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\£_^ 1993

Board of Governors of the Federal Reserve System



This publication is available from the Board of Governors of the Federal Reserve System,
Publications Services, Mail Stop 127, Washington, DC 20551.




Letter ofTransmittal

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM

Washington, D.C., April 15, 1994

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 Eightieth Annual Report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1993.

Sincerely,

Chairman




Contents
Part 1

3
5
6
8
11
13
15

Monetary Policy and
the U.S. Economy in 1993

INTRODUCTION
THE ECONOMY IN 1993
The household sector
The business sector
The government sector
Labor market developments
Price developments

19 MONETARY POLICY AND FINANCIAL MARKETS IN 1993
19 The implementation of monetary policy
23 Money and credit flows
29
30
33
35
35

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

37 MONETARY POLICY REPORTS TO THE CONGRESS
37 Report on February 19, 1993
64 Report on July 20, 1993




Part 2

91
91
91
92
92
93

93
93
94
94
95
95
95
98
101
102
103
103
105
106
106
125
135
145
158
166
176
187

Records, Operations,
and Organization

RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
Regulation A (Extensions of Credit by Federal Reserve Banks)
Regulation B (Equal Credit Opportunity)
Regulation C (Home Mortgage Disclosure)
Regulation D (Reserve Requirements of Depository Institutions)
Regulation H (Membership of State Banking Institutions in the Federal
Reserve System), Regulation K (International Banking Operations),
and Regulation Y (Bank Holding Companies and Change in Bank Control)
Regulation H and Regulation Y
Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders
of Member Banks)
Regulation DD (Truth in Savings) and Regulation Q (Interest on Deposits)
Rules of procedure
Rules regarding delegation of authority
Rules regarding equal opportunity
Policy statements and other actions
1993 discount rates
MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS
Authorization for domestic open market operations
Domestic policy directive
Authorization for foreign currency operations
Foreign currency directive
Procedural instructions with respect to foreign currency operations
Meeting held on February 2-3, 1993
Meeting held on March 23, 1993
Meeting held on May 18, 1993
Meeting held on July 6-7, 1993
Meeting held on August 17, 1993
Meeting held on September 21, 1993
Meeting held on November 16, 1993
Meeting held on December 21, 1993




199
199
204
206
207
209
210
214
215
217
218
219
220

CONSUMER AND COMMUNITY AFFAIRS
Regulatory matters
Community affairs
FFIEC and other interagency activities
Economic effects of the Electronic Fund Transfer Act
Compliance examinations
Compliance with consumer regulations
Applications
Complaints about state member banks
Unregulated practices
Consumer Advisory Council
Testimony and legislative recommendations
Recommendations of other agencies

221
221
221
222

LITIGATION
Bank Holding Company Act—review of Board actions
Litigation under the Financial Institutions Supervisory Act
Other actions

225 LEGISLATION ENACTED
225 Government Securities Act Amendments of 1993
227 North American Free Trade Agreement Implementation Act
228 Omnibus Budget Reconciliation Act of 1993
228 Unclaimed insured deposits
229 Depository Institutions Disaster Relief Act of 1993
231
232
238
244
248
249
251

BANKING SUPERVISION AND REGULATION
Scope of responsibilities for supervision and regulation
Supervisory policy
Regulation of the U.S. banking structure
International activities of U.S. banking organizations
Enforcement of other laws and regulations
Federal Reserve membership

253 REGULATORY SIMPLIFICATION
253 Loans to officers, directors, and principal shareholders
253 Consumer leasing
255 FEDERAL RESERVE BANKS
255 Developments in Federal Reserve services
260 Examinations
260 Income and expenses




I •

-

i-U ^<-h'

'

T

;,^

N

\S

^ i minued

261
261
262
263

Holdings of securities and loans
Volume of operations
Federal Reserve Bank premises
Financial statements for priced services

2W

HOARD OF GOVERNORS FINANCIAL STATEMENTS

275
276

STATISTICAL TABLES
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31,1993
2. Statement of condition of each Federal Reserve Bank,
December 31, 1993 and 1992
3. Federal Reserve open market transactions, 1993
4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities,
December 31, 1991-93
5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1993
6. Income and expenses of Federal Reserve Banks, 1993
7. Income and expenses of Federal Reserve Banks, 1914-93
8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1993
9. Operations in principal departments of Federal Reserve Banks, 1990-93
10. Federal Reserve Bank interest rates, December 31, 1993
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, 1993 and 1992
14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-93, and month-end 1993
15. Changes in number of banking offices in the United States, 1993
16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1993

278
282
284
285
286
292
296
297
298
299
300
301
302
308
309
*21
322
324
325
326
327
328
329
330

FEDERAL RESERVE DIRECTORIES AND MEETINGS
Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Advisory Council
Consumer Advisory Council
Thrift Institutions Advisory Council
Officers of Federal Reserve Banks, Branches, and Offices
Conferences of chairmen, presidents, and first vice presidents
Directors

350

MAPS OF THE FEDERAL RESERVE SYSTEM

352

INDEX




Parti
Monetary Policy and
the US. Economy in 1993




Introduction
Nineteen ninety-three was a favorable
year for the U.S. economy, with notable
gains in real output, declines in joblessness, and a further small drop in the rate
of inflation. Financial conditions conducive to growth prevailed throughout the
year and gave considerable impetus to
activity. With the Federal Reserve keeping reserve market pressures unchanged,
short-term interest rates held steady during the year at unusually low levels,
especially when measured relative to
inflation or inflation expectations. In
addition, long-term rates declined further, partly in response to actions taken
by the Congress and the Administration
to put the federal deficit on a more
favorable trend.
Against this backdrop, households
and businesses were able to take further
steps to reduce their burden of debt
service, and more expansive attitudes
toward spending and the use of credit
seemed to take hold. Spending in the
interest-sensitive sectors of the economy surged ahead, with particularly
large advances in residential investment,
business outlays for fixed capital, and
consumer durable goods. The growth of
real gross domestic product picked up
sharply in the second half, and the
increases for all of 1993 cumulated to
about 3V* percent according to preliminary estimates. In the labor market,
employment moved up at a moderate

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 1994). Data cited
here and in the next three chapters are those available as of mid-March 1994.



pace, and the unemployment rate
dropped almost a percentage point over
the year. Measured by the consumer
price index, the rate of inflation edged
lower in 1993, with the rise in prices
over the four quarters of the year
amounting to only 23A percent. The performance of the U.S. economy stood in
sharp contrast to the continued sluggish
growth in many of the other industrial
countries and helped to buoy the tradeweighted value of the dollar on foreign
exchange markets.
The strength in spending was supported by increased borrowing by both
households and businesses. Continuing
declines in a number of interest rates,
which sparked considerable refinancing
of existing obligations, helped to trim
debt service burdens for both sectors,
undoubtedly facilitating the pickup in
borrowing and spending. Indicators of
financial stress, including loan default
rates and bankruptcy filings, took a
decided turn for the better in 1993. Borrowing by households was robust
enough to raise the ratio of debt to disposable income; business debt, held
down in part by equity issuance, declined relative to income. All told, the
debt of the nonfinancial sectors is estimated to have grown 5 percent, the same
as in 1992, as a diminution of the net
funding needs of the federal government
was about offset by the pickup in private
demand. This growth placed the debt
aggregate in the lower half of its 4 percent to 8 percent monitoring range.
The growth of M2 slowed in 1993,
albeit considerably less than the deceleration in nominal GDP. For the year, M2
advanced 1 xh percent, placing it a little
above the lower bound of its 1 percent

80th Annual Report, 1993
to 5 percent annual growth cone. M3
expanded Vi percent, the same pace as
in 1992, and a bit above the lower bound
of its 0 percent to 4 percent annual
range. The ranges had been adjusted
down by the Federal Open Market Committee during 1993. The adjustments
were technical in nature and reflected
the Committee's judgment as to the
extent of the ongoing distortions of
financial flows relative to historical patterns and of consequent increases in
velocities—that is, the ratios of nominal
GDP to money.
The special factors shaping the
growth of the monetary aggregates
included a marked preference by borrowers for capital market financing,
rather than bank loans, and a configuration of market returns that enticed investors away from the traditional financial
products offered by depositories. Bond
and stock mutual funds were the primary beneficiaries of this shift, with
inflows into such funds in 1993 setting a
new record. This continuing redirection
of credit flows has rendered the movements of the broad monetary aggregates
less representative of the pace of nominal spending than was evident in the
longer historical record. In 1993, nominal GDP grew about 5Vi percent, or
4 percentage points above the rate of
expansion of M2 and nearly 5 percentage points above that of M3. In light
of uncertainties about the relationship
between money and nominal income,
the Federal Reserve continued to rely
heavily on a variety of financial and
economic indicators in formulating
policy.
Along with the immediate economic
gains achieved in 1993 came further
progress in putting the economy on
sounder footing for the long haul. With
the slowing of price increases of recent
years, the underlying rate of inflation
has been reduced to the lowest level in a



generation. In addition, labor productivity, the ultimate source of rising living
standards, appears to be trending up at a
stronger pace than it did through much
of the 1970s and 1980s.
The prospects for sustained growth
also have been bolstered by government
actions in the areas of fiscal policy and
trade policy. In the fiscal area, steps that
were taken in 1993 have been helpful in
bringing about a decline in the federal
budget deficit and reducing the growth
of federal debt, thereby freeing up a
greater portion of the nation's limited
saving for use in financing investment
and growth. In the trade area, the nation's long-standing support of an open
world trading system was reaffirmed by
the passage of the North American Free
Trade Agreement and the agreement in
the Uruguay Round—actions that will
yield important benefits over time not
only to the United States but also to its
trading partners.
In the area of monetary policy, the
strategies pursued in recent years have
been instrumental in achieving progress
against inflation and promoting conditions favorable to economic growth. The
challenge ahead is to build on that favorable performance in an economy that
will likely be operating at higher levels
of resource utilization than it has in
recent years. With success in keeping
the economy on course toward the longrun goal of price stability, the prospects
for sustained expansion will be greatly
enhanced.
•

The Economy in 1993
The economy recorded significant gains
in 1993, lifted, as in 1992, by a surge in
activity in the latter part of the year. Job
creation picked up, and the unemployment rate fell appreciably. Inflation continued to trend lower.
The rise in real gross domestic product over the year amounted to about
3% percent, according to preliminary
data from the Department of Commerce.
For a second year, the growth of activity
was propelled chiefly by rapid gains in
the investment outlays of households
and businesses. Households boosted
their purchases of homes and motor
vehicles considerably, and spending for
household durables also rose rapidly.
Business investment in computers continued to grow at an extraordinary pace
in 1993, and outlays for other types of
capital equipment strengthened. Investment in nonresidential structures, which
had gone through a protracted decline in
the latter part of the 1980s and early
1990s, rose moderately. Bolstered by the
gains in these sectors, the four-quarter
rise in the final purchases of households
and businesses amounted to 5 percent in
real terms in 1993, matching the large
1992 rise. Not since the 1983-84 period
had private final purchases exhibited a
comparable degree of strength.
The increase in private spending in
1993 was augmented by a pickup in the
spending of state and local governments,
especially for construction. By contrast,
real federal purchases of goods and
services—the part of federal spending
that is included in GDP—fell sharply, as
outlays for national defense continued
to trend lower. The federal budget deficit declined somewhat in fiscal 1993,
but the combined deficit in the operating



and capital accounts of state and local
governments increased further.
Growth of the economy continued to
be significantly influenced in 1993 by
the changing patterns of transactions
with foreign economies. The weakness
of activity in a number of foreign countries that are major trading partners of
the United States tended to limit the
gains in U.S. exports of goods and services. At the same time, a significant
portion of the rise in domestic spending
in this country continued to translate
into rapid increases in imports. Net
exports of goods and services thus fell
for the second year in a row, after a run
of several years in which real export
growth had outpaced the growth of real
imports by a considerable margin.
The CPI rose 2.7 percent over the
four quarters of 1993, after increases
of about 3 percent in both 1991 and
1992. Price increases were damped last

Chanee in Real GDP
Percent, annual rate

I
1989

1990

1991

1992

1993

The data are seasonally adjusted and come from the
Department of Commerce; they are measured in terms of
1987 dollars.

80th Annual Report, 1993
year by falling oil prices, near-stable
prices for non-oil imports, and a further
rise in labor productivity, which held
down production costs in the domestic
economy.

The Household Sector
Consumer spending recorded a second
year of brisk growth in 1993. Support
for the rise in expenditures came from
declines in interest rates and moderate
increases in real incomes. Household
balance sheets continued to strengthen
in 1993 and debt servicing burdens
diminished, easing the financial strains
that had inhibited spending earlier in the
1990s.
In real terms, the 1993 advance in
personal consumption expenditures
(fourth quarter to fourth quarter)
amounted to about 3lA percent. After
surging in late 1992, growth of real outlays slowed in the first quarter of 1993.
Whatever tendency there may have been
for a "payback" after a period of unusually rapid growth was reinforced by a
severe late-winter storm on the East
Coast, which temporarily hurt retail
sales. Thereafter, spending proceeded at
a relatively strong pace over the remaining three quarters of the year.
Consumer expenditures for motor
vehicles increased 6 percent in real
terms over the four quarters of 1993,
after rising 9 percent the previous year.
The advance in expenditures continued
to come partly from the replacement
needs of individuals who had put off
buying vehicles earlier in the 1990s, as
well as from growth in consumers'
desired stock of vehicles. Increasingly,
buyers have opted for vans, light trucks,
and other vehicles instead of cars, and
annual sales of these vehicles in 1993
reached the highest level on record. Car
sales also rose, but they remained well
below previous highs.



Expenditures for a number of other
types of durable goods also rose rapidly
in 1993. Outlays for furniture and appliances scored further hefty gains, in conjunction with sharp increases in sales of
new and existing homes. Consumer purchases of home computers and other
electronic equipment remained on a
steep uptrend. In total, outlays for durable goods other than motor vehicles
increased more than 9 percent over the
year, after a rise of 10 percent in 1992.
Other types of consumer expenditures,
which typically exhibit less cyclical
variation than do outlays for durables,
rose moderately, on balance, during
1993. Consumer purchases of nondurable goods increased about 2 percent,
after a jump of more than 3V£ percent in
1992. Spending for services rose nearly
3 percent during 1993, an increase of
roughly the same magniture as that of
the previous year.
Real income continued to advance in
1993, although its trend was masked by
tax considerations that caused a sizable
volume of bonuses that would have been

Change in Real Inco*~~ "^
Percent, annual rate

I
1989

is

1990

1991

1992

1993

The data are seasonally adjusted and come from the
Department of Commerce; they are measured in terms of
1987 dollars.

The Economy in 1993
paid to workers in early 1993 to be holds have been holding part of their
shifted into the latter part of 1992. saving in the form of consumer duraAbstracting from these shifts in timing, bles, which, at the time of purchase, are
the beneficial effects of continued eco- counted fully as consumption in the
nomic expansion showed through in national accounts, but which in reality
most categories of income, much as they will yield households a flow of services
had in 1992. Wage and salary accruals, a over time.
measure of income as it is earned rather
Household wealth rose further in
than as it is disbursed, rose about 1993. As in 1992, the total nominal
AlA percent in nominal terms over the value of household assets increased at a
four quarters of 1993, considerably out- pace moderately faster than the rate of
pacing the rate of inflation for the sec- inflation. Large increases in stocks and
ond year in a row. Further gains also bonds boosted the nominal holdings of
were reported over the course of 1993 in financial assets, more than offsetting a
dividends and in the income of propri- reduction in the aggregate holdings of
etors, both farm and nonfarm. Transfer deposits and credit market instruments.
payments, which tend to vary inversely The nominal value of tangible assets
with the state of the economy, slowed in was lifted by heavy investment in con1993 after rising at rates of 10 percent or sumer durables and residential strucmore in each of the four previous years. tures and by a rise in the average price
Interest income, which had declined on of existing residential properties. With a
net in 1991 and 1992, edged up slightly jump in the growth of consumer credit
over the four quarters of 1993. Because and a slight pickup in the growth of
of the shift in timing of bonuses, growth home mortgage debt, household liabiliof real disposable income in 1993 was ties rose somewhat faster than in 1992.
noticeably less than in 1992. However, Nonetheless, net worth appears to have
the cumulative gain over the two-year increased in both real and nominal
period was about 6 percent, a clear terms. The incidence of financial stress
step-up from the performance of the among households diminished further in
three previous years, when real income 1993, as delinquency rates on various
growth had averaged less than 1 percent types of household debt continued to
per year.
decline, in some cases to the lowest
The personal saving rate—measured levels since the first half of the 1970s.
as the percentage of nominal after-tax According to survey data, households'
income disbursements that are not used own assessments of their financial situafor consumption or other outlays— tions improved, on net, with some surdeclined nearly 2 percentage points, on vey readings the most upbeat in more
net, over the course of 1993. However, than three years.
the saving rate in late 1992 had been
Residential investment increased
temporarily elevated by the aforemen- nearly 8 percent in real terms over the
tioned speedup of bonus payments. four quarters of 1993, building on the
Looking through that blip of late 1992, a 18 percent rise of 1992. As in 1992,
downward drift still is evident in the most of the advance came from
saving rate from mid-1992 to the end of increased construction of new single1993. Such a pattern is not uncommon family homes. The construction of
when economic recovery is taking hold multifamily housing continued to be
and consumer purchases of durable adversely affected by a persistent overgoods are rising rapidly. In effect, house- hang of vacant rental units.




8

80th Annual Report, 1993

In the single-family market, the impetus for activity continued to come
mainly from declines in mortgage interest rates, which by autumn had dropped
to their lowest levels in more than two
decades. Fairly sharp declines in mortgage interest rates took place early in
the year, but the effect on housing activity was apparently short-circuited for
a time by a number of influences. A
severe blizzard on the East Coast in
mid-March temporarily waylaid the
start-up of construction in that region,
and a huge run-up in lumber prices during late winter also may have discouraged some new construction for a while.
Concerns about the possible loss of jobs
perhaps continued to deter some potential homebuyers. Other buyers may simply have been holding back, waiting to
see how far rates eventually would fall.
In any event, the effects of the drop in
mortgage rates began to show through
with greater force over the summer and
fall, and considerable strength had
emerged by year-end in all the major
indicators of single-family housing
activity. Sales of existing homes rose
without interruption from April on. By
the fourth quarter they had climbed to
the highest level on record (the series
Private Housing Starts
Millions of units, annual rate

0.5

1987

1989

1991

1993

The data are seasonally adjusted and come from the
Department of Commerce.




goes back to 1968). Although sales of
new homes proceeded more erratically
from month to month, their increase
over the four quarters of the year
amounted to nearly 25 percent. Housing construction also strengthened. The
number of single-family starts increased
about 18 percent over the year, reaching
the highest quarterly level since 1979.
According to survey data, consumers'
assessments of home-buying conditions
continued to be very upbeat at year-end,
as were builders' ratings of market
conditions.
Activity in the multifamily housing
market remained depressed in 1993. In
the mid-1980s, tax incentives and the
relatively easy availability of credit
encouraged overbuilding in many
locales. The proportion of multifamily
rental units that were vacant soared and
has remained high even as the construction of multifamily units has dwindled.
Starts of these units reached the lowest
levels on record early in 1993, and
they picked up only slightly thereafter,
despite restoration of tax credits for lowincome units.

The Business Sector
The year saw appreciable gains in most
important barometers of business activity. Output of the nonfarm business
sector increased more than 4 percent,
slightly more than during 1992. Profits
rose further, business balance sheets
continued to strengthen, and capital
spending surged.
In the industrial sector, production
rose 4lA percent, the largest advance in
six years. The production gain was at
least moderate in each quarter, and in
the final quarter it was quite large—on
the order of 63A percent at an annual
rate. Output of business equipment held
to a strong uptrend throughout the year,
as did the production of materials that

The Economy in 1993
are used as inputs in the durable goods
industries. The output of construction
supplies rose moderately in the first half
of the year and at a stronger pace in the
second half. Motor vehicle assemblies
also rose appreciably, with strength
early in 1993 and in the year's final
quarter more than offsetting a stretch of
sluggishness through the middle part
of the year. By contrast, output of consumer goods other than motor vehicles
rose only a small amount, and production of defense and space equipment fell
9Vi percent further, extending a downward trend that began in 1987.
The amount of spare capacity in the
industrial sector continued to diminish.
The utilization rate in December,
83.0 percent, was up more than 2 percentage points from the level of a year
earlier and was at the highest level since
the summer of 1989. In manufacturing, capacity use in primary-processing
industries was above its long-run average throughout 1993, and the rate
of utilization in advanced-processing
industries had moved up almost into line
with its long-run average by year-end.
Corporate profits, which had surged
in 1992, increased an additional 6V2 percent over the first three quarters of 1993
and appear to have risen further in the
year's final quarter. Financial institutions in general continued to benefit in
1993 from the persistence of a relatively
wide margin between their cost of funds

and the interest rates on their assets;
insurers' profits suffered less drag from
natural disasters than in 1992, the year
of hurricane Andrew. The profits of nonfinancial corporations moved up slightly
further over the first three quarters,
boosted by the rise in the volume of
output over that period. Operating
profits per unit of output held fairly
steady, close to the high level reached in
the final quarter of 1992. Although nonfinancial corporations raised their prices
by only a small amount over those three
quarters, they were able to maintain unit
profit margins through continued tight
control over costs. Gains in productivity
restrained the rise in unit labor costs,
and net interest expenses per unit of
output continued to edge lower.
Business fixed investment increased
15 percent in real terms over the four
quarters of 1993, after a rise of IVi percent in 1992. A spectacular increase in
outlays for office and computing equipment accounted for about half of the
1993 gain. Business expenditures for
these items increased more than 25 percent in nominal terms over the year, the
steepest annual gain since 1984, and the
rise in real terms was greater still. The
latest computers are far more powerful
than those that were at the forefront only

Corporate Profits before Taxes
Percentage of nominal product

Industrial Production
Index, 1987 = 100

1987

1989

1990

1991




1992

1993

1989

1991

1993

Profits of nonfinancial corporations from domestic
operations, with adjustments for inventory valuation and
capital consumption, divided by GDP of nonfinancial
corporate sector.

10

80th Annual Report, 1993

a few years ago, and highly competitive
market conditions have kept prices on
a downward course. The many businesses eager to boost labor productivity
and overall operating efficiency provided a huge market for the new
products.
Excluding office and computing
equipment, outlays for capital equipment increased about MVi percent in
real terms during 1993, the biggest rise
in ten years. Business expenditures for
motor vehicles advanced about 14 percent, as investment in trucks, which had
strengthened considerably in 1992,
climbed further. Factories producing
heavy trucks were operating at or near
full capacity at year-end. Spending for
communication equipment also advanced sharply, as did real outlays for
many other types of machinery and
equipment. Diminished slack in many
industries and expectations of continued
business expansion were among the
chief factors giving rise to the increase
in these outlays. Internal cash flow provided a ready source of finance.
Commercial aircraft was the most
notable exception to the general upward
trend in equipment spending. Outlays
for aircraft plunged in the second half of
1993, and survey data pointed to continued weakness in 1994. The reductions in
outlays had been foreshadowed by earlier declines in new orders, and producers of aircraft have been scaling back
their operations for some time.
Business investment in structures rose
about 5Vi percent, the first annual
increase since 1989. Declines in the
intervening years had cumulated to
about 18 percent. Within the sector,
divergent trends were evident once
again. Outlays for the construction of
office buildings fell for the sixth consecutive year, to a level two-thirds below
the peak of the mid-1980s. Several indicators suggested, however, that the



worst of the decline in office construction might be over. The rate at which
real outlays fell in 1993 was much
smaller than the declines of the three
previous years. In addition, the national
vacancy rate for office buildings, while
still quite high, moved down somewhat;
the improvement was most noticeable
in suburban areas, where vacancy rates
previously had been the highest. The
value of contracts for construction of
office buildings firmed over the course
of the year.
Investment increased for most other
types of structures. Outlays for industrial structures, which had declined
sharply in 1991 and 1992, rose about
9Vi percent, on net, over the four quarters of 1993. Outlays for commercial
structures other than office buildings
increased sharply for a second year; by
the fourth quarter, they had retraced
nearly half of the steep decline that took
place during 1990 and 1991. Investment
in drilling also rose as incentives from
rising prices for natural gas apparently
offset the disincentives associated with
falling oil prices. Spending for other
types of structures rose by a small
amount in the aggregate.

Change in Real Business Fixed Investment
Percent, annual rate

20

10

+
0
10

1989

1990

1991

1992

1993

The data are seasonally adjusted and come from the
Department of Commerce; they are measured in terms of
1987 dollars.

The Economy in 1993
Swings in business inventory investment played only a small role in the
1993 economy. Inventory accumulation
in the nonfarm business sector picked
up in the early part of the year but
slowed thereafter. Accumulation for the
year as a whole was of only modest
proportions, especially when compared
with the rates of buildup seen during
previous business expansions. Conceivably, the usual cyclical patterns in inventory change have been tempered to some
degree by the more sophisticated inventory control procedures that have
become widespread in the business sector in recent years. Toward year-end,
inventories appeared to be comfortably
aligned with sales in most industries and
were lean in some. Most notable among
the latter were the stocks of motor vehicles, which were drawn down by production delays through the summer and
strength in sales through the latter part
of the year. In view of those developments, producers of motor vehicles
scheduled a hefty rise in production for
the first quarter of 1994.
In the farm sector, inventories declined. Stocks were pulled down by
weather-related reductions in crop output, especially in parts of the Midwest,
where the worst flood of the century
took millions of acres out of production

\\

and cut deeply into yields of the crops
that were planted. Inventories of some
major field crops tightened markedly.
Farmers whose crops were hurt by
weather suffered income losses in 1993,
while the producers whose crops were
not hurt benefited from rising prices.
Total net farm income appears to have
held in the range of other recent years,
at a level well within the extremes of
either boom or bust.
Trends in business finance remained
favorable for sustained expansion. Business expenditures for fixed capital and
inventories were financed almost entirely with funds generated internally,
and, in the aggregate, the relatively little
external financing that did take place
came partly from positive net issuance
of equity. Debt rose slowly, both in
absolute terms and relative to the rapid
pace seen in the 1980s. With little
growth in debt and interest rates down,
the portion of business cash flow required for the repayment of principal
and interest declined further.

The Government Sector
Federal purchases of goods and services, the portion of federal outlays that
are included in GDP, fell 6V2 percent
in real terms over the four quarters of
1993. Real outlays for national defense,

C
Billions of 1987 dollars, annual rate

Change in Real Federal Purchases
Percent Q4 to Q 4

30
15
+
0
15

1989

1990

1991

1992

1993

Total nonfarm sector. The data are seasonally adjusted
and come from the Department of Commerce.




1989

1990

1991

1992

1993

The data are from the Department of Commerce.

12

80th Annual Report, 1993

which have been trending down since
1987, declined nearly 9 percent. Nondefense outlays fell slightly, on net,
after rising fairly rapidly in each of the
three previous years. The level of real
federal purchases in the fourth quarter
of 1993 was down more than 10 percent
from the peak of six years earlier. Real
defense purchases dropped about 20 percent over that six-year stretch.
Total federal outlays, measured in
nominal terms in the unified budget,
rose 2 percent in fiscal 1993, the smallest increase in six years. Outlays for
defense fell about 2Vi percent in nominal terms, and net interest payments
were down slightly—the first decline in
that category since 1961. Net expenditures for deposit insurance, which had
been slightly positive in 1992, were negative in fiscal 1993, held down in part
by delays in funding the activities of the
Resolution Trust Corporation. Federal
spending for income security slowed
from the rapid pace of 1991 and 1992,
as economic expansion led to a reduction in outlays for unemployment
compensation and a less rapid rate of
increase in outlays for food stamps. The
growth in federal expenditures for Medicare and other health programs also
slowed, but the rate of increase continued to exceed the growth of nominal
GDP by a considerable margin.
The growth of federal receipts picked
up a bit in fiscal 1993, to a pace roughly
matching that of nominal GDP growth.
Combined receipts from individual
income taxes and social insurance taxes,
which account for about 80 percent of
total federal receipts, rose about 5Vi percent, after a gain of 3 percent in fiscal 1992. Receipts from corporate
income taxes, which account for about
half of the remaining receipts, increased
more than 17 percent in fiscal 1993,
after only a small gain in the previous
fiscal year.



Taken together, the slowing of federal
outlays and the pickup of receipts led to
a decline in the size of the federal budget deficit in fiscal 1993, after three
years of sharp increases. The 1993 deficit amounted to $255 billion and was
equal to 4.0 percent of nominal GDP.
The previous year, the deficit had
amounted to $290 billion and was equal
to 4.9 percent of nominal GDP. In fiscal
1989, toward the end of the last economic expansion, the size of the deficit
relative to nominal GDP had reached a
cyclical low of 2.9 percent.
In the state and local sector, receipts
moved up about in step with the growth
of nominal GDP in 1993, but state and
local expenditures rose still faster. In
nominal terms, the increases in spending
cumulated to a rise of about 7 percent
over the four quarters of the year. State
and local transfer payments to persons
slowed from the extraordinary rates of
increase seen in the early 1990s, a reflection of improvement in the economy
and intensified efforts among state and
local governments to tighten control
over these types of outlays. Nonetheless, the rate of rise in these payments
remained above 10 percent in 1993.
Nominal purchases of goods and services rose moderately but at a pace
somewhat faster than that of 1992. The

Federal Budget Deficit
Billions of dollars

l
1989

an

1990

1991

1992

300

1993

The data are for fiscal years. They are on a unified
budget basis and are from the Department of the
Treasury.

The Economy in 1993

13

deficit in the combined operating and terms, the same as in 1992. Employment
capital accounts of state and local gov- in the state and local sector again grew
ernments widened further during the slowly by historical standards, and
first three quarters of the year, from an increases in hourly compensation were
end-of-1992 level that already was quite relatively small. State and local pursizable; in the fourth quarter, the deficit chases of goods rose moderately in real
apparently shrank, but not by enough to terms.
fully retrace the earlier increases.
In real terms, purchases of goods and
Labor Market Developments
services by state and local governments
!
increased nearly 3 /2 percent over the The labor market strengthened in 1993,
four quarters of 1993, after gains of as economic expansion began to transabout l!/2 percent per year in both 1991 late more forcefully into increased job
and 1992. State and local expenditures creation. Payroll employment, a meafor structures rose almost 12 percent in sure of jobs that is derived from a
real terms over the year, according to monthly survey of establishments, rose
preliminary data. Some of the spending more than 2 million over the twelve
went for the repair or replacement of months of the year. Although this gain
structures that had been damaged in was only moderate when compared with
recent natural disasters, such as the increases in many years of the 1970s
summer flooding in the Midwest. In and 1980s, it was about twice the
addition, the efforts of state and local increase of 1992.
governments to cope with the needs
Hiring picked up in most major secof growing populations prompted tors in 1993. The number of jobs in
increased investment in schools, high- retail and wholesale trade increased
ways, and other state and local facilities. more than one-half million, the largest
Low interest rates probably convinced annual rise since 1988. The number of
state and local officials to undertake jobs in finance, insurance, and real
more of this new construction in 1993 estate picked up a bit, after a five-year
than they would have otherwise. Growth period that had encompassed three years
in other types of state and local pur- of sluggish growth and two years of
chases continued to be fairly restrained. unprecedented reductions. Construction
Employee compensation, which makes employment rose 200,000, after three
up nearly two-thirds of state and local years of sharp declines.
purchases, rose about 1 lA percent in real
The services industry added about
1.2 million new jobs in 1993. More than
one-third of the increase came at firms
Change in Real State and Local Purchases
that supply services to other businesses;
Percent, Q4 to Q4
in that group, the most rapid growth by
far was in personnel supply firms—
companies that essentially lease the services of their employees to other businesses, usually on a temporary basis.
Many companies requiring additional
labor apparently have been attracted by
the flexibility of such arrangements, as
well as by cost advantages, at least over
1989
1990
1991
1992
1993
the short run.
The data are from the Department of Commerce.



14

80th Annual Report, 1993

Elsewhere in the services industry,
health services continued to generate
a substantial number of new job opportunities in 1993, even though the gain
was not quite as large as those of other
recent years. Small to moderate employment gains also were reported during
the year at firms supplying a wide variety of other types of services.
Manufacturing employment continued to decline in 1993, but at a slower
pace than in any of the three previous
years. Although manufacturers boosted
output considerably, the gain was
achieved mainly through another sizable
rise in factory productivity. Labor input
in manufacturing reportedly increased
only slightly and only in the form of
a lengthened workweek rather than
increased hiring. By the latter part of the
year, the average workweek in manufacturing had reached 41% hours, the longest since World War II. Hiring did pick
up late in the year, however. Reliance
by manufacturers on workers from personnel supply firms reportedly has
increased in recent years; because these
workers are carried on the payrolls of
the personnel firms, actual labor input in
manufacturing in 1993 was greater than
the data indicate.
Like the survey of establishments, the
monthly survey of households showed
significant improvement in labor market
conditions in 1993. The measure of
employment that is derived from this
survey rose 2Vi million over the twelve
months of 1993, after an increase of
about Wi million during the previous
year. At the same time, the number of
unemployed persons fell more than
1 million over the course of 1993, and
the civilian unemployment rate declined
nearly a full percentage point, to a yearend level of 6.4 percent.
Growth of the civilian labor force—
the sum of persons who are employed
and those who are looking for work—



Labor Market Conditions
Millions of jobs, annual rate
Net change, total nonfarm payroll employment

Percent
Civilian unemployment rate

Percent, Dec. to Dec.
Change in employment cost index
Total compensation, private industry

|jg jgjjg gg| | n

1111
111
Percent, Q4 to Q4

Change in output per hour
Nonfarm business sector

1987

1989

1991

The data are from the Department of Labor.

1993

The Economy in 1993
was relatively sluggish again in 1993.
The rise over the four quarters of the
year was 1.2 percent, only slightly faster
than the rate of growth of the workingage population. Over the four years
ended in 1993, labor force growth averaged less than 1 percent per year, and
the labor force participation rate edged
down slightly, on net. The number of
individuals who desired work but did
not seek it because of a perceived lack
of job openings changed little over the
course of 1993. In addition, the number
of individuals outside the labor force
and not wanting a job rose about 0.8 percent during the year, pulled up, in part,
by a sharp increase in the number of
retirees. Workers whose careers were
cut short by business restructurings and
defense cutbacks probably augmented
the normal flow of workers into retirement. Growth in the number of persons
not wanting a job because of attendance
in school also increased during 1993. To
the extent that these individuals have
been building their job skills, their lack
of current participation in the labor force
could turn into a positive factor for the
economy over the longer run.
The slowing of nominal increases in
hourly compensation came to a halt in
1993. The employment cost index for
private industry—a labor cost measure
that includes wages and benefits and
covers the entire nonfarm business
sector—increased 3.6 percent from
December 1992 to December 1993,
about the same as the rise of the previous year. Wages rose 3.1 percent over
the year, V2 percentage point more than
in 1992, and the growth of benefits
slowed only a little, to 5.0 percent. Compensation gains picked up for workers in
some white-collar occupations, notably
sales workers and managers. Slightly
bigger gains than in 1992 also were
realized by workers in some blue-collar
occupations. By contrast, the rate of



15

compensation growth held steady in
service occupations and edged down in
some blue-collar occupations in which
fewer specialized skills are required.
The overall rise in hourly compensation
during 1993 exceeded the rise in consumer prices by about 1 percentage
point. Hourly wage gains more than kept
pace with inflation, and the value of
benefits provided to workers by their
employers continued to rise rapidly in
real terms.
Labor productivity continued to
increase in 1993, albeit less rapidly than
in the earlier stages of the cyclical expansion. According to preliminary data,
output per hour in the nonfarm business
sector rose 1.9 percent during the year,
after increases of 2.2 percent in 1991
and 3.6 percent in 1992. Part of the gain
over this three-year period is no doubt a
reflection of normal cyclical processes.
The data, however, also seem to suggest
that the longer-run trend in productivity
is tilting up a bit more sharply than in
the 1970s and 1980s, a result of heavy
investment by business in new information technologies, the rising skill of
workers in exploiting those technologies, and, perhaps, the more quiescent
inflation environment of recent years.
With gains in labor productivity offsetting part of the 1993 increase in compensation per hour, unit labor costs in
the nonfarm business sector increased
just 0.9 percent, the smallest rise in ten
years.
Price Developments
Inflation edged down a bit further in
1993. The 2.7 percent rise in the CPI
over the four quarters of the year was
the smallest increase since 1986, and the
four-quarter rise of 3.1 percent in the
CPI excluding food and energy was the
smallest increase in that measure in
more than twenty years. At the same

16

80th Annual Report, 1993

time, however, progress toward lower
inflation was sporadic during the year,
and the slowing of price increases was
less widespread than it had been in
1992. Scattered upward price pressures
showed up in the commodity markets
from time to time during 1993; late in
the year these increases became more
widespread.
The patterns of price change for items
other than food and energy were more
checkered in 1993 than they had been in
1992, a year when deceleration was
widespread among both commodities
and services. The CPI for commodities
other than food and energy rose only
1.6 percent over the four quarters of
1993, 1 percentage point less than in
1992. Within this category, the CPI for
tobacco fell 5 percent, after many years
of large increases, and the price of
apparel rose less than 1 percent, an even
smaller increase than in 1992. By contrast, the prices of motor vehicles moved
up somewhat faster than in 1992; the
price rise for trucks was the largest in
recent years.
The CPI for non-energy services
increased 3.8 percent over the four quarters of 1993, about the same as the rise
during the previous year. The index for
medical care services slowed for the
third year in a row, but airfares rose
sharply for a second year. Price
increases for other services generally
were little different from those in 1992,
with a small deceleration for some items
and a small acceleration for others.
Food prices picked up in 1993. The
consumer price index for food increased
2.7 percent over the four quarters of the
year, an acceleration of about 1 percentage point from the pace of the two previous years. Because price increases in
those two previous years had been held
down, in part, by unusually favorable
supply developments in agriculture,
some pickup of food price inflation



might have been in store for 1993 even
had weather conditions been no worse
than average. In the event, the weather
was unusually bad. Severe winter
weather disrupted livestock production
early in the year; drought in the eastern
states hurt crop production in that region
during the summer; and flooding of
historic severity in the Missouri and
Mississippi river basins cut deeply into
the production of major field crops. At
retail, effects of the various supply disruptions showed through in the prices of
meats, poultry, and fresh produce. Price
increases for other foods, which represent by far the larger share of Votal food
in the CPI, showed almost no accelera-

Change in Prices
Percent, Q4 to Q4
Consumer

Consumer excluding food and energy

iiiiin

1987

1989

1991

1993

Consumer price index for all urban consumers. The
data are seasonally adjusted and are from the Department
of Labor.

The Economy in 1993
tion in 1993; most of the value added in
production of these other foods comes
from nonfarm inputs.
Consumer energy prices declined
0.4 percent over the four quarters of
1993 after rising only moderately in
1992. With world oil production outstripping demand, crude oil prices fell
sharply during the last three quarters of
1993, to levels in December that were
about 25 percent below those of a year
earlier. Gasoline prices, after increasing
in the early part of 1993, turned down in
March and fell for six additional months
thereafter. The string of declines was
interrupted in October when federal
gasoline taxes were raised, but they
resumed in November and continued
through year-end. Average pump prices
for the fourth quarter were about 4 percent below the level of a year earlier.
Fuel oil prices fell about 3 percent over
the same period. Prices of the service
fuels—electricity and natural gas—
increased during 1993. The rise for electricity amounted to 1.7 percent, slightly
less than the increase posted in 1992.
Natural gas prices rose nearly 5 percent
for the second year in a row; consumption of natural gas has picked up in
recent years, after trending lower
through much of the 1970s and a large
part of the 1980s.
The producer price index for finished
goods, which includes both consumer
goods and capital equipment and covers
only the prices received by domestic
producers, increased just 0.2 percent
over the four quarters of 1993. An identical increase was reported in the PPI for
finished goods other than food and
energy; the increase in this measure
was the smallest in its history, which
goes back to 1974. As at retail, price
increases for these domestically produced goods were held down, in part, by
the sharp drop in prices of tobacco products. More broadly, competition from



17

imports and further increases in labor
productivity in manufacturing were
important elements in pricing restraint.
The prices of intermediate materials
excluding food and energy rose 1.5 percent over the four quarters of 1993, a
small step-up from the pace of the previous year.
In the markets for raw commodities
and other primary inputs, scattered
upward price pressures emerged from
time to time during the first three quarters of 1993, and fairly widespread
increases were reported in the year's
final quarter. The producer price index
for crude materials excluding food and
energy thus moved up sharply over the
year, by more than 10 percent in all. The
weight of these inputs in GDP is quite
small, however, and in the absence of
more general cost pressures, increases in
their prices usually do not impart much
upward thrust to the prices of finished
goods.
Inflation expectations, as reported in
various surveys of consumers and other
respondents, flared up for a time during
1993 but retreated in the latter part of
the year. The most pronounced swing in
expectations was reported in the survey
conducted by the University of Michigan Survey Research Center, in which
the rate of price increase expected one
year into the future moved up from an
average of 3.8 percent in the final quarter of 1992 to an average of 4.7 percent
in the third quarter of 1993; the rise was
fully reversed in the fourth quarter, however. As in 1992, the surveys continued
to show one-year expectations of price
change running somewhat higher than
the actual increases of recent years.
Longer-run expectations of price change
remained higher still; for interviews
conducted in the second half of 1993,
the Survey Research Center's series on
average inflation rates that are expected
over a five- to ten-year horizon ranged

18

80th Annual Report, 1993

from AV2 percent to 5 percent, down
only slightly from the average rates
reported earlier in the 1990s.
•




19

Monetary Policy and Financial Markets in 1993
Financial repair continued in 1993 amid
increasing signs that borrowers and
lenders were more comfortable with
their balance sheet positions. Households, in particular, and firms, to a lesser
extent, stepped up their borrowing as
the year progressed. Depository institutions, for their part, were sufficiently
encouraged by the stronger economy
and the improvement in their own financial conditions to ease the terms and
conditions of credit for businesses and
households.
N o n e t h e l e s s , with efforts to
strengthen financial positions continuing, financing remained concentrated in
capital markets, largely bypassing banks
and thrift institutions. In part spurred by
the higher returns available in those
markets, investors found bonds and
stocks to be more attractive alternatives
than deposits, and flows into bond and
stock mutual funds were at record
levels. As a consequence, the monetary
aggregates continued to grow quite
slowly relative to the expansion of nominal income. Recognizing the ongoing
redirection of financial flows relative
to historical norms, the Federal Open
Market Committee in February and
July 1993 lowered the annual ranges for
M2 and M3 for 1993 in two technical
adjustments totaling IV2 percentage
points for M2 and 1 percentage point for
M3. Uncertainty about the extent and
duration of the unusual change in
velocity meant that growth in the aggregates could not be relied upon to guide
changes in reserve conditions, and the
Committee continued to employ a wide
variety of information about financial
and economic conditions for this
purpose.



In assessing the incoming information, the Federal Reserve judged that no
change was needed in reserve and
money market conditions during 1993
to sustain the economic expansion without engendering inflationary pressure.
With money market rates remaining in a
range not much, if at all, above the core
rate of inflation, however, the members
of the Committee believed that a tightening in reserve conditions at some
point would likely be needed to avoid
pressures on capacity and a pickup in
inflation.
The Implementation
of Monetary Policy
Most short-term interest rates ended
1993 where they had begun the year, at
quarter-century lows that had resulted
from the substantial easing in reserve
conditions engineered by the Federal
Reserve from 1989 to 1992. The rate
charged for adjustment borrowing at the
discount window remained at 3 percent,
and federal funds traded around the
same rate. Despite the stability of shortterm interest rates, longer-term interest
rates fell as much as 1 percentage point
over the course of 1993, to settle at
levels not seen on a sustained basis since
the late 1960s. Investors apparently
were encouraged by the prospects for
low inflation and reduced federal budget deficits. Helped by the decline in
long-term rates and by brighter earnings
reports, the stock market enjoyed strong
gains.
In February 1993, the time of the first
Committee meeting of the year, incoming information suggested that the economy had exhibited considerable strength

20

80th Annual Report, 1993

in the fourth quarter of 1992. Final estimates for that quarter put the increase in
real gross domestic product at a 53A percent annual rate and the growth of nominal GDP in excess of 9 percent. Final
demand was seen to be strong, paced by
household consumption and business
investment. With slack relative to
capacity still considerable—the unemployment rate averaged IV* percent—
upward price pressures were not perceived to be near at hand. The expansion of the monetary aggregates had
faltered around the turn of the year, but
special factors—importantly including a
decline of mortgage prepayments that
constricted the level of transactions
deposits—seemed to account for some
of the weakness. Against this backdrop,
it appeared to the members of the Committee that unchanged reserve conditions would support economic expansion and still be consistent with further
declines in inflation and inflation expectations. Moreover, the situation did not
seem to call for a presumption of the
likely direction of any intermeeting
adjustment in reserve conditions; such a
symmetric directive had been issued to
the Account Manager of the System
Open Market Account at the end of the
December 1992 meeting as well.
Investor confidence in the longer-term
prospects in capital markets apparently
strengthened in the weeks that followed,
in part because of a growing perception
that significant progress in reducing the
path of future budget deficits might be
in the offing. By the time of the March
Committee meeting, bond yields had
fallen appreciably, touching levels last
observed in 1973, with the largest
declines posted at the longest maturities.
Indicators of real activity suggested
some slowing from the torrid fourthquarter pace, but, in labor markets, payroll employment had strengthened and
the unemployment rate had moved down



further. Readings on inflation sparked
some concern about the potential for a
buildup of inflationary momentum. With
fundamental forces still suggesting further disinflation, however, and with
those concerns not evident in capital
market indicators, or in the exchange
value of the dollar, which remained relatively steady, the Committee retained its
symmetric directive.
In May, Committee members were
confronted with ambiguous indicators of
economic activity, prices, and the financial aggregates, which were all made
more confusing by a spell of bad
weather that had distorted somewhat the
seasonal patterns of spending and production. As for the prices of goods and
services, many analysts thought that the
major indexes were distorted by difficulties in seasonal adjustment, but data
releases showing a variety of labor compensation and price indexes on the high
side of investor expectations still roiled
financial markets. Slack in the economy
remained appreciable, which weighed

Percent

12

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
against any pickup in inflation, but inflation expectations were in danger of

21

ratcheting higher, with possible adverse
consequences for inflation itself. Mean-

Reserves. Money Stock, and Debt Aggregates
Annual rate of change in percent, based on seasonally adjusted data except as notedl
1993
Item

1990

1991

1992
Year

Depository institution reserves2
Total
Nonborrowed
Required
Monetary base 3
Concepts of money 4
Ml
Currency and travelers checks .
Demand deposits
Other checkable deposits
M2
Non-Mi components
MMDAs, savings, and 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 nonflnancial sector debt .
Federal
Nonfederal

Q2

Q3

Q4

2.2
2.4
1.8
9.4

8.7
9.1
9.4
8.2

20.1
20.3
20.3
10.4

12.3
12.3
12.6
10.4

9.3
9.5
8.7
9.5

10.8
10.6
12.4
10.2

12.4
10.9
12.3
10.6

14.6
16.0
14.6
9.9

4.2
11.0
-.7
3.5

7.9
7.9
3.2
12.3

14.3
9.1
17.7
15.6

10.5
9.9
13.4
8.4

8.3
9.3
7.0
8.6

10.7
10.0
16.0
6.5

12.0
10.0
15.9
10.0

9.4
8.9
12.2
7.3

4.0
4.0

2.9
1.2

1.9
-2.4

1.4
-J2.3

-1.3
-5.2

2.2
-1.4

2.6
-1.5

2.1
-1.2

2.8

.9

-2.4

-2.9

-4.6

-2.3

-2.4

-2.2

12.0
2.3

4.6
-3.8

-4.2
4.8

-1.8
9.7

-7.7
-15.3

.1
-5.6

-1.8
30.6

2.1
29.9

1.7
-7.1
-9.7

1.2
-6.0
-12.8

.5
-6.3
-15.7

.6
-3.5
-6.8

-3.2
-12.8
-17.4

2.1
1.6
-2.1

1.1
-6.6
-7.0

2.4
3.9
-1.4

21.5
-12.4
-13.6

33.4
-20.2
-10.7

18.4
8.3
-22.6

-5.4
16.9
-1.1

-17.6
9.4
-2.6

-2.2
37.2
7.7

-10.4
24.3
-32.8

8.8
-5.8
25.6

6.6
10.2
5.5

4.6
11.3
2.6

5.0
10.7
3.1

5.0
8.4
3.7

4.0
7.6
2.7

4.5
10.4
2.4

5.7
9.2
4.5

5.2
5.5
5.1

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.




Ql

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.

22

80th Annual Report, 1993

while, the latest readings on the monetary aggregates showed a burst of
growth in early May, but tax-induced
distortions and a surge in prepayments
of mortgage-backed securities made this
information particularly difficult to
interpret. In the view of a majority of
the members of the Committee, wage
and price developments were sufficiently worrisome to warrant positioning policy for a move toward restraint
should signs of mounting inflation pressures continue to multiply. Although
they saw no immediate need to alter the
degree of reserve pressure, they agreed
that current conditions made it easier to
envisage a tightening rather than an easing over the intermeeting period, a sense
that was embodied in an asymmetric
policy directive.
In advance of the July meeting of the
Committee, the unemployment rate had
moved back up to 7 percent, and industrial production had changed little over
the preceding few months. The surge in
the monetary aggregates in May apparently had not marked a trend toward
more rapid expansion in broad measures
of money. Overall, the evidence pointed
toward a sustained economic expansion
and some ebbing of the recent upsurge
in inflationary pressures. News in that
vein, along with progress in the Congress toward adoption of a deficitreduction package, had fostered a drop
in longer-term bond yields in the days
leading up to the meeting. The durability of that improvement in market sentiment remained an open question, however. Monetary policy could be viewed
as relatively expansive in light of the
behavior of a variety of other indicators,
including the growth in narrow measures of the monetary aggregates and
reserves and the low levels of money
market interest rates in both nominal
and, in particular, real terms. In such
an environment, Committee members



agreed that it was necessary to remain
especially alert to the potential for a
pickup in inflation. As a result, the
Committee decided to retain the current
degree of restraint in the reserve market
and an asymmetric directive toward
tightening.
At the time of the August meeting of
the Committee, readings on inflation
were encouraging: Consumer prices had
changed little, and producer prices had
fallen over recent months. Data on
spending and production had a weakish
cast, and the persistence of the sluggishness in the second quarter had become
more apparent. These data releases had
bolstered investor confidence in the
prospects for continued disinflation, and
the recently passed legislation on the
federal budget offered the promise of
meaningful cuts in the deficit over the
next several years. Accordingly, longerterm yields fell about 40 basis points.

Percent

16

1982

1984 1986 1988 1990 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
Department of the Treasury.

Monetary Policy and Financial Markets
The resulting capital gains apparently
added to the allure of stock and bond
mutual funds, thereby weakening M2,
which moved up only slightly in July.
At this meeting, policymakers saw existing reserve conditions as consistent with
their goals. Moreover, the dissipation of
the inflation threat and the encouraging
downward tilt to expectations of inflation suggested to members of the Committee that the risks were more evenly
balanced than of late. As a result, the
Committee reverted to a symmetric
directive—instructions that carried no
presumption as to the direction of an
intermeeting move—which was retained
for the remainder of 1993.
In the period leading up to the September Committee meeting, the unemployment rate had edged lower, to
6.7 percent, housing starts had declined,
and retail sales were flat in real terms.
Substantial drags on economic growth
remained: cutbacks in the defense sector, uncertainties regarding the effects of
other government policies that had the
potential to raise labor and production
costs, and slow growth on average in the
foreign industrial economies. However,
sources of stimulus were also apparent:
the cumulative spur to spending provided by low interest rates, especially
at longer maturities; the lessening of
balance sheet constraints on households
and firms; and the improving financial
condition of the depository sector,
which was making credit more available. Given these conflicting influences
on spending, the Committee determined that leaving reserve conditions
unchanged would be most consistent
with maintaining sustainable economic
growth.
The incoming data in advance of the
final two Committee meetings of 1993
indicated a robust near-term expansion
in activity with no immediate inflationary pressure. There was a sense that



23

with reserves ample and money-market
rates at the low end of the range of
experience over the past three decades,
the next move in policy would be to
tighten, but the members of the Committee agreed that until trends became
clearer, the current stance of policy
should be maintained. The prospects of
heightened credit demands and forecasts
of looming capacity pressures pushed
up longer-term interest rates over the
latter part of the year; by year-end, longterm rates were about 3/s percentage
point from their yearly lows set in
mid-October. Over that same span, the
dollar showed notable strength on
foreign exchange markets.

Money and Credit Flows
The long expansion of the 1980s was
associated with growth of total debt of
domestic nonfinancial sectors that was
about Vh times the pace of nominal
GDP growth. In the wake of this
phenomenal leveraging, the recession
together with the tepid economic recovery from 1990 to 1992 was importantly
a balance sheet phenomenon that was
reflected in a slowing in debt growth. In
retrospect, the deceleration in debt was

Trillions of dollars

12.5

12.0

1992

1993

The range was adopted by the FOMC for the period
from 1992:Q4 to 1993:Q4.

24

80th Annual Report, 1993

one symptom of the general dissatisfaction of both borrowers and lenders with
their financial conditions, a concern that
also led to some restraint on spending
and asset accumulation. Nineteen
ninety-three saw some lessening of this
restraint, and the growth of the debt of
the nonfinancial sectors expanded 5 percent, close to the pace of nominal GDP
growth. This performance put the debt
aggregate in the lower portion of its
4 percent to 8 percent monitoring range,
a range that had been set at the first
meeting of the year.
The debt of the nonfederal sectors
(nonfinancial businesses, households,
and state and local governments) expanded 33/4 percent last year. For nonfinancial corporations, a pickup in fixed
investment and inventory investment
outpaced increases in internally generated funds, pushing the financing gap
into positive territory after two years of
negative readings; as those firms sought
outside funds, they turned in the main to
long-term debt markets, but net equity
issuance remained sizable as well. The
debt markets in 1993 saw far more
activity, however, than the net requirements for external funds implied. Low
longer-term rates induced many firms to

refinance existing obligations, pushing
the gross issuance of public debt by
nonfinancial firms above $190 billion.
Earlier efforts to restructure balance
sheets, along with the opportunities
afforded by lower long-term rates to
refinance existing obligations, apparently put households in a better position
to take on new debt in 1993. With debtservice burdens holding at about 16 percent of income, or about 2XA percentage
points below the peak set at the end
of the previous decade, and loan rates
declining substantially, households
assumed new liabilities rapidly enough,
on net, to push up the ratio of their total
liabilities to disposable income to just
under 90 percent in 1993. The largest
swing was in the consumer credit category, as households evidently became
more confident of the sustainability of
the economic expansion and made previously delayed purchases of durable

Household Sector Finances
Percent
Debt

Financing Gap of the Nonfinancial
Corporate Sector
Percent

17

15

1975
1975

1980

1985

1990

Percentage of gross domestic product. Financing gap is
capital expenditures less internal funds arising from
domestic operations.




1980

1985

1990

Percentage of disposable personal income. Debt is total
credit market debt of the household sector. Debt service
is a staff estimate of scheduled payments of principal and
interest on home mortgages and consumer debt.

Monetary Policy and Financial Markets
goods, especially autos. The record
volume of mortgage originations mostly
involved refinancings, but with a pickup
in construction activity and some
cashing out of equity in the process of
refinancing, home mortgages expanded
about 7 percent, on net, last year.
Overall, this pickup in liabilities was
dwarfed by a substantial expansion of
the asset side of the household balance
sheet last year, raising net worth to a
level about 43A times that of disposable
income. In the allocation of their assets,
households continued to shun deposits
in favor of the investment products of
nonbank intermediaries, notably mutual
funds and insurance companies. As a
result, deposits shrank to less than
20 percent of total household assets, a
low for the period since World War II.
Much of the declining role for deposits
probably was attributable to the pattern of financial returns: investors, confronted by a steep yield curve, sought
out the higher yields provided by longer
maturity instruments, which were
mostly available from outside the depository sector.
Depository institutions, pressed by
their own balance sheet problems, were
unaggressive in seeking deposits and

25

extending credit in the early 1990s. But
by 1993, commercial banks had made
substantial strides in improving their
capital standing. About three-quarters of
the assets at commercial banks were on
the books of well-capitalized institutions as of September 1993, 2Vi times
the proportion at the end of 1990. Partly
as a consequence, banks reported on
Federal Reserve surveys a substantial
easing of terms and standards on business and consumer loans during the
year. Borrowers, however, endeavoring
to lock in longer-term funds, which are
not typically supplied by banks, continued to rely heavily on capital markets,
keeping the need of depositories to fund
asset expansion subdued. Depository
credit did expand moderately in 1993,
marking a substantial rebound from the
declines posted in the previous three
years. The increase in depository credit
Changes in Debt of
the Domestic Nonfn
and in Depository C
Percent

16
Debt
12

B
Percent

1960

1975

1980

1985

1990

Deposits of the household sector at all depository
institutions in the United States and in money market
mutual funds, as a percentage of household assets.




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.

26

80th Annual Report, 1993

exceeded the growth of deposit funds,
as depositories made extensive use of
equity, subordinated debt, and other
nondeposit funds to finance the expansion of depository balance sheets. Bank
credit increased 5 percent last year, after
two years of growth around 3Vi percent,
while thrift credit contracted only a bit.
Indeed, thrift credit is estimated to have
expanded in the second half of the year,
pulled up by extensions of loans by
credit unions that outweighed continuing, albeit slackening, runoffs at savings
and loans.
The slow expansion of depository
credit, together with the increased reliance by banks on nondeposit funds,
damped the growth of M3 in 1993. From

Stock of M3
Billions of dollars

the fourth quarter of 1992 to the fourth
quarter of 1993, M3 grew xh percent,
ending the year a little above the lower
bound of its annual range of 0 percent to
4 percent. This range had been adjusted
down for technical reasons to acknowledge the appreciable upward trend to
M3 velocity over the past few years,
which accompanied the shrinking role
of depositories in intermediating funds.
The part of M3 exclusive to that aggregate declined 3!/2 percent, fourth quarter
to fourth quarter, being pulled down by
a steep drop in institution-only money
market mutual funds. Overall, M3
velocity rose nearly 5 percent in 1993,
down about 1 Vi percentage points from
the previous year.
M o n e t a r y Velocities j*pH O p p o r t u n i t y C o s t s
kaiio vjak:
Percentage points, ratio scale
6.5

Range
4.5
Opportunity cost

4,300
1.7 4,200

1992

1993

The range was adopted by the FOMC for the period
from 1992:Q4 to 1993:Q4.

14
7.0 ;

10

Stock of M2
Billions of dollars
5%

Range

3,650
1984
• 3,550
1%

1992

1993

The range was adopted by the FOMC for the period
from 1992:Q4 to 1993:Q4.




1986

1988

1990

1992

The velocity of each aggregate is the ratio of gross
domestic product, measured in current dollars, to the
stock of the aggregate. The opportunity cost of M2 is a
two-quarter moving average of the three-month Treasury
bill rate less the weighted average return on assets
included in M2. The calculation of the opportunity cost of
M1 corresponds to that of M2 and assumes a zero return
on demand deposits.

Monetary Policy and Financial Markets
The velocity of M2 rose 4 percent in
1993 after increasing nearly 5 percent in
1992. The rise in velocity was posted
even as the return on many competing
short-term assets remained relatively
constant, and it was this ongoing drift
upward in the ratio between nominal
GDP and the aggregate that led the
FOMC to reduce the annual growth
range for M2 from the spread of 2 percent to 6 percent that was set in February to the 1 percent to 5 percent range
that was ultimately in effect. In the
event, M2 grew \xh percent from the
fourth quarter of 1992 to the fourth
quarter of 1993, slowing slightly from
the 2 percent growth rate in 1992. Even
this anemic expansion was accounted
for in part by special factors. In particular, foreign demands for currency were
strong, and transactions deposits were
boosted late in the year by the surge in
mortgage refinancings that followed a
drop in mortgage rates to levels not seen
in a generation. Refinancings are associated with the temporary parking of funds
in highly liquid deposit accounts.
Especially after taking account of
such special factors, the growth of M2
was quite subdued in 1993, in large part
because of the attractiveness of capital
market instruments. Although the bond

aiiu DUIIU jvuuuai runus

Percent

27

market rally trimmed as much as 1 percentage point from longer-term yields,
the term structure still retained an abnormally steep tilt through all of 1993.
Some investors were willing to expose
themselves to the greater price risk
inherent in capital market mutual funds
in the pursuit of higher average returns.
Commercial banks took some measures
to keep those customers, if not their
deposits: Many banks made it possible
to buy stock and bond mutual funds
in their lobbies. Promotion of these
services picked up, and some banks
sponsored their own mutual funds
or established exclusive marketing
arrangements with mutual fund companies; these developments undoubtedly
encouraged the diversion of deposits to
mutual funds.
At the end of 1993, assets in stock
and bond mutual funds totaled about
%\xh trillion, up $400 billion from yearend 1992. About one-half of the December 1993 total was held by institutions
and in retirement accounts—two categories generally not in M2. M2 plus the
remainder of stock and bond funds
expanded at around a 5V2 percent annual
rate in 1993, a pace roughly in line with
that of nominal GDP over the period.
Ml grew 10!/2 percent in 1993,
spurred on by sizable increases in currency and demand deposits. As noted
above, the former was importantly
boosted by foreign demands, while
the latter was closely related to swings

Billions of dollars
M2

. /

/ i S

" • ^

1985

1987

1989

1991




10%

—~-**>

1993

Mutual fund data exclude institutional holdings and
IRA and Keogh balances.

*

1992

1993

15
, 0
1
1,100

1,050

28

80th Annual Report, 1993

in mortgage refinancing. Ml velocity
declined AV2 percent despite the relative
stability of money market interest rates.
In contrast, the narrow aggregate's
velocity had followed the path of short
rates down during the easing of monetary policy from 1989 to 1992. Altogether, the drop in Ml velocity in recent
years illustrates both its sensitivity to
interest rates and the fairly loose relationship of Ml with interest rates and
income. With the rapid expansion of
transactions deposits, total reserves grew
at a 121/4 percent annual rate last year,
down from the 20 percent pace posted in
1992. Adding the increase in currency
resulted in 10V£ percent growth for the
monetary base in 1993, the same performance as in the previous year.
Confronted with this rapid expansion
in transaction deposits, and therefore
required reserves, and directed by the
FOMC to keep reserve market pressures
unchanged over all of 1993, the Domestic Desk at the Federal Reserve Bank of
New York added about $35 billion of
securities, on net, to the System Open
Market Account over the course of the
year. In keeping with previous FOMC
instructions, those purchases were
weighted more heavily than in the past
toward longer-maturity instruments. As

Mniiiriiv of Tivnsurv Dt^bt
Years

1960

1970

1980




1990

a result, the average maturity of the
Treasury securities held by the Federal
Reserve moved up slightly over 1993, to
3.2 years.
•

29

Ipf*™ational Developments
Economic activity in the major foreign
industrial countries remained weak in
1993 and unemployment increased.
These conditions kept increases in consumer prices low; on average, inflation
in the foreign G-10 economies was only
about 2lA percent.1 Foreign authorities
responded to the ongoing economic
slack by easing money market conditions and by adopting stimulative fiscal
measures where scope to do so existed.
In contrast, many developing countries experienced another year of strong
economic growth. Continued rapid expansion of trade among Asian countries,
especially with China, contributed to
growth in this region. Ongoing economic reforms in several Latin Ameri1. 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 1992 to the fourth quarter
of 1993, and averages for groups of countries are
weighted by the gross domestic products of the
countries as valued after adjusting for differences
in the purchasing power of their currencies.

!

can countries helped raise output growth
there. In addition, stimulative policies
pushed up the pace of economic activity
in Brazil. But in Mexico, authorities
responded to signs of overheating and
adopted policies that slowed growth to
nearly zero.
Stagnant economic activity in several
important U.S. export markets contributed to a further widening in the U.S.
merchandise trade deficit. U.S. exports
were limited to a rate of growth of
only about half that of U.S. imports,
which increased rapidly as the U.S. economic expansion continued. Net service
and investment receipts, held down by
the slow growth abroad, remained at
about the same level as in 1992, and net
unilateral transfers did not change, so

Exchange Value of the Dollar
and Interest Rate Differential
!JOJ-

Ratio scale, M a r c h 1973 = 100
Price-adjusted
exchange value
of the dol

!ar

• 80

December 1992= 100
Canadian dollar
110
German mark
100
90

1993
Foreign currency units per dollar. The data are weekly.




1975

1980

1985

1990

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.

