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TZeport
vO
1992
Board of Governors of the Federal Reserve System
This publication is available from Board of Governors of the Federal Reserve System,
Publications Services, Mail Stop 138, Washington, DC 20551.
Letter of Transmitted
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., April 16, 1993
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-Ninth Annual Report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1992.
Sincerely,
Chairman
Contents
Part 1
3
7
8
10
13
15
17
Monetary Policy and
the U.S. Economy in 1992
INTRODUCTION
THE ECONOMY IN 1992
The household sector
The business sector
The government sector
Labor markets
Price developments
21 MONETARY POLICY AND FINANCIAL MARKETS IN 1992
21 The implementation of monetary policy
26 Monetary and credit flows
35 INTERNATIONAL DEVELOPMENTS
36 Foreign economies
39 U.S. international transactions
41 Foreign currency operations
43 MONETARY POLICY REPORTS TO THE CONGRESS
43 Report on February 19, 1992
67 Report on July 20, 1992
Part 2
Records, Operations,
and Organization
95 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
95 Regulation D (Reserve Requirements of Depository Institutions)
97 Regulation F (Limitations on Interbank Liabilities)
97 Regulation H (Membership of State Banking Institutions in the Federal
Reserve System)
98 Regulation H and Regulation Y (Bank Holding Companies and
Change in Bank Control)
98 Regulation J (Collection of Checks and Other Items by Federal Reserve Banks
and Funds Transfers through Fedwire) and policy statements on measures
for reducing payment system risks
99 Regulation K (International Banking Operations) and Regulation Y
100 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders
of Member Banks) and Regulation Y
101 Regulation Y and Rules of Procedure
103 Regulation Z (Truth in Lending)
103 Regulation CC (Availability of Funds and Collection of Checks)
104 Regulation DD (Truth in Savings) and Regulation Q
(Prohibition Against the Payment of Interest on Demand Deposits)
105 Policy statements
106 1992 discount rates
109 RECORD OF POLICY ACTIONS
OF THE FEDERAL OPEN MARKET COMMITTEE
109 Authorization for domestic open market operations
111 Domestic policy directive
111 Authorization for foreign currency operations
113 Foreign currency directive
113 Procedural instructions with respect to foreign currency operations
114 Meeting held on February 4-5, 1992
125 Meeting held on March 31, 1992
133 Meeting held on May 19, 1992
141 Meeting held on June 30-July 1, 1992
151 Meeting held on August 18, 1992
159 Meeting held on October 6, 1992
167 Meeting held on November 17, 1992
176 Meeting held on December 22, 1992
185
185
190
192
193
194
196
201
202
204
204
205
205
CONSUMER AND COMMUNITY AFFAIRS
Regulatory matters
Community affairs
FFIEC and other interagency activities
Mortgage lending discrimination
Use of the expanded HMDA data
Compliance with consumer regulations
Economic effects of the Electronic Fund Transfer Act
Complaints about state member banks
Unregulated practices
Consumer Advisory Council
Testimony and legislative recommendations
Recommendations of other agencies
207
207
207
207
208
LITIGATION
Bank holding companies—antitrust action
Bank Holding Company Act—review of Board actions
Litigation under the Financial Institutions Supervisory Act
Other actions
211 LEGISLATION ENACTED
211 Depository Institutions Disaster Relief Act of 1992
211 Federal Reserve Bank Branch Modernization Act
212 Futures Trading Practices Act of 1992
212 Housing and Community Development Act of 1992
215 BANKING SUPERVISION AND REGULATION
216 Scope of responsibilities for supervision and regulation
222 Supervisory policy
229 Regulation of the U.S. banking structure
232 International activities of U.S. banking organizations
233 Enforcement of other laws and regulations
236 Federal Reserve membership
237 REGULATORY SIMPLIFICATION
237 Reviews of regulatory burden
237 Reserve requirements
238 Bank holding companies
238 Application procedures
238 Policy on disaster relief
241 FEDERAL RESERVE BANKS
241 Developments in Federal Reserve services
245 Examinations
245 Income and expenses
FEDERAL RESERVE BANKS—Continued
246 Holdings of securities and loans
246 Volume of operations
247 Federal Reserve Bank premises
248 Financial statements for priced services
253
BOARD OF GOVERNORS FINANCIAL STATEMENTS
259
260
STATISTICAL TABLES
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1992
2. Statement of condition of each Federal Reserve Bank,
December 31, 1992 and 1991
3. Federal Reserve open market transactions, 1992
4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities,
December 31, 1990-92
5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1992
6. Income and expenses of Federal Reserve Banks, 1992
7. Income and expenses of Federal Reserve Banks, 1914-92
8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1992
9. Operations in principal departments of Federal Reserve Banks, 1989-92
10. Federal Reserve Bank interest rates, December 31, 1992
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, 1992 and 1991
14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-92, and month-end 1992
15. Changes in number of banking offices in the United States, 1992
16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1992
262
266
268
269
270
274
278
279
280
281
282
283
284
290
291
305
306
308
309
310
311
312
313
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
314
Directors
334
MAPS OF THE FEDERAL RESERVE SYSTEM
336
INDEX
Parti
Monetary Policy and
the US. Economy in 1992
Introduction
Economic activity accelerated over the
course of 1992, and the rise in real gross
domestic product during the year cumulated to more than 3 percent, the largest
increase since 1988. Inflation continued
to trend lower in 1992, with many broad
measures of price change showing increases that were among the smallest of
recent decades.
Although the rise of real GDP in 1992
was far from robust by the standards of
past cyclical upswings in activity, it was
a much larger gain than many analysts—
both inside and outside government—
had thought likely, given the extraordinary headwinds with which the
economy had to contend. Chief among
the influences restraining growth were
budgetary stresses at all levels of government, widespread structural changes
in the business sector, both in defenserelated industries and elsewhere, exceptional caution among financial intermediaries, and ongoing efforts by
businesses and households to strengthen
their finances by restricting the growth
of their indebtedness. Adding still further to the drag on the economy in 1992
was the sluggish performance of foreign
industrial economies, a number of which
still were struggling at year-end to
regain forward momentum.
The force of the headwinds seemed
greatest in the first half of the year. In
the second half, their power appeared to
abate somewhat. In addition, a number
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 1993). Data cited
are those available as of mid-March 1993.
of important sectors—housing, consumer durables, and business fixed
investment—continued to benefit in the
second half from the substantial easing
of money market conditions that had
been implemented over time by the Federal Reserve.
With the firming of the economy,
employment turned up in 1992, but the
rate of job growth was relatively sluggish. The structural adjustments undertaken by large businesses were accompanied in many cases by permanent
cutbacks in employment. More generally, businesses were able to meet their
output objectives through hefty increases in productivity, thereby limiting
the need for additional workers. The
unemployment rate rose in the first half
of 1992 in conjunction with a surge in
the share of the working-age population
in the labor force but turned down
thereafter as labor force participation
fell back. The unemployment rate in
December was 7.3 percent, almost half a
percentage point below the peak rate of
June, but still a little above the level of a
year earlier.
Price developments remained favorable in 1992. The rise in the consumer
price index over the four quarters of the
year amounted to 3.1 percent, essentially matching the low rate achieved in
the previous year. Consumer energy
prices turned back up in 1992, but the
prices of other goods and services that
enter into the CPI generally rose less
rapidly than they had in 1991. The success in keeping inflation in check, while
restoring growth, had highly salutary
effects on financial markets and on the
process of financial reconstruction, the
continuing progress of which is essen-
79th Annual Report, 1992
tial to the achievement of renewed and
sustainable prosperity.
The hesitant pace of the economy
evident in incoming information
throughout much of 1992, along with
notable weakness in the monetary and
credit aggregates and steady gains
against inflation, prompted the Federal
Reserve to ease monetary conditions
three times, bringing short-term rates
down another full percentage point over
the year. The discount rate was reduced
to 3 percent, and short-term rates generally closed the year at their lowest levels
since the early 1960s.
Long-term rates also fell, on balance.
At times, the declines in long-term rates
were limited by concerns about prospective federal budget deficits and about the
possibility that inflation might begin to
move higher as the expansion proceeded. However, notable decreases in
long rates were registered in late 1992,
as inflation remained subdued and as
statements by the incoming Administration suggested that it might seek only
limited near-term fiscal stimulus and
were giving serious consideration to
proposals aimed at making substantial
cuts over time in the federal budget deficit. The trade-weighted foreign exchange value of the dollar in terms of
the other Group of Ten currencies appreciated on balance over the course of
1992. The dollar benefited from the improved performance of the U.S. economy relative to conditions in other industrial countries.
Growth of the monetary aggregates
slowed in 1992 despite an acceleration
in nominal spending and income. For
the year, M2 advanced 1.8 percent,
below the 2l/i percent lower end of its
target range. M3 also came in under
its 1 percent to 5 percent target range,
growing only 0.3 percent. The Federal
Reserve did not make greater efforts to
boost growth to within these ranges
because, as the year went on, it became
increasingly clear that slow growth of
the broad money aggregates did not
indicate that financial market conditions
were impeding the expansion of spending and income. In fact, growth of nominal GDP, which accelerated to 5.7 percent from 3.5 percent in 1991, exceeded
that of M2 by nearly 4 percentage points
in 1992 and that of M3 by nearly
5Vi percentage points. Not only did data
on spending itself show a firming trend
over the year, but narrow money (Ml)
and reserves expanded rapidly—
suggesting to some that liquidity was
quite ample—and the growth of debt,
while restrained, was considerably in
excess of that of the broader monetary
aggregates.
The faster rise of nominal GDP in
1992 was fueled by spending that was
financed largely outside banks and other
depositories, whose liabilities constitute
the lion's share of the monetary aggregates. Spurred in part by advances in
equity prices and by declines in longerterm interest rates, businesses and
households strengthened their balance
sheets by raising funds in bond, mortgage, and equity markets and repaying
bank loans and other short-term debt.
This shift in the focus of financing
efforts toward the capital markets, a process that had been evident in 1991 as
well, helped to redress financial distortions that had accompanied the preceding buildup of debt and the rapid rise of
some asset prices in the 1980s.
The low level of credit demanded
from depositories meant that these institutions did not need to seek large volumes of deposits. As a consequence,
rates paid on deposits were adjusted
downward rapidly as short-term market
rates declined. Savers, reacting to the
lower deposit rates and to attractive
returns on bonds and equity, shifted
funds from M2 deposits into the capital
Introduction
markets. One notable aspect of this shift
toward the capital markets was the purchase of bond and stock mutual funds,
which are not included in the monetary
aggregates and which together experienced record inflows in 1992. In addition, with consumer loan rates falling
by less than deposit rates, households
apparently used M2 assets to repay consumer debt or restrain its growth. The
combination of rate incentives, desires
to strengthen balance sheets, and the
greater availability at low transaction
cost of a broadened array of savings
vehicles beyond traditional deposits
appear to have distorted, at least for
a time, the traditional relationship
between levels of M2 and M3 assets and
given levels of spending.
Although growth of M2 and M3 was
very weak in 1992, Ml growth accelerated to 14.3 percent, the second fastest
annual increase recorded in the official
series, which begins with 1959. This
pickup owed in part to the expansion
of aggregate spending, but it mainly
reflected the tendency for rates on liquid
deposits to adjust downward less rapidly
than those on time deposits. In response,
savers shifted substantial volumes of
funds from maturing time deposits to
NOW accounts. In addition, businesses
boosted their demand deposits substantially. To support this growth in transactions deposits, the Federal Reserve
added substantial volumes of reserves in
1992. Total reserves increased 20 percent last year, and the monetary base,
which includes currency outstanding as
well as reserves, increased 10.4 percent,
the highest rate ever registered in the
official series.
The decisions of households and businesses to strengthen their balance sheets
also affected debt growth in 1992,
although not as much as the broad monetary aggregates. In total, the debt of
nonflnancial sectors expanded 4.9 per
cent in 1992, somewhat faster than in
1991 but still just above the lower end
of its monitoring range. With debt growing less rapidly than aggregate income
and with declines in market interest rates
allowing higher-cost debt to be rolled
over at lower rates, households and businesses made substantial further progress
in reducing debt-service burdens over
the course of the year.
Some of the financial and economic
adjustments that were evident in the
economy in 1992 seemed likely to
extend into 1993 and perhaps beyond.
At year-end, government spending for
defense appeared likely to continue on a
path of sharp decline. More broadly, balance sheet repair and business restructuring seemed to be still in progress at
year-end, and near-term prospects for
the foreign industrial economies were
far from encouraging. The degree to
which these, and other, developments
might restraint growth in the coming
year remained somewhat uncertain.
This uncertainty notwithstanding,
however, the economy clearly ended the
year 1992 on stronger footing than it
had been on at the start of the year. The
improvement in household and business
finances over the course of 1992, together with the ongoing efforts of businesses to enhance efficiency, seemed to
augur well for sustained expansion of
the economy in 1993 and beyond. In
addition, the considerable progress that
had been made in bringing down inflation provided another of the essential
underpinnings for sustained growth of
real living standards.
Looking ahead to 1993, the aim of the
Federal Reserve will be to promote
financial conditions that will help to
maintain the greater momentum that
the economy developed in 1992, while
consolidating the trend toward lower
inflation. But, achieving a satisfactory
economic performance both in 1993 and
79th Annual Report, 1992
over the long run will depend on government policies in many areas other
than monetary policy. The most important, perhaps, is the direction of fiscal
policy. The new Administration and the
Congress have an opportunity to make a
fresh start in coming to grips with the
federal government's long-standing
budgetary problems. Credible action to
reduce the prospective size of future
budget deficits would likely yield a
direct and meaningful payoff in the form
of reduced federal demands on national
saving, leading in turn to lower longterm interest rates than would otherwise
prevail, increased capital investment,
and higher living standards.
•
The Economy in 1992
The economy began to exhibit renewed
firmness in 1992, overcoming a host of
impediments that were working to
retard the growth of activity. With the
strengthening of growth in the second
half, to an annual rate of more than
4 percent, the rise in real GDP over the
year cumulated to 3.2 percent, the
strongest gain since 1988. Employment
also picked up in 1992, but rather
slowly; the unemployment rate rose
further in the first half of the year but
thereafter followed a course of gradual
decline. Inflation continued to trend
lower over the year.
The growth of household and business expenditures picked up appreciably
in 1992. Households began to spend
more freely on motor vehicles and other
goods, and their purchases of homes
also strengthened, spurring additional
gains in residential construction. Businesses began investing more heavily in
new equipment; much of the gain went
for computers and other electronic
equipment embodying new technologies. Business outlays for nonresidential
construction declined, on net, over the
year, but by a much smaller amount than
in 1991. In total, the final purchases of
households and businesses rose about
4V2 percent in real terms in 1992, after
declining in each of the two previous
years; the gain was the largest in eight
years. By contrast, governments at all
levels continued to be burdened by huge
budget deficits in 1992, and for a second
year their combined purchases of goods
and services changed little in real terms.
In addition, export growth was slowed
by weakness of activity in several foreign industrial economies; despite improvement in the second half, the rise in
real exports of goods and services over
the year, 5 percent, was the smallest
gain since 1985. Meanwhile, the faster
growth of domestic spending pushed up
the growth in imports of goods and
services to 9lA percent in 1992.
Further progress was made in reducing inflation last year. The consumer
price index excluding food and
energy—a measure widely used in
gauging the underlying trend of
inflation—increased about 3!/2 percent
over the four quarters of 1992; this was
a full percentage point less than the
increase during 1991. The total CPI rose
about 3 percent over the four quarters of
1992, almost the same as in the previous
year; energy prices, which had fallen
sharply in 1991, turned up slightly this
past year, while increases in food prices
were quite small for the second year in a
row. Except for 1986, when the CPI was
pulled down by a collapse of world oil
prices, the increases of the past two
Real GDP
Percentage change, annual rate
1989
1990
1991
1992
The data are seasonally adjusted and come from the
Department of Commerce.
8
79th Annual Report, 1992
years are the smallest in a quarter
century.
The Household Sector
The financial condition of households
improved in 1992. Income growth
picked up a little in the aggregate, the
strains on household balance sheets
eased a bit, and the spirits of consumers
brightened markedly toward year-end.
Growth in consumer spending followed
a stop-and-go pattern through midsummer, but the gains thereafter were
steadier and fairly sizable overall.
Spending for residential investment also
advanced over the year, by a considerable amount in total.
The aggregate wealth of households
appears to have increased further during
1992. The value of households' financial assets rose moderately, and the
value of residential real estate also
moved up, on average. On the liability
side, households remained cautious in
taking on new debt in 1992, and the
burden of carrying debt continued to
ease because of restrained growth in
the volume of debt outstanding and
further reductions in interest rates,
which facilitated the ongoing substitution of new, lower-cost debt for old,
higher-cost obligations. The incidence
of households experiencing loanrepayment difficulties diminished over
the year.
Income growth picked up moderately
in 1992. Wages and salaries rose nearly
AVi percent in nominal terms, after a
gain of only 2V* percent in 1991. In
addition, proprietors' incomes benefited
from the strengthening of economic
activity, and, with corporate profits on
the rise, the dividends paid to shareholders more than reversed the decline of the
previous year. Transfer payments, which
had soared as the economy softened
in 1990 and 1991, continued to grow
rapidly in 1992. By contrast, interest
income trended sharply lower, as the
rates of return on household deposits
and other financial assets fell further.
Total after-tax income got a temporary
boost in 1992 from an adjustment of
federal tax withholdings that took effect
at the start of March. With inflation
low, real disposable personal income
increased nearly 2V2 percent over the
year—not a large gain by past cyclical
standards, but nonetheless the biggest
since 1988.
Real personal consumption expenditures rose about 3x/4 percent over the
four quarters of 1992, after essentially
no gain over the two previous years.
For a considerable part of 1992, the
increases in spending were interspersed
with stretches of sluggishness. A surge
in consumer expenditures early in the
year was followed by listlessness during
the spring, and a second jump in spending around midyear was followed by
still another bout of slow growth during
the summer. However, the last few
months of the year brought fairly sizable
advances, boosting the growth of consumption expenditures to a rate of about
43/4 percent in the fourth quarter.
Real Income and Consumption
Percentage change, annual rate
Disposable personal income
Personal consumption expenditures
_L
1989
1990
_L
1991
1992
The data are seasonally adjusted and come from the
Department of Commerce.
The Economy in 1992
Consumer expenditures for motor
vehicles increased 8I/2 percent over the
four quarters of 1992. A large portion of
the gain came in the fourth quarter,
when sales of new vehicles were
boosted by special promotional incentives and, apparently, by a growing perception among consumers that better
economic conditions lay ahead. More
than likely, some fundamental support
for sales came from the replacement
needs of persons who had put off buying
new vehicles during the recession and
the early phases of the recovery.
Spending picked up during the second half of 1992 for many items other
than motor vehicles, with notable gains
in categories in which an element of
discretion typically enters into households' purchasing decisions. Real outlays for furniture and household equipment rose at an annual rate of about
15 percent in the second half of 1992,
and real expenditures for apparel
climbed at more than a 10 percent rate.
In total, spending for consumer durables
other than motor vehicles grew almost
10 percent in real terms over the four
quarters of 1992, after declining in each
of the two previous years. Real outlays
Private Housing Starts
Millions of units, annual rate
Single-family
0.5
1986
1988
1990
1992
The data are seasonally adjusted and are from the
Department of Commerce.
for nondurables, which also had fallen
in both 1990 and 1991, rose more than
3 percent in the latest year. Real expenditures for services increased about
2 percent during 1992, slightly faster
than in other recent years.
The personal saving rate (the share of
disposable income not used for consumption or other outlays) rose moderately in the first half of the year, when
concerns of households about the
prospects for the economy apparently
led them to adopt more cautious attitudes toward spending. The rate then
turned down in the second half of the
year as consumers began to spend more
freely. The fourth-quarter rate was
slightly below the average for 1992 but
well within the range of quarterly observations seen over the past several years.
Real outlays for residential investment rose almost 15 percent during
1992, climbing to a fourth-quarter level
nearly 24 percent above the recession
low of early 1991. Most of the 1992 rise
in residential investment came in the
form of increased construction of singlefamily housing units, which benefited
from the further net reduction in mortgage interest rates over the course of the
year. Outlays for home improvements,
which make up about one-fifth of total
residential investment, also increased in
1992, after declining in each of the three
previous years; repair of the damage
caused by Hurricane Andrew accounted
for part of that gain. By contrast, multifamily housing remained depressed;
high vacancy rates and unfavorable
demographic trends continued to be big
obstacles to new construction activity in
that portion of the market.
As with consumer spending, the gains
in single-family housing activity tended
to come in intermittent bursts through
much of 1992. Sales of new homes
surged early in the year, weakened in
the spring, surged again during the sum-
10
79th Annual Report, 1992
mer, and then flattened out in the fourth
quarter; on net, the increase over the
year amounted to about 15 percent.
Mortgage interest rates, although lower
than in 1991, exhibited some mild
swings during 1992, and these swings
appear to have contributed to the fluctuations in home sales. Proposals early in
the year for a tax credit for first-time
homebuyers also may have affected the
timing of purchases to some degree.
Construction activity in the singlefamily sector also had its ups and downs
in 1992, influenced by unusual weather
patterns as well as by the fluctuations in
sales. Even so, the trend over the year
as a whole was decidedly upward, and
the average level of starts in the fourth
quarter was about 20 percent above that
of a year earlier.
Nonetheless, by the fourth quarter of
1992, starts in the single-family sector
had retraced only part of the decline that
took place in the late 1980s and early
1990s. Strong impetus for recovery was
provided by the declines in mortgage
interest rates, which were considerably
lower in 1992 than they were in 1986,
when single-family starts were at their
most recent annual peak. However, a
number of other developments continued to retard the recovery of housing
activity. Uncertainties about job prospects no doubt deterred some buyers
from taking advantage of the lower rates
on home mortgages. More broadly,
demographic trends in 1992 were less
favorable to growth in the demand for
single-family housing than were the
trends of the mid-1980s. The declines in
house prices in a number of regions in
recent years—and the more general lack
of any real price appreciation to speak
of—also may have affected demand to
some extent; certainly, housing was no
longer viewed by potential buyers as the
sure-fire, high-yield investment that it
was once thought to be.
Builders, for their part, remained
a little cautious in 1992, as did the
lenders who finance new construction.
More often than in the past, houses
tended to be started only when a buyer
was lined up; eagerness to build in anticipation of future sales was not widely
apparent.
In the multifamily sector, the number
of units started in 1992 was about
75 percent below the peak rates of the
mid-1980s; the sector accounted for
only 6 percent of total residential investment in 1992. The overbuilding that had
occurred in the multifamily sector in the
mid-1980s led to high vacancy rates
that stymied activity thereafter. In that
regard, only limited progress was made
in reducing vacancy rates for multifamily rental units in 1992, despite the
greatly diminished level of new construction. Declines in the population of
young adults continued to hold down
the speed at which the excess supply of
space could be worked off.
The Business Sector
The past year brought moderate increases in activity in the business sector
of the economy. Production, sales, and
orders rose, on net, over the year, and
business profits continued to swing back
up from the recession lows of 1991.
Many businesses continued to undertake
major structural changes designed to
cut costs and enhance efficiency; the
changes were manifest both through
reorganization of existing operations
and through investment in new technologies. Businesses also continued to
shore up their finances, trimming away
debt and building equity. Financial pressures persisted in the business sector
in 1992, but, in general, they seemed
to become less acute as the year
progressed.
The Economy in 1992
Industrial output rose more than
3 percent from December 1991 to
December 1992. Production fell in the
first month of 1992 but then picked up,
rising about XA percent per month from
February through May. During the summer, the expansion of activity seemed to
be losing momentum; orders and shipments fell slightly, on net, from May to
August, factory inventories backed up a
little, and industrial production essentially flattened out over a four-month
stretch. However, orders and shipments
began moving up once again in September, and they increased considerably in
the fourth quarter. Industrial production
also picked up once again in the fourth
quarter, rising at an annual rate of about
7 percent over the final three months of
the year.
Business profits, which had taken
a turn for the better late in 1991,
improved further during 1992. The operating profits earned by nonfinancial corporations from their domestic operations rose 18 percent from the final
quarter of 1991 to the third quarter of
1992, and a further gain seemed implicit
in the available data for the fourth quarter. (An actual estimate of fourth-quarter
profits was not published by the Department of Commerce until late March,
after this REPORT had gone to press.)
Profits of these firms were lifted, in part,
by further increases in the volume of
output. In addition, tight control over
\\
costs led to increases in profits per unit
of output. Unit labor costs of nonfinancial corporations rose only slightly from
the start of the current economic expansion to the third quarter of 1992, and net
interest costs declined sharply over this
period because of lower interest rates
and restraint in the use of debt. The
domestic profits of financial corporations were strong in the first half of 1992
but were severely depressed in the third
quarter by the unprecedented losses that
insurance companies suffered in the
wake of Hurricane Andrew; in the
absence of the hurricane, profits in the
financial sector would have increased in
the third quarter.
The economic condition of smaller
companies also seemed to improve
somewhat in 1992. The estimated rise in
the profits of nonfarm proprietors over
the year was the largest annual gain
since the mid-1980s; increases had been
relatively small over the three previous
years.
The net income of farm proprietors
turned back up in 1992 after a moderate
decline in 1991. Farm output rose to a
record high in 1992, with strong gains
for both crops and livestock. Prices,
meanwhile, lagged year-earlier levels
through much of 1992, but most of that
Corporate Profits before Taxes
Percent of gross domestic product
Industrial Production
Index, 1987= 100
1986
_L
1989
1990
1991
1992
1988
1990
1992
Profits of nonfinancial corporations from domestic
operations, with adjustments for inventory valuation and
capital consumption, divided by GDP of nonfinancial
corporate sector.
12
79th Annual Report, 1992
slippage in farm prices already had
taken place by the start of the year; the
average level of farm prices in December 1992 actually was about the same
as that a year earlier. Farm production
expenses were little changed for a second year as farm operators, like their
nonfarm counterparts, continued to
maintain tight control over costs.
Business investment in fixed capital
rose about 8 percent in real terms during
1992, more than reversing the decline of
the previous year. Spending for equipment increased in each quarter of 1992,
and the gains cumulated to about
121/2 percent by the fourth quarter; with
spare capacity still extensive in most
industries in 1992, much of the gain in
equipment spending over the year probably was a result of the desire of businesses to modernize their operations.
Meanwhile, nonresidential construction
spending, which had plunged 14 percent
in 1991, fell by a much smaller amount
in 1992—23/4 percent according to the
estimate in the latest GDP report.
Increased spending for computers was
at the forefront of the rise in equipment
outlays in 1992. In terms of annual averages, the nominal outlays for office and
computing equipment rose nearly
17 percent; the gain in real terms was
much greater still, as technological
advances and competitive market conditions combined to continue driving
down the price of real, effective computing power. Businesses also boosted their
outlays for telecommunications equipment, especially in the second half of
1992. Spending for motor vehicles
strengthened in 1992, and investment in
industrial equipment edged up after
three years of decline. Spending for aircraft traced out a volatile pattern during
1992 and, for the year as a whole, was
down only moderately from the high
level of 1991; at year-end, however, the
prospects for such spending did not
seem encouraging, given the losses that
had been experienced by airline companies and the related cancellations and
stretch-outs of orders that had been
reported.
The moderate decline in nonresidential construction outlays during 1992
reflected some widely divergent trends
across the various types of construction
activity. Spending for new office buildings fell sharply further during the year,
to a fourth-quarter level that was more
than 60 percent below the peak of the
mid-1980s. In addition, real outlays for
industrial structures declined in 1992 for
the second year in a row, influenced, no
doubt, by the current high levels of
unused industrial capacity and by the
Real Business Fixed Investment
Changes in Real Business Inventories
Percentage change, annual rate
Billions of 1987 dollars, annual rate
Structures
30
Producers' durable equipment
1|
15
I ••
1
1—
1
0
1
15
1
1989
1990
1991
1992
Total nonfarm sector. The data are seasonally adjusted
and come from the Department of Commerce.
1
1989
1
1990
J
1991
10
i
1992
The data are seasonally adjusted and come from the
Department of Commerce.
The Economy in 1992
ongoing trend toward tighter control of
inventories and concomitant reductions
in needed storage space. Annual outlays
for oil and gas drilling also fell further
in 1992; a rise in drilling in the year's
final quarter probably was prompted
mainly by a year-end phaseout of certain tax incentives, although some drillers may also have been responding to an
upturn in natural gas prices over the
year.
Other types of construction activity
fared better in 1992. Spending for commercial structures other than office
buildings moved up over the year, after
sharp declines in both 1990 and 1991,
and the outlays of utilities rose appreciably, boosted by environmental requirements as well as by further moderate
additions to capacity. Increases in construction spending also were reported
for various types of institutional structures, such as hospitals.
13
ually strengthening, the rate of increase
in federal receipts picked up a little, to
3V2 percent, from only 2lA percent in
fiscal 1991. However, spending once
again rose faster than receipts; total federal outlays were up AV2 percent in fiscal
1992, after a rise of nearly 53/4 percent
in the previous fiscal year.
The rates of growth in total spending
in 1991 and 1992 may well understate
the degree of upward momentum in federal outlays in those years. In 1991, total
spending was held down considerably
by a convention used in the federal budget to account for the flow of contributions to the United States from its allies
in the Gulf War. Those contributions
were counted as negative defense outlays rather than additions to receipts.
Additional contributions from the allied
countries were received in fiscal year
1992, but they were much smaller than
Government Surpluses and Deficits
Billions of dollars
The Government Sector
Government purchases of goods and services, the portion of government spending that is included in GDP, increased
slightly in real terms over the course of
1992, after declining slightly during
1991. Federal purchases fell about
3
/4 percent in real terms over the year, as
a further decline in real defense purchases more than offset a small increase
in real nondefense purchases. State and
local purchases of goods and services
increased about Wi percent during
1992, a rise slightly larger than in 1991
but still well below the rates of increase
seen through much of the 1980s.
Governments at all levels continued
to be plagued by severe budgetary
imbalances in 1992. At the federal level,
the unified budget deficit rose about
$20 billion in fiscal year 1992, to a level
of $290 billion. With the economy grad
Federal government
pnm
100
200
I
I
I
I
I
I • •
State and local governments
15
30
II
1986
II
1i
1988
II
II • •
1990
I
™
1992
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 for operating and capital accounts on a national income accounts
basis and are from the Department of Commerce.
14
79th Annual Report, 1992
in 1991. Another important factor at
work in 1992, however, was a delay in
funding the activities of the Resolution
Trust Corporation, which kept the 1992
outlays for deposit insurance programs
much lower than they otherwise would
have been.
Excluding the outlays for deposit
insurance and the effect of the allied
contributions on reported levels of
defense spending, federal expenditures
rose about 6V2 percent in nominal terms
in fiscal year 1992, after an increase of
nearly 9 percent in fiscal year 1991.
Spending for entitlements, especially
those related to health care and income
support, continued to grow very rapidly
in 1992. In the health area, federal outlays for Medicaid increased nearly
30 percent, and spending for Medicare
rose 14 percent. Spending for income
security was boosted in 1992 by further
large increases in unemployment benefits and food stamp disbursements. In
dollar terms, the combined rise in outlays for health care and income security
amounted to about $60 billion. Increased expenditures for social security
added almost another $20 billion.
Combined spending for all other programs rose only slightly in fiscal year
1992. Within that broad and diverse
grouping, defense outlays fell sharply in
nominal terms, once adjustment is made
for the allied contributions, but some
nondefense functions posted large
increases in outlays.
State and local governments saw no
relief from budgetary pressures in 1992.
The combined deficit in their operating
and capital accounts, net of social insurance funds, widened a bit over the first
three quarters of the year, reversing the
small improvement that had been
achieved in the latter part of 1991. As is
true at the federal level, a rapidly rising
level of mandated transfer payments to
individuals for health and income sup
port was at the core of the budget difficulties of many states and localities; in
nominal terms, transfer payments in the
fourth quarter were about 16 percent
above the level of a year earlier.
Construction spending by state and
local governments picked up in 1992.
According to preliminary data, the real
gain in these outlays amounted to 3 percent over the four quarters of the year.
Spending for highways increased considerably in 1992, and outlays for buildings other than schools were strong in
the first half of the year. Construction of
educational facilities, which had been
boosted in previous years by increases
in the school-age population, rose further in 1992, but the increase was small,
both in absolute terms and relative to the
gains in most other recent years.
Growth in other major categories
of state and local expenditures was
restrained. Compensation of employees,
which accounts for more than half of
total state and local expenditures, increased IV2 percent in real terms over
the four quarters of 1992; in nominal
terms, the rise over the year amounted
to about 43/4 percent, similar to that of
1991 but much less than the nominal
increases seen in the years before 1991.
Restraint on wage growth was widespread in the state and local sector in
1992, and although total employment in
the sector grew a little faster than in
1991, hiring freezes, furloughs, and layoffs continued to be reported in some
hard-pressed jurisdictions. State and
local purchases of durable and nondurable goods—such things as equipment
and supplies—apparently grew little in
real terms over the course of 1992. Real
purchases of services from outside suppliers apparently edged down for the
third year in a row.
Many states and localities have implemented tax increases in recent years in
an effort to bolster receipts. In addition,
The Economy in 1992
grants-in-aid from the federal government have been rising rapidly, and, in
1992, improvement in the economy
helped boost receipts to some degree. In
total, state and local receipts rose
73/4 percent in annual average terms in
1992, outpacing the growth of nominal
GDP by a considerable amount. However, for the third year in a row, the
increase in receipts fell short of the
annual rise in nominal expenditures,
which amounted to more than 8 percent
in 1992.
Labor Market Developments
The labor market remained relatively
sluggish in 1992. Some large companies
continued to undergo major restructurings or reorganizations, and these
changes led in many cases to permanent
work force reductions at those firms.
More generally, businesses remained
hesitant to take on new workers, even as
the recovery progressed. The stillsluggish pace of output growth in the
first half of the year tended to limit labor
requirements during that period. Later
on, when firms started to expand output
more rapidly, they were able to do so
without making major long-term hiring
commitments. Needs for additional
workers were met, in many cases,
through use of temporary-help firms,
rather than through permanent additions
to companies' own payrolls.
Nonetheless, the tilt of the overall
employment trend was positive, rather
than negative as it had been in 1990 and
1991. Payroll employment, a measure
that is derived from a monthly survey of
business establishments, was up about
600,000 during 1992. The number of
jobs in manufacturing fell further in
1992, but not as much as in either of
the two previous years. In addition,
employment in construction changed
15
little in 1992, after two years of sharp
decline.
About 900,000 new jobs were created
in the service-producing sector of the
economy in 1992. The number of jobs
in retail trade turned up a little, on net,
after dropping about one-half million
over the two previous years. Also, firms
that provide services to other businesses
recorded strong employment growth in
1992; more than likely, these firms were
the ones that benefited most from the
tendency of businesses to purchase labor
and services from other firms rather than
hire additional workers of their own.
Employment in health services, which
had remained on a strong upward trend
right through the recession, continued to
grow fairly rapidly in 1992.
The employment measure that is
derived from the monthly survey of
households was stronger than the payroll measure in 1992; it showed an
increase of about IV2 million in the
number of persons holding jobs and by
year-end had moved back close to the
previous cyclical peak of mid-1990.
Reasons for the stronger performance of
the household series are not entirely
clear. Differences in coverage between
the household survey and the payroll
survey accounted for only a small part
of the 1992 gap, and at year-end other
possible explanations were little more
than conjecture.
The number of unemployed persons
increased in the first half of 1992, to a
peak in June of nearly 9.8 million. Job
losses—many of them apparently
permanent—continued to mount in the
first half of the year, and new job opportunities did not open up fast enough to
fully absorb either those workers or
others entering the work force for the
first time. As a result, the unemployment rate rose more than V2 of a percentage point in the first half of the year, to a
June level of 7.7 percent.
16
79th Annual Report, 1992
The second-half outcome was more
favorable. The number of unemployed
persons declined about one-half million
from June to December, and the unemployment rate moved down over that
period, to a level of 7.3 percent at yearend. Some of the workers who had been
laid off temporarily were recalled in the
second half of the year. In addition, the
number of unemployed workers not
expecting to be recalled—the so-called
permanent job losers—also declined;
presumably, these workers either found
new jobs elsewhere in the economy or
dropped out of the labor force altogether. A similar story applied to
unemployed new entrants, a category of
jobless workers whose ranks were a
little thinner at the end of 1992 than they
had been at midyear.
In the aggregate, the civilian labor
force—the sum of those persons who
are employed and those who are looking
for work—rose sharply in the first half
of 1992 but changed relatively little
thereafter. Its level in December was up
l3/4 million from that of a year earlier.
The labor force participation rate—the
proportion of the working-age population that is in the labor force—fell over
the second half of the year, reversing
part of its first-half rise.
Against a backdrop of slack in labor
markets and in the context of reduced
inflation, the rate of rise in workers'
hourly compensation continued to slow
in 1992. The employment cost index for
private industry (a measure of labor cost
that includes wages and benefits and
covers the entire nonfarm business sector) increased 3V2 percent from December of 1991 to December of 1992. The
index had risen nearly AVi percent in the
previous twelve-month period, and as
recently as mid-1990 its twelve-month
rate of change had exceeded 5 percent.
The employment cost index for wages
and salaries increased only 2.6 percent
Labor Market Conditions
Net change, millions of jobs, annual rate
Private nonfarm payroll employment
J
1
1
1
L
Percent
Civilian unemployment rate
I
I
I
Percentage change, Dec. to Dec.
Employment cost index
Total compensation, private industry
• 11111
Percentage change, Q4 to Q4
Output per hour
Nonfarm business sector
I
1986
I
1
1988
J
1990
The data are from the Department of Labor.
L
1992
The Economy in 1992
during 1992; this was the smallest annual rise ever reported in this measure,
which dates back to 1975. The rate of
rise in the cost of benefits provided by
firms to their employees also slowed in
1992, but the size of the increase—5lA
percent—was still relatively large. Many
firms, both large and small, continued to
be pressured by the rising cost of medical care for their employees and by the
increased cost of workers compensation
insurance; the difficulty of bringing
these costs under control may well have
been a serious deterrent to increased hiring in 1992.
Despite the further slowdown in nominal compensation per hour in 1992, the
purchasing power of an hour's labor
appears to have risen in real terms, as
the nominal increase in hourly wages
and benefits, as measured by the
employment cost index, outpaced the
rise in consumer prices for the second
year in a row. Real compensation, computed in this manner, had declined
sharply in 1990, and the increase in
1989 had been barely positive.
Sustained increases in real living standards depend ultimately on advances in
the productivity of the work force, and
on that score the economy performed
well in 1992. Output per hour worked in
the nonfarm business sector jumped
more than 3 percent over the year, the
largest annual gain since 1975. A portion of this large rise was a reflection of
normal cyclical tendencies, but longerrange improvement in productivity
growth also appeared to be in progress.
The jump in output per hour in 1992,
combined with the slowing of compensation gains, held the increase in unit
labor costs to just 0.4 percent.
Price Developments
The consumer price index rose 3.1 percent over the four quarters of 1992, vir
17
tually the same as the increase in the
previous year. Energy prices, which had
fallen in 1991, turned up a little in 1992,
but price increases elsewhere in the
economy were generally smaller than
those of the previous year. The limited
rise in labor costs in 1992 was one
important factor exerting restraint on the
rate of price increase. In addition, the
cost of materials used in production
rose only moderately over the year, as
did the prices of goods imported from
abroad. Although inflation expectations,
as reported in various surveys of consumers and business officials, remained
a step or so above actual inflation rates,
they too appear to have moved lower
over the year. Their levels toward yearend were about in line with—or, according to some surveys, less than—the
lower bound of the range of inflation
expectations reported during the 1980s.
The CPI for food increased a bit less
than PA percent in 1992, about the same
amount as in 1991. Not since the 1960s
had there been a two-year period in
which the cumulative increase in food
prices was so small. This low rate of
food price inflation in 1991 and 1992
was, in part, a reflection of the same
factors that were working to pull inflation down in other parts of the economy.
In addition, food prices were restrained
by favorable supply conditions in the
farm sector. Meat production rose further in 1992, and the output of crops
soared. Dryness in some regions imparted temporary volatility to crop
prices in late spring. Thereafter, growing conditions turned exceptionally
favorable and remained so through the
summer and into early autumn. Unusually wet conditions in some regions later
on in the autumn apparently made only
a small dent in the eventual size of the
harvest.
The rise in consumer energy prices
over the four quarters of 1992 amounted
18
79th Annual Report, 1992
to about 2lA percent. The previous year,
energy prices had fallen 8 percent. With
no major supply or demand shocks
springing up in world oil markets in
1992, the price of West Texas intermediate stayed in the relatively narrow trading range of about $18 to $23 per barrel.
At the retail level, price changes for
petroleum products were mixed in 1992;
the price of gasoline rose about 3 percent, while fuel oil prices declined moderately. The CPI for natural gas rose
nearly 5 percent in 1992, considerably
more than in other recent years.
Although much of that rise in gas prices
came in the second half of the year in
the wake of supply disruptions caused
by Hurricane Andrew, prices of gas at
the wellhead had already moved up considerably before the hurricane hit, apparently in response to a somewhat tighter
supply-demand balance than had
existed over the previous year or so.
The CPI excluding food and energy
rose 3.4 percent over the four quarters
of 1992, a percentage point less than it
had risen in 1991. The slowdown was
widespread among the various categories of goods and services that are
included in this measure of core inflation. The rate of rise in the cost of
shelter—the single most important category in the CPI, with a weight equal to
more than one-fourth of the total—
slowed further in 1992; rents for both
apartments and houses apparently were
damped by the large amount of vacant
housing that was available in many parts
of the country. The prices of other services that are included in the CPI—
which collectively make up another onefourth of the total index—also slowed
appreciably in 1992; nonetheless, their
overall rate of increase remained relatively high. The costs of medical care
services and tuition continued to rise
much faster than prices in general in
1992, and airfares rebounded from their
1991 decline. The CPI for commodities
other than food and energy rose 2Vi percent during 1992, after an increase of
more than 4 percent over the four quarters of 1991. Price increases for this
broad category of goods were restrained
by the cost and price developments in
manufacturing: Unit labor costs in manufacturing actually declined in 1992,
and the producer price index for finished
goods rose less than 2 percent.
After falling sharply from mid-1990
to the end of 1991, the prices of industrial commodities generally changed
little, on balance, during 1992. By the
end of 1992, however, prices for some
industrial metals had begun to tilt up,
consistent with the pickup in the pace of
Prices
Percentage change, Q4 to Q4
Consumer
Consumer excluding food and energy
1986
1988
1990
1992
For all urban consumers. The data are seasonally
adjusted and are from the Department of Labor.
The Economy in 1992
industrial expansion toward year-end.
The prices of lumber and plywood—
following a path considerably different
from that of most other commodities—
rose substantially during 1992. The
surge in prices of these products appeared to be a reflection of the uptrend
in single-family housing construction,
weather-related supply disturbances in
some timber regions, and adjustment of
the logging industry to environmental
restrictions that had been implemented
in some areas of the country. Prices of
some other wood products, such as pulp,
also rose sharply at the producer level in
1992.
The increases in prices of these raw
materials showed through to some
extent to broader measures of producer
prices. For example, the producer price
index for intermediate materials excluding food and energy—a price index that
encompasses a wide range of production
materials—rose 1 percent during 1992
after declining about 3A percentage point
over the four quarters of 1991. From an
economywide perspective, however, the
pickup in materials prices in 1992 was
not sufficient to dominate the deceleration in labor costs, which account for
a far greater share of total production
costs in the economy.
•
19
21
Monetary Policy and Financial Markets in 1992
Federal Reserve policy in 1992 was
directed at promoting and extending the
recovery from the 1990-91 recession
in the context of continued progress
toward price stability. Designing and
implementing constructive monetary
policies continued to be exceptionally
difficult. As in the previous couple of
years, economic activity was held back
to an unusual degree by the efforts of
households, nonfinancial businesses,
and some key providers of credit to
the economy, including commercial
banks, to strengthen their balance sheets.
These forces tended to alter the normal
relations between financial flows—
particularly those reflected in movements in M2 and M3—and the behavior
of the economy. Under the circumstances, the Federal Reserve had to take
a flexible approach to the use of money
and credit aggregates as intermediate
policy targets; specifically, in light of
evidence that expansion in economic
activity was being financed to an
unusual extent in capital markets rather
than through banks and other depositories, the System tolerated shortfalls of
M2 and M3 from their target ranges.
The Federal Reserve judged it appropriate to ease reserve conditions on three
occasions in 1992, when financial and
economic data suggested that the economy might be losing momentum. The
extent of the easings last year was considerably less than in 1991, however, as
the underlying trend of the economy
overall was more positive. Partly as a
result of the cumulative effect of the
monetary easings of recent years, economic activity accelerated in 1992 to its
fastest pace since 1988. This pickup was
achieved even as various measures of
inflation evidenced further slowing, with
the "core" inflation rate falling to levels
last seen in the early 1970s. Thus, 1992
was a year not only of financial repair,
but also of improved aggregate economic performance in the United States.
The Implementation
of Monetary Policy
The year 1992 began with short-term
interest rates at their lowest levels in
more than a quarter of a century, following a series of actions by the Federal
Reserve in the latter part of 1991 that
reduced the discount rate and the level
around which the federal funds rate was
expected to trade to 3Vi percent and
4 percent respectively. Long-term rates
were also at lower levels, reflecting the
policy actions and a weakening of economic activity in the final quarter of
1991.
Evidently in the expectation that these
rate cuts would revive the recovery, the
stock market began the year with strong
upward momentum, and the dollar
appreciated. However, other evidence
that the economy was picking up
remained scanty in the initial part of
1992, despite the significant monetary
stimulus already in place and the positive developments in equity and capital
markets. Apart from rising housing
starts, a phenomenon in part related to
special weather and tax factors, the
economy appeared sluggish in the first
few weeks of 1992, and confidence levels were low. Spending by households
and businesses was seemingly being
restrained by efforts to strengthen financial positions, and banks had done little
22
79th Annual Report, 1992
to reverse the substantial tightening of
lending standards that occurred in 1990
and 1991. In view of the still-tentative
nature of the recovery and the solid
progress against inflation that had been
made to that point, the Federal Open
Market Committee at its first meeting of
1992 instructed the Manager of the
Open Market Account at the Federal
Reserve Bank of New York to remain
especially alert to evidence that money
market conditions might need to be
eased before the next scheduled meeting
of the Committee. Such a policy stance
biased toward ease had prevailed over
much of 1991.
M2 and M3, which had posted moderate gains in January, surged in February,
partly because of stronger income
growth and earlier sharp declines in
short-term interest rates and partly because of special factors—above-average
tax refunds and a jump in mortgage
refinancing, which resulted in funds being held temporarily in demand deposits. Underlying money growth remained
very weak, however, and well below
that consistent with expectations based
on the historical relationship of money
with income, deposit rates, and market
interest rates. In March, as the influence
of the special factors abated, M2 flattened out, and M3 contracted.
News on the economy became more
upbeat as the first quarter progressed.
Retail sales and housing starts strengthened, industrial production turned up,
and the confidence of businesses and
households improved, as did the quality
of their balance sheets. The signs of
recovery and a market view that prospects for further near-term monetary
ease had faded caused long-term interest
rates to increase during this period, and
the dollar rose on foreign exchange markets as well. Private interest rates rose
less than rates on Treasuries, likely
reflecting perceived reductions in the
riskiness of private debt as the economy
strengthened coupled with concerns
about enlarged Treasury demands on
credit markets stemming from discussions of possible fiscal stimulus.
Areas of weakness in the economy
remained, however—some attributable
to the substantially overbuilt commercial real estate sector and some to the
transition to a smaller defense sector. In
addition, the backup in long-term interest rates threatened to slow the pace
of balance sheet adjustment and to damp
spending for housing, consumer durables, and business investment. Meanwhile, the outlook for exports clouded.
In early April, the System eased
reserve conditions again. The action was
taken on indications that the monetary
aggregates, already at the bottom of
their target ranges after their sluggish
performance in March, were contracting, that the pace of economic expansion might be slowing once again, and
that inflation was continuing to recede.
Short-Term Interest Rates
Percent
Treasury bills
Three-month
1982
1984
1986
1988
1990
1992
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.
Monetary Policy and Financial Markets
Short-term interest rates fell more than
the lA percentage point drop in the trad-
23
ing level of the federal funds rate, as
market participants judged the economy
Reserves, Money Stock, and Debt Aggregates
Annual rate of change in percent, based on seasonally adjusted data except as notedl
1992
Item
Depository institution reserves 2
Total
Nonborrowed
Required
Monetary base 3
Concepts of money4
Ml
Currency and travelers checks
Demand deposits
Other checkable deposits
M2
Non-Mi components
MMDAs, savings, and smalldenomination 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
1989
1991
Year
Ql
Q2
Q3
Q4
-.4
4.6
-.2
4.0
2.2
2.4
1.8
9.4
8.7
9.2
9.4
8.2
20.2
20.4
20.4
10.4
23.4
19.3
23.5
9.1
14.9
16.7
15.4
7.8
9.3
6.0
9.9
10.5
27.9
34.5
27.4
12.9
.6
4.8
-2.9
1.0
4.3
10.9
-.6
3.6
8.0
8.3
3.3
12.5
14.3
9.1
18.0
15.4
15.5
7.2
21.6
16.9
10.6
6.7
13.4
11.3
11.6
11.1
13.3
10.8
16.8
10.3
19.6
19.3
4.7
6.2
4.0
3.9
2.8
1.1
1.8
-2.6
3.2
-1.1
.3
-3.4
.8
-3.2
2.7
-2.8
3.8
2.8
.9
-2.3
-1.6
-2.5
-2.8
-2.2
30.6
-8.5
11.4
3.4
4.2
-6.8
-5.2
1.7
-3.0
18.5
-6.6
-27.8
-7.5
15.3
-4.1
2.3
3.7
-.3
5.4
1.8
-6.5
-9.7
1.1
-6.2
-13.0
.3
-6.6
-16.3
1.9
-4.1
-17.6
-.6
-4.9
-16.9
.1
-3.6
-17.9
-.2
-14.3
-17.1
17.7
-13.3
-23.3
21.9
-12.4
-13.6
33.5
-20.2
-10.7
18.2
7.8
-22.6
33.0
-11.2
-27.0
24.0
16.5
-24.0
32.8
2.6
-19.5
-19.3
23.1
-28.5
7.2
8.4
6.9
10.3
5.9
4.3
11.0
2.2
4.9
10.7
3.0
4.2
10.0
2.3
5.7
14.4
2.8
4.9
10.7
2.9
4.4
6.0
3.8
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 all
quarterly reporters, and for all weekly reporters without
required reserve balances, the excess of current vault cash
over the amount applied to satisfy current reserve requirements. For further details, see the Federal Reserve's H.3
Statistical Release.
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.
1990
M2 is Ml plus savings deposits (including money
market deposit accounts); small-denomination time
deposits (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
general-purpose and broker-dealer money market mutual
funds, excluding IRAs and Keogh accounts; wholesale
overnight and continuing-contract repurchase agreements
(RPs) issued by commercial banks and thrift institutions
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; 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 at all banking
offices in Canada and the United Kingdom and at foreign
branches of U.S. banks worldwide net of money fund
holdings. For further details, see the Federal Reserve's
H.6 Statistical Release.
n.s.a. Not seasonally adjusted.
24
79th Annual Report, 1992
sufficiently weak to make further nearterm monetary easing moves likely. The
easing buoyed the stock market, but
long-term rates showed a limited
response and remained well above yearend levels.
In the weeks following the April easing, news on the economy was mixed,
but positive on balance. Single-family
housing starts, which had contracted
in March, fell considerably further in
April, and retail sales were little
changed on balance between February
and April. However, nonfarm payroll
employment and industrial production
continued to expand. Weakness in the
monetary aggregates persisted into
April, but concerns on this front were
allayed to some degree by evidence that
this weakness was importantly related to
the ongoing rechanneling of credit away
from depository institutions and into
capital markets, and by expectations that
this rechanneling and other financial
restructuring would continue to damp
money growth considerably more than
economic activity. Moreover, the restraint that balance sheet restructuring
was exerting on spending was seen as
likely to abate in view of the considerable progress that by then had been
made in that regard, both by borrowers
and by depository institutions, as banks
added rapidly to capital. At its mid-May
meeting, the Committee determined that
its bias toward ease in assessing possible intermeeting policy changes was no
longer appropriate.
However, data that became available
in the weeks after the mid-May meeting
suggested that the forces restraining economic expansion continued to be quite
strong. The contraction of consumer
credit accelerated, and bank loans more
generally began to decline. With the
forces that had been constraining money
growth intensifying, all three monetary
aggregates contracted in June.
Nonfinancial data confirmed that the
economy remained slack. Although both
nonfarm payroll employment and industrial production increased in May for the
fourth straight month, the unemployment rate rose sharply because of a rising labor force participation rate. Moreover, homebuying and retail sales, other
than of automobiles, slowed from the
pace earlier in the year, and demand for
U.S. exports was held down as growth
in some foreign industrial countries
slowed or turned negative while other
countries struggled to recover from
their downturns in 1991 or remained in
recession.
With the tenor of incoming economic
news having become distinctly negative,
long-term Treasury rates, which had
been little changed during most of May
and June, turned down around midyear,
although they remained above year-end
lows. In light of these developments,
and with the downward trend in inflation continuing, the System reinstated
its bias toward ease at its midyear meeting. Immediately after that meeting, on
July 2, with evidence of a weakening
economy confirmed by a further rise in
the unemployment rate, to 73A percent
in June, the Federal Reserve reduced
both the discount rate and the federal
funds rate by Vz percentage point, to
3 percent and 3lA percent respectively.
Banks lowered their prime rate, also by
Vi percentage point, to 6 percent, leaving its unusually wide spread over market rates intact.
Long-term interest rates fell in July in
response to the employment data and
the monetary easing, and they moved
down further into early August as the
incoming economic news continued to
be poor. The drop in yields brought
long-term rates to the lowest levels since
the early 1970s, and the dollar continued
to retreat from the higher levels reached
in April.
Monetary Policy and Financial Markets
In early September, after another
weak labor market report and in the
context of contracting industrial production and positive but weaker-thanexpected expansion in the monetary and
credit aggregates, reserve conditions
were eased further and the federal funds
rate fell to around 3 percent. Shorterterm market rates dropped on this action, bringing them to the neighborhood
of zero in real terms. Despite the poor
economic news and expectations that
further easing moves were in the offing,
long-term interest rates, which had
initially declined after the September
action, drifted back up on renewed concerns that weakness of the economy
might prompt significant fiscal stimulus,
thereby enlarging the size of the federal
budget deficit.
Throughout the late summer and
early fall, policy was conducted against
a background of tension in foreign
Long-Term Interest Rates
Percent
16
. Conventional mortgages
U.S. government bonds
i
1982
i
1984
i
i
1986
i
i
i
1988
i
i
1990
i
1992
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.
25
exchange markets; a strong deutsche
mark had caused several European
countries to raise interest rates sharply
to preserve fixed exchange rate relationships with the exchange rate mechanism
of the European Monetary System at a
time when aggregate demand in these
countries was slowing or sluggish. The
dollar continued to decline into early
September but then began to firm. The
rise in long-term rates contributed to the
reversal, as did actions by several European countries to devalue their currencies, in some cases dropping out of the
ERM, and to lower their interest rates.
With short-term interest rates in the
United States lower, the monetary
aggregates continued to expand in September. The implications of the strength
of M2 were difficult to assess, however,
because it reflected to an uncertain
degree the impact of mortgage refinancing on demand deposits as well as strong
foreign demands for U.S. currency.
Stronger income also appeared to be
contributing to money growth, as private employment edged up and the
unemployment rate declined in September. Nevertheless, the outlook for the
economy remained uncertain. Final
demand seemed weak and was being
met in part through higher imports,
holding down industrial production and
employment, and business and consumer sentiment remained relatively
depressed.
In these circumstances, the Committee established a strong bias toward ease
at its early October meeting. However,
an improvement in economic indicators
immediately after the meeting, along
with evidence of some strength in M2
and bank credit, stayed any further easing actions. Because anticipation of further easing had been built into the structure of interest rates, short-term rates
backed up after the meeting. Rates also
rose at the long end, responding to
26
79th Annual Report, 1992
growing expectations that fiscal stimulus could follow the upcoming presidential election, as well as to the indications
of improved economic performance.
Evidence of greater economic
strength continued to accumulate in a
variety of indicators of production and
spending during the fourth quarter.
Although this news initially put further
upward pressures on longer-term interest rates, these increases were slowed
and then reversed as the better economic
prospects, along with statements and
actions of the incoming Administration,
began to be viewed as reducing the likelihood of outsized fiscal stimulus. Also
helping to lower longer-term rates was
continuing good news on inflation.
With the better economic news, the
Federal Reserve kept reserve conditions
and short-term interest rates unchanged
toward year-end, and the Committee at
its December meeting decided to move
back to a symmetric policy stance.
Reflecting the improved economic outlook, a stock market rally developed that
rivaled in strength the rally at the beginning of the year, and the dollar rose
further.
Although the monetary aggregates
strengthened a bit in the fourth quarter,
the depressing effects of balance sheet
restructuring continued to be important,
a fact that became clearer once the hardto-measure temporary boost to deposits
deriving from higher mortgage refinancing abated after October. The velocities
of both M2 and M3 rose significantly
further in the final quarter of the year,
contributing to the exceptional velocity
increases posted by both measures for
the year as a whole.
pickup in nominal GDP growth last
year, the broad monetary aggregates
decelerated further, and expansion of the
nonfinancial debt aggregate picked up
by only a small amount. As had been the
case in the previous couple of years,
considerable efforts in key sectors of the
economy to improve balance sheets had
a significant restraining effect on credit
growth and, especially, on money
growth—indeed, a much greater effect
than on spending itself. Growth of the
debt of nonfinancial borrowers other
than the federal government amounted
to about 3 percent in 1992, only 3A percentage point more than in 1991. Households restrained their borrowing in
1992, in part by limiting the accumulation of financial assets, and businesses
curbed their credit needs by financing
spending out of cash flow and equity
issuance.
The expansion of federal debt slowed
slightly to a still-rapid IO3A percent, held
down by the lack of activity by the
Resolution Trust Corporation (RTC)
after April, when it exhausted its legislative authority to fund losses at savings
and loans. Reflecting the slowdown
in the activities of the RTC and the
Total Domestic Nonfinancial Debt
Trillions of dollars
Actual
12.0
11.5
Range
11.0
Monetary and Credit Flows
Credit flows were damped again in
1992, and money growth was exceptionally weak. Despite an appreciable
I
1991
i
i
i
i
i
i
i
i
i
i
1992
The range was adopted by the FOMC for the period
from 1991:Q4to 1992:Q4.
Monetary Policy and Financial Markets
improving health of depositories, federal outlays attributable to deposit insurance activity fell from around $50 billion in 1991 to nil in 1992. The total
nonfinancial debt aggregate expanded
about 5 percent in 1992, a rate that was
near the lower end of the Committee's
monitoring range.
The sluggishness in credit and money
growth in 1992 appeared to represent
mainly weak demand rather than any
new tightening of credit supply terms.
At banks, loan flows were depressed,
and, in the absence of appreciable credit
demands, bank asset growth mainly took
the form of security acquisitions.
Some observers have argued that the
shift to government securities in 1992
and other recent years was motivated by
the Basle risk-weighted capital standards, which require capital against
loans but not against many government
securities. However, the effect of these
standards appears to have been relatively minor. As in 1990 and 1991,
banks that had already achieved adequate capital positions were the major
purchasers of U.S. Treasury and agency
securities in 1992, and loan flows were
Capital Ratios and the Loan Delinquency
Rate at Commercial Banks
Percent
Percent
Total capital to
risk-weighted assets
6.0 Delinquency
5.5 ~ Equity capital to asset1
5.0
-
1988
1990
1992
27
depressed at these banks as well. Moreover, other regulatory factors may have
contributed to a reduction in the willingness of banks to take deposits and make
loans; these factors included rising
deposit insurance premiums and tighter
regulations and requirements of the laws
governing banks and thrift institutions
in recent years. A similar pattern of asset
growth concentrated in government securities occurred at credit unions, which
are not subject to the Basle capital standards. Although loan growth at banks
generally remained lackluster in 1992, it
did strengthen in the final quarter of the
year as the economy began to expand
more rapidly. At the same time, the
growth of bank holdings of government
securities, which had been very rapid all
year, slowed in the fourth quarter.
To be sure, the pickup of bank lending toward year-end seemed primarily
related to stronger demand. Banks gave
little indication in Federal Reserve surveys that they had begun to ease the
tighter lending standards and terms that
they had put in place in 1990 and 1991,
and the unusually wide spread of the
prime rate over market rates persisted.
Nonetheless, banks did seem better positioned to meet increases in demand
thanthey had been a few years earlier.
Not only has their liquidity improved
with the acquisition of government securities, but banks have made substantial
progress in improving capital positions,
including leverage ratios—which are
unaffected by asset composition. Banks'
profits and their debt and equity issuance reached record levels in 1992.
Moreover, the quality of banks' assets
showed some scattered signs of improvement; the delinquency rate for
bank loans, though still high, began to
turn down, as did the rate of charge-offs.
Other financial intermediaries also
have taken steps to strengthen balance
sheets, and the availability of credit
28
79th Annual Report, 1992
from these lenders also remained somewhat constrained in 1992—though probably not more than in 1991. Life insurance companies, having suffered from
an abundance of bad loans, remained
saddled with poor-quality commercial
real estate loans in 1992. Such firms
limited their acquisitions primarily to
high-quality, easily marketable assets;
thus, as in 1991, some medium-sized,
below-investment-grade companies
found credit from life insurance companies difficult to obtain in 1992. Some
business finance companies also experienced high and rising levels of nonperforming loans, many of which were
secured by commercial real estate, with
effects on the willingness of these lenders to make new loans.
Downgradings of the manufacturing
parents of automobile sales finance companies led to some increases in their
funding costs in 1992. However, the
downgradings had little or no effect on
the cost or availability of consumer
credit, as these finance companies increased the volume of loans they securitized. The availability of credit at thrift
institutions likely improved a bit in
1992. Reflecting the declines in interest
rates, profits of private sector savings
and loan associations reached a record
level, sustained by a wide spread
between interest earned on assets and
the cost of funds as well as by a decline
in the industry's still high level of troubled assets.
Weak credit demand and constraints
on some sources of supply produced
generally restrained borrowing in each
major nonfinancial sector other than the
federal sector. Overall household borrowing accelerated but remained moderate, as demand was depressed by insecurity about employment as well as by
efforts to restructure balance sheets.
Declines in mortgage rates were accompanied by a pickup in the growth of
mortgage debt outstanding; the volume
of mortgage refinancings increased considerably. Some of the proceeds of mortgage refinancings likely were used to
pay down higher-cost consumer credit.
Consumer credit also was held down in
1992 by the tendency of households to
pay down high-cost debt using funds
that otherwise would have been held in
low-yielding deposits.
With the pace of debt accumulation
by the household sector damped, and
with rates on consumer debt falling and
mortgage debt being refinanced at lower
rates, the ratio of debt-servicing payments to household income declined
considerably further in 1992. Other indicators of financial stress also improved
somewhat. Consumer loan delinquency
rates mostly fell over the year, although
they remained at relatively high levels.
Home mortgage delinquency rates also
declined in 1992; by year-end, they had
moved back down to near their prerecession levels and were around the
low end of the range of the 1980s.
Business debt grew only slightly in
1992 as internally generated funds
exceeded investment spending. Taking
advantage of the strong stock and bond
markets, nonfinancial corporations
Debt Service of the Household Sector
Percent
17
15
I
1980
I
I 1
1985
I
I
I I
1990
Percentage of disposable personal income. Debt service is a staff estimate of scheduled payments of principal
and interest on home mortgages and consumer debt.
Monetary Policy and Financial Markets
stepped up their equity issuance and
refinanced large volumes of longer-term
debt at more favorable rates. In part, the
proceeds of these issues were used to
pay down short-term debt, particularly
bank loans, thereby lengthening liability
structures.
The hospitality of the capital markets
extended even to lower-graded business
borrowers, which issued substantially
more bonds than in other recent years.
Overall public gross bond issuance by
nonfinancial corporations was well
above the 1991 level. Likewise, gross
equity issuance by nonfinancial corporations also rose from the already high
pace of 1991 and was four times that of
the late 1980s and early 1990s. As a
result of debt refinancing and sales of
equity, corporate net interest payments
as a percentage of cash flow fell sharply
for a second year. As declining interest
rates allowed firms to reduce debt burdens, and as the economy advanced, corporate debt ratings began to improve
and quality spreads narrowed.
The state and local sector also benefited from interest rate declines in 1992.
Large amounts of state and local debt
were refinanced, including a large vol-
29
ume that was called. Net debt growth of
state and local debt continued to be moderate, however, as the sector's spending
remained constrained.
Although balance sheet restructuring
damped credit flows and spending in
1992, its greatest impact was on the
monetary aggregates, as an unusually
high proportion of spending again was
financed outside depositories, whose liabilities make up the bulk of the monetary aggregates. Some spending was
supported through sources other than
borrowing—for example, by issuing
equity or restraining the accumulation
of liquid assets. Depository credit
expanded last year, after two years of
contraction, but its share of total nonfinancial debt continued to shrink, as
borrowers concentrated their credit
demands in long-term securities
Changes in Debt of
the Domestic Nonfinancial Sector
and in Depository Credit
Percent
Debt
Net Interest Payments of
the Business Sector
Percent
30
1960
25
20
1980
1985
1990
Percentage of cash flow plus net interest payments.
Cash flow is depreciation (book value) plus retained
earnings (book value).
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 changes
are then used in computing four-quarter moving averages.
30
79th Annual Report, 1992
markets—bonds for corporations and
fixed-rate mortgages for households.
The sluggish expansion of depository
credit was echoed in M3, which comprises most—though not all—of the
instruments depositories use to finance
their credit extensions. In fact, growth
of M3 slowed last year to lA percent
despite the pickup in depository credit,
as depositories relied much more on
equity issuance and sales of subordinated debt, which are not in M3. Large
time deposits at banks and thrift institutions fell rapidly. The tendency for
spending to be financed outside of
depositories, along with the latter's reliance on non-M3 funds, produced a sizable increase in M3 velocity in 1992—
at a rate far above that of other recent
years. The rise in velocity of M3 would
have been even greater had it not been
for strong inflows into institution-only
money funds over the first three quarters
of the year. The attractiveness of these
funds increases when short-term interest
rates are falling, a phenomenon caused
by the fact that the funds do not mark to
market, so that their yields tend to
exceed market rates when those rates
are declining.
M2 increased about \3A percent last
year, below the 2!/2 percent lower end of
its target range. M2 registered modest
growth in the first and last quarters of
the year but was about flat over the
middle quarters. The underlying weakness of money growth appeared to stem
from several important factors, many of
which were related to the unattractiveness of holding funds in M2 assets relative to other possible uses of savings.
Contributing to the relative attractiveness of nonmonetary assets was the
rapidity with which banks adjusted
down offering rates on retail deposits
as market rates declined in 1992.
Banks' unaggressive pricing of deposits
reflected substantial paydowns of bank
debt by households and businesses,
which kept loan demand low and banks'
need for funds to finance them quite
limited. In addition, banks and thrift
institutions were discouraged from
going after deposits by the rising cost of
issuing deposits to make loans; among
the factors accounting for this increase
were increases in deposit insurance rates
and higher capital ratios occasioned by
market and regulatory forces.
The prompt declines and low level of
deposit rates combined with several
other factors to induce savers to cut
back on holdings of assets in M2. One
important influence was the unprecedented steepness of the yield curve,
which pulled deposit funds into capital
Stock ofM2
Trillions of dollars
Stock ofM3
Range
Trillions of dollars
3.6
Actual
-^^
i_
i
i
1991
1 1
4.30
i%
**—-
"•
4.15
1
3.4
Actual
Range
i
i
i
i
i
t
i
i
i
i
1992
The range was adopted by the FOMC for the period
from 1991:Q4to 1992:Q4.
i
i
1991
1 1 1 !
i
i
i
i
i
i
i
i
1992
The range was adopted by the FOMC for the period
from 1991:Q4to 1992:Q4.
Monetary Policy and Financial Markets
markets. An important channel for
accomplishing this portfolio shift was
mutual funds, which experienced record
inflows in 1992. Not only were yields
on these funds attractive, but the funds
had become increasingly available
through banks and thrift institutions.
Assets in bond and equity mutual funds
(apart from those held by institutions
and those in IRA and Keogh accounts)
increased $125 billion in 1992, up from
$117 billion in 1991 and an average of
$30 billion over the previous five years.
The years 1991 and 1992 were the first
ever in which increases in mutual fund
assets exceeded increases in M2.
Money growth also was weakened
by the tendency of consumer loan rates
to move downward less rapidly than
deposit rates. As a consequence, households faced a considerable interest rate
incentive—particularly after taking
account of changes in the tax deductibility of consumer interest payments—to
use funds from deposit accounts to pay
down debt or to limit its accumulation.
In fact the rise in consumption in 1992
was accompanied by an unusually small
31
increase in debt and was financed in part
by reducing or limiting holdings of
financial assets.
The cuts in bank deposit rates were
particularly evident for larger (and
presumably more interest sensitive)
accounts and at longer maturities. Small
time deposits ran off throughout the
year. Some of these funds appeared to
flow into more-liquid deposit accounts,
as rates on small time deposits fell faster
than those on savings and checkable
deposits. General purpose and brokerdealer money market mutual funds
(MMMFs) also contracted over the year,
despite the yield advantage these assets
offered vis-a-vis other money market
rates in an environment of declining
yields. This contraction appeared to be
another reflection of the attractiveness
of bond and equity funds and other capital market instruments. MMMFs grew
in October and November, however, in a
reversal that perhaps reflected reactions
to capital losses in bond funds resulting
from the rise in long-term rates in September and October.
Spreads between Pre-Tax and After-Tax
Rates on Auto Loans and Rate Paid on
Small Time Deposits
Changes in M2 and in Assets
of Stock and Bond Mutual Funds
Percentage points
Billions of dollars
Pre-tax
Net change in M2
400
Net change in mutual funds
300
L Net change in M2 plus funds
1.5
200
100
i
+
0
1 1
1986
1
1
1988
J
L
1990
1992
Mutual fund data have been adjusted to exclude institutional holdings and IRA and Keogh balances; for 1992
the adjustment is an estimate.
i
i
1975
i
i
i
i
i
1980
i
i
i
1985
i
i
i
i
i
i
1990
The auto loan rate is the forty-eight-month rate. The
small time deposit rate is for maturities of two and
one-half years and longer. The marginal federal tax rate is
based on John J. Seater, "On the Construction of Marginal Federal Personal and Social Security Tax Rates in
the U.S." Journal of Monetary Economics, vol. 15 (January 1985), pp. 121-35.
32
79th Annual Report, 1992
The overall effect of the unusual
forces that influenced M2 in 1992 were
summed up by the behavior of its velocity, the growth of which accelerated
for the second year in a row, to nearly
4 percent, despite the continued sharp
downward trend in short-term interest
rates. In previous decades, M2 velocity
and short-term rates had moved together
in a reasonably predictable way (upper
panel of chart on M2 velocity and measures of opportunity cost). This seemingly predictable relationship was the
M2 Velocity and Indicators
of Opportunity Cost
Ratio scale
1.6 -
Percent, ratio scale
M2 velocity
I
I
I
I
I
1 1
Percentage points, ratio scale
Ratio scale
1.7 -
result of changes in deposit rates lagging behind changes in market rates:
When short-term rates fell, deposit rates
declined by a lesser amount, providing
an incentive for savers to shift assets
from market instruments to deposits,
thereby depressing M2 velocity. However, because of the unusual configuration of forces discussed above, these
incentives to hold M2 did not follow
their usual pattern in either 1991 or
1992. Instead, a combination of the
steep yield curve, sluggish adjustment
of loan rates, and other factors decreased the incentive to hold M2, forestalling the developments that normally
would have been seen in a period of
rapidly falling short-term interest rates.
In other words, the opportunity cost of
holding M2—the earnings given up—
actually widened in 1992, rather than
narrowing as had happened in the past
when market interest rates fell; that
divergence from past patterns helps to
explain why M2 velocity rose atypically
(bottom panel of chart).
Another indication of the unusual
behavior of M2 velocity in 1992 was
provided by the performance of the
Board staff's P* model in predicting
inflation. The model is premised on reasonably stable M2 velocity over time
and is used to predict the price level and
inflation rates that are consistent with
M2 growth. In situations where the
velocity of M2 is rising atypically, slow
1.6 -
-0.75
Stock of Ml
Billions of dollars
i
i
1980
i
i
i
i
i
1985
i
i
i
i
1,000
1990
The broad measure of opportunity cost is the difference
between a weighted average of competing rates and a
weighted average of rates paid on components of M2.
The competing rates are those on three-month and fiveyear Treasury securities and after-tax rates on auto loans.
The indicators of opportunity cost are two-quarter moving averages.
^ ^
15%
i
950
900
I
1
1991
1
1 1
1
1
1
!
1992
i
i
i
i
i
Monetary Policy and Financial Markets
Velocity of Debt and Money
Ratio scale
Debt
0.7
1 I
M2
1 I
M3
1.3
1 I
4.5
1960
1970
1980
1990
The velocity of each quantity is the ratio of gross domestic product, measured in current dollars, to the stock of the
quantity. The data are quarterly averages.
33
growth of M2 would be associated with
a lesser degree of disinflationary pressure than would be predicted by the P*
model, which assumes normal velocity
behavior. That, in fact, was what happened in 1992, when the model, using
actual M2 growth as an input, underpredicted inflation.
The growth of M2 that did take place
during 1992 was entirely attributable to
its currency and transactions deposit
components, as Ml growth surged to
about 14V4 percent. Although this
strength of Ml was in part a reflection
of the pickup in aggregate income
growth in 1992, it stemmed mainly from
declines in both short- and long-term
interest rates. Long-term rate declines
prompted large volumes of mortgagerate refinancings, particularly in the first
and last quarters. Because a large portion of prepayments are held in demand
deposits until the mortgage servicer
remits the funds, the level of demand
deposits is temporarily boosted by mortgage refinancings. Falling short-term
rates boosted demand deposits by lowering the opportunity cost of holding them
and by increasing the amount of deposits businesses needed to hold under compensating balance arrangements. In
addition, NOW accounts were boosted
by funds shifted from small time deposits, as rates on the latter fell faster than
those offered on the former. Growth in
NOW accounts accelerated in 1992 from
the already brisk pace of 1991, and
demand deposits posted the largest
increase since at least 1959.
To accommodate the growth in transactions deposits associated with the process of easing reserve conditions, the
Federal Reserve supplied large volumes
of new reserves in 1992. Total reserves
grew at around 20 percent, more than
twice the rate of increase in 1991. Currency growth also was rapid, in part
because of shipments abroad, and as
34
79th Annual Report, 1992
a consequence the monetary base
increased lOVi percent last year—the
highest growth rate in the Board's
official series, which extends back to
1959.
35
International Developments
Expectations of economic recovery in
the major foreign industrial countries
during 1992 were not realized. Despite
measures taken in some countries to
boost spending and stimulate activity,
real gross domestic product in the foreign G-10 countries increased by a disappointing lA percent.1 In Japan and
western Germany, strong first-quarter
performances gave hope that late-1991
slumps had been temporary, but activity
decelerated sharply thereafter. Economic
activity also weakened during the year
in France and Italy, while the United
Kingdom showed scant signs of recovery. Among the major foreign industrial
countries, only Canada experienced a
pickup in growth, which was supported
partly by the U.S. recovery.
By contrast, economic growth during
1992 was robust in many developing
countries, particularly in the Middle
East (which continued to rebound after
the Gulf War) and Asia. Results in Latin
America were mixed; economic reforms
boosted growth in several countries, but
political distractions dampened activity
in Brazil. In Mexico, the pace of activity
remained solid, but it was slower than
in 1991.
Sluggish economic activity in many
markets for U.S. exports contributed to a
larger U.S. merchandise trade deficit
in 1992. The growth rate of U.S. exports
was only about half that of U.S. imports,
which were boosted by the early effects
of the domestic economic recovery.
Largely because of an improvement in
net service receipts, however, the current account deficit widened by less than
the trade deficit after adjusting for 1991
and 1992 cash transfers associated with
the Persian Gulf war.
The value of the dollar rose about
5V2 percent from December 1991 to
December 1992 in terms of a tradeweighted average of the other G-10 currencies. The dollar's appreciation was
nearly the same after adjustment for
changes in consumer price levels here
and abroad, as consumer price inflation
in the United States exceeded a tradeweighted measure of the average rate of
inflation in the foreign G-10 countries
by only about lA percentage point. The
value of the dollar measured against the
mark gained slightly more than 1 percent; in terms of the yen, it deteriorated
about 3 percent. The rise in the weighted
average value of the dollar mainly
Exchange Value of the Dollar
versus Selected Currencies
December 1991 = 100
Canadian dollar
1. The Group of 10 consists of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom,
and the United States. Unless otherwise indicated,
growth rates and inflation rates are calculated from
the fourth quarter of 1991 to the fourth quarter of
1992, and averages for groups of countries are
weighted by the countries' gross domestic products as valued after adjusting for differences in the
purchasing power of their currencies.
Japanese yen
German mark
I
i
•
I i
1992
i
1
i
Foreign currency units per dollar. The data are monthly.
36
79th Annual Report, 1992
mirrored sharp depreciations in several
European currencies and to a lesser
extent the Canadian dollar.
Over the first three months of 1992,
the dollar appreciated and U.S. longterm interest rates rose amid expectations that an economic recovery would
take hold in the United States during the
year. Over the summer, however, when
the U.S. recovery proved halting and
U.S. long-term interest rates moved back
down, the movement in the dollar's
value reversed course. At the same time,
continuing growth in the German monetary aggregates at rates above Bundesbank targets and rising inflation
prompted the Bundesbank to maintain a
stringent monetary stance, boosting the
mark's value versus the dollar. Authorities in the other countries in the European Monetary System supported the
value of their currencies in terms of
marks by holding interest rates high
in spite of laggard economic activity.
Exchange Value of the Dollar
and Interest Rate Differential
Percentage points
Ratio scale, March 1973 = 100
Price-adjusted
exchange value
of the dollar
6 -
Before rebounding, the value of the
dollar in terms of most European currencies fell to levels well below those at
which it had begun the year.
In the fall, arrangements in Europe
governing exchange rates both within
and outside the European Monetary System came under severe stress, with the
result that some currencies were devalued and others were allowed to float. In
addition, the Bundesbank allowed
German interest rates to fall somewhat.
These adjustments contributed to an
appreciation of the dollar that was
already gaining momentum from
renewed indications of recovery in the
United States.
Net intervention in marks by foreign
central banks was of unprecedented size
in 1992 as a result of exchange rate
pressures in Europe. Net intervention in
dollars by fifteen major central banks
amounted to sales of about $9 billion.
U.S. intervention was moderate in 1992,
with sales of $200 million for yen and
purchases of about $1,270 million for
marks. U.S. monetary authorities also
exchanged about $6 billion equivalent
of marks for dollars directly with the
Bundesbank.
4 -
Foreign Economies
The exchange value of the U.S. dollar is its weighted
average exchange value in terms of the currencies of the
other Group of 10 (G-10) countries using 1972-76 total
trade weights. Price adjustments are made using 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.
All major industrial countries operated
below potential in 1992, some considerably so, and inflation continued to moderate. Average consumer price inflation
in the foreign G-10 countries was only
2Vi percent in 1992, almost Wi percentage points below the inflation rate
recorded in 1991. Effects on prices in
1992 from the depreciation of currencies in the United Kingdom, Italy, and
Canada were small. Wages also decelerated in most foreign industrial countries.
The leading exception to the generally
disinflationary pattern abroad was western Germany, where inflation remained
80
i i i i
1975
1980
1985
i
1990
International Developments
in the neighborhood of 33A percent
and contributed to the reluctance of German monetary authorities to ease more
rapidly.
Labor-market conditions deteriorated
during 1992 in the major industrial
countries. Unemployment rates moved
up across Europe, reaching IOV2 percent
in the United Kingdom and France. The
GDP, Demand, and Prices
Percentage change from previous year
Gross domestic product
Constant prices
J
L
Total domestic demand
Constant prices
J
L
Consumer price index
1988
1990
1992
Data for the foreign G-10 countries are weighted by the
countries' GDP as valued after adjusting for differences
in the purchasing power of their currencies; the data 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.
37
unemployment rate in Canada exceeded
H3/4 percent in late 1992, although
thereafter signs emerged that Canada's
long upward trend in unemployment
might have peaked. The west German
unemployment rate also moved up,
although only to 7lA percent, a level still
below historical peaks. In Japan, the
unemployment rate remained below
2V2 percent, but more sensitive indicators suggested a slackening of labor
market conditions.
The main factors that contributed to
the generally disappointing performance
of demand abroad were high levels of
real interest rates in Europe, continued
adjustment in spending by households
and enterprises so as to reduce high
levels of debt, a reduced pace of lending
in some countries, and worries about
financial-sector problems, especially in
Japan and Scandinavia.
Growth in major monetary aggregates
abroad generally remained subdued in
1992, with the important exception that
in Germany M3 increased %3A percent, a
rate well outside the Bundesbank's target range. Money market conditions
nonetheless eased in several key countries, including Japan and, late in the
year, Germany, as decelerating demand
provided room for authorities to let
short-term interest rates decline. Japanese short-term interest rates moved
down about 2lA percentage points, and
the official discount rate was cut twice
by a total of 1 lA percentage points. German authorities also allowed short-term
interest rates to ease after mid-year,
from a peak of about 93A percent to near
SV2 percent. In other countries, pressures in foreign exchange markets required authorities to keep short-term interest rates above desired levels,
particularly when those pressures intensified in the fall. The September departure of sterling and the lira from the
exchange rate mechanism of the Euro-
38
79th Annual Report, 1992
pean Monetary System allowed the
United Kingdom and Italy to lower
short-term interest rates, but rates in
France (which held the franc in the
exchange rate mechanism) were kept
high and finished the year up about
75 basis points. A declining trend in
Canadian short-term interest rates was
temporarily reversed in the autumn;
interest rate increases were intended to
relieve downward pressure on the Canadian dollar that was related in part to
political uncertainties.
In 1992 the combined current account
surplus of the foreign G-10 countries
widened about $30 billion, to nearly
$40 billion. This change was more than
accounted for by a $44 billion increase
in Japan's surplus as Japanese domestic
demand slowed. Much of the change
represented a widening of Japan's bilateral surpluses with European and Asian
trading partners. Lower inflation in
France improved French competitiveness and helped move the current
account into surplus. By contrast, current account positions in both the United
Kingdom and Italy deteriorated because
of their weakening competitive positions and softening demand in their
European markets; the German current
account deficit also widened slightly.
The current account deficit of developing countries as a group improved
from $80 billion in 1991 to $59 billion
in 1992. A decline in the collective trade
surplus was more than offset by an
improvement in net services that was
due in part to lower international interest rates. Net transfers also shifted in
favor of the developing countries
because the large war-related transfers
in 1991 from Saudi Arabia and Kuwait
to industrial countries were not repeated
in 1992. The deterioration of the trade
balance was traceable to weak external
demand and a decline in commodity
prices; both factors limited export
earnings while imports were being
spurred by strong growth in real output
in many developing countries. The
current account surplus of the newly
industrializing economies of Asia was
about $13 billion in 1992, essentially
unchanged from the previous year. A
decline of $5 billion in the surplus of
Taiwan was offset by increased surpluses in Hong Kong and Singapore and
a smaller deficit in Korea. By contrast,
the combined current account deficit of
fourteen heavily indebted developing
countries rose from $17 billion in 1991
to $30 billion in 1992.2 Much of this
shift was in Argentina, Mexico, and
Venezuela. The value of imports by
these countries rose 30 percent in 1992,
in part because of increased spending on
investment goods.
The rate of growth of real output
in developing countries as a group
increased sharply, from 3V4 percent in
1991 to 53/4 percent in 1992.3 However,
within the group, output growth was far
from uniform; it fell below population
growth rates in the Western Hemisphere
and Africa, but it increased in Asia
more than 1 percentage point, to almost
7 percent. Growth declined considerably in Brazil—which faced political
problems—and moderately in Mexico,
where the authorities sought to limit the
current account deficit and reduce inflation further. However, Argentina and
Chile, which have implemented major
economic reform programs in recent
years, registered gains in real output of
2. The countries are Argentina, Bolivia, Brazil,
Chile, Colombia, Cote d'lvoire, Ecuador, Mexico,
Morocco, Nigeria, Peru, Philippines, Uruguay, and
Venezuela.
3. The growth of output in developing countries is calculated by comparing measures of total
annual output rather than fourth-quarter output.
International Developments
6V2 percent or more, as did Venezuela.4
The most dramatic acceleration in output was in the Middle East, where
growth rebounded from around zero in
1991 to 10 percent in 1992 as the region
recovered from the Gulf War. Real output was also particularly robust in
China, where the rate of expansion is
estimated to have been nearly 13 percent in 1992, compared with 7 percent
in 1991.
During 1992, both Brazil and Argentina made progress toward normalizing
relations with foreign creditor banks to
whom they are in substantial arrears. In
July, Brazil reached preliminary agreement with its bank creditors on a debtreduction package, which will be implemented in 1993 if the country makes
further progress toward macroeconomic stabilization. Argentina and its
bank creditors signed an agreement
in December to reduce the country's
external debt in 1993.
The U.S. current account worsened
substantially more than the trade
account, moving from near balance in
1991 to a deficit of nearly $60 billion in
1992. However, abstracting from onetime cash transfers associated with the
Gulf War (they reduced the current
account deficit by $42 billion in 1991,
but by only $1 billion during 1992), the
current account weakened less than
the trade account largely because of
increased net service receipts. U.S.
armed forces purchased fewer services
abroad, and foreign reinsurers made
U.S. International Trade
Billions of dollars
Balances
60
120
U.S. International Transactions
The U.S. merchandise trade deficit, measured on a balance-of-payments basis,
widened to $96 billion in 1992, compared with $73 billion in 1991. Imports
rose nearly twice as fast as exports
as economic recovery gained some
momentum in the United States, while
growth in many U.S. export markets was
sluggish. Early in the year, the deficit
narrowed somewhat when a drop in oil
prices lowered the value of imports.
After the first quarter, however, the deficit widened sharply: Imports expanded
strongly during the second and third
quarters, while export growth remained
subdued until late in the year.
Merchandise trade
J
L
Ratio scale, billions of 1987 dollars
Merchandise trade
600
Total imports
—'*** 400
^
0 0 0
"^
1
Total exports
I
1
1
I
Ratio scale, 1987 = 100
GDP fixed-weight price index
120
Non-oil imports
^
As
^
~
Total exports
100
t
4. Argentina's reforms not only stimulated
rapid growth but brought inflation below 20 percent, compared with about 85 percent in 1991 and
more than 1,300 percent in 1990.
39
i
1988
l
l
1990
!
1992
The data are quarterly, seasonally adjusted at annual
rates, and come from the Department of Commerce. The
1992 data are preliminary.
40
79th Annual Report, 1992
substantial payments on claims for hurricane damage in the United States.
U.S. merchandise exports rose
6J/2 percent in real terms over the four
quarters of 1992. Most of the increase
occurred in the second half of the year,
and the largest gains were in computer
exports. Other nonagricultural exports
increased 3V2 percent in real terms,
about half the rate reached in 1991;
among these items, machinery (other
than computers) and automotive products accounted for most of the strength.
Among agricultural products, wheat,
soybeans, meat, and dairy products were
exported in significantly larger quantities in 1992; overall, the volume of agricultural exports rose 9 percent over the
four quarters of the year. The biggest
gains in the value of U.S. exports were
made in trade with the developing countries in Asia and Latin America where
fairly strong economic growth took
place. The value of exports to Japan and
to European countries declined.
Merchandise imports expanded more
than 10 percent in real terms during
1992. Two categories accounted for a
significant portion of that rise: oil and
computers. The quantity of imported oil
U.S. International Transactions *
Billions of dollars, seasonally adjusted
Quarter
Year
1991
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
1991
1992P
Q4
Ql
Q2
Q3
Q4
-73
416
489
45
164
118
16
53
-37
-96
439
535
55
178
123
10
49
-39
-31
-19
108
126
13
43
30
2
12
-10
-18
108
125
14
45
31
4
14
-9
-7
-25
107
132
13
44
31
2
12
-10
-28
110
138
16
45
29
3
13
-9
-7
-26
114
140
13
45
32
1
11
-10
-10
-62
-7
-18
-16
-22
-23
-18
-45
32
47
-49
-6
11
-9
25
10
-11
6
22
-14
7
4
-18
16
26
9
-27
11
5
35
35
-5
-35
-4
8
1
7
-2
-12
6
2
-1
8
-3
-16
-4
1
10
12
-1
-7
5
4
5
7
-3
-3
21
8
4
-9
-3
n.a.
18
40
13
21
21
-7
29
1
-30
15
-7
22
Current account balance
Private capital flows, net
Bank-related capital, net (outflows, - )
U.S. net purchases (-) of foreign securities
Foreign net purchases (+) of U.S. securities
Treasury securities
Corporate and other non-Treasury bonds
Corporate stocks
U.S. direct investment abroad
Foreign direct investment in United States
Other corporate capital flows, net
Foreign official assets in United States (increase, +)
-1
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.
1992 P
-1
-1
0
-1
-13
0
-13
2
1
2
-8
5
-13
n.a. Not available.
p Preliminary.
SOURCE. Department of Commerce, Bureau of Economic Analysis.
