies that are subsidiaries of
bank holding companies.
On-site examinations are essential to
ensure the safety and soundness of financial institutions that have 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.
During 1991, Federal Reserve examiners conducted on-site trust examinations of 152 state member banks and
state member trust companies and 36
inspections of bank holding company
subsidiaries engaged in fiduciary activities. The institutions examined in 1991
held more than $2.2 trillion in fiduciary
assets.
Government Securities Dealers
and Brokers
The Federal Reserve is responsible for
examining the activities of state member
banks, and of some foreign banks that
are government securities dealers and
brokers, for compliance with the Government Securities Act of 1986 and with
the Treasury Department's regulations.
Forty-four 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
210 78th Annual Report, 1991
securities dealers or as clearing agencies. Registered with the Board are
forty-four banks that act as municipal
securities dealers and five clearing agencies that act as custodians of securities
involved in transactions settled by bookkeeping entries. In 1991 the Federal Reserve examined all five of the clearing
agencies and nineteen of the banks that
deal in municipal securities.
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 mortgagerelated securities, and securitized consumer loans) in a manner consistent with
the Glass-Steagall 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. This limit was subsequently increased in September 1989
to 10 percent.
In January 1989 the Board approved
applications by five U.S. bank holding
companies to underwrite and deal in corporate and sovereign debt and equity
securities, subject in each case to reviews of managerial and operational infrastructure and other conditions and requirements specified by the Board. Four
of these organizations subsequently received authorization to underwrite and
deal in corporate and sovereign debt
securities, and two also received equity
underwriting and dealing authority.
At year-end 1991, thirty-one bank
holding companies had section 20 subsidiaries authorized to underwrite and
deal in ineligible securities. Of these,
seven could underwrite any debt or
equity securities; three could underwrite
all types of debt securities; and twentyone could underwrite only the limited
types of debt securities approved by the
Board in 1987. Specialized inspection
procedures have been developed for use
in reviewing operations of these securities subsidiaries.
Transfer Agents
Federal Reserve 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 1991, System
examiners reviewed 66 of the 169 banks
and bank holding companies registered
as transfer agents with the Board.
Surveillance and Monitoring
The Federal Reserve monitors the financial condition of state member banks
and bank holding companies through a
quarterly surveillance program to supplement the Federal Reserve's on-site
examinations. This program consists of
automated screening systems that identify organizations with poor or deteriorating financial profiles. Banking organizations submit financial statements from
which the screening systems compute
numerous financial ratios. These ratios
are then analyzed to determine whether
the organizations have emerging problems that may require the commitment
of examiner resources for on-site examinations or other appropriate supervisory
responses. The Federal Reserve supplements the quarterly surveillance pro-
Banking Supervision and Regulation 211
grams with ad hoc screening reports on
specific areas of supervisory concern.
To enhance the timeliness and quality
of the surveillance processes, the current
system is being revised and will include
an early-warning model to continually
evaluate a banking organization's supervisory rating based on the most current
financial information available.
the supervisory authorities of the countries in which the examinations took
place; when applicable, they were coordinated with the Office of the Comptroller of the Currency. Also, examiners
made five visits to overseas offices to
obtain current financial information on
their operations and to evaluate their
compliance with corrective measures
previously required.
International Activities
The Federal Reserve is responsible
for supervising international activities
through various vehicles.
Edge Act Corporations
and Agreement Corporations
Edge Act 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 Act corporation. In 1991 the Federal Reserve examined all 97 Edge Act and agreement
corporations, which held about $29 billion in total assets at year-end.
Foreign-Office Operations of U.S.
Banking Organizations
The Federal Reserve examines the international operations of state member
banks, Edge Act corporations, and bank
holding companies, principally at the
U.S. head offices of these organizations
where the ultimate responsibility for
their foreign offices lies. In 1991 the
Federal Reserve examined eight foreign
branches of state member banks and
twenty-four subsidiaries of Edge Act
corporations and bank holding companies. All of the examinations abroad
were conducted with the cooperation of
U.S. Activities of Foreign Banks
Foreign banks continue to be significant
participants in the U.S. banking system.
As of year-end 1991, 313 foreign banks
operated 529 state-licensed branches
and agencies, of which 53 are insured
by the Federal Deposit Insurance Corporation. These foreign banks also operated 84 branches and agencies licensed
by the Office of the Comptroller of the
Currency, of which 9 have FDIC insurance. Foreign banks also directly owned
11 Edge Act corporations and 13 commercial lending companies. In addition,
foreign banks held an interest of at least
25 percent in 90 U.S. commercial banks.
Altogether, these foreign banks control
approximately 24 percent of U.S. banking assets.
The Federal Reserve has broad authority to supervise and regulate foreign
banks that engage in banking and related activities in the United States
through branches, agencies, commercial
lending companies, Edge Act corporations, banks, and certain nonbanking
companies. The Federal Reserve conducted or participated with state regulatory authorities in the examination of
123 such offices during the past year.
Before the December 1991 passage
of the FDICIA, the Federal Reserve
had residual authority to examine all
branches, agencies, and commercial
lending subsidiaries of foreign banks
in the United States. The International
212 78th Annual Report, 1991
Banking Act of 1978 instructed the
Federal Reserve to use, to the extent
possible, the examination reports of
other state and federal regulators. The
FDICIA amended the International
Banking Act and increased the Federal Reserve's authority with respect to
these foreign bank operations, including
representative offices, in the United
States. The Federal Reserve may coordinate the examinations of foreign bank
operations with other state and federal
regulators. Branches and agencies are
now required to be examined at least
once during each twelve-month period
in an on-site examination. The FDICIA
also authorizes the Federal Reserve to
terminate the operations of foreign
banks in the United States under certain
conditions. In addition, the legislation
requires Federal Reserve approval to
establish foreign bank branches, agencies, commercial lending subsidiaries,
and representative offices in the United
States.
standards for federally related transactions ended on January 25, 1991, with
more than 2,800 comment letters being
received. For such transactions, the proposed amendment seeks reconsideration
of the level above which financial institutions would be required to obtain the
services of a licensed or certified appraiser. The Board's existing regulation
sets the level at $100,000, and the proposal would lower the threshold to
$50,000. Recently, the FDIC and the
Office of the Comptroller of the Currency (OCC) announced amendments to
their regulations to raise their appraisal
threshold from $50,000 to $100,000.
The Board amended its appraisal regulation as a result of a provision in the
FDICIA that changed—from July 1,
1991, to December 31, 1992—the effective date for the use of state licensed and
certified appraisers in federally related
transactions. However, any requirements of state law regarding the use of
licensed or certified appraisers remain
unaffected by the Board's action.
Supervisory Policy
During 1991 the Federal Reserve undertook several major supervisory and regulatory policy initiatives. These initiatives included increased supervision of
problem banking organizations, action
on several merger applications involving large regional and multinational
banking organizations, and an intensified review of internal supervisory policies relative to alleviating credit availability conditions throughout the nation.
The following sections summarize these
initiatives and review other activities
conducted in 1991 to enhance the Federal Reserve's supervisory programs.
Real Estate Appraisals
The comment period on the Board's
amendment to its regulation on appraisal
Risk-Based Capital Standards
at Year-End 1991
The risk-based capital standard provides
for a two-year phase-in period, which
began December 31, 1990. As of that
date, banking organizations were expected to maintain total capital equal to
at least 7.25 percent of risk-adjusted
assets. This minimum standard rises to
8 percent at year-end 1992. The riskbased capital standard was developed in
cooperation with the FDIC and OCC
and representatives of the other eleven
members of the Basle Committee on
Banking Regulations and Supervisory
Practice.
In October 1991 the Board also issued for public comment a proposal to
establish new guidelines for bank holding companies, which would remove the
Banking Supervision and Regulation 213
limit on the amount of noncumulative
perpetual preferred stock a bank holding
company may include in its tier 1 capital. The guidelines would continue to
limit cumulative perpetual preferred
stock to 25 percent of tier 1 capital. The
additional flexibility provided by this
step may assist bank holding companies
to strengthen their capital positions and
expand their lending capacity. [The
Board approved the proposal in January
1992.]
The Board issued in final form the
clarifications, modifications, and technical changes to the risk-based capital
guidelines that became effective November 8, 1991. The modifications and
technical changes relate to the (1) treatment of certain assets sold with recourse, (2) redemption of perpetual
preferred stock, (3) treatment of supervisory goodwill in the definition of capital, and (4) treatment of claims on central banks of countries outside the
Organisation for Economic Cooperation
and Development. The purpose of these
modifications, clarifications, and technical changes is to make the Federal
Reserve's risk-based capital framework
consistent with recent international interpretations of the risk-based capital
accord and with the current proposed
treatment of certain items by the other
federal banking agencies. In addition,
these changes are intended to bring the
guidelines into closer conformity with
the risks associated with certain transactions and with current Federal Reserve
supervisory practices.
The risk-based capital framework of
the Basle Accord encourages banking
organizations to strengthen their capital
positions. The standard offers the advantages of differentiating, in a broad way,
among the relative riskiness of banking
assets and accounting for off-balancesheet risks. Because of its acceptance by
countries with major international bank
ing centers, the risk-based capital standard helps to create a level playing field
for U.S. banking organizations as they
compete with banks in other countries.
When the Basle Committee adopted
the risk-based capital standards in 1988,
it expected that further efforts would be
required to incorporate certain noncredit
risks into the risk-based framework. In
this connection, the Federal Reserve in
1991 participated in various international efforts to strengthen the capital
positions of internationally active banking organizations. These efforts include
incorporating into the risk-based capital
framework a capital charge for risks
arising from changes in interest rates
(interest rate exposure) and from
changes in foreign exchange rates (foreign exchange position risk).
The Federal Reserve has advanced a
preliminary proposal for measuring and
evaluating interest rate risk in U.S. commercial banks. During the second half of
1991, both Federal Reserve and FDIC
examiners conducted field tests of the
proposed measurement system in selected banks across the country. Once
fully developed and field-tested, the approach under consideration could supplement existing examination procedures and provide an additional off-site
monitoring tool for identifying banks
with excessive exposures to interest rate
changes.
Report on Capital and Reporting
Standards
As required by section 1215 of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA), the Federal Reserve, together with the other federal banking
agencies, is required to prepare an annual report to the Congress discussing
any differences in their capital and accounting standards for federally insured
214 78th Annual Report, 1991
depository institutions. The second annual report was delivered to the Congress on August 9, 1991.
The report indicated that the banking
agencies' guidelines relating to the capital treatment of identifiable intangible
assets are not entirely uniform. The Federal Reserve is working with other banking agencies to reach agreement on the
matter.
The report also indicated that the
accounting and reporting requirements
applicable to commercial banks are substantially consistent among the three
federal banking agencies. However, the
federal banking agencies and the Office
of Thrift Supervision continue to undertake projects and study ways to reduce
differences in reporting standards between commercial banks and savings
and loan associations.
guidance that was both prudent from a
supervisory perspective and consistent
with generally accepted accounting principles. In addition, officials of each
agency held meetings with their examiners to ensure that they fully understood
these policies.
The Federal Reserve also issued guidance for resolving differences that can
arise between banks and examiners during an examination. In addition, meetings were held with the senior management of major banking organizations
around the country to explain these
initiatives. Senior agency officials also
participated in several regional meetings, sometimes referred to as "town
meetings," involving bankers, businessmen, and members of the Congress.
Environmental Liability
Credit Availability
The Federal Reserve, together with
other supervisors of depository institutions, has been working to ensure that
supervisory policies and examiner
practices—and bankers' perceptions of
these policies and practices—are not detering lenders from meeting the financial needs of creditworthy borrowers. To
that end, the Federal Reserve and other
supervisory agencies have introduced a
series of initiatives designed to clarify
longstanding policies and to make sure
that examiners and depository institutions are fully informed of these policies. These efforts, which included
the issuance of policy statements on
March 1 and November 7 to reiterate
and clarify longstanding guidance regarding general lending practices and
the evaluation of real estate collateral,
were designed to ensure that examiners
use prudent and balanced practices and
procedures. The agencies sought to offer
In October the Board issued guidance to
examiners regarding the risks to banks
and borrowers posed by the liability associated with the clean-up of hazardous
substance contamination under the federal "Superfund" statute. The guidance
provided an overview of the Superfund
statute and identified specific situations
in which a bank might find itself liable
for hazardous substance contamination.
In addition, the statement provided examiner guidance on assessing the adequacy and effectiveness of a bank's policies and procedures to identify and limit
hazardous substance liability. The guidance gives specific procedures and precautions for banks to limit their Superfund liability.
Dividend Payments
In 1990 the Board issued amended regulations on the payment of dividends
by state member banks, which became
Banking Supervision and Regulation 215
effective January 1, 1991. The rule simplifies and clarifies the calculation of
certain statutory limitations on the payment of dividends. The rule also makes
the treatment of loan-loss allowances
and provisions for dividend payment
purposes consistent with current regulatory reporting standards and generally
accepted accounting principles.
Highly Leveraged Transactions
In 1991 the Federal Reserve, together
with the other banking regulatory agencies, provided additional interpretive
guidance on the definition of highly leveraged transactions (HLT). The guidance clarified the purpose test, clarified
the application of the HLT definition to
parent companies and their subsidiaries,
and broadened the criteria for removing
loans from HLT status. It also excluded
debtor-in-possession financings from
HLT designation and clarified other provisions. However, further questions and
comments concerning the HLT definition prompted the agencies to seek additional public comments. The Federal
Reserve received more than 260 comments. [In early 1992 the Board decided
to phase out the HLT definition by midyear.]
Sale of Uninsured Annuities
on Retail Banking Premises
In 1991 the Federal Reserve issued
guidelines to examiners for reviewing
the sale of uninsured annuities on retail
banking premises. This guidance indicated that state member banks and bank
holding companies should not market,
sell, or issue uninsured annuities, or allow third parties to do so, in a manner
that could give purchasers the impression that the annuities are federally insured deposits or that they are obligations of the depository institution.
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
1991, the Federal Reserve conducted a
variety of schools and seminars, and
Federal Reserve staff members participated in several courses offered by or
cosponsored with other agencies, as
shown in the accompanying table. In
1991, the Federal Reserve trained 1,634
persons in System schools, 875 in
FFIEC schools, and 26 in other schools,
for a total of 2,535 students, including
116 representatives from foreign banks.
The Federal Reserve System also provided scholarship assistance to the states
for training their examiners in Federal
Reserve and FFIEC schools. Through
this program, 402 state examiners were
trained; 196 in Federal Reserve courses,
203 in FFIEC programs, and 3 in other
courses.
Federal Financial Institutions
Examination Council
The members of the FFIEC approved a
policy statement on securities activities
mainly to update and revise its 1988
supervisory policy statement on the
"Selection of Securities Dealers and
Unsuitable Investment Practices."3 The
policy statement addresses the selection
of securities dealers, requires depository
institutions to establish prudent policies
3. The FFIEC consists of representatives from
the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the National Credit Union Administration,
the Office of the Comptroller of the Currency, and
the Office of Thrift Supervision.
216 78th Annual Report, 1991
and strategies for securities transactions,
defines securities trading or sales practices that are viewed by the agencies as
being unsuitable when conducted in an
investment portfolio, indicates characteristics of loans held for sale or trading,
and establishes a framework for identifying certain mortgage derivative products as high-risk mortgage securities that
must be held either in a trading account
or a held-for-sale account.
The Board, together with the FFIEC,
is also reviewing guidance on the allowance for loan and lease losses with a
view to developing an interagency policy statement.
The FFIEC is continuing its study on
the appropriate regulatory reporting and
capital treatments to be applied to recourse arrangements for depository institutions and bank holding companies.
The FFIEC also proposed several
changes to the Report of Condition and
Income (Call Report), which is filed by
all insured commercial banks. The pro-
posed changes fall into four general
areas: (1) real estate lending and related
exposures, (2) other asset quality information, including highly leveraged
transactions, (3) assets held for sale, and
(4) sources of other noninterest income
and expense. There are also several miscellaneous proposed changes.
The Federal Reserve has continued its
support of the appraisal subcommittee
of the FFIEC. The subcommittee was
established pursuant to title XI of
FIRREA to monitor the overall implementation of real estate appraisal reform. During the past year, the subcommittee retained permanent staff to handle
its daily affairs. The subcommittee is
working with the state appraisal regulatory agencies to implement appraiser
license and certification programs. In
addition, to promote communications
with the states, the subcommittee held a
two-day conference for state regulators
on the requirements of title XI of
FIRREA.
Training Programs for Banking Supervision and Regulation, 1991
Number of sessions
Agency and type of training
Total
Schools or seminars conducted by the Federal Reserve
Banking I
Banking II
Banking III
Senior forum for current banking and regulatory issues
Effective writing for banking supervision staff
Credit analysis
Abbreviated cash flow seminar
Bank holding company applications
Bank holding company inspection
Conducting meetings with management
Basic entry-level trust
Advanced trust
Consumer compliance
Seminar for senior supervisors of foreign central banks l
Other agencies conducting courses2
Federal Financial Institutions Examination Council ,
Federal Deposit Insurance Corporation and
Office of the Comptroller of the Currency
Federal Bureau of Investigation3
1. Conducted jointly with the World Bank.
2. Open to Federal Reserve employees.
3. Cosponsored by the Federal Reserve, Federal De-
Regional
6
3
18
13
4
1
5
13
1
2
3
1
'V
78
15
12
4
'V
12
3
13
posit Insurance Corporation, Office of the Comptroller of
the Currency, Office of Thrift Supervision, and the Resolution Trust Corporation.
Banking Supervision and Regulation 217
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. In addition, the Board has established regulations for the interstate
banking activities of these foreign banks
and for foreign banks that control a U.S.
subsidiary commercial bank.
Bank Holding Company Act
By law, a company must obtain the Federal Reserve's approval if it is to form a
bank holding company by acquiring
control of one or more banks. Moreover,
once formed, a bank holding company
must receive the Federal Reserve's approval before acquiring additional banks
or nonbanking companies.
In reviewing an application filed by
a bank holding company, the Federal
Reserve considers factors including the
financial and managerial resources of
the applicant, the future prospects of
both the applicant and the firm to be
acquired, the convenience and needs of
the community to be served, the potential public benefits, and the competitive
effects of the proposal.
In 1991 the Federal Reserve acted on
1,261 bank holding company and related applications. The Federal Reserve
approved 213 proposals to organize
bank holding companies and denied 2;
approved 37 proposals to merge existing
bank holding companies and denied 1;
approved 207 bank acquisitions by existing bank holding companies and denied 1; approved 772 requests by exist-
Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1991
Action under authority delegated
by the Board of Governors
Proposal
Direct action
by the
Board of Governors
Approved
Formation of holding company
Merger of holding
company
Retention of
bank
Acquisition
Bank
Nonbank
Bank service
corporation
Other
Total
Director of the
Division of Banking
Supervision and
Regulation
Office
of the
Secretary
Federal
Reserve Banks
Total
Denied
Approved
Denied
13
2
0
0
3
197
0
215
5
1
0
0
2
30
0
38
0
0
Approved Approved Permitted
0
0
32
114
1
4
0
45 1
0
0
11
40
164
489
0
84
208
776
0
2
0
0
0
21
0
0
0
0
0
0
1
0
1
23
166
8
66
0
56
880
85
1,261
1. Each of these actions represents the acquisition of a
savings association that was subsequently merged into an
existing subsidiary of a bank holding company, as permit-
0
0
0
0
ted by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.
218 78th Annual Report, 1991
ing companies to acquire nonbank firms
engaged in activities closely related to
banking and denied 4; and approved
24 other applications. Data on these
and related bank holding company decisions are shown in the accompanying
table. Included in the totals are applications related to the sale of failed thrift
institutions by the Resolution Trust
Corporation.
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 thefinancialand managerial resources
of the applicant, the future prospects
of the existing and combined institutions, the convenience and needs of the
community to be served, and the competitive effects of the proposal. The Federal Reserve must also consider the
views of certain other agencies on
the competitive factors involved in the
transaction.
During 1991 the Federal Reserve approved 90 merger applications. As required by law, each merger is described
in this REPORT (in table 16 of the Statistical Tables chapter).
When the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, or the Office of
Thrift Supervision has jurisdiction over
a merger, the Federal Reserve is asked
to comment on the competitive factors
to assure comparable enforcement of the
antitrust provisions of the act. The Federal Reserve and those agencies have
adopted standard terminology for assessing competitive factors in merger
cases to assure consistency in administering the act. The Federal Reserve
submitted 719 reports on competitive
factors to the other Federal banking
agencies in 1991.
Change in Bank Control Act
The Change in Bank Control Act requires persons seeking control of a bank
or bank holding company to obtain
approval from the appropriate Federal
banking agency before the transaction
occurs. Under the act, the Federal
Reserve is responsible for reviewing
changes in the control of state member
banks and of bank holding companies.
In so doing, the Federal Reserve must
review the financial condition, competence, experience, and integrity of the
acquiring person; consider the effect on
the financial condition of the bank or
bank holding company to be acquired;
and 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 Federal
Reserve routinely makes such a determination and verifies information contained in the proposal.
In 1991 the Federal Reserve acted on
183 proposed changes in control of state
member banks and bank holding companies. The total number of notices was
less than the year before because, in late
1990, the Board amended Regulation Y
to reduce the filing requirements for individuals purchasing additional shares
of a banking organization.
Banking Supervision and Regulation 219
Public Notice of Federal Reserve
Decisions
An order or announcement effects each
decision by the Federal Reserve that involves a bank holding company, bank
merger, change in control, or international banking proposal. An order states
the decision along with the essential
facts of the application and the basis for
the decision; an announcement states
only the decision. All orders and announcements are released immediately
to the public; they are subsequently 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 received, but not yet acted
on, by the Federal Reserve.
Board Policy Decisions
and Developments
in Bank-Related Activities
Having made certain that the proper
managerial and operational infrastructures were in place, the Board in 1991
permitted a domestic banking organization and several foreign banking organizations to commence equity underwriting activities under authority originally
granted in 1989 and 1990. In mid-1991
the Board permitted a regional bank
holding company to acquire an investment banking firm that would continue
to engage in a full range of securities
activities, including the underwriting of
equity securities. During the year the
Board also approved other new nonbanking activities for individual bank
holding companies.
Timely Processing of Applications
The Federal Reserve maintains target
dates and procedures for the processing
of applications. These target dates promote efficiency at the Board and the
Reserve Banks and reduce the burden
on applicants. The time allowed for
a decision is 60 days; during 1991,
91 percent of the decisions met this
standard.
Delegation of Applications
The Board has delegated certain regulatory functions—including the authority
to approve, but not to deny, certain types
of applications—to the Reserve Banks,
to the Director of the Board's Division
of Banking Supervision and Regulation,
and to the Secretary of the Board.
The delegation of responsibility for
applications allows staff members to
work more efficiently at both the Board
and the Reserve Banks by removing
routine cases from the Board's agenda.
In 1991, delegated authority was involved in 78 percent of the applications.
Action on Nonbanking Activities
In 1991 the Board for the first time
approved a proposal by a foreign
banking organization to trade for the
company's account in futures, options,
and options on futures based on U.S.
government securities that are permissible investments for national banks and
certain money market instruments. The
Board also approved several more proposals by domestic bank holding companies to provide asset management
services to the Resolution Trust Corporation, the FDIC, and unaffiliated third
party investors, for pools of assets assembled from failed or troubled financial institutions.
In early 1991 the Board denied an
application by a foreign bank to clear
securities options and other financial instruments for the accounts of professional floor traders because the proposal,
as structured, involved potential adverse
effects that outweighed the potential
public benefits.
220 78th Annual Report, 1991
Proposals to Engage in New
Nonbanking Activities
In 1991 the Board continued to consider
several proposals related to nonbanking
activities. One proposal involved expanding the list of generally permissible
nonbanking activities for bank holding
companies to include (1) combined
investment advisory and securities
brokerage activities, and (2) financial
advisory activities. The Board also
considered modifying its investment
advisory policy statement to ease current limitations on the securities underwriting powers of bank holding companies and to permit certain joint
marketing and common management
officials. In addition, the Board considered adding higher-residual-value leasing to the list of generally permissible
nonbanking activities for bank holding
companies.
At year-end, two other rulemakings
were under consideration. 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 conducted by the parent bank. The other
rulemaking was a proposal to 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 Federal Reserve 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, although
the notice period may be shortened or
eliminated in specific cases.
Stock Repurchases by Bank
Holding Companies
A bank holding company sometimes
purchases its own shares from its shareholders. When the company borrows the
money to buy the shares, the transaction
increases the debt of the bank holding
company and simultaneously decreases
its equity. Relatively large purchases
may therefore undermine the financial
condition of a bank holding company
and its bank subsidiaries. The Board's
regulations require holding companies
to give advance notice of repurchases
that retire 10 percent or more of their
consolidated equity capital. The Federal
Reserve may object to stock repurchases
by holding companies that fail to meet
certain standards, including the Board's
capital guidelines. During 1991 the
Federal Reserve reviewed 94 proposed
stock repurchases by bank holding
companies.
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
Act corporations, and bank holding
companies; and of investments by bank
holding companies in export trading
companies. In addition, the Board is required to charter and regulate Edge Act
corporations and their investments.
Banking Supervision and Regulation 221
Foreign Branches of Member
Banks
Under provisions of the Federal Reserve
Act and of Regulation K (International
Banking Operations), 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 1991, the Board approved
the opening of ten foreign branches.
By the end of 1991, 123 member
banks were operating 794 branches in
foreign countries and overseas areas of
the United States; 92 national banks
were operating 674 of these branches,
and 31 state member banks were operating the remaining 120 branches.
Edge Act Corporations
and Agreement Corporations
Under sections 25 and 25(a) of the Federal Reserve Act, Edge Act corporations
and agreement corporations may engage
in international banking and foreign financial transactions. These corporations,
which are usually subsidiaries of member banks, may (1) 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) make foreign investments that 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 1991 there were ninetyseven Edge Act corporations, which
together had forty-four branches. The
Board requires each Edge Act corporation that is engaged in banking to maintain a ratio of equity to risk assets of at
least 7 percent. In line with the revision
of Regulation K, this equity to riskasset ratio will be replaced with a minimum ratio of qualifying total capital
to weighted-risk assets of 10 percent,
effective January 1, 1993.
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. Significant investments require advance review by the
Board, although pursuant to Regulation
K, most foreign investments may be
made under general-consent procedures
that involve only after-the-fact notification to the Board.
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 Act or
agreement corporations, and bankers'
banks to invest in export trading companies, subject to certain limitations and
after Board review. The purpose of this
amendment 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. Although the
Board did not approve any new export
trading companies in 1991, it has since
1982 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
222 78th Annual Report, 1991
laws, rules, and regulations other than
those specifically related to bank safety
and soundness and the integrity of the
banking structure.
Bank Secrecy Act
The proliferation of criminal activity is
viewed by many as the result of criminal
enterprises having the ability to retain
the cash proceeds of their illegal activity. The Currency and Foreign Transactions Reporting Act (the Bank Secrecy
Act) was originally proposed as a means
of creating and maintaining records of
various transactions that otherwise
would not be identifiable. The records
required by the Bank Secrecy Act provide useful data for aiding in the detection of unlawful activity as well as determining the safety and soundness of
financial institutions.
The Federal Reserve has maintained
its practice of regularly scheduled Bank
Secrecy Act examinations of financial
institutions under its supervision. The
Federal Reserve also continues to provide quarterly reports to the Department
of the Treasury detailing all Bank Secrecy Act violations discovered during
the examination process and it provides
more specific information of such violations when required by the Treasury Department for their enforcement functions. Additionally, the Federal Reserve
has increased its efforts with regard to
enforcement actions againstfinancialinstitutions which result from violations
of the Bank Secrecy Act.
The Federal Reserve is still committed to ensuring that all new examiners
receive training in the areas of the Bank
Secrecy Act and money laundering
and that seasoned examiners receive
refresher courses in these areas. In addition, the Federal Reserve has participated in numerous programs that provide the financial community with
insight into the Federal Reserve's belief
in strict compliance with the rules and
regulations of the Bank Secrecy Act.
The Systemwide committee established within the Federal Reserve
in 1990 to coordinate anti-moneylaundering activities has continued to
develop innovative programs to assist
the law enforcement community and educate the banking community with regard to the Bank Secrecy Act and
money laundering issues. The Federal
Reserve has also continued to assist law
enforcement agencies conducting criminal investigations related to the Bank
Secrecy Act and money laundering
violations.
During the past year, a Federal Reserve study of the effectiveness and
practicability of its current procedures
for conducting examinations under the
Bank Secrecy Act concluded that the
procedures could be more streamlined
and more effective. New procedures
have been developed and continue to be
subjected to considerable testing before
their release.