30

80th Annual Report, 1993

the current account deficit worsened at a
pace about in line with that of the trade
deficit.
The value of the dollar rose about
6 percent from December 1992 to
December 1993 in terms of a tradeweighted average of the other G-10 currencies. The dollar's appreciation was
slightly greater after adjustment for
changes in consumer price levels here
and abroad because U.S. consumer price
inflation exceeded the average rate of
inflation in the other G-10 countries by
about xh percentage point. The main factor behind the increase in the dollar's
value appears to have been the weakening of activity abroad during the
strengthening of activity in the United
States. This divergence in economic performance was associated with a substantial decline in foreign interest rates relative to U.S. rates.

for economic reform crumbled, output
continued to contract.
Labor-market conditions in most foreign industrial countries worsened in
1993, raising concerns that structural
conditions as well as cyclical factors
may be responsible for recent increases
in unemployment. By the end of the
year, unemployment rates in France and
Italy had moved up to 11% percent and
14!/4 percent respectively. Although
unemployment rates in Switzerland,
Sweden, the Netherlands, and other

Changes in GDP, Demand, and Prices
Percent, from previous year
Gross domestic product
Constant prices

Foreign Economies
Real output in both Japan and western
Germany moved erratically in 1993 and
gave little indication of sustained nearterm recovery. In addition, weakness
was widespread elsewhere in continental Europe, with recoveries stalled in
France, Italy, and many of the smaller
countries. However, clear signs of
expansion began to emerge in the United
Kingdom, and Canada continued to
make steady progress, although only at a
moderate pace; activity in these countries was boosted by lower-valued
currencies and firmer growth of export
demand, especially from the United
States.
In Poland, Hungary, and the Czech
Republic, output stabilized, and further
progress was made in installing marketbased economies. In Russia, however,
where average monthly inflation exceeded 20 percent and political support



Total domestic demand
Constant prices

Consumer price index

1989

1991

1993

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.

International Developments
smaller European countries with traditionally lower unemployment did not
reach the double-digit range, they too
increased. In eastern Germany, the rate
of unemployment stabilized near 15 percent, and in western Germany it moved
up to 8 percent. Even in Japan, where
measured unemployment has been
very low historically, the unemployment rate was nearly 3 percent at the
end of 1993; more sensitive indicators,
such as the ratio of job offers to applicants, also showed further deterioration
of labor market conditions. The exceptions to the overall picture were Canada
and the United Kingdom, where unemployment rates edged down from high
levels.
Slack labor markets and wide gaps
between actual and potential output
moderated inflation pressures in the foreign G-10 countries. Italy's inflation
rate, 4 percent, was the lowest in nearly
25 years, even though the lira's external
value declined significantly. In France,
downward pressure on unit labor costs
helped keep inflation near 2 percent. In
Japan, recession and the deflationary
effect of a sizable appreciation in the
yen kept consumer price inflation to
only \lA percent. Even in Canada and
the United Kingdom, where output gaps
narrowed somewhat and currencies
depreciated, inflation remained below
3 percent. In western Germany, inflation
picked up to about 33/4 percent in 1993
mainly because of the effect on consumer prices of additional indirect taxes;
without tax effects, inflation remained at
about 3lA percent.
Government budget deficits increased
in response to cyclical factors in all foreign G-10 countries in 1993, and some
foreign authorities, most notably in
Japan, took expansionary actions that
further enlarged their deficits. Accordingly, scope for additional fiscal measures narrowed in most G-10 countries



31

and the burden of promoting recovery
fell increasingly on monetary policy.
Money market conditions generally
continued to ease in 1993; foreign shortterm interest rates, measured by a tradeweighted average, fell about 300 basis
points. German short-term interest rates
were cautiously lowered in several
steps, to 6 percent; these moves were
accompanied by declines in interest
rates in the countries that held their currencies well within the widened bands
of the European Monetary System's
exchange rate mechanism (ERM).2 Free
from ERM constraints, Italian authorities and, to a lesser extent, U.K. authorities maintained the downward movement in short-term rates that they had
aggressively begun after leaving the
ERM in 1992. Short-term rates were
lowered about 300 basis points in
Canada. In Japan, the discount rate was
cut twice during the year, to a historic
low of P/4 percent, and at year-end
short-term interest rates were close to
2 percent. Although the growth of key
monetary aggregates remained subdued
in most countries, it did pick up in the
United Kingdom. The Bundesbank's
most closely watched monetary aggregate, M3, remained above its target
range of 4Vz percent to 6V2 percent
throughout 1993, a development that
German authorities found worrisome in
their efforts to limit inflationary pressures.
The combined current account surplus of the foreign G-10 countries
widened nearly $60 billion in 1993, to
$110 billion. This development was in
large part due to domestic demand,

2. The countries that continued to participate in
the exchange rate mechanism after the departure
of Italy and the United Kingdom in 1992 were
Belgium, Denmark, France, Germany, Ireland,
Luxembourg, the Netherlands, Portugal, and
Spain.

32

80th Annual Report, 1993

which grew more slowly in these economies than it did in key trading partners
in Asia and North America. In Japan,
the slump in the domestic economy and
temporary valuation effects from the
strengthening of the yen contributed to a
$13 billion widening of the surplus. The
lower-valued lira was a key factor in a
$30 billion swing to a small surplus in
Italy, while France's improved competitiveness helped widen its surplus about
$7 billion.
The rate of growth of real output in
developing countries as a group was
5J/2 percent in 1993, essentially the same
as in 1992.3 In Asian countries, real
economic activity was particularly
strong and even accelerated about
Vi percentage point, to a rate of growth
of 73/4 percent. Gross domestic product
in China increased 13 percent for the
second consecutive year despite a
new economic retrenchment program
announced in the middle of the year.
Hong Kong, Korea, Taiwan, and
Singapore, the so-called newly industrializing Asian economies, expanded their
collective output 5*/2 percent in 1993,
about matching their 1992 performance.
These economies benefited from the
strong demand elsewhere in Asia and in
the United States for their exports of
electronic gear and other high technology equipment. Growth in some
Asian countries was also stimulated by
increased real investment associated
with large capital inflows, which were
attracted by recent financial liberalizations and, in China, by the fast growing
market.
The growth of output in Latin America increased slightly in 1993, reaching
a rate of 3*/4 percent. Brazil's gross
domestic product expanded 5 percent
3. The growth of output in developing countries is calculated by comparing measures of total
annual output rather than fourth-quarter figures.




after the authorities adopted more stimulative fiscal and monetary policies.
Large-scale privatizations lent credibility to the permanence of ongoing monetary and fiscal reforms in Argentina,
where real output rose 6 percent, and
in Chile, where it rose 5 percent. These
two countries have seen a substantial
influx of foreign capital and related
real investment in recent years, in
sharp contrast to the conditions associated with the depressed rate of capital
inflows recorded directly after the
debt crisis. In Mexico, policies designed
to limit increases in the current account
deficit and to reduce inflation contributed to a further slowing in the
growth of output, from 2Vz percent in
1992 to Vi percent in 1993. Political
uncertainty and rising inflation in Venezuela may have contributed to a slight
fall in gross domestic product there in
1993, after three years of substantial
growth.
The expansion of economic activity
in the Middle East fell from 10 percent
in 1992 to 3Vi percent in 1993 as the
early stages of recovery from the Gulf
War were completed and as a moderation in the demand for oil in industrial
countries helped push down its price
about 20 percent.
Patterns of merchandise trade in
developing countries varied considerably among regions. The merchandise
exports of Asian countries expanded
rapidly, while their merchandise imports, stimulated by the rapidly rising
level of overall economic activity,
increased at an even faster pace. Elsewhere, demand for imports decelerated
markedly, primarily because of the substantial slowing of economic activity
in Mexico and Venezuela. But weak
demand in many trading partners of
Latin American countries also severely
limited the expansion of exports from
these economies.

International Developments

33

U.S. merchandise exports increased
6 percent in real terms over the four
The U.S. current account deficit ex- quarters of 1993. Exports, which
panded from $66 billion in 1992 to changed little over the first three quar$109 billion in 1993. The nominal mer- ters of the year, strengthened in the
chandise trade deficit, measured on a fourth quarter with the rise in shipments
balance of payments basis, widened of machinery and automotive products
$37 billion, to $133 billion, while other to Canada and Mexico. The very rapid
elements of the current account balance expansion in the volume of computer
changed little. Imports rose much faster exports that has been observed in
than exports, partly because economic recent years slowed somewhat but still
expansion continued in the United States amounted to 20 percent in 1993. Agriwhile economic growth in many U.S. cultural exports declined, in part beexport markets remained slow. The ap- cause U.S. crop output was reduced by
preciation in the real value of the dollar, flooding in the Midwest and drought in
which began in August 1992, also the Southeast. Most of the 1993 increase
tended to depress U.S. real net exports.
in merchandise exports went to Canada.
Shipments to the sluggish economies
in continental Europe flattened, but
exports to Mexico and developing
Billions of dollars
countries in Asia increased at a healthy
Balances
pace. Exports to OPEC countries, whose
revenues have been depressed by declinCurrent account
ing oil prices, increased only marginally.
Merchandise imports rose about
13 percent in real terms during 1993.
This increase was spread fairly evenly
among import categories. Rising deRatio scale, billions of 1987 dollars
mand for computers accounted for oneMerchandise trade
third of the import expansion measured
in real terms, but imports of other
Total imports
machinery, industrial supplies, consumer goods, and automotive products
also rose rapidly. Low inflation abroad
and the appreciation of the dollar held
import prices in check during 1993. The
average price of imports other than oil
Ratio scale, 1987= 100
rose only slightly and was more than
GDP fixed-weight price index
offset by a sharp drop in the price of oil
120
Non-oil imports
imports.
Recorded net capital inflows balanced
110
only part of the substantial U.S. current
account deficit in 1993. The statistical
100
discrepancy was positive and large. One
significant cause of this discrepancy is
1989
1991
1993
the shipments of U.S. currency to forThe data are from the Department of Commerce; they
eigners that are not recorded in U.S.
are quarterly at annual rates and seasonally adjusted. The
international accounts.
1993 data are preliminary.
L.LJ.

itional Transactions




34

80th Annual Report, 1993

Net official inflows amounted to
$71 billion in 1993. Part of these inflows
represented funds acquired by G-10
countries as the consequence of intervention in foreign exchange markets.
Other sources were the authorities in
some Latin American and other developing countries, where the sterilization
of large private capital inflows added
substantially to official dollar holdings.
Although gross inflows and outflows
of private capital were close to balanced
in 1993, flows in both directions continued to expand with broadening opportunities for cross-border transactions. U.S.

net purchases of foreign securities,
which were about evenly divided
between stocks and bonds, reached a
record $125 billion. Net purchases from
market participants in Europe, Canada,
and Japan increased sharply and, as
usual, constituted the bulk of these
transactions. However, net purchases
from entities in other countries, particularly emerging markets, increased even
more rapidly in 1993. Foreign private
net purchases of U.S. government securities and corporate bonds also remained
strong, and foreign holdings of U.S. corporate stocks once again showed a net

US. International Transactions'
Billions of dollars, seasonally adjusted
Quarter
Year
Transaction

1992

1993 P

1992

1993 P

Q4

Ql

Q2

Q3

Q4

Merchandise trade, net
Exports
Imports
Services, net
Receipts
Payments
Investment income, net
Direct investment, net
Portfolio investment, net
Unilateral transfers, private and government, net

-96
440
536
56
180
123
6
48
-42
-33

-133
457
589
56
187
131
0
46
^6
-33

-26
114
140
13
45
32
-1
10
-11
-10

-29
112
141
15
47
32
0
11
-11

-34
113
148
15
47
32
0
12
-12
-7

-36
112
148
14
47
33
2
13
-11
-8

-33
120
153
13
47
34
-1
11
-12
-10

Current account balance

-66

-109

-24

-22

-27

-28

-32

Private capital flows, net
Bank-related capital, net (outflows, - )
US. 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

36
44
-48

13
47
-125

2
-5
-17

3
9
-27

-5
4
-24

10
33
-46

6
*
-29

37
35
-4
-35
2
5

24
61
18
-50
32
6

21
9
4
-12
3
-2

14
6
4
-9
9
-3

-1
15
*
-12
10
2

3
15
3
-8
3
7

26
12
-21
10
n.a.

41

71

6

11

18

19

23

2

-1

1

-1

-1

15
1
14

9
6
3

14
1
13

-7
7

Foreign official assets in United States (increase, +)
U.S. official reserve assets, net (increase, - )
U.S. government foreign credits and other claims, net

4
-2

1
27
0
27

Total discrepancy
Seasonal adjustment discrepancy
Statistical discrepancy

-12
0
-12

1. Details may not sum to totals because of rounding.
*In absolute value, greater than zero and less than
$500 million.

n.a. Not available.
p Preliminary.
SOURCE. Department of Commerce, Bureau of Economic Analysis.




International Developments
gain. Moreover, capital inflows from
foreign direct investors in the United
States resumed in 1993, while capital
outflows by U.S. direct investors abroad
surged to a record level.
Foreign Exchange Markets
Measured against the major European
currencies and the Canadian dollar, the
external value of the dollar rose in 1993,
but it fell in terms of the yen.
The value of the dollar increased
8 percent relative to the German mark in
1993. During the first half of the year,
the mark-dollar exchange rate fluctuated
in response to revisions in expectations
about the pace of Bundesbank easing. It
peaked in late July, when German
authorities were widely thought to be on
the verge of easing monetary conditions
aggressively because of weak economic
activity. Pressures on currency arrangements in Europe also contributed to the
strength of the dollar at this time. When
German easing did not materialize, the
dollar's value began to decline, and its
slide continued until the Bundesbank
lowered its official interest rates in midSeptember. Over this period, the dollar's
value fell 8V2 percent relative to the
mark. From mid-October, the dollar
appreciated in response to further German interest rate reductions and an
improving U.S. economy; by late
December, the dollar had again attained
its level of late July in terms of the
mark.
Stresses on currency arrangements in
Europe, which resulted in an exchange
rate crisis in the fall of 1992, re-emerged
during the first half of 1993 and intensified during the summer. To reduce pressures, the fluctuation margins for currencies participating in the exchange rate
mechanism of the European Monetary
System were widened to 15 percent in
early August. Despite this dramatic



35

change, the dollar thereafter rose about
the same amount in terms of the remaining ERM currencies as it did versus the
mark. The other countries participating
in the ERM did not make use of their
greater exchange rate leeway to lower
interest rates faster than Germany did.
By contrast, authorities in Italy sharply
lowered short-term interest rates, and
the dollar rose about 20 percent in terms
of the lira. Political uncertainties and
massive budget deficits also weighed on
the exchange value of the lira. Similar
concerns, although on a smaller scale,
contributed to the Canadian dollar's
depreciation of nearly 5 percent relative
to the U.S. dollar. U.K. authorities also
pushed down short-term interest rates,
but more slowly than the Bundesbank,
and the dollar moved up only about
4 percent versus sterling.
Japan's rising external surplus
strengthened the view of many market
participants that an appreciation of the
yen would be needed to reduce the surplus. From January through mid-August,
the yen rose 17 percent relative to the
dollar. After U.S. officials expressed
concern in mid-August over the dollar's
weakness and initiated U.S. intervention
in the market for yen, the dollar's slide
halted. As economic activity in Japan
continued to stagnate over the remainder of the year, the dollar appreciated,
partially offsetting its earlier decline.
Overall, the yen rose 12 percent relative
to the dollar in 1993.
Foreign Currency Operations
U.S. monetary authorities intervened in
foreign exchange markets on a moderate
scale in 1993. As the dollar depreciated
relative to the yen during the spring,
U.S. authorities, in cooperation with Japanese authorities, sold $1,268 million of
yen; mid-August sales of $165 million
of yen brought the total for the year to

36

80th Annual Report, 1993

$1,433 million. The sales were split
evenly between the Federal Reserve
System and the Treasury.
At year-end, the System held
$22,345 million of foreign currencies
valued at current exchange rates, almost
entirely in marks and yen. No Treasury
balances were warehoused with the System during 1993. The System realized
$172 million in profits on sales of foreign currency during 1993 and recorded
a translation gain of $93 million on foreign currency balances.
Intervention in dollars by fifteen
major foreign central banks amounted
to net purchases of about $34 billion in
1993. There was no activity involving
the Federal Reserve swap network during the year.
•




37

Monetary Policy Reports to the Congress
Given below are reports submitted to
the Congress on February 19 and July
20, 1993, pursuant to the Full Employment and Balanced Growth Act of 1978.

Report on February 19, 1993
Monetary Policy and
the Economic Outlook for 1993
Last July, when the Federal Reserve
Board presented its semiannual monetary policy report to the Congress, there
was considerable uncertainty about the
prospects for the economy in the second
half of 1992. After a promising start at
the beginning of the year, growth of the
economy had slowed once again in the
spring, and various structural adjustments that had been impeding the pace
of the expansion retained considerable
force. However, with drag from the
structural adjustments expected to diminish gradually over time and with the
economy continuing to benefit from the
substantial easing of money market conditions that the System had implemented
over the years, the most likely prospect
for the economy was thought to be one
of moderate growth in the second half of
the year.
In the event, economic growth did
indeed proceed at an improved pace in
the second half of 1992, although the
pickup did not start to become evident
in the incoming economic data until
well into the autumn. Fueled by strong
increases in household and business
spending, real gross domestic product
rose at an annual rate of 3.6 percent in
the second half of the year. The increase



over the four quarters of the year
amounted to 2.9 percent. This was the
largest gain in output since 1988, and,
while far from robust by the standards
of past cyclical upswings in activity, it
was a much stronger performance than
many analysts—inside and outside
government—had thought likely, given
the extraordinary headwinds with which
the economy had to contend. Indeed, the
performance of the U.S. economy stands
in sharp contrast to that of a number of
major foreign industrial economies that
appear still to be laboring to regain forward momentum.
Employment has grown since the
middle of last year, but at only a gradual
pace. Hiring has been damped by the
ability of firms to meet their output
objectives through hefty increases in
productivity. The unemployment rate,
which had risen in the first half of 1992
in conjunction with a surge in the share
of the working-age population in the
labor force, turned down thereafter as
labor force participation fell back. The
unemployment rate in January of this
year was 7.1 percent, more than half a
percentage point below the peak rate of
last summer.
Price developments remained favorable in the second half of 1992, and the
rise in the consumer price index over the
four quarters of the year amounted to
about 3 percent, 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.
Although the CPI spurted Vi percent this
past month, the underlying trends in
labor costs and prices remain encourag-

38

80th Annual Report, 1993

ing. The success to date in keeping inflation in check, while restoring growth,
has had highly salutary effects on
financial markets and on the process of
financial reconstruction, the continuing
progress of which is essential to the
achievement of renewed and sustainable
prosperity.
The hesitant pace of the economy
evident in incoming information
throughout much of last year, 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 are now at their lowest levels since
the early 1960s.
Long-term rates also fell, on balance.
Declines were limited at times, however, by concerns about prospective federal budget deficits and about the possibility that inflation might begin to move
higher as the expansion proceeded.
Notable decreases in long rates were
registered in late 1992 and early 1993,
as inflation remained subdued and as
statements by Administration officials
suggested that they would seek only limited near-term fiscal stimulus and that
proposals to make substantial cuts in the
federal budget deficit over time were
under serious consideration. The tradeweighted foreign exchange value of the
dollar in terms of the other Group of Ten
currencies appreciated on balance over
the course of 1992 and rose further during the first weeks of 1993. 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 last year despite an acceleration
in nominal spending and income. For
the year, M2 advanced 1.9 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 0.5 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 exceeded that of M2 by
3V2 percentage points last year and that
of M3 by 43/4 percentage points. Not
only did data on spending itself show a
firming trend over the year, but narrow
money (Ml) and reserves were expanding 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.
Nominal GDP growth last year, which
picked up to 5.4 percent from 3.5 percent in 1991, 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 longer-term interest rates, businesses
and households strengthened their balance sheets by raising funds in bond,
mortgage, and equity markets and
repaying bank loans and other shortterm debt. This shift in the focus of
financing efforts toward the capital markets, a process that has been in progress
for the last couple of years, has helped
to redress financial distortions that
accompanied the buildup of debt and the
rapid rise in some asset prices in the
1980s.
The low level of credit demanded
from depositories has meant that these
institutions have not needed to seek
large volumes of deposits. As a conse-

Monetary Policy Reports, February
quence, rates paid on deposits have been
adjusted downward rapidly as shortterm market rates have declined. Savers,
reacting to the lower deposit rates and to
attractive returns on bonds and equity,
have shifted funds from M2 deposits
into the capital marked- One method
savers have useH *° capture these higher
capital market yields has been the purchase of bond and stock mutual funds,
which are not included in the monetary
aggregates and which together experienced record inflows in 1992. Moreover,
consumer loan rates have fallen by
less than deposit rates, and households
appear to be using 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 last year, Ml 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 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 10.5 percent, the highest rate
ever registered in the official series.




39

Decisions to strengthen balance
sheets had a smaller but significant
effect on debt growth. The debt of nonfinancial sectors is estimated to have
expanded 4.6 percent, only slightly
faster than in 1991 and just above the
lower end of its monitoring range. With
debt growing less rapidly than 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.

Monetary Objectives for 1993
The aim of the Federal Open Market
Committee in 1993 is to promote financial conditions that will help to maintain
the greater momentum that the economy
developed in 1992 and to consolidate
the trend toward lower inflation. The
objectives for the monetary aggregates
in 1993 were set with that aim in mind.
At its July 1992 meeting, the Committee had provisionally chosen the
same ranges for 1993 as it was confirming for 1992—2!/2 percent to 6!/2 percent for M2 and 1 percent to 5 percent
for M3, with a monitoring range for the
nonfinancial debt aggregate of 4V£ percent to SVi percent. At that time, the
Committee noted that the extent and
duration of deviations of money growth
from historical relationships remained
Ranges for Growth of Monetary
and Debt Aggregates]
Percent
Aggregate
M2
M3
Debt2

1991
1

l

2 /2-6 /2
1-5
Wi-Vh

1992

1993

2Vi-&h
1-5
4V2-SV2

2-6
V2-AV2
1
4 /2-81/2

1. Change from average for fourth quarter of preceding year lo average lot \ourtn qoanei vft ^e*a vm$hsraRwfc.
Ranges for monetary aggregates are targets; range for
debt is a monitoring range.
2. Domestic nonfinancial sector.

40

80th Annual Report, 1993

highly uncertain and that the actual setting, in February, of 1993 ranges consistent with the basic policy objectives
would need to be made in light of additional experience and analysis.
At its February meeting, in reviewing
the ranges provisionally chosen for
1993, the Committee noted that nominal spending had accelerated considerably in 1992 despite the quite-sluggish
growth of M2 and M3 throughout
the year. The Committee viewed this
development as underscoring the
importance that special, and historically
anomalous, forces have had in restraining the growth of broad money relative
to spending. Although the intensity of
some of these forces might diminish in
1993, as borrowers and lenders achieve
more comfortable balance sheet positions, the forces are unlikely to disappear. For example, the substantial volume of liquid securities on banks'
balance sheets suggested that banks will
not become vigorous bidders for deposits in 1993 even if, as expected, lending
picks up. In addition, the yield curve,
although it had begun to flatten a bit
early in the new year, is likely to
continue to provide savers an incentive
to shift funds out of monetary assets
and into capital markets—a process
facilitated by the growing availability
of mutual funds at banks and thrift
institutions.
Given that these and other forces
tending to channel funds around depository institutions and hence to raise
velocity (the ratio of nominal GDP to
money) seem likely to persist in 1993, a
downward adjustment of the money
ranges is appropriate to take account of
the expected atypical behavior of velocity: Money growth lower than normally
expected would be sufficient to support
substantial growth in income. With this
in mind, the Committee made a technical downward adjustment in the target



growth ranges for M2 and M3, reducing
the upper and lower ends of each range
by V2 percentage point.
The strength of the influences depressing money growth relative to income
remains somewhat uncertain, however.
If they persist in 1993 to the same extent
as in 1992, growth of M2 and M3 in the
lower portions of their reduced target
ranges would be consistent with substantial further growth of nominal
spending. Alternatively, the upper ends
of the target ranges would accommodate
ample provision of liquidity to support
further economic expansion, even if the
growth of money and income were to
begin coming into more normal alignment and the recent high rate of increase
in velocity were to slow. The Committee will continue to examine money
growth as the year unfolds for evidence
on developing economic and financial
conditions. As in the past, the Federal
Reserve will also be guided by a careful
assessment of a wide variety of other
financial and economic indicators. The
Committee's primary concern, as in
1992, will remain fostering financial
conditions conducive to sustained economic expansion and a noninflationary
environment.
For debt growth, which has been less
damped by special forces than has the
expansion of the broader monetary aggregates, last year's range was retained
for 1993. Federal debt growth again is
likely to be substantial. Growth of the
debt of nonfederal sectors is expected to
accelerate somewhat as borrowers' balance sheets continue to improve, as intermediaries become more willing to lend,
and as the economy expands. Nevertheless, the growth of nonfederal debt is
expected to remain below that of nominal GDP, a development the Committee
sees as contributing to building the
sound financial foundation crucial to a
sustained economic expansion.

Monetary Policy Reports, February
Economic Projections for 1993
Although the economy and the financial
markets continue to face difficult adjustments, the governors and Bank presidents think that the most likely prospect
for 1993 is that economic growth will
proceed at a moderate pace. The growth
of output probably will be supported by
further gains in productivity, the
ultimate source of increased real income
and improved living standards over
the long run. In addition, increases in
employment are expected to be large
enough to bring further gradual declines
in the unemployment rate over the
course of 1993. Inflation is expected to
remain subdued, boding well for sustained expansion in 1993 and beyond.
The governors' and Bank presidents'
forecasts of real GDP growth over the
four quarters of 1993 span a range of
2Vi percent to 4 percent, with the central
tendency of the forecasts in a range of
3 percent to VA percent. In considering
the possible outcomes for 1993, the governors and Bank presidents cited the
degree of momentum that appears to
have developed in the economy in the
latter part of 1992 and early 1993. The
various balance sheet problems that
apparently retarded growth of the
economy during the early phases of the
current expansion, while by no means
fully resolved, seem to be receding. In
addition, such sectors as residential con-

41

struction, business investment, and consumer durables clearly are benefiting
from the declines that have occurred in
interest rates.
However, impediments to more rapid
expansion are still present. Government
spending for defense appears likely to
continue to decline for some time to
come. More broadly, balance sheet repair and business restructuring, which
have exerted major restraint on economic activity in recent years, are still
in process, despite the apparent improvement in business finances in 1992.
Indeed, the new year has brought
additional announcements of business
restructurings in a variety of industries,
both defense-related and other. These
changes are leading to an economy that
is more productive and competitive, but
at the cost of some dislocation and disruption in the short run. The magnitude
of structural changes like these is a
special uncertainty in the economic outlook for the remainder of the year. With
regard to the external sector, many foreign industrial countries are experiencing prolonged economic weakness.
Under the circumstances, the growth of
U.S. exports, while remaining positive,
may well fall short of the growth of
imports again in 1993, exerting a drag
on real GDP in contrast to the substantial impetus in the period up to early
1991.

Economic Projections of FOMC Members and Nonvoting Reserve Bank Presidents for 1993
Percent
Measure

Central
tendency

Range

MEMO

1992 actual

Change, fourth quarter to fourth quarter'
Nominal GDP
Real GDP
Consumer price index 2

5V+-&A
2V2-A
2Vi-3

5Vi-6
3-314
2»/2-2 3 /4

5.4
2.9
3.1

Average level, fourth quarter
Unemployment rate 3

6»/2-7

63/4-7

7.3

1. Change from average for fourth quarter of preceding year to average for fourth quarter of year indicated.




2. All urban consumers.
3. Civilian labor force.

42

80th Annual Report, 1993

Despite the job cutbacks at some large
companies, other firms, especially
smaller ones, are adding to payrolls,
albeit cautiously, and total employment
has been rising modestly. The governors
and Bank presidents expect this pattern
to persist, with net gains in employment
during 1993 likely to be sufficient to
bring the unemployment rate down
somewhat further over the year.
The central tendency of the unemployment rate forecasts for the fourth quarter
of 1993 extends from 63A percent to
7 percent; the remaining forecasts of the
System officials range down to about
61/2 percent.
The governors' and Bank presidents'
forecasts of the rise in the consumer
price index over the four quarters of
1993 extend from a low of 2Vi percent
to a high of 3 percent. Within that range,
a large majority of the forecasts are
clustered in the span of 2Vz percent to
23/4 percent. The considerable progress
that has been made in bringing down
inflation during the past decade is providing one of the essential underpinnings for the sustained growth of real
living standards over the long run.
However, achieving a satisfactory
economic performance in 1993—and in
the years thereafter—will depend on
initiatives in many types of policy other
than monetary policy. In coming
months, the Congress and the new
Administration will be grappling with a
host of issues, including those related to
fiscal policy, regulatory policy, and foreign trade policy. Farsighted approaches
are needed in all those areas if the economy is to perform at its full potential
over the long haul. In framing regulatory policy and foreign trade policy, the
Congress and the Administration will
need to keep an eye on potential costs
and rigidities that could sap the vigor of
a market economy. With regard to fiscal



spective size of future federal budget
deficits could yield a very direct and
meaningful payoff in the form of lower
long-term interest rates than otherwise
would prevail. Such action would
encourage capital investment and would
go far toward relieving anxieties that
many of the nation's citizens still have
about longer-run economic prospects.
The Performance of
the Economy in 1992
The economy began to exhibit renewed
firmness in 1992, overcoming a host of
impediments that have been working to
retard the growth of activity. With the
strengthening of growth in the second
half, to a 3.6 percent rate, the rise in real
GDP over the year cumulated to 2.9 percent, the strongest gain since 1988.
Employment also picked up in 1992, but
rather slowly; the unemployment rate
continued to move up in the first half of
the year, but thereafter followed a course
of gradual decline. Inflation continued
to trend lower in 1992, with most broad
price indexes showing increases that
were among the smallest since the mid1960s.
The growth of household and business expenditures picked up appreciably
in 1992. Households, for their part,
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 4V4 percent in real terms in
1QQ? after declining in each of the two

Monetary Policy Reports, February
previous years; the 1992 gain matched
that of 1988 and otherwise 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,
3J/2 percent, was only about half as large
as the annual gains in 1990 and 1991.
Meanwhile, the faster growth of domestic spending pushed up the growth in
imports of goods and services to
9V4 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 3lA> 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,
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 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



43

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. With stock prices increasing, 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, owing
both to slow growth in the volume of
debt outstanding and to the 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 loan-repayment difficulties
diminished over the year.
Income growth picked up moderately
in 1992. Wages and salaries rose about
AlA percent in nominal terms, after a
gain of only 2lA 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 their 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 2Vi percent over the year—
not a large gain by past cyclical stan-

44

80th Annual Report, 1993

dards, but nonetheless the biggest since
1988.
Real personal consumption expenditures rose about 3lA 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 more
than 4 percent in the fourth quarter.
Consumer expenditures for motor
vehicles increased about 9 percent over
the four quarters of 1992. More than
half 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. At the
start of 1993, after some of the more
highly publicized promotional programs
had ended, sales of cars and light trucks
fell sharply for a brief time, but they
since appear to have regained strength.
More than likely, some fundamental
support for sales is coming 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 nearly
15 percent in the second half of 1992,



and real expenditures for apparel
climbed at nearly a 10 percent rate. In
total, spending for consumer durables
other than motor vehicles grew about
9 percent in real terms over the four
quarters of 1992, after declining in each
of the two previous years. Real outlays
for nondurables, which also had fallen
in both 1990 and 1991, rose almost
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
it was well within the range of quarterly
observations seen over the past several
years.
Real outlays for residential investment rose 15 percent during 1992,
climbing to a fourth-quarter level nearly
25 percent above their recession low of
early 1991. Most of the 1992 rise in residential investment came in the form of
increased construction of single-family
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

Monetary Policy Reports, February
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 summer, and then fell back just a touch in
the fourth quarter; on net, the increase
over the year amounted to 12 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. Nonetheless, 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. In January,
single-family starts fell back somewhat; volatility in the monthly data on
starts is not unusual at this time of year,
however.
Despite the large gains seen in 1992,
starts in the single-family sector have
retraced only part of the decline that
took place in the late 1980s and early
1990s. Strong impetus for recovery has
come from declines in mortgage interest
rates, which have been considerably
lower this past year than they were in
1986, when single-family starts were at
their most recent annual peak. However,
a number of other developments have
continued to retard the recovery of housing activity. Uncertainties about job
prospects no doubt have deterred some
buyers from taking advantage of the
lower rates on home mortgages. More



45

broadly, recent demographic trends have
been 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 is no longer viewed by potential
buyers as the sure-fire, high-yield
investment that it was once thought
to be.
Builders, for their part, have remained
a little cautious, as have the lenders
who finance new construction. In many
cases, houses are being started only
when a buyer is lined up; eagerness to
build in anticipation of future sales is
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 this past year. The overbuilding
that occurred in the multifamily sector
in the mid-1980s led to high vacancy
rates that have stymied activity ever
since. In that regard, little progress was
made in reducing vacancy rates for
multifamily rental units in 1992, despite
the greatly diminished level of new construction. The speed at which the excess
supply of space can be worked off is
being limited by declines in the population of young adults, as well as by the
slow rate of depreciation of these longlived structures.
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

46

80th Annual Report, 1993

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.
Industrial output rose nearly 3 percent
from December 1991 to December
1992. Production fell in the first month
of 1992 but then picked up, rising about
l
/i 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, and a further gain, amounting to
0.4 percent, was recorded in January of
this 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 seems implicit in the available data for the fourth quarter. (An
actual estimate of fourth-quarter profits
will not be published by the Commerce
Department until late March.) Profits of
these firms have been lifted, in part, by
increases in the volume of output since
the end of the recession. In addition,



tight control over costs has led to
increases in profits per unit of output.
Unit labor costs of nonfinancial corporations have risen only slightly since the
start of the current economic expansion,
and their net interest costs have declined
sharply, owing to 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 past year's estimated rise in the profits of nonfarm proprietors 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
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 edged down 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 nearly
12 percent by the fourth quarter; with

Monetary Policy Reports, February
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—IVi percent according to the
estimate in the most recent GDP report.
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 about 17 percent; the gains in real terms were 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;
however, these outlays closed out the
year on a weak note, and prospects for
1993 are not encouraging, given the
losses that have been experienced by
airline companies and the related cancellations and stretch-outs of orders.
The small 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 about
60 percent below the peak of the mid1980s. 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



47

unused industrial capacity and by the
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 religious facilities and
hospitals.

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
x
h percent in real terms over the year, as
a further decline in real defense purchases more than offset another year of
increase in real nondefense purchases.
State and local purchases of goods and
services increased about IV2 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

48

80th Annual Report, 1993

$20 billion in fiscal year 1992, to a level
of $290 billion. With the economy gradually strengthening, the rate of increase
in federal receipts picked up a little, to
y/2 percent, from only 2XA 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
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 support is 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 about
3Vi 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 has been
boosted by increases in the school-age
population in recent years, 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

Monetary Policy Reports, February
total state and local expenditures,
increased about 1V2 percent in real terms
over the four quarters of 1992; in nominal terms, the rise over the year
amounted to about AV2 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,
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
IV2 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 8 percent in 1992.
The External Sector
The trade-weighted foreign exchange
value of the U.S. dollar, measured in
terms of the other G-10 currencies, rose
nearly 6 percent on balance from
December 1991 to December 1992. The
dollar increased over the first three
months of 1992 amid expectations of
strengthening economic recovery in the
United States and slowing economic



49

growth abroad. Over the summer, however, the dollar declined to a point below
the previous year's low as growth of the
U.S. economy was perceived to be more
sluggish than expected and as the Federal Reserve eased short-term interest
rates further. The dollar reversed direction again in the fall, strengthening
sharply in the wake of turmoil in the
European Monetary System and, more
important, on evidence of increased
momentum in the U.S. economic expansion and sluggish conditions in foreign
industrial economies. The dollar's rise
continued into the early weeks of 1993.
On a bilateral basis, the net rise in the
weighted average dollar over 1992 primarily reflected sharp increases in the
dollar's value against several European
currencies and against the Canadian
dollar. Denmark's rejection of the Maastricht Treaty in early June called into
question the future of European monetary and political union and led to pressures on the exchange rate mechanism
(ERM) of the European Monetary System. In September, those pressures
intensified enough to force Italy and the
United Kingdom to withdraw from the
ERM, and their currencies depreciated
sharply. For the year as a whole, the
dollar appreciated against those two currencies by 19 percent and 18 percent
respectively. Several other European
currencies, including those of Spain,
Portugal, and the Scandinavian countries, also depreciated sharply against
the dollar in the autumn. The parity of
the French franc with the German mark
was maintained within the ERM, but at
the cost of relatively high French shortterm interest rates in the face of a
sluggish French economy and rising
unemployment.
The dollar fell more than 7 percent
against the German mark from December 1991 to August 1992, as German
monetary policy, responding to rela-

50

80th Annual Report, 1993

tively high German money growth and
inflation, remained tight longer than
market participants had expected. That
decline of the dollar was more than
reversed during the fall and winter, however, as it became clear that German
economic activity had turned significantly downward and as German monetary policy was eased somewhat. By
mid-February 1993, the dollar was about
5 percent higher against the mark than it
had been in December 1991.
The dollar depreciated about 6 percent on balance against the Japanese yen
during 1992 and early 1993, despite a
noticeable decline in Japanese GDP during the second and third quarters and a
significant reduction in Japanese interest
rates. The net strengthening of the yen
probably can be attributed, at least in
part, to market reactions to a substantial
widening of Japan's external surplus.
The U.S. merchandise trade deficit
widened to about $84 billion in 1992,
compared with $65 billion in 1991
(Census basis). Imports grew about
twice as fast as exports as the U.S. economic recovery gained some momentum, while economic growth in U.S.
markets abroad was sluggish on average. Early in the year, the deficit narrowed somewhat when a drop in oil
prices lowered the value of imports. The
deficit widened sharply in the second
quarter, however, when imports surged
and exports remained about unchanged.
During the second half of 1992, imports
continued to expand somewhat more
rapidly than exports, and the deficit
increased further.
The current account balance worsened substantially more than the trade
deficit, moving from near balance in
1991 to a deficit of $51 billion at an
annual rate over the first three quarters
of 1992. However, one-time cash transfers associated with the Gulf War
accounted for most of the difference;



these transfers had reduced the current
account deficit by $42 billion in 1991,
but they reduced it by only about $2 billion at an annual rate during the first
three quarters of 1992. Excluding these
transfers, the current account deficit
weakened somewhat less than the trade
deficit, owing to a strengthening of net
service receipts.
U.S. merchandise exports grew
AV2 percent in real terms over the four
quarters of 1992. Most of the increase
occurred in the second half of the year
and consisted largely of stronger shipments of agricultural goods, computers,
other machinery, and automotive products. Excluding agricultural products
and computers, the quantity of exports
grew only 1 percent in 1992, compared
with a rise of 6V2 percent in 1991; the
slowdown was mainly a reflection of
sluggish demand in key industrial countries. By region of the world, most of the
increase in exports during 1992 went to
areas that continued to register moderate
to fairly strong rates of economic
growth—primarily developing countries
in Asia and Latin America. Exports to
Japan and to European countries, whose
growth rates probably averaged less than
1 percent when weighted by the shares
of those countries in U.S. exports, actually declined in 1992.
Merchandise imports grew IOV2 percent in real terms during 1992. Two
categories—oil and computers, the latter
of which includes peripherals and
parts—accounted for a significant portion of that rise. Oil imports 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
its long-run downtrend. U.S. domestic
sales of computers were very strong
beginning in the summer, fueled by
price wars and by a push on the part of
U.S. businesses to upgrade PCs and

Monetary Policy Reports, February
workstations to take advantage of
improvements in software. Most of the
sales were at the lower end of the spectrum of computer products—items that
often are imported. Imports of products
other than oil and computers increased
5lA percent in 1992 as domestic demand
in the United States picked up. The
strongest increases were in a wide range
of consumer goods, especially from
China and various other developing
countries in Asia. Imports of telecommunications equipment, electric machinery, and other types of machinery also
showed significant increases in 1992,
for the first time since 1988.
For the first three quarters of 1992,
the substantial current account deficit
was more than matched by recorded net
capital inflows, both official and private.
Net official inflows amounted to more
than $30 billion at an annual rate,
despite substantial net outflows associated with intervention sales of dollars by
major foreign industrial countries. Net
private inflows were almost as large,
with banks accounting for a large part
of these inflows. The agencies and
branches of Japanese-based banks used
funds from abroad to substitute for a
runoff in CDs outstanding in the United
States, while other foreign-based banks
used funds from abroad to help finance
asset expansion in the United States. A
reduction in the holdings of Eurodeposits by U.S. residents also contributed to the net private capital inflow
during the first three quarters of the year,
but that reduction was partially reversed
in the fourth quarter.
Although securities transactions contributed little to the net inflow of capital
in the first three quarters of 1992, the
continued impact of the globalization of
financial markets was apparent. U.S. net
purchases of foreign stocks and bonds
were very strong, accompanied by a
near-record pace of foreign bond issues



51

in the United States. During the same
period, foreigners added substantially to
their holdings of U.S. government and
corporate bonds; however, they made
net sales of U.S. equities.
U.S. direct investment abroad was
very strong in the first three quarters of
1992. Outflows to Europe remained
high, while outflows to Latin America
and Asia grew. In contrast, foreign
direct investment in the United States
fell further, producing a net outflow. The
rate of new foreign direct investment in
the United States has declined dramatically in recent years from large inflows
recorded during the latter part of the
1980s, partly reflecting the sharp drop in
mergers and acquisitions in the U.S.
business sector. In addition, the very
low rates of return reported by foreign
direct investors on their holdings in the
United States in recent years may have
helped discourage new investment.
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

52

80th Annual Report, 1993

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 and an additional
100,000 in January. The number of jobs
in manufacturing fell further in 1992,
but not as much as in either of the two
previous years; small increases in the
number of factory jobs were reported
toward year-end and in early 1993. In
addition, employment in construction
changed 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. In addition,
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 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 other possible
explanations are little more than conjecture at this point. A portion of the gap
between the two series was eliminated



in January, as the rise in jobs reported in
the payroll survey in that month was
accompanied by a decline in the household measure of employment.
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 Vi of a percentage point in the first half of the year, to a
June level of 7.7 percent.
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 January of this
year, the number of unemployed persons
fell further, and the unemployment rate
edged down to 7.1 percent.
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 January of 1993
was up about one million from that of
a year earlier. The labor force partici-

Monetary Policy Reports, February
pation rate—the proportion of the
working-age population that is in the
labor force—fell over the second half of
the year and into January of 1993, leaving it about where it had been at the end
of 1991.
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 both wages and benefits and that covers the entire nonfarm
business sector—increased 3Vi percent
from December of 1991 to December
of 1992. The index had risen nearly
4V2 percent in the previous twelvemonth period, and as recently as mid1990 its twelve-month rate of change
had exceeded 5 percent. The employment cost index for wages and salaries
increased only 2.6 percent 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



53

1990, and the increase in 1989 had been
barely positive.
Sustained increases in real living standards depend ultimately on achieving
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 3 percent over the year,
the largest annual gain since 1975.
Although a portion of this large rise is
no doubt a reflection of normal cyclical
tendencies, longer-range improvement
in productivity growth also may be in
progress. The jump in output per hour
in 1992, combined with the slowing
of compensation gains, held the
annual increase in unit labor costs to
just 0.7 percent.
Price Developments
The consumer price index rose 3 percent
over the four quarters of 1992, the same
as 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, have remained a step or so above
actual inflation rates, they too appear to
have moved lower over time. On average, their recent levels are about in line
with—or, according to some surveys,
less than—the lower bound of the range
of inflation expectations reported during
the 1980s. In view of these recent trends
in prices, labor costs, and inflation
expectations, the January rise of

54

80th Annual Report, 1993

0.5 percent in the CPI appears to be
something of an aberration.
The CPI for food increased a bit less
than P/4 percent in 1992, the same as in
1991. Not since the 1960s has 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 have been 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
to about 2Vi 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;
the price has remained in that range in
the early part of 1993. 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 about 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,



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 2lA 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 industrial expansion toward year-end, and
additional price increases have been

Monetary Policy Reports, February
reported in some of these markets in
early 1993. The prices of lumber and
plywood—following a path considerably different from that of most other
commodities—rose substantially during
1992, and further steep increases have
been evident in early 1993. The surge in
prices of these products appears 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 have 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 recent increases in prices of these
raw materials have shown 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 of a
percentage point during 1991, and the
past couple of months have seen some
further pickup in that measure of price
change. From an economywide perspective, however, that pickup in materials
prices has not been sufficient to dominate the deceleration in labor costs,
which account for a far greater share of
total production costs.
Monetary and Financial
Developments 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. The difficulty of
designing and implementing constructive monetary policies during this period
has been exceptional. In 1992, as earlier,



55

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 have 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 has 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, follow-

56

80th Annual Report, 1993

ing 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 31/2 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 the
year, 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 and confidence levels were low. Spending by
households and businesses seemed to be
restrained by efforts to strengthen financial positions, and banks had done little
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,
owing partly to stronger income and earlier sharp declines in short-term interest



rates and partly to special factors—
above-average tax refunds and a jump in
mortgage refinancing, which results 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 was about flat and M3 contracted.
The economy seemed to be improving during much of the first quarter:
Retail sales and housing starts were
strong, industrial production turned up,
and confidence levels of the business
and household sectors were rising, as
was the quality of their balance sheets.
The signs of recovery and the market
view that the prospects for further nearterm monetary ease had faded caused
long-term interest rates to increase, and
the dollar rose on foreign exchange markets as well. Increases in private interest
rates were less than increases in 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 longterm interest rates threatened to slow the
pace of balance sheet adjustment and
could damp housing and its related
industries as well as business investment spending, and 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

Monetary Policy Reports, February
their target ranges after their flat performance in March, were beginning to
contract, that the balance of evidence
was beginning to suggest a slowing of
the economic expansion, and that inflation was continuing to recede. Shortterm interest rates fell more than the
l
A percentage point drop in the trading
level of the federal funds rate, as market
participants judged the economy sufficiently weak to make further near-term
monetary easing moves likely. The easing buoyed the stock market, but longterm rates showed a limited response
and remained well above year-end
levels.
In the weeks following the easing, the
economy appeared to improve a bit, but
the evidence continued to be mixed.
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. On the other hand,
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 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,
what restraint 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 this area, both by the borrowing
sectors 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.



57

Data becoming available over subsequent weeks, however, 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 run off. 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, owing
to 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 over 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 13A percent
in June, the Federal Reserve reduced
both the discount rate and the federal
funds rate by Vi percentage point, to
3 percent and 3lA percent respectively.
Banks lowered their prime rate, also by
V2 percentage point, to 6 percent, leaving its unusually wide spread over market rates intact.

58

80th Annual Report, 1993

Long-term interest rates fell 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 longterm rates to the lowest levels since the
early 1970s, and the dollar continued to
retreat from its peak levels reached in
April.
In early September, with another
weak labor report and in the context of
contracting industrial production and
expansion in the monetary and credit
aggregates that, while now positive, was
weaker than had been expected, reserve
conditions were eased further and the
federal funds rate fell to around 3 percent. Shorter-term 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 rates,
although they initially declined, drifted
back up on renewed concerns that the
federal deficit would be enlarged by
fiscal actions taken to stimulate the
economy.
Throughout the late summer and early
fall, policy was conducted against a
background of tension in foreign exchange markets; a strong deutsche mark
had caused several European countries
to raise interest rates sharply to preserve
fixed exchange rate relationships with
and within 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 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. In the
event, 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 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 over the fourth quarter.
Although this news initially put further
upward pressures on longer-term interest rates, these came to be muted and
then reversed as the better economic
prospects, along with statements and
actions of the incoming Administration,

Monetary Policy Reports, February
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.
These factors, buttressed by an increasing focus in public discourse on reducing the federal deficit, continued to play
an important role as long-term rates fell
further into the new year.
With the better economic news, the
Federal Reserve kept reserve conditions
and short-term interest rates unchanged
as the year ended, 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.
Monetary and Credit Flows
Credit flows again were quite damped in
1992, and money growth was exceptionally weak. Despite an appreciable
pickup in nominal GDP growth last
year, the broad monetary aggregates
decelerated further, and expansion of the
nonfinancial debt aggregate edged up
only a bit. As had been the case for the
last couple of years, considerable efforts
by key sectors of the economy to
improve balance sheets had a significant
restraining effect on credit and, espe


59

cially, on money growth—a much
greater effect than they had on spending
itself. Growth of the debt of nonfinancial borrowers other than the federal
government edged up only lA percentage point from 1991, to 2lA percent, as
businesses and households restrained
borrowing by financing spending out
of cash flow and equity issuance and
by limiting accumulation of financial
assets. 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 improving health of depositories,
federal outlays attributable to deposit
insurance activity fell from around
$50 billion in 1991 to nil last year.
The total nonfinancial debt aggregate
expanded about AVi percent last year, at
the lower end of its monitoring range.
The sluggishness in credit and money
growth last year 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
have argued that the shift to government
securities over recent years has been
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 be 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 last year, and loan flows were
depressed at these banks as well. Moreover, other regulatory factors may be
contributing to a reduction in willing-

60

80th Annual Report, 1993

ness to take deposits and make loans,
including rising deposit insurance premiums and the tighter regulations and
requirements of new 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 remained
lackluster, it strengthened 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.
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.
Banks do seem better positioned to meet
increases in demand than they were a
few years ago. Not only has their liquidity improved with the acquisition of
government securities, but they have
made substantial progress in improving
capital positions, including leverage
ratios—which are unaffected by asset
composition—as both profits and debt
and equity issuance reached record
levels in 1992. Moreover, the quality of
their assets showed some scattered signs
of improvement last year; 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
from these lenders also remains somewhat constrained—though probably not
more so than in 1991. Life insurance
companies, for example, have suffered



from an abundance of bad loans and
remain saddled with poor-quality commercial real estate loans. Such firms
have been limiting acquisitions primarily to high-quality, easily marketable
assets, meaning that, 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 have experienced high and rising
levels of nonperforming loans, many of
which were secured by commercial real
estate, with effects on their willingness
to make new loans.
Downgradings of the manufacturing
parents of automobile sales finance companies have led to some increases in
their funding costs. To date, however,
there has been little or no effect on the
cost or availability of consumer credit,
as these finance companies have
increased the volume of loans they have
securitized. The availability of credit at
thrift institutions likely improved a bit
last year. Reflecting the declines in interest rates, profits of private sector savings
and loan associations had reached a
record level as of the third quarter, 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 have produced generally sluggish borrowing in
each major nonfinancial sector other
than the federal government. Overall
household borrowing accelerated
slightly but continued moderate, as
demand was depressed by insecurity
about employment as well as by efforts
to restructure balance sheets. Declines
in mortgage rates promoted only about a
V2 percentage point boost to net home
mortgage growth, but they spurred a
substantial volume of refinancing. Some
of the proceeds of mortgage refinanc-

Monetary Policy Reports, February
ings likely were used to pay down
higher-cost consumer credit. Consumer
credit also was held down last year as
households apparently used funds that
otherwise would have been held in lowyielding deposits to reduce high-cost
debt.
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 last year. Another
sign of improving household financial
conditions has been recent trends in
delinquency rates. Consumer loan
delinquency rates mostly fell last year,
although they remain at high levels.
Home mortgage delinquency rates were
little changed on balance last year and
still somewhat above their pre-recession
levels, but well below those of the mid1980s.
Business debt grew only slightly last
year as internally generated funds exceeded investment spending. Taking
advantage of the strong stock and bond
markets, nonfinancial corporations
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 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, corpo


61

rate net interest payments as a percentage of cash flow fell for the 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 the rate declines last year,
with large amounts of debt being refinanced, including a large volume that
was called. Net debt growth continued
to be moderate, however, as this sector's
spending remained constrained.
Although balance sheet restructuring
has damped credit flows and spending,
its greatest impact has been on the monetary aggregates, as an unusually high
proportion of spending in recent years
has been financed outside the depository
system, whose liabilities make up the
bulk of the monetary aggregates. Some
of this spending has been supported
through sources other than borrowing,
for example, by issuing equity or restraining the accumulation of liquid
assets. Depository credit expanded last
year, following two years of contraction,
but it continued to shrink as a share of
nonfinancial debt as borrowers concentrated their credit demands in long-term
securities 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 Vi 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 reli-

62

80th Annual Report, 1993

ance on non-M3 funds, produced a sizable increase in M3 velocity last
year—at a rate far above that of 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 2 percent last
year, below the 2Vi 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 weak
money growth appeared to stem from
several important factors, many related
Growth oi Money and Debt
Percent
Measurement
period
Year1
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992

. . .

. . .

Quarter
(annual rate)3
1992: 1
2
3
4

Ml

M2

M3

Domestic
nonfinancial
debt

7.4
5.4
(2.5 2)
8.8
10.4
5.5
12.0
15.5
6.3
4.3
.6
4.3
8.0
14.3

8.9
9.3

9.5
12.3

9.5
10.0

9.1
12.2
8.1
8.7
9.3
4.3
5.3
4.7
4.0
2.8
1.9

9.9
9.9
10.8
7.6
8.9
5.8
6.4
3.7
1.8
1.1
.5

9.3
11.4
14.3
13.8
14.0
10.1
9.2
8.1
6.9
4.3
4.6

3.3
.6
.8
2.9

2.0
-.3
.1
.2

4.3
5.4
4.2
4.2

15.5
10.6
11.6
16.8

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.




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 last year. 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 have been discouraged from
going after deposits by the rising cost of
issuing deposits to make loans; among
the factors accounting for this increase
have been increases in deposit insurance
rates and higher capital ratios occasioned by market and regulatory forces.
The prompt declines and low level of
deposit rates have 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 was pulling deposit funds into
capital markets. An important method
for accomplishing this portfolio shift
was mutual funds, which experienced
record inflows last year. Not only were
yields on these funds attractive, but they
have 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 last year, up from
$117 billion in 1991 and an average of
$30 billion over the previous five years.
In 1991 and 1992 for the first time,
increases in mutual fund assets exceeded
increases in M2.
Money growth has also weakened as
consumer loan rates have moved downward less rapidly than deposit rates. As
a consequence, households face a con-

Monetary Policy Reports, February
siderable interest rate incentive, particularly after taking account of changes in
the tax deductibility of consumer interest payments, to use funds in deposit
accounts to pay down, or limit the accumulation of, debt. In fact, the rise in
consumption has been accompanied by
an unusually small increase in debt,
implying that consumption has been
financed to a large extent 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 appeared to be another
example of the attraction that bond and
equity mutual funds and other capital
market instruments provided to investors last year. MMMFs grew in October
and November, however, perhaps reflecting capital losses in bond funds
resulting from the rise in long-term rates
in September and October.
The overall effect of the unusual
forces that have been influencing M2 is
summed up by the behavior of its velocity, which accelerated for the second
year in a row, to a V/i percent rate,
despite the sharp downward trend in
short-term interest rates over this period.
Over previous decades, the velocity of
M2 and short-term rates had moved
together in a reasonably predictable
way. This occurred because deposit rates
lagged market rates. When, for example,
short-term rates fell, deposit rates



63

dropped by less, providing an incentive
to shift assets from market instruments
to deposits and depressing velocity.
However, because of the unusual configuration of forces discussed above, these
incentives to hold M2 have not followed
their usual pattern in the current cycle.
As noted, despite the drop in short-term
interest rates, a combination of the steep
yield curve, sluggish adjustment of loan
rates, and other factors has decreased,
not increased, the incentives to hold M2
in the last year. In other words, the
opportunity cost—the earnings given
up—in holding M2 actually has widened, rather than narrowed as has happened in the past when market interest
rates fell, and this helps to explain why
M2 velocity has risen atypically.
Another indication of the unusual
behavior of the velocity of M2 is the
recent performance of the Board staff's
P* model in predicting inflation. The
model is premised on reasonably stable
M2 velocity over time and under this
premise predicts the price level and
inflation rates that are consistent with
M2 growth. If the velocity of M2 is
rising atypically, slow growth of M2
would not be associated with the degree
of disinflationary pressures that would
be predicted by the P* model, which
assumes normal velocity behavior. In
fact, consistent with the notion that
velocity is behaving abnormally, the
model, using actual M2 growth, underpredicted inflation in 1992.
The growth of M2 over the year was
entirely attributable to its currency and
transactions deposit components, as Ml
growth surged to about 141A percent in
1992. This performance reflected the
advance in income growth but stemmed
mainly from declines in both short- and
long-term interest rates. Long-term rate
declines prompted large volumes of
mortgage-rate refinancings, particularly
in the first and last quarters. Because a

64

80th Annual Report, 1993

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 shortterm 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 last year
accelerated 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
owing to shipments abroad, and as a
consequence the monetary base
increased 10V6 percent last year—the
highest growth rate in the Board's official series, which begins in 1959.

Report on July 20, 1993
Monetary Policy and
the Economic Outlook
for 1993 and 1994
In February, when the Federal Reserve
prepared its monetary policy plans for
1993, the broad trends in the economy
appeared favorable. After a hesitant
beginning, the economic expansion had
picked up steam in the latter part of
1992, while inflation seemed still to be
headed downward. Most members of the
Federal Open Market Committee and
nonvoting presidents anticipated that



1993 would be a good year for growth
and would also see further progress
toward price stability.
As the year has unfolded, however,
the economy's performance has fallen
short of these expectations. Economic
growth has slowed appreciably from the
pace late last year; in part, this has
reflected a retreat in business and consumer confidence and the effects on our
trade balance of weakness in a number
of other industrial countries. Like most
private forecasters, the Board members
and Bank presidents generally have
trimmed their projections of growth in
real gross domestic product for the year
as a whole, although they continue to
foresee increases in output large enough
to extend the reduction in the unemployment rate that began last summer.
Events on the price side also have been
disappointing. The inflation rate in the
first part of this year was higher than in
late 1992. There is evidence that some
of the pickup in the consumer price
index may have reflected difficulties in
seasonal adjustment, and price data for
the past couple of months have been
much more favorable. Nonetheless, a
broad array of indicators points to a
leveling out of the underlying inflation
trend.
In this circumstance, and with shortterm interest rates unusually low, especially when compared with inflation, the
Federal Reserve recognized a need to be
alert to the possibility that the balance of
risks in the economy could shift soon in
a direction dictating some firming of
policy; failure to act in a timely manner
could lead to a buildup of inflationary
pressures, to adverse reactions in financial markets, and ultimately to the disruption of the growth process. To this
point, however, the moderate thrust of
aggregate demand and considerable
slack in the economy, taken together
with the more subdued price data of

Monetary Policy Report, July
late, do not suggest that a sustained
upswing in inflation is at hand. Accordingly, the Federal Reserve has not adjusted its monetary policy instruments.
The pace of economic growth in the
final quarter of 1992 was not expected
to be sustained, but the slowing in the
first quarter of 1993 was surprisingly
sharp. With the exception of business
fixed investment, the slowdown cut
across the major categories of final
demand. After stepping up their spending in late 1992, consumers became
more pessimistic about their economic
prospects and more cautious in their
spending decisions; the uncertainty surrounding the efforts to reduce the federal deficit may have been a factor in the
weakening of household sentiment.
Housing activity, which also had been
exceptionally strong late last year, hit a
lull—even before the March blizzard on
the East Coast—and real defense purchases plunged. Moreover, net exports
deteriorated sharply, as exports declined
and imports surged; the drop in exports
was attributable in part to continued
weak growth in some other industrial
countries and in part was an adjustment
to the big increase in late 1992.
The more recent statistical indicators,
taken together, point to a resumption of
moderate growth in real GDP in the
second quarter. Most notably, on the
positive side, the increase in aggregate
hours worked for the quarter as a
whole—a useful indicator of movements
in overall output—was the largest of the
current expansion. Sales of motor vehicles also exhibited considerable vigor.
But other key indicators were less
robust. In particular, after allowing for
the effects of the blizzard, consumer
spending on items other than motor
vehicles was lackluster, and housing
activity improved only modestly. In the
manufacturing sector, orders generally
remained soft, and factory output, after



65

having posted solid gains over the preceding seven months, is estimated to
have declined somewhat over May and
June.
Broad measures of inflation picked up
in early 1993, with monthly increases
through April in the upper part of the
range of the past couple of years.
Although readings on consumer and
producer prices were much more favorable in May and June, the cumulative
price and wage data for the year to date
suggest that underlying inflation has
flattened out, after having trended down
over the preceding two years. Excluding
the especially volatile food and energy
components, the twelve-month change
in the CPI has held in the range of 3lA to
3Vi percent since the summer of 1992.
In financial markets, short-term interest rates have changed little so far in
1993, while intermediate- and long-term
interest rates have fallen 3A to 1 percentage point, reaching their lowest levels in
more than twenty years. The decline in
longer-term rates seems largely to have
been a response to the enhanced prospects for credible fiscal restraint, though
the slower pace of economic expansion
may also have played a role. Falling
interest rates have helped stock market
indexes set new records. Despite a
decline in the dollar versus the yen, the
average value of the dollar on a tradeweighted basis relative to G-10 currencies has risen, on balance, since the end
of 1992. Although foreign intermediateterm interest rates have been down, on
average, about as much as U.S. interest
rates, short-term rates abroad have
decreased substantially relative to U.S.
rates, as foreign monetary authorities
have taken steps to bolster weak
economies.
Declining U.S. market interest rates
contributed to robust growth in narrow
measures of money and in reserves over
the first half of the year, but broad

66

80th Annual Report, 1993

monetary aggregates were very weak
and their velocities continued to show
exceptional increases. Credit demands
on depositories remained quite subdued
relative to spending, considerable depository credit was funded from nonmonetary sources, and savers continued to
demonstrate a marked preference for
capital market instruments over money
stock assets.
In part because of the drop in bond
and stock yields, as well as the desire to
strengthen balance sheets, corporate borrowers have continued to concentrate
credit demands on long-term securities
markets, using the proceeds in part to
repay bank loans; business loans at
banks have not grown this year,
although there were tentative signs of a
pickup over May and June. Total lending and credit growth at banks has risen
only slightly from the depressed pace of
1992, and these institutions have therefore not needed to pursue deposits.
Thrifts have continued to contract but at
a much slower pace than in recent years.
Banks have eased lending standards
for smaller firms for several quarters,
and they recently relaxed standards for
medium- and large-sized firms as well.
An increased willingness to lend on the
part of banks has been associated with
considerably more comfortable capital
positions. Banks have continued to
strengthen their balance sheets by issuing large volumes of equity and subordinated debt while retaining a substantial
amount of earnings. As a result, the
portion of the industry that is wellcapitalized (taking account of supervisory ratings as well as capital ratios)
increased from about one-third at the
end of 1991 to more than two-thirds by
March 1993.
In turning to equity and other nondeposit funds, banks have reduced
the share of depository credit that is
financed by monetary liabilities. Depos


itors, for their part, have continued to
shift funds into capital markets, attracted
by still-high returns in these markets
relative to earnings on deposits. Inflows
into bond and equity mutual funds have
run at record levels this year, and banks
have facilitated investing in mutual fund
products by increasingly offering them
in their lobbies. As a consequence of
these various forces, M2 increased at
only a 3A percent annual rate from its
fourth-quarter 1992 average through
June, while M3 fell slightly. The sum of
M2 and estimated household holdings
of long-term mutual funds grew at about
a 43/4 percent rate from the fourth quarter through June, a pace little changed
from that of recent years.
Debt growth has edged up this year,
despite a deceleration in nominal spending, perhaps buoyed by improvements
in financial positions achieved over the
past few years by both borrowers and
lenders. Investment outlays are estimated to have exceeded the internal
funds of corporations for the first time in
two years, while household borrowing
has picked up relative to spending. In
addition, Treasury financing needs have
remained heavy. Nevertheless, nonfinancial debt has grown at only a 5 percent rate this year.