International Developments
rose 13 percent over the four quarters of
1992 as U.S. consumption of petroleum
products recovered from depressed levels in 1991 and as domestic oil production resumed a downward course. Measured in constant dollars, imports of
computers (including peripheral equipment and parts) jumped nearly 50 percent in 1992. U.S. domestic sales of
computers became strong beginning in
the summer; they were fueled by price
wars and by a push on the part of
U.S. businesses to take advantage of
improvements in software by upgrading desktop microcomputers. Most of
these sales were in lower-technology
equipment—items that are often imported. Imports of products other than
oil and computers rose 6 percent in real
terms in 1992 as domestic demand in
the United States picked up. Major
sources were developing countries in
Latin America and Asia, especially
China.
The substantial U.S. current account
deficit in 1992 was more than matched
by recorded net capital inflows, so the
statistical discrepancy was negative. By
contrast, in 1991 the current account,
capital account, and statistical discrepancy all had been close to zero.
As shown in the table, substantial inflows were recorded for both official and
private capital. Foreign official holdings
in the United States increased $40 billion, more than twice as much as in
1991. Substantial inflows were recorded
from both industrial and other countries.
The net flow of private capital
reversed in 1992, reaching an inflow of
about $32 billion. Banks more than
accounted for these net inflows, and
foreign-related banks were a particularly important factor. They used the
funds to help finance a continued general expansion of their assets in the
United States. In 1991, by contrast,
foreign-based banks had relied more
41
heavily on large time deposits issued in
the United States and less on inflows
from abroad to finance asset growth.
Although securities transactions also
contributed to the net inflow of capital
in 1992, strong two-way gross flows
again emphasized the widening scope
for cross-border financial transactions.
Foreigners added substantially to their
holdings of U.S. government and corporate bonds, although they were net sellers of U.S. equities. U.S. net purchases
of foreign stocks and bonds were large;
in fact, the pace of foreign bond issues
in the United States set a record.
U.S. direct investment abroad was
strong again in 1992. Outflows to Latin
America and Asia grew, and outflows to
Europe were again substantial. By contrast, foreign direct investment in the
United States remained depressed at a
level close to zero, compared with the
peak of almost $70 billion, reached in
1989. Merger and acquisition activity in
the United States has declined since the
1980s, and foreign investors in particular may have been discouraged in 1992
by the disappointing returns on much
recent foreign investment in the United
States.
Foreign Currency Operations
U.S. monetary authorities intervened in
foreign exchange markets on a moderate
scale in 1992. In late January and early
February, during a period when the dollar was appreciating relative to the yen,
the Federal Reserve System and the
Treasury's Exchange Stabilization Fund,
cooperating with foreign authorities,
purchased Japanese yen worth $200 million, of which $50 million was for the
account of the Federal Reserve. As the
dollar depreciated sharply during July
and August, particularly in terms of the
German mark, U.S. authorities purchased $1,270 million for marks in
42
79th Annual Report, 1992
cooperation with foreign authorities.
The proceeds of these operations were
split evenly between the accounts of the
Federal Reserve and the Treasury. U.S.
authorities also exchanged $6,177 million of marks for dollars directly with
the Bundesbank, including $3,705 million of marks from System balances.
These transactions were made to bring
U.S. and German balances of foreign
currencies more nearly in line with current needs. On April 2 the Exchange
Stabilization Fund purchased $2 billion
equivalent of marks that had been warehoused with the System. No warehoused
balances were outstanding from that
date through the end of the year.
At year-end, the System held
$21,514 million of foreign currencies
valued at current exchange rates, almost
entirely in marks and yen. The System
realized $804 million in profits on sales
of foreign currency during 1992 and
recorded a translation loss of $1,882
million on foreign currency balances.
There was no activity on the Federal
Reserve swap network during the year. •
43
Monetary Policy Reports to the Congress
Given below are reports submitted to
the Congress on February 19 and July
20, 1992, pursuant to the Full Employment and Balanced Growth Act of 1978.
Report on February 19, 1992
Monetary Policy and the Economic
Outlook for 1992
When the Federal Reserve presented its
midyear monetary policy report to Congress last July, a moderate economic
upturn was under way. Consumer spending and housing activity had risen considerably since the winter, bolstered by
the decline in oil prices, by a rebound in
consumer confidence in the wake of the
allied victory in the Persian Gulf conflict, and by lower interest rates. Inventories had been trimmed appreciably,
orders were rising, and businesses, while
still cautious, had begun to increase
employment and production. The key
monetary aggregates had accelerated
and were around the middle of their
1991 target ranges. With the stance of
monetary policy seemingly conducive
to an upturn in economic activity, the
Federal Reserve, after having progressively reduced pressures on reserve
positions earlier in the year, maintained
a more neutral money market posture in
the spring and early summer.
As the year wore on, however, the
incipient recovery lost its momentum.
Consumer spending turned down, and
business and consumer 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.
Although the economy—as measured
by its real gross domestic product—
continued to grow in the second half of
the year, the pace of expansion was only
marginally positive.
The faltering of the recovery process
apparently owed to a variety of forces,
some of which were operating well
before the oil price shock of 1990 tipped
the economy into recession. In a sluggish economy and amid unexpectedly
weak asset values—particularly in real
estate—deteriorating financial positions
of debt-laden households and corporations further damped credit demands and
aggregate spending. Financial intermediaries, chastened by their negative
experience with earlier loans, became
more hesitant about extending new
credit; the resultant tighter lending standards deepened the slowdown in economic activity and inhibited the subsequent recovery. In the government
sector, where deficits remained large,
not only at the federal level but also
in many state and local jurisdictions,
efforts to curb spending and increase
revenues constituted a further drag on
aggregate demand in the short run.
Inflation, meanwhile, moved down
over the second half of 1991. Weak
demand reduced pressures in both labor
and product markets, and, after some
acceleration of wages and prices in 1989
and 1990, an underlying disinflationary
trend has now been established. Important in this process has been a reduction
in inflation expectations, visible not only
in a variety of survey data but also in the
behavior of securities markets.
With actual and prospective inflationary pressures easing, economic activity
44
79th Annual Report, 1992
flagging, and the broader monetary
aggregates weakening and growing near
the bottom of their target ranges, the
Federal Reserve resumed easing money
market conditions in the second half of
the year. As a result, the federal funds
rate fell from 53A percent in July to
4 percent by year-end, and most other
short-term rates followed suit; the discount rate was also reduced over this
period, from 5Vi percent to 3V2 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.
Although long-term rates have backed
up some in recent weeks, they remain
appreciably below the levels of last summer. The decline in rates has helped
reduce the financial burdens of highly
leveraged households and corporations,
which have taken this opportunity to
refinance mortgages and to replace
existing debt with new lower-cost
bonds. Lower interest rates also have
contributed to an increase in stock
prices, inducing firms to boost equity
issuance and to pay down debt, further
strengthening their balance sheets. With
the decline in U.S. interest rates, the
foreign exchange value of the dollar has
largely reversed the upward movement
that had occurred earlier in the year.
The unusually slow growth of the key
monetary and credit aggregates last year
was, to a degree, indicative of the
continuing restraint on private credit
usage and spending. The aggregate debt
of domestic nonfinancial sectors—
abstracting from federal government
debt, which continued to grow briskly—
expanded only 23A percent in 1991, the
slowest advance in decades, and below
the pace of nominal GDP; households,
nonfinancial businesses, and state and
local governments all retrenched, curbing spending and borrowing in order to
buttress deteriorating financial positions.
The weakness in the monetary aggregates M2 and M3 reflected not only
subdued overall credit usage but also a
continued decline in the share of credit
intermediated by depositories. With
the thrift industry contracting further,
commercial banks exercising caution in
their credit extensions, and borrowing
demand concentrated in longer-term
instruments, depository credit continued
to shrink as a share of overall credit
extensions. As a result, the velocity of
M3—a monetary aggregate that comprises most of the liabilities used by
depositories to fund credit growth—
increased again in 1991, as M3 grew
only 1 lA percent, near the bottom of its
target range. Depository restructuring
also restrained M2, which grew in line
with nominal GDP despite a steep drop
in short-term market interest rates; ordinarily such a drop would have been
expected to depress the velocity of this
aggregate. Banks, eager to improve capital positions, reduced deposit rates
more than loan rates, increasing the
incentive for households to pay down
debt rather than to accumulate monetary
assets. Less aggressive pursuit of retail
accounts by depositories also led investors to switch into other financial assets,
such as bond and stock mutual funds.
Ranges for Growth of Monetary
and Debt Aggregatesl
Percent
Aggregate
M2
M3
Debt2
1990
3-7
1-5
5-9
1991
1
1
2 /2^6 /2
1-5
41/2-81/2
1992
1
2 /2-61/2
1-5
41/2-81/2
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.
Monetary Policy Reports
45
ues to be channeled outside depositories; in this case, relatively modest
growth in M2 would be adequate to
support a satisfactory outcome for the
economy. On the other hand, as the balance sheets and capital positions of depositories continue to improve, banks
and thrifts may adopt a generally more
accommodative posture with respect to
credit extensions and would therefore
have greater need for retail deposits. In
that event, somewhat faster growth of
M2 would be appropriate.
On balance, the Committee's M2
range for 1992 allows room for a variety
of developments in the intermediation
Monetary Objectives for 1992
In formulating its objectives for mone- process and thus in the behavior of
tary policy for 1992, the Federal Open monetary velocity. Flexibility in interMarket Committee has sought to pro- preting M2 within its range is particumote a sustainable upturn in economic larly important at this time, in light of
activity while continuing to build upon the ongoing and unpredictable shifts in
the hard-won gains against inflation that the patterns of credit usage and financial
have already been made. The task of intermediation that likely will continue
translating these objectives into specific to buffet our financial system. Looking
ranges for money and debt continues to ahead to future years, the Committee
be complicated by the ongoing restruc- also recognizes that the range for M2
turings of depositories and by the evolv- growth may eventually have to be lowing attitudes toward credit on the part of ered in order to put in place the moneborrowers and lenders. The Committee tary and credit conditions consistent
believes that the rechanneling of credit with price level stability.
flows away from depository institutions
The target range for M3 growth in
could well continue to produce slower 1992 remains at 1 percent to 5 percent.
growth in the broad monetary aggre- Although credit growth is expected to
gates than normally would be associated pick up somewhat in 1992, in line with a
with a given path for nominal GDP.
firming of economic activity, much of
Taking account of these effects, the this credit likely will be financed outside
Committee has deemed the ranges for the depository system. The thrift indus1992 tentatively adopted last July as try is expected to contract further as
appropriate for achieving its objectives. activity by the Resolution Trust CorpoThe target range for M2 growth in 1992 ration continues apace, and banks, faced
is 2Vi percent to 6V2 percent, unchanged with continued—though moderating—
from 1991. Demands for M2 relative to pressures on capital positions, will still
income would be damped if, as seems be somewhat hesitant to expand. At the
likely, banks and thrifts continue to same time, additional households are
reduce deposit rates in lagged response likely to refinance adjustable-rate mortto the decline that has occurred in mar- gages with fixed-rate obligations that
ket rates. These deposit-rate reductions can easily be securitized, and corporacould be especially large if credit contin- tions will probably continue to turn to
Flows into these funds helped finance
credit that had formerly been intermediated by depositories, facilitating shifts to
longer-term borrowing and reducing the
adverse effects of any retrenchment by
banks and thrifts on the cost and availability of credit to many borrowers.
However, some types of lending that
are not so easily rechanneled—such as
construction loans and credits to small
and lower-rated businesses—have been
curtailed, and a number of borrowers
now face more stringent credit terms.
46
79th Annual Report, 1992
equity markets and long-term bonds
rather than bank loans. As a result,
depository funding needs are likely to
remain damped relative to the pace of
economic activity, and the velocity of
M3 should consequently rise further.
The monitoring range for the aggregate debt of domestic nonflnancial sectors for 1992 is AVi percent to SVi percent, also unchanged from 1991. Federal
government borrowing is expected to
remain heavy in 1992, given the large
budget deficit. Debt growth in nonfederal sectors, however, should remain
fairly subdued relative to economic
activity as borrowers and lenders alike
maintain a cautious approach to leverage, in part because of a desire to make
further repairs to damaged balance
sheets.
Economic Projections for 1992
Although the long-standing structural
problems that aborted the fledgling
recovery last summer clearly are being
addressed, the speed of their resolution—
and the associated restraint on economic
growth—is quite difficult to gauge,
augmenting the usual uncertainties in
assessing the economic outlook. On the
whole, however, the members of the
Board of Governors and the Reserve
Bank presidents believe that, with the
easing of monetary conditions to date
providing considerable impetus to the
economy, the most likely outcome is for
a moderate reacceleration of activity
over 1992. At the same time, they anticipate that the trend toward price stability, which now appears to be rooted
more securely, will be sustained through
this year.
The forecasts of most of the governors and presidents for growth of real
gross domestic product are in a range of
P/4 percent to 2Vi percent measured
from the fourth quarter of 1991 to the
fourth quarter of 1992. With employers
likely to be cautious about hiring until
they are fully persuaded of the sustained
vitality of the upturn, gains in employment are expected to come slowly. Thus,
only a small improvement in the unemployment rate is anticipated this year,
with the central tendency of projections
being a range of 63/4 percent to 7 percent
for the fourth quarter of 1992. With
regard to inflation, the central tendency
range for the CPI increase this year is
3 percent to 3V2 percent. These forecasts
are, in general, very similar to the projections presented by the Administration
in the fiscal year 1993 budget. Indeed,
the Administration's forecast for nominal GDP is well within the Committee's
central tendency range and thus appears
to be quite consistent with the FOMC's
monetary ranges.
In their early February discussion of
the economic outlook, the Board members and Reserve Bank presidents
observed that the effects of recent job
losses and weak consumer confidence
are likely to restrain activity in the near
term. Under the circumstances, the
Board members and Bank presidents
stressed that economic developments
need to be monitored closely to guard
against the possibility that the economy
might falter. Nonetheless, the monetary
stimulus already in train is expected to
provide effective support for economic
growth this year, and in this regard the
early indications of a marked pickup in
residential real estate activity and a rise
in retail sales are a particularly favorable sign.
It is also expected that the drags on
growth from disruptions in credit supply
and from the restructuring of household
and business balance sheets will begin
to lessen over the year. As noted above,
this is obviously an area of substantial
uncertainty. However, as household and
corporate debt loads diminish in an environment of stronger economic activity,
Monetary Policy Reports
and as lower interest rates continue to
ease financing burdens of borrowers,
consumers and businesses should be
poised to participate more fully in the
economic expansion. Moreover, the
problems of credit availability that have
plagued the economy over the past
couple of years should begin to ease in
1992 as the economic recovery takes
hold and lenders become more confident
about extending credit.
Nonetheless, the pace of expansion
this year is expected to remain weaker
than in previous business cycle recoveries. In large part, this expectation
reflects some still-unresolved economic
and financial imbalances in particular
segments of the economy. The persistent
overhang of space in office and other
commercial buildings undoubtedly will
inhibit new construction in that sector
for some time. In addition, the budgetary constraints that have capped government spending are likely to linger; a
good many states and localities are
finding that budget gaps are reopening
despite the spending cuts and tax
increases they instituted last year. Meanwhile, the external sector is expected to
have a relatively neutral net influence on
domestic production this year; foreign
demand—particularly from Mexico and
developing countries in Asia—should
continue to boost export growth, but the
anticipated pickup in domestic purchases is likely to draw in additional
imports as well, limiting the potential
for further substantial improvement in
the trade balance.
Only a minority of Board members
and Reserve Bank presidents foresee a
smaller increase this year in the overall
CPI than the 3 percent rise experienced
in 1991. But the pickup in inflation suggested by the 3 percent to 3lA percent
central tendency range is deceptive: the
underlying trends in price movement are
more favorable. The CPI was held down
to a substantial degree last year by the
unwinding of the energy price shock
that followed Iraq's invasion of Kuwait
in August 1990, and further sharp
declines in energy prices do not appear
likely in the current environment. However, an ongoing deceleration in prices
is evident for a wide range of other
goods and services, and with inflationary tendencies under considerable
restraint from several factors—
including further moderation in labor
cost growth, continued slack in industrial product markets, and small
increases in import prices—"core"
inflation is expected to move down
appreciably in 1992. Indeed, this trend
should carry into 1993—a pattern
Economic Projections for 1992
Item
FOMC members and
other FRB presidents
Administration
MEMO
1991 actual
Range
Central tendency
Percent change,
fourth quarter to fourth quarter1
Nominal GDP
Real GDP
Consumer price index2
4-6
11/2-23/4
21/2-31/2
41/2-53/4
13/4-21/2
3-31/2
5.4
2.2
3.1
3.2
.2
2.9
Average level,
fourth quarter (percent)
Unemployment rate 3
63/4-71/4
63/4-7
6.8
6.9
1. From average for fourth quarter of 1990 to average
for fourth quarter of 1992.
47
2. All urban consumers
3. Percentage of civilian labor force.
48
79th Annual Report, 1992
that bodes well for the achievement
of a balanced, sustained economic
expansion.
The Performance of the Economy
in 1991
The year 1991 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 this
weakness spilled into the first quarter
with further reductions in production
and employment. By the spring, however, economic data indicated that the
decline in economic activity had bottomed out. The rapid conclusion of the
Persian Gulf war boosted consumer confidence, and the reversal of the earlier
runup in oil prices and the cumulative
effects of declining interest rates were
providing support for an increase in
household spending. Indeed, 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 hiring activity increased.
However, the pickup in the economy
evident from April to July failed to
develop any momentum, as the thrust to
domestic demand initiated by the end of
the Gulf war dissipated during the summer. The absence of a more robust
recovery likely reflected the drag on
aggregate demand from some longerterm economic and financial adjustments. For example, imbalances long
evident in the commercial and multifamily construction sectors damped
enthusiasm for new projects, and ongoing difficulties in the financial sector
continued to restrain credit availability;
these influences undoubtedly muted the
stimulus that normally would have been
forthcoming from the decline in interest
rates. 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 sustained a reluctance on the part of businesses and
consumers to borrow and increase
spending.
Despite their cautious planning, some
businesses experienced inventory backups in the late summer and fall, necessitating another round of production
adjustments. In part, the impact of these
adjustments was felt abroad as businesses cut back their imports of foreign
goods. However, domestic adjustments
were evident as well, and, apart from
atypical weather patterns that temporarily increased the demand for electricity, industrial production was flat over
the second half of the year. The sluggish
pace of activity in the industrial sector
was joined by weakness in other parts of
the economy, and overall, the nation's
real gross domestic product is estimated
to have risen a scant V* percent at an
annual rate in the fourth quarter of last
year. In the labor market, layoffs proliferated once again, and the civilian
unemployment rate rose to 7.1 percent
at the end of 1991.
The deterioration in both industrial
activity and nonfarm employment
extended into this year, with factory production down sharply in January and
private payrolls edging beneath the low
of last April. On the other hand, housing
market activity appears to have picked
up somewhat since the beginning of the
year, and nominal retail sales rose about
Vi percent in January.
Monetary Policy Reports
Inflation slowed in 1991, with consumer prices up 3 percent over the year,
much less than the 6 percent rise posted
during 1990. In part, the slowing in
inflation reflected the sharp drop in oil
prices early in the year; consumer energy prices in December were IV2 percent below their level at the end of 1990,
with the decline concentrated in the first
quarter of the year. Food price inflation
also moderated considerably, amounting
to only 2 percent last year after three
years of increases in excess of 5 percent.
Even apart from food and energy,
inflation now appears to be on a downward trend. To be sure, there were sizable increases in the CPI excluding food
and energy early in the year, as higher
federal excise taxes and a pass-through
of the sharp rise in energy prices boosted
prices for a variety of goods and services. With the subsequent reversal in
oil prices and no further major tax hikes,
however, price pressures eased visibly
beginning in the spring. On balance, the
CPI excluding food and energy rose less
than 4 percent at an annual rate in the
second half of 1991, well below the
5 percent pace of 1990. Labor cost pressures also diminished last year, 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 4V2 percent over
1991, somewhat less than the increases
recorded in each of the three previous
years.
Household Spending—Consumption and
Residential Construction
With household finances adversely
affected by job losses and declining real
incomes, real consumer spending rose
just lA percent over the year, the same as
in 1990. At the beginning of the year,
consumer purchasing power already had
49
been sapped by the rise in energy prices
and by declines in employment. And
although the retreat in oil prices then in
progress and an improvement in consumer confidence following the end of
the Gulf war provided a boost to spending in the spring, the failure of the
recovery to take hold and concerns
about financial prospects and debt burdens restrained spending in the second
half of the year. On balance, real consumer outlays edged down between July
and December, retracing part of the
rise that had occurred during the spring
and early summer.
The weakness in consumer spending
over the past year was particularly evident for durable goods. A sharp drop in
motor vehicle purchases accounted for
much of the overall decline in spending
on durables; indeed, the level of motor
vehicle sales in 1991, at \2lA million
units, was the lowest since 1983. Outlays for other durable goods were down
slightly over the year, after a 1 Vi percent
decline in 1990. As with total spending,
purchases of other durables picked up
somewhat in the spring and early summer, but then fell in the fourth quarter as
consumers retrenched. Spending on
nondurable goods also declined last
year, with expenditures, especially for
apparel, down sharply in the fourth
quarter. In contrast, outlays for services
continued to trend up at a pace similar to
that registered in the two previous years.
The patterns of change among the
components of consumer spending—
particularly the steep decline in outlays
for "big ticket" durable goods—
underscore the role of household balance sheet concerns in restraining economic growth last year. Household debt
burdens rose substantially during the
1980s, when consumers stepped up
spending on motor vehicles and other
consumer durables, often financing their
purchases with credit. In some parts of
50
79th Annual Report, 1992
the nation, this spending boom spread to
residential real estate as well, with the
associated borrowing, which was often
predicated on expectations of rapidly
rising family incomes, adding further to
the financing burdens of households. As
income growth weakened over the past
year and a half, consumers struggled
to meet the monthly obligations on
their accumulated debt and apparently
deferred some discretionary spending in
the process. This financial stress also
was evidenced by an increase in delinquency rates for consumer and mortgage loans last year to levels comparable
to those experienced in the previous two
recessions.
A renewed pessimism on the part of
households may also have contributed
to the reluctance of consumers to step
up spending over the latter part of 1991.
As noted previously, consumer confidence, which was quite low at the beginning of the year, rose markedly upon the
conclusion of the Gulf war. However, as
it became apparent that the anticipated
recovery in the economy was not materializing and announcements of layoffs
resumed, confidence turned down, dropping especially sharply toward the end
of the year. In January 1992, the Survey
Research Center's index of consumer
sentiment stood at the levels of last winter, while the Conference Board's confidence index was below that seen in
the 1981-82 recession. Many analysts
observed that consumers appeared to be
more apprehensive than normally might
be expected, given the broad macroeconomic circumstances—for example, the
unemployment rate has remained well
below that reached in the early 1980s—
suggesting that concerns about longerrun economic prospects may have
contributed to the heightened anxiety
among households last fall.
After dropping sharply in January,
housing starts posted a moderate recov
ery over the remainder of the year,
fueled by 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. Reflecting the strengthening in demand, the
excess supply of unsold new homes
diminished, and the pace of singlefamily housing starts moved above
900,000 units at an annual rate by the
fourth quarter, an increase of more than
16 percent from a year earlier. Nevertheless, production was well below that of
earlier years, and, despite the upturn
in activity, the single-family housing
market remains softer than would be
expected given recent mortgage rates
and the rising number of households
of prime homebuying age. Continued
lender caution about granting landacquisition and construction loans
reportedly has damped production in
some locales. However, given the
absence of significant price pressures in
the housing market, restraint on the
demand for single-family homes, stemming from weak income growth, concerns about employment prospects, and
poor conditions for home selling, likely
has been a more prominent influence
on homebuilding than have supply
constraints.
In the multifamily housing market, an
excess supply of vacant units and
restraints on credit availability continued to depress construction last year.
Starts of multifamily units fell about
30 percent over the twelve months of
1991, and the number of starts during
the year was the lowest since the 1950s.
There have been numerous reports of
restrictive lending practices damping
activity in this sector. However, vacancy
rates for rental units remain exceptionally high—and rents soft—suggesting
that in many areas new projects might
Monetary Policy Reports
well be of questionable economic viability. Until market supplies begin to
tighten discernibly, activity in this segment of the market is unlikely to show
appreciable improvement.
Business Spending—Investment in
Inventories and Fixed Capital
In early 1991, the investment climate
was dominated by the effects of the
decline in the demand for business output and the jump in energy prices during
the second half of 1990. 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 in the motor vehicle sector were
especially sharp over that period,
although output of most other types of
goods and materials turned down as
well.
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 an average 0.7 percent per month
from April to July. Despite the firming
in sales, businesses remained cautious,
and inventory levels continued to
decline through midyear.
In late summer, however, final
demand slackened, and after seven
months of decline, business inventories
accumulated at a substantial rate from
September through December. The rise
in inventories was centered in wholesale
and retail trade, and inventory-sales
ratios there moved into ranges that
appeared undesirably high in light of
carrying costs and expected sales. A
portion of the accumulation appeared to
consist of goods ordered from abroad;
51
indeed, a partial reaction to the overhang may have been visible in the sharp
drop in nonoil imports in November.
Nonetheless, retailers evidently also
reduced orders from domestic suppliers,
contributing to the sluggish pattern of
manufacturing output in the fourth quarter. By January of this year, factory production had dropped back to its level of
a year earlier, and the operating rate in
industry was back down to levels that,
prior to last winter, had not been seen
since the brief industrial slump of 1986.
Business investment in fixed capital
fell 7 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
on the part of many businesses to reduce
debt burdens and by a continued oversupply of office and other commercial
space. Even adjusting for cyclical considerations, last year's weak pace of
investment appeared to extend the relatively slow rate of capital formation evident for some time. The capital stock in
the nonresidential business sector, net of
depreciation, has risen about 23A percent
at an annual rate over the past decade—
down from 33A percent annually during
the previous decade. In part, this pattern
has owed to a shift toward shorter-lived
assets—such as computers—that depreciate more quickly. However, such outlays, by generating a relatively high
flow of capital services per dollar of
investment, have cushioned the impact
on productivity of the slowing pace of
capital formation. Even so, the quantity
of investment, which has also been
depressed by large federal budget deficits and the resulting low level of
national saving, has been inimical to
productivity growth and thus to the
advance of living standards.
52
79th Annual Report, 1992
Real spending for equipment fell
3V4 percent over 1991, as outlays
plunged in the first quarter and showed
only limited improvement on net over
the remainder of the year. The strongest
area in investment spending was computers, for which real outlays increased
more than 40 percent at an annual rate
over the second half of the year; these
gains were driven by new product introductions and by the substantial price
cuts offered by computer manufacturers.
In contrast, business investment in other
types of equipment generally declined,
on balance, over the year. Outlays for
industrial equipment continued to deteriorate as excess capacity limited expansion in the manufacturing sector, and
business purchases of motor vehicles
dropped off sharply. 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 orders that still remains should
sustain production and shipments for
some time, the slackening in demand
indicated by the sharp downturn in aircraft orders suggests that the growth
surge in this sector may have run its
course.
Nonresidential construction plummeted 15 percent in real terms over the
four quarters of 1991. The contraction
was broadly based, but especially large
declines in outlays were evident for
office buildings and other commercial
structures. Despite the sharp cutbacks in
construction in recent years, prices of
existing commercial properties have
continued to fall, contributing to the
substantial stress evident in the financial
sector. Of course, the fundamental problem is the space overhang from the earlier overbuilding; the vacancy rate for
office buildings nationwide was still
close to 20 percent at the end of the
year. However, a lack of liquidity in this
market—in particular, the reluctance
of lenders to finance acquisitions of
commercial properties—has made the
adjustment still more difficult. Such
problems are especially acute in the
market for office buildings, where
appraised values have declined nearly
30 percent since 1985 and where lenders
and developers generally have shown
little interest in new projects. For other
commercial structures—primarily shopping centers and warehouses—the outlook is slightly less downbeat, with the
data on new contracts and building
permits suggesting that the steepest
declines may have already occurred.
Spending for industrial structures also
generally declined over the year, as low
rates of capacity utilization curtailed
plans for new factory construction.
Petroleum drilling activity, meanwhile,
dropped sharply in response to the
decline in oil prices.
Federal banking regulators have taken
a number of steps to ensure that supervisory pressures do not unduly restrict real
estate lending. The agencies have, for
example, addressed issues relating to
accounting and appraisal, to make sure
that illiquid real estate exposures are
evaluated sensibly and consistently.
And, they have 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 has 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
have 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
Monetary Policy Reports
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 increased 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 largely
stemmed from weak nominal income
growth; 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, spending rose nearly
6 percent in fiscal 1991. Part of the
$71 billion increase in nominal federal
outlays reflected the slightly more rapid
pace at which the Resolution Trust Corporation resolved insolvent thrift institutions last year. In contrast, outlays were
reduced by allied contributions to the
Defense Cooperation Account. These
contributions, 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 put toward the replacement of munitions in 1992 and beyond.
Excluding deposit insurance and contributions of allies, outlays rose about
9 percent in fiscal 1991. Spending for
53
health programs continued to rise rapidly, elevated by large increases in
health care costs and in outlays for the
medicaid program. Among other entitlement programs, outlays 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, reflecting
substantial increases in the number of
beneficiaries. In contrast, declining
interest rates reduced the growth of
interest payments on the federal debt.
Defense outlays—excluding foreign
contributions—were up 5l/i percent
from fiscal year 1990 to fiscal year 1991,
as the additional U.S. outlays for the
Persian Gulf conflict were only partially
offset by the spending cuts enacted in
the 1990 budget agreement and in previous years.
Federal purchases of goods and services, the portion of federal spending
that is included directly in GDP, fell
?>lA 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, defense purchases
were down about AVi percent last year.
In contrast, nondefense purchases were
up slightly in 1991; increases for 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
and capital accounts (excluding social
insurance funds) narrowed to $34 billion in the third quarter of 1991 from
a high of nearly $47 billion in the
54
79th Annual Report, 1992
fourth quarter of 1990; the shrinkage of
this deficit represents the first major
improvement since 1984, when the state
and local budget surplus peaked. Even
so, relative to GDP, the deficit still is
quite high on a historical basis. The
credit quality of state and local government debt also continued to deteriorate
last year, as illustrated by the downgrading of the general obligation debt of
eight states by one rating agency; most
of the rating changes were the direct
result of budgetary imbalances.
The poor fiscal position of state
and local budgets led to both severe
restraints on spending and sizable tax
hikes. Overall, real purchases of goods
and services edged down over the four
quarters of 1991. In nominal terms, total
expenditures by these governments
were up 4 percent last year, less than
one-half the average pace in recent
years. Receipts rose an estimated 7 percent over 1991, as numerous jurisdictions imposed a variety of new tax
measures and federal aid to state
and local governments—especially for
medicaid—increased substantially.
Nonetheless, many state and local governments continue to report revenue
shortfalls and spending overruns for the
current fiscal year, setting the stage for
another round of budget-balancing
measures ahead.
The External Sector
Measured in terms of the other Group
of Ten (G-10) currencies, the tradeweighted foreign exchange value of the
U.S. dollar appreciated 14 percent, on
balance, from December 1990 to July
1991, reversing more than one-half of
the decline that had occurred from the
middle of 1989 to the end of 1990. In
large part, the rise in the dollar over this
period reflected the quick end to the
Gulf war and expectations of a recovery
in the U.S. economy, as well as developments in Eastern Europe that initially
weighed on the German mark. However,
as the U.S. economic recovery faltered
in late summer and market participants
viewed further easing actions by the
Federal Reserve as more likely, the
dollar again turned down, averaging in
December 1991 only about 3 percent
above its level in December 1990. The
dollar rebounded somewhat in January
on market perceptions of a diminished
likelihood of an additional easing in U.S.
interest rates and expectations that German authorities would not push their
interest rates up further.
On a bilateral basis, the dollar rose
19 percent against the mark between
December 1990 and July 1991, amid
disappointment about the effect of German unification on German inflation and
trade. During the second half of last
year, German monetary policy tightened, and the dollar gave up much of its
previous gains, finishing the year just
4 percent above its December 1990
level. Other currencies in the European
Monetary System generally moved with
the mark during 1991, although sterling
slipped somewhat near year-end. The
dollar declined about 4 percent on net
against the yen in 1991, as increasing
Japanese trade surpluses led to the view
that an appreciation of the yen would be
welcomed by the authorities.
The merchandise trade deficit narrowed to less than $75 billion in 1991,
compared with $108 billion in 1990; the
trade deficit last year was the smallest
since 1983. An especially large decline
in the deficit was registered early in the
year, as the drop in oil prices sharply
reduced the value of imports. In addition, trade flows during the first half of
1991 were influenced by the weakening
of U.S. activity (which reduced demand
for imports), by continued growth
abroad (which boosted exports), and by
Monetary Policy Reports
the lagged effects of the decline in dollar
exchange rates that had taken place in
1990. However, imports rose sharply in
the third quarter, and the trade deficit
widened somewhat in the second half of
the year. The current account balance
recorded a small surplus, on average,
during the first three quarters of 1991, a
sharp improvement from the $92 billion
deficit in 1990. However, about half of
that improvement resulted from cash
grants from foreign governments to
support operations in the Persian Gulf;
excluding these transfers, the current
account showed an average deficit
of $48 billion at an annual rate over
the first three quarters of 1991. The
improvement in the current account
(excluding transfers) was somewhat
greater than that in the trade balance
owing to a strengthening of net service
receipts in such areas as travel, education, and professional services.
U.S. merchandise exports grew about
10 percent in real terms over the four
quarters of 1991, tempering the production declines associated with the weakness in domestic demand. Exports rose
fairly strongly in the second quarter, as
high levels of investment in such countries as Germany and Japan boosted
exports of computers and other capital
equipment. Economic activity in the
major foreign industrial countries weakened as the year wore on, however, and
with a deterioration in the competitive
position of U.S. companies following
the appreciation of the dollar over the
first half of the year, export growth
slowed markedly in the third quarter.
Exports surged again in the fourth quarter, led by sales of computers, aircraft,
and other capital goods. However, some
of the recent increase appears to represent a bunching of sales rather than an
increase in economic activity abroad.
Merchandise imports excluding oil
grew about 4 percent in real terms dur
55
ing 1991. Imports declined early in the
year as weak domestic spending reduced
the demand for foreign goods. As
domestic demand in the United States
turned up in the spring, imports—
especially of automotive products, computers, and consumer goods—rose and
remained strong through the summer.
With the subsequent weakening in
demand, however, some of the additional import volume apparently ended
up on retailers' shelves. In response,
U.S. businesses reduced orders from
abroad, and import growth slowed
sharply over the fourth quarter. The
quantity of oil imports, which had
plunged after the sharp rise in oil prices
in the fall of 1990, generally moved up
through the third quarter as refiners
moved to rebuild inventories. However,
oil import volumes turned down again
in the fourth quarter, reflecting sluggish
U.S. activity and unseasonably warm
weather.
The sharp reduction in the recorded
U.S. current account deficit in the first
three quarters of 1991 was mirrored by
changes in recorded capital inflows and
the statistical discrepancy. The statistical discrepancy in the international
accounts, which had jumped to $64 billion in 1990, declined to virtually zero
in the first three quarters of 1991.
Inflows of official capital were about
matched by outflows of private capital
in the first three quarters of 1991. Net
official inflows amounted to $16 billion
despite net intervention sales of dollars
in foreign exchange markets by the
G-10 countries and a drawdown of
reserves held in the United States by
countries helping to cover the costs of
Desert Storm; some countries also
financed their contributions by borrowing and liquidating investments in the
Euromarkets. Net private capital outflows were $18 billion in the first three
quarters, largely accounted for by banks.
56
79th Annual Report, 1992
In part, these outflows reflected the
increased net demand for funds in the
Euromarkets associated with Desert
Storm transfers. In addition, the elimination by the Federal Reserve of certain
reserve requirements in December 1990
led some U.S. agencies and branches of
foreign banks to increase their issuance
of large time deposits in the United
States and to reduce their reliance on
borrowing from abroad.
Securities transactions in the first
three quarters of 1991 reflected the continued internationalization of financial
markets. Although the net inflow was
modest, private foreigners added substantially to their holdings of U.S. stocks
and bonds, while U.S. residents bought a
large volume of foreign stocks and
bonds. Reflecting interest rate developments that encouraged shifting from
short- to long-term financing, both
issues of foreign bonds in the United
States and issues of Eurobonds by U.S.
corporations were strong. Capital outflows associated with U.S. direct investment abroad also were sizable, as U.S.
investors positioned themselves to take
advantage of EC 1992 and participated
in the privatization of previously stateowned enterprises in such countries as
Mexico. In contrast, foreign direct
investment in the United States was far
below recent peaks; foreign takeovers
of U.S. businesses declined, and reinvested earnings were depressed by the
recession.
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
pattern continued into 1991, with non
farm payroll employment down sharply
over the first four months of the year.
Economic conditions improved in the
spring, and labor demand turned up for
a time. However, the subsequent weakening in activity in the late summer led
to a renewed bout of layoffs that has
continued into early 1992, retracing the
job gains recorded during the spring and
summer.
The net job losses last year 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 workforces. Employment in manufacturing,
which began its decline in 1989, fell
more than 400,000 over 1991 with most
of the losses in the durable goods sector.
The continued contraction in commercial building depressed construction employment despite the moderate recovery
in residential housing demand. Efforts to
restructure existing operations and to
downsize workforce levels were evident
in the finance, insurance, and real estate
sector as well, where job losses last year
stood in contrast to the past pattern
of continued hiring during recessions.
Employment in trade establishments
also fell substantially over the year,
pushed down by the decline in consumer spending and the high degree of
financial distress among retailers. In
contrast, employment in services continued to trend up over the latter part of the
year, as steady gains in health services
more than offset sluggish hiring in the
more cyclically sensitive business and
personal service industries.
Reflecting the substantial declines in
output and employment over the past
year and a half, the unemployment rate
rose more than \Vi percentage points
between July 1990 and December 1991.
Moreover, the distribution of job losses
Monetary Policy Reports
was especially wide compared with
previous episodes of rising unemployment. Increases in unemployment were
broadly based across regions, industries,
and occupations, and an unusually large
proportion appeared to constitute permanent layoffs.
Nonetheless, the rise in the jobless
rate has been less than in prior episodes
of increasing unemployment. In part, the
rise has been smaller because labor force
growth has been unusually slow over
the past two years. In particular, the
labor force participation rate, which
stood at about 66 percent at the beginning of this year, is V2 percentage point
below its average during the first half
of 1990. This decline in participation
appears to contain some elements of a
cyclical pattern: The number of discouraged workers rose over the year, and
sizable increases in the number of retirees were reported, 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 rate of trend
potential output growth. In this regard,
the composition of the corresponding
increase in nonparticipants is, in part, a
favorable long-term development. There
has been a sharp rise in recent years in
the number of individuals who have left
the labor force in order to attend school.
Although that increase may, to some
degree, reflect declining opportunity
costs associated with the poor job prospects of last year, recognition of the
longer-term decline in relative wages
among lower-skilled workers may also
have played a role. As these individuals
reenter the labor force upon completion
of their schooling, their increased skills
should boost labor productivity and
potential output in future years.
57
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. The performance of
productivity, which rose about 1 percent
for the nonfarm business sector in 1991,
has been somewhat better than is typical
in a weak economy. However, last year's
advance came after a decline in 1989
and no change in 1990, and it is difficult
at this stage to distinguish more fundamental changes in productivity trends
from the apparent cyclical tendency last
year for employers to reduce labor
inputs aggressively in response to deteriorating sales.
With widespread layoffs and the
unemployment rate rising throughout
the year, the upward pressures on wages
that had intensified between 1987 and
mid-1990 diminished somewhat over
1991. As measured by the employment
cost index, increases in hourly compensation for private nonfarm workers rose
4V2 percent over the four quarters of
1991, down from more than 5 percent in
the first half of 1990. The wage and
salary component of hourly compensation, which rose 3 percent at an annual
rate over the second half of last year,
exhibited the most deceleration.
Although employer costs for benefits
have also decelerated from their mid1990 peak, increases in benefit costs—at
6V4 percent in 1991—remained well
above those for wages alone. Expenses
for health insurance have continued to
spiral upward despite considerable
efforts on the part of employers to control costs by negotiating directly with
58
79th Annual Report, 1992
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
of medical care costs.
Price Developments
Evidence that a significant slowing of
inflation is under way mounted over
1991. The consumer price index rose
3 percent during the year, about half the
rate of increase 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 moved into 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 CPI for energy fell
30 percent at an annual rate in the first
quarter of last year, as the sequence of
events in the Middle East reduced the
posted price of West Texas Intermediate
crude oil from a peak of about $39 per
barrel in October of 1990 to less than
$20 by February of last year. Oil prices
subsequently held near that level, but
gasoline prices finned 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. Price pressures again emerged in the fall as crude
oil prices trended up in September and
October on concerns about supplies
from the Soviet Union. Since October,
however, oil prices have retreated again,
with the most recent quotes at about $18
per barrel. These latest reductions probably will show up at the retail level in
the first quarter of 1992; indeed, the
energy component of the producer price
index fell nearly 3 percent in January,
and other preliminary information points
to sizable declines in both retail gasoline
and heating oil prices.
The CPI for food rose just 2 percent
over 1991, well below the increases of
5 percent to 5Vi percent in the three
previous years. In part, the subdued pace
of food price inflation reflects 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 whose prices
are influenced more by the cost of nonfarm inputs than by supply conditions in
agriculture; for example, the increase in
the price of food away from home last
year was the smallest since 1964. Elsewhere, there were large monthly variations in prices for fruits and vegetables,
as adverse weather conditions temporarily boosted prices in the first half of
the year and prices for some fresh vegetables jumped toward the end of the year
because of the whitefly infestation in
California.
The consumer price index for items
other than food and energy rose 4V2 percent in 1991, about 3A percentage point
less than in 1990. The index was
boosted early in the year by increases in
federal excise taxes on cigarettes and
alcoholic beverages and by an increase
in postal rates. Price increases last winter also were enlarged by the passthrough of the rise in energy prices to a
wide range of nonenergy goods and services. However, the subsequent decline
Monetary Policy Reports
in energy prices soon spread to the nonenergy sector, and except for an uptick
during the summer associated with some
bunching of price increases, this measure of core inflation moderated significantly over the remainder of the year.
Prices for nonenergy services decelerated considerably last year, rising
4V2 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
last year. The drop in interest rates
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 the weak economy
cut into demand; more recently, however, airfares have turned up again as
carriers have reduced the availability of
and increased restrictions on low-end
"super-saver" fares. In contrast, prices
for medical care services rose 8 percent
over the year, while 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 V2 percentage point faster than in
1990. In large part, the more rapid rate
of inflation in goods prices reflected the
aforementioned hike in excise taxes and,
despite weak sales, larger increases in
prices for both new and used cars. However, a slowing in price increases was
evident for a number of other goods,
notably apparel, household paper products, and personal care items.
The easing of inflationary pressures
has been even more evident at earlier
stages of processing. The producer price
index for finished goods edged down
over 1991 after an average 5 percent
annual rate of increase over the three
preceding years; this index posted
another small decline in January of this
year. Falling prices for energy and con
59
sumer foods accounted for much of the
overall deceleration last year. Even apart
from food and energy, however, producer prices slowed to a 3 percent pace.
Prices for intermediate materials excluding food and energy declined 3A percent
over the year, reflecting declining fuel
and petroleum feedstock costs, an easing
of wage pressures, and weak demand.
The downturn in economic activity also
depressed industrial commodity markets
last year. After dropping sharply in the
fourth quarter of 1990, spot prices for
these commodities continued to decline
gradually over most of 1991.
Monetary and Financial
Developments in 1991
The principal objective of monetary policy this past year has been 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 progressively eased money market conditions in 1991 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—which
now stands at its lowest level in nearly
30 years—brought the federal funds rate
and most other short-term interest rates
down about 3 percentage points over the
course of the year. These actions, building on earlier easing efforts, pushed the
federal funds rate down to 4 percent, its
lowest sustained level since the 1960s
and 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 owed in
part to an unusually cautious approach
60
79th Annual Report, 1992
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, depositories 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 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 depositories, reflecting the more
restrictive lending standards at banks
and thrifts 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 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 to date the trend toward
deleveraging has exerted a restraining
effect on aggregate spending, over time
this trend should help put consumers,
firms, and financial intermediaries on a
sounder financial footing, paving 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, weakness in the monetary aggregates early in
the year, 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, to engender a 125
basis point decline 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 50 basis point
increments to 8V2 percent.
Long-term interest rates, by contrast,
were roughly unchanged on balance
over the first few months of the year. At
Monetary Policy Reports
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
the face of falling interest rates in the
United States dissipated.
In March, bond yields drifted up on
the post-war rebound in consumer confidence and other evidence, particularly
from the housing industry, that an economic upturn was at hand. The improving outlook for recovery also contributed to narrowing risk premiums on
private securities, especially on belowinvestment-grade issues, which had
reached very high levels in January. The
debt and equity instruments of banks
performed especially well over this
period, responding to lower short-term
interest rates and the likelihood that an
economic rebound would help limit the
deterioration in their loan portfolios.
Moderate official support for the dollar,
better prospects for a U.S. economic
recovery, and a rise in U.S. long-term
interest rates relative to those abroad,
together with an uncertain economic and
political situation overseas, especially
in the Soviet Union, helped to reverse
the dollar's slide on foreign exchange
markets.
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
61
economic activity apparently quickening, and with the broader monetary
aggregates near the middles of their
target ranges, the Federal Reserve held
money market conditions steady, as the
stimulus already 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
approach 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 during the latter part
of the year. Pressures on reserve positions were reduced slightly in August
and again in September, with the latter
move accompanied by a 50 basis point
reduction 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 full 1 percentage point reduction in the discount rate on December
20. All told, these moves combined to
62
79th Annual Report, 1992
drive the federal funds rate down from
53/4 percent in July to 4 percent by yearend. Most other short-term interest rates
declined by similar magnitudes, and the
prime rate was reduced by 2 percentage
points, to 6!/2 percent.
The decline in short-term interest
rates, in combination with flagging
economic activity, depressed credit
demands, and prospects for lower inflation, contributed to bringing long-term
interest rates down significantly in the
latter part of 1991. The thirty-year Treasury bond rate dropped about a 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
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 the pace of policy easings quickened. Rising interest rates in Germany
also put downward pressure on the foreign exchange value of the dollar. In
January 1992, the dollar rebounded
somewhat, reflecting an emerging view
that interest rate declines in the United
States and interest rate increases in Germany might have come to an end. The
former view was also reflected in the
U.S. bond market, where rates retraced a
portion of their earlier declines, partly
on brightening prospects for the U.S.
economy but also on concerns that
impending fiscal stimulus may increase
federal government demands on credit
markets.
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.
These changes were evident in the
behavior of the aggregate debt of
nonfinancial sectors, which expanded
43/4 percent in 1991, leaving this aggregate near 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 23A percent
rate in 1991, the slowest advance in
decades and below even the sluggish
growth rate of nominal GDP.
The small rise in nonfederal debt
velocity last year runs 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 financial innovations, which
combined to lower the cost of borrowing to households and businesses,
spawning a surge in leveraging activity.
Greater debt burdens may also have
been accumulated under the assumption
that nominal income growth 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
Monetary Policy Reports
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 severely
strained the ability of highly leveraged
households and corporations to service
debt. These difficulties, in turn, have fed
back on to 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.
This 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,
Growth of Money and ]Debt
Percent
Period
Annually, fourth
quarter to
fourth quarter]
1980
1981
Ml
M2
M3
Debt of
domestic
nonfinancial
sector
7.5
54
(2.52)
8.9
9.3
9.5
12.3
9.2
9.9
O O
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
10.4
5.4
12.0
15.5
6.3
4.3
.6
4.2
8.0
9.1
12.2
8.0
8.7
9.2
4.3
5.2
4.8
3.8
3.1
9.9
9.9
10.8
7.6
9.0
5.9
6.4
3.6
1.7
1.3
9.2
11.3
14.1
13.8
13.8
10.4
9.4
8.2
6.9
4.7
Quarterly
(annual rate)3
19911
2
3
4
5.2
7.4
7.5
11.1
3.5
4.3
1.1
3.3
3.3
1.8
-1.1
1.2
4.5
4.0
4.9
5.2
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.
63
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,
grew only Vz percent 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 the first time 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 longterm 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 runup seen in
the late 1980s. Consistent with an
improving financial picture and prospects of an economic rebound, quality
spreads on corporate issues narrowed
considerably from their peaks in early
1991, especially on below-investmentgrade 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
64
79th Annual Report, 1992
debt and other consumer credit, which
carry higher financing costs and are 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, reducing the ratio of scheduled
debt payments to disposable personal
income, which had risen sharply 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 previous cyclical downturns. On the
other side of the ledger, many households that had 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 but 3 percent last 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 borrowing, along with more restrictive credit
standards by some lenders and the closing and shrinkage of troubled thrifts,
have affected the channels through
which debt flows. In particular, in recent
years there has been a major rerouting
of credit flows away from depository
institutions. The decline in the importance of depositories, when measured by
the credit they book relative to the total
debt of nonfinancial sectors, has been
striking, and this trend was extended in
1991. Not only did the thrift industry
continue to contract, as the direct result
of RTC resolutions as well as the
retrenchment of marginally capitalized
institutions, but commercial banks cut
back on their net credit extensions.
Indeed, bank credit increased only 4 percent, not even enough to offset the continued runoff at thrifts. Weakness was
particularly evident in bank lending,
which shrank lA 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 last
year was more pronounced than the
usual experience. Apparently, loan
growth was depressed not only by
reduced credit demands, but also by a
more restrained bank lending posture.
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.
A more prudent approach to capitalization and lending decisions is, in the
main, a positive development that ultimately will result in strengthened balance sheets for the nation's depositories.
Reflecting this improved outlook, prices
of outstanding bank debt and equity
increased markedly from their lows in
late 1990 and early 1991, outperforming
broader market indexes. Bank profits,
benefiting from wide spreads between
loan rates and deposit rates, also showed
improvement relative to the depressed
levels of recent years, although they
remained low by broader historical
standards.
Monetary Policy Reports
To date, depository retrenchment
appears to have had some restraining
effects on aggregate borrowing. Of
course, in some areas, much of the credit
formerly extended by banks and thrifts
has been supplanted by 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 have filled the vacuum created by depository restraint in
the areas of residential mortgage and
consumer lending. Similarly, many large
businesses have 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 thrifts have cut back on other
types of lending that can less easily be
rechanneled, however, including 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, have been
afflicted by some of the same balance
sheet problems plaguing depositories
and have also curbed their lending to
these sectors. As a result of the pullback
in credit supplies, these borrowers now
face somewhat more stringent borrowing terms.
As in 1990, the retrenchment of banks
and thrifts and the associated redirection
of credit flows away from depositories
continued in 1991 to have 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 thrifts to fund credit
expansion, has been most affected by
the reduced importance of depository
credit in funding spending. The velocity
of this aggregate, which declined
through much of the 1980s, has trended
65
up in recent years; this trend continued
in 1991, as M3 rose only VA percent,
well below the pace of nominal GDP,
leaving this aggregate near the bottom
of its 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 "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 repurchase agreement markets.
Domestic depositories, by contrast,
faced with high and rising U.S. deposit
insurance premiums, exhibited no inclination to alter their funding strategies in
favor of large time deposits.
The surge in Yankee CD issuance,
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 a VA percent
annual rate in the third quarter, reflecting feeble loan demand in a tepid economy as well as the restructuring of
depositories. The Resolution Trust Corporation played a direct role in damping
M3 growth by taking assets formerly
held by thrifts 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.
66
79th Annual Report, 1992
The effects of depository restructuring on M2 remain imperfectly understood. In the past, the velocity of M2 has
tended to move in tandem with changes
in a simple measure of the opportunity
cost of holding this aggregate—that is,
with 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 declines as decreases in money market interest rates
outpace drops in yields on deposits,
holdings of M2 strengthen relative to
expenditures—and velocity drops. 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
opportunity cost. This was particularly
evident in 1991, when M2 expanded at
about the same pace as nominal GDP
despite a significant decline in such
opportunity costs. M2 finished the year
near the bottom of its target range and
much weaker than would be expected
on the basis of historical relationships
among income, interest rates, and the
public's appetite for monetary assets.
In the early months of the year, M2
growth accelerated somewhat from its
lackluster pace of late 1990. Narrowing
opportunity costs generated substantial
inflows to liquid deposits, particularly
those in Ml, which 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, M2
growth remained broadly consistent
with the general configuration of opportunity costs and income, and near the
middle of its target range.
M2 began to slow in June, however,
and stalled in the third quarter, despite
expansion in nominal income and
further declines in opportunity costs.
Growth in this aggregate resumed in
the following quarter, fueled by a surge
in transactions deposits owing to additional declines in opportunity costs, but
inflows to M2 remained fairly weak, and
this 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
has not been fully explained, it surely is
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 thrifts seem to have
pursued additional retail deposits less
aggressively than in the past. Although
rates offered on these deposits did not,
until very recently, fall unusually rapidly in response to declining market
interest rates, depositories 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 very low relative to
loan rates, partly in an attempt to bolster
profit margins while shrinking their balance sheets, depositories provided
households with a greater incentive to
finance 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, 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
Monetary Policy Reports
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
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, and especially since midyear,
when investors seemed particularly
intent on reaching for higher yields by
lengthening the maturity of their portfolios. Depositories, faced with weak
loan demand and pressures on capital
positions, seemed disinclined to compete aggressively for these funds by
offering competitive rates on longerterm CDs.
The rapid pace of activity by the
Resolution Trust Corporation also likely
depressed M2 growth in the third
quarter, 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 has responded to declining
market interest rates about as would be
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
67
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,
owing in part to continued strong foreign demands, also contributed to the
strength in Ml, as well as in the monetary base, which increased SVA percent
last year.
Report on July 20, 1992
Monetary Policy and the Economic
Outlook for 1992 and 1993
Economic activity has increased on balance since the beginning of the year, but
rather hesitantly in recent months, and
inflationary pressures have continued to
abate. Against this backdrop, and with
money and credit exhibiting renewed
weakness in the second quarter, the Federal Reserve has eased money market
conditions twice—in April and again in
early July. The descent of domestic
interest rates, which began in 1989, has
now carried nominal yields on many
market instruments to the lowest levels
in two or three decades.
In mid-February, when the Board presented its last semiannual report on
monetary policy to the Congress, the
economy seemed to be struggling to
regain forward momentum. Growth had
come almost to a standstill in the final
quarter of 1991, and, while a hint of
improvement was evident in some of
the indicators that were available in
mid-February, convincing signs of a
strengthening of activity had not yet
appeared. Moreover, in looking ahead at
that time, growth seemed likely to continue to be retarded by the still incomplete resolution of major structural
adjustments in a variety of sectors,
68
79th Annual Report, 1992
financial and nonfinancial. Chief among
those structural impediments were persistent problems in commercial real
estate markets, budgetary stress at all
levels of government, a downsizing of
the defense industry, exceptional caution among financial intermediaries,
and ongoing efforts of businesses and
households to reduce the level of their
indebtedness.
At the same time, however, considerable impetus to activity was thought to
be already in train, partly as a result of
the substantial easing of money market
conditions that the System had implemented in the second half of 1991.
Among other effects, the decline in
short- and long-term interest rates was
reducing debt-servicing obligations and
was facilitating needed balance sheet
restructuring by borrowers and lenders.
In assessing the situation as of last February, the Board members and Reserve
Bank presidents recognized that the
uncertainties in the outlook were unusually large, but they believed that a moderate pickup in output from the especially sluggish pace of the fourth quarter
of 1991, coupled with further improvement in underlying price trends, was the
most likely prospect in 1992.
In the event, economic growth did
move back into a moderate range in the
first quarter of 1992. After keeping a
tight grip on their expenditures during
the holiday shopping season, consumers
stepped up their spending sharply in
early 1992; simultaneously, purchases
of new houses soared, spurred in part
by lower mortgage interest rates. An
unusually mild winter also helped to
buoy activity in January and February.
Although businesses were able to
accommodate much of the burst in
spending through a drawdown of inventories, the rise in demand sparked a
rebound in industrial output. Consumer
sentiment, which had deteriorated in late
1991 and early 1992, began to tilt back
up in late winter and early spring, and
business executives expressed greater
optimism. Economic growth, as measured by the annualized rate of change
in real gross domestic product, moved
up to 23/4 percent in the first quarter, the
largest quarterly gain in more than three
years.
The strength in final demand that
seemed to be emerging in the early part
of the year does not appear to have
carried through the second quarter, however. Households, restrained by a soft
labor market and the lack of significant
gains in real income, clamped down on
their spending after the burst early in the
year; real consumption expenditures
appear to have grown little, if at all, in
the second quarter, and new home sales
fell steadily from February through
May. In addition, exports, which, over
the past several years, had been an area
of strength in the economy, showed little growth over the first five months of
1992. Although manufacturers boosted
production in April and May, they
tended to do so more by stretching the
hours of their workers, rather than by
adding employees to their payrolls.
Declines in production became evident
in the industrial sector in June, as firms
apparently moved quickly to forestall
unintended inventory accumulation. In
the labor market, the data for May and
June showed a disturbing rise in the
unemployment rate, to a level of 7.8 percent. On the whole, the growth of total
output in the economy likely was positive again in the second quarter—as it
had been in each of the four preceding
quarters. But, as the Federal Reserve
had anticipated at the start of the year,
the drag from ongoing structural adjustments has remained heavy.
Inflationary forces have been muted
this year. Prices accelerated somewhat
in the first quarter, but that flare-up
Monetary Policy Reports
proved to be short-lived, as increases in
the consumer price index were small, on
average, in the second quarter. The
"core" rate of inflation, as measured by
the change in the CPI excluding food
and energy, averaged 3.8 percent at an
annual rate in the first six months of
1992; this rate of rise was a little lower
than the average rate of increase during
1991, and it was considerably less than
the increase seen during 1990. With inflation expectations down appreciably
from recent highs, and with firms striving to reduce their costs on all fronts, a
trend toward gradual reduction in the
rate of price increase appears to be well
established at the present time.
Growth in the broad measures of
money was quite weak in the second
quarter, leaving both M2 and M3 in
June below the lower bounds of their
annual ranges. Measured from its average level in the fourth quarter of 1991,
M2 increased at an annual rate of
IV2 percent through June, while M3
edged down at a rate of lA percent over
that same period. As is discussed in
more detail below, the sluggishness of
money during this period seemed to be
more a reflection of changing patterns
of finance than of restraint on nominal
income growth. Still, private credit
growth also was relatively slow, and, in
the context of renewed softness in the
incoming data on spending and production, the weakness in both money and
credit added to concerns about the
ongoing strength of the expansion.
In this environment, the System eased
money market conditions slightly in
April and implemented a reduction of
V2 percentage point in the discount rate
on July 2, along with a commensurate
further easing of money market conditions. In total, short-term interest rates
have declined about 3A of a percentage
point since the beginning of the year.
Longer-term rates backed up early in
69
the year as the economic expansion
appeared stronger than many people had
expected, raising market concerns about
a revival of inflationary pressures. However, in recent months many bond and
mortgage rates have retraced their earlier increases. Broad indexes of stock
prices have remained close to record
levels. In foreign exchange markets, the
weighted average value of the dollar, in
terms of the currencies of other Group
of Ten (G-10) countries, appreciated
until early March, but recent depreciation, occasioned primarily by a less
robust outlook for the U.S. economy,
has left the dollar somewhat below its
1991 year-end level.
Declining interest rates in recent years
have contributed to sizable reductions in
debt-service obligations, as both longand short-term debt has been rolled over
or refinanced at lower rates. In addition,
lower long-term rates and high priceearnings ratios on stocks have encouraged businesses to reduce the interest
rate risk and the uncertainty associated
with short-term funding by relying more
heavily on issuance of long-term debt
and equity. Households also have taken
advantage of lower rates to refinance
existing debt, especially mortgages. In
addition, over-leveraged households,
facing uncertain income and employment prospects and wide spreads
between rates charged on consumer
credit and yields on monetary assets,
have moved to limit debt growth.
The resulting improvements in the
financial conditions of households and
businesses are evident in several indicators: Delinquencies on consumer loans
and home mortgages have declined, ratings for a number of firms have been
upgraded, and yield spreads have narrowed on private fixed-income securities relative to Treasury obligations. Of
course, not all parties have benefited
from lower interest rates; households
70
79th Annual Report, 1992
holding short-term deposits have experienced a sizable decline in interest
income. On balance, however, lower
interest rates have helped households
and businesses strengthen their balance
sheets, thereby building a firmer financial foundation for future economic
expansion.
Efforts to return to more sustainable
leverage positions have contributed to
slow expansion of the debt of nonfederal sectors in the first half of this year.
Heavy borrowing by the federal government has kept total debt expanding at
the lower end of the Federal Open Market Committee's (FOMC) monitoring
range of 4Vi to 8V2 percent, based on
current estimates. Depository credit
remains especially weak, reflecting not
only muted private loan demands, but
also continued caution among depositories. Commercial banks no longer
appear to be tightening their nonprice
terms of lending, but the degree of credit
restraint remains substantial and spreads
between loan rates and the cost of funds
remain unusually wide. Bank capital
positions have improved substantially
over the past year; nonetheless, banks
are likely to continue working to bolster
capital, partly as a consequence of incentives contained in the FDIC Improvement Act.
The contraction of depository credit
has been mirrored by the meager
advance in the monetary aggregates.
This is seen clearly in M3, which
includes most of the liabilities banks
and thrift institutions use to fund loans
and other assets. But M2 has also been
affected. Banks and thrift institutions
have not actively pursued deposit funding in light of weak loan growth, and
retail deposit rates have fallen considerably over the course of the year.
Consumers consequently have sought
higher-yielding assets outside M2,
including those in the capital market
where—despite the greater risks
involved—returns have appeared more
attractive. In addition, given the wide
deposit-loan rate spreads, some M2
holders likely have opted to pay down
debt rather than to hold monetary assets.
The rechanneling of credit flows away
from depositories and the associated
sluggish money growth have not been
entirely benign; many borrowers face
higher costs and stricter terms of credit
now than in the past at given levels of
market interest rates. Nonetheless,
weakness of the monetary aggregates
has not been associated with a similar
degree of restraint on aggregate demand.
Indeed, growth in nominal spending
has considerably outpaced that of M2
and M3; put differently, both monetary
aggregates appear to have registered sizable increases in their income velocities
in the first half of the year. The rise
in M2 velocity is particularly notable,
given the marked drop in short-term
interest rates in the latter part of 1991.
Ordinarily, velocity tends to fall for a
time after a decline in short-term rates.
Monetary Objectives
for 1992 and 1993
In reviewing the annual ranges for the
monetary aggregates in 1992, the Committee noted the substantial uncertainties created by the unusual behavior of
M2 and M3 velocity thus far this year. If
portfolio shifts ebb and more normal
relationships of depository credit to
spending begin to emerge, growth of the
monetary aggregates within the existing
ranges would be consistent with the
Committee's objectives for making
progress toward price stability and fostering economic growth. However, it is
unclear whether the forces giving rise to
the unusual behavior of the aggregates
will wane in coming months or continue
unabated. Faced with these uncertain-
Monetary Policy Reports
Ranges for Growth of Monetary
and Debt Aggregatesl
Percent
Aggregate
M2
M3
Debt2
1991
1992
Provisional
range
for 1993
21/2-6V2
21/2-61/2
21/2-6V2
1-5
1-5
1-5
41/2-81/2
41/2-8V2
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.
ties, the Committee chose to retain the
2V2 to 6V2 percent range for M2 and the
1 to 5 percent range for M3 announced
earlier this year for 1992.
The Committee also reaffirmed the
existing 1992 monitoring range for the
aggregate debt of domestic nonfinancial
sectors. The more cautious attitudes
toward borrowing that have damped
credit growth this year, and the improving balance sheets of borrowers, should
lay the groundwork for sustained economic expansion in years to come.
The ongoing structural changes in the
financial system and the tentative nature
of the recovery greatly complicated the
task of choosing ranges for the coming
year. The Committee recognized that the
range for M2 probably would need to be
reduced at some point to be consistent
with the Federal Reserve's long-run
objective of reasonable price stability.
However, pending further analysis of the
recent relationship of money stock
movements to income and interest rates,
the Committee chose to carry forward
the 1992 ranges for the monetary aggregates and debt as provisional ranges for
1993.
Economic Projections for 1992 and 1993
The members of the Board of Governors
and the Reserve Bank presidents, all of
71
whom participate in the discussions of
the Federal Open Market Committee,
generally believe that the most likely
scenario for the economy in the second
half of 1992 is one in which real GDP
increases at a moderate pace and job
growth is sufficient to impart a downward tilt to the unemployment rate. In
1993, output growth is expected to pick
up slightly further from the 1992 pace,
bringing additional small reductions in
the unemployment rate. Inflation will
likely hold to a gradual downward trend
over the next year and a half.
In quantifying their views of the prospects for economic growth, the Board
members and Reserve Bank presidents
ended up with forecasts that are somewhat stronger than those made in February. A large majority of them see the
most likely outcome for this year as
being one in which real gross domestic
Economic Projections for 1992 and 1993
FOMC members and
other FRB presidents
Item
Central
tendency
Range
1992
Percent change, fourth
quarter to fourth quarterl
Nominal GDP
Real GDP
Consumer price index2
Average level, fourth
quarter (percent)
Unemployment rate 3
5-61/4
2-31/4
3-31/2
51/4-6
2i/ 4 -2 3 /4
3-31/2
7-71/2
7^4-71/2
1993
Percent change, fourth
quarter to fourth quarterx
Nominal GDP
Real GDP
Consumer price index2
41/2-7
21/2-31/2
21/2-4
51/2-6V4
2 3 / 4 -3
23/4-3i/4
Average level, fourth
quarter (percent)
Uunemployment rate 3
61/2-71/4
61/2-7
1. From average for fourth quarter of 1990 to average
for fourth quarter of 1992.
2. All urban consumers.
3. Projections are for civilian labor force.
72
79th Annual Report, 1992
product rises 2lA percent to 23A percent
over the four quarters of 1992; the central tendency of the forecasts for 1993
spans a range of 23A to 3 percent. With
regard to the unemployment rate, the
central tendency of the governors' and
Bank presidents' forecasts for the fourth
quarter of 1992 covers a range of 11A to
7V2 percent, as compared with the
second-quarter average of IVi percent;
the corresponding central tendency
range for the final quarter of 1993 is
6V2 to 7 percent.
The achievement of the projected
GDP growth will depend in part on the
progress in resolving the various structural adjustments noted earlier. In general, the Board members and Reserve
Bank presidents believe that these structural problems will continue to exert
negative drag on the economy in coming quarters, but that their force will
gradually lessen. On that score, some of
the recent trends have been encouraging. In the market for commercial real
estate, which has been the most striking
area of weakness in the economy in
recent quarters, downward pressures on
the prices of existing properties seem to
have begun to diminish, and the rate of
decline in new construction appears to
be slowing. In addition, businesses and
households also have made considerable
progress in strengthening their finances,
and even though that improvement evidently has not yet generated more
expansive attitudes toward spending and
investing, such a shift probably will be
forthcoming at some point. An obvious
risk in the outlook is that these, and the
other, structural adjustments could persist with greater intensity than is anticipated; but, alternatively, a faster resolution of the structural problems—and a
stronger pickup of the economy—is not
out of the question either.
The governors and Bank presidents
expect the rise in the consumer price
index over the four quarters of 1992 to
end up in the range of 3 to 3Vi percent.
Although an increase of this magnitude
is to the high side of that realized in
1991, inflation rates were held down last
year by the unwinding of the oil price
shock that had occurred in 1990. Core
inflation this year is expected to be
lower than it was in 1991, and most
Board members and Reserve Bank presidents believe that sustained progress
toward the containment of costs and a
further easing of inflation expectations
will keep the trend rate of price increase
on a course of gradual slowing next year
as well. With neither food nor energy
prices anticipated to depart in any meaningful way from the broad trends of
inflation, the total CPI is also expected
to slow in 1993, to a range of 23A to
3V4 percent, according to the central tendency of the FOMC participants' forecasts.
Earlier this year, in the Economic
Report of the President and the Budget,
the Administration issued forecasts that
showed nominal GDP growth in 1992
and 1993 that falls within the ranges
anticipated by Federal Reserve officials.
Consequently, there would appear to be
no inconsistency between the System's
plans for monetary policy and the shortterm goals of the Administration.
Looking more toward the long term,
the prospect of a sustained period of
declining inflation, together with a resolution of the many structural problems
that currently afflict the economy, suggests the opportunity for substantial economic gains and a broadening prosperity. The Federal Reserve, for its part,
can best contribute to the achievement
of those objectives by keeping its sight
firmly on the long-run goal of price stability. But the longer-range progress of
American living standards will depend
on more than monetary stability. Sound
fiscal policies and an open world trading
Monetary Policy Reports
system are essential if we are to enhance
capital formation and achieve the greatest possible productivity of our human
and physical resources.
The Performance of the Economy
in 1992
After coming almost to a standstill in
the final quarter of 1991, economic
activity showed more vitality in the
early part of 1992. Buoyed by a surge in
final sales, real gross domestic product
rose at an annual rate of 23A percent
in the first quarter. Growth evidently
slowed considerably in the second quarter; in that period, signs of softness
began to surface once again in a number
of the indicators. Most notably, industrial production and payroll employment
turned down in June, after four months
of increases, and, with an influx of jobseekers into the labor market, the civilian unemployment rate moved up
sharply toward midyear, to a June level
of 7.8 percent—about 3A of a percentage
point above the rate at the end of 1991.
The first-quarter surge in final sales
was largely a reflection of a firming of
demand in the domestic economy. Consumer spending strengthened markedly
in the opening months of the year,
housing starts and home sales jumped,
and business fixed investment increased
for the first time in several quarters. In
the second quarter, domestic demand
appears to have risen further, but, on the
whole, at a slower pace than in the first
quarter. By contrast, the external sector
of the economy, which had contributed
appreciably to growth of the economy in
1990 and 1991, has provided little or no
impetus to activity this year; exports
have been limited recently by the continued sluggishness of many foreign industrial economies, and imports appear to
have moved up after a couple quarters
of flatness.
73
Although price movements were
erratic from month to month in the first
half of 1992, there was ample evidence
that the underlying processes of disinflation still were at work. Wage increases
moderated further, and productivity increases also contributed importantly to
the containment of costs. The twelvemonth change in the consumer price index excluding food and energy, a rough
gauge of the underlying rate of inflation
in the economy, dropped below the
4 percent mark; as recently as the first
quarter of 1991, that measure had been
running as high as 5Vi percent. The total
CPI rose only 3 percent over the twelve
months ended in June, held down by
small increases in food and energy
prices over that twelve-month period.
The Household Sector
Indicators of the economic health of
households were mixed in the first half
of 1992. Households continued to make
gradual progress in reducing their debt
burdens in the first half of the year, and
the incidence of financial stress seemed
to diminish. However, neither income
nor wealth displayed the degree of vigor
needed to sustain strength in household
expenditures.
When the year began, consumer
spending was a major question mark in
the economic outlook. Consumer outlays for goods had weakened appreciably in the final quarter of 1991, and
consumer confidence, which had gone
into an alarming plunge during the
autumn, continued to soften into
early 1992. But—such pessimism
notwithstanding—consumers pushed
expenditures up at a very rapid pace in
January and raised them further in February; although spending softened in
March, the rise in real consumption
expenditures for the first quarter as a
whole amounted to 5 percent at an
74
79th Annual Report, 1992
annual rate, the strongest quarterly
advance in four years. Purchases of
durable goods rose briskly, and solid
gains were also recorded for a wide
range of nondurables. Given the size of
those increases—and with housing sales
also rising sharply in the early part of
the year—it seemed for a time that the
forces of expansion might be gathering
considerable strength.
However, the first-quarter surge did
not carry over into the spring. Indeed, it
appears that real consumption expenditures probably were little changed in the
second quarter as a whole. Nevertheless,
a bright spot in the recent spending data
has been the firmness of motor vehicle
sales. After bottoming out in January at
an annual rate of about 12 million units,
the sales of cars and light trucks
rebounded to a rate of about HV2 million units in the next three months and
then moved up further to a level of
133/4 million units in June. Although a
portion of the recent strength in auto
sales apparently is a reflection of
increased business investment in motor
vehicles, it also seems likely that households that have put off buying new cars
and trucks in the past couple of years are
now entering the market in greater
numbers.
Real disposable personal income fell
after the oil price shock of 1990 and
then turned up in the spring of 1991.
Growth since then has been positive in
each quarter, but a bit erratic and, on
average, relatively slow. The level of
real income in the first quarter of this
year was about 2 percent above the
recession low of a year earlier; the average for April and May was up less than
2 percent from the level of a year ago.
Growth of wage and salary income has
remained sluggish this year, and interest
income has continued to decline. By
contrast, government transfer payments
to individuals have continued to grow
rapidly in recent quarters, buoyed, in
part, by a rise in unemployment benefits. Starting in March, disposable
income also was lifted by a change in
tax withholding schedules that altered
the timing of tax payments to some
extent, delaying a portion of those payments until 1993.
A combination of restrained debt
growth and lower interest rates has led
to reductions in the debt-servicing burdens of households, although, measured
relative to income, the repayment burden still is relatively high by historical
standards. The incidence of financial
stress among households also appears to
have eased somewhat in the most recent
quarters for which data are available.
Delinquency rates on consumer loans
and home mortgages, which rose
sharply from mid-1990 to mid-1991,
turned down in the second half of last
year and declined further in the first
quarter of 1992.
Real outlays for residential investment have been rising since the start of
1991. The first-quarter gain—H3/4 percent at an annual rate—took outlays to a
level close to 10 percent above that of a
year earlier. Even so, spending gains
over the year ended in the first quarter of
1992 recouped less than half of the
sharp decline of the preceding four
quarters.
For a brief time early this year, residential investment seemed to be picking
up considerably more momentum. In the
latter part of 1991, mortgage interest
rates had dropped to their lowest levels
in more than fifteen years, and the sales
of new single-family houses, which had
already been moving up at the end
of last year, surged in January and
remained strong in February. Reacting
to the rise in demand—and aided by
an unusually mild winter—builders
boosted the pace of single-family housing starts to the highest seasonally
Monetary Policy Reports
adjusted level in two years. In March,
however, sales of new homes plummeted, and they weakened further in
April and May. Starts also retreated; the
number of single-family units started in
the second quarter was 6 percent below
the first-quarter average.
Several factors have affected the
recent patterns of the housing indicators.
The mild winter weather evidently permitted some starts to be undertaken a bit
sooner than they otherwise would have
been. In addition, a substantial backup
of mortgage interest rates after January
undoubtedly cut into demand to some
degree; rates on thirty-year fixed-rate
conventional mortgages rose from about
SVA percent in mid-January to 9 percent
by March and remained above SVz percent until June. Discussion of a possible
tax credit for first-time homebuyers
also appears to have raised demand
temporarily.
Moreover, the recovery in housing
activity probably has continued to be
retarded to some degree by negative
influences that were evident in 1991. A
significant number of potential homebuyers are being deterred by concerns
about jobs and incomes. Others now
view the purchase of a home as being a
riskier, less attractive investment than it
once seemed, owing to the sharp
declines seen in house prices in some
regions in recent years and to the lack of
much price appreciation more generally.
High vacancy rates and unfavorable
demographic trends continue to be formidable obstacles to recovery in the
multifamily sector. By contrast, an
increasingly favorable factor is the
improved affordability of housing:
Lower mortgage interest rates—in part a
reflection of the less inflationary environment of recent years—have substantially reduced the size of the monthly
payment associated with the purchase of
a home, measured relative to personal
75
income. In that regard, the latest round
of cuts in mortgage interest rates, to the
lowest level since 1973, appears to have
stimulated some pickup in real estate
activity very recently.
The Business Sector
When the year began, the business sector of the economy was still in the process of adjusting to the sluggishness of
demand and the mild backup of inventories that had emerged in the second
half of 1991. Industrial production,
which had declined in the final two
months of last year, fell further in January; assemblies of motor vehicles
dropped sharply in that month, and cutbacks in output were reported in other
industries as well. Those production
cuts, coupled with the January surge in
household spending, led to a reduction
in business inventories, clearing away
most of the excess stocks that had accumulated in the final four months of
1991.
Industrial production turned up in
February, and, with orders and shipments trending up, additional gains followed in each of the next three months.
Assemblies of motor vehicles rose considerably during this period and, by
May, were at the highest level since the
fall of 1990; although assemblies were
reduced by a small amount in June,
automakers have announced plans to
step up assemblies in the third quarter.
Production of consumer goods other
than motor vehicles also increased moderately over the four-month period
beginning in February; a small portion
of those gains was reversed in June,
however. Bolstered by strong gains in
the production of office and computing
equipment, output of business equipment (other than motor vehicles) rose in
each month from February through
June.
76
79th Annual Report, 1992
Manufacturing and trade inventories,
measured in real terms, fell further in
February. Thereafter, inventories appear
to have risen somewhat, on net. In manufacturing, the level of inventories at the
end of May was relatively low, compared to the level of sales. But, in parts
of the trade sector, stocks may have
been slightly higher than desired, and
with household demand looking sluggish once again, some businesses may
have felt it appropriate to pull back a bit
on orders for additional merchandise,
triggering the production adjustments
that were evident in June.
Business profits, which came under
considerable pressure during the recession, began rising noticeably in the latter
part of 1991 and increased sharply in the
first quarter of 1992. The before-tax economic profits of all U.S. corporations
jumped YlVi percent in the first quarter
and were at the highest level since the
first half of 1989. The profits of financial corporations have been boosted by
sharp reductions in interest expenses and
by a strengthening of their loan portfolios. The economic profits of nonfinancial corporations from their domestic operations also have been rising; in
the first quarter of 1992, these profits, on
a pre-tax basis, were more than 20 percent above their quarterly low of late
1990. That rise in profits was the result
of small increases in volume, a moderate increase in the margin over unit
labor costs, and substantial reductions in
net interest expenses.
Stress has continued to be evident this
year in several industries—notably
retailing, airlines, and commercial real
estate. Overall, however, corporate balance sheets have been strengthening.
Issuance of equity by nonfinancial corporations has been outstripping share
retirements in recent quarters, after several years in which the balance ran
markedly in the other direction. In addi
tion, the growth of business debt has
remained sluggish this year, as internal
sources of funds have proved to be large
enough to finance a subdued level of
business investment. Lower bond yields
have enabled firms to replace highercost debt and have encouraged a shifting
out of short-term liabilities. Among
farm businesses, income has dropped
back from the relatively high levels of
1989 and 1990, and farmers have cut
back on their investment in machinery
and equipment. However, farmers' balance sheets appear to be considerably
stronger at this point than they were in
the mid-1980s, when the sector went
through an extended period of severe
financial stress.
Business fixed investment turned up
in the first quarter of this year, after
declining in each quarter from late 1990
to the end of 1991. Real outlays for
equipment increased moderately in the
first quarter, and business investment
in new structures turned up, after five
quarters of sharp declines. The secondquarter indicators that are in hand suggest that equipment spending probably
increased enough to raise total real business fixed investment further in that
period.
The first-quarter rise in equipment
spending amounted to about Vh percent
at an annual rate. Increased outlays for
computers and related devices more than
accounted for the first-quarter gain;
spending for that type of equipment
has been rising briskly since mid1991, boosted by product innovations,
extensive price-cutting by computer
manufacturers, and the ongoing efforts
of businesses to achieve efficiencies
through the utilization of new
information-processing technologies. By
contrast, spending for aircraft, which
had been strong in 1990 and for most of
1991, has weakened substantially since
last autumn; a first-quarter uptick in
Monetary Policy Reports
those outlays retraced only a small part
of the fourth-quarter plunge. Business
outlays for motor vehicles were down
moderately in the first quarter, but they
appear to have firmed in the second
quarter. Spending for all other types of
equipment, roughly half of which is
industrial machinery, was down further
in the first quarter in 1992, but at a
much slower pace than in 1991. In
total, equipment investment appears to
be exhibiting the traditional lagged
response to changes in aggregate economic activity, the recent pickup being
supported by the rise in profits and
increased cash flow.
Real outlays for nonresidential structures rose at an annual rate of 2!/2 percent in the first quarter. Investment in
industrial structures was up for the second quarter in a row, and increases also
were reported for utilities, private educational facilities, and hospitals and
institutions. However, spending for gas
and oil drilling fell further in the first
quarter, and the outlays for construction
of office buildings continued to decline.
In total, the first-quarter level of
spending for offices and other commercial structures was about 40 percent
below the level of two years earlier, but
there are tentative indications that the
steepest part of this protracted decline
may now be over. Although spending
for the construction of office buildings
has continued to fall rapidly this year,
the outlays for commercial structures
other than offices—a category that includes such things as warehouses, shopping malls, and other retail outlets—
have changed little, on net, over the past
several months. In addition, there are
indications that the rate of decline in
prices of existing commercial properties
has slowed, and transactions in commercial real estate reportedly have picked
up in some areas of the country this
year.
77
The Government Sector
Government purchases of goods and
services—the part of government spending that is included in gross domestic
product—increased at an annual rate of
3 percent in real terms in the first quarter
of 1992, after declining about \Vi percent over the four quarters of 1991. Federal purchases, which fell 3 percent last
year, rose at an annual rate of about
1 percent in the first quarter; nondefense
purchases moved higher, and the decline
in defense purchases was smaller than
those seen in previous quarters. State
and local purchases, which had declined
slightly over the course of 1991, were
boosted in the first quarter of 1992 by a
surge in the outlays for structures.
Budgetary problems continue to confront many governmental units. At the
federal level, the unified budget deficit
over the first eight months of fiscal
1992—the period from October to
May—totaled $232 billion; this total
was about $56 billion larger than the
deficit recorded in the first eight months
of the previous fiscal year. Federal
receipts in the current fiscal year are up
only 1 percent from the same period of a
year earlier, while outlays have climbed
about IV2 percent. On the receipts side
of the ledger, the income taxes paid by
individuals have been damped by slow
income growth, and, despite a pickup
recently, the revenue from corporate
profits taxes has been weak for the fiscal
year to date. Receipts from excise taxes
have risen considerably this fiscal year,
but these do not account for a very large
share of total federal revenue.
The sharp rise in federal spending this
year partly reflects a diminished flow of
contributions to the United States from
our allies in the Gulf War; these contributions are counted as negative outlays
in the federal budget, and their shrinkage therefore translates into a rise in
recorded outlays. By contrast, spending
78
79th Annual Report, 1992
has been held down this year by a reduction in outlays for deposit insurance programs. This reduction stems, in part,
from delays in funding the activities of
the Resolution Trust Corporation (RTC),
the federal agency that is responsible for
cleaning up the problems of insolvent
thrift institutions.
Excluding the allied contributions and
the spending for deposit insurance programs, federal outlays have risen about
5Vi percent this fiscal year. Federal
financing of health care has continued to
rise at a very rapid pace in fiscal 1992;
grants to states for Medicaid, the fastest
growing category in the health care budget, are running more than 30 percent
above the level of a year ago. In addition, slow growth of the economy and
actions taken to extend unemployment
benefits have pushed federal spending
for income support programs sharply
higher, and outlays for social security
have been boosted by cost-of-living
adjustments and increases in the number
of beneficiaries. Combined federal
spending for other functions has risen
only slightly in nominal terms this fiscal
year. The mix of this spending is changing, however. Outlays for some nondefense functions—notably law enforcement, education, and health programs
other than Medicaid—have risen fairly
rapidly in fiscal 1992; outlays for
defense have been cut back, even in
nominal terms, once adjustment is
made for the diminished flow of allied
contributions.
Many state and local governments
still are grappling with severe budgetary
imbalances, and further progress toward
correcting those imbalances was not
evident in the first quarter of 1992. After
four quarters in which state and local
governments had managed to chip away
steadily at the deep deficit in their combined operating and capital accounts,
that deficit is estimated to have widened
a little in the first quarter, to a total,
excluding social insurance funds, of
about $26 billion.
Last year's progress in reducing the
combined state and local budget deficit
was achieved partly through tax
increases and partly through spending
restraint. With deficits still large this
year, legislators and administrators are
facing yet another round of painful
choices. Tax hikes have been implemented in some places this year, and
efforts to curb spending appear to be
widespread, even as the demands for
many types of government services have
continued to rise. Increases in the wages
and benefits of state and local workers
have slowed considerably in recent
quarters, with wage freezes being
imposed in some cases. Although state
and local employment has risen a little
in recent months, partly because of election activity, the cumulative growth in
the number of state and local jobs over
the past year has been quite sluggish,
and some governments have furloughed
workers temporarily in order to hold
down expenditures. Against the backdrop of these widespread attempts to
restrain spending, the substantial firstquarter rise in real state and local purchases may well have been a temporary
bulge, rather than the harbinger of a
renewed uptrend in state and local
spending.
The External Sector
For the year to date, the foreign
exchange value of the dollar, in terms of
the currencies of the other Group of Ten
(G-10) countries, has declined somewhat, on balance, from its level at the
end of 1991. Appreciation early in the
year has been offset by subsequent
depreciation.
From its low point at the end of 1991,
the dollar appreciated through about
Monetary Policy Reports
mid-March, reaching a level nearly
9 percent above where it was at yearend. The dollar was lifted during this
period by data pointing to increasing
strength in the recovery of U.S. economic activity, which also worked to
raise U.S. long-term interest rates relative to those in other countries. From
mid-March through April, exchange
rates fluctuated in a fairly narrow range.
Beginning in May, however, the dollar
began to decline as long-term interest
rates eased, and as of mid-July, it had
more than reversed the rise earlier in
the year. The market's reassessment of
the prospects for a strong U.S. economic
recovery appears to have been a major
factor underlying the declines in both
the dollar and long-term rates.
Developments abroad reinforced
these factors. The dollar rose sharply
against both the Japanese yen and the
German mark early in the year. Signs of
further weakening of economic growth
in Japan and the decline of the Japanese
stock market worked to depress the yen.
Reports of a decline in German output
in the fourth quarter of 1991 and increasing expectations that the Bundesbank
would not move further toward tightening German monetary policy contributed
to the weakness of the mark. Beginning
in late April, the dollar started to decline
against the yen and the mark. News of a
substantial widening of Japan's current
account surplus and a belief that the
Group of Seven nations supported
appreciation of the yen contributed to a
turnaround in the dollar's exchange rate
against that currency. In Germany, economic activity proved stronger than
expected in the first quarter and, along
with rapid money growth in that country, led both to a reevaluation of the
prospects for an early easing by the
Bundesbank and to a rise in the mark.
On balance, the dollar declined
more than 3 percent against the mark
79
and was little changed against the
yen from the start of the year to midJuly. The dollar appreciated against the
Canadian dollar; with Canadian real
GNP flat in the fourth quarter of 1991
and posting only a small rise in the first
quarter of this year, Canadian authorities
eased interest rates and appeared to welcome the associated decline in their currency as a way to help stimulate economic activity. By contrast, the dollar
depreciated moderately against the currencies of major developing countries
over the first half of 1992, after adjustment for movements in relative price
levels.
Prices of U.S. non-oil imports accelerated to a 6VA percent annual rate of
increase in the first quarter of 1992,
more than double the rate of rise in the
fourth quarter of 1991. The jump in
import prices most likely reflected the
lagged effects of the depreciation of the
dollar that occurred during the latter part
of 1991. Most of the price increase of
the first quarter was reversed in April
and May. The price of oil imports
declined 15 percent in the first quarter in
response to strong OPEC production and
warmer-than-normal weather. However,
that oil price decline was reversed in the
second quarter in response to production
restraint by Saudi Arabia and to indications that the Kingdom may be prepared
to target prices at a somewhat higher
level.
With growth of the U.S. economy still
on a relatively slow track, real merchandise imports remained about unchanged
in the first quarter, after only a small
increase in the fourth quarter of 1991.
Increases in imports of capital goods in
the first quarter were about offset by
declines in imports of consumer goods.
Data for April and May show the quantities of imports of most categories of
goods moving up noticeably from their
first-quarter averages.
80
79th Annual Report, 1992
Export volume, which had climbed
sharply in the final quarter of 1991, held
around its fourth-quarter pace in the first
five months of 1992. Despite its recent
flatness, export volume in this fivemonth period was about IVi percent
above the level of a year earlier. The
strongest growth in exports over the past
year has been in capital goods, particularly to developing countries, reflecting
strong investment demand in Latin
America (especially Mexico), the Middle East, and in Asia. However, the general slowdown in growth in the major
industrial countries last year, and the
recessions in some countries, generally
continued during the first half of 1992,
depressing the growth of U.S. exports to
these countries. At the same time,
special factors that contributed to the
strength in exports last year—notably
the surge in investment demand in Latin
America and replacement demands from
the Persian Gulf countries after the
war—have been less pronounced this
year.
The merchandise trade deficit narrowed to an annual rate of $70 billion in
the first quarter of 1992, slightly below
the deficit recorded in the fourth quarter
of 1991 and also a little below the 1991
average. The current account showed a
deficit of $21 billion at an annual rate in
the first quarter, compared with a deficit
of $4 billion for calendar-year 1991.
However, excluding unilateral transfers
associated with Operation Desert Storm
in both periods, the current account deficit in the first quarter—$23 billion at an
annual rate—was about half the deficit
seen in 1991. This improvement in current account transactions reflected a further widening of the substantial surplus
on net service transactions (particularly
in the areas of medical, educational, and
other professional and business services)
and an increase in net investment
income receipts.