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. 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. The Securities and Exchange Commission, the National Asso-
Banking Supervision and Regulation 223
ciation of Securities Dealers, and the
national securities exchanges examine
brokers and dealers for compliance with
Regulation T. The federal banking agencies examine banks under their respective jurisdictions for compliance with
Regulation U. Lenders subject to Regulation G are examined by the Board, the
Farm Credit Administration, the National Credit Union Administration, or
the Office of Thrift Supervision, according to the jurisdiction involved. At the
end of 1991, 593 lenders were registered
under Regulation G, and 331 came under the Board's supervision. Of these
331, the Federal Reserve regularly inspects 221 either biennially or triennially, according to the type of credit they
extend. During 1991, Federal Reserve
examiners inspected 41 lenders for compliance with Regulation G.
In general, Regulations G and U impose credit limits on loans secured by
publicly held securities when the purpose of the loan is to purchase or carry
those or other publicly held equity securities. Regulation T limits the amount of
credit that brokers and dealers may extend when the credit is used to purchase
or carry publicly held debt or equity
securities. Collateral for such loans at
brokers and dealers must be securities in
one of the following categories: those
traded on national securities exchanges,
certain over-the-counter (OTC) stocks
that the Board designates as having
characteristics similar to those of stocks
listed on the national exchanges, or
bonds that meet certain requirements.
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
1991 the OTC list was revised in February, May, August, and November; the
November list contained 2,766 stocks.
Pursuant to a 1990 amendment to
Regulation T, the Board publishes a list
of foreign stocks that are eligible for
margin treatment by brokers and dealers
on the same basis as domestic margin
securities. In 1991 the foreign list was
revised in February, May, August, and
November; the November list contained
294 stocks.
The Board adopted two sets of
amendments in September 1991 to
equalize treatment between lenders and
between regulations. Amendments to
Regulations G and T excluded from the
margin regulations the deposit of margin securities with clearing agencies regulated either by the Commodity Futures
Trading Commission or the Securities
and Exchange Commission. Amendments to Regulations G and U extended
the exemption for subsequent transfers
of under-margined loans currently found
in each of the regulations to loans made
by one type of lender that are later transferred to the other type of lender.
The Board also issued an interpretation of the "single-credit" rule in Regulations G and U to indicate that
compliance with the withdrawal and
substitution provisions for syndicated
loans can be met by the lead bank or
lender.
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. The
Board processed no new agreements in
1991.
In 1991 the Securities Regulation
Section of the Board's Division of
Banking Supervision and Regulation
issued forty-nine interpretations of the
margin regulations. Those that presented
224 78th Annual Report, 1991
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,
including financial reports and proxy
statements, if they issue securities registered under the Securities Exchange Act
of 1934. By statute, the Board's financial disclosure rules must be substantially similar to those issued by the
Securities and Exchange Commission.
At the end of 1991, thirty-seven state
member banks, most of which are small
or medium-sized, were registered with
the Board under the Securities Exchange
Act.
Loans to Executive Officers
Under Section 22(g) of the Federal Reserve Act, state member banks 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 this information,
beginning with the last quarter of 1990
and continuing through the first three
quarters of 1991.
Federal Reserve Membership
At the end of 1991, 4,831 banks were
members of the Federal Reserve System, a decrease of 216 from the previous year. Member banks operated
34,874 branches on December 31, 1991,
a net increase of 1,569 for the year.
Member banks accounted for 39 percent of all commercial banks in the
United States and for 66 percent of all
commercial banking offices.
•
Loans by State Member Banks to their Executive Officers, 1990-91
Period
October 1-December 31,1990
January 1-March 31, 1991
April 1-June 30, 1991
July 1-September 30,1991
SOURCE. Call Report data for the period
Number
Amount (dollars)
Range of interest
rates charged
(percent)
793
773
904
771
15,206,000
14,439,000
22,646,000
12,483,000
5.0-18.0
5.0-18.0
6.5-28.5
6.8-18.0
225
Regulatory Simplification
In 1978 the Board of Governors established the Regulatory Improvement
Project in the Office of the Secretary to
help 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 purpose of the regulatory
simplification function is 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
continually review regulations for their
adherence to these objectives.
Minimum Security Devices
and Procedures
In March, after a period of public comment, the Board completed its review of
Regulation P, which implements the
Bank Protection Act of 1968. Since its
adoption in 1969, the regulation has received only minor revisions, in 1973
and 1981. The Board's revisions simplify and clarify the parts of the regulation that already granted to bank management flexibility in achieving the
purposes of the act; eliminate many obsolete or technical requirements, particularly those in Appendix A; and delete
reporting requirements no longer specifically mandated by statute.
The revised regulation highlights the
security responsibilities of boards of directors and security officers of banks
rather than technological aspects of security, which become obsolete and require constant updating. The regulation
gives managers flexibility to design security programs that include devices and
procedures warranted by individual circumstances so long as the devices and
procedures meet minimum requirements
of the regulation.
International Banking
In April the Board completed its periodic review of Regulation K, International Banking Operations. The International Banking Act requires that the
Board review its regulation of Edge Act
corporations at least every five years.
During some of the mandated reviews,
the Board considers only the aspects of
Regulation K that relate to Edge Act
corporations; this time the Board included all of Regulation K in its review.
Many provisions of the revised regulation expand the authority of U.S. banks
to operate in overseas financial markets
without first obtaining Board approval.
Among other things, the revisions enlarge existing authority to engage in
underwriting and dealing in equity securities outside the United States, increase
the dollar limits under which U.S. banking organizations may make investments
abroad without advance notice to the
Board, and clarify portfolio investment
authority under which U.S. banking organizations may make limited equity investments in any type of company outside the United States.
Under the revision, Edge Act corporations can provide domestic banking services to foreign persons and governments; and U.S. banking organizations
226 78th Annual Report, 1991
may engage in futures merchant activities and life insurance underwriting as
permissible activities abroad. The revision also modifies the authorization for
debt-for-equity investments by permitting banking organizations to include a
cash component in such investments
without first notifying the Board.
Applications by Bank Holding
Companies To Conduct
Nonbanking Activities
In 1990 the Board proposed for public
comment adding three activities to the
list of generally permitted activities under Regulation Y for nonbank subsidiaries of certain bank holding companies.
The list of permissible activities allows
simplified applications by bank holding
companies to form or acquire subsidiaries engaging in the listed activities.
The three activities proposed for inclusion were (1) leasing through non-fullpayout contracts, (2) givingfinancialadvice to financial and nonfinancial
institutions and to individuals with high
net worth, and (3) giving advice on securities investments in combination with
the brokering of such investments. Because of pending legislation on bank
products and services, the Board took no
action on these regulatory proposals in
1991, but it will re-examine them in
1992 in light of the public comments
received.
•
227
Federal Reserve Banks
The Federal Reserve Banks are preparing to consolidate their general purpose
data processing operations. Currently,
each of the twelve Banks maintains a
general purpose data processing center;
in addition, the System has four backup
centers (located in New York, Chicago,
Los Angeles, and Culpeper, Virginia).
Over the next several years, the data
processing functions of the centers will
be consolidated at three facilities—the
Bank headquarters in Dallas (currently
under construction) and Richmond and
the New York Bank's East Rutherford,
New Jersey, operations center (also
under construction). The primary objectives of consolidation are improved
reliability, enhanced responsiveness to
changing business requirements, increased control of payment system risk
in a national banking environment, and
greater efficiency.
The decision to use three sites in the
consolidation was influenced by anticipated capacity requirements, recovery
capabilities, and flexibility in workload
management. A key consideration in designing the consolidated environment
has been the new nationwide telecommunications network currently being
established.
Other Developments in Federal
Reserve Services
The Monetary Control Act of 1980 requires the Federal Reserve System to
recover all its costs of providing services. In 1991, income from all priced
services was $912.5 million and costs
were $886.8 million, resulting in net
income of $25.6 million and a recovery
rate of 102.9 percent. In 1990, the System recovered 103.3 percent of its
service costs.1
Check Collection
The Federal Reserve's 1991 operating
expenses and imputed costs for commercial check collection were $524.0 million (see the second pro forma income
statement for priced services at the end
of this chapter). Overall, check operations for the year generated $561.3 million in income and a net of $10.6 million in other income and expenses. Income from operations after imputed
costs was $37.3 million. The Federal
Reserve Banks handled 18.7 billion
checks, an increase of 0.8 percent over
1990.
In 1989, the Board approved a pilot
program in three Federal Reserve Districts under which the Reserve Banks
will accept intermingled deposits of
returned and forward-collection checks
from depository institutions and in turn
may present intermingled cash letters to
the institutions. (Normally, these items
must be kept separate.) In February
1991, the Director of the Division of
Reserve Bank Operations and Payment
Systems, acting under delegated authority, approved expansion of the pilot program to additional offices in the three
1. For a detailed breakdown of revenue, cost,
and net revenue, see the first pro forma income
statement at the end of this chapter. Revenue is the
sum of income from services and investment income. Cost is the sum of production expenses,
imputed costs, earnings credits, imputed income
taxes, and the targeted return on equity. Net revenue is net income less the targeted return on
equity.
228 78th Annual Report, 1991
Districts. The expansion is making it
possible to test specific aspects of exchanging intermingled checks among
Federal Reserve offices within the same
District. Expansion also has allowed
large depository institutions that have
affiliates served by several Federal
Reserve offices within the same District
to participate in a pilot program.
In May the Board revised the criteria
for offering a tiered pricing structure for
check collection: (1) Tiered pricing may
be offered in all collection zones but
may be used only when clear cost differences exist between groups of checks
within a zone; (2) tiered prices may be
used only when they have a potential to
provide net savings for a substantial
number of depositing institutions or a
substantial amount of deposited volume;
(3) a blended per-item fee will be offered as an alternative to tiered prices
for each deposit category; and (4) Federal Reserve Banks may offer more than
two price tiers within a collection zone,
provided clear cost differences exist to
justify more than two tiers. The Board
also modified the process for approving
implementation of tiered pricing; the
revised process is the same as the process for approving other changes in
price and service levels.
In October the Board voted not to
approve an August 1990 proposal to
introduce a cap on the per-item fees
charged to ship checks from one Federal
Reserve office to another via the Interdistrict Transportation System (ITS).
The Board believed that the proposed
pricing structure did not adequately reflect the marginal cost of transporting
checks via ITS, and it determined that
an alternative structure should not be
adopted until a Federal Reserve System
study of ITS can be completed and the
results evaluated.
The Federal Reserve System continues to study the application of digital
image technology to check processing.
Use of the technology in such areas
as archival systems, return item notification, check truncation, and adjustments may make check collection more
efficient. During 1991, high-speed systems and low-speed applications were
evaluated.
Automated Clearinghouse
Operating expenses and imputed costs
of providing automated clearinghouse
(ACH) services in 1991 were $54.1 million; income was $57.4 million. The
Federal Reserve Banks processed
1,119 million commercial transactions
during the year, an increase of 22.3 percent over 1990.
In June the Board adopted a proposal,
issued for comment in December 1990,
requiring depository institutions to originate or receive commercial ACH transactions through the Federal Reserve
Banks via electronic connections. This
practice will enable the Reserve Banks
to improve their ACH services significantly by increasing the speed of delivery of ACH payments and reducing the
risks associated with ACH payments.
Depository institutions must establish
these electronic connections by July 1,
1993.
Funds Transfer
Operating expenses and imputed costs
of providing funds transfer services in
1991 totaled $73.0 million, and income
was $78.2 million. The number of Fedwire funds transfers originated increased
7.0 percent over 1990, to 66.9 million.
In January the Federal Reserve Banks
started providing same-day telephone
notice of receipt of incoming Fedwire
third-party funds transfers (including
nonvalue messages related to a transfer
of funds) to all depository institutions
Federal Reserve Banks 229
that do not have electronic access to
Fedwire. Approved by the Board in
September 1990, the service is designed
to promote efficiency in the payments
mechanism by providing timely information, which in turn permits prompt
crediting of funds to beneficiary
accounts.
Net Settlement
During 1991, 770,000 net settlement
transactions were processed for participants in small-dollar clearing and settlement arrangements, predominantly
check clearing arrangements; this volume was approximately the same as that
processed in 1990. Net settlement via
Fedwire is provided to two large-dollar
clearing and settlement arrangements—
the Clearing House Interbank Payments
System and Participants Trust Company.
Transaction volumes, costs, and income
arising from the net settlement service
are included with figures for the funds
transfer service.
In April the Federal Reserve Bank of
San Francisco began using a national
ACH clearing arrangement to provide
net settlement services to depository institutions. The service is the first ACH
net settlement arrangement that uses a
special settlement account and that is
intended to operate nationally. The
account is funded by participants in net
debit positions using Fedwire transfers,
and the funds are then disbursed to participants in net credit positions using
Fedwire transfers.
tion and the Student Loan Marketing
Association. Book-entry services for
federal agency securities, a Federal
Reserve priced service, in 1991 incurred
costs of $12.3 million and earned income of $11.5 million. The Federal
Reserve processed 2.8 million such
transfers during the year, a 9.6 percent
increase over 1990.
Most Federal Reserve Banks have
fully implemented the Regional Delivery System (RDS) for over-the-counter
savings bonds. The total number of
bonds printed by the Federal Reserve
System in 1991, RDS and other, exceeded 37 million.
Definitive Securities Safekeeping
and Noncash Collection
The System received $13.8 million in
income for definitive securities safekeeping and noncash collection services
in 1991; the cost of providing these
services was $14.4 million. The average
number of definitive securities issues
and deposits maintained in safekeeping
accounts at the Federal Reserve Banks
decreased 30.5 percent in 1991, to
57,039. The number of noncash collection items processed decreased 21.4 percent, to 2.2 million.
With volumes in both services declining, the System is developing a longrange plan for the definitive safekeeping
service and will consolidate noncash
collection functions at the Cleveland
Bank and the Jacksonville Branch of the
Atlanta Bank by 1993.
Securities and Fiscal Agency
Services
Currency and Coin
The Federal Reserve provides bookentry securities services for debt issues
of the U.S. Treasury and for certain federally sponsored agencies such as the
Federal Home Loan Mortgage Corpora-
In its currency and coin operations, the
Federal Reserve continued to focus on
effectiveness of controls, efficiency of
processing, and maintenance of quality
in circulating currency.
230 78th Annual Report, 1991
In 1991, income from priced cash
services was $15.2 million, and the
cost was $14.6 million. Four Federal
Reserve Districts provided transportation of cash by armored carrier, and
three Districts provided wrapped coin to
depository institutions.
The Western Currency Facility of the
U.S. Treasury's Bureau of Engraving
and Printing began printing currency in
April and began shipping currency to
Federal Reserve offices in June. In
August the Federal Reserve began distributing a new series of $100 note with
two new features—a security thread and
microprinting—to discourage photocopied counterfeits. Over the next five
years, these security features will be
incorporated into notes of all denominations except the $1 note.
In September a comprehensive assessment of the quality of U.S. currency
was completed. The study revealed that,
generally, the quality of currency in circulation is acceptable to consumers.
In October the first delivery of the
System's new currency-processing
equipment (ISS-3000), manufactured by
Giesecke and Devrient, Inc., was received at the Baltimore Branch of the
Federal Reserve Bank of Richmond.
The new equipment will be installed
throughout the Federal Reserve System
by 1997.
The Federal Reserve System continued to work with the Department of the
Treasury and other agencies to deter
counterfeiting and laundering of U.S.
currency.
Float
Federal Reserve float decreased to a
daily average of $348 million in 1991,
compared with $431 million in 1990.
The costs of Federal Reserve float associated with priced services are recovered each year.
Examinations
The Board's Division of Reserve Bank
Operations and Payment Systems examines the operations of the twelve Federal
Reserve Banks and their twenty-five
Branches each year, as required by section 21 of the Federal Reserve Act. The
findings of the examinations are reported to the management and directors
of the respective Banks and to the Board
of Governors. Also, to assess conformance with policies established by the
Federal Open Market Committee
(FOMC), the division annually audits
the accounts and holdings of the 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 FOMC.
The examination procedures used by the
division are reviewed each year by a
public accounting firm.
Income and Expenses
The accompanying table summarizes the
income, expenses, and distribution of
net earnings of the Federal Reserve
Banks for 1991 and 1990.
Income was $22,553 million in 1991
and $23,477 million in 1990. Total expenses were $1,539 million ($1,265 million in operating expenses, $164 million
in earnings credits granted to depository
institutions, and $110 million in assessment for expenditures by the Board of
Governors). The cost of currency was
$261 million. Income from financial services was $737 million.
The profit and loss account showed a
net addition of $496 million, primarily a
result of realized and unrealized gains
on assets denominated in foreign currencies and gains on the sales of securities
from the System Open Market Account
portfolio. Dividends paid to member
Federal Reserve Banks 231
Income, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1991 and 1990l
Millions 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
1991
1990
22,553
1,429
1,265
164
21,124
496
90
371
110
261
21,158
153
20,778
228
23,477
1,350
1,211
139
22,127
2,201
102
297
104
193
23,929
141
23,608
18C
pension costs of $83 million in 1991 and $60 million in
1990.
banks, as required by law, totaled lion, an increase of $19,485 million over
$153 million, $12 million more than in 1990 (see accompanying table). From
1990. The rise reflects an increase in the 1990 to 1991, average daily holdings of
capital and surplus of member banks U.S. government securities increased
and a consequent increase in the paid-in $20,036 million, and average daily holdcapital stock of the Federal Reserve ings of loans decreased $551 million.
Banks.
Over the same period, the average rate
Payments to the U.S. Treasury in the of interest decreased from 8.45 percent
form of interest on Federal Reserve to 7.51 percent on holdings of U.S. govnotes totaled $20,778 million, compared ernment securities and from 7.88 perwith $23,608 million in 1990. The pay- cent to 5.74 percent on loans.
ments consist of all net income after
deduction of dividends and deduction of
the amount necessary to bring the sur- Volume of Operations
plus of the Banks to the level of capital Table 9, in the Statistical Tables chapter,
paid in.
shows the volume of operations in the
In the Statistical Tables chapter of principal departments of the Federal
this report, table 6 details income and Reserve Banks for the years 1988-91.
expenses of each Federal Reserve Bank
for 1991, and table 7 shows a condensed
statement for each Bank for 1914-91. A Federal Reserve Bank Premises
detailed account of the assessments and
During 1991, the Board of Governors
expenditures of the Board of Governors
authorized construction of new headappears in the next chapter—Board of
quarters buildings for the Federal ReGovernors Financial Statements.
serve Banks of Cleveland and Minneapolis. Construction of the new operations
center for the New York Bank and the
Holdings of Securities and Loans
new headquarters building for the Dallas
Average daily holdings of securities and Bank continued. Renovations of the
loans during 1991 were $256,929 mil- main lobby of the St. Louis Bank and
232 78th Annual Report, 1991
the main auditorium of the New York
Bank were completed. Table 8, in the
Statistical Tables chapter, shows the
costs and book values both of premises
owned or occupied by the Federal
Reserve Banks and Branches and of real
estate acquired for future banking-house
purposes.
Securities and Loans of Federal Reserve Banks, 1989-91
Millions of dollars, except as noted
Item and year
Average daily holdings31
1989
1990
.
1991
Earnings
1989
1990
1991
Average interest rate (percent)
1989
1990
1991
1. Includes federal agency obligations.
2. Does not include indebtedness assumed by FDIC.
Total
U.S.
government
securities1
Loans 2
233,449
237,444
256,929
232,312
236,523
256,559
1,137
921
370
20,163
20,067
19,283
20,065
19,995
19,262
99
73
21
8.64
8.45
7.51
8.64
8.45
7.51
8.70
7.88
5.74
3. Based on holdings at opening of business.
Federal Reserve Banks 233
Pro Forma Balance Sheet for Priced Services, December 31, 1991 and 1990l
Millions of dollars
1991
Item
Short-term assets2
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
Long-term assets3
Premises
Furniture and equipment
Leases and leasehold improvements
Prepaid pension costs
8,031.7
Total long-term liabilities
Total liabilities
Equity
Total liabilities and equity
4
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 shortterm 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; adjustments for
items associated with nonpriced items, such as those
collected for government agencies; and adjustments for
items associated with providing fixed availability or credit
before items are received and processed. Among the costs
DigitizedtoforbeFRASER
recovered under the Monetary Control Act is the
4,809.1
319.9
158.0
18.3
71.1
360.1
163.5
22.0
97.3
Total assets
Long-term liabilities
Obligations under capital leases
Long-term debt
270.4
1,982.6
60.4
6.2
15.4
2,474.1
453.8
3,328.2
63.4
5.7
13.1
4,167.4
Total long-term assets
Short-term liabilities
Clearing balances and balances arising from early
credit of uncollected items
Deferred-availability items
Short-term debt
Total short-term liabilities
1990
642.9
567.3
8,674.5
5,376.4
4,576.0
3,373.4
82.3
2,726.8
2,000.3
82.0
8,031.7
1.2
173.1
4,809.1
1.2
157.4
174.3
158.6
8,206.0
4,967.7
468.6
408.7
8,674.5
5,376.4
cost of float, or net CIPC during the period (the difference
between gross CIPC and deferred-availability items,
which is the portion of gross CIPC that involves a financing cost), 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 1991 the Reserve Banks recognized a credit to
expenses of $28.1 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 fifty
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 short-term liabilities include clearing balances
maintained at Reserve Banks and deposit balances arising
from float. Other long-term liabilities consist of obligations on capital leases.
234
78th Annual Report, 1991
Pro Forma Income Statement for Federal Reserve Priced Services,
Calendar Years 1991 and 1990l
Millions of dollars
Item
1991
1990
Income from services provided
to depository institutions2
Operating expenses3
737.5
730.2
611.9
597.1
Income from operations
125.6
133.1
4
Imputed costs
Interest on float
Interest on debt
Sales taxes
FDIC insurance
19.0
19.4
9.9
6.3
Income from operations after imputed costs
54.6
33.2
17.0
8.0
5.0
71.0
Other income and expenses5
Investment income
Earnings credits
175.0
162.3
Income before income taxes
12.7
83.7
63.2
70.0
155.5
139.2
16.3
86.2
Imputed income taxes 6
25.5
24.0
Net income
58.1
62.3
32.5
33.6
MEMO
Targeted return on equity7
1. Details may not sum 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. Operating 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 $2.0 million
in 1991 and $1.7 million in 1990. The credit to expenses
under FASB 87 is reflected in operating 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 costs for checks,
book-entry securities, noncash collection, ACH, and
funds 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 1991 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
603.2
16.6
586.6
70.2
258.5
102.4
155.5
Unrecovered float includes float generated by services
to government agencies and 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 for float
for cash items in process of collection, which reduces
imputed reserve requirements. 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 1991.
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.
Federal Reserve Banks 235
Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1991 1
Millions of dollars
Total
Commercial
check
collection
Funds
transfer
and net
settlement
Commercial
ACH
Definitive
safekeeping
and
noncash
collection
Bookentry
securities
Cash
services
Income from services
737.5
561.3
78.2
57.4
13.8
11.5
15.2
Operating expenses
611.9
481.1
69.3
49.5
13.3
10.2
14.4
Income from operations .
125.6
80.2
8.9
7.9
.4
1.3
.8
_U
2.1
.2
Item
2
54.6
42.9
_T7
Income from operations
after imputed costs .
71.0
37.3
5.2
3.3
-.7
-.8
.6
Other income and
expenses, net 3
12.7
10.6
.9
.7
.2
.1
.2
Income before
income taxes
83.7
47.9
6.1
4.0
-.5
-.7
.8
Imputed costs
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 interest on float, interest on debt, sales
taxes, and the FDIC assessment. Float costs are based on
J6
the actual float incurred for each priced service. Other
imputed costs are allocated among priced services
according to the ratio of operating expenses less shipping
expenses for each service to the total expenses for all
services less the total shipping expenses for 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.
Activity in Federal Reserve Priced Services, Calendar Years 1991, 1990, and 1989l
Thousands of items, except as noted
Percent change
Service
Funds transfers
Commercial ACH
Commercial checks
Securities transfers
Definitive safekeeping
Noncash collection
Cash transportation
1991
66,921
1,119,073
18,742,950
2,800
57
2,243
338
1990
62,559
915,257
18,594,652
2,555
82
2,854
330
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;
1989
60,645
740,623
18,014,301
2,536
110
3,180
322
1991-90
1990-89
7.0
22.3
.8
9.6
-30.5
-21.4
2.4
3.2
23.6
3.2
.7
-25.4
-10.3
2.5
for 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.
236
78th Annual Report, 1991
Income and Expenses for Locally Priced Federal Reserve Services, by District, 1991 ]
Millions of dollars
District
Total
Operating
expense
Float
expense
Total
expense
Net
income
Commercial check collection
Boston
New York . . .
Philadelphia..
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis .
Kansas City..
Dallas
San Francisco
39.9
72.4
28.2
32.2
54.0
73.3
72.7
24.6
30.7
36.0
38.1
59.2
31.9
61.2
24.9
27.4
46.7
61.7
60.5
19.3
27.2
30.5
33.6
56.2
1.1
2.3
2.4
1.1
1.6
1.6
2.3
1.4
.5
1.2
1.6
1.5
33.0
63.5
27.3
28.5
48.3
63.3
62.8
20.7
27.7
31.7
35.2
57.7
6.9
8.9
.9
3.7
5.7
10.0
9.9
3.9
3.0
4.3
2.9
1.5
System total.
561.3
481.1
18.6
499.7
61.6
Definitive safekeeping and noncash collection
.7
2.4
.8
1.3
.9
1.9
2.1
.5
.3
1.3
1.1
*
.0
.0
.1
.3
-.1
.5
-.1
.2
-.1
-.4
.1
*
13.4
A
1.8
1.9
1.8
1.8
.0
.1
.0
.0
.4
.1
Boston
New York . . .
Philadelphia..
Cleveland....
Richmond
Atlanta
Chicago
St. Louis
Minneapolis..
Kansas City..
Dallas
San Francisco
.7
2.4
.9
1.6
.8
2.4
2.0
.7
.2
.9
1.2
.7
2.4
.8
1.3
.9
1.9
2.1
.5
.3
1.3
1.1
*
System total.
13.8
133
9
3
i
.1
Cash services
Boston
New York . . .
Philadelphia..
Cleveland....
Richmond
Atlanta
Chicago
St. Louis
Minneapolis..
Kansas City..
Dallas
San Francisco
.5
.1
3.0
.6
.5
.1
2.6
.5
7.2
6.9
System total.
15.2
14.4
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. To reconcile net revenue by priced
.8
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.
•In absolute value, greater than zero and less than
$50,000.
237
Board of Governors Financial Statements
The financial statements of the Board
were audited by Coopers & Lybrand,
independent public accountants, for
1991 and 1990.
REPORT OF I N D E P E N D E N T A C C O U N T A N T S
To the Board of Governors of the
Federal Reserve System
We have audited the accompanying balance sheets of the Board of Governors of
the Federal Reserve System (the Board), as of December 31, 1991 and 1990, and
the related statements of revenues and expenses and fund balance and cash flows
for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing standards and 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 audits provide 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, 1991 and 1990, and the results of its
operations and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Washington, D.C.
February 12, 1992
"
238
78th Annual Report, 1991
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS
As of December 31,
1991
1990
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Prepaid expenses and other assets
$ 4,498,138
1,227,367
778,485
$ 9,256,285
1,146,044
827,876
6,503,990
11,230,205
50,338,953
50,841,923
$56,842,943
$62,072,128
Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Unearned revenues and other liabilities
$ 3,609,392
1,120,332
5,057,365
1,257,442
$ 4,208,717
3,673,252
4,760,513
1,042,167
Total current liabilities
11,044,531
13,684,649
45,798,412
48,387,479
$56,842,943
$62,072,128
Total current assets
PROPERTY, BUILDINGS AND EQUIPMENT, Net (Note 3)
Total assets
LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES
COMMITMENTS (Note 5)
FUND BALANCE
Total liabilities and fund balance
The accompanying notes are an integral part of these statements.