Monetary Objectives
for 1993 and 1994
In reviewing the annual ranges for the
monetary aggregates in 1993, the Federal Open Market Committee (FOMC)
noted that the relationship of broadly
defined money to income has continued
to depart from historical patterns. The
annual velocities of these aggregates last
fell in 1986, and their prolonged upward
movements since then strongly suggest
breaks from previous long-run trends
of flat velocity for M2 and slowly
decreasing velocity for M3. The rise in

Monetary Policy Report, July
the velocity measures has been particularly surprising in the last four years, a
period of declining interest rates, normally associated with a reduction in
velocity.
In February, anticipating that further
balance sheet restructuring and portfolio
shifts from deposits to mutual funds
would result in further increases in
velocity, the FOMC lowered the 1993
growth ranges for M2 and M3 by V2 percentage point from the provisional
ranges set in July 1992. In fact, velocities of the broad monetary aggregates
have been especially strong; in the first
quarter of 1993, the velocities of M2
and M3 posted substantial increases of
6V4 percent and 8 percent, respectively,
and appear to have recorded additional,
but smaller, gains in the second quarter.
As a consequence, at its meeting this
month, the Committee reduced the 1993
range for M2 by an additional percentage point and the range for M3 by
another Vi percentage point, leaving
them at 1 to 5 percent for M2 and 0 to
4 percent for M3.
The reductions of these growth ranges
represented further technical adjustments in response to actual and anticipated increases in velocity and not a
shift in monetary policy, which remains
focused on fostering sustainable economic expansion while making contin-

ued progress toward price stability. With
further substantial increases in velocities, continued sluggish expansion of
M2 and M3, which are now at the lower
ends of their revised ranges, would be
consistent with an acceptable track for
the economy. Also at the July meeting,
the annual monitoring range for the
domestic nonfinancial debt aggregate
was reduced by Vi percentage point, to
4 to 8 percent; growth in this aggregate
is likely to continue to be roughly in line
with that of nominal GDP.
Although the future behavior of the
velocities of broad money aggregates
was recognized to be difficult to predict
with precision at a time of ongoing
structural changes in the financial sector,
it appeared likely that the forces contributing to the unusual strength in velocities would continue for some time, and
the FOMC carried forward the revised
1993 ranges for the monetary and debt
aggregates to 1994 as well. With considerable uncertainty persisting about
the relationship of the monetary
aggregates to spending, the behavior of
the aggregates relative to their annual
ranges will likely be of limited use in
guiding policy over the next eighteen
months, and the Federal Reserve will
continue to utilize a broad range of
financial and economic indicators in
assessing its policy stance.

Ranges tor Growth of Monetary and Debt Aggregates !
Percent
1993
Aggregate

M2
M3
Debt2

1992

21/2-61/2
1-5
4 1 / 2 -8 l / 2

As of
February

As of
July

2-6

1-5

Vi^Vi
4 / 2 -8 1 /2

0-4
4-8

1

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.




67

2. Domestic nonfinancial sector.

1994

1-5
0-4
4-8

68

80th Annual Report, 1993

Economic Projections for 1993 and 1994
The members of the Board of Governors
and the Reserve Bank presidents, all of
whom participate in the deliberations of
the FOMC, generally anticipate that
economic activity will strengthen in the
second half of 1993 and continue to
expand moderately in 1994. The growth
of output is likely to be accompanied
by further gains in productivity, but
increases in employment are projected
to be large enough to keep the unemployment rate moving down. Inflation is
not expected to change materially over
this period.
The economic growth forecasted by
the Board members and Reserve Bank
presidents for 1993 is somewhat weaker
than that forecasted in February, mainly
because of the shortfall in real growth in
the first quarter. Most expect output
gains over the balance of the year to be
Economic Projections of FOMC Members
and Nonvoting Reserve Bank Presidents for
1993 and 1994
Percent
Measure

Range

Central
tendency
1993

Change, fourth quarter to
fourth quarterx
Nominal GDP
Real GDP
Consumer price index 2

43/4-6!/4
2-3 Vi
3-3'/2

2V4-23/4
3 - 3 »/4

Average level, fourth quarter
Unemployment rate 3

6 1 / 2 -7

63/4

5-53/4

1994
Change, fourth quarter to
fourth quarterl
Nominal GDP
Real GDP
Consumer price index 2

4«/2-63/4
2-3»/4
2-4'/4

5-6V2
21/2-31/4
2-3V4

Average level, fourth quarter
Unemployment rate 3

6»/4-7

61/2-63/4

1. Change from average for fourth quarter of preceding year to average for fourth quarter of year indicated.
2. All urban consumers.
3. Civilian labor force.




large enough to result in a four-quarter
change in real gross domestic product in
the range of 2lA percent to 23/4 percent;
for 1994, the central tendency of the
forecasts spans a range of 2Vi to 3lA percent. The civilian unemployment rate,
which averaged 7 percent in the second
quarter of 1993, is projected to fall to
the area of 63A percent by the fourth
quarter of this year and to drop slightly
further over the course of 1994.
Recent developments in the financial
sphere should be conducive to the sustained increases in spending projected
for the quarters ahead. The financial
positions of many households and businesses have continued to improve, and
banks are showing signs of greater
willingness to make loans. Short-term
interest rates are relatively low, and the
appreciable declines in long-term interest rates over the past several months
should further the process of balance
sheet adjustment and are anticipated to
provide considerable impetus to business investment and residential construction. It is likely that business
investment also will continue to be bolstered by the ongoing push to improve
products and boost efficiency through
the use of state-of-the-art equipment.
Moreover, with at least a moderate
pickup in average growth in foreign
industrial countries, the external sector
should be exerting a less negative influence on economic activity in the United
States.
Despite the improvement in financial
conditions, there are reasons to be
cautious about the near-term outlook.
Efforts this year to bring the federal
budget deficit under control already
have helped to ease pressures on longterm interest rates, and a successful
agreement to reduce deficits significantly will produce substantial benefits
over the longer run. But such actions
also are expected to exert some restraint

Monetary Policy Report, July
on aggregate demand this year and next.
Government outlays for defense will
continue to contract, extending the dislocations and disruptions that have been
evident for some time in industries and
regions that depend heavily on military
spending. Prospects for higher taxes
may already be influencing the behavior
of some households and businesses, and
the constraint is likely to intensify in
1994. In addition, uncertainties about
prospective federal policies reportedly
are weighing on businesses and consumers; although the outcome of the
congressional budget deliberations will
be known shortly, uncertainties about
health care reform are not anticipated to
be resolved fully for some time.
Most Board members and Bank presidents expect the rise in the consumer
price index over the four quarters of
1993 to be in the range of 3 percent to
3lA percent, about the same as the
increase over the four quarters of 1992.
At this stage, the food and energy sectors are not expected to have much
effect, on balance, on the broad price
measures in 1993, but the flooding in
the Midwest raises the risk of higher
food prices in the quarters ahead. For
1994, the central tendency forecast is
for CPI inflation in the range of 3 to
3x/2 percent, not much different than in
1992 and 1993.
The fundamentals remain consistent
with additional disinflation; businesses
continue to focus on controlling costs,
and slack in labor and product markets
is anticipated to decrease only gradually
in the period ahead. However, the disappointing price performance in the first
half of the year suggests that further
progress will not come easily—in part
perhaps because inflation expectations
remain high. Lowering inflation and
inflation expectations over time, and
achieving sustained reductions in longterm interest rates, will depend impor


69

tantly on a monetary policy that remains
committed to fostering further progress
toward price stability. The performance
of prices and the economy also will
depend on government policies in other
areas. Namely, a sound fiscal policy, a
judicious approach to foreign trade
issues, and regulatory policies that preserve flexibility and minimize the costs
they impose are crucial to reestablishing
the disinflation trend of the past couple
of years and allowing the economy to
perform at its full potential.
The Administration has not yet
released the mid-year update to its economic and budgetary projections. However, statements by Administration officials suggest that the revised forecasts
for real growth and inflation in 1993 and
1994 are not likely to differ significantly
from those of the Federal Reserve.
The Performance of
the Economy in 1993
Economic activity has continued to
advance in fits and starts. After posting
robust gains in the second half of 1992,
real GDP rose at an annual rate of less
than 1 percent in the first quarter of
1993. The slowing in activity was evident in a broad range of production and
spending indicators. The more recent
data suggest that the economy expanded
at a firmer pace in the second quarter,
although growth probably was not as
rapid as in the second half of last year.
To some extent, the slackening in economic activity in the first quarter of
1993 can be interpreted as a payback
after two quarters of strong growth. In
particular, much of the slowing was in
consumer spending, where large gains
in the second half of 1992 had outpaced
income growth by a substantial margin.
In addition, there was a sharp contraction in defense spending; although real
defense purchases clearly will remain

70

80th Annual Report, 1993

on a downtrend for some time, the firstquarter plunge followed a spurt in the
second half of 1992 and is not likely to
be repeated in coming quarters. In the
external sector, exports declined in the
first quarter after a big increase late last
year, while imports rose markedly.
Activity was also depressed, especially
in the housing sector, by unusually bad
weather last winter.
Moderate growth in real GDP appears
to have resumed in the second quarter.
Nonetheless, experience thus far in 1993
has underscored that the impediments to
a more rapid pace of economic expansion over the near term remain sizable.
Besides defense cutbacks, the process of
balance sheet adjustment goes on, as do
the restructuring efforts under way at
many large firms. Moreover, the continued disappointing economic performance of some major foreign industrial
countries is taking a toll on U.S exports.
Finally, uncertainties about prospective
federal policies on a variety of fronts,
although difficult to measure, are reportedly making some businesses and consumers reluctant to make major hiring
and spending commitments.
News on the price side was also worrisome in the first half of the year.
Month-to-month movements in prices
were on the high side through April, but
they moderated in May and June. The
more favorable recent data helped to
ease concerns that a significant pickup
in inflation was under way. Nonetheless,
the disinflation process seemingly has
stalled, with underlying inflation, as
measured by the twelve-month change
in the CPI excluding food and energy,
holding in a narrow band between
3VA percent and 3Vi percent since last
summer.
The Household Sector
Growth of consumer spending on goods
and services continued in a stop-and-go



pattern in early 1993: It hit a lull in the
first quarter after surging in the second
half of 1992. Averaging through the
quarterly data, consumption grew at
about a 3 percent annual rate over those
three quarters, and available data point
to a moderate increase in the second
quarter. Housing activity appears to
have revived in recent months, after sagging earlier in the year.
Consumer spending increased only
about 1 percent at an annual rate in real
terms in the first quarter. Outlays for
goods were especially weak, down at
about a 2 percent annual rate; although a
part of the drop was probably attributable to the severe blizzard on the East
Coast in March, signs of some retreat in
spending had already appeared in January and February. Meanwhile, spending
on services remained on the moderate
uptrend that had been evident for the
past few years.
Spending rose appreciably in April,
spurred by a post-blizzard bounce-back
in outlays for motor vehicles and other
goods. Demand for motor vehicles
remained strong through June, resulting
in an average sales pace for the quarter
of almost 14V2 million units (annual
rate)—the highest since early 1990.
Sales were boosted by the replacement
needs of households that put off buying
vehicles during the 1990-91 recession
and the early recovery period. In addition, price increases—at least for models with domestic nameplates, which
have accounted for almost all of the rise
in sales this year—have been relatively
small, and financing terms favorable.
Meanwhile, real spending on goods
other than motor vehicles appears to
have posted a moderate gain for the
quarter as a whole, and outlays for services rose slowly through May.
The downshift in overall spending
growth this year does not appear to be
attributable to any worsening of the cur-

Monetary Policy Report, July
rent trends in household incomes and
financial positions, but it has coincided
with a deterioration in consumer confidence. In contrast to the ebullience evident last fall, surveys conducted by the
University of Michigan and the Conference Board this year have found respondents more pessimistic about their job
and income prospects. Spending may
also have been crimped by smaller-thanusual tax refunds—or larger tax bills—
this year. Although the change in withholding schedules in March 1992 raised
workers' take-home pay, and thus provided the wherewithal to fund additional
purchases last year, many households
may well have found themselves less
liquid than usual in early 1993. More
fundamentally, the slowing in spending
appears to reflect a return to trend after a
surge that outstripped the rise in real
disposable income in the second half of
last year. Indeed, after having risen
somewhat over the preceding couple of
years, the personal saving rate dropped
from 5lA percent in the second quarter
of 1992 to 4V2 percent in the fourth
quarter, in the lower part of the range of
recent years. The saving rate retraced
some of that decline in the first quarter,
but it appears to have fallen back in the
spring.
Real disposable income has remained
on the moderate uptrend that has been
evident for the past several quarters: In
May, it stood about 2lA percent above
the level of a year earlier. Growth in
wages and salaries has stayed relatively
sluggish despite the firmer pace of
employment growth this year. Meanwhile, transfer payments have continued
to expand, although recent increases
have been diminished by a drop in
unemployment insurance benefits as the
number of unemployed has declined.
Interest income, which fell appreciably
over 1992, has only edged down thus far
this year.



71

Household financial positions have
continued to show signs of improvement. The value of household assets has
been buoyed by the rising stock market,
while debt growth has remained moderate. Moreover, reductions in interest
rates have continued to lower debtservicing burdens; when measured in
relation to disposable income, the repayment burden has fallen back to the levels
of the mid-1980s. The incidence of
financial stress among households also
appears to have eased further. Delinquency rates on consumer loans generally dropped again in the first quarter
and are down significantly from their
recent peaks, and delinquencies on
home mortgages are at the low end of
the range of the past decade.
Housing activity turned surprisingly
soft in the first quarter, after a burst at
the end of 1992. However, the most
recent monthly indicators suggest that
the sector remains on a path of gradual
expansion. In the single-family area,
both starts and sales of new homes fell
back at the beginning of the year and
remained below trend through March.
Single-family starts rebounded in April
and edged up further in May, lifting the
average level for the two months about
5 percent above the first-quarter pace;
new home sales gyrated in the spring
but also were higher, on average, than in
the first quarter.
Undoubtedly, some of the recent improvement reflects a reversal of transitory factors that damped homebuilding
in the first quarter. The East Coast blizzard delayed both builders and their
customers in March; in addition, the
weather for the nation as a whole was
slightly worse than usual in January and
February. Lumber prices ran up sharply
between October and March: As measured by the producer price index, prices
rose about one-third over that period,
and spot market quotes for some lumber

72

80th Annual Report, 1993

products more than doubled. The jump
in lumber costs, which has since been
reversed, seems not to have left much of
a mark on the prices recorded in sales
transactions; indeed, the inability of
builders to pass along the cost increases
may have accounted for some of the
disruption in construction activity.
In any event, low mortgage rates
clearly are helping to stimulate housing
demand. Interest rates on fixed-rate
home mortgages, like most other longterm interest rates, fell to near their
twenty-year lows last winter and have
since declined further; initial rates on
adjustable-rate mortgages have been the
lowest since these loans first became
widely available at the beginning of the
1980s. Given the trends in house prices,
these interest rates have pushed the cost
of home purchase—as measured by the
share of household income needed to
make the mortgage payments on an
average home—to the lowest levels
since the mid-1970s.
Nonetheless, the trends in house
prices this year—small rises in some
markets, declines in others—have not
been a uniform positive for demand,
mainly because they have muted the
investment motive for owning a home.
Moreover, although most respondents to
the Michigan survey in recent months
reported that it was a good time to buy a
house, only about one-third of those
who already owned homes thought it
was a good time to sell. In fact, industry
reports suggest that first-time homebuyers have accounted for an unusually
large share of all home purchases in the
past two years, and that sales and prices
in many localities have been strongest at
the lower end of the market.
Construction of multifamily housing
this year has been at its lowest level
since the 1950s. These structures—most
of which are intended for rental use—
now account for less than 5 percent of



total residential investment expenditures, compared with a figure of about
15 percent in the mid-1980s. Despite the
reduced production in the past several
years, vacancy rates and rents have not
yet shown clear signs of tightening for
the nation overall. By contrast, improvements to all existing housing units have
trended up over the past year and now
account for nearly one-fourth of total
residential construction expenditures.
The Business Sector
Developments in the business sector
generally were favorable in the first half
of 1993. Business fixed investment,
which continued to grow briskly, was
boosted by ample profits and cash flow,
the relatively low cost of capital, and
ongoing efforts to improve productivity.
Meanwhile, business balance sheets
strengthened further as growth of business debt remained relatively slow and
many firms continued to take advantage
of lower bond yields and high stock
prices to enhance liquidity by funding
out short-term liabilities.
Real business fixed investment
increased at a 13 percent annual rate in
the first quarter of 1993. Real outlays
for equipment posted another healthy
gain, and investment in structures,
which had been on a protracted decline
for some time, was about unchanged for
a second quarter. The indicators in hand
suggest that real business fixed investment remained strong in the second
quarter.
Equipment spending has continued to
be a mainstay of economic growth. It
rose at an annual rate of about 18 percent in real terms in the first quarter,
after a MV2 percent rise over the course
of 1992. Real outlays for computers and
related devices have continued to soar;
since early 1991, they have roughly
doubled, boosted by product innovations, extensive price-cutting by com-

Monetary Policy Report, July
puter manufacturers, and the ongoing
efforts of businesses to achieve efficiencies through the utilization of new
information-processing technologies.
However, demand for other, more traditional types of equipment also began to
grow around the middle of 1992 and
continued to expand in early 1993.
Domestic purchases of aircraft spurted
in the first quarter; but, given the financial problems besetting the airlines, this
increase will likely be reversed in coming quarters.
Investment in nonresidential structures appears to be stabilizing after several years of steep declines. Construction outlays were essentially flat in real
terms over the fourth and first quarters,
and the advance indicators suggest that
the bottom has been reached or is close
at hand. Trends within the construction
sector have been divergent. In the office
sector, the excess of unoccupied space
remains huge, and spending continues to
contract. However, spending for commercial structures other than office
buildings, which also had fallen sharply
over the past several years, has apparently turned the corner because of both
the stronger pace of retail sales over the
past year and the ongoing shift of retailing activity to large suburban stores.
Outlays for industrial construction have
not exhibited the normal cyclical
rebound—mainly because utilization of
existing capacity has tightened only
gradually—but they seem, at least, to be
leveling out. Meanwhile, activity in the
public utilities sector has continued to
trend up, mainly because of capacity
expansion at electric utilities but also
because of the installation of pollution
abatement technology, which the Clean
Air Act requires be in place by 1995.
In contrast, drilling activity remains
depressed.
Nonfarm business inventories, which
had shown only small changes, on net,



73

since the middle of 1991, rose considerably last winter and spring. Although
the buildup early in the year was likely
motivated in part by the need to replenish stocks drawn down by surprisingly
strong sales in late 1992, some of the
recent increase may be attributable to
softer-than-expected sales. Notably,
the inventory-sales ratio for non-auto
retail stores remained in May around the
high end of the range of recent years. By
contrast, inventories at factories and at
wholesale trade establishments generally seem to be reasonably well aligned
with sales.
After advancing markedly over the
course of 1992, economic profits of U.S.
corporations were little changed overall
in the first quarter of 1993. The pretax
profits earned by nonfinancial corporations on their domestic operations weakened after a fourth-quarter surge, but
they still stood nearly 35 percent above
the cyclical low reached in 1991; the
upswing in these profits over the past
two years has reflected primarily a combination of moderation in labor costs
and reductions in net interest expenses.
Domestic profits of financial corporations have been buffeted in recent quarters by the losses that insurance companies sustained from major natural
disasters; without such losses, domestic
financial profits in the first quarter would
have surpassed the high reached in the
first quarter of 1992.
The farm economy has been beset by
numerous weather disruptions so far this
year. In the first quarter, severe weather
in some regions retarded livestock production and damaged fruit and vegetable crops. In many regions, spring
planting was hampered by wet weather,
and, in parts of the Midwest, continued
heavy rains around mid-year caused
major flooding. Because of the planting
delays and the floods, uncertainties
about acreage and yields are consider-

74

80th Annual Report, 1993

ably greater than usual for this time of
year, and farmers in the flooded regions
obviously have suffered financial losses.
Despite the weather-related supply
disruptions, farm income and farm
financial conditions for the nation as a
whole seem to have held up reasonably
well in the first half of 1993. On average, farm prices in the first half were
slightly above those of a year earlier,
with declines for farm crops being offset
by higher prices for livestock. Farm subsidies, which have been running well
above their 1992 pace, have been lifting
farm income and cash flow, and farm
investment in new machinery has picked
up. The recent jump in crop prices—a
consequence of the flooding—will boost
the incomes of the many farm producers
whose crops are still in good condition.

The Government Sector
Governments at all levels continue to
struggle with budgetary difficulties. At
the federal level, the unified budget deficit over the first eight months of fiscal
year 1993—the period from October to
May—totaled $212 billion, somewhat
less than during the comparable period
of fiscal 1992. However, excluding
deposit insurance and adjusting for the
inflow of contributions to the Defense
Cooperation Account in fiscal 1992, the
eight-month deficit was about $230 billion in both fiscal years. In the main, the
underlying deficit has failed to drop
because the restraint in discretionary
spending that was legislated in 1990 and
the deficit-closing effects of stronger
economic activity have been offset by
continued large increases in spending
for entitlement programs.
In total, federal outlays in the first
eight months of fiscal 1993 were only
about 2 percent higher than during the
same eight months of fiscal 1992. Outlay growth was damped significantly by



a sharp swing in net outlays for deposit
insurance that was attributable largely
to the improved health of depository
institutions. In fact, so far this year,
receipts from insurance premiums and
proceeds from sales of assets taken over
by the government have exceeded by
$181/2 billion the gross outlays to
resolve troubled institutions. Defense
spending was also quite weak in the first
eight months of fiscal 1993. Outlays for
Medicare and Medicaid continued to
rise rapidly; however, the increase so far
this year—about 10 percent—was only
half as large as the one in the preceding
year. The deceleration in health care
spending appears to stem, in part, from
federal regulations issued in 1992 that
limit the states' ability to shift Medicaid
costs to the federal government.
Federal purchases of goods and
services—the part of federal spending
included directly in gross domestic
product—declined at an annual rate of
18 percent in real terms in the first quarter of 1993. A sharp decrease in defense
spending more than accounted for the
drop. Real defense purchases have been
falling noticeably since early 1991, but
the decline has been erratic; at least part
of the first-quarter plunge can be interpreted as a correction after a few quarters of surprisingly strong spending.
Meanwhile, real nondefense purchases
have been almost flat over the past
couple of quarters.
Federal receipts in the first eight
months of fiscal 1993 were about 5 percent greater than in the same period of a
year earlier; the rise was roughly the
same as that in nominal GDP. Boosted
by the upswing in business profits, corporate taxes rose sharply. However, they
account for less than one-tenth of total
receipts, and growth in other categories
was only moderate in the aggregate.
States and localities continue to face
sizable budget deficits: As measured

Monetary Policy Report, July
in the national income and product
accounts (NIPA), the combined deficit
(net of social insurance funds) in the
sector's operating and capital accounts
has been stuck around $40 billion since
late 1990. These outsized deficits have
persisted despite ongoing efforts by
many governments to adjust spending
and taxes. As at the federal level, deficit
reduction has been complicated by the
upsurge in payments to individuals for
health and income support; in the first
quarter of 1993, state and local transfer
payments for Medicaid and Aid to Families with Dependent Children (in nominal terms) were nearly 20 percent above
those of a year earlier.
The deficit-reduction efforts of state
and local governments in recent quarters
have been concentrated on the spending
side. Their purchases of goods and services were nearly flat in real terms in the
first quarter of 1993 and have changed
little, on net, since early 1992. Outlays
for construction, which fell at an annual
rate of 7 percent, on average, in the
fourth and first quarters, have been especially weak. For all major categories
except sewer and water, outlays in
recent months have been running significantly below year-earlier levels. State
and local employment has continued to
expand at the somewhat slower pace
that has been evident since 1991, while
these governments have continued to
hold the line on wages and benefits. The
approximately 3Vi percent increase in
state and local compensation rates over
the year ended in March was similar to
the rise for workers in private industry;
by contrast, in the 1980s, state and local
workers received increases that, on average, were more than 1 percentage point
per year greater than those in private
industry.
Receipts of state and local governments, restrained by the relatively tepid
cyclical upswing in the sector's tax



75

bases, have grown only moderately over
the past year. Also, these governments
have lately been reluctant to raise taxes,
after the sizable hikes they enacted in
1990 and 1991. All told, the sector's
own-source general receipts, which
comprise income, corporate, and indirect business taxes, rose 5 percent over
the four quarters ended in the first quarter of 1993, an increase about the same
as that in nominal GDP.

The External Sector
Since December 1992, the tradeweighted foreign exchange value of the
dollar has risen about 5 percent, on balance, in terms of the currencies of the
other Group of Ten (G-10) countries.
This net increase has reflected much
larger movements in the dollar's value
against individual currencies: In particular, a sharp decline against the Japanese
yen was more than offset by substantial increases against major European
currencies.
Relative to the monthly average for
December 1992, the dollar has declined
nearly 15 percent against the yen to
record lows, prompting heavy Japanese
official purchases of dollars and moderate dollar purchases by U.S. authorities.
The strengthening of the yen has
occurred despite the weak performance
of the Japanese economy and market
expectations that Japanese short-term
interest rates will remain near historically low levels over the next year; it
seems to be based largely on the perception that Japan's external surplus, which
has grown rapidly over this period, is
not sustainable.
Against the German mark, the dollar
has risen almost 10 percent since
December, reflecting a substantial easing of German interest rates and the
expectation of further declines in light
of the sharp contraction in German

76

80th Annual Report, 1993

economic activity. The dollar has also
appreciated against other European
currencies, and it has remained little
changed against the Canadian dollar.
Economic activity in the major foreign industrial countries generally has
been sluggish so far this year. The
recovery in Canada now seems to be
reasonably well established, and real
GDP in the United Kingdom has been
growing slowly. However, continental
Europe remained in recession in the first
quarter, with a sizable reduction in real
GDP in western Germany; recent indicators point to continued weakness in
the second quarter. After falling for
much of 1992, Japanese real GDP
advanced in the first quarter, a rise in
large part reflecting the effects of earlier
fiscal measures; however, indicators for
the second quarter are mixed, and the
appreciation of the yen will likely result
over time in a drag on net exports.
Unemployment rates have continued
to rise (into the double-digit range in
many instances) in the countries still in
recession; even in the countries showing
signs of recovery, unemployment has
remained high. Partly as a consequence,
wage pressures have ebbed, and underlying inflation has continued to decelerate, on average. A notable exception is
western Germany, where the CPI rose
more than 4 percent over the twelve
months ended in June, partly because of
an increase in the value-added tax early
this year and large increases in the prices
of housing services.
In contrast to the overall weakness of
activity in foreign industrial countries,
real growth so far this year in major
developing countries, especially in Asia,
appears to have remained at around the
strong pace of 1992.
After expanding rapidly at the end of
1992, real merchandise exports declined
during the first quarter of 1993, but they
bounced back to their fourth-quarter



1992 high in April and May. Shipments
to developing countries, which had risen
sharply over 1992, dropped back during
the January-to-May period. In the aggregate, exports to industrial countries rose
somewhat in the first five months of
1993, but Canada and the United Kingdom accounted for most of the increase.
Real merchandise imports, extending
the rapid pace of growth recorded over
the four quarters of 1992, rose sharply
over the first five months of 1993. Trade
in computers continued to soar and was
responsible for about one-third of the
increase in merchandise imports. More
broadly, imports were boosted by the
rapid growth of U.S. domestic final
demand in the second half of 1992
and inventory restocking this year. In
addition, the prices of non-oil imports,
reflecting the lagged effects of the appreciation of the dollar during the last quarter of 1992, fell somewhat in the first
quarter; much of that decline appears to
have been reversed in the second quarter. The price of oil imports fluctuated in
a relatively narrow range over the first
half of 1993. Mild weather and strong
OPEC production pushed oil prices
down early in the year, but prices subsequently retraced the decline on signs
that OPEC would effectively curb
production. Recently, oil prices have
dropped on Kuwait's decision not to
participate in OPEC's quota allocations
for the third quarter and speculation that
Iraq may be allowed to resume exporting sooner than had been expected.
The merchandise trade deficit widened to $116 billion (at an annual rate)
in the first quarter of 1993, nearly
$10 billion greater than in the second
half of 1992; it increased somewhat
further in April and May, on average.
With moderate increases in net income
from direct investments and a slight further widening of the surplus on net service transactions, the deficit in the cur-

Monetary Policy Report, July
rent account deficit rose somewhat less
than the trade deficit, to $89 billion
(annual rate) in the first quarter, compared with $83 billion in the second half
of 1992.
Net capital inflows recorded in the
first quarter of 1993 were largely attributable to substantial increases in foreign
official assets held in the United States,
particularly in those of some newly
industrializing Asian economies and of
certain Latin American countries. Net
private capital inflows were relatively
small. Private foreigners added significantly to their holdings of U.S. securities, particularly Treasury bonds. However, U.S. net purchases of foreign bonds
reached record levels, and net purchases
of foreign stocks, although down from
peak levels reached in the last half of
1992, remained heavy. New bond issues
by foreigners in the United States also
were very strong.
Capital inflows associated with foreign direct investment in the United
States recovered substantially in the first
quarter but remained far below the peaks
reached in 1989. Foreign direct investment in the United States apparently has
been deterred by unfavorable returns
realized on earlier investments and
by financial market conditions less
favorable to acquisitions. In contrast,
capital outflows associated with U.S.
direct investment abroad remained
strong.
Labor Market Developments
The labor market showed signs of
improvement in the first half of 1993.
According to the payroll survey,
employment increased about 1 million;
this number compares with a rise of
about 600,000 over the second half of
last year and brings the total increase
since the cyclical low in 1991 to about
2 million.



77

Nonetheless, job gains have continued to fall far short of the norms set
by earlier business cycle expansions.
For example, only in May did payroll
employment return to its pre-recession
peak, two years after the cyclical trough;
by contrast, recessionary job losses typically have been reversed within the first
year of the expansion. Job growth has
continued to be restrained by the temperate pace of economic activity and
employers' ongoing efforts to improve
productivity. In addition, firms are confronting cost pressures associated with
sizable increases in health insurance premiums and in other fringe benefits;
uncertainties about the future course of
government policies may also be contributing to the reluctance of some firms
to expand their permanent full-time
work forces.
Moreover, firms are relying increasingly on temporary workers, in part
because doing so affords them greater
flexibility in responding to fluctuations
in demand for their products. Indeed,
employment at personnel supply firms,
which consist largely of temporary-help
agencies, rose more than 150,000
between December and June. Over the
past two years, the increase has been
about 500,000; thus, although these
firms currently account for less than
2 percent of total payroll employment,
they are responsible for one-quarter of
the increase in total employment over
this period.
Job gains in the first half of 1993 also
reflected a continuation of the steady
uptrend in employment in health services. In addition, gains occurred at
trade establishments, construction payrolls improved with the recent stronger
housing activity, and there were scattered increases in services other than
health and personnel supply.
Meanwhile, manufacturing employment declined further, on balance, over

78

80th Annual Report, 1993

the first six months of the year.
Although factory output increased
steadily through April, firms relied
mainly on a combination of productivity
improvements and longer workweeks to
meet their output objectives; in May and
June, output decreased somewhat. Job
losses in the first half were concentrated
in the durable goods sector, with particular weakness at producers of aircraft
and motor vehicles. Since its last peak
in January 1989, manufacturing employment has fallen about PA million; layoffs in defense-related industries (those
industries that depend on defense expenditures for at least 50 percent of their
output) have accounted for about onefifth of the decrease in total factory
payrolls.
Employment as measured by the
monthly survey of households rose
about 900,000 over the first six months
of the year—essentially the same as in
the payroll series. The number of unemployed fell appreciably at the beginning
of the year, and the civilian unemployment rate dropped from 7.3 percent in
December to 7.0 percent in February; it
has shown little change since that time.
The civilian labor force expanded
only moderately over the first six
months of 1993—less than 1 percent at
an annual rate. Labor force growth continued to be damped by the relatively
small increase in the working-age population. In addition, perceptions of meager employment opportunities evidently
continued to deter many potential job
seekers. The labor force participation
rate, which measures the percentage of
the working age population that is either
employed or looking for work, spurted
in late spring; however, this spurt followed a sharp decline earlier in the year,
and the level at mid-year was about the
same as that in late 1992.
Output-per-hour in the nonfarm business sector declined at an annual rate of



1 xh percent in the first quarter, echoing
the sharp deceleration in output. Nonetheless, the first-quarter drop followed a
string of sizable increases; all told, the
rise in productivity over the year ended
in the first quarter of 1993 was Wi percent—smaller than the gains recorded
earlier in the economic expansion but
still noticeably larger than the norms for
the past decade. Productivity growth in
the manufacturing sector, where downsizing and restructuring efforts have
been under way for some time, has continued to be especially impressive, totaling more than 5 percent over the past
year.
Labor compensation has tilted up of
late. The employment cost index for private industry—a measure that includes
wages and benefits—rose at an annual
rate of 4lA percent over the first three
months of the year. Even so, the data are
volatile, and the total increase since
March 1992 amounted to only 3J/2 percent; by contrast, this index had risen
4lA percent over the preceding twelve
months, and, as recently as early 1990,
the twelve-month change had exceeded
5 percent. The increase in wages over
the past year was less than 3 percent,
whereas the cost of fringe benefits,
pushed up by the steep rise in the cost of
medical insurance and by higher payments for workers' compensation, rose
more rapidly. Primarily because of the
drop in productivity, unit labor costs
deteriorated markedly in the first quarter, but they still were up less than 2 percent over the past year.
Price Developments
Inflation exhibited considerable monthto-month volatility in the first half of the
year. Broad measures of inflation picked
up somewhat in early 1993, with
monthly readings through April in the
upper part of the range of the past

Monetary Policy Report, July
couple of years. However, price changes
at the consumer and the producer levels
were small in May and June. Cutting
through the monthly data, the disinflation process evident in 1991 and 1992
seems to have stalled, with underlying
inflation, as measured by the twelvemonth change in the CPI excluding food
and energy, holding in the range of
314 percent to 3!/2 percent that has prevailed since last summer. The total CPI,
held down by essentially flat energy
prices, has risen 3 percent over the past
twelve months.
The CPI for food increased at an
annual rate of 2 percent in the first half
of 1993, a shade above the rate of
increase during 1992. Meat prices
jumped sharply during the first few
months of the year as production fell
short of year-earlier levels. In addition,
the prices of fresh vegetables were
boosted during the spring by weatherrelated production setbacks in several
regions of the country. By late spring,
these supply problems had abated, and
the June CPI brought price declines in
food categories where the sharpest
upward pressures previously had been
evident. Since the end of June, however,
farm crop prices have moved up in
response to the severe flooding in the
Midwest. The increases in crop prices
have already been reflected in the
form of large advances in some commodity price indexes and have raised
the possibility that renewed upward
pressures on consumer food prices could
soon emerge.
Consumer energy prices changed little, on net, over the first half of the year.
With world oil markets remaining relatively quiescent, the price of West Texas
intermediate generally fluctuated
between $18 and $20 per barrel but has
weakened recently. Retail prices for
refined petroleum products changed
fairly little on the whole through April



79

and dropped, on balance, in May and
June. Residential natural gas prices rose
considerably over the first half, in part
because of inventory adjustments associated with last winter's colder-thanusual weather; although recent declines
in wellhead prices suggest that some of
the increase at the retail level may be
retraced in coming months, over the
longer haul, natural gas prices are being
supported by an ongoing shift toward
the use of cleaner-burning fuels.
All told, the CPI excluding food and
energy increased at an annual rate of
3lA percent over the first half of the
year, after rising 3 percent over the second half of 1992. The CPI for goods
soared in January and February, with
large increases reported for several
items. Apparel prices jumped early in
the year, in part because strong sales in
late 1992 limited the need for postChristmas markdowns. Some retailers
may also have seen opportunities to
widen profit margins on other merchandise; the recent decrease in prices of
home furnishings, for example, suggests
that not all of these increases stuck.
Increases in prices of non-energy services were steadier but also somewhat
larger than in 1992. Part of the step-up
was in shelter costs, which account for
about half of non-energy services and
had posted some unsustainably small
increases last summer. However, the
substantial deceleration in medical care
prices (for both goods and services) that
has been in train over the past few years
extended into 1993. In fact, the CPI for
medical care rose only about 6 percent
over the twelve months ended in June;
this increase was among the smallest of
the past decade.
To some extent, the higher underlying
CPI inflation rates in the first half of
1993 may be a statistical phenomenon
that will be reversed in the second half:
Indeed, over the past several years, price

80

80th Annual Report, 1993

increases early in the year have tended
to exceed those for the year as a whole,
even after seasonal adjustment by the
Bureau of Labor Statistics. But, even
allowing for this phenomenon, inflation
seems to have leveled out. The lack of
further deceleration is puzzling in light
of the considerable slack in labor and
product markets. One possible explanation is that the pickup in economic
activity late last year may have triggered a round of price increases; if so,
some deceleration in prices is likely in
the wake of the subdued performance of
the economy in the first half. Another
may be the apparent failure of inflation
expectations, as measured by various
surveys of consumers and businessmen, to reflect fully the reduction in
actual inflation over the past few
years; although the survey measures
vary considerably, respondents seem to
share a sense that inflation has bottomed
out.
Prices received by domestic producers have slowed in recent months, after
undergoing a pickup earlier in the year.
All told, the twelve-month change in the
producer price index for finished goods
other than food and energy was less than
2 percent in June, down somewhat from
a year earlier. At earlier stages of processing, where price movements tend to
track cyclical fluctuations in demand,
prices of intermediate materials (excluding food and energy) firmed a little early
in the year, but they subsequently moderated; although the pattern was exaggerated by the spike in lumber prices, it
was evident for some other materials as
well. In commodity markets, prices of
precious metals have moved up sharply
over the past couple of months, and
some scattered increases have been evident elsewhere. More broadly, however,
industrial commodity prices were down
slightly, on net, over the first half of the
year.



Monetary and Financial
Developments in 1993
Monetary policy in 1993 has been
directed toward the goal of sustaining
the economic expansion while preserving and extending the progress made
toward price stability in recent years.
In the first half of the year, economic
activity slowed markedly from the very
rapid pace of the fourth quarter, while
inflation indicators fluctuated widely.
Although inflation readings were a
source of concern for the Federal Open
Market Committee, the intensification
of price pressures did not seem likely to
be sustained over an extended period,
and reserve conditions were kept
unchanged. With short-term rates
steady, prices of fixed-income securities
were buoyed by prospects for significant
fiscal restraint and by a slowing of the
economic expansion, although fears of a
pickup in inflation at times prompted
partial reversals in bond rates. Yield
spreads on private securities relative to
Treasury rates remained historically
narrow, and stock price indexes set new
records.
The monetary aggregates have been
sluggish this year, as both the share of
depository institutions in overall debt
finance and the proportion of depository
credit funded with monetary liabilities
have fallen further. The reduced role
for depositories largely reflects weak
demands for loans and deposits by the
public. Corporate borrowers have continued to issue heavy volumes of stocks
and bonds in part to pay down bank
debt, while households have withdrawn
deposits to invest in bond and equity
funds that finance, among others, corporate issuers. After two years of no
growth, bank loans weakened further
early this year, but increased fairly vigorously in May and June, posting a
small net gain for the first six months of

Monetary Policy Report, July
the year. The growth of nonfinancial
sector debt so far this year has edged up
from the subdued pace of 1992, despite
a deceleration of nominal spending, as
investment spending is estimated to
have exceeded the internal funds of corporations, household borrowing has
picked up relative to spending, and
Treasury financing needs have remained
heavy.

The Implementation
of Monetary Policy
Early in the year, incoming data suggested that the faster pace of economic
activity that had emerged in the third
quarter of 1992 had been maintained
through year-end. Indicators of industrial production, retail sales, business
fixed investment, and residential construction activity all posted solid gains.
Financial impediments to the expansion
appeared to be diminishing as the balance sheets of households, business
firms, and financial institutions continued to improve, although money and
credit growth remained weak. Wage and
price data suggested a continuing trend
toward lower inflation. Intermediateand long-term interest rates had declined
somewhat, in part reflecting a view that
the new Administration's fiscal stimulus
package was likely to be modest and
that material reductions in future deficits
were in prospect. The economic outlook
remained clouded, however, by uncertainties regarding details of fiscal policy
plans, continued restructuring and
downsizing of large businesses, and
lingering restraints on credit supplies.
At its early February meeting, the
FOMC decided that its directive to the
Federal Reserve Bank of New York
regarding domestic open market operations should retain a symmetric stance
regarding possible reactions over the
intermeeting period to incoming indica


81

tors; such a directive, which implied no
presumption in how quickly changes in
operations should be made toward tightness or ease, had been instituted in
December, following directives that had
been biased toward easing over much of
the previous two years.
Economic activity appeared to decelerate in the early months of the year,
however, in part because of adverse
weather conditions, with softness in
retail sales, housing starts, and nonresidential construction. Bank credit was
failing to expand significantly, while
broad money was declining because of
temporary factors and a weak underlying trend. Although short-term interest
rates were little changed, bond markets
rallied further on weaker economic
activity and improved prospects for
fiscal restraint, which would reduce the
government's demand for credit. Longterm rates fell to the lowest levels in
almost twenty years in early March,
before backing up somewhat on reports
of a second month of substantial
increases in consumer and producer
prices. The drop in interest rates buoyed
stock markets to record highs and
contributed to a small decline in the
weighted-average value of the dollar.
The dollar depreciated substantially
against the yen, as market attention
focused on Japan's growing trade
surplus.
Signs of price pressures were a concern for the FOMC, but the fundamentals of continued slack in labor and capital utilization, subdued unit labor costs,
and protracted weakness in credit and
broad money suggested that a higher
trend inflation rate was not setting in.
With the economy slowing, reserve
pressures were kept unchanged and a
symmetric policy directive was retained
at the meeting in March.
After pausing in March, producer and
consumer prices leaped again in April.

82

80th Annual Report, 1993

Long-term interest rates backed up
further in response; the price of gold
surged, and the dollar fell more rapidly.
With the Japanese authorities buying
dollars in foreign exchange markets, the
U.S. Treasury and the Federal Reserve
also purchased dollars for yen in late
April. After extended weakness, the
monetary aggregates jumped in early
May by more than could be explained
by temporary factors.
At its May meeting, the FOMC was
confronted with weak output growth and
intensified inflation readings. It was difficult to identify reasons for this juxtaposition. Price increases by business firms
in early 1993 could have reflected optimism engendered by strong demand
conditions in the second half of 1992
or an upward adjustment of inflation
expectations. However, considerable
slack remained in labor and product
markets, and the pace of economic
activity had slowed markedly. The Committee concluded that no policy adjustment was needed at its meeting, but the
risks of increased inflation and inflation
expectations warranted a directive that
contemplated a relatively prompt tightening of reserve pressures if signs of
intensifying inflation continued to
multiply.
The subsequent readings on inflation
for May and June were subdued; moreover, evidence of heightened inflation
expectations did not emerge in markets
for fixed-income securities. Consequently, the stance of monetary policy
was not changed following the May
FOMC meeting. The dollar rebounded
on foreign exchange markets in June
and early July in the wake of the fall of
the Japanese government and evidence
that economic conditions in Europe had
deteriorated further.
On balance, since the beginning of
the year, short-term interest rates are
little changed, while intermediate- and



long-term rates have fallen 3A to 1 percentage point, reaching the lowest levels
in more than twenty years. In particular,
the thirty-year Treasury bond has
reached a low of 6.54 percent, while the
ten-year Treasury note has touched
5.71 percent, its lowest level since 1971.
The interest rate on fixed-rate thirtyyear mortgages has dropped to 7.16 percent, a record low in the twenty-two
year history of the series. The fall in
intermediate-term interest rates in the
United States was roughly matched on
average abroad, and the trade-weighted
value of the dollar in terms of G-10
currencies has increased about 5 percent
from its December average, as overseas
economies weakened and foreign shortterm rates declined substantially.

Monetary and Credit Flows
Growth of the broad money measures
was quite slow over the first half of
1993, falling below the subdued pace of
1992, and leaving them near the lower
arms of the revised growth cones for
1993. This deceleration did not, however, reflect a moderation in overall
credit flows or a tightening in financial
conditions. Rather, it resulted from a
further diversion of credit flows from
depository institutions as well as continued financing of depository credit
through capital accumulation rather than
deposits. Indeed, growth of the debt of
all nonfinancial sectors is estimated to
have edged up this year—to 5 percent—
despite an apparent slowing in nominal
GDP. Continued substantial demand for
credit by the federal government as well
as more comfortable financial positions
and consequent signs of a greater willingness to borrow and lend by private
sectors likely supported debt expansion.
Nevertheless, overall debt growth
remains in the lower portion of its
revised 4 to 8 percent annual range for

Monetary Policy Report, July
1993. Nonfederal debt growth has
expanded at a still-modest 3lA percent
pace, after two years of even weaker
growth.
Taking advantage of low long-term
interest rates and the strong stock market, businesses have issued an exceptionally large volume of bonds and
equity; the proceeds have been used
mainly to refund other marketable debt
and repay bank loans. Stresses associated with the restructuring of the economy and the earlier buildup of debt
linger. However, downgradings of corporate debt by rating agencies have
dropped well below the peak levels
of a few years ago, and a growing number of firms have received upgradings,
as corporate cash flows have strengthened substantially relative to interest
expenses.
Debt service burdens of households
also have continued to decline relative
to disposable income, as households
have repaid high interest debt or taken
advantage of lower rates to refinance.
Indeed, the decline in long-term interest
rates during the year has brought a new
surge of refinancings of mortgages.
With balance sheets improved, households have become somewhat more
willing to borrow, and consumer credit
has begun growing moderately after two
years of weakness. Some of that growth,
though, may reflect heavy promotion
of credit cards carrying special incentives for use in transactions, such as
"frequent-flier miles" or merchandise
discounts. Net mortgage debt is estimated to have grown only a bit more
than the low rate of 1992.
Gross issuance of state and local government debt has been particularly
robust this year. However, refunding
volume has accounted for nearly 70 percent of the offerings, compared with
about 45 percent in 1992, a record year
for refundings. Net debt of state and



83

local governments has grown only moderately again in 1993. The budgetary
situations of some state and local governments have improved, as tax receipts
have been stronger than expected, but
severe financial problems remain in
other locales.
With corporate borrowers still relying
heavily on financing through capital
markets, and depository lending spreads
over market rates remaining high, the
trend decline in the share of total credit
flows provided by depository institutions was extended through the first half
of 1993. From the fourth quarter of 1992
to June, bank credit expanded at a
4lA percent annual rate, only a slight
pickup from the sluggish pace of the
previous two years. Securities acquisitions accounted for most of the expansion, as loans increased at only a
l3/4 percent rate. The growth of securities portfolios at banks in part reflects
additions to holdings of securitized
mortgage and consumer loans; bank
financing of consumer spending and real
estate transactions is thus stronger than
indicated by bookings of loans in those
sectors. Although commercial and
industrial loans have been about flat on
balance so far this year, a few signs of
easing in bank lending terms and conditions have recently emerged, and business loans rebounded in May and June.
Judging by business loan growth at
smaller banks so far this year, a pickup
has occurred in lending to smaller nonfinancial firms. Thus, the continuing
weakness in overall business loan
growth does not appear to be driven
primarily by restrictive supply conditions but rather by the preference of
larger firms to fund through capital
markets.
Lower market interest rates over the
past few years have helped strengthen
the financial positions of banks and
thrifts. The lower rates have resulted in

84

80th Annual Report, 1993

capital gains on securities and improved
interest margins—as deposit rates have
fallen more than lending rates. Lower
rates also have helped bank borrowers
by decreasing interest expenses and
boosting economic activity, thereby
reducing loan loss provisions for banks.
Banks posted record earnings in 1992
and remained very profitable in early
1993; prices of their shares on equity
markets have risen substantially.
Thrift institutions have continued to
contract in 1993, though at a much
slower pace than over the past four
years. A lack of funding for the Resolution Trust Corporation caused a hiatus
in the closure of institutions under its
conservatorship. However, privately
operated thrifts have not expanded and
the industry continues to consolidate.
Slower growth in nominal GDP, moderate demand for credit relative to
spending, and the reduced share of
credit provided by depositories have all
contributed to the lack of significant
growth in the broad monetary aggregates this year. Another factor inhibiting
money growth has been continued substantial funding of bank and thrift assets
with subordinated debt and equity issues
as well as with retained earnings—all a
byproduct of ongoing efforts to build
capital positions. Only about one-third
of the industry (by asset volume) had
Distribution of Assets of Domestic
Commercial Banks, by Adjusted
Capital Categoryl
Percent
End of year
Category
1991
Well capitalized
Adequately capitalized .
Undercapitalized

1992

34
45
21

68
22
10

March
1993
70
20
10

1. Capital categories adjusted for overall supervisory
rating according to the rule of thumb of downgrading a
bank by one category for a low examination rating by its
supervisory agency (CAMEL 3,4, or 5).




capital ratios and supervisory ratings
high enough at the end of 1991 to be
considered well-capitalized, but more
than two-thirds was so positioned by
early 1993. About $10 billion was added
to bank equity and subordinated debt
during the first quarter, a pace about the
same as that in 1992; data on new debt
and equity issues indicate another sizable gain over the second quarter.
Depositories have also recently relied
more heavily on other nondeposit
sources of funds. Weak economies and
credit demand abroad have prompted
the U.S. offices of foreign banks to draw
more funding from overseas and the
domestic offices of U.S. banks to reduce
foreign lending this year. Overall shifts
from deposits to other sources of funding may be driven partly by regulatory
inducements—including higher insurance premiums on deposits and incentives to bolster capital. But changes in
investor preferences from short-term
depositsr to longer-term debt and equity
may also be playing a role in motivating
the restructuring of bank and thrift
sources of funds.
Greater reliance by borrowers on capital markets has been facilitated by concurrent shifts in saving preferences away
from monetary assets and into capital
market investments. Such portfolio
realignments are evident in record
inflows to bond and stock mutual funds,
and money balances were also likely
invested directly in stocks and bonds.
The incentives for what appears to be an
extraordinary adjustment of household
portfolios are varied. Interest rates paid
on retail time deposits, NOW accounts,
and money market deposit accounts
(MMDAs) have fallen well below any
rate offered since the inception of deregulated deposits in the early 1980s, and
savings deposit rates are now the lowest
in more than thirty years. The shock
effect of historically low deposit interest

Monetary Policy Report, July
rates caused many depositors to investigate alternative investments. With the
yield curve extraordinarily steep, much
higher returns have been available in
recent years on longer-term investments.
A bond or stock mutual fund offers
investors a chance to earn these higher
yields and still enjoy liquidity features,
including in some cases a check-writing
facility. However, investment in such a
mutual fund carries with it a higher risk
of loss as well, because unlike monetary
assets, its principal value fluctuates with
market prices. Indeed, the higher yield
on bonds relative to short-term instruments probably anticipates some capital
losses. Whether all households accurately assess relative risks when comparing returns recently earned on mutual
funds with those on money balances
remains an open question.
Shifts into mutual funds have become
much easier and less costly for households, most notably because many banks
have begun offering mutual funds for
sale in their lobbies. While many banks
now offer discount brokerage services, a
survey by the Federal Reserve found
that larger banks have recently been
making special efforts to promote
mutual fund investments among their
depositors. An increasing number of
banks have sponsored their own mutual
funds or entered into exclusive sales
relationships with nonbank sponsors of
funds. Some banks have promoted these
products as a defensive measure to
retain long-run relationships with valued depositors. In other cases, however,
banks have promoted funds as part of a
strategy to earn fee income without
booking assets, thereby avoiding the
need to raise additional capital.
Substitution between money and
long-term mutual funds appears to have
become evident in the aggregate data in
recent years. There was little increase in
such funds from 1987 through 1990, but



85

inflows have surged since then, at the
same time that accretions to M2 balances have declined. A comparison of
the quarterly growth rates of M2 and the
sum of M2 and bond and stock funds
shows that growth of the sum has not
weakened as dramatically as that of M2
over the last two and half years; it has
averaged nearly a 5 percent annual rate,
compared with less than 2 percent for
M2. Although adding mutual funds and
M2 together captures some substitution
out of M2 in recent years, the total
remains quite volatile, indicating that
other forces have affected both M2 and
mutual funds. Partly as a consequence,
the relationship of the total to aggregate spending is subject to considerable
uncertainty. Investments in bond and
stock funds are themselves subject to
potentially volatile capital gains and
losses. More fundamentally, with the
public's holdings of mutual funds now
vastly expanded, its responses to a variety of interest rate and stock price movements has yet to be tested.
Because weakness in the demand for
broad money has resulted largely from
shifts of portfolio preferences rather
than changes in spending intentions, it
has not been reflected in comparable
weakness in nominal GDP. Furthermore,
the effects of a declining share for
depositories in overall credit growth
have been substantially offset by
increased funding through capital markets, where households now invest a
larger share of wealth. The velocity of
M2 has been subject to extraordinary
and unpredictable surges that have
reduced the value of M2 as a guide to
policy. Traditional models of velocity
based on the difference between shortterm market interest rates and interest
rates on deposits and money market
mutual funds, and even broader models
that take account of longer-term interest
rates and after-tax loan rates faced by

86

80th Annual Report, 1993

households, cannot explain the full
4 percent rise in M2 velocity in 1992,
nor what may be a somewhat faster rate
of increase in the first half of 1993.
Money growth in the first quarter was
depressed in part by the effects of several temporary factors, including distortions of seasonal factors and a lull in
mortgage refinancing. A renewed surge
of mortgage refinancing began to bolster
demand deposits and MMDAs in
April, as mortgage servicers increased
balances temporarily before making
remittances to investors in mortgagebacked securities. The seasonal-factor
distortions began to reverse that month
as well. However, substantial shortfalls
in individual nonwithheld tax payments
relative to recent years produced an

offsetting restraint to money growth in
April, as the buildup of balances
required to pay taxes was smaller than
that incorporated into seasonal factors.
Even excluding estimated effects of
these special factors, however, underlying growth of money through the first
four months of the year was far weaker
than historical relationships would
suggest.
Despite continued heavy inflows to
bond and equity funds in May, the monetary aggregates surged, boosted in part
by a reversal of the tax effects and an
intensification of mortgage refinancing
activity. However, the aggregates decelerated substantially in June, and by more
than might be suggested by a waning of
tax and mortgage refinancing effects.

Growth of Money and Debt
Percent

Measurement period

Ml

M2

M3

Domestic nonfinancial
debt
Total

Year*
1980 .
1981
1982
1983
1984

.

7.4
5.4 (2.52)
8.8
10.4
5.5

Nonfederal

8.9
9.3
9.1
12.2
8.1

9.5
12.3
9.9
9.9
10.8

9.5
10.0
9.3
11.4
14.3

9.0
9.7
7.4
8.8
13.9

1985
1986
1987
1988
1989

12.0
15.5
6.3
4.3
6

8.7
9.3
4.3
5.3
4.7

7.6
8.9
5.8
6.4
3.7

13.8
14.0
10.1
9.2
8.2

13.3
13.7
10.4
9.6
8.5

1990
1991
1992

4.3
8.0
14.3

4.0
2.8
1.8

1.8
1.1
.3

6.8
4.4
4.8

5.9
2.5
2.9

Half year (annual rate)3
1993 HI

8.7

.1

-.7

5.1

3.3

Quarter (annual rate)4
1993Q1
Q2

6.6
10.6

-2.0
2.2

3.8
2.4

4.4
5.7

3.0
3.6

9.5

.8

-.3

5.1

3.3

Fourth quarter 1992 average to June 1993 average
(annual rate) 5
....
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 1992:Q4 to average for 1993:Q2
(for debt, estimated with data through May).




4. From average for preceding quarter to average for
quarter indicated (for debt, estimated with data through
May).
5. For debt, to May 1993 average.

Monetary Policy Report, July
In 1993, household portfolio adjustments differed somewhat from their previous pattern. In the past, the realignment of household wealth toward capital
market investments had mainly involved
shifts from money market mutual funds
and small time deposit accounts. At the
same time, outflows from those accounts
had also gone into NOW and savings
deposits, the interest rates on which
were falling only slowly as market rates
declined. This year, the sum of all these
M2 balances has fallen at about the
same rate as in 1992, but a slower runoff
of small time deposits and money funds
has been offset by a sharp deceleration
in the growth of NOW and savings
deposits. Catch up declines in interest
rates on liquid deposits may account for
part of their slower growth. Some nontransactions balances held in NOW and
MMDA deposits have likely been
shifted into bond and equity funds. It
may be that some depositors who do not
ordinarily shop for small rate advantages have been induced to make basic
portfolio adjustments because of the historically low deposit interest rates and
the increased ease of making investments in capital market instruments.
Partly as a result, narrow measures of
money have decelerated this year, but
their expansion has remained rapid. Ml
has grown at a 9V2 percent rate from the
fourth quarter of 1992 through June,
compared with 14V4 percent in 1992.
Reserves, now held exclusively against
transaction deposits, have grown at an
11 percent pace compared with 20 percent in 1992. The monetary base has
slowed by much less, because of continued strong foreign demand for currency
this year.
With reduced strength in its Ml component, and in savings and MMDAs, as
well as continued runoffs of small time
deposits and retail money funds, M2 has
grown at only a 3A percent annual rate



87

from the fourth quarter of 1992 through
June 1993, well below the lower end of
its growth cone set in February. The
FOMC monitored the behavior of M2
carefully over the first half of the year,
but in light of actual and expected
strength of velocity, the Committee
determined that actions to boost M2
growth were not needed to achieve its
underlying objectives for prices and the
economy. The aggregate is near the
lower arm of the revised annual growth
cone established in July, and if velocity
continues to increase substantially, M2
may well come in toward the lower end
of the revised growth range for the year.
The non-M2 portion of M3 has
declined this year at nearly the same
pace as that of the previous two years.
Large time deposits have continued to
fall, and the halt in reductions in shortterm rates has ended the rapid growth of
institutional money funds, as their
slower-adjusting yields have come down
to their usual relationship to market interest rates. From the fourth quarter of
1992 through June, M3 fell at about a
VA percent annual rate; it lies slightly
below its revised annual growth cone. •

Part 2
Records, Operations,
and Organization




91

Record of Policy Actions
of the Board of Governors
Regulation A (Extensions of Credit
by Federal Reserve Banks)
December 16, 1993—Amendments
The Board approved amendments to
Regulation A, effective January 30,
1994, to carry out a provision of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 that set limits
on Federal Reserve Bank credit.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and Lindsey and
Ms. Phillips.
Section 142 of the Federal Deposit
Insurance Corporation Improvement Act
of 1991 amended section 10B of the
Federal Reserve Act to discourage
advances to undercapitalized and critically undercapitalized insured depository institutions. This amendment provides that after December 19, 1993, the
Board may be financially liable to the
Federal Deposit Insurance Corporation
(FDIC) for certain losses incurred by the
FDIC's insurance funds. Specifically,
the Board is liable for excess losses
attributable to advances after the expiration of certain periods to undercapitalized insured depository institutions
that are not viable and to critically
undercapitalized insured depository
institutions.
The Board approved amendments to
Regulation A to place limitations on
Federal Reserve Bank credit to undercapitalized and critically undercapitalized insured depository institutions;
describe the calculation of amounts that



may be payable to the Federal Deposit
Insurance Corporation; define undercapitalized and critically undercapitalized
insured depository institutions; clarify
the term "viable" as it applies to an
undercapitalized insured depository
institution; and provide for assessments
on the Federal Reserve Banks for
amounts that the Board may be required
to pay the Federal Deposit Insurance
Corporation under section 142. The
revised regulation will guide the Federal
Reserve Banks in their dealings with
undercapitalized and critically undercapitalized institutions and will advise
those institutions and their banking
supervisors of potential limitations on
the availability of Federal Reserve Bank
credit. The Board also approved several
technical and stylistic changes to update
and clarify the regulation.

Regulation B (Equal Credit
Opportunity)
November 29, 1993—Amendments
The Board approved amendments to
Regulation B to give credit applicants
the right to receive a copy of their
appraisal reports, effective December 14, 1993.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The Federal Deposit Insurance Corporation Improvement Act of 1991 pro-

92

80th Annual Report, 1993

vided credit applicants with a right to
receive a copy of appraisal reports. The
Board amended Regulation B to provide
alternative methods of compliance with
the law.
Under the amendments, creditors
could automatically provide a copy of
the appraisal report to each applicant for
certain loans secured by dwellings or
could provide a copy upon request, subject to certain other provisions in the
rule.
For creditors who do not automatically provide a copy of appraisal
reports, the regulation includes limits on
when applicants may request (and creditors must provide) a copy of a report and
a requirement that applicants be notified
of the right to receive a copy. The
amendments are effective on December 14, 1993, but compliance with the
regulatory requirements is optional until
June 14, 1994.

Regulation C (Home Mortgage
Disclosure)
February 26, 1993—Amendments
The Board amended Regulation C to
implement statutory requirements for
disclosure of information, effective
March 1, 1993.
Votes for this action: Messrs. Greenspan,
Angell, LaWare, and Lindsey and Ms.
Phillips. Absent and not voting: Messrs.
Mullins and Kelley.
The Board amended Regulation C to
implement statutory amendments requiring that lenders release disclosure statements earlier than they previously had
been available and make their modified
loan application register data publicly
available. The revised rules apply to
data collected for 1992.



Regulation D (Reserve
Requirements of Depository
Institutions)
November 15, 1993—Amendments
The Board amended Regulation D to
increase the amount of transaction
balances to which the lower reserve
requirement applies.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, LaWare, and Lindsey and
Ms. Phillips.
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 nationwide transaction balances. By
the beginning of 1993, that amount was
$46.8 million. Recent increases in transaction balances warranted an increase
of $5.1 million. The Board, therefore,
amended Regulation D to increase to
$51.9 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 institutions's
reservable liabilities. The act also provides for annual adjustments to that
exemption based on nationwide deposit
growth. By the beginning of 1993, that
amount had been increased to $3.8 mil-

Board Policy Actions
lion. Recent growth in deposits warranted an increase to $4 million in
the amount of deposits subject to a
zero percent reserve requirement, and
the Board amended Regulation D
accordingly.
The amendments are effective with
the reserve computation period beginning December 21, 1993, for institutions reporting weekly, and December 14, 1993, for institutions reporting
quarterly.

Regulation H (Membership
of Stale Banking Institutions in the
iVdoral Rcvcivc S w c m : .
Regulation h ; Intimation;! 1
Banking OrvratioT- . '//.;.-:
Rtguiatkm \ . Ban* Hohiuw
^nmparhc* ami Ohtn^J M- Bank

May 26, 1993—Amendments
The Board amended Regulations H, K,
and Y to adopt a uniform multiagency
criminal referral form for domestic and
foreign financial institutions operating
in the United States, effective October 8,
1993.
Votes for this action: Messrs. Mullins,
Angell, Kelley, and Lindsey and Ms.
Phillips. Absent and not voting: Messrs.
Greenspan and LaWare.
The Board adopted a final rule
amending its Regulations H, K, and Y to
require that all domestic and foreign
banking organizations supervised by the
Board, including state member banks,
bank holding companies, Edge Act corporations, and certain U.S. branches and
agencies of foreign banks, file criminal
referrals on a broad range of suspected
criminal activities.



93

Regulation H (Membership
Requirements for State-Chartered
Banks) and
Regulation Y (Bank Holding
Companies and Change in Bank
Control)
April 20, 1993—Amendments
The Board approved amendments of
Regulations H and Y to adopt as final its
interim rule concerning the treatment of
one- to four-family residential construction loans, effective April 26, 1993.
Votes for this action: Messrs. Greenspan,
Angell, Kelley, and LaWare and Ms. Phillips. Absent and not voting: Messrs.
Mullins and Lindsey.
The Board adopted as final its interim
rule amending the risk-based capital
guidelines for bank holding companies
and state member banks to lower from
100 percent to 50 percent the risk weight
assigned to certain loans to builders to
finance the construction of presold residential (one- to four-family) properties.
The rule implements section 618(a)
of the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act of 1991.

Regulation O (Loans to Executive
Officers, Directors, and Principal
Shareholders of Member Banks)
May 3, 1993—Amendments
The Board approved amendments to
Regulation O to incorporate three exceptions to the regulation's insider lending
limit, effective May 3, 1993.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and LaWare
and Ms. Phillips. Absent and not voting:
Mr. Lindsey.

94

80th Annual Report, 1993

The Housing and Community Development Act of 1992 authorizes the
Board to adopt exceptions to the definition of "extension of credit" that pose
minimal risk to the lending bank. The
Board amended Regulation O to except
from the aggregate lending limit extensions of credit secured by obligations of
the United States or other obligations
fully guaranteed as to principal and
interest by the United States, extensions
of credit to or secured by commitments
or guarantees of a department or agency
of the United States, and extensions of
credit secured by a segregated deposit
account with the bank.