A large net capital inflow was recorded in the first quarter of 1992; foreign official holdings of reserve assets in
the United States rose strongly, and private capital transactions showed a small
net inflow. Within the private-sector
accounts, the first quarter brought substantial capital outflows that were associated with U.S. purchases of foreign
securities and increased direct investment abroad—particularly in intercompany debt flows to Canada and the
United Kingdom. These outflows were
largely offset by a sizable net capital
inflow reported by banks, and by private
foreign purchases of U.S. securities
other than Treasury securities. Inflows
associated with foreign direct investment in the United States amounted to
less than $1 billion in the first quarter,
down sharply from the average pace in
recent years; acquisitions of U.S. businesses by foreigners fell sharply, and
slow growth in the United States produced reduced earnings to be reinvested
in this country. The net capital inflow in
the first quarter exceeded the current
account deficit by a wide margin, implying a substantial statistical discrepancy
in the international accounts—$16 billion at a quarterly rate. The discrepancy
in 1991 had amounted to only $1 billion
over the year as a whole.
Labor Market Developments
Payroll employment, which had declined somewhat in the final quarter of
1991, fell further in January of this year.
Thereafter, employment rose in each
month from February through May,
before turning down once again in June.
In the private sector, the level of payroll
employment in June was up only
slightly from its level at the end of 1991,
and it remained well below the prerecession peak of 1990.
The sectoral patterns of change in the
number of workers on private payrolls
Monetary Policy Reports
continued to vary considerably in the
first half of 1992. Employment at establishments that provide services to other
businesses rose fairly briskly, especially
in the period from February through
May. Those gains seemed to be a reflection of a firming of activity in the business sector, but they also may have been
symptomatic of businesses' hesitation
to push aggressively into expansion; it
appears that firms may simply have been
turning temporarily to outside help,
rather than committing themselves to
the expansion of their own payrolls.
Elsewhere, employment in the health
services industry continued to rise in the
first half of 1992, but in many of the
other major sectors employment either
changed little or declined. The number
of jobs in the construction business in
the second quarter was about the same
as in the final quarter of last year.
Employment in retail trade was also
about flat over that same period. In manufacturing, employment fell slightly
over the first half of the year, with small
declines reported across a wide range of
industries.
In total, about 200,000 new jobs
were created in the first half of 1992,
according to the payroll data obtained
from business establishments and governments. An alternative employment
series, compiled from the monthly survey of households, showed the number
of persons with jobs rising by a larger
amount—about 850,000—over that
same period. Although a complete
accounting of the reasons for the recent
disparity between these two surveys is
not possible, one possibility is that the
payroll survey might not be fully capturing job growth at newly created establishments. If that is the case, then actual
employment growth in the first half of
this year may have been somewhat
stronger than the payroll data indicate,
although it still was not comparable to
81
the gains seen at a similar stage of previous economic recoveries.
Despite the rise in employment in the
household survey, there were further
sharp increases in the number of unemployed, and the civilian unemployment
rate rose from 7.1 percent in December
to a level of 7.8 percent in June. Unemployment rates moved up, on net, for
most occupational and demographic
groups during the first half of the year,
with especially large increases for adult
men and teenagers. Much of the rise in
unemployment in the first half consisted
of persons who had lost their jobs. In
addition, unemployment was boosted by
a rise in the number of persons who had
entered or re-entered the labor force, but
were unable to find jobs; this influence
was especially pronounced in May and
June, the two months in which most of
the first-half rise in the unemployment
rate occurred.
The civilian labor force—the sum of
those persons who are employed and
those who are seeking work but cannot
find it—grew very rapidly in the first
half of 1992—about 3 percent at an
annual rate. However, this surge in the
labor force follows a period in which
labor force growth had been quite weak,
and the percentage increase over the past
year is much smaller—about \l/i percent. Moreover, with the labor force participation rate now back to its previous
peak and the working-age population
estimated to be rising rather slowly in
coming quarters, it does not seem likely
that labor force growth can be maintained at its recent pace for very long.
The softening of labor markets and
easing of inflation expectations since
mid-1990 has been reflected in a gradual, but persistent deceleration of labor
compensation rates over the past couple
of years. The twelve-month rate of
change in the employment cost index
for private compensation, after peaking
82
79th Annual Report, 1992
at 5.2 percent in the first half of 1990,
declined to 4.6 by the end of that year,
slowed to 4.4 percent in 1991, and eased
still further, to 4.2 percent in the twelvemonth period that ended this past
March. The annual rate of increase in
straight-time wages has been running at
less than 3x/2 percent in recent quarters.
However, the cost of benefits that firms
provide to their employees has continued to rise rapidly, propelled by the
steep climb in the cost of medical insurance and by increases in payments for
workers' compensation. Nonetheless,
the slower rate of increase in nominal
compensation per hour, coupled with a
somewhat faster rate of deceleration
in consumer prices, has been translating into increases in real hourly
compensation.
Productivity has been picking up. In
the first quarter of 1992, output per hour
worked in the nonfarm business sector
was 1.9 percent above the level of a year
earlier, a four-quarter improvement last
achieved in early 1988 when the economy was still growing rapidly. At the
same time that employers have been
cautious in expanding output, they have
continued to move aggressively to economize on labor input, thus boosting output per hour. The increase in productivity, together with the slowing of hourly
compensation, held the rise in unit labor
costs to just 1.2 percent over the year
ended in the first quarter of 1992, the
smallest four-quarter increase in labor
costs in eight years.
Price Developments
All the measures of aggregate price
change show inflation to have eased substantially from its most recent peak. The
3 percent rate of rise in the consumer
price index over the past year is roughly
half the rate at which that index increased in 1990; swings in energy prices
account for a sizable part of that slowdown, but most non-energy prices have
slowed as well. A halving of the rate of
price rise also is evident in the fixedweight price index for gross domestic
purchases, a measure that takes account
of the prices paid by businesses and
governments as well as those paid by
consumers. Measures of price change
that are related to domestic production
(rather than to domestic spending) have
slowed by smaller, but still appreciable,
amounts. For example, the fixed-weight
price index for gross domestic product,
the broadest measure of price change for
goods and services produced domestically, rose less than 3 percent over the
four quarters ended in early 1992; that
index had moved up at rates of 4 to
4V2 percent in each year from 1988 to
1990.
Consumer energy prices have continued to fluctuate since the end of the Gulf
War, but those fluctuations have been
relatively subdued. Energy prices at the
retail level fell early in 1992, influenced
by the mildness of the winter, the further
cut in U.S. industrial production early in
the year, the persistence of sluggish
growth in other industrial countries, and
the high level of OPEC production.
Later in the winter, however, energy
prices began to firm. The upswing in
U.S. industrial activity that began in
February gave some lift to prices, as did
the return to more normal weather patterns in late winter. Further impetus to
prices came in the spring, with the
apparent mid-May shift by Saudi Arabia
toward somewhat greater production
restraint than had been expected. In
response to these developments, the spot
price of West Texas intermediate moved
up from a February low of about $18 per
barrel to a level of more than $22 per
barrel in June. The CPI for energy, basically following the lead provided by the
oil markets, rose moderately in March,
Monetary Policy Reports
April, and May, and then jumped 2 percent in June. These increases more than
reversed the declines seen early in the
year. Even so, the CPI for energy in
June was up only moderately from the
level of a year earlier, most of the price
swings of the past twelve months having
essentially cancelled out. In the oil market, the price of West Texas intermediate has softened a little, on net, since
June and recently has been in a range
not much different from that of a year
earlier.
Food prices have slowed considerably over the past year and a half. The
CPI for food rose more than 5 percent in
each year from 1988 to 1990. But last
year they rose only 2 percent, and in the
first half of this year, they changed little
on net. A temporary runup in fruit and
vegetable prices in late winter was
reversed in the spring, and increases in
the prices of other foods were small on
average during the first half of the year.
As of June the CPI for food was only
0.1 percent above the level of a year
earlier.
The marked slowing of food prices
since the end of 1990 is partly the result
of declines in the prices received by
farmers for their products. In addition,
however, the food sector is being
affected by forces similar to those that
are shaping price trends in other parts of
the economy: Demand growth has been
relatively sluggish in the food sector,
competition is intense in both food
retailing and the fast food business, and
increases in labor costs have been
restrained. Price increases at grocery
stores over the past year have been small
even for those foods for which farm
products account for only a small portion of value added, and the twelvemonth rise in prices of food consumed
away from home, a category dominated
by nonfarm inputs, has been running in
the lowest range since the mid-1960s.
83
The CPI excluding food and energy,
which had increased at an annual rate of
only 3 percent during the final three
months of 1991, climbed at a rate of
43/4 percent in the first three months of
1992. The prices of non-energy services
rose a little faster in the first quarter than
they had in the latter part of 1991, and
the prices of commodities other than
food and energy, which had changed
little in the fourth quarter, surged ahead
at an annual rate of 5lA percent. Apparel
prices, which had declined in late 1991,
moved up rapidly in the first quarter,
and fairly large increases were reported
for several other commodities. But, the
first-quarter flare-up of price increases
dissipated in the spring, as the annual
rate of increase in the CPI excluding
food and energy dropped to less than
3 percent over the three months ending
in June. The price indexes for both commodities and services rose much less
rapidly during this period than they had
in the first quarter.
Looking beyond the many twists and
turns that inevitably show up in the price
data over any short period, the reports of
recent months appear to be depicting a
gradual, but broadly based, slowing
in the trend of consumer prices. The
twelve-month change in the CPI for services excluding energy, a category that
has a weight of more than 50 percent in
the CPI total, has dropped back about
2 percentage points since early 1991, to
a pace of 41/* percent; deceleration is
evident for most types of services
included in that total. A slower rate of
price increase also has emerged across a
broad range of CPI commodities,
although, somewhat surprisingly, the
slowing there has not proceeded as rapidly as in the markets for services.
A sustained easing of inflation pressures also is widely evident in the data
on prices received by domestic producers. In June, the producer price index
84
79th Annual Report, 1992
for finished goods other than food
and energy was 2Vi percent above the
level of a year earlier; toward the end of
the 1980s, this index had been moving
up at more than a 4 percent rate. The
prices received by producers of intermediate materials other than food and
energy have risen less than Vi percent,
on balance, over the past year; their
cumulative increase over the past three
years amounts to just VA percent. The
prices of industrial commodities, which
tend to track roughly the contours of
the business cycle, have firmed in the
first half of this year, after sharp
declines from the autumn of 1990 to
the end of 1991; however, in the context
of a still hesitant recovery, the recent
finning of these prices has been relatively subdued compared with the
increases seen during many past periods
of stronger expansion in industrial
activity.
Monetary and Financial
Developments in 1992
Monetary policy in 1992 has continued
to be directed toward the goal of securing a sustained economic expansion
while making progress toward price stability. In furtherance of these objectives,
the Federal Reserve this year has eased
money market conditions twice—once
in association with a cut in the discount
rate—and lowered reserve requirements.
On balance, most signs from financial
markets this year have been consistent
with a moderate pace of expansion in
economic activity, but also seemed to
indicate questions about lasting gains
in reducing inflation. Short-term real
and nominal interest rates have declined
to unusually low levels, and the yield
curve has been extraordinarily steep
while share prices have been at nearrecord levels—a pattern often associated with market expectations of a
strengthening economy. In addition, the
risk premiums on private credit instruments relative to Treasury obligations
have narrowed, indicating growing market confidence in private borrowers and
ample credit availability in securities
markets. Households and businesses
improved their balance sheets by constraining total debt growth, issuing
equity, and refinancing costly existing
debt with longer-term debt at lower
rates. As a result of these actions and the
decline in interest rates, borrowers have
been successful in reducing the ratio
of debt-service payments relative to
income.
In contrast with the positive signals
from other financial variables, the
advance in the money and credit aggregates has been very subdued. M2 and
M3 in June stood below the lower end
of their annual growth cones, and the
debt of domestic nonfinancial sectors
was running at the lower end of its
range. In part, the sluggish expansion of
M2 and M3 seemed to be related to the
actions of borrowers and lenders to
restructure balance sheets and was not
reflected in commensurate weakness in
spending. Under pressure to improve
their capital positions and earnings and
facing weak loan demand from borrowers relying more heavily on longer-term
debt from market sources, banks and
thrift institutions have not been aggressively seeking to expand loan portfolios.
In these circumstances, depositories
have cut deposit rates substantially this
year, and many customers have shifted
their funds to alternative assets or
applied their deposit balances toward
debt repayment. These actions have
resulted in appreciable increases in the
velocities of the broad aggregates—a
situation the FOMC has taken into
account in assessing how much weight
to place on slow growth in the aggregates in making policy decisions.
Monetary Policy Reports
Implementation of Monetary Policy
Early in the year, economic releases and
financial market indicators signaled an
improvement in economic activity—
consumer expenditures and confidence
were up, M2 growth surged in late January and February, a wave of refinancing
activity indicated households and businesses were successfully reducing debtservicing costs, and the ebullient tone
in the stock market anticipated even
stronger economic fundamentals in the
future. The Federal Open Market
Committee noted these positive developments at its meetings during the late
winter and spring, but in view of ongoing impediments to robust expansion—
including still-strained balance sheets
and limitations on credit availability—
concluded that the recovery was still
fragile. Recognizing the tentative nature
of the recovery and confident that a disinflationary trend had been firmly established, the Committee remained especially alert in this period to the potential
need for further easing of money market
conditions if the economy failed to show
continued improvement.
During the early months of the year,
the bond market seemed to focus on the
possibility of a strong recovery, and
long-term interest rates backed up about
V2 percentage point from early January
through March. A robust recovery could
rekindle upward price pressures and
would produce stronger demands for
credit. In addition, looming U.S. budget
deficits and potential credit needs of
countries undergoing the transition from
centrally planned to market economies
were seen as adding to upward pressure
on interest rates in the future.
Despite the rise in long-term rates,
corporate bond yields remained well
below levels prevailing in recent years.
Eager to refinance costly existing debt
and to reduce the uncertainty and interest rate risk of short-term funding, many
85
firms issued bonds and used a portion of
the proceeds to pay down bank loans.
Faced with tepid loan demand and continuing pressures on earnings and capital positions, banks lowered deposit
rates promptly as market rates declined
and did not raise them when intermediate and long-term market rates backed
up in the first quarter. Households
responded by shifting funds into nonmonetary assets and by paying down
debt at the expense of deposit accumulation. Although these and other portfolio
adjustments appeared to play a prominent role in the deceleration of M2, the
possibility that income growth might
also be slackening, perhaps due to tight
lending terms at banks and the reluctance of businesses and households to
borrow, could not be ruled out. Incoming data over the spring suggested only
a modest further rise in economic activity after February, and given the Committee's concerns about the sustainability of the recovery, the Federal Reserve
slightly eased the degree of reserve market pressure in mid-April. The federal
funds rate declined to 33A percent, its
lowest sustained trading level since the
1960s; other short-term rates generally
followed suit, edging down about
25 basis points. Long-term rates registered little response to the policy action;
the rate on the thirty-year Treasury bond
was essentially unchanged in the days
following the move.
The Federal Reserve's easing of
reserve market pressure in April came
only days after implementation of a previously announced reduction in reserve
requirements. Reserve requirements are
effectively a tax on depository intermediation; the cut in reserve requirements
on transaction deposits from 12 to
10 percent was intended to reduce this
burden on depositories and their customers and thereby to stimulate flows of
credit. The effect on credit should come
86
79th Annual Report, 1992
directly as sterile reserves are freed for
lending and indirectly as increased earnings improve depository institutions'
access to capital and their willingness
to lend. This year's reduction in reserve
requirements sparked little of the heightened volatility of the federal funds rate
that ensued from the reserve requirement cut in 1990. In large measure, the
smoother transition this year reflected
the higher level of reserve balances
available to cover daily clearing needs;
balances have been boosted in recent
months by a higher level of transaction
deposits in concert with a sizable
increase in bank clearing balances at the
Federal Reserve.
Neither the April easing of reserve
market pressure nor the cut in reserve
requirements revived the broad monetary aggregates. Other financial indicators, however, suggested that the
markets were anticipating continued
economic expansion. Spreads on commercial paper and corporate bonds
relative to Treasury rates continued to
narrow, especially for less-than-prime
issues, evidencing easier access to
market sources of funds for businesses.
Improvement in banks' capital positions
placed them in a better position to meet
loan demand, and many reported that
they were no longer tightening credit
standards. In addition, long-term interest rates edged down from their March
peak, providing some stimulus to mortgage markets and debt restructuring. On
balance, despite continued weakness in
the broad monetary aggregates, many
financial variables appeared to indicate
that conditions conducive to a moderate
economic expansion were in place.
Still, overall credit growth remained
quite subdued, suggesting that some
impediments to borrowing and spending
remained, and M2 and M3 turned down
further in June. In these circumstances,
and with direct readings on the economy
indicating some weakening relative to
earlier in the year, the Federal Reserve
in early July cut the discount rate Vi percentage point to 3 percent and allowed
this reduction to show through as a
similar-sized easing of money market
conditions. Banks responded quickly to
the policy actions, cutting the prime rate
by Vi percentage point to 6 percent.
On balance, short-term rates generally have declined about 3A of a percentage point this year. Long-term rates,
after falling in recent months, have
about returned to their lows of early
January. The foreign exchange value of
the dollar generally has tracked the
course of long-term rates, appreciating
from January through March and
depreciating more recently. On a tradeweighted basis in terms of the currencies of the other G-10 countries, the
dollar in mid-July stood at a level somewhat below its 1991 year-end level.
Monetary and Credit Flows
Overall credit flows have been damped
this year, reflecting a moderate pickup in
spending and efforts by borrowers to
pare debt burdens. Although demands
for credit by the federal government
have been heavy, growth in the debt of
other sectors has been lethargic, and, as
a result, the total debt aggregate has
remained around the lower bound of its
annual range throughout much of 1992.
Reacting to the difficulties that resulted
from carrying heavily leveraged positions in a period of weak economic
growth and to wide spreads between the
cost of borrowing and the returns on
holding financial assets—especially
deposits—households and businesses
have sought to reduce debt and restructure balance sheets. Total debt, including that of the federal sector, grew about
in line with nominal GDP after many
years in which debt growth exceeded
income.
Monetary Policy Reports
Along with limiting debt growth, borrowers have sought to strengthen their
balance sheets by refinancing existing
debt at lower rates. By issuing equity
and refinancing debt, businesses have
been successful in reducing debt-service
burdens; the ratio of net interest payments to cash flow for businesses has
declined appreciably this year. The
decline in rates over the past year or so
has been especially evident for highyield bonds, indicating that lower-rated
borrowers are regaining some of the
access to capital markets lost during the
credit distress in late 1990 and 1991. A
substantial number of firms this year
have been upgraded by rating agencies,
reflecting improved economic prospects
Growth of Money and Debt
Percent
Ml
M2
M3
Debt of
domestic
nonfinancial
sector
8.9
9.3
9.5
12.3
9.3
10.1
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
7.5
5.4
(2.5 2)
8.8
10.4
5.4
12.0
15.5
6.3
4.3
.6
4.2
8.0
9.1
12.2
8.0
8.7
9.2
4.3
5.2
4.8
4.0
2.8
9.9
9.9
10.8
7.6
9.0
5.9
6.4
3.6
1.7
1.2
9.3
11.4
14.2
13.9
14.1
10.4
9.4
8.1
7.0
4.4
Semiannually
(annual rate)3
1992:1
13.4
2.1
.2
4.5
Quarterly
(annual rate)4
1991:1
2
16.5
9.9
4.3
.0
2.2
-1.9
3.8
5.1
Period
Annually, fourth
quarter to
fourth quarter'
1980
1981
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.
87
and the salutary effects of lower interest
rates and stronger balance sheets on
financial conditions.
Many households also have refinanced debt at more attractive rates.
Mortgage refinancing began to increase
late in 1991 and was very heavy early
this year after mortgage rates fell
sharply. Later, as mortgage rates backed
up, mortgage refinancing applications
subsided, but they remained brisk relative to recent years. Households evidently shared the view of businesses
that long-term rates presented an opportunity to lock in attractive financing, and
many opted to refinance with longerterm fixed-rate mortgages rather than
risk future interest rate increases with
adjustable-rate mortgages.
Just as for businesses, refinancings
and debt reduction appear to have
helped relieve the stress on household
balance sheets. The ratio of household
debt-service payments to personal disposable income has declined appreciably through May. Delinquencies on consumer loans, auto loans, and home
mortgages have fallen this year as well.
On the other hand, many households
with financial assets substantially exceeding debt have seen their spendable
income decrease as a result of lower
interest rates. Some of the decline in
interest rates compensates for lower
inflation—the purchasing power of the
principal invested is not falling as rapidly as in previous years—but real
returns have declined as well, especially
for short-dated assets.
State and local governments have
exhibited a similar trend in credit
demand; on net, total debt growth has
been restrained, but gross issuance of
bonds has ballooned as municipalities
refinance existing debt. A substantial
portion of the debt being refinanced
likely was issued during the high interest rate episodes of the early 1980s.
79th Annual Report, 1992
Not only has total borrowing been
muted, but banks and thrift institutions
are accounting for a sharply decreasing
share of the total. In fact, credit at
depositories has declined over the past
two and one-half years even as total
credit in the economy continued to
advance, and this pattern has left its
imprint on the monetary aggregates and
their velocities. Part of this rerouting of
credit flows reflects the closure of insolvent thrift institutions; the RTC usually
assumes the assets of closed thrift institutions and effectively finances them
with Treasury obligations rather than
deposits. Moreover, when the assets are
later sold, depositories are not always
the acquirers. The shift in credit flows
away from depositories also reflects
ongoing market and regulatory pressure
on banks and thrift institutions to bolster
earnings and capital. Responding to
increased deposit insurance costs, to
past and prospective loan losses, and to
regulatory restrictions triggered as
capital-asset ratios fall below the highest levels, depositories have maintained
wide spreads between loan rates and
deposit rates. The prime lending rate,
for example, has remained unusually
high relative to market rates and the
depository cost of funds, and depositories have tightened nonprice terms of
credit as well in recent years. On the
deposit side, rates have fallen considerably as depositories have moved to limit
balance sheet growth and bolster net
interest margins.
Bank credit from the fourth quarter of
1991 to June managed only a 23A percent growth rate, slower than in 1991.
Bank lending to businesses has contracted in 1992, leaving total loan
growth at banks essentially flat. Overall,
the contraction in bank business lending
in 1992, which has been at an even
faster pace than the decline in 1991,
appears to reflect primarily weaker
demand, as firms have opted to borrow
directly in the market and have relied on
strong increases in internal funds. Evidence from survey data indicates very
little, if any, additional tightening of
credit terms by depositories this year.
However, the cumulative degree of
tightening over the past two years
remains substantial, and many banks
apparently are still responding to concerns about the condition of borrowers,
cumulative loan losses, and pressures to
meet or exceed fully phased-in capital
requirements. Foreign banks, which had
been aggressively seeking new business
in the recent past, have reined in balance
sheet growth and have tightened the
terms of lending this year by somewhat
more than domestic banks.
With loans falling relative to deposits,
banks have elected to expand their security investment portfolios, pushing the
share of government securities in total
bank credit to its highest level in twenty
years. It seems likely that some of this
increase represents banks taking advantage of the steep yield curve to improve
earnings by funding these securities with
short-term deposits bearing low interest
rates. The sharp rise in bank security
investments has also been spurred by
capital considerations: Mortgage-backed
securities issued by government sponsored enterprises (GSEs) are treated
more favorably than the underlying
loans by risk-based capital standards. As
a result, many banks have sold a substantial share of their home mortgage
loan portfolios to GSEs and replaced
them with the securities issued by these
same agencies.
Although continued loan losses and
increased deposit insurance premiums
have added to bank costs, bank profitability has improved. Earnings have
been bolstered by wider net interest margins and some improvement in the quality of loan portfolios. The market has
Monetary Policy Reports
looked favorably on these developments, as gains on bank share prices this
year have outstripped advances in broad
stock price indexes.
Conditions in the thrift industry
appear to have improved this year, at
least for solvent institutions. Thrift institutions in fairly secure financial condition have experienced better profit
trends analogous to those of banks, and
share prices of better capitalized SAIFinsured institutions have fared well over
the first half of this year. Still, the
improved profit picture for a portion of
the thrift industry has not implied any
expansion in overall thrift balance
sheets; total thrift credit is estimated to
have contracted at a 3Vi percent rate
from the fourth quarter of 1991 to June.
A large part of this contraction owes to
the significant volume of RTC resolutions conducted through early April of
this year. However, additional funds to
cover losses have not been appropriated,
bringing RTC resolutions to a halt after
early April.
The limited growth in total bank and
thrift balance sheets has carried important implications for the monetary
aggregates. The velocities of the deposit
components of the broader aggregates,
M2 and M3, have tracked the upward
trajectory of the velocity of total depository credit in recent years, and this trend
has continued in 1992. M3, especially,
has been hindered by the lack of growth
of depository credit this year. This
aggregate was essentially unchanged
in June from its fourth-quarter 1991
level and fell below the 1 to 5 percent
annual range set by the FOMC. With
retail deposits expanding—if only
sluggishly—and depository credit subdued, banks and thrift institutions have
shed large time deposits and other managed liabilities. At branches and agencies of foreign banks, large time deposits (Yankee CDs), having decelerated
89
sharply from last year's rapid growth,
have been flat this year. Market concerns that lower Japanese stock prices
had impaired the capital positions of
Japanese banks evidently tarnished the
appeal of Yankee CDs for some institutional investors. In response, U.S.
branches and agencies of Japanese
banks cut back issuance of Yankee
CDs, shed liquid assets, and relied
more heavily on funding in Eurodollar
markets.
Institution-only money market funds
were the only source of strength in the
non-M2 portion of M3 during the first
half of 1992. Investors capitalizing on
the sluggish adjustment of money market fund yields to declining market rates
accounted for much of the strength in
money funds. In addition, some institutional investors, finding their resources
augmented rapidly by inflows from
former bank depositors, likely have
parked some of the cash inflow in
money market funds.
The implications of depository retrenchment and household balance sheet
adjustments for longstanding empirical
relationships between money and spending have been perhaps most pronounced
for M2 growth. Despite the pickup in
nominal income growth this year and
very substantial stimulus from drops in
short-term interest rates last year, M2
advanced at only a Wi percent annual
rate from the fourth quarter of 1991 to
June, placing its June level below the
lower bound of its annual range. The
decoupling of the historical relationships
among M2, GDP growth, and shortterm interest rates is evident in the
behavior of M2 velocity. M2 usually
rises relative to income (its velocity
falls) when market rates drop because
rates on M2 deposits do not decline one
for one with market rates, inducing portfolio shifts into M2 assets. But in recent
months, M2 velocity has risen markedly
90
79th Annual Report, 1992
despite a substantial decline in market
rates and a standard measure of opportunity costs—the difference between
short-term market rates and returns on
M2 assets.
In this period of extraordinary retrenchment, depositories apparently
have reduced deposit rates in ways not
captured in standard measures of average deposit rates, and the pull of market
alternatives has been stronger than is
captured by comparisons of deposit rates
to short-term market rates. For example,
banks and thrift institutions appear to
have made larger cuts in the relatively
high rates offered to individuals with
larger balances and in the rates offered
on brokered deposits; holders of both
types of accounts might be especially
sensitive to rates on alternative investments. In addition, depositories have
been particularly hesitant to compete
for funds at intermediate and longer
maturities. As a result, longer-term bank
and thrift CDs have not been attractive
investments for savers seeking to raise
returns by moving out the upward sloping yield curve. In effect, depositories
have used retail time deposits as managed liabilities in making balance sheet
adjustments. The result has been large
outflows of retail time deposits, with a
relatively large portion of the outflow
finding its way to higher-yielding, nonmonetary assets. Depositors, witnessing
substantial declines in the rates on their
accounts relative to market alternatives,
apparently exited M2 in favor of stock
and bond funds or direct equity and
bond investments. Of course, in doing
so, these depositors sacrificed the benefits of deposit insurance and accepted
the risk of asset price fluctuations.
For a time, the depressing effects of
depository retrenchment and investor
portfolio shifts on M2 were obscured by
the confluence of various special factors. Early in the year, demand deposits
surged as lower rates required businesses to build up compensating balances and as mortgage servicers held
larger balances during the mortgage refinancing boom. Later, the abrupt deceleration in M2 appeared related to the
effects of tax flows and RTC resolutions. Federal nonwithheld taxes this
year were weak relative to previous
years, and this may have resulted in a
smaller deposit buildup in March and
April than could be anticipated by normal seasonal adjustment factors. In
late March and early April, the RTC
resolved a substantial number of institutions. In the past, a heavy volume of
RTC resolutions has appeared to damp
M2 growth for a month or two, apparently as acquiring institutions abrogate
time deposit contracts and depositors
take the opportunity to reallocate their
portfolios in light of the current configuration of deposit rates and market rates.
Thus the RTC resolutions in March and
April likely played a role in slowing M2
growth during April and perhaps even in
May.
As the weakness in M2 persisted,
however, it became increasingly clear
that these special factors were not the
whole story. If the deceleration of M2 in
March and April reflected evolving seasonal tax patterns, May and June should
have witnessed an appreciable rebound
in M2 growth. In fact, M2 continued to
founder, leaving its level in June well
below its February level and also below
the lower bound of its annual range.
Furthermore, RTC resolutions halted
abruptly when additional funding for
losses was not forthcoming. By June,
M2 should have been largely free of
RTC effects, but growth of M2 in June
was, in fact, even weaker than in April
and May. On balance, these special factors appeared to figure prominently in
the month-to-month variations of M2
growth, but the overall advance of M2
Monetary Policy Reports
this year was impeded by more fundamental forces.
These fundamental forces, involving
balance sheet adjustments by depositories and money holders, appear to
be boosting the velocity of M2. There
is considerable uncertainty, however,
about how long this process will persist,
and whether it will permanently affect
the equilibrium level or cyclical behavior of M2 velocity. One means of evaluating this question will be observations
of the future performance of the P-star
model in predicting inflation. This
model is based on M2 per unit of potential output, normalized by equilibrium
velocity, which had proved to be constant. Persistent underpredictions of inflation by this model would suggest that
the rise in velocity relative to its historical average may be a more permanent
phenomenon.
While highly interest-responsive
depositors were tilting their portfolios
toward capital market instruments, less
rate-sensitive, more risk-averse households simply rolled over a portion of
their maturing small time deposit holdings into more liquid M2 deposits, at
little or no sacrifice in yield. In fact,
while M2 growth overall this year has
been moribund, growth in its liquid
components has been robust and more
in line with historical relationships to
income and interest rates. Ml, for example, has grown at a 12 percent pace
through June, a rate well above its average during 1991 of 8 percent. Especially
since the introduction of NOW accounts
in the early 1980s, the demand for Ml
has become quite interest sensitive,
leading to wide fluctuations in the velocity of Ml, and the drop in Ml velocity
this year is consistent with that pattern.
Foreign demands for U.S. currency have
been more subdued this year, and currency growth has slowed a bit relative to
the pace of 1990 and 1991. Even so,
91
moderate growth in currency, together
with the brisk advance in transaction
deposits, has fueled growth in the monetary base of 13A percent from the fourth
quarter of 1991 to June.
The unusual behavior of the velocity
of M3 and, especially, of M2 this year
has sparked renewed interest in alternative definitions of the monetary aggregates. Two alternatives that have
received some attention are M2 plus
stock and bond mutual funds and M2
plus institution-only money funds less
small time deposits. Both alternative
aggregates have grown substantially
more rapidly than M2 in recent quarters.
The former adds back into M2 the
apparent destination of much of the
recent outflows from M2; the latter subtracts the weakest component of M2—
retail time deposits—to create a highly
liquid aggregate, which behaves over
time very much like Ml. Both alternatives recently appear to have followed
more closely historical relationships
with income and opportunity costs than
has M2. However, both show periods in
the past in which their velocities have
been highly variable and difficult to predict. The Federal Reserve is continuing
to analyze these experimental monetary
measures carefully.
•
Part 2
Records, Operations,
and Organization
95
Record of Policy Actions
of the Board of Governors
Regulation D (Reserve
Requirements of Depository
Institutions)
February 18, 1992—Amendments
The Board amended Regulation D,
effective April 2, 1992, to lower reserve
requirements on transaction accounts.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and Lindsey and
Ms. Phillips. Absent and not voting: Mr.
LaWare.
The Board reduced from 12 percent
to 10 percent reserve requirements on
net transaction accounts to reduce funding costs for depository institutions. It
was hoped that the reduction would
strengthen banks' financial condition,
improve their access to capital markets,
and put them in a better position to
extend credit. The reduction was effective with the reserve maintenance period
beginning April 2, 1992.
August 12, 1992—Amendments
The Board amended Regulation D to
reduce the seasonal variation in required
reserves and to improve the ability of
depository institutions to manage their
reserve balances.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The Board amended Regulation D to
shorten by two weeks the lag in the
application of vault cash to reserve
requirements. The change was effective
with the reserve maintenance period
beginning November 12, 1992.
The Board also amended the regulation to increase the amount of excesses
or deficiencies in reserve balances that
an institution can carry over from one
reserve maintenance period to the next.
Effective September 3,1992, the amount
of excess or deficiency that can be carried forward was increased from the
greater of 2 percent or $25,000, to the
greater of 4 percent or $50,000.
August 12, 1992—Amendments
and Interpretations
The Board amended Regulation D and
issued several interpretations to prevent
the evasion of reserve requirements on
transaction accounts.
Votes for these actions: Messrs. Greenspan,
Mullins, Angell, and Kelley and Ms.
Phillips. Votes against these actions:
Messrs. LaWare and Lindsey.
The Board took several actions to preserve the integrity of reserve requirements, prevent erosion of the reserve
base for transaction accounts, and maintain equitable competition among depository institutions. Included in those
actions are amendments and interpretations that (1) change the definition of
teller's checks to treat them as cashier's
checks and include them as demand
deposits subject to reserve requirements;
(2) reclassify certain multiple savings
accounts as transaction accounts and
make them subject to reserve require-
96
79th Annual Report, 1992
ments under certain conditions; (3) reclassify certain linked time deposits as
transaction accounts; (4) revise the definition of "cash items in process of collection" to clarify that matured bonds
and coupons may be deducted from
gross transaction accounts; (5) prohibit
larger institutions from reducing their
reservable liabilities by depositing funds
with smaller banks and thereby generating a "due from" deduction; and
(6) prohibit the netting of negative balances in individual trust accounts
against positive balances in other trust
accounts to lower reserve requirements.
Governors LaWare and Lindsey dissented from this action. They thought
that the proposal affecting teller's
checks inappropriately assessed reserve
requirements against the seller of the
checks. They believed that the payablethrough bank should be assessed the
applicable reserve requirement because
that institution was likely to hold the
transaction account on which the teller's
check would be drawn. Governor Lindsey also disagreed with the proposed
treatment of multiple savings accounts.
He preferred alternative measures to
prevent evasion of reserve requirements,
particularly those that would permit the
payment of interest on required reserve
balances.
The revisions pertaining to teller's
checks, cash items in process of collection, and trust accounts were effective
December 22, 1992; the others were
effective September 29, 1992.
November 18, 1992—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, LaWare, and Lindsey and
Ms. Phillips. Absent and not voting: Mr.
Mullins.
Under the Monetary Control Act of
1980, depository institutions, Edge Act
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 amount. (Subsequently, the Board lowered the maximum
reserve requirement to 10 percent.) 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 1992, that amount was
$42.2 billion. Recent increases in transaction balances warranted an increase of
$4.6 million. The Board, therefore,
amended Regulation D to increase to
$46.8 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 1992, that amount had
been increased to $3.6 million. Recent
growth in deposits warranted an increase
to $3.8 million in the amount of deposits
subject to a zero percent reserve requirements, and the Board amended Regulation D accordingly.
The amendments are effective with
the reserve computation period beginning December 22, 1992, for institutions that report weekly, and Decem-
Board Policy Actions
ber 15, 1992, for institutions that report
quarterly.
Regulation F (Limitations
on Interbank Liabilities)
97
that is not adequately capitalized would
be set at 50 percent of an insured institution's total capital beginning June 19,
1994, and would be reduced to 25 percent on June 19, 1995.
November 20, 1992—Adoption of
New Regulation
Regulation H (Membership
of State Banking Institutions
in the Federal Reserve System)
The Board adopted Regulation F to limit
the risk that the failure of a depository
institution would have on insured
institutions.
September 14, 1992—Amendments
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The Board adopted the new Regulation F to implement provisions of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 that require
the Board to limit the risk that the failure of a large depository institution
would pose for federally insured institutions. The new regulation requires that
federally insured depository institutions,
including banks, savings associations,
and branches of foreign banks, adopt
procedures to evaluate and control exposure to their correspondents. In addition,
an insured institution must limit its overnight credit exposure to any institution
that is not adequately capitalized to an
amount not more than 25 percent of the
institution's total capital. No regulatory
limits have been established for correspondents that are at least "adequately
capitalized," as that term is defined in
the rule.
The new regulation is effective
December 19, 1992, but provides for a
phased implementation period over
thirty months. Insured institutions must
have internal policies and procedures in
place by June 19, 1993. The regulatory
limit on exposure to a correspondent
The Board amended Regulation H,
effective December 19, 1992, to implement legislation requiring prompt corrective action when assisting financially
troubled institutions.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
A section of the Federal Deposit
Insurance Corporation Improvement Act
of 1991 requires the Federal Reserve,
the Comptroller of the Currency, the
Federal Deposit Insurance Corporation,
and the Office of Thrift Supervision to
take prompt corrective action to resolve
the problems of insured depository institutions, and it requires that such action
minimize the long-term loss to the
deposit insurance fund. The legislation
created a framework that specifies the
supervisory actions that the agencies
must or should take, depending on the
institution's placement in one of five
categories of capital levels.
The Board implemented these requirements for state member banks by
amending Regulation H. Among other
provisions, the new rules establish capital measures and thresholds for the five
categories of capital specified in the statute; establish procedures for providing
banks with notice of a proposed supervisory directive; establish procedures
98
79th Annual Report, 1992
for lowering a bank's rating if such a
reclassification is based on factors other
than capital; and provide a uniform
schedule by which under-capitalized
state member banks must file capital
restoration plans and by which the Federal Reserve must review those plans.
Regulation H (Membership of
State Banking Institutions in the
Federal Reserve System) and
Regulation Y (Bank Holding
Companies and Change in Bank
Control)
December 9, 1992—Amendments
The Board amended Regulations H and
Y, effective March 9, 1993, to revise the
capital adequacy guidelines regarding
the treatment of intangible assets.
Votes for this action: Messrs. Greenspan,
Mullins, Kelley, and LaWare and Ms.
Phillips. Absent and not voting: Messrs.
Angell and Lindsey.
The Federal Reserve and the other
federal bank regulatory agencies have
been attempting to develop more consistent treatment of intangible assets—
other than goodwill—in the calculation
of capital ratios. In connection with
those efforts, the Board amended Regulations H and Y to revise the capital
adequacy guidelines by specifying the
types of intangible assets that can be
included in tier 1 capital when calculating risk-based capital ratios and leverage ratios. Under the revised guidelines,
all identifiable intangible assets other
than goodwill, purchased mortgageservicing rights, and purchased credit
card relationships are to be deducted
from capital. The amendments also
establish quantitative limits on the
amount of purchased mortgage servicing rights and purchased credit card relationships that can be included in tier 1
capital and specify the conditions under
which those intangible assets can be included.
Pursuant to provisions in the Federal
Deposit Insurance Corporation Improvement Act of 1991, the amendments
require that organizations determine the
fair market value and the book value of
their purchased mortgage-servicing
rights. The amendments provide criteria
for determining those values.
The other bank regulatory agencies
would adopt substantially similar
guidelines for the organizations they
supervise.
Regulation J (Collection of
Checks and Other Items by Federal
Reserve Banks and Funds Transfers
through Fedwire) and Policy
Statements on Measures for
Reducing Payment System Risks
September 30, 1992—Adoption of
Amendments and Issuance of
Policy Statements
The Board amended Regulation J and
issued two policy statements regarding
fees to be charged and new posting procedures to be implemented to reduce
risks in the payments system.
Votes for these actions: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
Under existing procedures for clearing and settling transactions on the Federal Reserve's payments system, institutions present items for payment
throughout the business day and settle
Board Policy Actions
for the net amount of those transactions
at the end of the day. The Federal
Reserve, therefore, runs the risk that an
institution using the payments system
might fail during the day or otherwise
be unable to settle for the checks presented during the day.
For some time now, the Board has
had in place a program to reduce risks
both in the Federal Reserve's payments
and in private systems. The latter type
of risk can arise in circumstances
such as the failure of a participant on
a private-sector transfer network to
cover a net debit. That failure, in turn,
could prevent the creditors of that participant from settling their own commitments and could have further repercussions in the payments system and the
economy in general. The Board's program is designed to encourage riskreducing behavior by payments system
participants.
Recently, the Board decided that additional measures were needed and took
three actions to reduce risks. The primary change is the introduction of a
charge for average daily intraday (daylight) overdrafts in reserve or clearing
accounts. The new daylight overdraft
fee will be phased-in in three steps and
will be assessed against an institution's
average daily total of overdrafts. Fees of
$25 or less during any two-week period
would be waived.
To facilitate pricing, the Board also
adopted new procedures for accurate
measurement of daylight overdrafts. The
Board also amended Regulation J to provide for intraday posting of debits for
checks presented by the Federal Reserve
Banks.
The daylight overdraft measurement
procedures and the Regulation J amendment are effective October 14, 1993; the
assessment of fees for daylight overdrafts will begin April 14, 1994.
99
Regulation K (International
Banking Operations) and
Regulation Y (Bank Holding
Companies and Change in Bank
Control)
April 2, 1992—Interim Rules
The Board amended Regulations K and
Y to adopt interim rules to implement
provisions of the Foreign Bank Supervision Enhancement Act of 1991 and the
Federal Deposit Insurance Corporation
(FDIC) Improvement Act of 1991.
Votes for these actions: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
Because the Foreign Bank Supervision Act was effective when enacted,
the Board published for comment proposed implementing amendments and
also adopted them as interim rules. That
act included provisions that: (1) require
foreign banks to obtain Board approval
before establishing a branch, agency,
commercial lending company, or representative office in the United States;
(2) establish standards for entry by foreign banks; (3) allow termination of a
foreign bank's U.S. office if a violation
occurs; (4) require annual examinations
of U.S. branches of foreign banks and
permit the Federal Reserve to coordinate examinations of all U.S. operations
of a foreign bank; (5) permit snaring of
supervisory information with foreign
bank regulators; (6) establish limits for
state-licensed branches and agencies on
lending to a single borrower; (7) require
foreign banks to obtain Board approval
before acquiring more than 5 percent of
the shares of a U.S. bank; and (8) establish new restrictions on retail deposittaking by branches and agencies of foreign banks.
100 79th Annual Report, 1992
The Board also approved adoption of
an interim rule and publication for comment of an amendment to Regulation Y
to implement provisions of the FDIC
Improvement Act that govern bank
holding companies and foreign banking
organizations with operations in the
United States. The rule specifies additional factors the Board will consider
when reviewing applications to acquire
a bank.
November 4, 1992—Amendments
The Board amended Regulations K and
Y to implement provisions of the Foreign Bank Supervision Enhancement
Act of 1991.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The Foreign Bank Supervision Enhancement Act provided uniform standards for entry by foreign banks into the
United States and also strengthened
supervision of their operations by U.S.
banking regulators. Among other provisions, the act requires that any foreign
bank that seeks to operate in the United
States be subject to comprehensive
supervision, on a consolidated basis, by
supervisors in its home country.
Because the legislation was effective
upon enactment, the Board adopted
interim rules in April 1992 and also
sought comment on those rules. The
interim rules had outlined the standards
and the factors that the Board would
consider in determining whether an
organization receives comprehensive
and consolidated supervision in its home
country. The rules also reviewed the
other mandatory and discretionary standards for Board approval of applications
by foreign banks to establish a branch,
agency, representative office, or commercial lending company. In addition,
the rules implement other provisions of
the act relating to the Board's new regulatory and supervisory powers over the
U.S. offices of foreign banks.
After completion of its review of the
comments received on the interim rules,
the Board amended Regulation K to
adopt the rules in final form, with certain modifications to reflect those comments. The Board also amended Regulations K and Y to require that a foreign
banking organization file an application
under the Bank Holding Company Act
if it proposes to acquire more than 5 percent of the shares of a U.S. bank or bank
holding company. These amendments in
the final rules were effective January 28,
1993. In addition, the Board amended
Regulation Y, effective February 4,
1993, to specify two additional factors it
will consider when reviewing foreign
banking applications and to reflect the
new requirement for an application
from foreign banks that seek to acquire
more than 5 percent of a U.S. banking
organization.
Regulation O (Loans to Executive
Officers, Directors, and Principal
Shareholders of Member Banks)
and Regulation Y (Bank Holding
Companies and Change in Bank
Control)
April 22, 1992—Amendments
The Board amended Regulation O to
implement provisions in the Federal
Deposit Insurance Corporation (FDIC)
Improvement Act, to make technical
revisions, and to clarify certain ambiguities in the rules. The Board also
Board Policy Actions
amended Regulations O and Y to implement certain reporting requirements
imposed by the act. The amendments
were effective May 18, 1992.
101
Regulation Y (Bank Holding
Companies and Change in Bank
Control) and Rules of Procedure
April 22, 1992—Amendments
Votes for these actions: Messrs. Greenspan,
Angell, Kelley, LaWare, and Lindsey and The Board amended Regulation Y to
Ms. Phillips. Absent and not voting: Mr. permit bank holding companies to
engage in full-service brokerage and
Mullins.
financial advisory activities and in certain leasing transactions; and revised an
The FDIC Improvement Act modified interpretative rule regarding advisory
in several ways the requirements con- activities.
cerning a bank's extensions of credit to
its officials, including executive officers,
Votes for these actions: Messrs. Greenspan,
directors, and principal shareholders and
Angell, Kelley, LaWare, and Lindsey and
Ms. Phillips. Absent and not voting: Mr.
their related interests. One modification
Mullins.
limits the aggregate amount of credit
that a bank may extend to insiders.
Another modification extends the aggreThe Board amended Regulation Y,
gate lending limits to directors and their effective September 4, 1992, to include
related interests.
on the list of activities permissible for
A bank's aggregate lending limit gen- bank holding companies the provision
erally is equal to the amount of its unim- of full-service securities brokerage
paired capital and surplus. Because of activities to both institutional and retail
the effect that such a limit might have on customers; and the provision of finansmaller banks, the Board established cial advisory services regarding transactemporarily a higher limit for institu- tions such as mergers, acquisitions, and
tions that have less than $100 million in divestitures, as well as the structuring of
deposits. For such institutions, the limit loan syndications, interest rate swaps,
would be up to 200 percent of unim- and similar types of transactions. The
paired capital and surplus, provided the permissible activities are subject to cerbank's board of directors passes a reso- tain disclosure and other requirements.
The Board also expanded the list of
lution to establish a limit higher than
100 percent. The higher lending limit permissible activities to allow holding
would be in effect for a year. During that companies to engage in the leasing of
time the Board would assess the effect personal property, activities in which
of the limitation on the ability of banks national banks are permitted to engage
to attract directors and to serve commu- under the Competitive Equality Banking
Act. The Board amended Regulation Y
nity credit needs.
The Board also amended Regulations to permit a holding company to rely on
O and Y to implement certain reporting up to 100 percent of the residual value
requirements of the FDIC Improvement of a leased property for recovering the
Act pertaining to loans to executive offi- holding company's leasing costs. The
cers and directors of certain bank hold- amendment imposes a limit on the voling companies, to make technical revi- ume of such leasing activities but permits holding companies to engage in an
sions, and to eliminate ambiguities.
102 79th Annual Report, 1992
unlimited number of transactions in
which they rely on residual values of up
to 25 percent of the acquisition cost of
the leased property for compensation of
their full leasing costs. This amendment
was effective May 14, 1992.
The Board also revised an interpretive rule, effective August 10, 1992, to
permit a holding company or a nonbank
subsidiary to act as an agent for customers in the brokerage of shares of an
investment company to which the holding company or any of its subsidiaries
provides investment advice. The revision also permits the provision of investment advice to customers regarding the
purchase or sale of shares of an investment company to which a holding
company affiliate provides investment
advice. In both circumstances, certain
disclosures must be made to address the
potential conflicts of interest or the possible adverse effects.
June 19, 1992—Amendments
The Board approved several amendments to Regulation Y, effective
June 29, 1992, as part of its efforts to
reduce regulatory burden and simplify
the applications process.
Votes for this action: Messrs. Greenspan,
Mullins, Kelley, and Lindsey and Ms.
Phillips. Votes against: None. Absent and
not voting: Messrs. Angell and LaWare.
The Board revised several provisions
of Regulation Y to streamline certain
procedural requirements. Among other
provisions, the amendments (1) increase
the size of nonbank companies that can
be acquired by bank holding companies
under the fifteen-day expedited notice
procedures, (2) increase the relative size
of nonbank assets that holding companies may acquire in the ordinary course
of business without Federal Reserve
approval, and (3) define the criteria for
determining when bank holding company applications may be waived in connection with certain bank mergers.
September 3, 1992—Amendments
and Adoption of New Rule
The Board amended Regulation Y,
revised its Rules of Procedure, and
issued a new rule as part of its efforts to
reduce regulatory burden and simplify
the applications process.
Votes for these actions: Messrs. Mullins,
Kelley, and LaWare and Ms. Phillips.
Votes against: None. Absent and not
voting: Messrs. Greenspan, Angell, and
Lindsey.
The Board revised its Rules of Procedure and Regulation Y to reduce the
number of times institutions must publish notice in local newspapers of certain applications filed with the Federal
Reserve. Effective October 13, 1992,
institutions need publish only once,
instead of twice, notices of applications
to become a member of the Federal
Reserve, to establish a branch, to merge
with or acquire another bank, or to
become a bank holding company.
In a related action, the Board adopted
a new rule, effective September 11,
1992, to exempt from the limitations of
section 23A of the Federal Reserve Act
certain transactions between affiliates of
an insured depository institution, provided certain criteria are met. Section
23A limits the ability of institutionss to
purchase assets from, or lend to, affiliates. The new rule exempts transactions
that have been approved by an appropriate federal banking agency pursuant to
the Bank Merger Act and thereby eliminates the need for duplicate federal
applications.
Board Policy Actions
Regulation Z (Truth in Lending)
July 29, 1992—Amendments
The Board adopted amendments to Regulation Z pertaining to home equity
loans to bank officials.
Votes for this action: Messrs. Mullins,
Kelley, LaWare, and Lindsey and Ms.
Phillips. Absent and not voting: Messrs.
Greenspan and Angell.
The Board amended Regulation Z to
permit depository institutions to retain
the right to demand payment of a home
equity line of credit extended to their
executive officers when required by federal law. The amendment resolved a discrepancy between the Home Equity
Loan Consumer Protection Act and Regulation O (Loans to Executive Officers,
Directors, and Principal Shareholders
of Member Banks). The amendment is
effective immediately; compliance is
optional, however, until October 1,
1993.
Regulation CC (Availability of
Funds and Collection of Checks)
January 15, 1992—Amendments
The Board amended Regulation CC,
effective immediately, to implement
provisions of the Federal Deposit Insurance Corporation (FDIC) Improvement
Act of 1991.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, and Lindsey and
Ms. Phillips. Absent and not voting: Mr.
Mullins.
The FDIC Improvement Act amended
the Expedited Funds Availability Act to
allow banks to extend the holds that
they place on checks under certain conditions. Accordingly, the Board adopted
103
an interim rule for Regulation CC and
also sought comment on the rule. The
interim rule allows banks—on an exception basis—to extend the holds to "nextday" and "second day" availability and
to allow one-time notices of exception
holds in certain cases.
July 29, 1992—Amendments
The Board amended Regulation CC,
effective September 14, 1992, to adopt
an interim rule in final form.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
Regulation CC implements the Expedited Funds Availability Act, in part, by
establishing schedules by which banks
must make available to customers the
funds deposited in their transaction
accounts. The FDIC Improvement Act
of 1991 amended provisions of the
Funds Availability Act, and in January
the Board had adopted an interim rule.
Subsequently, it took final action by
adopting the rule in final form. The revision to Regulation CC allows banks to
extend the holds, on an exception basis,
to "next-day" and "second-day" availability checks and allows one-time
notices of exception holds, in certain
cases. In addition, the amendments
made permanent the availability schedules that had been in effect for deposits
at nonproprietary automated teller
machines and affirmed the administrative enforcement authority of federal
regulatory agencies over U.S. offices and
branches of foreign banks.
September 30, 1992—Amendments
The Board amended Regulation CC,
effective January 3, 1994, to provide for
104 79th Annual Report, 1992
same-day settlement of checks presented
by private-sector banks.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The Board amended Regulation CC
to require that paying banks settle for
checks presented to them by privatesector banks on the same day that the
checks are presented, without imposing
a presentment fee. Under the new rule,
paying banks must settle for any checks
presented on the same day they are presented, if the checks are presented by
8:00 a.m. local time, at the location designated by the paying bank. Settlement
must be made by credit to an account at
a Federal Reserve Bank by the close of
business on the day presented. The provisions of the rule may be varied by
agreement.
Regulation DD (Truth in Savings)
and Regulation Q (Prohibition
Against the Payment of Interest on
Demand Deposits)
September 10, 1992—Adoption of
New Regulation
The Board adopted a new Regulation
DD to implement provisions of the
Truth in Savings Act of 1991 and made
conforming changes to Regulation Q.
Votes for this action: Messrs. Angell and
Lindsey and Ms. Phillips. Votes against
this action: Messrs. Mullins and LaWare.
Absent and not voting: Messrs. Greenspan
and Kelley.
The Truth in Savings Act is part of
the Federal Deposit Insurance Corporation Improvement Act of 1991. One purpose of the Truth in Savings Act is to
assist consumers in comparing deposit
accounts offered by depository institu
tions. The act establishes certain disclosures that must be provided whenever a
consumer requests the information or
before an account is opened.
The new Regulation DD implements
the requirements of the act and also
provides explanations and sample disclosure forms to assist in compliance.
Among other provisions, the new regulation (1) provides formulas for computing the required annual percentage yield
to ensure a uniform method for calculating the return on accounts; (2) specifies
the conditions under which institutions
must disclose any fees imposed, the
annual percentage yield, and other information; (3) limits the manner in which
an institution may determine the balance
on which interest is paid; and (4) establishes rules for advertising deposit
accounts.
Although Board members were concerned about the compliance burden
imposed by the legislation, a majority
did not object to adoption of Regulation
DD as the best measure for implementing the statutory requirements. Governors Mullins and LaWare, however, did
not support adoption of the new regulation. Governor Mullins believed that the
amount of detail in the regulation and
accompanying model forms would interfere with an institution's operations, and
he preferred that the amount of detail in
the explanatory information be reduced.
Governor LaWare thought that the burden of complying with the regulation
would serve to reduce the amount of
interest that institutions paid on deposits and the amount of service they
provided.
In a related action, the Board
approved conforming revisions to Regulation Q to delete advertising and disclosure requirements that were included in
the new regulation and also changed the
title of Regulation Q from "Interest on
Deposits" to "Prohibition Against the
Board Policy Actions
105
Payment of Interest on Demand
Deposits."
The new regulation is effective September 21, 1992; compliance is optional,
however, until March 21, 1993. After
this action, the Congress amended the
Truth in Savings Act to delay its effective date by three months. Accordingly,
compliance is optional until June 21,
1993.
agencies, decided to discontinue supervisory use of the definition of highly
leveraged transactions and to eliminate
required reporting on such exposure by
banking organizations after midyear.
Until use of the term was discontinued,
however, the agencies approved revisions to the definition that banks and
bank holding companies should use for
purposes of their financial reports for
March 31, and June 30, 1992.
Policy Statements
March 6, 1992—Community
Reinvestment Act
January 21, 1992—Highly
Leveraged Transactions
The Board discontinued use of the
supervisory definition of highly leveraged transactions, effective after institutions submit their midyear 1992 financial reports, and made certain interim
changes in reporting requirements,
effective with the
first-quarter
statements.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The Board, the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation had adopted use of the
definition of highly leveraged transactions for supervisory purposes in 1989,
when leveraged buyouts were frequent.
Besides providing guidance to examiners, the definition had encouraged financial institutions to structure highly leveraged financings in a manner consistent
with the associated risks, to develop
adequate internal controls, and to review
mechanisms to monitor such transactions. Now, however, merger and acquisition activity has declined significantly,
and the term no longer serves a useful
purpose. Rather than revise the definition, the Board, along with the other two
The Board issued a policy statement
noting the responsibility of financial
institutions under the Community Reinvestment Act (CRA) to analyze the
geographic distribution of their lending
patterns.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, and Lindsey and
Ms. Phillips. Absent and not voting: Mr.
Mullins.
Under the CRA, financial institutions
are required to serve the convenience
and needs of the communities in which
they are chartered, and supervisory
agencies are required to assess an institution's record of meeting the credit
needs of its entire community, including low- and moderate-income areas.
Among the factors the agencies consider
when making such assessments are
(1) the extent to which an institution's
board of directors participates in formulating policies and reviewing performance and (2) the distribution of the
institution's credit extensions, applications, and denials throughout the delineated community.
The Board, along with the Federal
Deposit Insurance Corporation, the
Comptroller of the Currency, and the
Office of Thrift Supervision, adopted a
106 79th Annual Report, 1992
policy statement to emphasize the need
for institutions to analyze the geographic
distribution of their credit extensions as
part of their CRA planning process and
to ensure that potential borrowers are
treated fairly and that all segments of
the community are served appropriately.
The statement also reviews the agencies' expectations regarding such lending and provides guidance regarding
how best to meet those expectations.
duties; and (5) whether there are no
public benefits from continued provision of the service that outweigh the
reasons for withdrawal. The statement
also indicated that the Board would consider discontinuing a service line only
when a Reserve Bank failed to achieve
full cost recovery for a particular service
line over the long run.
1992 Discount Rates
October 28, 1992—Withdrawal
from a Priced Service
The Board issued a policy statement,
effective October 29, 1992, describing
the criteria it would consider in deciding
whether to withdraw from a priced
service.
Votes for this action: Messrs. Mullins,
Angell, Kelley, LaWare, and Lindsey and
Ms. Phillips. Absent and not voting: Mr.
Greenspan.
The policy statement indicated that
the Board would consider the following
factors when assessing a request from
one or more Federal Reserve Banks to
discontinue the provision of a priced
service: (1) whether other service providers are likely to provide an adequate
level of the same service in the relevant
markets(s) if the Federal Reserve withdraws from the service; (2) whether it is
likely that users could obtain other substitutable services that can reasonably
meet their needs, if other firms are not
likely to provide an adequate level of
the same service in the market(s);
(3) whether withdrawal from the service
would not have a material, adverse
affect on the ability of the Federal
Reserve to provide an adequate level of
other services; (4) whether withdrawal
would not have an adverse effect on the
System's ability to discharge its other
The Board approved one change in the
basic discount rate during 1992, a reduction from 3!/2 to 3 percent in early July.
The Board also approved numerous
changes, including increases and decreases, in the rates charged for seasonal
credit and for extended credit; rates for
both types of credit are set on the basis
of market-related formulas and exceeded the basic discount rate by varying amounts during the year.
The reasons for Board decisions are
reviewed below. Those 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
more fully elsewhere in this Report.
Basic Discount Rate
In December 1991 the Board approved a
reduction of a full percentage point in
the basic discount rate, to 3lA percent,
and the FOMC also acted to reduce
pressures on reserve positions. These
policy easing moves, together with the
ongoing effects of cumulatively sizable
easing actions implemented earlier, were
viewed as likely to have a positive effect
on financial markets and to provide a
basis for a rate of economic growth
stronger than the quite sluggish pace
experienced since the beginning of the
current upturn in the spring of 1991.
Board Policy Actions
The economic expansion picked up
some momentum in the early months of
1992. Much of the impetus was supplied
by an upswing in consumer spending
and a sharp increase in purchases of new
houses. In financial markets, interest
rates fell considerably around the turn of
the year, but most rates, including those
on mortgages, subsequently came under
appreciable upward pressure. By early
spring, growth in final demand moderated as consumers appeared to respond
to continuing weakness in labor markets
and the absence of significant gains in
real income. New home sales fell
steadily after February, net exports
weakened in the second quarter, and
defense spending remained on a downtrend. On the positive side, wage and
price increases seemed to be trending
lower. After strengthening somewhat in
the first quarter, the broad measures of
money weakened markedly in the second quarter, and the growth of credit
continued to lag.
In this environment, the FOMC eased
pressures on reserve conditions slightly
in April. In the weeks that followed,
market interest rates fell appreciably,
notably in short-term markets. During
this period nearly all of the Reserve
Banks recommended that the basic rate
be maintained at its then current level,
and the Board took no action on a proposed reduction of V2 percentage point
that was pending at one Bank. Subsequently, on July 2, the Board approved a
reduction in the basic rate from V/2 to
3 percent. Open market operations were
directed toward allowing the full amount
of the reduction to be reflected in money
market interest rates.
Over the course of July and August,
indicators of economic activity pointed
to a continuing but quite sluggish expansion. Although growth in the broad measures of money picked up in August
after declining in previous months, their
107
expansion remained slow. Against this
background, the FOMC implemented a
slight further easing of reserve conditions in early September. Over the balance of the year, indications of renewed
firmness in economic activity tended to
multiply. Consumer spending picked up,
especially toward year-end; housing
demand grew somewhat further; and
business purchases of capital equipment
continued to rise at a brisk pace. However, growth in the broad measures of
money and in nonfederal debt remained
quite limited during the latter part of
the year. Several Reserve Banks proposed a further reduction in the basic
discount rate, to 2Vi percent, during the
September-to-December period, but the
Board took no action on these proposals, and only one was still pending at
year-end.
Structure of Discount Rates
The basic discount rate is the rate
charged on loans to depository institutions for short-term adjustment credit,
while flexible, market-related rates generally are charged on other types of
credit. These flexible rates are adjusted
periodically, subject to Board approval.
Under the seasonal program, loans may
be provided for periods longer than
those permitted under adjustment credit
to assist smaller institutions in meeting
regular needs arising from a clear pattern of intra-yearly movements in their
deposits and loans. Since its introduction on January 9, 1992, the flexible rate
charged on seasonal credit has been
closely aligned with short-term market
rates and is never less than the basic rate
applicable to adjustment credit.
A different flexible rate is charged on
extended-credit loans, which are made
to depository institutions that are under
sustained liquidity pressure and are not
able to obtain funds from other sources.
108 79th Annual Report, 1992
The rate for extended credit is 50 basis
points higher than the seasonal rate and
is at least 50 basis points above the basic
discount rate. 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
are not clearly 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
credit.
At the end of 1992 the structure of
discount rates was as follows: a basic
rate of 3 percent for short-term adjustment credit, a rate of 3.20 percent for
credit under the seasonal program, and a
rate of 3.70 percent for extended credit.
During 1992 the flexible rate on seasonal credit ranged from a high of
4.15 percent to a low of 3.15 percent
and that on extended credit ranged from
a high of 4.65 percent to a low of
3.65 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 proposals on
the discount rate include requests to
renew the formulas for calculating the
flexible rates on seasonal and extended
credit. Indicated below are the votes
relating to the Board's decision to
reduce the basic discount rate in early
July. Votes relating to the reestablishment of existing rates or for the updat
ing of market-related rates under the
seasonal and extended credit programs
are not shown. All votes taken during
1992 on discount rates were unanimous.
Effective July 2, the Board approved
proposals by the directors of the Federal
Reserve Banks of Boston, New York,
Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas,
and San Francisco to reduce the basic
discount rate from 3Vi to 3 percent.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, Lindsey, and
Mullins and Ms. Phillips. Votes against
this action: None.
The Board subsequently approved
similar actions taken by the directors of
the Federal Reserve Banks of Cleveland, effective July 6, and St. Louis,
effective July 7, 1992.
.
109
Record of Policy Actions
of the Federal Open Market Committee
The record of policy actions of the Federal Open Market Committee is presented in the ANNUAL REPORT of the
Board of Governors pursuant to the requirements of section 10 of the Federal
Reserve Act. That section provides that
the Board shall keep a complete record
of the actions taken by the Board and by
the Federal Open Market Committee on
all questions of policy relating to open
market operations, that it shall record
therein the votes taken in connection
with the determination of open market
policies and the reasons underlying each
such action, and that it shall include in
its annual report to the Congress a full
account of such actions.
The pages that follow contain entries
relating to the policy actions at the meetings of the Federal Open Market Committee held during the calendar year
1992, 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.
Members of the Committee voting for
a particular action may differ among
themselves as to the reasons for their
votes; in such cases, the range of their
views is noted in the record. When
members dissent from a decision, they
are identified in the record along with a
summary of the reasons for their dissent.
The policy record for each meeting is
released a few days after the next regularly scheduled meeting and is subse
quently 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, a Foreign
Currency Directive, and Procedural
Instructions with Respect to Foreign
Currency Operations. These policy
instruments are shown below in the form
in which they were in effect at the beginning of 1992. 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, 1992
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary
to carry out the most recent domestic policy
directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal
110 79th Annual Report, 1992
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;
(b) When appropriate, to buy or sell in
the open market, from or to acceptance dealers and foreign accounts maintained at the
Federal Reserve Bank of New York, on a
cash, regular, or deferred delivery basis, for
the account of the Federal Reserve Bank of
New York at market discount rates, prime
bankers acceptances with maturities of up to
nine months at the time of acceptance that
(1) arise out of the current shipment of goods
between countries or within the United
States, or (2) arise out of the storage within
the United States of goods under contract of
sale or expected to move into the channels of
trade within a reasonable time and that are
secured throughout their life by a warehouse
receipt or similar document conveying title
to the underlying goods; provided that the
aggregate amount of bankers acceptances
held at any one time shall not exceed
$100 million;
(c) To buy U.S. Government securities,
obligations that are direct obligations of, or
fully guaranteed as to principal and interest
by, any agency of the United States, and
prime bankers acceptances of the types
authorized for purchase under l(b) above,
from dealers for the account of the Federal
Reserve Bank of New York under agreements for repurchase of such securities, obligations, or acceptances in 15 calendar days
or less, at rates that, unless otherwise
expressly authorized by the Committee, shall
be determined by competitive bidding, after
applying reasonable limitations on the volume of agreements with individual dealers;
provided that in the event Government securities or agency issues covered by any such
agreement are not repurchased by the dealer
pursuant to the agreement or a renewal
thereof, they shall be sold in the market or
transferred to the System Open Market
Account; and provided further that in the
event bankers acceptances covered by any
such agreement are not repurchased by the
seller, they shall continue to be held by the
Federal Reserve Bank or shall be sold in the
open market.
2. In order to ensure the effective conduct
of open market operations, the Federal Open
Market Committee authorizes and directs the
Federal Reserve Banks to lend U.S. Government securities held in the System Open
Market Account to Government securities
dealers and to banks participating in Government securities clearing arrangements conducted through a Federal Reserve Bank,
under such instructions as the Committee
may specify from time to time.
3. In order to ensure the effective conduct
of open market operations, while assisting in
the provision of short-term investments for
foreign and international accounts maintained at the Federal Reserve Bank of New
York, the Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York (a) for System Open
Market Account, to sell U.S. Government
securities to such foreign and international
accounts on the bases set forth in paragraph
l(a) under agreements providing for the
resale by such accounts of those securities
within 15 calendar days on terms comparable to those available on such transactions in
the market; and (b) for New York Bank
account, when appropriate, to undertake with
dealers, subject to the conditions imposed on
purchases and sales of securities in paragraph l(c), repurchase agreements in U.S.
Government and agency securities, and to
arrange corresponding sale and repurchase
agreements between its own account and
foreign and international accounts maintained at the Bank. Transactions undertaken
with such accounts under the provisions of
this paragraph may provide for a service fee
when appropriate.
FOMC Policy Actions
Domestic Policy Directive
In Effect January 1, 19921
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
AVi 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 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
1. Adopted by the Committee at its meeting on
December 17, 1991.
\11
of 2x/2 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
41/2 to 8V6 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. 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
1Vi percent, respectively.
Authorization for Foreign
Currency Operations
In Effect January 1, 1992
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
112 79th Annual Report, 1992
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 currency, plus outstanding contracts for future
receipt, minus outstanding contracts for
future delivery of that currency, i.e., as the
sum of these elements with due regard to
sign.
2. The Federal Open Market Committee
directs the Federal Reserve Bank of New
York to maintain reciprocal currency arrangements ("swap" arrangements) for the
System Open Market Account for periods up
to a maximum of 12 months with the following foreign banks, which are among those
designated by the Board of Governors of the
Federal Reserve System under Section 214.5
of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of
the Committee to renew such arrangements
on maturity:
Foreign bank
Amount
(millions of
dollars equivalent)
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
700
500
250
300
4,000
600
1,250
Any changes in the terms of existing swap
arrangements, and the proposed terms of any
new arrangements that may be authorized,
shall be referred for review and approval to
the Committee.
3. All transactions in foreign currencies
undertaken under paragraph 1(A) above
shall, unless otherwise expressly authorized
by the Committee, be at prevailing market
rates. For the purpose of providing an investment return on System holdings of foreign
currencies, or for the purpose of adjusting
interest rates paid or received in connection
with swap drawings, transactions with foreign central banks may be undertaken at
non-market exchange rates.
4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In
making operating arrangements with foreign
central banks on System holdings of foreign
currencies, the Federal Reserve Bank of New
York shall not commit itself to maintain any
specific balance, unless authorized by the
Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by
the Federal Reserve Bank of New York with
the foreign banks designated by the Board
of Governors under Section 214.5 of Regulation N shall be referred for review and
approval to the Committee.
5. Foreign currency holdings shall be
invested insofar as practicable, considering
needs for minimum working balances. Such
investments shall be in liquid form, and
generally have no more than 12 months
FOMC Policy Actions
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'
113
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.
Foreign Currency Directive
In Effect January 1, 1992
1. System operations in foreign currencies
shall generally be directed at countering disorderly market conditions, provided that
market exchange rates for the U.S. dollar
reflect actions and behavior consistent with
the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency
("swap") arrangements with selected foreign central banks and with the Bank for
International Settlements.
C. Cooperate in other respects with
central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light
of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular
currencies, and to facilitate operations of the
Exchange Stabilization Fund.
C. For such other purposes as may be
expressly authorized by the Committee.
4. System foreign currency operations
shall be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with
foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange
arrangements under the IMF Article IV.
Procedural Instructions with
Respect to Foreign Currency
Operations
In Effect January 1, 1992
In conducting operations pursuant to the
authorization and direction of the Fed-
114 79th Annual Report, 1992
eral Open Market Committee as set forth
in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve
Bank of New York, through the Manager for Foreign Operations, System
Open Market Account, shall be guided
by the following procedural understandings with respect to consultations and
clearance with the Committee, the Foreign Currency Subcommittee, and the
Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the
Committee.
1. The Manager for Foreign Operations shall clear with the Subcommittee
(or with the Chairman, if the Chairman
believes that consultation with the Subcommittee is not feasible in the time
available):
A. Any operation that would result
in a change in the System's overall open
position in foreign currencies exceeding
$300 million on any day or $600 million
since the most recent regular meeting of
the Committee.
B. Any operation that would result
in a change on any day in the System's
net position in a single foreign currency
exceeding $150 million, or $300 million
when the operation is associated with
repayment of swap drawings.
C. Any operation that might generate a substantial volume of trading in a
particular currency by the System, even
though the change in the System's net
position in that currency might be less
than the limits specified in l.B.
D. Any swap drawing proposed by
a foreign bank not exceeding the larger
of (i) $200 million or (ii) 15 percent of
the size of the swap arrangement.
2. The Manager for Foreign Operations shall clear with the Committee (or
with the Subcommittee, if the Subcommittee believes that consultation with
the full Committee is not feasible in the
time available, or with the Chairman, if
the Chairman believes that consultation
with the Subcommittee is not feasible in
the time available):
A. Any operation that would result
in a change in the System's overall open
position in foreign currencies exceeding
$1.5 billion since the most recent regular meeting of the Committee.
B. Any swap drawing proposed by
a foreign bank exceeding the larger of
(i) $200 million or (ii) 15 percent of the
size of the swap arrangement.
3. The Manager for Foreign Operations shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System,
and about any operations that are not of
a routine character.
Meeting Held on
February 4-5, 1992
1. Domestic Policy Directive
The information reviewed at this meeting suggested that economic activity remained sluggish. Spending for housing
and exports was rising, but retail sales
had been weak, and nonresidential construction continued to hold down overall
investment expenditures. Nonfarm payroll employment had changed little in
December, and industrial production had
edged lower in November and December as business firms acted to hold down
inventories in the face of slack final
demand. Wage and price increases continued to trend downward.
Total nonfarm payroll employment
was about unchanged in December after
a large decline in November. Manufacturing jobs fell in December for a fourth
consecutive month, with nearly all of
the losses occurring in durable goods
industries. Employment in retail and
wholesale trade contracted again, while
FOMC Policy Actions
employment in construction, which had
been depressed by unseasonably severe
weather in November, registered a small
rise. New hires in December were concentrated in health services and local
governments. The civilian unemployment rate rose to 7.1 percent in December, its high for the year.
Industrial production declined slightly
in December and was unchanged on balance since July; the limited information
available suggested that production
might have contracted appreciably further in January. Over the NovemberDecember period, output was held down
in part by reduced production of motor
vehicles; in addition, unseasonably
warm weather led to lower production
of electricity and natural gas. Additional
restraints on output included the depressing effects of a strike at a major supplier of industrial equipment and persisting declines in the production of defense
and space equipment. By contrast, the
output of other types of business equipment had strengthened, particularly in
the office and computing component,
and the production of construction supplies and a variety of nondurable goods
had increased. Total industrial capacity
utilization declined further in December
but remained somewhat above its low of
last March.
Consumer spending had been weak
on balance in recent months amid continuing indications of depressed consumer confidence and essentially no
growth in disposable income. Nominal
retail sales were estimated to have
declined appreciably in November and
December, and for the fourth quarter
decreases in sales were widespread
among general merchandise, apparel,
and furniture and appliance stores.
Against a background of improved consumer attitudes toward homebuying and
the strongest quarterly pace of new
home sales since the spring of 1990,
\ 15
single-family housing starts rose in
December from an upward-revised
November level. With high vacancy
rates persisting for multifamily units,
starts of such units remained near their
May 1991 low.
Business fixed investment appeared
to have fallen in the fourth quarter as a
small rise in equipment spending was
offset by further steep reductions in nonresidential construction. After little
change in the third quarter, shipments of
nondefense capital goods picked up in
the fourth quarter, principally because of
a surge in outlays for computers. Recent
data on orders suggested little growth
in business spending for equipment over
the near term. Office and other commercial construction activity weakened
substantially further in November. The
persistently low occupancy rates for
commercial structures, and the continuing downtrend in construction contracts
and appraisal values of office properties,
suggested that nonresidential construction activity would remain depressed for
some time.
Business inventories rose noticeably
over the months of September through
November after substantial liquidation
earlier in the year. At the retail level,
inventories continued to build, and
inventory-to-sales ratios rose for most
types of retailers, although the pace of
accumulation appeared to have slowed
in November. Wholesale inventories
expanded sharply in October and
November; for most types of distributors, inventory-to-sales ratios had moved
up in recent months but had remained
well below their highs of a year ago. By
contrast, manufacturing stocks in the
aggregate continued to decline, despite
slowing shipments that led to buildups
in stocks of finished goods in some
industries. The ratio of stocks to sales in
manufacturing remained on a downtrend
that began in late 1990.
116 79th Annual Report, 1992
The nominal U.S. merchandise trade
deficit narrowed considerably in November. For the October-November
period, a sizable rise in exports that was
only partly offset by an increase in
imports brought a substantial improvement in the trade balance from the thirdquarter rate. The strength in exports,
which may have been associated in part
with a bunching of shipments, was concentrated in aircraft, machinery, consumer goods, and agricultural products.
Among imports, most of the rise was in
consumer goods. The available data on
economic activity in the major foreign
industrial countries suggested that relatively weak growth had continued into
the fourth quarter. In most of these countries, with output moving closer to or
further below potential, inflationary
pressures appeared to have eased somewhat further.
Producer prices of finished goods declined in December; prices of food and
energy moved lower, while prices of
other finished goods rose at about the
reduced pace of earlier months in the
year. At the consumer level, prices of
nonfood, non-energy items increased in
December at the moderate rate evident
since the first quarter of 1991 and well
below the pace for 1990. Average hourly
earnings rose more rapidly in December
than in prior months; however, for the
year as a whole, this earnings measure
increased at a considerably slower pace
than in 1990.
At its meeting on December 17, 1991,
the Committee adopted a directive that
called for initially maintaining the existing degree of pressure on reserve positions but that included a marked bias
toward easing during the intermeeting
period. Accordingly, the directive indicated that in the context of the Committee's long-run objectives for price stability and sustainable economic growth,
and giving careful consideration to eco
nomic, financial, and monetary developments, slightly greater reserve restraint
might be acceptable or somewhat lesser
reserve restraint would be acceptable in
the intermeeting period. 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 IV2 percent respectively over the period from
November through March.
Shortly after the meeting, with incoming information continuing to point to a
very sluggish economy, receding inflationary pressures, and slow growth in
the broader monetary aggregates, open
market operations were directed toward
a substantial easing of conditions in
reserve markets. This step was taken in
conjunction with a reduction in the discount rate from 42/2 to 3V2 percent that
was approved by the Board of Governors effective December 20. Two technical reductions were made to expected
levels of adjustment plus seasonal borrowing during the intermeeting period
to reflect the downward drift in seasonal
borrowing in early winter. Adjustment
plus seasonal borrowing averaged a little above expected levels over most of
the intermeeting interval, although very
large adjustment borrowing occurred on
the settlement day of one reserve maintenance period as a result of a reserve
shortfall. At the beginning of the intermeeting period, the federal funds rate
averaged around 4!/2 percent; after the
easing of reserve conditions, the funds
rate dipped to a little below 4Vi percent
through the first week of the new year
and then dropped further to around
4 percent as relatively mild year-end
pressures abated.
In response to the easing in reserve
markets, other short-term interest rates
declined about the same amount as the
federal funds rate, while longer-term
rates fell somewhat less. Rates on
FOMC Policy Actions
intermediate- and long-term securities
continued to decline through the early
part of 1992 as incoming data seemed to
indicate further economic weakness.
However, these rates began to firm again
by mid-January; over the latter part
of the intermeeting period, concerns
mounted with regard to current and prospective supplies of federal debt offerings, especially in the context of proposals for fiscal stimulus, and market
participants reacted to evidence that
tended to suggest an improved economic
outlook and consequently a reduced
prospect of further monetary easing. For
the intermeeting period as a whole,
interest rates on intermediate-term Treasury issues were up somewhat, while
rates on long-term Treasury and private
instruments registered mixed changes.
Following the 1 percentage point drop
in the discount rate, the prime rate was
reduced by the same amount, to 61/2 percent. Broad stock price indexes rose
substantially.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies rose
slightly on balance over the intermeeting period. The dollar declined early in
the period, particularly against the German mark, in response to the easing of
monetary policy in the United States
and the nearly concurrent rise in official
German lending rates. In January, however, the dollar rebounded sharply amid
market speculation that interest rates in
the United States might not decline further and that interest rates in Germany
might have peaked. On balance, the
dollar weakened appreciably against the
Japanese yen over the intermeeting
period in response to concerns about
trade imbalances between the two countries and to official intervention during
the period in support of the yen.
After accelerating somewhat in the
fourth quarter from a very weak perfor
117
mance earlier, growth of M2 and M3
appeared to have slowed in January,
partly reflecting temporary distortions in
demand deposits and money market
funds around year-end. The slower
growth also seemed to reflect the attraction of relatively high bond yields and
persistently rising prices in the stock
market at a time when many banking
institutions were aggressively reducing
offering rates on deposits. For the year
1991, the expansion of both M2 and M3
was estimated to have been at rates a
little above the lower ends of the Committee's ranges, while growth of total
domestic nonfinancial debt appeared to
have been marginally above the lower
end of its monitoring range.
The staff projection prepared for this
meeting pointed to a recovery in economic activity. In the near term, a small
overhang of inventories and depressed
confidence would tend to limit overall
increases in spending despite indications of a substantial pickup in residential construction, notably of singlefamily homes. Subsequently, however,
the cumulative effects of earlier declines
in interest rates would be expected to
lead to a moderate pickup in growth,
with the risks to that trajectory for the
economy being viewed as about in
balance. Stronger consumer spending, a
rise in business equipment investment,
and a swing from liquidation to accumulation of inventories were projected to
provide most of the impetus for faster
growth. The retarding effects of
depressed nonresidential construction
activity and of the ongoing restructuring
of household and business balance
sheets were expected to lessen gradually
as the expansion progressed. The potential nature and size of any stimulative
fiscal package remained highly uncertain, and the staff projection did not
incorporate major new fiscal initiatives.
The substantial though diminishing
118 79th Annual Report, 1992
slack expected in labor and product markets in coming quarters was projected to
induce further declines in the underlying
rate of inflation.
In their discussion of the economic
situation and outlook, Committee members continued to view some strengthening in aggregate demand and overall
business activity as the most likely prospect during the months ahead, with the
expansion settling into a pattern of moderate growth by the second half of the
year. The available information suggested that the sluggish performance of
the economy was continuing in early
1992, though there were indications, still
very tentative and largely anecdotal, of
some improvement. Nonetheless, the
decline in interest rates over the second
half of 1991 accompanied by the appreciable progress achieved by many financial institutions, business firms, and
households in improving their balance
sheets appeared to have established
a basis for a pickup in final demand.
The timing and strength of an upturn
remained subject to substantial uncertainties, and the need for further policy
stimulus to foster a satisfactory economic expansion could not be ruled out.
The uncertainties arose in part from the
largely unpredictable course of fiscal
policy, the still depressed state of business and consumer confidence, the
strength and effects of continuing efforts
to shore up balance sheets, and the
extent to which economic growth might
slow abroad. With regard to the outlook
for inflation, the available data and anecdotal information about recent increases
in costs and prices reflected quite promising developments, and the members
continued to anticipate appreciable
progress toward a lower core rate of
inflation.
In keeping 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 Federal Reserve Bank
presidents not currently serving as members had prepared projections of economic activity, the rate of unemployment, and inflation for the year 1992.
Measured from the fourth quarter of
1991 to the fourth quarter of 1992, the
forecasts for growth of real GDP had a
central tendency of 13A to IVi percent.
Projections of the civilian rate of unemployment in the fourth quarter of 1992
were concentrated in a range of 63A to
7 percent. These forecasts pointed to
rates of resource utilization that seemed
consistent with appreciable progress
toward price stability. Projections of the
increase in the CPI from the fourth
quarter of 1991 to the fourth quarter of
1992 were centered in a range of 3 to
3V2 percent; this range compared with a
realized increase in the CPI of 3 percent
in 1991, but the result for 1991 had been
heavily influenced by the sharp decline
in oil prices, so the members' forecasts
represented a significant decrease in the
underlying rate of inflation. Forecasts
of growth of nominal GDP had a central tendency of 4Vi to 53A percent for
1992.
The members acknowledged that
there were substantial risks of an outcome outside the central tendency of
their forecasts for economic activity.
Views differed with regard to the most
likely direction of any deviation, but
many of the members saw those risks
as being in better balance than previously. Among the uncertainties in the
outlook was the extent to which financial intermediaries would continue to
restrict their extensions of credit to less
than prime borrowers. In this connection, a number of members reported on
anecdotal indications that banking
institutions in various parts of the country appeared to have become somewhat
more willing lenders, even though over-
FOMC Policy Actions
all survey results and many banker comments did not indicate any easing in
credit standards. A second source of
uncertainty related to the continuing
efforts of business firms and households
to strengthen their balance sheets and in
the process to divert some of their corporate cash flows or disposable personal
incomes from spending to reducing
debt and improving equity positions.
These efforts together with lower market
interest rates already appeared to have
induced significant progress toward
reducing debt exposures and debt servicing costs, but the financial restructuring process was still under way and
the extent to which it would continue
to inhibit spending remained unclear.
A further source of uncertainty related
to the ongoing and widespread adjustments in corporate business structures,
including downsizings, that were aimed
at improving the competitive efficiency of business firms. While these
restructuring activities were serving
to strengthen the long-run competitive position of the economy, they
tended for the present to inhibit overall
spending, both directly and indirectly
through the adverse effects of widely
publicized job cutbacks on consumer
sentiment.
Many of the members observed that
fiscal policy developments were adding
to the uncertainties in the economic
outlook. At the moment, the potential
outcome of fiscal initiatives by the
Administration and the Congress was
unknown. In the view of at least some
members, a limited package of shortterm fiscal stimulus measures implemented relatively early this year could
have a favorable effect on business
activity. On the other hand, adoption of
fiscal measures involving substantial
stimulus, which would further impede
the prospects for long-term budgetary
balance, would be likely to have
\ \9
strongly adverse repercussions on financial markets and perhaps on business
and consumer confidence. Indeed, concerns about the outlook for fiscal policy
might well have been an important factor behind the rise in long-term bond
yields this year. It also was noted that
uncertainty about the exact provisions
of the fiscal program that might eventually be adopted was causing some businesses to defer investment decisions.
In their review of business conditions
in different parts of the country, members again reported on mixed patterns of
activity in recent months, and they
described overall conditions in the different regions as ranging from slightly
weaker to slightly stronger. Although an
expected upturn in general business
activity had not materialized thus far,
many members sensed some improvement in business attitudes. Notwithstanding the persistence of gloomy
consumer sentiment, contacts among
retailers indicated that many had experienced somewhat better sales in recent
weeks than they had anticipated earlier,
though reports from some parts of the
country pointed to significant exceptions. Members commented that the
pickup in sales of single-family homes
together with reduced interest burdens
stemming from home mortgage refinancings would tend to stimulate consumer spending in the quarters ahead.
Over the near term, production activity
was likely to be inhibited to some
degree by the moderate buildup that had
occurred late in 1991 in wholesale and
retail inventories. As the year progressed, however, a pickup in consumer
spending probably would encourage
some increase in inventory investment.
Likewise, cautious business attitudes
along with excess capacity in several
key industries and the ongoing efforts to
improve balance sheets would limit the
growth in business spending for plant
120 79th Annual Report, 1992
and equipment for some period of time,
probably until an upturn in final demand
was well under way. The prospects
for commercial construction activity
remained severely constrained by high
vacancy rates in many parts of the country. On the foreign side, the outlook for
relatively sluggish economic growth in
several key industrial nations implied
more limited growth in U.S. exports; in
addition, if sentiment favoring more
protectionism were to gather added
strength in the context of a weak domestic economy, new trade restrictions
might be imposed that would have
adverse effects.
With regard to the prospects for inflation, members observed that core
inflation was continuing to recede, and
in the context of their outlook for
relatively limited pressures on production resources, some commented that
they would not view an inflation result
below the central tendency of the members' projections as a surprising outcome. Developments having favorable
implications for inflation included an
extended period of subdued monetary
growth, highly competitive conditions
in domestic and international markets
for numerous products, and productivity
gains associated with business restructuring activities that were adding to the
usual operating efficiencies achieved
during the early quarters of cyclical
upswings. The members did not rule out
the possibility that unanticipated surges
in energy or food prices might temporarily arrest or reverse progress toward
price stability, but they assumed that
such prices would move in line with
most other prices in the year ahead.
In keeping with the requirements of
the Full Employment and Balanced
Growth Act of 1978 (the HumphreyHawkins Act), the Committee at this
meeting reviewed the ranges for growth
of the monetary and debt aggregates in
1992 that it had established on a tentative basis in July 1991. The tentative
ranges included expansion of 2Vi to
6V2 percent for M2 and 1 to 5 percent
for M3, measured from the fourth quarter of 1991 to the fourth quarter of 1992.
The monitoring range for growth of total domestic nonfinancial debt had been
set provisionally at 4Vi to 8!/2 percent
for 1992. All of these ranges were
unchanged from those for 1991 that the
Committee had set in February and
reaffirmed in July of last year.
In the Committee's discussion, a
majority of the members indicated a
preference for affirming the ranges for
1992 that had been established on a
tentative basis in July. While those
ranges were acceptable to all the members, several expressed a preference for
lowering them.
In formulating the Committee's objectives for 1992, members stressed that
policy needed to promote sustainable
expansion in economic activity while
consolidating and extending gains
against inflation. Both objectives were
attainable, especially in light of the
degree of slack in the economy. However, the translation of these objectives
into specific money growth ranges was
complicated by questions about the relation of the monetary aggregates to
spending. Since 1989, the level of M2
had fallen increasingly short of levels
that past historical relationships with
nominal GDP and market interest rates
would have indicated. Insofar as could
be judged at this point, retention of a 2xh
to 6V2 percent range for M2 should provide adequate leeway and operational
flexibility to accommodate a satisfactory economic performance. Demand
for M2 balances relative to income
would continue to be damped if, as
appeared likely, banks and thrifts were
to reduce further their offering rates on
deposits in lagged response to earlier
FOMC Policy Actions
declines in market rates. The reductions
in offering rates could be pronounced if
banking institutions maintained their
cautious lending policies and many
prime borrowers continued to channel a
larger-than-usual share of their financing needs toward longer-term market
sources of funds and away from depository institutions. Under those circumstances, velocity could well rise appreciably and relatively modest M2 growth
would not necessarily be inconsistent
with a satisfactory economic expansion.
On the other hand, the continuing
improvement in the balance sheets and
capital positions of depository institutions might prompt them as a group to
become more willing lenders and thus to
bid more aggressively for deposits to
fund additional lending. In this case
faster growth of M2, perhaps toward the
upper end of the tentative range, might
be desirable. On balance, the members
believed that adoption of the tentative
M2 range for 1992 should allow sufficient room for the likely range of developments in the intermediation process.
Nonetheless, the substantial uncertainties surrounding the outlook for M2 suggested that the Committee would have
to approach monetary developments
with a great deal of flexibility over the
year ahead.