Board Financial Statements 239
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31,
1991
1990
BOARD OPERATING REVENUES
Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 4)
Total operating revenues
$ 109,631,000
4,520,462
$ 103,752,200
4,217,225
114,151,462
107,969,425
75,056,412
11,590,355
5,682,355
3,542,401
3,344,444
3,286,946
3,113,853
2,877,050
2,478,238
2,059,165
3,709,310
69,562,505
9,529,726
5,968,909
3,466,251
3,358,071
3,460,224
3,048,327
2,709,196
2,125,800
2,202,823
2,988,899
116,740,529
108,420,731
BOARD OPERATING EXPENSES
Salaries
Retirement and insurance contributions
Depreciation and net losses on disposals
Travel
Postage and supplies
Utilities
Contractual services and professional fees
Repairs and maintenance
Software
Printing and binding
Other expenses (Note 4)
Total operating expenses
BOARD OPERATING REVENUES (UNDER) EXPENSES
(2,589,067)
(451,306)
ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES
Assessments levied on Federal Reserve Banks
for currency costs
Expenses for currency printing, issuance,
retirement, and shipping
CURRENCY ASSESSMENTS (UNDER) OVER EXPENSES
261,316,379
193,006,998
261,316,379
193,006,998
—
—
TOTAL REVENUES (UNDER) EXPENSES
(2,589,067)
FUND BALANCE, Beginning of year
48,387,479
48,838,785
$ 45,798,412
$ 48,387,479
FUND BALANCE, End of year
The accompanying notes are an integral part of these statements.
(451,306)
240
78th Annual Report, 1991
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
For the years ended December 31,
1991
1990
CASH FLOWS FROM OPERATING ACTIVITIES
Board operating revenues (under) expenses
$(2,589,067)
$ (451,306)
5,682,355
5,968,909
Adjustments to reconcile operating revenues (under) expenses to net cash
provided by operating activities:
Depreciation and net losses on disposals
Increase in accounts receivable, and prepaid expenses
and other assets
Increase in accrued annual leave
(Decrease) in accounts payable
(Decrease) Increase in payroll payable
Increase in unearned revenue and other liabilities
Net cash provided by operating activities
(31,932)
296,852
(599,325)
(2,552,920)
215,275
421,238
(210,391)
422,251
(652,063)
641,836
139,027
5,858,263
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of furniture and equipment
Capital expenditures
36,156
(5,215,541)
8,900
(3,521,903)
Net cash used in investing activities
(5,179,385)
(3,513,003)
NET INCREASE (DECREASE) IN CASH
(4,758,147)
2,345,260
CASH BALANCE, Beginning of year
CASH BALANCE, End of year
9,256,285
6,911,025
$ 4,498,138
$ 9,256,285
The accompanying notes are an integral part of these statements.
Board Financial Statements
241
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
(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 three to ten years for furniture
and equipment and from ten to fifty 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 before 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
December 31, 1991, actuarial calculations showed that
the fair value of the assets of the System's Plan exceeded
the projected benefit obligations by 113 percent. Based on
these calculations and similar calculations performed for
1990, it was determined that employer funding contributions were not required for the years 1991 and 1990 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 $674,700 in 1991 and
$639,600 in 1990.
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
$2,696,800 in 1991 and $2,107,700 in 1990.
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 $522,100 in 1991 and $367,300 in 1990.
(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,
1991
1990
Land and
improvements
Buildings
Furniture and
equipment
Less accumulated
depreciation
Total property,
buildings and
equipment
$
.
1,301,314
63,726,137
$
32,768,173
97,642,823
35,146,359
100,173,810
49,834,857
$ 50,338,953
1,301,314
63,573,336
46,800,900
$ 50,841,923
(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,
1991
1990
Other Revenues
Data processing
revenue
Subscription
revenue
Assistance
to Federal
agencies
Miscellaneous
Total other
revenues
$2,364 284
$2 002 546
1,744,775
1,681,241
43,426
367,977
332,658
200,780
$4,520,462
$4,217,225
242 78th Annual Report, 1991
(4) OTHER REVENUES AND OTHER EXPENSES—Cont.
Other Expenses
Cafeteria operations,
net
Tuition, registrations
and membership
fees
Equipment and
facility rentals
Subsidies and
contributions . . .
Miscellaneous
Total other
expenses
$ 783,362
$ 694,047
692,131
615,534
682,962
544,187
638,975
911,880
529,289
605,842
$3,709,310
$2,988,899
(5) COMMITMENTS
The Board has entered into several operating leases to
secure office, classroom, and warehouse space for periods
ranging from two to ten years. Minimum future rental
commitments under those operating leases having an
initial or remaining noncancelable lease term in excess of
one year at December 31,1991, are as follows:
1992
1993
1994
1995
1996
$ 611,242
571,978
456,441
406,620
422,796
$2,469,077
Rental expenses under these operating leases were
$635,100 and $471,500 in 1991 and 1990, respectively.
(6) FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL
The Board is one of the five member agencies of the
Federal Financial Institutions Examination Council (the
"Council"). During 1991 and 1990, the Board paid
$241,040 and $146,200, respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1991 and
1990.
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 $40,000 and $34,000 for 1991
and 1990, 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
244
78th Annual Report, 1991
1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31, 1991 l
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
11,058,778
10,018,000
527,613
218,356
6,044,500
552,850
132,635,005
101,519,719
32,331,474
Total bought outright
266,486,198
Held under repurchase agreement
15345,150
Total securities
281,831,348
Total loans and securities
288,647,054
Items in process of collection
Transit items
7,093,797
Other items in process of collection
1,191,655
Total items in process of collection
Bank premises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowance
8,285,452
144,591
690,804
191,695
199,872
1,082,371
240,249
842,122
Bank premises, net
Other assets
Furniture and equipment
Less depreciation
Total furniture and equipment, net
Denominated in foreign currencies2
Interest accrued
Premium on securities
Overdrafts
Prepaid expenses
Suspense account
Real estate acquired for banking-house purposes
Other
Total other assets
Total assets
986,714
819,345
480,008
339,337
27,626,276
3,111,150
1,869,578
17,312
354,413
12,698
16,753
189,675
33,537,192
353,060,803
Tables 245
1.—Continued
LIABILITIES
Federal Reserve Notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks
366,467,574
78,561,962
Total Federal Reserve notes, net
287,905,612
Deposits
Depository institutions
US. Treasury, general account
Foreign, official accounts
29,412,997
17,696,902
967,609
Other deposits
Officers' and certified checks
International organizations
Other3
19,932
79,778
1,606,070
Total other deposits
Deferred credit items
1,705,780
7,259,372
Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other
2,319,224
72,311
34,095
383,884
Total other liabilities
2,809,514
Total liabilities
347,757,787
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 $8,152.3 million was invested in
securities issued by foreign governments, and the balance
was invested with foreign central banks and the Bank for
International Settlements.
2,651,508
2,651,508
0
353,060,803
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.
246 78th Annual Report, 1991
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1991 and 1990
Millions of Dollars1
Total
Boston
Item
1991
1990
11,059
10,018
528
11,058
10,018
535
218
0
190
0
Federal agency obligations
Bought outright
Held under repurchase agreements
6,045
553
6,342
1,341
409
0
426
0
U.S. Treasury securities
Bought outright2
Held under repurchase agreements
Total loans and securities
266,486
15,345
288,647
235,090
17,013
259,975
18,041
0
18,450
15,794
0
16,233
8,286
987
6,106
872
464
89
287
90
27,626
5,911
32,633
6,376
1,111
303
1,207
287
1991
1990
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
747
711
34
750
711
41
14
0
Acceptances held under repurchase agreements
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies3
Allother
Interdistrict Settlement Account
0
0
-1,287
1,909
353,061
327,573
20,623
21,515
287,906
267,657
18,350
18,879
29,413
17,697
968
1,706
49,783
38,658
8,960
369
242
48,228
1,391
0
6
81
1,478
2,109
0
6
3
2,118
7,259
2,810
3,540
3,301
443
156
132
192
47,758
322,727
20,428
21,320
2,652
2,652
0
2,423
2,423
0
99
98
0
97
97
0
353,061
327,573
20,623
21,515
Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
366,468
78,562
304,829
37,172
23,044
4,693
21,409
2,530
Federal Reserve notes, net
287,906
267,657
18350
18,879
Collateral for Federal Reserve notes
Gold certificate account
Special drawing rights certificate account
Other eligible assets
U.S. Treasury and federal agency securities
11,059
10,018
0
266,829
11,058
10,018
0
246,581
Total collateral
287,906
267,657
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 dividends
4
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT
Tables 247
2.—Continued
New York
1991
Cleveland
Philadelphia
1990
1991
1990
1991
3,914
3,395
16
3,501
3,395
16
318
319
40
384
319
31
692
645
30
7
0
23
0
45
0
24
0
2,382
553
2,341
1,341
160
0
105,022
15,345
123,309
86,783
17,013
107,501
969
127
Richmond
1990
1991
1990
688
645
39
948
961
99
1,008
961
105
0
0
0
0
105
0
6
0
185
0
378
0
380
0
478
0
590
0
7,041
0
7,246
6,846
0
7,055
16,674
0
17,052
14,084
0
14,464
21,079
0
21,662
21,881
0
22,476
570
76
592
44
527
45
354
34
257
36
608
123
341
122
7,606
2,918
8,844
2,373
1,312
146
1,468
179
1,428
350
1,795
332
1,688
374
2,023
906
-12,000
-1,044
3,172
-702
1,766
1,077
321
-5,674
130,253
125,233
13,189
9,307
22,352
19,332
26,784
22,270
100,834
102,697
10,872
7,078
19,950
17,005
23,426
18,904
6,461
17,697
859
642
25,658
9,934
8,960
259
156
19,310
1,470
0
7
74
1,551
1,774
0
7
2
1,782
1,572
0
8
88
1,667
1,817
0
8
2
1,827
2,210
0
9
66
2,285
2,654
0
9
16
2,679
866
1,353
382
1,511
490
66
132
84
270
143
83
167
541
191
119
271
128,710
123,899
12,979
9,077
22,029
19,082
26,443
21,974
111
771
0
130,253
667
667
0
105
105
0
115
115
0
161
161
0
125
125
0
171
171
0
148
148
0
125,233
13,189
9,307
22,352
19,332
26,784
22,270
128,066
27,231
108,722
6,026
13,068
2,196
8,380
1,302
23,151
3,201
18,651
1,646
31,583
8,158
24,543
5,639
100,834
102,697
10,872
7,078
19,950
17,005
23,426
18,904
248
78th Annual Report, 1991
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1991 and 1990—Continued
Millions of Dollars1
Atlanta
Chicago
Item
1991
1991
1990
465
303
54
1,370
1,336
53
1,377
1,336
33
12
0
13
0
20
0
1990
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
479
303
46
Loans
To depository institutions
Other
Acceptances held under repurchase agreements
Federal agency obligations
Bought outright
Held under repurchase agreements
202
0
221
0
760
0
773
0
U.S. Treasury securities
Bought outright2
Held under repurchase agreements
Total loans and securities
8,912
0
9,115
8,209
0
8,443
33,486
0
34,259
28,672
0
29,465
895
57
581
58
799
112
759
110
2,799
205
3,198
336
3,420
599
4,079
759
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies3
All other
Interdistrict Settlement Account
Total assets
1,987
2,887
237
2,974
15,887
16,325
42,183
40,892
11,426
11,768
37,207
36,047
2,970
0
15
117
3,102
3,723
0
15
3
3,740
3,102
0
19
211
3,332
3,511
0
19
31
3,560
792
81
226
100
702
301
343
342
5,401
15,834
41,542
40,292
243
243
0
246
246
0
321
321
0
300
300
0
15,887
16,325
42,183
40,892
17,196
5,771
15,085
3,317
41,660
4,452
39,007
2,960
11,426
11,768
37,207
36,047
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 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 sum 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 back 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 249
2.—Continued
Minneapolis
St. Louis
1991
1990
1981
Dallas
Kansas City
1990
1991
1990
1991
San Francisco
1990
1991
1990
328
307
29
346
307
36
171
172
14
203
172
13
370
334
31
422
334
33
515
463
43
585
463
44
1,207
1,072
94
1,329
1,072
89
25
0
28
0
0
0
6
0
9
0
10
0
3
0
23
0
11
0
25
0
160
0
184
0
78
0
101
0
168
0
207
0
237
0
226
0
633
0
706
0
7,058
0
7,243
6,817
0
7,028
3,445
0
3,523
3,755
0
3,862
7,386
0
7,563
7,672
0
7,890
10,456
0
10,695
8,391
0
8,640
27,886
0
28,528
26,185
0
26,917
275
29
280
28
544
32
365
33
515
53
478
54
773
141
977
72
1,498
147
685
149
724
128
881
146
782
77
979
107
1,055
136
1,273
168
2,105
192
2,480
224
3,597
482
4,405
559
1,609
183
2,640
-189
-810
-926
1,600
986
3,983
-1,482
7,453
9,235
7,955
5,546
9,247
9,725
16,526
14,472
40,608
33,722
6,035
7,507
6,691
3,929
7,145
7,799
13,530
11,481
32,440
24,563
914
0
4
42
960
1,410
0
4
1
1,415
653
0
4
38
695
1,028
0
5
6
1,039
1,313
0
6
60
1,379
1,202
0
6
9
1,217
1,646
0
11
97
1,754
1,757
0
11
7
1,775
5,713
0
20
192
5,924
7,741
0
20
7
7,768
255
73
105
80
399
31
395
46
458
68
430
95
722
96
746
100
1,321
251
448
313
7,322
9,108
7,816
5,408
9,049
9,540
16,103
14,102
39,936
33,092
66
66
0
64
64
0
70
70
0
69
69
0
99
99
0
93
93
0
211
211
0
185
185
0
336
336
0
315
315
0
7,453
9,235
7,955
5,546
9,247
9,725
16,526
14,472
40,608
33,722
8,883
2,848
9,163
1,656
8,117
1,427
4,698
769
9,618
2,473
9,910
2,111
17,683
4,152
13,926
2,445
44,400
11,961
31,335
6,773
6,035
7,507
6,691
3,929
7,145
7,799
13,530
11,481
32,440
24,563
250
78th Annual Report, 1991
3. Federal Reserve Open Market Transactions, 1991
Millions of dollars
Type of transaction
Jan.
Feb.
Mar.
Apr.
Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchanges
Redemptions
0
120
23,702
1,000
1967
0
21,381
0
313
0
18,808
0
908
0
21,981
0
Others within 1 year
Gross purchases
Gross sales
Maturity shift
Exchanges
Redemptions
0
0
989
-1,326
1,000
100
0
2,292
-3,045
0
700
0
413
-1,877
0
700
0
4,324
-993
0
1 to 5 years
Gross purchases
Gross sales
Maturity shift
Exchanges
0
0
-778
929
0
0
-1,909
2,545
2,950
0
-213
1,877
550
0
-A,2U
111
5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
0
0
-212
397
350
0
-23
400
50
0
-200
0
0
0
-110
216
oooo
0
0
-361
100
oooo
oooo
U.S. TREASURY SECURITIES
0
120
1,000
2,417
0
0
4,013
0
0
2,158
0
0
137,176
137,512
127,589
127,502
151,096
151,412
185,662
187,032
36,337
38,462
44,688
44,809
23,821
38,589
16,173
16,173
-2,909
2,209
-10,439
3,528
More than 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
All maturities
Gross purchases
Gross sales
Redemptions
Matched transactions
Gross sales
Gross purchases
Repurchase agreements2
Gross purchases
Gross sales
Net change in U.S. Treasury securities
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 sum to
totals because of rounding.
ooo
Net change in agency obligations
ooo
Repurchase agreements2
Gross purchases
Gross sales
ooo
FEDERAL AGENCY OBLIGATIONS
Outright transactions
Gross purchases
Gross sales
Redemptions
0
0
91
4,416
3,571
3,546
4,466
2,518
3,784
640
640
845
-920
-1,266
-91
2,064
1,290
-11,705
3,437
2. In July 1984 the Open Market Trading Desk discontinued accepting bankers acceptances in repurchase
agreements.
•Less than $500,000 in absolute value.
Tables 251
3.—Continued
July
Aug.
Sept.
Oct.
Nov.
3,411
0
27,548
0
37
0
19,680
0
1,359
0
25,180
0
5,776
0
28,009
0
529
0
19,508
0
2,198
0
25,409
0
200
0
5,175
-4,887
0
0
0
0
0
0
625
0
1,478
-3,136
0
340
0
3,425
-2,443
0
200
0
1,131
-2,202
0
0
0
-3,410
4,287
0
0
0
0
0
0
-1,192
2,601
0
0
-3,425
1,993
0
0
-1,605
400
0
0
0
0
0
0
-286
534
0
0
-160
200
0
0
0
0
3,611
0
0
Dec.
Total
2,823
0
24,141
0
837
0
21,967
0
20,158
120
277,314
1,000
0
0
2,002
-2,034
0
178
0
1,655
-2,585
0
0
0
1,570
-3,562
0
3,043
0
24,454
-28,090
1,000
650
0
-1,131
2,202
0
0
-1,877
1,686
2,133
0
-1,492
2,135
300
0
-1,570
3,562
6,583
0
-21,211
24,594
0
0
-688
300
0
0
0
0
0
0
-126
347
880
0
163
300
0
0
0
0
1,280
0
-2,037
2,894
0
0
0
0
0
0
-688
150
0
0
0
0
0
0
0
0
375
0
0
150
0
0
0
0
375
0
-1,209
600
37
0
0
1,984
0
0
6,116
0
0
1,379
0
0
2,198
0
0
6,390
0
0
1,137
0
0
31,439
120
1,000
147,796
147,803
118,903
118,239
120,292
121,803
112,414
110,280
116,266
118,481
137,073
135,281
98,063
97,925
118,127
118,263
1,570,456
1,571,534
9,241
9,241
9,440
8,478
35,149
36,111
16,847
16,847
40,447
40,447
12,432
3,718
14,165
22,879
51,345
36,000
310,084
311,752
3,618
335
2,532
3,981
3,595
9,121
-2,462
16,619
29,729
0
0
37
0
0
55
ooo
June
ooo
May
0
5
0
0
0
14
0
0
51
0
0
45
0
5
292
885
885
1,225
748
3,245
3,722
537
537
3,061
3,061
714
695
275
294
1,744
1,191
22,807
23,595
-37
477
-532
0
-5
5
-70
508
-1,085
3,581
812
2,000
3,981
3,590
9,126
-2,532
17,127
28,644
252
78th Annual Report, 1991
4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 1989-91 *
Millions of dollars
Increase or
decrease (-)
December 31
Description
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
By type of holding
Held outright
Treasury bills 3
Treasury notes
Treasury bonds
Held under repurchase agreements
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 Banks 3
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 repurchase agreements
1. Details may not sum to totals because of rounding.
2. Includes the effects of temporary transactions
(repurchase agreements and matched sale-purchase
agreements).
1991
1990
1989
1991
1990
281,831
252,103
228,367
29,728
23,736
21,109
66,759
90,655
64,299
14,469
24,540
22,530
57,538
75,428
58,749
13,121
24,736
9,413
55,523
70,687
53,509
12,529
26,706
-1,421
9,221
15,227
5,550
1,348
-196
13,117
2,015
4,741
5,240
592
-1,970
132,635
101,520
32,331
15,345
112,520
91,407
31,163
17,013
104,581
91,381
30,814
1,592
20,115
10,113
1,168
-1,668
7,939
25
350
15,421
6,045
6^42
6,525
-297
-183
200
811
1,329
2,508
1,008
189
200
737
1,639
2,555
1,022
188
153
568
1,346
3,198
1,071
188
0
74
-310
-41
-14
1
47
169
293
-643
-49
0
1,440
2,029
0
0
0
66
0
2,342
0
1,560
2,161
0
0
0
108
0
2,346
0
1,630
2,251
0
0
0
130
0
2,347
0
-120
-132
0
0
0
-42
0
-4
0
-70
-90
0
0
0
-22
0
-1
0
0
37
0
37
0
37
0
0
0
0
117
12
553
117
12
1,341
117
13
525
0
0
-788
0
-1
816
3. Includes the effects of matched sale-purchase
agreements.
4. There were no outstanding issues as of December 31,
1989.
Tables 253
5. Number and Salaries of Officers and Employees of Federal Reserve Banks,
December 31, 1991
President
Federal Reserve
Bank (including)
branches
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
Employees
Other officers
Number
Number
Annual
salaries
(dollars)
162,600
245,400
173,500
Vacant
187,900
196,000
209,000
179,000
162,000
146,500
147,500
210,000
56
173
58
62
87
71
95
50
49
58
58
100
4,982,200
17,254,050
4,870,350
5,129,800
7,120,600
5,660,700
7,837,150
3,718,100
3,881,500
4,599,000
4,627,300
9,346,925
1,264
3,834
1,272
1,301
1,921
2,255
2,405
1,072
989
1,550
1,624
2,430
2,019,400
917
79,027,675
21,917
Annual
salary
(dollars)
Fulltime
Total
Annual
salaries
(dollars)
Number
Annual
salaries
(dollars)
267
62
146
70
132
63
34
101
123
46
49
78
45,447,152
135,587,042
38,775,718
36,592,862
52,486,264
62,856,318
74,310,793
29,596,497
29,999,915
44,389,377
50,336,327
79,618,829
1,588
4,070
1,477
1,434
2,141
2,390
2,535
1,224
1,162
1,655
1,732
2,609
50,591,952
153,086,492
43,819,568
41,722,662
59,794,764
68,713,018
82,356,943
33,493,597
34,043,415
49,134,877
55,111,127
89,175,754
1,171
679,997,094
24,017
761,044,169
Parttime
254
78th Annual Report, 1991
6. Income and Expenses of Federal Reserve Banks, 1991
Dollars
Item 1
Total
Boston
New York
Philadelphia
Cleveland
CURRENT INCOME
Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other
25,571,333
1,845,058
3,526,832
510,153
477,189
19,262,265,500
2,499,370,712
737,454,292
28,339,977
1,293,210,618
99,778,152
49,114,837
1,212,267
7,506,681,372
687,140,766
105,489,922
18,369,961
522,542,526
118,175,928
37,861,697
824,337
1,181,833,460
129,935,784
43,638,765
635,040
Total
22,553,001,814
1,445,160,932
8,321,208,853
679,914,641
1,356,520,238
738,153,925
101,544,004
20,456,306
32,816,521
32,733,641
50,947,365
11,326,125
2,817,489
1,694,429
1,734,559
157,898,201
37,066,336
2,447,486
4,402,544
8,338,608
43,484,791
10,632,465
512,588
1,801,676
1,275,675
44,513,218
11,164,188
5,872,972
2,338,517
1,463,654
88,175,111
9,773,482
54,576,433
5,130,166
589,212
3,383,120
10,876,235
2,001,558
9,921,250
4,916,471
453,934
2,913,789
6,209,011
623,744
3,059,846
26,526,902
35,554,702
26,706,109
23,629,300
20,542,848
3,679,240
2,841,455
2,156,338
651,033
880,511
3,944,404
3,976,235
3,795,032
15,935,929
3,103,584
1,841,755
1,796,763
2,986,575
100,276
964,753
1,345,599
1,800,882
1,813,805
400,177
703,652
6,386,264
20,741,963
87,143,920
51,852,412
163,976,030
34,791,808
0
(36,945,993)
(2,691,014)
231,896
753,471
5,486,594
3,037,153
9,180,545
2,428,345
(1,062,949)
(8,977,795)
(235,354)
41,171
4,770,697
16,880,471
8,137,433
33,190,616
5,556,468
(873,667)
(4,096,735)
(6,386)
341,693
811,205
3,986,909
2,374,637
13,986,254
1,641,305
2,424,132
(2,855,095)
(36,858)
740,619
6,540,737
3,687,398
8,545,603
2,351,105
1,874,861
(4,152,604)
(444,877)
1,581,444,679
(152,122,522)
1,429,322,157
98,672,948
(6,915,454)
91,757,494
327^07,470
(29,467,199)
297,840,271
96355,693
(17,115,996)
79,239,697
100,597,326
(14,807,673)
85,789,653
CURRENT EXPENSES
Salaries and other personnel
expenses
Retirement and other benefits2
Fees
Travel
Software expenses
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.
145,222
Tables 255
6.—Continued
Richmond
Atlanta
Chicago
3,394,970
Dallas
San Francisco
292,159
1,193,302
1,600,439,605 649,486,457 2,383,565,534 522,560,419 266,252,373 560,940,540
309,683,301 65,657,650 71,102,234 95,650,099
152,907,456 252,467,935
95,097,878 31,356,786 39,930,238 47,494,854
64,150,968 89,947,749
380,806
425,266
495,690
2,198,281
935,572
838,713
729,589,919
190,408,514
49,081,803
662,911
2,045,162,677
326,462,893
84,288,795
1,361,132
1,823,778^77 997,067,483 2,791,490^73 622,595,377 381,105,082 705,656^53
970,035306
2,458,468,800
4,229,770
2,524,832
Minneapolis Kansas City
1,190,054
5,441,635
945,379
St. Louis
60,990,329
14,894,132
1,312,589
2,518,849
3,077,506
71,550,121
17,793,529
1,180,655
3,126,865
2,353,502
85,682,157
19,673,511
776,982
3,624,046
4,263,971
35,200,543
8,202,399
578,414
1,777,061
1,614,931
35,230,037
8,188,371
1,210,338
2,008,755
1,786,926
52,250,411
13,299,790
1,165,726
2,603,411
1,544,840
52,645,903
12,718,401
1,318,377
2,429,251
1,822,605
92,760,850
19,731,480
1,262,690
4,491,117
3,456,864
7,516,573
782,050
5,135,240
10,401,775
996,837
5,729,944
9,835,913
1,121,169
6,267,190
4,064,431
521,084
3,303,832
5,879,536
491,719
2,189,054
6,024,001
694,438
3,677,754
4,534,350
779,807
3,351,103
12,786,650
717,930
5,644,311
2,161,783
4,300,009
2,468,448
740,206
2,300,283
1,631,583
2,960,406
2,331,870
892,117
1,788,087
5,862,998
4,576,443
2,654,552
2,155,506
4,346,653
428,854
1,684,390
1,591,563
413,323
970,852
1,003,977
1,297,874
885,798
502,098
894,267
834,409
3,043,845
1,591,706
291,333
903,517
1,255,119
1,486,904
1,185,138
1,327,810
925,801
2,537,181
5,789,497
3,245,283
219,493
2,760,888
692,486
1,113,096
5,135,159
2,772,736
5,164,840
1,428,432
2,013,741
(1,169,381)
(164,707)
304,108
2,226,718
2,733,877
1,905,121
8,317,915
2,158,378
1,334,622
(895,743)
(392,559)
524,746
1,059,684
5,057,737
2,573,953
6,049,595
2,536,879
1,918,705
(705,207)
(325,435)
1,654,673
2,239,226
10,166,054
6,131,511
16,236,890
4,220,697
464,599
(3,700,086)
(151,805)
199,918,206 74,107,196 78,555,152 105,617,618 104,471,226
(15,949,065) (8,686,314) (5,790,842) (10,023,655) (7,341,520)
183,969,141 65,420,882 72,764,310 95,593,963
97,129,706
192,665,993
(14,050,405)
178,615,588
707,555
785,129
1,992,374
1,047,190
7,858,882
8,735,006
5,619,705
5,266,409
14,382,148 13,482,866
3,832,039
1,724,207
(4,712,948) 1,155,339
(2,375,021)
(3,468,751)
(269,975)
(374,869)
131,581,518 154,741,055
(9,845,150) (12,129,248)
121,736,368 142,611,807
266,367
691,219
450,210
3,537,473
2,740,652
11,821,842
2,008,891
8,337,465
5,935,048
29,503,710
1,344,225
5,569,728
(6,858,100) 2,321,670
(1,243,942)
(3,305,633)
(67,601)
(220,589)
256
78th Annual Report, 1991
6. Income and Expenses of Federal Reserve Banks, 1991—Continued
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
21,123,679,659
1,353,403,438
8,106,515,306
600,674,945
1,270,730,586
PROFIT AND LOSS
Current net income
Additions to and deductions
from current net income5
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 expenditures6
Cost of currency
Net income before payment to
U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)
131,447,796
8,828,460
49,980,606
3,632,617
8,018,932
366,450,220
153,614
498,051,630
(1,851,036)
11,931,153
2,546
20,762,159
(35,007)
97,121,050
37,427
147,139,083
(671,921)
15,218,772
3,604
18,854,993
(14,090)
21,833,127
935
29,852,993
(6,240)
496,200,594
20,727,152
146,467,162
18,840,903
29,846,753
90,471,276
4,517,310
13,380,979
11,939,825
9,694,406
109,631,000
261,316,379
4,558,600
18,431,584
31,222,600
100,248,786
4,818,600
6,912,056
6,028,900
16,602,497
21,158,461,599
1,346,623,096
8,108,130,103
595,845,367
1,268,251,536
152,553,160
6,006,860
43,267,767
6,134,888
9,032,226
20,777,552,288
1,340,045,736
7,960,494,986
599,783,979
1,223,419,259
Transferred to surplus
228,356,150
570,500
104,367,350
(10,073,500)
35,800,050
Surplus, January 1
Surplus, December 31
2,423,151,600
2,651,507,750
97,281,500
97,852,000
667,053,050
771,420,400
115,174,000
105,100,500
125,355,700
161,155,750
1. Details may not sum 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 sum to current net
income. The effect of FASB 87 on the Reserve Banks was
a reduction in expenses of $83,146,723.