Regulation DD (Truth in Savings)
and Regulation Q (Interest on
Deposits)
March 16, 1993—Amendments
The Board amended Regulation DD,
effective March 21, 1993, and Regulation Q, effective June 21, 1993, to make
certain changes required by the Housing
and Community Development Act.
Votes for this action: Messrs. Greenspan,
Mullins, and Angell and Ms. Phillips.
Absent and not voting: Messrs. Kelley,
LaWare, and Lindsey.
The Housing and Community Development Act of 1992 extended the mandatory date for compliance with the
Truth in Savings Act by three months.
The act also modified the advertising
rules relating to signs on the premises of
an institution and made a technical
change in the provision dealing with
notices required to be given to existing
account holders. The Board amended
Regulation DD to implement these
changes. The Board also made two
minor changes in the regulation and provided guidance on several issues that



had been raised by institutions since
publication of the regulation in September 1992.
In connection with this amendment,
the Board also amended Regulation Q
to delay by three months the deletion
of rules governing the advertising of
deposit accounts.
Rules of Procedure
September 1, 1993—Amendments
The Board approved an amendment to
its Rules of Procedure to require that
bank merger applicants publish notice
of a proposed merger three times and
made certain technical changes in the
regulation, effective September 30,
1993.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and LaWare.
Vote against this action: Ms. Phillips.
The Bank Merger Act, section 18(c)
of the Federal Deposit Insurance Act,
requires that notice of merger applications be published at appropriate intervals during a period of at least thirty
days. Since 1992, in an effort to reduce
regulatory burden, the Board had
required the publication of only one
notice of a proposed merger. Because
the act requires that notice of merger
applications be published at appropriate
intervals, the Board approved amendments to its Rules of Procedure to
require that bank merger applicants publish notice of a proposed merger three
times over a thirty-day period. The
Board also approved certain other technical amendments to the regulation.
Ms. Phillips dissented from this
action because she was concerned about
the economic impact of publication of
multiple notices. She would have supported the publication of two notices but

Board Policy Actions
felt that the publication of three notices
would be excessive.

Rules Regarding Delegation
of Authority
September 1, 1993—Amendment
The Board amended its Rules Regarding
Delegation of Authority to delegate to
its ethics officer (the Board's General
Counsel) the authority to grant certain
individual waivers under the federal
conflicts of interest statute, effective
September 1, 1993.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and LaWare and
Ms. Phillips.
The Board delegated to the General
Counsel the authority to grant individual
waivers under the federal conflicts of
interest statute in cases in which the
employee's financial interest is not so
substantial as to be likely to affect the
integrity of the employee's services to
the Board.

95

Board's implementing regulation, Regulation DD. This authority matches the
delegations already in place for the
Truth in Lending Act, the Electronic
Fund Transfer Act, the Equal Credit
Opportunity Act, the Home Mortgage
Disclosure Act, and the regulations
implementing those statutes.

Rules Regarding Equal
Opportunity
February 10, 1993—Interim Rules
The Board approved an interim rule
revising its Rules Regarding Equal
Opportunity, effective February 18,
1993.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The revised rules conform as closely
as possible to a final regulation adopted
by the Equal Employment Opportunity
Commission governing the handling of
complaints of discrimination in the federal sector.

December 1, 1993—Amendment
The Board amended its Rules Regarding
Delegation of Authority to delegate to
the Director of the Division of Consumer and Community Affairs authority
for determining inconsistencies between
state laws and the federal Truth in
Savings law.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The Board delegated to the Director
of the Division of Consumer and Community Affairs the authority to determine whether a state law is inconsistent
with (and, therefore, preempted by) the
federal Truth in Savings Act and the



Policy Statements and
Other Actions
January 26, 1993—Securities
Activities of Section 20
Subsidiaries of Bank Holding
Companies
The Board approved an alternative
method of adjusting the 10 percent revenue test for ineligible securities held by
section 20 subsidiaries of bank holding
companies, effective January 26, 1993.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Ms.
Phillips. Votes against this action: Messrs.
Mullins and Angell.

96

80th Annual Report, 1993

The Board approved an alternative
test to measure compliance with the
10 percent limit on the ineligible securities that could be held by section 20
subsidiaries of bank holding companies.
Under the alternative test, revenue may
be indexed to interest rate changes by
comparing current interest rate changes
for various portfolio durations with rates
on corresponding durations in September 1989, when the 10 percent limit
was first adopted. Messrs. Mullins
and Angell thought that the indexed
revenue test was unduly complex and
burdensome.

March 8, 1993—Procedures for
Processing Applications Filed
by Foreign Banks
The Board adopted new procedures to
be used in processing applications filed
by foreign banks under the Foreign
Bank Supervision Enhancement Act of
1991.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey. Absent and not voting: Ms.
Phillips.

The Foreign Bank Supervision
Enhancement Act of 1991 establishes
uniform standards for all foreign banks
entering the United States and requires
that they meet financial, managerial,
and operational standards equivalent to
those required of U.S. banking corporations. A foreign bank may not establish a branch, agency, representative office, or commercial lending company
without the advance approval of the
Board.
The new procedures were designed to
expedite the processing of applications
and to reduce the burden on applicants.
The procedures require simultaneous



review of applications by staff members
of the Board and the Reserve Banks,
urge all foreign bank applicants to meet
with such staff members before filing
applications, require adherence to deadlines in requesting information during
the acceptance process, establish new
internal guidelines for processing applications after acceptance, and inform
the public that information files on
home country supervision and bank secrecy laws are maintained and available
in the Board's Freedom of Information
Office.

March 10, 1993—Interagency
Policy Statement on Credit
Availability
The Board approved issuance of an
interagency policy statement on credit
availability that would facilitate lending
to creditworthy small and medium-sized
businesses, effective March 10, 1993.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and LaWare and
Ms. Phillips. Absent and not voting: Mr.
Lindsey.

Problems with the availability of
credit over the past few years have been
especially significant for small and
medium-sized businesses and farms. In
response to a request by President Clinton, the Board, along with the Office of
the Comptroller of the Currency, the
Federal Deposit Insurance Corporation,
and the Office of Thrift Supervision,
issued an outline of a new program to
help ensure that regulatory policies do
not needlessly stand in the way of lending. The statement noted that loans to
creditworthy borrowers should be made
whenever possible as long as they are
consistent with safe and sound banking
practices.

Board Policy Actions
March 15, 1993—Delegation
of Authority
The Board delegated to the Commodity
Futures Trading Commission the authority to determine margins on stock index
futures contracts and options on those
contracts, effective March 15, 1993.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.

97

In connection with the Interagency
Policy Statement on Credit Availability
issued on March 10, 1993, the Board
approved issuance of an interagency
policy statement aimed at eliminating
unnecessary and overly burdensome
documentation for loans to small and
medium-sized businesses and farms.
June 8, 1993—Interagency Policy
Statements on Credit Availability
The Board approved issuance of five
interagency policy statements on credit
availability, effective June 10, 1993.

The Futures Trading Practice Act of
1992 gave the Board authority to set
margin requirements on stock index
futures contracts and options on those
contracts. The statute also allowed the
Board to delegate any or all of its
authority under this provision to the
Commodity Futures Trading Commission. Contract markets must submit all
rules, other than those relating to levels
of margins, to the commission for
approval. Because of the broad authority
of the commission over contract markets and because margins are but one
component of the risk-control systems
used by contract markets, the Board
concluded that the commission was the
most appropriate entity to exercise the
functions assigned to the Board. The
Board delegated its authority under the
statute to the Commodity Futures Trading Commission until further notice.

To implement the credit-availability
program announced by the five banking
agencies on March 10, 1993, the Board
approved issuance of five interagency
policy statements. The statements concerned the definition of "special mention" assets, avoidance of the use of
liquidation values in the supervisory
assessment of commercial real estate
loans, restoration of partially chargedoff loans to performing status, revision
of reporting and examination guidance
on sales of Other Real Estate Owned,
and revision of the in-substance foreclosure reporting rules.

March 30, 1993—Interagency Loan
Documentation Policy Statement

June 9, 1993—Interagency Policy
Statement on Credit Availability

The Board approved issuance of an
Interagency Policy Statement on Documentation Required for Loans to Small
and Medium-Sized Businesses and
Farms, effective March 30, 1993.

The Board approved issuance of an
interagency policy statement on credit
availability, effective June 10, 1993.

Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, and Lindsey and
Ms. Phillips. Absent and not voting:
Mr. LaWare.



Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.

Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
To implement the credit-availability
program announced by the five banking

98

80th Annual Report, 1993

agencies on March 10, 1993, the Board
approved issuance of an interagency
policy statement that outlines a program
for coordinating examinations of insured
depository institutions and inspections
of their holding companies.

August 11, 1993—Interagency
Policy Statement on the Closing
of Branches
The Board approved issuance of an
interagency policy statement on the
closing of branches by depository institutions, effective September 21, 1993.
Votes for this action: Messrs. Greenspan,
Mullins, Kelley, and LaWare and Ms.
Phillips.
The Board approved issuance of a
policy statement to implement section
228 of the Federal Deposit Insurance
Corporation Improvement Act of 1991,
which requires that insured depository
institutions give ninety days advance
written notice of the closing of any
branch to its primary federal regulator
and to branch customers, post a notice at
the branch site at least thirty days before
closing, and develop a policy on the
closing of branches.
December 17, 1993—Risk-Based
Capital Guidelines
The Board approved an amendment to
its risk-based capital guidelines for state
member banks and bank holding companies to permit them to lower the risk
weight assigned to certain multifamily
housing loans.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelly, LaWare, and
Lindsey and Ms. Phillips.
The Board amended its risk-based
capital guidelines to lower from 100 per


cent to 50 percent the risk weight for
certain multifamily housing loans meeting specified criteria. This amendment
implements section 618(b) of the Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act of
1991.

1993 Discount Rates
During 1993 the basic discount rate was
left unchanged at 3 percent, the level
established by the Board in early July
1992. Over the course of 1993, however,
the Board approved numerous increases
and decreases in the rates charged by the
Reserve Banks for seasonal credit and
for extended credit; rates for both types
of credit are set on the basis of marketrelated formulas.
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 in the Minutes of the Committee and in the Monetary Policy
Reports to the Congress, which are
printed elsewhere in this REPORT.
Basic Discount Rate
During the first quarter of 1993 the
directors of ten Reserve Banks regularly
proposed that the basic discount rate
remain unchanged at 3 percent. The directors of the other two Banks requested
reductions of Vi percentage point at various times during the quarter. The Board
considered but took no action on these
pending requests until late March. Data
that became available during the first
quarter indicated that the economic
expansion had slowed markedly from a
very rapid pace in the closing months of
1992, but the Board viewed policy as

Board Policy Actions
already stimulative and recent developments as pointing on the whole toward
sustainable growth in economic activity.
Moreover, advances in consumer and
producer prices were larger in early
1993 than those recorded in the latter
part of 1992.
Against this background, the Board
on March 29 turned down a longstanding request from the Federal
Reserve Bank of Cleveland to lower the
basic discount rate from 3 percent to
2Vi percent; a similar request from the
Federal Reserve Bank of Boston had
been withdrawn early in the year.
The economic expansion picked up
some momentum during the spring,
while broad measures of prices continued to suggest a deteriorating inflation
picture. From mid-May to early August
the Federal Reserve Bank of Richmond
submitted recommendations to increase
the basic discount rate from 3 percent to
3J/4 percent as a means of signaling the
System's concern about inflation. The
Board took no action on this request, but
in association with the unchanged policy posture of the Federal Open Market
Committee, it supported the requests
of the other eleven Banks to maintain
the existing rate. In the Board's view, a
steady monetary policy remained desirable and provided an appropriate balance between the risks of inflation and
those of a faltering economic expansion.
By summer a broad array of price and
wage indicators suggested some moderation in the underlying rate of inflation,
and the request of the Richmond Bank
was withdrawn. No further recommendations to change the basic discount rate
were received from Federal Reserve
Banks over the balance of the year.
Structure of Discount Rates
The basic discount rate is the rate
charged on loans to depository institu


99

tions for short-term adjustment credit,
while flexible, market-related rates generally are charged on other types of
credit. These flexible rates are changed
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; it 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.
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 1993 the structure
of discount rates was as follows: a basic
rate of 3 percent for short-term adjustment credit, a rate of 3.10 percent for
credit under the seasonal program, and a
rate of 3.60 percent for extended credit.
During 1993 the flexible rate on seasonal credit ranged from a high of
3.20 percent to a low of 3.00 percent,
and that on extended credit ranged

100 80th Annual Report, 1993
from a high of 3.70 percent to a low of
3.50 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. As shown below, the Board voted
in late March to deny a request for a
reduction in the basic rate, but other
requests to change the rate were left
pending and were withdrawn by the
Reserve Banks as their evaluation of
economic developments changed. Votes
relating to the reestablishment of existing rates or for the updating of marketrelated rates under the seasonal and
extended credit programs are not shown.
All votes taken during 1993 on discount
rates were unanimous.
On March 29, 1993, the Board disapproved an action taken on March 25 by
the directors of the Federal Reserve
Bank of Cleveland to reduce the
basic discount rate from 3 percent to
2V6 percent.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips. Votes against
this action: None.
•




101

iff federal Open Mtvhji
dmnautee Meetings
MWUTC\

The policy actions of the Federal Open
Market Committee, contained in the
minutes of its meetings, are presented in
the ANNUAL REPORT of the Board of
Governors pursuant to the requirements
of section 10 of the Federal Reserve
Act. That section provides that the
Board shall keep a complete record
of the actions taken by the Board and
by the Federal Open Market Committee
on all questions of policy relating to
open market operations, that it shall
record therein the votes taken in connection with the determination of open
market policies and the reasons underlying each such action, and that it
shall include in its annual report to
the Congress a full account of such
actions.
In the past, the policy record for each
meeting was released simultaneously
with, but separately from, the minutes, a
few days after the next regularly scheduled meeting; only the policy record was
subsequently published in the Federal
Reserve Bulletin and in the ANNUAL
REPORT. At its March 23, 1993, meeting, the Committee unanimously voted
to merge the policy record with the minutes, beginning with the February 2-3
meeting. The merged document (hereafter, "the minutes") is published in the
Bulletin and, for the meetings in 1993,
in this REPORT.
The minutes of the meetings contain
the votes on the policy decisions made
at those meetings as well as a resume of
the discussions that led to 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.
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 1993. Changes
in the instruments during the year are
reported in the records for the individual
meetings.

102 80th Annual Report, 1993

Authorization for Domestic
Open Market Operations
In Effect January 1, 1993
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary
to carry out the most recent domestic policy
directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal
Financing Bank, and securities that are direct
obligations of, or fully guaranteed as to principal and interest by, any agency of the
United States in the open market, from or to
securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System
Open Market Account at market prices, and,
for such Account, to exchange maturing U.S.
Government and Federal agency securities
with the Treasury or the individual agencies
or to allow them to mature without replacement; provided that the aggregate amount of
U.S. Government and Federal agency securities held in such Account (including forward
commitments) at the close of business on the
day of a meeting of the Committee at which
action is taken with respect to a domestic
policy directive shall not be increased or
decreased by more than $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 compara-

Minutes of FOMC Meetings
ble 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.

Domestic Policy Directive
In Effect January 1, 19931
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
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.

1. Adopted by the Committee at its meeting on
December 22, 1992.



1 03

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 6V6 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 Wi 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.

Authorization for Foreign
Currency Operations
In Effect January 1, 1993
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, for System Open Market

104 80th Annual Report, 1993
Account, to the extent necessary to carry out
the Committee's foreign currency directive
and express authorizations by the Committee
pursuant thereto, and in conformity with
such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following
foreign currencies in the form of cable transfers through spot or forward transactions on
the open market at home and abroad, including transactions with the U.S. Treasury, with
the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve
Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial
institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks

Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs

B. To hold balances of, and to have
outstanding forward contracts to receive or
to deliver, the foreign currencies listed in
paragraph A above.
C. To draw foreign currencies and to
permit foreign banks to draw dollars under
the reciprocal currency arrangements listed
in paragraph 2 below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months
after any amount outstanding at that time
was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding
$25.0 billion. For this purpose, the overall
open position in all foreign currencies is
defined as the sum (disregarding signs) of
net positions in individual currencies. The
net position in a single foreign currency is
defined as holdings of balances in that 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

Minutes of FOMC Meetings
the Federal Reserve Bank of New York with
the foreign banks designated by the Board
of Governors under Section 214.5 of Regulation N shall be referred for review and
approval to the Committee.
5. Foreign currency holdings shall be
invested insofar as practicable, considering
needs for minimum working balances. Such
investments shall be in liquid form, and
generally have no more than 12 months
remaining to maturity. When appropriate in
connection with arrangements to provide
investment facilities for foreign currency
holdings, U.S. Government securities may be
purchased from foreign central banks under
agreements for repurchase of such securities
within 30 calendar days.
6. All operations undertaken pursuant to
the preceding paragraphs shall be reported
promptly to the Foreign Currency Subcommittee and the Committee. The Foreign
Currency Subcommittee consists of the
Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of
Governors, and such other member of the
Board as the Chairman may designate (or in
the absence of members of the Board serving on the Subcommittee, other Board Members designated by the Chairman as alternates, and in the absence of the Vice
Chairman of the Committee, his alternate).
Meetings of the Subcommittee shall be
called at the request of any member, or at
the request of the Manager for Foreign
Operations, for the purposes of reviewing
recent or contemplated operations and of
consulting with the Manager on other matters relating to his responsibilities. At the
request of any member of the Subcommittee,
questions arising from such reviews and consultations shall be referred for determination
to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or
understanding with the Secretary of the Treasury about the division of responsibility for
foreign currency operations between the
System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with
the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit
appropriate reports and information to the



105

National Advisory Council on International
Monetary and Financial Policies.
8. Staff officers of the Committee are
authorized to transmit pertinent information on System foreign currency operations
to appropriate officials of the Treasury
Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for
System Account in accordance with paragraph 3 G(l) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.

Foreign. Currency Directive
In Effect January 1, 1993
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.

106 80th Annual Report, 1993
Procedural Instructions with
Respect to Foreign Currency
Operations
In Effect January 1, 1993
In conducting operations pursuant to the
authorization and direction of the Federal
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 2-3, 1993
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, February 2, 1993, at
2:30 p.m. and was continued on
Wednesday, February 3, 1993, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Corrigan, Vice Chairman
Mr. Angell
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer
Mr. Mullins
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and Syron,
Presidents of the Federal Reserve
Banks of Kansas City, St. Louis,
and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary

Minutes of FOMC Meetings, February 107
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Patrikis,2 Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R. Davis, Lang, Lindsey,
Promisel, Rosenblum, Scheld,
Siegman, Simpson, and Slifman,
Associate Economists
Mr. McDonough, Manager of the
System Open Market Account
Ms. Greene, Deputy Manager for
Foreign Operations
Ms. Lovett,3 Deputy Manager for
Domestic Operations
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Stockton, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Madigan, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Mr. Brady,4 Section Chief, Division of
Monetary Affairs, Board of
Governors
Mr. Rosine,4 Senior Economist,
Division of Research and
Statistics, Board of Governors
Mr. Wiles,5 Secretary of the Board,
Office of the Secretary, Board of
Governors
Mr. Winn,5 Assistant to the Board,
Office of Board Members,
Board of Governors
Ms. Werneke,5 Special Assistant to the
Board, Office of Board Members,
Board of Governors
Mr. Siciliano,5 Special Assistant to the
General Counsel, Legal Division,
Board of Governors

2. Attended Wednesday session only.
3. Attended Tuesday session only.
4. Attended portion of meeting relating to the
Committee's discussion of the economic outlook
and its longer-run objectives for monetary and
debt aggregates.
5. Attended portion of the meeting relating to
the release of FOMC information to the public.



Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Beebe, T. Davis, Dewald,
Goodfriend, and Ms. Tschinkel,
Senior Vice Presidents, Federal
Reserve Banks of San Francisco,
Kansas City, St. Louis, Richmond,
and Atlanta respectively
Mr. McNees, Vice President, Federal
Reserve Bank of Boston
Mr. Gavin, Assistant Vice President,
Federal Reserve Bank of
Cleveland
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis
Ms. Meulendyke, Manager, Open
Market Operations, Federal
Reserve Bank of New York

The Secretary reported that advices of
the election of the Reserve Bank members and alternate members of the Federal Open Market Committee for the
period commencing January 1, 1993,
and ending December 31, 1993, had
been received and that these individuals
had executed their oaths of office. The
elected members and alternate members
were as follows:
E. Gerald Corrigan, President of the Federal
Reserve Bank of New York, with James
H. Oltman, First Vice President of the
Federal Reserve Bank of New York, as
alternate;
Edward G. Boehne, President of the Federal
Reserve Bank of Philadelphia, with
J. Alfred Broaddus, Jr., President of the
Federal Reserve Bank of Richmond, as
alternate;
Silas Keehn, President of the Federal
Reserve Bank of Chicago, with Jerry L.
Jordan, President of the Federal Reserve
Bank of Cleveland, as alternate;
Robert D. McTeer, Jr., President of the Federal Reserve Bank of Dallas, with Robert P. Forrestal, President of the Federal
Reserve Bank of Atlanta, as alternate;
Gary H. Stern, President of the Federal
Reserve Bank of Minneapolis, with

108 80th Annual Report, 1993
Robert T. Parry, President of the Federal Reserve Bank of San Francisco, as
alternate.

By unanimous vote, the Committee
elected the following officers of the Federal Open Market Committee to serve
until the election of their successors at
the first meeting of the Committee after
December 31, 1993, with the understanding that in the event of the discontinuance of their official connection with
the Board of Governors or with a Federal Reserve Bank, they would cease to
have any official connection with the
Federal Open Market Committee:
Alan Greenspan
E. Gerald Corrigan

Chairman
Vice Chairman

Secretary and
Economist
Normand R.V. Bernard Deputy Secretary
Joseph R. Coyne
Assistant
Secretary
Gary P. Gillum
Assistant
Secretary
J. Virgil Mattingly, Jr.
General Counsel
Ernest T. Patrikis
Deputy General
Counsel
Michael J. Prell
Economist
Edwin M. Truman
Economist
Richard G. Davis, Richard W. Lang,
David E. Lindsey, Larry J. Promisel,
Arthur J. Rolnick, Harvey Rosenblum,
Karl A. Scheld, Charles J. Siegman,
Thomas D. Simpson, and Lawrence
Slifman, Associate Economists
Donald L. Kohn

By unanimous vote, the Federal
Reserve Bank of New York was
selected to execute transactions for the
System Open Market Account until the
adjournment of the first meeting of the
Committee after December 31, 1993.
By unanimous vote, William J.
McDonough, Margaret L. Greene, and
Joan E. Lovett were selected to serve
at the pleasure of the Committee in the



capacities of Manager of the System
Open Market Account, Deputy Manager
for Foreign Operations, System Open
Market Account, and Deputy Manager
for Domestic Operations, System Open
Market Account respectively, on the
understanding that their selection was
subject to their being satisfactory to the
Federal Reserve Bank of New York.
Secretary's note: Advice subsequently was
received that the selections indicated above
were satisfactory to the board of directors of
the Federal Reserve Bank of New York.
On January 15, 1993, the continuing
rules, regulations, authorizations, and
other instruments of the Committee
listed below were distributed with the
advice that, in accordance with procedures approved by the Committee, they
were being called to the Committee's
attention before the February 2-3 organization meeting to give members an
opportunity to raise any questions they
might have concerning them. Members
were asked to indicate if they wished to
have any of the instruments in question
placed on the agenda for consideration
at this meeting. No requests for substantive consideration were received.
At the meeting, the Committee voted
unanimously to update the references to
the Management of the System Open
Market Account that were contained in
the following: (1) Procedures for allocation of securities in the System Open
Market Account and (2) Program for
Security of FOMC Information. Apart
from the indicated updating of titles, all
of the instruments listed below remained
in effect in their existing forms.
1. Procedures for allocation of securities
in the System Open Market Account
2. Authority for the Chairman to appoint
a Federal Reserve Bank as agent to operate
the System Account in case the New York
Bank is unable to function

Minutes of FOMC Meetings, February
3. Resolution of FOMC to provide for the
continued operation of the Committee during
an emergency; Resolution of FOMC authorizing certain actions by Federal Reserve
Banks during an emergency
4. Resolution relating to examinations of
the System Open Market Account
5. Guidelines for the conduct of System
operations in federal agency issues
6. Regulation relating to Open Market
Operations of Federal Reserve Banks
7. Program for Security of FOMC
Information
8. Federal Open Market Committee
Rules.

By unanimous vote, the Authorization for Domestic Open Market Operations, as shown below, was reaffirmed:
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary
to carry out the most recent domestic policy
directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal
Financing Bank, and securities that are direct
obligations of, or fully guaranteed as to
principal and interest by, any agency of the
United States in the open market, from or to
securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System
Open Market Account at market prices, and,
for such Account, to exchange maturing U.S.
Government and Federal agency securities
with the Treasury or the individual agencies
or to allow them to mature without replacement; provided that the aggregate amount of
U.S. Government and Federal agency securities held in such Account (including forward
commitments) at the close of business on the
day of a meeting of the Committee at which
action is taken with respect to a domestic
policy directive shall not be increased or
decreased by more than $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 deal


109

ers 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

110 80th Annual Report, 1993
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.
By unanimous vote, the Authorization for Foreign Currency Operations
was amended to update the title of the
Manager of the System Open Market
A c c o u n t . T h e A u t h o r i z a t i o n , as
amended, is shown below:
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, for System Open Market
Account, to the extent necessary to carry out
the Committee's foreign currency directive
and express authorizations by the Committee
pursuant thereto, and in conformity with
such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following
foreign currencies in the form of cable transfers through spot or forward transactions on
the open market at home and abroad, including transactions with the U.S. Treasury, with
the U.S. Exchange Stabilization Fund estab


lished 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:

Minutes of FOMC Meetings, February

Amount of
Foreign ban.

—nTof'
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 gen


l\\

erally have no more than 12 months remaining to maturity. When appropriate in connection with arrangements to provide
investment facilities for foreign currency
holdings, U.S. Government securities may be
purchased from foreign central banks under
agreements for repurchase of such securities
within 30 calendar days.
6. All operations undertaken pursuant to
the preceding paragraphs shall be reported
promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee,
the Vice Chairman of the Board of Governors, and such other member of the Board as
the Chairman may designate (or in the
absence of members of the Board serving on
the Subcommittee, other Board Members
designated by the Chairman as alternates,
and in the absence of the Vice Chairman of
the Committee, his alternate). Meetings of
the Subcommittee shall be called at the
request of any member, or at the request of
the Manager of the System Open Market
Account, 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

112 80th Annual Report, 1993
System Account in accordance with paragraph 3 G(l) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.

By unanimous vote, the Foreign Currency Directive, as shown below, was
reaffirmed:
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.

By unanimous vote, the Procedural
Instructions with respect to Foreign Currency Operations were amended to
update the title of the Manager of the
System Open Market Account. The Procedural Instructions, as amended, are
shown below:



In conducting operations pursuant to the
authorization and direction of the Federal
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 of the System Open
Market Account ("Manager"), 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 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 1(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 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

Minutes of FOMC Meetings, February
(i) $200 million or (ii) 15 percent of the size
of the swap arrangement.
3. The Manager 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.
The Report of Examination of the
System Open Market Account, conducted by the Board's Division of
Reserve Bank Operations and Payment
Systems as of the close of business on
July 31, 1992, was accepted.
By unanimous vote, the minutes of
actions taken at the meeting of the Federal Open Market Committee held on
December 22, 1992, were approved.
The Deputy Manager for Foreign
Operations reported on developments
in foreign exchange markets during the
period December 22, 1992, through
February 2, 1993. There were no
System open market transactions in
foreign currencies during this period,
and thus no vote was required of the
Committee.
The Manager of the System Open
Market Account reported on developments in domestic financial markets and
on System open market transactions in
government securities and federal
agency obligations during the period
December 22, 1992, through February 2, 1993. By unanimous vote, the
Committee ratified these transactions.
The Committee then turned to a discussion of the economic outlook, the
ranges for the growth of money and debt
in 1993, and the implementation of
monetary policy over the intermeeting
period ahead. A summary of the economic and financial information available at the time of the meeting and of
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.



113

The information reviewed at this
meeting indicated that economic activity rose appreciably further in the fourth
quarter. Final demands were buoyed
by strength in consumption, business
spending for durable equipment, and
residential construction. Manufacturing
activity also increased considerably, and
employment appeared to be on a modest
upward trajectory, despite a continuing
flow of announcements of layoffs by
large corporations. Although recent data
on wages and prices had been mixed, on
balance they suggested that inflation was
trending gradually lower.
Total nonfarm payroll employment
registered a small increase in December
for the fourth consecutive month. Service industries, notably business and
health services, and retail trade accounted for nearly all of the rise in jobs.
Manufacturing and construction payrolls
changed little, and government employment fell as temporary election workers
were dropped from payrolls. The civilian unemployment rate remained at
7.3 percent, almost Vi percentage point
below its midyear peak but slightly
above its level at the beginning of the
year.
Industrial production advanced further in December and was up considerably over the fourth quarter as a whole.
Motor vehicle assemblies rose sharply
during the quarter; strong gains also
were registered in business equipment,
partly reflecting a further jump in output
of computers, and in nondurable consumer goods. By contrast, the production of durable consumer goods other
than motor vehicles was lower on balance after changing little over the third
quarter, and the output of defense and
space equipment remained on a downward trend. Total utilization of industrial
capacity increased significantly in the
fourth quarter and for the year as a
whole.

114 80th Annual Report, 1993
Consumer spending was up substantially in the fourth quarter. Retail sales,
after rising sharply in October and
changing little in November, posted a
further sizable increase in December.
The largest sales gains in the fourth
quarter were reported at automotive
dealers and at building material and supply outlets, but most other types of retail
stores also recorded higher sales. By
contrast, consumer spending for services, as indicated by data on personal
consumption expenditures, rose more
slowly. Housing starts surged in December, with single family starts reaching
their highest level in nearly three years
and multifamily starts picking up
slightly from the very low levels of
October and November. Sales of new
and existing homes remained on a strong
upward trend in December.
Real outlays for business fixed investment apparently registered a notable
gain in the fourth quarter, particularly
for producers' durable equipment. Shipments of nondefense capital goods rose
in November and December after changing little in October; for the quarter as
a whole, shipments advanced substantially, with increases widespread by
category. Business purchases of cars and
trucks were up sharply in the fourth
quarter, while nonresidential construction activity retraced a small part of a
third-quarter decline.
Business inventories expanded moderately in November as a sizable drop in
manufacturing inventories was more
than offset by increases in wholesale
and retail inventories. At the manufacturing level, the drawdown of stocks
was associated with strong shipments
of durable goods, and inventory-toshipments ratios in most industries were
at or near the bottom of their recent
ranges. In the wholesale sector, sizable
inventory increases were reported in
November for a second straight month;



most of the buildup was limited to
machinery, motor vehicles, and miscellaneous nondurable goods. With stocks
rising in line with sales since September,
the stock-to-sales ratio in wholesaling
remained at the low end of its range
over the past year. Retail inventories
increased moderately further in November; the inventory-to-sales ratio for the
sector was slightly below its average for
previous months of the year.
The nominal U.S. merchandise trade
deficit widened slightly in November.
For October and November together,
however, the deficit narrowed a little
from its average rate in the third quarter,
as the value of exports rose more than
the value of imports. Most of the
increase in exports was in capital goods,
both machinery and aircraft, and in consumer goods. Passenger cars accounted
for a considerable part of the rise in
imports, while the inflow of consumer
goods eased from the very strong pace
of the third quarter. Recent indicators
suggested that economic activity had
remained weak in the major foreign
industrial countries and that unemployment rates had increased further in most
of those countries. The recovery in
Canada appeared to be continuing, but
the downturn in western Germany and
Japan evidently had persisted into the
fourth quarter.
A small November decline in producer prices of finished goods was
reversed in December, with a rebound in
prices of finished foods outweighing a
further drop in energy prices. For finished items other than food and energy,
producer prices rose in December, but
the advance followed six months of no
change on balance; for 1992 as a whole,
this measure of prices increased by a
considerably smaller amount than in
1991. At the consumer level, the index
for prices of nonfood, non-energy items
edged higher in December after some-

Minutes of FOMC Meetings, February 115
what larger increases in the two preceding months. The rise in this index in
1992 was the smallest for any year since
the early 1970s, when wage and price
controls were in effect. Hourly compensation of private industry workers
advanced a little more rapidly in the
fourth quarter than in the two previous
quarters, but the rise in total compensation over the year as a whole was considerably smaller than in 1991. The
slowing of labor cost increases last year
occurred in both the wages and benefits
components.
At its meeting on December 22, 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 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 during the intermeeting
period. The reserve conditions associated with this directive were expected to
be consistent with expansion of M2 at
an annual rate of about 1 Vi percent and
with M3 remaining about unchanged on
balance over the four-month period from
November through March.
Open market operations during the
intermeeting period were directed
toward maintaining the existing degree
of pressure on reserve positions. Adjustment plus seasonal borrowing was well
above expected levels in the first two
full reserve maintenance periods in the
intermeeting interval; borrowing was
sizable over the long New Year's weekend and also later when unusually heavy
Treasury tax receipts drained reserves



from the banking system. The federal
funds rate averaged close to expected
levels over the intermeeting period.
However, the rate was somewhat volatile in late December as a result of sizable swings in market factors affecting
reserves and of shifting market anticipations regarding year-end pressures.
Most other short-term interest rates
declined somewhat over the intermeeting period, in part reflecting the passing
of year-end pressures. Intermediate- and
long-term rates, including those on
fixed-rate mortgages, also moved somewhat lower; the declines occurred in
response to growing indications that any
proposed near-term fiscal stimulus
would be quite moderate and that the
new Administration intended to recommend steps, possibly including new
taxes, to lower the trajectory of the fiscal deficit appreciably over time. Broad
indexes of stock prices exhibited mixed
results over the intermeeting period:
Indexes giving heavy weight to large
companies changed little, while those
primarily reflecting smaller companies
rose significantly.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies rose
on balance over the intermeeting period.
Through early January, the dollar appreciated against both the yen and the mark,
especially the latter, in response to
actual and expected further declines in
interest rates in Japan and Germany.
Subsequently, the dollar's gains were
partially erased as the prospects for
near-term easing in Germany diminished somewhat and perceptions grew
that fiscal initiatives in the United States
would lower the deficit and reduce the
chances that monetary policy might be
tightened in the months ahead.
After expanding at a moderate pace
over the course of earlier months, M2
contracted in December and January.

116 80th Annual Report, 1993
Some of the weakness reflected a slowdown in Ml growth associated with
lower mortgage refinancing activity.
Within M2's nontransactions component, the expansion of savings and
money market deposit accounts slowed
abruptly, perhaps owing in part to the
wider spread that had developed during
the fall between market rates and those
paid on these accounts, as well as to the
use of monies in these accounts to fund
a step-up in consumer purchases and
nonwithheld tax payments. In addition,
the continued attractiveness to investors
of bond and stock mutual funds might
have contributed to a quickening of the
runoff of holdings of money market
mutual funds and to the persisting weakness in other M2 accounts. Appreciable
declines in M3 in December and January reflected both the contraction in M2
and reduced needs by banks for managed liabilities at a time of weak overall
credit demand. From the fourth quarter
of 1991 to the fourth quarter of 1992,
both M2 and M3 grew at rates somewhat below the lower ends of the Committee's annual ranges. Total domestic
nonfinancial debt appeared to have
expanded at the lower end of the Committee's monitoring range for 1992.
The staff projection prepared for this
meeting suggested that economic activity would expand over the year ahead at
a pace that would be sufficient to reduce
gradually margins of unemployed labor
and capital. Recent declines in longterm interest rates and more optimistic
attitudes on the part of businesses and
households were expected to support
further solid gains in business fixed
investment and in homebuying. Continuing progress in reducing debt service burdens and a gradual lessening of
concerns regarding job security were
projected to foster an expansion of consumer spending a shade faster than the
growth in incomes. Export demand



would be damped for some period of
time by the appreciation of the dollar
since mid-1992, but an anticipated
pickup in growth abroad later this year
would begin to counteract the effects of
the higher dollar. Against the background of considerable uncertainties
associated with still unannounced fiscal
policy initiatives, the staff retained for
this forecast the assumption contained
in several previous forecasts that fiscal
policy would remain mildly restrictive,
largely because of declining defense
outlays. The persisting slack in resource
utilization over the forecast horizon was
expected to be associated with some
additional progress in reducing inflation.
In the Committee's discussion of current and prospective economic developments, the members were encouraged
by the mounting evidence of appreciable
momentum in the economic expansion.
On the whole, recent developments
tended to reinforce their forecasts of
continuing growth at a moderate pace
over the year ahead, especially in light
of the improvement in business and consumer confidence. The impact of some
retarding influences on the expansion,
notably various balance sheet adjustment activities, appeared to be waning.
In addition, while some major sectors of
the economy such as defense spending
and commercial construction remained
weak, the economy was benefiting from
considerable growth in consumer spending, from rising business expenditures
for producer equipment, and from
increasing outlays for housing. In one
view, the recent behavior of commodity
prices also tended to indicate some
strengthening in the economy's expansion. Despite various indications of a
more firmly established expansion,
however, the members felt that the
outlook remained subject to a good deal
of uncertainty, and some commented
that substantial deviations—in either

Minutes of FOMC Meetings, February 117
direction—from their current forecasts
could not be ruled out. It was noted in
this connection that the specifics of the
President's fiscal policy proposals were
still unknown, and their reception by the
public and the Congress would have a
major influence on confidence, interest
rates, and the performance of the
economy. Other sources of uncertainty
related to the outlook for further restructuring activities that involved cutbacks
in operations and employment by many
firms, and the prospective lending policies of banking institutions. With regard
to the outlook for inflation, most of the
members believed that some further
progress toward stable prices was likely
over the year ahead, given an economic
outcome about in line with their forecasts of continued, albeit reduced, margins of unutilized or underutilized productive resources. Some members also
referred to the extended period of relatively sluggish growth in the broad measures of money as a favorable indicator
in the outlook for 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 the Federal Reserve Bank
presidents not currently serving as members had prepared projections of economic activity, the rate of unemployment, and inflation for 1993. The central
tendencies of the forecasts pointed to
slightly faster economic growth this year
than currently seemed to have occurred
in 1992. The anticipated rate of economic expansion would be at a pace that
was rapid enough to reduce the rate of
unemployment a little further. Nonetheless, with some slack in productive
resources persisting, price and cost pressures would remain subdued and modest
additional moderation in inflation was
expected by most members. Measured
from the fourth quarter of 1992 to the



fourth quarter of 1993, the forecasts for
growth of real GDP had a central tendency of 3 to 3V4 percent within a full
range of 2Vi to 4 percent. Projections of
the civilian rate of unemployment in the
fourth quarter of 1993 were concentrated in the upper half of a 6V2 to 7 percent range. For the CPI, the central tendency of the forecasts for the period
from the fourth quarter of 1992 to the
fourth quarter of 1993 was centered on
increases in a range of 2l/i to 23A percent, and for nominal GDP the forecasts
were clustered in a range of 5Vi to 6 percent for the year.
In the course of the Committee's discussion of various factors underlying the
outlook for economic activity, the members observed that on the whole the
effects of a number of structural impediments to the expansion seemed to be
diminishing as the financial condition of
households, business firms, and financial institutions continued to improve.
Household and business debt-service
burdens had eased substantially, but it
remained difficult to predict to what
extent and for how long the ongoing
balance sheet adjustments would continue to divert an unusual proportion of
cash flows from spending to balance
sheet repair. Improved profitability and
new capital-market issuance had
strengthened the capital positions of
banking institutions, and in general they
were now in a much better position to
augment their lending activities. However, there were few indications thus far
of any easing in terms or standards on
business loans, and the depressed and
uncertain values of commercial mortgages and real estate held in bank portfolios might continue to exert an inhibiting effect on the willingness of banks to
lend. Another negative factor was the
persistence of downsizing and other
restructuring activities by numerous
firms, notably large businesses. Such

118 80th Annual Report, 1993
restructuring activities had not fully run
their course as many firms continued to
pare excess production capacity and to
modernize production facilities to meet
strong competition in domestic and foreign markets. The resulting layoffs had
damped overall job growth.
Despite tepid job growth, retail sales
had strengthened markedly during the
closing months of 1992, and several
members commented that such sales had
continued to display surprising vigor in
some parts of the country during the
early weeks of 1993. Apart from the
improvement in consumer sentiment,
other favorable factors cited with regard
to the outlook for consumer spending
included lower debt-service burdens and
the capital gains or enhanced cash flows
now being realized as sales of homes
picked up and mortgage refinancings
again strengthened. Some members
nonetheless expressed a degree of concern about the sustainability of the gains
in consumer spending unless there were
faster growth in employment and
income to support such spending.
Announcements by prominent firms of
cutbacks in their workforces had continued into the new year, and while job
gains at other firms, especially smaller
ones, were contributing to modest net
growth in overall employment, the publicity surrounding the persisting job cutbacks and a tendency for many new jobs
to be lower-paying added an element of
caution to the outlook for consumer
expenditures. On balance, with the measured saving rate already at a low level,
though an argument could be made that
the actual rate was somewhat higher
than indicated by the currently published data, consumer spending seemed
likely to expand about in line with the
growth in consumer incomes over the
coming year.
The growth in consumer incomes in
turn was likely to depend importantly on



the expansion in business investment
spending, and members cited a number
of factors that were expected to provide
a favorable setting for sustained momentum in such spending over the year
ahead. These included the strengthening
of final demands, the recent declines in
intermediate- and long-term interest
rates, the greater leeway for financial
intermediaries to increase their lending
to businesses, and a continuing desire by
business firms to improve their operating efficiencies. Commercial construction activity, however, was likely to
remain quite sluggish. There were indications that commercial real estate values had stabilized in a number of areas,
but at low levels, and given the persistence of marked imbalances in numerous real estate markets that were the
result of several years of overbuilding, a
significant rebound in commercial building activity for the nation as a whole
might well be several years away. The
outlook for housing construction was
much more promising. Against the
background of a general upswing in consumer confidence and the improved balance sheets of many households, the
declines that had occurred in mortgage
interest rates had fostered a marked
strengthening in the demand for singlefamily housing as evidenced by reports
from many parts of the country as well
as the overall statistics on housing. On
the basis of these developments, the
members anticipated a continuing impetus to the economic expansion from
housing construction and from related
industries over the year ahead. In addition, the current indications of generally
lean business inventories, associated in
part with strong final demands over the
past several months, suggested that the
prospects for further gains in overall
spending were likely to stimulate efforts
by business firms to build up inventories
over the quarters ahead.

Minutes of FOMC Meetings, February 119
The increasing signs of slow growth
or recession in a number of foreign
nations represented a greater downside
risk to the demand for U.S. exports than
had been apparent earlier. It was noted,
for example, that firms engaged in business activities abroad were reporting
substantial deterioration in markets for
U.S. goods in many foreign countries.
Growth in U.S. exports might remain
positive over the year ahead, but against
the background of a relatively expansive
U.S. economy and the dollar's recent
appreciation, the value of exports might
well fall increasingly short of that of
imports with adverse effects on the
growth of U.S. economic activity.
Turning to the outlook for fiscal policy, members were encouraged by the
prospect that the President would soon
propose a program that would produce
substantial reductions in the federal deficit over the years ahead. Such a deficitreduction program, if deemed credible,
could result in lower intermediate- and
long-term interest rates than would
otherwise prevail—even before the program was enacted—with very positive
implications for interest-sensitive expenditures. For the nearer term, the President was expected to announce some
modest fiscal stimulus relative to what
was currently in train. However, the specifics of the President's proposals were
not yet known and there was little current basis on which to judge prospective
public and congressional reactions.
Members emphasized the critical need
for long-term deficit reduction, and
some expressed concern about the
adverse effects on financial markets if
fiscal stimulus measures were to be
enacted for the short run without the
assurance of further legislation to cut
federal deficits over time.
With regard to the outlook for inflation, most of the members anticipated
that the trend toward lower price and



wage inflation would be sustained
over the year ahead, and one member observed that the disinflationary
momentum in the economy might well
be underestimated. Favorable developments relating to the outlook for inflation included evidence of slowing
increases in labor costs and continued
aggressive efforts by many business
firms to improve productivity and
reduce costs in the face of intense competition from domestic and foreign producers. Indeed, anecdotal reports from
around the country continued to suggest
little or no upward pressure on prices in
many regions. In addition, the behavior
of interest rates in longer-term debt
markets was consistent with spreading
expectations of gradually diminishing
inflation. Some members believed, however, that little or no further progress in
reducing inflation was a more likely outcome in the year ahead, though none
anticipated higher inflation. Some commodity price indexes had edged higher
recently, apparently in response to growing demands related to strengthening
activity in several sectors of the economy. Lumber prices in particular had
risen considerably in conjunction with
the uptrend in single-family housing
construction and various constraints on
lumber supplies. Some business contacts reported for the first time in a long
while that they were experiencing or
anticipated some upward pressure on
their raw materials prices. Further, while
most business contacts saw or anticipated little or no upward pressure on
prices in their own industries, many continued to expect rising inflation more
generally. The still relatively steep slope
of the yield curve and its implications
with regard to expectations of future
increases in interest rates also suggested
that investors remained concerned about
the possibility of higher inflation over
the longer run, even though such con-

120 80th Annual Report, 1993
cerns might have abated somewhat
recently and did not appear to extend to
the next year or two. In general, however, the members viewed the inflation
outlook with considerable optimism on
the presumption of favorable fiscal and
monetary policy developments.
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
1993 that it had established on a tentative basis at its meeting on June 30July 1, 1992. 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 1992 to
the fourth quarter of 1993. The monitoring range for growth of total domestic
nonfinancial debt had been set provisionally at AV2 to 8V2 percent for 1993.
All of these ranges were unchanged
from those that the Committee had set
for 1992 at its meeting in February of
last year and had reaffirmed at midyear.
When the provisional ranges for money
growth were established, the Committee
had noted that they were especially
tentative and subject to revision in the
latter part of 1992 or early 1993 owing
to the considerable uncertainty about
the evolving relationship of money to
income.
In the event, the velocities of M2 and
M3 had increased appreciably in the second half of 1992 and analysis of the
factors behind this development suggested further increases in the year
ahead. Consequently, in the Committee's discussion, which tended to focus
on M2, all the members indicated that
they could support a proposal to lower
the tentative ranges for growth of the
broad monetary aggregates by V2 percentage point for 1993. At the same
time, a number of members indicated



that they preferred somewhat different
ranges including the retention of the tentative ranges, lowering the ranges by
more than the proposal, and widening or
narrowing them. All the members were
in firm agreement that the purpose of the
proposed reductions was not to signal or
implement any change in monetary policy or to convey any intention to move
away from the Committee's commitment to maximum sustainable economic
expansion. Rather, the reductions were
motivated by the persistence of marked
shortfalls in the growth of M2 and M3
from their historical relationships with
various measures of aggregate economic
performance; those shortfalls appeared
to be the technical result of forces that
are altering the relationship between
money and income. Members of the
Committee urged that the Board's report
to the Congress and the Chairman's
accompanying testimony make clear the
reasons for the unusual behavior of
money and its consequences for the
Committee's choice of ranges.
The deviations in monetary growth
from historical norms reflected a number of developments whose relative
importance and intensity had shifted to
some extent over the course of recent
years, but in general they had served to
rechannel funds away from depository
institutions, and the associated weakness in deposit growth had raised
velocity—the ratio of nominal GDP to
money. The result was the need for
lower money growth than in the past to
support a given rate of income growth.
Among the developments that had
tended to retard the relative growth of
M2 and M3 was the unprecedented
steepness of the yield curve that had
prompted large shifts of funds by savers
from M2 accounts to higher-yielding
intermediate- and long-term assets. At
the same time, credit growth at bank and
thrift depository institutions had been

Minutes of FOMC Meetings, February 121
weak, partly as a result of efforts by
these institutions to improve capital and
liquidity positions, and partly owing to
weak demand. As a consequence, they
also had maintained relatively low offering rates on deposits that had provided
consumers with an incentive to reduce
or hold down their deposit holdings in
order to pay down relatively high-cost
mortgages and other debts. In 1992,
sluggish growth of M2 and M3 had been
associated with a considerable acceleration in nominal spending. Indeed,
despite growth of both M2 and M3 at
rates below the Committee's ranges, the
expansion of the economy had exceeded
most forecasts.
The members generally anticipated
that the intensity of these forces might
diminish in 1993 as borrowers and lending institutions achieved more comfortable balance sheet positions. Nonetheless, the relative weakness in money
growth was seen as likely to persist to a
marked extent. The yield curve, while it
had flattened a bit recently, was still
expected to provide a considerable
incentive for many savers to shift funds
out of M2 assets, especially as relatively
high-yielding time deposits continued to
mature. In addition, banks were likely to
remain generally unaggressive in bidding for deposits, in part because their
substantial earlier acquisitions of securities would permit them to accommodate
some of the anticipated growth in loan
demand by selling securities or limiting purchases. In these circumstances,
restrained money growth seemed likely
to remain consistent with relative
strength in the economic expansion.
The members recognized that the
strength of the factors that were expected to continue to depress broad
money growth in relation to income in
1993 was still subject to considerable
uncertainty, and this implied the need
for flexibility in assessing the implica


tions of money growth relative to the
Committee's ranges. Should the factors
influencing the behavior of the broad
aggregates persist in holding down
money growth to the extent seen in
1992, expansion of M2 and M3 in the
lower portion of their reduced ranges
would be consistent with considerable
further growth in nominal spending.
Indeed, a shortfall from the reduced
ranges could not be ruled out, and one
member felt that the potential for such a
development warranted consideration of
a somewhat larger reduction in the M2
range; such a reduction also would signal more clearly the Committee's commitment to price stability. On the other
hand, the upper portions of the reduced
ranges would still accommodate an
ample provision of liquidity to support
further economic expansion even if the
growth of money and of income were
to move toward a historically more normal alignment and velocity were to slow
from its high rate of increase. In one
view, widening the tentative M2 range
by reducing its lower limit while retaining its upper limit would help the Committee to convey its views regarding the
potential for a continuing but acceptable
sluggishness in M2 growth while leaving room for the possibility of faster M2
expansion should changing circumstances foster diminishing strength in
velocity. Another member expressed a
preference for narrowing the tentative
range by lowering only its upper limit as
a means of signaling the Committee's
intent to resist both inflationary and
recessionary developments. In light of
the uncertainties that were involved, the
informational content of the aggregates
probably had diminished and in any
event the Committee would need to
continue to evaluate monetary growth
developments in the context of a careful
assessment of a wide variety of other
financial, economic, and price develop-

122 80th Annual Report, 1993
ments. In this connection, one member
observed that the uncertainties were of
such a magnitude that, while plausible
arguments could be made for a number
of different ranges, retention of the tentative ranges would be appropriate in
light of the Committee's willingness to
review the ranges in the event that unanticipated developments were to unfold.
All of the members agreed that it
would be desirable to retain the monitoring range of 4Vi to %Vi percent that the
Committee had established on a provisional basis for the growth of total
domestic nonfinancial debt in 1993. The
expansion in such debt had not been
damped by special forces to the same
extent as the broad monetary aggregates
in 1992. Over the year ahead, growth in
the federal debt was likely to remain
substantial, and the expansion of debt in
the nonfederal sectors was projected to
accelerate somewhat given the continued improvement in borrower balance
sheets and an anticipated increase in the
willingness of financial institutions to
lend as the economy continued to
expand. Nonetheless, in the context of
still cautious attitudes on the part of
both borrowers and lenders, the growth
of nonfederal debt probably would
remain below that of nominal GDP in
the year ahead.
At the conclusion of the Committee's
discussion, all of the members indicated
that they favored or could accept a technical downward adjustment of Vi percentage point in the tentative ranges for
the broader monetary aggregates for
1993 to rates of 2 to 6 percent for M2
and Vi to AVi percent for M3. It was
agreed that there should be no change
from the tentative range for total domestic nonfinancial debt. 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



growth and velocity behavior of the
aggregates and ongoing economic and
financial developments. Accordingly, by
unanimous vote, the following longerrun policy for 1993 was approved by the
Committee 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 2 to 6 percent and xh to \xh percent
respectively, measured from the fourth quarter of 1992 to the fourth quarter of 1993. The
Committee expects that developments contributing to unusual velocity increases are
likely to persist during the year. The monitoring range for growth of total domestic nonfinancial debt was set at \xh to 8V2 percent
for the year. 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.
Turning to policy for the intermeeting
period ahead, all of the members
endorsed a proposal to maintain
unchanged conditions in reserve markets, and all indicated that they could
accept a directive that did not incorporate any presumption with regard to the
likely direction of possible intermeeting
adjustments to policy. While there was
concern about the weakness in the monetary aggregates, the members generally
agreed that recent economic developments tended to reinforce the view that
monetary policy was on an appropriate
course. The economy seemed to be on a
stronger growth track than earlier in the
expansion, and inflation remained quite
subdued—only a bit above some estimates of price stability—and likely to
moderate further in coming quarters in
the view of most members. Some commented that a further easing move at this

Minutes of FOMC Meetings, February
juncture might well have adverse effects
on inflation sentiment and on interest
rates in intermediate- and long-term debt
markets. A few referred to the recent
firming in some commodity prices and
the consensus among private forecasters
that inflation could drift higher over the
next few years. In the view of one
member, these developments might
argue for a tilt in the directive toward
possible restraint, but they did not call
for an immediate tightening in reserve
conditions.
A staff analysis prepared for this
meeting suggested a resumption of some
growth in the broad measures of money
later in the first quarter but a decline in
both M2 and M3 for the quarter as a
whole. While part of the declines
appeared to reflect difficulties with seasonal adjustments and the ebbing of special factors that previously had boosted
growth, the uncertainties surrounding
the behavior of these aggregates tended
to reduce their role in current monetary
policy. Nevertheless, there was concern
about the persisting weakness in the
broad aggregates, including the likelihood that they would fall well short of
the Committee's new ranges over the
first part of the year. Some members
also noted that the growth of Ml, while
still fairly robust in December and January, was markedly below its pace over
most of 1992. On the other hand, bank
loans had increased in recent months,
and the weakness in the monetary aggregates did not appear to reflect underlying softness in the economy. In these
circumstances, a number of members
believed that any effort to stimulate
monetary growth under immediately
prevailing economic conditions and
market expectations might well prove
to be counterproductive. An easing
at this time could accelerate outflows
from interest-sensitive M2 assets if the
easing were seen as signaling a weak


123

ening of the System's anti-inflationary
resolve and were to result in higher rates
on intermediate- and long-term debt
securities.
At the conclusion of the Committee's
discussion, all of the members indicated
that they favored a directive that called
for maintaining the existing degree of
pressure on reserve positions. They also
noted their preference for, or acceptance
of, a directive that did not include a
presumption about the likely direction
of any adjustment to policy over 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 reserve restraint would be
acceptable during the intermeeting
period. The reserve conditions contemplated at this meeting were expected to
be consistent with little change in the
levels of M2 and M3 over the twomonth period from January through
March.
By unanimous vote, the Federal
Reserve Bank of New York was authorized and directed, until otherwise
directed by the Committee, to execute
transactions in the System Account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
indicates that economic activity rose appreciably further in the fourth quarter. Total
nonfarm payroll employment registered
another small increase in December, and the
civilian unemployment rate remained at
7.3 percent. Industrial production posted
solid gains over the closing months of the
year. Retail sales were up substantially in the
fourth quarter, and residential construction
activity increased sharply. Indicators of businessfixedinvestment suggest a notable gain
in recent months, particularly for producers'
durable equipment. The nominal U.S. mer-

124 80th Annual Report, 1993
chandise trade deficit narrowed slightly in
October-November from its average rate in
the third quarter. Recent data on wages and
prices have been mixed but they continue to
suggest on balance a trend toward lower
inflation.
Interest rates have declined somewhat
since the Committee meeting on December 22. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies rose on balance
over the intermeeting period.
M2 appears to have contracted in December and January, after expanding at a moderate pace over the course of previous months;
M3 is estimated to have declined appreciably
in both months. From the fourth quarter of
1991 to the fourth quarter of 1992, both M2
and M3 grew at rates somewhat below the
lower ends of the Committee's annual ranges
for 1992. Total domestic nonfinancial debt
appears to have expanded at 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 to 6 percent and V2 to AV2 percent
respectively, measured from the fourth
quarter of 1992 to the fourth quarter of 1993.
The Committee expects that developments
contributing to unusual velocity increases
are likely to persist during the year. The
monitoring range for growth of total domestic nonfinancial debt was set at AV2 to
8V2 percent for the year. 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 consis


tent with little change in M2 and M3 over

the period from January to March.
At this meeting the Committee discussed a preliminary report of a subcommittee that had been established to
examine various issues relating to the
release of information about Committee
meetings and decisions. All of the members agreed that the Committee should
keep the public as fully informed as
possible about its monetary policy decisions and their rationale. Such information could reduce uncertainty about the
stance of policy and about the factors
the Committee takes into account in
reaching its decisions. However, release
of information should not be allowed to
compromise the overriding objective of
making and implementing the best possible decisions. In that regard, the Committee noted that its deliberative process
requires a free flow of ideas, including
the ability to advance or question
hypotheses, to speculate on alternative
outcomes, and to change opinions in
response to the views expressed by other
members. The members also needed to
feel at liberty during meetings to use
a wide array of information that is
obtained on a confidential basis; at least
some of that information would no
longer be provided to the Committee if
there were a risk of public disclosure.
Moreover, the Committee wanted to
give further consideration to the risk
that the adoption of a different schedule
for releasing information about policy
decisions might have the effect, in difficult circumstances, of reducing its willingness to make needed policy adjustments promptly. No decisions were
made at this meeting concerning various
options for apprising the public more
fully or promptly of the Committee's
actions, and it was understood that the
subcommittee would continue to study
the matter.

Minutes of FOMC Meetings, March
It was agreed that the next meeting of
the Committee would be held on Tuesday, March 23, 1993.
The meeting adjourned.
Donald L. Kohn
Secretary

Meeting Held on
March "23, 1993
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, March 23, 1993, at
9:00 a.m.
PresentMr. Greenspan, Chairman
Mr. Corrigan, Vice Chairman
Mr. Angell
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer
Mr. Mullins
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and Syron,
Presidents of the Federal Reserve
Banks of Kansas City, St. Louis,
and Boston respectively
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Patrikis, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R. Davis, Lang, Lindsey,
Rolnick, Rosenblum, Scheld,



125

Siegman, Simpson, and Slifman,
Associate Economists
Mr. McDonough, Manager of the
System Open Market Account
Ms. Greene, Deputy Manager for
Foreign Operations
Ms. Lovett, Deputy Manager for
Domestic Operations
Mr. Ettin, Deputy Director, Division
of Research and Statistics,
Board of Governors
Mr. Winn, Assistant to the Board,
Office of Board Members,
Board of Governors6
Mr. Madigan, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Mr. Hooper, Assistant Director,
Division of International
Finance, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Beebe, T. Davis, Dewald,
Goodfriend, and Ms. Tschinkel,
Senior Vice Presidents, Federal
Reserve Banks of San Francisco,
Kansas City, St. Louis, Richmond,
and Atlanta respectively
Ms. Browne, and Mr. Sniderman, Vice
Presidents, Federal Reserve Banks
of Boston and Cleveland
respectively
Ms. Krieger, Manager, Open Market
Operations, Federal Reserve Bank
of New York
At the start of the meeting, the subcommittee established to review policies relating to the release of Committee
information reported on its further deliberations and proposed a merging of the
current "Minutes of Actions" and the
"Record of Policy Actions" into a new
document to be designated "Minutes of
the Federal Open Market Committee

6. Attended actions portion of meeting relating
to discussion of merging minutes of action and
policy record into one document.

126 80th Annual Report, 1993
Meeting." Merging the two documents
would put in convenient form all the
information that is released pertaining to
FOMC meetings, and the new document
would be made public on the same
schedule as its predecessor documents.
The Committee members endorsed the
subcommittee's proposal and by unanimous vote the Committee approved the
"Minutes of the Federal Open Market
Committee Meeting" held on February 2-3, 1993; this merged document was scheduled to be released on
March 26, 1993.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets since
the previous meeting on February 2-3,
1993. There were no System open market transactions in foreign currencies
during this intermeeting period, and thus
no vote was required of the Committee.
The Deputy Manager for Domestic
Operations reported on developments in
domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period February 3,
1993, through March 22, 1993. By
unanimous vote, the Committee ratified
these transactions.
The Committee then turned to a discussion of the economic outlook and
the implementation of monetary policy
over the intermeeting period ahead. A
summary of the economic and financial
information available at the time of the
meeting and of the Committee's discussion is provided below, followed by the
domestic policy directive that was approved by the Committee and issued to
the Federal Reserve Bank of New York.
The, information reviewed at this
meeting suggested that economic activity was expanding at a more moderate
pace in the early months of 1993 after
increasing substantially in the fourth
quarter. Although outlays for business



equipment apparently remained on a
strong upward trajectory, sales of new
homes had slackened and consumer
spending was rising less rapidly. Indicators of production activity also were
mixed: Industrial output had continued
to post solid gains, but homebuilding
had been less robust since year-end.
Payroll employment had strengthened,
and the unemployment rate had moved
down further. Increases in wages had
remained subdued in recent months, but
advances in consumer and producer
prices had been larger than those
recorded in the latter part of 1992.
Total nonfarm payroll employment
rose sharply in February, following
generally small advances in previous
months, and the length of the average
workweek remained at the fourthquarter level. The strong job gains in
construction, services, and retail trade in
February apparently reflected to some
extent a partial reversal of the special
factors that had depressed reported employment in these sectors in previous
months. Since December, initial claims
for unemployment insurance had fluctuated in a range that was consistent with
further modest growth in employment.
The civilian unemployment rate edged
lower again in February, to 7.0 percent.
Industrial production continued to rise
at a fairly brisk pace in January and
February. Changes in mining and utilities were about offsetting on balance
over the two months, but increases in
manufacturing were fairly widespread.
Although motor vehicle assemblies fell
in February from a relatively high January level, the production of consumer
durables and computers turned up
sharply. In addition, increases in output
were recorded in several other categories, including non-energy materials and
construction supplies. Recent surveys
indicated that new orders for durable
goods increased further in February, and

Minutes of FOMC Meetings, March 127
lean factory inventories coupled with
reports of lengthening delivery times
suggested further gains in industrial output in coming months. Total utilization
of industrial capacity rose again in
February.
Retail sales advanced in February
after a fourth-quarter surge and a pause
in January. Sales at automotive dealers
weakened in February. However, there
were sharp increases in sales of building
materials and supplies, miscellaneous
durable goods, and nondurable goods
other than apparel. After registering sizable gains late last year, housing starts
fell substantially in January and retraced
only part of that decline in February.
The slowdown was concentrated in
single-family housing starts; multifamily starts were up in February from
a historically low level in January.
Although mortgage interest rates had
dropped to the lowest levels in decades,
sales of both new and existing homes
turned down in January from their high
December levels.
Incoming data on orders and shipments of nondefense capital goods suggested a further brisk advance in outlays for business equipment in coming
months. In January, a decline in shipments of nondefense capital goods only
partially reversed a large December rise,
as a surge in shipments of computing
equipment helped sustain the overall
level. Shipments of complete civilian
aircraft posted a solid gain in January.
The increase appeared to be concentrated in sales to foreign purchasers; in
the domestic airline industry, intense
competition was forcing cutbacks of
unprofitable routes and reductions in
both the number of planes in service and
orders for new planes. Shipments of
durable equipment other than computers
and aircraft fell in January to about the
level of the fourth quarter. On the other
hand, the January reading on new orders



for these goods was well above the average for the fourth quarter, suggesting
that additional advances in shipments
might lie ahead. Nonresidential construction activity was down slightly
further in January, reflecting persisting
declines in office and industrial building
in an environment of excess supply and
some continuing, though perhaps lessening, downward pressure on the prices of
such structures.
Business inventories appeared to have
edged lower in January. In manufacturing, factory stocks were drawn down
further, and most industries had relatively low stocks-to-shipments ratios.
Among wholesalers, strong January
sales pulled down inventories at many
types of establishments; in numerous
cases, a large accumulation of stocks
in the fourth quarter was reversed. For
the wholesale sector as a whole, the
inventories-to-sales ratio in January was
near the bottom of the range of the past
two years. Retail inventories rose somewhat further in January after a large
December increase. Stocks at automotive dealers accounted for all of the
January accumulation. At retail stores
other than auto dealers, the ratio of
inventories-to-sales remained within the
narrow range observed over the past
year.
The nominal U.S. merchandise trade
deficit widened slightly in January but
was little changed from its average level
in the fourth quarter. The value of both
exports and imports dropped sharply in
January from the December levels. The
decline in imports was spread widely
among major trade categories, but the
decrease in exports largely reflected a
reduction in shipments of aircraft after a
strong December rise. Among the major
foreign industrialized countries, the
level of real activity contracted further
in the fourth quarter in Japan, western
Germany, and France; for the first quar-

128 80th Annual Report, 1993
ter, the limited data available were generally weak for Japan and France but
somewhat more mixed for western
Germany. By contrast, economic activity appeared to be increasing in Canada
and the United Kingdom.
Producer prices of finished goods
were up in January and February after
changing little over the fourth quarter.
Producer prices of finished foods
declined over the first two months of the
year, but prices of finished energy products climbed rapidly, and prices of other
finished items rose at a faster rate than
in 1992. At the consumer level, price
increases in January and February also
were on the high side of the past year's
advances. Food prices jumped in January and rose slightly further in February,
while energy prices retraced most of a
sharp January rise. Excluding food and
energy items, consumer prices advanced
at a substantially faster pace over the
January-February period than in 1992.
Increases in wages, as measured by
average hourly earnings of production
or nonsupervisory workers, remained
subdued in recent months. The advance
in average hourly earnings slowed in
February, and the rise over the twelve
months ended in February was considerably smaller than over the previous
twelve-month period.
At its meeting on February 2-3, 1993,
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 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 during the intermeeting
period. The reserve conditions associated with this directive were expected to
be consistent with little change in the
levels of M2 and M3 over the twomonth period from January through
March.
Open market operations during the
intermeeting period were directed
toward maintaining the existing degree
of pressure on reserve positions. Adjustment plus seasonal borrowing averaged
only slightly above expected levels in
the three full reserve maintenance periods in the intermeeting interval. For the
period as a whole, the federal funds rate
remained close to the 3 percent level
that had prevailed in previous months.
Other short-term interest rates
changed little over the intermeeting
period, while long-term rates fell appreciably on balance. Bond markets rallied
over most of the period, reflecting market assessments of improved prospects
for significant reductions in the federal
budget deficit in coming years and the
consequences for overall spending.
Prices of Treasury notes and bonds also
were boosted by municipal defeasance
activity and by perceptions of heightened prepayment risks in mortgagebacked securities. In early March, interest rates on long-term Treasury bonds
and conventional fixed-rate mortgages
reached their lowest levels since 1973,
but some of the decline in bond and
mortgage rates subsequently was reversed in response to increased apprehension about inflation. Equity prices
generally responded favorably to the
drop in long-term interest rates, but concerns about future changes in government policy toward a number of industries, including health care, led to lower
prices in some segments of the equities
market.
In foreign exchange markets, the
trade-weighted value of the dollar in

Minutes of FOMC Meetings, March 129
terms of the other G-10 currencies fell
on balance over the intermeeting period.
The dollar depreciated through late
February, partly in response to declines
in U.S. long-term interest rates and
incoming data that were seen as pointing to some slowing of the expansion in
the United States. Subsequently, the
dollar rebounded in the wake of unexpectedly strong U.S. employment statistics, disappointing inflation numbers,
and further signs of weakening economic activity abroad. Near the end of
the period, the dollar again dropped
against the German mark and other
European currencies, following a cut by
the Bundesbank of its discount rate that
apparently was less than market participants were expecting. On balance over
the period, the dollar was marginally
lower against the mark and other European currencies, but it declined substantially against the Japanese yen, reaching
an all-time low.
M2 and M3 contracted in January and
February. Part of the weakness apparently reflected temporary factors, such
as distortions in seasonal adjustment
factors and a lull in prepayments of
mortgage-backed securities that reduced
deposits held in association with this
activity. More fundamentally, relatively
attractive returns on capital market
instruments continued to prompt households to shift large amounts of liquid
balances into market investments, such
as bond and stock mutual fund shares.
In addition, banks continued to issue
subordinated debt and equity to improve
their balance sheets at a time when the
expansion of bank credit was slowing
noticeably; in particular, bank lending to
businesses had been depressed by paydowns from the proceeds of heavy bond
and stock issuance by nonfinancial corporations. Total domestic nonfinancial
debt appeared to have expanded somewhat further in January.