An unchanged target range for M3
also was seen as likely to provide
adequate room for a desirable rate of
growth in this aggregate in the context
of accommodating the Committee's
broad policy objectives. The growth of
M3 probably would continue to be affected to a greater extent than that of M2
by the diversion of credit demands to
sources outside depository institutions
and by the ongoing contraction of the
thrift industry in conjunction with the
activities of the Resolution Trust Corporation. Accordingly, a lower range for
M3 than for M2 appeared to remain
\ 21
appropriate. Retention of an unchanged
monitoring range for growth in nonfinancial debt also seemed warranted for
1992, even though the expansion in such
debt was likely to accelerate somewhat
from a very sluggish pace in 1991,
mainly as a result of more rapid growth
in the federal debt. Nonfederal debt also
might increase a little faster this year,
but the pickup was likely to be limited
by the still cautious attitudes of households and businesses toward new debt.
Thus, the 1991 range for nonfinancial
debt should comfortably encompass an
expansion of credit to support stronger
spending in 1992.
Members who preferred a lower range
for M2 believed that a reduction was
desirable at this time to underscore the
Committee's commitment to its longrun objective of price stability. While
the unchanged range supported by the
majority might provide the flexibility
needed for a desirable anti-inflationary
policy in the year ahead, a lower range
would be more consistent with the Committee' s ultimate objective of price level
stability. However, in the view of other
members a reduction at this time could
be interpreted as an indication that the
Committee might not be willing to supply enough liquidity to foster an appreciable strengthening in the economy in
1992, especially if a fairly rapid increase
in M2 were needed to compensate for
relatively slow money growth in 1991.
No member advocated higher monetary
growth ranges, but a number suggested
that the emergence of more normal patterns of monetary velocity in association
with an economic performance in line
with the central tendency of the members' projections might appropriately
result in M2 growth in the upper half of
the Committee's range.
Concerns about the implications of
slow money growth in 1991 and the
possibility of more normal velocity pat-
122 79th Annual Report, 1992
terns in 1992 prompted some members
to suggest a modification of the current
procedure for constructing yearly monetary growth ranges. The modification
would involve linking the ranges for the
current year to those for the previous
year rather than to the actual outcomes
for that year. The new approach would
place monetary targeting in a multi-year
context with the objective of constraining money growth to a desired range
over a longer horizon. Such an approach
would have advantages over current procedures if the relationship between
money growth and spending could be
predicted with confidence. In the course
of the Committee's discussion, however, a number of members referred to
questions that had arisen about that relationship in recent years as thrift institutions were closed and credit flows
increasingly bypassed depository institutions. A satisfactory performance of
the economy in 1992 might well
be accompanied by a rise in velocity,
although there was considerable uncertainty about such an outcome. Should
velocity in fact rise, the acceleration of
the broader aggregates implied by this
alternative approach and the associated
easing of reserve conditions and shortterm interest rates might not be consistent with the Committee's objectives.
Given the uncertainties about velocity, a
broad array of indicators, in addition to
money, would need to continue to be
assessed in determining the appropriate
stance of the Committee in providing
reserves. Members concluded that the
proposal should be studied further and
reconsidered later in light of changing
circumstances.
At the conclusion of the Committee's
discussion, all of the members indicated
that they favored or could accept the
ranges for 1992 that the Committee had
established on a tentative basis at its
meeting in July 1991. 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 andfinancialconditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at this meeting established
ranges for growth of M2 and
M3 of 2x/2 to 6V2 percent and 1 to 5 percent,
respectively, measured from the fourth quarter of 1991 to the fourth quarter of 1992. The
monitoring range for growth of total domestic nonfinancial debt was set at 4V2 to
8V2 percent for the year. With regard to M3,
the Committee anticipated that the ongoing
restructuring of 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, Angell, Hendricks, Hoenig,
Kelley, LaWare, Lindsey, Melzer, and
Mullins, Ms. Phillips, and Mr. Syron.
Votes against this action: None.
In the Committee's discussion of policy for the period immediately ahead, all
of the members favored or found acceptable a proposal to maintain unchanged
conditions in reserve markets and to bias
the directive toward possible easing during the intermeeting period. In support
of this policy, members observed that
reserve conditions had been eased substantially over the past several months,
including the easing undertaken in the
latter part of December, and that much
of the stimulus from recent policy
actions had yet to be felt in the econ-
FOMC Policy Actions
omy. The members generally agreed that
enough monetary stimulus probably had
been implemented to foster the desired
upturn in economic activity without further policy moves. Nonetheless, the high
degree of uncertainty surrounding the
outlook suggested that the Committee
needed to remain alert to the possibility
of developments that might require additional easing.
In these circumstances, a majority of
the members expressed a preference for
a directive that was biased toward some
easing. The lagged effects of earlier easing actions could prove to be less stimulative than anticipated, in part because
of ongoing balance sheet restructuring
activities. The persistence of a weak
economy might well have especially
severe consequences, and, in the view of
some members, signs of such an outcome would call for prompt action.
However, many members who supported a bias toward ease also stipulated
that there should not be an unusually
strong presumption that any easing
would in fact be implemented during the
intermeeting period ahead: The Committee should ease only in response to
cumulating evidence that economic
activity was not picking up or that monetary growth was falling appreciably
short of current expectations. A few
members, while not ruling out the possible need for further easing, preferred not
to bias the directive in either direction.
In this view, more emphasis needed to
be put on the inflationary risks of overreacting to the current weakness in the
economy, and a symmetrical directive
would require more persuasive evidence
of the need for some easing before
action was taken.
With regard to the outlook for monetary expansion, some members expressed concern about the relatively
sluggish growth of the broader aggregates. While the most recent data sug
123
gested some pickup in M2 growth, the
behavior of that aggregate had been
erratic in recent months and it was difficult to discern its underlying trend.
According to a staff analysis prepared
for this meeting, the growth of M2 and
M3 could be expected to accelerate
somewhat in the period ahead, given
current conditions in reserve markets
and some projected strengthening in the
economy. However, expansion of M2
probably would continue to be restrained by the aggressive reductions by
depository institutions in their offering
rates on deposit components of this
aggregate and the continuation of related
shifts of M2 funds into higher-yielding
capital market instruments. In addition,
the expected pickup in the pace of RTC
resolutions over the balance of the first
quarter would tend to moderate the
growth of M2 and especially M3. To the
extent that subdued growth of the
broader aggregates were to reflect such
special influences, there would not be
significant adverse implications for the
overall performance of the economy.
Moreover, in the view of some members, the very considerable strength of
narrow measures of money and reserves
also tended to attenuate concerns about
the possibly inadequate expansion of the
broader monetary aggregates; indeed, in
at least one view, the rapid growth of
narrow money would become a worrisome development were it to persist.
The members generally concluded,
however, that somewhat faster growth in
the broader aggregates would be a welcome development.
At the conclusion of the Committee's
discussion, all of the members indicated
that they were prepared to vote for a
directive that called for maintaining the
existing degree of pressure on reserve
positions. The members also noted their
preference for or acceptance of a directive that included some bias toward pos-
124
79th Annual Report, 1992
slightly on balance over the intermeeting
period.
After accelerating somewhat in the fourth
quarter, M2 and M3 slowed in January,
partly reflecting temporary distortions
around year-end. For the year 1991, the
expansion of both M2 and M3 is estimated
to have been at rates a little above the lower
ends of the Committee's ranges. Growth of
total domestic nonfinancial debt appears to
have been marginally above the lower end of
the Committee's monitoring range for the
year.
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 this
meeting established ranges for growth of
M2 and M3 of 2!/2 to 61/2 percent and 1 to
5 percent, respectively, measured from the
fourth quarter of 1991 to the fourth quarter
of 1992. The monitoring range for growth of
total domestic nonfinancial debt was set at
4x/2 to 8V2 percent for the year. With regard
to M3, the Committee anticipated that the
The information reviewed at this meeting ongoing restructuring of depository institusuggests that economic activity has remained tions would continue to depress the growth
sluggish. Total nonfarm payroll employment of this aggregate relative to spending and
was little changed in December, and the total credit. The behavior of the monetary
civilian unemployment rate rose to 7.1 per- aggregates will continue to be evaluated in
cent. Industrial production fell slightly in the light of progress toward price level staNovember and December, partly reflecting a bility, movements in their velocities, and desizable drop in motor vehicle assemblies. velopments in the economy and financial
Consumer spending has been weak on bal- markets.
In the implementation of policy for the
ance in recent months amid continuing indications of depressed consumer confidence immediate future, the Committee seeks to
and essentially no growth in disposable maintain the existing degree of pressure on
income. Demand for business equipment has reserve positions. In the context of the Combeen uneven, while nonresidential construc- mittee's long-run objectives for price stabiltion has remained in a steep decline. Single- ity and sustainable economic growth, and
family housing starts continued to recover in giving careful consideration to economic,
December. The nominal U.S. merchandise financial, and monetary developments,
trade deficit narrowed in November, and for slightly greater reserve restraint might or
October-November combined the trade bal- slightly lesser reserve restraint would
ance improved substantially from the third- be acceptable in the intermeeting period.
quarter rate. Wage and price increases have The contemplated reserve conditions are
expected to be consistent with growth of M2
continued to trend downward.
Short-term interest rates have declined and M3 over the period from December
appreciably since the Committee meeting on through March at annual rates of about 3 and
December 17, while longer-term rates have 1V2 percent, respectively.
registered mixed changes. The Board of
Governors approved a reduction in the disVotes for this action: Messrs. Greenspan,
count rate from 4Vi to 3V2 percent on
Corrigan, Angell, Hendricks, Hoenig,
December 20. In foreign exchange markets,
Kelley, LaWare, Lindsey, Melzer, and
the trade-weighted value of the dollar in
Mullins, Ms. Phillips, and Mr. Syron.
terms of the other G-10 currencies rose
Votes against this action: None.
sible 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 slightly
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 IVi percent respectively over the
three-month period from December
through March.
At the conclusion of the meeting the
following domestic policy directive was
issued to the Federal Reserve Bank of
New York:
FOMC Policy Actions
2. Agreement to "Warehouse"
Foreign Currencies
On February 5, 1991, the Committee
had approved a reduction from $15 billion to $10 billion in the amount of
eligible foreign currencies that the System was prepared to "warehouse" for
the Treasury and the Exchange Stabilization Fund (ESF). The purpose of the
warehousing facility is to supplement
the U.S. dollar resources of the Treasury
and the ESF for financing their purchases of foreign currencies and related
international operations.
At this meeting, the Committee
agreed to reduce the limit further to
$5.0 billion, a ceiling that earlier had
been in place for many years. System
holdings of foreign currencies under the
warehousing facility had risen to a peak
of $9.0 billion in March 1990, but by the
end of August 1991 they had been cut
back to their current level of $2.0 billion. Accordingly, the new $5.0 billion
ceiling was expected to provide an adequate cushion of unused capacity and,
thus, to maintain operational flexibility
to respond on short notice to unanticipated developments.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hendricks, Hoenig,
Kelley, LaWare, Lindsey, Melzer, and
Mullins, Ms. Phillips, and Mr. Syron.
Votes against this action: None.
Meeting Held on
March 31, 1992
Domestic Policy Directive
The information reviewed at this meeting suggested that domestic final demand, especially in the consumer sector,
had strengthened somewhat in recent
months. Production and employment
had not picked up commensurately because businesses apparently were meet
125
ing much of their increased sales by
drawing down inventories. Wage and
price increases had continued to trend
downward.
Total nonfarm payroll employment
rebounded in February from a large drop
in January. The February gain was concentrated in retail trade, but employment
in services also rose moderately further
and manufacturing payrolls, after five
months of decline, were lifted somewhat
by the return of auto workers from
temporary layoffs. The average workweek increased substantially in manufacturing and in some service-producing
industries. Although employment picked
up in February, appreciable expansion
of the labor force brought a rise in
the civilian unemployment rate to
7.3 percent, and initial claims for unemployment insurance remained elevated.
Industrial production rose considerably in February but was little changed
on balance over the first two months of
the year. Part of the increase reflected an
upturn in motor vehicle assemblies, with
the remainder being spread across a
broad range of other goods. Among final
products, gains were posted in both
business products, notably office and
computing equipment, and consumer
goods. By contrast, utility output again
was held down by unseasonably warm
winter weather, and the production of
defense and space equipment continued
to ebb. Total industrial capacity utilization moved higher in February but
remained well below its pre-recession
high.
Retail sales registered large gains in
January and February after edging down
in the fourth quarter of 1991. The stronger sales were associated with sizable
increases for most types of durable and
nondurable goods. Single-family housing starts rose substantially further in
January and February, reaching their
highest level since the first quarter of
126 79th Annual Report, 1992
1990, and sales of both new and existing
homes were up considerably on balance
over the two months. With vacancy rates
persisting at historically high levels,
starts in the multifamily sector remained
depressed.
Shipments of nondefense capital
goods increased sharply in January and
February, reflecting strength in office
and computing equipment and in business purchases of motor vehicles; in
addition, shipments of aircraft rebounded in January from a very low
level in the fourth quarter. Recent data
on orders pointed to further increases
over coming months in outlays for business equipment other than aircraft. Nonresidential construction activity edged
up in January but remained below its
fourth-quarter average. Further declines
were recorded in the construction of
office buildings and hotels in January,
and persisting weakness in commercial
construction was signaled by continued
decreases in appraised values of office
properties in late 1991.
Business inventories registered steep
declines in January after rising substantially in previous months. Stocks at
wholesale and retail trade establishments reversed a sizable portion of the
accumulation that occurred in the fourth
quarter; even so, for many types of businesses in the trade sector, inventory-tosales ratios remained at elevated levels.
In manufacturing, inventories were
reduced further in January, with much of
the drawdown occurring in defense
aircraft and parts, food products, and
petroleum. Inventory-to-shipments
ratios in most manufacturing industries
remained well below the cyclical peaks
reached in early 1991.
The nominal U.S. merchandise trade
deficit narrowed slightly in January and
was essentially unchanged from its average rate in the fourth quarter. A decline
in exports was concentrated in aircraft
and automotive products. A slightly
larger drop in the value of imports
reflected weakness in both oil and consumer goods. The available data on
fourth-quarter economic activity in the
major foreign industrial countries indicated that real output declined in Canada, Germany, Japan, and the United
Kingdom, while data for France pointed
to little change. For the first quarter of
this year, the limited data available
showed some signs of recovery in continental Europe but suggested continued
sluggishness in the other major industrial countries.
Producer prices of finished goods
edged down on balance in January and
February, as a reduction in energy prices
more than offset an increase in food and
other prices. Excluding the food and
energy components, producer prices
rose over the January-February period
at about the 1991 pace. At the consumer
level, food prices changed little over the
two months while energy prices fell;
prices of nonfood, non-energy items increased at about the same rate as last
year but significantly below that of
1990. Average hourly earnings of production or nonsupervisory workers in
February more than reversed a small
decline in January. However, over the
twelve-month period ending in February, this measure of worker earnings
increased more slowly than in the twelve
months ending in February 1991.
At its meeting on February 4-5, 1992,
the Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
but that included a bias toward possible
easing during the intermeeting period.
Accordingly, the directive indicated that
in the context of the Committee's longrun objectives for price stability and
sustainable economic growth, and giving careful consideration to economic,
financial, and monetary developments,
FOMC Policy Actions
slightly greater reserve restraint might
be acceptable or slightly lesser reserve
restraint would be acceptable in the
intermeeting period. 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 1Vi percent respectively over the three-month period from
December through March.
Open market operations during the
intermeeting period were directed toward maintaining the existing degree of
pressure on reserve positions. Expected
levels of adjustment plus seasonal borrowing were raised modestly immediately after the Committee meeting in
anticipation of a slight rise in seasonal
borrowing. In the event, adjustment plus
seasonal borrowing remained quite low,
averaging a little less than $70 million
over most of the intermeeting period;
seasonal borrowing, newly subject to a
market-based discount rate, increased
relatively little and adjustment credit
remained at depressed levels. The federal funds rate averaged around 4 percent over most of the intermeeting
period, although late in the period the
rate averaged a little lower.
Many other market interest rates rose
appreciably over the intermeeting
period, as market participants interpreted incoming data as indicating that
the economic recovery was regaining
some momentum. The most pronounced
increases occurred at intermediate maturities, perhaps reflecting the improved
cyclical outlook for business activity.
Although yields on investment-grade
corporate debt rose in tandem with rates
on U.S. Treasury securities, yields on
lesser-rated securities were unchanged
to somewhat lower. Most broad indexes
of stock prices declined somewhat over
the intermeeting period.
In foreign exchange markets, the
trade-weighted value of the dollar in
\ 27
terms of the other G-10 currencies
increased substantially over the period.
The dollar declined initially on market
expectations of additional monetary easing in the United States, but it subsequently appreciated in response to
indications of a strengthening of the
recovery. Late in the intermeeting
period, a tightening of money market
conditions in Germany, where monetary
growth continued to be quite rapid and
concerns over wage pressures were
mounting, contributed to a retreat in the
dollar. The yen weakened on balance in
relation to the dollar and other major
currencies in response to indications of
further declines in economic growth and
resultant expectations of another monetary easing action in Japan.
Growth of M2 and M3 accelerated
sharply in February, but M2 apparently
leveled off or even declined slightly in
March and M3 contracted somewhat.
Growth of M2 and M3 from December
through March appeared to have been,
respectively, somewhat above and close
to the Committee's expectations. Much
of the growth in both aggregates over
recent months reflected a surge in transactions balances that, in turn, resulted to
an important extent from narrow opportunity costs relative to market interest
rates and from a bulge in demand deposits associated with mortgage refinancings and other financial market activity.
The staff projection prepared for this
meeting pointed to a continuing recovery in economic activity. In the near
term, growth in consumer spending was
expected to moderate after the firstquarter spurt, but residential construction was likely to record further substantial gains, and the pace of nonfarm
inventory liquidation should slow. Over
time, the cumulative effects of earlier
declines in interest rates, the progress
achieved in strengthening household and
business balance sheets, and some dimi-
128 79th Annual Report, 1992
nution of credit supply restraints would
provide continuing impetus to economic
activity. Moreover, the retarding effects
of depressed nonresidential construction
activity were expected to lessen as the
expansion progressed. The projection
did not incorporate any major new fiscal
initiatives at the federal level, and it
anticipated that spending for goods and
services at all levels of government
would be restrained somewhat. The substantial, though diminishing, margin of
slack in resource utilization was projected to be associated with appreciable
further slowing in the underlying rate of
inflation.
In the Committee's discussion, the
members generally viewed the incoming information, including anecdotal
reports from around the country, as providing substantial evidence of some
quickening in the pace of overall economic activity. Final demands appeared
to be strengthening in the context of
improving business and consumer confidence. Nonetheless, key sectors of the
economy, such as defense spending and
commercial real estate, remained weak
and a back-up in long-term interest
rates, owing in part to lagging savings
and strong demand for credit by the
Treasury, threatened to limit gains in
housing and business investment. With
these cross-currents and sources of
uncertainty raising at least some questions about the sustainability of the
expansion, careful, ongoing evaluation
was warranted. On balance, however,
relatively moderate but sustained growth
was seen as the most probable outcome.
The members generally regarded the
prospects for some continuing slack in
labor and product markets as consistent
with their projections of a downtrend in
the core rate of inflation.
With regard to financial developments
bearing on the economic outlook, members stressed, as they had at earlier meet
ings, that considerable progress had
been made in strengthening business and
consumer balance sheets. While media
attention continued to be focused on
some large financial and nonfinancial
firms that were experiencing difficulties,
most businesses now appeared to be
much more favorably positioned to
weather adverse developments and to
finance spending that would support an
expanding economy. The improvement
stemmed from ongoing efforts to
streamline operations and enhance productivity and to reduce balance-sheet
leverage and interest costs. For some
business firms and many financial institutions, recent reports of a tendency for
commercial real estate values to stabilize was a particularly favorable omen.
Consumer balance sheets also were benefiting from lower interest rates that
tended to lessen debt loads in relation to
income and from the appreciated value
of stock portfolios. On the negative side,
the restructuring of business operations
and balance sheets was still exerting
considerable constraints on spending
and lending activities, and it was unclear
how much longer or to what extent those
constraints would last. A number of
members also expressed concern that
the relatively slow growth of the broader
monetary aggregates, were it to persist,
might prove to be a harbinger of continued restraint in lending and of underlying weakness in the economy.
In their review of business conditions
in different regions, members indicated
that overall economic activity appeared
to be rising in many parts of the nation
while some signs of an emerging upturn
could be discerned in most other areas.
Improving business conditions generally
were associated with better retail sales
since the start of the year and with the
further recovery in housing demand.
Indeed, the growing demands for consumer goods stemmed to an extent from
FOMC Policy Actions
the strengthening of housing markets.
These developments were accompanied
and bolstered by widespread indications
of some improvement in business and
consumer confidence, and some members commented that pent-up demands
for many consumer durables might well
materialize in the context of further
gains in overall consumer confidence.
However, most business executives
were still very cautious despite increasing sales and a more favorable outlook
for corporate profits, and consumer confidence remained well below earlier levels, apparently reflecting to a major
extent the persistence of anxieties about
job security and employment opportunities. Retail contacts and available
statistical reports suggested that an
important part of the spurt in retail sales
in January and February was met out of
inventories. Further growth in such sales
would lead to efforts to rebuild inventories and induce related gains in production and incomes.
Sales of residential real estate and the
construction of new homes, principally
single-family dwellings, were displaying considerable strength across the
country. In a number of areas the
increases were appreciably greater than
expected, though the gains appeared to
be due at least in part to favorable
weather conditions and thus might represent some borrowing from the future.
Even so, and despite the inhibiting
effects of recent increases in mortgage
interest rates, the construction of singlefamily homes and its spillover effects in
related industries were believed likely to
make an important contribution to the
overall expansion of economic activity
over the next several quarters.
Construction of nonresidential structures continued to decline in many areas
as work on existing buildings was completed and few new projects were
started. Vacancy rates for office build
1 29
ings remained high across the country,
but there were indications in at least
some major cities that prices and rental
rates for commercial real estate might
be stabilizing or even tending to firm.
However, the better tone in those markets had not translated itself into new
building activity. Indeed, commercial
construction was likely to remain
depressed for an extended period and to
hold down the growth in overall business investment at a time when spending for business equipment might be
trending appreciably higher.
The outlook for exports to a number
of major foreign industrial countries was
less encouraging than earlier, given
financial and other difficulties that
would tend to inhibit economic growth
in those countries. On the favorable side,
U.S. businesses had significantly enhanced their ability to compete in international markets over the course of
recent years, partly through gains in productivity, and they were now in a better
position both to sustain the nation's
exports and to meet competition from
foreign products in domestic markets.
Moreover, the improved health of many
Latin American economies was being
reflected in higher export sales to such
countries. Some parts of the country also
were benefiting from large increases in
the number of foreign visitors. Nevertheless, members suggested that the
export sector was vulnerable to weakness from abroad, and reports from
some business contacts tended to reinforce those concerns.
Turning to the outlook for fiscal policy, members noted that market concerns about possible legislation that
would substantially increase an already
massive federal deficit appeared to have
subsided. Nonetheless, an important reason for the rise in intermediate- and
long-term interest rates since early January had been the apparently worsening
130 79th Annual Report, 1992
outlook for federal deficit financing over
the course of the next several years.
Such deficits would tend to keep longterm interest rates fairly high, and in
association with the nation's relatively
low savings, they implied a financial
constraint on the ability of the U.S.
economy to generate robust increases in
investment. Because the volume of savings available for investment was limited, interest rates had tended to react
fairly strongly to indications of sizable
gains in private spending.
The outlook for moderate economic
growth and the associated, if diminishing, slack in labor and product markets
were likely to prove consistent in the
view of many members with further
progress in reducing the core rate of
inflation. Competitive price pressures
remained strong in many local markets,
and efforts to raise prices very often did
not succeed. In this competitive environment, business firms seeking to maintain
or increase profits were forced to concentrate on measures to curb costs
rather than to raise prices. Labor markets were described as generally soft,
and most wage settlements continued to
have favorable implications for future
costs and inflation. The outlook for
energy costs, while always subject to
unanticipated developments, nonetheless seemed favorable at this point.
In the Committee's discussion of policy, all of the members indicated that
they were in favor of maintaining unchanged conditions in reserve markets
for the period immediately ahead. A
majority also indicated a preference for
retaining the current bias in the directive
toward possible easing during the intermeeting period, while the remaining
members were in favor of moving to a
symmetrical directive. A steady policy
course, at least for now, was viewed as
desirable in the context of encouraging
evidence of a strengthening economy
and the outlook for continuing expansion at a pace that was deemed likely to
be consistent with further progress
toward price stability. The members
acknowledged that the uncertainties in
the economic outlook were considerable, but given the ongoing stimulus
stemming from earlier easing actions,
they agreed that for now an unchanged
policy represented an appropriate balancing of the various risks to a satisfactory economic performance. In this connection, it was suggested that substantial
further easing at this time might well
fail to provide much added stimulus;
indeed, it could prove to be counterproductive because of adverse repercussions in financial markets. Moreover, too
much easing at this juncture could establish the basis for unduly rapid growth of
money and credit when the economic
expansion gathered momentum.
With regard to possible adjustments
to the degree of reserve pressure during
the intermeeting period, many of the
members endorsed the view that it
would be premature to move away from
a directive that was biased toward ease
to a symmetrical directive. While the
members generally anticipated that economic and financial developments during the intermeeting period would not
call for an adjustment to policy, many
remained concerned about the vulnerability of the expansion to a variety of
risks. In the circumstances, any policy
adjustments in the weeks ahead were
more likely to be in the direction of
some easing than toward restraint. A
number of these members also commented that even though the risks of a
deviation from the projected path of the
economy now seemed to be in better
balance than earlier, the consequences
of a substantial shortfall from expectations would be much more severe than
the effects of a comparable overshoot.
Other members did not rule out the pos-
FOMC Policy Actions
sible need for an easing move in the
period ahead, but they believed that the
more balanced risks that were now perceived to surround the economic outlook warranted a symmetric directive.
Some observed that such a directive did
not preclude an easing action that might
be triggered by economic or financial
developments, including the behavior of
the monetary aggregates, in the weeks
ahead. Moreover, in the view of some of
these members, a directive that remained tilted toward ease under prevailing circumstances could be misread by
domestic and international observers as
evidence of greater concern about the
economic outlook than many members
currently felt, or as an indication of a
bias on the part of the Committee
toward bolstering the real economy
rather than securing further progress toward price stability.
In the course of the discussion, members expressed varying degrees of concern about the behavior of the monetary
aggregates. According to the most
recently available data for March, M2
apparently leveled off or declined
slightly and M3 contracted somewhat.
Moreover, the weekly pattern toward the
end of March suggested the possibility
of sluggish growth on average in April.
While this development needed to be
assessed in the context of emerging
information on the economy and financial markets, it was suggested that a
persisting shortfall in the growth of M2
and M3 could signal that monetary policy was not positioned to support a satisfactory expansion. For the year through
March, growth of M2 had fallen somewhat short of the midpoint of the Committee's range for 1992, and in the view
of some members growth near the midpoint or somewhat higher in the range
might be more consistent with a desirable economic performance for the year.
On the other hand, expansion of narrow
\ 31
money and reserves had been quite
robust for some time. In the view of at
least one member, the possibility could
not be ruled out that this rapid growth
could be signaling an overly accommodative monetary policy which, if continued, could boost inflation pressures at
some point. Conclusions could not be
drawn on the basis of short-term movements in the narrow or broad monetary
aggregates, and in any event the implications for the economy of specific monetary growth rates were clouded by a
variety of developments that the members had discussed at length at the
February meeting. Nonetheless, against
the background of relatively sluggish
growth in the broader aggregates for an
extended period, many members agreed
that the ongoing performance of those
aggregates should be monitored closely.
Indeed, some observed that concerns
about the behavior of the broader aggregates, rather than the currently available
information on economic activity, persuaded them that a directive that was
tilted toward ease was preferable to a
symmetrical directive at this time.
At this meeting, the Committee
reviewed its practices with regard to the
maturity composition of its portfolio
of Treasury obligations. The overall
approach in recent years had been to
meet the long-term need for growth in
the System's portfolio through purchases in all maturity sectors of the
market for Treasury obligations, with
a major emphasis on ensuring substantial liquidity in the System's portfolio.
With regard to the Treasury's quarterly
financings, the Manager had followed
the practice over the past several years
of exchanging the bulk of the maturing
securities held in the System account
into the shortest issue offered by the
Treasury, while placing relatively small
amounts in the longer-term Treasury
offerings. This approach had replaced
132 79th Annual Report, 1992
the earlier practice of rolling over maturing System holdings into the refinancing
issues in roughly proportionate amounts
to the size of those issues being offered
to the public. The System's participation
in Treasury financings had contributed
importantly to the reduction in the average maturity of the System portfolio in
recent years; however, given Treasury
techniques with regard to accommodating System rollovers, the System's
actions did not have any effect on the
amounts or the maturity composition of
the securities being acquired by the public. The members generally agreed that
current practices for managing the composition of the System's portfolio
remained appropriate. Rollovers in Treasury financings would continue to be
tilted toward the shorter-maturity offerings, and net additions to System holdings would be made in all maturity
areas, taking account of the progress
already made in enhancing the liquidity
of the System's portfolio.
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 their preference for or
acceptance of a directive that included
some 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 slightly 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
3Vi percent and IVi 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
suggests a strengthening in domestic final
spending, although industrial production and
overall employment do not appear to have
picked up correspondingly. Retail sales registered large gains in January and February,
with data on inventories, which are available
through January, showing some offsetting
decline in that month. Single-family housing
starts increased substantially further in January and February. Recent data on orders and
shipments of nondefense capital goods indicate an increase in outlays for business
equipment, but nonresidential construction
has remained in a steep decline. The nominal
U.S. merchandise trade deficit narrowed
slightly in January and was essentially unchanged from its average rate in the fourth
quarter. Industrial production rose considerably in February, partly reflecting an upturn
in motor vehicle assemblies, but was little
changed on balance over the first two months
of the year. Total nonfarm payroll employment rebounded in February from a large
decline in January. With the labor force
growing appreciably in recent months, the
civilian unemployment rate has risen to
7.3 percent. Wage and price increases have
continued to trend downward.
Most interest rates have risen appreciably
since the Committee meeting on February
4-5. In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies increased substantially
over the intermeeting period.
Growth of M2 and M3 accelerated in February, but M2 appears to have leveled off and
M3 to have declined in March. Much of the
growth in the broader aggregates over recent
months has been accounted for by a surge in
transactions balances.
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 February established ranges for
growth of M2 and M3 of 2x/2 to 6x/2 percent
and 1 to 5 percent, respectively, measured
from the fourth quarter of 1991 to the fourth
FOMC Policy Actions
quarter of 1992. The monitoring range for
growth of total domestic nonflnancial debt
was set at 4Vz to 8V2 percent for the year.
With regard to M3, the Committee anticipated that the ongoing restructuring of
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
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 March through
June at annual rates of about 3 V2 and 1 Vi percent, respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Jordan, Kelley,
LaWare, Lindsey, Melzer, and Mullins,
Ms. Phillips, and Mr. Syron. Votes against
this action: None.
Meeting Held on
May 19, 1992
1. Domestic Policy Directive
The information reviewed at this meeting was mixed, but it suggested on balance that economic activity was expanding at a moderate pace. Retail spending
and homebuying apparently had softened after sharp gains early in the year,
but recent data on contracts and orders
pointed toward some firming in business
capital spending. Industrial production
and employment had firmed in recent
months. Incoming data on prices and
labor costs suggested little change from
1 33
recent trends.
Total nonfarm payroll employment
continued to increase in April, with
more than half of the job gains occurring in service industries, notably in
health and business services. In addition, employment in retail trade establishments registered a relatively strong
rise, the number of manufacturing jobs
increased for a third straight month, and
state and local governments added more
workers. By contrast, construction
employment was down slightly in April
and had changed little on balance since
the beginning of the year. The civilian
unemployment rate edged down to
7.2 percent in April, and initial claims
for unemployment insurance fell somewhat further.
Industrial production rose appreciably
further in April, and in the three months
ending with that month, industrial output retraced most of the decline that had
occurred between October and January.
The April advance reflected in part some
further recovery in motor vehicle assemblies as well as another solid gain in
the production of industrial equipment,
especially office and computing equipment. Output of construction supplies
also advanced more rapidly, and the production of consumer goods other than
automobiles increased slightly further.
Total industrial capacity utilization continued to rise in April but was still well
below its pre-recession high.
Retail sales rebounded in April after a
sizable decline in March; for the two
months combined, retail spending was
little changed following strong gains in
the first two months of the year. Purchases of nondurable goods, particularly
general merchandise items, were down
on balance for the March-April period,
while spending for durable goods rose
further. Single-family housing starts fell
considerably for a second month in
April. The declines followed sizable
134 79th Annual Report, 1992
increases earlier in the year that appeared to have reflected lower mortgage
rates, unusually warm winter weather,
and the prospect of a tax credit for firsttime homebuyers. Starts in the multifamily sector in April reversed the jump
in March. Vacancy rates for multifamily units remained at historically
high levels.
Business fixed investment apparently
firmed in the first quarter after declining
moderately over the preceding several
quarters. Shipments of nondefense capital goods rose somewhat further in the
first quarter, largely as a result of continued growth in outlays for office and
computing equipment. Recent data on
orders pointed to a pickup in business
spending for a broad range of industrial
equipment over coming months. Nonresidential construction activity contracted less rapidly in the first quarter.
While outlays for office buildings continued to plummet in response to the
substantial overhang of unoccupied
space, spending for other commercial
buildings declined more slowly, and
construction of industrial and public
utility structures increased. Recent
information on building permits and
contracts suggested some further slowing of the decline in nonresidential
construction.
Business inventories increased considerably in March after changing little
in February. At the retail level, about
half of the rise in March was in stocks at
automobile dealers. For other retailers,
the buildup of stocks reversed most of
the drawdowns posted in the preceding
two months. Inventory-to-sales ratios
rose for most categories of retail stores
but remained well below the elevated
levels at the end of last year. Manufacturing inventories were essentially
unchanged in March from the lower levels that prevailed in January and February. For many industries, stock-to-sales
ratios in March were at their lowest
levels in more than a decade. By contrast, stocks held by wholesalers increased again in March, and inventoryto-sales ratios were little changed from
the relatively high level at the end of last
year.
The nominal U.S. merchandise trade
deficit declined in February, and its
average for January-February was
somewhat lower than the average rate in
the fourth quarter. Exports for the twomonth period were about unchanged
from the strong fourth-quarter rate but
were considerably higher than a year
earlier. Imports in January and February
were down from the fourth-quarter rate;
most of the decline was associated
with a fall in prices of oil imports. The
available data on first-quarter economic
activity in the major foreign industrial
countries were mixed; signs of strengthening activity in Europe were offset by
indications of continued weakness in
Japan and Canada.
Producer prices of finished goods rose
at a slightly faster pace in March and
April, as energy prices partially retraced
earlier declines. Excluding food and
energy, producer prices increased over
the March-April period at about the subdued average monthly rate seen over the
twelve months ending in April. At the
consumer level, prices jumped in March
and rose more moderately in April.
Prices of nonfood, non-energy consumer
items increased a little more rapidly on
balance in March and April than over
the twelve-month period ending in
April. Total hourly compensation for
private industry workers advanced in the
first quarter at a rate close to that recorded during the second half of 1991.
At its meeting on March 31, 1992, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that included a bias toward possible
FOMC Policy Actions
easing during the intermeeting period.
Accordingly, the directive indicated that
in the context of the Committee's longrun 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 slightly lesser reserve
restraint would be acceptable in the
intermeeting period. The reserve conditions contemplated under this directive
were expected to be consistent with
growth of M2 and M3 over the period
from March through June at annual
rates of about 3l/z and \xh percent
respectively.
Open market operations during the
intermeeting period initially were directed toward maintaining the existing
degree of pressure on reserve positions.
Prior to mid-April, however, operations
were adjusted to implement some easing
in the degree of reserve pressure. This
action was taken in light of the significant weakness in the broad monetary
aggregates and of indications that the
economic expansion was not as strong
as its pace early in the year and that
underlying inflation would continue to
trend lower. The management of
reserves was complicated to some extent
during this period by the uncertainties
associated with the mid-April tax date.
A reduction in reserve requirements on
transactions deposits from 12 percent to
10 percent implemented on April 2 had
only minor effects on demands for
excess reserves and on volatility in
money markets. Expected levels of
adjustment plus seasonal borrowing
were raised in the intermeeting period in
anticipation of a slight rise in seasonal
borrowing. Over the three complete
reserve maintenance periods during the
intermeeting interval, adjustment plus
seasonal borrowing averaged a little
more than $100 million. The federal
135
funds rate remained around 4 percent
early in the intermeeting period but
averaged a little below 33/4 percent in
the weeks after the easing action.
Most other short-term interest rates
fell more than the federal funds rate.
Many market participants, interpreting
incoming data as suggesting that the
economic expansion would remain subdued and that the weakness in the broad
monetary aggregates would persist, concluded that some further easing in policy was likely in the near term. Bond
yields also fell, but generally by less
than short-term rates, and they remained
above the lows reached around the turn
of the year. Changes in broad indexes of
stock prices were mixed over the intermeeting period.
Questions about the prospects for the
economic recovery in the United States
and the related outlook for interest rates
affected the value of the dollar in foreign exchange markets. On a tradeweighted basis in terms of the other
G-10 currencies, the dollar remained
within a fairly narrow range until late in
the period, when growing market expectations of a near-term easing in U.S.
monetary policy exerted downward
pressure on its value.
M2 and M3 contracted in March and
April. The performance of these aggregates was considerably weaker than the
Committee's expectations at the time of
the March meeting. Expansion in transactions balances, which had accounted
for much of the growth in the broader
aggregates over previous months,
slowed markedly. Some of the slowdown perhaps reflected a reduced need
for liquid balances to make personal tax
payments, which were unusually weak
in April. In addition, some retail time
deposit funds evidently were shifted into
the capital markets in response to the
low offering rates on these deposits relative to market rates. Through April,
136 79th Annual Report, 1992
expansion of M2 was slightly above and
that of M3 was slightly below the lower
ends of the ranges established by the
Committee for the year.
The staff projection prepared for this
meeting pointed to a continuing recovery in economic activity. In the near
term, expansion in consumer spending
was expected to be considerably below
the rapid first-quarter pace, and growth
in spending on residential construction
was likely to moderate in response to
the earlier backup in mortgage interest
rates. On the other hand, stronger orders
for nondefense capital goods portended
some pickup in business fixed investment despite the continuing drag exerted
by the persisting, though abating, weakness in nonresidential construction; in
addition, inventory liquidation was
likely to slow from the first-quarter
pace. Over time, some easing of
restraints on credit supplies and the
progress achieved in restructuring business and household balance sheets
would help set the stage for sustained,
moderate growth in spending. The projection did not incorporate any major
new fiscal initiatives at the federal level.
The considerable margin of slack in
resource utilization, though decreasing,
was projected to be associated with
appreciable further slowing in the underlying rate of inflation.
In the Committee's discussion, members referred to the indications that the
rate of economic growth had slowed
since earlier in the year, but they interpreted the recent statistical and anecdotal information as consistent on balance with a continuing and relatively
broad-based expansion in overall business activity. Although some sectors of
the economy remained troubled, reports
from many parts of the country suggested that economic activity was
expanding and that business executives
were becoming more confident that a
sustained recovery was under way. Several members noted, however, that in the
absence of strong momentum in any
sector of the economy, the advance was
proceeding at a pace that was well
below the typical rate of growth in the
early phases of past cyclical upswings.
In such circumstances, a faltering in the
recovery, such as had occurred in 1991,
could not be ruled out, especially given
the financial difficulties still being experienced by many business firms, consumers, and lending institutions that in
turn appeared to be reflected in the continued weakness in broad measures of
money and credit. A differing view gave
more weight to the recently abnormal
behavior of the velocities of broad
money and debt and the possibility that,
once the recovery was more firmly
established, some sectors of the economy and thus the economy more generally might generate more strength than
was currently projected. With regard
to the outlook for inflation, the recent
performance of some key indicators of
labor compensation and prices was
somewhat disappointing. However,
members continued to view further
progress as likely, given the persisting
though diminishing slack that was projected in labor and other production
resources.
Many of the members commented
that the various financial constraints on
the expansion were diminishing and that
a sounder financial foundation to support sustained economic recovery was
being established. Considerable restructuring of balance sheets by both business firms and households had been
accomplished; these developments
together with lower interest rates had
reduced interest burdens and had
increased the capacity to borrow and
spend. In the financial sector, banking
institutions were continuing to work
down problem credits in their loan port-
FOMC Policy Actions
folios and, in the context of growing
profits associated with relatively wide
interest margins on loans, were rebuilding their capital positions. The access of
lending institutions to the capital markets had improved, and there were
increasing indications, not yet reflected
in the loan data, that banks were seeking
lending opportunities more actively in
many parts of the country and that loan
demand from small and medium-size
businesses was tending to revive. Thus,
while banking institutions remained cautious lenders and their loan rates were
on the high side in relation to market
rates, members saw some signs that a
more accommodating climate was
emerging in loan markets.
In their reports on business conditions
in various parts of the country, members
noted that at least modest growth
seemed to be occurring in most regions,
while with some exceptions activity in
other areas appeared to be stabilizing
after declining earlier. Business confidence seemed to be improving, indeed
appreciably so in some areas, and was
described as more optimistic even in
sections of the country that did not
appear to be participating thus far in the
economic recovery. Nonetheless, business concerns about the sustainability of
the expansion were being reflected in
cautious hiring and investment decisions. On balance, current business attitudes pointed to continuing economic
expansion, though many business executives did not anticipate a robust recovery and the overall state of confidence
appeared to be somewhat fragile.
Turning to individual sectors of the
economy, members observed that the
strong growth in consumer spending in
the early months of the year, apparently
outpacing the expansion in income,
seemed to have slowed more recently.
Nonetheless, improving consumer sentiment against the background of reduced
137
debt burdens and strengthening employment opportunities pointed to further
gains in consumer spending. Over time,
such spending was likely to be associated more closely with developments in
labor markets and the related growth in
disposable incomes, though the demand
for consumer durables also would
respond to changing conditions in the
housing markets. In those markets, anecdotal reports from around the country
tended to confirm recent data indicating
some slowing of activity from the pace
at the start of the year, but conditions
varied substantially across the nation.
Housing activity had tended to display
considerable sensitivity to changes in
mortgage rates, and the recent declines
in the latter along with gains in consumer confidence were seen as likely to
encourage some pickup in housing
demand and residential construction.
Nonresidential construction, especially
that of office buildings and hotels, was
expected to remain weak for an
extended period in many areas as excess
capacity was absorbed. On the positive
side, rates of occupancy and prices of
existing buildings appeared to be
approaching bottom or stabilizing in
many areas, thereby facilitating sales of
repossessed property on the books of
financial institutions. Other nonresidential construction activity was mixed; oil
and gas drilling was still quite weak, but
the construction of manufacturing and
wholesale space was displaying some
strength in various parts of the country.
Gains in final demand, if sustained, were
expected to foster appreciable further
increases in the production of business
equipment.
Government purchases of goods and
services continued to be constrained by
budgetary problems, including the
severe financial difficulties of many state
and local governments, and with defense
spending projected to decline substan-
138 79th Annual Report, 1992
tially, the government sector appeared
likely to remain a negative influence on
economic activity over the next several
quarters. With regard to the outlook for
exports, members referred to reports of
relatively strong sales abroad by firms in
some parts of the country. More generally, prospective growth in exports to
some key industrial nations could be
relatively sluggish if recent economic
trends in those nations were to persist,
though exports to a number of developing countries appeared to be rising fairly
briskly. At the same time, the recovery
in the domestic economy was likely to
foster relatively rapid growth in imports.
On the whole, net exports were expected
to make little or no contribution to the
expansion in domestic economic
activity.
Despite the somewhat disappointing
inflation news in recent months, the
members generally viewed a slow
downtrend in the rate of inflation as a
plausible outcome for the year ahead.
Reports from various parts of the country emphasized the highly competitive
markets for many producer goods and
the inability of many sellers to increase
profit margins or to pass on rising costs
through higher prices. Commodity
prices had tended to fluctuate in a narrow range and appeared consistent with
progress toward price stability. Consumer resistance to rising prices was
described as strong. In the context of the
relatively limited pressures on production resources associated with the members' outlook for economic activity and
an appropriate monetary policy, the slow
process of reducing inflation was believed likely to continue for some time.
In the Committee's discussion of policy for the intermeeting period ahead, all
of the members endorsed a proposal to
maintain an unchanged degree of pressure in reserve markets. The members
agreed that policy seemed to be appro
priately positioned at this point to
accommodate sustained economic expansion while also encouraging progress
toward price stability.
In the course of the Committee's discussion, members devoted considerable
attention to the behavior of the monetary aggregates. They expressed varying
degrees of concern about the slow
growth of M2 and M3 in 1992, including declines in March and April. Some
emphasized that the lagging growth of
those aggregates this year was occurring
after relatively limited expansion over
the previous year or so. Although the
growth rates and velocities of the
broader aggregates were subject to considerable short-run variations and had to
be evaluated in the context of surrounding economic and financial circumstances, average growth over longer
periods of time had been quite subdued.
Plausible explanations, relating importantly to temporary factors such as the
unexpectedly weak build-up of balances
associated with the April tax date, permitted at least some discounting of the
recent weakness of the broader aggregates, and growth of both M2 and M3
according to a staff analysis was likely
to resume at a modest pace over the
balance of the second quarter. However,
in the opinion of a number of members,
continuing weakness in these aggregates
could be indicative of an increase in
the downside risks to the expansion
and would thus be a matter of growing
concern.
Other members tended to discount to
an extent the sluggish behavior of the
broader aggregates. In this view, a variety of developments that were reflected
in the channeling of credit away from
depository institutions seemed to have
altered previous relationships between
M2 and M3 and measures of spending
and income. To an important degree,
current spending was being financed
FOMC Policy Actions
internally or, especially in the case of
business firms, by raising funds in the
capital markets. Moreover, against the
background of weak loan demand and
relatively low deposit offering rates and
an unusually steep yield curve, many
depositors were shifting funds from M2
into higher-yielding, longer-term market
assets. In these circumstances, satisfactory economic expansion would tend to
be consistent with weaker growth and a
higher velocity of M2 than would be
suggested by historical relationships.
Some members viewed the strength of
Ml and reserves as indicative of a quite
accommodative monetary policy in
recent quarters, and they felt that continued rapid expansion in these measures
could raise questions about the consistency of current monetary policy with
progress toward price stability.
The members expressed differing
preferences with regard to possible
adjustments to the degree of reserve
pressure during the intermeeting period,
but all indicated that they could accept a
symmetric directive. Some preferred
such a directive because it would tend to
underscore their view that the risks to
the expansion and the possible need to
adjust policy were now fairly evenly
balanced in either direction. In light
of the information on the economy
reviewed at this meeting, they felt that
current monetary policy was likely to
remain properly positioned to accommodate the Committee's objectives for
some time and that any adjustment to
policy should be approached with considerable caution. In the context of
persisting concerns about inflation, an
easing in reserve conditions and lower
short-term interest rates might well fail
at this time to induce lower interest rates
in long-term debt markets, though circumstances might change. In any event,
the Committee should keep its options
open and changing circumstances might
1 39
warrant a Committee consultation during the weeks ahead.
A number of members expressed a
preference for continuing to bias the
directive toward possible easing during
the intermeeting period. In this view, the
risks to the expansion appeared to be
tilted at least marginally to the downside, and while a steady policy course
might well prove to be appropriate until
the next meeting, these members
believed it would be desirable for policy
to be adjusted fairly promptly should the
incoming evidence suggest a faltering
expansion, especially if money growth
were still lagging. Other members preferred a bias toward possible firming
during the intermeeting period. They
believed that a relatively stimulative
monetary policy was in place and that
the next move in policy might well need
to be to the tightening side if, in the
context of a strengthening economy, the
Committee was to continue to pursue its
long-run objectives of sustainable economic growth and progress toward price
stability.
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 adjustments to policy
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 or slightly lesser
reserve restraint might 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
140 79th Annual Report, 1992
rates of around 2Vi percent and \l/i percent respectively over the two-month
period from April 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
suggests on balance that economic activity is
expanding at a moderate pace. Total nonfarm
payroll employment increased somewhat in
April, and the civilian unemployment rate
edged down to 7.2 percent. Industrial production rose appreciably further in April
partly reflecting some further recovery in
motor vehicle assemblies. A rebound in retail
sales in April about offset the decline in
March. Single-family housing starts fell
considerably for a second month in April.
Recent data on orders and shipments of nondefense capital goods indicate appreciable
increases in outlays for business equipment,
and building contracts point to some slowing
of the decline in nonresidential construction.
The nominal U.S. merchandise trade deficit
in January-February was somewhat below
its average rate in the fourth quarter. Incoming data on prices and labor costs suggest
little change from recent trends.
Most interest rates have fallen since the
Committee meeting on March 31. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies declined on balance over the
intermeeting period.
M2 and M3 contracted in March and
April; and expansion in transactions balances, which had accounted for much of the
growth in the broader aggregates over previous months, slowed markedly. Through
April, expansion of M2 was slightly above
and that of M3 was slightly below the lower
ends of the ranges established by the Committee for the year.
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 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 1991 to the fourth
quarter of 1992. 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
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 or slightly
lesser reserve restraint might be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be
consistent with growth of M2 and M3 over
the period from April through June at
annual rates of about 2Vi and \xh percent,
respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Jordan, Melzer,
Mullins, Kelley, LaWare, and Lindsey,
Ms. Phillips, and Mr. Syron. Votes against
this action: None.
2. Authorization for Domestic
Open Market Operations
The Committee approved a temporary
increase of $2 billion, to a level of
$10 billion, in the limit on changes
between Committee meetings in System
Account holdings of U.S. government
and federal agency securities. The
increase amended paragraph l(a) of the
Authorization for Domestic Open Market Operations and was effective for the
intermeeting period ending with the
close of business on July 1, 1992.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Jordan, Melzer,
Mullins, Kelley, LaWare, and Lindsey,
Ms. Phillips, and Mr. Syron. Votes against
this action: None.
FOMC Policy Actions
The Manager for Domestic Operations advised the Committee that the
current leeway of $8 billion for changes
in System Account holdings might not
suffice to meet the potentially large need
to add reserves over the intermeeting
period to accommodate a seasonal bulge
in currency in circulation, an increase
in required reserves, and other factors
that might call for substantial reserve
additions.
Meeting Held on
June 30-July 1, 1992
The information reviewed at this meeting suggested that economic activity
was expanding at a moderate pace.
Employment and industrial output had
continued to rise, but a sizable increase
in the labor force had lifted the unemployment rate to a cyclical high. Increased sales and production of motor
vehicles were providing a boost to the
economy, as was higher spending for
capital equipment, especially computers. However, non-auto retail sales and
homebuying had slowed since earlier in
the year, and the latest data indicated
some widening of the merchandise trade
deficit. Incoming data on retail prices
and labor costs suggested that inflation
was slowing.
Total nonfarm payroll employment
increased for a fourth straight month in
May, and aggregate hours worked by
production or nonsupervisory workers
exceeded the average for the first quarter. The services industry recorded further sizable job gains in May, while
employment in retail trade fell considerably and had changed little on balance
thus far this year. Hiring was off slightly
in manufacturing, but further increases
in overtime hours elevated the factory
workweek to a little above its average
level for the first half of 1990. The civilian unemployment rate rose sharply in
141
May, to 7.5 percent, reflecting a surge in
the number of job seekers. Substantial
increases in the labor force since late
last year had returned the labor-force
participation rate to its average level for
the first half of 1990.
Industrial production rose appreciably
further in May, partly reflecting continued recovery in motor vehicle assemblies. Also contributing to the rise were
large increases in the production of other
consumer durables, notably household
appliances and furniture, and of business equipment. The recent gains in production had raised the utilization of total
industrial capacity considerably, but the
average operating rate remained well
below its July 1990 peak.
After a surge early in the year, growth
in real personal consumption expenditures had slowed despite a strengthening
in the demand for motor vehicles. In
April and May, spending for goods other
than motor vehicles was slightly below
the average level for the first quarter,
and outlays for services increased only a
little. Purchases of new single-family
homes declined in May for a fourth
straight month. Starts of single-family
housing units rebounded in May to a
level close to the first-quarter pace,
while multifamily housing starts remained depressed in reflection of historically high vacancy rates for such
housing.
Shipments of nondefense capital
goods other than aircraft over April and
May were somewhat above the firstquarter level, boosted mainly by further
increases for office and computing
equipment. Business purchases of motor
vehicles also were stronger. Recent data
on orders pointed to a further pickup in
business outlays for durable equipment
over coming months. Outlays for nonresidential structures continued to trend
lower in May, but incoming information
on contracts for new construction sug-
142 79th Annual Report, 1992
gested that nonresidential building activity would decline more slowly in the
months ahead. Although construction of
office buildings continued to plummet in
response to the substantial overhang of
vacant office space, spending for other
nonresidential structures had firmed
since the fourth quarter.
Business inventories rose slightly further in April. Stocks increased relatively
sharply at the retail level, but about half
the buildup was at automobile dealerships, where the rise in inventories
appeared to be about in line with a
recent pickup in sales of new vehicles.
In manufacturing, inventories continued
to decline; with factory shipments rising, the ratio of stocks to shipments was
at its lowest level in more than a decade.
At wholesale establishments, inventories were trimmed substantially further
in April. However, inventory-sales
ratios remained near the high end of the
range that had prevailed over the past
several years.
The nominal U.S. merchandise trade
deficit widened in April and was substantially above its average rate for the
first quarter. The value of exports declined, largely because of a decline in
exports of aircraft. The value of imports
increased further in April; a rise in
imports of capital goods more than offset a small decline in imports of consumer goods. The available data on economic activity in the major foreign
industrial countries in the second quarter were mixed. In Germany and Japan,
growth during the first quarter had been
boosted by transitory influences that
appeared to be unwinding in the second
quarter. By contrast, a moderate recovery in economic activity was continuing
in Canada, and there were some indications that economic recovery was getting under way in the United Kingdom.
Producer prices of finished goods rose
more rapidly in May; sizable increases
in the prices of energy and other goods
outweighed a further decline in food
prices. Apart from anomalous jumps in
the prices of a few items, however,
increases in prices of nonfood, nonenergy finished goods generally remained modest. Consumer prices posted
a small advance in May, despite a relatively large rise in energy costs. Excluding food and energy items, consumer
prices increased more slowly in the first
five months of this year than in 1991.
Average hourly earnings for production
or nonsupervisory workers were little
changed over April and May and also
had risen more slowly thus far this year
than in 1991.
At its meeting on May 19, 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 adjustments to
policy during the intermeeting period.
Accordingly, the directive indicated that
in the context of the Committee's longrun objectives for price stability and
sustainable economic growth, and giving careful consideration to economic,
financial, and monetary developments,
slightly greater or slightly lesser reserve
restraint might be acceptable during the
intermeeting period. The reserve conditions contemplated under this directive
were expected to be consistent with
growth of M2 and M3 at annual rates of
about 2Vi and IV2 percent respectively
over the two-month period from April
through June.
Open market operations during the
intermeeting period were directed toward maintaining the existing degree of
pressure on reserve positions. During
the period, several technical increases
were made to expected levels of adjustment plus seasonal borrowing to reflect
the rising demands for seasonal credit.
Actual levels of borrowing averaged
FOMC Policy Actions
about $165 million over the three
reserve maintenance periods completed
during the intermeeting interval. The
federal funds rate remained close to
33/4 percent.
Most other interest rates changed
little on balance over the intermeeting
period. Rates moved higher in the days
following the May meeting as widespread market expectations of a monetary easing action were not realized.
Later in the period, however, interest
rates fell, especially at intermediate
maturities, as markets interpreted incoming data on the economy and the
monetary aggregates as indicating a
sluggish recovery. Broad indexes of
stock prices declined over the period in
response to reductions in forecasts of
corporate earnings.
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 rose initially in response to data pointing to a somewhat
stronger economic recovery in the
United States but subsequently more
than retraced its gains as less positive
economic data, including a larger-thanexpected trade deficit, were reported.
M2 and M3 changed little in May and
appeared to have contracted in June;
both retail and large-denomination time
deposits continued to run off rapidly.
Depository institutions, facing weak
loan demand and intent on further bolstering capital positions, had reduced
rates on time deposits fairly aggressively earlier in the year, and as a result
these components of M2 and M3 had
become less attractive relative to alternative investments or debt repayment.
In addition, Ml was unusually weak in
June. Through June, expansion of the
two broad aggregates was somewhat
below the lower ends of the ranges
established by the Committee for the
143
year. Growth of nonfinancial debt was
estimated to be at the lower end of
the Committee's monitoring range. Borrowing had been concentrated in the
capital markets, with beneficial effects
in reducing debt and debt-servicing
burdens.
The staff projection prepared for this
meeting pointed to a modest pickup in
economic growth over the second half
of the year and to some further acceleration in 1993. The forecast took into
account the lagged effects on aggregate
demand of earlier declines in interest
rates and the progress that had been
made by households and businesses in
strengthening their balance sheets.
Nonetheless, financial strains were
expected to continue to prompt the
diversion of some cash flows from business and consumer spending, though the
magnitude of such adjustments was projected to lessen over time. Partly as a
consequence, moderate growth well
below that experienced during typical
cyclical upswings in the past was projected in consumer spending and in business investment in durable equipment.
Economic expansion also would be restrained by further, though diminishing,
declines in business spending on nonresidential structures before a projected upturn in such spending began to materialize in the second half of next year.
Moreover, in the government sector, federal purchases of goods and services
were forecast to decrease over the projection horizon, largely reflecting cutbacks in defense spending. At the state
and local government levels, continuing
budget problems were expected to result
in a small decline in real purchases during the quarters immediately ahead and
in only modest growth later. A persisting though decreasing margin of slack
in resource utilization was expected to
be associated with further slowing in
wage and price inflation.
144 79th Annual Report, 1992
In the Committee's discussion of economic and financial developments and
the outlook for the economy, the members agreed that a sustained expansion at
a moderate pace remained the most reasonable expectation and that such an
expansion was likely to be associated
with further easing of inflation. They
noted that considerable progress had
been made in correcting major structural
imbalances and financial problems in
various sectors of the economy and that
business and consumer confidence had
improved appreciably since the turn of
the year. However, the most recent information suggested some weakening in
the expansion, and a number of members expressed concern about the apparent absence of cumulating or selfreinforcing improvement in overall
economic activity. Sluggish growth of
jobs and income, ongoing efforts to
strengthen balance sheets, and in the
view of a number of members the weakness in broad measures of money and
credit suggested that the risks to the
economy were more heavily weighted
to the downside. Others felt that
the expansion was now more firmly
entrenched and that the risks were more
evenly balanced; some of these members noted, however, that given the
likely restrained pace of the expansion,
a significant shortfall from their current
projections could have more worrisome
effects than the limited inflationary pressures that might be fostered by a somewhat stronger-than-projected economy.
With regard to the outlook for inflation,
the members were encouraged by indications of moderating price and labor
cost pressures. Most believed that additional progress toward price stability
was likely over the next several quarters
in the context of some persisting slack
in labor and other production resources
and after an extended period of slow
growth in key measures of money.
In keeping with the practice at meetings when the Committee sets its longrun 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 nominal and real GDP,
the rate of unemployment, and the
rate of inflation for the years 1992 and
1993. These projections took account of
the monetary growth ranges that the
Committee reaffirmed at this meeting
for 1992 and established on a tentative
basis for 1993; these ranges were
expected to be consistent with the
Committee's goals of promoting a
sustained expansion in the economy
and continued progress toward price
stability. The projections generally
portrayed an economy performing in
line with these objectives—that is, with
expansion at a moderate pace over the
next one and one-half years and inflation slowing gradually further. Forecasts
of nominal GDP converged on growth
ranges of 5lA to 6 percent for 1992
as a whole and 5lA to 6lA percent for
1993. With regard to the rate of expansion in real GDP, the projections had a
central tendency of 2lA to 23A percent
for 1992 and of 23A to 3 percent for
1993, implying a gradual acceleration
from the pace currently estimated for
the first half of this year. The projected
strengthening of the economy was
associated with some decline in the
rate of civilian unemployment to a
consensus range of 6V2 to 7 percent by
the fourth quarter of 1993. Given the
moderate expansion of the economy
and the still relatively elevated level
of the unemployment rate, the rate of
inflation, as measured by the consumer
price index, was projected to move
somewhat lower; the central tendency of
the range expected for 1993 was 2% to
3 ^percent.
FOMC Policy Actions
Members observed that developments
relating to the financial condition of
households and businesses were likely
to continue to have an important influence on economic activity over the
quarters ahead. Widespread efforts to
strengthen balance sheets along with
conservative lending policies at financial intermediaries had exerted a significantly retarding effect on economic
activity by diverting cash flows from
consumer and investment expenditures
or limiting the availability of financing
for current spending. However, while
the process of adjusting balance sheets
was still incomplete and was still restraining business and consumer spending, the combination of greatly reduced
interest rates and strengthened balance
sheets pointed to subsiding constraints
on expenditures from financial factors.
At the same time, lending institutions
now appeared to be in a better position
to accommodate borrowers. Indeed,
anecdotal reports from several parts of
the country indicated that many banking
institutions were intensifying their
efforts to make loans, though loan
demand remained quite limited. Members also observed that corporate cash
flows and profits were much improved.
In their review of economic conditions and business and consumer attitudes in different regions, members
reported that gradual expansion characterized most parts of the nation, though
they cited some significant exceptions
and also noted that on the whole recent
indicators pointed to less strength than
early in the year. Business and consumer
sentiment, while considerably improved
since late last year, nonetheless remained quite cautious and seemed vulnerable to adverse developments. Consumers were still very concerned about
employment opportunities, while business executives were reluctant to make
investment commitments or to build
145
inventories in the absence of firmer
indications of a significant pickup in
demand.
With regard to developments in major
sectors of the economy, members generally viewed some pickup in consumer
spending from its recently sluggish pace
as a likely development that in turn
would provide ongoing support to the
expansion. An essential element in sustaining consumer expenditures, and thus
the economy more generally, would be
the growth in job opportunities and personal incomes. While heavy debtservice burdens and reduced interest
incomes, among other factors, continued to curb the ability or willingness of
many consumers to increase their spending, some tentative indications of a firming trend in such spending could be
drawn from the signs of reviving consumer confidence and anecdotal reports
suggesting that consumer spending was
growing at least modestly in many areas.
In particular, demands for motor vehicles had strengthened, and the related
step-up in the production of automotive
products had accounted for much of the
growth in industrial production over
recent months. With regard to the outlook for housing, residential construction had weakened in many parts of the
country, though it was holding up well
in some areas. The backup in mortgage
rates earlier in the year had reinforced
the more general cautionary factors that
had tended to inhibit overall spending.
However, mortgage rates had fallen substantially over the spring, and the members expected housing activity to pick
up somewhat over the quarters ahead.
Despite still cautious business attitudes, moderate growth in overall business fixed investment was anticipated
over the forecast period. Spending could
be buoyed by demands for business
equipment, much of which probably
would be related to efforts to modernize
146 79th Annual Report, 1992
production facilities for competitive reasons. Rising rates of capacity utilization
also could be expected to spur investment demand as time went on. The
outlook for nonresidential construction
was more negative. Office construction
appeared likely to remain severely
depressed for an extended period as
excess capacity was absorbed in many
parts of the country. On the more positive side, anecdotal impressions from
several cities suggested that prices and
lease terms of office and other commercial structures were tending to stabilize,
though the volume of actual transactions
remained quite limited.
The government and foreign trade
sectors also were not seen as likely to
contribute significantly to the expansion. The widespread financial problems
of state and local governments pointed
to quite limited growth in spending,
even though examples of sizable expenditure programs, such as for highway
construction in some areas, could be
cited. At the federal level, defense
spending was on a clear downtrend, and
the persistence of large federal deficits
argued against sizable new initiatives
for nondefense spending. With regard to
the external sector, a number of members expressed the view that the outlook
for net exports had worsened despite the
weakening in the foreign exchange
value of the dollar in recent months. The
growth in exports appeared to be moderating, and it was uncertain at this point
to what extent economic expansion
abroad might strengthen and thereby
produce increased demand for U.S.
goods and services. At the same time,
domestic expansion in line with the
members' forecasts would add to the
demand for imports.
Most members anticipated at least a
limited decline in the core rate of inflation over the period through the end of
next year. In support of this view, some
members emphasized the lagged effects
of the very restrained growth in money
over a long period while others gave
more weight to the outlook for continuing if diminishing slack in labor and
other production inputs. In addition,
business executives reported that strong
competition still was making it very difficult to raise prices and that continuing
efforts were being made to improve
operating efficiencies and hold down
costs. At the same time, surveys of price
expectations and conversations with
business contacts suggested a view,
rooted partly in concerns about the prospects for and implications of further
large federal deficits, that inflation ultimately would return to the 4 to 5 percent
pace of the 1980s. These attitudes
tended to underscore the need for a
sound fiscal policy that in conjunction
with the continued implementation of an
anti-inflationary monetary policy would
foster a reduction in inflationary expectations and would facilitate the eventual
achievement of price stability.
In keeping with the requirements of
the Full Employment and Balanced
Growth Act of 1978 (the HumphreyHawkins Act), the Committee at this
meeting reviewed the ranges for growth
in the monetary and debt aggregates that
it had established in February for 1992
and decided on tentative ranges for
growth in those aggregates in 1993. The
current ranges for the period from the
fourth quarter of 1991 to the fourth
quarter of 1992 included expansion of
2!/2 to 6V2 percent for M2 and 1 to
5 percent for M3. The monitoring range
for growth of total domestic nonfinancial debt had been set at 4V2 to
8V2 percent.
In the course of the Committee's discussion, all of the members supported a
proposal to retain the ranges established
in February for this year. Although the
rates of M2 and M3 growth for the year
FOMC Policy Actions
through June were somewhat below the
lower ends of the Committee's ranges
for both aggregates, this outcome had
not been associated with unexpected
weakness in nominal spending; the
expansion in nominal GDP over the first
half of the year currently was estimated
to have been toward the upper end of the
central tendency of the members' earlier
expectations. Instead, velocity had risen
appreciably—a highly unusual occurrence following a period of sharp
declines in interest rates. Among the
developments helping to explain the
weakness in money and the rise in
velocity were a variety of business and
balance sheet pressures that tended to
reduce total borrowing and channel
credit flows away from depository institutions, thereby lessening the need of
those institutions to increase their monetary liabilities. At the same time, business firms and households, in the course
of their restructuring activities and
deleveraging of their balance sheets, had
found that monetary assets had become
less attractive relative to a variety of
other financial assets or debt repayment.
It appeared that the balance sheet
adjustments by depository institutions
and their customers that had contributed
to velocity increases were well under
way. However, the factors that were
tending to depress broad money growth
in relation to measures of economic and
price performance were likely to persist,
and the extent and duration of deviations from historic relationships were
highly uncertain. In these circumstances,
while an argument could be made that a
somewhat lower M2 range might more
readily encompass the rate of expansion
in money needed for a satisfactory economic performance over the balance of
the year, the selection of a different
range would imply greater certainty
about emerging relationships than was
warranted. Instead, the current ranges
147
should be maintained, pending further
developments and the possible emergence of a more settled outlook for
money demand. Some members also
commented that lowering the ranges
could be misconstrued as an intention to
tighten monetary policy at a time when
relatively sluggish growth in the economy and weakness in the monetary
aggregates argued for a steady policy
course or possibly for some easing.
At the conclusion of this discussion,
the Committee voted to reaffirm the
1992 ranges of 2Vi to 6V2 percent and
1 to 5 percent that it had established
in February for growth of M2 and
M3 respectively; the Committee also
decided to retain the range of AV2 to
8x/2 percent for growth of nonfinancial
debt in 1992. The following statement
was approved for inclusion in the Committee's domestic policy directive:
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 reaffirmed
at this meeting 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
1991 to the fourth quarter of 1992. The Committee anticipated that developments contributing to unusual velocity increases could persist in the second half of the year. The
monitoring range for growth of total domestic nonfinancial debt also was maintained at
AV2 to 8V2 percent for the year.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Jordan, Kelley,
LaWare, Lindsey, Melzer, and Mullins,
Ms. Phillips, and Mr. Syron. Votes against
this action: None.
With regard to the ranges for 1993 to
be established on a tentative basis at
this meeting, a majority of the members
endorsed an extension of the current
ranges for another year, but some
148 79th Annual Report, 1992
believed that a somewhat lower range
for M2 would be preferable. Members
who wanted to retain the current ranges
acknowledged that a lower M2 range
probably would be desirable at some
point to be consistent over time with the
Committee's objective of achieving and
maintaining reasonable price stability.
However, current uncertainties with
regard to how soon and to what extent
various factors tending to inhibit the
growth in M2 would dissipate argued
for caution in making any change to the
range now. A reduction in the M2 range
could be considered next February when
the Committee meets to set final ranges
for money growth for 1993, or the range
could be lowered even sooner if new
information on the emerging relationship between the monetary aggregates
and nominal spending allowed a determination of the appropriate range to be
made with more confidence.
Members who preferred a somewhat
lower M2 range for 1993 acknowledged
that substantial uncertainties with regard
to an appropriate rate of M2 growth
were likely to persist for some time, but
they felt that relatively subdued monetary expansion was likely to be consistent with an adequate degree of liquidity
and a satisfactory economic performance next year. Lowering the M2
range at this point would extend the
series of gradual reductions in the ranges
that had been implemented over the past
five years or so and would have the
important advantage of affirming the
Committee's commitment to price
stability, with favorable implications for
inflationary expectations and in turn perhaps also for the strength and sustainability of the expansion. A few members
favoring this option were also of the
view that more weight ought to be
placed on M2 as a guide to policy; this
would have possible implications for
actions to boost M2 growth in 1992 in
addition to reducing the range for 1993
to promote long-run disinflation. All of
the members agreed that regardless of
the particulars of the decisions to be
made at this meeting, it was vital for the
Committee to reaffirm its commitment
to the goal of achieving price stability.
This outcome was the key contribution
the Federal Reserve could make toward
facilitating the highest possible growth
of the economy over time; and maintaining the credibility of the System's antiinflationary effort was the best means
available to the Committee to minimize
disruptions to the economy as it was
moving toward its potential.
At the conclusion of this discussion,
the Committee approved provisional
ranges for 1993 that were unchanged
from those for 1992. The Committee
voted to incorporate the following statement regarding the 1993 ranges in its
domestic policy directive:
For 1993, the Committee on a tentative
basis set the same ranges as in 1992 for
growth of the monetary aggregates and debt,
measured from the fourth quarter of 1992 to
the fourth quarter of 1993. 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.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Kelley,
LaWare, Lindsey, Melzer, Mullins, and
Syron. Votes against this action: Mr. Jordan and Ms. Phillips.
Mr. Jordan and Ms. Phillips dissented
because they believed that a somewhat
lower M2 range for 1993 would be more
consistent with a policy of continuing
progress toward price stability. They
recognized that the substantial uncertainties surrounding the outlook for M2
growth and its velocity next year made
it very difficult to determine an appropri-
FOMC Policy Actions
ate M2 range, but a lower range would
be needed eventually to achieve and sustain stable prices. In the interim, it was
important for the System and the credibility of its anti-inflationary policy to
continue the practice of gradually reducing the M2 range to be consistent with a
noninflationary target. They would have
coupled the decrease in the range for
1993 with actions to expand bank
reserves immediately with the objective
of boosting M2 growth to within its
range for 1992. Such a combination
would make clear that the decrease in
the range for M2 growth in 1993 did not
represent a monetary "tightening" in
the conventional sense, but rather that it
was a step toward lasting reductions in
inflation.
Turning to policy for the intermeeting
period ahead, the members were divided
between those who supported an unchanged policy stance and others who
preferred to ease. A majority indicated,
however, that they could support an
unchanged directive that incorporated a
bias toward possible easing.
Members who preferred not to change
policy at this point believed that the
economy was on a moderate growth
path and that in any case the forces
restraining the expansion were not the
result of inadequate liquidity or a restrictive monetary policy. While the outlook
was clouded by unusual forces acting on
the economy, the available economic
information remained consistent with
continuing expansion at a pace that
offered favorable prospects for a gradual
reduction of unemployment and abatement of inflation. The low level of real
and nominal short-term interest rates,
the decline in the dollar, and the rapid
growth of reserves and narrow money
along with the expansion of bond mutual
funds—which while not in M2 seemed
to provide liquidity at least comparable
to that of time deposits—suggested that
149
monetary policy had been quite accommodative. Some members who supported this view expressed concern that
in the absence of more definitive indications of a softening economy or much
greater weakness in the monetary aggregates, any easing at this point would
tend to erode the credibility of the
Committee's commitment to an antiinflationary policy. The result might
well be to put substantial and disruptive
downward pressure on the dollar in foreign exchange markets and to arrest or
reverse the tendency for domestic longterm interest rates to decline.
Most of the members who preferred
an immediate easing of policy emphasized the risks of a faltering economy in
the period ahead, especially given the
recent indications of some slowing in
the expansion and the already considerable slack in the economy. Their
concerns were heightened by the constraining effects of ongoing structural
adjustments in the economy, the weakness in various measures of money, and
the limited expansion in total credit. A
few of these members focused on the
desirability of taking relatively prompt
action to foster growth in the broad measures of money within the Committee's
ranges for the year. Some members
observed that under current circumstances an easing action might have a
relatively limited effect in stimulating
monetary growth over the months
ahead, but such a policy move would
nonetheless tend to boost spending by
reducing the costs of borrowing.
In their discussion, the members took
account of a staff analysis that suggested
only modest growth in M2 and virtually none in M3 for the third quarter
on the assumption of an unchanged
degree of reserve pressure. Relatively
weak expansion in these broad measures of money did not appear to have
the usual implications for the econ-
150 79th Annual Report, 1992
omy, as evidenced by experience over
the first half of the year. The prospects
were for continuing balance sheet and
other adjustments that would tend to
curb the demand for money assets relative to spending and income. Many
members nonetheless were concerned
about the possible persistence of the
recent weakness in reserves and the
longer-term sluggish behavior of broad
money, especially given the relatively
subdued pace of the expansion. While
monetary measures might well have
lost some of their indicator and predictive properties, continued weakness
in money might still be a signal that
financial conditions were not yet conducive to fostering a sustained pickup in
spending.
The varying policy preferences expressed by the members were reflected
in differing views with regard to possible adjustments to the degree of reserve
pressure in the intermeeting period
ahead. All of the members who favored
some immediate easing in policy indicated that they could support an unchanged directive that was tilted toward
ease, and at least some of these members anticipated that developments over
the near term were likely to trigger an
adjustment toward easing. Most of the
members who favored an unchanged
policy stance at this point also indicated that they could accept a bias
toward ease in the directive, especially
in light of current uncertainties and the
potential problems associated with any
significant shortfall in the expansion
from current expectations. Other members who preferred a steady policy
course believed that it would be premature for the Committee to signal any
bias toward easing, given the relatively
low probability that they assigned to the
potential need for such a move, and they
believed that a return to an asymmetric
directive after the move to symmetry at
the May meeting could have unfavorable repercussions on the Committee's
credibility.
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 maintaining the existing degree of pressure
on reserve positions and that included a
bias toward possible 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 slightly lesser reserve restraint
would be acceptable during the intermeeting period. The reserve conditions
contemplated at this meeting were
expected to be consistent with a resumption of growth in M2 and M3 at annual
rates of about 2 percent and Vi 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:
The information reviewed at this meeting
continues to suggest that economic activity
is expanding at a moderate pace. Total nonfarm payroll employment increased somewhat further in May, but a surge in job
seekers led to a sizable rise in the civilian
unemployment rate to 7.5 percent. Industrial
production rose appreciably further in May,
partly reflecting continued recovery in motor
vehicle assemblies. Growth in consumer
spending has slackened after a sharp advance
earlier this year. Although sales of new
homes declined in May, single-family housing starts rebounded to a level close to the
first-quarter pace. Recent data on orders and
shipments of nondefense capital goods indicate appreciable increases in outlays for
business equipment, and the trend of building contracts points to some slowing of the
decline in nonresidential construction. The
FOMC Policy Actions
nominal U.S. merchandise trade deficit
increased in April and was substantially
above its average rate in the first quarter.
Incoming data on retail prices and labor costs
suggest that inflation is slowing.
Most interest rates have changed little
since the Committee meeting on May 19.
In foreign exchange markets, the tradeweighted value of the dollar in terms of the
other G-10 currencies declined further over
the intermeeting period.
M2 and M3 changed little in May and
appear to have contracted in June; both retail
and large-denomination time deposits continued to run off rapidly. Through June, expansion of the two aggregates was somewhat
below the lower ends of the ranges established by the Committee for the year.
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 6V2 percent and 1 to 5 percent respectively, measured from the fourth quarter of
1991 to the fourth quarter of 1992. The Committee anticipated that developments contributing to unusual velocity increases could persist in the second half of the year. The
monitoring range for growth of total domestic nonfinancial debt also was maintained at
AVi to %Vi percent for the year. For 1993, the
Committee on a tentative basis set the same
ranges as in 1992 for growth of the monetary aggregates and debt, measured from the
fourth quarter of 1992 to the fourth quarter
of 1993. 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
slightly lesser reserve restraint would be
acceptable in the intermeeting period. The
contemplated reserve conditions are expected to be consistent with growth of M2
1 51
and M3 over the period from June through
September at annual rates of about 2 and
Vi percent, respectively.
Votes for short-run policy: Messrs.
Greenspan, Corrigan, Angell, Hoenig,
Jordan, Kelley, Lindsey, and Mullins, Ms.
Phillips, and Mr. Syron. Votes against this
action: Messrs. LaWare and Melzer.
Messrs. LaWare and Melzer dissented
because they judged an asymmetric
directive, with a bias toward easing, as
being inappropriate at this time. In their
view, the current stance of monetary
policy was not impeding an expansion
consistent with the economy's long-run
potential. In addition, a bias toward
ease, especially in the context of the
Committee's decision at the May meeting to adopt a symmetrical directive,
suggested an excessive emphasis on
short-term economic developments that
might undermine the credibility of the
System's long-run policies. They were
concerned that such a loss of credibility
could have adverse effects on the dollar
in foreign exchange markets and on
long-term interest rates in domestic markets. Mr. Melzer also believed that, if
additional easing were undertaken, a
greater policy reversal ultimately would
be necessary, making the attainment of
sustainable economic growth more difficult in the long run.
Meeting Held on
August 18, 1992
The information reviewed at this meeting suggested that economic activity
was continuing to expand, although at a
subdued pace. Consumer spending had
firmed recently; business purchases of
capital equipment had risen further; and
falling mortgage interest rates, which
appeared to have triggered a wave of
mortgage refinancings, likely were pro-
152 79th Annual Report, 1992
viding some impetus to housing demand. On the other hand, industrial production and employment had increased
little on balance, and a sizable expansion in the labor force had raised the
unemployment rate to a cyclical high.
Recent data on wages and prices indicated that inflation was slowing.
A rebound in total nonfarm payroll
employment in July more than offset a
decline in June; however, about half the
rise over June and July reflected temporary hiring associated with a federally
sponsored summer jobs program that
recently had been enacted. Apart from
the jobs program, moderate gains in
employment were recorded in service
industries, while payrolls declined in
both manufacturing and construction.
The average workweek of production or
nonsupervisory workers during the
June-July period was at its lowest level
of the year, and the civilian unemployment rate averaged 13A percent.
Industrial production, which had
increased noticeably in earlier months,
was about unchanged on balance over
June and July, as a rise in July retraced a
decline that had occurred in June. Much
of the July advance stemmed from a
higher level of output in mining and
utilities, where special factors had held
down production in earlier months. Factory output was unchanged in July after
a small decline in June; production of
computers and other information processing equipment continued to increase
at a rapid rate, but output of motor vehicles and parts fell in both months. Production schedules indicated that domestic assemblies of motor vehicles would
increase in August. The utilization of
total industrial capacity slipped on balance over June and July but remained a
little above its December 1991 level.
Retail sales increased moderately in
July after registering little growth in the
second quarter. General merchandisers
reported sharp gains following a period
of sluggish sales since April, and sales
rose considerably further at apparel outlets and furniture and appliance stores.
Sales of motor vehicles dropped back in
July from an elevated June pace. With
mortgage rates falling, sales of new
single-family homes increased in June
after leveling off in May, and reports
indicated that mortgage applications for
home purchases were rising. Permits
issued for the construction of new housing units advanced slightly in July, but
starts of such units declined further.
Shipments of nondefense capital
goods were up sharply in June, partly
reflecting continued increases in shipments of office and computing equipment. Data on new orders pointed to a
further substantial rise in business purchases of durable equipment in coming
months. Nonresidential construction
slackened again in June; weakness in
industrial construction added to persisting contractions in outlays for commercial office buildings. Recent information
on new contracts continued to suggest
that nonresidential construction would
decline more slowly over the months
ahead.
Business inventories surged in June
after declining a little in May. At the
retail level, inventories increased by a
substantial amount, with the accumulation spread about equally among durable and nondurable goods. The jump in
inventories lifted retailers' stocks-tosales ratios to the upper end of the range
of the past year. Wholesale trade inventories also expanded sharply in June,
with runups reported for a wide range of
goods; sales increased by more, however, and the inventory-to-sales ratio in
wholesale trade fell slightly. By contrast, manufacturing stocks edged down
in June, and the inventory-to-shipments
ratio dropped to its lowest level since
the middle of 1979.
FOMC Policy Actions
The nominal U.S. merchandise trade
deficit widened again in May. For April
and May combined, the deficit was substantially larger than its average rate in
the first quarter. The value of exports
fell considerably over the two-month period, with reduced shipments of aircraft
accounting for the bulk of the decline.
The value of imports rose substantially,
as imports of oil rebounded from firstquarter lows and imports of a wide
range of other goods also increased.
Economic activity in the major foreign
industrial countries appeared to have
slowed on balance in recent months.
Canada, France, and Italy seemed to
have experienced modest economic
growth, but activity apparently had
slowed or declined in Germany and
Japan, and there was little indication
that a recovery had begun in the United
Kingdom.
Producer prices of finished goods
increased modestly over June and July.
Abstracting from the sometimes volatile
food and energy components, prices of
other finished goods rose at a significantly slower pace in the twelve months
ended in July than in the preceding
twelve months. At the consumer level,
prices advanced only a little in July after
a June increase that had been boosted
somewhat by a temporary bulge in
energy prices. Food prices, which were
unchanged on balance over June and
July, continued to hold down overall
increases in consumer prices. Excluding
food and energy items, consumer price
inflation over the year ended in July was
markedly lower than in the preceding
year. Measures of labor costs also evidenced smaller increases. Hourly compensation of private industry workers
rose at a substantially slower pace in
the second quarter and in the twelve
months ended in June. The deceleration
in overall compensation reflected slower
growth in both its benefits and its wage
153
and salary components. For production
or nonsupervisory workers, average
hourly earnings were unchanged in July,
and the twelve-month change in this
measure was substantially reduced.
At its meeting on June 30-July 1, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that included a bias toward possible
easing during the intermeeting period.
Accordingly, the directive indicated that
in the context of the Committee's longrun 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 slightly lesser reserve
restraint would be acceptable during the
intermeeting period. The contemplated
reserve conditions were expected to be
consistent with a resumption of growth
in M2 and M3 at annual rates of about
2 percent and Vi percent respectively
over the three-month period from June
through September.
The day after the meeting, the Board
of Governors approved a reduction in
the discount rate from 3V6 to 3 percent,
and open market operations were
directed at allowing the full amount of
the reduction to be reflected in money
market rates. These actions were taken
in the context of a continuing downtrend
in inflation and in light of incoming
information that suggested flagging momentum in the economic recovery and
persisting softness in credit and money.
Later in the intermeeting period, a technical increase was made to expected
levels of adjustment plus seasonal borrowing to reflect rising demands for seasonal credit. Adjustment plus seasonal
borrowing averaged close to expected
levels during the two full reserve maintenance periods completed since the
meeting. The federal funds rate, which
154 79th Annual Report, 1992
had been around 33A percent prior to
the monetary easing action, averaged
3lA percent subsequently.
Other market interest rates declined
considerably in early July, reflecting
both the sluggishness portrayed by incoming economic data and the monetary
policy easing. Commercial banks also
lowered their prime rate from 6V2 percent to 6 percent. In subsequent weeks,
with a steady flow of new information
pointing to a hesitant recovery and more
favorable trends in wages and prices,
yields on intermediate- and long-term
Treasury securities dropped further.
Over the intermeeting period, yields on
most private securities tended to decline
by amounts comparable to those on
Treasury instruments, but rates on fixedrate home mortgages fell by somewhat
less, apparently owing in large part to
heightened mortgage investor concerns
about prepayment risk stemming from
a surge in refinancing activity. Broad
indexes of stock prices changed little
over the period.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
declined on balance over the intermeeting period. Early in the period, the dollar fell in response to the more uncertain
prospects for near-term growth in the
United States and the concurrent easing
of U.S. monetary policy. Later, the dollar fell further following an increase in
the discount rate in Germany and the
issuance of unfavorable U.S. trade data
for May. Concerted central-bank intervention in foreign exchange markets
was undertaken to brake the decline of
the dollar, and the latter tended to stabilize over the remainder of the intermeeting period.
M2 and M3 contracted somewhat
further in July, despite a resumption of
rapid growth in Ml. Both broad monetary aggregates were substantially
weaker in July than had been anticipated
at the time of the June 30-July 1 meeting. The declines in these aggregates
apparently reflected in part the continuing redirection of household holdings of
time deposits toward bond and stock
funds or the repayment of debt, and in
part the reduced funding needs of depository institutions owing to the further
rechanneling of credit demands outside
the depository sector, a development
that was encouraged by the declines in
interest rates in long-term debt markets.
To some extent, the persisting weakness
in money also might have been associated with relatively slow expansion in
income since the early months of the
year. Through July, both M2 and M3
were appreciably below the lower ends
of the Committee's ranges for their
growth in 1992.
The staff projection prepared for this
meeting pointed to a continuation of
subdued economic expansion in the near
term followed by a gradual pickup in
growth through next year. The forecast
took account of the further easing of
reserve conditions in early July and the
substantial rally that had taken place in
the bond markets. Housing construction
was expected to pick up in response to
the declines in mortgage interest rates;
and in the business sector, lower interest
rates and improved profits and cash
flows were projected to enhance access
to sources of finance and to provide the
basis for an acceleration in plant and
equipment spending as the recovery
gained momentum. The slow pace of
hiring and the modest expansion of incomes currently were tending to restrain
consumer spending, but continued
progress by households in restructuring
balance sheets and reducing debtservicing burdens, in conjunction with
improving job prospects, were expected
to foster growth in consumer spending
more in line with the expansion of
FOMC Policy Actions
income. In addition, some stimulus to
domestic production was projected to
emerge over the forecast horizon from
improving export demand as a result of
the depreciation of the dollar in recent
months and some anticipated strengthening of economic activity in the major
foreign industrial countries. In the government sector, continuing cutbacks in
defense spending were expected to
damp federal expenditures, and budget
problems at state and local levels of
government to constrain spending and
result in tax increases. A persisting
though decreasing margin of slack in
resource utilization was projected to be
associated with further progress toward
price stability.
In the Committee's discussion of current and prospective economic developments, members referred to statistical
and anecdotal indications that the rate of
economic expansion had slowed to a
relatively subdued pace since the early
months of the year. A number of factors
seemed to be restraining the expansion,
including efforts by business firms and
households to restructure balance sheets,
some apparent deterioration in business
and consumer sentiment, and sluggish
economic growth abroad. Nonetheless,
the low levels of real and nominal interest rates in short-term debt markets,
recent decreases in intermediate- and
long-term interest rates and in the foreign exchange value of the dollar, and
the fairly ample liquidity suggested by
some measures all were consistent with
expectations of some strengthening in
business activity in coming quarters.
Still, in the view of a number of members, the economic expansion was likely
to be on a slightly lower track over the
next several quarters than they previously had anticipated. At the same time,
many commented that they were encouraged by the accumulating signs of
diminishing price and wage inflation,
155
and some observed that faster and more
convincing progress was being made
toward achieving price stability than
they had anticipated earlier.
The members recognized that the outlook for the economy was subject to
major uncertainties. A number commented that they could not identify any
sector of the economy that seemed
primed to provide the impetus needed
for a vigorous expansion, but they also
acknowledged the difficulty of anticipating the pattern and trajectory of an
expansion. With regard to domestic
economic developments, the ongoing
restructuring activities by financial and
nonfinancial firms and by households
were continuing to exert a restraining
effect on economic activity by diverting cash flows from business investment
and consumer expenditures. Considerable progress appeared to have been
made toward redressing earlier overexpansion and credit excesses. Over
time, cash flows would be redirected
toward more normal patterns of spending for goods and services, with stimulative implications for the economy. However, the timing and extent of such a
development could not be predicted with
any degree of confidence, and in any
case the positive effects probably would
be felt only gradually and there could be
substantial restraint on economic activity for a longer period than was anticipated earlier. On the more positive side,
banking institutions had made a good
deal of progress in improving their capital positions and strengthening their
portfolios, and many of these institutions now were reported to be seeking
lending opportunities more actively,
though the demand for loans remained
unusually depressed.
Turning to developments in key sectors of the economy, members noted
that, for now, consumers continued to
be affected by a high degree of caution
156 79th Annual Report, 1992
that appeared to stem especially from
concerns about job security and job
opportunities in an environment of
continuing business consolidations, cutbacks by state and local governments,
and reductions in defense spending.
Against the background of quite limited
growth in overall demand, which could
be met largely through improvements
in productivity and lengthening workweeks, business firms were continuing
to hold back in their hiring of new workers. Ongoing efforts by many consumers
to reduce their debt burdens and lower
interest income from declining rates on
deposits and market instruments were
contributing to the softness in consumer
spending. Against this background,
some members indicated that they
would not rule out a further rise in the
personal saving rate.