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. Includes reimbursement from the U.S. Treasury for
uncut sheets of Federal Reserve notes, gains-losses on the
sale of Reserve Bank buildings, counterfeit currency that
is not charged back to the depositing institution, and stale
Reseve Bank checks that are written off.
6. For additional details, see the last four pages of
the preceding section: Board of Governors, Financial
Statements.
Tables 257
6.—Continued
Richmond
1,702,042,008
Atlanta
Chicago
St. Louis
Minneapolis Kansas City
854,455,675 2,607,521,232 557,174,495 308,340,773 610,062,390
11,254,137
4,472,899
23,177,649
5,912
34,233,757
5,670
16,210,524
4,176,758
1,888,462
3,944,925
Dallas
San Francisco
872,905,600
2,279,853,211
4,907,714
14,131,763
34,437,698 38,712,326
(61,619)
(119,710)
46,416,592 10,301,032 11,858,119 14,698,435
359
239
81,619
1,209
62,627,475 14,478,029 13,828,199 18,644,569
(10,535)
(551,842)
(59,531)
(170,160)
27,748,498
5,674
32,661,885
(27,877)
51,912,037
8,421
66,052,221
(122,504)
34,376,079
38,592,616
62,616,940
13,926,188
13,768,669
18,474,409
32,634,008
65,929,717
6,210,206
6,844,689
9,544,401
4,274,362
3,992,817
6,561,327
4,271,749
9,239,205
6,947,500
18,464,922
10,430,300
11,484,999
13,527,400
35,192,869
2,843,700
7,330,281
2,963,400
3,836,426
4,132,600
7,615,887
8,034,000
11,210,264
14,123,400
23,985,808
1,704,795,459 864,288,303 2,611,873,502 556,652,339 311,316,799 610,226,985
882,023,595
2,298,434,515
5,818,508
11,467,541
19,638,502
852,190,013 2,572,456,564 550,749,761 305,855,306 597,599,727
9,770,119
1,672,578,641
22,446,700
14,806,390
(2,708,100)
148,060,400 245,507,100
170,507,100 242,799,000
18,583,288
3,880,528
4,146,543
843,853,254
2,258,525,064
20,833,650
2,022,050
1,314,950
6,808,750
26,702,800
20,270,950
300,030,900
320,864,550
63,560,300
65,582,350
68,511,400
69,826,350
92,503,350
99,312,100
184,736,800
211,439,600
315,377,100
335,648,050
258
78th Annual Report, 1991
7. Income and Expenses of Federal Reserve Banks, 1914-91 l
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
^,673,446
302,304
192,277
237,795
382,641
594,818
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
181,296,711
122,865,866
50,498,699
50,708,566
38,340,449
41,800,706
47,599,595
43,024,484
64,052,860
70,955,496
27,548,505
33,722,409
28,836,504
29,061,539
27,767,886
26,818,664
24,914,037
24,894,487
25,401,233
25,810,067
-3,743,907
-6,314,796
-4,441,914
-8,233,107
-6,191,143
-4,823,477
-3,637,668
-2,456,792
-5,026,029
-4,861,642
709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644
1,714,421
1,844,840
805,900
3,099,402
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
36,424,044
29,701,279
50,018,817
49,487,318
48,902,813
42,751,959
37,900,639
41,233,135
36,261,428
38,500,665
25,357,611
24,842,964
24,456,755
25,917,847
26,843,653
28,694,965
26,016,338
25,294,835
25,556,949
25,668,907
-93,136
311,451
-1,413,192
-12,307,074
-4,430,008
-1,736,758
485,817
-1,631,274
2,232,134
2,389,555
809,585
718,554
728,810
800,160
1,372,022
1,405,898
1,679,566
1,748,380
1,724,924
1,621,464
2,175,530
1,479,146
1,105,816
2,504,830
1,025,721
1,476,580
2,178,119
1,757,399
1,629,735
1,356,484
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
43,537,805
41,380,095
52,662,704
69,305,715
104,391,829
142,209,546
150,385,033
158,655,566
304,160,818
316,536,930
25,950,946
28,535,547
32,051,226
35,793,816
39,659,496
41,666,453
50,493,246
58,191,428
64,280,271
67,930,860
11,487,697
720,636
-1,568,208
23,768,282
3,221,880
-830,007
-625,991
1,973,001
-34,317,947
-12,122,274
1,704,011
1,839,541
1,746,326
2,415,630
2,296,357
2,340,509
2,259,784
2,639,667
3,243,670
3,242,500
1,510,520
2,588,062
4,826,492
5,336,118
7,220,068
4,710,309
4,482,077
4,561,880
5,186,247
6,304,316
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
275,838,994
394,656,072
456,060,260
513,037,237
438,486,040
412,487,931
595,649,092
763,347,530
742,068,150
886,226,116
69,822,227
83,792,676
92,051,063
98,493,153
99,068,436
101,158,921
110,239,520
117,931,908
125,831,215
131,848,023
36,294,117
-2,127,889
1,583,988
-1,058,993
-133,641
-265,456
-23,436
-7,140,914
124,175
98,247,253
3,433,700
4,095,497
4,121,602
4,099,800
4,174,600
4,194,100
5,339,800
7,507,900
5,917,200
6,470,600
7,315,844
7,580,913
8,521,426
10,922,067
6,489,895
4,707,002
5,603,176
6,374,195
5,973,240
6,384,083
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1,103,385,257
941,648,170
1,048,508,335
1,151,120,060
1,343,747,303
1,559,484,027
1,908,499,896
2,190,403,752
2,764,445,943
3,373,360,559
139,893,564
148,253,719
161,451,206
169,637,656
171,511,018
172,110,934
178,212,045
190,561,166
207,677,768
237,827,579
13,874,702
3,481,628
-55,779
614,835
725,948
1,021,614
996,230
2,093,876
8,519,996
-557,553
6,533,700
6,265,100
6,654,900
7,572,800
8,655,200
8,576,396
9,021,600
10,769,596
14,198,198
15,020,084
7,455,011
6,755,756
8,030,028
10,062,901
17,229,671
23,602,856
20,167,481
18,790,084
20,474,404
22,125,657
For notes see end of table.
Tables
259
7.—Continued
Payments to U.S. Treasury
Dividends
paid
Trail sferrfid
X ICUIulvllvii
Franchise
tax
Under
section 13b
Interest on
Federal Reserve
notes
to surplus
(section 13b)
1 lollolvllvU
to surplus
(section 7)
217,463
1,742,775
6,804,186
5,540,684
5,011,832
1,134,234
'. '. '.
2,703,894
'. '. '.
5.654,018
6,119,673
6,307,035
6.552.717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911
60,724,742
59,974,466
10,850,605
3.613.056
113,646
59,300
818,150
249,591
2,584,659
4,283,231
82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597
10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462
17,308
-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071
607,422
352,524
2,616,352
1,862,433
4,533,977
1,134,234
48,334,341
70,651,778
2,011,418
'. '. '.
'. '. '.
291,661
227,448
176,625
119,524
24,579
-60,323
27,695
102,880
67,304
-419,140
-425,653
82,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605
-54,456
-4,333
49,602
135,003
201,150
262,133
27,708
86,772
8,214,971
8,429,936
8,669,076
8,911,342
9,500,126
10,182,851
10,962,160
11,523,047
11,919,809
12,329,373
75,283,818
166,690,356
193,145,837
17,617,358
570,513
3,554,101
40,327,237
48,409,795
81,969,625
81,467,013
8,366,350
18,522,518
21,461,770
13,082,992
13,864,750
14,681,788
15,558,377
16,442,236
17,711,937
18,904,897
20,080,527
21,197,452
22,721,687
196,628,858
254,873,588
291,934,634
342,567,985
276,289,457
251,740,721
401,555,581
542,708,405
524,058,650
910,649,768
21,849,490
28,320,759
46,333,735
40,336,862
35,887,775
32,709,794
53,982,682
61,603,682
59,214,569
-93,600,791
23,948,225
25.569,541
27,412,241
28,912,019
30,781,548
32,351,602
33,696,336
35,027,312
36,959,336
39,236,599
896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614
1,296,810,053
1,649,455,164
1,907,498,270
2,463,628,983
3,019,160,638
42,613,100
70,892,300
45,538,200
55,864,300
-465,822,800
27,053,800
18,943,500
29,851,200
30,027,250
39,432,450
260
78th Annual Report, 1991
7. Income and Expenses of Federal Reserve Banks, 1914-91—Continued
Dollars
Current
income
Period, or Federal
Reserve Bank
Net
expenses
Net additions
or
deductions (-)
Assessments by
Board of Governors
Board
expenditures
Costs
of currency
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
3,877,218,444
3,723,369,921
3,792,334,523
5,016,769,328
6,280,090,965
6,257,936,784
6,623,220,383
6,891,317,498
8,455,309,401
10,310,148,406
276,571,876
319,608,270
347,917,112
416,879,377
476,234,586
514,358,633
558,128,811
568,851,419
592,557,841
625,168,261
11,441,829
94,266,075
(49,615,790)
(80,653,488)
(78,487,237)
(202,369,615)
7,310,500
(177,033,463)
(633,123,486)
(151,148,220)
21,227,800
32,634,002
35,234,499
44,411,700
41,116,600
33,577,201
41,827,700
47,366,100
53,321,700
50,529,700
23,573,710
24,942,528
31,454,740
33,826,299
30,190,288
37,130,081
48,819,453
55,008,163
60,059,365
68,391,270
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
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
23,476,603,651
22,553,001,815
718,032,836
814,190,392
926,033,957
1,023,678,474
1,102,444,454
1,127,744,490
1,156,867,714
1,146,910,699
1,205,960,134
1,332,160,712
1,349,725,812
1,429,322,157
(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
2,201,470,397
496,200,596
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
103,752,200
109,631,000
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
193,006,998
261,316,379
306,789^65,773
21,853,044,903
16,264,953,430
93,387,502,883
11,908,379,850
20,253,318,881
24,398,593,168
13,091,540,927
43,134,265,658
10,177,663,539
5,541,631,415
12,771,936,223
17,015,823,986
38,843,755,814
1,440,486,112
4,331,691,989
1,168,688,247
1,442,044,215
1,735,274,160
1,937,332,109
2,856,768,715
1,139,332,018
1,025,919,831
1,405,226,579
1,291,578,195
2,318,238,863
Total, 1914-91
Aggregate for each Bank,
1914-91
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total
306,789,3*5,773
208,440,526
1,629,214,138
266,084,769
287,609,331
347,089,590
553,832,021
729,664,356
154,705,167
186,939,633
243,179,019
499,476,826
886,302,400
57,377,486
412,102,586
75,849,418
114,705,490
84,821,676
123,782,760
218,399,072
47,842,872
46,707,415
66,217,009
105,456,373
220,715,451
157,926,126
718,017,914
108,689,256
163,790,587
237,382,718
145,070,727
358,638,108
94,442,151
44,603,140
116,419,895
145,641,166
306,256,335
21,853,044,9034 5,992,537,781 1,573,977,608 2,596,878,123
1. Details may not sum 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 $2,551,844,799 transferred to surplus was reduced by direct changes of $500,000 for charge-off on
Bank premises (1927), $139,299,557 for contributions to
5,992,537,781 1,573,977,608 2,596,878,123
capital of the Federal Deposit Insurance Corporation
(1934) and $3,657 net upon elimination of sec. 13b
surplus (1958); and was increased by transfer of
$11,131,013 from reserves for contingencies (1945), leaving a balance of $2,400,910,572 on Dec. 31,1990.
4. See note 2, table 6.
Tables 261
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
140,757,879
152,553,160
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
23,608,397,730
20,777,552,290
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
180,291,500
228,356,150
2,583,226,869
149,138300
2,188,893
281,009,629,148
(3,657)
104,984,470
702,594,457
135,410,959
199,352,355
135,323,399
188,909,204
351,031,319
9,997,418
73,058,447
106,452,553
163,819,096
342,293,191
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
14,586,014,730
88,180,797,056
10,529,232,886
18,416,818,939
22,354,295,539
10,975,794,021
39,693,584,132
8,885,976,666
4,449,687,355
11,194,234,390
15,581,044,712
36,162,148,720
135,411
(433,412)
290,661
(9,906)
(71,517)
5,491
11,682
(26,515)
64,874
(8,674)
55,337
(17,089)
107,946,825
808,676,971
119,430,722
174,389,543
176,386,908
248,065,540
336,193,304
70,722,978
73,703,563
103,452,050
215,717,078
345,515,467
2,583,226,869
149,13830
2,188,893
281,009,629,148
(3,657)
2,780,200,949
2,780,200,949*
262
78th Annual Report, 1991
Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 31, 1991 l
Dollars
Acquisition costs
Federal Reserve
Bank or
Branch
Land
Buildings
(including
vaults)2
22,073,501
27,840
82,486,486
125,317
5,582,111
44,538
NEW YORK.
Annex
Buffalo
3,436,277
447,863
887,844
116,649,642
1,136,219
3,118,698
21,735,584
745,855
2,471,014
PHILADELPHIA
BOSTON.
Annex..
Building machinery and
equipment
Total
3
110,142,098
197,695
Net
book
value
89,218,858
167,185
141,821,503 122,920,203
2,359,936
706,862
6,477,557
3,474,280
2,251,556
53,271,757
5,903,704
61,427,017
44,271,308
CLEVELAND .
Cincinnati
Pittsburgh
1,074,281
2,246,599
1,658,376
8,740,141
13,942,719
8,574,545
6,858,976
7,623,142
4,230,643
16,673,399
23,812,459
14,463,564
11,539,388
12,021,662
10,739,757
RICHMOND.
Annex
Baltimore
Charlotte
5,237,036
572,128
6,476,335
3,129,645
58,593,682
3,725,466
26,879,073
27,402,251
14,420,091
3,924,584
3,842,189
4,698,497
78,250,809
8,222,179
37,197,597
35,230,393
54,293,182
4,631,774
30,457,607
33,403,463
ATLANTA...
Birmingham..
Jacksonville..
Miami
Nashville . . . .
New Orleans.
1,209,360
3,197,830
1,665,439
3,767,616
592,342
3,087,693
12,241,666
1,905,770
16,485,846
11,995,766
1,474,678
3,330,539
4,319,451
1,072,438
2,363,679
2,223,399
1,416,665
1,575,492
17,770,477
6,176,039
20,514,964
17,986,781
3,483,685
7,993,725
13,597,584
4,205,538
18,490,892
14,087,994
1,417,245
5,162,943
CHICAGO.
Annex...
Detroit
4,511,942
53,066
797,734
107,526,660
1,016,162
4,857,747
17,197,585
426,419
5,062,528
ST. LOUIS.
Little Rock.,
Louisville..
Memphis
700,378
1,148,492
700,075
1,135,623
14,340,398
2,082,669
2,870,836
4,216,382
5,298,206
1,003,022
1,131,238
2,280,473
20,338,982
4,234,183
4,702,149
7,632,478
17,404,159
2,494,660
3,332,679
5,335,943
MINNEAPOLIS.
Helena
1,394,384
1,954,514
27,604,213
9,036,528
7,851,532
486,396
36,850,129
11,477,438
20,350,501
11,256,465
KANSAS CITY.
Denver
Oklahoma City..
Omaha
1,798,804
3,187,962
646,386
6,534,583
16,351,116
4,507,028
3,644,075
11,102,353
11,707,026
3,711,037
2,182,552
1,401,083
29,856,947
11,406,027
6,473,013
19,038,019
22,803,073
8,734,962
4,218,228
17,461,651
DALLAS
El Paso
Houston
San Antonio .
33,352,767
93,555,687
1,566,054
3,490,638
2,969,399
3,737,706
404,946
1,112,539
1,183,116
SAN FRANCISCO.
Los Angeles
Portland
Salt Lake City
Seattle
15,541,937
3,891,887
415,924
480,222
324,772
67,394,008
17,581,323
8,398,066
1,128,105
1,458,650
1,899,563
144,591,273
891,835,123
Total
262,477
2,205,500
482,284
50,604,257
4,174,067
4,190,703
2,653,881
1. Details may not sum to totals because of rounding.
2. Includes expenditures for construction at some
offices, pending allocation to appropriate accounts.
3. Excludes charge-offs of $17,698,968 before 1952.
Other
real
estate4
1,224,363
13,072,919
912,*813
292,710
129,236,187 102,856,819
1,495,648
1,227,377
10,718,009
8,581,301
149,948
1,100,000
130,646,160 128,251,554
2,233,478
2,036,401
6,808,677
6,401,785
4,634,799
3,771,644
100,517,269
62,894,210
5,718,096
6,129,575
4,878,215
79,647,327
55,810,304
4,776,887
3,408,941
2,902,369
191,695,166 1,228,121,5<>3 987,872,757
16,752,753
4. Covers acquisitions for banking-house purposes
and bank premises formerly occupied and being held
pending sale.
Tables 263
9. Operations in Principal Departments of Federal Reserve Banks, 1988-91
Operation
1991
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 securitiesl
Transfer of funds
Automated clearinghouse transactions
Commercial2
Government
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!
Transfer of funds
Automated clearinghouse transactions
Commercial2
Government
Food stamps redeemed
1989
1988
11
19,711
6,254
9,462
15
19,462
6,561
12,072
22
19,857
6,319
12,668
22
17,580
5,910
17,137
503
166
18,743
547
162
18,595
541
147
18,014
547
144
17,623
52
65
44
63
40
60
186
56
1,119
521
3,439
915
520
2,875
741
441
2,334
602
408
2,327
64,597
265,473
77,496
1,354
194,538
252,430
65,863
1,734
229,358
246,598
59,985
1,828
537,952
195,647
47,184
3,684
610,106
17,716
12,164,175
623,008
16,485
12,514,201
635,064
14,284
12,321,576
608,307
13,189
11,789,787
119,114,811
192,254,895
102,332,172
199,067,200
98,130,603
182,575,303
89,516,419
160,730,050
6,188,185
723,426
17,888
4,173,667
486,809
14,517
3,840,462
391,463
11,714
3,372,615
n.a.
10,748
1. Agents' savings bonds transactions are not included
after 1988 and are small in dollar amount.
1990
2. Data for years preceding 1991 do not include items
sent to the Reserve Banks by the New York Automated
Clearing House.
264
78th Annual Report, 1991
10. Federal Reserve Bank Interest Rates, December 31, 1991
Loans to depository institutions
Bank
All Federal Reserve Banks..
Adjustment credit
and seasonal
credit1
3.5
1. Adjustment credit is available on a short-term basis
to help depository institutions meet temporary needs for
funds that cannot be met through reasonable alternative
sources. After May 19,1986, the highest rate established
for loans to depository institutions may be charged on
adjustment credit loans of unusual size that result from a
major operating problem at the borrower's facility.
Seasonal credit is available to help smaller depository
institutions meet regular, seasonal needs for funds that
cannot be met through special industry lenders and that
arise from a combination of expected patterns of movement in their deposits and loans.
See section 201.3(b)(l) of Regulation A.
2. Extended credit is available to depository institutions,
if similar assistance is not reasonably availablefromother
Extended credit2
First 30 days
of borrowing
After 30 days of borrowing3
3.5
4.85
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. See section
201.3(b)(2) of Regulation A.
3. For extended-credit loans outstanding more than 30
days, a flexible rate somewhat above rates on market
sources of funds ordinarily will be charged, but in no case
will the rate charged be less than the basic discount rate
plus 50 basis points. The flexible rate is reestablished on
the first business day of each two-week reserve maintenance period. At the discretion of the Federal Reserve
Bank, the time period for which the basic discount rate is
applied may be shortened.
Tables 265
11. Reserve Requirements of Depository Institutionsl
Requirements
Type of deposit2
Net transaction accounts3
$0 million-$42.2 million
More than $42.2 million
Percent of deposits
Effective date
3
12
12/17/91
12/17/91
Nonpersonal time deposits4
0
12/27/90
Eurocurrency liabilities5
0
12/27/90
1. Reserve requirements in effect on Dec. 31, 1991.
Required reserves must be held in the form of deposits
with Federal Reserve Banks or vault cash. Nonmember
institutions 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 or
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 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. 17, 1991, the exemption was
raised from $3.4 million to $3.6 million. The exemption
applies in the following order: (1) net negotiable order of
withdrawal (NOW) accounts (NOW accounts less allowable deductions); and (2) net other transaction accounts.
The exemption applies only to accounts that would be
subject to a 3 percent reserve requirement.
3. Transaction accounts include all deposits against
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,
money market deposit accounts (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).
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. 17, 1991 for institutions reporting quarterly and Dec. 24, 1991 for institutions reporting weekly, the amount was increased from
$41.1 million to $42.2 million.
4. For institutions that report weekly, the reserve requirement on nonpersonal time deposits with an original
maturity of less than \xh years was reduced from 3 percent to \xh percent for the maintenance period that began
Dec. 13,1990, and to zero for the maintenance period that
began Dec. 27,1990. The reserve requirement on nonpersonal time deposits with an original maturity of Wi years
or more has been zero since Oct. 6,1983.
For institutions that report quarterly, the reserve requirement on nonpersonal time deposits with an original
maturity of less than \xh years was reduced from 3 percent to zero on Jan. 17,1991.
5. The reserve requirement on Euroccurency liabilities
was reduced from 3 percent to zero in the same manner
and on the same dates as were the reserve requirement on
nonpersonal time deposits with an original maturity of
less than 1 xh years (see note 4).
266
78th Annual Report, 1991
12. Initial Margin Requirements under Regulations T, U, G, and X 1
Percent of market value
Effective date
1934, Oct. 1 ..
1936, Feb. 1 . .
Apr. 1 . .
1937, Nov. 1..
1945, Feb. 5 ..
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 28.
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 margin on individual stock options, allowing it to
be the same as the option maintenance margin required
by the appropriate exchange or self-regulatory organization; such maintenance margin rules must be approved by
the Securities and Exchange Commission. Effective June
6, 1988, the SEC approved new maintenance margin
rules, permitting margins to be the current market value
of the option plus 20 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 267
13. Principal Assets and Liabilities and Number of Insured Commercial Banks,
by Class of Bank, June 30, 1991 and 1990l
Asset and liability items shown in millions of dollars
Member banks
Item
Total
Total
National
State
Nonmember
banks
June 30, 1991
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,445,569
1,849,239
1,838,524
596,329
1,775,046
1,368,963
1,361,764
406,083
1,436,507
1,121,475
1,115,632
315,032
338,539
247,488
246,132
91,051
670,523
480,276
476,760
190,247
453,603
142,726
191,511
310,807
95,275
146,926
244,450
70,582
120,060
66,358
24,693
26,866
142,796
47,451
44,585
Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
2,294,434
44,983
604,021
1,868,424
221,969
1,645,777
38,152
444,565
1,316,613
157,296
1,342,201
29,260
360,293
1,080,761
123,644
303,576
8,892
84,272
235,852
33,651
648,657
6,830
159,456
551,811
64,674
12,090
4,893
3,907
986
7,197
Number of banks
June 30, 1990
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,399,166
1,852,133
1,839,702
547,033
1,764,503
1,387,501
1,378,895
377,002
1,430,039
1,134,670
1,127,766
295,369
334,464
252,831
251,129
81,633
634,663
464,633
460,807
170,031
398,815
148,218
207,721
274,656
102,346
160,768
218,919
76,451
129,472
55,738
25,895
31,297
124,159
45,872
46,952
Deposits, total
Interbank
Other demand
Other time and savings
Equity capital
2,224,783
48,372
590,962
1,790,490
212,001
1,607,654
41,595
435,794
1,272,178
150,827
1,314,183
31,095
352,426
1,049,994
119,371
293,471
10,500
83,368
222,184
31,456
617,128
6,777
155,168
518,312
61,175
12,439
5,065
4,049
1,016
7,374
Number of banks
1. All insured commercial banks in the United States.
Details may not sum to totals because of rounding.
268 78th Annual Report, 1991
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-91, and Month-End 1991l
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
outstanding 6
1918
1919
239
300
239
300
0
0
1,766
2,215
199
201
294
575
0
0
2,498
3,292
2,873
2,707
1,795
1,707
1920
1921
1922
1923
1924
287
234
436
134
540
287
234
436
80
536
0
0
0
54
4
2,687
1,144
618
723
320
119
40
78
27
52
262
146
273
355
390
0
0
0
0
0
3,355
1,563
1,405
1,238
1,302
2,639
3,373
3,642
3,957
4,212
1,709
1,842
1,958
2,009
2,025
1925
1926
1927
1928
1929
375
315
617
228
511
367
312
560
197
488
8
3
57
31
23
643
637
582
1,056
632
63
45
63
24
34
378
384
393
500
405
0
0
0
0
0
1,459
1,381
1,655
1,809
1,583
4,112
4,205
4,092
3,854
3,997
1,977
1,991
2,006
2,012
2,022
1930
1931
1932
1933
1934
739
817
1,855
2,437
2,430
686
775
1,851
2,435
2,430
43
42
4
2
0
251
638
235
98
7
21
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..... 2,184
2,254
1941
6,189
1942
11,543
1943
18,846
1944
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
25,009
25,825
26,880
25,885
22,706
22,695
23,187
22,030
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
For
notes see last two oases of table.
Tables 269
14.—Continued
Factors absorbing reserve funds
Currency
in
circulation
Deposits, other
than reserves, with
Federal Reserve Banks
Treasury
cash
holdings 7
Treasury
Foreign
Member bank
Other
Other
Federal
Reserve
accounts4
Required
clearing
bal-
Other
Federal
Reserve
liabilities
and
capital4
With
Federal
Reserve
Banks
Currency
and
coin 9
Required 1(
1,585
1,822
51
68
0
Excess 10
4,951
5,091
288
385
51
51
96
73
25
28
118
208
0
0
0
0
1,636
1,890
0
0
5,325
4,403
4,530
4,757
4,760
218
214
225
213
211
57
96
11
38
51
5
12
3
4
19
18
15
26
19
20
298
285
276
275
258
0
0
0
0
0
0
0
0
0
0
1,781
1,753
1,934
1,898
2,220
0
0
0
0
0
1,884
2,161
0
99
0
14
59
4,817
4,808
4,716
4,686
4,578
203
201
208
202
216
16
17
18
23
29
8
46
5
6
6
21
19
21
21
24
272
293
301
348
393
0
0
0
0
0
0
0
0
0
0
2,212
2,194
2,487
2,389
2,355
0
0
0
0
0
2,256
2.250
2,424
2,430
2,428
-44
-56
63
-41
-73
4,603
5,360
5,388
5,519
5,536
211
222
272
284
6
79
19
4
20
22
31
24
128
169
375
354
355
360
241
0
0
0
0
0
0
0
0
0
0
2,471
1,961
2,509
2,729
4,096
0
0
0
0
0
2,375
1,994
1,933
1,870
2,282
96
-33
576
859
3,029
19
54
8
3
121
1,814
5,882
6,543
6,550
6,856
7,598
2,566
2,376
3,619
2,706
2,409
544
244
29
99
226
160
253
261
0
0
0
0
172
235
263
0
923
634
199
397
242
256
260
251
0
0
0
0
0
5,587
6,606
7,027
8,724
11,653
0
0
142
2,743
4,622
5,815
5,519
6,444
2,844
1,984
1,212
3,205
5,209
8,732
11,160
15,410
20,499
25,307
2,213
2,215
2,193
2,303
2,375
368
867
799
579
440
1,133
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
1,360
1,204
599
586
485
356
394
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
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
821
862
508
392
642
767
0
0
0
14,457
15,577
16,400
19,277
15,550
1,458
562
1,499
1,202
1,018
27,741
29,206
30,433
30,781
30,509
1,293
1,270
1,270
761
796
668
247
389
346
563
895
526
550
423
490
565
363
455
493
441
714
746
111
839
907
0
0
0
0
0
0
0
0
0
0
17,681
20,056
19,950
20,160
18,876
0
0
0
0
0
16,509
19,667
20,520
19,397
18,618
1,172
389
-570
763
258
31,158
31,790
31,834
32,193
32,591
767
775
761
683
391
394
441
481
358
504
402
322
356
272
345
554
426
246
391
694
925
901
998
0
0
0
0
0
0
0
0
0
0
19,005
19,059
19,034
18,504
18,174
0
0
0
0
310
18,903
19,089
19,091
18,574
18,619
102
-30
-57
-70
-135
377
217
485
422
465
279
247
380
597
361
880
171
612
820
229
533
320
393
291
321
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
32,869
33,918
35,338
37,692
39,619
1,123
774
793
1,122
841
941
1,044
1,007
1,065
1,036
0
0
0
0
0
1,654
0
270 78th Annual Report, 1991
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-91 and Month-End 1991x—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
U.S. Treasury and
federal agency securities
Total
Other
All
Federal
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
13,733
13,159
11,982
10,367
10,367
Loans
Float2
Total
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 6
1965
1966
1967
1968
1969
40,768
44,316
49,150
52,937
57,154
40,478
43,655
48,980
52,937
7,1543
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
130,592
140,348
148,837
160,795
169,627
128,038
136,863
144,544
159,203
167,612
2,554
3,485
4,293
1,592
2,015
1,809
1,601
717
918
3,577
4,467
1,762
2,735
1,605
833
776
195
1,480
418
0
8,739
9,230
9,890
8,728
12,347
146,383
153,136
63,659
172,464
186,384
11,160
11,151
11,148
11,121
11,096
2,518
3,318
4,618
4,618
4,618
13,427
13,687
13,786
15,732
16,418
1985
1986
1987
1988
1989
191,248
221,459
231,420
247,489
235,417
186,025
205,454
226,459
240,628
233,300
5,223
16,005
4,961
6,861
2,117
3,060
1,565
3,815
2,170
481
988
1,261
811
1,286
1,093
0
0
0
0
0
15,302
17,475
15,837
18,803
39,631
210,598
241,760
251,883
269,748
276,622
11,090
11,084
11,078
11,060
11,059
4,718
5,018
5,018
5,018
8,518
17,075
17,567
18,177
18,799
19,620
1990
1991
259,786
288,429
241,432
272,531
18,354
15,898
190
218
2,566
1,026
0
0
39,880 302,421 11,058
34,524 324,197 11,059
10,018
10,018
20,404
21,038
1. For a description of figures and discussion of their
significance, see Banking and Monetary Statistics, 19411970 (Board of Governors of the Federal Reserve System, 1976), pp. 507-23. Components may not sum 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 Reserve liabilities and capital" are shown
separately.