The staff projection prepared for this
meeting suggested that economic activity would grow over the year ahead at a
pace that would foster a further gradual
reduction in margins of unemployed
labor and capital. The projection incorporated the essential elements of the
fiscal proposals recently set forth by the
Administration; the effects on aggregate
demand, all other things equal, were
expected to be small over the next several quarters. However, the appreciable
declines in long-term interest rates
that had occurred in recent months—
evidently partly in response to anticipations of intermediate-term deficit
reduction—were expected to support
substantial additional gains in business
and residential investment. Consumer
spending would be bolstered by the
progress already achieved in reducing
debt-service burdens and by a gradual
lessening of concerns regarding job
security, although the higher personal
income taxes now envisioned for upperincome taxpayers were expected to be
an inhibiting factor. Increases in export
demand would be limited in the near
term by the continuing weakness in the
economies of the major industrialized
countries. The persisting slack in
resource utilization was expected to be
associated with a return to more subdued price increases after a spurt earlier
this year.
In the Committee's discussion of current and prospective economic conditions, the members remained encouraged by recent developments that they
viewed on the whole as tending to confirm their forecasts of sustained economic expansion, though at a pace
appreciably below that now indicated
for the fourth quarter of 1992. If realized, such economic growth would be
associated over time with a further gradual decline in unemployment. While the
expansion appeared to have generated

130 80th Annual Report, 1993
some momentum, a number of factors
were likely to limit its strength, including ongoing balance sheet and business
restructuring activities, the outlook for a
more restrictive federal budget, and continuing weakness in key foreign markets. At the same time, greatly reduced
interest rates and much improved, if
still vulnerable, business and consumer
confidence were positive factors in the
outlook. Some members cautioned that
even though a moderate rate of economic growth could be viewed as the
most likely outcome over the forecast
horizon, the current expansion differed
in important respects from earlier cyclical recoveries, and in light of the attendant uncertainties a considerably different result—in either direction—could
not be ruled out. With regard to the
outlook for inflation, the faster increases
in consumer prices in recent months and
a sharp upturn in the prices of certain
producer materials tended to raise concerns, or at least a degree of unease,
with regard to underlying inflation
trends. While these developments might
well prove to be an aberration rather
than a signal of intensifying inflation,
they did suggest the need to reassess the
likelihood of a further decline in inflation and to be alert to further signs of a
sustained upturn. For now, however, the
favorable trends in underlying unit labor
costs, which were associated in turn
with ongoing gains in productivity and
the absence of any firming in wage pressures, led many members to conclude
that recent price developments did not
provide persuasive evidence of a change
in the inflation outlook.
Members continued to report somewhat uneven business conditions across
the nation. Steady economic growth
characterized many parts of the country,
but business activity remained depressed
in some areas and industries, notably
those related to defense, aerospace, and



nonresidential construction. While business sentiment was generally positive,
many business contacts were uncertain
about the outlook for demand in their
own industries or the potential strength
of the overall expansion, and recent
fiscal policy developments appeared to
have introduced a further note of caution. This uncertainty helped to account
for the continuing reliance of numerous
firms on overtime work to meet growing
demand rather than incurring the considerable costs of adding new workers.
Even so, an increasing number of contacts were reporting worker recalls or
new hires. One member commented that
job growth could be viewed both as a
measure of business sentiment and as a
necessary element in building or maintaining consumer confidence and thus
helping to ensure an enduring economic
expansion.
The quickening recovery during
1992, especially in the second half of
the year, had received considerable
impetus from consumer spending, and
while growth in such spending could be
expected to moderate from its pace in
recent quarters, the consumer sector was
viewed as likely to play a key role in
sustaining the expansion this year. Many
consumers had taken advantage of steep
declines in interest rates to strengthen
their balance sheets and reduce their
debt-service burdens, and they were
now in a much improved position to
finance further growth in their expenditures. The members took note of recent
indications of a decline in consumer
confidence and of some softening in
retail sales since early in the year. However, the latter appeared to be in part the
result of recently adverse weather conditions in some major parts of the country,
and consumer confidence was still much
improved on balance since earlier in the
recovery. Accordingly, recent developments were not seen in themselves as

Minutes of FOMC Meetings, March 131
harbingers of a weakening consumer
spending trend over the next several
quarters.
Business spending on producers'
durable equipment also was believed
likely to continue to provide appreciable
stimulus to the expansion, assuming that
the much reduced interest rates and
currently favorable business attitudes
would be sustained and that proposed
investment tax credit legislation eventually would be enacted. At the same time,
business spending for nonresidential
structures probably would continue to
be held back by weakness in office construction stemming from widespread
overcapacity. While office building
activity was likely to be restrained for
an extended period, members saw some
positive signs that pointed to a degree of
stabilization in this sector, including the
leveling out or even a marginal pickup
in rents and occupancy rates in some
markets that previously had been
severely depressed. A slow turnaround
in other building activity was reported
in some regions, notably for industrial
and retail structures.
While the available data on starts of
single-family houses in January and
February were somewhat disappointing,
the members felt that housing construction activity had held up relatively well
thus far this year, after allowing for the
adverse weather conditions that had
retarded construction in some areas. The
greatly reduced cost of mortgage financing pointed to continuing gains in housing construction despite a rise in costs
associated with the sharp jump in lumber prices and a scarcity of finished
building lots in some areas.
The members agreed that the prospects for overall spending on business
capital goods and housing were vulnerable to shifts in attitudes that might be
triggered, for example, by increases in
market interest rates associated with an



absence of progress in reducing the federal budget deficit. The outlook for a
significant contraction in the federal
deficit was subject to considerable
uncertainty, especially in light of the
still pending decisions to be made with
regard to health care programs and their
financing. The members recognized that
the direct effects of appreciable deficit
reduction would tend to constrain economic activity, as evidenced by the
impact in many areas of the defense
cutbacks that were already being
implemented. Business contacts had
expressed concerns about the potential
effects on their industries and local
markets of various provisions in the
proposed legislation. Even so, a more
encompassing assessment of the effects
of deficit reduction needed to take
account of its favorable implications for
domestic interest rates. Moreover, insofar as the nearer-term outlook was concerned, the fiscal legislation now under
consideration included new spending
initiatives and an investment tax credit
that were intended to provide some
temporary stimulus to an economic
expansion that, in the view of many
observers, might still be in the process
of gathering sustainable momentum. On
balance, substantial deficit reduction in
line with the currently proposed legislation was seen as likely to have a
positive effect on business and consumer
confidence, financial markets, and the
longer-term health of the economy.
Several members observed that the
outlook for exports had worsened as
a result of weakening economic trends
in a number of major industrialized
nations. Members also commented on
the uncertainties in the outlook for foreign trade associated with a variety of
political risks abroad and the persisting
protectionism that currently was highlighted by strong opposition to key trade
agreements now under negotiation or

132 80th Annual Report, 1993
under consideration for ratification.
Anecdotal information from business
contacts involved in export markets
continued to suggest lagging foreign
demand for many U.S. goods; however, backlogs for other products, such
as labor-saving capital equipment,
remained sizable.
The members devoted considerable
attention to the discussion of various
factors underlying the outlook for inflation. The consumer and producer price
indexes had been less favorable in January and February than in the latter part
of 1992. Also, prices of various industrial and construction materials had
firmed since the start of the year in
apparent response to rising production
and, in some industries, to import or
environmental restrictions. Anecdotal
reports of increasing costs and prices
had begun to appear with somewhat
greater frequency in some areas, and
pressures to widen profit margins reportedly were strong in a number of industries. In their evaluation of recent
inflation developments, however, the
members generally gave more weight to
the behavior of unit labor costs, which
indicated that much of the economy's
underlying cost structure did not reflect
any signs of a pickup in inflationary
pressures. Moreover, from a financial
perspective, extensions of credit and
growth in overall nonfinancial sector
debt were not consistent with an economy that was generating significant
inflationary pressures, and the recent
behavior of long-term debt markets suggested expectations of more subdued
inflation. Against this background, the
recent upturn in consumer and certain
commodity prices might well represent
a temporary development such as had
occurred previously during the current
cyclical upswing. In support of this
view, members cited various fundamentals that seemed inconsistent with accel


erating inflation, including the considerable slack in the utilization of labor and
capital resources, strong competitive
conditions in many markets, the absence
of significant lengthening in supplier
delivery schedules, and an extended
period of weak expansion in the broader
monetary aggregates that now encompassed some recent deceleration in Ml.
Nonetheless, the members acknowledged that recent price developments
had raised a degree of unease in their
minds, and their concerns would rise if
the recent pace of price advances were
sustained in the months immediately
ahead. One member observed that a
somewhat faster economic expansion
than currently was expected by most
members might well serve to intensify
inflation pressures. While price developments were notably difficult to predict,
most of the members concluded that the
evidence at this point did not confirm a
resurgence in inflationary pressures, and
some commented that further modest
disinflation remained a reasonable
expectation for the next several quarters.
In the Committee's discussion of policy for the intermeeting period ahead,
most of the members endorsed a proposal to maintain an unchanged degree
of pressure on reserve positions, while
two members supported an immediate
move to tighten reserve conditions. In
the majority view, the current degree of
reserve pressure continued to represent
a policy stance that was appropriately
balanced in light of the opposing risks
of a faltering economic expansion and a
resurgence of inflation. Conditions in
credit markets did not provide confirming evidence of the emergence of greater
inflationary pressures and the need to
restrain the growth in credit. Indeed, the
continuation of balance sheet restructuring activities by financial institutions
and the associated caution on the part of
these institutions with regard to extend-

Minutes of FOMC Meetings, March 133
ing loans still appeared to be exerting
a significantly inhibiting effect on the
overall growth in spending and economic activity. Several members
acknowledged that a policy of maintaining unchanged reserve conditions and
an associated federal funds rate around
current levels, which implied that real
short-term rates were near zero or even
slightly negative, could have inflationary consequences in the event of a
strengthening of the expansion and a
sustained pickup in credit demands. The
Committee would need to remain alert
to such a development. In present circumstances, however, an unchanged
policy stance seemed most consistent
with achieving sustained economic
expansion in an environment of subdued
inflation. The members who favored a
prompt move toward restraint were persuaded that a steady policy incurred an
unacceptable risk of halting the progress
toward price stability and indeed of
intensifying inflation as the current
expansion matured. In this view, a policy tightening move at this point was
likely to counter the need for more substantial and potentially disruptive tightening actions later.
In the course of the Committee discussion, the members took account of a
staff analysis that pointed to a resumption of M2 and M3 growth over the
months ahead. This analysis suggested
that the temporary factors depressing the
broader monetary aggregates likely
would be reversing, but that the other
influences causing a rechanneling of
credit flows away from depository institutions and boosting the velocity of
money undoubtedly would persist,
though probably with diminishing force.
Accordingly, the staff foresaw moderate
growth of M2 and M3 that at midyear
would leave these aggregates below the
lower ends of the Committee's ranges
for 1993. Under prevailing circum


stances, such continuing weakness in the
broader aggregates was not viewed as
indicating inadequate monetary stimulus. Indeed, a number of members commented that other indicators suggested
that current monetary policy was in fact
quite accommodative as evidenced for
example by low short-term interest
rates, especially on an inflation-adjusted
basis. Moreover, Ml, reserves, and the
monetary base had continued to expand
in the first quarter, though at much
reduced rates. One member commented
that the slowdown in these narrower
monetary measures, which he viewed as
important indicators of the thrust of
monetary policy, had favorable implications with regard to bringing inflation
under control. The members agreed that
the considerable uncertainty that continued to surround the outlook for broad
money relative to spending implied that
forming precise expectations for monetary growth over the months ahead was
not feasible.
In the Committee's discussion of possible intermeeting adjustments to the
degree of reserve pressure, members
who favored an unchanged policy stance
also expressed a preference for retaining
the symmetry of the existing directive.
Some observed that a policy change
during the intermeeting period, if any,
might well be in the direction of a tightening move. However, because there
was no compelling case in the view of
most members for such a move at this
time and any intermeeting adjustment
would be made in the light of emerging
developments, a symmetric directive
was warranted. In this connection, one
member commented that, given the
Committee's assessment of current economic and financial conditions, a tilt in
the directive toward restraint would give
a misleading indication of the Committee's current intentions. Members also
noted that a change in policy, should

134 80th Annual Report, 1993
one be called for by intermeeting developments, would represent a shift in the
direction of policy and would be likely
to have an especially pronounced
impact on financial markets.
At the conclusion of the Committee's
discussion, a majority of the members
indicated that they favored a directive
that called for maintaining the existing
degree of pressure on reserve positions.
These members also expressed a preference for a directive that did not include
a presumption about the likely direction
of any adjustment 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 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 moderate growth in M2 and M3 over the
second quarter.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests that economic activity has increased
at a more moderate pace in the early months
of 1993 after expanding robustly in the
fourth quarter. Total nonfarm payroll
employment registered a sharp increase in
February following generally small advances
in previous months, and the civilian unemployment rate edged down further to 7.0 percent. Industrial production continued to post
solid gains in January and February. Retail
sales increased somewhat further over the
first two months of the year after a fourthquarter surge. Housing starts slipped in early



1993 after registering sizable gains late last
year. Incoming data on orders and shipments
of nondefense capital goods suggest a further
brisk advance in outlays for business equipment, while nonresidential construction has
remained soft. The nominal U.S. merchandise trade deficit was essentially unchanged
in January from its average level in the
fourth quarter, but both exports and imports
were substantially lower. Increases in wages
have remained subdued, but recent advances
in consumer and producer prices have been
larger than those recorded in the latter part of
1992.
Short-term interest rates have changed
little since the Committee meeting in early
February while bond yields have fallen
appreciably on balance. 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 January and
February, apparently reflecting transitory
factors and further shifts into market investments. Total domestic nonfinancial debt
appears to have expanded somewhat further
in January.
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 2 to 6 percent and
Vi to 4!/2 percent respectively, measured
from the fourth quarter of 1992 to the fourth
quarter of 1993. The Committee expects that
developments contributing to unusual velocity increases are likely to persist during the
year. The monitoring range for growth of
total domestic nonfinancial debt was set at
4V2 to 8V2 percent for the year. 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

Minutes of FOMC Meetings, May
lesser reserve restraint would be acceptable
in the intermeeting period. The contemplated
reserve conditions are expected to be consistent with a resumption of moderate growth
in the broader monetary aggregates over the
second quarter.
Votes for this action: Messrs. Greenspan,
Corrigan, Boehne, Keehn, Kelley,
LaWare, McTeer, Mullins, Ms. Phillips,
and Mr. Stern. Votes against this action:
Messrs. Angell and Lindsey.
Messrs. Angell and Lindsey indicated
that their concerns about the outlook for
inflation prompted them to favor an
immediate move to tighten reserve conditions. In their view, such an action
was desirable not only to arrest the possible emergence of greater inflation but
especially to promote further disinflation. They were persuaded that monetary policy currently was overly accommodative as suggested by various
indicators such as recent data on consumer and producer prices, the upswing
in commodity prices, the low level of
real short-term interest rates, and what
in their judgment was a relatively
depressed foreign exchange value of the
dollar given the comparative strength
of the U.S. economy and international
interest rate trends. They noted that the
current federal funds rate was probably
not sustainable in the long term and that
a tightening move at this time might
well avoid the need for more sizable
and potentially disruptive policy actions
later.
Mr. Angell also emphasized the risks
associated with any policy that did not
firmly maintain a disinflationary trend.
As he interpreted historical precedents,
the typical result of a policy that tolerated some inflation was an eventual rise
in inflation leading to permanently
higher interest rates with adverse effects
on economic activity. Indeed, he supported unpegging the federal funds rate
to counter incipient price pressures



135

showing through in commodity and finished goods prices. He believed that a
clear signal of the Committee's commitment to price level stability would stabilize the price of gold along with the
exchange value of the dollar and thereby
provide a climate for further reductions
in long- and intermediate-term interest
rates. Such an approach to policy not
only would assure a continuing disinflationary trend and eventual price stability, with very favorable implications for
financial markets and economic growth,
but it would in his view preclude an
unsettling tendency for the debt markets
to weaken every time newly available
data appeared to suggest that economic
growth was strengthening and that further monetary policy tightening actions
therefore might be in the offing. In sum,
such a policy would provide for the
achievement of the Committee's objective of sustaining progress toward price
stability, which he believed was necessary for maintaining recent higher labor
productivity, a permanently higher saving rate, and a prolonged period of economic expansion.
It was agreed that the next meeting of
the Committee would be held on Tuesday, May 18, 1993.
The meeting adjourned.
Normand Bernard
Deputy Secretary

Meeting Held on
May 18, 1993
A meeting of the Federal Open Market
Committee was held in the offices of the
Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, May 18, 1993, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Corrigan, Vice Chairman
Mr. Angell

136 80th Annual Report, 1993
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer
Mr. Mullins
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and Syron,
Presidents of the Federal Reserve
Banks of Kansas City, St. Louis,
and Boston respectively
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Prell, Economist
Messrs. R. Davis, Lang, Lindsey,
Promisel, Rolnick, Rosenblum,
Scheld, Siegman, and Slifman,
Associate Economists
Mr. McDonough, Manager of the
System Open Market Account
Ms. Greene, Deputy Manager for
Foreign Operations
Ms. Lovett, Deputy Manager for
Domestic Operations
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Stockton, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Hooper, Assistant Director,
Division of International
Finance, Board of Governors
Mr. Small,7 Section Chief, Division of
Monetary Affairs, Board of
Governors
7. Attended portion of meeting relating to a
report on a study entitled "Operating Procedures



Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. T. Davis, Dewald, and Goodfriend,
Senior Vice Presidents, Federal Reserve
Banks of Kansas City, St. Louis, and
Richmond respectively
Ms. Browne, Mr. Judd, and
Mses. Rosenbaum and White,
Vice Presidents, Federal Reserve Banks
of Boston, San Francisco, Atlanta, and
New York respectively
Mr. Eberts, Assistant Vice President,
Federal Reserve Bank of Cleveland
By unanimous vote, the minutes for
the meeting of the Federal Open Market
Committee held on March 23, 1993,
were approved.
The Deputy Manager for Foreign
Operations reported on developments in
foreign exchange markets and on System transactions in foreign currencies
during the period March 23, 1993,
through May 17, 1993. By unanimous
vote, the Committee ratified these
transactions.
The Manager of the System Open
Market Account reported on developments in domestic financial markets and
on System open market transactions
in government securities and federal
agency obligations during the period
March 23, 1993, through May 17, 1993.
By unanimous vote, the Committee ratified these transactions.
The Committee then turned to a discussion of the economic outlook and the
implementation of monetary policy over
the intermeeting period ahead. A sum-

and the Conduct of Monetary Policy: Conference
Proceedings," edited by Marvin Goodfriend and
David Small. This two-volume study has been
designated Working Studies 1, Parts 1 and 2, of
the Federal Reserve Board's Finance and Economic Discussion Series.

Minutes of FOMC Meetingsy May
mary of the economic and financial
information available at the time of the
meeting and of the Committee's discussion is provided below, followed by the
domestic policy directive that was approved by the Committee and issued to
the Federal Reserve Bank of New York.
The information reviewed at this
meeting suggested that the pace of the
economic expansion had slowed in
recent months. Business outlays for
durable equipment had remained strong,
but consumer spending had been quite
sluggish, reflecting limited gains in
employment and real labor income and
diminished optimism about near-term
economic prospects. Additionally, U.S.
exports continued to be constrained by
the disappointing performance of the
major foreign industrial economies.
Available data indicated relatively modest growth in payroll employment and
industrial production over recent
months. Despite the considerable slack
in the economy, increases in wages and
prices had been appreciably larger thus
far in 1993 than in the second half of
last year.
Total nonfarm payroll employment
rose only slightly on balance over March
and April after registering sizable
increases in the first two months of the
year. Strong job gains in the services
industry, notably in business and health
services, were offset in considerable
measure by job losses in manufacturing
and construction in March and April. In
manufacturing, reductions in payrolls
were widespread, with particularly large
declines at manufacturers of transportation equipment. Construction employment recovered only partially in April
from the weather-related decline in
March. The civilian unemployment rate
remained at 7.0 percent.
Industrial production, after having
posted solid gains in previous months,
was little changed in March and April.



137

Part of the recent sluggishness reflected
a decline in utility output following a
weather-related runup in February, but
manufacturing output also grew more
slowly. In the transportation industry,
motor vehicle assemblies edged down
and production of civilian aircraft
remained weak over March and April.
Elsewhere, the output of consumer
goods other than motor vehicles was
about unchanged, and the continuing
strength in the computer industry contrasted with sluggish production of other
types of business equipment. Total utilization of industrial capacity changed
little over the two months.
Retail sales increased substantially in
April, reversing the weather-related
decline in March; automotive dealers
reported large sales gains in April, and
expenditures at other retail outlets
retraced part of the March decrease. For
the year to date, however, retail sales
had been lackluster after the strong
increases of the latter part of 1992.
Housing starts picked up in April; both
single-family and multifamily starts
rebounded from weather-depressed
March levels.
Business fixed investment advanced
further during the first quarter of 1993,
with another sizable rise in outlays for
equipment outweighing continued
weakness in nonresidential construction.
Shipments of nondefense capital goods
during the first quarter were paced by
another sharp increase in shipments of
office and computing equipment. By
contrast, business spending for transportation equipment generally exhibited
little strength; although sales of heavy
trucks continued to trend up, outlays for
complete aircraft apparently edged
down further. Recent data on orders for
nondefense capital goods other than aircraft suggested further expansion in
business spending for equipment in the
near term. Nonresidential construction

138 80th Annual Report, 1993
activity was mixed in the first quarter.
Office construction declined considerably further in response to the depressing effects of a continuing overhang of
unoccupied space. On the other hand,
building activity in the public utilities
sector continued to trend up, and the
construction of commercial structures
other than office buildings increased for
a second consecutive quarter.
Business inventories appeared to have
risen in the first quarter. Manufacturing
inventories expanded in both February
and March after a series of declines that
began early in the fall; much of the
recent advance occurred in the durable
goods sector, where shipments were
strong, and the ratio of inventories to
shipments fell for manufacturing as a
whole. Wholesale inventories increased
appreciably in March. However, the
inventory-to-sales ratio for the sector
moved up only slightly, and it remained
near the low end of its range over the
past two years. In the retail sector, available data indicated that inventories rose
appreciably over January and February
but that the inventory-to-sales ratio
remained in the narrow range that had
prevailed over the preceding year.
The nominal U.S. merchandise trade
deficit in February was unchanged from
its January level, reflecting little change
in total exports and total imports. For
January-February combined, however,
the trade deficit was slightly below its
average level for the fourth quarter, with
both exports and imports down considerably from their fourth-quarter levels.
Much of the drop in exports reflected a
reversal of an earlier, largely transitory
runup in aircraft and automotive products. The decline in imports was spread
across all major trade categories;
imports of aircraft and miscellaneous
industrial supplies dropped appreciably,
and imports of consumer goods fell further. Recent indicators pointed to further



weakness in economic activity in continental Europe and Japan through the
first quarter. Elsewhere, the recovery in
the United Kingdom appeared to be
firming, and growth continued at a
modest pace in Canada.
Producer prices of finished goods rose
more rapidly in March and April, partly
as a result of sharp increases in the
prices of finished energy goods in March
and in the prices of finished foods in
April. Excluding the food and energy
components, producer prices advanced
over the first four months of 1993 at a
faster pace than in 1992. At the consumer level, the increase in prices of
nonfood, non-energy items over the
March-April period was smaller than
the outsized change over the first two
months of the year; nevertheless, averaging over the first four months of the
year, the rate of increase in consumer
prices was higher than in 1992. The
deceleration of labor costs also appeared
to have stalled in 1993. Average hourly
earnings of production or nonsupervisory workers had grown more rapidly
thus far this year than in 1992, and total
hourly compensation of private industry
workers rose at a faster pace in the first
quarter of 1993 than in any quarter of
last year.
At its meeting on March 23, 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 reserve restraint or
slightly lesser reserve restraint would
be acceptable during the intermeeting

Minutes of FOMC Meetings, May
period. The reserve conditions associated with this directive were expected to
be consistent with a resumption of moderate growth in M2 and M3 over the
second quarter.
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 during the
period in anticipation of some increase
in seasonal borrowing. Adjustment plus
seasonal borrowing was near or a little
above expected levels, except for a
surge at the end of the first quarter, and
the federal funds rate remained close to
the 3 percent level that had prevailed for
an extended period.
Short-term interest rates changed
little over the period since the March
meeting. Long-term rates rose considerably early in the period when a sharp
increase in average hourly earnings and
some upward pressure on commodity
prices sparked fears among market participants of a buildup in inflation pressures. Subsequently, despite growing
doubts about the fate of the deficit
reduction program, bond yields declined
in response to a series of more favorable
readings on price behavior and to indications of a slowing of the economic
expansion. Adverse news about consumer and producer prices rekindled
inflation concerns late in the period, and
bond rates once again moved higher. On
balance, most long-term market rates
rose somewhat over the period. Despite
unexpectedly favorable earnings reports
for many firms, major indexes of stock
prices were narrowly mixed over the
period.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
declined somewhat on balance over the
intermeeting period. The dollar depreci


139

ated considerably more against the Japanese yen than against the German mark.
A variety of factors contributed to the
dollar's weakness, including indications
of renewed sluggishness in U.S. economic activity, diminished prospects for
a fiscal stimulus package, and market
perceptions over much of the intermeeting period of limited official support for concerted actions to support the
dollar against the yen. After falling to a
historical low against the yen in late
April, the dollar tended to stabilize following Treasury Secretary Bentsen's
clarification of the Administration's
exchange rate policy and intervention
purchases of dollars against yen in a
coordinated operation. Later in the
period, the dollar rose somewhat against
European currencies as the outlook for
economic activity in Europe became
more pessimistic.
M2 contracted slightly on balance
over March and April, while M3 was
unchanged over the two months; both
monetary aggregates increased substantially in early May. Much of the weakness in M2 over the March-April period
owed to a smaller volume of nonwithheld tax payments in April of this year
that reduced the need for a buildup
in deposits to fund these payments.
Abstracting from this temporary depressant, weak underlying growth in M2
continued to reflect the relatively attractive returns available on capital market
instruments such as bond and stock
mutual funds, which experienced heavy
inflows during the two-month period.
Total domestic nonfinancial debt
expanded somewhat further through
March.
The staff projection prepared for this
meeting suggested that economic activity would grow at a moderate pace and
that such growth would foster a gradual
reduction in margins of unemployed
labor and capital. The projection contin-

140 80th Annual Report, 1993
ued to incorporate the essential elements
of the Administration's fiscal package,
excluding that portion of the short-run
stimulus initiative that seemed unlikely
to be enacted by the Congress. Although
the outlook for fiscal policy now seemed
somewhat more contractionary than earlier, the sizable declines in long-term
interest rates that had occurred in recent
months were expected to support substantial additional gains in business and
residential investment. Moreover, the
increasingly favorable financial environment associated with expected further
easing of credit supply constraints and
the ongoing strengthening of balance
sheets would tend to buttress private
spending on housing, consumer durables, and business equipment. Increases
in export demand would be damped
in the near term by the continuing
weakness in the economies of the major
industrialized countries. The persisting
slack in resource utilization was
expected to be associated with a return
to more subdued price increases after a
spurt earlier in the year.
In the Committee's discussion of current and prospective economic conditions, the members focused with some
concern on the evidence of a slower
economic expansion and a higher rate of
inflation since late 1992. While recent
indicators of economic activity were disappointing, the expansion nonetheless
appeared to have sustainable momentum
and the members generally viewed moderate growth in line with, or perhaps a
bit below, their February forecasts as a
reasonable expectation. At the same
time, several emphasized that the outlook was subject to substantial uncertainty stemming to an important extent
from the unsettled course of legislation
aimed at reducing the federal deficit.
Members expressed particular concern
about the rise in various measures of
inflation over the past several months.



The increase seemed to reflect temporary factors and a worsening in inflationary expectations rather than any significant change in economic fundamentals.
Accordingly, it was premature in the
view of many members to conclude that
the inflationary trend had tilted upward.
Even so, higher inflation expectations,
if sustained, would be detrimental to
economic performance, and the risks of
an uptrend in inflation clearly had
increased.
In their review of business developments across the nation, members continued to report uneven conditions ranging from apparently moderate gains in
some parts of the country to mixed or
marginally declining activity in others.
Business confidence had deteriorated in
many areas and firms were trimming or
putting on hold new or expanded spending programs pending a resolution of
federal tax and spending proposals,
including prospective health care
reform, and the outcome of proposed
tax legislation in some states as well.
Cautious business attitudes were
reflected in continuing efforts to constrain costs and to hold down or reduce
employment levels, notably of permanent workers in light of the large nonwage costs associated with full-time
workers. Accordingly, while some job
growth was occurring, especially outside major firms and the defense sector,
business firms generally appeared disposed to continue to meet increases in
demand through overtime work and
temporary workers, and members anticipated that such attitudes were likely
to persist in the absence of a major
improvement in business confidence.
As reflected in the available data for
the national economy, anecdotal reports
from around the country suggested generally lackluster retail sales over the first
four months of the year. To an extent,
this development probably involved

Minutes of FOMC Meetings, May
some retrenchment in consumer spending following an unsustainable surge
during the latter part of 1992. In some
parts of the country, unusually severe
weather conditions also had served to
hold down retail sales earlier this year,
and recovery from that slowdown had
tended to be limited thus far, especially
outside the automotive sector. Looking
ahead, the members continued to anticipate that consumer spending would provide moderate support for a sustained
economic expansion.
Despite the cautious business attitudes about the economic outlook,
spending for business equipment had
continued to help maintain the expansion. Encouraged in part by relatively
low interest rates, receptive financial
markets, and the more aggressive lending policies of some depository institutions, many firms were upgrading equipment to reduce costs and improve their
product offerings. Concurrently, however, numerous firms reported that they
were holding off on making major new
investment commitments and in some
cases were revising down earlier expansion plans in light of prevailing economic uncertainties, notably those generated by the current legislative debate
about federal taxes and spending.
Nonresidential construction remained
uneven and on the whole relatively subdued across the nation. The construction
of new office structures was likely to
stay depressed in much of the country as
overcapacity continued to be worked
down, but members saw indications of
some strengthening in industrial and
commercial building activity and in public works projects in some areas.
Turning to the outlook for the
nation's trade balance, some members
referred to quite gloomy assessments
from business contacts and other sources
regarding current economic conditions
in a number of major industrial nations



141

and the associated prospect of little or
no growth in U.S. exports to such countries. While total U.S. exports might
continue to expand, reflecting sizable
gains in some parts of the world, imports
probably would grow at a somewhat
faster pace, given moderate expansion
in domestic demand in line with the
members' expectations. At the same
time, members expressed concern about
the potential impact of growing protectionist sentiment on current trade negotiations and on the longer-run outlook for
domestic industries and parts of the
country that relied on foreign trade.
With regard to the inflation situation,
members commented that it remained
difficult to find a satisfactory explanation for the faster-than-projected
increases in price measures thus far this
year. Although temporary anomalies
seemed to be involved, including measurement problems and special factors
boosting some prices, higher inflation
expectations also might have been playing a key role. The latter seemed to have
intensified in the last month or two,
perhaps as a result of growing concerns
that significant deficit-reduction legislation might not be enacted. Strong competitive pressures in many markets,
including competition from foreign
producers, still appeared to be restraining or precluding price increases by
many business firms, but efforts to
raise prices seemed to be encountering
somewhat less resistance recently than
earlier in the economic expansion.
Some price increases appeared to be
associated with the earlier surge in
demand, and in the case of one key
industry higher prices had been facilitated by the implementation of import
restrictions. The downtrend in labor
compensation inflation also seemed to
have stalled in recent months. Against
this background, a considerable degree
of uncertainty surrounded the outlook

142 80th Annual Report, 1993
for inflation and the members differed to
some extent with regard to the most
likely outcome. A number of members,
while they did not rule out the possibility of a more favorable result, stressed
the risk that a faster rate of inflation
might well tend to be sustained. Others
gave more emphasis to the still considerable slack in labor and product markets
and to the restrained growth in broad
measures of money and credit. In this
view, an inflation rate in the quarters
ahead more in line with their earlier
forecasts was still a reasonable expectation even though the average rate for the
year as a whole was likely to be higher
than they had forecast at the start of the
year.
In the Committee's discussion of policy for the intermeeting period ahead,
many of the members commented that
recent price and wage developments
were troubling but did not point persuasively at this juncture toward an
extended period of higher inflation. In
light of underlying economic and financial conditions, the upturn in inflation
expectations and the somewhat quickened pace of inflation might well prove
to be temporary. The economy was
expanding, but the pace had slowed in
recent months. On the other hand, the
potential for a sustained increase in the
rate of inflation could not be dismissed.
Waiting too long to counter any emerging uptrend in inflation or further worsening in inflationary expectations would
exacerbate inflationary pressures and
require more substantial and more disruptive policy moves later. Indeed, in
one view sensitive commodity prices
and other key measures of inflation
already indicated the need for a prompt
move toward restraint, especially in the
context of the Committee's objective
of fostering progress toward price stability. However, the other members all
supported a proposal to maintain an



unchanged degree of pressure on
reserve positions at this time.
In the course of the Committee's discussion, the members took account of a
staff analysis that pointed to a considerable pickup in the growth of M2 and M3
over the months of May and June. Such
strengthening, which appeared to have
emerged in early May, was associated
in part with the reversal of earlier taxrelated distortions and with a surge in
prepayments of mortgage-backed securities. Monetary growth was expected to
revert to a more modest pace over subsequent months, and the members recognized that in any event the interpretion of monetary growth rates needed to
be approached with considerable caution in a period when traditional relationships of such growth to aggregate
measures of economic performance
were not reliable. In present circumstances, M2 and M3 no longer seemed
to be good barometers of underlying
liquidity, which appeared to be ample.
One member expressed the view that the
relatively robust growth of Ml and
reserves served as a better indicator of
the thrust of monetary policy than did
the broader monetary aggregates.
In the view of a majority of the members, wage and price developments over
recent months were sufficiently worrisome to warrant positioning policy for a
move toward restraint should signs of
intensifying inflation continue to multiply. In addition to new information on
prices and costs, such signs could
include developments in markets
affected by inflation psychology, such as
those for bonds, foreign exchange, and
sensitive commodities, all of which
would need to be monitored carefully.
These members supported a directive
that incorporated a greater predilection
to tighten than to ease over the intermeeting period. Given the special nature
of current inflation concerns and atten-

Minutes of FOMC Meetings, May
dant uncertainties, however, the Committee agreed with a proposal by the
Chairman that an intermeeting consultation would be appropriate in the event
that a tightening move were to be contemplated during this period. If a policy
tightening action were not needed, an
asymmetric directive would nonetheless
underscore the Committee's concern
about recent inflation readings and its
judgment that a policy to encourage
progress toward price stability would
promote sustained economic growth.
In the event that a tightening action
became necessary, such action could
help to moderate inflationary expectations, with positive implications over
time for long-term interest rates and the
performance of the economy. Monetary
policy would still be stimulative after a
modest tightening move in that such a
move would leave short-term interest
rates close to or even below their yearago levels in real terms, given the
interim rise in inflation.
Some members preferred to retain a
directive that did not incorporate a presumption about the likely direction of a
change in policy, if any, during the intermeeting period. They were concerned
that adopting a biased directive might
prove to be an overreaction to temporary factors and to a short-lived upturn
in inflationary sentiment that was not
warranted by underlying economic conditions. They noted that, if called for
by intermeeting developments, a move
toward restraint could be implemented
from a symmetric directive. More fundamentally, they believed that the circumstances surrounding the recent performance of the economy and the
uncertainties about price developments
suggested the need for considerable caution before any policy tightening was
implemented and that such a policy
move should be carried out only in the
light of information that pointed clearly



143

to the emergence of higher inflation.
Nonetheless, all but one of these members could accept an asymmetric directive on the understanding that the Committee would have a chance to discuss
any possible policy action.
At the conclusion of the Committee's
discussion, all but two of the members
indicated that they preferred or could
accept a directive that called for maintaining the existing degree of pressure
on reserve positions and that included a
bias toward possible firming of reserve
conditions 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 reserve restraint
would be acceptable 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 appreciable growth in the broader
monetary aggregates over the second
quarter.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests that the economic expansion has
slowed in recent months. Total nonfarm payroll employment rose only slightly over
March and April after registering sizable
increases earlier in the year, and the civilian
unemployment rate remained at 7.0 percent.
Industrial production was little changed in
March and April after posting solid gains in
previous months. Retail sales increased substantially in April but were about unchanged
on balance for the year to date. Housing
starts picked up in April. Incoming data on

144 80th Annual Report, 1993
orders and shipments of nondefense capital
goods suggest a further brisk advance in
outlays for business equipment, while nonresidential construction has remained soft.
The nominal U.S. merchandise trade deficit
in January-February was slightly below its
average level in the fourth quarter. Increases
in wages and prices have been appreciably
larger this year than in the second half of
1992.
Short-term interest rates have changed
little since the Committee meeting on
March 23 while bond yields have risen
somewhat. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies declined somewhat on balance over the intermeeting
period.
After contracting during the first quarter,
M2 was unchanged in April while M3 turned
up; both aggregates increased substantially
in early May. Total domestic nonfinancial
debt expanded somewhat further through
March.
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 2 to 6 percent and
x
h to AVi percent respectively, measured
from the fourth quarter of 1992 to the fourth
quarter of 1993. The Committee expects that
developments contributing to unusual velocity increases are likely to persist during the
year. The monitoring range for growth of
total domestic nonfinancial debt was set at
4V2 to 8V2 percent for the year. 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 would or
slightly lesser reserve restraint might be
acceptable in the intermeeting period. The
contemplated reserve conditions are
expected to be consistent with appreciable



growth in the broader monetary aggregates
over the second quarter.
Votes for this action: Messrs. Greenspan,
Corrigan, Keehn, Kelley, LaWare, Lindsey, McTeer, Mullins, Ms. Phillips, and
Mr. Stern. Votes against this action:
Messrs. Angell and Boehne.
Mr. Angell dissented because he
believed that the persisting indications
of rising inflation and the related deterioration in inflationary psychology called
for a prompt move to tighten monetary
policy. In his view, low real interest
rates, a very steep yield curve, a surprisingly weak exchange value of the dollar
along with the confirming price behavior of inflation-sensitive commodities
such as gold underscored the need for
Committee action to signal the System's
continuing commitment to the eventual
achievement of price stability. In his
opinion, progress toward lower inflation
was not likely in 1993 and 1994 in the
absence of a monetary policy that was
sufficiently restrictive to check inflationary expectations. He added that history
demonstrated that a monetary policy
focused primarily on developments in
the real economy ran the risk of waiting
too long to counter a worsening in inflationary expectations and thus requiring
more substantial and possibly more disruptive policy changes later.
Mr. Boehne supported a steady policy
course, but he dissented because he
objected to a directive that was biased
toward tightening. Although recent
developments suggested that inflation
would be somewhat higher and real
growth somewhat lower during the year
than had been expected earlier, he did
not believe recent data indicated a fundamental shift in the outlook for inflation or the economy. He was concerned
that adopting a biased directive might
prove to be an overreaction to temporary factors affecting the inflation rate

Minutes of FOMC Meetings, July
and inflationary sentiment. In his view,
underlying economic conditions did not
point toward an extended period of
higher inflation. While the pace of
economic growth conceivably could
quicken, it seemed just as likely that the
tempo of business and consumer spending could diminish in the face of uncertainty about the stance of fiscal policy,
particularly with regard to potential tax
increases. Given these uncertainties, he
had a strong preference for keeping an
open mind about possible Committee
action during the intermeeting period
and, accordingly, favored a balanced
policy directive.
It was agreed that the next meeting of
the Committee would be held on
Tuesday-Wednesday, July 6-7, 1993.
The meeting adjourned at 1:50 p.m.
Normand Bernard
Deputy Secretary

Meeting Held on
July 6-7, 1993
A meeting of the Federal Open Market
Committee was held in the offices of the
Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, July 6, 1993, at 2:30 p.m.
and continued on Wednesday, July 7,
1993, at 9:00 a.m.
PresentMr. Greenspan, Chairman
Mr. Mullins 8
Mr. Angell
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer

8. Acting Vice Chairman in Mr. Corrigan's
absence.



145

Mr. Oltman9
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal,
and Parry, Alternate Members of
the Committee
Messrs. Hoenig, Melzer, and Syron,
Presidents of the Federal Reserve
Banks of Kansas City, St. Louis,
and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Patrikis, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R. Davis, Lang, Lindsey,
Promisel, Rolnick, Rosenblum,
Scheld, Siegman, Simpson, and
Slifman, Associate Economists
Mr. McDonough, Manager of the
System Open Market Account
Ms. Greene, Deputy Manager for
Foreign Operations
Ms. Lovett, Deputy Manager for
Domestic Operations
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Stockton, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Danker, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Messrs. Small,10 and Whitesell, n
Section Chiefs, Division of

9. First Vice President, Federal Reserve Bank
of New York, attending as alternate member for
Mr. Corrigan.
10. Attended portion of meeting relating to a
discussion of the uses of a broad monetary aggregate that includes bond and stock mutual funds.
11. Attended portion of meeting relating to the
Committee's discussion of the economic outlook
and its longer-run growth objectives for monetary
and debt aggregates.

146 80th Annual Report, 1993
Monetary Affairs, Board of
Governors
Ms. Kusko,11 Senior Economist,
Division of Research and
Statistics, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Beebe, J. Davis, T. Davis,
Goodfriend, and Ms. Tschinkel,
Senior Vice Presidents, Federal
Reserve Banks of San Francisco,
Cleveland, Kansas City,
Richmond, and Atlanta
respectively
Mr. McNees, Vice President, Federal
Reserve Bank of Boston, Messrs.
Coughlin and Guentner, Assistant
Vice Presidents, Federal Reserve
Banks of St. Louis and New York
respectively
By unanimous vote, the minutes for
the meeting of the Federal Open Market
Committee held on May 18, 1993, were
approved.
The Manager of the System Open
Market Account reported on developments in foreign exchange markets and
on System transactions in foreign currencies during the period May 18, 1993,
through July 6, 1993. By unanimous
vote, the Committee ratified these
transactions.
The Deputy Manager for Domestic
Operations reported on developments in
domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period May 18, 1993,
through July 6, 1993. By unanimous
vote, the Committee ratified these
transactions.
The Committee then turned to a discussion of the economic outlook, the
ranges for the growth of money and debt
in 1993 and 1994, and the implementation of monetary policy over the intermeeting period ahead. A summary of



the economic and financial information
available at the time of the meeting and
of the Committee's discussion is provided below, followed by the domestic
policy directive that was approved by
the Committee and issued to the Federal
Reserve Bank of New York.
The information reviewed at this
meeting provided a mixed reading on
the economy, but on balance the available data suggested that the expansion
had picked up somewhat during the second quarter from the very slow pace of
the first quarter. Employment statistics,
while tending to soften in June, pointed
to considerable strength for the second
quarter as a whole, although recent
spending indicators suggested a much
more moderate expansion. Consumer
and producer price inflation slowed substantially in May, but prices had risen at
a faster rate over the first five months of
the year than over the second half of
1992.
Total nonfarm payroll employment
changed little in June after registering
substantial gains in April and May. For
the second quarter as a whole, the
increase in employment matched that of
the first quarter. Manufacturing employment, which was about unchanged over
the first quarter, declined somewhat in
June for a third straight month. Construction payrolls edged lower after rising appreciably over the preceding two
months, and job gains in the services
industries were considerably smaller in
June than those recorded earlier in the
year. The civilian unemployment rate
backed up to 7.0 percent in June.
Industrial production increased in
May at the relatively subdued rate
recorded in March and April; for June,
the limited data available suggested a
modest decline in output. In May,
assemblies of motor vehicles declined
after holding steady over the two previous months. Among other manufactured

Minutes of FOMC Meetings, July
goods, the production of business equipment, led by computers and industrial
equipment, recorded another brisk
advance whereas the output of non-auto
consumer goods continued to expand
sluggishly. Total utilization of industrial
capacity was unchanged in May for a
third straight month.
Real personal consumption expenditures edged higher in May after a sizable
rebound in April from weather-related
weakness. On balance, however, consumer spending had increased only
slightly thus far this year. Outlays for
new cars and light trucks advanced in
May to their highest level since January
1990 and apparently remained near that
elevated level in June. In addition,
spending for non-energy services had
increased substantially in recent months.
By contrast, energy consumption had
fallen from the especially high levels of
late winter, and outlays for nondurable
goods in May were still below their
fourth-quarter level. Housing starts
increased in April and May from a
depressed first-quarter pace, with most
of the rise attributable to starts of singlefamily dwellings.
Shipments of nondefense capital
goods in May retraced only a portion
of a sizable April decline. However, for
the two months combined, shipments of
such goods were above the average for
the first quarter and apparently remained
on an upward trend that began early in
1992. The upward trajectory for spending on machinery and on electrical and
communications equipment seemed to
have reflected improved cash flows for
the business sector and a declining cost
of capital, and incoming data suggested
that outlays for business equipment
would increase further over the months
ahead. Nonresidential construction
activity was unchanged over the first
quarter but picked up slightly on balance over April and May. Office build


HI

ing rose over the two months, while
construction of non-office commercial
structures was little changed and industrial building activity was down sharply.
Business inventories recorded another
appreciable rise in April, and available
data pointed to a further increase in
May. In manufacturing, inventory accumulation stepped up in April and May
after changing little in the first quarter;
the ratio of stocks to shipments edged
higher in each month and was only
slightly above the very low level
reached early in 1993. In the wholesale
trade sector, inventories advanced at a
slower rate in May than in April, and the
inventory-to-sales ratio fell to the low
end of the range for the past three years.
The buildup of retail inventories slowed
considerably in April, and with sales
rebounding from the effect of March
storms, the inventory-to-sales ratio
declined for the retail sector. Nonetheless, the ratio still was near the high end
of its range for the past several years.
The nominal U.S. merchandise trade
deficit for April was unchanged from
March, with both imports and exports
declining slightly. However, the April
deficit was substantially above the average for the first quarter, reflecting sizable increases in imports of capital
goods, automotive products, consumer
goods, and oil. The value of exports in
April was only slightly above the firstquarter average. Recent indicators
pointed to further weakness in economic
activity in continental Europe thus far
this year. By contrast, economic recovery appeared to be continuing in the
United Kingdom and Canada. In Japan,
economic activity was up appreciably in
the first quarter, but available data suggested that this strength had not carried
over to the second quarter.
Changes in producer and consumer
prices were small in May following sizable increases earlier in the year. Pro-

148 80th Annual Report, 1993
ducer prices of finished goods were
unchanged in May, as declines in prices
of finished consumer food and energy
products offset small advances in prices
of other finished goods. Excluding the
food and energy components, producer
prices had risen more rapidly thus far in
1993 than they had in the second half of
1992. At the consumer level, prices of
items other than food and energy rose
only slightly in May, but this measure of
inflation also had risen faster this year
than in the second half of last year.
Labor costs likewise had evidenced a
quickened pace of increases this year.
Average hourly earnings of production
or nonsupervisory workers rose substantially in May after edging lower in April,
and these earnings had grown more rapidly over the first five months of 1993
than over the preceding six months.
At its meeting on May 18, the Committee adopted a directive that called
for maintaining the existing degree of
pressure on reserve positions but that
included a tilt toward possible firming
of reserve conditions 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 would be acceptable or slightly
lesser reserve restraint might be acceptable during the intermeeting period. The
reserve conditions associated with this
directive were expected to be consistent
with appreciable growth of the broader
monetary aggregates over the second
quarter.
Open market operations were directed
toward maintaining the existing degree
of pressure on reserve positions throughout the intermeeting period. Several
upward adjustments were made to
expected levels of adjustment plus sea


sonal borrowing during the period in
anticipation of stepped-up demand for
seasonal credit during the crop-growing
season; borrowing averaged near
expected levels over the period. The federal funds rate remained close to 3 percent over the period, although quarterend pressures in money markets pushed
the rate higher for a brief period at the
end of June.
Other short-term interest rates also
were little changed on balance over the
period since the May meeting. Early in
the period, unexpectedly robust employment data for May, coupled with media
reports about the monetary policy stance
adopted at the May meeting, led to some
upward pressure on money market interest rates. Subsequently, however, this
pressure abated in response to the
release of data suggesting slower inflation and a somewhat weaker outlook for
the economy. These developments along
with the progress in the Congress
toward adoption of a deficit-reduction
package fostered a decline in bond
yields; buoyed by the drop in yields,
major indexes of stock prices rose over
the intermeeting period in spite of disappointing second-quarter earnings reports
by several major companies.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
increased on balance over the intermeeting period. After depreciating somewhat
through the end of May, the dollar
recovered in early June when U.S.
money market interest rates moved
higher. The dollar rose more strongly
over the last half of June, principally in
response to actual and expected monetary easing abroad. The rise in the dollar
over the intermeeting interval reflected
sizable appreciations against European
currencies, especially the German mark.
The dollar continued to fall against the
Japanese yen through the middle of

Minutes of FOMC Meetings, July 149
June, in the process setting several new
lows, before recovering a little over the
remainder of the period.
After contracting during the first quarter, M2 and M3 expanded appreciably
over the second quarter. Most of this
growth, which was especially pronounced in May, reflected strength in
Ml and occurred despite continued
heavy outflows to bond and equity
funds. The May surge resulted in part
from a strong pickup in mortgage
refinancing activity and a reversal of the
depressing effect in April of relatively
damped individual nonwithheld tax payments on the seasonally adjusted level
of liquid deposits. The growth of the
broader aggregates moderated substantially in June, and by more than might
have been suggested by the waning of
these mortgage and tax influences. For
the year through June, growth of both
M2 and M3 was below the lower ends
of the ranges for 1993 that the Committee had established in February. This
sluggishness reflected ongoing changes
in asset preferences and financing patterns rather than restrictive financial
conditions. The velocity of M2 was estimated to have increased at a rate of
about 4V2 percent over the first half of
the year after a 4 percent rise in 1992.
Total domestic nonfinancial debt expanded somewhat further through April.
The staff projection prepared for this
meeting suggested moderate growth in
economic activity and modest reductions in margins of unemployed labor
and capital through 1994. The projection assumed the enactment of a federal
budget bill that implied a moderately
restrictive fiscal policy over the forecast
horizon. As in earlier staff projections,
lower interest rates were expected to
support appreciable gains in interestsensitive expenditures, including housing, consumer durables, and business
equipment. Private spending also would



be buttressed by a favorable financial
environment associated with strengthened balance sheets and reduced debt
burdens and by the apparently increasing willingness of banking institutions
to make new loans. Export demand was
likely to remain constrained over the
near term by the weakness in the economies of several major industrial countries, but some improvement in foreign
demand was anticipated later as those
economies started to strengthen. The
outlook for moderate growth and continuing slack in resource utilization suggested considerably more subdued price
increases than had occurred in the early
months of 1993.
In the Committee's discussion, the
members generally agreed that ongoing
economic developments remained consistent with moderate but sustained
growth in economic activity. No sector
of the economy seemed poised at this
juncture to provide strong impetus to
the expansion, but a promising basis for
further growth was seen in the much
improved financial condition of many
households and business firms. Lower
long-term interest rates, which had contributed to the improvement in balance
sheets, were likely as well to bolster
housing and business capital spending
more directly. While the expansion now
appeared to be firmly established, a
number of members cautioned that it
was subject to some downside risks,
notably those associated with the still
uncertain outlook for government budget and other policies. The possibility of
higher taxes, associated with the deficit
reduction legislation currently under
consideration in the Congress and with
the forthcoming proposals for national
health care reform, was widely reported
to be damping spending. With regard to
the outlook for inflation, the most recent
data on prices offered some encouragement that the earlier upturn in key mea-

150 80th Annual Report, 1993
sures of inflation might prove to be
temporary, especially in the context of
still ample margins of unutilized labor
and other production resources. Even
so, given generally held expectations
among the public that inflation was not
likely to decline and might in fact trend
higher, many members concluded that
for now the disinflationary trend might
have been arrested or, at least, that further progress toward price stability
would be quite difficult to achieve over
the next several quarters.
In conformance with the usual practice at meetings when the Committee
considers its longer-run objectives for
growth of the monetary and debt aggregates, the members of the Committee
and the Federal Reserve Bank presidents not currently serving as members
provided individual projections of
growth in real and nominal GDP, the
rate of unemployment, and the rate of
inflation for the years 1993 and 1994. In
light of the experience in the first half of
the year, forecasts of real growth in 1993
had been revised down somewhat since
February, while projections of inflation
had been raised. The central tendency of
the forecasts of the rate of expansion in
real GDP in 1993 was now 2VA to
23/4 percent for the year as a whole; for
1994, these projections had a central
tendency of 2Vi to 3V4 percent. With
regard to the expansion of nominal GDP,
the forecasts converged on growth rates
of 5 to 53/4 percent for 1993 and 5 to
6V2 percent for 1994. Given the projections of a moderate uptrend in economic
activity and expectations of some further gains in labor productivity, the forecasts incorporated only a small decline
in unemployment to rates of around
63/4 percent in the fourth quarter of 1993
and only slightly lower by the fourth
quarter of 1994. For the rate of inflation,
as measured by the CPI, the projections
had a central tendency of 3 to 3VA per


cent in 1993 and 3 to 3V2 percent in
1994, reflecting little change in both
years from the rate of inflation experienced in 1992.
Members commented that the improved prospects for significant reductions in the federal deficit had played an
important role in fostering the declines
in longer-term interest rates that had
occurred since the latter part of 1992;
the lower rates were having positive
effects on spending decisions in a number of interest-sensitive sectors of the
economy as well as on balance sheets
more generally. At the same time, the
prospects for higher taxes—accentuated
by uncertainties about their size and
incidence—were widely reported to be
inhibiting spending decisions by business firms and might also be adding to
cautious consumer attitudes. Some of
the anecdotal evidence suggested that
uncertainties associated with the potential impact of the still unannounced proposals for health care reform were making many businesses especially cautious,
notably in their hiring decisions. Adding
to the effects of anticipated federal legislation were concerns in various parts of
the country about further cuts in defense
spending and the impact of additional
reductions in state and local expenditures or of increases in state and local
taxes. Some members observed that the
fiscal policy legislation before the Congress appeared to have generated a perhaps exaggerated degree of concern, and
passage of this legislation might have a
generally favorable effect on business
and consumer sentiment.
Turning to the outlook for individual
sectors of the economy, members
referred to indications of an upturn in
consumer spending in recent months,
but they also noted that survey results
and anecdotal reports still suggested
generally cautious consumer attitudes.
The prospects for increased taxes might

Minutes of FOMC Meetings, July
be having some negative effect on
consumer confidence, but consumers
remained especially concerned about the
outlook for jobs and incomes as defense
cutbacks continued and many firms,
notably larger business establishments,
took further steps to restructure and
downsize their operations. To an important extent the improvement in retail
sales in the second quarter was associated with stronger sales of motor vehicles that, in the view of at least some
members, appeared to reflect previously
postponed replacement demand rather
than a major shift in consumer attitudes.
In any event, moderate growth in consumer spending was likely to be maintained in the context of the improved
financial condition and the related
reduction in debt-service burdens of
many households. Further growth in
overall employment, in line with that
achieved in the first half of the year,
would if it persisted provide important
support toward sustaining the expansion
of consumer spending and thus the
growth of the economy more generally.
With regard to the outlook for business fixed investment, members reported
that many firms were scaling back or
putting on hold their capital spending
plans pending a resolution of the business tax proposals under consideration
in the Congress. Nonetheless, business
spending for equipment still constituted
a relatively robust sector of the economy, at least according to the data available to date. To a considerable extent,
such spending reflected ongoing efforts
to improve the quality of products and
the efficiency of business operations
while holding down the number of
employees, and the members saw this
trend as likely to continue. In general,
other business capital spending had
remained sluggish, although construction activity other than office building
appeared to have picked up in parts of



1 51

the country. The prospects for housing
construction, though not ebullient, were
viewed as more promising particularly
in light of the declines in mortgage
interest rates to relatively low levels.
The improved financial position of many
potential homebuyers also provided a
basis for anticipating stronger housing
markets. Despite these favorable factors, however, overall housing activity
had improved only modestly in recent
months as homebuyers tended to remain
cautious, and at least in some areas
housing developers continued to report
that they were encountering difficulties
in securing construction finance. On
balance, housing construction seemed
likely to provide some impetus to the
expansion in coming quarters.
Relatively weak economic conditions
in a number of foreign industrial countries were likely to continue to limit U.S.
exports, which had declined since the
end of 1992. Indeed, available data supplemented by reports from a variety of
contacts suggested that business conditions had remained quite weak or had
worsened in a number of foreign industrial nations. Even so, business contacts
in some parts of the United States indicated that foreign demand for their products was still quite robust. Business
activity abroad, which already was
trending higher in a few industrial
nations, was viewed as likely to
strengthen more generally over the year
ahead, with positive effects on overall
U.S. exports.
Turning to the outlook for inflation,
members commented that despite favorable readings recently, a wide range of
price and wage data had suggested some
acceleration in the rate of inflation during the early months of the year. To
some extent, the indications of intensified inflation might have been the result
of difficulties with seasonal adjustments
or other temporary factors, but there

152 80th Annual Report, 1993
were reports of some successful efforts
by business firms to raise prices following the spurt in demand and the rise in
capacity utilization toward the end of
1992. These price developments were
disappointing and suggested to many
members that the disinflationary trend
might have been arrested, at least for
now, though the economic fundamentals
remained consistent with a resumption
of some further downward movement
in the rate of inflation. With regard to
those fundamentals, many members saw
significant, albeit diminished, slack in
labor and product markets as likely to
persist over the forecast horizon, given
their current forecasts of moderate
expansion in economic activity. Other
favorable factors in the inflation outlook
included efforts by businesses to hold
down costs and increase productivity by
restructuring their operations and investing in new, more productive equipment. Unfortunately, these favorable
elements in the underlying economic
situation seemed at odds with the apparently widely held view by the public
that inflation would not diminish and
indeed was likely to increase and that in
any event current inflation levels were
tolerable. Such expectations and attitudes would tend to temper the gains
against inflation, if any, over the forecast horizon by their effects on the pricing and wage behavior of business firms
and employees and the reactions of consumers toward rising prices. This inflationary climate underscored the importance of credible government policies—
monetary, fiscal, trade, and regulatory—
that encouraged reduced inflation over
time.
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 1993,
and it decided on tentative ranges for
growth in those aggregates in 1994. The
current ranges for the period from the
fourth quarter of 1992 to the fourth
quarter of 1993 included expansion of 2
to 6 percent for M2 and xh to 4Vi percent for M3. A monitoring range for
growth of total domestic nonfinancial
debt had been set at 4Vi to 8V2 percent
for 1993.
In the Committee's discussion, the
members focused on the issue of
whether or not to lower the ranges further. In February, the ranges for M2 and
M3 had been reduced by V2 percentage
point in the expectation that continuing
rechanneling of credit demands and savings flows into securities markets and
away from depository institutions would
result in further increases in velocity, the
ratio of nominal GDP to monetary measures such as M2 or M3. In fact, the
strength of these forces was underestimated to some extent. Substantial
increases occurred in the velocity of
both M2 and M3, especially in the first
quarter, that were reflected in weak bank
credit and huge inflows into bond and
stock mutual funds. In the circumstances, the expansion of both aggregates through midyear was below the
lower ends of the reduced ranges established by the Committee for the year.
According to a staff analysis, the developments boosting M2 and M3 velocity
could be expected to persist over the
balance of 1993. Such an outcome
would imply monetary growth for the
year as a whole slightly below the Committee's current ranges, even if the
growth of nominal GDP picked up in
the second half of the year as implied by
the central tendency of the members'
forecasts.
In light of this expectation, many of
the members indicated their support of
a proposal to lower the M2 and M3

Minutes of FOMC Meetings, July
ranges further for 1993 and on a tentative basis to retain the reduced ranges
for 1994. It was emphasized during the
discussion that the reductions were
intended solely as technical adjustments
to reflect expected increases in velocity
and that the lower ranges did not imply
any tightening of monetary policy.
Rather, the reductions in the ranges
would serve to align them with monetary growth rates that were more likely
to be associated with a satisfactory economic performance. Indeed, M2 and M3
growth consistent with most members'
forecasts might still leave the expansion
of those aggregates near the lower
ends of their reduced ranges for the year;
at the same time, the probability of a
surge in monetary growth to levels
above the new ranges appeared remote.
In this connection, some members
commented that the uncertainties surrounding the behavior of M2 and M3
might well persist for some time. The
value of these aggregates in guiding
policy seemed to have diminished in
1992 and 1993, and the Committee
needed to continue to rely on its evaluation of a broad array of other financial
and economic developments in its
assessment of an appropriate course
for monetary policy. The members did
not rule out the possibility that a more
normal or predictable relationship
between money and economic activity
might be restored once the current process of balance sheet adjustments was
completed, the yield curve flattened, and
some stabilization in the intermediation
function of depository institutions
emerged. In the view of a few members,
moreover, the lower range proposed for
M2 might in fact be more consistent
with the rate of monetary growth that
would be needed over the long term to
sustain price stability and satisfactory
economic expansion, if the earlier relationships between broad money growth



153

and economic performance were to
reemerge.
Many of these members commented
that the considerations underlying the
desirability of a technical adjustment to
the ranges for this year applied to 1994
as well, and they therefore supported
extending the reduced ranges to 1994 on
a tentative basis subject to review early
next year. Monetary growth outcomes
somewhat higher within these ranges
might be anticipated in association with
the somewhat faster economic growth
and essentially unchanged rate of inflation that most members had forecast for
next year.
Several members indicated that while
they could accept reductions in the 1993
ranges, they nonetheless preferred to
retain the existing ranges. One reason
given for this preference was that the
prospective performance of the broad
monetary aggregates in relation to
developments in the economy was not
sufficiently understood to warrant the
specification of new ranges. Indeed, a
change might be misinterpreted as
implying more knowledge about velocity relationships than the Committee in
fact possessed and could set up expectations that the Committee would put
greater and, depending on emerging
circumstances, perhaps undesirable
emphasis on achieving monetary growth
within the new ranges. Moreover, to the
extent that some observers interpreted
the ranges as the Committee's proxies
for presumed nominal GDP objectives,
an erroneous conclusion could be
reached that the Committee had decided
on a reduced target level of nominal
GDP even though the Committee had
not in fact framed its objectives in terms
of GDP targets. On balance, while these
members did not view this choice as a
matter of great consequence in current
circumstances, they concluded that it
was marginally preferable to retain the

154 80th Annual Report, 1993
ranges for this year, and if necessary, to
accept and explain the reasons for a
shortfall once the latter were more
clearly established. The members who
preferred to retain the current ranges
agreed that there were plausible arguments on both sides of this issue and
they could accept a proposal to reduce
the ranges for both 1993 and 1994.
In light of the limited reliance that the
members felt they could place on the
behavior of the current monetary aggregates, the Committee at this meeting
reviewed the possible advantages of a
newly constructed measure of money.
This measure involved the addition of
bond and stock mutual funds to M2 as
currently defined. There were indications that the shares of such funds had
become closer substitutes for M2, and
large portfolio shifts into such funds
seemed to account for much of the
weakness in M2 and its uncertain relationship to income and the longer-run
behavior of prices. After examining the
properties of this measure and reviewing its past behavior in relation to key
indicators of economic performance, the
members concluded that it would not
enhance the formulation or implementation of monetary policy, at least at this
point. However, the members agreed
that mutual funds flows should continue
to be monitored for their effects on M2
and that the relevant data should be
made available to outside analysts.
At the conclusion of its discussion,
the Committee voted to lower the M2
range that it had established in February
by an additional 1 percentage point and
to reduce the M3 range by another
Vi percentage point, bringing the M2
range to 1 to 5 percent and that for M3
to 0 to 4 percent for 1993. The Committee also voted to reduce the annual monitoring range for growth of total domestic nonfinancial debt by Vi percentage
point to 4 to 8 percent. The members



anticipated that this debt aggregate
would continue to grow at a rate that
was roughly in line with that of nominal
GDP. The Committee approved the
following statement for inclusion in its
domestic policy directive.
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 lowered the ranges it had established in
February for growth of M2 and M3 to ranges
of 1 to 5 percent and 0 to 4 percent respectively, measured from the fourth quarter of
1992 to the fourth quarter of 1993. The Committee anticipated that developments contributing to unusual velocity increases would
persist over the balance of the year and that
money growth within these lower ranges
would be consistent with its broad policy
objectives. The monitoring range for growth
of total domestic nonfinancial debt also was
lowered to 4 to 8 percent for the year.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Boehne, Keehn, Kelley,
LaWare, Lindsey, McTeer, Oltman, Ms.
Phillips, and Mr. Stern. Votes against
this action: None. Absent: Mr. Corrigan.
(Mr. Oltman voted as alternate for Mr.
Corrigan.)