Overall spending by business firms
on fixed investment and inventories
was believed likely to remain relatively moderate, at least in the quarters
immediately ahead, in light of the negative business sentiment associated in
turn with lagging consumer and government expenditures. While spending
for equipment was growing at a fairly
brisk pace, spurred by efforts to modernize production facilities for competitive
reasons, business construction continued to be deterred by an over-supply of
space in commercial structures, especially office buildings, in numerous
areas around the country. Cautious
inventory investment reflected lackluster demand as well as continuing
efforts to manage inventories more
tightly in relation to sales.
The outlook for housing activity
appeared to have improved somewhat
after the recent declines in mortgage
rates, though the available data and
anecdotal reports on housing market
developments were mixed. While mortgage refinancing activity had turned
sharply upward across the nation, mortgage loan demand for home purchases
was still lagging in many areas.
Given serious budgetary problems at
all levels of government, the public sector of the economy was not viewed as
likely to provide stimulus to the expansion over the next several quarters. At
the federal level, continuing declines in
defense spending were expected to be
offset only in part by fairly slow growth
in other expenditures for goods and services, and some of the most depressed
areas of the country were strongly
affected by trends in the defense industry. At the state and local government
levels, the well-publicized budget problems of California were shared to one
degree or another by many other parts of
the country; spending curbs seemed
likely to hold down any impetus to
demand from this sector of the economy, while increases in state and local
taxes would tend to restrain business
and household demand.
The outlook for the nation's foreign
trade balance was difficult to evaluate.
The decline in the foreign exchange
value of the dollar had favorable implications for net exports over time, but the
outlook for relatively restrained expansion in key industrial countries pointed
to limited growth in the demand for U.S.
exports. At the same time, even moderate economic growth in the U.S. economy could be expected to foster some
further increases in imports over coming
quarters despite the lower dollar.
With regard to the outlook for inflation, many of the members commented
on what they viewed as increasingly
persuasive evidence of slower rates of
increase in wages and prices. Against
the background of relatively restrained
growth in economic activity and the
related outlook for limited pressures on
labor and other productive resources, a
number of members indicated that they
FOMC Policy Actions
had lowered their inflation forecasts for
the next several quarters. There were
widespread reports of strong competitive pressures in most industries and of
successful efforts to hold down costs
through improvements in productivity.
On the negative side, the considerable
depreciation of the dollar in recent
months and lingering concerns about
future price pressures, apparently associated especially with worries about the
outlook for the federal budget, could
tend to impair progress toward price
stability. On balance, however, members
saw the prospects for significantly less
inflation over the projection horizon as
quite promising.
Turning to policy for the intermeeting
period, a majority of the members indicated that they favored an unchanged
policy, while some expressed a preference for further easing either at this
meeting or in the near future. The members who supported a steady policy
course recognized that in a period characterized by relatively sluggish economic expansion and a wide variety of
risks to the economy, conditions might
emerge that would warrant consideration of some further easing. For the
time being, however, they preferred a
wait-and-see approach in view of the
recent easing of reserve conditions and
the considerable declines in longer-term
interest rates and in the foreign exchange value of the dollar. The Committee should continue to evaluate a variety
of indicators for signs that the expansion
might be falling short of an acceptable
growth path.
Some members commented that an
easing of monetary policy under current
conditions would incur too great a risk
of adversely affecting domestic bond
markets. One aspect of that risk was the
possibility of a destabilizing decline of
the dollar in foreign exchange markets;
the potential for such a decline had
157
prompted the recent exchange market
intervention in support of the dollar by
the United States and several other
nations. Any further easing in this view
should be implemented only under conditions or circumstances in which the
System's commitment to its price stability objective was not likely to be
brought into question. An unchanged
policy also would give the Committee
more room to respond vigorously, if
necessary, to a weaker-than-expected
economy or to disruptive conditions in
financial markets, should they develop
at some point.
Members who leaned toward some
near-term easing of reserve conditions
commented that such a policy move was
not likely to foster inflationary pressures
under current or prospective economic
conditions, given the appreciable margin of unused resources in the economy.
At the same time, an easier monetary
policy would accelerate balance-sheet
restructuring activities and tend to compensate for the adverse effects of such
activities on spending. A greater degree
of monetary policy easing than had been
needed in the past seemed to be required
to overcome the depressing effects of
the restructuring activities and to cushion an already sluggish expansion
against the possibility of some further
loss in momentum.
One factor weighing in favor of careful consideration of a more accommodative posture in reserve markets was the
behavior of the broad monetary aggregates. The staff analysis prepared for
this meeting suggested that some pickup
in the growth of M2 and M3, though to
a still quite sluggish pace, was likely
over the months ahead on the assumption of unchanged conditions in reserve
markets. Members observed that the
indications of some renewed M2 growth
since late July tended to support that
conclusion; some also drew encour-
158 79th Annual Report, 1992
agement from the sharp upturn in the
growth of reserves and Ml in July. The
members noted that growth of the
broader aggregates in line with current
expectations implied expansion for the
year at rates somewhat below the lower
ends of the Committee's ranges. Such a
development would be consistent with
the Committee's policy objectives if, as
expected, unusual strength in the velocity of M2 and M3 were to persist over
the balance of the year. In the circumstances, monetary growth and indicators of velocity behavior would need to
be monitored carefully over coming
months.
In the Committee's discussion of
possible intermeeting adjustments to
the degree of reserve pressure, a majority of the members indicated their preference or acceptance of a directive
that was biased toward possible easing
during the weeks ahead. Members who
preferred some easing over the near
term indicated that they could support a
directive that gave particular weight to
developments that might call for an
easing move. Some others noted that
while they might have preferred a
symmetric directive in current circumstances, the proposed bias in the directive was acceptable because an easing
of reserve conditions was more likely
than a tightening in the intermeeting
period. Moreover, a return to a symmetric directive might well be misread
as a change in policy that the Committee did not intend at this point.
Two members expressed a strong preference for a symmetric directive because
they were persuaded that monetary
policy should not be eased except in
response to compelling new evidence
that current policy was impeding an
expansion of the economy in line with
its long-run potential. They noted that
a symmetric directive would not rule
out a policy change, in either direction,
during the intermeeting period if such
a change appeared to be warranted
by the incoming economic or financial
information.
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 maintaining the existing degree of pressure
on reserve positions and that included
a bias toward possible 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 slightly lesser
reserve restraint would be acceptable
during the intermeeting period. The
reserve conditions contemplated at
this meeting were expected to be consistent with growth in M2 and M3 at
annual rates of about 2 percent and
Vi percent respectively over the sixmonth period from June 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
suggests that economic activity is continuing
to expand at a subdued pace. Total nonfarm
payroll employment rebounded in July after
declining in June, and the civilian unemployment rate edged down to 7.7 percent. Manufacturing output was unchanged in July, but
overall industrial production was boosted by
a higher level of mining and utility output.
Retail sales increased moderately in July.
Permits issued for the construction of new
housing units rose slightly in July, but housing starts fell. Recent data on orders and
shipments of nondefense capital goods indicate further increases in outlays for business
equipment, while nonresidential construction
has remained soft. The nominal U.S. merchandise trade deficit in April-May was sub-
FOMC Policy Actions
stantially above its average rate in the first
quarter. Incoming data on wages and prices
suggest that inflation is slowing.
Interest rates have declined considerably
since the Committee meeting on June 30July 1. The Board of Governors approved a
reduction in the discount rate from 3Vi to
3 percent on July 2. In foreign exchange
markets, the trade-weighted value of the
dollar in terms of the other G-10 currencies
declined further over the first several weeks
of the intermeeting period, but it has stabilized more recently.
M2 and M3 contracted somewhat further
in July. Through July, both aggregates were
appreciably below the lower ends of the
ranges established by the Committee for the
year.
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 on June 30-July 1 reaffirmed the ranges
it had established in February for growth of
M2 and M3 of 2Vi to 6!/2 percent and 1 to
5 percent respectively, measured from the
fourth quarter of 1991 to the fourth quarter
of 1992. The Committee anticipated that
developments contributing to unusual velocity increases could persist in the second half
of the year. The monitoring range for growth
of total domestic nonfinancial debt also was
maintained at AV2 to 8!/2 percent for the year.
For 1993, the Committee on a tentative basis
set the same ranges as in 1992 for growth of
the monetary aggregates and debt measured
from the fourth quarter of 1992 to the fourth
quarter of 1993. The behavior of the mone
tary 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
slightly lesser reserve restraint would be
acceptable in the intermeeting period. The
contemplated reserve conditions are expected to be consistent with growth of M2
\ 59
and M3 over the period from June through
December at annual rates of about 2 and
Vi percent, respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Jordan, Kelley,
Lindsey, and Mullins, Ms. Phillips, and
Mr. Syron. Votes against this action:
Messrs. LaWare and Melzer.
Messrs. LaWare and Melzer dissented
because they did not favor a directive
that was biased toward possible easing
during the intermeeting period. In their
view, monetary policy already was
appropriately stimulative, as evidenced
in part by the low level of short-term
interest rates and by the rapid growth in
reserves since early this year, and was
consistent with the promotion of economic growth in line with the economy's long-run potential. Business and
consumer confidence were in fact at low
levels, but they reflected a variety of
problems facing the economy that were
unrelated to the stance of monetary policy. Accordingly, what was needed at
this point was a more patient monetary
policy—one that was less predisposed
to react to near-term weakness in economic data and that allowed more time
for the effects of earlier easing actions to
be reflected in the economy. Indeed, an
easing move in present circumstances
might well stimulate inflationary concerns by reducing confidence in the System's willingness to pursue an antiinflationary policy and thus could have
adverse repercussions on domestic bond
markets and further damaging effects on
the dollar in foreign exchange markets.
Meeting Held on
October 6, 1992
The information reviewed at this meeting suggested that economic activity
was expanding at a subdued pace.
Domestic final sales appeared to have
160 79th Annual Report, 1992
picked up in the third quarter, led by an
increase in consumer spending and
another sharp gain in business purchases
of office and computing equipment, but
demand had remained sluggish in most
other sectors of the economy. The limited growth in overall demand was being
met in part through higher imports, and
as a consequence, industrial production
and employment had been weak. Recent
data on wages and prices continued to
suggest that inflation was slowing.
Total nonfarm payroll employment
fell somewhat further in September,
reflecting a drop in government jobs
associated with the end of a federally
funded summer jobs program. Employment in the private sector was up in
September, as new hiring in the services
industry more than offset job losses
in manufacturing and construction;
employment in other industries was
little changed after a sizable decline in
August. The civilian unemployment rate
edged down to 7.5 percent in September
when the labor force registered another
decrease.
After a considerable gain in July,
industrial production declined appreciably in August, and available information
suggested further weakness in September. The decline in industrial output
since July partly reflected the disruptive
effects of Hurricane Andrew on oil and
gas production and of a labor strike on
the manufacture of automobiles and
parts. However, output of a broad range
of other goods also was down. One area
of continuing strength was the production of business equipment, notably
office and computing equipment. The
utilization of total industrial capacity
fell on balance over July and August,
retracing a portion of the increase that
occurred over the first half of the year.
Real personal consumption expenditures were little changed in August after
increasing appreciably in the two previ
ous months; for July and August combined, spending was moderately higher
than in the second quarter. In August,
outlays for services continued to rise,
while expenditures for most major categories of goods declined. Housing starts
climbed in August, with starts of singlefamily homes reaching their highest
level since March. By contrast, permit
issuance and sales of new and existing
homes edged lower in August.
Shipments of nondefense capital
goods slowed considerably in July and
August, retracing much of the sharp gain
recorded in June. Shipments of office
and computing equipment slackened on
balance over the two months; however,
after adjusting for ongoing rapid declines in prices, the underlying upward
trend in demand for such equipment
remained robust. Recent data on orders
and shipments of nondefense capital
goods suggested that business outlays
for durable equipment, particularly for
items other than computers, would grow
more slowly in coming months. Outlays
for nonresidential construction contracted again in August, with steep
decreases occurring for commercial and
industrial structures. Data on contracts
continued to indicate that spending for
new construction would remain sluggish
over the months ahead.
Total business inventories rose somewhat further in July following a large
increase in June. In manufacturing,
inventory stocks were little changed
over June and July but were up sharply
in August as factory shipments of goods
slowed; as a result, the ratio of inventories to shipments for all manufacturing
rebounded to the middle of the range
that had prevailed over the previous
year. At the wholesale level, inventories
were trimmed a little in July after a
sizable rise in June, and the stocks-toshipments ratio remained relatively
high. Retail trade inventories expanded
FOMC Policy Actions
at a considerable pace in July, but a
rebound in sales lowered the inventoryto-sales ratio somewhat at most types of
stores.
The nominal U.S. merchandise trade
deficit widened somewhat in July from
its average rate in the second quarter.
Imports, particularly of capital goods
and consumer goods, remained on the
fairly strong upward path evident during the first half of the year. Exports
increased by a smaller amount in July;
exports of agricultural products rose
noticeably, but exports of nonagricultural goods were about unchanged from
the pace of the previous three quarters.
Recent indicators of economic activity
in the major foreign industrial countries
suggested a continuation of sluggish
growth on average in those countries.
Producer prices of finished goods
edged up in August in association with a
rebound in prices of fresh fruits and
vegetables. Abstracting from the volatile food and energy components, the
increase in prices of other finished goods
over the twelve months ended in August
was considerably smaller than the rise
over the previous twelve-month period.
At the consumer level, prices of nonfood, non-energy items registered
another modest increase, and the twelvemonth change in this measure also was
down substantially from a year earlier.
In September, a drop in the average
hourly earnings of production or nonsupervisory workers retraced part of a
sizable rise in August. Over the twelve
months ended in September, these earnings grew at a significantly slower rate
than in the preceding twelve-month
period.
At its meeting on August 18, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that included a bias toward possible
easing during the intermeeting period.
1 61
Accordingly, the directive indicated that
in the context of the Committee's longrun 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 slightly lesser reserve
restraint would be acceptable during the
intermeeting period. The contemplated
reserve conditions were expected to
be consistent with growth in M2 and
M3 at annual rates of about 2 percent
and Vi percent respectively over the
six-month period from June through
December.
Open market operations during the
intermeeting period were directed
initially toward maintaining the existing
degree of pressure on reserve positions.
In early September, operations were
adjusted to implement some easing in
reserve pressures. This action was taken
in response to incoming information that
suggested unexpected sluggishness in
economic activity and a smaller-thananticipated pickup in the growth of the
broad monetary aggregates. Adjustment
plus seasonal borrowing tended to run a
little above expected levels during the
intermeeting interval, reflecting in part
reserve shortfalls that produced sharp
increases in borrowing at the end of two
reserve maintenance periods. The reserve shortfalls along with quarter-end
pressures contributed to a somewhat
higher federal funds rate than had been
expected following the monetary easing
action.
Other short-term interest rates also
declined somewhat, while longer-term
rates were about unchanged since the
Committee meeting on August 18.
Short-term debt markets reacted to
the Committee's easing action in early
September and subsequently to growing
expectations of further System easing in
the context of continued indications of a
162 79th Annual Report, 1992
sluggish economic expansion. Yields on
intermediate-term securities also fell.
However, rates on long-term obligations
were little changed on balance; the System's policy easing and generally weak
economic data tended to reduce bond
yields, but long-term debt markets also
appeared to reflect growing concerns
about the fiscal outlook and increased
uncertainty stemming in part from volatility in the foreign exchange markets
and policy developments abroad.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies fluctuated widely over the intermeeting
period but ended somewhat higher on
balance. The dollar weakened considerably early in the period on disappointing
reports about the U.S. economy and
related expectations of Federal Reserve
easing. In mid-September, the dollar
moved sharply higher as turmoil in
European currency markets prompted
some safe-haven buying of dollars and
resulted in interest rate reductions in
Germany. More recently, reduced tensions within the European Monetary
System and heightened expectations of
further easing by the Federal Reserve
induced renewed declines in the dollar.
Expansion of M2 and M3 resumed in
August, though at fairly slow rates, and
limited growth appeared to have continued in September. Through September,
both aggregates were estimated to have
grown at rates somewhat below the
lower ends of the ranges established by
the Committee for the year. The pickup
in the broad aggregates seemed to reflect
the cumulative effects on demand deposits and liquid retail deposits of declines
in market interest rates since midyear
and a related drop in opportunity costs.
Currency growth strengthened further in
August and September, evidently owing
in part to further foreign demand. Bank
credit growth also picked up in both
months in conjunction with an upturn in
bank loans.
The staff projection prepared for this
meeting indicated that economic activity would expand at a slow pace in the
current quarter and that growth would
pick up gradually in 1993 to a rate that
would remain quite moderate by past
cyclical standards. The declines that had
occurred in interest rates were expected
to boost housing activity to some extent,
particularly in the single-family sector.
Gains in expenditures for equipment
were projected to be large enough to
raise business fixed investment despite
sluggish spending for nonresidential
construction. As employment growth
was restored and further improvements
in household balance sheets were
achieved, consumer spending would
strengthen. The projection pointed to
some decline in federal government purchases, reflecting further cutbacks in
defense expenditures, and weak spending by state and local governments. The
persisting slack in resource utilization in
this forecast was projected to be associated with additional progress in reducing inflation.
In the Committee discussion of current and prospective economic developments, many of the members expressed
disappointment and concern about the
sluggish pace of the expansion, and a
number commented that the softening in
several recent business indicators could
portend quite slow economic growth
over the months immediately ahead.
Business and consumer sentiment was
relatively depressed and seemed to have
worsened a bit further recently in some
parts of the country. While further deterioration in business activity culminating in an economic downturn could not
be ruled out, some of the very latest data
had a slightly more positive tone, and
the members generally continued to
view somewhat stronger economic
FOMC Policy Actions
growth as a reasonable prospect for the
year ahead. However, no important sector of the economy seemed poised to
provide much impetus to business activity, and the timing of the acceleration
from the presently sluggish advance
remained uncertain. Nonetheless, declines over the third quarter in the
foreign exchange value of the dollar and
in domestic interest rates—the latter
along the entire maturity spectrum—
suggested improved conditions for
greater expansion. Recently, these more
favorable conditions had been reflected
in an upturn in money growth and bank
lending activity. With regard to the outlook for inflation, the available statistics
and anecdotal information continued to
indicate appreciable progress toward the
goal of price stability.
In the course of the Committee's discussion, the members gave a great deal
of emphasis to the uncertainties that surrounded the economic outlook, including potential developments abroad. Several members commented that against
the background of a relatively weak
expansion, the recent volatility in some
domestic financial markets and in the
foreign exchange market tended to
underscore the risks of developments
that could have adverse effects on the
economy. Another key uncertainty
related to the ongoing restructuring of
business firms and of business and consumer balance sheets. Those activities
were continuing to divert financial flows
from spending to savings or debt reduction, and prior experience provided little
basis for determining when such restructuring might come closer to being completed and flows of funds redirected on
balance into more normal spending
channels. Nonetheless, the members
drew considerable encouragement from
the substantial progress that already
had been made by business firms in
improving their balance sheets and by
163
many lenders, notably banking institutions. While some banks clearly were
continuing to experience financial difficulties, many had pared their problem
assets and strengthened their capital
positions. Moreover, a growing number
of reports suggested that banks were
intensifying their efforts to find creditworthy borrowers, though when such
efforts might become more general was
another source of uncertainty.
Consumer spending seemed to have
been reasonably well maintained in most
parts of the country, including indications of some growth in a number of
areas where overall business activity
appeared to be moving sideways or even
edging lower. At least in some parts of
the country, retailers were expressing
moderate optimism with regard to their
prospective sales during the upcoming
holiday season. Even so, very cautious
consumer attitudes, associated especially with concerns about employment
prospects, seemed likely to restrain
overall growth in consumer spending
over the next several months. Indeed,
barring unanticipated economic developments leading to a major strengthening in employment opportunities, continuing efforts by many households to
improve their financial positions could
be expected in the context of an already
low saving rate to limit the contribution
of the consumer sector to faster economic growth for some considerable
period.
In their comments about developments in other key sectors of the economy, members also cited single-family
housing construction as a source of
some stimulus in many regions. The
manufacturing of related building materials had exhibited a corresponding
pickup recently. Other construction
activity, notably that of office structures,
remained weak, but there were reports
of some improvement or continuing
164 79th Annual Report, 1992
growth in the construction of industrial
facilities and public works projects in
some parts of the country. In the energy
sector, a firming of gas prices was encouraging somewhat greater production.
On balance, there was little current evidence that construction, other than in the
single-family sector, would provide significant impetus to the overall expansion
in the year ahead. Likewise, flagging
demand was curtailing the production of
aircraft and inducing at least temporary
cutbacks in auto assemblies. In addition,
the foreign trade sector was not expected
to add significantly to demands on the
U.S. economy despite the decline in the
foreign exchange value of the dollar.
While the latter had fostered large
increases in tourism from abroad in a
number of areas and some domestic producers reportedly were gaining market
share, recessions or weak expansion in
major foreign trading nations were
likely to limit the growth in foreign
demand for U.S. goods.
The fiscal outlook remained uncertain. The large federal deficit was still
tending to preclude the adoption of
spending or tax reduction programs that
would increase fiscal stimulus, but some
members suggested that continued sluggishness in the economy might well
overcome current inhibitions against
new initiatives. In any event, defense
spending was on a clear downtrend and
was exerting an adverse effect on overall economic activity in many parts of
the country. At the state and local government levels, severe fiscal problems
probably would continue to curb spending and force many jurisdictions to raise
taxes so long as a relatively weak economy continued to hold down revenues.
With regard to the outlook for inflation, the members were encouraged by
the further indications of a disinflationary trend in prices and wages, and they
saw little likelihood that upward pres
sures on prices would emerge over the
next year or two, even in the context of
some pickup in the expansion of economic activity. While medical, tuition,
and some other costs were rising at relatively rapid rates, members cited widespread examples of very strong competitive pressures in markets for goods,
including key agricultural products, and
ongoing efforts by firms to cut costs in
the face of steady or even declining
prices in the markets for their products.
Nonetheless, business contacts still
seemed to anticipate rising inflation at
some point for the economy generally if
not in their own industries, and longterm interest rates still appeared to
embody higher rates of inflation.
In the Committee's discussion of policy for the intermeeting period ahead,
the members generally agreed that current uncertainties made an assessment
of the economic outlook and the determination of an appropriate course for
monetary policy particularly difficult.
While the members' preferences for policy implementation ranged from the
maintenance of unchanged reserve conditions to an immediate easing move, a
majority indicated that they could support a policy prescription of maintaining
unchanged reserve conditions for the
present while biasing the directive
strongly toward possible easing during
the intermeeting period.
Members who favored an unchanged
policy stance argued that despite the
softness in a number of recent economic
indicators they could see no currently
persuasive evidence of a cumulative
deterioration in the economy. Moreover,
earlier monetary policy easing actions
had provided a substantial amount of
stimulus to the economy that would continue to exert its effects over time. Real
short-term interest rates were at very
low levels, and intermediate-term rates
had declined considerably since mid-
FOMC Policy Actions
year. The reductions in interest rates had
greatly facilitated the progress already
achieved by business firms and households in restructuring their debts and
reducing their debt service burdens,
thereby strengthening thefinancialunderpinnings of the economy. The dollar
recently had been subject to considerable volatility in the foreign exchange
markets, and there was some risk that an
easing of monetary policy at this time
might tend to destabilize it. These members concluded that the present stance of
monetary policy continued to reflect an
appropriate balancing of the need to sustain progress toward price stability while
encouraging an acceptable rate of economic growth.
Members who favored an immediate
easing of policy believed that the outlook for the economy and prices argued
for a policy move at this time. These
members acknowledged that a good deal
of uncertainty surrounded the economic
outlook. However, there were some risks
that an already sluggish economy might
weaken further. In the circumstances, a
prompt easing move would be a desirable and prudent course, particularly in
a situation in which they saw a minimal
risk that inflation would be deflected
from its downward trend. In the view of
some of these members, continued
expansion in the broad monetary aggregates at rates below the Committee's
ranges suggested that financial conditions were not yet conducive to a pickup
in business activity that was sufficiently
robust to reduce margins of underutilized resources. An easing in monetary
policy seemed to be widely anticipated
in financial markets, and a failure to
take action at this time might well result
in an undesirable backup in market
interest rates, thus further weakening the
outlook.
A majority of the members noted that
they could support an unchanged direc
165
tive that included a decided presumption
of some easing if indications of stronger
economic activity failed to emerge or
the recent firming in money and credit
flows showed signs of ebbing materially. It was anticipated that any decision
to ease reserve conditions during this
period would be coordinated with the
consideration of a reduction in the discount rate by the Board of Governors.
Two members felt strongly that a directive calling for unchanged reserve
conditions should also provide for an
unbiased intermeeting instruction. While
such a directive would not rule out
an intermeeting adjustment—in either
direction—it would require more substantial evidence of changing or unexpected economic or financial information before a policy action was
implemented. Several members, including some who favored an immediate
easing of policy, expressed some discomfort about the extent to which the
Committee might be seen as reacting to
individual pieces of incoming data
rather than to an accumulation of information and analysis regarding the course
of the economy and prices.
In the course of the discussion, members commented that the pickup in the
growth of the broad monetary aggregates in August and September was a
reassuring development, even though
the rates of expansion were still quite
sluggish. According to a staff analysis
prepared for this meeting, the growth of
both aggregates was likely to remain
quite limited over the balance of the
year and to fall somewhat short of the
lower bounds of the Committee's ranges
for 1992 as a whole. Despite the lingering effects of earlier declines in shortterm interest rates, the projected expansion of M2 and especially that of M3
would be expected to remain below the
growth of nominal GDP, and the velocity of these monetary aggregates would
166 79th Annual Report, 1992
continue to display unusual strength in
comparison with past patterns. The persistence of slow growth in the broader
aggregates probably would involve further decreases in deposit offering rates
and shifts of funds to higher-yielding
alternatives such as bond and stock
mutual funds, with little effect on consumer spending or overall economic
activity. The members nonetheless recognized the need to assure adequate
monetary expansion for a growing economy and noted that money growth
appreciably below current expectations
would be a matter of increasing concern.
A differing view focused on the growth
of Ml and reserves, which had been
very rapid since the latter months of
1991. In this view, the outsized growth
in narrow measures of money was indicative of a quite stimulative monetary
policy, but given the long lags that were
involved, the inflationary consequences
of such growth, if allowed to continue,
might not become evident until much
later, perhaps not until well into 1994.
At the conclusion of the Committee's
discussion, a majority of the members
indicated their acceptance of a directive
that called for maintaining the existing
degree of pressure on reserve positions
and an understanding that there would
be a marked bias toward possible easing
during the intermeeting period. Two of
the members expressed a strong preference for a symmetric directive with
regard to possible intermeeting policy
adjustments, while two others were
firmly persuaded of the desirability of
an immediate increase in reserve availability to strengthen the growth of M2.
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, it was decided that
slightly greater monetary restraint might
be acceptable or slightly lesser monetary restraint would be acceptable during the intermeeting period. The reserve
conditions contemplated at this meeting
were expected to be consistent with
growth in M2 and M3 at annual rates of
about 2 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
suggests that economic activity is expanding
at a subdued pace. Total nonfarm payroll
employment declined somewhat further in
September, but the civilian unemployment
rate edged down to 7.5 percent. Industrial
production is estimated to have declined
appreciably since July. Real personal consumption expenditures appear to have risen
moderately in the third quarter. Data on
housing have been mixed, but on balance
they continue to suggest a gradual uptrend in
housing expenditures. Recent data on orders
and shipments of nondefense capital goods
indicate slower growth in outlays for business equipment, while expenditures for nonresidential construction have been weak. The
nominal U.S. merchandise trade deficit
widened somewhat in July from its average
rate in the second quarter. Incoming data on
wages and prices suggest that inflation is
slowing.
Short-term interest rates have declined
somewhat, while longer-term rates are about
unchanged since the Committee meeting on
August 18. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies fluctuated
widely over the intermeeting period but
ended the period higher on balance.
Expansion of M2 and M3 resumed in
August, though at fairly slow rates, and
limited growth appears to have continued in
September. Through September both aggregates were estimated to have grown at rates
somewhat below the lower ends of the
ranges established by the Committee for the
year.
The Federal Open Market Committee
seeks monetary and financial conditions that
FOMC Policy Actions
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting on June 30-July 1 reaffirmed the ranges
it had established in February for growth of
M2 and M3 of 2Vi to 6Vi percent and 1 to
5 percent respectively, measured from the
fourth quarter of 1991 to the fourth quarter
of 1992. The Committee anticipated that developments contributing to unusual velocity
increases could persist in the second half of
the year. The monitoring range for growth of
total domestic nonfinancial debt also was
maintained at AVi to 8V2 percent for the year.
For 1993, the Committee on a tentative basis
set the same ranges as in 1992 for growth of
the monetary aggregates and debt measured
from the fourth quarter of 1992 to the fourth
quarter of 1993. 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
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 2
and 1 percent, respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Kelley, and
Mullins, Ms. Phillips, and Mr. Syron.
Votes against this action: Messrs. Jordan,
LaWare, Lindsey, and Melzer.
Messrs. Jordan and Lindsey preferred
immediate action by the Committee to
increase the availability of bank reserves
sufficiently to achieve the Committee's
pre-announced target growth for M2 in
1992. Such reserve provision would
likely be associated with further declines in short-term market interest rates.
167
They believed that this policy action by
the Committee should be accompanied
by an announcement of reductions of
the upper and lower limits of the range
for M2 growth in 1993. They felt that it
was important to make clear that nearterm action to increase M2 expansion
was not an abandonment of the longterm objective of non-inflationary monetary growth.
Messrs. LaWare and Melzer dissented
because they did not want to bias the
directive toward possible easing during
the intermeeting period. In their view, a
variety of indicators, including the level
of short-term interest rates and the
growth of reserves, suggested that monetary policy already was positioned to
foster an expansion in economic activity
consistent with the economy's long-run
potential. Moreover, further easing at
this time would incur a substantial risk
of destabilizing the dollar in the foreign
exchange markets. In these circumstances, they favored a steady monetary
policy that was not disposed to react to
near-term weakness in economic data
and that allowed more time for the
effects of earlier easing actions to be felt
in the economy. Mr. Melzer also
expressed concern that the progress
already made toward achieving price
stability might be jeopardized if very
rapid growth in Ml were to continue.
Meeting Held on
November 17, 1992
1. Domestic Policy Directive
The information reviewed at this meeting suggested that economic activity had
been expanding at a moderate pace.
Consumer spending had picked up
somewhat, business purchases of capital
equipment continued to rise at a brisk
pace, and housing demand had increased
moderately since midyear. At the same
168 79th Annual Report, 1992
time, part of these demands were being
met through higher imports, and recent
gains in industrial production and
employment had been limited. Incoming
data on wages and prices had been
mixed but suggested on balance a continuing trend toward lower inflation.
Total nonfarm payroll employment
rose slightly in October after declining
in August and September. Substantial
job gains were recorded in the services
industries, especially in health services
and the cyclically sensitive business services, and employment in construction
rebounded from a September decline.
In manufacturing, the number of jobs
declined further in October, although
total hours worked were unchanged as
the drop in employment was offset by
an increase in overtime. Government
employment continued to contract,
reflecting the end of a federally funded
summer jobs program and early retirements by postal workers. Initial claims
fell somewhat during October, and the
civilian unemployment rate edged down
to 7.4 percent.
Industrial production rose somewhat
further in October following a modest
increase in the third quarter. Much of
the October gain reflected a sharp rise in
light truck assemblies, but there was
another sizable advance in the manufacture of office and computing equipment.
Elsewhere, the production of consumer
goods other than motor vehicles and
parts had changed little in recent
months, and the output of defense and
space equipment remained on a downward trend in October. Utilization of
industrial capacity edged higher in
October but was still near its 1991 low.
Retail sales increased appreciably in
September and October, led by a substantial rise in sales at automotive dealers. Sales at general merchandisers,
apparel outlets, furniture and appliance
stores, and building materials and sup
plies centers also were up noticeably
over the two months. Housing starts rose
significantly in August and then edged
up further in September to their highest
level since March. Sales of new homes
had increased on balance over recent
months, and the inventory of new homes
for sale in September had reached its
lowest level since 1983.
Real outlays for producers' durable
equipment posted another strong increase in the third quarter. A sharp
advance in outlays for computing equipment outweighed a dropoff in aircraft
purchases from an unsustainably high
level in the second quarter. Purchases of
items other than aircraft and computing
equipment rose at a rapid rate in the
third quarter, and recent data on orders
for such goods pointed to additional
growth in the near term. Expenditures
for nonresidential construction, which
had fluctuated within a narrow range
earlier in the year, dropped sharply in
the third quarter. Office construction
registered the largest decline, but other
commercial and industrial building also
fell considerably.
Business inventories rose only
slightly in September, but over the third
quarter as a whole stocks grew at the
same rate as in the second quarter. In
manufacturing, stocks were drawn down
in September, retracing a sizable portion
of the runup that had occurred in
August. In most manufacturing industries, inventory-to-shipments ratios in
September were at or near the bottom
of their recent ranges. Wholesale inventories rose modestly in the third quarter,
and the stocks-to-sales ratio in September was at the low end of the range
posted over the past year. At the retail
level, inventories rebounded in September from an August decline, leaving
the inventory-to-sales ratio for the retail
sector unchanged from the second
quarter.
FOMC Policy Actions
The nominal U.S. merchandise trade
deficit widened sharply in August; for
July and August combined, the deficit
was somewhat larger than its average
rate in the second quarter. The value of
exports was little changed from the second quarter, but the value of imports
increased appreciably. Most of the increase in imports was in capital goods,
especially computers, and consumer
goods. Recent indicators suggested that
economic activity in the major foreign
industrial countries had remained sluggish in the third quarter. A recovery
seemed to have gotten under way in
Canada, but the economies of most
European countries and Japan evidenced
little if any forward impetus, and the
downturn that began in western Germany in the second quarter appeared to
have persisted into the third quarter.
Producer prices of finished goods
edged up in October, reflecting a slight
increase in food prices and a further
sharp advance in prices of energy products. Excluding the finished food and
energy components, producer prices
declined slightly, and for the twelvemonth period ended in October, this
measure of prices increased considerably less than it had in the comparable
year-earlier period. At the consumer
level, prices of nonfood, non-energy
goods and services advanced more rapidly in October than in other any month
since March. Over the twelve months
ended in October, however, the rise in
this index of consumer prices was considerably smaller than that recorded in
the year-earlier period. Increases in
labor costs, measured by the total hourly
compensation of private industry workers, slowed further in the third quarter,
and both the wage and benefits components of this index had increased substantially less over the four quarters that
ended in September than in the preceding four quarters.
1 69
At its meeting on October 6, the Committee adopted a directive that called for
maintaining the existing degree of pressure on reserve positions and that
included a marked bias toward possible
easing during the intermeeting period.
Accordingly, the directive indicated that
in the context of the Committee's longrun 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 slightly lesser reserve
restraint would be acceptable during the
intermeeting period. The contemplated
reserve conditions were expected to be
consistent with growth in M2 and M3
at annual rates of about 2 percent and
1 percent respectively over the threemonth period from September through
December.
Open market operations during the
intermeeting period were directed
toward maintaining the existing degree
of pressure on reserve positions. The
emergence of more favorable indications regarding the performance of the
economy and the continued more rapid
expansion of money and credit were
seen as obviating the need to implement an easing in reserve conditions
that had been contemplated as a
strong possibility under the directive
issued at the October 6 meeting. Several
small technical decreases were made
during the intermeeting period to
expected levels of adjustment plus
seasonal borrowing to reflect the usual
pattern of diminishing needs for seasonal credit. Actual borrowing averaged close to expected levels over
the three reserve maintenance periods
completed since the October meeting.
Early in the intermeeting period, the
federal funds rate exhibited some of
the firmness that had prevailed over
most of the previous period, but sub-
170 79th Annual Report, 1992
sequently it averaged close to expected
levels.
Most other interest rates increased
appreciably over the intermeeting
period. At the beginning of the period,
rates generally incorporated an expected
near-term easing of monetary policy.
Subsequently, when an easing move was
not forthcoming and when concerns
about fiscal stimulus increased amid
some signs of firmer economic activity
and increasing money and credit demands, market interest rates rose for all
maturities. The largest increases were in
intermediate maturities, which were
especially affected by expectations of
additional federal borrowing and of a
stronger economy that would stimulate
rising private credit demands over the
next few years. Expectations of firmer
economic growth also boosted stock
prices appreciably over the period.
With interest rates rising in the United
States and falling abroad, the tradeweighted value of the dollar in terms of
the other G-10 currencies rose very substantially over the intermeeting period.
Declines in interest rates in foreign
countries were widespread, reflecting
signs of greater economic weakness as
well as actual or prospective easing in
monetary policies abroad. The dollar
was particularly robust against European currencies but advanced only moderately against the yen.
M2 growth strengthened somewhat in
October from its pace in the two previous months. The acceleration of M2
growth reflected more rapid expansion
of its transaction components that
appeared to be associated in part with
the lagged effect of earlier declines in
market interest rates and opportunity
costs and the heavy pace of mortgage
refinancing activity. M3 grew more
slowly in October partly owing to
reduced needs for managed liabilities in
conjunction with somewhat weaker
expansion in bank credit. Through
October, both broad aggregates were
estimated to have grown at rates a
little below the lower ends of the
ranges established for the year by the
Committee.
The staff projection prepared for this
meeting suggested a continuing expansion in economic activity. Growth was
expected to pick up gradually over 1993
to a rate that, although quite moderate
by past cyclical standards, would be
sufficient to reduce the margins of
unemployed labor and capital resources.
The recent backup in long-term interest
rates and the appreciation of the dollar
in foreign exchange markets would exert
some restraining influence over the next
several quarters. Continuing cautiousness on the part of consumers facing
uncertain job and income prospects
would tend to hold down gains in
consumption for some period ahead.
But, as further progress was made in
improving household balance sheets
and employment growth gradually
resumed, consumer spending would
strengthen. Additional gains in outlays
for business equipment were expected
over coming quarters as firms sought to
meet increasing demand for goods and
to respond to competitive pressures by
modernizing product lines and achieving labor-cost savings. The projection
pointed to sluggish export demand in
light of sustained economic weakness
abroad. While recognizing the possibility of a stimulative fiscal initiative in
1993, the staff retained for this forecast
the assumption employed in several
previous forecasts that fiscal policy
would remain mildly restrictive owing
in large part to a substantial decline in
defense spending. The persisting slack
in resource utilization over the forecast
horizon was expected to be associated
with additional progress in reducing
inflation.
FOMC Policy Actions
In the Committee's discussion of current and prospective economic developments, the members indicated that they
were encouraged by the somewhat more
positive tone in the latest economic
reports and by the signs of improving
business and consumer confidence. The
expansion appeared to have gathered
somewhat more upward momentum
than many had anticipated earlier,
though a number of members commented that relatively slow economic
growth was likely to persist over the
nearer term. The outlook beyond the
next quarter or two was subject to considerable uncertainty and indeed to both
upside and downside risks. The advent
of a new Administration and a new Congress early next year made fiscal policy
especially hard to predict. Members
observedthatindicationsofsomeimprovement in overall domestic demands,
should they persist, might well generate
considerable strengthening in production activity as businesses attempted to
maintain or build up their currently lean
inventories. On the other hand, the recent appreciation of the dollar and the
signs of growing weakness in major foreign economies could have adverse
implications for demands for goods produced in the United States. On balance,
moderate but sustained growth in overall economic activity was seen as a
likely prospect, though the gains probably would be uneven both in terms of
their timing and the sectors of the economy that would be affected. Against this
background, the members generally
continued to view further progress
toward price stability as a reasonable
expectation and an important element in
enabling the expansion to be sustained.
In their review of developments in
key sectors of the economy, the members generally agreed that while the
evidence of a strengthening business
expansion was still quite limited and
1 71
much of it was still anecdotal, there
were growing indications of improving
business and consumer confidence.
Some members cautioned that changing
attitudes alone could not be relied on as
harbingers of a more satisfactory economic performance, as experience in
recent years made clear, but the
improved financial condition of many
business firms, households, and lending
institutions provided a further basis for
optimism. A good deal of progress
already had been made toward reducing
debt burdens, and the retarding effects
of balance sheet adjustments on current
spending seemed likely to lessen over
the forecast horizon. Moreover, despite
many lingering problems, the general
health of the banking industry had
improved markedly and there were
spreading reports of greater efforts by
banks to find creditworthy borrowers.
At the same time, the members saw
signs that demands for bank loans might
be picking up a bit from very depressed
levels.
The latest data on retail sales and
anecdotal reports from many parts of the
country suggested some improvement
in consumer spending. There were
widespread reports of increasing optimism among retailers regarding the
outlook for sales during the holiday season. Sales of automobiles and trucks
appeared to be rising. The members
nonetheless generally continued to view
the outlook for consumer spending with
considerable caution. Consumers remained concerned about job prospects
against the background of continuing
downsizing and restructuring activities
by many business firms. Ongoing efforts
to reduce debt burdens also seemed to
be exerting a retarding effect on consumer spending. Against this background, the upturn in consumer confidence indicated by a recent survey could
prove to be relatively fragile and short-
172 79th Annual Report, 1992
lived. On balance, a strengthening trend
in consumer spending, though to a relatively moderate pace by past business
recovery standards, was still expected to
provide major support for a sustained
economic expansion.
Since the stimulus from the consumer
sector coincided with relatively lean
inventories, its effects might well be
reinforced for a time by business efforts
to build their inventories. Business
spending for equipment also appeared
likely to remain fairly robust, given a
moderate expansion in sales and the
improving financial condition of many
businesses. The housing sector was
viewed as another potential, though limited, source of stimulus over the forecast
horizon. There were reports of improving home sales and home construction
activity in many parts of the country,
including some otherwise depressed
areas, and many business contacts also
were seeing better demand for construction materials and home furnishings. On
the negative side, nonresidential construction remained weak across much of
the nation, and further reductions in construction activity were likely as major
projects were completed. However, nonresidential construction was being maintained or even trending higher in a few
areas and appeared to have bottomed
out in others. The rise in natural gas
prices had spurred drilling activity in
recent months, but some members commented that the outlook for significant
further gains in that industry was not
promising.
Many of the members stressed that
the external sector constituted a major
source of downside risk for the economy. The economic prospects for major
foreign economies appeared to have
deteriorated recently, and given the
appreciation of the dollar, net exports
might well worsen further over the next
several quarters. The possible failure of
ongoing trade negotiations would further dampen the outlook for U.S. trade.
For the present, anecdotal reports from
around the country on export sales were
mixed, with such sales still well maintained in some industries and areas but
slowing in others.
The outlook for fiscal policy constituted a major source of uncertainty;
while the enactment of some fiscal
policy measures now appeared to be
increasingly likely, there was no reliable
way to predict their overall size, specific
provisions, or the timing of their effects.
For now, the downtrend in federal government purchases of goods and services constituted a sizable negative in
the forecast of aggregate demands. In
particular, the cutbacks in defense
expenditures were having a major effect
on local economies in several parts of
the country. Any new fiscal initiatives
might well contain some stimulative
elements designed to provide a boost to
a relatively slow economic expansion.
However, the delays usually encountered in enacting such legislation
together with the subsequent lags before
much of the effects were felt in the
economy implied continued fiscal drag
during the quarters immediately ahead;
moreover, the propensity for financial
markets to raise interest rates in anticipation of fiscal policy stimulus might
also damp spending for some period.
Some members saw a risk that much
of the fiscal stimulus would be felt
at a time when economic activity
might already be gaining considerable
momentum.
Turning to the outlook for inflation,
members commented that despite a disappointing report on consumer prices
for October, the disinflationary trend
still appeared to be well established. In
the view of most members, the outlook
for relatively subdued pressures on
resources over the forecast horizon
FOMC Policy Actions
together with the slow growth over an
extended period in broad measures of
money augured well for further progress
toward price stability. Members were
continuing to observe strong competitive pressures in local markets, and business contacts were still emphasizing the
stout resistance that they encountered
when they tried to raise prices to widen
profit margins or to pass along rising
costs. Most businessmen currently saw
and anticipated little or no inflation in
their own industries. Consumers also
remained highly price conscious. At the
same time, however, there seemed to be
a widespread view in the business community and among consumers that at
some point the rate of inflation was
likely to rise appreciably from its recent
level, and such expectations tended to
have adverse repercussions in long-term
debt markets and to create tensions in
wage negotiations and other pricesetting activities. Members noted that
current inflationary expectations had
been built up over a period of many
years and an extended period of reduced
inflation probably would be required
before they disappeared.
At this meeting, the Committee had a
preliminary discussion of the ranges for
monetary growth in 1993 that it had
established on a tentative basis at the
meeting on June 30-July 1, 1992. The
ranges in question had been set at 2Vi to
6V2 percent for M2 and 1 to 5 percent
for M3 and were unchanged from those
adopted for 1992. While there had been
considerable sentiment at midyear in
favor of lowering the ranges, a majority
of the members had concluded then that
uncertainties about the prospective relationship between the monetary aggregates and nominal spending argued for
caution in making any changes. The
information since midyear had confirmed the persistence of sizable
increases in the velocity of M2 and M3.
173
A recent staff study had provided some
reasons for this unusual behavior, and
staff analysis pointed to a strong probability that velocity would rise again next
year.
During the discussion, the members
generally agreed that developments
since mid-1992 had reinforced the case
for some reduction in the 1993 range for
M2, and they indicated that they probably would support proposals for a lower
range. Such a reduction would be a technical adjustment intended to take
account of the atypical strength in velocity. Some noted that a lower range also
would be seen as underscoring the desire
of the Committee to avoid any pickup in
inflation should the expansion gain
momentum and indeed as promoting
further progress toward price stability,
thereby establishing a sounder basis for
sustained growth in the economy at its
highest potential. The ranges would
be voted on in February before their
scheduled announcement to the Congress, and by that time more information
would be available to gauge the prospective behavior of M2 during 1993.
In the Committee's discussion of policy for the intermeeting period ahead, a
majority of the members indicated a
preference for maintaining unchanged
conditions in reserve markets, but several others believed that some easing
would be a more appropriate policy.
Members who supported a steady policy
course emphasized the growing if still
tentative indications of a strengthening
economy—including the pickup in
money and credit growth—and the
apparent upturn in business and consumer confidence. Some also cited the
increased prospects of fiscal policy measures that were likely to provide some
net stimulus to the economy over the
intermediate term. Members who preferred to ease monetary policy at this
time referred to what they viewed as an
174 79th Annual Report, 1992
unsatisfactory outlook for economic
activity, and some stressed the desirability of taking prompt action to promote
sustained growth in the broader monetary aggregates within the Committee's
ranges. Members who favored an immediate easing also endorsed coupling such
a policy move with a reduction at this
time in the tentative M2 range for 1993
in order to emphasize the Committee's
commitment to noninflationary economic growth.
In the course of the discussion, the
members took account of a staff analysis
that suggested some moderation in the
growth of M2 over the remainder of
the year, assuming unchanged conditions in reserve markets. While M2
growth on a quarterly average basis was
expected to be stronger in the current
quarter than in the previous two
quarters, expansion for the year as a
whole was still projected to fall a little
below the Committee's annual range.
Some members commented that an
important policy objective would be to
prevent M2 growth from faltering—
such a development might parallel a
similar pause in the economy—as it
had earlier in the current expansion.
On the other hand, some members
noted the persisting increases in M2
velocity. They remarked that the level of
short-term interest rates together with
the very rapid expansion in Ml and
reserves pointed to an adequate availability of liquidity in the economy and
thus suggested that current monetary
policy already was appropriately stimulative and properly positioned to support the projected strengthening in
economic activity. Indeed, in one
view, continued rapid expansion in the
narrrow measures of money and
reserves, if allowed to continue, would
be a matter of increasing concern with
respect to the longer-run implications
for inflation.
In the Committee's discussion of possible adjustments to policy during the
intermeeting period, many of the members expressed a preference for a directive that did not bias potential adjustments in either direction. In this view,
the expansion was on a reasonably solid
footing, the risks to the expansion were
now fairly evenly balanced, and a steady
policy course should be maintained in
the absence of unanticipated developments with significant implications for
the economic outlook. Other members,
while encouraged by recent economic
developments, wanted to bias the directive toward ease, though without the
strong presumption of some potential
easing that had been associated with the
previous directive. They observed that
the economy was still expanding at a
relatively subdued pace, inflation was
on a downward track, and given the
earlier tendency for the recovery to
weaken, they believed that the Committee should react relatively promptly to
indications, including any downturn in
money growth, that the economy might
again be falling short of a moderate
growth path. Most of the members who
preferred to ease immediately indicated
that they could accept an unchanged
directive that was biased toward ease,
and such a directive also was acceptable
to many members who favored a symmetrical directive.
At the conclusion of the Committee's
discussion, all but three of the members
indicated their acceptance of a directive
that called for maintaining the existing
degree of pressure on reserve positions
and that would include some bias toward possible easing during the intermeeting period. Two of the members
expressed a strong preference for a symmetric directive with regard to possible
intermeeting policy adjustments, while
another was firmly persuaded of the
desirability of an immediate increase
FOMC Policy Actions
in reserve availability to strengthen the
growth of M2. 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, the Committee decided that slightly greater monetary restraint might be acceptable or
slightly lesser monetary restraint would
be acceptable during the intermeeting
period. The reserve conditions contemplated at this meeting were expected
to be consistent with growth in M2
and M3 at annual rates of about 3!/2 and
1 percent respectively over the threemonth 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
suggests that economic activity has been
expanding at a moderate pace. Total nonfarm
payroll employment was up slightly in October after declining in the previous two
months, and the civilian unemployment rate
edged down to 7.4 percent. Industrial production rose somewhat in October. Retail
sales increased considerably in September
and October. There was some strengthening
in residential construction activity over the
summer months. Outlays for business equipment have continued to increase, and recent
data on orders for nondefense capital goods
point to further growth in the near term;
expenditures for nonresidential construction
have remained weak. The nominal U.S. merchandise trade deficit widened somewhat in
July-August from its average rate in the
second quarter. Recent data on wages and
prices have been mixed but suggest on
balance a continuing trend toward lower
inflation.
Most interest rates have increased appreciably since the Committee meeting on
October 6. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies rose very substantially over the intermeeting period.
175
M2 has expanded at a moderate pace since
midsummer, with all of its growth stemming
from its Ml component, while M3 grew
slowly. Through October, both aggregates
were estimated to have grown at rates a little
below the lower ends of the ranges established by the Committee for the year.
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 on June 30-July 1 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 1991 to the fourth quarter
of 1992. The Committee anticipated that
developments contributing to unusual velocity increases could persist in the second half
of the year. The monitoring range for growth
of total domestic nonfinancial debt also was
maintained at AV2 to SV2 percent for the year.
For 1993, the Committee on a tentative basis
set the same ranges as in 1992 for growth of
the monetary aggregates and debt, measured
from the fourth quarter of 1992 to the fourth
quarter of 1993. 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
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
31//2 and 1 percent, respectively.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Kelley, Lindsey, and Mullins, Ms. Phillips, and Mr.
Syron. Votes against this action: Messrs.
Jordan, LaWare, and Melzer.
176 79th Annual Report, 1992
Mr. Jordan dissented because he preferred taking immediate action to increase the availability of bank reserves
sufficiently to raise M2 growth to a pace
more consistent with the Committee's
annual range. Because desirable M2
expansion in line with the Committee's
objectives would be likely to fall within
a lower range next year, he would announce concurrently a reduction in the
1993 range to make clear that near-term
action to increase M2 expansion was not
an abandonment of the long-term objective of noninflationary monetary growth.
Messrs. LaWare and Melzer dissented
because they did not want to bias the
directive toward possible easing during the intermeeting period. In their
view, recent developments pointed
to a strengthening economy, and they
favored a steady policy that was not
predisposed to react to near-term weakness in economic or monetary data.
More time was needed to evaluate the
effects of prior monetary policy actions,
and they were concerned that the adoption of a more stimulative policy over
the near term might well establish a
basis for greater inflation later. Mr.
Melzer was concerned that rapid growth
in total bank reserves, the monetary
base, and Ml over the past two years
might already have laid a foundation for
accelerating nominal GDP growth and a
reversal of the disinflationary trend. In
addition, he noted that policy errors can
easily be made at this stage of the business cycle. In an economic expansion,
efforts to resist increases in the federal
funds rate through large reserve injections eventually lead to higher inflation
and higher nominal interest rates.
2. Authorization for Domestic
Open Market Operations
The Committee approved a temporary
increase of $3 billion, to a level of
$11 billion, in the limit on changes
between Committee meetings in System
Account holdings of U.S. government
and federal agency securities. The
increase amended paragraph l(a) of the
Authorization for Domestic Open Market Operations and was effective for the
intermeeting period ending with the
close of business on December 22, 1992.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Jordan, Kelley,
LaWare, Lindsey, Melzer, and Mullins,
Ms. Phillips, and Mr. Syron. Votes against
this action: None.
The Manager of the System Open
Market Account advised the Committee
that the current leeway of $8 billion for
changes in System Account holdings
might not be sufficient to accommodate
the potentially large need to add reserves
over the intermeeting period ahead to
meet an anticipated seasonal bulge in
the demand for currency and required
reserves.
Meeting Held on
December 22, 1992
The information reviewed at this meeting suggested that economic activity
was rising appreciably in the fourth
quarter. Consumer spending, in association with an apparent upturn in wage
income and a surge in confidence, had
improved considerably; sizable gains
were being registered in the sales and
starts of single-family homes; and business spending for capital equipment
remained strong. There also had been
solid advances in industrial output, and
private payroll employment had turned
up. Data on wages and prices had been
slightly less favorable recently, and on
balance they raised the possibility that
the trend toward lower inflation might
be slowing a little.
FOMC Policy Actions
Total nonfarm payroll employment
expanded for the third consecutive
month in November, and the average
workweek increased further. A sizable
rise in government employment largely
reflected temporary hiring to staff polling places during the general election.
Private employment also picked up
somewhat, despite a decline in construction jobs and weaker-than-usual seasonal hiring in the retail trade sector.
A range of service industries recorded
further gains in employment, and the
number of jobs in manufacturing
increased after three months of sizable
declines. The civilian unemployment
rate fell further in November, to
7.2 percent.
Industrial production recorded
another advance in November. Motor
vehicle assemblies were about unchanged, but significant gains were evident elsewhere, notably in the production of business equipment, construction
supplies, and industrial materials. The
output of consumer goods rose slightly
further in November; all of the increase
was in the production of nondurable
goods. Reflecting the higher level of
output, total utilization of industrial
capacity edged higher in November to a
level slightly above that at the end of
1991.
Retail sales, buoyed by strong gains
in disposable income and a marked
improvement in consumer attitudes, rose
sharply in October and posted a further
increase in November. Sales of light
trucks were up substantially in the
October-November period, and sales of
a wide variety of other goods, both durable and nondurable, also advanced considerably. Single-family starts rose over
October and November to their highest
level since February, but starts of multifamily units remained at depressed levels. Sales of new and existing homes
continued on an upward trend, although
177
the preliminary estimate for new home
sales was down in October.
The limited data available suggested
that real business fixed investment was
continuing to expand at a brisk pace.
Shipments of nondefense capital goods
were up on balance over September and
October. A decline in shipments of
office and computing equipment, which
had accounted for most of the gains in
shipments since early 1991, was more
than offset by a considerable rise in
shipments of other items. Among other
indicators of spending for durable equipment over the September-October
period, sales of heavy trucks rose
sharply, and business purchases likely
accounted for some of the recent sizable
increase in sales of light trucks; on the
other hand, shipments of complete aircraft were weak. Nonresidential construction activity turned up on balance
in September and October, partly reflecting a steadying of expenditures for
office buildings, which had plunged during the summer. At the same time, construction of other commercial structures
recovered from a sharp decline in
August, while outlays for industrial
structures remained weak. A sharp
increase in drilling activity occurred in
October, apparently in response to
higher natural gas prices and the expiration at year-end of a drilling subsidy.
Business inventories were drawn
down appreciably further in October. In
manufacturing, reductions in stocks
were smaller in October than in September. The ratios of stocks to shipments in
most industries were at or near the bottom of their recent ranges. In the trade
sector, a sharp drop in stocks held by
auto dealers more than accounted for an
overall decline in retail inventories in
October. Aside from auto dealers, a
slight increase in retail stocks coupled
with a strong increase in sales produced
a small decline in inventory-to-sales
178 79th Annual Report, 1992
ratios. Wholesale inventories fell again
in October, and the inventory-to-sales
ratio for this sector was near the low end
of the range observed over the past two
years.
The nominal U.S. merchandise trade
deficit narrowed somewhat in October
from its average rate in the third quarter,
reflecting both a considerable increase
in the value of exports and a decline in
the value of imports. Most of the expansion in exports was in capital goods,
notably aircraft and industrial machinery, and consumer goods. The reduction
in imports was primarily in consumer
goods and in passenger cars imported
from Canada. Recent indicators generally pointed to continued weakness in
the economies of the major foreign
industrial countries. During the third
quarter, economic activity contracted
further in Japan and western Germany
and expanded slowly in France and
Canada. In the United Kingdom, activity appeared to have changed little.
Producer prices of finished goods fell
slightly in November, reflecting sharp
declines in the prices of food, gasoline,
and fuel oil. Excluding the finished food
and energy components, producer prices
edged higher and, for the twelve months
ended in November, rose at a considerably slower pace than in the comparable
year-earlier period. By contrast, at the
consumer level, prices of nonfood, nonenergy goods increased over October
and November at a faster rate than in the
previous several months. Consumer
prices of apparel, tobacco, and used cars
rose sharply in October, and airfares
surged in October and November as
domestic airlines sought to restore profit
margins that had been squeezed by promotions over the summer. Even with
these upticks, however, the index of consumer prices excluding food and energy
increased considerably more slowly in
the twelve months ended in November
than in the year-earlier period. Average
hourly earnings of private production or
nonsupervisory workers also rose more
rapidly in November; the strongest gains
were in the finance, insurance, and real
estate category, but sizable increases
were recorded in several other sectors as
well. Nevertheless, average hourly earnings rose more slowly over the twelve
months ended in November than over
the year-earlier period.
At its meeting on November 17, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that included some bias toward possible easing during the intermeeting
period. Accordingly, the directive indicated that 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 slightly lesser
reserve restraint would be acceptable
during the intermeeting period. The contemplated reserve conditions were
expected to be consistent with growth
of M2 and M3 at annual rates of about
3x/2 and 1 percent respectively over the
three-month period from September
through December.
Open market operations during the
intermeeting period were directed toward maintaining the existing degree of
pressure on reserve positions. One small
technical decrease was made during the
period to expected levels of adjustment
plus seasonal borrowing to reflect the
usual pattern of diminishing needs for
seasonal credit. Because of settlementday pressures, actual borrowing along
with the federal funds rate tended to
average a little above expected levels.
Changes in other short-term interest
rates were mixed over the intermeeting
period. In the market for Treasury secu-
FOMC Policy Actions
rities, bill rates were essentially unchanged while bond yields fell despite
the emergence of a more robust economic picture. Tending to offset the
effects of the latter on long-term rates
was the tenor of statements emanating
from the incoming Administration,
which were viewed by market participants as reducing the likelihood of a
large fiscal stimulus package. The recent
step-up in the size of bill auctions and
the potential for some shortening of the
maturity of Treasury debt issues under
the new Administration also might have
contributed to the flattening of the Treasury yield curve. Market expectations of
year-end pressures sharply boosted
interest rates on very short-term private
paper for a time; however, concerns
about year-end pressures subsequently
abated, and much of the rise in rates was
retraced. Most three- to six-month private rates fell on balance over the
period; the lower rates likely were associated with lessened expectations of
year-end pressures but also might have
reflected perceptions of reduced credit
risks in a strengthening economy.
Buoyed by the prospects for a stronger
economy and the declines that had
occurred in bond yields, most major
indexes of stock prices reached record
highs.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies was
essentially unchanged on balance over
the intermeeting period. The dollar
moved moderately higher over the first
half of the period in response to incoming data suggesting that the prospects
for sustained economic growth in the
United States were improving while the
economic outlook for Japan and Germany was deteriorating somewhat. Later
in the period, the dollar gave up its
gains, partly as a result of strong antiinflationary statements from Bundes
179
bank officials that damped market
expectations of near-term monetary
easing in Germany. The relative stability
of the dollar contrasted sharply with
the rekindling of exchange rate pressures among a number of European
currencies.
The growth of M2 slowed in November, and on average it had expanded at a
moderate pace in recent months; the limited available data indicated a further
reduction in growth of this aggregate in
December. The recent behavior of M2
largely reflected a sharp falloff in the
expansion of demand deposits associated with a backup in money market
rates in previous months and a likely
slowing in the rate of increase in mortgage refinancing activity. M3 expanded
at a relatively slow rate in November
and appeared to be declining in December. For the year, both M2 and M3
apparently grew at rates a little below
the lower ends of the annual ranges established by the Committee.
The staff projection prepared for this
meeting suggested a continuing expansion in economic activity that would be
associated with gradual reductions in the
margins of unemployed or underutilized
labor and capital resources. The pickup
in economic activity in recent months,
through its positive effects on confidence and incomes, was expected to
provide greater momentum to the economy in the near term. However, this
impetus would in part be offset by
weaker export demand as a result of
slower growth abroad and the higher
level of the dollar; the earlier backup in
long-term interest rates, only part of
which was retraced in recent weeks, also
would have a restraining effect. Consumer spending, which had outpaced
income growth in the second half of
1992, was projected to expand more in
line with incomes in coming quarters.
Residential construction was expected
180 79th Annual Report, 1992
to strengthen gradually as concerns
about employment security receded and
incomes improved. Spending increases
on business equipment were expected
to be sustained in part by continuing
efforts to improve productivity, and
investment in industrial building and in
commercial structures other than office
buildings would begin to pick up in
1993. While recognizing the possibility
of a stimulative fiscal initiative in 1993,
the staff retained for this forecast the
assumption in several recent forecasts
that fiscal policy would be mildly restrictive. The persisting, though diminishing, slack in resource utilization over
the forecast period was expected to be
associated with additional progress in
reducing inflation.
In the Committee's discussion of current and prospective economic developments, the members cited growing
indications of a somewhat stronger
expansion than had seemed to be under
way earlier and a marked improvement
in business and consumer confidence,
especially over the past month or two.
Although substantial uncertainties still
surrounded the outlook, these developments provided encouraging support for
forecasts of continued economic growth
at a pace sufficient to reduce gradually
margins of unutilized resources. The expansion now seemed to have gathered
fairly broad-based momentum that
might be reinforced over the quarters
ahead by business efforts to build
up inventories in the context of generally low inventory-to-sales ratios. Moreover, the improving financial condition
of many households and business firms,
notably banking institutions, was a
promising development that should
reduce constraints on economic growth
over coming quarters. The possibility
of expansionary fiscal measures was
another source of potential short-term
stimulus to the economy, though one
surrounded by substantial uncertainty
with respect to the nature, size, and
timing of any fiscal initiatives and the
longer-run consequences. On the negative side, many of the members stressed
what they regarded as a worsening outlook for U.S. exports; they also noted
the continuing weakness in commercial
construction, defense spending, and the
retarding effects on employment of
ongoing downsizing and restructuring
by many business and financial firms.
With regard to the outlook for inflation,
some of the recent reports on prices and
wages had been less favorable than
earlier. However, against the background of continuing though diminishing slack in production resources, favorable trends in productivity, and
restrained growth in the broad measures
of money, the members generally continued to anticipate further progress
toward price stability over the forecast
horizon.
The statistical evidence of a stronger
expansion was bolstered by anecdotal
reports of improving business conditions across much of the nation. Confidence appeared to be rising in most
areas and indeed seemed to be leading
the statistics. Some members observed,
however, that representatives of many
larger business firms did not seem to
share the ebullient mood of their smaller
business counterparts, possibly reflecting the still active retrenchment efforts
of many large firms and growing indications for some of weakening markets
abroad. There also were significant geographic exceptions to the improving
business climate, notably in areas that
were substantially affected by cutbacks
in defense spending, business consolidation and cost-cutting activities, and
underlying weakness in the energy
industry. On balance, regional weakness
in parts of the country such as southern
California tended to be masked in the
FOMC Policy Actions
overall economic statistics by what were
increasingly robust business conditions
in the rest of the nation.
Personal consumption expenditures
had posted relatively good gains over
the past several months, and retail sales
were displaying considerable strength in
the ongoing holiday season according to
anecdotal reports from around the country. Further growth in consumer expenditures was expected to provide a key
underpinning for continuing economic
expansion. A development that might
well be buttressing consumer spending
was the improvement in existing home
sales and the related capital gains that
were tending to supplement the recent
strengthening in disposable incomes.
Nonetheless, the contribution of the consumer sector was likely to be constrained by a number of factors despite
the recent surge in consumer confidence. In particular, an already low saving rate and still substantial household
debt burdens would tend to restrain the
growth in consumption expenditures.
Moreover, it seemed likely that gains in
employment would continue to be relatively limited, owing to further business
restructuring activities and related
improvements in productivity that
would tend to hold down the demand for
new workers. Even so, the pace of business hiring could be expected to quicken
as existing workers were utilized more
fully and the practical limits to increasing output through overtime work were
reached.
Continuing efforts to improve productivity were seen as likely to stimulate
appreciable further expansion in business fixed investment. Much of that
expansion was expected to take the form
of substantial further growth in outlays
for business equipment, especially if an
investment tax credit were to be enacted. At the same time, investment in
nonresidential structures was projected
181
to stabilize for the nation as a whole
next year after declining in recent years.
In this connection, members drew some
encouragement from anecdotal reports
that prices, rental rates, and other terms
relating to the value of commercial real
estate seemed to be bottoming out in
several depressed markets, though a
turnaround involving significant new
construction was unlikely for an
extended period in many of those markets. The outlook for housing construction was more promising, especially for
the single-family sector. Housing activity had strengthened at least marginally
in recent months in many parts of the
country, and the conjunction of reduced
mortgage rates and some projected
increase in incomes was expected to
support at least a gradual uptrend in
housing construction.
With regard to fiscal policy, members
noted that the bond markets had
responded favorably in recent weeks to
indications that the incoming Administration would give emphasis to reducing
the federal budget deficit over time. Indeed, the prompt enactment of legislation to achieve that objective
undoubtedly would bolster business and
consumer confidence as well as bond
markets, with favorable effects on the
economy. Some members cautioned,
however, that those effects would tend
to be negated to the extent that lower
federal spending was offset by legislated
increases in required spending by business firms to finance worker benefits
and other programs; such spending
would reduce profits and incentives to
expand and ultimately would boost costs
and prices. In any event, the course of
fiscal legislation remained highly uncertain in terms of its size, structure, and
timing and thus its near- and longerterm effects on the economy.
Many of the members saw a substantial risk that lagging exports could exert
182 79th Annual Report, 1992
a significant constraint on the domestic
expansion. There were increasing indications of a weaker economic performance in many foreign countries, which
were reinforced by recent anecdotal
reports from contacts at domestic firms
engaged in international business activities. However, while the risks for prospective economic activity abroad
seemed to be tilted to the downside,
stimulative policy responses by foreign
authorities—some of which had already
been initiated—might well alter developing trends. For now, though, diverging business trends in the United States
and foreign nations in association with
the rise that had occurred in the dollar
over the course of recent months pointed
to a worsening trade balance for the
United States.
The members generally anticipated
further progress toward price stability,
although some now expected somewhat
less improvement than they had earlier.
In the view of many members, key factors underlying a favorable inflation outlook included the persisting, though
decreasing, slack in the utilization of
production resources associated with the
moderate expansion expected in overall
economic activity and the slow growth
that had occurred for an extended period
in the broad measures of money. While
recent data on consumer prices and
wages had a somewhat less favorable
tenor, price competition remained vigorous in markets for many goods and
developments in long-term debt markets
suggested some shift in expectations
toward lower inflation. It also was noted
that ongoing cutbacks in work forces by
many employers, including widely publicized reductions by some major corporations, were tending to limit demands
for higher wages. Another important
influence was the strong competition
from foreign suppliers in the context of
sluggish demands in their own markets
and the rise in the foreign exchange
value of the dollar. Rapid increases in
the narrow measures of money and
reserves also were cited as possibly signifying a risk on the other side if such
increases persisted—that is, that monetary policy might soon be accommodating renewed inflationary pressures.
In the Committee's discussion of
short-run policy for the period until the
next meeting, all of the members
expressed a preference for maintaining
an unchanged degree of pressure on
reserve positions; all also indicated that
they could support a shift from the tilt
toward ease incorporated in recent directives to a symmetrical directive that
would not include any bias with regard
to possible adjustments to the degree of
reserve restraint during the intermeeting
period. Improved prospects for moderate economic growth argued for maintaining the Committee's current stance
in reserve markets, and they also warranted a shift toward a more balanced
approach to possible intermeeting
changes in policy. At the same time, the
still considerable uncertainties surrounding the economic outlook, including
some lingering questions about the
sustainability of the expansion, indicated
the desirability of a cautious approach to
any policy changes. In this connection,
several members referred to the swings
in the outlook that had characterized the
current expansion, including the recent
reversal of sentiment regarding the
strength of the expansion, and the associated risks of premature or misdirected
policy moves.
The members observed that the next
policy move might be in either direction. For example, the need for some
easing could not be ruled out should the
expansion again appear to be faltering.
Substantial weakness in the monetary
aggregates over coming months would
be one factor to be weighed in assessing
FOMC Policy Actions
the economic outlook, though velocity
developments also would have to be
taken into account. On the other hand, a
stronger economic performance might
raise questions as to the need for a tightening move at some point during the
year ahead as a means of maintaining
progress toward price stability while
continuing to encourage maximum sustainable economic expansion. If a tightening move were to be needed, it would
be desirable to implement such a move
before inflation pressures showed
through in the actual price statistics in
order to avoid sharp and potentially disruptive tightening actions later. One
member expressed concern about the
risk of maintaining an overly stimulative monetary policy for too long, with
adverse consequences for inflation;
while not prepared to tighten policy at
this point, he indicated a preference for
biasing the directive toward restraint.
In the course of this discussion, the
members took account of a staff analysis
that pointed to quite sluggish growth in
M2 and M3 over the months ahead and
to a marked slowing in the expansion
of Ml. The broader monetary aggregates were expected to continue to be
affected by the various factors that had
inhibited their growth over the past two
years and that had induced a substantial
diversion of credit flows from banking
institutions into capital market instruments. Moreover, some special factors
that had boosted the growth of the
broader aggregates in recent months,
such as the enlarged volume of mortgage refinancing activity, would tend to
dissipate in the months immediately
ahead, assuming no significant change
in mortgage interest rates. While the
atypically slow growth of the broader
aggregates during the current economic
recovery did not under prevailing circumstances have the usual implications
for the performance of the economy,
1 83
given the concomitant and unusual rise
in their velocities, several members
nonetheless expressed concern about the
persistence of the lagging growth. A few
were more concerned about the behavior of the narrower measures of money
such as Ml or the monetary base whose
growth had been unsustainably rapid
over much of 1992, though these now
gave some indications of moderating.
There was general agreement that the
performance of the various monetary
aggregates should continue to be monitored with special care.
At the conclusion of the Committee's
discussion, all of the members indicated
their support of 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 adjustments to
policy 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, the Committee decided
that slightly greater or slightly lesser
monetary restraint would be acceptable
during the intermeeting period. The
reserve conditions contemplated at this
meeting were expected to be consistent
with M2 growth at an annual rate of
about IV2 percent and with M3 about
unchanged 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
suggests that economic activity has been rising appreciably in the current quarter. Total
nonfarm payroll employment has increased
slightly since September, and the average
workweek has moved higher. The civilian
unemployment rate fell further in November
184 79th Annual Report, 1992
to 7.2 percent. Industrial production posted
solid gains in October and November. Retail
sales increased sharply in October and rose
further in November. Residential construction activity appears to have increased from
the third-quarter pace. Indicators of business
fixed investment have been mixed recently,
but on balance they suggest further growth.
The nominal U.S. merchandise trade deficit
narrowed somewhat in October from its
average rate in the third quarter. Recent data
on wages and prices suggest on balance a
possible slowing in the trend toward lower
inflation.
Changes in short-term interest rates have
been mixed since the Committee meeting on
November 17 while bond yields have edged
lower. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies was essentially
unchanged on balance over the intermeeting
period.
Over the course of recent months, M2 has
expanded at a moderate pace, while M3 has
continued to expand at a very slow rate.
More recently, both aggregates have weakened somewhat. Both appear to have grown
at rates a little below the lower ends of the
ranges established by the Committee for the
year.
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 on June 30-July 1 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 1991 to the fourth quarter
of 1992. The Committee anticipated that
developments contributing to unusual velocity increases could persist in the second half
of the year. The monitoring range for growth
of total domestic nonfinancial debt also was
maintained at 4Vi to %Vi percent for the year.
For 1993, the Committee on a tentative basis
set the same ranges as in 1992 for growth of
the monetary aggregates and debt measured
from the fourth quarter of 1992 to the fourth
quarter of 1993. 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 or slightly
lesser reserve restraint would be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be consistent with M2 growing at a rate of around
1 Vi percent and M3 about unchanged in the
period from November through March.
Votes for this action: Messrs. Greenspan,
Corrigan, Angell, Hoenig, Jordan, Kelley,
LaWare, Lindsey, Melzer, and Mullins,
Ms. Phillips, and Mr. Syron. Votes against
this action: None.
•
185
Consumer and Community Affairs
Concerns about possible discrimination
in mortgage lending and access to credit
by minorities and low-income households continued to receive special attention from the Division of Consumer and
Community Affairs in 1992. This chapter presents the efforts of the Board to
address these concerns and to promote
fair lending. It summarizes the Board's
actions to enforce existing federal consumer protection laws and to implement
new statutory protections. It also discusses the community affairs program
of the Board and Reserve Banks; 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; details the
activities of the Board's Consumer
Advisory Council; and reports on
congressional testimony on consumer
affairs issues.
Regulatory Matters
The Board took these actions with
regard to consumer affairs regulations:
• Proposed an amendment to Regulation B (Equal Credit Opportunity) giving credit applicants the right to receive
copies of appraisal reports
• Amended Regulation C (Home
Mortgage Disclosure) to expand the
coverage of the act and to implement a
small-institution exemption standard for
nondepository mortgage companies
• Revised Regulation Z (Truth in
Lending) to provide a limited exception
that allows banks to include a demand
provision in home equity lines to executive officers and proposed comparable
language for closed-end loans in the
staff commentary to Regulation Z. Other
proposed amendments applicable to
home equity lines were not adopted
• Provided an exception, pursuant
to temporary authority granted by the
Depository Institutions Disaster Relief
Act of 1992, with regard to the right of
rescission—the three-day waiting period
normally applicable to the disbursement of funds in credit transactions
secured by a consumer's home. The
exception allows borrowers in certain
disaster areas to waive their right of
rescission and permits creditors to use
preprinted waiver forms in these limited
instances
• Amended Regulation CC (Expedited Funds Availability) to permit institutions, on an exception basis, to extend
holds on checks that usually require
next-day and second-day availability.
The Board also finalized the hold schedule for deposits made at nonproprietary
automated teller machines
• Adopted Regulation DD, implementing the Truth in Savings Act
(TISA), to require depository institutions to provide consumers with account
disclosures. At year-end the Board published proposed changes after the Congress amended TISA by extending the
mandatory compliance date, changing a
part of the advertising rules, and modifying a notice provision
• Issued guidance through updates to
the official staff commentaries to Regulations B and Z.
Regulation B
(Equal Credit Opportunity)
In December the Board issued proposed
revisions to Regulation B (Equal Credit
186 79th Annual Report, 1992
Opportunity) to provide credit applicants the right, upon written request, to
receive copies of appraisal reports. The
revisions to Regulation B implement
statutory amendments contained in the
Federal Deposit Insurance Corporation
Improvement Act. The proposed amendments specify that the appraisal provision covers applications to be secured
by a lien on a residential structure containing one- to four-family units. They
also provide the time frames in which
applicants must request, and creditors
must give, a copy of an appraisal report.
The proposal would require most creditors to notify applicants in writing of
the right to receive a copy of an
appraisal report unless a copy is provided automatically.
Regulation C
(Home Mortgage Disclosure)
Regulation C generally applies to mortgage lenders that have assets of more
than $10 million and are located in
metropolitan areas. It requires disclosure of data concerning home purchase
and home improvement loans. Lenders
submit data—about loans they originate,
about the disposition of other applications they receive, and about loans that
they purchase—to their supervisory
agencies, and the Federal Financial Institutions Examination Council (FFIEC)
uses the data to prepare HMDA disclosure statements for individual institutions.1 During 1992, the Board, the other
banking agencies, and the Department
1. The FFIEC consists of representatives from
the five financial regulatory agencies: the Board of
Governors of the Federal Reserve System, 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).
of Housing and Urban Development
processed data covering the 1991 lending activity of more than 9,300 institutions; and the FFIEC produced
more than 25,900 individual disclosure
statements.
The information now available under
HMDA has expanded the opportunities
for analysis of home lending activity.
Before 1989, HMDA data revealed
information only about the geographic
distribution of residential lending by
covered institutions. Statutory amendments to HMDA, enacted in 1989,
expanded disclosures to include the
disposition of applications—approved,
denied, withdrawn, or files closed for
incompleteness—and the race or national origin, income, and sex of applicants and borrowers. The amendments
also expanded coverage to include independent mortgage companies.
The regulatory agencies use the
HMDA data in assessing lender compliance with the Community Reinvestment
Act and the fair lending laws. These
data are also used by community organizations, financial institutions, and the
public to obtain a greater awareness and
understanding of residential lending
activities in local communities.
Lenders make their HMDA disclosure statements available to the public.
The FFIEC also prepares reports showing the overall lending activity among
all reporting lenders in each of the
nation's 341 metropolitan areas. These
reports and copies of the individual
reports are available at central depositories. Data from the loan application register will be available on magnetic tape
and personal computer diskettes from
the FFIEC.
Like the HMDA data for 1990, the
data for 1991 indicate that rates of credit
denial are higher for black and Hispanic
loan applicants than for Asian and white
applicants, even when applicants are in
Consumer and Community Affairs
the same income bracket. Also, analysis
of the data shows that the rate of loan
denial generally increases with an
increase in the proportion of minority
residents in a neighborhood. Income
levels account for some of the variation
in loan-disposition rates among racial
groups. However, even after controlling
for income, white applicants for conventional home loans in all income groups
had lower rates of denial than black and
Hispanic applicants.
The HMDA data alone are not sufficient to determine whether a lender is
discriminating unlawfully. Specifically,
the data do not reflect the wide range of
financial and property-related factors
that lenders consider in evaluating loan
applications. The data do provide a
means for targeting specific application
files to review and for generating questions to ask of the institution's management. Examiners evaluate targeted files
by applying the lender's underwriting
standards to the application data to
determine whether the applicant received fair treatment.
In November the Board adopted an
amendment to Regulation C that will
expand HMDA coverage of nondepository mortgage companies in metropolitan areas. Previously such lenders, like
depository institutions, were covered
only if their assets exceeded $10 million
in the preceding calendar year. A statutory provision contained in the Federal
Deposit Insurance Corporation Improvement Act (FDICIA) directed the Board
to set a new exemption standard for
mortgage companies comparable to the
asset test for depository institutions.
Under the revised regulation, nondepository mortgage lenders continue to be
covered by HMDA if their assets exceed
$10 million; they are also covered if
they originated 100 or more homepurchase loans in the preceding calendar
year.
187
In December the Board solicited comments on a proposal requiring earlier
public access to the HMDA data to
implement an amendment to the act
made by the Housing and Community
Development Act of 1992. Under the
proposal, covered lenders will make disclosure statements available to the public within three business days, instead of
thirty days, after receiving the statements from supervisory agencies. Also,
they will make a copy of their loan
application register available to the public beginning March 31, 1993; to protect
the privacy of mortgage applicants and
borrowers, they will delete certain
items—the loan or application number,
the date of application, and the date
action was taken.
The FFIEC issued a revised version
of A Guide to HMDA Reporting, Getting
it Right, to assist institutions. The comprehensive guide discusses the law's
requirements, coverage, and management responsibilities; it also sets forth
detailed directions for gathering data,
plus step-by-step instructions for completing the reporting form.
Regulation Z (Truth in Lending)
In July the Board adopted a final rule
regarding home equity disclosures and
laws dealing with lines of credit to executive officers. The revision of Regulation Z resolved a conflict between the
home equity disclosure rules and regulations on loans to bank executive officers. A demand provision in loans to
executive officers is required by the Federal Reserve Act and Regulation O
(Loans to Executive Officers, Directors,
and Principal Shareholders of Member
Banks), but a demand provision is generally prohibited by the home equity
rules in Regulation Z. To resolve the
conflict, the final rule provides a limited
188 79th Annual Report, 1992
exception in Regulation Z for transactions involving bank officers.
Pursuant to the decision by the U.S.
Court of Appeals for the District of
Columbia Circuit in Consumers Union
of U.S., Inc. v. Board of Governors (938
F.2d 266), the Board reconsidered
whether to require disclosure of the discounted initial rate and certain payment
examples for each payment option in
home equity lines offered to consumers.2 After further analysis and a review
of comment letters, the Board left the
existing rules unchanged. The Board
concluded that the current requirements
provide the most useful information to
consumers and fulfill congressional
intent.
In November, the Board acted under
authority granted by the Depository
Institutions Disaster Relief Act of 1992
(DIDRA), and created an exception to
the three-day delay period normally
applicable to disbursement of funds in
credit transactions (other than purchase
money) secured by a consumer's home.
The exception provides easier access to
funds in emergency situations for transactions that take place (or for creditors
that are located) in areas of Florida,
Hawaii, Louisiana, and Los Angeles
declared to be disaster areas by the President. Lenders have the option to routinely accept a consumer's waiver of the
right to rescind and are permitted to use
preprinted waiver forms. The exception
2. Consumers Union challenged certain provisions of the Home Equity Loan Consumer Protection Act. The U.S. District Court for the District of
Columbia rendered a decision in favor of the
Board on several aspects of the lawsuit {Consumers Union of U.S., Inc. v. Board of Governors, 736
F. Supp. 337). On appeal by Consumers Union,
the D.C. Circuit decided in favor of the Board on
four issues and remanded two other issues for
reconsideration by the Board. The Board proposed
amendments in response to the decision but did
not adopt them.
expires one year from the enactment of
DIDRA (October 23, 1992) or from the
date the area was declared a disaster,
whichever is earlier.
Regulation CC
(Expedited Funds Availability)
In August the Board issued final amendments to Regulation CC pursuant to provisions in FDICIA. The amendments
permit banks to extend, on an exception
basis, holds on checks that usually
require next-day and second-day availability, and permit one-time notices of
exception holds in certain cases. The
Board also made permanent the availability schedules for deposits at nonproprietary automated teller machines and
reaffirmed administrative enforcement
authority of federal regulatory agencies
over U.S. offices and branches of foreign banks.
In December the Board published a
pamphlet entitled Guide to Regulation
CC Compliance. It identifies five areas
that pose problems for institutions and
are frequently cited as violations: providing a specific availability-policy disclosure, training employees to ensure
compliance, posting the availability policy where employees accept deposits,
providing the deposit availability notice
on preprinted deposit slips, and providing next-day availability when required.
The pamphlet discusses these problems
in detail to increase understanding of
Regulation CC and to minimize compliance problems.
Regulation DD (Truth in Savings)
In September the Board adopted Regulation DD to implement the Truth in Savings Act (TISA). The act's effective date
was originally set for March 21, 1993,
but in late 1992 was extended three
Consumer and Community Affairs
months by the Congress. The final regulation closely reflected the statutory provisions and addressed many of the concerns raised by more than 1,400
comment letters. The Board exercised
its regulatory authority judiciously by
creating exceptions when necessary to
further the purposes of the act.
Regulation DD requires depository
institutions to disclose to consumers
before they open an account the costs
and other features related to the account,
the interest rate, and the annual percentage yield. Institutions must calculate
interest on the full amount of principal
on deposit in the account for each day
and are prohibited from using a "lowbalance method" or "investable-balance
method" to calculate interest. Account
disclosures are to state an annual percentage yield (APY), an interest rate,
and the period of time that the interest
rate will be in effect. Other disclosures
apply to the minimum balance required
to open the account, to avoid fees, or to
obtain the APY; the balance computation method; the name and description
of any fees for maintaining the account;
any limitations on the number or amount
of withdrawals and deposits or on
checks that may be written on an
account for any period; any early withdrawal penalties; and details regarding
renewal policies.
For variable-rate accounts, disclosures will alert the consumer to potential
rate changes and the frequency of such
changes. Special maturity notices will
be given for time deposit accounts and
will differ for rollover and nonrollover
accounts. When a change in one of the
disclosed terms may reduce the APY or
adversely affect the consumer, the institution is required to give advance notice.
Although periodic statements are not required, if institutions provide statements
they must include information regarding
fees imposed, the total number of days
189
in the period, the interest earned, and the
annual percentage yield earned.
Because the new regulation governs
advertising of deposit accounts, overlapping rules in Regulation Q (Interest on
Deposits) will be eliminated on June 21,
1993—the mandatory compliance date
for Regulation DD. Any rate advertised
must be stated as an annual percentage
yield, and no other rate except an interest rate may be shown. Other disclosures apply when the APY or a bonus is
stated in the advertisement. Limited
exceptions from certain advertising
disclosures apply to broadcast or electronic media, outdoor media, telephone
response machines, or lobby boards.
Besides delaying the compliance date,
the Housing and Development Act
amendments make a minor change to
the advertising rules and modify a notice
provision. In December the Board
issued proposed amendments to the regulation to implement the changes, and
proposed interpretations to provide
guidance on other issues raised by institutions since the Board released the final
rule in September 1992.
The Board is conducting a two-phase
cost study of the law's effect. In November 1992 the Board sent out more than
4,000 surveys to financial institutions
covering, for the first phase, preimplementation account practices and,
for the second phase, start-up compliance costs and any changes in account
practices attributable to the regulation.
Replies for the second phase are anticipated in July 1993. The study will provide an assessment of the effect of TIS A
on the financial industry and, in general,
the extent of regulatory costs.
In conjunction with the cost study, the
Board has arranged for the University
of Michigan to conduct a telephone survey among consumers in 1993. It will
assess consumer knowledge of deposit
accounts and bank practices before
190 79th Annual Report, 1992
Regulation DD goes into effect. Some
time after the effective date, another survey will be taken. The two surveys will
be used to provide data on the benefits
of the TISA to consumers.
Interpretations
In 1992 the Board continued to offer
legal interpretations and guidance
through official staff commentaries.
These commentaries, intended to help
financial institutions and others apply
the regulations to specific situations, are
updated periodically to address significant questions that arise.
In April the Board issued revisions to
the staff commentary to Regulation B to
clarify the relationship with Regulation
C in regard to data collection. Both regulations require lenders to collect data
on home loan applications about the race
or national origin of applicants or borrowers. Loan brokers, correspondents,
or others who are prohibited from collecting monitoring information under
Regulation B will not be in violation
when they collect the data for a creditor
that is subject to Regulation C.
In December the Board proposed
revisions to the commentary to Regulation Z. Disclosures about collateral
securing a transaction need not specify
whether the security interest is newly
acquired or existing. The proposed revision also states that the model form for
rescission, when refinancing with an
original creditor, adequately discloses
the existence of a security interest when
a new one is acquired. Consistent with
the rule applicable to home equity lines,
the proposed commentary would provide that if an institution retains the
ability to demand payment of a loan in
its closed-end credit agreement with its
executive officers to the extent required
by federal law, the institution need not
provide demand disclosures.
The Board published a proposed policy statement on branch closings to help
depository institutions comply with a
FDICIA requirement. Covered institutions must adopt a written branch
closing policy and provide ninety days'
notice of any proposed branch closing to
customers and to their federal regulator.
The notice to the regulator must detail
the reasons behind the decision and give
supporting statistical information. A
notice of the decision must be posted at
the branch thirty days before its closing.
Community Affairs
Through its community affairs program,
the Federal Reserve System conducts
outreach, education, and technical assistance activities to help financial institutions and the public understand and
address community development and
reinvestment issues. During 1992, the
Reserve Banks increased the resources
devoted to community affairs activities
so that they could respond to an increase
in the number of requests from banks
and others for assistance and information on the Community Reinvestment
Act (CRA), fair lending, and community development. The Reserve Banks
also increased their efforts to work with
financial institutions, banking associations, governmental entities, businesses,
and community groups to develop community development lending programs
that help finance affordable housing,
small and minority businesses, and other
community revitalization projects. The
Federal Reserve's community affairs
program responded to several federal
and state legislative inquiries and initiatives involving the CRA and bank involvement in community development.
Various community affairs initiatives
addressed growing concerns related to
the availability of credit to minority borrowers and communities. The Federal
Consumer and Community Affairs
Reserve Bank of Kansas City sponsored
a conference for bankers on "Credit
and the Economically Disadvantaged,"
focusing on barriers faced by minority
borrowers and steps banks can institute
to ensure that credit is offered on an
equitable basis. The Boston and New
York Reserve Banks cosponsored a
conference on credit issues affecting
Native Americans, especially those living on reservations, in pursuing economic development programs.
Also, as part of the community affairs
program, the Board updated its publication, Directory: Bank Holding Company
Community Development Investments,
which presents profiles of community
development corporations (CDCs), limited partnerships, and other community
development projects in which bank
holding companies have been allowed
to invest. Community affairs staff members responded to inquiries from banks
and bank holding companies concerning
investments in CDCs and in limited
partnerships or equity pools for lowincome housing. Legislation authorizing
state member banks to make community
development investments, enacted in
late 1992, is expected to stimulate additional interest.