5. Before Jan. 30, 1934, includes gold held in Federal
Reserve Banks and in circulation.
5,575
6,317
6,784
6,795
6,852
6. Includes currency and coin (other than gold) issued
directly by the Treasury. The largest components are
fractional and dollar coins. For details see "Currency and
Coin in Circulation," Treasury Bulletin.
7. Coin and paper currency held by the Treasury, as
well as any gold in excess of the gold certificates issued
to the Reserve Bank.
8. Beginning in November 1979, includes reserves of
member banks. Edge corporations, and U.S. agencies and
branches of foreign banks. Beginning on Nov. 13, 1980,
includes reserves of all depository institutions.
9. Between Dec. 1, 1959, and Nov. 23, 1960, part was
allowed as reserves; thereafter all was allowed.
10. Estimated through 1958. Before 1929, data were
available only on call dates (in 1920 and 1922 the call
dates were Dec. 29). Beginning on Sept. 12, 1968, the
amount is based on close-of-business figures for the reserve period two weeks before the report date.
Tables 271
14.—Continued
Factors absorbing reserve funds
Currency
in
circulation
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
136,829
144,774
154,908
171,935
183,796
197,488
211,995
230,205
247,649
260,453
286,965
307,780
Deposits, other
than reserves, with
Federal Reserve Banks
Treasury
cash
holdings 7
760
1,176
1,344
695
596
431
460
345
317
185
483
460
392
240
494
441
443
429
479
Foreign
Other
668
416
1,123
703
1,312
150
174
135
216
355
588
563
747
211
0
0
-147
-773
-1,353
0
0
134
807
0
0
0
0
0
1,156
2,020
1,855
2,542
2,113
148
294
325
251
418
353
352
379
368
1,233
0
1,41914
1,27514
0
0
0
0
0
1,090
1,357
1,187
1,256
1,412
617
781
Treasury
429
3,062
4,301
5,033
3,661
5,316
411
505
328
191
253
447
9,351
7,588
454
395
450
5,313
8,656
6,217
480
287
244
347
589
561
636
8,960
17,697
369
968
550
Required
clearing
balances
Other
Federal
Reserve
accounts4
7,285
10,393
7,114
4,196
4,075
513
Member bank
Other
Federal
Reserve
liabilities
and
capital4
999
840
1,033
851
867
1,041
917
1,027
548
1,298
242
1,706
CurWith
Federal rency
Reserve and
coin 9
Banks
Required 10
Ex-
-238
-232
-182
-700
-901
0
0
18,447
19,779
21,092
21,818
22,085
4, 163
4,310
4,631
4,921
5,187
22,848
24,321
25,905
27,439
28,173
0
0
0
0
1,986
2,131
2,143
2,669
2,935
24,150
27,788
25,647
27,060
25,843
5,423
5,743
6,216
6,781
7,370
-460
30,033
1,035
32,496
32,044
98 13
35,268 -1,360
37,011 -3,798
0
0
0
0
0
0
0
0
0
0
2,968
3,063
3,292
4,275
4,957
26,052
25,158
26,870
31,152
29,792
8,036
8,628
9,421
10,538
11,429
35,197
35,461
37,615
42,694
44,217
0
0
0
0
0
0
117
436
1,013
1,126
4,671
5,261
4,990
5,392
5,952
27,456
25,111
26,053
20,413
20,693
13,654
15,576
16,666
17,821
40,558
675
42,145 -1,442
41,391
1,328
39,179
-945
i
ii
0
0
0
0
0
1,490
1,812
1,687
1,605
1,626
5,940
6,088
7,129
7,683
8,486
27,141
46,295
40,097
37,742
36,701
0
0
1,963
3,955
8,147
8,113
36,695
25,458
11. Beginning Dec. 1, 1966, includes federal agency
obligations held under repurchase agreements and beginning Sept. 29, 1971, federal agency issues bought
outright.
12. Beginning in 1969, includes securities loaned—
fully guaranteed by U.S. government securities pledged
with Federal Reserve Banks—and excludes securities
sold and scheduled to be bought back under matched
sale-purchase 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,
$172; Q3, $112; Q4, $84; 1974—Ql, $67; Q2, $58. The
transition period ended with the second quarter of 1974.
reserves 8
i
n.a.
n.a.
-1,10315
-1,535
-1,265
-893
-2,835
n.a.
1I 1
14. For the period before July 1973, includes certain
deposits of domestic nonmember banks and foreignowned 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.
272 78th Annual Report, 1991
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-91, and Month-End 19911—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
Gold
stock5
Snecial
drawing
rights
certificate
account
Treasury
currency
outstanding 6
11,058
11,058
11,058
11,058
11,057
11,062
11,062
11,062
11,062
11,059
11,058
11,059
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
20,461
20,519
20,577
20,644
20,697
20,752
20,783
20,841
20,889
20,940
20,982
21,038
U.S. Treasury and
federal agency securities
Total
Bought
outright12
1991
Jan. .. 257,722 240,648
Feb. .. 259,012 242,978
Mar. .. 247,307 247,307
250,743 250,743
May '.'. 254,324 254,324
June .. 255,136 253,697
July .. 257,137 257,137
Aug. .. 261,118 261,118
Sept. . 264,708 264,708
Oct. .. 273,834 265,101
Nov. .. 271,302 271,302
Dec. .. 288,429 272,531
Held
under
repurchase
agreement
17,074
16,034
0
0
0
1,439
0
0
0
8,733
0
15,898
Loans
Float2
180
506
244
291
205
1,479
574
844
315
153
105
218
690
684
2,542
1,263
503
280
1,006
191
285
798
853
1,026
Other
All
Federal
other3 Reserve
assets4
0
0
0
0
0
0
0
0
0
0
0
0
41,458
38,706
36,639
36,584
36,166
34,992
35,014
31,334
32,365
32,765
32,420
34,524
Total
300,049
298,907
286,731
288,881
291,199
291,887
293,731
293,487
297,672
307,549
304,680
324,197
Tables 273
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Currency
in
circulation
Treasury
cash
holdings
Treasury
Foreign
Othpr
wincr
283,011
285,176
286,685
286,794
290,509
291,563
292,596
294,892
293,512
296,522
301,817
307,780
590
605
623
652
629
613
605
605
607
631
636
636
27,810
23,898
10,922
13,682
6,619
11,822
5,831
6,745
7,928
18,111
6,317
17,697
271
329
228
292
196
224
314
256
385
223
346
968
183
171
188
276
225
213
212
219
283
213
221
1,706
counts
Required
clearing
balances
Other
Federal
Reserve
liabilities
and
capital4
0
0
0
0
0
0
0
0
0
0
0
0
2,275
2,434
2,674
2,909
3,018
3,034
3,147
3,165
3,177
3,310
3,795
3,955
9,820
8,216
5,670
6,826
8,570
7,082
8,165
8,729
9,522
8,354
10,156
8,113
Other
Federal
Reserve
ac-
Member bank
reserves8
CurWith
Federal rency
Reserve and
coin 9
Banks
17,627
19,674
21,393
19,172
23,205
19,167
24,724
20,798
24,228
22,203
23,450
25,458
ExRequired10 cess10'13
i k,
n.a.
f
n.a.
n.a.
II
274
78th Annual Report, 1991
15. Changes in Number of Banking Offices in the United States, 1991 *
Commercial banks 2
Type of office
and change
Banks, Dec. 31, 1990...
Changes during 1991
New banks
Ceased banking
operation
Banks converted
into branches
Other4
Member
Total
Mutual
savings
Nonmember
Total
13,032
12,669
Total
National
State
Insured
5,040
3,986
1,054
7,356
Noninsured3
273
Insured
Noninsured
363
105
102
39
31
8
63
0
3
-155
-136
-57
-49
-8
-67
-12
-19
-All
66
^08
48
-187
3
-151
-36
1
-221
28
0
17
-9
18
-35
-197
5
-7
1,019
7,159
278
356
107
2,886
2
-401
Net change
-394
-202
-167
Banks, Dec. 31,1991 ..
12,631
12,275
4,838
3,819
Branches and
additional offices,
Dec. 31, 1990
Changes during 1991
De novo
Banks converted
into branches
Discontinued
Sale of branch
Other4
Net change
4
Branches and
additional offices,
Dec. 31,1991 . . .
54,191
51,305
33,270
27,365
5,905
17,928
2,694
2,480
1,595
1,375
220
881
417
-1,240
0
79
408
-1,164
50
130
255
-822
38
663
215
-692
19
244
40
-130
19
419
153
-340
12
-533
1,950
1,904
1,729
1,161
568
173
214
0
-2
0
0
9
-76
-50
-51
46
56,141
53,209
34,999
28,526
1. Preliminary. Final data will be available in the
Annual Statistical Digest, 1991, forthcoming.
2. Includes stock savings banks, nondeposit trust companies, private banks, industrial banks, and nonbank
banks.
6,473
18,101
109
2,932
3. As of Dec. 31, 1988, includes noninsured national
trust companies.
4. Includes interclass changes,
Tables 275
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1991
Correction: On page 254 of the Board's 77th
Annual Report, 1990, the entry for the merger of
Texas Bank with Citizens National Bank contains
an error. The entry should read:
Texas Bank, Weatherford, Texas to merge with
Citizens National Bank, Denton, Texas
Isabella Bank and Trust, M t Pleasant, Michigan to acquire certain assets and liabilities of the
Beal City branch of First of America Bank, Mt.
Pleasant, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12/5/90)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(01/14/91)
Isabella Bank (Applicant) has assets of $183 million and the Beal City branch (Branch) has assets
of $3.9 million. Applicant and Branch operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
United New Mexico Bank at Albuquerque, Albuquerque, New Mexico to acquire the assets
and liabilities of American Bank, N.A., Rio
Rancho, New Mexico
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/25/91)
United New Mexico Bank (Applicant) has assets
of $360 million and American Bank (Bank) has
assets of $22 million. The OCC has recommended
immediate action by the Federal Reserve System
to prevent the probable failure of Bank.
Fleet Bank of Maine, Portland, Maine to acquire the assets and liabilities of Maine Savings
Bank, Portland, Maine
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as autho
rized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2/1/91)
Fleet Bank of Maine (Applicant) has assets of
$1.8 billion and the Maine Savings Bank (Bank)
has assets of $1.4 billion. The Maine Superintendent for the Bureau of Banking has recommended
immediate action by the Federal Reserve System
to prevent the probable failure of Bank.
Dollar Savings and Trust Company, Youngstown, Ohio to acquire the assets and liabilities of
The McKinley Bank, Niles, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2/22/91)
Dollar Savings and Trust Company (Applicant)
has assets of $1.0 billion and The McKinley Bank
(Bank) has assets of $66 million. The State of
Ohio has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Bank.
Moorcroft State Bank, Moorcroft, Wyoming to
acquire the assets and liabilities of The National
Bank of Newcastle, Newcastle, Wyoming
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1/24/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/4/91)
Moorcroft State Bank (Applicant) has assets of
$11.0 million and The National Bank of Newcastle (Bank) has assets of $20.5 million. Applicant
and Bank do not operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Citizens Bank & Trust Company, Blackstone,
Virginia to acquire the assets and liabilities of the
Blackstone, Virginia, branch of First Colonial
Savings Bank, Hopewell, Virginia
276 78th Annual Report, 1991
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1991—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3/5/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/8/91)
Citizens Bank & Trust Company (Applicant) has
assets of $122.6 million and the Blackstone
branch (Branch) has assets of $8.7 million. Applicant and Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
First United Bank, Boca Raton, Florida to acquire the assets and liabilities of First Marine
Bank of Florida, Palm City, Florida
of Commonwealth Federal Savings and Loan,
Fort Lauderdale, Florida through SouthTrust
of Florida FSB, St. Petersburg, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3/5/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/8/91)
SouthTrust Bank of Pinellas County (Applicant)
has assets of $252.3 million and Commonwealth
Federal Savings and Loan (Thrift) has assets of
$33.1 million. Applicant and Thrift operate in the
same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/8/91)
First United Bank (Applicant) has assets of
$50.2 million and First Marine Bank of Florida
(Bank) has assets of $16.5 million. The Department of Banking and Finance, State of Florida has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Bank.
The Peoples Bank, Pratt, Kansas to acquire the
assets and liabilities of Sharon Valley State
Bank, Sharon, Kansas
SUMMARY REPORT BY THE ATTORNEY GENERAL
(01/01/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/8/91)
The Peoples Bank (Applicant) has assets of
$134 million and Sharon Valley State Bank (Bank)
has assets of $6 million. Applicant and Bank do
not operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
SouthTrust Bank of PineUas County, St. Petersburg, Florida to acquire the assets and liabilities
UnionBank/Streator, Streator, Illinois to acquire the assets and liabilities of Ottawa National
Bank, Ottawa, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3/8/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/22/91)
UnionBank/Streator (Applicant) has assets of
$151.9 million and Ottawa National Bank (Bank)
has assets of $54.9 million. Applicant and Bank
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Tiog State Bank, Spencer, New York to acquire
the assets and liabilities of the Waverly branch
of Norstar Bank, N.A., Buffalo, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2/21/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4/5/91)
Tiog State Bank (Applicant) has assets of
$78.7 million and the Waverly branch (Branch)
has assets of $13.5 million. Applicant and Branch
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Tables 277
16.—Continued
Caliber Bank, Phoenix, Arizona to acquire the
assets and liabilities of the Phoenix and Mesa
Arizona branches of Arizona Commerce Bank,
Tucson, Arizona
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4/10/91)
Caliber Bank (Applicant) has assets of $1.0 million and the Phoenix and Mesa Arizona branches
(Branches) of Arizona Commerce Bank have
assets of $20.5 million. The State Banking Commissioner has recommended immediate action by
the Federal Reserve System to prevent the probable failure of Arizona Commerce Bank.
Manufacturers Hanover Trust Company, New
York, New York to acquire the assets and liabilities of thirteen branches of Goldome, Buffalo,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/11/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4/19/91)
Manufacturers Hanover Trust Company (Applicant) has assets of $58 billion and the thirteen
branches of Goldome (Branches) have assets of
$1.5 billion. Applicant and Branches operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Chemical Bank Bay Area, Bay City, Michigan
to acquire the assets and liabilities of the Marlette, Michigan, branch of First Federal Savings Bank and Trust, Pontiac, Michigan from
Old Kent Bank-Central, Owosso, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/19/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4/23/91)
Chemical Bank (Applicant) has assets of $232 million and the Marlette branch (Branch) has assets of
$15.9 million. Applicant and Branch operate in the
same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Vectra Bank, Denver, Colorado to merge with
Columbine Valley Bank and Trust, Littleton,
Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/1/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(04/26/91)
Vectra Bank (Applicant) has assets of $42.5 million and Columbine Valley Bank and Trust (Bank)
has assets of $7.2 million. Applicant and Branch
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Signet Bank/Virginia, Richmond, Virginia to
acquire the assets and liabilities of Madison
National Bank of Virginia, McLean, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/10/91)
Signet Bank/Virginia (Applicant) has assets of
$8.2 billion and Madison National Bank of Virginia (Bank) has assets of $139.8 million. The
OCC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Bank.
Centura Bank, Rocky Mount, North Carolina
to acquire the assets and liabilities of the Wilmington, North Carolina, branch of Pioneer
Savings Bank, Inc., Rocky Mount, North
Carolina
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.
278 78th Annual Report, 1991
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1991—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/17/91)
Centura Bank (Applicant) has assets of $2.3 billion and the Wilmington branch (Branch) has
assets of $11.1 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent probable failure of Pioneer Savings Bank.
(6/14/91)
Chemical Bank Michigan (Applicant) has assets
of $147.7 million and the Harrison branch
(Branch) has assets of $6.3 million. Applicant and
Branch operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Centura Bank, Rocky Mount, North Carolina
to acquire the assets and liabilities of Watauga
Savings and Loan Association, Inc., Boone,
North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/12/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/17/91)
Centura Bank (Applicant) has assets of $2.3 billion and Watauga Savings and Loan (Thrift) has
assets of $120.1 million. Applicant and Thrift do
not operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Manufacturers and Traders Trust Co., Buffalo,
New York to acquire the assets and liabilities of
various branches of Goldome, Buffalo, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/17/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/31/91)
Manufacturers and Traders Trust Co. (Applicant)
has assets of $5.3 billion and the Goldome
branches (Branches) have assets of $1.9 billion. Applicant and Branches operate in the same
market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Chemical Bank Michigan, Midland, Michigan
to acquire the assets and liabilities of the Harrison, Michigan, office of Mutual Savings Bank,
FSB, Bay City, Michigan
United Jersey Bank, Hackensack, New Jersey
to acquire the assets and liabilities of the North
Arlington and Tenafly branches of Howard
Savings Bank, Livingston, New Jersey
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5/13/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/28/91)
United Jersey Bank (Applicant) has assets of
$6 billion and the North Arlington and Tenafly
branches (Branches) have assets of $172 million. Applicant and Branches operate in the same
market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Fleet Bank of Maine, Portland, Maine to acquire the assets and liabilities of New Maine
National Bank, Portland, Maine
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6/28/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/1/91)
Fleet Bank of Maine (Applicant) has assets of
$2.8 billion and the New Maine National Bank
(Bank) has assets of $1.0 billion. Applicant and
Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
SUMMARY REPORT BY THE ATTORNEY GENERAL
Crestar Bank, Richmond, Virginia to acquire
the assets and liabilities of the Heritage Federal
Savings Bank, Richmond, Virginia
(5/17/91)
The proposed transaction would not be significantly adverse to competition.
No report received. Request for report on the
competitive factors was dispensed with, as autho-
SUMMARY REPORT BY THE ATTORNEY GENERAL
Tables 279
16.—Continued
rized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
Haygood and Kempsville branches of Atlantic
Permanent, FSB, Norfolk, Virginia
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
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.
(7/5/91)
Crestar Bank (Applicant) has assets of $11.7 billion and Heritage Federal Savings Bank (Bank)
has assets of $542 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of Bank.
Fifth Third Bank, Cincinnati, Ohio, and Fifth
Third Bank of Columbus, Ohio to acquire the
assets and liabilities of nine branches of the
Chase Bank of Ohio, Columbus, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7/9/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/12/91)
Fifth Third Bank of Cincinnati has assets of
$4.5 billion and Fifth Third Bank of Columbus
(Applicants) have assets of $422 million and the
nine branches (Branches) have total assets of
$225 million. Applicants and Branches operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
St. Bernard Bank & Trust Company, Arabi,
Louisiana to acquire the assets and liabilities of
Commonwealth Federal Savings Association,
New Orleans, 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.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/12/91)
St. Bernard Bank & Trust Company (Applicant)
has assets of $180.1 million and Commonwealth
Federal Savings Association (Thrift) has assets of
$30.8 million. The RTC has recommended immediate action by the Federal Reserve System to
prevent the probable failure of Thrift.
The Bank of Tidewater, Virginia Beach, Virginia to acquire the assets and liabilities of the
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/12/91)
The Bank of Tidewater (Applicant) has assets of
$79.7 million and the Haygood and Kempsville
branches (Branches) have assets of $24.4 million.
The RTC has recommended immediate action by
the Federal Reserve System to prevent the probable failure of Atlantic Permanent.
The Bank of New York, FSB, New York, New
York to acquire the assets and liabilities of the
Monsey branch of Ensign FSB, New York,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/19/91)
The Bank of New York (Applicant) has assets of
$36.6 billion and the Monsey branch (Branch) has
assets of $100 million. Applicant and Branch operate in the same market. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of Ensign.
Chemical Bank, New York, New York to acquire the assets and liabilities of nine New York
City and two Westchester County, New York,
branches of Ensign FSB, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/19/91)
Chemical Bank (Applicant) has assets of $47.6 billion and the branches (Branches) have assets of
280 78th Annual Report, 1991
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1991—Continued
$588 million. The RTC has recommended immediate action by the Federal Reserve System to
prevent the probable failure of Ensign.
First State Bank, Beebe, Arkansas to acquire
the assets and liabilities of the Indian Hills
branch of First Savings of Arkansas, F.A., Little
Rock, Arkansas
assets of $77.4 million. The OTS and RTC have
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Bank.
1st United Bank, Boca Raton, Florida to acquire
the assets and liabilities of Bank of South Palm
Beaches, Hypoluxo, Florida
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.
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/26/91)
First State Bank (Applicant) has assets of
$25.1 million and the Indian Hills Branch
(Branch) has assets of $13 million. The OTS has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
First Savings.
Central Bank of Oklahoma City, Oklahoma
City, Oklahoma to merge with Lakeshore Bank,
N.A., Oklahoma City, Oklahoma
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6/12/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/1/91)
Central Bank (Applicant) has assets of
Bank (Bank) has assets of $270.6 million. Applicant and Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Central Bank, Monroe, Louisiana to acquire the
assets and liabilities of Homestead Savings Bank
(8/9/91)
1st United Bank (Applicant) has assets of
$65.5 million and Bank of South Palm Beaches
(Bank) has assets of $43.2 million. The Florida
State Banking Commissioner has recommended
immediate action by the Federal Reserve System
to prevent the probable failure of Bank.
Banco Popular de Puerto Rico, Hato Rey,
Puerto Rico to acquire the assets and liabilities of
a branch of The New York Capital Bank, N.A.,
New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/13/91)
Banco Popular de Puerto Rico (Applicant) has
assets of $8.8 billion and the branch (Branch) has
assets of $68 million. The OCC has recommended
immediate action by the Federal Reserve System
to prevent the probable failure of The New York
Capital Bank.
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/2/91)
Central Bank (Applicant) has assets of $677.4 million and Homestead Savings Bank (Bank) has
Citizens Fidelity Bank and Trust Company,
Louisville, Kentucky to acquire the assets and
liabilities of the main office and the Shively,
Jeffersontown, Okolona/Highview, Highlands,
Fern Creek/Buechel, St. Matthews, Pleasure
Ridge Park, and Middletown branches in
Louisville and the Glasgow and Tompkinsville,
Kentucky, branch offices of Future FSB, Louisville, Kentucky
Tables 281
16.—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/30/91)
Citizens Fidelity Bank and Trust Company (Applicant) has assets of $52 billion and the branches
(Branches) have assets of $326 million. The RTC
has recommended immediate action by the Federal Reserve System to prevent the probable failure of Future.
Trustco Bank New York, Schenectady, New
York to acquire the assets and liabilities of
Home & City Savings Bank, Albany, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(06/03/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/30/91)
Trustco Bank New York (Applicant) has assets of
$927 million and Home & City Savings Bank
(Bank) has assets of $866 million. Applicant and
Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Premier Bank (formerly Bank of Shawsville),
Shawsville, Virginia to acquire the assets and
liabilities of Bank of Speedwell, Speedwell,
Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/16/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/6/91)
Premier Bank (Applicant) has assets of $42 million and Bank of Speedwell (Bank) has assets of
$105 million. Applicant and Bank operate in the
same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Johnstown Bank and Trust Company,
Johnstown, Pennsylvania to acquire the assets
and liabilities of Peoples FSB, New Kensington,
Pennsylvania through BT Interim FSB,
Johnstown, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/6/91)
Johnstown Bank and Trust Company (Applicant)
has assets of $437.9 million and Peoples Federal
Savings Bank (Bank) has assets of $97.1 million.
The RTC has recommended immediate action by
the Federal Reserve System to prevent the probable failure of Bank.
Commercial Trust and Savings Bank, Mitchell,
South Dakota to acquire the assets and liabilities
of First FSB, Huron, South Dakota, through
Mitchell Interim FSB, Mitchell, South Dakota
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/13/91)
Commercial Trust and Savings Bank (Applicant)
has assets of $140.9 million and First FSB (Bank)
has assets of $26.4 million. The OTS and RTC
have recommended immediate action by the Federal Reserve System to prevent the probable failure of Bank.
Hand County State Bank, Miller, South Dakota
to acquire the assets and liabilities of Miller
Savings, Miller, South Dakota
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/13/91)
Hand County State Bank (Applicant) has assets of
$44.8 million and Miller Savings (Bank) has assets
282 78th Annual Report, 1991
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1991—Continued
of $5.4 million. The OTS and RTC have recommended immediate action by the Federal Reserve
System to prevent the probable failure of Bank.
Pioneer Bank of Longmont, Longmont, Colorado to acquire the assets and liabilities of First
America Federal Savings Bank, Longmont,
Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/13/91)
Pioneer Bank of Longmont (Applicant) has assets
of $24.2 million and First America Federal Savings Bank (Bank) has assets of $10.7 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Bank.
Farmers & Merchants Bank, Huron, South Dakota to acquire the assets and liabilities of Farmers & Merchants Savings Bank, FSB, Huron,
South Dakota
eral Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/20/91)
Crestar Bank (Applicant) has assets of $10.3 billion and United FSB (Bank) has assets of
$272 million. The RTC has recommended immediate action by the Federal Reserve System to
prevent the probable failure of Bank.
Marine Bank of Springfield, Springfield, Illinois to acquire the assets and liabilities of the
Taylorsville branch of United Savings Association of America, Chicago, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/27/91)
Marine Bank of Springfield (Applicant) has assets
of $694.4 million and the Taylorsville branch
(Branch) has assets of $31.4 million. The OTS has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
United.
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.
Ireland Bank, Malad City, Idaho to acquire the
assets and liabilities of the Soda Springs, Grace,
and Lava Hot Springs branches of Security
State Bank, Soda Springs, Idaho
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/13/91)
Farmers & Merchants Bank (Applicant) has assets
of $143 million and Fanners & Merchants Savings
Bank (Bank) has assets of $3.7 million. The OTS
and RTC have recommended immediate action by
the Federal Reserve System to prevent the probable failure of Bank.
Crestar Bank, Richmond, Virginia to acquire
the assets and liabilities of United FSB, Vienna,
Virginia through CRFC Interim FSB, Richmond, Virginia
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 Fed
(8/2/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/4/91)
Ireland Bank (Applicant) has assets of $42 million
and the branches (Branches) have assets of
$14 million. Applicant and Branches operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Beaver Trust Company, Beaver, Pennsylvania
to merge with Colony FSB, Wexford, Pennsylvania through Interim FSB, New Castle,
Pennsylvania
Tables 283
16.—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve system to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/11/91)
Beaver Trust Company (Applicant) has assets of
$285 million and Colony FSB (Bank) has assets of
$222 million. The OTS and RTC have recommended immediate action by the Federal Reserve
System to prevent the probable failure of Bank.