For the year 1994, the Committee
approved provisional ranges that were
unchanged from the reduced levels for
1993. Accordingly, the Committee voted
to incorporate the following statement
regarding the 1994 ranges in its domestic policy directive.
For 1994, the Committee agreed on tentative ranges for monetary growth, measured
from the fourth quarter of 1993 to the fourth
quarter of 1994, of 1 to 5 percent for M2 and
0 to 4 percent for M3. The Committee provisionally set the monitoring range for growth
of total domestic nonfinancial debt at 4 to
8 percent for 1994. The behavior of the
monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their

Minutes of FOMC Meetings, July
velocities, and developments in the economy
andfinancialmarkets.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Boehne, Keehn, Kelley,
LaWare, Lindsey, McTeer, Oltman, Ms.
Phillips, and Mr. Stern. Votes against
this action: None. Absent: Mr. Corrigan.
(Mr. Oltman voted as alternate for Mr.
Corrigan.)
In the Committee's discussion of policy for the period until the next meeting,
most of the members indicated that they
saw little or no reason to change monetary policy in either direction. The most
recent information on the performance
of the economy was mixed, and this
together with questions about the course
of fiscal policy contributed to considerable uncertainty about the outlook. Even
so, the members felt that the evidence
pointed on the whole to a sustained rate
of economic expansion. The latest price
statistics provided some encouragement
that the apparent intensification of inflation in earlier months of the year might
have abated. For now, therefore, nearly
all the members saw the balance of factors bearing on the course of economic
activity and the outlook for inflation as
calling for an unchanged degree of pressure on reserve positions.
According to a staff analysis prepared
for this meeting, the growth of M2 could
be expected to slow markedly in the
months ahead from its pace over the
second quarter. The projected deceleration was mainly associated with some
unwinding of the second-quarter bulge
in mortgage refinancings along with further heavy inflows to bond and stock
mutual funds. The expansion of M3
appeared likely to be held down by
weaker bank credit extensions as alternative sources of funds in the capital
markets attracted more borrowers. On
balance, modest growth of both M2 and
M3 would keep them close to the lower



155

ends of their downward-revised ranges
through September.
Some members cautioned that despite
the very sluggish behavior of the broad
measures of money thus far this year,
monetary policy was relatively expansive as evidenced by a variety of other
indicators including the growth in narrow measures of money and reserves
and the very low levels of money market interest rates. Indeed, in the view of
several members, in a period characterized by indications of some worsening
in inflationary expectations, a policy
course that maintained steady conditions in reserve markets could be said to
have become more accommodative as
the federal funds rate, in real terms after
adjustment for expected inflation,
moved down from an already low level.
Accordingly, while current monetary
policy seemed likely to support further
economic expansion, the Committee
needed to remain alert to the potential
for intensifying inflation. At some point
the current policy stance could well
begin to foster greater price pressures.
One member urged a prompt move
toward restraint, given the prospect in
his view that further progress toward
price stability was unlikely with the current, quite stimulative, stance of monetary policy.
A majority of the members, taking
account of the current stance of monetary policy, favored a proposal to retain
the bias toward possible tightening that
the Committee had adopted at the May
meeting. In this connection, some commented that while the need for any policy adjustment during the period ahead
seemed somewhat remote, the next policy move was more likely to be in the
direction of some firming than toward
easing. Other members suggested that a
symmetrical directive might be more
consistent with current economic conditions and the related outlook for a steady

156 80th Annual Report, 1993
policy course over the near term. These
members agreed, however, that a return
to symmetry so soon after the adoption
of a directive that was biased toward
restraint could convey a misleading
impression that recent developments
had increased the Committee's concerns
about the sustainability of the expansion
or that the Committee had become less
committed to a disinflationary policy
course. Accordingly, these members
indicated that they could support an
asymmetric directive at this point. Several members observed that a number of
key economic measures were scheduled
for release during the intermeeting
period and that the data in question
should provide a firmer basis for evaluating the performance of the economy
and a desirable course for monetary
policy.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they preferred or found
acceptable a directive that called for
maintaining the existing degree of
pressure on reserve positions and that
retained a bias toward possible firming
of reserve conditions 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
reserve restraint would be acceptable
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 modest growth in the
broader monetary aggregates over the
third quarter.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute



transactions in the System account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests that the economic expansion has
picked up somewhat in recent months from
the very slow pace of the first quarter. Total
nonfarm payroll employment changed little
in June after registering substantial gains in
April and May, and the civilian unemployment rate edged up to 7.0 percent in June.
Industrial production has changed little on
balance over the last few months. Real consumer expenditures edged higher in May
after a sizable rise in April but have
increased only slightly thus far this year.
Housing starts turned up in April from a
depressed first-quarter pace and rose somewhat further in May. Incoming data suggest
a continued brisk advance in outlays for
business equipment, while nonresidential
construction has remained soft. The nominal
U.S. merchandise trade deficit was about
unchanged in April but substantially larger
than its average rate in the first quarter. Consumer and producer prices were about
unchanged in May, but for the year to date
inflation has been more rapid than in the
second half of 1992.
Short-term interest rates have changed
little since the Committee meeting on
May 18 while bond yields have declined
somewhat. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies increased on
balance over the intermeeting period.
After contracting during the first quarter,
M2 and M3 expanded appreciably over the
second quarter. For the year through June,
growth of the two aggregates was below the
lower ends of the ranges established by the
Committee for 1993. Total domestic nonfinancial debt expanded somewhat further
through April.
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 lowered the ranges it had established in
February for growth of M2 and M3 to ranges
of 1 to 5 percent and 0 to 4 percent respectively, measured from the fourth quarter of
1992 to the fourth quarter of 1993. The

Minutes of FOMC Meetings, July 157
Committee anticipated that developments
contributing to unusual velocity increases
would persist over the balance of the year
and that money growth within these lower
ranges would be consistent with its broad
policy objectives. The monitoring range for
growth of total domestic nonfinancial debt
also was lowered to 4 to 8 percent for the
year. For 1994, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1993 to the
fourth quarter of 1994, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the monitoring range for
growth of total domestic nonfinancial debt at
4 to 8 percent for 1994. 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
would or slightly lesser reserve restraint
might be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with modest
growth in the broader monetary aggregates
over the third quarter.
Votes for this action: Messrs. Greenspan,
Mullins, Boehne, Keehn, Kelley, LaWare,
Lindsey, McTeer, Oltman, Ms. Phillips,
and Mr. Stern. Vote against this action:
Mr. Angell. Absent: Mr. Corrigan.
(Mr. Oltman voted as alternate for Mr.
Corrigan.)

Mr. Angell dissented because he
favored a prompt move to tighten policy. In his view, monetary policy was
overly expansive at this point as evidenced by what he viewed as excessive
liquidity in financial markets, the negative level of real short-term interest
rates, and the disappointing lack of
progress toward lower inflation this



year. Given indications of worsening
inflationary expectations, such as the
substantial rise in the price of gold, as
well as projections of an increase in
inflation, a policy that led to a steady
federal funds rate in fact implied a further easing of an already stimulative
monetary policy. In these circumstances,
a tightening of policy would not involve
any significant risk to the expansion but
would foster changes in financial conditions and the outlook for inflation that
would be more consistent with renewed
progress toward price stability in 1994
and later. Declining inflation around the
world and a stronger trend of productivity growth in the United States, among
other factors, were providing a favorable environment for further disinflation, but those developments needed to
be supported and validated by appropriate monetary policy action.
At this meeting, the Committee
reviewed its practices with regard to the
release of information to the public. This
review was undertaken in response to
media reports of the purported results of
the May meeting before the Committee
had made public any information about
that meeting. In its discussion, the Committee reaffirmed its long-standing rules
governing the confidentiality of FOMC
information, including the schedule that
calls for releasing the minutes of a Committee meeting, along with an explanation of the Committee's decisions, a few
days after the next meeting. These rules
are designed to safeguard the Committee's flexibility to make needed adjustments to policy and also to provide adequate time to prepare a full report of the
context and rationale for its decisions.
Committee members emphasized the
potential for inadvertent leaks of information in the course of general conversations with representatives of the news
media or others concerning the members' views about economic develop-

158 80th Annual Report, 1993
ments or monetary policy. The members
agreed that particular care needed to be
taken for some period before and after
each of its meetings.
It was agreed that the next meeting of
the Committee would be held on Tuesday, August 17, 1993.
The meeting adjourned at 12:25 p.m.
on Wednesday, July 7, 1993.
Donald L. Kohn
Secretary

Meeting Held on
August 17, 1993
A meeting of the Federal Open Market
Committee was held in the offices of the
Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, August 17, 1993, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Angell
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer
Mr. Mullins
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and Syron,
Presidents of the Federal Reserve
Banks of Kansas City, St. Louis,
and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel



Mr. Patrikis, Deputy General Counsel
Mr. Prell, Economist
Messrs. R. Davis, Promisel,
Rosenblum, Scheld, Siegman,
Simpson, and Slifman, Associate
Economists
Ms. Greene, Deputy Manager for
Foreign Operations
Ms. Lovett, Deputy Manager for
Domestic Operations
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Stockton, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Johnson, Assistant Director,
Division of International Finance,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Beebe, J. Davis, T. Davis,
Dewald, Goodfriend, and
Ms. Tschinkel, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Cleveland,
Kansas City, St. Louis, Richmond,
and Atlanta respectively
Messrs. McNees, Meyer, and Miller,
Vice Presidents, Federal Reserve
Banks of Boston, Philadelphia, and
Minneapolis respectively
Ms. Meulendyke, Manager, Open
Market Operations, Federal
Reserve Bank of New York
By unanimous vote, the minutes for
the meeting of the Federal Open Market
Committee held on July 6-7,1993, were
approved.
Secretary's Note: Advice had been received of the election of William J. McDonough by the Board of Directors of the

Minutes of FOMC Meetings, August
Federal Reserve Bank of New York as a
member of the Federal Open Market Committee for the period commencing July 19,
1993, and ending December 31, 1993, and
that he had executed his oath of office.
By unanimous vote, the Committee
elected William J. McDonough as Vice
Chairman of the Committee to serve
until the first meeting of the Committee
after December 31, 1993.
The Deputy Manager for Foreign
Operations reported on developments in
foreign exchange markets during the
period since the July meeting. There
were no System open market transactions in foreign currencies during this
period, and thus no vote was required of
the Committee.
The Deputy Manager for Domestic
Operations reported on developments in
domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period July 7, 1993,
through August 16, 1993. By unanimous vote, the Committee ratified these
transactions.
The Committee then turned to a discussion of the economic and financial
outlook and the implementation of
monetary policy over the intermeeting
period ahead. A summary of the economic and financial information available at the time of the meeting and of
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
The information reviewed at this
meeting suggested that economic activity was expanding at a moderate pace.
The limited data available on spending
in the third quarter presented a mixed
picture but on balance pointed to continued expansion in consumption, business
fixed investment, and homebuilding.



159

Employment remained on an uptrend,
and industrial production recently had
firmed somewhat. After rising at a faster
rate in the early part of the year, consumer prices had changed little and producer prices had fallen in recent months.
Total nonfarm payroll employment,
after a small gain in June, expanded
in July at a rate close to its average
advance in earlier months of the year.
The services industries, led by business
services, provided half of the July
increase. Elsewhere, considerable hiring
was evident in wholesale and retail
trade, and construction employment
moved up after a small decline in June.
In manufacturing, more jobs were lost,
although at a slower rate than earlier in
the year. The civilian unemployment
rate dropped to 6.8 percent in July.
Industrial production recovered in
July from small declines in May and
June. Manufacturing output rose in spite
of a sizable cutback in motor vehicle
assemblies; utility production registered
a strong weather-related gain; and mining output declined further. Within manufacturing, the production of consumer
durable goods other than automobiles
and trucks rebounded in July, and the
output of business equipment advanced
further. Total utilization of industrial
capacity edged higher in July, reflecting
a substantial gain at electric utilities;
utilization of manufacturing capacity
was unchanged.
Retail sales increased slightly further
in July after a sizable rise in the second
quarter. Spending on automobiles was
down in July for a second straight
month, but sales were strong at apparel,
furniture and appliance, and general
merchandise stores. Total housing starts,
depressed by wet weather and floods in
some areas of the country, were down
somewhat in July; however, permit issuance moved up, suggesting that homebuilding activity remained in a mild

160 80th Annual Report, 1993
uptrend. In addition, consumer surveys
indicated that attitudes toward homebuying continued to be strongly positive
during July, and builders' assessments
of home sales improved substantially.
Business fixed investment increased
in the second quarter at about the rapid
pace of the first quarter. Spending for
equipment remained strong, with solid
increases in purchases of motor vehicles, computers, and a wide range of
machinery and equipment. However,
outlays for aircraft declined in the second quarter, retracing some of the substantial first-quarter rise. The limited
information available for the third
quarter pointed to some slowing of the
growth of spending for equipment. In
the second quarter, nonresidential building activity posted its largest advance in
three years. Expenditures were up across
a broad array of categories, with investment in institutional and public utilities
structures being particularly strong.
Business inventories expanded moderately during the second quarter, and
inventory accumulation was broadly in
line with sales over the first half of the
year. In manufacturing, stocks edged
lower in June, reflecting a further
decline in inventories held by aircraft
producers. Outside of the aircraft industry, inventory changes were mixed. For
manufacturing as a whole, the ratio of
inventories to shipments fell in June to
one of the lowest levels in recent years.
In the wholesale trade sector, inventories expanded modestly in June, and
with sales lower, the inventory-to-sales
ratio for the sector increased slightly.
Retail inventories, after changing little
in May, rose slightly more than sales in
June, and the stocks-to-sales ratio for
the retail sector remained near the high
end of its range for the past several
years.
The nominal U.S. merchandise trade
deficit was considerably smaller in May



than the deficits recorded in March and
April; however, the deficit for April and
May combined was larger than the
average rate for the first quarter. The
value of exports rose slightly in May;
increases in sales abroad of industrial
supplies, machinery, and consumer
goods offset declines in agricultural
products, civilian aircraft, and motor
vehicles and parts. A drop in the value
of imports was spread across a wide
range of products, particularly automotive products, consumer goods, and oil.
The economic performance of the major
foreign industrial countries was mixed
in the second quarter. Output continued
to decline in western Germany, and economic activity in Japan appeared to have
stalled after modest growth in the first
quarter. In contrast, economic recovery
continued in Canada and the United
Kingdom.
Producer prices of finished goods
declined in July for a second consecutive month. Prices of finished foods
edged lower, and prices of finished
energy goods, particularly gasoline and
fuel oil, fell significantly; excluding the
food and energy components, producer
prices edged up in July and to that point
in the year had risen at a slightly lower
rate than was recorded in 1992. At the
consumer level, prices for nonfood, nonenergy items were up slightly in both
June and July and for the year to date
had increased a little more slowly than
last year. Hourly compensation for private industry workers rose in the second quarter at about the rate seen last
year. Average hourly earnings of production or nonsupervisory workers were
unchanged on balance over June and
July, but for the year through July these
earnings had increased at the same pace
as in 1992.
At its meeting on July 6-7, 1993, the
Committee adopted a directive that
called for maintaining the existing

Minutes of FOMC Meetings, August
degree of pressure on reserve positions
and that retained a tilt toward possible
firming of reserve conditions 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 would be acceptable or slightly
lesser reserve restraint might be acceptable during the intermeeting period. The
reserve conditions associated with this
directive were expected to be consistent
with modest growth of the broader monetary aggregates over the third quarter.
Throughout the intermeeting period,
open market operations were directed
toward maintaining the existing degree
of pressure on reserve positions. Two
upward adjustments were made to
expected levels of adjustment plus seasonal borrowing in anticipation of further increases in demand for seasonal
credit. Borrowing averaged close to
expected levels over most of the intermeeting interval, and the federal funds
rate remained near 3 percent.
Money market interest rates were
little changed on balance over the
intermeeting period, while rates on
intermediate-term U.S. Treasury obligations and on fixed-rate mortgages
dropped slightly. Yields on long-term
Treasury and corporate bonds were
down by more, with the rate on the
thirty-year Treasury bond falling below
6V2 percent. Many market interest
rates moved higher after Chairman
Greenspan's congressional testimony on
July 20, which was perceived by market
participants as suggesting a greater likelihood of some tightening of monetary
policy in the future. Subsequently, interest rates generally retreated in reaction
to incoming economic data indicating
subdued inflation pressures and to the



161

passage of the deficit-reduction legislation. Major indexes of stock prices
increased somewhat over the intermeeting period.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies was
about unchanged on balance over the
intermeeting period. The dollar strengthened slightly against the German mark,
but it rose by significantly more against
most other European currencies in the
Exchange Rate Mechanism in the aftermath of a widening of the margins
within which participating currencies
are allowed to fluctuate relative to each
other. The widening, which was in
response to massive selling pressures on
the French franc and several other currencies, followed sharp increases in
short-term interest rates in the affected
countries. With exchange market participants continuing to focus on Japan's
trade surplus, the dollar fell substantially against the yen.
M2 expanded only slightly in July
after growing appreciably over the second quarter. The continued strength of
inflows to bond and stock mutual funds
suggested that households were still
realigning their portfolios toward assets
outside the monetary aggregates.
Through July, M2 was estimated to have
grown at a rate close to the lower end of
the Committee's range for the year. M3
contracted slightly in June and July,
owing in part to a substantial drop in
institution-only money market mutual
funds, whose returns had not kept pace
with the increase in money market rates
in late spring. In addition, depository
institutions placed greater reliance on
various nondeposit sources of funds,
including the issuance of equity and subordinated debt. Through July, M3 had
declined a little and was slightly below
its annual range. Total domestic nonfinancial debt had expanded at a moderate

162 80th Annual Report, 1993
rate in recent months, and for the year
through June was estimated to have
increased at a rate in the lower half of
the Committee's monitoring range.
The staff projection prepared for this
meeting suggested moderate growth in
economic activity and modest reductions in margins of unemployed labor
and capital through next year. The fiscal
restraint stemming from the recent legislation and uncertainty about other government policies would act as a drag on
the economy. On the other hand, lower
interest rates were expected to contribute to further gains in spending on consumer durables, housing, and business
fixed investment. Continued expansion
also would be supported by further
improvements in the availability of
credit, a small boost to production over
the next several quarters associated with
rebuilding activity in areas of the Midwest affected by the recent floods, and a
pickup in foreign demand resulting from
some strengthening in economic activity
abroad. The projected slack in labor and
product markets, coupled with some
tempering of inflation expectations, was
expected to foster modest further reductions in wage and price inflation.
In the Committee's discussion of prospective economic conditions, members
commented that recent developments
had not materially altered the outlook
for moderate and sustained growth in
economic activity. Despite widespread
indications of pessimistic consumer and
business attitudes, overall consumer
spending and business investment
appeared to be reasonably well maintained. Likewise, the outlook for
increased fiscal restraint associated with
the recently enacted deficit-reduction
legislation needed to be weighed against
the favorable effects on spending of
reduced interest rates in intermediateand long-term debt markets, the
improved balance sheets of consumers



and businesses, and the indications of a
somewhat better availability of loans
from financial intermediaries. In an
environment of moderate economic
growth, the fundamentals bearing on the
outlook for inflation were consistent
with further disinflation, and the members drew some encouragement from
consumer and producer price developments in recent months. Several cautioned, however, that recent price measures probably overstated the reduction
in inflation, just as the surge in prices
earlier in the year seemed to have overstated the underlying inflation trend.
Members also referred to the persistence
of inflationary expectations among business executives and consumers. Thus,
while the rise in inflation appeared to
have been arrested, any further progress
toward price stability was likely to be
limited over the quarters ahead.
Business contacts and other sources
of information suggested little change
since the July meeting in the pace or
composition of economic activity in different parts of the country. Descriptions
of economic performance varied from
slow to moderate growth in most
regions, though business activity probably continued to weaken in some major
areas such as California. Despite sustained, if not ebullient, growth in sales
to consumers and the relative strength in
business investment spending in the first
half of this year, business sentiment was
widely described as cautious or negative
even in some regions whose economies
were outperforming the nation as a
whole. According to business contacts,
the recent enactment of deficit-reduction
legislation had tended to mitigate concerns about the size of future federal
deficits, but business executives were
now focusing on the implications of
higher taxes and many were expressing
apprehension about further though still
unannounced tax increases that might be

Minutes of FOMC Meetings, August
associated with health care reform.
Business sentiment and sales also were
being affected adversely in many areas
by cutbacks in defense contracts and
closings of military installations and by
the weakness in foreign demand for
some products.
With regard to developments and
prospects in key sectors of the economy,
members noted that despite further survey indications of eroding consumer
confidence, consumer expenditures had
strengthened in recent months after a
pause earlier in the year. The pickup had
featured rising sales of motor vehicles,
and while the latter had slipped recently,
a number of special factors such as
shortages of popular models at the end
of the model year and the effects of
flooding in some parts of the Midwest
suggested the need to withhold judgment on any downward shift in the
underlying demand for motor vehicles.
Tourism was reported to have strengthened considerably in many areas this
summer, though there were major
exceptions. As had been true for an
extended period, consumer attitudes
continued to be inhibited by concerns
about employment opportunities, especially given further reductions in
defense spending, the ongoing restructuring and related downsizing of many
business operations, and the continuing
efforts by business firms to limit the
number of their permanent employees in
order to hold down the rising costs of
health care and other nonwage worker
benefits. Members noted, however, that
the growth in employment thus far this
year, while tending to involve many
low-paying jobs, had greatly exceeded
the rate of expansion in 1992. In the
view of at least some members, appreciable further growth was likely as business firms found it increasingly difficult
in an expanding economy to meet growing demands through outsourcing, tem


163

porary workers, and overtime work.
Some members also noted that the
newly legislated taxes on higher
incomes would tend to curtail some consumer spending. The timing of that
effect was uncertain; tax liabilities had
already risen, but some payments on the
added tax liabilities were not due until
April of 1994 and 1995.
Members anticipated that building
activity, notably housing construction,
would provide some stimulus to the
expansion. Although indicators of housing activity were somewhat mixed for
the nation as a whole, sales of new and
existing homes were brisk in many
regions and even sales of second homes
were reported to be improving in some
areas. Prospective homebuyers continued to exercise considerable caution, but
reductions in mortgage rates and generally improved affordability pointed to
rising housing sales and construction
over the quarters ahead. In the nonresidential sector, there was growing evidence of some strengthening in the construction of commercial and institutional
structures, but overcapacity was likely
to depress the construction of new office
buildings for an extended period in most
parts of the country. In some areas,
infrastructure and other rebuilding associated with the recent floods was likely
to stimulate some construction activity
later this year.
With regard to the external sector of
the economy, the members again noted a
somewhat mixed picture. Exporters
from some parts of the country continued to report relatively brisk sales
abroad, but many domestic producers
were expressing concerns about weak
markets in key foreign nations. Against
the background of more stimulative
economic policies in a number of those
countries, some overall strengthening
in the major foreign economies was
viewed as a reasonable expectation, but

164 80th Annual Report, 1993
the overall growth in exports was likely
to lag the anticipated expansion in
imports over the projection horizon. The
North American Free Trade Agreement
now under consideration in the Congress was a topic of active discussion
among business contacts, and the uncertain outcome of that treaty was a matter
of concern in several parts of the
country.
Members observed that the more
favorable performance of key measures
of prices in recent months had tended
to relieve earlier concerns about a possible worsening in inflation. However,
because the recent price indexes probably overstated the improvement in the
trend rate of inflation, it was too early to
determine whether they pointed to
renewed disinflation. In any event, a
number of fundamental factors appeared
to have favorable implications for the
inflation outlook, notably the prospect
that some slack in labor and capital
resources would persist in the context of
projections that pointed to a relatively
moderate rate of economic expansion.
Members continued to cite reports from
numerous business firms regarding their
inability to raise prices because of the
highly competitive markets in which
those firms had to operate. Many business contacts also referred to the
absence of significant increases—and
indeed to occasional decreases—in the
costs of their outside purchases. Oil
price developments in world markets
and the ongoing competition from foreign producers also were cited as favorable elements in the outlook for inflation. On the negative side, adverse
weather conditions in recent months
including severe floods in the Midwest
appeared to have fostered some upward
pressure on food prices, and higher taxes
would raise gasoline prices in the fourth
quarter. Perhaps of greater significance,
business contacts and surveys of house


holds indicated persisting expectations
that inflation would rise at some point.
In this connection, however, passage of
the federal deficit-reduction legislation
and the Committee's reaffirmation in its
directive and in congressional testimony
of its commitment to price stability
seemed to have had a constructive effect
on attitudes in financial markets and on
long-term interest rates, and these developments could prove to be harbingers of
more favorable inflation attitudes more
generally.
In the Committee's discussion of policy for the intermeeting period ahead,
the members agreed that recent developments pointed to the desirability of a
steady policy course. While economic
growth did not seem particularly robust,
neither was it clear that a disinflationary
trend had been reestablished. Many
members observed that real short-term
interest rates were at very low levels,
indeed slightly negative by some calculations, and while real intermediate- and
long-term interest rates were higher, it
was apparent that monetary policy was
in an accommodative posture. This conclusion was seen as reinforcing the view
that monetary policy probably would
have to move in the direction of restraint
at some point to resist any incipient
tendency for inflationary pressures to
intensify. For now, the relatively slow
economic expansion in the first half of
the year, the fiscal restraint associated
with the deficit-reduction legislation,
other obstacles to economic growth, and
the encouraging inflation statistics for
recent months argued against any nearterm policy adjustment.
Moreover, there was no compelling
evidence that current monetary policy
was fostering credit flows usually associated with speculative excesses or
impending increases in price pressures.
Growth in the broad measures of money
and in the debt of nonfinancial sectors

Minutes of FOMC Meetings, August
remained fairly damped despite indications of greater willingness to supply
credit by banks, other financial intermediaries, and investors in securities markets. With regard to the monetary aggregates, low short-term interest rates
undoubtedly were contributing to large
shifts of funds from depository institutions, notably from components of M2
and M3 to stock and bond mutual funds
and to other financial instruments, and
thus to the sluggish behavior of the
broad measures of money. In this connection, a staff analysis pointed to continuing slow growth in M2 over the near
term and, on the assumption of little or
no change in the degree of pressure on
reserve positions, to growth for the year
at a rate around the lower end of the
Committee's range. Growth in M3 was
likely to fall marginally below the Committee's range for the year. On the other
hand, growth in Ml and various reserve
measures was expected to remain relatively robust.
Turning to possible adjustments to
policy during the intermeeting period
ahead, the members endorsed a proposal
to return to an unbiased intermeeting
instruction that did not incorporate any
presumption with regard to the direction
of possible intermeeting policy changes.
The members agreed that the probability
of an intermeeting policy adjustment
was relatively remote. Incoming data
on economic activity and prices had
reduced concerns that inflation and
inflationary expectations might be
worsening. The Committee retained its
fundamental objectives of fostering economic expansion at a sustainable pace
that was consistent with further progress
over time toward stable prices. However, it now appeared less likely than at
the time of the May and July meetings
that the Committee needed to bias its
consideration of responses to incoming
information in the intermeeting period



165

toward possible tightening in order to
achieve those objectives. One member,
while agreeing that a tightening move
would not be appropriate under current
circumstances, nonetheless believed that
monetary policy had been overly stimulative for some time and that the Committee should move toward restraint at
the first favorable opportunity.
At the conclusion of the Committee's
discussion, all the members expressed a
preference for a directive that called for
maintaining the existing degree of pressure on reserve positions. They also
indicated their support of a directive that
did not include a presumption about the
likely direction of any adjustment 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
reserve restraint might be acceptable
during the intermeeting period. The
reserve conditions contemplated at this
meeting were expected to be consistent
with modest growth in M2 and little net
change in M3 over the balance of the
third quarter.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests that economic activity is expanding
at a moderate pace. Total nonfarm payroll
employment increased in July at a rate close
to its average advance in earlier months of
the year, and the civilian unemployment rate
declined to 6.8 percent. Industrial production
turned up in July after posting small declines
in May and June. Retail sales edged higher

166 80th Annual Report, 1993
in July following a sizable rise in the second
quarter. Housing starts were down somewhat
in July, but permits moved up. Available
indicators point to continued expansion in
business capital spending. The nominal U.S.
merchandise trade deficit declined in May,
but for April and May combined it was larger
than its average rate in the first quarter. After
rising at a faster rate in the early part of the
year, consumer prices have changed little
and producer prices have fallen in recent
months.
Short- and intermediate-term interest rates
have changed little since the Committee
meeting on July 6-7, while yields on longterm Treasury and corporate bonds have
declined somewhat. In foreign exchange
markets, the trade-weighted value of the dollar in terms of the other G-10 currencies was
about unchanged on balance over the intermeeting period.
After expanding appreciably over the second quarter, M2 increased slightly further in
July and M3 declined. For the year through
July, M2 is estimated to have grown at a rate
close to the lower end of the Committee's
range for the year, and M3 at a rate slightly
below its range. Total domestic nonfinancial
debt has expanded at a moderate rate in
recent months, and for the year through June
it is estimated to have increased at a rate in
the lower half of the Committee's monitoring range.
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 lowered the ranges it had established in February for growth of M2 and M3
to ranges of 1 to 5 percent and 0 to 4 percent
respectively, measured from the fourth quarter of 1992 to the fourth quarter of 1993. The
Committee anticipated that developments
contributing to unusual velocity increases
would persist over the balance of the year
and that money growth within these lower
ranges would be consistent with its broad
policy objectives. The monitoring range for
growth of total domestic nonfinancial debt
also was lowered to 4 to 8 percent for the
year. For 1994, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1993 to the
fourth quarter of 1994, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Commit


tee provisionally set the monitoring range for
growth of total domestic nonfinancial debt at
4 to 8 percent for 1994. 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 modest growth in M2 and little net
change in M3 over the balance of the third
quarter.
Votes for this action: Messrs. Greenspan,
McDonough, Angell, Boehne, Keehn,
Kelley, LaWare, Lindsey, McTeer, Mullins, Ms. Phillips, and Mr. Stern. Votes
against this action: None.

Donald L. Kohn
Secretary

Meeting Held on
September 21, 1993
A meeting of the Federal Open Market
Committee was held in the offices of the
Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, September 21, 1993, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Angell
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer
Mr. Mullins

Minutes of FOMC Meetings, September 167
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and Syron,
Presidents of the Federal Reserve
Banks of Kansas City, St. Louis,
and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Patrikis, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R. Davis, Lang, Lindsey,
Promisel, Rolnick, Rosenblum,
Scheld, Siegman, Simpson, and
Slifman, Associate Economists
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Stockton, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Ms. Browne, Messrs. T. Davis, Dewald,
and Goodfriend, Senior Vice
Presidents, Federal Reserve Banks
of Boston, Kansas City, St. Louis,
and Richmond respectively
Messrs. Judd, King, and Ms. White,
Vice Presidents, Federal Reserve
Banks of San Francisco, Atlanta,
and New York respectively



Mr. Gavin, Assistant Vice President,
Federal Reserve Bank of
Cleveland
Ms. Krieger, Manager, Open Market
Operations, Federal Reserve Bank
of New York

By unanimous vote, the minutes for
the meeting of the Federal Open Market
Committee held on August 17, 1993,
were approved.
By unanimous vote, Joan E. Lovett
and Peter R. Fisher were selected to
serve at the pleasure of the Committee
in the capacities of Manager for Domestic Operations, System Open Market
Account, and Manager for Foreign
Operations, System Open Market
Account respectively, on the understanding that their selection was subject to
their being satisfactory to the Federal
Reserve Bank of New York.
Secretary's Note: Advice subsequently
was received that the selections indicated
above were satisfactory to the Federal
Reserve Bank of New York.
The Manager for Foreign Operations
reported on developments in foreign
exchange markets and on System
transactions in foreign currencies during
the period August 17, 1993, through
September 20, 1993. By unanimous
vote, the Committee ratified these
transactions.
Ms. Betsy B. White, Vice President
for Domestic Operations of the Federal
Reserve Bank of New York, reported on
developments in domestic financial markets and on System open market transactions in government securities and
federal agency obligations during the
period August 17, 1993, through
September 20, 1993. By unanimous
vote, the Committee ratified these
transactions.
The Committee then turned to a discussion of the economic and financial
outlook and the formulation of mone-

168 80th Annual Report, 1993
tary policy for the intermeeting period
ahead. A summary of the economic and
financial information available at the
time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive
that was approved by the Committee
and issued to the Federal Reserve Bank
of New York.
The information reviewed by the
Committee at this meeting suggested
that economic activity, adjusted for the
temporary depressing effects of the
flood in the Midwest, was continuing to
expand at a moderate pace. Consumer
spending was up, and business purchases of durable equipment had
recorded further healthy gains. On the
other hand, housing activity had shown
a muted response to the declines in
mortgage rates that had occurred
through the spring, and gains in manufacturing output and in employment had
been limited in recent months. After
rising at an accelerated rate in the early
part of the year, consumer prices had
increased more slowly in recent months
and producer prices had fallen.
Total nonfarm payroll employment
edged lower in August after a sizable
gain in July. Hiring in the serviceproducing sectors, especially in health
and business services, was down in
August from the pace of recent months,
and more jobs were lost in manufacturing. Construction employment also
moved lower, retracing part of the July
increase. On the other hand, the average
workweek rose to a relatively high level
in August, and as a result, aggregate
hours worked by production or nonsupervisory workers were significantly
above the second-quarter average. The
civilian unemployment rate declined to
6.7 percent.
Industrial production posted a further
moderate gain in August. Manufacturing output more than accounted for the



increase, as strikes damped mining
production and utilities output was
unchanged following large gains in
earlier months. Within manufacturing,
the output of motor vehicles and parts
was unchanged. Excluding the motor
vehicle component, another sharp gain
in computers and related electronic components boosted the production of business equipment, while the output of consumer goods declined as a result of a
retrenchment in appliance production
following the advance posted in July.
Total utilization of manufacturing capacity edged up again in August.
Total retail sales were little changed
in real terms in July and August. Despite the recent sluggishness, however,
real spending for goods in July and
August was appreciably above the level
in the second quarter. In addition, real
expenditures for services had grown
rapidly in July; this reflected both high
energy consumption associated with
unusually hot weather and robust spending for other services. The persistence of
hot weather through August suggested
that spending on energy services continued at a high level for that month. After
a slight decline in July, housing starts
rose substantially in August. Singlefamily starts accounted for all of the
August increase, as multifamily starts
fell further and continued to hover
around their thirty-year low.
Growth in real business fixed investment appeared to be slowing in the third
quarter from the robust pace earlier in
the year. Shipments of nondefense capital goods dropped substantially in July,
with all of the decline occurring in the
volatile aircraft component. For capital
goods other than aircraft and parts, shipments again moved higher in July; while
the demand for computing equipment
strengthened after dropping off somewhat in the second quarter, shipments of
other types of durable equipment soft-

Minutes of FOMC Meetings, September 169
ened. In addition, heavy-truck sales
were off substantially in July after
advancing steadily since late 1992, and
fleet sales of light vehicles were down in
July and August. Investment in nonresidential structures posted its largest
advance in three years in the second
quarter. However, construction activity
fell in July in reflection of a sharp
decline in the construction of commercial structures other than offices.
Business inventories contracted
sharply in July after changing little in
June. The bulk of the July decline
occurred in the retail sector and reflected drawdowns in inventories at
automobile dealerships. Non-auto retail
inventories edged down in July; with
sales flat, the ratio of non-auto inventories to sales remained near the high
end of the range for the past several
years. In the wholesale trade sector,
stocks were trimmed somewhat further
in July, but the inventory-to-sales ratio
remained at the midpoint of its range
over the past three years. Manufacturing
stocks were unchanged in July after a
small reduction in June. With shipments
down in July owing to weak shipments
of aircraft and motor vehicles, the
stocks-to-sales ratio rebounded but was
still at a low level.
The nominal U.S. merchandise trade
deficit decreased in July, but it remained
essentially unchanged from its average
rate in the second quarter. The value of
exports edged lower in July, while the
value of imports fell by more, retracing
nearly all of the sizable June rise. The
decline in imports was primarily in automotive products, consumer goods, and
oil. The performance of the major foreign industrial economies continued to
present a mixed picture. Economic
activity in Japan, after increasing
slightly in the first quarter, evidenced
renewed weakness in the second quarter
that apparently persisted into the third



quarter. In western Germany, real output
rose in the second quarter, but much
of the gain apparently stemmed from
unintended inventory accumulation. In
France and Italy, economic activity
appeared to have leveled out in the second quarter after declining earlier. By
contrast, both the United Kingdom and
Canada recorded further modest gains in
economic activity.
Producer prices of finished goods fell
sharply further in August; higher prices
for consumer foods were more than offset by lower prices for the energy and
the nonfood, non-energy components of
the index. For finished goods other than
food and energy, producer prices
increased over the twelve months ended
in August by a considerably smaller
amount than in the previous twelvemonth period. Consumer prices rose a
little faster in August than in July, with
an increase in food prices counterbalancing a decline in prices of consumer
energy goods. For nonfood, non-energy
items, consumer prices advanced over
the twelve months ended in August by
an amount comparable to that recorded
for the twelve months ended in August
1992. Average hourly earnings of production or nonsupervisory workers were
up in August after little change on balance in June and July; the rise reflected
in part overtime earnings in manufacturing. Over the twelve months ended in
August, this measure of earnings
increased by about the same amount as
in the previous twelve-month period.
At its meeting on August 17, 1993,
the Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
and that, in contrast to the two previous
directives, did not include a tilt toward
possible firming of reserve conditions
during the intermeeting period. Accordingly, the directive indicated that in
the context of the Committee's long-run

170 80th Annual Report, 1993
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
during the intermeeting period. The
reserve conditions associated with this
directive were expected to be consistent
with modest growth of M2 and little net
change in M3 over the balance of the
third quarter.
Open market operations were directed
during the intermeeting period toward
maintaining the existing degree of pressure on reserve positions. The federal
funds rate remained close to 3 percent
over the period, while adjustment plus
seasonal borrowing averaged somewhat
above anticipated levels, reflecting
demand for adjustment credit by banks
experiencing temporary technnical
difficulties.
Other short-term interest rates were
little changed on balance over the
intermeeting period, while yields on
intermediate- and long-term debt obligations declined somewhat. The drop in
longer-term yields appeared to be associated with incoming data indicating
continuing sluggishness in economic
activity and the more favorable performance of broad measures of prices.
Major indexes of stock prices increased
somewhat further over the intermeeting
period, evidently reflecting lower bond
yields and heavy inflows to stock
mutual funds.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
depreciated on balance over the intermeeting period. Much of the dollar's
decline reflected the strength of the mark
and other European currencies, which
was related in part to the unexpectedly
slow pace of monetary easing in
Germany and other European countries.



Against the yen, the dollar rebounded
early in the intermeeting period from the
historical low that occurred around the
time of the Committee's August meeting. The dollar was buoyed by joint
central bank sales of yen against the
dollar and by the accompanying public
statement from the U.S. Treasury that
was seen by market participants as signaling a new attitude toward any further
appreciation of the yen. On September
21, the dollar rose sharply on news that
President Yeltsin had dissolved the
Russian Parliament.
Growth of M2 continued at a slow
rate in August. The sluggishness in
this aggregate, which occurred despite
further rapid expansion in its Ml component, apparently reflected ongoing
efforts by households to shift funds
away from depository accounts in search
of better returns. M3 turned up after
declining in June and July; however,
expansion of this aggregate continued to
be held down by declines in institutiononly money market funds. For the year
through August, M2 and M3 were estimated to have grown at rates close to the
lower ends of the Committee's ranges
for the year. Total domestic nonfinancial
debt had expanded moderately in recent
months, and for the year through July it
was estimated to have increased at a rate
in the lower half of the Committee's
monitoring range.
The staff projection prepared for this
meeting suggested moderate growth in
economic activity and limited reductions in margins of unemployed labor
and capital through next year. Fiscal
restraint, uncertainty about other government policies, and slow growth of
foreign industrial economies over the
near term would act as a constraint on
the economy. However, improving
balance-sheet positions and credit supply conditions were lifting an unusual
constraint on spending, and the lower

Minutes of FOMC Meetings, September 171
interest rates would encourage further
increases in consumer spending, housing construction, and business fixed
investment. The continued slack in labor
and product markets, coupled with some
tempering of inflation expectations, was
expected to foster further reductions in
wage and price inflation.
In the Committee's discussion of current and prospective economic conditions, members commented that recent
developments had not altered their outlook for moderate and sustained expansion in economic activity. The members
acknowledged that the interpretation of
ongoing developments presented some
unusual problems, notably the difficulty
of reconciling the appreciable growth in
employment thus far this year with the
slow expansion in measured output; the
associated drop in measured productivity was especially surprising in light of
the business drive toward more efficient
operations. Moreover, the economic outlook clearly remained subject to a variety of uncertainties, including potential
developments abroad that were especially difficult to predict. Nonetheless,
while temporary factors were likely to
depress third-quarter expansion, the
members saw little in the current statistical or anecdotal reports on the domestic
economy that pointed to the likelihood
of a significant deviation from a moderate growth trend. It was noted in this
connection that the inhibiting effects of
increased fiscal restraint and expected
further weakness in net exports needed
to be weighed against the favorable
effects on interest-sensitive spending of
considerably reduced intermediate- and
long-term interest rates and the much
improved financial condition of many
business firms and households. With
regard to the outlook for inflation, some
members suggested that the prospects
for continued slack in resource utilization were consistent with a disinflation


ary trend, but the disparate factors bearing on the outlook for inflation as well
as the swings in price performance
experienced in recent quarters argued
for caution in assessing the future course
of inflation.
In their review of developments
around the nation, members commented
that business conditions remained
uneven across local areas and industries,
but they characterized general economic
activity in most regions as ranging from
little change to moderate growth since
midsummer. However, business conditions continued to be quite weak in some
areas, notably in California, and business sentiment appeared to have remained cautious in much of the nation.
One member emphasized uneven conditions of a different kind. Relatively disadvantaged members of the population,
often living in inner cities, had high and
rising expectations about their economic
prospects. At the same time, however,
some traditional paths of upward mobility were being cut back, such as the
military and civil service within the
government and office jobs more generally. In addition, regulations aimed
at correcting some problems in financial institutions—such as real estate
a p p r a i s a l and d o w n p a y m e n t
requirements—were having unintended
adverse effects on lower-income businesses and households, and other proposals aimed at promoting minority
lending were in danger of promising
more than they could deliver. An apparently widening gap between economic
realities and aspirations might not have
measurable implications for the macroeconomic outlook over short periods of
time, but they reflected a worrisome
trend in terms of the longer-run health
of the economy.
In other comments, members referred
to a number of financial developments
that had favorable implications for

172 80th Annual Report, 1993
sustained economic expansion. Business
firms and consumers had made substantial progress in strengthening their balance sheets, and while the process of
adjusting balance sheets evidently was
still under way, the material improvement accomplished thus far had diminished financial risks and constraints on
spending. Banking institutions had bolstered their capital positions and were
in a better position to accommodate
increases in loan demand. Bond and
stock markets had exhibited considerable strength. In this connection, however, a few members commented on the
apparently growing concern in financial
markets that current equity prices were
high relative to earnings and dividends.
A correction in U.S. equity markets
could trigger cumulative selling, especially by mutual funds, which had garnered substantial new investors, some of
whom might not fully appreciate the
risks of their new assets relative to
deposits. On the positive side, there
were good reasons for optimism on the
trajectory of business profits in an environment of low inflation and moderate
growth. Moreover, some managers of
mutual funds reportedly were taking
steps to strengthen the liquidity of their
portfolios, and members reported on
efforts to improve individual investor
awareness of the risks of equity
investments.
During their review of the prospective performance of key sectors of the
economy, members gave somewhat
mixed reports on retail sales in recent
weeks, but they generally anticipated
that consumer spending would provide
continued if not strong support to sustained economic expansion. As had been
true for an extended period, consumer
attitudes remained hesitant in the context of concerns about employment and
income prospects and, in the case of
many consumers with higher incomes,



increased income tax liabilities. Some
members expressed the view that more
vigorous growth in employment might
well occur as the expansion matured,
and such a development would be likely
to have a favorable effect on consumer
attitudes and spending.
Cautious attitudes also appeared to
have held back housing demand and
construction activity despite declines in
mortgage interest rates. The combination of some further declines in mortgage interest rates recently and a tendency for house prices to stabilize or
even to firm in some markets seemed to
have induced appreciable and widespread strengthening in demand for
single-family housing. Indeed, despite
persisting weakness in some areas,
housing markets were described as
quite strong in many parts of the country, and the overall improvement in
housing activity might not be captured
in the latest statistics. Other construction
activity appeared on the whole to
have bottomed out and might have
begun to trend higher. Anecdotal reports
suggested a pickup in the volume of
commercial property transactions,
though apparently not yet in the prices
of commercial properties in most areas,
and rising construction outlays were
anticipated for commercial, industrial,
and institutional facilities as economic
activity continued to expand. Office
construction was likely to remain generally depressed as excess capacity continued to be absorbed, but such construction might not decline further.
Members also anticipated appreciable
further growth in business spending for
equipment, notably for the purpose of
enhancing productivity in an environment of strong competitive pressures;
concurrently, spending to expand capacity seemed likely to remain relatively
limited unless consumer spending
gathered more momentum in coming

Minutes of FOMC Meetings, September 173
quarters than was now anticipated. On
balance, business fixed investment
was expected to continue to provide
considerable support to the economic
expansion.
The passage of deficit-reduction legislation in July implied increased fiscal
restraint but also appeared to have
improved confidence in financial markets and in the business community
more generally regarding the ability of
the federal government to enact needed
legislation. At the same time, the new
taxes stemming from that legislation and
a greater focus on the potential for
further legislation, notably health care
reform and its implications for mandated business costs, were a key factor
in sustaining cautious attitudes among
business executives. Members also
referred to the constraining effects in
many areas, and on the economy more
generally, of current and prospective
cutbacks in defense expenditures, spending curbs by state and local governments, and the outlook for further
tax increases by many of these
governments.
The prospects for net exports also
were cited as a negative factor in the
economic outlook. Expectations of persisting weakness in some major foreign
economies implied relatively limited
growth in U.S. exports in a period when
moderate expansion in this country was
likely to foster somewhat more rapid
increases in U.S. imports. Some members also commented that the controversial NAFTA legislation under consideration in the Congress continued to
dominate business discussions in parts
of the country. It was suggested that
whatever its eventual benefits for the
three nations immediately involved
might be, a defeat of that legislation
could prove to be a setback for the
GATT negotiations with dislocative
implications for world trade.



Many members referred to the more
favorable price developments that had
occurred since the early part of the year
when key measures of inflation had
surged. While it was premature to conclude that a distinct disinflationary trend
had been reestablished, the members
generally agreed that price pressures
were likely to remain subdued given
their projections of some continuing
slack in resource utilization. Favorable
developments tending to support that
conclusion included the persistence of
intensely competitive conditions in most
markets for goods around the country.
The costs of materials purchased by
business firms generally were reported
to be rising only slowly, if at all. There
were indications of fairly tight labor
markets in some areas, but wage pressures remained limited even in those
markets. At the same time, the costs of
worker benefits continued to rise fairly
rapidly and many business contacts were
expressing concern about the possibility
of further mandated cost increases
related to the health care reform legislation. For the next several months, relatively rapid increases in food prices
associated with weather-related crop
losses and an increase in the excise
tax on gasoline would tend to boost
consumer prices. On balance, these
developments were not seen as inconsistent with longer-run progress toward
price stability, though the inflation outlook remained subject to considerable
uncertainty.
In the Committee's discussion of policy for the intermeeting period ahead,
all of the members agreed that recent
economic and financial developments
pointed to the desirability of an
unchanged policy stance. The members
recognized that neither the pace of the
economic expansion nor the uncertain
progress toward price stability reflected
a wholly satisfactory economic perfor-

174 80th Annual Report, 1993
mance, but at this point the present posture of monetary policy continued to
offer the best promise in their view of
promoting sustained economic growth
in the context of subdued if not declining inflation.
From the perspective of a variety of
financial measures, the current monetary
policy continued to be quite accommodative. Short-term interest rates were
low, indeed close to zero after adjustment for inflation, and there had been
appreciable further declines in longerterm interest rates. Growth of M2
remained slow, but it had picked up
since earlier in the year, and M3 had
expanded in August, albeit at a sluggish
rate, after declining in previous months.
One member observed that growth in
M2, adjusted to include certain stock
and bond mutual funds, was estimated
to have accelerated since early spring to
a fairly healthy pace. Narrow measures
of money and reserves, though subject
to a variety of influences, were growing
at rates that suggested an ample provision of liquidity to the economy.
In considering possible adjustments
to policy during the intermeeting period,
all of the members endorsed a proposal
to retain a symmetrical directive. While
current economic uncertainties were
mirrored in uncertainties about the
future course of monetary policy, the
members agreed that developments in
the period until the next meeting in midNovember were not likely to call for any
adjustment to policy. Beyond the nearer
term, however, both the timing and, in
the view of at least some members, the
direction of the next policy change could
not be foreseen at this time. While they
did not see convincing evidence that
monetary policy was overly stimulative
at this point, some members were
concerned that the current stance, as
reflected in short-term interest rates, was
quite accommodative and probably



would need to be firmed at some point.
These members stressed the need to
remain especially alert to potential inflationary developments against the background of persisting inflationary expectations and uncertain progress toward
price stability. Other members, while
sharing this concern to an extent, gave
some weight to the possibility that the
expansion might remain quite sluggish
for a period; under the circumstances,
they foresaw the need to maintain an
accommodative policy posture and
could not rule out the possibility that the
next policy move might have to be
toward greater monetary stimulus.
At the conclusion of the Committee's
discussion, all 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 adjustment 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
reserve restraint might be acceptable
during the intermeeting period. According to a staff analysis, the reserve conditions contemplated at this meeting were
expected to be consistent with modest
growth in M2 and M3 over the balance
of the year.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests that economic activity is continuing

Minutes of FOMC Meetings, September 175
to expand at a moderate pace. Total nonfarm
payroll employment edged down in August
after a sizable gain in July, but the average
workweek rose to a relatively high level
and the civilian unemployment rate declined
to 6.7 percent. Industrial production has
advanced moderately over recent months.
Retail sales changed little in real terms in
July and August after increasing appreciably
in the second quarter. Housing starts were
down slightly in July but rose substantially
in August. Available indicators suggest a
slowing in the expansion of business capital
spending from a robust pace earlier in the
year. The nominal U.S. merchandise trade
deficit was about unchanged in July from its
average rate in the second quarter. After
rising at an accelerated rate in the early part
of the year, consumer prices have increased
more slowly and producer prices have fallen
in recent months.
Short-term interest rates have changed
little since the Committee meeting on
August 17, while yields on intermediate and
long-term debt obligations have declined
somewhat. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies depreciated
substantially over the intermeeting period.
M2 continued to expand at a slow rate in
August, while M3 turned up after declining
in June and July. For the year through
August, M2 and M3 are estimated to have
grown at rates close to the lower end of the
Committee's ranges for the year. Total
domestic nonfinancial debt has expanded at a
moderate rate in recent months, and for the
year through July it is estimated to have
increased at a rate in the lower half of the
Committee's monitoring range.
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 lowered the ranges it had established in February for growth of M2 and M3
to ranges of 1 to 5 percent and 0 to 4 percent
respectively, measured from the fourth quarter of 1992 to the fourth quarter of 1993. The
Committee anticipated that developments
contributing to unusual velocity increases
would persist over the balance of the year
and that money growth within these lower
ranges would be consistent with its broad
policy objectives. The monitoring range for



growth of total domestic nonfinancial debt
also was lowered to 4 to 8 percent for the
year. For 1994, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1993 to the
fourth quarter of 1994, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the monitoring range for
growth of total domestic nonfinancial debt at
4 to 8 percent for 1994. 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 modest
growth in M2 and M3 over the balance of
the year.
Votes for this action: Messrs. Greenspan,
McDonough, Angell, Boehne, Keehn,
Kelley, LaWare, Lindsey, McTeer, Mullins, Ms. Phillips, and Mr. Stern. Votes
against this action: None.

It was agreed that the next meeting of
the Committee would be held on Tuesday, November 16, 1993.
The meeting adjourned at 12:35 p.m.
During the intermeeting period, available members participated in three telephone conference calls to discuss issues
relating to the release of information
about discussions at Federal Open Market Committee meetings. These calls
were prompted by hearings on such
issues that were held by the House Committee on Banking, Finance, and Urban
Affairs. The discussions took into
account information that unedited transcripts for meetings since early 1976

176 80th Annual Report, 1993
were maintained by the FOMC secretariat at the Board of Governors. The members did not reach any decisions on these
matters during these conferences. In the
course of two further telephone conferences during the intermeeting period,
the Committee reviewed economic and
financial developments affecting Mexico and discussed various contingencies
that might involve the Federal Reserve.
Donald L. Kohn
Secretary
Meeting Held on
November 16, 1993
A meeting of the Federal Open Market
Committee was held in the offices of the
Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, November 16, 1993, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Angell
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer
Mr. Mullins
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal,
and Parry, Alternate Members
of the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and Syron,
Presidents of the Federal Reserve
Banks of Kansas City, St. Louis,
and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary



Mr. Mattingly, General Counsel
Mr. Patrikis, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R. Davis, Lang, Lindsey,
Promisel, Rolnick, Rosenblum,
Scheld, Siegman, Simpson, and
Slifman, Associate Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
Mr. Winn, Assistant to the Board,
Office of Board Members, Board
of Governors12
Mr. Ettin, Deputy Director, Division
of Research and Statistics, Board
of Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Stockton, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Beebe, Ms. Browne, Messrs.
J. Davis, T. Davis, Dewald,
Goodfriend, and Ms. Tschinkel,
Senior Vice Presidents, Federal
Reserve Banks of San Francisco,
Boston, Cleveland, Kansas City,
St. Louis, Richmond, and Atlanta
respectively
Mr. Guentner, Assistant Vice President,
Federal Reserve Bank of
New York
By unanimous vote, the minutes for
the meeting of the Federal Open Market

12. Attended portion of meeting on the review
of FOMC practices with regard to recording and
transcribing FOMC meeting discussions and the
release of information about such discussions.

Minutes of FOMC Meetings, November
Committee held on September 21, 1993,
were approved.
The Report of Examination of the
System Open Market Account, conducted by the Board's Division of
Reserve Bank Operations and Payment
Systems as of the close of business on
April 30, 1993, was accepted.
The Manager for Foreign Operations
reported on developments in foreign
exchange markets during the period
since the September meeting. There
were no open market transactions in foreign currencies for the System account
during this period, and thus no vote was
required of the Committee.
By unanimous vote, the Committee
authorized the renewal for further periods of one year of the System's reciprocal currency ("swap") arrangements
with foreign central banks and the
Bank for International Settlements. The
amounts and maturity dates of these
arrangements are indicated in the table
that follows:

Foreign bank

Austrian National
Bank
Bank of England
Bank of Japan
Bank of Mexico
Bank of Norway
Bank of Sweden
Swiss National
Bank
Bank for International
Settlements
Swiss francs
Other authorized
European
currencies
National Bank
of Belgium
Bank of Canada
National Bank
of Denmark
Bank of France
German Federal
Bank
Bank of Italy
Netherlands Bank ...

Amounts
(millions
Term
of
(months)
dollars
equivalent)
250
3,000
5,000
700
250
300

12

Maturity
dates

12/04/93
12/04/93
12/04/93
12/04/93
12/04/93
12/04/93

4,000

12/04/93

600

12/04/93

1,250

12/04/93

1,000
2,000

12/18/93
12/28/93

250
2,000

12/28/93
12/28/93

6,000
3,000
500

12/28/93
12/28/93
12/28/93




177

The Manager for Domestic Operations reported on developments in
domestic financial markets and on
System open market transactions in
U.S. government securities and federal
agency obligations during the period
September 21, 1993, through November 15, 1993. By unanimous vote, the
Committee ratified these transactions.
The Committee then turned to a discussion of the economic and financial
outlook and the formulation of monetary policy for the intermeeting period
ahead. A summary of the economic and
financial information available at the
time of the meeting and of the Committee's discussion is provided below, followed by the domestic policy directive
that was approved by the Committee
and issued to the Federal Reserve Bank
of New York.
The information reviewed at this
meeting suggested some strengthening
in the expansion of economic activity in
recent months. Consumer spending had
picked up; housing activity was quickening; and business spending for durable equipment had continued to trend
higher, though at a reduced pace. Industrial production, particularly manufacturing, and employment had posted solid
gains. At the same time, inflation had
remained muted, with consumer prices
increasing moderately on balance in recent months and producer prices falling.
Total nonfarm payroll employment
rose appreciably in September and October after declining slightly in August.
Although job gains were widespread
in October, a large part of the increase
was in various business services, notably temporary employment agencies. In
other categories, construction employment registered its largest monthly
rise since last spring, and jobs in manufacturing increased after seven months
of declines. The civilian unemployment
rate edged up to 6.8 percent in October.

178 80th Annual Report, 1993
Industrial production rose sharply in
October, with manufacturing more than
accounting for the increase. Part of the
gain in manufacturing reflected a further
rebound in the output of motor vehicles
and parts. Aside from motor vehicles,
however, the production of business
equipment was lifted by another surge
in office and computing equipment, and
the output of consumer goods was
boosted by strength in furniture and
appliances. Utilization of total industrial
capacity rose in October, reaching a
level last seen in the fourth quarter of
1992.
Nominal retail sales were up substantially in October after changing little in
September. Sales in October were
boosted by a turnaround in spending at
automobile dealerships and by a surge at
building materials and supply stores.
Sales at other types of retail outlets were
mixed. Purchases at general merchandise stores were brisk. However, sales
at apparel outlets and at furniture and
appliance stores edged down after rising
strongly for several months, and the
increase in spending at gasoline stations
entirely reflected the effects of the new
federal gasoline tax on pump prices.
Housing activity strengthened further in
the third quarter. Starts of single-family
homes in August and September were at
their highest levels in almost five years;
starts of multifamily units also picked
up in September, although construction
activity in this sector remained at a very
low level. Sales of new and existing
homes moved up further in the third
quarter and were especially strong in
September.
Real business capital spending
increased in the third quarter at a considerably slower pace than earlier in the
year. The slowdown largely reflected a
smaller rise in spending for producers'
durable equipment, as reduced outlays
for aircraft and motor vehicles more



than offset continued strong gains in
spending for computing equipment and
other capital goods. Nonresidential construction was down slightly in the third
quarter after a sizable advance over the
first half of the year. Office and industrial building activity appeared to have
bottomed out, but high vacancy rates
and declining property values continued
to limit new construction.
Business inventories climbed significantly further in September; for the third
quarter as a whole, however, stocks were
accumulated at a somewhat slower pace
than in the first half of the year. At the
retail level, inventories rebounded in
September after declining on balance
over July and August. The ratio of
inventories to sales for retailing edged
up in September but remained near the
low end of its range over the past year.
Inventory accumulation in the wholesale sector slowed in September after
rising substantially in August; the
inventory-to-sales ratio for this sector
was unchanged at the midpoint of its
range over the past several years. In
manufacturing, stocks dropped in September after changing little over the two
previous months; with factory shipments
up, the stocks-to-shipments ratio for
manufacturing as a whole fell in September to its lowest level in recent years.
The nominal U.S. merchandise trade
deficit declined further in August, but
for July and August combined the deficit was about the same as its average
rate for the second quarter. The value of
both exports and imports was slightly
lower in July-August than in the second
quarter. The decline in the value of
exports primarily reflected shortfalls in
shipments of aircraft and automotive
products, and the drop in imports was
associated with reduced imports of oil
and automotive products. Available data
indicated that the performance of the
major foreign industrial economies

Minutes of FOMC Meetings, November
continued to be mixed. Economic activity appeared to have remained weak in
Japan in the third quarter and to have
stagnated in western Germany after
increasing moderately in the second
quarter. On the other hand, the recessions in France and Italy seemed to
have bottomed out, and the economies
of Canada and the United Kingdom to
have recovered somewhat further.
Producer prices for finished goods fell
in October, retracing the small increase
in September; excluding the effects of
higher prices for finished foods and
energy goods, producer prices were
down over the September-October
period. Over the twelve-month period
ended in October, producer prices for
nonfood, non-energy finished goods
were fractionally higher on balance, the
lowest yearly increase on record for this
index, which was introduced in 1973.
Consumer prices rose in October after
being unchanged in September, with the
increase partly reflecting the effect of
the implementation of the new federal
gasoline tax. For nonfood, non-energy
consumer items, the rise in consumer
prices over the twelve months ended in
October was considerably smaller than
the rise over the comparable period
ended in October 1992. Labor compensation costs did not show a comparable
downtrend. The increase in hourly compensation for private industry workers
in the third quarter was about the same
as in the second quarter. For the twelve
months ended in September, hourly
compensation advanced slightly faster
than over the comparable year-earlier
period.
At its meeting on September 21,
1993, 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 adjustment to policy during the intermeeting



179

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 or slightly lesser
reserve restraint might be acceptable
during the intermeeting period. The
reserve conditions associated with this
directive were expected to be consistent
with modest growth of M2 and M3 over
the balance of the year.
Open market operations during the
intermeeting period were directed
toward maintaining the existing degree
of pressure on reserve positions. Adjustment plus seasonal borrowing averaged somewhat above anticipated levels
as a result of increased demands for
adjustment credit associated with
quarter-end pressures in financial markets and an unexpected swing in the
Treasury balance. The federal funds rate
remained close to 3 percent over the
period.
Most other interest rates were up
somewhat over the period since the
Committee's September meeting. Treasury bill rates rose in part because of the
Treasury's need to rely more heavily on
bill issuance in a quarter containing a
reduced schedule for auctioning longterm debt. Intermediate- and long-term
yields fell in the weeks following the
September meeting and reached twentyyear lows. These declines were more
than reversed subsequently, however,
when investors interpreted incoming
data as suggesting stronger economic
growth and credit demands over the
intermediate term and a somewhat
greater likelihood of some tightening of
monetary policy. Most indexes of stock
market prices posted robust gains early
in the intermeeting period, but these
gains subsequently were pared back as
interest rates moved higher.