Two Reserve Banks supported collaborative multibank approaches to lending
and investment to promote community
development. The Atlanta Reserve Bank
provided technical assistance to help
create consortium CDCs or loan funds
in Florida and Mississippi. The San
Francisco Reserve Bank assisted financial institutions in San Diego to help
create a multibank CDC that focuses on
small business financing and also
worked with institutions in Nevada and
the State of Washington to form statewide reinvestment corporations.
Several Reserve Banks developed
new educational programs for bankers.
The Boston Reserve Bank created a new
191
community development curriculum for
bankers, and the Kansas City Reserve
Bank conducted a series of seminars on
community development lending, primarily for bankers in smaller communities. The Chicago and Minneapolis
Reserve Banks cosponsored two seminars on rural community development.
The San Francisco, Atlanta, and Philadelphia Reserve Banks sponsored CRA
seminars targeted specifically to members of boards of directors and senior
management of commercial banks.
Overall, the Reserve Banks' Community Affairs programs sponsored or
cosponsored more than 110 conferences
and seminars on fair lending, community development, and reinvestment
topics. Often in these programs, the
Reserve Banks worked with state bankers associations. Also, Community
Affairs staff members of the Board
and the Reserve Banks made more than
300 presentations at conferences, seminars, and meetings that were sponsored
by banking, governmental, business, and
community organizations.
In conjunction with outreach efforts,
the Philadelphia, St. Louis, and San
Francisco Reserve Banks developed
and published community profiles that
identify key community and economic
development needs and describe resource organizations in major communities in their Districts. These profiles are
available to banks and to community
and business organizations to help
stimulate collaborative approaches. The
Philadelphia Reserve Bank's profile
covered community needs and opportunities in the Vineland, New Jersey, area.
Discussions with financial institutions
serving that area led to the creation of
a lenders council that addresses community development and reinvestment
issues.
Staff members of the Reserve Banks
in community affairs continued to
192 79th Annual Report, 1992
support the Federal Reserve's supervisory responsibilities. Reserve Bank staff
members were increasingly called on
for direct technical assistance to help
individual institutions with less-thansatisfactory CRA ratings strengthen
their CRA programs. Several Reserve
Banks also assisted in conducting
HMDA analyses to help target institutions and areas for educational and technical assistance activities related to the
CRA and fair lending. The Board's
community affairs staff, working with
Reserve Bank examiners, revamped and
conducted a one-week seminar on
advanced CRA examination techniques
for consumer affairs examiners. The
Board's staff also presented a special
course segment for senior commercial examiners on community development lending and investment by banks.
FFIEC and Other Interagency
Activities
The Board and the other banking agencies undertake certain initiatives to
ensure compliance with the CRA and
fair lending laws through the FFIEC, an
interagency body that prescribes uniform principles, standards, and report
forms for the examination of financial
institutions at the federal level. 3
Through the FFIEC, the agencies acted
to refine and strengthen enforcement of
fair lending laws, provide education and
training in CRA responsibilities, and
identify and promote successful techniques that ensure equal treatment of
loan applicants.
Regarding CRA responsibilities, the
FFIEC took the following actions. In
March 1992, the banking agencies
amended the CRA guidelines to clarify
that examiners should view favorably an
3. For the member-agencies of the FFIEC, see
p. 186, note 1.
institution's working through minority
financial institutions to help serve the
credit needs of low-income and minority households. In April, the FFIEC
updated the series of interagency questions and answers that provides financial
institutions with guidance on how to
meet their CRA responsibilities. In June,
the FFIEC offered clarification on the
level of recordkeeping and documentation financial institutions need to maintain, along with the issuance of new
examination procedures for the CRA.
In the area of fair lending, the FFIEC
took several actions. In March, the agencies distributed to the institutions they
supervise a brochure, prepared jointly
through the FFIEC, entitled Home Mortgage Lending and Equal Treatment. The
brochure identifies and cautions lenders
about lending standards and practices
that may produce unintended discriminatory effects. It focuses on discrimination based on race and includes examples of subtle forms of discrimination,
such as unduly conservative appraisal
practices that may lead to rejection or
reduced loan amounts for property in
minority areas; property standards,
such as size and age, which may
exclude homes in minority and lowincome areas; and unrealistically high
minimum-loan amounts. The Federal
Reserve published a brochure in 1991,
entitled Home Mortgages: Understanding the Process and Your Right to Fair
Lending, to inform consumers about the
mortgage application process and about
their rights under fair lending and consumer protection laws. In December, the
FFIEC contracted with an outside consultant for a review of the agencies'
examination procedures to enforce civil
rights laws. The contractor will examine
the existing training and other procedures and recommend improvements. In
the meantime, the FFIEC's task force on
consumer compliance is revising an
Consumer and Community Affairs
interagency policy statement on the
enforcement of the ECOA and the Fair
Housing Act and is working on the
supervisory enforcement policy for the
two statutes.
Federal financial regulators continue
to pursue discussions with the Department of Justice, HUD, and the Federal
Trade Commission to strengthen
enforcement of civil rights laws with
regard to lending. Amendments to the
Fair Housing Act in 1990 strengthened
HUD's enforcement authority, and HUD
and the banking regulators have entered
into a memorandum of understanding to
refer to each other, and to coordinate
their investigation of, complaints alleging fair housing violations. The banking
agencies are also exploring ways to
work with the Department of Justice in
detecting possible patterns of discrimination against minority applicants.
Coordination among the regulatory
agencies will generally enhance enforcement of fair lending laws and detection
of possible discrimination and may produce new techniques to uncover unlawful discrimination.
The agencies took further actions to
improve enforcement of fair lending
laws—through HMDA-based targeting
of institutions with questionable lending
patterns, revision of examination strategies to identify possible discrimination,
and preparation of education programs
on fair lending practices for industry.
The agencies also encouraged financial
institutions and their trade associations
to strengthen their fair lending education for management, lending personnel,
and consumers.
Mortgage Lending
Discrimination
The data released under HMDA in October 1991 documented sharp contrasts in
the credit experience of various racial
193
and ethnic groups and raised concerns
about possible discrimination in the
mortgage lending process. The HMDA
data for 1992 continued to show these
disparate lending patterns.4 Suggestions
of possible discrimination were intensified by a major investigation of an
Atlanta thrift institution completed in
1992 by the Department of Justice and
a research study by the Federal Reserve
Bank of Boston, both reporting evidence
of disparate treatment of minorities by
lenders.
Findings from the Boston Study
During 1992 the Federal Reserve Bank
of Boston undertook a detailed study of
lending in the Boston metropolitan area,
in cooperation with the other federal
banking agencies and HUD. The study
was initiated in response to the large
differences in rates of denial of home
loan applications among whites, blacks,
and Hispanics in Boston that were
revealed by the 1990 HMDA data: a
ratio of nearly three rejections for black
and Hispanic applicants to one for white
applicants. The study sought to analyze
whether racial disparities in denial rates
for mortgages among surveyed lenders
reflected the equal application of legitimate credit standards.
Because the only financial data collected under HMDA are for income, the
Boston Reserve Bank collected thirtyeight additional items of information
pertaining to financial characteristics,
employment experience, and credit
history—information that lenders voluntarily provided from their files. The
study revealed substantial differences
based on financial and other economic
4. See Glenn B. Canner and Dolores S. Smith,
"Expanded HMDA Data on Residential Lending:
One Year Later," Federal Reserve Bulletin,
vol. 78 (November 1992), pp. 801-27.
194 79th Annual Report, 1992
circumstances of typical white applicants and those of minority applicants.
Statistical analysis also revealed, however, that after controlling for significant
economic factors, unexplained differences remained in loan approval rates
for black, Hispanic, and white applicants. Specifically, the model showed
that minority applicants with the same
economic and property characteristics as
white applicants would be expected to
experience a denial rate of 17 percent,
as compared with an 11 percent rate for
white applicants.
Racial or ethnic background was generally not found to be a factor in the case
of clearly qualified or clearly unqualified applicants. Disparities were evident, however, among applicants with
some negative characteristics (such as
high debt or income ratios) or weaknesses in credit history. For such applicants, national origin or ethnic background appeared to be a consideration.
The authors of the study suggest that
differences in treatment may arise from
differences in the level of assistance
received from loan officers. The degree
to which the findings reflect outright
. discrimination by individual loan officers and financial institutions in the market is unclear. The findings do confirm,
however, that greater attention is needed
to ensure the fairness of the mortgage
lending process.
After the October release of the
results of the Boston study, member
agencies of the FFIEC issued a joint
statement that addressed the issue of
disparate treatment. In this statement,
the agencies attempted to shift the focus
from a debate about whether unequal
treatment is occurring to an emphasis on
initiatives that will ensure fair lending
practices. The interagency statement
reiterated concerns about fair treatment
of applicants for mortgage loans. The
statement pointed to the increase in the
amount of empirical data suggesting that
economic factors might not explain
differences in denial rates.
Use of the Expanded HMDA
Data
The HMDA data enable regulatory
agencies to select specific loan files to
review during on-site examinations and
also to target specific lenders for more
extensive fair lending and CRA investigations. Several of the supervisory agencies, as well as the Department of Justice, are using the new HMDA data to
identify institutions to review, based
either on the large disparities in denial
rates among different racial groups or on
the low number of applications from
minority households in relation to the
racial composition of the community.
Acting in concert, the agencies are
developing techniques using automated
access to the data to detect evidence of
differential treatment. Through these
combined efforts, the agencies also seek
to identify the factors that underlie disparate lending patterns.
A data analysis system recently implemented by several of the agencies
seeks to maximize the usefulness of the
HMDA data by allowing examiners to
formulate and test specific hypotheses
regarding lenders' treatment of different
groups. The data available about loan
applicants' race or ethnic origin, sex,
and income—together with information
on the disposition of loan applications—
provides an opportunity to focus on the
accessibility of home purchase and
home improvement loans to certain
groups of consumers. The analysis system enables examiners to determine
whether disposition patterns (for example, rates of loan denial) differ significantly for one group of applicants compared with another. Examiners can also
use this evaluation technique to select
Consumer and Community Affairs
specific loan application files for on-site
review.
The Federal Reserve routinely uses
the expanded HMDA data to evaluate a
lender's geographic delineation of its
local CRA service area. Although many
factors affect the selection of the primary area a lender seeks to serve, the
HMDA data help determine whether the
geographic distribution both of home
loans extended and of applications
received are consistent with the boundaries of the delineated community. If an
institution's home lending activity is
substantially outside its delineated community, examiners will require the institution to substantiate the low number of
applications from the local community.
In some instances, the lender may need
to consider revising the boundaries of
their local service area, for example, by
expanding the area to be more in line
with the geographic pattern of the home
loans they provide. (The Board and the
FDIC have initiatives under way to
develop a computer-based mapping
technology that will assist examiners
in matching a bank's lending activity
with the boundaries of its delineated
community.)
Historically, examiners have used the
HMDA data to assess lenders' compliance with the twelve assessment criteria
established by the regulations that
implement the CRA. Among these criteria, the HMDA data are used in evaluating the following factors:
• The geographic distribution of the
institution's credit applications, extensions, and denials
• The institution's record of originating or purchasing residential mortgage
loans, housing rehabilitation credit,
home improvement loans, and loans to
small businesses and farms within its
community
• Evidence of prohibited, discriminatory, or other illegal credit practices.
195
The expanded data provide opportunities for a more comprehensive assessment of lending patterns. Over the past
two years, the Federal Reserve, in
consultation with the other banking
agencies, has developed and implemented a computer-based system for
analysis of HMDA data. The system
uses both HMDA data and information
from the U.S. Census of Population and
Housing. For example, one of the analysis reports in the new system shows
examiners how the residential lending
performance of an institution compares
with the performance of other lenders
serving the same local community. If
other institutions report significantly
larger numbers of applications and home
loans per housing unit, the institution
being examined may be asked to focus
on determining how to meet the credit
needs of its community, perhaps by reassessing its marketing activities.
The HMDA data are being used by
financial institutions themselves to
develop strategies and programs (including a different mix of products) that will
help them address the credit needs of the
various segments of their communities.
The data are one source of information
for assessing the geographic distribution
of their lending, as encouraged by the
agencies' policy statement on geographic analysis. For community organizations and other members of the public,
the HMDA data provide a basis for discussing the record of the lending institutions in their local communities, and for
documenting protests of applications by
banks for mergers and expansions.
Other Uses of HMDA Data
Considerable information about the
home loan purchase and securitization
activities of secondary market institutions, particularly governmentsponsored enterprises, the Federal
196 79th Annual Report, 1992
National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the
Government National Mortgage Association (GNMA), has long been publicly
available. Before 1989, however, secondary market data were produced
mostly in aggregate form. With the 1989
amendments to HMDA, covered lenders
are required to identify secondary market purchasers by type of entity. As a
consequence, the expanded HMDA data
provide new opportunities to profile the
characteristics of both the borrowers
whose loans are purchased by secondary
market entities and the neighborhoods
in which those borrowers reside.
A paper delivered at FNMA's annual
housing conference in May 1992 presented the first assessment of the HMDA
data as it pertains to secondary market
activity. That study, which focused on
the 1990 HMDA data, revealed that the
secondary market's loan purchase distributions, arranged by borrower and
neighborhood characteristics, generally
reflect those of loan origination patterns
in the primary market. The borrower
and locational characteristics of loans
supported by GNMA guarantees accurately reflect that agency's specialization in government-backed loans,
whereas the borrower and locational
attributes of loans purchased or securitized by FNMA and FHLMC more
closely align with the characteristics of
borrowers relying on conventional home
loans. The HMDA data also indicate
that in the primary market, a somewhat
larger share of conventional home loans
is granted to borrowers whose incomes
are below the median family income for
the metropolitan area where they reside
than is true for the loans purchased or
securitized by FNMA and FHLMC
The expanded HMDA data provide
an important database for HUD's Office
of Federal Housing Enterprise Over
sight, the new secondary market regulatory agency established by statute. The
information can be used to help assess
the success of efforts made by FNMA
and FHLMC in reaching certain
statutory mandates for supporting loans
to moderate-income homebuyers and
properties located in central-city
neighborhoods.
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 Expedited Funds Availability Act
decreased from 1991 levels, whereas
compliance with the Truth in Lending
Act, the Equal Credit Opportunity Act,
and the Electronic Fund Transfer Act
remained essentially unchanged. This
section summarizes these compliance
data for the reporting period July 1,
1991, to June 30, 1992.5
Equal Credit Opportunity Act
(Regulation B)
The financial regulatory agencies reported that compliance with Regulation
B remained about the same as in 1991.
In the 1992 reporting period, 57 percent
of examined institutions were in compliance with the Equal Credit Opportunity
Act (ECOA) compared with 58 percent
for 1991. 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, 77 percent had between one and
5. Not all the federal agencies that regulate
financial institutions use the same method to compile compliance data. However, the data support
the general conclusions presented here.
Consumer and Community Affairs
five violations—an improvement over
the 73 percent reported for 1991. 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 primarily for the purchase
or refinancing of a primary dwelling.
The Board issued two written agreements, one cease-and-desist order, and
one civil money penalty involving violations of Regulation B. The OTS issued
one cease-and-desist order and imposed
eighteen civil money penalties. The
FDIC issued three cease-and-desist
orders involving Regulation B.
The Federal Trade Commission
(FTC) obtained a consent judgment
against a large mortgage company for
the failure to retain records of rejected
applications as required under Regulation B. The FTC also obtained consent
judgments against related lenders in
cases alleging age, sex, and marital
status discrimination.
The Farm Credit Administration
(FCA) reported a satisfactory level of
compliance with ECOA. As a result of
examinations and enforcement activities, the FCA took formal actions
against three institutions for violations
of Regulation Z or Regulation B or both.
These institutions are now in substantial
197
compliance. The total number of violations decreased 8 percent from 1991
levels.
The other agencies that enforce
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 by the institutions
they supervise.
Electronic Fund Transfer Act
(Regulation E)
The financial regulatory agencies found
that, at 85 percent, the level of compliance with Regulation E remained similar to that in 1991. 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 electronic fund transfer (EFT) service.
• Provide a summary of a consumer's
liability for unauthorized EFTs.
• Provide a statement for each
monthly cycle in which an EFT
occurred, or at least quarterly if no transfer occurred.
• Provide a notice of the procedures
for resolving alleged errors at least once
each calendar year.
• Investigate and resolve alleged
errors promptly.
The Board issued one written agreement and one cease-and-desist order
involving violations of Regulation E.
The OTS issued one cease-and-desist
order and imposed one civil money penalty. The FTC reported ongoing litigation involving one telemarketing company that allegedly failed to obtain
written authorization from consumers
for preauthorized transfers.
198 79th Annual Report, 1992
Consumer Leasing (Regulation M)
The 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 in full compliance with the regulation. The violations the agencies noted involved
the failure to provide disclosures that
were clearly written, conspicuously
displayed, and presented in logical
sequence.
Truth in Lending Act
(Regulation Z)
The data from the financial regulatory
agencies show that, on average, 44 percent of examined institutions were in
full compliance with Regulation Z, up
slightly from 42 percent in 1991.6 The
Board, the NCUA, and the OCC showed
increases in compliance, while the FDIC
and the OTS reported declines. Four
agencies were able to provide the frequency of violations (the Board, the
NCUA, the OCC, and the OTS); they
indicated that of the financial institutions examined that were not in full
compliance, 57 percent had between one
and five violations (the lowest frequency
category), an improvement over the
53 percent reported for 1991.
The most frequent violations of Regulation Z observed by the five agencies
were the failure to accurately disclose
the finance charge, the annual percentage rate (APR), the amount financed,
and the number, amounts, and timing of
payments scheduled to repay the obliga6. The percentage of institutions in full compliance with the regulations given in this report is
calculated using a straight average of the percentage of institutions in compliance as reported by
the five financial regulatory agencies.
tion; and the general failure to provide
Truth in Lending disclosures that accurately reflected the terms of the legal
obligation.
The Board issued two written agreements, one cease-and-desist order, and
one civil money penalty involving violations of Regulation Z. The OTS issued
four cease-and-desist orders and imposed eighteen civil money penalties.
Under the Truth in Lending Policy
Guide and interagency enforcement policy on Regulation Z, a total of 368 institutions supervised by the Board, the
FDIC, the OCC, and the OTS refunded
$4.1 million on 23,967 accounts in
1992, compared with roughly $5.7 million on 26,796 accounts in 1991.
The FTC continued its Truth in Lending enforcement program and issued
final consent orders in three cases
involving the understatement of credit
costs, including the APR and finance
charge, in violation of Regulation Z. In
its enforcement efforts against telemarketing and other frauds on consumers
regarding credit card overcharges, the
FTC entered a consent judgment against
an individual in the marketing of travel
certificates. The agency is litigating
another case regarding distribution
of redress funds to consumers who
purchased vacation packages from
defendants.
Educating consumers and businesses
about their rights and responsibilities is
an integral part of the FTC's enforcement activities. In this effort, the FTC
released a publication on reverse mortgages and updated publications on refinancing home mortgages and on exercising the right of rescission under
Regulation Z.
Other agencies found that the institutions they supervise were generally in
compliance with Regulation Z. The
Department of Transportation reported a
satisfactory level of compliance with
Consumer and Community Affairs
Regulation Z by foreign and domestic
carriers. Consumer inquiries that were
investigated resulted in no formal
enforcement proceedings for violations.
The FCA reported that violations had
decreased more than 16 percent from
the 1991 reporting period. As a result of
examinations and enforcement activities, the FCA took formal actions
against three 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. It believes that
individuals and firms it regulates are in
substantial compliance.
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, the OCC,
the FDIC, and the OTS assess the CRA
performance of the institutions they
supervise during regular compliance
examinations and take the CRA record
into account, along with other factors,
when acting on certain applications.
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 Reserve Banks
199
• Analyses of CRA compliance when
processing applications from bank and
bank holding companies.
Federal Reserve examiners review
performance in fair lending, community
revitalization, and other relevant areas
to assess CRA compliance. During the
1991 reporting period (July 1, 1991,
through June 30, 1992), they conducted
711 examinations for compliance with
the consumer laws, including those that
address fair lending, and 674 for compliance with the CRA. During the reporting period, 93 banks received outstanding ratings for meeting community
credit needs, 523 received satisfactory
ratings, 52 received "needs to improve"
ratings, and 6 received "substantial noncompliance" ratings. When appropriate,
examiners suggested ways to improve
CRA performance.
In March the Board issued a policy
statement to reiterate the need for institutions to analyze the geographic distribution of their lending patterns as part
of the CRA planning process. The Board
encouraged institutions to document
these analyses and to make them accessible to examiners. Such analyses represent one of the twelve factors considered by the agencies in assessing CRA
performance.
In June, the FFIEC adopted revised
CRA examination procedures. Although
the agencies expect a reasonable level of
documentation of an institution's CRA
record, the new procedures emphasize
that the predominant concern under the
CRA is the degree to which an institution is helping to meet the credit needs
in all areas of its community. The FFIEC
also released A Citizen's Guide to the
CRA to increase awareness and understanding of the act. The guide reviews
the background of the CRA, the policies
and procedures of the enforcement agencies, and the 1990 changes to the CRA.
As a part of the Financial Institutions
200 79th Annual Report, 1992
Reform, Recovery and Enforcement Act
of 1989 (FIRREA), effective July 1990,
regulatory agencies were required to
make institutions' CRA ratings available to the public and to include public
discussion and involvement in the CRA
process. It describes the public role in
the CRA process and how public opinion is regarded in evaluating certain
types of applications.
The examination procedures also
implement a provision contained in
FDICIA relating to notice of branch
closings and to giving favorable consideration in CRA evaluations to an institution that donates, sells on favorable
terms, or makes available on a rent-free
basis branch facilities in minority neighborhoods to minority- or women-owned
depository institutions. The Housing and
Community Development Act of 1992,
enacted in October, adds another provision, directing the agencies to give
favorable consideration to certain institutions. These institutions are those that
have engaged in capital investments,
loan participations, or other ventures in
cooperation with minority- and womenowned institutions and low-income
credit unions to help meet the credit
needs of the communities in which
such institutions and credit unions are
chartered.
During calendar year 1992, adverse
CRA ratings were at issue in forty-five
applications from banks and bank holding companies received by the Federal
Reserve System, an increase over the
number in previous years. Thirty-one
such applications posed CRA ratings
issues in 1991, and forty-two in 1990.
The number of applications that were
protested because of CRA performance
also increased: twenty-nine applications
were protested in 1992, compared with
twenty-four in 1991 and twenty-seven
in 1990. Of the thirty, nine also contained ratings issues and are included in
the total count of forty-four for calendar
year 1992. At year-end, twenty-three of
the protested applications had been
approved and six were still pending.
In March 1992, the Board approved
an application by BankAmerica Corporation to merge with Security Pacific
Corporation. The Board received almost
350 comments on that application and
held four public meetings—in California, Washington, and Arizona—at which
approximately 175 commenters provided testimony.
The Board denied an application by
Gore-Bronson Bancorp, Incorporated,
an Illinois corporation, to acquire indirectly 96.3 percent of the voting shares
of Water Tower Trust and Savings Bank.
The Board denied the application based
on the CRA performance records of
Gore-Bronson's two bank subsidiaries
and of Water Tower Trust and Savings
Bank, as well as on considerations of
financial and future prospects.
Expedited Funds Availability Act
(Regulation CC)
The financial regulatory agencies reported that the level of compliance with
Regulation CC declined from 73 percent
in the 1991 reporting period to 69 percent in 1992. 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, 85 percent had between
one and five violations. The most frequent violations of Regulation CC were
the failure to take the following actions:
• Provide next-day availability as
required for certain items
• Provide a written notice when the
time is extended for the availability of
funds
• Provide two-day availability for
local checks
Consumer and Community Affairs 201
• 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
• Follow certain procedures for
exceptions for large deposits.
The Board issued one written agreement and one cease-and-desist order
involving violations of Regulation CC.
The OTS issued one cease-and-desist
order and imposed seven civil money
penalties.
Economic Effects of the
Electronic Fund Transfer Act
In keeping with statutory requirements,
the Board monitors the effect of the
Electronic Fund Transfer Act on the
compliance costs and consumer benefits
from EFT services. In 1992, there were
no new requirements or changes in the
regulation that altered the economic
effect of the act.
A large number of consumer accounts
and financial institutions are covered by
the act. In 1992, about three-fourths of
all households in the United States had
one or more EFT features on accounts at
financial institutions. About two-thirds
of all banks and thrift institutions offered
EFT services and were covered by the
act. Because of continued growth in the
availability and use of EFT services, the
economic effect of the act increased in
1992.
Automated teller machines (ATMs)
are the most widely used EFT service in
the United States. Most of the nation's
depository institutions offer consumers
access to ATMs, and more than half of
all households currently have ATM
access cards. ATM services have
become more widely available with the
continuing expansion of shared networks. Almost all ATM terminals in
operation today participate in one or
more shared networks. The monthly
average number of ATM transactions
increased about 13 percent, from
535 million in 1991 to 605 million in
1992. During the same period, the
number of installed ATMs rose about
5 percent.
Direct deposit is another widely used
EFT service. More than 40 percent of all
U.S. households receive direct deposit
of funds into their accounts. Direct
deposit is particularly widespread in the
public sector, with 54 percent of social
security payments and about two-thirds
of federal salary and retirement payments made by direct deposit. Although
direct deposit is less common in the
private sector, there too it has grown
substantially in recent years.
Point-of-sale (POS) systems account
for a small share of all EFT transactions,
but their use grew rapidly in 1992. The
volume of transactions on POS systems
rose 31 percent, to 25.5 million a month;
and the number of POS terminals rose
50 percent, to 117,000.
The benefits of the law are difficult to
measure because they cannot be isolated
from consumer protections that are provided even in the absence of regulation.
The available evidence provides no indication of serious consumer problems
with electronic transactions. In 1992,
about 85 percent of depository institutions examined by federal agencies were
in full compliance with Regulation E.
Statistics indicate that institutions that
are not in full compliance generally had
fewer than five violations. The violations primarily involved the failure of
institutions to provide one or more disclosures to consumers.
The Board's Consumer Complaint
Control System provides another source
of information on potential problems. In
1992, fifty-two of the complaints processed involved electronic transactions.
The Federal Reserve System forwarded
twenty-five complaints that did not
involve state member banks to other
202 79th Annual Report, 1992
agencies for resolution. Of the remaining twenty-seven complaints, one
involved a violation of the act or
regulation.
The Board also obtains information
about potential problems from consumer
surveys carried out by the University of
Michigan. A December 1990 survey of
consumer attitudes contained several
Board-sponsored questions about consumer experience with EFT. The survey
results suggest that EFT problems are
relatively infrequent and that the vast
majority of problems that do occur are
resolved satisfactorily. Of the households that had accounts with EFT features, 7.5 percent reported having experienced EFT errors in the previous
twelve months. This percentage is about
the same as that reported in surveys
from 1981 and 1983. In 1990, 88.0 percent of those experiencing problems had
complained to the institution about the
error, and 87.8 percent of the complainants reported that the error was resolved
to their satisfaction.
The incremental costs associated with
the EFTA are also difficult to quantify,
again because the industry practices that
would have evolved in the absence of
the statutory requirements are unknown.
Complaints about State Member
Banks
The Board and the Federal Reserve
Banks investigate complaints against
state member banks and forward to
appropriate enforcement agencies
complaints that involve other creditors
or businesses. In 1992 the System
received 2,586 complaints: 2,145 by
mail, 427 by telephone, and 14 in
person. The Federal Reserve investigated the 1,002 complaints that
were against state member banks (see
accompanying table). The System also
received 1,778 oral and written inquiries
about consumer credit and banking
policies and practices. In responding to
these complaints and inquiries, staff of
the Board and the Reserve Banks gave
specific explanations of laws, regulations, and banking practices and provided printed materials on the general
issues.
A second table summarizes the nature
and resolution of the 1,002 complaints
against state member banks, eighty-one
of which were pending at year-end.
About 63 percent involved loan functions: 11 percent alleged discrimination
on a prohibited basis, and 52 percent
Consumer Complaints to the Federal Reserve System Regarding
Financial Institutions, by Subject and Institution, 1992
Subject
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
Real Estate Settlement Procedures Act
Unregulated practices
Total
1. Complaints against these institutions were referred
to the appropriate regulatory agencies.
Other
institutionsx
Total
91
27
18
114
1
18
21
6
7
0
699
57
25
31
215
4
38
72
10
4
4
1,124
148
52
49
329
5
56
93
16
11
4
1,823
1,002
1,584
2,586
State member
banks
Consumer and Community Affairs 203
concerned credit denial on nonprohibited bases (such as length of residency)
and other unregulated lending practices
(such as release or use of credit information). Approximately 25 percent
involved disputes about interest on
deposits and general deposit account
practices. The remaining 12 percent
concerned disputes regarding electronic
fund transfers, trust services, and other
miscellaneous bank practices.
In May 1992 the member-agencies
of the FFIEC signed a memorandum
of understanding with HUD regarding
cooperation in the investigation of complaints alleging violations of the Fair
Housing Act. In early June 1992 the
Board sent the Reserve Banks procedures for investigating complaints alleging violations of the act by state member
banks. As of December 1992 the Federal Reserve had referred nine such
complaints to HUD under the memorandum; investigations completed by the
Federal Reserve in six of the complaints
revealed no evidence of discrimination.
Three of the investigations were pending at year-end.
Consumer Complaints Received by the Federal Reserve System, by Function, Institution,
and Resolution, 1992
Function
Type of institution
and resolution
Loans
Total
Discrimination
Complaints about state
member banks, by type
Insufficient information!
Information furnished to
complainant2
Bank legally correct
No reimbursement or
accommodation
Reimbursement or
accommodation—
goodwill3
Bank error
No reimbursement
Reimbursement
Factual dispute 4
Possible bank violation5
Matter in litigation 6
Customer error
Pending, December 31
Deposits
Other
Electronic
fund
transfers
Trust
services
Other
25
1
13
8
0
0
3
115
18
62
20
2
0
13
447
59
232
107
17
4
28
170
10
113
33
j
1
12
31
62
34
9
13
15
81
6
1
2
1
0
0
13
12
29
11
5
5
10
29
10
19
16
0
4
5
28
I
2
0
1
3
0
0
3
0
0
2
11
2
2
1
0
o
o
10
1,002
100
111
11
521
52
250
25
27
3
9
1
84
8
Complaints referred to
other agencies
1,584
69
957
323
25
26
184
Total
2,586
180
1,478
573
52
35
268
Total, state member banks . . . .
Percent
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.
o
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.
204 79th Annual Report, 1992
Unregulated Practices
In 1992 the Board continued to monitor,
under section 18(f) of the Federal Trade
Commission Act, complaints about
banking practices not subject to existing
regulations in order to focus on those
that may be unfair or deceptive. Three
categories each accounted for 10 percent or less of the 1,823 complaints:
refinancings of real estate loans (182);
denial of credit applications based on
credit history (84); and debt collection
tactics (55). Each of these categories
account for a small number (7 percent
or less) of all consumer complaints
received by the System.
The mortgage refinancing complaints
covered a wide variety of practices,
including alleged delays by lenders in
processing applications; lenders not
refunding application fees in instances
where refinancing applications were
denied; and alleged failure by lenders to
honor their lock-in commitments. Many
of the complaints about credit denials
based on credit history indicated that the
applicant underestimated the importance
lenders give to a poor credit history or
a lack of borrowing experience when
assessing the applicant's creditworthiness. The complaints about debt collection tactics were usually about the methods lenders employed to collect late
payments or outstanding debts.
Consumer Advisory Council
The Consumer Advisory Council 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, and state and
local government. Council meetings are
open to the public.
During 1992 the council considered a
variety of topics including the Boston
Reserve Bank's survey of mortgage
lending practices in Boston, implementation of the Truth in Savings Act, the
possible application of Regulation E to
electronic benefit transfer programs, a
review of CRA performance evaluations, lending patterns reflected by
Home Mortgage Disclosure Act data,
and other matters.
In March the council discussed
amendments to the Equal Credit Opportunity Act giving mortgage loan applicants the right to receive copies of
appraisal reports on properties associated with their loans.
In June, the council adopted a resolution that urged the lending industry and
the regulatory community to conclude
the debate about whether discrimination
exists in mortgage lending and to begin
focusing on how best to detect and remedy the problem. The committee also
introduced a list of suggestions for how
regulators, HUD, and mortgage lenders
might strive to combat discrimination in
lending.
A roundtable discussion, known as
the Members Forum, gives council
members the opportunity to offer their
views on a variety of topics. During
1992 the council discussed matters such
as whether there were any visible signs
of an economic recovery within their
industries or local economies and
whether there was any evidence that
obtaining a loan was becoming easier.
During the year, the council also considered the following issues:
• The burdens and benefits of consumer protection rules and the merits of
possible actions that could be taken to
reduce the regulatory burden associated
with them
• Concerns about the consistency and
quality of the publicly available CRA
performance evaluations for individual
Consumer and Community Affairs 205
institutions within and among the banking agencies, and the type of information contained in the reports, including a
statutory directive that examiners discuss the data they use to reach a conclusion about an institution's CRA efforts.
Testimony and Legislative
Recommendations
The Board testified on matters relating
to the 1990 HMDA data and to disclosures and substantive requirements for
lease-purchase transactions.
Matters Relating
to the 1990 HMDA Data
In May the Board testified in a joint
hearing before the Subcommittee on
Housing and Community Development
and the Subcommittee on Consumer
Affairs and Coinage, addressing concerns raised by the release of the 1990
HMDA data. The Board joined other
agencies in discussing how best to
address the disturbing statistics reflected
in the rejection rates for Hispanic and
black mortgage applicants compared
with white applicants applying for mortgage loans. The Board provided information on how HMDA data would be
used to strengthen fair lending enforcement and CRA activities.
Disclosures and Substantive
Requirements for Lease-Purchase
Transactions
The Board testified in June before a
House banking subcommittee about the
proposed Lease-Purchase Agreement
Act, which would impose disclosure and
substantive requirements on "leasepurchase" transactions, also known as
rental-purchase or rent-to-own arrangements. Lease-purchase transactions are
distinguishable from transactions cov
ered by the Consumer Leasing or Truth
in Lending laws. The lessee's ability to
terminate the lease removes the leasepurchase transaction from coverage
under Truth in Lending, and the monthto-month feature distinguishes it from
the leases covered by the Consumer
Lease Act, which covers leases of more
than four months.
In its testimony, the Board noted that,
with the high level of state legislation, it
is not clear whether federal legislation is
warranted. In 1983, the Board offered a
legislative recommendation for amending the Consumer Leasing Act to expand
its coverage of lease-purchase transactions, but the Congress did not enact
the amendments. Since then, more
than thirty states have enacted leasepurchase laws containing provisions
similar to the bill introduced in 1983.
The Board made substantive and technical recommendations for revising the
bill in the event federal legislation was
deemed appropriate. The Board also
suggested that, inasmuch as it has
no supervisory role with the parties
engaged in lease-purchase transactions,
the Congress may find it more appropriate to designate another agency to issue
the implementing rules.
Recommendations
of Other Agencies
Each year the Board asks those agencies
that have enforcement responsibilities
under Regulations B, E, M, Z, and CC
for recommendations of changes to the
regulations or the underlying statutes. In
1992 the Department of Transportation
(DOT) offered a recommendation regarding Truth in Lending. In its recommendation, the DOT noted that U.S.
travel agents and carriers participating
in the Airline Reporting Corporation
(ARC) maintain a weekly sales and
refund system. The short time frame of
206 79th Annual Report, 1992
this system ensures compliance with a
section of Regulation Z that requires a
creditor to submit a credit card refund
within seven business days. Because
of documented financial losses by carriers resulting from the short processing
requirement, however, ARC instituted
new procedures for reporting, processing, and settling credit card refunds. The
processing time for credit card refunds
under the new procedures may exceed
seven business days. If the Board determines that the new procedures fail to
comply with Regulation Z, the DOT
recommends that the Board amend the
section or grant a waiver or exemption
to allow the airline industry to retain the
ARC procedures.
•
207
Litigation
During 1992, the Board of Governors
was named in seventeen lawsuits, compared with twenty-seven in 1991. Seven
new lawsuits were filed in 1992, one of
which raised questions under the Bank
Holding Company Act. As of December 31, 1992, nine cases were pending.
Bank Holding Companies—
Antitrust Action
In United States v. Society Corp., No.
9 2 - C V 0 5 2 5 ( N . D . O h i o , filed
March 13, 1992), the Department of Justice challenged the acquisition by Society Corporation, a bank holding company, of Ameritrust Corporation under
the antitrust laws. The Board had
approved the transaction on February 13, 1992 (78 Federal Reserve Bulletin 302). The case was settled.
Bank Holding Company Act—
Review of Board Actions
In Synovus Financial Corporation v.
Board of Governors, No. 89-1394 (D.C.
Circuit, filed June 21, 1989), petitioner
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 (952
F.2d 426). Synovus's petition for a rehearing was denied on March 27, 1992.
In Citicorp v. Board of Governors,
No. 90-4124 (2d Circuit, filed Octo
ber 4, 1990), petitioner sought review of
a Board order requiring Citicorp to terminate certain insurance activities by a
nonbank subsidiary of Citicorp's subsidiary 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). A petition
for certiorari filed by the Independent
Insurance Agents of America was
denied on January 13, 1992 (112 S.Ct.
869).
In First Interstate BancSystem of
Montana, Inc. v. Board of Governors,
No. 91-1525 (D.C. Circuit, filed
November 1, 1991), petitioner sought
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,
(77 Federal Reserve Bulletin 1007). On
December 14, 1992, the court dismissed
the action on the parties' joint motion.
In State of Idaho, Department of
Finance v. Board of Governors, No. 9270107 (9th Circuit, filed February 24,
1992), petitioner sought review of a
Board order determining, in accordance
with Synovus v. Board of Governors,
952 F.2d 426 (D.C. Circuit 1991), that
no application is required for a bank
holding company to relocate its subsidiary bank across state lines. The case is
pending.
Litigation Under the Financial
Institutions Supervisory Act
In Board of Governors v. Pharaon, No.
91-CIV-6250 (S.D. New York, filed
208 79th Annual Report, 1992
September 17, 1991), the Board sought
to freeze the assets of an individual
pending administrative adjudication of a
civil money penalty assessment by the
Board. On September 17, 1991, 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 sought to
freeze the assets of an individual pending administrative adjudication of a civil
money penalty assessment by the Board.
On October 15, 1991, the court issued a
preliminary injunction restraining the
transfer or disposition of the individual's assets. The case is pending.
In Greenberg v. Board of Governors,
No. 91-4200 (2nd Circuit, filed November 22, 1991), petitioners sought review
of a Board order dated October 28,
1991, prohibiting former national bank
officials from banking. The Board's
orders were affirmed on June 19, 1992
(968 F.2d 164).
In Davis v. Board of Governors, No.
91-6972 (U.S. Supreme Court, filed
December 4, 1991), petitioner sought
review of Burke v. Board of Governors,
940 F.2d 1360 (10th Circuit 1991), in
which the court of appeals upheld Board
orders assessing civil money penalties
and issuing orders of prohibition. The
Supreme Court denied the petition for
certiorari on May 18, 1992 (112 S.Ct.
1957).
In Board of Governors v. bin Mah~
fouz, No. 92-CIV-5096 (S.D. New
York, filed July 8, 1992), the Board
sought to freeze an individual's assets
pending the administrative adjudication
of civil money penalty assessment by
the Board. On July 8, 1992, the court
issued a temporary order restraining the
transfer or disposition of the individual's assets. On October 30, 1992, the
parties filed a stipulation of dismissal
without prejudice.
In CBC, Inc. v. Board of Governors,
No. 92-9572 (10th Circuit, filed December 2, 1992), petitioners seek review of
a civil money penalty assessment
against a bank holding company and
three of its officers and directors for
failure to comply with reporting requirements. The case is pending.
Other Actions
In Fields v. Board of Governors, No.
3:91CV7069 (N.D. Ohio, filed February 5, 1991), the plaintiff appeals the
denial of a request for information under
the Freedom of Information Act. The
Board's motion for summary judgment
was granted in part and its motion to
dismiss was denied on June 23, 1992.
The case is pending.
In In Re Subpoena Served Upon the
Board of Governors of the Federal
Reserve System, Nos. 91-5427 and 9 1 5428 (D.C. Circuit, filed December 27,
1991), the Board appealed from an order
of the U.S. District Court requiring the
Board and the Office of the Comptroller
of the Currency to comply with a subpoena issued in a shareholder derivative
suit against the Fleet/Norstar Financial
Group seeking bank examination and
deliberative information. On June 26,
1992, the Court of Appeals affirmed
the District Court order in part, and
remanded for further consideration of
issues related to the privilege issue (967
F.2d 630). On August 6, 1992, the District Court ordered the matter held in
abeyance pending settlement of the
underlying action.
In Zemel v. Board of Governors, No.
92-1057 (D. District of Columbia, filed
May 4, 1992), the plaintiff alleges discriminatory practices under the Age Discrimination in Employment Act. The
case is pending.
Litigation 209
In Castro v. Board of Governors, No.
92-1764 (D. District of Columbia, filed
July 29, 1992), plaintiff appealed the
denial of his request under the Freedom
of Information Act. The action was dismissed on plaintiff's motion on November 30, 1992.
In Fields v. Board of Governors, No.
92-3920 (6th Circuit, filed September
14, 1992), plaintiff brought a Federal
Tort Claims Act complaint alleging misrepresentation during the application
process. The District Court for the
Northern District of Ohio granted the
Board's motion to dismiss on August
10, 1992. Plaintiff's appeal to the Sixth
Circuit was voluntarily dismissed on
December 18, 1992.
In DLG Financial Corporation v.
Board of Governors, No. 392 Civ.
2086-G (N.D. Texas, filed October 9,
1992), plaintiffs seek to enjoin the Board
and the Federal Reserve Bank of Dallas
from taking certain enforcement actions,
and seek money damages on a variety of
tort and contract theories. On October 9,
1992, the court denied plaintiffs' motion
for a temporary restraining order. The
case is pending.
In U.S. Check v. Board of Governors,
No. 92-2892 (D. District of Columbia,
filed December 30, 1992), plaintiff seeks
review of the denial of its request for
information under the Freedom of Information Act. The case is pending.
•
211
Legislation Enacted
In 1992 the Congress enacted four
pieces of legislation directly affecting
the Federal Reserve or the institutions it
regulates: the Depository Institutions
Disaster Relief Act of 1992, the Federal
Reserve Bank Branch Modernization
Act, the Futures Trading Practices Act
of 1992, and the Housing and Community Development Act of 1992.
Depository Institutions Disaster
Relief Act of 1992
The Depository Institutions Disaster
Relief Act of 1992, Public Law 102485, was enacted on October 23, 1992.
The major provisions of the act are as
follows:
• When the President designates a
major disaster area, any of the federal
agencies that regulate financial institutions may exempt such institutions, for
up to three years, from the real estate
appraisal requirements of the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 with respect
to property in the disaster area if the
agency determines that the exemption
would facilitate recovery from the disaster and would be consistent with safety
and soundness.
• For 180 days after enactment, the
Board may make exceptions to the Truth
in Lending Act and the Expedited Funds
Availability Act with respect to transactions or depository institutions in a
disaster area, with the exceptions expiring no later than the earlier of October 23, 1994, or one year following the
President's determination of a disaster
area.
• For eighteen months after enactment, the federal agencies that regulate
financial institutions may permit, under
specified conditions, certain insured
depository institutions located in a major
disaster area to subtract qualified assets
attributable to the deposit of insurance
proceeds from total assets in determining the institutions' leverage ratios.
• For 180 days after enactment, the
appropriate regulatory agencies may
take actions with respect to depository
institutions, other regulated entities, or
transactions in a major disaster area
without complying with certain requirements of the Administrative Procedures
Act; the agencies may also exempt such
institutions from publication requirements relating to the establishment of
branches or for other purposes.
The act also authorizes state member
banks to make community development
investments to promote the public welfare to the extent permissible under state
law and subject to regulation by the
Board. The Board generally may permit
a state member bank to invest up to
5 percent of its capital in community
development projects and may permit
an adequately capitalized state member
bank to invest up to 10 percent of its
capital in such projects if the Board
determines that the higher investment
will not pose a significant risk to the
insurance fund.
Federal Reserve Bank Branch
Modernization Act
The Federal Reserve Bank Branch Modernization Act, Public Law 491, was
enacted on October 24, 1992. The act
removes a statutory $140 million cumulative ceiling on expenditures for all
212 79th Annual Report, 1992
Branch buildings of Federal Reserve
Banks and substitutes a requirement of
Board approval for the acquisition or
construction of Branch buildings.
Futures Trading Practices Act of
1992
The Futures Trading Practices Act of
1992, Public Law 102-546, was enacted
on October 28, 1992. The act reauthorizes the Commodity Futures Trading
Commission (CFTC) for two years and
contains a variety of measures relating
to the regulation of the trading of futures
and options contracts.
Title V of the act directs any contract
market in stock index futures or options
on stock index futures to submit to the
Board any rule establishing or changing
levels of either initial or maintenance
margin on such contracts. The Board
may request an exchange to set margins
on stock index contracts at levels that
the Board believes are appropriate to
preserve the financial integrity of the
exchange and its clearing system or to
prevent systemic risk. The Board also
may direct an exchange to amend its
rules to effect the requested margin levels. The act permits the Board to delegate to the CFTC its authority over margin levels for stock index contracts.
Housing and Community
Development Act of 1992
The Housing and Community Development Act of 1992, Public Law 102-550,
was enacted on October 28, 1992. The
act addresses housing, community
development, crime, and other issues.
Title IX
Title IX, Subtitle A, of the act clarifies
or amends a variety of regulatory and
other programs as follows:
• The provisions of the Real Estate
Settlement Procedures Act (RESPA) that
prohibit the payment of "kickbacks" or
other fees with respect to the provision
of settlement services are to be understood as also applying to services relating to the origination and processing of
mortgage loan applications.
• The coverage of RESPA is
extended to refinancings and second
mortgages.
• By amendment of the Community
Reinvestment Act, federal bank
regulatory agencies may consider certain ventures undertaken by a depository
institution in cooperation with financial
institutions owned by minorities or
women and low-income credit unions as
a factor in determining whether the
depository institution is meeting the
credit needs of local communities.
• The Board must, in consultation
with the other federal regulators of
depository institutions, submit within
one year of the law's enactment a report
to the Congress comparing residential,
small business, and commercial lending
by insured depository institutions in
low-income, minority, and distressed
areas to such lending in other areas.
• For any precomputed consumer
credit transaction with a term of more
than sixty-one months that is consummated after September 30, 1993, lenders
must refund in full any unearned interest
charged to a consumer that has prepaid
the obligation, and it prohibits the use of
the "rule of 78s" and other methods that
are unfavorable to the consumer when
calculating unearned interest.
Subtitle A also amends the Home
Mortgage Disclosure Act of 1975
(HMDA) as follows:
• Depository institutions must make
the information in loan application registers available upon request, subject to
regulations of the Board concerning format and appropriate deletions.
Legislation Enacted 213
• Depository institutions must maintain and disclose the information in loan
application registers according to timetables in the act, and depository institutions may charge a reasonable fee for
providing copies of the information.
• Depository institutions must make
HMDA disclosure statements available
to the public no later than three business
days after receipt of the statements from
the Federal Financial Institutions Examination Council.
• A timetable in the act shortens the
period before initial public disclosure of
loan application information statements
and HMDA disclosure statements.
Subtitle B of Title IX contains the
following provisions:
• By amendment of RESPA, lenders
need not provide a loan applicant with a
good faith estimate of real estate settlement costs and consumer information
concerning settlement costs when the
application is denied within three days
of its receipt;
• Existing requirements for the establishment of a maximum interest rate
on any adjustable rate mortgage are to
be understood as applying only to consumer loans.
• Federal regulators of financial institutions may establish a limit below
which an appraisal by a state-licensed
or state-certified appraiser would not be
required for real estate lending transactions by insured depository institutions,
but the regulator must certify that establishment of the threshold does not represent a threat to the safety and soundness
of the financial institutions it regulates.
• By amendment of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the Board
may exclude transactions from the limits on extensions of credit to insiders, if
the Board determines such transactions
pose a minimal risk, and it may exclude
a depository institution's bank holding
company from insider lending limits
placed on shareholders of a depository
institution.
• By amendment of FDICIA, regulations concerning safety and soundness
required by FDICIA may not set specific levels or ranges on compensation
of directors, officers, or employees of
insured depository institutions.
• By amendment of the Truth in
Savings Act, the effective date for compliance with regulations implementing
that act are delayed and on-premises
displays that include interest rate information are excluded from disclosure
requirements if the displays include the
annual percentage yield and indicate that
further information can be obtained concerning terms of the account.
Title XV
Title XV of the act contains the
Annunzio-Wylie Anti-Money Laundering Act. Portions of Subtitle A relate
to insured depository institutions, as
follows:
• The Federal Deposit Insurance Corporation (FDIC) may appoint itself as
conservator or receiver for any insured
state depository institution that has been
convicted of money laundering.
• The FDIC must consider revoking
the insurance of an insured state depository institution convicted of money
laundering, and it may consider revocation of insurance for an insured state
depository institution convicted of
offenses related to the reporting of cash
transactions.
• The Office of the Comptroller of
the Currency (OCC) must consider
revoking the franchise of any national
bank or federal branch or agency of a
foreign bank convicted of money laundering, and the OCC may consider revocation for any national bank or federal
branch or agency of a foreign bank con-
214 79th Annual Report, 1992
victed of offenses related to the reporting of cash transactions.
• The Board must consider terminating a state agency, uninsured state
branch, or state commercial lending
company subsidiary of a foreign bank if
any of these entities, or the foreign bank
itself, is convicted of money laundering
or offenses related to the reporting of
cash transactions.
• A federal regulator of financial
institutions may consider removing an
institution-affiliated party who has violated requirements related to the reporting of cash transactions or had knowledge of certain violations concerning
money laundering.
• A federal regulator of financial
institutions may suspend or prohibit an
institution-affiliated party charged with
money laundering if continued service
or participation by such party poses a
threat to the depository institution, and
the regulator must remove or prohibit
any institution-affiliated party convicted
of money laundering.
• A person convicted of money laundering cannot participate in the affairs of
an insured depository institution except
with the permission of the FDIC.
Portions of Subtitle B of Title XV
relate to insured depository institutions
and other financial institutions, as
follows:
• The Department of the Treasury
must prescribe regulations requiring
depository institutions to identify customers that are defined as financial institutions under the rules for reporting cash
transactions.
• A depository institution must not
disclose the existence of Treasury orders subjecting the institution to special
rules for recording and reporting cash
transactions.
• When the Board and Treasury
determine that records of payment
orders transferring funds through whole
sale funds transfer systems have a high
degree of usefulness in criminal, tax, or
regulatory investigations or proceedings,
the agencies may jointly prescribe regulations concerning the maintenance of
such records by insured depository
institutions
• The Board and Treasury—after
considering the degree of usefulness of
records of payment orders that are
related to international transactions in
criminal, tax, or regulatory investigations or proceedings and the effect that
such recordkeeping will have on the cost
and efficiency of the payment system—
must jointly prescribe regulations concerning the maintenance of records of
such transfers made through wholesale
transfer systems or on the books of an
insured depository institution or a business that provides check cashing
services, money transmittal services, or
issuance or redemption of money orders,
travelers' checks, or similar instruments.
• Treasury may require a financial
institution to report any suspicious transaction; the financial institution must not
disclose the existence of such reports to
the parties involved in the transaction;
and the institution is immune from potential liability under any law for reporting the transaction without notifying the
parties to the transaction.
• Treasury may require financial
institutions to carry out programs to
deter and detect money laundering.
Subtitle F of Title XV authorizes
Treasury to require insured depository
institutions to request copies of cash
transaction reports from any financial institution, other than another
depository institution, that engages
in any reportable transactions with the
depository institution with respect to
any earlier transactions involving the
same coin, currency, or monetary
instruments.
•
215
Banking Supervision and Regulation
The past year was in many respects a
transitional period for the U.S. banking
system and for the Federal Reserve's
banking supervision and regulation
activities. After having experienced
weak profitability and a rise in problem
assets for several years, the commercial
banking industry in 1992 reported its
highest profitability in more than a
decade, and problem assets decreased.
These achievements were possible in
large part because of declining market
interest rates. The industry's capital
ratios also improved significantly from
1991, with the equity capital ratio reaching its highest point since 1966. Banking organizations drove up their capital
ratios mainly by retaining a greater share
of their profits and by issuing record
amounts of new equity; these actions
were taken in anticipation of the full
phase-in of the international capital standards and in preparation for domestic
banking legislation that went into effect
at the end of 1992.
One consequence of this overall
improvement was that the number of
bank failures during 1992 was lower
than had been anticipated. Nonetheless,
the number of troubled and failed institutions remained high, and problem
commercial real estate loans continued
to stress much of the industry. Earlier
efforts by banking organizations and the
regulatory agencies to address the industry's problems and to strengthen lending
standards had led to concerns about the
availability of bank loans to creditworthy borrowers; those concerns persisted throughout 1992. Surveys of
senior lending officers indicated that
banks had generally taken measures to
adopt more conservative lending poli
cies and practices, in part in response to
the losses associated with some laxities
in the 1980s. Anecdotal evidence indicated that the move to tighten standards
was caused, in part, by concerns that
examiners were being overly critical in
evaluating loans. Building on earlier
policy statements, the Federal Reserve
during the year further addressed possible disincentives to prudent bank lending. These efforts included continuing
clarification of Federal Reserve policies
to examiners and other supervisory staff
members to promote realistic loan evaluation procedures.
The industry's recent problems gave
rise in late 1991 to major legislation
designed to improve banking and bank
supervisory practices, generally with the
purpose of reducing potential costs to
the public. The Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) contained numerous
provisions covering broad aspects of
bank lending and operating standards.
Developing regulations to implement
this statute was a major activity of the
division during 1992 and will remain
one throughout much of 1993. FDICIA
specifies supervisory policies and
actions for all banks, especially for those
that are undercapitalized. The statute
also directs the banking and thrift regulatory agencies to more formally
address noncredit risks in bank capital
standards and gives the Federal Reserve
broader supervisory authority over foreign banks operating in the United
States. Many provisions of FDICIA
require the issuance of uniform rules by
the banking and thrift regulatory agencies; as a consequence, the amount of
interagency coordination on supervisory
216 79th Annual Report, 1992
issues increased significantly during
1992.
The Congress enacted as part of
FDICIA the Foreign Bank Supervision
Enhancement Act of 1991 (FBSEA).
This legislation expanded the authority
of the Federal Reserve to regulate and
supervise foreign banks conducting
business in the United States. To implement the act, the Board issued interim
amendments to Regulation K relating to
the international banking operations of
foreign banking organizations in the
United States. In November 1992 the
Board approved the final regulations.
The Department of the Treasury and the
Board also completed two joint studies
required by FBSEA. The first study
found that the Basle risk-based capital
framework provides an appropriate basis
for evaluating the capital equivalency of
U.S. and foreign banks. The second
study concluded that foreign banks
should continue to operate branches in
the United States pursuant to the International Banking Act of 1978, as
amended, and FBSEA, as opposed to
operating only through subsidiaries.
To meet its additional responsibilities,
the Division of Banking Supervision and
Regulation was reorganized in July, and
the Division's authorized staff level was
increased. Several new sections of the
division were created to coordinate
issues dealing with Federal Reserve
Bank supervisory procedures, industry
accounting practices, computerized
information, enforcement activities, and
foreign bank supervision.
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 Sys
tem. 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.1 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 subsidiaries.
The Federal Reserve is responsible
for the supervision of (1) all Edge Act
corporations and agreement corporations, (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.2 In addition, the FBSEA
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.
1. The Board's Division of Consumer and
Community Affairs is responsible for 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.
2. Edge Act corporations are chartered by the
Federal Reserve, and agreement corporations are
chartered by the states, to provide all segments of
the U.S. economy with a means of financing international trade, especially exporting.
Banking Supervision and Regulation 217
The Federal Reserve also exercises
important regulatory influence over
the entry into, and the structure of, the
U.S. banking system 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. Also, the Federal Reserve is
responsible for regulatory 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,
visitations, and inspections and off-site
surveillance and monitoring, and it undertakes 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, of
branches and agencies of foreign banks,
and of Edge Act and agreement corporations, as well as 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 1992, 957 state-chartered
banks belonged to the Federal Reserve
System, 25 fewer than at year-end 1991.
These banks represented about 8 percent
of all insured commercial banks and
held about 17 percent of all insured
commercial bank assets.
Federal Reserve guidelines call for all
state member banks to be examined at
least annually by either a Reserve Bank
or state banking agency. Large or troubled banks must be examined at least
annually by a Reserve Bank. Since
December 19, 1992, FDICIA has
required an on-site, full scope examination during each twelve-month period
for all depository institutions; however,
well-capitalized and well-managed institutions with assets of less than $100 million may be examined every eighteen
months.
In conformance with Federal Reserve
guidelines, all state member banks were
examined at least once in 1992 except
for five healthy, well-managed banks
whose examinations were deferred into
the first quarter of 1993. Altogether, the
Reserve Banks conducted 815 examinations (some of them jointly with state
agencies), and state banking departments conducted 368 independent
examinations. Also in conformance with
Federal Reserve guidelines, Reserve
Bank officials held 261 meetings with
directors of large state member banks
as well as with directors of state member banks that displayed significant
weaknesses.
Bank Holding Companies
At year-end 1992 the number of bank
holding companies totaled 6,348, 93
fewer than at year-end 1991. These
organizations controlled about 8,500
insured commercial banks and held
approximately 93 percent of the assets
218 79th Annual Report, 1992
of all insured commercial banks in the
United States.
Federal Reserve guidelines call for
annual inspections of large bank holding
companies and smaller companies with
significant nonbank assets. Small companies (those with assets of less than
$150 million) that do not appear to have
problems are inspected on a sample
basis, and medium-sized companies that
do not appear to have 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 the supervision of
these banks. In 1992, 2,119 bank holding companies were inspected, 2,006 by
Federal Reserve examiners and 113 by
state examiners. The assignment of
some examiners to work on other industry problems and major mergers and
acquisitions in 1992 required the
deferment to 1993 of 38 bank holding
company inspections. During 1992,
Reserve Bank officials held 575 meetings with the boards of directors of
bank holding companies to discuss
supervisory concerns.
Enforcement Actions,
Civil Money Penalties, and
Significant Criminal Referrals
In 1992 the Federal Reserve Banks recommended, and members of the Board's
staff initiated and worked on, 255 formal enforcement cases involving 634
separate actions dealing with unsafe or
unsound practices and violations of law.
The actions included written agreements, cease-and-desist orders, removal
and prohibition orders, and civil money
penalties. Of these, 96 cases involving
176 actions were completed by yearend, including the assessment and collection of more than $230 million in
civil money penalties. In addition to
these enforcement actions, the staffs of
the Board of Governors and several
Reserve Banks during 1992 continued
their investigation, the most extensive
ever conducted by the Federal Reserve,
regarding activities of the Bank of
Credit and Commerce International
(BCCI) in the United States and other
countries. As a result of the investigation, which was continuing at year-end,
the Board in 1992 initiated 43 actions.
By year-end 1992, several of the BCCI
actions had been completed, with the
Board assessing more than $230 million
in fines.
All final enforcement actions issued
by the Board of Governors and all written agreements executed by the Federal
Reserve Banks in 1992 are available to
the public. In addition to formal enforcement actions, the Federal Reserve Banks
initiated and worked on 356 informal
enforcement actions and completed 336
of them through instruments such as
memoranda of understanding with state
member banks, bank holding companies, and foreign financial institutions
subject to the jurisdiction of the Federal
Reserve. The staff of the Board of Governors also obtained approximately
$475 thousand in restitution to, and
more than $9.4 million in capital infusions into, state member banks and bank
holding companies through informal actions that were taken in lieu of the issuance of formal enforcement orders or
agreements.
In 1992 the Division of Banking
Supervision and Regulation forwarded
393 criminal referrals to the Fraud
Section of the Criminal Division of the
Department of Justice for inclusion in
its significant referral tracking system.
Banking Supervision and Regulation 219
Specialized Examinations
The Federal Reserve conducts specialized examinations in the following areas
of bank activity: electronic data processing, fiduciary activities, dealing and
brokering in government and municipal
securities, and underwriting and dealing
in securities through section 20 securities subsidiaries. The Federal Reserve
also reviews state member banks and
bank holding companies that act as
transfer agents.
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 data centers that provide
EDP services to these institutions. In
1992 the Federal Reserve System also
assumed supervisory responsibility for
examining data centers associated with
U.S. branches and agencies of foreign
banks. The Federal Reserve conducted
364 on-site EDP reviews for the year.
The Federal Reserve also was the
agency-in-charge on 4 examinations of
13 large, independent data service providers conducted jointly with the Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of
the Currency (OCC), and the Office of
Thrift Supervision (OTS).
Fiduciary Activities
The Federal Reserve has supervisory
responsibility for institutions that hold
more than $3.6 trillion of discretionary
and nondiscretionary assets in various
fiduciary capacities. This group of institutions includes 317 state-chartered
member banks and trust companies and
53 nonmember trust 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 1992, Federal Reserve examiners conducted 200 on-site trust examinations of state member banks and trust
companies engaged in fiduciary activities. The institutions examined in 1992
held more that $2.2 trillion in fiduciary
assets.
Government Securities Dealers
and Brokers
The Federal Reserve is responsible for
examining state member banks and
some foreign banks that are government
securities dealers and brokers for their
compliance with the Government Securities Act of 1986 and with regulations
of the Department of the Treasury.
Forty-four state member banks, three
state branches of foreign banks, and one
state agency of a foreign bank have notified the Board that that they are government securities dealers or brokers that
are not otherwise exempt from Treasury
regulations. During 1992 the Federal
Reserve conducted twenty-six examinations of broker-dealer activities in
government securities at state member
banks and foreign banks.
Municipal Securities Dealers
and Clearing Agencies
The Securities Act Amendments of 1975
made the Board responsible for supervising state member banks and bank
220 79th Annual Report, 1992
holding companies that act as municipal
securities dealers or as clearing agencies. Registered with the Board are
forty-three banks that act as municipal
securities dealers and three clearing
agencies that act as custodians of securities involved in transactions settled by
bookkeeping entries. In 1992 the Federal Reserve examined all three of the
clearing agencies and twenty-two 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 commence underwriting and dealing in cor
porate and sovereign debt securities, and
two received authorization to commence
equity underwriting and dealing in
equity securities.
At year-end 1992, thirty foreign and
domestic banking organizations had
so-called section 20 subsidiaries authorized to underwrite and deal in ineligible
securities. Of these subsidiaries, eight
could underwrite all debt or equity securities; three could underwrite all debt
securities; and eighteen could underwrite only the types of debt securities
approved by the Board in 1987. The
Federal Reserve uses specialized inspection procedures in reviewing operations
of these securities subsidiaries. During
1992 the Federal Reserve conducted
twenty-four inspections of section 20
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 1992, System
examiners reviewed 82 of the 177 banks
and bank holding companies registered
with the Board as transfer agents.
Surveillance and Monitoring
The Federal Reserve monitors the financial condition and performance of individual banking organizations and the
banking system as a whole to identify
areas of supervisory concern. Automated screening systems are used to
identify organizations with poor or deteriorating financial profiles and to identify adverse trends affecting the banking
system. Information from these systems
are then used in decisions to allocate
examination resources or take other
Banking Supervision and Regulation 221
appropriate supervisory actions. Among
the automated systems used by the Federal Reserve to monitor banking organizations is the System to Estimate Examination Ratings (SEER), which is used
to track the overall financial condition
of individual organizations. SEER statistically estimates an institution's supervisory rating based on its quarterly
Reports of Condition and Income. A
number of supplementary screening systems are used to monitor specific areas
of supervisory interest. Another automated system tracks examinations and
inspections and summarizes the results
and supervisory actions.
To assist supervisory staff in evaluating individual bank holding companies,
the Federal Reserve produces and distributes the quarterly Bank Holding
Company Performance Report, which
provides detailed financial information
on the condition and performance of
each bank holding company. The Federal Reserve also produces several
aggregate reports on the national and
regional performance and condition of
the banking industry.
Automated monitoring systems rely
heavily on the information in regulatory
reports filed by banking organizations.
To ensure the timeliness and accuracy of
the reports, the Federal Reserve maintains the Regulatory Reports Monitoring
System to track domestic and foreign
banking organizations that file late or
inaccurately.
International Activities
The Federal Reserve is responsible for
supervising international activities
through various vehicles.
Edge Act 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 1992 the Federal Reserve examined all ninety-four Edge Act and agreement corporations, which held about
$30 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 1992 the
Federal Reserve conducted full-scope
and targeted-scope examinations of ten
foreign branches of state member banks
and forty-nine foreign subsidiaries of
Edge Act corporations and bank holding
companies. All of the examinations
abroad were conducted with the cooperation of the supervisory authorities of
the countries in which they took place;
when applicable, the examinations were
coordinated with the Office of the
Comptroller of the Currency. Also,
examiners made eighty-five visits to the
overseas offices to obtain current financial and operating information and, in
some instances, to evaluate their compliance with corrective measures or testcheck their adherence to safe and sound
practice.
U.S. Activities of Foreign Banks
Foreign banks continue to be significant
participants in the U.S. banking system.
As of year-end 1992, 288 foreign banks
from 57 countries operated 502 statelicensed branches and agencies, of
222 79th Annual Report, 1992
which 33 are insured by the FDIC.
These foreign banks also operated 76
branches and agencies licensed by the
OCC, of which 7 have FDIC insurance.
Foreign banks also operated approximately 240 representative offices and
directly owned 14 Edge Act corporations and 13 commercial lending companies. In addition, foreign banks held an
interest of at least 25 percent in 117 U.S.
commercial banks. Altogether, these
foreign banks control approximately
21 percent of banking assets in the
United States.
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, representative
offices, Edge Act corporations, banks,
and certain nonbanking companies. In
1992, 314 such offices were examined
by the Federal Reserve together, in some
cases, with state or other federal regulatory authorities.
Before the December 1991 passage of
FBSEA, the Federal Reserve had residual authority to examine all branches,
agencies, and commercial lending subsidiaries of foreign banks in the United
States. The International Banking Act of
1978 instructed the Federal Reserve to
use, to the extent possible, the examination reports of other state and federal
regulators. The FBSEA amended the
International Banking Act and increased
the Federal Reserve's authority with
respect to these foreign bank operations,
including representative offices. The
Federal Reserve has acted to ensure that
all branches and agencies licensed by
the state or federal government are
examined on-site at least once during
each twelve-month period. These examinations are usually coordinated with
other state and federal regulators. The
FBSEA 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. Applications by two Taiwanese banks to establish a branch and
agency respectively were approved in
December 1992.
Supervisory Policy
During 1992 the Federal Reserve undertook several major supervisory and regulatory policy initiatives. Most of these
initiatives involved the implementation
of actions required under FDICIA.
Other initiatives included several
amendments to the Board's risk-based
capital guidelines and other rules and
policies, as well as the continuation of a
review of internal supervisory policies
related to the availability of credit.
Federal Deposit Insurance
Corporation Improvement
Act of 1991
In 1992 the Board issued final rules to
implement various sections of FDICIA,
as required by the Congress. In addition,
the Board initiated proposals in 1992 to
implement sections of FDICIA that had
statutory deadlines during 1993. The
major Board actions of 1992 to implement FDICIA as it relates to supervisory
policy covered the following sections of
the law:
• Section 122: On November 17 the
banking and thrift regulatory agencies,
working under the auspices of the Federal Financial Institutions Examination
Council (FFIEC), approved regulatory
reporting changes to gather information
on lending to small businesses and small
Banking Supervision and Regulation 223
farms; the changes will become effective as of the June 30, 1993 report date.
• Section 131: On September 18 the
Board issued a final rule implementing
the provisions pertaining to prompt corrective action, which became effective
on December 19, 1992.
• Section 132: On September 14, the
Board issued an advance notice of proposed rulemaking requesting public
comment on safety and soundness standards with regard to operations, management, credit underwriting, asset quality, earnings, stock valuations, and
employee compensation. Final regulations are to be issued by August 1, 1993,
and are to become effective by December 1, 1993.
• Section 304: On December 2 the
Board adopted a rule with regard to real
estate standards that matched rules
issued separately by the other banking
and thrift regulatory agencies. The rules
will become effective on March 19,
1993.
• Section 305: On August 8 the banking regulatory agencies issued an interagency advance notice of a proposed
rulemaking, requesting comment on the
incorporation of interest rate risk and
the risks of portfolio concentrations and
nontraditional activities into the riskbased capital framework. A proposed
rulemaking is expected to be issued in
early 1993, and final rules are required
to be issued by mid-June 1993.
• Section 306: On April 22 the Board
adopted amendments to Regulations O
and Y to provide safeguards against
insider abuse; the amendments apply a
new aggregate lending limit applicable
to all of a bank's insiders and expand
the application of existing lending limits
under Regulation O to loans to directors
and their related interests. These
changes became effective on May 18.
• Section 308: On November 20 the
Board approved an amendment to Regu
lation F to limit the exposure of insured
depository institutions to the exposure
of any other depository institution. This
rule will be phased in and will become
fully effective on June 19, 1995.
The more significant of these FDICIA
provisions and the Board actions taken
in connection with them are discussed in
more detail below along with other significant policy initiatives on which the
Board acted in 1992.
Risk-Based Capital Standards
at Year-End 1992
On December 31, 1992, the two-year
phase-in period for the risk-based capital standards ended. At that time, the
minimum standard of total capital to
risk-adjusted assets that banking organizations were expected to maintain was
raised from 7.25 percent to 8 percent.
The risk-based capital standards were
developed in conjunction with the FDIC
and OCC to implement the Basle
Accord, which is a risk-based capital
framework proposed by the Basle Committee on Banking Regulations and
Supervisory Practices and endorsed by
the central bank governors of the Group
of Ten countries in July 1988.
During 1992 the Board adopted the
following amendments to its risk-based
capital guidelines:
• On January 17 the Board amended
the guidelines to remove the limit on the
amount of noncumulative perpetual preferred stock a bank holding company
may include in its tier 1 capital. The
guidelines for bank holding companies
continue to limit cumulative perpetual
preferred stock to 25 percent of tier 1
capital.
• The Congress, as part of the Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act of
1991, required that the federal banking
agencies lower the risk weight from
224 79th Annual Report, 1992
100 percent to 50 percent on two types
of loans: (1) those for multifamily housing and (2) those to finance the construction of presold one- to four-family residential properties. On April 10 the
Board issued a proposal to lower the
risk weight for multifamily housing
loans meeting certain criteria. On
December 29 the Board adopted an
interim rule, effective immediately, to
lower the risk weight for presold one- to
four-family residential construction
loans. Final rules covering these
changes were to be adopted in 1993.
• In early 1992 the Board and the
other banking and thrift regulatory agencies, as part of an interagency effort to
achieve uniformity in their risk-based
capital guidelines, proposed revisions to
the guidelines to provide explicit guidance on the types and amounts of intangible assets that may be included in
capital. The Board approved a final rule
on December 9, which became effective
in February 1993.
• The Board lowered the risk weight
from 20 percent to zero for certain collateralized transactions such as certain
indemnified securities lending arrangements. This change, which became
effective on December 30, 1992, recognizes the minimal risk in such transactions and is consistent with the Basle
Accord.
Interest Rate Risk
With regard to interest rate risk, the
proposal set forth in the notice of proposed rulemaking issued in accordance
with section 305 would require some
additional reporting by all banks but
would impose additional capital requirements on only those institutions having
exceptionally high measures of risk.
This approach seeks to balance the regulatory burden associated with more precise measures of interest rate risk with
the commercial banking industry's
favorable experience in adapting to
changing rate environments.
Prompt Corrective Action
Section 131 of FDICIA established a
regime of "prompt corrective action"
that provides for successively more
stringent regulatory actions as an
insured depository institution's capital
deteriorates through five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. The final rule, which was
developed in conjunction with the three
other banking and thrift regulatory agencies, specifies minimum levels of capital
for those categories.
The relevant capital measures established for the four highest categories
consist of the total, the tier 1 risk-based
capital measures, and the tier 1 leverage
ratio. After an opportunity for a hearing,
an institution may be downgraded to the
next lower category (but not into the
critically undercapitalized category) if
the appropriate regulatory agency has
determined that the institution is in an
unsafe or unsound condition or if it has
received a less-than-satisfactory rating
for asset quality, management, earnings,
or liquidity in its most recent report of
examination. An institution is deemed to
be critically undercapitalized if its ratio
of tangible equity to total assets is 2 percent or less.
Real Estate Lending Standards
In accordance with section 304, a regulation issued jointly by the four agencies
prescribes real estate lending standards
that require each insured depository
institution to adopt and maintain a comprehensive written real estate lending
Banking Supervision and Regulation 225
policy. These policies must be consistent with safe and sound banking practices and must be appropriate to the size
of the institution and the nature and
scope of the institution's operations.
They also must address certain lending
considerations, including loan-to-value
limits; loan administration procedures;
portfolio diversification standards; and
documentation, approval, and reporting
requirements. The agencies also issued
the Interagency Guidelines for Real
Estate Lending Policies to be used in
conjunction with the regulation, which
was scheduled to become effective on
March 19, 1993.
Small Business and Farm Information
The reporting requirements approved by
the FFIEC pursuant to section 122 of
FDICIA generally require insured
banks, thrift institutions, and U.S.
branches of foreign banks to report
annually on the number and amount of
currently outstanding nonfarm nonresidential real estate loans, commercial
loans, and agricultural real estate and
agricultural loans in various size categories. These reporting requirements
will become effective with the filings of
Reports of Condition and Income beginning on June 30, 1993.
Real Estate Appraisals
Credit Availability
The Federal Reserve continued to work
in a number of policy and supervisory
areas to ease problems related to the
availability of bank credit. The policy
changes that were implemented phased
out the reporting of highly leveraged
transactions and made adjustments to
risk-based capital definitions, to treatment of intangible assets, and to examination and reporting procedures. In
addition, the Federal Reserve continued
to work with other supervisors of depository institutions to ensure that supervisory policies and practices are not
encouraging overly cautious lending
policies at depository institutions that
could deter lenders from meeting the
financial needs of creditworthy borrowers. In an effort to gauge the effect of
these and other changes, the Federal
Reserve initiated or participated in a
number of surveys and held several
meetings across the country to further
determine the causes of credit availability problems and work toward appropriate solutions. In this regard, System officials also testified before the Congress
on a number of occasions on the actions
undertaken to alleviate these problems.
The 1987 interagency guidelines for real
estate appraisals were revised to incorporate the requirements of the Board's
real estate appraisal regulation, which
was issued in 1990. The revised guidelines were developed by an interagency
working group, and each of the banking
and thrift regulatory agencies have
issued separate, but similar, guidelines.
The Board's guidelines, which were
issued in September 1992, provide
information on evaluations for real
estate related financial transactions that
do not require the services of a state
certified or licensed appraiser and on
requirements for administering an
institution's appraisal and evaluation
programs.
In November 1992 the Board in conjunction with the other banking and
thrift regulatory agencies issued an order
granting relief from certain real estate
appraisal requirements for several major
disaster areas, in particular, those
affected by Hurricanes Andrew and
Iniki, and for the Los Angeles civil
unrest. The Board acted under provisions of the Depository Institutions
Disaster Relief Act of 1992 (DIDRA).
DIDRA gives the regulatory agencies
226 79th Annual Report, 1992
the authority to waive the appraisal
requirements of title XI of the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) for
transactions involving property located
in major disaster areas. The Board and
the other agencies also adopted uniform
policies pursuant to DIDRA that will be
followed in granting similar relief in
future major disaster areas.
transactions by banking organizations
after the June 30, 1992, reporting date.
Nonetheless, the agencies will continue
to closely review all highly leveraged
credits during the examination process,
and examiners will continue to use guidance previously issued by the agencies
in the assessment of individual credits to
finance corporate restructurings and the
evaluation of internal processes for initiating and reviewing such credits.
Highly Leveraged Transactions
The Federal Reserve, together with the
other banking and thrift regulatory agencies, decided to phase out the supervisory definition of highly-leveraged
transactions and to discontinue regulatory reporting requirements for such
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,
Training Programs for Banking Supervision and Regulation, 1992
Number of sessions
Program
Schools or seminars conducted by the Federal Reserve
Banking I (after March, examiner training school I)
Banking II
Banking III
Credit analysis
Abbreviated cash flow seminar
Real estate lending seminar
Senior lending seminar
Senior forum for current banking and regulatory issues
Bank operations school
Effective writing for banking supervision staff
Management skills school
Conducting meetings with management
Bank holding company applications
Bank holding company inspection
Advanced EDP examinations
Basic entry-level trust
Advanced trust school
Consumer compliance examination I
Consumer compliance examination II
Advanced CRE examination techniques
Seminar for senior supervisors of foreign central banks •
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-
Total
Regional
12
12
5
12
3
6
2
2
4
16
5
18
1
7
1
1
1
2
2
1
3
5
7
1
10
3
3
3
16
3
18
22
'V
posit Insurance Corporation, Office of the Comptroller of
the Currency, Office of Thrift Supervision, and the Resolution Trust Corporation.
Banking Supervision and Regulation 227
and surveillance—and stresses the
interdependence of these areas. During
1992 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
1992 the Federal Reserve trained
2,167 students in System schools, 881 in
FFIEC schools, and 108 in other
schools, for a total of 3,156 students,
including 154 representatives from
foreign central 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, 570 state examiners were
trained; 304 in Federal Reserve courses,
246 in FFIEC programs, and 20 in other
courses.
Five new schools were added to the
training program during the year: Real
Estate Lending Seminar, Senior Lending
Seminar, Bank Operations School, Management Skills, and Advanced EDP
Examinations.
During 1992 the Federal Reserve
began integrating its core supervision
schools with those of the FDIC. In
March the introductory school was
merged, and six sessions of the joint
school were offered during the year. In
November and December, the pilot sessions of the joint second school were
held.
Federal Financial Institutions
Examination Council
The Board and the three other banking
and thrift regulatory agencies, pursuant
to the recommendation of the FFIEC,
issued on January 10, 1992, a revised
"Supervisory Policy Statement on Secu
rities Activities."3 The statement, which
became effective on February 10, 1992,
supersedes the "Supervisory Policy
Concerning Selection of Securities
Dealers and Unsuitable Investment
Practices," issued in 1988. The new
policy statement addresses the selection
of securities dealers and requires depository institutions to establish prudent
policies and strategies for securities
transactions. The statement also 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 when certain mortgagederivative products are high-risk
mortgage securities, which must be
reported as securities held for sale or for
trading.
Under the auspices of the FFIEC, the
Board and the three other agencies during 1992 continued their study of appropriate regulatory reporting and capital
treatments to be applied to recourse
arrangements for depository institutions
and bank holding companies; they also
continued their review of guidance on
the allowance for loan and lease losses.
An interagency policy statement on the
allowance is expected to be published in
early 1993.
The Federal Reserve continued its
participation in the work of the FFIEC's
Appraisal Subcommittee. The subcommittee was established in November
1989, pursuant to title XI of FIRREA, to
monitor the overall implementation of
real estate appraisal reform. The sub-
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.
228 79th Annual Report, 1992
committee is working with the state
appraisal regulatory agencies to implement programs to license and certify
appraisers. During 1992 the staff members of the subcommittee completed 20
state field reviews. Pursuant to title XI,
the subcommittee has developed a national registry of appraisers licensed and
certified by the states. As of the end of
the year, the database included 35,000
appraisers from 36 states.
Pursuant to section 221 of FDICIA,
the FFIEC on December 8 approved for
submission to the Congress its Study on
Regulatory Burden. Done in consultation with insured depository institutions
and consumer and community groups,
the study reviewed policies, procedures,
and requirements of the banking and
thrift regulatory agencies. It identified
rule changes that could reduce unnecessary regulatory burden without diminishing compliance with, or enforcement
of, consumer laws and without endangering the safety and soundness of
insured institutions.
During 1992 the FFIEC took several
actions with regard to regulatory reporting requirements. On May 22 the FFIEC
issued a policy statement concerning the
frequency and timing of changes in regulatory reporting requirements. Under
this advance notification policy, the
agencies, subject to certain exceptions,
will announce before the end of each
year all reporting changes that will take
effect in the following year. The policy
should ensure that depository institutions have at least ninety days' notice of
changes in their regulatory reporting
requirements and, accordingly, should
lessen the regulatory burden associated
with reporting changes.
In response to a new accounting standard regarding income taxes, issued
in February 1992 by the Financial
Accounting Standards Board (FASB
Statement No. 109), the FFIEC on July
28 issued a request for public comment
on possible regulatory treatments for
deferred tax assets. After it evaluated
these comments and held further
interagency discussions, the FFIEC
announced on December 23, that, for
regulatory purposes, federally supervised banks and thrift associations
should report deferred tax assets in
accordance with generally accepted
accounting principles. At the same time,
the FFIEC recommended that the banking and thrift regulatory agencies amend
their regulatory capital standards to limit
the amount of deferred tax assets that
can be included in capital.
The FFIEC also approved a number
of revisions to the Reports of Condition
and Income (Call Report), which are
filed quarterly by all insured commercial banks. These revisions will become
effective as of the March 31, 1993, reporting date. Some of these revisions—
including those pertaining to the collection of data on loans to small businesses
and small farms, off-balance sheet items,
deposits in lifeline accounts, preferred
deposits, and insured and uninsured
deposits—implement certain reportingrelated requirements of FDICIA. Other
revisions adopted in 1992 relate to intangible assets that are grandfathered for
regulatory capital purposes and to pastdue and nonaccrual loans and leases that
are wholly or partially guaranteed by the
U.S. government.
In November 1992 the FFIEC
adopted a supplement to the Report of
Assets and Liabilities of U.S. Branches
and Agencies of Foreign Banks to obtain
improved data for supervisory purposes
and for the analysis of U.S. credit and
deposit flows in connection with international indebtedness. The supplement
was proposed for public comment at the
end of 1991, and the final version was
scheduled to be implemented on
March 31, 1993.
Banking Supervision and Regulation 229
Regulation of the U.S. Banking
Structure
The Board administers the Bank Holding Company Act, the Bank Merger Act,
and the Change in Bank Control Act for
bank holding companies and state member banks. In doing so, the Federal
Reserve acts on a variety of proposals
that directly or indirectly affect the
structure of U.S. banking at the local,
regional, and national levels. The Board
also has primary responsibility for regulating the international operations of
domestic banking organizations and the
overall U.S. banking operations of foreign banks, whether conducted directly
through a branch or agency or indirectly
through a subsidiary commercial lending company. In addition, the Board has
established regulations for the interstate
banking activities of these foreign banks
and for foreign banks that control a U.S.
subsidiary commercial bank.
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 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 1992 the Federal Reserve acted on
1,119 bank holding company and related
applications. The Federal Reserve
approved 194 proposals to organize
bank holding companies and denied 2;
approved 85 proposals to merge existing
bank holding companies; approved 217
bank acquisitions by existing bank holding companies and denied 1; approved
594 requests by existing companies to
acquire nonbank firms engaged in activities closely related to banking and
denied 3; and approved 23 other applications. Data on these applications 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 the financial and 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 1992 the Federal Reserve
approved 120 merger applications. As
required by law, each merger is
described in this REPORT (in table 16 of
the Statistical Tables chapter).
When the OCC, the FDIC, or the
OTS 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 agencies have
230 79th Annual Report, 1992
adopted standard terminology for assessing competitive factors in merger
cases to assure consistency in administering the act. The Federal Reserve
submitted 763 reports on competitive
factors to the other federal banking
agencies in 1992.
Change in Bank Control Act
The Change in Bank Control Act
requires that persons seeking control of
a bank or bank holding company 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 1992 the Federal Reserve acted
on 145 proposed changes in control of
state member banks and bank holding
companies.
Public Notice of Federal Reserve
Decisions
Each decision by the Federal Reserve
that involves a bank holding company,
bank merger, change in control, or international banking proposal is effected by
an order or announcement. Orders state
the decision along with the essential
facts of the application and the basis for
Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1992
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
7
Denied
Director of the
Division of Banking
Supervision and
Regulation
Office
of the
Secretary
Approved
Approved Approved Permitted
2
17
0
0
0
34
132
1
3
0
0
0
0
190
6
0
0
0
0
0
71
3
0
0
184
7
0
61
0
0
0
17
36
0
18
0
0
1
0
25
0
64
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-
Denied
Federal
Reserve Banks
Total
0
196
0
85
0
0
166
327
0
92
218
597
0
4
0
5
18
738
96
1,119
0
ted by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.
Banking Supervision and Regulation 231
the decision; announcements state 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
lists applications and notices received
by the Federal Reserve during the preceding week.
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 sixty days; during 1992,
93 percent of the decisions met this
standard.
Delegation of Applications
Historically, 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 permits
staff members at both the Board and the
Reserve Banks to work more efficiently
by removing routine cases from the
Board's agenda.
In the fall of 1992, in an effort to
increase efficiency and reduce regulatory burden in the applications process,
the Board greatly expanded the number
of applications that may be acted upon
by the Reserve Banks under delegated
authority. In addition, the Board
approved procedural changes to streamline the review of certain proposals by
both Board staff members and the
Reserve Banks and to expedite the preacceptance review of applications. In
1992, 80 percent of applications were
acted on under delegated authority.
Board Policy Decisions
and Developments
in Bank Related Activities
In July 1992 the Board requested public
comment on alternative methods to
adjust the 10 percent revenue test that
limits underwriting and dealing in ineligible securities by section 20 subsidiaries of bank holding companies. The
matter was still under consideration at
year-end.
Proposals to Engage in New
Nonbanking Activities
In 1992 the Board expanded the list of
generally permissible nonbanking activities for bank holding companies to
include (1) combined investment advisory and securities brokerage activities,
(2) additional financial advisory activities, and (3) higher-residual-value leasing activities. The Board also approved
certain modifications to its investment
advisory policy statement to permit bank
holding companies to recommend and
broker shares of mutual funds when the
mutual fund is advised by the bank holding company or one of its subsidiaries.
At year-end, the Board was considering a proposal by a foreign bank to
engage in a new activity that will
involve the clearing of futures transactions that generally have been executed
by other pre-approved execution groups.
Other Pending Rulemakings
Three other rulemakings were under
consideration at year-end. The first proposal would ease the restrictions on the
underwriting and dealing activities of
bank holding companies to permit cer-
232 79th Annual Report, 1992
tain joint marketing activities and the
employment of management officials
working in both the holding company
and in the securities subsidiary. The second proposal would 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 third
proposal would permit bank holding
companies to engage in real estate
investment activities within certain
limitations.
Applications by State Member
Banks
State member banks must obtain the permission of the 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. During the year, the
Board substantially reduced the filing
requirements for creating new domestic
branches and approved modification of
the regulation governing the establishment of bank premises. In addition, the
Board reduced the prior review requirements for new debt instruments of state
member banks that are intended to qualify as capital. State member banks must
still 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. If the company borrows the
money to buy the shares, the transaction
increases the debt of the bank holding
company and simultaneously decreases
its equity. Relatively larger purchases
may undermine the financial condition
of a bank holding company and its bank
subsidiaries. The Federal Reserve may
object to stock repurchases by holding
companies that fail to meet certain standards, including the Board's capital
guidelines.
In the past, the Board's regulations
have required all bank holding companies to give advance notice of repurchases that retire 10 percent or more of
the company's consolidated equity capital. During the second half of 1992 the
Board approved modification of the
regulation that would exempt "wellcapitalized" banking holding companies
from having to give advance notice.
In 1992 the Federal Reserve reviewed
eighty-eight proposed stock repurchases
by bank holding companies, eighty-six
of which were acted on by the Reserve
Banks on behalf of the Board.
International Activities of U.S.
Banking Organizations
The Board has several statutory responsibilities in supervising the international
operations of U.S. banking organizations. The Board must provide authorization and regulation of foreign
branches of member banks; of overseas
investments by member banks, Edge
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.
Foreign Branches of Member
Banks
Under provisions of the Federal Reserve
Act and of Regulation K (International
Banking Supervision and Regulation 233
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 1992 the Board approved
the opening of three foreign branches.
By the end of 1992, 120 member
banks were operating 774 branches in
foreign countries and overseas areas of
the United States; 88 national banks
were operating 660 of these branches,
and 32 state member banks were operating the remaining 114 branches.
tal to weighted risk assets of 10 percent
effective January 1, 1993.
Edge Act and Agreement
Corporations
Export Trading Companies
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.
In 1992 the Federal Reserve approved
one new agreement corporation. At
year-end, there were ninety-four Edge
Act and agreement 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 1991
revision of Regulation K, this ratio of
equity to risk assets was replaced with a
minimum ratio of qualifying total capi
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 prior 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.
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. In 1992, one
new export trading company was
approved; since 1982 the Federal
Reserve has acted affirmatively on notifications by forty-eight bank holding
companies to establish export trading
companies.
Enforcement of Other Laws
and Regulations
The Board is also responsible for the
enforcement of various laws, rules, and
234 79th Annual Report, 1992
regulations other than those specifically
related to bank safety and soundness
and the integrity of the banking
structure.
Bank Secrecy Act
The Currency and Foreign Transactions
Reporting Act of 1970 (the Bank
Secrecy Act) was originally aimed at
identifying and tracking proceeds of
illegal activity by creating records of
various financial transactions that otherwise would not be identifiable. These
records are also useful for determining
the safety and soundness of financial
institutions. Through regular examinations, the Federal Reserve monitors
compliance with the Bank Secrecy Act
by the institutions it supervises.
During 1992 the Federal Reserve
significantly increased the number of
targeted examinations of financial institutions to determine compliance with
the Bank Secrecy Act. In addition the
Federal Reserve enhanced its enforcement actions related to the act, which
included the issuance of civil money
penalties and cease-and-desist orders.