SouthTrust Bank of Pinellas County, St. Petersburg, Florida to acquire the assets and liabilities
of a branch of Florida Bank of Commerce,
Clearwater, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/11/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/30/91)
SouthTrust Bank of Pinellas County (Applicant)
has assets of $257.2 million and the branch
(Branch) has assets of $18.0 million. Applicant
and Branch operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Centura Bank, Rocky Mount, North Carolina
to acquire the assets and liabilities of Citizens
Federal Savings and Loan Association, Rutherfordton, North Carolina, through Centura
Interim Bank, Rutherfordton, North Carolina
Chemical Bank, New York, New York to acquire the assets and liabilities of Community
National Bank & Trust Company of New York,
Staten Island, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/8/91)
Chemical Bank (Applicant) has assets of $47.6 billion and Community National Bank & Trust Company of New York (Bank) has assets of $322 million. The OCC has recommended immediate
action by the Federal Reserve system to prevent
the probable failure of Bank.
The Provident Bank, Cincinnati, Ohio to merge
with Hunter Savings Association, Cincinnati,
Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/13/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/13/91)
The Provident Bank (Applicant) has assets of
$22 billion and Hunter Savings Association
(Thrift) has assets of $1.0 billion. Applicant and
Thrift operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Clifton Trust Bank, Cockeysville, Maryland to
merge with The Commercial Bank, Bel Air,
Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/4/91)
The proposed transaction would not be significantly adverse to competition.
(10/18/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/1/91)
Centura Bank (Applicant) has assets of $2.2 billion and Citizens Federal Savings and Loan Association (Thrift) has assets of $79.2 million. Applicant and Thrift operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
(11/13/91)
Clifton Trust Bank (Applicant) has assets of
$66 million and Commercial Bank (Bank) has
assets of $215 million. Applicant and Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
284 78th Annual Report, 1991
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1991—Continued
Johnstown Bank and Trust Company,
Johnstown, Pennsylvania to acquire the assets
and liabilities of Somerset branch of Atlantic
Financial Savings, FA, Bala Cynwyd, Pennsylvania, through BT Interim FSB, Johnstown,
Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/15/91)
Johnstown Bank and Trust Company (Applicant)
has assets of $516.3 million and the branch
(Branch) has assets of $26.2 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Atlantic Financial.
First State Bank of Taos, Taos, New Mexico to
merge with National Bank of Albuquerque,
Albuquerque, New Mexico
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/27/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/15/91)
First State Bank of Taos (Applicant) has assets of
$57 million and National Bank of Albuquerque
(Bank) has assets of $54 million. Applicant and
Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Auburn State Bank, Auburn, Indiana to merge
with Citizens State Bank, Waterloo, Indiana
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/25/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/18/91)
Auburn State Bank (Applicant) has assets of
$93.6 million and Citizens State Bank (Bank) has
assets of $16.1 million. Applicant and Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Fifth Third Bank of Columbus to acquire the
assets and liabilities of one branch office of
Chase Bank of Ohio, Columbus, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/16/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/19/91)
Fifth Third Bank (Applicant) has assets of
$441.9 million and the branch (Branch) has assets
of $58.7 million. Applicant and Branch operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
1st Source Bank, South Bend, Indiana to acquire the assets and liabilities of the LaPaz
branch, LaPaz, Indiana, of Norcen Bank,
Culver, Indiana
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/4/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/21/91)
1st Source Bank (Applicant) has assets of
$980.6 million and the LaPaz branch (Branch) has
assets of $25.6 million. Applicant and Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Manufacturers and Traders Trust Company,
Buffalo, New York to merge with The First National Bank of Highland, Newburgh, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/8/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/27/91)
Manufacturers and Traders Trust Company (Applicant) has assets of $6.6 billion and The First
National Bank of Highland (Bank) has assets of
Tables 285
16.—Continued
$451.5 million. Applicant and Bank do not operate
in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
assets of $257.1 million. Applicant and Branches
do not operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Fifth Third Bank, Cincinnati, Ohio to acquire
the assets and liabilities of MidFed Savings
Bank, Middletown, Ohio
Marine Bank of Springfield, Springfield, Illinois to acquire the assets and liabilities of the
Taylorville, Illinois, branch of Champion Federal Savings and Loan Association
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/1/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/26/91)
Fifth Third Bank (Applicant) has assets of
$4.9 billion and MidFed Savings Bank (Bank) has
assets of $240.5 million. Applicant and Bank do
not operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Chemical Bank, New York, New York to merge
with Manufacturers Hanover Trust Company,
New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/21/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/29/91)
Chemical Bank (Applicant) has assets of $48.5 billion and Manufacturers Hanover Trust Company
(Bank) has assets of $59.3 billion. Applicant and
Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Fifth Third Bank, Cincinnati, Ohio to acquire
the assets and liabilities of five branches of
Chase Bank of Ohio, Columbus, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/4/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/29/91)
Marine Bank of Springfield (Applicant) has assets
of $745.1 million and the Taylorville branch
(Branch) has assets of $74.2 million. Applicant
and Branch operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Lorain County Bank, Elyria, Ohio to merge
with the Greenwich and Shiloh, Ohio, branches
of Society Bank and Trust, Toledo, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/31/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/9/91)
Lorain County Bank (Applicant) has assets of
$421 million and the branches (Branches) have
assets of $19.9 million. Applicant and Bank operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
1st United Bank, Boca Raton, Florida to merge
with Mizner Bank, Boca Raton, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/1/91)
The proposed transaction would not be significantly adverse to competition.
(11/1/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/29/91)
Fifth Third Bank (Applicant) has assets of
$4.9 billion and the five branches (Branches) have
(12/17/91)
1st United Bank (Applicant) has assets of
$103.9 million and Mizner Bank (Bank) has assets
286 78th Annual Report, 1991
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1991—Continued
of $43.6 million. Applicant and Bank operate in
the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
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.
Institution!
Assets
(millions
of dollars)
First of America Bank-Northern Michigan, Traverse City, Michigan
Merger
First of America Bank-Manistee, Manistee, Michigan
588
PrimeBank, Federal Savings Bank, Grand Rapids, Michigan
Merger
First of America Bank-Holland, N.A., Holland, Michigan
425
United Jersey Bank, Hackensack, New Jersey
Merger
United Jersey Bank/Northwest, Randolph, New Jersey
Comerica Bank-Detroit, Detroit, Michigan
Merger
Comerica Bank, N.A., Jackson, Michigan
Star Bank, Northern Kentucky, Covington, Kentucky
Merger
Star Bank, N. A., Newport, Kentucky
Fanners Loan & Trust Company, Columbia City, Indiana
Merger
INB National Bank, Indianapolis, Indiana
United New Mexico Bank at Albuquerque, Albuquerque,
New Mexico
Merger
United New Mexico Bank at Rio Rancho, Rio Rancho, New Mexico
1/8/91
101
3/1/91
130
6249
3/15/91
535
10,200
3/21/91
1,800
298
4/9/91
182
81
4/19/91
1042
361
4/26/91
60
Centura Bank, Rocky Mount, North Carolina
Merger
Watauga Savings and Loan Association, Inc., Boone, North Carolina
2340
Jackson Exchange Bank and Trust Company, Jackson, Missouri
Merger
First Exchange Bank of Madison County, Fredericktown, Missouri ..
167
Date of
approval
5/17/91
120
4
6/27/91
Tables 287
16—Continued
Institutionl
Central Bank of Oklahoma City, Oklahoma City, Oklahoma
Merger
Lakeshore Bank, N.A., Oklahoma City, Oklahoma
Assets
(millions
of dollars)
247
618
Boatmen's Bank of Vandalia, Vandalia, Missouri
Merger
Boatmen's National Bank of St. Louis, St. Louis, Missouri
39
Old Kent Bank of Kalamazoo, Kalamazoo, Michigan
Merger
Old Kent Bank-Southwest, Niles, Michigan
First of America Bank-West Michigan, Grand Rapids, Michigan
(formerly PrimeBank, FSB)
Merger
First of America Bank-Muskegon, Muskegon, Michigan
Signet Bank/Maryland, Baltimore, Maryland
Merger
Signet Bank, National Association, Washington, D. C
United Missouri Bank Northeast, Monroe City, Missouri
Merger
United Missouri Bank of Paris, Paris, Missouri
Commonwealth Bank, Williamsport, Pennsylvania
Merger
County Bank, Montrose, Pennsylvania
First Bank of Troy, Troy, Michigan
Liberty State Bank, Mount Carmel, Pennsylvania
First Bank of Greater Pittston, Pittston, Pennsylvania
8/1/91
478
First of America Bank-Ann Arbor, Ann Arbor, Michigan
Merger
First of America Bank-Wayne, Wayne, Michigan
Norstar Bank of Upstate NY, Albany, New York
Merger
Norstar Bank of Central NY, Syracuse, New York
Date of
approval
8/1/91
104
46
8/5/91
2
4,600
8/30/91
125
788
9/30/91
351
578
9/30/91
380
3,307
10/3/91
14 2
32
10/31/91
38
1,327
11/21/91
184
135
64
137
Manufacturers and Traders Trust Company, Buffalo, New York .
Merger
The First National Bank of Highland, Newburgh, New York
11/27/91
6,600
452
Citizens Fidelity Bank and Trust Company, Louisville, Kentucky
Merger
Citizens Fidelity Bank and Trust Company, Lexington, Kentucky
11/29/91
5,200
455
Chemical Bank Michigan, Clare, Michigan
Merger
Chemical Bank Gladwin County, Beaverton, Michigan
12/9/91
146
67
288 78th Annual Report, 1991
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1991—Continued
Institutionl
Old Kent Bank-Chicago, Chicago, Illinois
Merger
Old Kent Bank, N. A., Elmhurst, Illinois
Assets
(millions
of dollars)
Date of
approval
537
12/24/91
740
1. Each proposed transaction was to be effected under
the charter of the first named bank. The entries are in
chronological order of approval.
2. Involves the acquisition of only certain assets and
liabilities of the affiliated bank.
Mergers Approved Involving a Nonoperating
Institution with an Existing Bank
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, whichever approved
the application, determined that the proposal
would, in itself, have no adverse competitive
effects and that the financial factors and considerations relating to the convenience and needs of the
community were consistent with approval.
The following transactions have no significant
effect on competition; they merely facilitate the
acquisition of the voting shares of a bank (or
banks) by a holding company. In such cases, the
Summary Report by the Attorney General indicates that the transaction will merely combine an
existing bank with a nonoperating institution; in
consequence, and without regard to the acquisition
Assets
(millions
of dollars)2
Institutionl
Commercial State Bank Interim of Orlando, Orlando, Florida
Merger
Commercial State Bank of Orlando, Orlando, Florida
Commercial Savings Bank of Florida, Miami, Florida
Merger
Commercial Bank of Florida, Miami, Florida
56
69
9/5/91
25
C & D Banking Company, Marietta, Ohio
Merger
The Dime Bank, Marietta, Ohio
9/20/91
35
Millersburg Interim Bank, Millersburg, Ohio
Merger
The Commercial & Savings Bank of Millersburg, Millersburg, Ohio .
7/12/91
7/19/91
Teutopolis Interim Bank, Teutopolis, Illinois
Merger
Teutopolis State Bank, Teutopolis, 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
11/14/91
154
2. Where no assets are listed, the bank is newly organized and not in operation,
Federal Reserve
Directories and Meetings
290 78th Annual Report, 1991
Board of Governors of the Federal Reserve System
December 31,1991
ALAN GREENSPAN of New York, Chairmanl
DAVID W. MULLINS, JR., of Arkansas, Vice Chairmanl
Term expires
January 31, 1992
January 31, 2000
SUSAN M. PHILLIPS of Iowa
WAYNE D. ANGELL of Kansas
January 31, 1998
January 31, 1994
LAWRENCE B. LINDSEY of Virginia
EDWARD W. KELLEY, JR., of Texas
JOHN P. LAWARE of Massachusetts
January 31, 2000
January 31, 2004
January 31, 2002
OFFICE OF BOARD MEMBERS
DIVISION OF CONSUMER
Joseph R. Coyne, Assistant to the Board
Donald J. Winn, Assistant to the Board
Theodore E. Allison, Assistant to the Board
for Federal Reserve System Affairs
Bob Stahly Moore, Special Assistant
to the Board
Diane E. Werneke, Special Assistant
to the Board
AND COMMUNITY AFFAIRS
Griffith L. Garwood, Director
Glenn E. Loney, Assistant Director
Ellen Maland, Assistant Director
Dolores S. Smith, Assistant Director
^
„
o
DIVISION OF BANKING SUPERVISION
AND REGULATION
LEGAL DIVISION
J. Virgil Mattingly, Jr., General Counsel
Scott G. Alvarez, Associate General
Counsel
n- u .j w A L* A
•
Richard M. Ashton, Associate
General Counsel
Oliver Ireland, Associate General
Counsel
Ricki R. Tigert, Associate General Counsel
Kathleen M. O'Day, Assistant General
Counsel
MaryEllen A. Brown, Assistant
to the General Counsel
Richard Spillenkothen, Director
Stephen C. Schemering, Deputy Director
^ Associate
Don £ j
Director
Frederick M. Struble, Associate Director
«r-«i A
^>
A « i
William A.
Ryback, Associate Director
__ .
. _/
. .
_.
Herbert A B i e m
«
' Assistant Director
R
° g e r T- C o l e ' distant 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
L a u r a M Homer, Securities Credit Officer
OFFICE OF THE SECRETARY
DIVISION OF INTERNATIONAL FINANCE
William W. Wiles, Secretary
Jennifer J. Johnson, Associate Secretary
Barbara R. Lowrey, Associate Secretary
Richard C. Stevens, Assistant Secretary2
Edwin M. Truman, Staff Director
Larry J. Promisel, Senior
Associate Director
Charles J. Siegman, Senior
Associate Director
Dale W. Henderson, Associate Director
David H. Howard, Senior Adviser
Donald B. Adams, Assistant Director
Peter Hooper III, Assistant Director
Karen H. Johnson, Assistant Director
Ralph W. Smith, Jr., Assistant Director
1. The Chairman is currently serving under a recess
appointment which will expire at the end of the 102d
Congress. The designation of Vice Chairman expires on
July 24, 1995, unless the service of this member of the
shall have terminated sooner.
DigitizedBoard
for FRASER
2. On loan from the Division of Information Re-
Directories and Meetings 291
DIVISION OF RESEARCH
OFFICE OF THE CONTROLLER
AND STATISTICS
George E. Livingston, Controller
Stephen J. Clark, Assistant Controller
Darrell R. Pauley, Assistant Controller
Michael J. Prell, Director
Edward C. Ettin, Deputy Director
William P. Jones, Associate 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
Patrick M. Parkinson, Assistant Director
Martha S. Scanlon, Assistant Director
Joyce K. Zickler, Assistant Director
Levon H. Garabedian, Assistant Director
(Administration)
DIVISION OF MONETARY AFFAIRS
Donald L. Kohn, Director
David E. Lindsey, Deputy Director
Brian F. Madigan, Assistant Director
Richard D. Porter, Assistant Director
Normand R.V. Bernard, Special Assistant
to the Board
OFFICE OF THE INSPECTOR GENERAL
Brent L. Bowen, Inspector General
Barry R. Snyder, Assistant Inspector
General
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT
S. David Frost, Staff Director
William C. Schneider, Jr., Project Director
Portia W. Thompson, Equal Employment
Opportunity Programs Officer
DIVISION OF SUPPORT SERVICES
Robert E. Frazier, Director
George M. Lopez, Assistant Director
David L. Williams, Assistant Director
DIVISION OF INFORMATION
RESOURCES MANAGEMENT
Stephen R. Malphrus, Director
Bruce M. Beardsley, Deputy Director
Robert J. Zemel, Senior Advisor
Marianne M. Emerson, Assistant Director
Po Kyung Kim, Assistant Director
Raymond H. Massey, Assistant Director
Edward T. Mulrenin, Assistant Director
Day W. Radebaugh, Jr., Assistant Director
Elizabeth B. Riggs, Assistant Director
DIVISION OF FEDERAL RESERVE BANK
OPERATIONS AND PAYMENT SYSTEMS
Clyde H. Farnsworth, Jr., Director
David L. Robinson, Deputy Director
(Finance and Control)
Bruce J. Summers, Deputy Director
(Payments and Automation)*
Charles W. Bennett, Assistant Director
Jack Dennis, Jr., Assistant Director
Earl G. Hamilton, Assistant Director
Jeffrey C. Marquardt, Assistant Director
John H. Parrish, Assistant Director
Louise L. Roseman, Assistant Director
Florence M. Young, 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
3. On loanfromFederal Reserve Bank of Richmond.
292 78th Annual Report, 1991
Federal Open Market Committee
December 31,1991
Members
ALAN GREENSPAN, Chairman, Board of Governors
E. GERALD CORRIGAN, Vice Chairman, President, Federal Reserve Bank of New York
WAYNE D. ANGELL, Board of Governors
ROBERT P. BLACK, President, Federal Reserve Bank of Richmond
ROBERT P. FORRESTAL, President, Federal Reserve Bank of Atlanta
SILAS KEEHN, President, Federal Reserve Bank of Chicago
EDWARD W. KELLEY, JR., Board of Governors
JOHN P. LAWARE, Board of Governors
LAWRENCE B. LINDSEY, Board of Governors
DAVID W. MULLINS, JR., Board of Governors
ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco
SUSAN M. PHILLIPS, Board of Governors
Alternate Members
THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City
THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis
RICHARD F. SYRON, President, Federal Reserve Bank of Boston
JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York
VACANCY, Federal Reserve Bank of Cleveland
Officers
DONALD L. KOHN,
Secretary and Economist
NORMAND R.V. BERNARD,
Deputy Secretary
JOSEPH R. COYNE,
Assistant Secretary
GARY P. GILLUM,
Assistant Secretary
J. VIRGIL MATTINGLY,
General Counsel
ERNEST T. PATRIKIS,
Deputy General Counsel
MICHAEL J. PRELL,
Economist
EDWIN M. TRUMAN,
Economist
JACK H. BEEBE,
J. ALFRED BROADDUS, JR.,
Associate Economist
RICHARD G. DAVIS,
Associate Economist
DAVID E. LINDSEY,
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
SHEILA L. TSCHINKEL,
Associate Economist
Associate Economist
PETER D. STERNLIGHT, Manager for Domestic Operations,
System Open Market Account
VACANCY, Manager for Foreign Operations,
System Open Market Account
During 1991, the Federal Open Market Committee held eight meetings (see Record of
Policy Actions of the Federal Open Market
Committee in this REPORT.)
Directories and Meetings 293
Federal Advisory Council
December 31,1991
Members
District 1—IRA STEPANIAN, Chairman and Chief Executive Officer,
Bank of Boston, Boston, Massachusetts
District 2—CHARLES S. SANFORD, JR., Chairman, Bankers Trust Company, New York,
New York
District 3—TERRENCE A. LARSEN, Chairman, President, and Chief Executive Officer,
CoreStates Financial Corp., Philadelphia, Pennsylvania
District 4—JOHN B. MCCOY, Chairman, President, and Chief Executive Officer,
Bane One Corporation, Columbus, Ohio
District 5—EDWARD E. CRUTCHFIELD, Chairman and Chief Executive Officer, First Union
Corporation, Charlotte, North Carolina
District 6—E. B. ROBINSON, JR., Chairman and Chief Executive Officer, Deposit Guaranty
Bank, Jackson, Mississippi
District 7—B. KENNETH WEST, Chairman and Chief Executive Officer,
Harris Bankcorp, Inc. and Harris Trust and Savings Bank, Chicago, Illinois
District 8—DAN W. MITCHELL, Chairman, Old National Bancorp and Old National Bank
of Evansville, Evansville, Indiana
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—RONALD G. STEINHART, Chairman and Chief Executive Officer,
Team Bank, Dallas, Texas
District 12—PAUL HAZEN, President and Chief Operating Officer, Wells Fargo and Co.,
San Francisco, California
Officers
PAUL HAZEN, President
LLOYD P. JOHNSON, Vice President
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVIK, Associate Secretary
Directors
IRA STEPANIAN
TERRENCE A. LARSEN
The Federal Advisory Council met on January 31-February 1, May 2-3, September
5-6, and October 31-November 1, 1991.
The Board of Governors met with the council on February 1, May 3, September 6, and
November 1, 1991. The council, which is
composed of one representative of the bank-
DAN W. MITCHELL
ing industry from each of 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,
294 78th Annual Report, 1991
Consumer Advisory Council
December 31,1991
Members
VERONICA E. BARELA, Executive Director, NEWSED Community Development Corp.,
Denver, Colorado
GEORGE H. BRAASCH, Corporate Credit Counsel, Spiegel, Inc., Oak Brook, Illinois
TOYE L. BROWN, Director, Freedom House, Inc., Boston, Massachusetts
CLIFF E. COOK, Vice President, Puget Sound National Bank, Tacoma, Washington
R. B. (JOE) DEAN, JR., Associate Director, South Carolina Downtown Development
Association, Columbia, South Carolina
DENNY D. DUMLER, Senior Vice President, Consumer Banking, Colorado National Bank
of Denver, Denver, Colorado
WILLIAM C. DUNKELBERG, Dean, School of Business and Management, Temple
University, Philadelphia, Pennsylvania
JAMES FLETCHER, President and Director, South Shore Bank Chicago, Chicago, Illinois
GEORGE C. GALSTER, Professor of Economics, The College of Wooster, Wooster, Ohio
E. THOMAS GARMAN, Professor of Consumer Studies, Virginia Polytechnic Institute and
State University, Blacksburg, Virginia
DONALD A. GLAS, President, First State Federal Savings and Loan Association,
Hutchinson, Minnesota
DEBORAH B. GOLDBERG, Reinvestment Specialist, Center for Community Change,
Washington, D.C.
MICHAEL M. GREENFIELD, Professor of Law, Washington University, St. Louis, Missouri
JOYCE HARRIS, President and Chief Executive Officer, Telco Community Credit Union,
Madison, Wisconsin
COLLEEN D. HERNANDEZ, Executive Director, Kansas City Neighborhood Alliance,
Kansas City, Missouri
JULIA E. HILER, Executive Vice President, Sunshine Mortgage Corporation, Marietta,
Georgia
HENRY JARAMILLO, JR., President, Ranchers State Bank, Belen, New Mexico
BARBARA KAUFMAN, Co-Director, KCBS Call for Action, San Francisco, California
KATHLEEN E. KEEST, Staff Attorney, National Consumer Law Center, Boston,
Massachusetts
MICHELLE S. MEIER, Counsel for Government Affairs, Consumers Union, Washington,
D.C.
BERNARD F. PARKER, JR., Executive Director, Community Resource Projects, Detroit,
Michigan
OTIS PITTS, JR., President, Tacolcy Economic Development Corp., Miami, Florida
VINCENT P. 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
NANCY HARVEY STEORTS, President, Nancy Harvey Steorts and Associates, Dallas, Texas
ALAN M. SILBERSTEIN, Executive Vice President, Chemical Bank, New York, New York
DAVID B. WARD, ESQ., Consultant, Beneficial Management Corp., Chester, New Jersey
SANDRA L. WILLETT, Consultant on Quality Service, Boston, Massachusetts
Directories and Meetings 295
Consumer Advisory Council—Continued
Officers
JAMES W. HEAD, Chairman
The Consumer Advisory Council met with
members of the Board of Governors on
March 14, June 20, and October 10, 1991.
The council is composed of academics, state
government officials, representatives of the
financial industry, and representatives of
LINDA K. PAGE, Vice Chairman
consumer and community interests. It was
established pursuant to the 1976 amendments to the Equal Credit Opportunity Act
to advise the Board on consumer financial
services,
Thrift Institutions Advisory Council
December 31,1991
Members
DANIEL C. ARNOLD, Chairman and President, Farm & Home Financial Corporation,
Houston, Texas
JAMES L. BRYAN, President and Chief Executive Officer, TEXINS Credit Union,
Richardson, Texas
DAVID L. HATFIELD, President, Fidelity Savings Bank, FSB, Kalamazoo, Michigan
LYNN W. HODGE, President and Chief Executive Officer, United Savings Bank, Inc.,
Greenwood, South Carolina
ELLIOTT K. KNUTSON, Chairman and Chief Executive Officer, Washington Federal Savings
and Loan Association, Seattle, Washington
JOHN WM. LAISLE, President and Chief Executive Officer, MidFirst Bank SSB, Oklahoma
City, Oklahoma
RICHARD A. LARSON, Chairman and Chief Executive Officer, West Bend Savings Bank,
West Bend, Wisconsin
PRESTON MARTIN, Chairman and Chief Executive Officer, WestFed Holdings, Inc.,
San Francisco, California
RICHARD D. PARSONS, President and Chief Executive Officer, The Dime Savings Bank of
New York, FSB, New York, New York
MARION O. SANDLER, President and Chief Executive Officer, World Savings and Loan
Association, Oakland, California
EDMOND M. SHANAHAN, President and Chief Executive Officer, Bell Federal Savings and
Loan Association, Chicago, Illinois
WOODBURY C. TITCOMB, President and Chief Executive Officer, Peoples Bancorp of
Worcester, Inc., and Peoples Savings Bank, Worcester, Massachusetts
Officers
MARION O. SANDLER, President
The members of the Thrift Institutions Advisory Council met with the Board of Governors on March 8, May 9, September 13, and
November 15, 1991. The council, which
is composed of representatives from credit
LYNN W. HODGE, 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.
296 78th Annual Report, 1991
Officers of Federal Reserve Banks, Branches, and Offices
December 31,1991*
BANK,
Branch, ox facility
Chairman2
Deputy Chairman
President
First Vice President
BOSTON3
Richard N. Cooper
Jerome H.
Grossman
Richard F. Syron
Cathy E. Minehan
NEW YORK 3 ....
Cyrus R. Vance
Ellen V. Futter
Mary Ann Lambertsen
E. Gerald Corrigan
James H. Oltman
PHILADELPHIA.
Peter A. Benoliel
Jane G. Pepper
Edward G. Boehne
William H. Stone, Jr.
CLEVELAND 3 ...
John R. Miller
A. William
Reynolds
Kate Ireland
Robert P. Bozzone
Vacant
William H.
Hendricks
Anne Marie
Whittemore
Henry J. Faison
John R. Hardesty, Jr.
Anne M. Allen
Robert P. Black
Jimmie R.
Monhollon
Larry L. Prince
Edwin A. Huston
Roy D. Terry
Hugh M. Brown
Dorothy C. Weaver
Shirley A. Zeitlin
JoAnn Slaydon
Robert P. Forrestal
Jack Guynn
Charles S. McNeer
Richard G. Cline
Phyllis E. Peters
Silas Keehn
Daniel M. Doyle
H. Edwin Trusheim
Robert H. Quenon
L. Dickson Flake
Lois H. Gray
Katherine Hinds
Smythe
Thomas C. Melzer
James R. Bowen
Delbert W. Johnson
Gerald A.
Rauenhorst
James E. Jenks
Gary H. Stern
Thomas E. Gainor
Buffalo
Cincinnati
Pittsburgh
RICHMOND 3 ....
Baltimore
Charlotte
James O. Aston
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
Ronald B.Duncan 4
Albert D.
Tinkelenberg4
John G. Stoides4
Donald E. Nelson
FredR.Herr 4
James D. Hawkins4
James T. Curry i n
Melvyn K. Purcell
Robert J. Musso
Roby L. Sloan4
Karl W. Ashman
Howard Wells
Raymond Laurence
John D. Johnson
Directories and Meetings 297
BANK,
Branch, or facility
Chairman 2
Deputy Chairman
President
First Vice President
KANSAS CITY
Fred W. Lyons, Jr.
Burton A. Dole, Jr.
Barbara B. Grogan
Ernest L. Holloway
Herman Cain
Thomas M. Hoenig
Henry R. Czerwinski
Hugh G. Robinson
Leo E. Linbeck, Jr.
W. Thomas Beard III
Gilbert D. Gaedcke, Jr.
Roger R.
Hemminghaus
Robert D. McTeer, Jr.
Tony J. Salvaggio
Robert F. Erburu
Carolyn S.
Chambers
Yvonne B. Burke
William A. Hilliard
D. N. Rose
Judith Runstad
Robert T. Parry
Patrick K. Barron
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
Sammie C. Clay
Robert Smith III 4
Thomas H. Robertson
John F. Moore 4
Leslie R. Watters
Andrea P. Wolcott
Gerald R. Kelly 4
1. A current list of these officers appears each month
in the Federal Reserve Bulletin.
2. The Chairman of a Federal Reserve Bank, by statute, serves as Federal Reserve Agent.
3. Additional offices of these Banks are located at
Lewiston, Maine; Windsor Locks, Connecticut; Cranford,
New Jersey; Jericho, New York; Utica at Oriskany, New
York; Columbus, Ohio; Columbia, South Carolina;
Charleston, West Virginia; Des Moines, Iowa; Indianapolis, Indiana; and Milwaukee, Wisconsin.