180 80th Annual Report, 1993
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
appreciated over the intermeeting
period. The strengthening of the dollar,
and the associated rise in U.S. long-term
interest rates relative to foreign rates,
reflected both more optimistic expectations for growth in the United States and
more pessimistic assessments for the
course of economic activity in continental Europe and Japan.
M2 registered a relatively strong
advance in September, but growth
slowed again in October. The September
pickup partly reflected an unexpected
surge in the volatile overnight repurchase agreement (RP) component of
M2. Ml also was strong, but the total of
time and savings deposits continued to
decline, apparently in large part because
of the persisting allure of capital market
instruments. Growth of M3 strengthened somewhat more than M2 over the
two months, reflecting a run-up in
institution-only money market funds.
For the year through October, M2 and
M3 were estimated to have grown at
rates a little above the lower ends of the
Committee's ranges for the year. Total
domestic nonfinancial debt expanded at
a moderate rate in recent months, and
for the year through September it was
estimated to have increased at a rate in
the lower half of the Committee's monitoring range.
The staff projection prepared for this
meeting suggested that economic activity, after advancing relatively strongly in
the fourth quarter, would expand moderately next year, about in line with the
potential rate of economic growth over
time, and thus would be associated with
limited, if any, further reductions in margins of unemployed labor and capital.
Consumer spending, which had buoyed
growth recently, was expected to expand
at the same pace as incomes over the



year ahead. In addition, fiscal restraint
and uncertainty about other government
policies would continue to inhibit the
expansion, and a sluggish acceleration
in foreign industrial economies pointed
to only modest improvement in export
demand. However, improving balance
sheet positions and credit supply conditions were lifting an unusual constraint
on spending, and the lower interest rates
would encourage further increases in
business fixed investment and housing
construction. The continued slack in
labor and product markets, coupled with
some tempering of inflation expectations, was expected to foster further
reductions in wage and price inflation.
In the Committee's discussion of the
economic outlook, members commented
that the economic data and anecdotal
reports received since the September
meeting had tended to reinforce their
earlier forecasts that moderate economic
expansion would be sustained. After a
sluggish performance in the first half of
the year, overall economic activity had
picked up somewhat more in the third
quarter than most members had anticipated, and available indicators of spending and production pointed to relatively
robust economic growth in the current
quarter. Looking ahead to 1994, the
members expected the expansion to
slow somewhat from its apparent pace
over the closing months of this year.
Fluctuations in the rate of quarterly GDP
growth undoubtedly would occur, but
the economy over the year ahead was
thought likely to continue on a trend of
moderate expansion averaging close to
the economy's long-run potential or
somewhat higher. Most members saw
the probability of a sharp deviation in
either direction from their current forecasts as relatively remote, though a
number also believed that any deviation
was more likely to be in the direction of
somewhat stronger rather than weaker

Minutes of FOMC Meetings, November
growth. In general, members expected
core inflation to change little or to edge
lower next year, but a few saw some
danger of marginally higher inflation.
In their assessment of developments
underlying the economic outlook, members referred to indications in many
areas of some strengthening in business
conditions and in related business sentiment, though economic activity clearly
remained sluggish or even depressed
in some parts of the country and overall business attitudes could still be
described as cautious. Current financial
conditions, including the strength in
equity markets, reduced intermediateand long-term interest rates, and an
apparently improving availability of
business credit from financial institutions, provided a favorable backdrop for
further economic expansion. Moreover,
businesses and households had made
substantial progress in improving their
financial positions. These factors were
seen as reducing downside risks to the
expansion. At the same time, while there
were signs of significant firming in the
economic expansion, a number of members observed that at this point they did
not see the usual indications of any nearterm intensification of inflationary pressures such as general increases in commodity prices, lengthening delivery lead
times along with efforts to increase
inventories, and strong growth of credit.
Indeed, the risks of an overheated and
inflationary expansion in the near term
seemed quite limited in light of various
constraints on the economy such as
those associated with a restrictive fiscal
policy and the continuing weakness in
key export markets.
With regard to the outlook for specific sectors of the economy, a step-up
in consumer spending, notably for motor
vehicles and housing-related durable
goods, had contributed substantially
to the strengthening of the economic



181

expansion. Indications of improving
consumer confidence, reflected in turn
in the growing optimism expressed by
business contacts regarding the outlook
for holiday sales, should help to sustain
relatively ebullient consumer spending
through the year-end. Contacts in the
motor vehicles industry also appeared to
be relatively optimistic about the prospects for sales of the new models. The
outlook for the consumer sector also
was subject to some constraining influences. Growth in consumer spending
had tended to exceed the expansion in
consumer incomes, and a number of
members questioned the extent to which
the acceleration in such spending was
likely to extend into the new year. The
saving rate already was near the low end
of its historic range, at least on the basis
of current estimates, and was unlikely to
decline significantly, if at all. Much
would depend on consumers' outlook
for employment and incomes. Growing
demands should eventually be translated
into faster employment gains, but at this
point business firms continued to resist
adding to their workforces despite
increasing sales and many firms were
still announcing workforce reductions.
While net gains in employment, including growth associated with increases in
self-employment and new business formations, were continuing, expansion in
jobs and consumer incomes probably
would be at a moderate pace over the
year ahead. Against this background,
members generally expected moderate
growth in consumer spending to be
maintained, but they did not see such
spending as likely to give extra impetus
to growth in economic activity in 1994.
The members anticipated appreciable
further expansion in business investment spending, especially in the context
of reduced interest rates, improved business balance sheets, and ongoing efforts
to improve productivity. Growth in

182 80th Annual Report, 1993
spending for business equipment probably would continue at a relatively
vigorous pace, though perhaps somewhat below the growth rates experienced in recent quarters, and other investment activity seemed poised to pick
up. In this connection, several members
reported that vacancy rates in commercial office buildings were declining
in some areas and while this development was not yet being translated into
appreciable new construction, investment funds appeared to be flowing more
freely into commercial real estate.
Clear indications of strengthening were
observed in housing construction in
many parts of the country and the outlook for such building activity seemed
promising in the context of reduced
mortgage rates and improving consumer
sentiment.
Fiscal policy developments, including
the effects on business attitudes of the
uncertainties surrounding health care
reform legislation, were likely to continue to inhibit the expansion over
the year ahead. Some members again
emphasized the negative effects that the
ongoing retrenchment in defense spending was having on local economies as
well as on the economy more generally.
On the taxation side, the rise in tax
liabilities on higher incomes could have
an especially pronounced effect during
the early months of next year, given the
retroactive inclusion of 1993 incomes
subject to the new tax, but some members noted that the increased tax payments probably had been widely anticipated and the negative implications for
the economy might well be less than
many observers expected. Nonetheless,
the overall posture of fiscal policy and
associated business concerns about the
cost implications of possible future legislation were likely to be an important
factor tending to limit the strength of the
expansion.



Net exports were seen as another constraining factor in the performance of
the economy next year. On the import
side, even moderate expansion in
domestic economic activity was likely
to stimulate appreciable further growth
in U.S. demands for foreign goods. At
the same time, the prospects for exports
to a number of major industrial countries were not promising, at least for the
nearer term, given lagging economies in
Europe and Japan. In this connection, a
number of members referred to reports
of weak export demand for specific U.S.
products and also noted that an extended
coal mining strike had cut supplies of
coal available for export and had
induced some domestic firms to turn to
imports to help fill their requirements.
On the other hand, some markets for
U.S. exports, notably those in a number
of East Asian nations and some Latin
American countries, were likely to continue to experience considerable growth,
thereby mitigating an otherwise fairly
gloomy outlook for exports.
With regard to the outlook for inflation over the year ahead, views did not
vary greatly among the members. They
ranged from expectations of some limited progress toward price stability to
forecasts of a marginal increase in the
core rate of inflation. Members who
anticipated a relatively favorable inflation performance tended to underscore
the likely persistence of appreciable
slack in labor and other production
resources on the assumption that growth
in overall economic activity would
remain on a moderate trend in line with
their forecasts. Some also pointed to the
absence of inflationary pressures in most
commodity markets, the persistence of
intense competition in local markets
across the nation, and the outlook for
relatively subdued increases in labor
costs in part because of ongoing
improvements in productivity. Other

Minutes of FOMC Meetings, November
members gave more emphasis to the
possibility that the economic expansion
next year, especially if it turned out on
the high side of the range encompassing
the members' current projections, was
more likely to be associated with some
upward pressures on costs and prices. In
this connection, relatively rapid growth
in economic activity, should it persist
into the early part of next year, probably
would trigger attempts to raise prices
and wages somewhat more rapidly even
in the context of some continuing slack
in overall capacity and labor utilization.
At this point, however, there were no
significant indications of accelerating
inflation, and business contacts around
the nation did not currently see or seem
to anticipate increasing inflationary
pressures.
In the Committee's discussion of policy for the intermeeting period ahead,
the members generally agreed that
despite various indications of a pickup
in economic growth, the underlying
economic situation and the outlook for
inflation had not changed sufficiently to
warrant an adjustment in monetary policy. Looking beyond the intermeeting
period, however, several members commented that the Committee might well
have to consider the need to move from
the currently stimulative stance of monetary policy toward a more neutral policy posture, should concerns about
rising inflationary pressures begin to be
realized. The members recognized the
desirability of taking early action to
arrest incipient inflationary pressures
before they gathered strength, especially
given the Committee's commitment not
just to resist greater inflation but to
foster sustained progress toward price
stability. In appropriate circumstances, a
prompt policy move also might allay
market concerns about inflation with
favorable implications for longer-term
interest rates and the performance of



183

interest-sensitive sectors of the economy. The members acknowledged that
current measures of inflation and anecdotal reports from around the nation did
not on the whole suggest an intensification of inflation at this point. Moreover,
the Committee had to be wary of misleading signals that were inherent in the
saw-tooth pattern of typical economic
expansions, and it needed to avoid a
policy move that would incur an unnecessary risk to the expansion, given
uncertainties about the degree to which
recent strength in spending would
persist.
Most of the members concluded that
on balance current economic conditions
warranted a steady policy course and, in
light of prevailing uncertainties, that it
would be premature to anticipate any
particular policy change or its timing.
As a consequence, the members also
concluded that the currently unbiased
instruction in the directive relating to
the direction of possible intermeeting
policy changes should be retained; in
any case, significant changes in the outlook requiring policy action were
viewed as unlikely in the relatively short
period until the next scheduled meeting
on December 21. One member expressed the differing view that a less
accommodative policy would be more
consistent over time with the Committee's desire to foster sustained economic
expansion and progress toward price
stability. However, this member also felt
that a policy tightening move at this
time might be seen as a response to a
stronger economy, rather than an action
that clearly was intended to underscore
the Committee's commitment to price
stability and therefore would elicit a
favorable response in intermediate- and
long-term debt markets.
With regard to financial developments bearing on the economic outlook
and the potential need to adjust mone-

184 80th Annual Report, 1993
tary policy, members observed that the
broader money and credit aggregates
had strengthened somewhat since
earlier in the year, though to still relatively moderate growth rates. Moreover, much of the acceleration in M2
and M3 could be attributed to special or
temporary factors, and according to a
staff analysis growth in these aggregates was likely to revert to relatively
slow rates in coming months, assuming
unchanged reserve conditions. At the
same time, growth in Ml and reserves
had remained comparatively rapid and
in one view such growth might well
be indicative of an overly stimulative monetary policy that would promote more inflation over time or at
least prove inconsistent with further
disinflation.
At the conclusion of the Committee's
discussion, all 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 adjustment 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
reserve restraint might be acceptable
during the intermeeting period. The
reserve conditions contemplated at this
meeting were expected to be consistent
with modest growth in M2 and M3 over
coming months.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System Account in
accordance with the following domestic
policy directive:



The information reviewed at this meeting
suggests some strengthening in the expansion of economic activity in recent months.
Total nonfarm payroll employment rose
appreciably in September and October, while
the civilian unemployment rate edged up to
6.8 percent in October. Industrial production
increased sharply in October, partly reflecting a continuing rebound in the output of
motor vehicles. Retail sales were up substantially in October after changing little in September. Housing activity picked up further in
the third quarter. The expansion of business
capital spending has slowed from a robust
pace earlier in the year. The nominal U.S.
merchandise trade deficit in July-August
was about unchanged from its average rate
in the second quarter. Consumer prices have
increased moderately on balance in recent
months and producer prices have fallen.
Most interest rates have increased somewhat since the Committee meeting on September 21. In foreign exchange markets, the
trade-weighted value of the dollar in terms
of the other G-10 currencies appreciated over
the intermeeting period.
Growth of M2 picked up slightly on balance in September and October, while M3
strengthened to a somewhat greater extent
over the two months. For the year through
October, M2 and M3 are estimated to have
grown at rates a little above the lower end of
the Committee's ranges for the year. Total
domestic nonfinancial debt has expanded at a
moderate rate in recent months, and for the
year through August it is estimated to have
increased at a rate in the lower half of the
Committee's monitoring range.
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 lowered the ranges it had established in February for growth of M2 and M3
to ranges of 1 to 5 percent and 0 to 4 percent
respectively, measured from the fourth quarter of 1992 to the fourth quarter of 1993. The
Committee anticipated that developments
contributing to unusual velocity increases
would persist over the balance of the year
and that money growth within these lower
ranges would be consistent with its broad
policy objectives. The monitoring range for
growth of total domestic nonfinancial debt
also was lowered to 4 to 8 percent for the

Minutes of FOMC Meetings, November
year. For 1994, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1993 to the
fourth quarter of 1994, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the monitoring range for
growth of total domestic nonfinancial debt at
4 to 8 percent for 1994. 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 modest growth in M2 and M3 over
coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Angell, Boehne, Keehn,
Kelley, LaWare, Lindsey, McTeer, Mullins, Ms. Phillips, and Mr. Stern. Votes
against this action: None.

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 21, 1993.
Votes for this action: Messrs.
Greenspan, McDonough, Angell,
Boehne, Keehn, Kelley, LaWare,
Lindsey, McTeer, Mullins, Ms. Phillips, and Mr. Stern. Votes against this
action: None.



185

Release of Information
about FOMC Meetings
At this meeting the Committee considered a number of alternatives for releasing detailed information on its deliberations at past and future meetings.
Members emphasized that the most
important consideration was the preservation of a deliberative process that
would enable the Committee to arrive at
the best possible monetary policy decisions. Premature release of detailed
information, such as transcripts, would
sharply curtail the Committee's ability
to freely discuss evolving economic and
financial trends and alternative policy
responses. Moreover, if full transcripts
were subject to release before many
years had passed, much vital information obtained in confidence could not be
discussed in meetings and in any event
probably would not be made available
by foreign central banks, business firms,
and other sources.
The information for all past meetings
and many of the intermeeting telephone
consultations was contained in unedited
transcripts that had been preserved by
the FOMC Secretariat since March
1976. Virtually all the tapes from which
these transcripts were typed had been
reused to record subsequent meetings,
and very few tapes currently existed for
meetings before September 1993.
In the course of the Committee's discussion, members observed that the purpose of the transcripts had been to assist
the FOMC Secretariat in the preparation
of minutes that reported the economic
and monetary policy discussions and
were released after the next meeting. As
a result, the transcripts for past meetings
had never been edited nor had they been
checked by meeting participants for
accuracy. It was clear from even a
casual perusal that at times the transcripts failed for various reasons to

186 80th Annual Report, 1993
convey an intelligible account of members' comments, and on occasion they
even misstated the views that had been
expressed. Moreover, most participants
at these meetings had not been aware
until recently that the transcripts had
been preserved and that they could at
some point be made public. Their
release at this time would represent a
sharp break with past practice and would
raise an issue of fairness to participants
at earlier meetings of the Committee.
The members generally agreed that
their reservations about releasing the
transcripts could be mitigated through
appropriate safeguards such as withholding particularly sensitive materials
and providing for a considerable lapse
of time after Committee meetings. They
noted in this connection that, while there
was no legal requirement to prepare
transcripts, the substance of existing
transcripts needed to be preserved in
accordance with the Federal Records
Act. With regard to the manner in which
the information might be made public,
the Committee considered several
alternatives including making available
the unedited transcripts themselves, or
lightly edited versions of the transcripts,
or Memoranda of Discussion comparable to those prepared for meetings
before late March 1976. The members
expressed varying preferences among
these alternatives. Some proposed that
marginal notations be included with
raw or edited transcripts to provide
staff explanations or interpretations of
unclear or evidently mistranscribed
comments. It was understood that
preparation of edited transcripts and especially Memoranda of Discussion
would require a considerable amount of
time and effort before they would be
ready for public release. A majority
favored the release of lightly edited
transcripts that would retain all substantive comments but would allow for



grammatical corrections, the smoothing
of some sentences to facilitate the
understanding, and the correction of
obvious transcription errors. The editing
would be patterned after that done for
congressional hearings; importantly, no
changes would be made in the substance
or the intent of the speakers. Before
release to the public, particularly sensitive materials would be redacted in
accordance with the provisions of the
Freedom of Information Act. The Committee agreed that the FOMC Secretariat
should be given responsibility for the
editing process and that the Committee
itself would not undertake to review
these transcripts. It was noted in this
respect that many former members of
the Committee were no longer available
to review their comments and that in
any event the passage of time would
make it impossible for members to
recall precisely what they had said or to
verify many of their comments. Accordingly, the edited transcripts could not
be regarded as official records of the
Committee.
With respect to the interval between a
meeting and release of a lightly edited
transcript, all of the Committee members were concerned that the absence of
a substantial lag would seriously harm
the Committee's ongoing deliberative
process. Many also commented that the
absence of a substantial lag would be
unfair to meeting participants who had
been unaware that their remarks would
be released and were unable to review
the transcripts for accuracy. Various
members argued for lags that ranged
from three years to ten years or more,
but a majority felt that a five-year lag
was necessary to prevent harm to the
Committee's ongoing deliberations. The
other members indicated that a five-year
lag was acceptable because it represented a reasonable balance among the
various considerations.

Minutes of FOMC Meetings, December
At the conclusion of this discussion,
the members agreed unanimously to
authorize the preparation of lightly
edited transcripts of past meetings and
available telephone conferences since
late March 1976 and to release such
transcripts to the public five years after
the meetings, subject to the redaction of
especially sensitive materials as authorized by the Freedom of Information
Act. It was understood that the transcripts for the meetings held during
1988 would be edited on a priority basis
and released as soon as possible. Providing copies of unedited transcripts for all
past meetings and available conference
calls to the Chairman or staff of the
House Banking Committee in response
to a request was not approved by the
Committee.
The members reviewed various
options for the release of information
about the Committee's deliberations at
future meetings. These options included
continuing the preparation of the minutes in their current form, which members regarded as providing a complete
account of the substance of the Committee's deliberations. Some urged that
consideration be given to supplementing
the minutes with the prompt release
after each meeting of information about
Committee decisions. Among other
options considered were an expanded
version of the current minutes and the
release, after an appropriate lag, of a
lightly edited transcript or a Memorandum of Discussion for each meeting.
The members concluded that the complexity of the issues reflected in these
alternatives warranted further review by
the Committee and accordingly a decision was deferred. It was agreed that the
Committee would continue its discussion of these issues at a special meeting
during December.
Donald L. Kohn
Secretary



187

Meeting Held on
December 21, 1993
A meeting of the Federal Open Market
Committee was held in the offices of the
Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, December 21, 1993, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Angell
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer
Mr. Mullins
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal,
and Parry, Alternate Members of
the Federal Open Market
Committee
Messrs. Hoenig, Melzer, and Syron,
Presidents of the Federal Reserve
Banks of Kansas City, St. Louis,
and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Patrikis, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R. Davis, Lang, Lindsey,
Promisel, Rolnick, Rosenblum,
Scheld, Siegman, Simpson, and
Slifman, Associate Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account

188 80th Annual Report, 1993
Mr. Winn, Assistant to the Board,
Office of Board Members, Board
of Governors13
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Stockton, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Ms. Pianalto, First Vice President,
Federal Reserve Bank of
Cleveland
Messrs. Beebe, T. Davis, Goodfriend,
and Ms. Tschinkel, Senior Vice
Presidents, Federal Reserve Banks
of San Francisco, Kansas City,
Richmond, and Atlanta
respectively
Mr. McNees, Vice President, Federal
Reserve Bank of Boston
Ms. Meulendyke and Mr. Thornton,
Assistant Vice Presidents, Federal
Reserve Banks of New York and
St. Louis respectively
By unanimous vote, the minutes for
the meeting of the Federal Open Market
Committee held on November 16, 1993,
were approved.
By unanimous vote, responsibility for
making decisions on appeals of denials
by the Secretary of the Committee for
access to Committee records was delegated under the provisions of 271.4(d)
of the Committee's Rules Regarding
Availability of Information to Mr. Mullins and, in his absence, to Ms. Phillips.
The Manager for Foreign Operations
reported on developments in foreign
exchange markets during the period
since the November meeting. There

13. Attended part of the meeting.



were no System open market transactions in foreign currencies during this
period, and thus no vote was required of
the Committee.
The Manager for Domestic Operations reported on developments in
domestic financial markets and on System open market transactions in government securities and federal agency obligations during the period November 16,
1993, through December 20, 1993. By
unanimous vote, the Committee ratified
these transactions.
The Committee then turned to a discussion of the economic and financial
outlook and the implementation of
monetary policy over the intermeeting
period ahead. A summary of the economic and financial information available at the time of the meeting and of
the Committee's discussion is provided
below, followed by the domestic policy
directive that was approved by the Committee and issued to the Federal Reserve
Bank of New York.
The information reviewed at this
meeting suggested that economic activity had recorded a strong advance in
recent months. Consumer spending had
picked up, and business purchases of
durable equipment had remained on a
marked upward trend. Residential construction was rising rapidly, and nonresidential construction had turned up from
depressed levels. Industrial production
had been boosted by developments in
the motor vehicle industry, and employment had continued to post solid gains.
Most indexes of prices pointed to little
change in inflation trends despite the
recent acceleration of economic activity.
Total nonfarm payroll employment
rose appreciably further in November.
Another substantial increase in jobs was
recorded in the services industries, notably in health and business services. Construction employment was up significantly further after registering modest

Minutes of FOMC Meetings, December
gains on balance over the first three
quarters of 1993. In manufacturing,
there were back-to-back increases in
jobs in October and November following seven consecutive monthly declines,
and both overtime hours and the average
workweek remained at a high level.
Most of the November expansion in factory jobs occurred in the motor vehicle
and capital goods industries. The civilian unemployment rate fell considerably
in November, to 6.4 percent.
Industrial production increased
sharply in October and November. Manufacturing accounted for all the gain
over the two months, with the rise partly
reflecting a continuing rebound in the
production of motor vehicles and parts.
Elsewhere in manufacturing, strong
advances were recorded in the output of
computers and non-auto durable consumer goods. The sharp expansion in
production was associated with substantial increases in the rate of utilization
of industrial capacity in October and
November.
Retail sales were up moderately in
November after a large advance in October. Motor vehicle sales surged in
October and remained at the higher level
in November, apparently reflecting in
part favorable financing terms, small
price increases—adjusted for quality
improvements—on 1994 models, and
generous incentives on pickup trucks
from some manufacturers. Sales of
apparel, furniture and appliances, and
other durable goods also were strong on
balance over October and November.
Housing starts rose substantially in
November; starts of single-family units
reached their highest level since early
1987, but starts of multifamily units
edged lower. Sales of both new and
existing homes remained robust in
October.
Business spending for durable equipment apparently continued to rise rap


189

idly. Among nondefense capital goods
other than aircraft, shipments of computers and other durable equipment were
significantly higher in October than
in the third quarter. In addition, the
demand for heavy trucks remained
strong, and the brisk sales of light vehicles in October and November likely
were the result in part of a step-up in
spending by businesses. Nonresidential
construction activity increased again in
October: Office building declined further and industrial construction retraced
part of a sizable September gain, but
outlays for institutional, public utilities,
and non-office commercial structures
continued to move higher.
Business inventories were little
changed in October, with reductions in
manufacturing and wholesale stocks
nearly offsetting increases at the retail
level. A moderate further decline in
manufacturers' inventories in October
was concentrated among producers of
aircraft and parts, where stocks have
been contracting for more than two
years; the stocks-to-shipments ratio for
manufacturing as a whole fell to its lowest level in recent years. In the wholesale sector, inventories declined in
October after changing little in September, and the ratio of inventories to sales
remained in the middle of its range over
the past several years. At the retail level,
stocks increased considerably further;
with sales expanding vigorously, however, the ratio of stocks to sales edged
lower, and this ratio also was in the
middle of its range over the past several
years.
The nominal U.S. merchandise trade
deficit for October was about unchanged
from its September level and its average
rate for the third quarter. The value of
both exports and imports increased in
October. Exports of automotive products rose strongly, and exports of aircraft rebounded from a September

190 80th Annual Report, 1993
downturn. The advance in imports
was spread across all major categories.
Economic activity in the major foreign
industrial countries expanded moderately in the third quarter; however, available data suggested that output in Japan
and Germany might decline in the current quarter, with a depressing effect on
growth for these industrial countries as a
group.
Broad indexes of consumer and producer prices pointed to little change in
inflation trends, although prices of some
commodities and industrial materials
had firmed recently. Producer prices of
finished goods were unchanged in
November after declining in October
and over the third quarter. In November,
a large drop in the prices of finished
energy goods offset a rebound in the
prices of other finished goods. Producer
prices for nonfood, non-energy finished
goods were about unchanged over the
twelve months ended in November. At
the consumer level, prices of items other
than food and energy advanced moderately in November; the twelve-month
increase in this price measure was a
little smaller than the rise over the comparable period ended in November
1992. Average hourly earnings edged up
in November; for the twelve months
ended in November, these earnings were
up a smaller amount than over the preceding year.
At its meeting on November 16,
1993, 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 adjustment to policy 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 develop


ments, slightly greater or slightly lesser
reserve restraint might be acceptable
during the intermeeting period. The
reserve conditions associated with this
directive were expected to be consistent
with modest growth of M2 and M3 over
coming months.
Open market operations during the
intermeeting period were directed
toward maintaining the existing degree
of pressure on reserve positions. Adjustment plus seasonal borrowing averaged
somewhat less than anticipated levels,
reflecting very light amounts of adjustment borrowing over most of the period,
and the federal funds rate remained
close to 3 percent.
While most short-term interest rates
changed little over the intermeeting
period, signs of stronger economic
growth and the firming of some commodity prices tended to push up longerterm interest rates, although that pressure was offset to some extent by
declines in oil prices. Taken as a whole,
incoming economic data were seen by
market participants as increasing the
odds of a tightening of monetary policy
at some point but not necessarily in the
very near term. Most indexes of stock
prices fell slightly over the intermeeting
period, but the strong performance of a
few firms boosted the Dow Jones Industrial Average to a new high near the end
of the period.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies was
about unchanged on balance over the
intermeeting period. The dollar appreciated against the yen in response to incoming data suggesting weakness in the
Japanese economy and heightened prospects for further monetary easing by the
Bank of Japan. Even though interest
rates eased in Europe as central banks
lowered their money-market intervention rates, the dollar was little changed

Minutes of FOMC Meetings, December
against the German mark and declined
somewhat against other European
currencies.
Growth of M2 and M3 strengthened
appreciably in November; both aggregates had risen at somewhat faster rates
since late summer than earlier in the
year. Ml growth remained brisk in
November, and money funds included in
M2 apparently benefited from a slowdown in inflows to bond funds in the
wake of the earlier decline in bond
prices. The pickup in M3 growth reflected a surge in term Eurodollar deposits as well as faster growth of M2. For
the year through November, M2 and
M3 were estimated to have grown at
rates somewhat above the lower end of
the Committee's ranges for the year.
Total domestic nonfinancial debt had
expanded moderately in recent months,
and for the year through November it
was estimated to have increased at a rate
in the lower half of the Committee's
monitoring range.
The staff forecast prepared for this
meeting suggested that, after a strong
fourth-quarter advance, the economy
would expand at a more moderate rate
in 1994. Consumer spending was projected to decelerate to a rate more in line
with the growth of disposable income.
Business fixed investment was expected
to advance briskly, although not quite as
rapidly as in 1993, and further gains in
homebuilding activity likely would be
concentrated in the first half of the year.
Exports were projected to strengthen
somewhat, bolstered by a modest pickup
in foreign economic growth. Fiscal
restraint was expected to exert a substantial drag on spending, through both
falling government defense purchases
and higher taxes. In light of the limited
margins of slack in labor and product
markets, the ongoing expansion was
projected to be associated with only a
slight further reduction in inflation.



191

In the Committee's discussion of current and prospective economic developments, members referred to widespread
indications, both statistical and anecdotal, of a marked strengthening in economic activity and much improved business and consumer confidence in recent
months. The rate of economic growth
could be expected to moderate during
the early months of 1994 from what
currently appeared to be an unsustainable pace, but the members viewed
the extent of such moderation as a key
uncertainty in the outlook. A number of
members observed that a sharp slowing
of the expansion early next year, similar
to the slowdown after the surge in activity during the closing months of 1992,
could not be ruled out. However, most
saw the gains in the economy as more
solidly based than earlier in the expansion, and they generally expected the
economy to settle into a pattern of moderate growth over coming quarters at a
trend rate close to or somewhat above
the economy's long-run potential. With
regard to the outlook for inflation, the
members saw little evidence in available
measures of prices and wages or in other
indicators that any significant change
might already have occurred in underlying inflation trends. Nonetheless,
views varied somewhat with regard to
the outlook and ranged from expectations of some modest further decline in
the core rate of inflation to concerns
about the possibility of some acceleration in the context of diminishing
margins of unemployed production
resources and an accommodative monetary policy as reflected in low real shortterm interest rates and continued rapid
growth in narrow measures of money
and reserves.
In their comments about developments across the nation, members
observed that economic conditions
clearly had strengthened in many

192 80th Annual Report, 1993
regions and that the better conditions
had fostered appreciable improvement
in business and consumer sentiment in
most parts of the country. The members
recognized that the economic expansion
was still quite subdued in many local
areas and that economic activity remained depressed in some parts of the
country such as southern California. The
overall strength of the economy was
fueled to an important extent by interestsensitive spending on producer and consumer durables and housing and tended
to confirm the durability of the expansion. Gains in such spending were not
likely to be sustained at their recent
rates, but the cash flow and income that
such expenditures had generated were
likely to foster further economic growth,
especially in the context of generally
supportive conditions in financial and
credit markets. The members acknowledged that a number of factors continued to constrain the expansion, including ongoing though less pervasive
balance-sheet rebuilding, business restructuring and downsizing activities,
and the downtrend in defense spending.
On balance, however, current developments did not point to a marked deviation from the moderate growth trend in
economic activity that had been experienced over the past two years, though in
the view of a number of members, the
odds on somewhat stronger growth were
greater than they had been earlier in the
expansion.
With regard to the outlook for key
sectors of the economy, consumer
expenditures were seen as likely to continue to provide vital support to the
expansion even though increases in
consumer spending were not likely to be
maintained at recent rates. Members
noted that the improved consumer confidence and increased spending were
reflected in a somewhat greater willingness to incur debt, at least in the context



of reduced interest rates. Some members
cautioned, however, that growth in consumer expenditures had exceeded gains
in incomes for an extended period, insofar as could be judged from available
data, and an already low saving rate
seemed likely to limit the potential
growth in such spending. Moreover, the
negative impact of increased tax rates
on high incomes seemed likely to be felt
especially during the first half of 1994,
though the extent of that impact on consumer spending remained uncertain. On
the positive side, members cited a number of developments that would tend to
bolster overall consumer expenditures,
including lower energy costs, reduced
income taxes for many individuals stemming from indexing, and lower interest
charges on various kinds of debt. More
generally, the rise in consumer confidence seemed to be related to perceptions of improving employment opportunities despite continuing announcements of sizable workforce reductions
by some large firms.
The members expected growth in real
business investment to remain robust in
1994 but to decelerate somewhat from
the rapid rate of expansion over the past
year. Continuing increases in business
sales and low financing costs along with
ongoing efforts to improve productivity
were likely to remain conducive to substantial further growth in overall spending for business equipment despite
persisting weakness in aerospace and
defense-related industries. Nonresidential construction activity, including
commercial and industrial building and
infrastructure construction, displayed
signs of considerable strength in some
parts of the country; and declining
vacancy rates pointed to a leveling out
or even a pickup in nonresidential building construction in a number of other
areas. Some expansion in inventories
seemed likely over the forecast horizon

Minutes of FOMC Meetings, December
to accommodate the continuing growth
in overall demands. In this connection,
members noted that a rise in inventories
probably contributed to the expansion in
production in recent months since the
latter could not be explained entirely by
the strength of final demand, and a
buildup of motor vehicle stocks in late
1993 was likely to continue into the
early part of 1994.
The housing sector was expected to
remain a source of considerable economic stimulus during the early months
of 1994, both directly and indirectly in
terms of the favorable effects on purchases of home furnishings. Some members commented that the increases in
housing starts experienced over the closing months of this year might not be
sustainable; even so, housing construction, especially in the single-family sector, should be relatively well maintained
given the likelihood that homeownership would remain comparatively
affordable in the context of growing
incomes, favorable mortgage rates, and
limited pressures on the prices of new
homes.
With respect to fiscal policy, members referred to the prospects for further
cutbacks in defense spending that probably would continue to be offset only in
part by growth in federal government
purchases of other goods and services.
However, net reductions in government
purchases were expected to diminish
over the projection horizon. Likewise,
adverse effects on spending of the rise in
tax rates on higher incomes would tend
to be concentrated in the first half of
1994, and the impact on spending over
the months ahead might well be relatively limited because many taxpayers
probably had anticipated the higher
taxes and had taken measures to mitigate or spread out their effects or would
meet new tax obligations partly out of
savings. Proposed health care reform



193

legislation would exert a restraining
effect on the economy, should it be
enacted, owing to mandated cost
increases on employers. If this form of
financing were adopted, however, the
legislation might have little, or perhaps
even a favorable, effect on the federal
deficit.
The external sector of the economy
also appeared likely to have a moderating effect on domestic economic activity
over the year ahead. The economies of
key foreign industrial nations and thus
U.S. exports to those nations were
projected to grow only gradually, while
the expansion of U.S. imports was likely
to remain relatively robust on the basis
of current expectations for domestic
economic activity. In the view of at least
some members, however, stimulative
economic policies in a number of foreign countries might well lead to stronger economic performances and to
greater demand for U.S. goods and
services than many observers currently
anticipated. In any event, the members
generally agreed that the outlook for
developments abroad remained a source
of particular uncertainty for the domestic economy.
Members commented that there were
few indications of any change in inflationary trends in broad measures of
prices and wages despite the surge in
economic activity in recent months and
associated increases in capacity utilization rates. One important sign of growing inflationary pressures, rising lead
times for deliveries of materials, had not
emerged. Some members noted that
although capacity usage rates were
approaching or had reached levels that
in the past had tended to signal the onset
of rising inflation, the growth of competition stemming from the internationalization of numerous markets suggested
that old capacity benchmarks might no
longer apply and, especially in the con-

194 80th Annual Report, 1993
text of excess capacity in many foreign
economies, the potential inflationary
effects of strong domestic demand pressures might remain subdued for some
period of time. In keeping with these
assessments, members again reported on
the absence of inflationary cost pressures in local areas across the country
and on persisting comments by business
contacts regarding their inability to raise
prices to achieve more satisfactory or
customary profit margins. Business
executives continued to look to
improvements in productivity to maintain or increase their margins, and there
were numerous reports of considerable
success in implementing productivity
gains. Price developments in commodity markets presented a mixed picture;
higher food prices stemming from
weather conditions earlier in the year
had had an adverse effect on broad measures of prices, but the drop in energy
prices had favorable implications for the
near-term inflation outlook.
It also was noted that rising inflationary pressures often were accompanied
by a pickup in credit demands, and there
was no evidence of any surge in such
demands. However, the expansion of
overall nonfinancial debt had strengthened to a degree. Moreover, in the view
of some members, the rise in long-term
interest rates and in gold prices might
well have been caused in part by heightened inflation concerns. Members also
cited scattered examples of greater price
pressures, notably the prices of lumber
and some other building materials and
of related efforts to pass on the added
costs through higher prices on new
homes in some areas. Despite the
absence of any general indication of
rising inflation, a number of members
expressed concern about the potential
for increasing inflationary pressures in
the economy and saw a need to monitor
possible future sources of inflation with



special care over the period ahead, especially in light of the considerable lags
between monetary policy actions and
their effects on prices.
In the Committee's discussion of
monetary policy for the period until the
next scheduled meeting in early February, a majority of the members endorsed
a proposal to maintain unchanged conditions in reserve markets and to retain the
currently unbiased instruction in the
directive concerning possible intermeeting adjustments to policy. Looking forward, many of the members commented
that the Committee probably would have
to firm reserve conditions at some point
to adjust monetary policy from its currently quite accommodative stance to a
more neutral position, and that such a
policy move might have to be made
sooner rather than later to contain inflation and continue to provide a sound
basis for sustained economic expansion.
Monetary conditions had been eased to
their current degree of accommodation
in the 1990-92 period in the context of
balance sheet restructuring and other
unusual forces that were holding down
spending. Since the latter part of 1992,
however, downside risks to the expansion had diminished considerably as
financial conditions became more supportive of economic activity. Borrowers
and lenders had strengthened their financial positions substantially and were less
reluctant to use and extend credit. Moreover, the low level of real short-term
interest rates and in the view of some
members the continued rapid growth of
reserves or increases in a variety of
commodity prices provided evidence of
a quite accommodative monetary policy.
Overstaying such a policy would incur
an increasing risk of fostering greater
inflationary pressures that in turn would
undermine the sustainability of the
expansion. For now, however, a majority believed that the risks remained at an

Minutes of FOMC Meetings, December
acceptable level, given the remaining
slack in the economy and the lack of
near-term inflation pressures. Waiting
for further developments before making
any policy move was warranted in light
of the uncertainties surrounding the outlook, notably with regard to the extent
of the moderation in economic growth
expected early next year. If the economy
settled into a pattern of growth about in
line with its potential, the chances of
greater inflation pressures down the road
would be reduced and the need for a
near-term policy adjustment would be
less pressing, though it would still be
required at some point.
Two members expressed a strong
preference for a prompt move toward a
firmer policy stance to forestall inflation
pressures. A number of others commented that the decision was a close
call, including two who had a marginal
preference for tightening policy at this
time but who could accept a delay in
light of the uncertainties that were
involved.
Members who could support an
unchanged policy stance also indicated
their acceptance of a directive that was
not biased in either direction with regard
to possible adjustments in the degree of
reserve pressure during the intermeeting
period. Some observed that while the
flow of economic reports during this
period was likely to underscore the
marked strengthening of the economy,
those reports mainly would cover developments in the fourth quarter, and from
a monetary policy perspective the members were more interested in knowing
something about the extent of the
follow-through strength early in the new
year. Moreover, the members recognized
that any tightening move would represent a turn in policy that might well
have a greater-than-usual effect on
financial markets. This prospect argued
for taking such an action at a meeting,



195

with the benefit of a full Committee
review of the implications for future
growth and inflation pressures of a wide
variety of emerging developments—
including those in money, credit, and
financial markets—rather than an intermeeting action based on an asymmetric
directive. In the view of one member, a
tightening action over the coming intermeeting period would incur an undue
risk of an exaggerated response in financial markets, given the likelihood of thin
trading markets around year-end; and
since a policy move should be postponed, a symmetrical directive seemed
appropriate.
At the conclusion of the Committee's
discussion, all but two members indicated that they could support 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 adjustment 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
reserve restraint might be acceptable
during the intermeeting period. According to a staff analysis, the reserve conditions contemplated at this meeting
would be consistent with moderate
growth in M2 and M3 over the months
ahead.
At the conclusion of the meeting, the
Federal Reserve Bank of New York was
authorized and directed, until instructed
otherwise by the Committee, to execute
transactions in the System Account in
accordance with the following domestic
policy directive:
The information reviewed at this meeting
suggests a strong advance in economic activ-

196 80th Annual Report, 1993
ity in recent months. Total nonfarm payroll
employment rose appreciably further in
November, and the civilian unemployment
rate fell considerably to 6.4 percent. Industrial production increased sharply in October
and November, partly reflecting a continuing
rebound in the output of motor vehicles.
Retail sales were up moderately in November after a large increase in October. Housing starts advanced substantially in November. Business equipment expenditures have
been rising rapidly, and nonresidential construction has turned up from depressed levels. The nominal U.S. merchandise trade deficit in October was about unchanged from its
average rate in the third quarter. Broad
indexes of consumer and producer prices
suggest little change in inflation trends,
although prices of some raw materials have
increased recently.
Short-term interest rates have changed
little, while intermediate- and long-term rates
have risen slightly since the Committee
meeting on November 16. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10
currencies is about unchanged on balance
over the intermeeting period.
Growth of M2 and M3 strengthened in
November, and both aggregates have risen at
somewhat faster rates since late summer than
earlier in the year. For the year through
November, M2 and M3 are estimated to
have grown at rates somewhat above the
lower end of the Committee's ranges for the
year. Total domestic nonfinancial debt has
expanded at a moderate rate in recent
months, and for the year through November
it is estimated to have increased at a rate in
the lower half of the Committee's monitoring range.
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 lowered the ranges it had established in February for growth of M2 and M3
to ranges of 1 to 5 percent and 0 to 4 percent
respectively, measured from the fourth quarter of 1992 to the fourth quarter of 1993. The
Committee anticipated that developments
contributing to unusual velocity increases
would persist over the balance of the year
and that money growth within these lower
ranges would be consistent with its broad



policy objectives. The monitoring range for
growth of total domestic nonfinancial debt
also was lowered to 4 to 8 percent for the
year. For 1994, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1993 to the
fourth quarter of 1994, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the monitoring range for
growth of total domestic nonfinancial debt at
4 to 8 percent for 1994. 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 moderate growth in M2 and M3
over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Boehne, Keehn, Kelley,
LaWare, McTeer, Mullins, Ms. Phillips,
and Mr. Stern. Votes against this action:
Messrs. Angell and Lindsey.

Messrs. Angell and Lindsey dissented
because they believed that monetary
policy was overly accommodative and
needed to be adjusted promptly toward a
more neutral stance to counter potential
inflationary pressures in the economy.
They referred to the long lags with
which monetary policy exerts its effects
on inflation and the consequent need to
adjust monetary policy on a timely basis
to foster the Committee's long-run
objective of stable prices. They understood the difficulty of finding the appropriate circumstances for tightening
actions so as to avoid unintended
interpretations and repercussions in

Minutes of FOMC Meetings, December
financial markets. In their judgment,
economic and financial conditions were
unlikely to be more favorable later and
waiting risked undesirable inflationary
consequences.
Mr. Angell also stressed that the
Committee should focus more directly
on forward-looking indicators such as
the price of gold and the estimate of the
natural rate of interest provided by the
yield on five-year Treasury notes. He
favored an immediate increase of 50
basis points in the federal funds rate,
which would enable the Committee to
observe how the market adjusted the
price of gold to the changed opportunity
cost of holding gold. He believed that if
bond market participants concluded that
the Committee was using the price of
gold to target the price level, five-year
and ten-year interest rates would then be
significantly lower than if the Committee's tightening was a belated response
to a worsening outlook for inflation. He
emphasized that the objective of monetary policy clearly should be stable
money, which produces stable prices
and an ongoing optimal and stable economic growth path.
Mr. Lindsey commented further that a
modest policy move now would appropriately signal the Committee's concern
about the potential for inflation. Such an
action would begin the process of moving policy away from what he perceived
as an unsustainable stance. He also
noted that foreign competition had been
restraining pressures on domestic prices,
and the policy course he had in mind
would continue to help in that regard by
supporting the foreign exchange value
of the dollar.
Request for Access to
Conference Call Record
At this meeting the Committee considered a request from Mr. Henry B.




197

Gonzalez, Chairman of the House Committee on Banking, Finance, and Urban
Affairs, for access by his staff to the tape
recording and transcript of the Committee's telephone conference on October 15, 1993. The main purpose of the
conference call was to discuss what
position the Committee should take on
the release of material about its deliberations that are contained in historical
files of meeting transcripts; the issue
undoubtedly would be raised in the near
future, probably during upcoming testimony before Chairman Gonzalez' Committee scheduled for October 19, 1993.
Chairman Gonzalez had indicated that
he was investigating the possibility that
Committee members had conspired during the conference call to hide information from the House Banking Committee. The accusation was wholly without
merit, but at this stage the Committee
could fully vindicate itself only by making the tape and transcript available to
congressional staff for their review.
Such a step would be taken with considerable reluctance. The recording in
question did not contain a discussion of
monetary policy, but it did involve Committee deliberations, which are protected
from public disclosure by the Freedom
of Information Act. Some members
expressed concern that granting access
to this material could be viewed as setting a precedent for the premature
release of other tapes and transcripts,
with adverse effects on the Committee's
deliberations. However, the Committee's General Counsel expressed the
opinion that the Committee could make
an exception for this transcript without
prejudicing its ability to withhold deliberative or other privileged materials in
other transcripts under the Freedom of
Information Act. The members agreed
with a proposal from the Chairman that
the staff of Chairman Gonzalez and of
certain other Banking Committee mem-

198 80th Annual Report, 1993
bers be allowed to listen to the tape
recording of the October 15 conference
call. The review would be conducted at
the offices of the Board of Governors,
and the congressional staff members
would be asked to keep confidential the
information to be made available to
them. The members indicated that it
should be made clear that access to the
tape in question was being undertaken
solely to dispel the unfounded allegations regarding the Committee's actions.
The Committee already had decided to
make public, with a five-year lag, lightly
edited versions of all the transcripts currently in the possession of the FOMC
Secretariat. These transcripts as edited
will include all the deliberative materials except for highly sensitive information that can continue to be withheld
under the provisions of the Freedom of
Information Act.
It was agreed that the next meeting of
the Committee would be held on
Thursday-Friday, February 3 ^ , 1994.
The meeting adjourned at 1:30 p.m.




Donald L. Kohn
Secretary

199

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 1993. A new process to reform the Community Reinvestment Act dominated Board and interagency activities during the latter half
of the year. This CRA initiative was a
response to a directive from President
Clinton to the regulatory agencies to
reform the law by developing new regulations, supervisory procedures, and
standards for assessing financial institution performance.
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. It also
discusses the community affairs program of the Board and the Reserve
Banks; reports on the examination of
institutions for compliance with consumer laws—by the Federal Reserve
and by 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:
• Amended Regulation B (Equal
Credit Opportunity) to clarify when
credit applicants have a right to receive
copies of appraisal reports on residential property. The amendments require




notice by creditors that do not routinely
provide appraisals. The regulation also
provides alternative methods for compliance with the law.
• Amended Regulation C (Home
Mortgage Disclosure) to require that
financial institutions make available to
the public an edited version of the loan
register data they file under the Home
Mortgage Disclosure Act. The amendment also requires that institutions
release their disclosure statement within
three business days, instead of thirty
days, after receiving it from their supervisory agencies.
• Adopted a supervisory statement
announcing a series of steps designed
to help ease financial stress on borrowers in areas affected by flooding in the
Midwest. The Board also temporarily
amended Regulation Z (Truth in Lending) to make it easier for borrowers in
flood-affected areas to waive the right to
cancel certain home-secured loans and
thus to gain ready access to the loan
proceeds.
• Issued for comment a proposal to
extend the provisions of Regulation E
(Electronic Fund Transfers) to electronic
benefit transfer (EBT) programs established by government agencies. Under
these programs, the agencies issue
access cards and personal identification
numbers that recipients use to obtain
government benefits.
• Amended Regulation DD (Truth in
Savings) to extend by three months the
mandatory date for compliance with the
requirements of the Truth in Savings
Act and make certain other technical
changes. The Board also issued proposed amendments to Regulation DD;
under these revisions the annual per-

200 80th Annual Report, 1993
centage yield would reflect not only the
effect of compounding of interest but
also the time value of money for consumers who receive interest payments
during the term of the account.
• Announced plans to review Regulation M (Consumer Leasing) to determine whether it can be simplified and
clarified to carry out more effectively
the purposes of the Consumer Leasing
Act.
• Revised the commentary to Regulation Z (Truth in Lending) to address
issues such as the interaction between
the Truth in Lending rules on the terms
on which banks can demand repayment
of loans and the other federal rules dealing with credit extended to executive
officers of depository institutions; the
revisions provide greater flexibility in
complying with disclosure requirements.

Regulation B
(Equal Credit Opportunity)
In December the Board revised Regulation B to implement statutory amendments contained in the Federal Deposit
Insurance Corporation Improvement Act
of 1991. The amendments give credit
applicants the right to receive copies of
appraisal reports on residential property.
The regulation sets alternative ways of
complying with the law. Creditors may
automatically give a copy of an appraisal report to all applicants for certain
dwelling-secured loans, or they may
give a copy to applicants upon request.
For creditors that do not routinely provide the reports, the regulation sets limits on when applicants may request (and
creditors must provide) the appraisal
reports, and requires that applicants be
notified of their right to receive the
report. These rules cover applications
for credit to be secured by a lien on a
residential structure containing one to
four family units.



Regulation C
(Home Mortgage Disclosure)
In March the Board amended Regulation C to expand public access to the
data collected under the Home Mortgage Disclosure Act (HMDA) and to
require earlier release. These amendments, which took effect in 1993, apply
to the HMDA data for 1992 and subsequent years; they implement provisions
contained in the Housing and Community Development Act of 1992. Lenders
must make a copy of their loan application register available to the public upon
request; they must first delete certain
items—the loan or application number,
the date of application, and the date of
the action taken—to protect the privacy
of applicants and borrowers. Covered
lenders will now make disclosure statements available to the public within
three business days, instead of thirty
days, after receiving the statements from
supervisory agencies.
To assist covered institutions in complying with the regulation, the Board
distributed a revised version of A Guide
to HMDA Reporting, Getting It Right,
issued by the Federal Financial Institutions Examination Council. The comprehensive guide discusses the law's
requirements, coverage, and management responsibilities; it also gives
detailed directions for gathering data
and step-by-step instructions for completing the reporting form.
Regulation Z (Truth in Lending)
In July the Board adopted a supervisory
statement that encouraged financial
institutions to work constructively with
borrowers harmed by the flooding in the
Midwest. The disruption caused by the
heavy floods placed many financial pressures on businesses and individuals, in
some cases adversely affecting their

Consumer and Community Affairs
ability to repay loans in accordance with
the original terms and conditions. The
statement suggested that lenders would
find it more prudent to ease credit terms
to help borrowers restore their financial
strength, consistent with sound banking
practices, and to restructure debt or
extend repayment terms for existing
borrowers.
The Board waived appraisal regulations for transactions related to real
estate affected by the flooding. The
Board also adopted a temporary amendment to Regulation Z to make it easier
for borrowers in the major disaster areas
to waive their right to cancel certain
home-secured loans and thereby gain
ready access to loan funds.
Regulation E
(Electronic Fund Transfers)
In February the Board issued a proposal
to revise Regulation E to cover electronic benefit transfer (EBT) programs
established by federal, state, or local
government agencies. The types of
transfers covered by Regulation E
include transfers initiated through an
automated teller machine, point-of-sale
terminal, automated clearinghouse,
telephone bill-payment system, or
home banking program. EBT programs
involve the issuance of plastic access
cards and personal identification numbers to recipients of government benefits such as food stamps, Aid to Families
with Dependent Children, and Supplemental Security Income. Recipients gain
access to benefits through automated
teller machines and point-of-sale
terminals.
The proposal would primarily affect
government agencies that administer
EBT programs and would affect only
indirectly most depository institutions
and other private sector entities. The
Board proposed certain limited modifi


201

cations; in particular, periodic account
statements would not be required provided certain conditions are met, such as
giving the benefits recipient information
about the balance remaining in the
account. The Board expected to take
final action early in 1994.
Regulation DD (Truth in Savings)
In March the Board amended Regulation DD to carry out changes made to
the Truth in Savings Act by the Housing
and Community Development Act of
1992. The law extended the mandatory
date for compliance by three months,
giving institutions until June 21, 1993,
to comply. The law also modified the
advertising rules relating to signs on the
premises of an institution and made a
technical change to the provision dealing with notices to be given to existing
account holders.
In November the Board issued a proposal to revise Regulation DD. Under
the proposed revisions, the annual percentage yield would reflect not only the
effect of compounding but also the time
value of money for consumers who
receive interest payments during the
term of the account.
In December the Board issued a consumer pamphlet entitled Making Sense
of Savings. It describes various types of
deposit accounts available as well as the
account features that consumers should
compare, and it helps consumers understand the disclosures they receive.
Regulation M (Consumer Leasing)
The Board published an advance notice
of proposed rulemaking, announcing a
review of Regulation M pursuant to the
Board's policy of periodically reviewing its regulations. The Consumer Leasing Act requires lessors to provide
disclosures about consumer lease

202 80th Annual Report, 1993
transactions. The Board plans to review
the regulation to determine whether it
can be simplified and clarified to better
achieve the purposes of the act without
diminishing consumer protections.

Interpretations
In 1993 the Board continued to offer
legal interpretations and guidance on
Regulation Z (Truth in Lending) through
an official staff commentary. The purpose of the commentary is to help financial institutions and others apply the regulation to specific situations, and it is
updated periodically to address significant questions that arise.
In April the Board revised the commentary to address the interaction
between the Truth in Lending rules on
demand features and other federal rules
dealing with credit extended to executive officers of depository institutions.
The revisions provide greater flexibility
in complying with the disclosure requirements under Regulation Z in these
transactions. Other revisions clarify the
disclosure rules for security interests and
offer creditors alternative methods of
disclosing security interests in rescindable transactions.
As part of an ongoing commitment to
assist the public by providing interpretations of the Board's regulations, the
division's attorneys responded to more
than 14,000 telephone requests in 1993.
HMDA Data
The Home Mortgage Disclosure Act
(HMDA) requires covered mortgage
lenders in metropolitan areas to disclose
data regarding home purchase and home
improvement loans, including refinancings. Depository institutions and mortgage companies generally are covered if
they are located in metropolitan areas
and have assets of more than $10 mil


lion. Beginning January 1, 1993, independent mortgage companies with lower
assets are covered if they originated 100
or more home purchase loans in the
preceding calendar year. This new rule
on coverage implements a statutory
amendment contained in the Federal
Deposit Insurance Corporation Improvement Act that directed the Board to set a
new exemption standard for mortgage
companies comparable to the asset test
for depository institutions.
Covered lenders collect and submit to
their supervisory agency geographic information about the property involved
in a loan or a loan application. They also
report information about the disposition
of applications and, in most cases, about
the race or national origin, income, and
sex of applicants and borrowers. The
Board processes the data and prepares
disclosure statements on behalf of the
Department of Housing and Urban Development and member agencies of the
FFIEC—the Board, the Federal Deposit
Insurance Corporation, the National
Credit Union Administration, the Office
of the Comptroller of the Currency, and
the Office of Thrift Supervision.
The FFIEC prepared almost 29,000
disclosure statements for the more than
9,000 lenders that reported HMDA data
for 1992. In August 1993, individual
institutions made these disclosure statements public. The FFIEC also prepared
aggregate reports that contained data for
all lenders in a given metropolitan area;
these reports became available in October 1993 at a central depository in each
of the nation's 341 metropolitan areas.
In November the Board appeared
before the Senate Committee on Banking, Housing, and Urban Affairs and
presented analyses based on national
aggregates of the HMDA data. The 1992
data continue to show rates of credit
denial that are higher for black and Hispanic loan applicants than for Asian and

Consumer and Community Affairs 203
white applicants, even when applicants
are in the same income bracket. For
neighborhoods, the rate of loan denial
generally increased with an increase in
the proportion of minority residents.
Income is the one financial characteristic of applicants collected under
HMDA, and analysis shows that income
levels account for some, but not all, of
the variations in loan disposition rates
among racial groups: Even after controlling for income, the categories show that
white applicants for conventional home
loans in all income groups had lower
rates of denial than black or Hispanic
applicants did.
The data collected under HMDA do
not include the wide range of financial
and property-related factors that lenders
consider in evaluating loan applications.
Consequently, the data alone do not
provide a sufficient basis for determining whether a lender is discriminating
unlawfully. But when the data are combined with other information available
to the agencies, they are an important
tool for enforcement.
In evaluating compliance with fair
lending laws, bank examiners assess
mortgage decisions in the context of the
lending institution's underwriting standards. They look at a sample of approved and denied applications and
check whether an institution, in applying its lending criteria, has implemented
standards consistently and fairly, particularly in its treatment of minority applicants. When examiners find apparent
exceptions, they seek to determine
whether differences in the decision to
grant or deny credit have a legitimate
basis or whether they suggest discriminatory treatment that warrants further
investigation. Access to all of a lender's
files on loan applications and to related
information enables the agencies to
overcome many of the limitations of the
HMDA data regarding the assessment of



applicant creditworthiness and of property characteristics.
During 1993 the supervisory agencies
began using a new computer-based
system that helps examiners analyze
HMDA data more effectively and efficiently. The system, which the Board
developed in consultation with the other
agencies, enables examiners to design
and obtain specialized HMDA reports
that provide a more complete picture of
an institution's mortgage lending record
than was readily available in the past.
To facilitate use of the HMDA analysis
system by the other agencies, the Board
conducted four interagency training
sessions for examiners.
In recent months the Federal Reserve
System also has been testing a new fair
lending examination tool for examinations of large-volume mortgage lenders.
The use of this tool, which begins with
an analysis of HMDA Loan/Application
Register (LAR) data, employs statistical
techniques to determine the significance
of race in a bank's lending decisions.
Examiners supplement their analysis of
HMDA LAR data with other information related to the bank's credit decisions drawn from actual loan files. The
analysis of this additional information
enables examiners to identify specific
loan files for further review and discussions of credit decisions with bank
management.

Other Uses of HMDA Data
The expanded HMDA data are being
used to address a variety of public policy issues. In response to a directive in
the Housing and Community Development Act of 1992, the Board used the
1992 data to assess the risks and returns
associated with community development lending in low-income, minority,
and distressed neighborhoods as com-

204 80th Annual Report, 1993
pared with lending elsewhere.1 The
analysis suggested that no significant,
consistent relationship exists between
profitability and variables describing the
income or racial or ethnic composition
of a neighborhood. The study found
evidence suggesting that FHA-insured
loans and loans purchased by the Federal Home Loan Mortgage Corporation
(Freddie Mac) had somewhat higher
default rates among borrowers in lowincome neighborhoods.
Lenders covered by HMDA 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 both of the borrowers
whose loans are purchased by
secondary-market entities and of the
neighborhoods in which those borrowers reside.2
The Department of Housing and
Urban Development (HUD) uses the
expanded HMDA data as an important
database in carrying out its statutory
responsibilities to oversee the housing
activities of Freddie Mac and the Federal National Mortgage Association
(Fannie Mae). The information can be
used to help assess the success of efforts
made by government-sponsored entities
like Fannie Mae and Freddie Mac in
attaining goals established by HUD for
supporting loans to benefit low- and
moderate-income families and to
finance mortgages on properties in
central cities.
1. Board of Governors of the Federal Reserve
System, Report to the Congress on Community
Development Lending by Depository Institutions
(Board of Governors, October 1993).
2. See the discussion of data on the secondary
market in Glenn B. Canner, Wayne Passmore, and
Dolores S. Smith, "Residential Lending to LowIncome and Minority Families: Evidence from the
1992 HMDA Data," Federal Reserve Bulletin,
vol. 80 (February 1994), pp. 79-108.



HMDA data are also being used
extensively as one component of fair
lending examinations conducted by
HUD's Office of Fair Housing and
Equal Opportunity and by the Office of
Lender Activities in the Office of Housing. The data assist in targeting lenders
for further investigation; the data are
also used in HUD's investigation of specific allegations of lending discrimination filed with HUD or with certain state
or local agencies. HMDA data are also
being used as part of a large-scale investigation in three metropolitan areas
where HUD is testing fair lending compliance. In connection with these efforts,
HUD sponsored a major conference on
HMDA and fair lending in May 1993.

Community Affairs
During 1993 the Federal Reserve System's Community Affairs programs
focused on community development,
reinvestment, and fair lending and
developed programs to facilitate constructive responses beneficial to banks
and their communities. Increased resources devoted by the Board and the
Reserve Banks enabled the System to
respond to public concerns about possible discrimination in lending and bank
participation in community development
and reinvestment.
Helping financial institutions and
communities address fair lending issues
had high priority during 1993. Fair lending and the techniques banks can use to
ensure equal access to credit was a focus
of the educational programs of the
Reserve Banks, which included training
workshops, seminars, and major conferences. Concurrently, the Reserve Banks
developed new publications and educational materials to assist bankers and
others to better understand and respond
to fair lending concerns.

Consumer and Community Affairs 205
The Boston Reserve Bank developed
Closing the Gap: A Guide to Equal
Opportunity Lending, a publication
highlighting various techniques that
banks can use to help combat possible
discrimination in lending and to ensure
equitable treatment for loan applicants.
In conjunction with state bankers associations throughout New England, the
Boston Reserve Bank conducted statewide antidiscrimination workshops
based on the publication. Community
Affairs programs at the other Federal
Reserve Banks distributed more than
50,000 copies of Closing the Gap to
bankers and to community and civil
rights groups throughout the country.
The Board, with the Federal Reserve
Bank of Richmond, sponsored a meeting of Washington, D.C., bankers to discuss options for improving the fair lending programs of financial institutions.
For bankers and representatives of
community organizations, the Reserve
Banks of Kansas City, San Francisco,
and Dallas conducted multiple sessions
of seminars with a focus on fair lending
issues and antidiscrimination initiatives.
Promoting greater awareness of community development and reinvestment
opportunities for bankers and their communities was another major focus of the
System's Community Affairs program.
The System sponsored six regional
roundtables with representatives of depository institutions, nonprofit lending
organizations, multibank loan consortia,
and other intermediaries to gain more
insight into the risks and profitability of
community development lending and to
further the Board's congressionally
mandated study of such lending.3
The Board and the Reserve Banks
responded to numerous requests for
information and assistance from bankers
3. Board of Governors, Report to the Congress
on Community Development Lending.



and others interested in community
development investments by banks and
bank holding companies. The Board
revised and published its Directory of
Bank Holding Company Community
Development Corporations. The Board
also worked to address policy issues
concerning the community development
investment authority of state member
banks.
The Federal Reserve Bank of Philadelphia published Community Reinvestment Advocates, a compilation of profiles on the performance of financial
institution programs designed to meet
the credit needs of low- and moderateincome borrowers; featured programs
include those of individual financial
institutions, multilender consortia, nonprofit lenders, and other community
development finance partnerships and
intermediaries.
The Reserve Banks of St. Louis,
Atlanta, Richmond, Kansas City, and
San Francisco sponsored training programs on the Community Reinvestment
Act for bank directors and executive
officers. The Reserve Banks of Boston,
Cleveland, Atlanta, Chicago, Kansas
City, Dallas, and San Francisco sponsored and conducted workshops and
major conferences on affordable housing, community development finance,
small business, and rural development.
Overall, during 1993 the Reserve
Banks' Community Affairs programs
sponsored or cosponsored more than
175 conferences, seminars, and informational meetings on fair lending, community development, and reinvestment
topics. Staff members of the Board and
of the Reserve Banks made more than
300 presentations at other conferences,
seminars, and meetings sponsored by
banking, governmental, business, and
community organizations.
As part of the System's ongoing outreach efforts, several Reserve Banks

206 80th Annual Report, 1993
published profiles of targeted communities, identifying their reinvestment needs
and resources and the reinvestment
opportunities for bankers. These profiles
often helped stimulate collaboration
among local financial institutions and
community and business organizations
by identifying community credit needs
and possible community development
finance programs to respond to those
needs. The Richmond Reserve Bank
issued profiles highlighting community
development organizations and resources in Richmond and Lynchburg,
Virginia, and the San Francisco Bank
published a comprehensive community
profile for Las Vegas, Nevada. The
St. Louis Reserve Bank published a
profile on Evansville, Indiana.
During 1993, Community Affairs programs at the Reserve Banks were
increasingly in demand to provide technical assistance to bankers, community
organizations, and others on community
development and reinvestment issues.
Unlike educational and training programs, technical assistance is aimed at
helping develop specific program responses to recognized needs or, in many
cases, to assist individual institutions in
strengthening their CRA programs.
For example, the Federal Reserve
Bank of Atlanta, working extensively
with Minority Business Development
centers and local financial institutions,
helped develop large-scale loan programs to assist minority businesses in
Orlando, Florida, and Nashville, Tennessee. The Richmond Reserve Bank
completed a three-year effort to assist
the West Virginia Bankers Association
and the state banking commission in
forming a statewide multibank community development corporation that will
focus on small business development.
The Chicago Reserve Bank provided
technical assistance on CRA and community development finance options to



help several banks strengthen their CRA
programs.
Community Affairs programs also
expanded the reach of their newsletters,
which typically feature information on
community development lending programs and related CRA, HMDA, and
fair lending issues. The Federal Reserve
Bank of Kansas City published the inaugural issue of its Community Reinvestment newsletter, bringing to ten the
number of Reserve Banks that now publish such newsletters. The newsletters
reach more than 48,000 representatives
of financial institutions, community
organizations, local government agencies, and other interested parties.
The Board intensified its support during 1993 for the Federal Reserve System's supervisory responsibilities, particularly those involving CRA and fair
lending. The Board conducted a oneweek course on advanced CRA examination techniques for compliance
examiners, and it continued to instruct
consumer compliance examiners in the
conduct of community contacts and in
bank involvement in community development finance. The Board also significantly expanded its training on
affordable housing and community development project finance for commercial examiners. For example, the Board
conducted five half-day training sessions
on community development finance for
senior commercial examiners.