Over the last year, the Federal Reserve
has on numerous occasions assisted
law enforcement agencies conducting
criminal investigations of financial institutions suspected of Bank Secrecy Act
violations and related violations.
In the area of training, the Federal
Reserve trains all new examiners
in the provisions of the Bank Secrecy
Act and in the detection of money
laundering and gives refresher courses
in these areas to more seasoned examiners. The Federal Reserve has also
participated in numerous programs to
inform the financial community about
the Federal Reserve's belief in strict
compliance with the Bank Secrecy
Act.
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
Association 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. The compliance of
other lenders with Regulation G is
examined by the Board, the Farm Credit
Administration, the National Credit
Union Administration, and the Office of
Thrift Supervision, according to the
jurisdiction involved. At the end of
1992, 605 lenders were registered under
Regulation G, and 363 came under the
Board's supervision. Of these 363, the
Federal Reserve regularly inspects 231
every second or third year according
to the type of credit they extend. The
others are exempted from periodic
on-site inspections by the Federal
Reserve, which instead monitors them
through the periodic regulatory reports
they file. During 1992, Federal Reserve
examiners inspected 64 lenders for compliance with Regulation G.
The Federal Reserve monitors the
market activity of all OTC stocks to
Banking Supervision and Regulation 235
determine which of them are subject to
the Board's margin regulations. The
Board publishes the resulting List of
Marginable OTC Stocks quarterly. In
1992 the OTC list was revised in February, May, August, and November. The
November OTC list contained 3,110
stocks.
Pursuant to a 1990 amendment to
Regulation T, the Board publishes a list
of foreign stocks that are eligible for
margin treatment at broker-dealers on
the same basis as domestic margin securities. In 1992 the foreign list was
revised in February, May, August, and
November. The November foreign list
contained 301 foreign stocks.
In April 1992 the Board announced
that it is conducting a review of Regulation T to consider whether any provisions of the regulation need updating. In
August 1992 the Board requested comment in connection with an advance
notice of proposed rulemaking that identified areas scheduled for review and
invited comment on all areas of Regulation T.
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
1992.
In 1992 the Securities Regulation
Section of the Board's Division of
Banking Supervision and Regulation
issued forty-seven interpretations of the
margin regulations. Those interpretations that presented sufficiently important or novel issues were published in
the Securities Credit Transactions
Handbook, which is part of the Federal
Reserve Regulatory Service. These
interpretations serve as a guide to the
margin regulations.
Financial Disclosure by State
Member Banks
State member banks must disclose certain information of interest to investors,
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 in each quarterly Report of Condition all extensions of credit made by
the bank to its executive officers since
Loans by State Member Banks tc their Executive Officers, 1991-92
Period
October 1-December 31, 1991
January 1-March 31, 1992
April 1-June 30, 1992
July 1-September 30, 1992
SOURCE. Report of Condition.
Number
Amount (dollars)
Range of interest
rates charged
(percent)
744
796
838
758
15,293,000
22,589,000
21,485,000
17,543,000
5.5-21.0
5.0-21.0
5.0-21.0
4.5-21.0
236 79th Annual Report, 1992
the date of the bank's previous report of
condition. The accompanying table
summarizes this information.
Federal Reserve Membership
At the end of 1992, 4,619 banks were
members of the Federal Reserve System, a decrease of 219 from the previous year-end. Member banks operated
35,469 branches on December 31, 1992,
a net increase of 659 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, the same
percentages as at year-end 1991.
•
237
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.
During 1992 the Board took several
actions to reduce the regulatory burden
on supervised institutions. Some of
these actions were responses to legislation; others were internal initiatives.
Reviews of Regulatory Burden
During 1992 the Board participated in
two reviews of Federal Reserve regulations. Early in the year, the Board completed an internal review of all regulations and recommended changes to them
that would reduce unnecessary regulatory burden. Initiatives were established,
including simplified application procedures, and these initiatives were implemented over the course of the year.
The Federal Reserve also participated
in the Study on Regulatory Burden,
required of the Federal Financial Institu
tions Examination Council (FFIEC)
under section 221 of the Federal Deposit
Insurance Corporation Improvement Act
of 1991. Section 221 requires the FFIEC
to complete four tasks: (1) review the
policies, procedures, recordkeeping
practices, and documentation requirements used to monitor and enforce compliance with all laws under the jurisdiction of the banking agencies and laws
affecting depository institutions under
the jurisdiction of the Secretary of the
Treasury; (2) determine whether such
policies, procedures, and requirements
impose unnecessary burdens on insured
depository institutions; (3) identify any
opportunities to reduce unnecessary burdens without diminishing the effectiveness of consumer laws or endangering
the safety and soundness of insured
institutions; (4) report these opportunities to the Congress within one year.
The Regulatory Planning and Review
Section was responsible for organizing
and drafting the study for the FFIEC.
The section drafted the final report after
it coordinated the work of an interagency task force, which held public
hearings in Kansas City, San Francisco,
and Washington. The FFIEC submitted
the 281-page report to the Congress on
December 17, 1992. Congressional
hearings on the report's findings were
expected to be held in early 1993.
Reserve Requirements
In August the Board adopted amendments to Regulation D, Reserve Requirements of Depository Institutions, to
simplify the procedure used by depository institutions to calculate reserve
238 79th Annual Report, 1992
requirements. One amendment shortened the lag in counting vault cash for
required reserves by two weeks. This
action synchronizes movements in
required reserves and vault cash, which
improves the ability of depository institutions to manage their required reserve
balances. A second amendment gave
institutions more flexibility to manage
reserves from one maintenance period
to another by doubling the carryover
allowance for reserve balances to the
larger of $50,000 or 4 percent of the
sum of required reserves and required
clearing balances.
Bank Holding Companies
During 1992 the Board announced a
series of changes in its Regulation Y,
Bank Holding Companies and Change
in Bank Control, to expand permissible
activities of bank holding companies
and their subsidiaries.
In April the Board approved an
amendment to add non-full-payout leasing to the leasing activities that are generally permissible for bank holding companies. The amendment raises the
maximum estimated residual value of
leased personal property to up to
100 percent of the acquisition cost of
the leased property, subject to certain
conditions.
In April the Board also approved an
amendment to Regulation Y to permit
the provision of financial advisory services to financial and nonfinancial institutions and to individuals with high net
worth under certain conditions, and the
offering of investment advisory services
and securities brokerage services on a
combined basis under certain conditions. This amendment enables Federal
Reserve Banks to expedite the applications process for bank holding companies to engage in these activities.
In July the Board announced an
amendment to an interpretive rule
regarding investment advisory activities
of bank holding companies. The amendment provides that a bank holding company and its nonbank subsidiaries may
broker shares in an investment company
that is also advised by the bank holding
company or any of its subsidiaries. The
amended rule also provides that a bank
holding company and its nonbank subsidiaries may give investment advice to
customers regarding the purchase and
sale of shares of an investment company
that is also advised by an affiliate of the
bank holding company. In either case,
the bank holding company engaging in
these activities must disclose the potential for conflict of interest or adverse
effects.
Application Procedures
In June the Board adopted amendments
to Regulation Y to streamline certain
procedural requirements in the applications process that would make filing of
applications for mergers and acquisitions less burdensome. The amendments
increased the size of nonbank companies that bank holding companies may
acquire under the expedited fifteen-day
notice procedures; they increased the
relative size of nonbank assets that bank
holding companies may acquire in the
ordinary course of business without
prior approval; and they described the
criteria for determining the waiver of an
application with certain bank mergers.
Policy on Disaster Relief
In November the federal agencies that
regulate financial institutions announced
several regulatory changes to facilitate
recovery in major disaster areas such as
those areas affected by hurricanes and
civil unrest. The agencies developed the
Regulatory Simplification 239
policies in response to the regulatory
flexibility permitted by the Depository
Institutions Disaster Relief Act of 1992.
The agencies' changes covered the following points:
• A waiver, by all of the agencies, of
real estate appraisal requirements of
Title XI of the Financial Institutions
Reform, Recovery, and Enforcement
Act of 1989
• A Federal Reserve order to permit
an exception to the rules in Regulation Z
regarding consumer waiver of the right
to cancel certain home-secured loans
• An extension of an interagency
statement concerning reduced examiner
criticism of restructured debts and
extended repayment terms—so long as
the efforts are consistent with safe and
sound banking practices
• An indication that the agencies will
give positive consideration, under the
Community Reinvestment Act, to financial institutions that actively participate
in programs to meet the needs of
communities that are devastated by
disasters—even if the low- and
moderate-income neighborhoods aided
are outside an institution's delineated
community.
•
241
Federal Reserve Banks
During 1992 the Federal Reserve Banks
made significant progress in preparing
for consolidation of their mainframe
data processing operations. Currently,
each of the twelve Banks maintains a
general purpose data processing center.
Eventually, the twelve centers, together
with four backup facilities, will be
consolidated at three "consolidation
centers"—the Reserve Bank head
offices in Richmond and Dallas and the
New York Bank's East Rutherford
Operations Center in New Jersey. The
objectives of automation consolidation
include greater reliability, increased control of payment system risk in a national
banking environment, improved security of the total automation environment,
enhanced responsiveness to changing
business requirements, and greater
efficiency.
The Federal Reserve Automation
Services (FRAS) organization, which
was established to plan and manage the
automation consolidation effort and to
operate the consolidated data centers, is
headquartered at the Federal Reserve
Bank of Richmond. FRAS reports to the
Richmond Bank's board of directors
through an oversight committee composed of senior Reserve Bank officials. Major FRAS accomplishments
during 1992 include preparing facilities, hiring staff, installing the computer
equipment needed to support the
Reserve Banks that will be moving
their mainframe processing to FRAS
during 1993, acquiring software, and
planning interoffice communication
connections. Also during 1992 the
Federal Reserve Banks developed plans
for moving mainframe workloads to
FRAS.
By December 1992 the Federal
Reserve Banks of Richmond and Dallas
had moved their data processing operations to FRAS computing equipment. Of
the remaining Banks, all but New York
plan to move their electronic payment
applications to FRAS by 1994 and all
other mainframe workloads to FRAS by
1995. The New York Bank plans to
move its electronic payment applications to FRAS during the first half of
1996.
Developments in Federal
Reserve Services
The Monetary Control Act of 1980
requires the Federal Reserve System to
recover all the costs it incurs in providing services to depository institutions.
In 1992, income from priced services
totaled $938.6 million and costs totaled
$892.7 million, resulting in net income
of $44.8 million and a recovery rate of
105.1 percent. In 1991 the System
recovered 102.9 percent of its priced
services costs.1
Check Collection
The Federal Reserve's operating expenses and imputed costs for commercial check collection in 1992 totaled
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 operating 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.
242 79th Annual Report, 1992
$545.7 million (see the second pro
forma income statement for priced services, at the end of this chapter). Check
operations for the year generated
$576.0 million in revenue and a net
of $2.4 million in other income and
expenses. Income from operations after
imputed costs was $30.3 million. The
Federal Reserve Banks handled 19.1 billion checks, an increase of 1.7 percent
over 1991 volume.
In October the Board approved several modifications to the Reserve Banks'
check collection service. After a thorough evaluation of service levels, the
Board approved new minimum service
standards, effective January 1, 1993.
The new standards are designed to speed
interdistrict check collection, to improve
deadlines and availability, and to provide more uniform service nationwide.
The Board also approved a service
option that allows depository institutions to mix returned checks with
forward-collection checks, effective
January 1, 1993. The latter action was
based on the results of a pilot project in
which three Federal Reserve Districts
accepted intermingled deposits of returned and forward-collection checks
and in turn presented intermingled cash
letters to participating depository institutions. (Normally, the items are deposited
separately.) The pilot project indicated
that intermingling contributes to cost
savings and improves quality for both
the Reserve Banks and participating
institutions.
During 1992 the Federal Reserve continued to explore technological improvements that would enhance check processing. Pilot projects were begun to test
interdistrict truncation, in which depositing financial institutions in one district
can truncate physical checks and forward the items electronically to the district where the paying bank is located,
and intra- and interdistrict transmission
of adjustment requests via Fedline. Significant progress was made in developing medium- and high-speed digital image applications for check collection. A
high-speed image archival system for
Treasury checks is scheduled for testing
in 1993.
Automated Clearinghouse
In 1992 the operating expenses and
imputed costs of providing commercial
automated clearinghouse (ACH) services totaled $60.5 million; income from
the service was $60.1 million. The Federal Reserve Banks processed 1,327 million commercial transactions during the
year, an increase of 18.5 percent over
1991 volume.
By the end of 1992, 92 percent of all
depository institutions that originate or
receive commercial ACH transactions
through the Federal Reserve Banks had
established electronic connections. By
July 1, 1993, all institutions using this
service must convert to electronic connections. The use of electronic connections will enable the Banks to improve
the ACH service significantly by speeding delivery of ACH payments and
reducing the associated risk. In August
1992 the Treasury Department requested
public comment on a proposal that
would require all government-only ACH
receivers to establish electronic connections to the Reserve Banks by July 1,
1994. Final action on the proposal is
expected in early 1993.
Funds Transfer
The operating expenses and imputed
costs of providing funds transfer services in 1992 totaled $69.2 million, and
income was $85.6 million. The number
of Fedwire funds transfers originated
Federal Reserve Banks 243
increased 4.3 percent over the 1991
volume, to 69.8 million transfers.
In October the Board requested public comment on a proposal to change the
opening time for the Fedwire funds
transfer service from 8:30 a.m. to
6:30 a.m. eastern time (ET). Comment
was also invited on changing the opening time of the book-entry securities
transfer service to 6:30 a.m. ET, should
the funds transfer service start to open
earlier. The earlier openings are believed
likely to facilitate efforts to strengthen
settlements of futures and options transactions among banks and bank customers. The Board also requested comment
on a longer-term objective of further
lengthening Fedwire operating hours
and possibly moving to round-the-clock
operations. The Board indicated that
expanding Fedwire operating hours has
the potential to reduce risks and to support payments and settlements related to
international financial activity.
Net Settlement
The Federal Reserve provides net settlement services to four national and
numerous local netting arrangements.
These arrangements settle their participants' net positions either via Fedwire
funds transfers using special settlement
accounts at the Federal Reserve or via
accounting entries to their settling participants' reserve or clearing accounts at
the Federal Reserve.
Two of the national arrangements, the
Clearing House Interbank Payments
System and the Participants Trust Company, process and net large-dollar transactions associated with interbank funds
transfers and payments related to the
settlement of mortgage-backed securities transactions, respectively. The other
two national arrangements, Visa and
Chexs, process and net small-dollar
transactions associated with automated
clearing house and check payments,
respectively. The Chexs settlement
arrangement was approved by the Board
in April 1992. The majority of local
arrangements are check clearinghouses.
In 1992, about 650,000 net settlement
entries were processed by the Reserve
Banks for local netting arrangements;
the value of these entries was about
$640 billion. An estimated $2.3 trillion
in net settlements were processed
through special Fedwire settlement
accounts for national arrangements in
1992. Cost and revenue data for the net
settlement activity are combined with
data for the funds transfer service.
Securities and Fiscal Agency
Services
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 Corporation and the Student Loan Marketing
Association. Only the services related to
federal agency securities are priced by
the Federal Reserve. In 1992, operating
expenses and imputed costs totaled
$11.6 million and earned income was
$13.1 million. The Federal Reserve processed 3.3 million government agency
securities transfers during the year, a
16.6 percent increase over 1991 volume.
The Federal Reserve continues to
operate Treasury Direct, the book-entry
securities safekeeping system for individuals who invest in Treasury securities and use the Treasury Department as
custodian. Treasury Direct has grown to
more than 1.1 million accounts with a
total par value of $62.5 billion. During
1992, the Reserve Banks processed
2.1 million applications to purchase
securities, issued 6.4 million payments
related to Treasury Direct, and handled
more than 1.2 million telephone and
244 79th Annual Report, 1992
written inquiries from Treasury Direct
account holders.
Also during 1992 the Federal Reserve
Bank of New York developed the Treasury Automated Auction Processing
System (TAAPS) for the Treasury Department. When TAAPS becomes available in the second quarter of 1993, it
will enable bidders for new issues of
Treasury securities, after having established electronic connections with a
Federal Reserve Bank, to submit their
bids electronically instead of on paper
and will facilitate the Federal Reserve's
review of bids.
All Federal Reserve Banks have fully
implemented the Regional Delivery System (RDS) for issuance of over-thecounter savings bonds. In 1992 the
System printed more than 67 million
savings bonds, including over-thecounter and other types of savings
bonds. The System is now preparing to
consolidate savings bonds operations at
five sites, down from the current twelve
sites; consolidation should be completed
within three years.
Definitive Securities Safekeeping
and Noncash Collection
The operating expenses and imputed
costs of providing priced definitive securities safekeeping and noncash collection services in 1992 totaled $12.8 million, and income was $10.6 million. The
average number of definitive securities
issues and receipts maintained in priced
safekeeping accounts at the Federal
Reserve Banks decreased 28.1 percent
during 1992, to 41,472. The number
of noncash collection items processed
decreased 27.1 percent, to 1.6 million.
The Board has announced that
because of declining volumes in both
services, the System will, by the end of
1993, discontinue its priced definitive
safekeeping service and consolidate
most of its noncash collection operations at the Cleveland Bank and the
Jacksonville Branch of the Atlanta
Bank.
Currency and Coin
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.
In 1992, income from priced cash services was $12.9 million, and the cost
was $12.3 million. Three Federal
Reserve Districts provided transportation of cash by armored carrier; the San
Francisco District discontinued this service during the year. Three Districts provided wrapped coin to depository institutions, and two Districts provided
nonstandard packaging of currency
orders and deposits and nonstandard
frequency of access to cash services.
In March the Federal Reserve began
distributing a new series of $50 note
with two new features—a security
thread and microprinting—to discourage photocopied counterfeits. The new
series of $10 and $20 notes—also incorporating the new features—were distributed during the fourth quarter, and distribution of a new series of $5 note is
scheduled for 1993. A new series of
$1 note incorporating the new security
features is not planned. In June the
Bureau of Engraving and Printing began
producing $1 notes using the web-fed
intaglio currency press, which prints
both sides of the note in a single pass
through the press.
The first production machine for
the System's new currency-processing
equipment (ISS-3000) was delivered to
the New York Bank's new processing
center in October, and training for use of
the equipment was conducted throughout the year. The new equipment will be
Federal Reserve Banks 245
installed throughout the System by
1997.
The Federal Reserve System continued to work with the Treasury Department and other agencies to deter
counterfeiting and laundering of U.S.
currency.
Float
Federal Reserve float increased to a
daily average of $417 million in 1992,
from $348 million in 1991. The costs of
Federal Reserve float associated with
priced services are recovered each year.
Examinations
The Federal Reserve Act, section 21,
requires the Board of Governors to
"order an examination of each Federal
Reserve Bank" at least once a year. The
responsibility is assigned to the Board's
Division of Reserve Bank Operations
and Payment Systems. In 1992 the
Board also engaged a certified public
accounting (CPA) firm to examine one
of the twelve Federal Reserve Banks; in
1993, two Banks will be examined by a
CPA firm. The findings of all examina-
tions are reported to the management
and directors of the respective Banks
and to the Board of Governors.
To assess conformance with policies
established by the Federal Open Market
Committee (FOMC), the Division of
Reserve Bank Operations and Payment
Systems also 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.
All 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 1992 and 1991.
Income was $20,235 million in 1992,
compared with $22,553 million in 1991.
Expenses totaled $1,604 million
($1,298 million in operating expenses,
$177 million in earnings credits
granted to depository institutions, and
Income, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1992 and 1991 '
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
1992
1991
20,235
1,475
1,298
177
18,760
-959
29
424
129
295
17,348
172
16,774
402
22,553
1,429
1,265
164
21,124
496
90
371
110
261
21,158
153
20,778
228
pension costs of $141 million in 1992 and $83 million in
1991.
246 79th Annual Report, 1992
$129 million in assessments for expenditures by the Board of Governors). The
cost of currency was $295 million.
Income from financial services was
$758 million.
The profit and loss account showed a
net deduction of $959 million, primarily
a result of realized and unrealized losses
on assets denominated in foreign currencies. Dividends paid to member banks,
as required by law, totaled $172 million,
$19 million more than in 1991. The rise
reflects an increase in the capital and
surplus of member banks and a consequent increase in the paid-in capital
stock of the Federal Reserve Banks.
Payments to the U.S. Treasury in the
form of interest on Federal Reserve
notes totaled $16,774 million, compared
with $20,778 million in 1991. The payments consist of all net income after
deduction of dividends and deduction of
the amount necessary to bring the surplus of the Banks to the level of capital
paid in.
In the Statistical Tables chapter of
this report, table 6 details income and
expenses of each Federal Reserve Bank
for 1992, and table 7 shows a condensed
statement for each Bank for 1914-92. A
detailed account of the assessments and
expenditures of the Board of Governors
appears in the next chapter—Board of
Governors Financial Statements.
Holdings of Securities and Loans
Average daily holdings of securities and
loans during 1992 were $283,104 million, an increase of $26,175 million over
1991 (see accompanying table). Average daily holdings of U.S. government
securities increased $26,368 million
over 1991, and average daily holdings
of loans decreased $193 million. The
average rate of interest on holdings of
U.S. government securities decreased
from 7.51 percent in 1991 to 6.13 percent in 1992, and the average rate of
interest on loans decreased from
5.73 percent to 3.43 percent.
Volume of Operations
Table 9, in the Statistical Tables chapter,
shows the volume of operations in the
principal departments of the Federal
Reserve Banks for the years 1988-92.
Securities and Loans of Federal Reserve Banks, 1990-92
Millions of dollars, except as noted
Item and year
Average daily holdings
1990
1991
1992
Total
U.S.
government
securities'
237,444
256,929
283,104
236,523
256,559
282,927
921
370
177
20,067
19,283
17,342
19,995
19,262
17,336
73
21
6
8.45
7.51
6.13
8.45
7.51
6.13
7.88
5.73
3.43
Loans2
3
Earnings
1990
1991
1992
Average interest rate (percent)
1990
1991
1992
1. Includes federal agency obligations.
2. Does not include indebtedness assumed by FDIC.
3. Based on holdings at opening of business.
Federal Reserve Banks 247
Federal Reserve Bank Premises
Construction of the new East Rutherford, New Jersey Operations Center for
the Federal Reserve Bank of New York
and the new headquarters building for
the Federal Reserve Bank of Dallas was
essentially completed by June, and the
Banks began moving staff and operations into the buildings at that time.
Operations are now underway at both
facilities, and complete conversion of all
operations is planned for early 1993.
In June the Board authorized the Federal Reserve Banks of Richmond and
Dallas to renovate their head offices and
the Federal Reserve Bank of New York
to construct an addition to and to renovate its East Rutherford Operations
Center—all to accommodate the new
Federal Reserve Automation Services.
The modifications at all three facilities
had progressed sufficiently by October
to allow installation of the first phase of
the automation equipment. Construction
at all three sites is planned to be completed during 1993.
Design work for the new head offices
of the Federal Reserve Banks of Cleveland and Minneapolis continued during
1992. In November the Board approved
the site selection for the new head office
for the Minneapolis Bank.
Other facility projects approved by
the Board during 1992 include renovation of the check processing facility at
the Federal Reserve Bank of Richmond
and a multiyear renovation program for
the Federal Reserve Bank of San Francisco's Salt Lake City Branch.
In the Federal Reserve Bank Branch
Modernization Act (enacted on October
24, 1992), the Congress eliminated the
funding ceiling on Branch facilties. The
action will enable the Banks to address
deficiencies at several Branch buildings
and to improve the effectiveness and
efficiency of the Branch facilities.
Table 8, in the Statistical Tables chapter, shows the cost and book values of
premises owned or occupied by the Federal Reserve Banks and the cost of other
real estate owned by the Reserve Banks.
248
79th Annual Report, 1992
Pro Forma Balance Sheet for Priced Services, December 31, 1992 and 1991
Millions of dollars
Item
1992
1991
2
Short-term assets
Imputed reserve requirement on clearing balances
Investment in marketable securities
Receivables
Materials and supplies
Prepaid expenses
Items in process of collection
Total short-term assets
453.8
3,328.2
63.4
5.7
13.1
4,167.4
699.2
5,127.8
66.6
6.5
12.3
4,062.4
9,974.7
8,031.7
3
Long-term assets
Premises
Furniture and equipment
Leases and leasehold improvements
Prepaid pension costs
Total long-term assets
Total 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
Long-term liabilities
Obligations under capital leases
Long-term debt
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
to be recovered under the Monetary Control Act is the
360.1
163.5
22.0
97.3
378.5
176.2
51.3
141.7
747.6
642.9
10,722.4
8,674.5
4,576.0
3,373.4
82.3
8,820.7
1,068.8
85.3
9,974.7
8,031.7
1.2
173.1
1.2
192.3
193.5
174.3
10,168.3
8,206.0
554.1
468.6
10,722.4
8,674.5
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 1992 the Reserve Banks recognized a credit to
expenses of $53.5 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.
Federal Reserve Banks
249
Pro Forma Income Statement for Federal Reserve Priced Services,
Calendar Years 1992 and 1991 l
Millions of dollars
1992
Item
1991
Income from services provided
to depository institutions2
Operating expenses3
758.4
737.5
606.1
611.9
Income from operations
152.3
125.6
4
Imputed costs
Interest on float
Interest on debt
Sales taxes
FDIC insurance
14.5
19.8
11.2
8.9
97.9
Income from operations after imputed costs
Other income and expenses
Investment income
Earnings credits
54.6
71.0
5
180.2
177.8
Income before income taxes
Imputed income taxes
54.4
19.0
19.4
9.9
6.3
6
Net income
2.4
175.0
162.3
12.7
100.3
83.7
29.5
25.5
70.8
58.1
24.9
32.5
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 $1.9 million
in 1992 and $2.0 million in 1991. 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 1992 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
521.1
-42.5
563.6
61.0
209.3
128.8
164.5
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 mterterritory 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 1992.
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. This
amount is adjusted to reflect the deferral of $1.1 million
for 1992 automation consolidation, an amount that the
Reserve Banks plan to recover, along with a finance
charge, by the end of 1999.
250 79th Annual Report, 1992
Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1992l
Millions of dollars
Funds
transfer
and net
settlement
Commercial
ACH
Definitive
safekeeping
and
noncash
collection
Bookentry
securities
Cash
services
Item
Total
Commercial
check
collection
Income from services ...
758.4
576.0
85.6
60.1
10.6
13.1
12.9
Operating expenses
606.1
501.9
64.4
56.6
11.9
10.7
12.3
Income from operations .
152.3
74.1
21.3
3.5
-1.3
2.5
.6
Imputed costs 2
54.4
43.8
4.8
3.9
.9
9
.0
Income from operations
after imputed costs .
97.9
30.3
16.5
-.4
-2.2
1.6
.6
2.4
2.4
.0
.0
.0
.0
.0
100.3
32.7
16.4
-.4
-2.2
1.6
.6
Other income and
expenses, net 3
Income before
income taxes
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
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 1992, 1991, and 19901
Thousands of items, except as noted
Percent change
Service
Funds transfers
Commercial ACH
Commercial checks
Securities transfers
Definitive safekeeping
Noncash collection
Cash transportation
1992
69,803
1,326,632
19,052,928
3,266
41
1,636
282
1991
66,921
1,119,073
18,742,950
2,800
57
2,243
338
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;
1990
62,559
915,257
18,594,652
2,555
82
2,854
330
1992-91
1991-90
4.3
18.5
1.7
16.6
-28.1
-27.1
16.6
7.0
22.3
.8
9.6
-30.5
-21.4
2.4
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.
Federal Reserve Banks
251
Income and Expenses for Locally Priced Federal Reserve Services, by District, 1992]
Millions of dollars
District
Total
Operating
expense
Float
expense
Total
expense
Net
revenue
Commercial check collection
Boston
New York
Philadelphia ..
Cleveland . . . .
Richmond
Atlanta
Chicago
St. Louis
Minneapolis ..
Kansas City ..
Dallas
San Francisco
35.3
69.6
31.2
32.0
54.9
76.4
76.6
24.0
31.3
36.8
41.9
66.2
33.8
65.0
27.5
28.4
48.5
64.0
62.6
19.9
26.7
30.7
35.5
59.5
.7
.6
.1
.1
.6
.7
.9
.0
.4
.8
1.4
.8
34.5
66.6
28.6
29.5
50.1
65.7
64.5
20.9
27.1
31.5
36.9
60.3
.8
3.0
2.6
2.5
4.8
10.7
12.1
3.1
4.2
5.3
5.0
5.9
System total .
576.0
502.1
14.1
516.2
60.0
Definitive safekeeping and noncash collection
Boston
New York
Philadelphia ..
Cleveland . . . .
Richmond
Atlanta
Chicago
St. Louis
Minneapolis ..
Kansas City ..
Dallas
San Francisco
.5
2.3
.8
1.3
.5
1.9
1.6
.6
.1
.4
.7
*
.8
2.2
.8
1.2
.8
2.0
1.7
.5
.1
.8
1.0
*
System total .
10.6
11.9
.0
.8
2.2
.8
1.2
.8
2.0
1.7
.5
.1
.8
1.0
*
-.3
.1
.0
.1
-.3
-.1
-.1
.1
.0
-.4
-.3
*
11.9
-1.2
Cash services
Boston
New York . . . .
Philadelphia ..
Cleveland . . . .
Richmond . . . .
Atlanta
Chicago
St. Louis
Minneapolis ..
Kansas City ..
Dallas
San Francisco
1.7
1.9
1.7
.5
.1
2.9
.6
*
.5
.1
2.6
.5
5.1
System total .
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
.0
.0
.3
.1
5.1
12.3
12.9
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.
253
Board of Governors Financial Statements
The financial statements of the Board
were audited by Coopers & Lybrand,
independent public accountants, for
1992 and 1991.
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1992 and 1991, 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, 1992 and 1991, 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, 1993
254
79th Annual Report, 1992
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
As of December 31,
1992
1991
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Prepaid expenses and other assets
$ 9,853,172
2,543,876
1,462,101
$ 4,498,138
1,227,367
778,485
Total current assets
13,859,149
6,503,990
48,968,026
50,338,953
$62,827,175
$56,842,943
Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Unearned revenues and other liabilities
$ 5,311,460
1,978,051
5,612,406
1,366,877
$ 3,609,392
1,120,332
5,057,365
1,257,442
Total current liabilities
14,268,794
11,044,531
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
48,558,381
45,798,412
$62,827,175
$56,842,943
The accompanying notes are an integral part of these statements.
—
Board Financial Statements 255
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31,
1992
1991
BOARD OPERATING REVENUES
Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 4)
Total operating revenues
$128,955,300
6,795,747
$109,631,000
4,855,384
135,751,047
114,486,384
81,981,637
13,106,634
7,527,562
6,079,387
3,953,838
3,757,815
3,687,785
3,607,431
2,751,537
2,089,901
4,447,551
75,391,334
11,590,355
3,113,853
5,682,355
3,542,401
2,877,050
3,344,444
3,286,946
2,478,238
2,059,165
3,709,310
132,991,078
117,075,451
BOARD OPERATING EXPENSES
Salaries
Retirement and insurance contributions
Contractual services and professional fees
Depreciation and net losses on disposals
Travel
Repairs and maintenance
Postage and supplies
Utilities
Software
Printing and binding
Other expenses (Note 4)
Total operating expenses
BOARD OPERATING REVENUES OVER (UNDER) EXPENSES
2,759,969
(2,589,067)
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 OVER (UNDER) EXPENSES
TOTAL REVENUES OVER (UNDER) EXPENSES
FUND BALANCE, Beginning of year
FUND BALANCE, End of year
295,400,650
261,316,379
295,400,650
261,316,379
—
—
2,759,969
(2,589,067)
45,798,412
48,387,479
$ 48,558,381
$ 45,798,412
The accompanying notes are an integral part of these statements.
256 79th Annual Report, 1992
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
For the years ended December 31,
1992
1991
CASH FLOWS FROM OPERATING ACTIVITIES
Board operating revenues over (under) expenses
$ 2,759,969
$(2,589,067)
Adjustments to reconcile operating revenues over (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
Increase (Decrease) in accounts payable
Increase (Decrease) in payroll payable
Increase in unearned revenue and other liabilities
Net cash provided by operating activities
.'
6,079,387
5,682,355
(2,000,125)
555,041
1,702,068
857,719
109,435
(31,932)
296,852
(599,325)
(2,552,920)
215,275
10,063,494
421,238
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of furniture and equipment
Capital expenditures
15,104
(4,723,564)
36,156
(5,215,541)
Net cash used in investing activities
(4,708,460)
(5,179,385)
NET INCREASE (DECREASE) IN CASH
5,355,034
(4,758,147)
CASH BALANCE, Beginning of year
4,498,138
9,256,285
$ 9,853,172
$ 4,498,138
CASH BALANCE, End of year
The accompanying notes are an integral part of these statements.
Board Financial Statements
257
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 costs 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 four 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.
Reclassification—Certain amounts from prior years
have been reclassified to conform with current year
presentation.
(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, 1992, actuarial calculations showed that
the fair value of the assets of the System's Plan exceeded
the projected benefit obligations. Based on these calculations and similar calculations performed for 1991, it was
determined that employer funding contributions were not
required for the years 1992 and 1991 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 $708,030 in 1992 and
$674,700 in 1991.
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
$3,419,000 in 1992 and $2,696,800 in 1991.
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 $554,195 in 1992 and $479,476 in 1991.
(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,
1992
1991
Land and
improvements
Buildings
Furniture and
equipment
Less accumulated
depreciation ..
Total property,
buildings, and
equipment
1,301,314
63,856,738
$
1,301,314
63,726,137
38,550,995
103,709,047
35,146,359
100,173,810
54,741,021
49,834,857
$ 48,968,026
$ 50,338,953
(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,
1992
1991
Other Revenues
Data processing
revenue
Subscription
revenue
Reimbursement
of regulatory
investigation
costs
Reimbursable
services to
other agencies . . .
Miscellaneous
Total other
revenues
$2,737,073
$2,364,284
1,537,013
1,744,775
1,500,000
471,590
550,071
334,922
411,403
$6,795,747
$4,855,384
258 79th Annual Report, 1992
(4) OTHER REVENUES AND OTHER EXPENSES—Cont.
Other Expenses
Cafeteria operations,
net
Tuition, registration,
and membership
fees
Equipment and
facility rentals
Subsidies and
contributions . . .
Miscellaneous
Total other
expenses
$ 765,478
$ 783,362
866,965
692,131
873,672
682,962
735,835
1,205,601
638,975
911,880
$4,447,551
$3,709,310
(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, 1992, are as follows:
1993
1994
1995
1996
1997
after 1997
$ 1,915,444
2,225,724
1,946,477
1,854,642
1,837,538
569,226
$10,349,051
Rental expenses under these operating leases were
$644,609 and $635,100 in 1992 and 1991, 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 1992 and 1991, the Board paid
$324,300 and $241,040, respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1992 and
1991.
•
Statistical Tables
260
79th Annual Report, 1992
1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31, 19921
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
11,055,613
8,018,000
446,078
674,690
5,412,625
631,000
141,794,280
118,179,154
35,037,172
Total bought outright
295,010,606
Held under repurchase agreement
7,463,000
Total securities
302,473,606
Total loans and securities
309,191,921
Items in process of collection
Transit items
7,770,112
Other items in process of collection
1,141,236
Total items in process of collection
Bank premises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowance
8,911348
157,201
758,056
208,635
156,148
1,122,839
254,306
868,533
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
1,025,734
922,125
534,813
387,312
21,513,571
3,259,086
2,918,509
239,164
492,823
103,377
28,363
309,792
29,251,996
367,900,690
Tables 261
1.—Continued
LIABILITIES
Federal Reserve Notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks
363,479,179
49,271,395
Total Federal Reserve notes, net
314,207,783
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
32,078,917
7,491,659
205,745
Other deposits
Officers' and certified checks
International organizations
Other3
24,214
124,960
222,461
Total other deposits
Deferred credit items
371,635
5,561,352
Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other
1,766,442
69,775
14,312
25,826
Total other liabilities
1,876,354
Total liabilities
361,793,445
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 $7,889.5 million was invested in
securities issued by foreign governments, and the balance
was invested with foreign central banks and the Bank for
International Settlements.
3,053,622
3,053,622
0
367,900,690
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 December 31.
262 79th Annual Report, 1992
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1992 and 1991
Millions of dollars'
Total
Boston
Item
1992
1991
11,056
8,018
446
11,059
10,018
528
675
0
218
0
Federal agency obligations
Bought outright
Held under repurchase agreements
5,413
631
U.S. Treasury securities
Bought outright2
Held under repurchase agreements
Total loans and securities
1992
1991
ASSETS
705
511
19
747
711
34
6,045
553
346
0
409
0
295,011
7,463
309,192
266,486
15,345
288,647
18,843
0
19,189
18,041
0
18,450
8,911
1,026
8,286
987
634
90
464
89
21,514
7,738
27,626
5,911
794
376
1,111
303
0
0
-1,634
-1,287
367,901
353,061
20,683
20,623
314,208
287,906
18,572
18,350
32,079
7,492
206
372
40,148
29,413
17,697
968
1,706
49,783
1,442
0
5
21
1,468
1,391
0
6
81
1,478
5,561
1,876
7,259
2,810
311
115
443
156
61,793
347,758
20,466
20,428
3,054
3,054
0
2,652
2,652
0
367,901
353,061
20,683
20,623
Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
363,479
49,271
366,468
78,562
21,432
2,860
23,044
4,693
Federal Reserve notes, net
314,208
287,906
18,572
18,350
Collateral for Federal Reserve notes
Gold certificate account
Special drawing rights certificate account
Other eligible assets
U.S. Treasury and federal agency securities
11,056
8,018
0
295,134
11,059
10,018
0
266,829
Total collateral
314,208
287,906
Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
Acceptances held under repurchase agreements
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies3
Allother
Interdistrict Settlement Account
Total assets
LIABILITIES
Federal Reserve notes
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits
Deferred credit items
Other liabilities and accrued dividends4
o o
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
O OO OO
Total liabilities
99
98
0
FEDERAL RESERVE NOTE STATEMENT
For notes see end of table.
Tables 263
2.—Continued
Philadelphia
New York
1992
1992
1991
Cleveland
1991
1992
Richmond
1991
1992
1991
692
645
30
941
652
95
948
961
99
0
0
0
0
0
0
105
0
341
0
378
0
423
0
478
0
7,041
0
7,246
18,569
0
18,909
16,674
0
17,052
23,068
0
23,492
21,079
0
21,662
538
45
592
44
442
36
354
34
760
128
608
123
852
199
1,312
146
1,308
375
1,428
350
1,383
876
-220
1,688
374
321
28,106
26,784
4,042
2,808
13
3,914
3,395
16
347
303
24
318
319
40
658
556
26
0
0
7
0
592
0
45
0
2,106
631
2,382
553
165
0
160
0
114,769
7,463
124,969
105,022
15,345
123,309
8,979
0
2,736
1,352
137
969
127
6,258
3,421
7,606
2,918
-19,514
-12,000
2,183
3,172
1,420
1,766
123,485
130,253
14,227
13,189
23,731
22,352
105,028
100,834
11,341
10,872
21,680
19,950
25,083
23,426
7,531
7,492
107
195
15,324
6,461
17,697
859
642
25,658
2,207
0
6
8
2,221
1,470
0
7
74
1,551
1,341
0
9
15
1,364
1,572
0
8
88
1,667
2,025
0
9
32
2,068
2,210
0
9
66
2,285
629
733
866
1,353
368
62
490
66
220
114
270
143
392
144
541
191
121,715
128,710
13,992
12,979
23,378
22,029
27,686
26,443
885
885
0
771
771
0
117
117
0
105
105
0
176
176
0
161
161
0
210
210
0
171
171
0
125,485
130,253
14,227
13,189
23,731
22,352
28,106
26,784
119,266
14,238
128,066
27,231
13,058
1,717
13,068
2,196
23,683
2,003
23,151
3,201
29,944
4,861
31,583
8,158
105,028
100,834
11,341
10,872
21,680
19,950
25,083
23,426
264
79th Annual Report, 1992
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1992 and 1991—Continued
Millions of dollars !
Chicago
Atlanta
Item
1992
1991
1992
1991
1,270
1,036
30
1,370
1,336
53
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
503
318
38
479
303
46
Loans
To depository institutions
Other
13
0
Acceptances held under repurchase agreements
Federal agency obligations
Bought outright
Held under repurchase agreements
184
0
202
0
670
0
760
0
U. S. Treasury securities
Bought outright2
Held under repurchase agreements
Total loans and securities
10,043
0
10,229
8,912
0
9,115
36,537
0
37,210
33,486
0
34,259
Items in process of collection
Bank premises
1,305
57
895
57
923
112
799
112
Other assets
Denominated in foreign currencies3
All other
1,971
326
2,799
205
2,603
3,420
599
Interdistrict Settlement Account
Total assets
in
3,833
1,987
-3,444
237
18,579
15,887
40,517
42,183
13,232
11,426
35,485
37,207
4,083
0
13
5
4,101
2,970
0
15
117
3,102
3,422
0
17
49
3,489
3,102
0
19
211
3,332
600
67
792
81
621
231
702
301
8,000
15,401
39,825
41,542
290
290
0
243
243
0
346
346
0
321
321
0
18,579
15,887
40,517
42,183
17,318
4,086
17,196
5,771
38,700
3,215
41,660
4,452
13,232
11,426
35,485
37,207
LIABILITIES
Federal Reserve notes
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits
Deferred credit items
Other liabilities and accrued dividends4
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT
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
Digitizedbought
for FRASER
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 265
2.— Continued
St. Louis
1992
1991
Dallas
Kansas City
Minneapolis
1992
1991
1992
1991
1992
San Francisco
1991
1992
1991
304
168
25
328
307
29
195
186
16
171
172
14
329
199
36
370
334
31
463
377
27
515
463
43
1,299
904
98
1,207
1,072
94
5
0
25
0
1
0
0
0
5
0
9
0
0
0
3
0
69
0
11
0
132
0
160
0
84
0
78
0
146
0
168
0
199
0
237
0
616
0
633
0
7,218
0
7,356
7,058
0
7,243
4,598
0
4,683
3,445
0
3,523
7,981
0
8,131
7,386
0
7,563
10,823
0
11,021
10,456
0
10,695
33,583
0
34,268
27,886
0
28,528
294
30
275
29
415
33
544
32
482
51
515
53
418
161
773
141
1,349
146
1,498
147
531
152
724
128
566
120
782
77
807
169
1,055
136
1,717
282
2,105
192
2,724
667
3,597
482
5,311
-1,609
2,555
2,640
5,062
-810
2,314
1,600
2,134
3,983
14,171
7,453
8,768
7,955
15,266
9,247
16,781
16,526
43,589
40,608
12,824
6,035
7,458
6,691
13,544
7,145
14,082
13,530
35,878
32,440
952
0
3
3
958
914
0
4
42
960
721
0
4
5
730
653
0
4
38
695
1,079
0
5
6
1,090
1,313
0
6
60
1,379
1,808
0
11
27
1,846
1,646
0
11
97
1,754
5,466
0
18
6
5,490
5,713
0
20
192
5,924
204
44
255
73
390
29
399
31
362
53
458
68
356
73
722
96
1,108
212
1,321
251
14,031
7,322
8,608
7,816
15,049
9,049
16,357
16,103
42,688
39,936
70
70
0
66
66
0
80
80
0
70
70
0
109
109
0
99
99
0
212
212
0
211
211
0
450
450
0
336
336
0
14,171
7,453
8,768
7,955
15,266
9,247
16,781
16,526
43,589
40,608
14,440
1,617
8,883
2,848
8,191
733
8,117
1,427
15,086
1,542
9,618
2,473
16,914
2,831
17,683
4,152
45,448
9,570
44,400
11,961
12,824
6,035
7,458
6,691
13,544
7,145
14,082
13,530
35,878
32,440
266 79th Annual Report, 1992
3. Federal Reserve Open Market Transactions, 1992l
Millions of dollars
Jan.
Feb.
Mar.
Apr.
0
1,628
26,750
1,600
123
0
24,435
0
505
0
21,674
0
0
0
27,526
0
0
0
1,174
-989
0
0
0
6,020
-2,742
0
0
0
2,552
-2,512
0
0
0
877
-1,863
0
1 to 5 years
Gross purchases
Gross sales
Maturity shift
Exchanges
0
0
-1,050
539
1,027
0
-6,020
2,292
1,425
0
-2,552
2,512
0
0
-654
1,484
5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
0
0
-124
451
0
0
96
300
oooo
0
0
-223
379
More than 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
oooo
0
0
-96
150
oooo
All maturities
Gross purchases
Gross sales
Redemptions
0
1,628
1,600
1,150
0
0
1,930
0
0
ooo
136,922
136,282
123,000
124,654
128,230
126,673
125,999
128,149
21,412
33,228
9,824
13,353
48,758
46,953
18,432
20,237
-15,684
-725
2,178
345
0
0
85
ooo
ooo
Type of transaction
0
0
49
390
808
571
706
1,640
1,640
224
224
-503
-135
0
-A9
16,186
-860
2,178
295
Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchanges
Redemptions
Others within 1 year
Gross purchases
Gross sales
Maturity shift
Exchanges
Redemptions
Matched transactions
Gross sales
Gross purchases
Repurchase agreements2
Gross purchases
Gross sales
Net change in U.S. Treasury securities
oooo
U.S. TREASURY SECURITIES
FEDERAL AGENCY OBLIGATIONS
Outright transactions
Gross purchases
Gross sales
Redemptions
Repurchase agreements2
Gross purchases
Gross sales
Net change in agency obligations
Total net change in System Open Market Account.
1. Sales, redemptions, and negative figures reduce
holdings of the System Open Market Account; all other
figures increase such holdings. Details may not sum to
totals because of rounding.
2. In July 1984 the Open Market Trading Desk discontinued accepting bankers acceptances in repurchase
agreements.
Tables 267
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
4,110
0
24,275
0
306
0
22,028
0
0
0
30,755
0
271
0
25,041
0
595
0
22,277
0
4,072
0
28,907
0
1,064
0
25,468
0
3,669
0
29,562
0
14,714
1,628
308,699
1,600
0
0
2,459
-5,225
0
285
0
3,447
-1,854
0
0
0
985
-1,669
0
0
0
4,448
-4,617
0
350
0
2,753
-1,905
0
0
0
2,010
-982
0
461
0
7,160
-4,615
0
0
0
2,777
-1,570
0
1,096
0
36,662
-30,543
0
200
0
-2,113
4,311
1,993
0
-3,447
1,854
0
0
-514
1,478
400
0
-4,036
3,567
3,500
0
-2,753
1,905
200
0
-1,762
884
4,172
0
-6,800
3,415
200
0
-2,777
1,570
13,118
0
-34,478
25,811
0
0
-346
614
597
0
0
0
0
0
-471
191
195
0
-412
700
750
0
0
0
0
0
-248
97
1,176
0
-187
800
100
0
0
0
2,818
0
-1,915
3,532
0
0
0
300
655
0
0
0
0
0
0
0
0
0
0
350
731
0
0
0
0
0
0
0
947
0
-173
400
0
0
0
0
2,333
0
-269
1,200
4,310
0
0
3,836
0
0
0
0
0
866
0
0
5,927
0
0
4,272
0
0
7,820
0
0
3,969
0
0
34,079
1,628
1,600
118,972
117,524
126,977
129,216
127,051
126,137
103,708
101,410
116,331
115,579
116,024
114,917
115,020
117,020
144,232
142,578
1,482,467
1,480,140
38,777
38,533
10,792
11,036
12,224
12,224
39,484
31,868
68,697
59,628
18,698
35,383
42,373
39,117
48,904
44,697
378,374
386,257
3,107
5,831
-914
6,184
14,244
-13,520
13,075
6,521
20,642
ooo
0
0
40
0
0
85
0
0
54
0
0
37
ooo
ooo
3.—Continued
0
0
121
0
0
632
1,281
1,281
402
402
94
94
601
548
3,222
1,800
1,778
3,253
2,760
2,506
1,601
1,224
14,565
14,486
-160
-40
-85
-1
1,385
-1,475
254
256
-554
2,946
5,791
-1,000
6,183
15,629
-14,995
13,329
6,777
20,089
268
79th Annual Report, 1992
4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 1990-92 l
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
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 Land Banks
Federal National Mortgage Association
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).
1992
1991
1990
1992
1991
302,474
281,831
252,103
20,643
29,728
12,824
70,610
103,582
68,750
18,903
27,805
21,109
66,759
90,655
64,299
14,469
24,540
22,530
57,538
75,428
58,749
13,121
24,736
-8,285
3,851
12,927
4,451
4,434
3,265
-1,421
9,221
15,227
5,550
1,348
-196
141,794
118,179
35,037
7,463
132,635
101,520
32,331
15,345
112,520
91,407
31,163
17,013
9,159
16,659
2,706
-7,882
20,115
10,113
1,168
-1,668
5,413
6,045
6^42
-632
-297
190
810
1,064
2,511
696
142
200
811
1,329
2,508
1,008
188
200
737
1,639
2,555
1,022
188
-10
-265
3
-312
-46
0
74
-310
-47
-14
0
1,296
1,766
66
2,167
0
1,440
2,029
66
2,342
37
1,560
2,161
108
2,346
37
-144
-263
0
-175
-37
-120
-132
-42
-4
0
117
0
631
117
12
553
117
12
1,341
0
-12
78
0
0
-788
3. Includes the effects of matched sale-purchase
agreements.
Tables 269
5. Number and Salaries of Officers and Employees of Federal Reserve Banks,
December 31, 1992
President
Federal Reserve
Bank (including)
branches
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Federal Reserve
Automation
Service
Total
Annual
salary
(dollars)
172,400
257,700
180,000
160,000
199,200
206,800
216,300
186,200
170,100
153,000
155,600
224,000
2,281,300
Employees
Other officers
Number
Total
Annual
salaries
(dollars)
Number
Annual
salaries
(dollars)
252
68
130
74
124
60
45
110
110
41
51
74
47,400,373
149,316,167
41,693,141
36,357,531
55,810,045
67,044,427
78,809,730
31,256,076
33,047,797
47,019,381
47,340,298
83,027,160
1,540
4,238
1,520
1,366
2,147
2,424
2,548
1,237
1,205
1,667
1,671
2,534
52,698,273
167,721,192
47,632,491
41,955,881
62,772,745
73,487,427
87,427,680
35,417,676
37,300,197
51,987,381
52,241,548
92,589,785
203
0
9,461,880
226
11,667,655
22,232
1,139
727,584,006
24,323
814,899,931
Number
Annual
salaries
(dollars)
55
175
63
62
81
75
97
52
48
57
57
95
5,125,500
18,147,325
5,759,350
5,438,350
6,763,500
6,236,200
8,401,650
3,975,400
4,082,300
4,815,000
4,745,650
9,338,625
1,232
3,994
1,326
1,229
1,941
2,288
2,405
1,074
1,046
1,568
1,562
2,364
23
2,205,775
940
85,034,625
Fulltime
Parttime
270
79th Annual Report, 1992
6. Income and Expenses of Federal Reserve Banks, 1992
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
CURRENT INCOME
Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other
6,067,617
151,445
992,253
343,370
51,177
17,336,350,446
2,122,018,858
758,392,481
12,198,537
1,121,372,762
78,725,876
44,676,475
361,601
6,824,747,348
615,293,854
106,480,551
7,104,890
504,283,274
85,045,492
41,061,467
263,036
1,083,681,615
127,851,245
43,856,163
284,196
Total
20,235,027,938
1,245,288,159
7,554,618,896
630,996,639
1,255,724,397
845,649,640
65,803,906
25,490,088
37,213,324
35,874,992
53,598,166
12,733,411
4,784,742
1,986,917
1,921,494
174,461,911
41,466,468
2,248,141
5,458,686
8,016,353
47,560,571
12,025,524
728,888
1,905,612
1,656,512
46,745,596
11,616,831
2,075,464
2,347,623
1,645,050
85,468,987
10,016,433
55,069,920
4,718,052
511,418
3,225,555
11,032,923
2,125,978
9,536,278
4,633,677
473,529
3,261,890
6,201,564
728,499
2,903,058
23,289,904
38,762,965
29,299,069
28,103,045
22,049,349
3,147,448
3,142,836
2,304,715
626,580
712,127
4,662,387
5,401,142
4,974,857
18,716,964
3,285,944
1,870,149
1,841,677
3,155,158
232,748
1,150,650
1,366,691
1,874,174
1,776,957
351,764
775,648
6,635,049
21,507,097
96,803,422
54,879,234
177,076,512
38,436,737
0
(39,890,532)
(2,555,498)
369,833
798,771
5,135,673
3,202,914
10,285,795
2,540,311
(715,064)
(9,285,111)
(316,949)
173,868
5,165,035
18,590,193
9,124,858
36,530,922
6,128,698
(2,589,340)
(3,885,810)
(5,760)
347,233
800,371
3,892,074
2,763,498
19,217,932
1,668,530
3,214,578
(2,976,430)
(71,472)
165,912
761,219
6,410,854
3,777,792
7,166,749
2,374,800
2,097,431
(3,505,458)
(383,494)
1,654,983,643
(180,453,120)
1,474,530,523
105,429,634
(9,155,026)
96,274,608
360,620,696
(37,712,388)
322,908,308
109^52,899
(19,326,840)
90,026,059
99,274,725
(16,428,504)
82,846,221
CURRENT EXPENSES
Salaries and other personnel
expenses
Retirement and other benefits
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.
Tables
271
6.—Continued
Richmond
Atlanta
Chicago
St. Louis
San Francisco
180,646
681,722
584,086,217
195,621,407
92,977,699
692,820
2,145,434,724 432,402,201 255,108,267 470,007,424
257,123,513 52,606,311 56,065,690 79,665,515
99,463,226 30,872,707 40,733,402 48,337,755
952,994
253,027
449,419
107,338
645,882,649
168,875,236
53,344,955
290,689
1,916,002,802
269,109,456
91,162,291
1,125,923
1,555,451,752
873,609,356
2,503,377,510 516,974,803 353,657,445
598,672,612
868,574,175
2,278,082,194
72,117,094
17,770,550
8,038,001
4,011,529
5,198,745
77,324,778
20,375,430
1,636,053
3,735,201
2,325,782
90,838,796
22,449,851
955,689
4,222,085
4,334,676
37,067,307
9,195,081
817,399
1,948,207
1,556,991
37,950,193
8,560,144
1,424,007
2,266,213
2,073,586
54,919,567
14,616,290
689,009
2,591,317
1,502,577
55,690,342
12,944,810
932,340
2,387,032
2,171,104
97,375,319
22,857,247
1,160,355
4,352,902
3,472,122
7,519,064
698,383
5,888,751
10,509,949
1,112,598
5,754,751
9,594,569
989,319
6,140,565
4,053,560
589,922
3,262,950
5,738,104
457,643
2,161,529
5,983,218
750,176
3,345,383
4,869,062
911,293
3,920,803
10,615,245
667,675
5,668,407
2,167,950
4,312,079
2,620,658
1,801,945
2,547,807
1,768,180
3,104,326
2,327,123
1,229,812
2,458,119
1,276,525
4,649,505
2,518,235
2,016,872
5,067,774
467,756
1,845,743
1,583,692
414,712
826,055
923,326
1,244,003
939,176
517,921
648,959
842,022
3,210,652
1,518,966
307,044
912,063
2,377,097
2,471,471
2,053,148
1,633,386
1,538,706
2,420,373
5,665,357
3,526,384
253,296
2,125,497
775,373
1,517,480
15,749,986
5,624,074
11,456,445
4,386,618
(8,550,309)
(5,202,261)
(274,157)
820,731
2,057,272
7,408,769
5,962,848
13,536,275
4,416,321
1,128,205
(2,693,365)
(308,927)
1,071,816
3,285,886
13,106,225
8,825,071
28,964,791
4,843,183
(5,715,685)
(3,369,408)
(102,070)
210,073
454,140
3,133,021
1,911,667
4,140,554
1,507,238
2,763,260
(1,295,976)
(77,447)
651,398
687,087
4,456,801
2,672,577
4,131,376
1,566,178
428,788
(996,350)
(241,946)
280,921
2,341,675
2,674,234
1,952,564
9,186,372
2,109,684
3,226,170
(917,480)
(355,804)
668,144
1,280,452
5,887,544
2,853,256
11,216,676
2,658,805
2,730,578
(1,756,557)
(343,938)
1,099,748
2,357,709
10,358,048
6,208,115
21,242,624
4,236,371
1,981,387
(4,006,326)
(73,534)
231,213
1,353,341,163
136,035,263
65,425,789
312,604
403,053
160,175,805 165,990,231
(11,519,875) (14,092,111)
148,655,930 151,898,120
1,300,667
Dallas
554,580
336,934
840,557
Minneapolis Kansas City
205,964,270 76^75,905 78,260,713 111,686,620 119,095,555
(8,862,605)
(19,557,478) (10,000,764) (6,856,866) (11,819,229)
186,406,792 66,375,141 71,403,847 99,867,391 110,232,950
203,564^21
(15,121,434)
188,442,887
272
79th Annual Report, 1992
6. Income and Expenses of Federal Reserve Banks, 1992—Continued
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
18,760,497,416
1,149,013,550
7,372,518,318
540,970,580
1,172,878,177
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
(298,078,707)
199,819,309
(1,158,895,231)
11,931,153
(12,504,152)
8,255,461
(39,878,680)
97,121,050
(99,700,683)
47,400,973
(314,525,769)
15,218,772
(15,346,861)
3,504,528
(42,771,873)
21,833,127
(22,242,170)
7,609,888
(65,595,821)
(959,075,922)
(31,623,219)
(267,124,796)
(39,267,344)
(57,985,932)
28,711,766
1,256,859
2,522,156
1,413,181
1,751,905
128,955,300
295,400,650
4,699,200
18,350,965
37,396,200
101,456,057
5,135,700
10,548,662
7,795,200
18,485,886
17,348,353,778
1,093,083,307
6,964,019,109
484,605,693
1,086,859,253
171,762,927
6,096,633
49,868,773
6,856,094
10,100,417
16,774,476,501
1,076,527,924
6,800,550,135
465,532,198
1,061,696,036
Transferred to surplus
402,114,350
10,458,750
113,600,200
12,217,400
15,062,800
Surplus, January 1
Surplus, December 31
2,651,507,750
3,053,622,100
97,852,000
108,310,750
771,420,400
885,020,600
105,100,500
117,317,900
161,155,750
176,218,550
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 $140,870,731.
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
273
6.—Continued
Richmond
Atlanta
Chicago
1,406,795,823
721,711,236
2,316,970,718
11,254,137
4,472,899
16,210,524
St. Louis
Minneapolis Kansas City
Dallas
San Francisco
498,805,221
758,341,226
2,089,639,308
3,944,925
4,907,714
14,131,763
46,416,592 10,301,032 11,858,119 14,698,435
23,177,649
34,233,757
(24,906,389) (34,608,612) (47,538,468) 66,769,209 (11,894,065) (15,328,997)
15,088,647 81,246,999
1,852,516
3,314,363
9,525,397
4,098,044
(69,481,045) (98,902,259) (130,557,878) (104,836,552) (28,487,784) (40,892,351)
27,748,498
(28,086,690)
4,569,522
(86,117,364)
51,912,037
(52,690,830)
13,352,971
(136,847,856)
(59,955,648) (94,804,215) (115,469,230) (23,589,553) (26,635,268) (37,577,988)
(81,547,843) (123,494,885)
450,599,662 282,253,598
4,176,758
1,888,462
2,891,351
3,010,027
3,240,033
1,669,383
1,957,630
2,582,431
2,317,745
4,099,064
8,474,000
25,527,479
11,888,400
15,152,205
15,443,600
33,248,750
3,183,400
7,170,003
3,431,000
6,643,480
4,810,500
7,858,863
10,274,600
14,354,345
16,423,500
36,603,955
414,987,323 243,586,220 445,975,439
1,309,947,345
11,464,752
1,258,927,693
39,554,900
596,856,389 2,149,569,105
649,846,693
1,909,017,904
6,210,600
13,076,651
23,041,886
533,630,395 2,104,451,832 406,545,547 228,761,942 430,257,039
16,384,793
19,888,622
4,091,876
46,841,200
25,228,650
4,349,900
170,507,100 242,799,000
210,062,000 289,640,200
320,864,550
346,093,200
65,582,350
69,932,250
4,681,827
636,266,342
1,771,329,417
9,507,800
503,700
114,646,600
69,826,350 99,312,100
79,968,800 108,819,900
211,439,600
211,943,300
335,648,050
450,294,650
10,142,450
274
79th Annual Report, 1992
7'. Income and Expenses of Federal Reserve Banks, 1914-921
Dollars
Federal Reserve Bank
and period
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
^,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
275
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)
217,463
1,742,775
6,804,186
5,540,684
5,011,832
2,703,894
1,134,234
48,334,341
70,651,778
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
2,011,418
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
297,667
227,448
176,625
119,524
24,579
-60,323
27,695
102,880
67,304
-419,140
-425,653
82,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605
-54,456
-4,333
49,602
135,003
201,150
262,133
27,708
86,772
75,283,818
166,690,356
193,145,837
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
276
79th Annual Report, 1992
7. Income and Expenses of Federal Reserve Banks, 1914-92—Continued
Dollars
Current
income
Federal Reserve Bank
and period
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
1992
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
20,235,027,938
718,032,836
814,190,392
926,033,957
1,023,678,474
,102,444,454
,127,744,490
156,867,714
,146,910,699
,205,960,134
,332,160,712
,349,725,812
1,429,322,157
1,474,530,523
(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
(959,075,921)
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
128,955,300
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
295,400,650
Total, 1914-92
327,024,393,711
23,327,575,426
Aggregate for each Bank,
1914-92
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
17,510,241,589
100,942,121,779
12,539,376,489
21,509,043,278
25,954,044,920
13,965,150,283
45,637,643,168
10,694,638,342
5,895,288,860
13,370,608,835
17,884,398,161
41,121,838,008
1,536,760,720
4,654,600,297
1,258,714,306
1,524,890,436
1,883,930,090
2,089,230,229
3,043,175,507
1,205,707,159
1,097,323,678
1,505,093,970
1,401,811,145
2,506,681,750
Total
327,02433,711
176,817,307
1,362,089,342
266,817,425
229,623,399
287,133,942
459,027,806
614,195,126
131,115,614
160,304,365
205,601,031
417,928,983
762,807,515
62,076,686
449,498,786
80,985,118
122,500,690
93,295,676
135,671,160
233,842,672
51,026,272
50,138,415
71,027,509
115,730,973
237,138,951
176,277,091
819,473,971
119,237,918
182,276,473
262,910,197
160,222,932
391,886,858
101,612,154
51,246,620
124,278,758
159,995,511
342,860,290
23,327,575,4264 5,033,440,856 1,702,932,908 2,892,278,773
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 $3,182,294,299 transferred to surplus was reduced by direct changes of $500,000 for charge-off on
Bank premises (1927), $139,299,557 for contributions to
5,033,440,856 1,702,932,908 2,892,278,773
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 $3,053,622,100 on December 31, 1992.
4. See note 2, table 6.
Tables
277
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
171,762,924
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
16,774,476,500
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
402,114,350
3,182,294,2993
2,754,989,793
149,138,300
2,188,893
297,784,105,648
(3,657)
111,081,103
752,463,230
142,267,053
209,452,772
146,788,151
205,293,997
370,919,941
84,089,294
77,740,274
112,663,153
176,895,747
365,335,077
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
15,662,542,654
94,981,347,191
10,994,765,084
19,478,514,975
23,613,223,232
11,509,424,416
41,798,035,964
9,292,522,213
4,678,449,297
11,624,491,429
16,217,311,054
37,933,478,137
135,411
(433,412)
290,661
(9,906)
(71,517)
5,491
11,682
(26,515)
64,874
(8,674)
55,337
(17,089)
118,405,575
922,277,171
131,648,122
189,452,343
215,941,808
294,906,740
361,421,954
75,072,878
83,846,013
112,959,850
216,220,778
460,162,067
2,754,989,793
149,138,300
2,188,893
297,784,105,648
(3,657)
3,182,294,299
278
79th Annual Report, 1992
Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 31, 1992l
Dollars
Acquisition costs
Federal Reserve
Bank or
Branch
Land
Buildings
(including
vaults)2
Building machinery and
equipment
Total
3
Net
book
value
BOSTON
22,073,501
83,813,108
5,675,602
111,562,211
89,589,840
NEW YORK
20,354,440
887,844
93,625,754
3,303,946
42,251,939
2,749,659
156,232,132
6,941,449
132,903,040
4,183,960
2,251,556
55,005,678
5,903,704
63,160,938
45,093,745
1,074,281
2,246,599
1,658,376
10,045,664
14,413,715
8,905,759
6,858,976
7,623,142
4,341,196
17,978,922
24,283,455
14,905,331
12,775,360
11,936,230
11,228,347
5,812,396
6,476,335
3,129,645
69,596,875
26,826,903
27,402,251
18,390,034
3,842,189
4,737,485
93,799,305
37,145,427
35,269,381
65,404,897
29,676,789
32,659,481
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
1,209,360
3,197,830
1,665,439
3,717,791
592,342
3,087,693
12,167,223
1,905,770
16,589,720
12,783,499
1,474,678
3,505,766
4,319,451
1,074,511
2,363,391
2,223,399
1,645,209
1,581,930
17,696,034
6,178,112
20,618,549
18,724,690
3,712,230
8,175,389
13,209,887
4,148,312
18,345,872
14,457,087
1,594,679
5,259,297
CHICAGO
Detroit
4,565,008 109,377,091
797,734
4,702,524
700,378 15,270,459
1,148,492
2,148,507
700,075
2,859,819
1,135,623
4,274,152
19,008,997
5,087,151
132,951,095
10,587,408
103,770,536
8,263,699
5,298,206
1,003,022
1,131,238
2,280,473
21,269,043
4,300,021
4,691,132
7,690,248
18,226,743
2,509,188
3,839,645
5,220,981
Buffalo
PHILADELPHIA .
CLEVELAND . . . .
Cincinnati
Pittsburgh
RICHMOND
Baltimore
Charlotte
ST. LOUIS
Little Rock
Louisville
Memphis
27,701,819
9,036,528
15,376,497
4,451,952
3,630,988
10,987,009
7,851,532
486,396
38,947,735
11,477,438
21,540,113
11,051,196
11,593,946
3,185,925
861,305
1,401,083
28,799,863
10,825,839
6,138,679
18,922,675
22,076,231
8,422,717
3,880,159
17,046,319
DALLAS
El Paso
Houston
San Antonio
29,565,708 120,896,877
262,477
1,458,093
2,205,500
3,295,695
482,284
2,674,490
0
404,946
1,126,030
1,581,919
150,462,585
2,125,516
6,627,225
4,738,694
149,224,965
2,048,477
6,207,363
3,704,407
SAN FRANCISCO
Los Angeles
Portland
Salt Lake City . . . .
Seattle
15,599,928
3,891,887
415,924
480,222
324,772
68,246,884
51,126,648
5,682,337
4,903,818
2,686,325
17,739,084
8,398,066
1,254,537
1,467,539
1,891,936
101,585,896
63,416,601
7,352,798
6,851,579
4,903,032
78,444,830
54,877,791
6,163,927
3,964,109
2,792,471
1,394,384
1,954,514
1,829,420
3,187,962
646,386
6,534,583
MINNEAPOLIS...
Helena
KANSAS CITY...
Denver
Oklahoma City....
Omaha
Total
157,258,687 914,154,822 208,635,149 1,280,048,658 1,025,742,686
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
13,086,575
944,483
292,710
149,948
1,412,500
11,252,712
28,363,291
4. Covers acquisitions for banking-house purposes
and bank premises formerly occupied and being held
pending sale.
Tables 279
9. Operations in Principal Departments of Federal Reserve Banks, 1989-92
Operation
Millions of pieces (except as noted)
Loans (thousands)
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
All other
Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities
Transfer of funds
Automated clearinghouse transactions
Commerciall
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
Commerciall
Government
Food stamps redeemed
1990
1989
8
20,166
7,506
8,660
11
19,711
6,254
9,462
15
19,462
6,561
12,072
22
19,857
6,319
12,668
493
181
19,054
503
166
18,743
547
162
18,595
541
147
18,014
76
68
52
65
44
63
40
60
1,327
531
4,183
1,119
521
3,439
915
520
2,875
741
441
2,334
29,427
277,681
96,744
1,275
64,597
265,473
77,496
1,354
194,538
252,430
65,863
1,734
229,358
246,598
59,985
1,828
588,311
20,188
13,241,785
610,106
17,716
12,164,175
623,008
16,485
12,514,201
635,064
14,284
12,321,576
142,768,966
199,175,034
119,114,811
192,254,895
102,332,172
199,067,200
98,130,603
182,575,303
7,597,811
859,774
21,452
6,188,185
723,426
17,888
4,173,667
486,809
14,517
3,840,462
391,463
11,714
1. Data for years preceding 1991 do not include items
sent to the Reserve Banks by the New York Automated
Clearing House.
1991
1992
280
79th Annual Report, 1992
10. Federal Reserve Bank Interest Rates, December 31, 1992
Loans to depository institutions
Bank
All Federal Reserve Banks
Extended credit3
Adjustment
credit1
Seasonal
credit2
3.0
3.2
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.
2. 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. The discount rate
on seasonal credit takes into account rates on market
sources of funds and ordinarily is reestablished on the
first business day of each two-week reserve maintenance
period; however, it is never lower than the discount rate
applicable to adjustment credit. See section 201.3(b)(l) of
Regulation A.
First 30 days
of borrowing
After 30 days
of borrowing4
3.0
3.7
3. Extended credit is available to depository institutions,
if similar assistance is not reasonably available from other
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.
4. Extended-credit loans outstanding more than thirty
days ordinarily will be charged a flexible rate somewhat
above rates on market sources of funds; however, the rate
will always be at least fifty basis points above the discount rate applicable to adjustment credit. In no case will
the rate be less than the basic discount rate plus fifty 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 flexible
rate may be charged on extended-credit loans that are
outstanding less than thirty days.
Tables 281
Reserve Requirements of Depository Institutions]
Requirements
Type of deposit2
Percent of deposits
Effective date
3
10
12/15/92
12/15/92
0
12/27/90
0
12/27/90
3
Net transaction accounts
$0 million-$46.8 million
More than $46.8 million
Nonpersonal time deposits4
Eurocurrency liabilities
5
1. Reserve requirements in effect on December 31,
1992. 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 December 15, 1992, the exemption was
raised from $3.6 million to $3.8 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 December 15, 1992 for
institutions reporting quarterly and December 22, 1992
for institutions reporting weekly, the amount was increased from $42.2 million to $46.8 million.
4. For institutions that report weekly, the reserve requirement on nonpersonal time deposits with an original
maturity of less than 1 xh years was reduced from 3 percent to 1 Vi percent for the maintenance period that began
December 13, 1990, and to zero for the maintenance
period that began December 27, 1990. The reserve requirement on nonpersonal time deposits with an original
maturity of 1 xh years or more has been zero since October 6, 1983.
For institutions that report quarterly, the reserve requirement on nonpersonal time deposits with an original
maturity of less than 1V2 years was reduced from 3 percent to zero on January 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 \xh years (see note 4).
282
79th Annual Report, 1992
12. Initial Margin Requirements under Regulations T, U, G, and X 1
Percent of market value
Short sales,
Tonly 2
Effective date
1934, Oct. 1 . . . .
1936, Feb. 1 . . . .
Apr. 1 . . . .
1937, Nov. 1 . . . .
1945, Feb. 5 . . . .
July 5 . . . .
1946, Jan. 21 . . .
1947, Feb. 2 1 . . .
1949, Mar. 3 . . . .
1951, Jan. 17 . . .
1953, Feb. 2 0 . . .
1955, Jan. 4
Apr. 23 . . .
1958, Jan. 16 . . .
Aug. 5 . . . .
Oct. 16 . . .
1960, July 28 . . .
1962, July 10 . . .
1963, Nov. 6 . . . .
1968, Mar. 1 1 . . .
June 8 . . . .
1970, May 6 . . . .
1971, Dec. 6 . . . .
1972, Nov. 24...
1974, Jan. 3 . . . .
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
value (100 percent) and the maximum loan value of 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 October 15, 1934; Regulation U,
effective May 1, 1936; Regulation G, effective March 11,
1968; and Regulation X, effective November 1, 1971.
On January 1, 1977, the Board of Governors for the
first time established in Regulation T the initial margin
required for writing options on securities, setting it at
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
30 percent of the current market value of the stock
underlying the option. On September 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 selfregulatory 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 October 1, 1934, to October 31, 1937, the
requirement was the margin "customarily required" by
the brokers and dealers.
Tables 283
13. Principal Assets and Liabilities and Number of Insured Commercial Banks,
by Class of Bank, June 30, 1992 and 1991'
Asset and liability items shown in millions of dollars
Member banks
Item
Total
Total
National
State
Nonmember
banks
June 30, 1992
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,486,738
1,799,154
1,790,741
687,584
1,798,362
1,320,465
1,315,292
477,897
1,441,254
1,073,000
1,068,991
368,254
357,107
247,464
246,301
109,643
688,376
478,689
475,449
209,687
549,931
137,654
189,728
386,690
91,207
147,810
300,265
67,989
119,433
86,425
23,218
28,377
163,240
46,447
41,917
Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
2,319,688
48,564
669,774
1,858,303
243,416
1,662,383
41,470
493,715
1,304,338
174,633
1,345,048
30,253
396,573
1,065,272
136,537
317,335
11,217
97,142
239,066
38,097
657,305
7,094
176,060
553,965
68,783
11,623
4,638
3,689
949
6,985
Number of banks
June 30, 1991
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,446,295
1,850,168
1,839,449
596,126
1,775,794
1,369,674
1,362,474
406,121
1,437,167
1,122,113
1,116,269
315,054
338,627
247,561
246,205
91,067
670,500
480,495
476,976
190,006
453,556
142,571
191,698
310,837
95,284
147,153
244,436
70,618
120,294
66,400
24,666
26,859
142,719
47,287
44,545
Deposits, total
Interbank
Other demand
Other time and savings
Equity capital
2,294,866
45,049
604,250
1,868,539
221,957
1,646,375
38,180
444,835
1,316,914
157,296
1,342,707
29,268
360,547
1,080,994
123,632
303,668
8,912
84,288
235,920
33,664
648,491
6,870
159,415
551,625
64,661
12,085
4,889
3,902
987
7,196
Number of banks
1. All insured commercial banks in the United States.
Details may not sum to totals because of rounding.
284 79th Annual Report, 1992
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-92, and Month-End 1992l
Millions of dollars
Factors supplying reserve tunds
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
1941
1942
1943
1944
2,184
2,254
6,189
11,543
18,846
2,184
2,254
6,189
11,543
18,846
0
0
0
0
0
3
3
6
5
80
80
94
471
681
815
8
10
14
10
4
0
0
0
0
0
2,274
2,361
6,679
12,239
19,745
21,995
22,737
22,726
21,938
20,619
3,087
3,247
3,648
4,094
4,131
1945
1946
1947
1948
1949
24,252
23,350
22,559
23,333
18,885
24,252
23,350
22,559
23,333
18,885
0
0
0
0
0
249
163
85
223
78
578
580
535
541
534
2
1
1
1
2
0
0
0
0
0
15,091
24,093
23,181
24,097
19,499
20,065
20,529
22,754
24,244
24,427
4,339
4,562
4,562
4,589
4,598
1950
1951
1952
1953
1954
20,778
23,801
24,697
25,916
24,932
20,725
23,605
24,034
25,318
24,888
53
196
663
598
44
67
19
156
28
143
1,368
1,184
967
935
808
3
5
4
2
1
0
0
0
0
0
22,216
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 pages of table.
Tables 285
14.—Continued
Factors absorbing reserve funds
Currency
in
circulation
Deposits, other
than reserves, with
Federal Reserve Banks
Treasury
cash
holdings 7
Treasury
Foreign
Other
Other
Federal
Reserve
accounts4
Required
clearing
bal-
Other
Federal
Reserve
liaWith
bilities
Federal
and
Reserve
capital4
Banks
Member bank
reserves8
Currency
and
Required 10
1,585
1,822
51
68
Ex-
51
51
96
73
25
28
118
208
0
0
0
0
1,636
1,890
0
0
218
57
211
4
19
19
20
0
0
0
0
0
0
0
0
0
0
1,781
1,753
1,934
1,898
2,220
0
15
26
298
285
276
275
258
0
96
11
38
51
5
12
3
18
214
225
213
0
0
0
0
1,654
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
3,029
19
54
8
3
121
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
1,814
5,882
6,543
6,550
6,856
7,598
2,566
2,376
3,619
2,706
2,409
544
244
142
923
634
29
99
172
199
397
226
160
235
242
256
253
0
0
0
0
0
0
0
0
0
0
5,587
6,606
7,027
8,724
11,653
0
261
263
260
251
0
0
0
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
774
793
1,360
1,204
599
586
485
356
394
284
291
256
339
402
0
0
0
0
0
0
0
0
0
0
4,026
12,450
13,117
12,886
14,373
0
0
0
0
0
7,411
9,365
11,129
11,650
12,748
6,615
3,085
1,988
1,236
1,625
28,515
28,952
28,868
28,224
27,600
2,287
2,272
1,336
1,325
1,312
977
393
870
1,123
821
862
508
392
446
314
569
0
0
0
642
767
547
750
495
607
563
590
106
0
0
0
0
0
15,915
16,139
17,899
20,479
16,568
0
0
0
0
0
14,457
15,577
16,400
19,277
15,550
1,458
562
1,499
1,202
1,018
27,741
29,206
30,433
30,781
30,509
1,293
1,270
1,270
668
895
565
247
389
346
563
526
550
423
490
363
455
493
441
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
394
441
481
358
504
402
322
356
272
345
554
426
246
391
694
925
901
998
1,122
841
0
0
0
0
0
0
0
0
0
0
19,005
19,059
19,034
18,504
18,174
0
0
0
0
310
18,903
19,089
19,091
18,574
18,619
102
-30
-57
-70
-135
485
465
597
880
820
217
279
533
320
393
291
941
1,044
1,007
1,065
1,036
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
4,951
5,091
288
385
5,325
4,403
4,530
4,757
4,760
31,158
31,790
31,834
32,193
32,591
761
796
767
775
761
683
391
377
32,869
33,918
422
35,338
380
37,692
361
39,619
612
for
FRASER
Digitized
247
171
229
321
714
746
111
839
907
0
0
0
0
0
0
0
0
645
471
574
286 79th Annual Report, 1992
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related ItemsYear-End 1918-92 and Month-End 1992l—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
5,575
6,317
6,784
6,795
6,852
1965
1966
1967
1968
1969
40,768
44,316
49,150
52,937
57,154
40,478
43,655
48,980
52,937
7,1543
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
776
918
3,577
in
4,467
1,762
2,735
1,605
833
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
1992
259,786
288,429
308,518
241,432
272,531
300,424
18,354
15,898
8,094
190
218
675
2,566
1,026
3,350
0
0
0
39,880 302,421 11,058
34,524 324,197 11,059
30,278 342,820 11,056
10,018
10,018
8,018
20,404
21,038
21,503
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 in 1960, figures reflect a minor change in
concept; see Federal Reserve Bulletin, vol. 47 (February
1961), p. 164.
3. Principally acceptances and, until August 21, 1959,
industrial loans, authority for which expired on that date.
4. For the period before April 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 January 30, 1934, includes gold held in
Federal Reserve Banks and in circulation.
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 November 13,
1980, includes reserves of all depository institutions.
9. Between December 1, 1959, and November 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
date was December 29). Beginning on September 12,
1968, the amount is based on close-of-business figures for
the reserve period two weeks before the report date.
Tables
287
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Currency
in
circulation
Treasury
cash
holdings 7
42,056
44,663
47,226
50,961
53,950
760
1,176
1,344
695
596
57,903
61,068
66,516
72,497
79,743
Required
clearing
bal-
Other
Federal
Reserve
liaWith
bilities
Federal
and
Reserve
capital4
Banks
Foreign
Other
Other
Federal
Reserve
accounts4
668
416
1,123
703
1,312
150
174
135
216
134
355
588
563
747
807
211
-147
-773
-1,353
0
0
0
0
0
0
0
0
0
0
0
431
460
345
317
185
1,156
2,020
1,855
2,542
2,113
148
294
325
251
418
1,233
999
840
1,41914
1,27514
0
0
0
0
0
0
0
0
0
0
86,547
93,717
103,811
114,645
125,600
483
460
392
240
494
7,285
10,393
7,114
4,1%
4,075
353
352
379
368
429
1,090
1,357
1,187
1,256
1,412
0
0
0
0
0
136,829
144,774
154,908
171,935
183,796
441
443
429
479
513
3,062
4,301
5,033
3,661
5,316
411
505
328
191
253
617
781
,033
851
867
197,488
211,995
230,205
247,649
260,453
550
447
454
395
450
9,351
7,588
5,313
8,656
6,217
480
287
244
347
589
286,965
307,780
334,757
561
636
508
8,960
17,697
7,492
369
968
206
Treasury
Currency
and
Required 1(
Ex-
18,447
19,779
21,092
21,818
22,085
4, 163
4,310
4,631
4,921
5,187
22,848
24,321
25,905
27,439
28,173
-238
-232
-182
-700
-901
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
32,496
1,035
32,044
98 13
35,268 -1,360
37,011 -3,798
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
675
40,558
42,145 -1,442
1,328
41,391
-945
39,179
i i
k
,041
917
,027
548
,298
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
242
,706
372
0
o
1,963
:5,955
i5,901
8,147
8,113
7,984
36,695
25,458
26,178
0
11. Beginning December 1, 1966, includes federal
agency obligations held under repurchase agreements and
beginning September 29, 1971, includes 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 November 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 November 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.
Member bank
reserves8
i
-1,103 15
-1,535
-1,265
-893
-2,835
n.a.
n.a.
n.a.
r
f
f
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 December 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 November 19, 1975.
288 79th Annual Report, 1992
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-92, and Month-End 1992'—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
Bought
outright12
Held
under
repurchase
agreement
272,243 268,579
271,383 271,383
273,561 271,756
273,855 273,855
276,802 276,558
282,593 282,593
281,594 281,594
287,777 280,108
301,868 287,066
288,411 288,411
301,740 298,230
308,518 300,424
3,664
0
1,805
0
244
0
0
7,669
14,802
0
3,510
8,094
Total
1992
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Gold
stock5
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 6
11,058
11,058
11,058
11,057
11,057
11,060
11,059
11,059
11,058
11,060
11,059
11,056
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
10,018
8,018
21,060
21,099
21,138
21,175
21,210
21,257
21,286
21,298
21,342
21,377
21,433
21,503
U.S. Treasury and
federal agency securities
..
..
..
..
..
..
..
..
.
..
..
..
Loans
Float2
112
62
52
115
150
1,359
256
244
299
80
35
675
246
294
634
548
387
484
398
530
301
567
-285
3,350
Other
Federal
All
other3 Reserve
assets4
0
0
0
0
0
0
0
0
0
0
0
0
34,051
32,040
32,512
31,175
29,021
31,030
31,860
31,230
33,000
31,111
29,424
30,278
Total
306,651
303,779
306,759
305,694
306,360
315,466
314,107
319,780
335,467
320,169
330,914
342,820
Tables
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Currency
in
circulation
Treasury
cash
holdings 7
299,879
301,374
303,212
306,373
309,719
310,935
314,338
316,136
317,314
320,363
327,281
334,757
684
698
711
705
682
612
578
539
522
505
525
508
Treasury
Foreign
Other
Other
Federal
Reserve
accounts4
10,828
5,477
6,846
4,692
5,583
13,630
6,923
6,232
21,297
4,413
6,985
7,492
321
264
262
206
217
219
264
297
438
415
229
206
251
231
364
260
224
249
220
254
275
317
296
372
0
0
0
0
0
0
0
0
0
0
0
0
Required
clearing
bal-
4,275
4,381
4,458
4,756
5,152
5,194
5,275
5,472
5,606
5,615
5,682
5,901
Other
Federal
Reserve
liaWith
bilities
Federal
and
4 Reserve
capital
Banks
7,629
7,222
8,098
7,906
8,716
9,416
8,846
9,275
8,275
7,271
7,759
7,984
24,920
26,307
25,023
23,046
18,351
17,546
20,027
23,950
24,159
23,724
24,667
26,178
Member bank
reserves8
Currency
and
Required 10
289
290
79th Annual Report, 1992
15. Changes in Number of Banking Offices in the United States, 19921
Commercial banks2
Type of office
and change
Banks, Dec. 31, 1991 ..
Member
Total
Nonmember
Total
12,629
12,269
State-chartered
savings
banks 4
Total
National
State
Insured
4,838
3,809
1,029
7,159
Noninsured3
272
Insured
360
Noninsured
0
Changes during 1992
New banks
Ceased banking
operation
Banks converted
into branches
Other5
94
94
49
43
6
29
16
0
0
-180
-157
-71
-51
-20
-62
-24
-23
0
-420
111
-416
25
-207
10
-165
-22
-42
32
-208
-2
-1
17
-4
86
0
0
Net change
-395
-454
-219
-195
-24
-243
8
59
0
Banks, Dec. 31,1992 ..
12,234
11,815
4,619
3,614
1,005
6,916
280
419
0
Branches and
additional offices,
Dec. 31, 1991 . . . .
55,921
53,000
34,810
28,315
6,495
18,080
110
2,921
0
1,677
1,560
1,074
856
218
483
3
117
0
420
-1,313
0
-264
414
-1,192
30
-68
255
-935
-93
358
197
-810
-130
-365
58
-125
37
723
159
-238
123
-419
0
-19
0
-7
6
-121
-30
-196
0
0
0
0
520
744
659
-252
911
108
-23
-224
0
Changes during 1992
De novo
Banks converted
into branches
Discontinued
Sale of branch
Other5
Net change5
Branches and
additional offices,
Dec. 31,1992 . . . .
56,441 53,744 35,469
28,063
3.
1. Preliminary. Final data will be available in the
trust
Annual Statistical Digest, 1992, forthcoming.
4.
2. Includes stock savings banks, nondeposit trust com5.
panies, private banks, industrial banks, and nonbank
banks.
7,406
18,188
87
2,697
0
As of Dec. 31, 1988, includes noninsured national
companies.
Formerly called mutual savings banks.
Includes interclass changes.
Tables 291
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1992
Crestar Bank, Richmond, Virginia to acquire
the assets and liabilities of twenty-four branches
of Perpetual Savings Bank, FSB, McLean, Virginia, through its wholly owned subsidiary,
CRFC VA Interim Federal Savings Bank, Richmond, Virginia1
SUMMARY REPORT BY THE ATTORNEY GENERAL
No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors of the branches of Perpetual
Savings Bank.2
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/10/92)
The applicant has assets of $10.3 billion; the target
institutions have assets of $1.9 billion. The OTS
has recommended immediate action by the Federal Reserve System to prevent the probable failure of Perpetual Savings Bank.
Wesbanco Bank Wheeling, Wheeling, West Virginia to merge with Bank of Follansbee, Follansbee, West Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12/16/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/10/92)
The applicant has assets of $302.9 million; the
target institution has assets of $18.0 million. The
parties 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 T H E A T T O R N E Y G E N E R A L
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/30/92)
The applicant has assets of $1.7 billion; the target
institution has assets of $21.2 million. The State
has recommended immediate action by the Federal Reserve System to prevent the probable failure of Atlantic Trust.
Clear Lake Bank and Trust, Clear Lake, Iowa
to acquire the assets and liabilities of the Garner,
Iowa, branch of Home Federal Savings and
Loan Association, Algon, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/31/92)
The applicant has assets of $83.7 million; the
target institution has assets of $6.7 million. The
OTS has recommended immediate action by the
Federal Reserve System to prevent the probable failure of Home Federal Savings and Loan
Association.
Iowa Trust and Savings Bank, Emmetsburg,
Iowa to acquire the Emmetsburg, Iowa, branch
of Home Federal Savings and Loan Association, Algona, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
Fleet Bank-NH, Nashua, New Hampshire to
merge with Atlantic Trust Company, Newington, New Hampshire
1. The institution or group of institutions named before
the italicized words is referred to subsequently as the
applicant, and the institution or group of institutions
named after the italicized words is referred to subsequently as the target institution or target institutions.
2. Hereafter, the entry for the summary report by the
Attorney General will read, "Request for report dispensed with as authorized by the Bank Merger Act," for
cases in which the Attorney General's report on the
competitive factors was dispensed with, as authorized by
the Bank Merger Act, to permit the Federal Reserve
System to act immediately to safeguard depositors.
(1/31/92)
The applicant has assets of $43 million; the target
institution has assets of $6 million. The OTS has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Home Federal Savings and Loan Association.
Rapides Bank & Trust Company, Alexandria,
Louisiana to acquire the assets and liabilities of
the Alexandria and Pineville branches of Pelican Homestead Savings Association, Metairie,
Louisiana
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
292 79th Annual Report, 1992
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1992—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/31/92)
The applicant has assets of $422.4 million; the
target institutions have assets of $1.5 billion. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Pelican Homestead Savings Association.
Titonka Savings Bank, Titonka, Iowa to acquire
the Forest City, Iowa, branch of Home Federal
Savings and Loan Association, Algona, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(1/31/92)
The applicant has assets of $49 million; the target
institution has assets of $4 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Home Federal Savings and Loan Association.
target institutions have assets of $181.0 million.
The parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
The Provident Bank of Kentucky, Alexandria,
Kentucky to merge with Peoples Federal Savings & Loan Association of Bellevue, Bellevue,
Kentucky, through Provident Bank of Boone
County, Bellevue, Kentucky, a wholly owned
subsidiary; and with Suburban Federal Savings & Loan Association of Covington, Kentucky, through Provident Bank of Kenton
County, Covington, Kentucky, a wholly owned
subsidiary
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1/28/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
Bank of Suffolk, Suffolk, Virginia to acquire the
assets and liabilities of the Whaleyville, Virginia,
branch of Sovran Bank, N.A., Richmond,
Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1/14/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2/5/92)
The applicant has assets of $51.3 million; the
target institution has assets of $9.3 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
(2/28/92)
The applicant has assets of $79.6 million; the
target institutions have assets of $116 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
The State Bank and Trust Company, Defiance,
Ohio to acquire the assets and liabilities of the
Delta, Lyon, and Wauseon branches of The
Society Bank and Trust Company, Toledo, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(1/28/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
Chemical Bank, New York, New York, to
acquire four branches of Anchor Savings Bank,
FSB, Hewlett, New York, through its wholly
owned subsidiary CBC Interim Federal Savings Bank 2, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/25/91)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2/5/92)
The applicant has assets of $107.9 billion; the
(3/3/92)
The applicant has assets of $183.7 million; the
target institutions have assets of $42.4 million.
The parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
CivicBank of Commerce, Oakland, California
to acquire the assets and liabilities of the Walnut
Creek and Fremont branches of American
Bank & Trust Company, San Jose, California
Tables
293
16.—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2/4/92)
The proposed transaction would not be significantly adverse to competition.
(3/6/92)
The applicant has assets of $72.9 million; the
target institution has assets of $9.7 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of CorEast Federal Savings Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/5/92)
The applicant has assets of $349 million; the target
institutions have assets of $37.9 million. The parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Central Fidelity Bank, Richmond, Virginia to
acquire the assets and liabilities of the Blacksburg, Virginia, branch of CorEast Federal Savings Bank, Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
Centura Bank, Rocky Mount, North Carolina
to merge with First Federal Savings Association,
Raleigh, North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $2.5 billion; the target
institution has assets of $87.4 million. The parties
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.
First Virginia Bank of Augusta, Staunton, Virginia to acquire the assets and liabilities of the
Staunton branch of CorEast Federal Savings
Bank, Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $73.5 million; the
target institution has assets of $13.4 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of CorEast Federal Savings Bank.
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $6.7 billion; the target
institution has assets of $16.8 million. The parties
operate in the same market. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of CorEast
Federal Savings Bank.
First Virginia Bank-Southwest, Roanoke, Virginia to acquire the assets and liabilities of eight
branches of CorEast Federal Savings Banks,
Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $345.1 million; the
target institutions have assets of $236.0 million.
The RTC has recommended immediate action by
the Federal Reserve System to prevent the probable failure of CorEast Federal Savings Bank.
First Virginia Bank-Piedmont, Lynchburg, Virginia to acquire the assets and liabilities of three
Lynchburg, Virginia, branches of CorEast Federal Savings Bank, Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
Central Virginia Bank, Powhatan, Virginia to
acquire the assets and liabilities of the Powhatan
branch of CorEast Federal Savings Bank, Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $170.3 million; the
target institutions have assets of $57.8 million.
The RTC has recommended immediate action
294 79th Annual Report, 1992
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1992—Continued
by the Federal Reserve System to prevent the
probable failure of CorEast Federal Savings Bank.
Virginia, branch of CorEast Federal Savings
Bank, Richmond, Virginia
First Virginia Bank-Franklin County, Lynchburg, Virginia to acquire the assets and liabilities
of the Hardy, Virginia, branch of CorEast Federal Savings Bank, Richmond, Virginia
Request for report dispensed with as authorized by
the Bank Merger Act.
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $121.6 million; the
target institution has assets of $5.8 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of CorEast Federal Savings Bank.
The State Bank of the Alleghenies, Covington,
Virginia to acquire the assets and liabilities of the
Clifton Forge, Virginia, branch of CorEast Federal Savings Bank
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $74.5 million; the
target institution has assets of $17.8 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of CorEast Federal Savings Bank.
First Virginia Bank-Highlands, Covington, Virginia to acquire the assets and liabilities of the
Covington, Virginia, branch of CorEast Federal Savings Bank, Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $115.1 million; the
target institution has assets of $10 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of CorEast Federal Savings Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/6/92)
The applicant has assets of $46.8 million; the
target institution has assets of $7.9 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of CorEast Federal Savings Bank.
First State Bank of Arkansas, Trumann, Arkansas to acquire the assets and liabilities of the
Trumann, Arkansas, branch of United Federal
Savings and Loan Association, Jonesboro,
Arkansas
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/13/92)
The applicant has assets of $32.8 million; the
target institution has assets of $3.4 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of CorEast Federal Savings Bank.
Commercial Bank of Florida, Miami, Florida to
acquire the assets and liabilities of the South
Dixie, Bird Road, and Sunset West branches of
Professional Federal Savings Bank
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/13/92)
The applicant has assets of $144.5 million; the
target institutions have assets of $119.5 million.
The State has recommended immediate action by
the Federal Reserve System to prevent the probable failure of Professional Federal Savings Bank.
Chemical Bank, New York, New York to merge
with Central Federal Savings Bank, Mineola,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
Regency Bank, Richmond, Virginia to acquire
the assets and liabilities of the Richmond,
Request for report dispensed with as authorized by
the Bank Merger Act.
Tables
295
16.—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/13/92)
The applicant has assets of $138.9 million; the
target institution has assets of $485 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Augusta Federal Savings Association.
SouthTrust Bank of Pinellas County, St. Petersburg, Florida to acquire the assets and liabilities
of the New Port Richey branch of Mid State
Federal Savings Bank, Hudson, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
Minden Bank & Trust Company, Minden, Louisiana to merge with Webster Bank & Trust
Company, Minden, Louisiana
Request for report dispensed with as authorized by
the Bank Merger Act.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3/16/92)
The applicant has assets of $305.2 million; the
target institution has assets of $13.3 million. The
RTC has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of Mid State Federal Savings Bank.
(1/7/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/13/92)
The applicant has assets of $124.1 million; the
target institution has assets of $35.9 million. The
parties operate in the same banking market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Plaza Bank of Miami, Miami, Florida to acquire
the assets and liabilities of the Coral Gables and
Sunshine branches of Professional Federal Savings Bank, Coral Gables, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
Meridian Bank, Reading, Pennsylvania to
merge with Bell Federal Savings Bank, Upper
Darby, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/20/92)
The applicant has assets of $9.7 billion; the target
institution has assets of $471.0 million. The RTC
has recommended immediate action by the Federal Reserve System to prevent the probable failure of Bell Federal Savings Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/13/92)
The applicant has assets of $60.1 million; the
target institutions have assets of $18.2 million.
The RTC has recommended immediate action by
the Federal Reserve System to prevent the probable failure of Professional Federal Savings Bank.
First Virginia Bank-Central Maryland, Bel Air,
Maryland to acquire the assets and liabilities of
the Catonsville, Maryland, branch of Augusta
Federal Savings Association, Baltimore,
Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
The Provident Bank to merge with Merit Savings Association through Merit Savings Bank,
both of Cincinnati, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3/11/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/20/92)
The applicant has assets of $3.4 billion; the target
institution has assets of $107.9 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.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/13/92)
The applicant has assets of $274.4 million; the
target institution has assets of $9.9 million. The
The Provident Bank, Cincinnati, Ohio to merge
with Thrift Savings and Loan Co., Cincinnati,
Ohio
296 79th Annual Report, 1992
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1992—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/20/92)
The proposed transaction would not be significantly adverse to competition.
(4/29/92)
The applicant has assets of $3.2 billion; the target
institution has assets of $971.6 million. The parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/20/92)
The applicant has assets of $3.4 billion; the target
institution has assets of $132.2 million. The parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Mercantile Bank of Kansas City, Kansas City,
Missouri to acquire the assets and liabilities of
the Independence Center branch of Home
Federal Savings Association of Kansas City,
Missouri
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/20/92)
The applicant has assets of $552 million; the target
institution has assets of $72 million. The OTS has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
Home Federal Savings Association.
First Source Bank, South Bend, Indiana to
merge with Farmers State Bank of Wyatt,
Wyatt, Indiana
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4/7/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/7/92)
The applicant has assets of $1.2 billion; the target
institution has assets of $83 million. The parties
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Mercantile Bank of Kansas City to merge with
American Bank, Kansas City, and American
Bank of Platte County, both of Kansas City,
Missouri
SUMMARY REPORT BY THE ATTORNEY GENERAL
Peoples State Bank of Plainview, Plainview,
Minnesota to merge with Eastwood Bank St.
Charles, St. Charles, Minnesota
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3/20/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3/23/92)
The applicant has assets of $42.6 million; the
target institution has assets of $8.9 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Valley Bank of Nevada to merge with Security
Pacific Bank Nevada, N.A., both of Las Vegas,
Nevada
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3/20/92)
The proposed transaction would not be significantly adverse to competition.
(4/14/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/18/92)
The applicant has assets of $552 million; the target
institutions have assets of $352 million. The parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Comerica Bank, Detroit, Michigan to merge
with Manufacturers Bank, N.A., Detroit,
Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5/6/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/19/92)
The applicant has assets of $12.2 billion; the target
institution has assets of $12.0 billion. The parties
operate in the same market.
Tables
297
16.—Continued
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
of American Savings Bank, White Plains, New
York, and three branches of Riverhead Savings
Bank, Riverhead, New York
Commercial Trust and Savings Bank, Mitchell,
South Dakota to merge with Sanborn County
Bank, Woonsocket, South Dakota
Request for report dispensed with as authorized by
the Bank Merger Act.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6/12/92)
The applicant has assets of $37.3 million; the
target institutions have assets of $691 million. The
State has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of American Savings Bank and Riverhead
Bank.
SUMMARY REPORT BY THE ATTORNEY GENERAL
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5/27/92)
The applicant has assets of $141.6 million; the
target institution has assets of $17.9 million. The
parties 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.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
J o h n s t o w n Bank & Trust Company,
Johnstown, Pennsylvania to merge with People
Bank One, West Lebanon, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
Manufacturers and Traders Trust Company,
Buffalo, New York to merge with Central Trust
Company, Rochester, New York, and Endicott
Trust Company, Endicott, New York
(6/21/92)
The proposed transaction would not be significantly adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7/1/92)
The applicant has assets of $530.4 million; the
target institution has assets of $18 million. The
parties 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.
(4/16/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/1/92)
The applicant has assets of $7.0 billion; the target
institutions have assets of $1.4 billion. The parties
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Banco Popular de Puerto Rico, New York, New
York to acquire the assets and liabilities of American Savings Bank, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6/12/92)
The applicant has assets of $8.9 million; the target
institution has assets of $622.1 million. The State
has recommended immediate action by the Federal Reserve System to prevent the probable failure of American Savings Bank.
Bank of New York, New York, New York to
acquire the assets and liabilities of six branches
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
The Bank of Hampton Roads, Chesapeake,
Virginia to merge with Coastal Virginia Bank,
Virginia Beach, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(5/5/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/9/92)
The applicant has assets of $50.5 million; the
target institution has assets of $17.4 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Central Fidelity Bank, Richmond, Virginia to
merge with Investors Federal Savings Bank,
Richmond, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
298 79th Annual Report, 1992
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1992—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/10/92)
The applicant has assets of $6.8 billion; the target
institution has assets of $875.4 million. The RTC
has recommended immediate action by the Federal Reserve System to prevent the probable failure of Investors Federal.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
The George Mason Bank, Fairfax, Virginia to
merge with The Washington Bank, Falls
Church, Virginia
City Center Bank of Colorado, Denver, Colorado to merge with Security Bank of Colorado,
Aurora, Colorado
Request for report dispensed with as authorized by
the Bank Merger Act.
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7/21/92)
The proposed transaction would not be significantly adverse to competition.
(9/18/92)
The applicant has assets of $266.2 million; the
target institution has assets of $23.8 million. The
State has recommended immediate action by the
Federal Reserve System to prevent the probable
failure of The Washington Bank.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/5/92)
The applicant has assets of $18.8 million; the
target institution has assets of $10.9 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Old Kent Bank & Trust Company, Grand
Rapids, Michigan to acquire the assets and liabilities of five branches of Great Lakes Bancorp,
Lansing, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/3/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8/28/92)
The applicant has assets of $3.8 billion; the target
institutions have assets of $66 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.
Merrill Merchants Bank, Bangor, Maine to acquire the assets and liabilities of seven branches
of Fleet Bank of Maine, Portland, Maine
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8/27/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/15/92)
The applicant, a de novo bank, and the target
institutions have assets of $73.6 million. The parties operate in the same market.
SUMMARY REPORT BY THE ATTORNEY GENERAL
Demotte State Bank, Demotte, Indiana to
acquire the assets and liabilities of the Knox,
Indiana, branch of Ameritrust National Bank,
Elkhart, Indiana
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/2/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9/29/92)
The applicant has assets of $104 million; the target
institution has assets of $6.5 million. The parties
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.
Mellon Bank (MD), Rockville, Maryland to
acquire the assets and liabilities of eight branches
of Standard Federal Savings Bank, Gaithersburg, Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/8/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/2/92)
The applicant has assets of $257 million; the target
institutions have assets of $313.6 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Tables
299
16.—Continued
Centura Bank, Rocky Mount, North Carolina
to acquire the assets and liabilities of the South
Glen Burnie Road branch of People Federal
Savings Bank, Wilmington, North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/5/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/7/92)
The applicant has assets of $2.6 billion; the target
institution has assets of $2.7 million. The parties
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Custer County Bank, Westcliffe, Colorado to
acquire the assets and liabilities of the Fountain
branch of Green Mountain Bank, Lakewood,
Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/8/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/9/92)
The applicant has assets of $8 million; the target
institution has assets of $10 million. The parties
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Meridian Bank, Reading, Pennsylvania to
merge with The Peoples National Bank of Lebanon, Lebanon, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/5/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/26/92)
The applicant has assets of $10.3 billion; the target
institution has assets of $142.8 billion. The parties
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.
Barnett Bank of Highlands County, Sebring,
Florida; Barnett Bank of Naples, Naples, Flor
ida; Barnett Bank of Pasco County, Holiday,
Florida; Barnett Bank of Pinellas County,
St. Petersburg, Florida; Barnett Bank of Polk
County, Lakeland, Florida; Barnett Bank of
Southwest Florida, Sarasota, Florida; Barnett
Bank of Tallahassee, Tallahassee, Florida; Barnett Bank of Volusia County, Deland, Florida;
and Barnett Bank of West Florida, Pensacola,
Florida to acquire the assets and liabilities of
branches of First Florida Bank, N.A., Tampa,
Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
None received.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/28/92)
The applicants have assets of $9.2 billion; the
target institutions have combined assets of
$2.1 billion. In each case, the acquiring bank and
the branches whose assets and liabilities were to
be acquired operate in the same market.
In each case, the banking factors and considerations relating to the convenience and needs of the
community are consistent with approval.
Farmers State Bank of Worden, Worden, Montana to merge with The First National Bank in
Hysham, Hysham, Montana
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/1/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10/29/92)
The applicant has assets of $12.7 million; the
target institution has assets of $8.9 million. The
parties 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 merge with Brevard Federal Savings and
Loan Association, Brevard, North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/8/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/18/92)
The applicant has assets of $2.6 billion; the target
institution has assets of $130.9 million. The parties do not operate in the same market.
300 79th Annual Report, 1992
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1992—Continued
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
The Merchants Bank of New York, New York,
New York to merge with First New York Bank
for Business, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/13/92)
The applicant has assets of $683 million; the target
institution has assets of $418 million. The State
has recommended immediate action by the Federal Reserve System to prevent the probable failure of First New York Bank for Business.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9/27/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/27/92)
The applicant has assets of $218.7 million; the
target institution has assets of $45.3 million. The
parties 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.
Equibank, Pittsburgh, Pennsylvania to acquire
Integra National Bank/Pittsburgh, Pittsburgh,
Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
Old Kent Bank, Elmhurst, Illinois to merge with
UnibancTrust/Dupage, Chicago, Illinois, and
First Federal of Elgin, FSA, Elgin, Illinois
The proposed transaction would not be significantly adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/30/92)
The applicant has assets of $2.8 billion; the target
institution has assets of $5.3 billion. The parties
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
(10/21/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/17/92)
The applicant has assets of $1.2 billion; the target
institutions have assets of $263.4 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
The Bank of New York, New York, New York to
acquire the assets and liabilities of the retail operations of Barclays Bank of New York, New
York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10/7/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11/4/92)
The applicant has assets of $41.3 billion; the target
operations have assets of $2.1 billion. The parties
operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
The Peoples Bank and Trust Company, Selma,
Alabama to merge with The Citizens Bank,
Prattville, Alabama
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
Fifth Third Bank, Cincinnati, Ohio to acquire
the assets and liabilities of the Chillicothe and
Oxford, Ohio, branches of Home Savings Bank
of America, FSB, Irwindale, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/8/92)
The applicant has assets of $5.6 billion; the target
institutions have assets of $400 million. The parties 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.
Bank of Neosho, Neosho, Missouri to merge with
Anderson State Bank, Anderson, Missouri, and
Citizens State Bank, Granby, Missouri
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12/2/92)
The proposed transaction would not be significantly adverse to competition.
Tables 301
16.—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/16/92)
The applicant has assets of $92.8 million; the
target institutions have assets of $213 million. The
parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Belcaro Bank, Glendale, Colorado to merge with
Denver Tec Bank, Denver, Colorado, and The
Professional Bank of Colorado, Englewood,
Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11/24/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/16/92)
The applicant has assets of $40.6 million; the
target institutions have assets of $24.9 million.
The parties operate in the same market.
The banking factors and considerations relating
to the convenience and needs of the community
are consistent with approval.
Peoples Bank, Bloomington, Illinois to merge
with Lexington Bank, Lexington, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12/15/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/21/92)
The applicant has assets of $356.6 million; the
target institution has assets of $93.6 million. The
parties 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, Aurora, Colorado to merge
with The Bank of Parker, Parker, Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12/1/92)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12/23/92)
The applicant has assets of $29.8 million; the
target institution has assets of $19.2 million. The
parties 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!
Chemical Bank, New York, New York
Merger
Chemical Bank Delaware, Wilmington, Delaware
Old Kent Bank and Trust Company, Grand Rapids, Michigan
Merger
Old Kent Bank of Lansing, N.A., Lansing, Michigan
Assets
(millions
of dollars)
Date of
approval
107,888
1/30/92
1,754
3,500
48
1/29/92
302 79th Annual Report, 1992
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1992—Continued
Institution'
Eastern Michigan Bank, Croswell, Michigan
(formerly State Bank of Croswell)
Merger
Sanilac County Bank, Deckerville, Michigan
Texas State Bank, McAllen, Texas
Merger
Mid Valley Bank, Weslanco, Texas
Harlingen State Bank, Harlingen, Texas
Tri-State Bank, Denver, Colorado
Merger
Boulder Tri-State Bank, Boulder, Colorado
First of America Bank-Ann Arbor, Ann Arbor, Michigan
Merger
First of America Bank-Livingston, Howell, Michigan
Citizens Fidelity Bank and Trust Co., Louisville, Kentucky
Merger
Citizens Fidelity Bank and Trust Co. of Hardin County,
Elizabethtown, Kentucky
Caliber Bank, Phoenix, Arizona
Merger
Bank of America Arizona, Phoenix, Arizona (30 branches)
Security Pacific Bank Arizona, Phoenix, Arizona (10 branches)
Farmers State Bank & Trust Company of Superior,
Superior, Nebraska
Merger
Hardy State Bank, Hardy, Nebraska
Assets
(millions
of dollars)
93
186
2/24/92
92
101
50
3/10/92
16
742
4/13/92
157
5,630
4/22/92
218
245
5/15/92
1,400
554
44
5/22/92
8
904
Vectra Bank, Denver, Colorado
Merger
Vectra Bank, Denver, Colorado
Vectra Bank of Lakewood, Lakewood, Colorado
Vectra Bank of Thornton, Thornton, Colorado
Vectra Bank of Wheat Ridge, Wheat Ridge, Colorado
Vectra Bank of Federal Heights, Federal Heights, Colorado ...
24
2/11/92
38
First of American Bank, Ann Arbor, Michigan
Merger
First of America Bank-Plymouth, N.A., Plymouth, Michigan ..
Citizens Fidelity B&T Company, Louisville, Kentucky
Merger
Citizens Fidelity B&T Company, LaGrange, Kentucky
Date of
approval
5/29/92
119
7/16/92
21
17
12
9
14
5,930
137
7/17/92
Tables
303
16.—Continued
Assets
(millions
of dollars)
Institutionl
Farmers State Bank of Western Illinois, New Windsor, Illinois
Merger
Bank of Alexis, Alexis, Illinois
46
City Center Bank of Colorado, Aurora, Colorado
Merger
Security Bank of Colorado, Aurora, Colorado
20
Date of
approval
7/27/92
16
8/5/92
11
Fleet Bank of New York, Albany, New York
Merger
Fleet Bank of New York, N.A., Buffalo, New York
5,910
Bank One Champaign-Urbana, Monticello, Illinois
Merger
Bank One Monticello Monticello Illinois
209
8/21/92
3,951
9/3/92
88
Cole Taylor Bank Chicago Illinois
Merger
Cole Taylor Bank/Yorktown, Lombard, Illinois
1 258
10/9/92
119
First Interstate Bank of Commerce, Billings, Montana
(the successor of First Interstate Bank of Billings, Montana) ...
Merger
First Interstate Bank of Missoula, N.A., Missoula, Montana
First Interstate Bank of Hardin, Hardin, Montana
First Interstate Bank of Miles City, Miles City, Montana
First Interstate Bank of Billings Heights, Billings, Montana
First Interstate Bank of West Billings, Billings, Montana
First Interstate Bank of Colstrip, Colstrip, Montana
First Interstate Bank of South Missoula, Missoula, Montana
(a de novo bank)
Community Bank and Trust Company, Forest City, Pennsylvania ...
Merger
First National Bank of Nicholson, Nicholson, Pennsylvania
296
10/26/92
195
46
40
34
45
12
176
12/17/92
122
1. Each proposed transaction was to be effected under
the charter of the first named bank. The entries are in
chronological order of approval. Some transactions
include the acquisition of only certain assets and liabilities of the affiliated bank.
Mergers Approved Involving a Nonoperating
Institution with an Existing Bank
sition 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 acqui
304 79th Annual Report, 1992
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1992—Continued
Assets
(millions
of dollars)2
Institution'
Interim Central Bank, Claysburg, Pennsylvania
Merger
Central Bank, Claysburg, Pennsylvania
2/26/92
228
Orange Interim Bank, Rocky Mount, North Carolina
Merger
Centura Banks, Rocky Mount, North Carolina
9/24/92
2,600
The KSB Bank, Killbuck, Ohio
Merger
The Killbuck Savings Bank Company, Killbuck, Ohio
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
10/22/92
125
2. Where no assets are listed, the bank is newly orga'nized and not in operation,
Federal Reserve
Directories and Meetings
306 79th Annual Report, 1992
Board of Governors of the Federal Reserve System
December 31,1992
Members
ALAN GREENSPAN of New York, Chairmanl
DAVID W. MULLINS, JR., of Arkansas, Vice Chairman1
Term expires
January 31, 2006
January 31, 1996
WAYNE D. A N G E L L of Kansas
SUSAN M. PHILLIPS of Iowa
January 31, 1994
January 31, 1998
LAWRENCE B. LINDSEY of Virginia
JOHN P. LAWARE of Massachusetts
EDWARD W. KELLEY, JR., of Texas
January 31, 2000
January 31, 2002
January 31, 2004
Officers
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
Lynn Fox, Special Assistant to the Board
AND COMMUNITY AFFAIRS
Griffith L. Garwood, Director
Glenn E. Loney, Associate Director
Dolores S. Smith, Associate Director
Maureen P. English, Assistant Director
I r e n e s McNulty, Assistant Director
Diane E. Werneke, Special Assistant
to the Board
AND
D I V I S I O N
O F B A N K I N G
SUPERVISION
REGULATION
Richard Spillenkothen, Director
Stephen C. Schemering, Deputy Director
LEGAL DIVISION
° ° " E - ^ ^ ^ c i a t e Director
, ... .. . . . . T „
.„
,
J. Virgil Mattingly, Jr.,
General Counsel
,
.
„
,
c
u ! , A1
Scott G. Alvarez, Associate General
Counsel
Richard M. Ashton, Associate
General Counsel
Oliver Ireland, Associate General
Counsel
Kathleen M. O'Day, Associate General
Counsel
MaryEllen A. Brown, Assistant
to the General Counsel
Frederick M. Struble, Associate Director
___.„.
. _ , . .
.
_.
William A. Ryback, Associate Director
__ ,
. _/
_
Herbert A. Biern, Deputy Associate
_ ire(LO1L . ^
^.
A
R
° g e r T- C o l e ' DePu*y Associate
Director
J a m e s L G a m e r De ut
' P y Associate Director
Howard Amer, Assistant Director
Gerald A. Edwards, Jr., Assistant Director
James D. Goetzinger, Assistant Director
Laura M. Homer, Assistant Director
J a m e s v . Houpt, Jr., Assistant Director
Jack P. Jennings, Assistant Director
Michael G. Martinson, Assistant Director
Rhoger H Pugh, Assistant Director
Sidney M. Sussan, Assistant Director
Molly S. Wassom, Assistant Director
OFFICE OF THE SECRETARY
William W. Wiles, Secretary
Jennifer J. Johnson, Associate Secretary
Barbara R. Lowrey, Associate Secretary
Ellen Maland, Assistant Secretary
1. The designations as Chairman and Vice Chairman
expire on March 2, 1996, and July 22, 1995, respectively,
unless the service of these members of the Board shall
have terminated sooner.
Directories and Meetings
DIVISION OF INTERNATIONAL FINANCE
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
DIVISION OF RESEARCH
AND STATISTICS
Michael J. Prell, Director
Edward C. Ettin, Deputy Director
William R. 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
John J. Mingo, Adviser
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 STAFF DIRECTOR
FOR MANAGEMENT
S. David Frost, Staff Director
William C. Schneider, Jr., Project Director,
National Information Center
Portia W. Thompson, Equal Employment
Opportunity Programs Officer
307
DIVISION OF H U M A N
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
OFFICE OF THE CONTROLLER
George E. Livingston, Controller
Stephen J. Clark, Assistant Controller
Darrell R. Pauley, Assistant Controller
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
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
Richard C. Stevens, Assistant Director
DIVISION OF FEDERAL RESERVE BANK
OPERATIONS AND PAYMENT SYSTEMS
Clyde H. Farnsworth, Jr., Director
David L. Robinson, Deputy Director
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
OFFICE OF THE INSPECTOR GENERAL
Brent L. Bowen, Inspector General
Barry R. Snyder, Assistant Inspector
General
308
79th Annual Report, 1992
Federal Open Market Committee
December 31,1992
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
THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City
JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland
EDWARD W. KELLEY, JR., Board of Governors
JOHN P. LAWARE, Board of Governors
LAWRENCE B. LINDSEY, Board of Governors
THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis
DAVID W. MULLINS, JR., Board of Governors
SUSAN M. PHILLIPS, Board of Governors
RICHARD F. SYRON, President, Federal Reserve Bank of Boston
Alternate Members
EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia
SILAS KEEHN, President, Federal Reserve Bank of Chicago
ROBERT D. MCTEER, JR., President, Federal Reserve Bank of Dallas
JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York
GARY H. STERN, President, Federal Reserve Bank of Minneapolis
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
RICHARD G. DAVIS,
Associate Economist
THOMAS E. DAVIS,
Associate Economist
DAVID E. LINDSEY,
Associate Economist
ALICIA H. MUNNELL,
Associate Economist
LARRY J. PROMISEL,
Associate Economist
CHARLES J. SIEGMAN,
Associate Economist
THOMAS D. SIMPSON,
Associate Economist
DAVID J. STOCKTON,
Associate Economist
JOHN M. DAVIS,
Associate Economist
WILLIAM J. MCDONOUGH, Manager of the System Open Market Account
MARGARET L. GREENE, Deputy Manager for Foreign Operations,
System Open Market Account
JOAN E. LOVETT, Deputy Manager for Domestic Operations,
System Open Market Account
1992 the Federal Open Market ComDigitizedDuring
for FRASER
mittee
held
eight meetings (see Record of
Policy Actions of the Federal Open Market
Committee in this REPORT.)
Directories and Meetings 309
Federal Advisory Council
December 31,1992
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, JR., 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—EUGENE A. MILLER, Chairman, President, and Chief Executive Officer,
Comerica Incorporated, Detroit, Michigan
District 8—DAN W. MITCHELL, Chairman and Chief Executive Officer,
Old National Bancorp, Evansville, Indiana
District 9—JOHN F. GRUNDHOFER, Chairman, President, and Chief Executive Officer,
First Bank System, Inc., Minneapolis, Minnesota
District 10—DAVID A. RISMILLER, Chairman, President, and Chief Executive Officer,
FirsTier Financial, Inc., Omaha, Nebraska
District 11—RONALD G. STEINHART, Chairman and Chief Executive Officer,
Team Bank, Dallas, Texas
District 12—RICHARD M. ROSENBERG, Chairman and Chief Executive Officer,
Bank of America, San Francisco, California
Officers
RONALD G. STEINHART, President
TERRENCE A. LARSEN, Vice President
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVIK, Associate Secretary
Directors
CHARLES S. SANFORD, JR.
JOHN B. MCCOY
The Federal Advisory Council met on February 13-14, May 7-8, September 10-11, and
November 5-6, 1992. The Board of Governors met with the council on February 4,
May 8, September 11, and November 6,
1992. The council, which is composed of
one representative of the banking industry
E. B. ROBINSON, JR.
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,
310 79th Annual Report, 1992
Consumer Advisory Council
December 31,1992
Members
BARRY A. ABBOTT, Partner, Morrison & Foerster, San Francisco, California
JOHN R. ADAMS, Corporate Vice President and Compliance Officer, CoreStates Financial
Corporation, Philadelphia, Pennsylvania
JOHN A. BAKER, Senior Vice President, Equifax, Inc., Atlanta, Georgia
VERONICA E. BARELA, Executive Director, NEWSED Community Development
Corporation, Denver, Colorado
MULUGETTA BIRRU, Executive Director, Urban Redevelopment Authority of Pittsburgh,
Pittsburgh, Pennsylvania
GENEVIEVE BROOKS, Deputy Borough President, Office of the Bronx Borough President,
Bronx, New York
TOYE L. BROWN, Director, Massachusetts Bay Transportation Authority, Boston,
Massachusetts
CATHY CLOUD, Enforcement Program Director, National Fair Housing Alliance,
Washington, D.C.
MICHAEL D. EDWARDS, President, Prairie Security Bank, Yelm, Washington
GEORGE C. GALSTER, Visiting Senior Research Associate, The Urban Institute,
Washington, D.C.
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
GARY S. HATTEM, Vice President, Community Development Group, Bankers Trust
Company, New York, New York
JULIA E. HILER, Executive Vice President, Sunshine Mortgage Corporation, Marietta,
Georgia
HENRY JARAMILLO, JR., President, Ranchers State Bank, Belen, New Mexico
KATHLEEN E. KEEST, Staff Attorney, National Consumer Law Center, Boston,
Massachusetts
EDMUND MIERZWINSKI, Consumer Advocate, U.S. Public Interest Research Group,
Washington, D.C.
BERNARD F. PARKER, JR., Executive Director, Community Resource Projects, Detroit,
Michigan
JEAN POGGE, Vice President, Development Deposits, South Shore Bank, Chicago, Illinois
JOHN V. SKINNER, President and Chief Executive Officer, Jewelers Financial
Services, Inc., Irving, Texas
NANCY HARVEY STEORTS, President, Nancy Harvey Steorts and Associates, Dallas, Texas
LOWELL N. SWANSON, President (Retired), United Finance Company, Portland, Oregon
MICHAEL W. TIERNEY, Program Director, Local Initiatives Support Corporation,
Washington, D.C.
Directories and Meetings 311
Consumer Advisory Council—Continued
Officers
COLLEEN D. HERNANDEZ, Chairman
DENNY D. DUMLER, Vice Chairman
Executive Director, Kansas City
Neighborhood Alliance, Kansas City,
Missouri
Senior Vice President, Colorado
National Bank, Denver,
Colorado
The Consumer Advisory Council met with
members of the Board of Governors on
March 26, June 11, and October 29, 1992.
The council is composed of academics, state
government officials, representatives of the
financial industry, and representatives of
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 31,1992
Members
DANIEL C. ARNOLD, Director, Farm & Home Financial Corporation, Houston, Texas
JAMES L. BRYAN, President and Chief Executive Officer, TEXINS Credit Union,
Richardson, Texas
VANCE W. CHEEK, President and Chief Executive Officer, Home Federal Bank, FSB,
Johnson City, Tennessee
BEATRICE D'AGOSTINO, Chairman, President, and Chief Executive Officer, New Jersey
Savings Bank, Somerville, New Jersey
LYNN W. HODGE, President and Chief Executive Officer, United Savings Bank, Inc.,
Greenwood, South Carolina
THOMAS J. HUGHES, President, Navy Federal Credit Union, Merrifield, Virginia
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, Chairman and Chief Executive Officer, The Dime Savings Bank of
New York, FSB, New York, New York
THOMAS R. RICKETTS, Chairman, President, and Chief Executive Officer,
Standard Federal Bank, Troy, Michigan
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
LYNN W. HODGE, President
The members of the Thrift Institutions Advisory Council met with the Board of Governors on March 6, May 29, August 14, and
November 13, 1992. The council, which
Digitizedisforcomposed
FRASER of representatives from credit
DANIEL C. ARNOLD, 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.
312 79th Annual Report, 1992
Officers of Federal Reserve Banks, Branches, and Offices
December 31,1992 1
BANK,
Branch, or facility
Chairman2
Deputy Chairman
President
First Vice President
BOSTON3
Richard N. Cooper
Jerome H.
Grossman
Richard F. Syron
Cathy E. Minehan
NEW YORK 3 ....
E. Gerald Corrigan
James H. Oltman
Buffalo
Ellen V. Futter
Maurice R.
Greenberg
Herbert L. Washington
PHILADELPHIA.
Peter A. Benoliel
Jane G. Pepper
Edward G. Boehne
William H. Stone, Jr.
John R. Miller
A. William
Reynolds
Marvin Rosenberg
Robert P. Bozzone
Jerry L. Jordan
William H.
Hendricks
Anne Marie
Whittemore
Henry J. Faison
John R. Hardesty, Jr.
Anne M. Allen
Robert P. Black
Jimmie R.
Monhollon
Edwin A. Huston
Leo Benatar
Nelda P. Stephenson
Lana Jane Lewis-Brent
Michael T. Wilson
Harold A. Black
Victor Bussie
Robert P. Forrestal
Jack Guynn
Richard G. Cline
Robert M. Healey
J. Michael Moore
Silas Keehn
William C. Conrad
H. Edwin Trusheim
Robert H. Quenon
James R. Rodgers
Daniel L. Ash
Seymour B. Johnson
Thomas C. Melzer
James R. Bowen
Delbert W. Johnson
Gerald A.
Rauenhorst
J. Frank Gardner
Gary H. Stern
Thomas E. Gainor
CLEVELAND 3 ...
Cincinnati
Pittsburgh
RICHMOND 3 ...
Baltimore
Charlotte.
Culpeper
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
CHICAGO3
Detroit
ST. LOUIS
Little Rock
Louisville
Memphis
MINNEAPOLIS.
Helena
Vice President
in charge of Branch
James O. Aston
Charles A. Cerino4
Harold J. Swart4
Ronald B. Duncan4
Walter A. Varvel4
JohnG. Stoides4
Donald E. Nelson4
Fred R. Herr 4
James D. Hawkins4
James T. Curry III
Melvyn K. Purcell
Robert J. Musso
Roby L.Sloan 4
Karl W. Ashman
Howard Wells
Raymond Laurence
John D. Johnson
Directories and Meetings 313
BANK,
Branch, or facility
Chairman2
Deputy Chairman
President
First Vice President
KANSAS CITY
Burton A. Dole, Jr.
Herman Cain
Barbara B. Grogan
Ernest L. Holloway
Sheila Griffin
Thomas M. Hoenig
Henry R. Czerwinski
Leo E. Linbeck, Jr.
Cece Smith
Alvin T. Johnson
Judy Ley Allen
Roger R.
Hemminghaus
Robert D. McTeer, Jr.
Tony J. Salvaggio
James A. Vohs
Robert F. Erburu
Donald G. Phelps
William A. Hilliard
Gary G. Michael
George F. Russell, Jr.
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
E. Ronald Liggett4
Andrea P. Wolcott
Gordon R. G.
Werkema4
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
Thomas C. Melzer, President of the Federal Reserve Bank of St. Louis, served as
Chairman of the Conference in 1992, and
Robert T. Parry, President of the Federal
Reserve Bank of San Francisco, served as its
Vice Chairman. Frances E. Sibley, of the
Federal Reserve Bank of St. Louis, served as
its Secretary, and Robert L. Feinberg, of the
Federal Reserve Bank of San Francisco,
served as its Assistant Secretary.
On October 26, 1992, the Conference
elected Robert T. Parry as its Chairman for
1993-94 and Richard E Syron, President of
the Federal Reserve Bank of Boston, as its
Vice Chairman.
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 27 and 28,
and on December 3 and 4, 1992.
The members of the Executive Committee
of the Conference of Chairmen during 1992
were Anne Marie Whittemore, Chairman;
Delbert W. Johnson, Vice Chairman; and
Richard N. Cooper, member.
On December 4, 1992, the Conference
elected its Executive Committee for 1993,
naming Delbert W. Johnson as Chairman,
Ellen V. Futter as Vice Chairman, and
Burton A. Dole, Jr., as the third member.
Conference of Presidents
The presidents of the Federal Reserve Banks
are organized into the Conference of Presidents, which meets periodically to consider
matters of common interest and to consult
with, and advise, the Board of Governors.
Conference of First
Vice Presidents
The Conference of First Vice Presidents of
the Federal Reserve Banks was organized in
1969 to meet periodically for the consideration of operations and other matters.
William H. Hendricks, First Vice President of the Federal Reserve Bank of Cleveland, served as Chairman of the Conference
314 79th Annual Report, 1992
for 1992, and William H. Stone, First Vice
President of the Federal Reserve Bank of
Philadelphia, served as its Vice Chairman.
Creighton R. Fricek, of the Federal Reserve
Bank of Cleveland, served as its Secretary,
and Milissa Tadeo of the Federal Reserve
Bank of Philadelphia, served as its Assistant
Secretary.
On October 13, 1992, the Conference
elected William H. Stone, First Vice President of the Federal Reserve Bank of Philadelphia, as its Chairman for 1993, and James
H. Oltman, First Vice President of the Federal Reserve Bank of New York, as its Vice
Chairman.
Directors
The following list of directors of Federal
Reserve Banks and Branches shows for each
director the class of directorship, the director's principal business affiliation, and the
date the director's 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.
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 315
Term expires
Dec. 31
DISTRICT 1—BOSTON
Class A
Terrence Murray
David A. Page
Robert M. Silva
Class B
Joan T. Bok
Stephen R. Levy
Edward H. Ladd
Class C
Richard N. Cooper
John E. Flynn
Jerome H. Grossman
Chairman of the Board, President, and Chief
Executive Officer, Fleet/Norstar Financial
Group, Inc., Providence, Rhode Island
President, Ocean National Bank of Kennebunk,
Kennebunk, Maine
President, Chief Executive Officer, and Director,
The Citizens National Bank,
Putnam, Connecticut
1992
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
Chairman and Ch^f Executive Officer, Standish,
Ayer and Wo a, Inc., Boston, Massachusetts
1992
Maurits C. Boas Professor of International
Economics, Harvard University,
Cambridge, Massachusetts
Executive Director, The Quality Connection,
East Dennis, Massachusetts
Chairman of the Board and Chief Executive
Officer, New England Medical Center, Inc.,
Boston, Massachusetts
1993
1994
1993
1994
1992
1993
1994
DISTRICT 2—NEW YORK
Class A
Victor J. Riley, Jr
Barbara Harding
Thomas G. Labrecque
Class B
John A. Georges
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
Chairman and Chief Executive Officer,
The Chase Manhattan Bank, N.A.,
New York, New York
Chairman of the Board and Chief Executive
Officer, International Paper,
Purchase, New York
1992
1993
1994
1992
316 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 2, Class B— Continued
Rand V. Araskog
Robert E. Allen
Class C
Cyrus R. Vance
Ellen V. Futter
Maurice R. Greenberg
Chairman, President, and Chief Executive
Officer, ITT Corporation, New York, New York
Chairman and Chief Executive Officer,
American Telephone and Telegraph Company,
Basking Ridge, New Jersey
Presiding Partner, Simpson Thacher & Bartlett,
New York, New York
President, Barnard College, New York, New York
Chairman and Chief Executive Officer,
American International Group, Inc.,
New York, New York
1993
1994
1992
1993
1994
BUFFALO BRANCH
Appointed by the Federal Reserve Bank
Wilbur F. Beh
President, Atlanta National Bank,
Atlanta, New York
Susan A. McLaughlin
General Credit Manager, Eastman Kodak
Company, Rochester, New York
Charles M. Mitschow
Senior Executive Vice President, Regional
Banking, Marine Midland Bank, N.A.,
Buffalo, New York
Richard H. Popp
Operating Partner, Southview Farm,
Castile, New York
Appointed by the Board of Governors
Herbert L. Washington
HLW Fast Track, Inc., Rochester, New York
Joseph J. Castiglia
President and Chief Executive Officer, Pratt &
Lambert, Inc., Buffalo, New York
Donald L. Rust
Plant Manager, General Motors Powertrain
Division, Tonawanda Engine Plant,
Buffalo, New York
1992
1993
1994
1994
1992
1993
1994
DISTRICT 3—PHILADELPHIA
Class A
Samuel A. McCullough
Gary F. Simmerman
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
1992
1993
Directories and Meetings 317
Term expires
Dec. 31
DISTRICT 3, Class A—Continued
H. Bernard Lynch
Class B
David W Huggins
James M. Mead
James A. Hagen
Class C
Peter A. Benoliel
Jane G. Pepper
Donald J. Kennedy
President and Chief Executive Officer,
The First National Bank of Wyoming,
Wyoming, Delaware
1994
President, RMS Technologies, Inc.,
Marlton, New Jersey
President, Capital Blue Cross,
Harrisburg, Pennsylvania
Chairman, President, and Chief Executive
Officer, Consolidated Rail Corporation,
Philadelphia, Pennsylvania
1992
Chairman of the Board, Quaker Chemical
Corporation, Conshohocken, Pennsylvania
President, The Pennsylvania Horticultural
Society, Philadelphia, Pennsylvania
Business Manager, International Brotherhood of
Electrical Workers, Local Union No. 269,
Trenton, New Jersey
1993
1994
1992
1993
1994
DISTRICT 4—CLEVELAND
Class A
Frank Wobst
Alfred C. Leist
William T. McConnell
Class B
Laban P. Jackson, Jr.
Verna K. Gibson
Douglas E. Olesen
Class C
A. William Reynolds
John R. Hodges
John R. Miller
Chairman of the Board and Chief Executive
Officer, Huntington Bancshares Incorporated,
Columbus, Ohio
Chairman, President, and Chief Executive
Officer, Apple Creek Banking Company,
Apple Creek, Ohio
President, The Park National Bank, Newark, Ohio
1992
Chairman, Clearcreek Properties,
Lexington, Kentucky
Business Consultant, Columbus, Ohio
President and Chief Executive Officer, Battelle
Memorial Institute, Columbus, Ohio
1992
Chairman and Chief Executive Officer, GenCorp,
Fairlawn, Ohio
President, Ohio AFL-CIO, Columbus, Ohio
Former President and Chief Operating Officer,
The Standard Oil Company (Ohio),
Cleveland, Ohio
1993
1994
1993
1994
1992
1993
1994
318 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 4—Continued
CINCINNATI BRANCH
Appointed by the Federal Reserve Bank
Clay Parker Davis
President and Chief Executive Officer, Citizens
National Bank, Somerset, Kentucky
Jack W. Buchanan
President, Sphar & Company, Inc.,
Winchester, Kentucky
Harry A. Shaw, III
Chairman and Chief Executive Officer, Huffy
Corporation, Dayton, Ohio
Marvin J. Stammen
President and Chief Executive Officer, Second
National Bank, Greenville, Ohio
Appointed by the Board of Governors
Eleanor Hicks
Hicks & Kinley, Cincinnati, Ohio
Marvin Rosenberg
Partner, Towne Properties, Ltd., Cincinnati, Ohio
Raymond A. Bradbury
Chairman, Martin County Coal Corporation,
Inez, Kentucky
1992
1993
1993
1994
1992
1993
1994
PITTSBURGH BRANCH
Appointed by the Federal Reserve Bank
William F. Roemer
Chairman and Chief Executive Officer,
Integra Financial Corporation,
Pittsburgh, Pennsylvania
George A. Davidson, Jr.
Chairman and Chief Executive Officer,
Consolidated Natural Gas Company,
Pittsburgh, Pennsylvania
I. N. Rendall Harper, Jr.
President and Chief Executive Officer,
American Micrographics Company, Inc.,
Monroeville, Pennsylvania
David S. Dahlmann
President and Chief Executive Officer,
Southwest National Corporation,
Greensburg, Pennsylvania
Appointed by the Board of Governors
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
Jack B. Piatt
Chairman of the Board, Millcraft Industries, Inc.,
Washington, Pennsylvania
1992
1993
1993
1994
1992
1993
1994
Directories and Meetings 319
Term expires
Dec. 31
DISTRICT 5—RICHMOND
Class A
A. Pierce Stone
James G. Lindley
Webb C. Hayes IV
Class B
R. E. Atkinson, Jr.
Paul A. DelaCourt
L. Newton Thomas, Jr.
Class C
Henry J. Faison
Stephen Brobeck
Anne Marie Whittemore
Chairman, President, and Chief Executive
Officer, Virginia Community Bank,
Louisa, Virginia
Chairman, President, and Chief Executive
Officer, South Carolina National Bank,
Columbia, South Carolina
President, The Palmer National Bank,
Washington, D.C.
Chairman, Dilmar Oil Company, Inc.,
Florence, South Carolina
Chairman, The North Carolina Enterprise
Corporation, Raleigh, North Carolina
Retired Senior Vice President, ITT/Carbon
Industries, Inc., Charleston, West Virginia
President, Faison Associates,
Charlotte, North Carolina
Executive Director, Consumer Federation of
America, Washington, D.C.
Partner, McGuire, Woods, Battle & Boothe,
Richmond, Virginia
1992
1993
1994
1992
1993
1994
1992
1993
1994
BALTIMORE BRANCH
Appointed by the Federal Reserve Bank
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
Thomas J. Hughes
President, Navy Federal Credit Union,
Vienna, Virginia
F. Levi Ruark
Chairman of the Board and President,
The National Bank of Cambridge,
Cambridge, Maryland
Appointed by the Board of Governors
John R. Hardesty, Jr.
President, Preston Energy, Inc.,
Kingwood, West Virginia
Michael R. Watson
President, Association of Maryland Pilots,
Annapolis, Maryland
Rebecca Hahn Windsor
Chairman and Chief Executive Officer, Hahn
Transportation, Inc., New Market, Maryland
1992
1993
1994
1994
1992
1993
1994
320 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 5—Continued
CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank
David B. Jordan
Vice Chairman, Chief Executive Officer, and
Director, Security Capital Bancorp,
Salisbury, North Carolina
Jim M. Cherry, Jr.
President and Chief Executive Officer,
Williamsburg First National Bank,
Kingstree, South Carolina
Dorothy H. Aranda
President, Dohara Associates, Inc.,
Hilton Head Island, South Carolina
L. Glenn Orr, Jr.
Chairman, President, and Chief Executive
Officer, Southern National Corporation,
Lumberton, North Carolina
Appointed by the Board of Governors
Anne M. Allen
President, Anne Allen & Associates, Inc.,
Greensboro, North Carolina
William E. Masters
President, Perception, Inc.,
Easley, South Carolina
Harold D. Kingsmore
President and Chief Operating Officer,
Graniteville Company,
Graniteville, South Carolina
1992
1993
1994
1994
1992
1993
1994
DISTRICT 6—ATLANTA
Class A
W. H. Swain
James B. Williams
Simpson Russell
Class B
J. Thomas Holton
Andre M. Rubenstein
Victoria B. Jackson
Class C
Leo Benatar
Chairman of the Board, First National Bank,
Oneida, Tennessee
Chairman and Chief Executive Officer, SunTrust
Banks, Inc., Atlanta, Georgia
Chairman and Chief Executive Officer,
The First National Bank of Florence,
Florence, Alabama
President, Sherman International Corporation,
Birmingham, Alabama
Chairman of the Board and Chief Executive
Officer, Rubenstein Brothers, Inc.,
New Orleans, Louisiana
President and Chief Executive Officer,
DSS/ProDiesel, Nashville, Tennessee
Chairman of the Board and President, Engraph,
Inc., Atlanta, Georgia
1992
1993
1994
1992
1993
1994
1992
Directories and Meetings 321
Term expires
Dec. 31
DISTRICT 6, Class C— Continued
Edwin A. Huston
Hugh M. Brown
Senior Executive Vice President-Finance, Ryder
System, Inc., Miami, Florida
President and Chief Executive Officer, BAMSI,
Inc., Titusville, Florida
1993
1994
BIRMINGHAM BRANCH
Appointed by the Federal Reserve Bank
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
Marlin D. Moore, Jr.
Chairman, Pritchett-Moore, Inc.,
Tuscaloosa, Alabama
Columbus Sanders
President, Consolidated Industries, Inc.,
Huntsville, Alabama
Appointed by the Board of Governors
Nelda P. Stephenson
President, Nelda Stephenson Chevrolet, Inc.,
Florence, Alabama
Donald E. Boomershine
President, Better Business Bureau of Central
Alabama, Inc., Birmingham, Alabama
Shelton E. Allred
Chairman of the Board, President, and Chief
Executive Officer, Frit Incorporated,
Ozark, Alabama
1992
1993
1994
1994
1992
1993
1994
JACKSONVILLE BRANCH
Appointed by the Federal Reserve Bank
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
Perry M. Dawson
President and Chief Executive Officer, Suncoast
Schools Federal Credit Union, Tampa, Florida
Arnold A. Heggestad
William H. Dial Professor and Director, College
of Business Administration, University of
Florida, Gainesville, Florida
Appointed by the Board of Governors
Lana Jane Lewis-Brent
President, Paul Brent Designer, Inc.,
Panama City, Florida
Joan Dial Ruffier
Member, Florida Board of Regents, Orlando, Florida
Samuel H. Vickers
President, Chairman, and Chief Executive Officer,
Design Containers, Inc., Jacksonville, Florida
1992
1993
1994
1994
1992
1993
1994
322 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 6— Continued
MIAMI BRANCH
Appointed by the Federal Reserve Bank
E. Anthony Newton
President, Island National Bank of Palm Beach,
Palm Beach, 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
Roberto G. Blanco
Vice Chairman and Chief Financial Officer,
Republic National Bank of Miami,
Miami, Florida
Appointed by the Board of Governors
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
Dorothy C. Weaver
Executive Vice President, Intercap Investments, Inc.,
Coral Gables, Florida
1992
1993
1993
1994
1992
1993
1994
NASHVILLE BRANCH
Appointed by the Federal Reserve Bank
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
William Baxter Lee III
Chairman and President, Southeast Services
Corporation, Knoxville, Tennessee
Marguerite W. Sallee
President and Chief Executive Officer,
Corporate Child Care Management Services,
Nashville, Tennessee
Appointed by the Board of Governors
Harold A. Black
Professor and Head, Department of Finance,
College of Business Administration,
University of Tennessee, Knoxville, Tennessee
Vacancy
James R. Tuerff
President and Chief Executive Officer, American
General Life and Accident Insurance
Company, Nashville, Tennessee
1992
1993
1994
1994
1992
1993
1994
Directories and Meetings 323
Term expires
Dec. 31
DISTRICT 6—Continued
NEW ORLEANS BRANCH
Appointed by the Federal Reserve Bank
Earl W. Lundy
Chairman of the Board and Chief Executive
Officer, First National Bank of Vicksburg,
Vicksburg, Mississippi
Howard C. Gaines
Chairman, President, and Chief Executive
Officer, First National Bank of Commerce,
New Orleans, Louisiana
Joel B. Bullard, Jr
President, Joe Bullard Automotive Companies,
Mobile, Alabama
Kay L. Nelson
Managing Director, Nelson Capital Corporation,
New Orleans, Louisiana
Appointed by the Board of Governors
Lucimarian Tolliver
Roberts
President, Mississippi Coast Coliseum
Commission, Pass Christian, Mississippi
Victor Bussie
President, Louisiana AFL-CIO,
Baton Rouge, Louisiana
Jo Ann Slay don
President, Slay don Consultants and Insight
Productions and Advertising,
Baton Rouge, Louisiana
1992
1993
1994
1994
1992
1993
1994
DISTRICT 7—CHICAGO
Class A
B. F. Backlund
David W. Fox
Stefan S. Anderson
Class B
Paul J. Schierl
A. Charlene Sullivan
Thomas C. Dorr
Class C
Richard G. Cline
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
Chairman, President, and Chief Executive
Officer, First Merchants Bank, N.A.,
Muncie, Indiana
Financial Consultant, Green Bay, Wisconsin
Associate Professor of Management, Krannert
Graduate School of Management, Purdue
University, West Lafayette, Indiana
President and Chief Executive Officer, Dorr's
Pine Grove Farm Co., Marcus, Iowa
Chairman, President, and Chief Executive Officer,
NICOR, Inc., Naperville, Illinois
1992
1993
1994
1992
1993
1994
1992
324 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 7, Class C— Continued
Robert M. Healey
Duane L. Bumham
President, Chicago Federation of Labor and
Industrial Union Council, AFL-CIO,
Chicago, Illinois
Chairman and Chief Executive Officer, Abbott
Laboratories, Abbott Park, Illinois
1993
1994
DETROIT BRANCH
Appointed by the Federal Reserve Bank
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
Daniel R. Smith
Chairman and Chief Executive Officer,
First of America Bank Corporation,
Kalamazoo, Michigan
Appointed by the Board of Governors
J. Michael Moore
Chairman of the Board and Chief Executive
Officer, Invetech Company, Detroit, Michigan
Beverly A. Beltaire
President, PR Associates, Inc., Detroit, Michigan
John D. Forsyth
Executive Director, University of Michigan
Hospitals, Ann Arbor, Michigan
1992
1993
1993
1994
1992
1993
1994
DISTRICT 8—ST. LOUIS
Class A
W. E. Ayres
Ray U. Tanner
Henry G. River, Jr.
Class B
Frank M. Mitchener, Jr.
Warren R. Lee
Sandra B.
Sanderson-Chesnut
Chairman of the Board, Simmons First National
Bank of Pine Bluff, Pine Bluff, Arkansas
Chairman, Director, and Chief Executive
Officer, Jackson National Bank,
Jackson, Tennessee
President and Chief Executive Officer,
First National Bank in Pinckneyville,
Pinckneyville, Illinois
President, Mitchener Farms, Inc.,
Sumner, Mississippi
President, W. R. Lee & Associates, Inc.,
Louisville, Kentucky
President and Chief Executive Officer,
Sanderson Plumbing Products, Inc.,
Columbus, Mississippi
1992
1993
1994
1992
1993
1994
Directories and Meetings 325
Term expires
Dec. 31
DISTRICT 8—Continued
Class C
H. Edwin Trusheim
Janet McAfee Weakley
Robert H. Quenon
Chairman and Chief Executive Officer, General
American Life Insurance Company,
St. Louis, Missouri
President, Janet McAfee, Inc., St. Louis, Missouri
Mining Consultant, St. Louis, Missouri
1992
1993
1994
LITTLE ROCK BRANCH
Appointed by the Federal Reserve Bank
Patricia M. Townsend
President, Townsend Company, Stuttgart, Arkansas
James V. Kelley
Chairman, President and Chief Executive
Officer, First United Bancshares, Inc.,
El Dorado, Arkansas
Mahlon A. Martin
President, Winthrop Rockefeller Foundation,
Little Rock, Arkansas
Barnett Grace
Chairman and Chief Executive Officer,
First Commercial Bank, N.A.,
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
Robert Daniel Nabholz, Jr. ..Chief Executive Officer, Nabholz Construction
Corporation, Conway, Arkansas
1992
1993
1993
1994
1992
1993
1994
LOUISVILLE BRANCH
Appointed by the Federal Reserve Bank
Morton Boyd
Chairman and Chief Executive Officer,
First Kentucky National Corporation,
Louisville, Kentucky
Robert M. Hall
Owner, Mike Hall Farm, Seymour, Indiana
Charles D. Storms
President and Chief Executive Officer, Red Spot
Paint and Varnish Company, Inc.,
Evansville, Indiana
Douglas M. Lester
Chairman, President, and Chief Executive
Officer, Trans Financial Bancorp, Inc.,
Bowling Green, Kentucky
Appointed by the Board of Governors
Daniel L. Ash
President, Louisville Energy and Environment
Corporation, Louisville, Kentucky
1992
1993
1993
1994
1992
326 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 8, LOUISVILLE BRANCH
Appointed by the Board of Governors—Continued
John A. Williams
Laura M. Douglas
Chairman and Chief Executive Officer,
Computer Services, Inc., Paducah, Kentucky
Legal Director, Metropolitan Sewer District,
Louisville, Kentucky
1993
1994
MEMPHIS BRANCH
Appointed by the Federal Reserve Bank
Michael J. Hennessey
President, Munro & Company, Inc.,
Wynne, Arkansas
Thomas M. Garrott
President and Chief Operating Officer, National
Bank of Commerce and National Commerce
Bancorporation, Memphis, Tennessee
Larry A. Watson
Chairman of the Board and President, Liberty
Federal Savings Bank, Paris, Tennessee
Lewis F. Mallory, Jr.
President and Chief Executive Officer,
National Bank of Commerce of Mississippi,
Starkville, Mississippi
1992
1993
1993
1994
Appointed by the Board of Governors
M. Rita Schroeder
President, St. Francis Hospital, Memphis, Tennessee
1992
Seymour B. Johnson
Owner, Kay Planting Company, Indianola, Mississippi 1993
Vacancy
1994
DISTRICT 9—MINNEAPOLIS
Class A
Rodney W. Fouberg
Charles L. Seaman
William W Strausburg
Class B
Bruce C. Adams
Earl R. St. John, Jr.
Duane E. Dingmann
Class C
Gerald A. Rauenhorst
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
Chairman and Chief Executive Officer, First
Bank Montana, N.A., and General Manager,
First Bank-Regional Banking Group,
Billings, Montana
1992
1993
1994
Partner, Triple Adams Farms, Minot, North Dakota
President, St. John Forest Products, Inc.,
Spalding, Michigan
President, Trubilt Auto Body, Inc.,
Eau Claire, Wisconsin
1992
1993
Chairman of the Board and Chief Executive Officer,
Opus Corporation, Minneapolis, Minnesota
1992
1994
Directories and Meetings 327
Term expires
Dec. 31
DISTRICT 9, Class C— Continued
Delbert W. Johnson
Jean D. Kinsey
President and Chief Executive Officer, Pioneer
Metal Finishing, Minneapolis, Minnesota
Professor, Consumption and Consumer
Economics, Department of Agricultural and
Applied Economics, University of Minnesota,
St. Paul, Minnesota
1993
1994
HELENA BRANCH
Appointed by the Federal Reserve Bank
Donald E. Olsson, Jr.
Executive Vice President, Ronan State Bank,
Ronan, Montana
Nancy M. Stephenson
Executive Director, Neighborhood Housing
Services, Great Falls, Montana
Beverly D. Harris
President, Empire Federal Savings and Loan
Association, Livingston, Montana
Appointed by the Board of Governors
J. Frank Gardner
President, Montana Resources, Inc.,
Butte, Montana
James E. Jenks
Jenks Farms, Hogeland, Montana
1992
1992
1993
1992
1993
DISTRICT 10—KANSAS CITY
Class A
Harold L. Gerhart, Jr.
Roger L. Reisher
Charles I. Moyer
Class B
Frank A. McPherson
Don E. Adams
Frank J. Yaklich, Jr
Class C
Herman Cain
Thomas E. Rodriguez
Chairman and Chief Executive Officer, First
National Bank, Newman Grove, Nebraska
Co-Chairman of the Board, FirstBank Holding
Company of Colorado, Lakewood, Colorado
Chairman and Chief Executive Officer,
The First National Bank of Phillipsburg,
Phillipsburg, Kansas
1992
Chairman of the Board and Chief Executive
Officer, Kerr-McGee Corporation,
Oklahoma City, Oklahoma
Buffalo, Oklahoma
President and Chief Executive Officer, CF & I
Steel Corporation, Pueblo, Colorado
1992
President and Chief Executive Officer,
Godfather's Pizza, Inc., Omaha, Nebraska
President and General Manager, Thomas E.
Rodriguez & Associates, P.C., Aurora, Colorado
1993
1994
1993
1994
1992
1993
328 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 10, Class C— Continued
Burton A. Dole, Jr.
Chairman of the Board and President,
Puritan-Bennett Corporation,
Overland Park, Kansas
1994
DENVER BRANCH
Appointed by the Federal Reserve Bank
Henry A. True III
Partner, True Companies, Casper, Wyoming
Peter R. Decker
President, Decker & Associates, Denver, Colorado
Clifford E. Kirk
President, First National Bank of Gillette,
Gillette, Wyoming
Richard I. Ledbetter
President and Chief Executive Officer,
First National Bank of Farmington,
Farmington, New Mexico
Appointed by the Board of Governors
Sandra K. Woods
Vice President, Corporate Real Estate, Adolph
Coors Company, Golden, Colorado
Gilbert Sanchez
President, New Mexico Highlands University,
Las Vegas, New Mexico
Barbara B. Grogan
President, Western Industrial Contractors, Inc.,
Denver, Colorado
1992
1993
1994
1994
1992
1993
1994
OKLAHOMA CITY BRANCH
Appointed by the Federal Reserve Bank
Gordona Duca
President and Owner, Gordona Duca, Inc.,
Realtors, Tulsa, Oklahoma
John Wm. Laisle
President and Chief Executive Officer, MidFirst
Bank, SSB, Oklahoma City, Oklahoma
C. Kendric Fergeson
Chairman of the Board and Chief Executive
Officer, The National Bank of Commerce,
Altus, Oklahoma
Appointed by the Board of Governors
Victor R. Schock
Executive Director, Credit Counseling Services
of Oklahoma, Inc., Tulsa, Oklahoma
Ernest L. Holloway
President, Langston University, Langston, Oklahoma
1992
1992
1993
1992
1993
OMAHA BRANCH
Appointed by the Federal Reserve Bank
John R. Cochran
President and Chief Executive Officer, Norwest
Bank Nebraska, N.A., Omaha, Nebraska
Donald A. Leu
President and Chief Executive Officer, Consumer
Credit Counseling Service, Omaha, Nebraska
1992
1993
Directories and Meetings 329
Term expires
Dec. 31
DISTRICT 10, OMAHA BRANCH
Appointed by the Federal Reserve Bank—Continued
Thomas H. Olson
President and Chief Executive Officer, Lisco
State Bank, Lisco, Nebraska
1993
Appointed by the Board of Governors
Sheila Griffin
Special Advisor to the Governor of the State of
1992
Nebraska for International Trade,
Lincoln, Nebraska
LeRoy W. Thorn
President, T-L Irrigation Company, Hastings, Nebraska 1993
DISTRICT 11—DALLAS
Class A
Robert G. Greer
T. C. Frost
Eugene M. Phillips
Class B
Gary E. Wood
J. B. Cooper, Jr.
Peyton Yates
Class C
Leo E. Linbeck, Jr.
Vacancy
Cece Smith
Chairman of the Board, Tanglewood Bank, N.A.,
Houston, Texas
Chairman of the Board, Frost National Bank,
San Antonio, Texas
Chairman of the Board and President, The First
National Bank of Panhandle, Panhandle, Texas
1992
1993
1994
President, Texas Research League, Austin, Texas
Farmer, Roscoe, Texas
President, Yates Drilling Company and
Executive Vice President, Yates Petroleum
Corporation, Artesia, New Mexico
1992
1993
1994
Chairman of the Board and Chief Executive
Officer, Linbeck Construction Corporation,
Houston, Texas
1992
General Partner, Phillips-Smith Specialty Retail
Group, Dallas, Texas
1993
1994
EL PASO BRANCH
Appointed by the Federal Reserve Bank
Wayne Merritt
Chairman of the Board and President, Texas
National Bank of Midland, Midland, Texas
Veronica K. Callaghan
Vice President and Principal, KASCO Ventures,
Inc., El Paso, Texas
Ben H. Haines, Jr.
President and Chief Operating Officer, First
National Bank of Dona Ana County,
Las Cruces, New Mexico
Hugo Bustamante, Jr.
Owner and Chief Executive Officer, ProntoLube,
El Paso, Texas
1992
1993
1993
1994
330 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 11, EL PASO BRANCH—Continued
Appointed by the Board of Governors
W. Thomas Beard III
President, Leoncita Cattle Company, Alpine, Texas
Diana S. Natalicio
President, The University of Texas at El Paso,
El Paso, Texas
Alvin T. Johnson
Senior Vice President, Management Assistance
Corporation of America, El Paso, Texas
1992
1993
1994
HOUSTON BRANCH
Appointed by the Federal Reserve Bank
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
Tieman H. Dippel, Jr.
Chairman of the Board and President, Brenham
Bancshares, Inc., Brenham, Texas
Appointed by the Board of Governors
Judy Ley Allen
Partner and Administrator, Allen Investments,
Houston, Texas
Milton Carroll
Chairman of the Board and Chief Executive
Officer, Instrument Products, Inc.,
Houston, Texas
Isaac H. Kempner III
Chairman of the Board, Imperial Holly
Corporation, Sugar Land, Texas
1992
1993
1993
1994
1992
1993
1994
SAN ANTONIO BRANCH
Appointed by the Federal Reserve Bank
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., Progreso, Texas
T. Jack Moore III
Owner and Manager, T.J. Moore Lumber Inc.,
Ingram, Texas
Appointed by the Board of Governors
Lawrence E. Jenkins
Vice President (Retired), Lockheed Missiles and
Space Company, Inc., Austin, Texas
Erich Wendl
President and Chief Executive Officer, Maverick
Markets, Inc., Corpus Christi, Texas
1992
1993
1993
1994
1992
1993
Directories and Meetings 331
Term expires
Dec. 31
DISTRICT 11, SAN ANTONIO BRANCH
Appointed by the Board of Governors—Continued
Roger R. Hemminghaus
Chairman, President, and Chief Executive
Officer, Diamond Shamrock, Inc.,
San Antonio, Texas
1994
DISTRICT 12-SAN FRANCISCO
Class A
Warren K. K. Luke
Richard L. Mount
William E. B. Siart
Class B
E. Kay Stepp
John N. Nordstrom
William L. Tooley
Class C
Robert F. Erburu
James A. Vohs
Judith M. Runstad
President and Director, Hawaii National
Bancshares, Inc., and Vice Chairman of the
Board and Chief Executive Officer, Hawaii
National Bank, Honolulu, Hawaii
Chairman, President, and Chief Executive
Officer, Saratoga Bancorp,
Saratoga, California
President, First Interstate Bancorp,
Los Angeles, California
1992
Advisor to the Chairman, Former President, and
Chief Operating Officer, Portland General
Electric, Portland, Oregon
Co-Chairman of the Board, Nordstrom, Inc.,
Seattle, Washington
Chairman, Tooley & Company, Investment
Builders, Los Angeles, California
1992
Chairman of the Board and Chief Executive
Officer, The Times Mirror Company,
Los Angeles, California
Chairman and Chief Executive Officer (Retired),
Kaiser Foundation Health Plan, Inc.,
and Kaiser Foundation Hospitals,
Oakland, California
Partner and Managing Director, Foster Pepper
and Shefelman, Seattle, Washington
1992
1993
1994
1993
1994
1993
1994
Los ANGELES BRANCH
Appointed by the Federal Reserve Bank
Fred D. Jensen
Executive Director, Long Beach Local
Development Corporation, Long Beach, California
Anita Landecker
Regional Vice President, Local Initiatives
Support Corporation, Los Angeles, California
1992
1993
332 79th Annual Report, 1992
Term expires
Dec. 31
DISTRICT 12, Los ANGELES BRANCH
Appointed by the Federal Reserve Bank—Continued
Antonia Hernandez
William S. Randall
President and General Counsel, Mexican
American Legal Defense and Educational
Fund, Los Angeles, California
Chief Executive Officer, Southwest Region, First
Interstate Bank, Phoenix, Arizona
Appointed by the Board of Governors
Anne L. Evans
Owner, Developer, and Operator, Evans Hotels,
San Diego, California
Donald G. Phelps
Chancellor, Los Angeles Community College
District, Los Angeles, California
David L. Moore
President and Chief Executive Officer, Western
Growers Association, Irvine, California
1994
1994
1992
1993
1994
PORTLAND BRANCH
Appointed by the Federal Reserve Bank
Elizabeth K. Johnson
President, TransWestern Helicopters, Inc.,
Scappoose Industrial Airpark,
Scappoose, Oregon
Cecil W. Drinkward
President, Hoffman Construction Company,
Portland, Oregon
Stephen G. Kimball
Chairman, President, and Chief Executive Officer,
Baker Boyer Bancorp, Walla Walla, Washington
Stuart H. Compton
Chairman, Pioneer Trust Bank, N.A., Salem, Oregon
Appointed by the Board of Governors
Wayne E. Phillips, Jr
Vice President, Phillips Ranch, Inc., Baker, Oregon
Ross R. Runkel
Professor of Law, Willamette University
Center for Dispute Resolution, Salem, Oregon
William A. Hilliard
Editor, The Oregonian, Portland, Oregon
1992
1993
1993
1994
1992
1993
1994
SALT LAKE CITY BRANCH
Appointed by the Federal Reserve Bank
Ronald S. Hanson
Director of the Board and Member of the
Executive Committee, 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 Consulting Group,
Salt Lake City, Utah
Gerald R. Sherratt
President, Southern Utah University,
Cedar City, Utah
1992
1993
1993
1994
Directories and Meetings 333
Term expires
Dec. 31
DISTRICT 12, SALT LAKE CITY BRANCH—Continued
Appointed by the Board of Governors
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
H. Roger Boyer
Chairman of the Board, The Boyer Company,
Salt Lake City, Utah
1992
1993
1994
SEATTLE BRANCH
Appointed by the Federal Reserve Bank
H. H. Larison
President and Chief Executive Officer, Columbia
Paint & Coatings, Spokane, Washington
B. R. Beeksma
Chairman of the Board, InterWest Savings
Bank, Oak Harbor, Washington
Gerry B. Cameron
President and Chief Executive Officer, U.S. Bank of
Washington, N.A., Seattle, Washington
Robert P. Gray
President, National Bank of Alaska,
Anchorage, Alaska
Appointed by the Board of Governors
Emilie A. Adams
President and Chief Executive Officer, Better
Business Bureau, Seattle, Washington
George F. Russell, Jr.
Chairman, Frank Russell Company,
Tacoma, Washington
William R. Wiley
Senior Vice President, Technology
Management; and Director, Pacific Northwest
Division, Battelle Memorial Institute,
Richland, Washington
1992
1993
1993
1994
1992
1993
1994
334 79th Annual Report, 1992
Maps of the Federal Reserve System
1
9
BOSTON
2 "
MINNEAPOLIS •
7
12
• SAN FRANCISCO
^
H N E W YORK
CHICAGO •
10KANSAS C I T Y B
CLEVELAND
4
ST. LOUIS
8
6
PHILADELPHIA
RICHMOND
5
.
ATLANTA
11 DALLAS
•
ALASKA
HAWAII
LEGEND
Both pages
• Federal Reserve Bank city
D 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 District 12, 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 maps show the boundaries within
the System as of year-end 1992.
Maps of the Federal Reserve System
1-A
3-C
2-B
335
5_E Baltimore
4-D
Pittsburgh
NY
J
CT
Buffalo
"F
• ^
KY
PHILADELPHIA
NEW YORK
BOSTON
6
/
Charlotte
• Cincinnati
CLEVELAND
7-G
• Nashville
RICHMOND
8-H
N
Birmingham J AL
Detroit •
CHICAGO
ATLANTA
9-1
• Helena
MINNEAPOLIS
10-J
12-L
Omaha •
Denver
Oklahoma City
KANSAS CITY
11-K
Salt Lake City
• Los Angeles
SAN FRANCISCO
336
Index
Advanced EDP examinations, 227
Agriculture during 1992, 11
Airline Reporting Corporation, 205
Annunzio-Wylie Anti-Money Laundering
Act, enacted, 213
Appraisal Committee, FFIEC, 227
Assets and liabilities
Banks, by class, 283
Board of Governors, 254
Federal Reserve Banks, 262
Automated clearinghouses, 242
Bank Export Services Act, 233
Bank Holding Company Act of 1956 (See
also Regulations: Y)
Banking structure regulation, 229
Securities subsidiaries, supervision, 220
Supervision and regulation, 217
Bank Holding Company Performance
Report, 221
Bank holding companies
Applications
Delegation, 231
Procedures, 238
Timely processing of, 231
Regulatory simplification, 238
Stock repurchases, 232
Supervision and regulation of, 217
Bank Merger Act
Banking structure regulation, 229
Supervision and regulation, 217
Bank mergers and consolidations, 291
Bank of Credit and Commerce
International, 218
Bank Operations School, 227
Bank Secrecy Act, 216, 234
BankAmerica Corporation merger with
Security Pacific Corporation, 200
Bankers acceptances, Federal Reserve
Bank holdings, 262
Banking offices, changes in number, 290
Banking Supervision and Regulation,
Board's Division of, reorganization,
216
Banking supervision and regulation, 215
Basle Accord, 223
Board of Governors (See also Federal
Reserve System)
Banking supervision and regulation, 215
Consumer and community affairs, 185
Federal Reserve Banks, 241
Federal Reserve decisions, public notice,
230
Financial statements, 253
Legislation enacted, 211
Litigation, 207
Members and officers, 306
Publications (See Publications in 1992)
Recommendations from other agencies,
205
Record of policy actions, 95
Regulatory simplification, 237
Salaries, 269
Testimony and legislative
recommendations, 205
Bureau of Engraving and Printing,
Department of the Treasury, 244
Business spending and investment, 12, 51,
75
Capital accounts
Banks, by class, 278
Federal Reserve Banks, 261, 262, 264
Capital adequacy guidelines, change in
treatment of intangible assets, 98
Cash flows, statement, 256
Census of Population and Housing, U.S.,
195
Chairmen, presidents, and vice presidents
of Federal Reserve Banks
Conferences, 313
List, 312
Salaries of presidents, 269
Change in Bank Control Act
Banking structure regulation, 230
Supervision and regulation, 217
Check clearing and collection
Federal Reserve Banks, 241
Policy statement to reduce risk in the
payments system, 98
Volume of operations, 279
Citicorp, 207
Index 337
Citizen's Guide to the CRA, publication of
the FFIEC, 199
Clearing House Interbank Payments
System, 243
Commerce, Department of, 11
Commodity Credit Corporation, monetary
policy, 53
Commodity Futures Trading Commission,
212
Community Reinvestment Act
Compliance, 199
Home mortgage disclosure, 186
Housing act amendment, 212
Member bank responsibilities, 192
Policy statement, 105
Comptroller of the Currency, Office of the,
97, 105, 192, 198, 213, 219, 221, 223
Condition statements of Federal Reserve
Banks, 260
Conference Board, confidence index, 50
Conferences of chairmen, presidents, and
vice presidents of Federal Reserve
Banks, 313
Construction activity, government spending
on, 10, 13, 14, 49
Consumer Advisory Council, 204, 310
Consumer and community affairs
Applicants right to receive copies of
appraisal reports, 185
Community Reinvestment Act, 199
Consumer leasing compliance, 198
Expedited Funds Availability Act,
compliance, 200
Home mortgage disclosure, 186
Truth in Lending Act, compliance, 198
Consumer Complaint Control System, 201
Consumer energy prices, 18
Consumer leasing, compliance, 198
Consumer price index, 17, 47, 58, 82
Consumer regulations, compliance, 196
Consumer spending in 1992, 8
Consumer survey, 189, 201
Credit availability, supervisory policy, 225
Currency and coin, 244
Currency and Foreign Transactions
Reporting Act of 1970, 234
Defense Cooperation Account,
contributions to, 53
Definitive securities safekeeping, 244
Depository Institutions Disaster Relief Act
of 1992, 188,211,225,239
Depository institutions, reserves and related
items, 284
Deposits (See also Regulations: Q)
Banks, by class, 283
Federal Reserve Banks, 262, 284
Time, as transaction accounts, 96
Directors, Federal Reserve Banks and
Branches, list, 314
Directory: Bank Holding Company
Community Development Investments,
publication, 191
Disaster relief, policy, 238
Dividends, Federal Reserve Banks, 272,
274
Earnings of Federal Reserve Banks, 245,
270
East Rutherford Operations Center, 247
Economy
Business, 10
Government spending, 13
Households, 8
Labor markets, 15
Overview of 1992, 3, 7
Performance of, in 1991, 48
Performance of, in 1992, 73
Price developments, 17
Edge Act and agreement corporations,
international activities, 233
Electronic data processing, supervision, 219
Electronic Fund Transfer Act
Compliance with in 1992, 197
Economic effects, 201
Employee compensation, government
spending on, 14
Employment in 1992, 3, 15
Equal Credit Opportunity Act (See also
Regulations: B)
Compliance with in 1992, 196
Interagency policy statement, 193
Examinations, inspections, regulations, and
audits
Federal Reserve Banks, 245
Specialized, 219, 220, 227
Expedited Funds Availability Act (See also
Regulations: CC)
Compliance in 1992, 196, 200
Depository Institutions Disaster Relief
Act of 1992, exceptions in, 211
Extension of holds on checks, 188
FDIC Improvement Act, amendments in,
103
338 79th Annual Report, 1992
Export Trading Company Act Amendments
of 1988, 233
Export trading companies, 233
Fair Housing Act, 193
Farm Credit Administration, 199, 234
Federal Advisory Council, 309
Federal agency securities
Federal Reserve Bank holdings and
earnings, 262, 284
Federal Reserve open market
transactions, 1989, 266
Repurchase agreements, 261, 262, 266,
268
Federal Deposit Insurance Corporation, 97,
105, 192, 198, 213, 219, 223
Federal Deposit Insurance Corporation
Improvement Act of 1991
Bank supervision and regulation, 215
Housing act amendment, 213
Interim rules to implement, 99
Regulation B, revisions to implement,
186
Regulation CC, amendment to
implement, 103
Regulation to limit risk to insured
institutions, 97
Supervisory policy, 222
Truth in Savings Act, 104
Federal Financial Institutions Examination
Council
Housing act amendment, 213
Regulation B, amendment, 186
Regulatory activities, 192
Regulatory burden study, 237
Reports to condition and income,
revisions to, 228
Small businesses and small farms,
information on, 222
Supervision and regulation, 227
Federal Home Loan Mortgage Corporation,
196, 243
Federal Housing Enterprise Oversight,
Office of, Department of Housing and
Urban Development, 196
Federal National Mortgage Association,
195, 196
Federal Open Market Committee
Meetings, 114, 125, 133, 141, 151, 159,
167, 176
Members and officers, list, 308
Policy actions, record, 109
Federal Reserve Act, 187
Federal Reserve Automation Services, 241,
247
Federal Reserve Bank Branch
Modernization Act, 211, 247
Federal Reserve Banks
Assessments for expenses of Board of
Governors, 272, 274
Bank premises, 260, 262, 278
Branches
Bank premises, 278
Directors, list, 314
Salt Lake City, 247
Vice presidents in charge, 312
Capital accounts, 261, 262
Chairmen and deputy chairmen, 312
Condition statement, 260
Conferences of chairmen, presidents, and
vice presidents, 313
Deposits, 261, 262
Directors, list, 314
District Banks
Atlanta
Community development
corporations, 191
Community Reinvestment Act,
seminars, 191
Boston
Creation of community development
curriculum, 191
Credit issues affecting Native
Americans, conference, 191
Discrimination in mortgage lending,
research study, 193
Chicago, rural community
development, seminars, 191
Cleveland, new head office, designed,
247
Dallas
Data processing center, 241
New head office, designed, 247
Kansas City
Community development lending
seminars, 191
Credit and the Economically
Disadvantaged, conference, 191
Minneapolis
New head office, designed, 247
Rural community development,
seminars, 191
Index 339
Federal Reserve Banks—Continued
District Banks—Continued
New York
Credit issues affecting Native
Americans, conference, 191
East Rutherford Operations Center,
241, 247
Treasury Automated Auction
Processing System, 244
Philadelphia
Community profiles created to
establish community needs,
191
Community Reinvestment Act,
seminars, 191
Richmond, 247
Data processing center, 241
St. Louis, created community profiles
to establish community needs,
191
San Francisco
Community development
corporations, 191
Community profiles created to
establish community needs,
191
Community Reinvestment Act,
seminars, 191
Salt Lake City Branch, 247
Dividends paid, 272, 275, 277
Enforcement actions, 218
Examinations, inspection, regulation, and
audits, 217, 227, 245
Fiscal agency services, 243
Interest rates, 280
International activities, 221
Loans and securities, 260, 262, 268, 270,
284, 286, 288
Officers and employees, number and
salaries, 269
Operations, volume, 279
Payments to the U.S. Treasury, 275, 277
Premises, 247
Presidents and first vice presidents, 269,
312
Priced services, table, 284
Specialized examinations, 219, 227
Supervision and regulation,
responsibilities, 216
Surveillance and monitoring, 220
Federal Reserve Board (See Board of
Governors)
Federal Reserve notes
Condition statement data, 262
Cost of issuance and redemption, 257,
272
Federal Reserve System (See also Board of
Governors)
Capital adequacy guidelines, change in
treatment of intangible assets, 98
Fees, Federal Reserve services to
depository institutions
Automated clearinghouse, 242
Check clearing and collection, 241
Currency and coin, 244
Definitive securities safekeeping, 244
Fiscal agency services, 243
Float, 245
Funds transfer, 242
Net settlement, 243
Securities, U.S., 243
Map, 334
Membership, 236
Security and loan holdings, 246
Staff training, 226
Federal Trade Commission, 193, 198
Federal Trade Commission Act, 204
Fed wire (See also Regulations: J), 242
Fees, Federal Reserve services to
depository institutions
Automated clearinghouse, 242
Check clearing and collection
Federal Reserve Banks, 241
Payments system, policy statement to
reduce risk, 98
Currency and coin, 244
Definitive securities safekeeping, 244
Fiscal agency services, 243
Float, 245
Funds transfer, 242
Net settlement, 243
Prices services, withdrawal, 106
Pricing of, 270
Securities, U.S., 243
Fiduciary activities, supervision, 219
Financial Accounting Standards Board, 228
Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, 199,
211,226
Financial Institutions Supervisory Act,
litigation, 207
Financial statements, Board of Governors,
253
340 79th Annual Report, 1992
First Interstate BancSystem of Montana,
Inc., 207
Fiscal agency services, Federal Reserve
Banks, 243
Float (See also Check clearing and
collection), 245
Foreign Bank Supervision Enhancement
Act of 1991, 99, 216
Foreign currencies
Federal Reserve income on, 270
Operations, 41
Foreign economies during 1992, 36
Foreign investments, 233
Fraud Section, Criminal Division,
Department of Justice, 218
Funds transfer (See also Regulations: J),
242
Futures Trading Practices Act of 1992,
enacted, 212
Garn-St Germain Depository
Institutions Act of 1982, 96
Gasoline prices, 18
Glass-Steagall Act, 220
Gold certificate accounts of Reserve Banks
and gold stock, 262, 286, 288
Gore-Bronson Bancorp, Inc., application to
acquire Water Tower Trust and
Savings Bank, 200
Government National Mortgage
Association, 196
Government Securities Act of 1986, 219
Government securities dealers and brokers,
219
Government spending, 52, 77
Guide to HMDA Reporting, Getting it
Right, FFIEC publication, 187
Guide to Regulation CC Compliance,
publication, 188
Highly leveraged transactions
Change in reporting requirements, 226
Policy statement, 105
Home equity loans
Consumer Protection Act, 103
Disclosures, 187
To bank officials, amendment to
Regulation Z, 103
Home mortgage disclosure (See
Regulations: C)
Home Mortgage Disclosure Act of 1975
Amendment to, 186
Home Mortgage Disclosure Act
of 1975—Continued
Data, FRB testimony, 205
Housing and Community Development
Act, 212
Use of data, 194
Home Mortgage Lending and Equal
Treatment, brochure, 192
Home Mortgages: Understanding the
Process and Your Right to Fair
Lending, publication, 193
Household spending, 8, 49, 73
Housing and Community Development Act
of 1992, 187, 200, 212
Housing and Urban Development,
Department of, 186, 193
Hurricane Andrew, 9, 11, 18, 225
Hurricane Iniki, 225
Idaho, State of, Department of Finance,
207
Income and expenses
Board of Governors, 255
Federal Reserve Banks, 245, 270
Income growth during 1992, 8
Industrial production, 10
Insured commercial banks
Assets and liabilities, by class of bank,
283
Banking offices, changes in number, 290
Number, by class of bank, 283
Interagency Guidelines for Real Estate
Lending Policies, 225
Interagency regulatory activities, 192
Interest rates
Federal Reserve Banks
Discount rates, 4, 106
Risk, supervisory policy, 224
Table, 280
In 1992, 21, 36
International Banking Act of 1978, 222
International banking activities (See also
Regulations: K)
Edge Act corporations and agreement
corporations, 221
Foreign-office operations of U.S. banking
organizations, 221
Supervision and regulation, 232
U.S. activities of foreign banks, 221
International developments in monetary
policy, 35, 54, 78
Interpretations of regulations, 190
Index
Interstate Commerce Commission, 197
Investments
Federal Reserve Banks, 260, 262
State member banks, 283
Justice, Department of, 193
Labor markets, 15, 56, 80
LaWare, John P., concerns about adoption
of Regulation DD, 104
Lease-Purchase Agreement Act, FRB
testimony, 205
Lease-purchase transactions, testimony,
205
Litigation involving the Board of
Governors
Antitrust action
Society Corporation, 207
Financial Institutions Supervisory Act
bin Mahfouz, 208
CBC, Inc., 208
Davis, 208
Greenberg, 208
Pharaon, 207
Shoaib, 208
Other actions
Castro, 209
DLG Financial Corporation, 209
Federal Reserve System, subpoena,
208
Fields, 209
U.S. Check, 209
Zemel, 208
Review of Board actions
Citicorp, 207
First Interstate BancSystem of
Montana, Inc., 207
Idaho, State of, Department of
Finance, 207
Synovus Financial Corporation, 207
Loans
Banks, by class, 283
Executive officers of state member banks
(See also Regulations: O), 187
Federal Reserve Banks
Depository institutions, 260, 262, 270,
286, 288
Holdings and income, 260, 262, 286,
288
Interest rates, 280
Volume of operations, 279
Los Angeles civil unrest, 225
341
Management skills, training class, 227
Margin requirements, 282
Medicaid and Medicare, 14
Member banks (See also Depository
institutions)
Assets, liabilities, and capital accounts,
283
Banking offices, changes in number, 290
Number, 283
Reserve requirements, 281
Members Forum, Consumer Advisory
Council, 204
Michigan, University of, telephone
consumer survey, 189, 201
Monetary aggregates, growth in 1992, 4
Monetary policy
Credit markets, 26, 59, 86
Developments during 1991, 59
Developments during 1992, 84
Financial markets relative to, 21
Implementation of, 60, 85
Objectives for 1992-93, 70
Reports to the Congress
February 19, 1992, 43
July 20, 1992, 67
Money market mutual funds, activity in
1992, 31
Mortgage lending discrimination, 193
Mortgage lending, refinancing complaints,
204
Mullins, David W., Jr., concerns about
adoption of Regulation DD, 104
Multiple savings accounts, 95
Municipal securities dealers and clearing
agencies, 219
Mutual funds, activity in 1992, 31
Mutual savings banks, 290
National Association of Securities
Dealers, 234
National Credit Union Administration, 192,
198, 234
Net settlement, 243
Nonmember depository institutions
Assets and liabilities, 283
Banking offices, changes in number, 290
Number, 283
Office of Thrift Supervision, 97, 105,
191, 198, 219, 234
Officers of Federal Reserve Banks,
Branches, and Offices, 312
342 79th Annual Report, 1992
Oil prices, 18, 82
Operation Desert Storm/Shield {See Persian
Gulf war)
Over-the-Counter Marginable Stocks, list,
235
Packers and Stockyards Administration,
Department of Agriculture, 197, 199
Participants Trust Company, 243
Payments system, policy statement to
reduce risk, 98
Persian Gulf war, 35, 39, 53, 55, 77
Point-of-sale systems, 201
Policy actions
Board of Governors, 95
Bank related activities, 231
Statements and other actions
Community Reinvestment Act, 105
Highly leveraged transactions, 105
Priced services, withdrawal, 106
Federal Open Market Committee
Authorization for domestic open
market operations, 109
Authorization for foreign currency
operations, 111
Domestic policy directive, 111
Foreign currency directive, 113
Procedural instructions, foreign
currency operations, 113
Price developments, 3, 17, 18, 58, 82
Priced services
Federal Reserve, 270
Withdrawal by Reserve Banks, 106
Profit and loss, Federal Reserve Banks, 272
Publications in 1992, Board of Governors
Directory: Bank Holding Company
Community Development
Investments, 191
Guide to Regulation CC Compliance,
188
Home Mortgages: Understanding the
Process and Your Right to Fair
Lending, 193
Over-the-Counter Marginable Stocks,
list, 235
Securities Credit Transactions
Handbook, Federal Reserve
Regulatory Service, 235
Real estate
Appraisals, supervisory policy, 225
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