4. Senior Vice President.
Conference of Chairmen
On November 19, 1990, the Conference elected Thomas C. Melzer, President of the Federal Reserve Bank of St.
Louis, as its Chairman for 1991-92, and
Robert T. Parry, President of the Federal
Reserve Bank of San Francisco, as its
Vice Chairman. The Conference appointed Frances E. Sibley, of the Federal
Reserve Bank of St. Louis, as its Secretary and Elizabeth Masten, of the Federal Reserve Bank of San Francisco, as
its Assistant Secretary.
The Chairmen of the Federal Reserve Banks
are organized into the Conference of Chairmen, which meets to consider matters of
common interest and to consult with, and
advise, the Board of Governors. Such meetings, attended also by the Deputy Chairmen,
were held in Washington on May 29 and 30,
and on December 4 and 5, 1991.
The Executive Committee of the Conference of Chairmen during 1991 comprised
Peter A. Benoliel, Chairman; Hugh G. Robinson, Vice Chairman; and Larry L. Prince,
member.
On December 5, 1991, the Conference
Conference of First
elected its Executive Committee for 1992,
Vice
Presidents
naming Anne Marie Whittemore as Chairman, Delbert W. Johnson as Vice Chairman, The Conference of First Vice Presidents of
and Richard N. Cooper as the third member.
the Federal Reserve Banks was organized in
1969 to meet periodically for the considerConference of Presidents
ation of operations and other matters.
The presidents of the Federal Reserve Banks
On October 16, 1990, the Conference
are organized into the Conference of Presi- elected Jimmie R. Monhollon, First Vice
dents, which meets periodically to consider President of the Federal Reserve Bank of
matters of common interest and to consult Richmond, as its Chairman for 1991, and
with, and advise, the Board of Governors.
William H. Hendricks, First Vice President
298 78th Annual Report, 1991
of the Federal Reserve Bank of Cleveland, as
its Vice Chairman. The Conference appointed Marsha S. Shuler, of the Federal
Reserve Bank of Richmond as its Secretary,
and Creighton R. Fricek, of the Federal
Reserve Bank of Cleveland, 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 299
Term expires
Dec. 31
DISTRICT 1—BOSTON
Class A
William H. Chadwick
Terrence Murray
Norman F. C. Kent
Class B
Edward H. Ladd
Joan T. Bok
Stephen R. Levy
Class C
Jerome H. Grossman
Richard N. Cooper
John E. Flynn
Vice Chairman of the Board and Chief
Operating Officer, Banknorth Group, Inc.,
Burlington, Vermont
Chairman of the Board, President, and Chief
Executive Officer, Fleet/Norstar Financial
Group, Inc., Providence, Rhode Island
President, First National Bank of Portsmouth,
Portsmouth, New Hampshire
1991
1992
1993
Chairman and Chief Executive Officer, Standish,
Ayer and Wood, Inc., Boston, Massachusetts
Chairman of the Board, New England Electric
System, Westborough, Massachusetts
Chairman of the Board and Chief Executive
Officer, Bolt Beranek and Newman, Inc.,
Cambridge, Massachusetts
1991
Chairman of the Board and Chief Executive
Officer, New England Medical Center, Inc.,
Boston, Massachusetts
Maurits C. Boas Professor of International
Economics, Harvard University,
Cambridge, Massachusetts
Executive Director, The Quality Connection,
East Dennis, Massachusetts
1991
Chairman of the Board and Chief Executive
Officer, Manufacturers Hanover Trust
Company, New York, New York
Chairman of the Board, President, and Chief
Executive Officer, KeyCorp,
Albany, New York
Chairman of the Board and Chief Executive
Officer, Phillipsburg National Bank and Trust
Company, Phillipsburg, New Jersey
1991
1992
1993
1992
1993
DISTRICT 2 — N E W YORK
Class A
John F. McGillicuddy
Victor J. Riley, Jr.
Barbara Harding
Class B
Richard L. Gelb
John A. Georges
Chairman of the Board and Chief Executive
Officer, Bristol-Myers Squibb Company,
New York, New York
Chairman of the Board and Chief Executive
Officer, International Paper,
Purchase, New York
1992
1993
1991
1992
300 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 2, Class B— Continued
Rand V. Araskog
Class C
Maurice R. Greenberg
Cyrus R. Vance
Ellen V. Futter
Chairman and Chief Executive Officer, ITT
Corporation, New York, New York
1993
Chairman and Chief Executive Officer,
American International Group, Inc.,
New York, New York
Presiding Partner, Simpson Thacher & Bartlett,
New York, New York
President, Barnard College, New York, New York
1991
1992
1993
BUFFALO BRANCH
Appointed by the Federal Reserve Bank
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
Wilbur F. Beh
President and Chief Executive Officer, FNB of
Rochester, Rochester, New York
Susan A. McLaughlin
President, Eastman Savings and Loan
Association, Rochester, New York
Appointed by the Board of Governors
Mary Ann Lambertsen
Former Vice President - Human Resources and
Information Systems, Fisher-Price, Division
of The Quaker Oats Company,
East Aurora, New York
Herbert L. Washington
HLW Fast Track, Inc., Rochester, New York
Joseph J. Castiglia
President and Chief Executive Officer, Pratt &
Lambert, Inc., Buffalo, New York
1991
1991
1992
1993
1991
1992
1993
DISTRICT 3—PHILADELPHIA
Class A
H. Bernard Lynch
Samuel A. McCullough
Gary F. Simmerman
President and Chief Executive Officer, The First
National Bank of Wyoming,
Wyoming, Delaware
Chairman of the Board and Chief Executive
Officer, Meridian Bancorp, Inc.,
Reading, Pennsylvania
President and Chief Executive Officer,
United Jersey Bank/South, N.A.,
Cherry Hill, New Jersey
1991
1992
1993
Directories and Meetings 301
Term expires
Dec. 31
DISTRICT 3—Continued
Class B
Nicholas Riso
David W. Huggins
James M. Mead
Class C
Donald J. Kennedy
Peter A. Benoliel
Jane G. Pepper
Executive Vice President, AHOLD, U.S.A.,
Harrisburg, Pennsylvania
President, R M S Technologies, Inc.,
Marlton, New Jersey
President, Capital Blue Cross,
Harrisburg, Pennsylvania
1991
1992
1993
Business Manager, International Brotherhood of
Electrical Workers, Local Union No. 269,
Trenton, New Jersey
Chairman of the Board, Quaker Chemical
Corporation, Conshohocken, Pennsylvania
President, The Pennsylvania Horticultural
Society, Philadelphia, Pennsylvania
1991
President, The Park National Bank,
Newark, Ohio
Chairman of the Board and Chief Executive
Officer, Huntington Bancshares Incorporated,
Columbus, Ohio
President, Chairman and Chief Executive
Officer, Apple Creek Banking Company,
Apple Creek, Ohio
1991
President and Chief Executive Officer, Battelle
Memorial Institute, Columbus, Ohio
Chairman of the Board, Clearcreek Properties,
Lexington, Kentucky
Business Consultant, Columbus, Ohio
1991
1992
1993
DISTRICT 4—CLEVELAND
Class A
William T. McConnell
Frank Wobst
Alfred C. Leist
Class B
Douglas E. Olesen
Laban P. Jackson, Jr.
Verna K. Gibson
Class C
John R. Miller
A. William Reynolds
John R. Hodges
Former President and Chief Operating Officer,
The Standard Oil Company (Ohio),
Cleveland, Ohio
Chairman and Chief Executive Officer,
GenCorp, Fairlawn, Ohio
President, Ohio AFL-CIO, Columbus, Ohio
1992
1993
1992
1993
1991
1992
1993
CINCINNATI BRANCH
Appointed by the Federal Reserve Bank
Allen L. Davis
President and Chief Executive Officer, The
Provident Bank, Cincinnati, Ohio
1991
302 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 4, CINCINNATI BRANCH
Appointed by the Federal Reserve Bank—Continued
Clay Parker Davis
Jack W. Buchanan
Harry A. Shaw III
President and Chief Executive Officer, Citizens
National Bank, Somerset, Kentucky
President, Sphar & Company, Inc.,
Winchester, Kentucky
Chairman and Chief Executive Officer, Huffy
Corporation, Dayton, Ohio
Appointed by the Board of Governors
Kate Ireland
National Chairman of the Board, Frontier
Nursing Service, Wendover, Kentucky
Eleanor Hicks
Advisor for Intl. Liaison Protocol and Services
and Associate Professor of Political Science,
University of Cincinnati, Cincinnati, Ohio
Marvin Rosenberg
Partner, Towne Properties, Ltd., Cincinnati, Ohio
1992
1993
1993
1991
1992
1993
PITTSBURGH BRANCH
Appointed by the Federal Reserve Bank
E. James Trimarchi
President and Chief Executive Officer, First
Commonwealth Financial Corporation,
Indiana, Pennsylvania
William F. Roemer
Chairman and Chief Executive Officer,
Integra Financial Corporation,
Pittsburgh, Pennsylvania
George A. Davidson, Jr.
Chairman of the Board and Chief Executive
Officer, Consolidated Natural Gas Company,
Pittsburgh, Pennsylvania
I. N. Rendall Harper, Jr.
President, American Micrographics Company, Inc.,
Monroeville, Pennsylvania
Appointed by the Board of Governors
Jack B. Piatt
Chairman of the Board, Millcraft Industries, Inc.,
Washington, Pennsylvania
Robert P. Bozzone
President and Chief Executive Officer,
Allegheny Ludlum Corporation,
Pittsburgh, Pennsylvania
Sandra L. Phillips
Executive Director, Pittsburgh Partnership
for Neighborhood Development,
Pittsburgh, Pennsylvania
1991
1992
1993
1993
1991
1992
1993
DISTRICT 5—RICHMOND
Class A
C. R. Hill, Jr.
A. Pierce Stone
Executive Vice President, Beckley National
Bank, Oak Hill, West Virginia
Chairman, President, and Chief Executive
Officer, Virginia Community Bank,
Louisa, Virginia
1991
1992
Directories and Meetings 303
Term expires
Dec. 31
DISTRICT 5, Class A—Continued
James G. Lindley
Chairman, President, and Chief Executive
Officer, South Carolina National Bank,
Columbia, South Carolina
1993
President, The Covell Company, Easton, Maryland
Chairman, Dilmar Oil Company, Inc.,
Florence, South Carolina
Chairman, The North Carolina Enterprise
Corporation, Raleigh, North Carolina
1991
1992
Partner, McGuire, Woods, Battle & Boothe,
Richmond, Virginia
President, Faison Associates, Charlotte,
North Carolina
Executive Director, Consumer Federation of
America, Washington, D.C.
1991
Class B
Edward H. Covell
R. E. Atkinson, Jr.
Paul A. DelaCourt
1993
Class C
Anne Marie Whittemore
Henry J. Faison
Stephen Brobeck
1992
1993
BALTIMORE BRANCH
Appointed by the Federal Reserve Bank
Joseph W. Mosmiller
Chairman of the Board, Loyola Federal Savings
and Loan Association, Baltimore, Maryland
F. Levi Ruark
Chairman of the Board and President,
The National Bank of Cambridge,
Cambridge, Maryland
Richard M. Adams
Chairman and Chief Executive Officer, United
Bankshares, Inc., Parkersburg, West Virginia
Daniel P. Henson III
Senior Development Director, Struever Bros.,
Eccles & Rouse, Inc., Baltimore, Maryland
Appointed by the Board of Governors
Thomas R. Shelton
President, Case Foods, Inc., Salisbury, Maryland
John R. Hardesty, Jr.
President, Preston Energy, Inc., Kingwood,
West Virginia
William H. Wynn
International President, United Food and
Commercial Workers International Union,
AFL-CIO & CLC, Washington, D.C.
1991
1991
1992
1993
1991
1992
1993
CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank
Crandall C. Bowles
President, The Springs Company, Lancaster,
South Carolina
L. Glenn Orr, Jr.
Chairman, President, and Chief Executive
Officer, Southern National Corporation,
Lumberton, North Carolina
1991
1991
304 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 5, CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank—Continued
David B. Jordan
Jim M. Cherry, Jr.
President, Chief Executive Officer, and Director,
Omni Capital Group, Inc. and OMNIBANK,
Salisbury, North Carolina
President and Chief Executive Officer,
Williamsburg First National Bank,
Kingstree, South Carolina
Appointed by the Board of Governors
Harold D. Kingsmore
President and Chief Operating Officer,
Graniteville Company, Graniteville,
South Carolina
Anne M. Allen
President, Anne Allen & Associates, Inc.,
Greensboro, North Carolina
William E. Masters
President, Perception, Inc., Easley, South Carolina
1992
1993
1991
1992
1993
DISTRICT 6—ATLANTA
Class A
Virgil H. Moore, Jr.
W. H. Swain
James B. Williams
Class B
Saundra H. Gray
J. Thomas Holton
Andre M. Rubenstein
Class C
Larry L. Prince
Leo Benatar
Edwin A. Huston
Chairman of the Board, First Farmers and
Merchants National Bank,
Columbia, Tennessee
Chairman of the Board, First National Bank,
Oneida, Tennessee
Chairman and Chief Executive Officer, SunTrust
Banks, Inc., Atlanta, Georgia
1991
Co-Owner, Gemini Springs Farm,
DeBary, Florida
Chairman of the Board and President,
Sherman International Corporation,
Birmingham, Alabama
Chairman of the Board and Chief Executive
Officer, Rubenstein Brothers, Inc.,
New Orleans, Louisiana
1991
Chairman and Chief Executive Officer, Genuine
Parts Company, Atlanta, Georgia
Chairman of the Board and President, Engraph, Inc.,
Atlanta, Georgia
Senior Executive Vice President-Finance, Ryder
System, Inc., Miami, Florida
1992
1993
1992
1993
1991
1992
1993
Directories and Meetings 305
Term expires
Dec. 31
DISTRICT 6—Continued
BIRMINGHAM BRANCH
Appointed by the Federal Reserve Bank
Shelton E. Allred
Chairman of the Board, President, and Chief
Executive Officer, Frit Industries, Inc.,
Ozark, Alabama
William F. Childress
President, First American Federal Savings and
Loan Association, Huntsville, Alabama
Robert M. Barrett
Chairman and President, The First National
Bank of Wetumpka, Wetumpka, Alabama
Julian W. Banton
Chairman, President, and Chief Executive
Officer, SouthTrust Bank of Alabama, N.A.,
Birmingham, Alabama
Appointed by the Board of Governors
Roy D. Terry
President and Chief Executive Officer,
Terry Manufacturing Company, Inc.,
Roanoke, Alabama
Nelda P. Stephenson
President, Nelda Stephenson Chevrolet, Inc.,
Florence, Alabama
Donald E. Boomershine
President, Better Business Bureau of Central
Alabama, Inc., Birmingham, Alabama
1991
1991
1992
1993
1991
1992
1993
JACKSONVILLE BRANCH
Appointed by the Federal Reserve Bank
Perry M. Dawson
President and Chief Executive Officer, Suncoast
Schools Federal Credit Union, Tampa, Florida
Samuel H. Vickers
Chairman, President, and Chief Executive
Officer, Design Containers, Inc.,
Jacksonville, Florida
Merle L. Graser
Chairman and Chief Executive Officer, First
National Bank of Venice, Venice, Florida
Hugh H. Jones, Jr.
Chairman of the Board and Chief Executive
Officer, Barnett Bank of Jacksonville, N.A.,
Jacksonville, Florida
Appointed by the Board of Governors
Hugh M. Brown
President and Chief Executive Officer,
BAMSI, Inc., Titusville, Florida
Lana Jane Lewis-Brent
Vice Chairman of the Board, President, and
Chief Executive Officer, Sunshine Jr. Stores,
Inc., Panama City, Florida
Joan Dial Ruffier
General Partner, Sunshine Cafes,
and Vice President, Vista Landscaping,
Orlando, Florida
1991
1991
1992
1993
1991
1992
1993
306 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 6—Continued
MIAMI BRANCH
Appointed by the Federal Reserve Bank
Roberto G. Blanco
Vice Chairman of the Board and Chief
Financial Officer, Republic National Bank of
Miami, Miami, Florida
A. Gordon Oliver
President and Chief Executive Officer, Citizens
and Southern National Bank of Florida,
Fort Lauderdale, Florida
Steven C. Shimp
President, O-A-K/Florida, Inc.,
Fort Myers, Florida
Pat L. Tornillo, Jr.
Executive Vice President, United Teachers of
Dade, Miami, Florida
Appointed by the Board of Governors
Dorothy C. Weaver
President, Intercap Equities, Inc.,
Coral Gables, Florida
R. Kirk Landon
Chairman and Chief Executive Officer,
American Bankers Insurance Group,
Miami, Florida
Michael T. Wilson
President, Vinegar Bend Farms, Inc.,
Belle Glade, Florida
1991
1992
1993
1993
1991
1992
1993
NASHVILLE BRANCH
Appointed by the Federal Reserve Bank
William Baxter Lee III
Chairman of the Board and President, Southeast
Services Corporation, Knoxville, Tennessee
Marguerite W. Sallee
President and Chief Executive Officer,
Corporate Child Care, Inc.,
Nashville, Tennessee
James D. Harris
President and Chief Executive Officer,
Brentwood National Bank,
Brentwood, Tennessee
Williams E. Arant, Jr.
President and Chief Executive Officer,
First National Bank of Knoxville,
Knoxville, Tennessee
Appointed by the Board of Governors
Shirley A. Zeitlin
President, Shirley Zeitlin & Co. Realtors,
Nashville, Tennessee
Harold A. Black
Professor and Head, Department of Finance,
College of Business Administration,
University of Tennessee, Knoxville, Tennessee
Victoria B. Jackson
President and Chief Executive Officer, Diesel
Sales and Service, Inc., and Prodiesel, Inc.,
Nashville, Tennessee
1991
1991
1992
1993
1991
1992
1993
Directories and Meetings 307
Term expires
Dec. 31
DISTRICT 6—Continued
NEW ORLEANS BRANCH
Appointed by the Federal Reserve Bank
Joel B. Bullard, Jr.
President, Joe Bullard Automotive Companies,
Mobile, Alabama
Kay L. Nelson
President-Owner, Nelson Capital Corporation,
New Orleans, Louisiana
Earl W. Lundy
Chairman of the Board and Chief Executive
Officer, First National Bank of Vicksburg,
Vicksburg, Mississippi
A. Hartie Spence
President, Calcasieu Marine National Bank,
Lake Charles, Louisiana
Appointed by the Board of Governors
JoAnn Slaydon
President, Slaydon Consultants,
Baton Rouge, Louisiana
Lucimarian Tolliver
Roberts
Commission President, Mississippi Coast
Coliseum, Pass Christian, Mississippi
Victor Bussie
President, Louisiana AFL-CIO,
Baton Rouge, Louisiana
1991
1991
1992
1993
1991
1992
1993
DISTRICT 7—CHICAGO
Class A
John W. Gabbert
B. F. Backlund
David W. Fox
Class B
Max J. Nay lor
Paul J. Schierl
A. Charlene Sullivan
Class C
Charles S. McNeer
President and Chief Executive Officer, First of
America Bank-LaPorte, N.A.,
LaPorte, Indiana
Chairman of the Board and Chief Executive
Officer, Bartonville Bank, Peoria, Illinois
Chairman, President, and Chief Executive
Officer, The Northern Trust Corporation and
The Northern Trust Company,
Chicago, Illinois
1991
President, Naylor Farms, Inc., Jefferson, Iowa
Financial Consultant, Green Bay, Wisconsin
Associate Professor of Management, Krannert
Graduate School of Management, Purdue
University, West Lafayette, Indiana
1991
1992
1993
Retired Chairman of the Board and Chief
Executive Officer, Wisconsin Energy
Corporation, Milwaukee, Wisconsin
1991
1992
1993
308 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 7, Class C— Continued
Richard G. Cline
Robert M. Healey
Chairman of the Board, President, and
Chief Executive Officer, NICOR, Inc.,
Naperville, Illinois
President, Chicago Federation of Labor and
Industrial Union Council, AFL-CIO,
Chicago, Illinois
1992
1993
DETROIT BRANCH
Appointed by the Federal Reserve Bank
Robert J. Mylod
Chairman of the Board, President, and Chief
Executive Officer, Michigan National
Corporation, Farmington Hills, Michigan
Norman F. Rodgers
President and Chief Executive Officer, Hillsdale
County National Bank, Hillsdale, Michigan
Charles E. Allen
President and Chief Executive Officer, Graistone
Realty Advisors, Inc., Detroit, Michigan
William E. Odom
Chairman, Ford Motor Credit Company,
Dearborn, Michigan
Appointed by the Board of Governors
Phyllis E. Peters
Director, Professional Standards Review,
Deloitte & Touche, Detroit, Michigan
J. Michael Moore
Chairman of the Board and Chief Executive
Officer, Invetech Company, Detroit, Michigan
Beverly Beltaire
President, P R Associates, Inc., Detroit, Michigan
1991
1992
1993
1993
1991
1992
1993
DISTRICT 8—ST. LOUIS
Class A
Henry G. River, Jr.
W. E. Ayres
Ray U. Tanner
Class B
Thomas F. McLarty III
Frank M. Mitchener, Jr.
Warren R. Lee
President and Chief Executive Officer,
First National Bank in Pinckneyville,
Pinckneyville, Illinois
Chairman of the Board and Chief Executive
Officer, Simmons First National Bank of Pine
Bluff, Pine Bluff, Arkansas
Chairman of the Board and Chief Executive
Officer, Jackson National Bank and Volunteer
Bancshares, Inc., Jackson, Tennessee
1991
Chairman of the Board and Chief Executive
Officer, Arkla, Inc., Little Rock, Arkansas
President, Mitchener Farms, Inc.,
Sumner, Mississippi
President, W. R. Lee & Associates, Inc.,
Louisville, Kentucky
1991
1992
1993
1992
1993
Directories and Meetings 309
Term expires
Dec. 31
DISTRICT 8—Continued
Class C
Robert H. Quenon
H. Edwin Trusheim
Janet McAfee Weakley
Mining Consultant, St. Louis, Missouri
Chairman of the Board and Chief Executive
Officer, General American Life Insurance
Company, St. Louis, Missouri
President, Janet McAfee, Inc., St. Louis, Missouri
1991
1992
1993
LITTLE ROCK BRANCH
Appointed by the Federal Reserve Bank
Barnett Grace
Chairman and Chief Executive Officer,
First Commercial Bank, N.A.,
Little Rock, Arkansas
Patricia M. Townsend
President, Townsend Company,
Stuttgart, Arkansas
James V. Kelley III
Chairman, President and Chief Executive
Officer, First United Bancshares, Inc.,
El Dorado, Arkansas
Mahlon A. Martin
President, Winthrop Rockefeller Foundation,
Little Rock, Arkansas
Appointed by the Board of Governors
James R. Rodgers
Airport Manager, Little Rock Regional Airport,
Little Rock, Arkansas
L. Dickson Flake
President, Barnes, Quinn, Flake & Anderson, Inc.,
Little Rock, Arkansas
Vacancy
1991
1992
1993
1993
1991
1992
1993
LOUISVILLE BRANCH
Appointed by the Federal Reserve Bank
Douglas M. Lester
Chairman of the Board, President, and Chief
Executive Officer, Trans Financial Bancorp,
Inc., Bowling Green, Kentucky
Morton Boyd
Chairman and Chief Executive Officer,
First Kentucky National Corporation,
Louisville, Kentucky
Laura M. Douglas
Legal Director, Metropolitan Sewer District,
Louisville, Kentucky
Vacancy
Appointed by the Board of Governors
Lois H. Gray
Chairman of the Board, James N. Gray
Construction Company, Inc.,
Glasgow, Kentucky
Daniel L. Ash
Managing Director, Louisville Energy and
Environment Corporation, Louisville, Kentucky
John A. Williams
Chairman and Chief Executive Officer,
Computer Services, Inc., Paducah, Kentucky
1991
1992
1993
1993
1991
1992
1993
310 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 8—Continued
MEMPHIS BRANCH
Appointed by the Federal Reserve Bank
Vacancy
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
Appointed by the Board of Governors
Katherine Hinds Smythe
President, Memorial Park, Inc.,
Memphis, Tennessee
Sandra B. SandersonChesnut
President and Chief Executive Officer,
Sanderson Plumbing Products, Inc.,
Columbus, Mississippi
Seymour B. Johnson
Owner, Kay Planting Company,
Indianola, Mississippi
1991
1992
1993
1993
1991
1992
1993
DISTRICT 9—MINNEAPOLIS
Class A
James H. Hearon III
Rodney W. Fouberg
Charles L. Seaman
Class B
Duane E. Dingmann
Bruce C. Adams
Earl R. St. John, Jr.
Class C
Jean D. Kinsey
Gerald A. Rauenhorst
Chairman of the Board and Chief Executive
Officer, National City Bank,
Minneapolis, Minnesota
Chairman of the Board, Farmers and Merchants
Bank and Trust Co., Aberdeen, South Dakota
President and Chief Executive Officer, First
State Bank of Warner, Warner, South Dakota
1991
President, Trubilt Auto Body, Inc.,
Eau Claire, Wisconsin
Partner, Triple Adams Farms,
Minot, North Dakota
President, St. John Forest Products, Inc.,
Spalding, Michigan
1991
Professor, Consumption and Consumer
Economics, Department of Agricultural and
Applied Economics, University of Minnesota,
St. Paul, Minnesota
Chairman of the Board and Chief Executive
Officer, Opus Corporation,
Minneapolis, Minnesota
1991
1992
1993
1992
1993
1992
Directories and Meetings 311
Term expires
Dec. 31
DISTRICT 9, Class C— Continued
Delbert W. Johnson
President and Chief Executive Officer, Pioneer
Metal Finishing, Minneapolis, Minnesota
1993
HELENA BRANCH
Appointed by the Federal Reserve Bank
Beverly D. Harris
President, Empire Federal Savings and Loan
Association, Livingston, Montana
Robert T. Gerhardt
Chairman, President and Chief Executive
Officer, First Interstate Bank of Montana,
N.A., Kalispell, Montana
Nancy M. Stephenson
Executive Director, Neighborhood Housing
Services, Great Falls, Montana
Appointed by the Board of Governors
James E. Jenks
Jenks Farms, Hogeland, Montana
J. Frank Gardner
President, Montana Resources, Inc.,
Butte, Montana
1991
1992
1992
1991
1992
DISTRICT 1 0 — K A N S A S CITY
Class A
Robert L. Hollis
Harold L. Gerhart, Jr.
Roger L. Reisher
Chairman of the Board and Chief Executive
Officer, First National Bank and Trust Co. of
Okmulgee, Okmulgee, Oklahoma
Chairman and Chief Executive Officer, First
National Bank, Newman Grove, Nebraska
Co-Chairman of the Board, FirstBank Holding
Company of Colorado, Lakewood, Colorado
1991
President, CF & I Steel Corporation,
Pueblo, Colorado
Chairman of the Board and Chief Executive
Officer, Kerr-McGee Corporation,
Oklahoma City, Oklahoma
Buffalo, Oklahoma
1991
1992
1993
Class B
Frank J. Yaklich, Jr.
Frank A. McPherson
Don E. Adams
1992
1993
Class C
Burton A. Dole, Jr.
Fred W. Lyons, Jr.
Thomas E. Rodriguez
Chairman of the Board and President,
Puritan-Bennett Corporation,
Overland Park, Kansas
President, Marion Merrell Dow Inc.,
Kansas City, Missouri
President and General Manager, Thomas E.
Rodriguez & Associates, P C , Aurora, Colorado
1991
1992
1993
312 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 10—Continued
DENVER BANCH
Appointed by the Federal Reserve Bank
Norman R. Corzine
President and Chief Executive Officer,
First National Bank in Albuquerque,
Albuquerque, New Mexico
W. Richard Scarlett III
Chairman of the Board and Chief Executive
Officer, Jackson State Bank,
Jackson Hole, Wyoming
Henry A. True III
Partner, True Companies, Casper, Wyoming
Peter R. Decker
President, Decker & Associates,
Denver, Colorado
Appointed by the Board of Governors
Barbara B. Grogan
President, Western Industrial Contractors, Inc.,
Denver, Colorado
Sandra K. Woods
Vice President, Corporate Real Estate, Adolph
Coors Company, Golden, Colorado
Gilbert Sanchez
President, New Mexico Highlands University,
Las Vegas, New Mexico
1991
1991
1992
1993
1991
1992
1993
OKLAHOMA CITY BRANCH
Appointed by the Federal Reserve Bank
C. Kendric Fergeson
Chairman of the Board and Chief Executive
Officer, The National Bank of Commerce,
Altus, Oklahoma
W. Dean Hidy, M.D
Chairman of the Board, Triad Bank, N.A.,
Tulsa, Oklahoma
John Wm. Laisle
President, MidFirst Bank, SSB, Oklahoma City,
Oklahoma
Appointed by the Board of Governors
Ernest L. Holloway
President, Langston University, Langston,
Oklahoma
William R. Allen
President and Chief Executive Officer,
Union Equity Cooperative Exchange,
Enid, Oklahoma
1991
1992
1992
1991
1992
OMAHA BRANCH
Appointed by the Federal Reserve Bank
Sheila Griffin
Special Advisor to the Governor for
International Trade, Lincoln, Nebraska
John T. Selzer
Chairman of the Board and Chief Executive
Officer, FirsTier Bank, N.A., Scottsbluff,
Nebraska
John R. Cochran
President and Chief Executive Officer, Norwest
Bank Nebraska, N.A., Omaha, Nebraska
1991
1991
1992
Directories and Meetings 313
Term expires
Dec. 31
DISTRICT 10, OMAHA BRANCH—Continued
Appointed by the Board of Governors
LeRoy W. Thorn
President, T-L Irrigation Company,
Hastings, Nebraska
Herman Cain
President and Chief Executive Officer,
Godfather's Pizza, Inc., Omaha, Nebraska
1991
1992
DISTRICT 11—DALLAS
Class A
Charles T. Doyle
Robert G. Greer
T. C. Frost
Class B
Peyton Yates
Gary E. Wood
J. B. Cooper, Jr.
Class C
Hugh G. Robinson
Leo E. Linbeck, Jr.
Henry G. Cisneros
Chairman of the Board and Chief Executive
Officer, Gulf National Bank, Texas City, Texas
Chairman of the Board, Tanglewood Bank, N.A.,
Houston, Texas
Chairman of the Board, Frost National Bank,
San Antonio, Texas
President, Yates Drilling Company and
Executive Vice President, Yates Petroleum
Corporation, Artesia, New Mexico
President, Texas Research League,
Austin, Texas
Farmer, Roscoe, Texas
Chairman of the Board and Chief Executive
Officer, The Tetra Group, Inc., Dallas, Texas
Chairman of the Board and Chief Executive
Officer, Linbeck Construction Corporation,
Houston, Texas
Chairman and Chief Executive Officer, Cisneros
Asset Management Co., San Antonio, Texas
1991
1992
1993
1991
1992
1993
1991
1992
1993
EL PASO BRANCH
Appointed by the Federal Reserve Bank
Humberto F. Sambrano
President, SamCorp General Contractors,
El Paso, Texas
Wayne Merritt
President, Claydesta National Bank,
Midland, Texas
Veronica K. Callaghan
Vice President and Principal, KASCO Ventures,
Inc., El Paso, Texas
Ben H. Haines, Jr.
President, First National Bank of Dona Ana
County, Las Cruces, New Mexico
1991
1992
1993
1993
314 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 11, EL PASO BRANCH—Continued
Appointed by the Board of Governors
Alvin T. Johnson
Senior Vice President and Founder,
Management Assistance Corporation of
America, El Paso, Texas
W. Thomas Beard III
President, Leoncita Cattle Company, Alpine, Texas
Diana S. Natalicio
President, The University of Texas at El Paso,
El Paso, Texas
1991
1992
1993
HOUSTON BRANCH
Appointed by the Federal Reserve Bank
Jeff Austin, Jr.
President, First National Bank of Jacksonville,
Jacksonville, Texas
Jenard M. Gross
President, Gross Builders, Inc., Houston, Texas
Walter E. Johnson
President and Chief Executive Officer,
Southwest Bank of Texas, Houston, Texas
Clive Runnells
President and Director, Runnells Cattle
Company, Bay City, Texas
Appointed by the Board of Governors
Gilbert D. Gaedcke
Chairman of the Board and Chief Executive
Officer, Gaedcke Equipment Company,
Houston, Texas
Judy Ley Allen
Partner and Administrator, Allen Investments,
Houston, Texas
Milton Carroll
President, Instrument Products, Inc.,
Houston, Texas
1991
1992
1993
1993
1991
1992
1993
SAN ANTONIO BRANCH
Appointed by the Federal Reserve Bank
Jane Flato Smith
Investor and Rancher, San Antonio, Texas
Gregory W. Crane
Chairman of the Board, President, and Chief
Executive Officer, Broadway National Bank,
San Antonio, Texas
Javier Garza
Executive Vice President, The Laredo National
Bank, Laredo, Texas
Sam R. Sparks
President, Sam R. Sparks, Inc., Santa Rosa, Texas
Appointed by the Board of Governors
Roger R. Hemminghaus
Chairman of the Board, President, and Chief
Executive Officer, Diamond Shamrock, Inc.,
San Antonio, Texas
Lawrence E. Jenkins
Vice President (Retired), Lockheed Missiles and
Space Company, Austin, Texas
Erich Wendl
President, Maverick Markets, Inc.,
Corpus Christi, Texas
1991
1992
1993
1993
1991
1992
1993
Directories and Meetings 315
Term expires
Dec. 31
DISTRICT 1 2 — S A N FRANCISCO
Class A
William E. B. Siart
Warren K. K. Luke
Richard L. Mount
Class B
William L. Tooley
E. Kay Stepp
John N. Nordstrom
President, First Interstate Bancorp,
Los Angeles, California
President and Director, Hawaii National
Bancshares, Inc., and Vice Chairman of the
Board, Hawaii National Bank, Honolulu, Hawaii
Chairman, President, and Chief Executive Officer,
Saratoga Bancorp, Saratoga, California
1991
Chairman, Tooley & Company, Investment
Builders, Los Angeles, California
President, Portland General Electric,
Portland, Oregon
Co-Chairman of the Board, Nordstrom, Inc.,
Seattle, Washington
1991
President and Chief Executive Officer,
Chambers Communications Corp.,
Eugene, Oregon
Chairman of the Board and Chief Executive
Officer, The Times Mirror Company,
Los Angeles, California
Chairman of the Board, Kaiser Foundation
Health Plan, Inc., and Kaiser Foundation
Hospitals, Oakland, California
1991
1992
1993
1992
1993
Class C
Carolyn S. Chambers
Robert F. Erburu
James A. Vohs
1992
1993
Los ANGELES BRANCH
Appointed by the Federal Reserve Bank
David R. Lovejoy
Former Vice Chairman of the Board,
Security Pacific National Bank,
Los Angeles, California
Ignacio E. Lozano, Jr.
Editor-in-Chief, La Opinion, Los Angeles,
California
Fred D. Jensen
Chairman of the Board, President, and Chief
Executive Officer, National Bank of Long
Beach, Long Beach, California
Anita Landecker
Director of California Programs, Local Initiatives
Support Corporation, Los Angeles, California
Appointed by the Board of Governors
Harry W. Todd
Managing Partner, Carlisle Enterprises, L.P.,
Coronado, California
Yvonne Brathwaite Burke ...Partner, Jones, Day, Reavis & Pogue,
Los Angeles, California
1991
1991
1992
1993
1991
1992
316 78th Annual Report, 1991
Term expires
Dec. 31
DISTRICT 12—Los ANGELES BRANCH
Appointed by the Board of Governors—Continued
Donald G. Phelps
Chancellor, Los Angeles Community College
District, Los Angeles, California
1993
PORTLAND BRANCH
Appointed by the Federal Reserve Bank
Stuart H. Compton
Chairman of the Board and Chief Executive
Officer, Pioneer Trust Bank, N.A.,
Salem, Oregon
Elizabeth K. Johnson
President and Chief Operating Officer,
Transwestern Helicopters, Inc.,
Scappoose, Oregon
Cecil W. Drinkward
President and Chief Executive Officer, Hoffman
Construction Company, Portland, Oregon
Stephen G. Kimball
President and Chief Executive Officer, Baker
Boyer Bancorp, Walla Walla, Washington
Appointed by the Board of Governors
William A. Hilliard
Editor, The Oregonian, Portland, Oregon
Wayne E. Phillips, Jr.
Vice President, Phillips Ranch, Inc.,
Baker, Oregon
Ross R. Runkel
Director, Willamette University Center for
Dispute Resolution, Salem, Oregon
1991
1992
1993
1993
1991
1992
1993
SALT LAKE CITY BRANCH
Appointed by the Federal Reserve Bank
Gerald R. Christensen
President and Chairman, First Federal Savings
Bank, Salt Lake City, Utah
Ronald S. Hanson
President, Zions First National Bank,
Salt Lake City, Utah
Curtis H. Eaton
Vice President; Manager, Community Banking
Area; and Member of the Board of Directors,
First Security Bank of Idaho, N.A.,
Twin Falls, Idaho
Virginia P. Kelson
Partner, Ralston & Associates, Salt Lake City, Utah
Appointed by the Board of Governors
D. N. Rose
President and Chief Executive Officer, Mountain
Fuel Supply Company, Salt Lake City, Utah
Gary G. Michael
Chairman and Chief Executive Officer,
Albertson's, Inc., Boise, Idaho
Constance G. Hogland
Executive Director, Boise Neighborhood
Housing Services, Inc., Boise, Idaho
1991
1992
1993
1993
1991
1992
1993
Directories and Meetings 317
Term expires
Dec. 31
DISTRICT 12—Continued
SEATTLE BRANCH
Appointed by the Federal Reserve Bank
Robert P. Gray
President, National Bank of Alaska,
Anchorage, Alaska
H. H. Larison
President, Columbia Paint & Coatings,
Spokane, Washington
B. R. Beeksma
Chairman of the Board, InterWest Savings
Bank, Oak Harbor, Washington
Gerry B. Cameron
President and Chief Operating Officer,
U.S. Bank of Washington, N.A.,
Seattle, Washington
Appointed by the Board of Governors
William R. Wiley
Senior Vice President, Technology
Management; and Director, Northwest
Division, Battelle Memorial Institute,
Richland, Washington
Judith M. Runstad
Managing Partner, Foster Pepper and
Shefelman, Seattle, Washington
George F. Russell, Jr.
Chairman, President, and Chief Executive Officer,
Frank Russell Company,
Tacoma, Washington
1991
1992
1993
1993
1991
1992
1993
319
Index
Agreement corporations, international
banking activities, 211, 221
Agriculture, Department of, Packers and
Stockyards Administration, 181
Assets and liabilities
Banks, by class, 267
Board of Governors, 238
Federal Reserve Banks, 246
Automated clearinghouse, fees for services,
228
Automated teller machines, usage in 1991,
184
Bank Enterprise Act, FDICIA, Title II
(See also Federal Deposit Insurance
Corporation Improvement Act of
1991), 201
Bank Export Services Act, 221
Bank for International Settlements, 203
Bank Holding Company Act of 1956 (See
also Regulations: Y)
Litigation, 193
Regulation of banking structure, 217
Securities subsidiaries examination, 210
Bank holding companies
Applications to conduct nonbanking
activities, 226
Banking structure, 217
Examinations and inspections, 208
Litigation, 193
Risk-based capital guidelines,
clarifications, 89
Stock repurchases, 220
Bank Merger Act, regulation of banking
structure, 218
Bank mergers and consolidations, 275
Bank of Credit and Commerce
International, 206
Bank Protection Act of 1968, 225
Bank Secrecy Act, 206, 222
Bankers acceptances, Federal Reserve
Banks, holdings, 246
Banking offices, changes in number, 274
Banking supervision and regulation by the
Federal Reserve System, 205
Basle Committee, 213
Board of Governors (See also Federal
Reserve System)
Banking supervison and regulation, 205
Consumer and Community Affairs, 173
Economy in 1991, 7
Federal Open Market Committee, policy
actions, 97
Federal Reserve Banks, 227
Financial statements, 237
International developments, 31
Legislation enacted, 197
Litigation, 193
Members and officers, 290
Monetary policy and financial markets,
19
Monetary policy, reports to the Congress,
39
Policy actions, 87
Regulatory simplification, 225
Salaries, 253
Staff
Schemering, Stephen C , 206
Spillenkothen, Richard, 206
Taylor, William, 206
Testimony
Evaluation of card holders, 190
Legislation, 190
Truth in Lending Act, 190
C&S Sovran Corporation, 183
California, whitefly infestation, 17
CAMEL reporting system, 197
Capital accounts
Banks, by class, 262
Federal Reserve Banks, 245, 246, 248
Chairmen, presidents, and vice presidents
of Federal Reserve Banks
Conferences, 297
List, 296
Salaries of presidents, 253
Change in Bank Control Act, regulation of
banking structure, 218
Check clearing and collection
Fees for Federal Reserve services, 227
Volume of operations, 263
Chemical Banking Corporation, 183
320 78th Annual Report, 1991
Clearing House Interbank Payments
System, 229
Commerce BancShares of Wyoming, Inc.,
184
Commodity Credit Corporation, 13
Commodity Futures Trading Commission,
oo, LLo
Commodity swaps by state member banks,
88
Community Reinvestment Act
Community affairs, 178
Compliance, 183
Consumer and community affairs
activities in 1991, 173
Institution ratings, amendment to
regulation, 90
Comptroller of the Currency, Office of the,
174, 179,200,211
Condition statements of Federal Reserve
Banks, 244
Conferences of chairmen, presidents, and
vice presidents of Federal Reserve
Banks, 297
Congressional Budget Office, 60
Consumer Advisory Council, 188, 294
Consumer attitudes survey, 185
Consumer Complaint Control System, 184
Consumer leasing, compliance, 181
Consumers Union, 177
Credit
Availability in 1991, 213
Evaluation of cardholders, testimony,
190
Legislation, testimony, 190
Currency and Foreign Transactions
Reporting Act (See Bank Secrecy
Act)
Data processing operations, 227
Defense Cooperation Account, 13
Depository institutions
Reserves and related items, 268
Deposits
Banks, by class, 267
Federal Reserve Banks, 246, 268
Insurance, 203
Desert Shield/Storm, Operation (See also
Kuwait), 12, 37
Directors, Federal Reserve Banks and
Branches, list, 298
Dividend payments to state member banks,
214
Dividends, Federal Reserve Banks, 256,
258
Earnings of Federal Reserve Banks (See
also Federal Reserve Banks, income
and expenses), 230, 254
Economy in 1990
Business, 46
External, 49
Government, 48
Household, 45
Labor markets, 50
Price developments, 52
Economy in 1991
Business, 10, 70
External, 73
Government, 12, 72
Household, 8, 69
Labor markets, 14, 75
Price developments, 16, 77
Edge Act corporations, international
banking activities, 211, 221
Electronic benefit transfers, application of
Regulation E requirements, 176
Electronic Fund Transfer Act
Compliance, 182
Economic effects, 184
Equal Credit Opportunity Act
Compliance, 181
FDICIA, Title II (See also Federal
Deposit Insurance Corporation
Improvement Act of 1991), 201
Examinations, inspections, regulation, and
audits
Bank holding companies, 208
Enforcement actions, civil money
penalties, 208
International activities
Edge Act corporations and agreement
corporations, 211
Foreign-office operations of U.S.
banking organizations, 211
U.S. activities of foreign banks, 211
Specialized
Electronic data processing, 209
Fiduciary activities, 209
Government securities dealers,
brokers, 209
Municipal securities dealers and
clearing agents, 209
Securities subsidiaries, 210
Transfer agents, 210
Index
Examinations, inspections, regulation, and
audits— Continued
State member banks, 207
Surveillance and monitoring, 210
Exchange Stabilization Fund, 38
Expedited Funds Availability Act, 91
Compliance, 182
FDICIA, Title II, 201
Export Trading Companies, 221
Fair Credit Reporting Act, 179
Fair Housing Amendments Act of 1988,
186
Farm Credit Administration, 181, 223
Federal Advisory Council, 293
Federal agency securities
Federal Reserve Bank holdings and
earnings, 246, 268
Federal Reserve open market
transactions, 1989, 250
Repurchase agreements, 245, 246, 250,
252
Federal Deposit Insurance Corporation,
174, 179,211
Federal Deposit Insurance Corporation
Improvements Act of 1991
Banking supervision and regulation, 206
Expedited Funds Availability, 177
Legislation, 197
Federal Financial Institutions Examination
Council
Activities, 179
HMDA reporting system, 174
Policy statement, 215
Title II, 201
Training courses, 215
Federal Open Market Committee
Meetings, 102, 113, 120, 128, 138, 147,
154, 163
Members and officers, list, 292
Federal Reserve Act, FDICIA, Title III,
203
Federal Reserve Banks
Assessments for expenses of Board of
Governors, 256, 258
Bank premises, 231, 244, 246, 262
Banks
Atlanta
Jacksonville branch, 229
Publication, Partners in Community
and Economic Development,
178
321
Federal Reserve Banks—Continued
B anks— Continued
Chicago, 179
Cleveland, 229, 231
Dallas, 231
Kansas City, 179
Minneapolis, 231
New York, 230, 231
Philadelphia, publication, Resources
for Revitalization, 179
Richmond, Baltimore Branch, 230
San Francisco, 179
St. Louis, 231
Branches
Baltimore Branch, 230
Bank premises, 262
Directors, list, 298
Jacksonville Branch, 229
Vice presidents in charge, 296
Capital accounts, 245, 246
Chairmen and deputy chairmen, 296
Check clearing and collection, 227
Condition statement, 244
Conferences of chairmen, presidents, and
vice presidents, 297
Data processing operations, 227
Deposits, 245, 246
Directors, list, 298
Dividends paid, 256, 259, 261
Examinations, 230
Income and expenses, 230
Interest rates, 264
Loans and securities, 244, 246, 252, 254,
268, 270, 272
Officers and employees, number and
salaries, 253
Operations, volume, 231, 263
Payments to the U.S. Treasury, 259, 261
Presidents and first vice presidents, 253,
296
Priced services
Developments, 227
Financial statements, 233
Tables, 268
Securities and loan holdings, 231
Federal Reserve notes
Condition statement data, 246
Cost of issuance and redemption, 241,
256
Federal Reserve System (See also Board of
Governors)
Map, 328, 329
Membership, 224
322 78th Annual Report, 1991
Federal Trade Commission, 181
Federal Trade Commission Act, 187
Fees, Federal Reserve services to
depository institutions
Automated clearinghouse, 228
Check clearing and collection, 227
Currency and coin, 229
Pricing of, 254
Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, 90, 92
Financial Institutions Supervisory Act,
litigation, 194
Financial statements, Board of Governors,
237
First Interstate BancSystem of Montana,
Inc., 184
Float (See also Check clearing and
collection), 230
Foreign bank regulation, 200
Foreign currencies
Federal Reserve income on, 254
Operations, 38
Foreign economies, 32
Foreign investments by U.S. banking
organizations, 221
Foreign-office operations, international
banking activities, 211
Insured commercial banks (See also
Commercial banks)
Assets and liabilities, by class of bank,
267
Banking offices, changes in number, 274
Number, by class of bank, 267
Interagency EDP examinations, 209
Interdistrict Transportation System, 228
Interest rates, Federal Reserve Banks
Discount rates, 1991, 22, 92
Table, 264
International Banking Act, 200, 225
International banking activities, 89, 211,
220, 225
International developments, review of
1991, 31
International transactions, 35
Interpretations of regulations, 177
Investments
Federal Reserve Banks, 244, 246
State member banks, 267
Iraq (See Kuwait)
General Accounting Office, 60
Giesecke and Devrient, Inc., 230
Glass-Steagall Act, 210
Gold certificate accounts of Reserve Banks
and gold stock, 246, 270, 272
Least-cost resolution of failed institutions
by FDIC, legislation, 199
Legislation enacted (See also specific act),
197
Legislative recommendations, other
agencies with enforcement
responsibilities, 191
Litigation
Bank holding companies, 193
Board procedures and regulations,
challenges to, 195
Loans
Banks, by class, 267
Executive officers, by member banks,
224
Federal Reserve Banks
Depository institutions, 244, 246, 254,
270, 272
Holdings and income, 244, 246, 270,
272
Interest rates, 264
Volume of operations, 263
Hazardous substance contamination
liability, 214
Highly leveraged transactions
Definition, 215
Monetary policy effects, 59
Home Mortgage Disclosure Act
Consumer and community affairs
activities, 173
Data revision, 185
FDICIA, Title II, 201
Housing and Urban Development,
Department of, 174, 186, 189, 201
Income and expenses
Board of Governors, 239
Federal Reserve Banks, 254
Insurance, deposit and pass-through,
203
Justice, Department of, 189, 209
Kuwait, invasion of, by Iraq (See also
Desert Shield/Storm), 7, 36
Manufacturers Hanover Corporation,
183
Index
Margin requirements, 266
Member banks (See also Depository
institutions)
Assets, liabilities, and capital accounts,
267
Banking offices, changes in number, 274
Number, 267
Reserve requirements, 265
Michigan, University of, 1990 Survey of
Consumer Attitudes, 185
Mitsui Taiyo Kobe Bank, 183
Monetary policy
Credit markets, 23
Developments during 1990, 54
Financial markets relative to, 19
Implementation, 20
Reports to the Congress, 39
Review of 1990, 43
Review of 1991, 67, 79
Mutual savings banks, 274
National Association of Securities
Dealers, 223
National Credit Union Administration, 174,
179, 223
NCNB Corporation, 183
Nonmember depository institutions
Assets and liabilities, 267
Banking offices, changes in number, 274
Number, 267
Officers of Federal Reserve Banks,
Branches, and Offices, 296
Over-the-counter marginable stocks, 223
Packers and Stockyards Administration
(See Agriculture, Department of,
Packers and Stockyards
Administration)
Participants Trust Company, 229
Payments system risk, reduction, 204
Point-of-sale systems, usage in 1991, 184
Policy actions
Board of Governors
Regulations, 87
Statements and other actions, 91, 92
Priced services, Federal Reserve, 254
Definitive securities safekeeping, 229
Net settlement transactions, 229
Securities and fiscal agency services, 229
Profit and loss, Federal Reserve Banks,
256
323
Publications
"Home Mortgages: Understanding the
Process and Your Right to Fair
Lending," 178
"List of Marginable OTC Stocks," 223
Community Development Investments,
178
Partners in Community and Economic
Development, 178
Securities Credit Transactions
Handbook, 224
Real estate appraisals, supervision, 212
Regulation of banking organizations
Application processing and delegation,
219
Bank Holding Company Act, 217
Bank Merger Act, 218
Bank Secrecy Act, 222
Change in Bank Control Act, 218
Public notice of Board decisions, 219
Regulations
B, Equal Credit Opportunity Act
Compliance, 181
Interpretation in 1991, 177
BB, Community Reinvestment Act
Compliance, 183
Ratings of institutions, amendment, 90
C, Home Mortgage Disclosure
Reporting requirements revision, 173
CC, Availability of Funds and Collection
of Checks
Checks, policy action for same day
settlement, 91
Compliance, 182
Schedule for deposits availability, 91
Schedule on holds for deposits at
ATMs, 177
D, Reserve Requirements of Depository
Institutions
Clarification of certain technical
amendments, 87
E, Electronic Fund Transfers
Compliance, 182
Electronic benefit transfers, application
to, 176
Interpretation in 1991, 177
G, Securities Credit by Persons other
than Banks, Brokers, or Dealers
Margin securities, deposit acceptance,
88
Transfers between lenders of purpose
loans, 88
324 78th Annual Report, 1991
Regulations— Continued
H, Membership of State Banking
Institutions in the Federal Reserve
System
Commodity swap approvals, 88
Risk-based capital guidelines,
clarifications, 89
K, International Banking Operations
Commodity swap approvals, 88
Expand scope, 89
M, Consumer Leasing
Compliance, 181
P, Minimum Security Devices and
Procedures for Federal Reserve
Banks and State Member Banks
Revision, 90
T, Credit by Brokers and Dealers
Margin securities, deposit acceptance,
88
U, Credit by Banks for the Purpose of
Purchasing or Carrying Margin
Stocks
Transfers between lenders of purpose
loans, 88
Y, Bank Holding Companies and Change
in Bank Control
Risk-based capital guidelines,
clarifications, 89
Z, Truth in Lending
Compliance, 180
Home equity loans to bank executive
officers, 177
Interpretations in 1991, 177
Regulatory Improvement Project, 225
Regulatory Policy and Planning
Committee, 225
Report of Condition and Income, 216
Reserve requirements of depository
institutions
Amendment to Regulation D, 87
Table, 265
Reserves and related items, 268
Resolution Trust Corporation, 13, 25, 29,
59, 218
Risk-based capital, 89, 212
Rules regarding delegation of authority,
merger approval by System officials,
amendment, 92
Salaries
Board of Governors, 239
Federal Reserve Banks, 253
Schemering, Stephen C , appointment, 206
Securities (See also specific types)
Credit, 88, 266
Definitive, 229
Fiscal agency services, 229
Holdings of Federal Reserve Banks, 231
Policy statement regarding activities by
depository institutions, 92
Regulation, 222
Securities and Exchange Act of 1934,
financial disclosure, 224
Securities and Exchange Commission, 88,
222
Security devices and procedures, 225
"Selection of Securities Dealers and
Unsuitable Investment Practices"
FFIEC policy statement, 215
Soviet Union, effect on U.S. economy, 17,
32
Special drawing rights, 244, 246, 268, 270,
272
Spillenkothen, Richard, appointment, 206
State member banks (See also Member
banks)
Applications, 220
Assets and liabilities, 267
Banking offices, changes in number, 274
Commodity swap approvals, 89
Complaints against, 187
Examinations and inspections, 207
Financial disclosure, 224
Foreign branches, 221
Foreign investments, 221
Loans to executive officers, 224
Membership, 224
Number, by class of bank, 267
Superfund statute, 214
Supervision
Dividend payments, 214
Environmental liability, 214
Loans to executive officers, 224
Policy, 212
Policy decisions in bank-related
activities, 219
Safety and soundness, 207
Scope of responsibilities, 206
System Open Market Account, authority to
effect transactions in domestic
operations and in foreign currencies
Domestic Open Market Operations,
authorization for, 97
Domestic policy directive, 99, 113, 120,
128, 147, 154, 163
Foreign currency directive, 101
Index 325
System Open Market Account—Continued
Foreign currency operations
Agreement to "warehouse" foreign
currencies, 112
Authorization for, 100
Taylor, William, resignation, 206
Thrift Institutions Advisory Council, 295
Thrift Supervision, Office of, 179, 223
Training, 215
Transactions, highly leveraged, definition,
59, 215
Transfers of funds {See also Fees and
Regulations: E)
Federal Reserve operations, volume, 263
Priced services, Federal Reserve, 228,
254
Schedule for deposit availability,
amendment, 91
Transportation, U.S. Department of, 181
Treasury securities
Bank holdings, by class of bank, 267
Federal Reserve Banks
Holdings, 244, 246, 252, 268, 270,
272
Income, 254
Open market transactions, 250
Repurchase agreements
Tables, 244, 246, 250, 252, 268, 270,
272
Treasury, U.S. Department of, 177, 230
Truth in Lending Act
Compliance, 180
Testimony, 190
Truth in Savings Act
FDICIA, Title II, 201
Uninsured annuities, sale of, on retail
banking premises, 215
Unregulated practices, complaints about,
187
West Texas intermediate, crude oil, 16
Whistleblower protection, FDICIA, Title II,
201
Yankee CDs, 27
FRB1/1—12500—0492C
326 78th Annual Report, 1991
Maps of the Federal Reserve System
1
9
BOSTON
2
MINNEAPOLIS •
CHIC/
12
• SAN FRANCISCO
7
m
"
B N E W YORK
CLEVELANr
10KANSAS C I T Y B
•
4
RICHMOND
ST. LOUIS
5
8
11 DALLAS
•
ATLANTA
ALASKA
HAWAII
LEGEND
Both pages
• Federal Reserve Bank city
• Board of Governors of the Federal
Reserve System, Washington, D.C.
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
branch boundaries of the System most
recently in December 1991.
Maps of the Federal Reserve System 327
5_E Baltimore
4-D
Pittsburgh
>m
Charlotte
• Cincinnati
KY
RICHMOND
CLEVELAND
7-G
• Nashville
TN
8-H
j
Birmingham X AL
WI
MI
Louisville
Detroit •
•
• Memphis
IN
Litti? )
MS
Rock \
CHICAGO
ATLANTA
ST. LOUIS
9-1
• Helena
MINNEAPOLIS
10-J
12-L
Omaha •
Oklahoma City
KANSAS CITY
11-K
Salt Lake City
El Paso
• Los Angeles
SAN FRANCISCO
@FedFRASER