FFIEC and Other
Interagency Activities
The Federal Financial Institutions Examination Council (FFIEC) is the interagency coordinating body charged with
developing uniform examination principles, standards, and report forms. During 1993, its activities and the joint
efforts of its member agencies focused
intensively on fair lending and CRA

Consumer and Community Affairs 207
initiatives. Through improved data analyses, examiner training, and more effective coordination efforts, the agencies
continued to strengthen their capacity to
enforce fair lending laws.
In May the Chairman of the Federal
Reserve Board and the heads of each of
the other financial regulators issued a
joint letter stressing the agencies' concerns about discriminatory treatment in
the credit application process. The agencies reaffirmed their ongoing efforts to
refine and improve the fair lending
examination process. They urged financial institutions to be creative in designing fair lending programs, and suggested
positive actions that institutions could
take to ensure that minority applicants
are not discouraged from seeking credit
and that they are treated equitably during the application process.
In June the agencies issued an "Interagency Policy Statement on Fair Lending Initiatives" that outlined ongoing
antidiscrimination projects and initiatives being considered. These measures
include expanded training for examiners; fair lending seminars to make toplevel financial industry executives aware
of practices that may result in inequitable treatment of applicants; development of new methods of discrimination
detection; procedures that govern referrals of possible discrimination cases to
the Department of Justice; and program
improvements to ensure that complaints
involving discrimination are handled
effectively.
The agencies continued to work with
HUD to ensure proper disposition of
consumer complaints involving violations of the Fair Housing Act. Representatives of the FFIEC's member agencies
and HUD held discussions in August
and November on the implementation of
a memorandum of understanding that
took effect in June 1992. The memorandum sets out procedures to facilitate



cooperation between HUD and the other
agencies in complaint investigation and
to minimize duplication of effort.
In September the FFIEC received a
consultant's report with recommendations for improving fair lending examination procedures. The report covered
pre-examination planning, onsite examinations, and procedures suggested for
cases in which enforcement action is
indicated. The FFIEC member agencies
anticipated implementing key recommendations in 1994.
In March the FFIEC sponsored its
first national interagency conference on
consumer compliance. The conference
explored key examination issues and
updated senior compliance examiners
from each of the agencies on current and
prospective developments in consumer
banking law and regulation. Sessions
covered community reinvestment,
HMDA, fair lending, real estate appraisals, trends in community development
lending by banks, the Truth in Savings
regulation, and common regulatory
problems with adjustable rate mortgages. Speakers included recognized
leaders from the industry and senior staff
members from the supervisory agencies
and other federal agencies.
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
related to EFT services. In 1993 there
were no new requirements or changes in
the regulation, but because of continued
growth in the availability and use of
EFT services, the economic effects of
the act increased.
The act covers a large number of consumer accounts and financial institutions. In 1993, about three-fourths of all

208 80th Annual Report, 1993
households in the United States had one
or more EFT features on accounts at
financial institutions, and about twothirds of all banks and thrift institutions
offered EFT services. 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 6 percent, from
605 million in 1992 to 642 million
in 1993. During the same period the
number of installed ATMs rose about
9 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 more than half of
social security payments and about
two-thirds of federal salary and retirement payments made by direct deposit.
Although direct deposit in the private
sector is less common, 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 1993. The
number of transactions on POS systems
rose 43 percent, to 36.4 million a month,
and the number of POS terminals rose
68 percent, to 196,000.
The incremental costs associated
with the EFT act are difficult to quantify
because no one knows how industry
practices would have evolved in the
absence of statutory requirements. The
benefits of the law are also 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
1993, about 90 percent of depository
institutions examined by federal agencies were in full compliance with
Regulation E. Statistics indicate that the
institutions that are not in full compliance with the regulation generally had
fewer than five violations. The violations primarily involved the failure to
provide disclosures to consumers.
The Board's database of consumer
complaints and inquiries is another
source of information on potential problems. In 1993, fifty of the complaints
processed involved electronic transactions. The System forwarded thirty-three
complaints that did not involve state
member banks to other agencies for
resolution. Of the remaining seventeen
complaints, one involved a possible
violation of the act or regulation.
In February 1993 the Board published
for comment a proposal to expand coverage of Regulation E to the electronic
benefit transfer (EBT) programs of government agencies. The Board expressed
the view that recipients of electronic
benefit transfers were entitled to the
same protections as consumers who
obtain EFT services from financial institutions. Because EBT programs have
not yet extended much beyond the pilotprogram stage, the potential benefits of
the proposal are difficult to measure.
The costs of operating EBT programs
are currently about the same as those of
paper-based systems. The expansion of
EBT programs could be expected to
result in lower per-unit costs through
scale economies. The regulatory cost
that most concerns government agencies
that administer benefit programs is the
cost of Regulation E liability rules,
which limit the consumer's liability if

Consumer and Community Affairs 209
the consumer reports promptly when a
debit card is lost or stolen. The one EBT
pilot program that operates under Regulation E liability rules has recorded loss
rates no greater than those of financial
institiutions for electronic fund transfers
and lower than those of paper-based
food stamp programs and Aid to Families with Dependent Children. If the limited available evidence on the costs of
Regulation E to financial institutions can
be a guide, ongoing costs of the regulation seem unlikely to greatly inhibit
growth of EBT programs.
Compliance Examinations
Since 1977 the Federal Reserve System
has maintained a specialized examination program to ensure compliance by
state member banks with consumer protection laws. The consumer compliance
examination program is under the general direction of the Board's Division
of Consumer and Community Affairs
and consists of a consumer affairs unit
within each Federal Reserve Bank's
examination department. The Compliance Section of the Board's Division of
Consumer and Community Affairs is
responsible for reviewing and coordinating compliance activities, providing
Reserve Banks with the information and
assistance they need, and ensuring that
the Reserve Banks take a uniform
approach to compliance examinations.
The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded the Board's enforcement authority to include certain types of foreign
banking organizations.4 The System
4. The Federal Reserve System is responsible
for enforcing consumer laws for state-chartered
agencies and state-chartered uninsured branches
of foreign banks, commercial lending companies
owned or controlled by foreign banks, and organizations operating under section 25 or 25 (a) of the
Federal Reserve Act (Edge Act and agreement
corporations).



began conducting compliance examinations of foreign banking organizations
in the first quarter of 1992. The scope of
these examinations typically includes
the Equal Credit Opportunity Act, the
Home Mortgage Disclosure Act, the
Truth in Lending Act, the Fair Credit
Reporting Act, the Fair Debt Collection
Practices Act, the Electronic Fund
Transfer Act, the Federal Trade Commission Act, and the Expedited Funds
Availability Act. The degree to which
foreign banking organizations conduct
activities covered by these laws and regulations varies, but often these institutions conduct far fewer such activities
than a typical state member bank does.
During the 1993 reporting period,
from July 1, 1992, to June 30, 1993,
Federal Reserve examiners conducted
951 examinations for compliance with
the consumer laws: 644 for state member banks and 307 for foreign banking
organizations.
An important aspect of the Federal
Reserve's compliance program is examiner training for CRA, fair lending, and
consumer compliance. New examiners
attend the Board's three-week basic consumer compliance school, while examiners with eighteen to twenty-four
months of field experience attend the
Board's week-long advanced compliance school and the one-week class on
advanced techniques for CRA examinations. In addition, examiners receive
training in the HMDA data analysis
system.
A resident examiner program complements the Board's schools and provides
Federal Reserve examiners with an
opportunity to get a System perspective
by working at the Board for several
weeks; examiners observe how the division works, how policies are developed,
and how the Board interacts with the
other agencies that supervise financial
institutions. Examiner training is supple-

210 80th Annual Report, 1993
mented by the Reserve Banks through
regular departmental staff meetings and
through special training sessions such
as the FFIEC's 1993 senior examiner
conference.
During calendar year 1993 the Federal Reserve System conducted two
basic consumer compliance schools for
69 students, two advanced consumer
compliance schools for 39 students, four
HMDA data analysis system training
sessions for 270 students, and one
advanced CRA examination techniques
class for 25 students. Twenty examiners
participated in the resident examiner
program.
New classes are incorporated into the
System's training program when
needed. For instance, Board and System
staff began working on a fair lending
school for System examiners during
1993. The first sessions will be held in
1994.
The Board monitors the various
aspects of state member banks' compliance examination records through data
collected on the Consumer Affairs
Report of Examination Systems. During
1993 the Board expanded its computer
systems to better track detailed information on violations of Regulation B and
the Fair Housing Act.

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 Equal Credit Opportunity Act, the
Electronic Fund Transfer Act, the Truth
in Lending Act, and the Expedited
Funds Availability Act improved from
1992 levels while compliance with the
Consumer Leasing Act remained essentially unchanged. This section summa


rizes these data for the reporting period
of July 1, 1992, to June 30, 1993.5

Equal Credit Opportunity Act
(Regulation B)
The data from the Board, the Federal
Deposit Insurance Corporation (FDIC),
the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the
Office of Thrift Supervision (OTS) show
that the level of compliance with the
Equal Credit Opportunity Act (ECOA)
increased from 57 percent in the 1992
reporting period to 61 percent during
1992.6 The four agencies that were able
to provide the frequency of violations
(the Board, the NCUA, the OCC, and
the OTS) reported that, as in 1992,
77 percent of the institutions examined
that were not in full compliance with
Regulation B had between one and five
violations (the lowest frequency category). 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
• Follow the prescribed form of the
ECOA notice
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.
6. The percentage of institutions in full compliance with the regulations included in this report is
calculated using a straight average of the percentage of institutions in compliance as reported by
the five financial regulatory agencies.

Consumer and Community Affairs
• 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
• Note information for monitoring
purposes on the basis of visual observation or surname if applicants choose not
to provide it.
The Board issued four written agreements and one cease-and-desist order
involving violations of Regulation B.
Civil money penalties were assessed in
connection with Regulation B violations
found at one bank. The OTS issued six
supervisory agreements.
The Federal Trade Commission
(FTC) continued its enforcement efforts
under the ECOA. The FTC worked with
other government agencies and with
creditor and consumer organizations to
increase awareness of, and compliance
with, the ECOA. In 1993 the FTC, in
cooperation with the American Bar
Association, issued a new consumer
brochure entitled Credit and Divorce.
The Farm Credit Administration
(FCA) reported a satisfactory level of
compliance with the ECOA. The total
number of violations found as a result of
examinations and enforcement activities
decreased 35 percent from 1992 levels.
The other agencies that enforce the
ECOA—the Department of Transportation, the Interstate Commerce Commission, the Small Business Administration, the Packers and Stockyards
Administration of the Department of
Agriculture, and the Securities and
Exchange Commission—reported substantial compliance among the entities
they supervise.
Electronic Fund Transfer Act
(Regulation E)
The five financial regulatory agencies
reported that 90 percent of examined



211

institutions were in full compliance with
Regulation E, up from 85 percent in
1992. The following five rules were the
most frequently violated provisions of
Regulation E:
• Provide a notice of the procedures
for resolving alleged errors at least once
each calendar year
• Provide, in a timely manner, a written statement outlining the terms and
conditions of the electronic fund transfer service
• Provide a summary of consumers'
liability for unauthorized transfers
• Provide a statement with all information required for each monthly cycle
in which an electronic transfer occurred
• Investigate and resolve alleged
errors promptly.
The OTS issued two supervisory
agreements involving violations of Regulation E. The Board issued one written
agreement; civil money penalties were
assessed at one bank.
The Federal Trade Commission
reported ongoing litigation with one
telemarketing company that allegedly
failed to obtain written authorization
from consumers for preauthorized
transfers.

Consumer Leasing
(Regulation M)
The five financial regulatory agencies
reported finding substantial compliance
with Regulation M, which implements
the Consumer Leasing Act. As in the
1992 reporting period, more than 99 percent of examined institutions were found
to be in full compliance with the regulation. The violations that were noted by
the agencies involved the failure to
adhere to specific disclosure requirements in the regulation.

212 80th Annual Report, 1993
The Federal Trade Commission
issued one consent order during the
reporting period. That consent order
involved the failure to provide advertising disclosures required by Regulations
Z and M.

Truth in Lending Act
(Regulation Z)
The five regulatory agencies that supervise financial institutions reported that,
on average, 49 percent of examined
institutions were in full compliance with
Regulation Z, up from 44 percent in
1992. The Board, the FDIC, and the
OTS showed increases in compliance,
the OCC reported a slight decline, and
the NCUA reported no change. The
agencies able to provide the frequency of violations (the Board, the
NCUA, the OCC, and the OTS) reported
that 62 percent of the financial institutions not in full compliance had
between one and five violations, an improvement from the 57 percent reported
for 1992.
The most frequent violations of Regulation Z observed by the five regulatory
agencies involved the failure to accurately disclose the finance charge, the
annual percentage rate, the amount
financed, and the number, amounts, and
timing of payments scheduled to repay
the obligation; and the failure to provide Truth in Lending disclosures that
accurately reflected the terms of the
legal obligation.
The Board issued three written agreements and one cease-and-desist order
involving violations of Regulation Z;
civil money penalties were assessed at
one bank. The OTS issued thirteen
supervisory agreements, one cease-anddesist order, and one notice of charges.
Under the interagency enforcement policy on Regulation Z, a total of 426 institutions supervised by the Board, the



FDIC, the OCC, or the OTS refunded
$5.9 million on 28,786 accounts in
1993. In 1992, roughly $4.1 million had
been refunded on 23,967 accounts.
The Federal Trade Commission
issued a final consent order in a case
involving the failure to provide advertising disclosures required by Regulations
Z and M. The FTC also issued a final
consent order against a mortgage lender
that prohibited the lender from misrepresenting the terms or nature of lock-in
agreements offered to consumers in residential mortgage transactions.
Educating consumers and businesses
about their rights and responsibilities
continued to be an integral part of the
FTC's enforcement activities. In this
effort, the FTC issued a new publication
entitled Secured Credit Card Marketing

Scams and updated its publication
entitled Refinancing Your Home.
Other agencies found that the institutions they supervise had a satisfactory
level of compliance with Regulation Z.
The Department of Transportation
reported that its investigation of consumer inquiries about foreign and
domestic carriers resulted in the initiation of formal enforcement proceedings
against a travel agency and a charter
operator. The department initiated the
proceedings after finding violations that
involved credit practices with regard to
required refunds on air charters. The
Farm Credit Administration (FCA)
reported that violations decreased
11 percent from the 1992 reporting
period, and that no formal enforcement
actions were taken as a result of the
agency's examinations and enforcement
activities. The Packers and Stockyards
Administration of the Department of
Agriculture received no complaints, initiated no enforcement actions, and indicated its belief that the individuals and
firms it regulates are in substantial compliance with Regulation Z.

Consumer and Community Affairs 213

Community Reinvestment Act
(Regulation BB)
The Community Reinvestment Act
requires the Board to encourage financial institutions under its jurisdiction
to help meet the credit needs of their
entire communities, including low- and
moderate-income neighborhoods, in a
manner consistent with safe and sound
banking practices. The Board assesses
the CRA performance of state member
banks during regular compliance examinations and takes the CRA record into
account, along with other factors, when
acting on applications from state member banks and bank holding companies.
For enforcing and fostering better
bank performance under the CRA, the
Federal Reserve System maintains a
three-part program:
• Examinations of institutions to
assess compliance
• Dissemination of information on
community development techniques to
bankers and to the public through community affairs offices at the Reserve
Banks
• CRA analyses in 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
1993 reporting period (July 1, 1992,
through June 30, 1993), they conducted
627 examinations.7 When appropriate,
examiners suggested ways to improve
CRA performance.
During the 1993 reporting period,
96 banks received "outstanding" CRA
7. The foreign banking organizations supervised by the Federal Reserve System are not subject to CRA.



ratings, 485 received "satisfactory" ratings, 40 received "needs to improve"
ratings, and 6 received "substantial noncompliance" ratings. The Board issued
four written agreements and, in the case
of one bank, a notice of charges.
CRA Reform
A new CRA reform process, initiated at
the direction of President Clinton, dominated interagency activities during the
latter half of 1993. In July the President
asked the four supervisory agencies with
CRA responsibilities (the Board, the
FDIC, the OCC, and the OTS) to reform
the implementation of the CRA by
developing new regulations, supervisory
procedures, and standards for assessing
financial institutions' CRA performance.
The President also directed the agencies
to consult with community groups and
with the banking and thrift industries
during the reform process.
In August and September the agencies held seven public hearings to solicit
the views of the public and of financial
institutions across the country on specific ways in which the CRA regulations
could be revised to facilitate improved
performance by institutions while reducing their regulatory burdens. Hearings
were held in Washington, D.C.; San
Antonio; Los Angeles; Albuquerque;
New York City; Chicago; and Henderson, North Carolina. More than 250 witnesses representing financial institutions, community and civil rights
groups, government agencies, small
businesses, and the general public presented their views. Many others submitted written statements to the agencies.
After taking into consideration the
President's directive, the results of the
hearings process, and their own experience in administering the current CRA
assessment system, the Board and the
other agencies jointly proposed CRA

214 80th Annual Report, 1993
regulations, which they published concurrently in December. The agencies
anticipated issuing final regulations in
1994.
The proposed regulations would provide more direct guidance to financial
instututions on the nature and extent of
their CRA responsibilities and the
means by which their obligations will be
assessed and enforced. The proposal
seeks to emphasize performance rather
than process, to provide greater predictability and consistency in examinations,
and to reduce the compliance burden
on some institutions. Specifically, the
proposal would do the following:
• Create a new quantitative system
for assessing CRA performance, which
would include measurements for lending, services, and investments
• Require institutions to collect additional data for small business, small
farm, and certain consumer loans
• Allow for alternative bases of evaluation to try to minimize the regulatory
burden on institutions
• Establish a new approach to
enforcement that would subject institutions to full enforcement actions based
solely on their CRA rating.

Expedited Funds Availability Act
(Regulation CC)
The five financial regulatory agencies
reported that the level of compliance
with Regulation CC improved during
the 1993 reporting period: 74.1 percent
of examined institutions were in full
compliance with the act, compared with
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, 90 percent had between
one and five violations. The most fre


quently violated provisions of Regulation CC were the following:
• Provide next-day availability as
required for certain items
• Provide two-day availability for
local checks
• Train employees adequately 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 the prescribed procedures
for exceptions involving large deposits
• Provide fifth-day availability for
nonlocal checks.
The OTS issued one supervisory
agreement involving violations of Regulation CC. The Board issued two written
agreements and one cease-and-desist
order and assessed civil money penalties
against one bank.

Applications
During 1993, ninety-eight of the applications from banks and bank holding
companies that the Federal Reserve
reviewed and acted on involved adverse
CRA ratings or CRA protests. This compares with fifty-nine applications in
1992.8
Among the ninety-eight applications
acted on in 1993, forty-five were protested on CRA grounds; forty raised
adverse CRA rating issues; and thirteen
involved both protests and adverse
CRA rating issues. In comparison, the
previous year's fifty-nine applications
involved twenty that were protested
based on CRA grounds, thirty-one that
raised CRA rating issues, and eight that
involved adverse CRA rating issues and
protests.
8. Fifteen applications were pending at yearend 1993. Statistics for 1992 have been recalculated from those in last year's REPORT to reflect
only applications acted on during 1992.

Consumer and Community Affairs 215
The Board denied two applications on
CRA grounds. In February it denied the
application of Farmers & Merchants
Bank of Long Beach (California) to
establish a new branch and invest in
bank premises because of chronic deficiencies in the bank's regulatory compliance and CRA performance efforts. In
May the Board denied the application
of First Colonial Bankshares Corporation (Chicago) to acquire all the voting
shares of Hi-Bancorp, Inc. (Highwood,
Illinois) and GNP Bancorp, Inc. (Mundelein, Illinois). First Colonial's third
largest subsidiary bank (which represented approximately 10 percent of consolidated assets) had received two consecutive CRA ratings of "needs to
improve." There also had been allegations of discriminatory lending practices
and of the failure to address adequately
the credit needs of the subsidiary bank's
delineated community.
In November, by a vote of three to
three, the Board did not approve the
application of Shawmut National Corporation (Hartford and Boston) to acquire
New Dartmouth Bank (Manchester,
New Hampshire). The three Board
members voting against the acquisition

cited concerns about Shawmut's compliance with the Equal Credit Opportunity
Act and the Home Mortgage Disclosure
Act.
The Board approved two applications,
with dissents from Governor Lindsey
that were based on consumer-related
issues. One, involving the application of
First Interstate Bancorp (Los Angeles)
to acquire Cal Rep Bancorp, Inc.
(Bakersfield, California), was approved
in November. Governor Lindsey believed that the lead bank's performance
in mortgage lending and in community
outreach efforts to low- to moderateincome and minority neighborhoods was
deficient. In the second application,
approved in December, Fleet Bank of
New York (Albany) proposed to acquire
twenty-nine branches of Chemical Bank
(New York City). Governor Lindsey
based his dissent on managerial concerns related to Fleet's compliance with
consumer credit protection laws.
Complaints about State
Member Banks
The Federal Reserve investigates complaints against state member banks, and

Consumer Complaints to me Federal Reserve System Regarding State Member Banks
and Other Institutions, by Subject. 1993
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
Flood Insurance
Real Estate Settlement Procedures Act
Unregulated practices
Tbtal
1. Complaints against these institutions were referred
to the appropriate regulatory agencies.




State member
banks

Other
institutionsl

Total

93
17
19
100
2
19
20
5
4
2
1
823

67
33
22
197
4
32
90
15
0
0
3
894

160
50
41
297
6
51
110
20
4
2
4
1,717

1,105

1,357

2,462

216 80th Annual Report, 1993
forwards to appropriate enforcement
agencies complaints that involve other
creditors or businesses. In 1993 the Federal Reserve received 2,462 complaints:
2,120 by mail, 327 by telephone, and
15 in person. The Federal Reserve
investigated and resolved the 1,105
complaints that were against state member banks (see preceding table). The
System also received 1,976 oral and
written inquiries about consumer credit
and banking policies and practices. In
responding to these complaints and
inquiries, the Board and Federal Reserve
Banks gave specific explanations of

laws, regulations, and banking practices
and provided relevant printed materials
on the general issues.
A second table summarizes the nature
and resolution of the 1,105 complaints
against state member banks. About
63 percent involved loan functions:
10 percent alleged discrimination on a
prohibited basis, and 53 percent 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 24 percent
involved disputes about interest on

Consumer Complaints to the Federal Reserve System, by Function
and Resolution, 1993
Loans
Type of complaint
and resolution
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 dispute4
Possible bank violation5
Matter in litigation6
Customer error
Pending, December 31

Total

Discrimination

Deposits
Other

Electronic
fund
transfers

Trust
services

Other

22

1

11

9

0

0

1

134

5

88

24

0

3

14

465

62

222

114

9

12

46

156

12

100

31

2

0

11

49
89
44
14
15
20
97

3
2
1
2
1
0
10

29
51
19
6
3
12
46

10
27
19
0
8
8
19

0
1
2
1
0
0
2

0
1
1
1
2
0
2

7
7
2
4
1
0
18

1,105
100

99
9

587
53

269
24

17
2

22
2

111
10

Complaints referred to
other agencies

1,357

81

772

293

33

16

162

Total

2,462

180

1,359

562

50

38

273

Total, state member banks
Percent

1. The staff was unable, after follow-up correspondence
with the consumer, to obtain sufficient information to process
the complaint.
2. When it appears that the complainant does not understand the law and that there has been no violation on the part
of the bank, the Federal Reserve System explains the law in
question and provides the complainant with other pertinent
information.
3. The bank appears to be legally correct but has chosen to
make an accommodation.




4. Involves a factual dispute not resolvable by the Federal
Reserve System or a contractual dispute that can be resolved
only by the courts. Consumers wishing to pursue the matter
may be advised to seek legal counsel or legal aid or to use
small claims court.
5. The Federal Reserve determined that a state member
bank violated a law or regulation, and the bank took corrective
measures voluntarily or as indicated by the Federal Reserve.
6. Parties are seeking resolution through the courts.

Consumer and Community Affairs 217
deposits and general deposit account
practices. The remaining 13 percent
concerned disputes about electronic
fund transfers, trust services, and other
miscellaneous bank practices.
In March 1993 the President issued
an Interagency Policy Statement on
Credit Availability, which requires agencies to review their programs to ensure
that complaints are carefully scrutinized
and handled in a timely manner, particularly complaints involving discriminatory lending practices.
In response the Federal Reserve reviewed its complaint investigation program and took actions during 1993 to
strengthen and improve it, particularly
with respect to complaints alleging
illegal credit discrimination. These actions included implementing new policies and procedures to ensure thorough
analysis and prompt investigation of discrimination complaints, and developing
special analysis reports from the Board's
automated data system.
Under a new program, staff members
from the consumer complaint sections
of the Reserve Banks began working for
several weeks in the consumer complaint section of the Board at various
times during the year to become familiar
with operations in Washington; staff
members from ten Reserve Banks participated during the year.
In November 1993 the first annual
Consumer Complaint Officers and Managers Conference was held at the Board
to discuss issues, policy matters, and
procedures related to the function.
In addition, an interagency work
group met regularly at the Board in 1993
to identify and develop ideas to improve
consumer access to the agencies and
improve the ability of the agencies to
handle consumer concerns about the
financial services area. In December
1993 the work group submitted four initiatives for consideration by the FFIEC



Consumer Compliance Task Force: creating an interagency toll-free number
dedicated to fielding discrimination
complaints from consumers; developing
a joint brochure on consumers' rights
under the fair lending laws; establishing
toll-free numbers at each FFIEC agency
for receiving complaints and inquiries;
and improving the exchange of complaint data among the agencies.
During 1993 the Federal Reserve continued to refer to the Department of
Housing and Urban Development complaints alleging violations of the Fair
Housing Act as required by a memorandum of understanding between HUD
and the federal bank regulatory agencies
that became effective in June 1992. The
memorandum encourages cooperation
and coordination between HUD and the
bank regulatory agencies in the investigation of these complaints. In 1993 the
Federal Reserve referred fourteen complaints about state member banks to
HUD. The Federal Reserve's investigations of thirteen of these complaints
revealed no evidence of illegal discrimination; one complaint remained pending
at year-end.
The memorandum of understanding
requires HUD and the agencies to
meet at least annually to discuss issues
relating to its implementation. The first
meeting was held in August 1993, and a
second meeting was held in November.
Unregulated Practices
In 1993 the Board continued to monitor,
under section 18(f) of the Federal Trade
Commission Act, complaints about
banking practices that are not subject to
existing regulations to focus on those
that may be unfair or deceptive. Two
categories each accounted for 7 percent
or less of the 1,717 complaints: denial
of credit applications based on credit
history (122) and other miscellaneous

218 80th Annual Report, 1993
complaints (54). Each of these categories accounts for a small number (5 percent or less) of all consumer complaints
received by the System.
Many of the complaints about credit
denials based on credit history indicate
that applicants underestimated the
importance lenders give to a poor credit
history or a lack of borrowing experience when assessing the applicant's
creditworthiness. Complaints in the miscellaneous category covered a wide
range of issues such as bank fees and
services; tactics lenders employed to
collect late payments or outstanding
debts; or a lender's failure to close on a
mortgage loan by the agreed settlement
date.

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 1993 the
council considered a variety of topics
including impediments to the availability of small business credit, community development banks, secured
credit cards, and models for economic
development.
In March the council discussed issues
related to the Community Reinvestment
Act, including safe harbors for banks
rated "outstanding" to provide protection against protests on applications.
The council also recommended that the
current number of CRA ratings be
increased from four to five, with the
"satisfactory" rating replaced by two
ratings: "good" and "adequate." The



three other ratings ("outstanding,"
"needs to improve," and "substantial
noncompliance") would remain unchanged. The council adopted the
recommendation unanimously.
In June the council's Community
Affairs and Housing Committee reported on the Administration's proposal
to create a Community Development
Bank and Credit Fund to help finance
community development financial institutions (CDFIs); CDFIs include traditional depository institutions and community development corporations. The
proposal specified, and the committee
endorsed, four purposes of the proposal:
• Support institutions whose primary
mission is community development
• Recognize the important role private money will play in the success of
CDFIs and the importance of CRA
credit in attracting private investment in
CDFIs
• Recognize the diversity of local
CDFIs, which range from unions to loan
funds to commercial banks specializing
in development lending
• Apportion funds to CDFIs based on
their performance in meeting local community needs, for example, by making
loans and leveraging private money.
In the context of the proposed reform
of the CRA, the council's Bank Regulation Committee in October identified
thirteen elements as key to any CRA
reform proposal. Six elements pertained
to CRA activities by banks. The committee believed that evidence of willful
discrimination should result automatically in a CRA rating of "substantial
noncompliance" and that significant statistical imbalances in institutional lending patterns should result in a rating of
less than "satisfactory." The committee
supported a system in which banks
developed a CRA business plan with

Consumer and Community Affairs 219
quantifiable performance measures
against which their performance would
later be measured by the regulators.
The committee also believed that
regulators should determine the value
of such a plan based in part on the
amount of community outreach by
the bank, with performance assessed on
the "depth and breadth" of performance
on market share and variety of services offered. In the case of specialty
or wholesale banks, the committee
believed that assessment of CRA performance should be based on the value
of their targeted initiatives in lowand moderate-income and minority
communities.
The remaining elements pertained to
the regulators. The committee recommended that regulators meet regularly
with community groups, provide advance public notice of CRA examinations, and provide feedback from
community groups to the institutions.
Members also favored making CRA
public evaluations available at central
data depositories, where the HMDA data
are currently available. The committee
recommended that the four agencies
should provide training and basic experience for their examiners in all aspects
of the examination process; create a
tiered structure for CRA examinations
that contains more cost-effective requirements for small community banks;
and create a five-tiered system of CRA
ratings.
Roundtable discussions, known as the
Members Forum and held at each council meeting, gave council members the
opportunity through the year to offer
their views on visible signs of an economic recovery within their industries
or local economies. During the year, the
council also considered "secured"
credit cards (with credit lines fully
backed by consumer deposits) and discussed actions that could reduce the



regulatory burden associated with the
Board's consumer protection rules.
Testimony and Legislative
Recommendations
The Board testified on matters relating
to the 1992 HMDA data, the status of
the Community Reinvestment Act,
bank-related community development
corporations and other types of community development equity investments,
the Home Ownership and Equity Protection Act of 1993, the Small Business
Loan Securitization and Secondary Market Enhancement Act, the challenges
that face banks in meeting the service
and credit needs of low-income and
minority communities, and the Community Development Secondary Market
Development Act.
Credit Discrimination
in Mortgage Lending
In February the Board testified before
the Senate Committee on Banking,
Housing, and Urban Affairs on credit
discrimination in mortgage lending on
its own behalf and on behalf of the
FFIEC. The Board noted the implementation of a system that has increased the
agencies' ability to analyze HMDA data
for purposes of fair lending and CRA
enforcement; cooperation with the
Justice Department to target banks for
fair lending examinations when HMDA
data suggest disparate treatment by the
banks of minority mortgage loan applicants; the referral of consumer complaints alleging violations of the Fair
Housing Act to HUD and to the Department of Justice; formal enforcement
actions, including assessment of civil
money penalties, to enforce compliance
with consumer protection laws, including the prohibitions against credit discrimination based on marital status, age

220 80th Annual Report, 1993
and race; and the denial by the Board
of three applications in the past two
years primarily because of poor CRA
performance.
In September the Board testified
before the House Committee on Banking, Finance and Urban Affairs about
the challenges that face banks in meeting the service and credit needs of lowincome and minority communities. The
hearing was held in Prince George's
County, a Maryland suburb of Washington, D.C.
In November the Board testified
before the Senate Committee on Banking, Housing, and Urban Affairs on the
results, of the 1992 HMDA data, the
Board's fair lending enforcement
efforts, and its examination process.
Community Reinvestment Act
In February the Board testified before
the House Committee on Banking,
Finance and Urban Affairs concerning
the status of CRA. The Board discussed
several issues relating to the act, including supervisory agency roles and
actions, examination improvements,
expanded educational and technical
assistance, effects on applications, and
discrimination and home mortgage
lending.
In October the Board testified before
the House Committee on Banking,
Finance and Urban Affairs on current
efforts of the agencies to strengthen and
improve the administration of CRA.

Other Testimony
In February the Board testified before
the House Committee on Banking,
Finance and Urban Affairs about the
Board's perspective on bank-related
community development corporations
(CDCs) and other types of community
development equity investments. The



Board's testimony focused on the role
of banks in community development,
the special role for CDCs, legal and
regulatory issues, characteristics of
CDCs, and types of community development investments.
In May the Board testified before the
Senate Committee on Banking, Housing, and Urban Affairs concerning the
Home Ownership and Equity Protection
Act of 1993. The bill would amend the
Truth in Lending Act to require additional disclosures to consumers who
take out "high-cost mortgages" on their
homes and would restrict the terms of
such mortgages.
In September the Board testified
before the Senate Committee on Banking, Housing, and Urban Affairs on the
Small Business Loan Securitization and
Secondary Market Enhancement Act
(S.384), which sought to increase the
availability of credit to small businesses
by facilitating the securitization of
small business loans. The Board's testimony was generally supportive of the
legislation.
Recommendations
of Other Agencies
Each year the Board asks the agencies
with enforcement responsibilities under
Regulations B, E, M, Z, and CC for
recommendations of changes to the regulations or the underlying statutes. They
had no recommendations in 1993.
•

221

Litigation
During 1993 the Board of Governors
was named in twenty-two lawsuits,
compared with seventeen in 1992. Fourteen new lawsuits were filed in 1993,
none of which raised questions under
the Bank Holding Company Act. As of
December 31, 1993, seventeen cases
were pending.

Bank Holding Company A c t Review of Board Actions
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. On June 4,
1993, the Court of Appeals denied the
petition for review (994 F.2d 1441).

Litigation under the Financial
Institutions Supervisory Act
In Board of Governors v. Ghaith R.
Pharaon, No. 91-CIV-6250 (S.D. New
York, filed 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 CBC, Inc. v. Board of Governors,
No. 92-9572 (10th Circuit, filed December 2, 1992), petitioners sought review



of a civil money penalty assessment
against a bank holding company and
three of its officers, directors, and
shareholders for failure to comply with
reporting requirements. The Board's
order was affirmed by the Court of
Appeals on November 30, 1993.
First National Bank of Bellaire v.
Board of Governors, No. H-93-1708
(S.D. Texas, filed June 8, 1993), is an
action to enjoin possible enforcement
actions by the Board of Governors and
other bank regulatory agencies. The case
is pending.
Board of Governors v. Oppegard,
No. 93-3706 (8th Circuit, filed November 1, 1993), is an appeal of a District
Court order ordering appellant Oppegard to comply with a prior order
requiring compliance with a Board civil
money penalty order. The case is
pending.
Board of Governors v. DLG Financial
Corp., Nos. 93-2944 and 94-20013
(5th Circuit, filed December 14 and
December 31, 1993), is an appeal from
orders, obtained by the Board, that
freeze appellants' assets pending administrative adjudication of civil money
penalty assessments by the Board. In a
related case, DLG Financial Corp. v.
Board of Governors, No. 94-10078
(5th Circuit, filed January 20, 1994),
appellants appeal the District Court dismissal of their action to enjoin the Board
and the Federal Reserve Bank of Dallas
from taking certain enforcement actions,
and for money damages on a variety of
tort and contract theories.
In addition, in a case in which the
records are sealed pursuant to a court
order, a former officer of a foreign bank
appeals a suspension order that the

222 80th Annual Report, 1993
Board issued against him. The case has
been stayed.

Other Actions
In Fields v. Board of Governors, No.
3:91CV069 (N.D. Ohio, filed February 5, 1991), the plaintiff appealed the
Board's denial of a request under the
Freedom of Information Act. On June
23, 1992, the Board's motion for summary judgment was granted in part, and
its motion to dismiss was denied. On
January 15, 1993, the action was
dismissed.
In In re Subpoena Served Upon the
Board of Governors of the Federal
Reserve System, Nos. 91-5427, 91-5428
(D.C. Circuit, filed December 27, 1991),
the Board appealed 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 for the
production of confidential examination
material to a private litigant. The subpoena was issued in a shareholder
derivative suit against the Fleet/Norstar
Financial Group. On June 26, 1992, the
Court of Appeals affirmed the District
Court order in part, but it held that the
bank examination privilege was not
waived by the agencies' provision of
examination materials to the examined
institution. The case was remanded for
further consideration of 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.
In re Subpoena Duces Tecum, Misc.
No. 92-0375 (D. District of Columbia,
filed August 25, 1992), is another sub


poena enforcement case in which plaintiffs seek bank examination reports and
other supervisory material in connection
with a shareholder derivative suit. On
February 25, 1993, the District Court
denied enforcement and upheld the
claim of privilege by the Board and the
Federal Deposit Insurance Corporation.
The case was appealed, and on December 28, 1993, the Court of Appeals for
the D.C. Circuit remanded the matter to
the District Court for further findings on
the privilege issue. The case is pending.
In U.S. Check v. Board of Governors,
No. 92-2892 (D. District of Columbia,
filed December 30, 1992), plaintiff
sought review of the denial of its request
under the Freedom of Information Act.
The case was dismissed by stipulation
on November 9, 1993.
In Sisti v. Board of Governors, No.
93-0033 (D. District of Columbia, filed
January 6, 1993), the plaintiff challenged a Board staff interpretation with
respect to margin accounts. The Board's
motion to dismiss was granted on
May 13, 1993, and on October 14, 1993,
dismissal was summarily affirmed by
the Court of Appeals for the District of
Columbia Circuit.
In Adams v. Greenspan, No. 93-0167
(D. District of Columbia, filed January 27, 1993), the plaintiff, a former
employee, alleges a violation of the
Civil Rights Act of 1964 and the Rehabilitation Act of 1973 concerning termination of employment. The case is
pending.
In Amann v. Prudential Home Mortgage Co., et al, No. 93-10320 WD
(D. Massachusetts, filed February 12,
1993), plaintiff alleges fraud and breach
of contract arising out of a home mortgage. The case is pending.
In Ezell v. Federal Reserve Board,
No. 93-0361 (D. District of Columbia,
filed February 19,1993), plaintiff sought
damages for personal injuries arising

Litigation 223
from a motor vehicle collision. The case
was dismissed on the Board's motion on
July 30, 1993.
In Bennett v. Greenspan, No. 9 3 1813, (D. District of Columbia, filed
April 20, 1993), plaintiff alleges employment discrimination. The case is
pending.
In Kubany v. Board of Governors,
et ai, No. 93-1428 (D. District of
Columbia, filed July 9, 1993), the plaintiff challenges a Board determination
under the Freedom of Information Act.
The case is pending.
In re Subpoena Duces Tecum, Misc.
No. 93-261 (D. District of Columbia,
filed August 17, 1993), is a subpoena
enforcement case in which plaintiffs
seek examination and other supervisory
material in connection with a shareholder derivative action against a bank
holding company. The case is pending.
Richardson v. Board of Governors,
et al, No. 93-C836A (D. Utah, filed
August 30, 1993), is an action for damages and injunctive relief against the
Board and other parties for alleged constitutional and statutory violations
caused by issuance of Federal Reserve
notes. The case is pending. A similar
case filed in Utah state courts, Scott v.
Board of Governors, No. 930905843CV
(District Court, Salt Lake County, Utah,
filed October 8, 1993), is also pending. •




225

Legislation Enacted
The 1993 federal legislation that directly
affects the Federal Reserve System or
the institutions it regulates includes the
Government Securities Act Amendments of 1993, the North American Free
Trade Agreement Implementation Act,
the Omnibus Budget Reconciliation Act
of 1993, an act relating to unclaimed
insured deposits, and the Depository Institutions Disaster Relief Act of 1993.
Government Securities Act
Amendments of 1993
The Government Securities Act Amendments of 1933, Public Law 103-202,
was enacted on December 17, 1993.
Title I augments the scope of regulation
of the government securities market, and
title II relates to the auction procedure.
Title I
Title I amends the government securities provisions of the Securities
Exchange Act of 1934 to extend the
rulemaking authority of the Department
of the Treasury, require transaction
records and large position reporting,
prohibit fraud and manipulation, regulate sales practices, require disclosure
by government securities dealers and
brokers that are not financial institutions if their accounts are not insured
by the Securities Investor Protection
Corporation, and obtain studies and
reports on the act's success in furthering
transparency.
Under the Government Securities Act
of 1986, Treasury had authority to write
rules related to capital adequacy, financial responsibility, recordkeeping, reports, audits, customer protection, secu


rities custody requirements, and transfer
and control of government securities
subject to repurchase agreements. The
1993 amendments extend this authority,
which had expired October 1, 1991, and
make it permanent.
The amendments also require every
government securities dealer and broker
to furnish on request sufficient transaction records for the Securities and
Exchange Commission (SEC) to reconstruct trading in a government security
under investigation. The SEC, however,
may not request information not otherwise required by law or customary business practice, must consult with the
appropriate regulator on information to
be requested, and may not obtain examination reports.
In addition, the SEC is not to request
of government securities dealers or
brokers information obtainable from the
Federal Reserve Bank of New York.
Requested information is to be furnished
to the SEC directly, to the New York
Reserve Bank, or to the appropriate regulatory agency. The Board is the appropriate regulatory agency for state member banks; for foreign banks, their
commercial lending companies, state
agencies, and uninsured state branches;
for foreign branches or affiliates of
national banks; and for Edge Act
corporations.
The 1993 amendments authorize
Treasury to adopt rules requiring holders of large positions in to-be-issued or
recently issued government securities to
file reports enabling Treasury to monitor
the impact of such concentrations of
position and authorize the SEC to enforce the provisions of title I. Treasury,
however, must take into account the

226 80th Annual Report, 1993
need for market liquidity and efficiency
and the cost to taxpayers of funding the
federal debt. Large positions include any
position that would allow its holder to
manipulate the supply, price, or cost of
financing of an issue or the portion
thereof available for active trading.
Treasury may also impose recordkeeping requirements to ensure that such
holders can comply with these reporting
requirements and may exempt any person or class of person from them. The
reports are to be filed with the New
York Reserve Bank as agent for Treasury, and the Reserve Bank is to provide
them to the SEC. The reports are confidential for Freedom of Information Act
purposes, but congressional requests,
legitimate requests from other agencies,
and court orders are to be fulfilled.
The 1993 amendments subject government securities dealers and brokers
to the prohibitions in the Securities
Exchange Act of 1934 on manipulative
activities (including fictitious quotations) to effect or induce a government
securities trade if the activities involve
use of the mails or other instrumentalities of interstate commerce. The SEC
must consult with Treasury before
adopting rules under this provision, but
Treasury does not have a veto over such
rules.
The amendments also grant rulemaking authority over sales practices to the
appropriate regulatory agencies and registered securities associations. For financial institutions, which include banks,
foreign banks, and savings institutions,
these agencies may adopt rules to prevent fraudulent and manipulative acts
and practices and to promote just and
equitable principles of trade. For government securities dealers and brokers,
the amendments remove prior limitations on the ability of registered securities associations to adopt rules applicable to government securities, subject to



SEC approval. The appropriate regulatory agencies and the SEC are to consult
with Treasury before adopting or approving such rules; but they may implement them, even if Treasury believes the
rules would adversely affect liquidity or
impose burdens on competition, if they
find them necessary.
Although the amendments are generally limited to secondary market trading
and specifically do not apply to the
issuance of government securities, these
provisions would apply to any resale by
a dealer even if part of the initial distribution. In addition, in a separate provision, the amendments prohibit false or
misleading written statements or omissions by any government securities
dealer or broker or any other bidder in
connection with any bid or purchase
related to any issuance of government
securities.
Under the Government Securities Act
of 1986, all government securities dealers and brokers that are not financial
institutions and not already registered
with the SEC as broker-dealers in other
securities are required to register with
the SEC as government securities dealers or brokers. Title I of the amendments requires any such government
securities dealer or broker that is not a
member of the Securities Investor Protection Corporation to follow such rules
as the SEC shall prescribe to assure
disclosure to its customers that their
accounts are not covered.
The amendments change somewhat
the Board's jurisdiction with respect
to government securities dealers and
brokers. Previously the Board was the
appropriate regulatory agency for all
state branches of foreign banks; under
title I, the Board is the agency for uninsured state branches of foreign banks,
and the FDIC becomes the agency for
insured state branches. The Board
also becomes the regulatory agency for

Legislation Enacted 227
foreign branches and affiliates of U.S.
banks, including agreement corporations, and for Edge Act corporations;
previously the SEC had supervisory
responsibility for their government securities activities.
Title I requires Treasury, the Board,
and the SEC to evaluate in a joint study
the regulations promulgated under the
amendments for their effectiveness and
impact on market efficiency and
liquidity. The study must also evaluate
the effectiveness of surveillance and
enforcement and the extent to which
they are affected by the availability
of automated, time-sequenced trade
data. The three agencies must make
recommendations to the Congress by
March 31, 1998, concerning the regulation of dealers, the dissemination of
quotation and trade information, and the
prevention of abusive sales practices.
Also with a view to promoting transparency, title I makes changes in the
annual report the SEC sends to the
Congress under the 1934 act. The SEC
report is to annually review the steps
taken to promote the timely, nondiscriminatory dissemination of quotation and
transactions data and make recommendations to assure the availability of
high-bid and low-offer price and size
information.
Finally, in consultation with the SEC,
Treasury is to study the continuing need
for, and consequences of, a separate regulatory system for government dealers
registered with the SEC and report its
recommendations to the Congress
within eighteen months of enactment.
Title II
Title II requires, among other things, the
Secretary of the Treasury to notify the
Congress of any significant modification
to Treasury auction procedures, requires
modification of the system to accept



computer-generated tenders, and prohibits discrimination by the Secretary
among government dealers. It also
requires that meetings of the Treasury
Borrowing Advisory Committee of the
Public Securities Association be open to
the public but permits closed meetings
at the recommendation of Treasury, prohibits members from discussing closed
meetings except with other members or
Treasury personnel, and prohibits the
committee or its members from giving
gratuities to employees of Treasury or
the Federal Reserve System.

North American Free Trade
Agreement Implementation Act
The North American Free Trade Agreement Implementation Act, Public Law
103-182, was enacted on December 8,
1993. It implements the North American
Free Trade Agreement (NAFTA), but
only to the extent consistent with prior
laws of the United States.
The parties to NAFTA are the United
States, Canada, and Mexico. Its financial services chapter covers financial
institutions, investment in such institutions, and cross-border trade in financial
services. The chapter generally requires
each party to grant both national treatment and most-favored-nation treatment
to financial service providers and investors of the other parties.
NAFTA's provisions do not apply to
existing federal, state, or provincial
measures that are identified and set forth
(reserved) in the Annex to NAFTA. In
addition, each party may adopt reasonable new prudential measures, including
measures to protect consumers of financial services, to maintain the soundness,
integrity, and financial responsibility of
financial market participants, and to
ensure the integrity and stability of the
financial system.

228 80th Annual Report, 1993
No U.S. banking laws were changed
by NAFTA; statutes and other measures
that do not conform to U.S. obligations
under NAFTA were reserved. Thus,
Canandian and Mexican banks in the
U.S. will continue to be subject to existing U.S. laws and regulations. The
United States will allow certain Mexican financial groups a period of five
years from the date each became subject
to U.S. law to conform their existing
U.S. securities activities to U.S. legal
requirements; this provision will be
implemented through administrative
action by the Board under section
4(a)(2) of the Bank Holding Company
Act. Subject to market share restrictions
during a six-year transition period,
Mexico will allow U.S. and Canadian
banks to establish and operate banking
and certain other financial services
subsidiaries.

Omnibus Budget Reconciliation
Act of 1993
The Omnibus Budget Reconciliation
Act of 1993, Public Law 103-66, was
enacted on August 10, 1993. Title III
creates a national depositor preference
and requires the transfer of certain Federal Reserve surpluses.
For insured depository institutions for
which a receiver is appointed, section
3001 of the act amends the Federal
Deposit Insurance Act to require that
depositors be paid after secured claims
and after the administrative expenses of
the receiver but before any general or
senior liability. Previously, when distributing the assets of a failed national bank
or a state bank in a state without a
depositor preference law, the Federal
Deposit Insurance Corporation (FDIC)
or the Resolution Trust Corporation as
receiver paid depositors on a pro rata
basis with general or senior creditors.
Depositor preference may reduce the



FDIC's losses because the FDIC as
insurer is subrogated to the claims of
insured depositors; but depositor preference also subordinates depositors at
foreign branches and other general or
senior creditors including sellers of
federal funds and counterparties in
off-balance-sheet transactions such as
derivatives transactions. This provision
supersedes inconsistent state laws,
including those in the many states with
depositor preference laws, to the extent
of any inconsistency; the FDIC will
determine, subject to judicial review,
whether any such inconsistency exists.
Section 3002 amends section 7 of the
Federal Reserve Act to require transfers
from the surplus funds of the Reserve
Banks to the Board and thence to
Treasury. These transfers will amount
to $106 million in fiscal 1997 and
$107 million in fiscal 1998, in addition
to all surplus in excess of 3 percent of
the paid-in capital and surplus of the
member banks. Previously, all surplus in
excess of such 3 percent was so transferred by the Reserve Banks pursuant to
Board policy, while the 3 percent was
retained by the Reserve Banks for capital purposes. Reserve Banks are prohibited from replenishing their reserve
funds by the amount of any such additional transfer during fiscal years 1997
and 1998.

Unclaimed Insured Deposits
An Act to Amend the Federal Deposit
Insurance Act to Improve Procedures
for Treating Unclaimed Insured Deposits, Public Law 103-44, was enacted
June 28, 1993. Within thirty days of
initiation of payment by the FDIC to
insured depositors of an institution in
default, the FDIC must, under section 1
of the act, notify insured depositors, at
the last known address on the institution's records, that they must claim

Legislation Enacted 229
payment from the FDIC or the transferee institution. The FDIC must send a
second notice to depositors who have
not claimed their deposits within fifteen
months of the FDIC's initiation of
payment.
After eighteen months, the transferee
shall refund any unclaimed deposits to
the FDIC and be relieved of liability;
such deposits shall be distributed to the
depositors' states of residence for custody, except that federal deposits shall
be given to Treasury. If the deposit
remains unclaimed for ten years, it
becomes the property of the FDIC.
Depositor.} institutions Disaster
Relief Act of 1993
The Depository Institutions Disaster
Relief Act of 1993, Public Law 103-76,
enacted on August 12, 1993, permits the
Board to make exceptions to the Truth
in Lending and Expedited Funds Availability acts within major disaster areas,
including those eligible because of the
1993 flooding of the Mississippi River.
The permission to make exceptions lasts
240 days from enactment and the exceptions must expire by October 1, 1994.
Bank regulatory agencies may also
allow federally insured depository institutions that are located in disaster areas
to subtract deposits attributable to qualified insurance proceeds from their assets
in calculating leverage limits for capital
adequacy purposes; the institutions must
have been adequately capitalized before
the disaster, and the • exception must
expire by April 1, 1995.
In order to facilitate recovery from a
major disaster, bank regulatory agencies
may also suspend certain administrative
law provisions, including requirements
for notice or hearing or time limits with
respect to agency action, and for publication to establish branches. The act
requires Treasury to report within eigh


teen months on how the bank regulatory
agencies used their authority under the
act and whether it should be extended. •

231

Banking Supervision and Regulation
Economic conditions in 1993 were generally favorable for the banking industry. Earnings for the industry substantially exceeded the record of 1992,
largely as a result of further improvements in asset quality and the continuation of historically wide net interest margins. The industry also made further
progress in expanding its fee-based
income, reflecting increased sales of
mutual funds and continued growth of
transactions in derivative instruments
(futures, forwards and options contracts
and swap agreements). Earnings were
also bolstered by profits obtained from
foreign exchange and securities trading
activities and by relatively large gains
on sales of securities from investment
portfolios.
The number of commercial bank failures in the country declined again, to
forty-one, the lowest level since 1983,
and at year-end the number of problem
banks and the volume of assets held by
these banks were down substantially
from the levels of the previous year. The
equity capital of the industry grew to its
highest level relative to assets since
1963, primarily through the retention
of a large portion of the year's strong
earnings.
Despite the industry's general
strength, pockets of weakness persisted,
particularly in Southern California and
New England, where many banks continued to have asset quality problems.
The majority of commercial bank failures for 1993 occurred in these areas.
One important effect of the recent
solid performance of banks has been the
alleviation of difficulties faced by some
creditworthy borrowers, particularly
small businesses, in obtaining bank



loans. In addition, the Federal Reserve
and the other federal banking agencies
continued their programs, begun in late
1991, to reduce regulatory impediments
to the availability of credit. By the end
of the year, reports seemed to suggest
that banks generally were seeking to
promote growth in loans to both business and household borrowers and were,
to some extent, relaxing their credit
standards.
During 1993, the substantial and
growing involvement of banks and other
financial firms in derivative markets
attracted considerable attention. The
Federal Reserve responded to a number
of inquiries from the Congress concerning the involvement of banking institutions in derivative markets. It also issued
guidance to examiners and field tested a
comprehensive trading activities manual
setting forth procedures for evaluating a
banking organization's derivatives and
trading activities.
The growth in mutual funds sales by
banks raised concerns that customers
may not understand that mutual funds
are not federally insured deposits. In
June the Board issued a supervisory letter to state member banks on this issue,
and, shortly after the end of the year, the
Board in coordination with the other
federal banking agencies issued guidance on mutual funds.
Risk-based capital standards, based
upon a framework adopted internationally in 1989, were fully phased-in at the
start of 1993. In addition, the Federal
Reserve, along with other banking
agencies, took steps to augment and
strengthen the risk-based standards during 1993 in the areas of market risk
and interest rate risk. The Board also

232 80th Annual Report, 1993
addressed rules on risk contained in the
Federal Deposit Insurance Corporation
Improvement Act of 1991 and continued the process of implementing title II
of that law, the Foreign Bank Supervision Enhancement Act of 1991.

Scope of Responsibilities for
Supervision and Regulation
The Federal Reserve is the primary federal supervisor and regulator of all U.S.
bank holding companies and of statechartered commercial banks that are
members of the Federal Reserve System. In overseeing 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, securities clearing activities, and securities underwriting and
dealing through special subsidiaries.
The Federal Reserve is also responsible for the supervision of (1) all Edge
Act and agreement corporations, (2) the
international operations of state member
banks and U.S. bank holding companies,
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.



and (3) the operations of foreign banking companies in the United States.2 The
Foreign Bank Supervision Enhancement
Act of 1991 increased the Federal
Reserves' s authority over the establishment, examination, and termination of
branches, agencies, commercial lending
subsidiaries, and representative offices
of foreign banks in the United States.
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 for state member
banks, and the Change in Bank Control
Act for bank holding companies and
state member banks. Also, the Federal
Reserve is responsible for imposing
margin requirements on securities transactions. In carrying out these responsibilities, 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.
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 exports.

Banking Supervision and Regulation 233
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 1993, 972 state-chartered
banks belonged to the Federal Reserve
System, an increase of 15 from the yearend 1992. These banks represented
about 9 percent of all insured commercial banks and held about 19 percent of
all insured commercial bank assets.
Federal Reserve guidelines call for
state member banks to be examined
annually by either a Reserve Bank or
state banking agency. Large or troubled
banks must be examined annually by a
Reserve Bank.3
In conformance with Federal Reserve
guidelines and the requirements of the
Federal Deposit Insurance Corporation
Improvement Act of 1991, all state
member banks were examined at least
once in 1993. Altogether, the Reserve
Banks conducted 773 examinations
(some of them jointly with the state
agencies), and state banking departments conducted 284 independent ex3. Beginning in 1994, the Federal Deposit
Insurance Corporation Improvement Act of 1991
will require full-scope, on-site examinations during each twelve-month period for all depository
institutions except well-capitalized and wellmanaged banks (CAMEL 1 rating), which may be
examined every eighteen months.



aminations. Also, in conformance with
Federal Reserve guidelines, Reserve
Bank officials held 244 meetings with
directors of large state member banks
and those state member banks that displayed significant weaknesses.
Bank Holding Companies
At the end of 1993 the number of bank
holding companies was 6,111, a decline
of 237 from the preceding year. These
organizations controlled about 8,100
insured commercial banks that held
approximately 90 percent of the assets
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 selected for inspection on
a sample basis; medium-sized companies ($150 million to $500 million in
assets) 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 refer to the examination reports of the federal and state
banking authorities that have primary
responsibility for the supervision of
these banks. In 1993, the Federal
Reserve inspected 1,922 bank holding
companies. Altogether, Federal Reserve
examiners conducted 2,146 inspections
and state examiners conducted 63 independent inspections. The assignment of
examiners to work on industry problems
and major mergers and acquisitions in
1993 required that inspections of 50
bank holding companies be deferred to
1994. During 1993, Reserve Bank officials held 465 meetings with the boards

234 80th Annual Report, 1993
of directors of bank holding companies
to discuss supervisory concerns.

Enforcement Actions,
Civil Money Penalties, and
Significant Criminal Referrals
In 1993 the Federal Reserve Banks recommended, and members of the Board's
staff initiated and worked on, 179 formal enforcement cases involving 468
separate actions such as written agreements, cease-and-desist orders, removal
and prohibition orders, and civil money
penalties. Of these, 65 cases involving
138 actions were completed by yearend. Of particular note was the completion of several actions relating to the
Board's extensive investigation of matters involving the Bank of Credit and
Commerce International; these actions
included orders requiring restitution of
$188 million and the assessment of more
than $45 million in fines. The Board
assessed a $400,000 fine against a foreign bank for its failure to maintain adequate Bank Secrecy Act compliance
procedures.
All final enforcement actions issued
by the Board of Governors and all written agreements executed by the Federal
Reserve Banks in 1993 are available to
the public. In addition to formal enforcement actions, the Federal Reserve Banks
initiated and worked on 261 informal
enforcement actions and completed 221
of them through instruments such as
memorandums of understanding with
state member banks, bank holding companies, and foreign financial institutions
subject to the jurisdiction of the Federal
Reserve.
In 1993 the staff of the Division of
Banking Supervision and Regulation
forwarded 539 criminal referrals to the
Fraud Section of the Criminal Division
of the Department of Justice for inclu


sion in its significant referral tracking
system.

Specialized Examinations
The Federal Reserve conducts specialized examinations of banks regarding
electronic data processing, fiduciary
activities, government securities dealing
and brokering, municipal securities dealing, securities clearing, and securities
underwriting and dealing through 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, U.S.
branches and agencies of foreign banks,
Edge Act and agreement corporations
and independent data centers that provide EDP services to these institutions.
The Federal Reserve conducted 457
on-site EDP reviews in 1992. The Federal Reserve also was the agency-incharge for 3 examinations of 18 large
independent providers of data services;
these examinations were coordinated
and conducted with the Federal Deposit
Insurance Corporation, the Office of the
Comptroller of the Currency, and the
Office of Thrift Supervision.
Fiduciary Activities
The Federal Reserve has supervisory
responsibility for institutions that hold
more than $4.3 trillion of discretionary
and nondiscretionary assets in various
fiduciary capacities. This group of institutions includes 304 state-chartered
member banks and trust companies and
61 nonmember trust companies that are
subsidiaries of bank holding companies.

Banking Supervision and Regulation 235
On-site examinations are essential to
ensure the safety and soundness of
financial institutions that have fiduciary
operations. These examinations include
(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 1993, Federal Reserve examiners conducted 177 on-site trust examinations of state member banks and trust
companies engaged in fiduciary activities. The institutions examined in 1993
held approximately $1 trillion in fiduciary assets.
Government Securities Dealers
and Brokers
The Federal Reserve is responsible for
examining the activities of state member
banks and foreign banks that are government securities dealers and brokers for
compliance with the Government Securities Act of 1986 and regulations of the
Department of the Treasury. Forty-three
state member banks, five state branches
of foreign banks, and one state agency
of a foreign bank have notified the
Board that they are currently government securities dealers or brokers that
are not exempt from Treasury's regulations. During 1993 the Federal Reserve
conducted twenty-two 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
holding companies that act as municipal



securities dealers or as clearing agencies. The Board supervises forty-six
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 1993 the Federal Reserve
examined all three of the clearing agencies and nineteen of the banks that deal
in municipal securities.
Securities Subsidiaries
of Bank Holding Companies
The Banking Act of 1933, commonly
known as the Glass-Steagall Act, prohibits, in section 20, the affiliation of a
member bank with a company that is
"engaged principally" in underwriting
or dealing in securities. The Board in
1987 approved proposals by banking
organizations to underwrite and deal on
a limited basis in specified classes of
bank "ineligible" securities (that is,
commercial paper, municipal revenue
bonds, conventional residential
mortgage-related securities, and securitized consumer loans) in a manner consistent with section 20 of the GlassSteagall Act and with 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
increased in September 1989 to 10 percent. In January 1993 the Board adopted
an optional indexed revenue test for calculating the 10 percent limit that reflects
the changes in the level and structure of
interest rates since 1989.
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

236 80th Annual Report, 1993
requirements specified by the Board.
Four of these organizations subsequently received authorization to underwrite and deal in corporate and sovereign debt securities, and two received
comparable authority for equities.
At year-end 1993, thirty-one bank
holding companies had so-called section
20 subsidiaries authorized to underwrite
and deal in ineligible securities. Of
these, nine could underwrite any debt or
equity security; four could underwrite
any debt security; and eighteen could
underwrite only the limited types of debt
securities approved by the Board in
1987. The Federal Reserve uses specialized procedures for reviewing operations of these securities subsidiaries; it
conducted twenty-nine such inspections
in 1993.
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 1993, Federal
Reserve examiners conducted on-site
examinations at 63 of the 182 banks and
bank holding companies registered as
transfer agents with the Board.
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
is then used in decisions to allocate
examination resources or take other
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
Report of Condition and Income (Call
Report). A number of supplementary
screening systems are used to monitor
specific areas of supervisory interest.
Another automated system tracks examinations and inspections and summarizes examination 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 the international activities
of various entities.
Edge Act and Agreement Corporations
Edge Act corporations are international
banking organizations chartered by the

Banking Supervision and Regulation 237
Board to provide all segments of the
U.S. economy with a means of financing
international trade, especially exports.
An agreement corporation is a statechartered company that enters into an
agreement with the Board not to exercise any power that is impermissible for
an Edge Act corporation. In 1993 the
Federal Reserve examined all eightyseven Edge Act and agreement corporations, which held about $31 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 1993 the
Federal Reserve conducted full-scope
and targeted-scope examinations of
twelve foreign branches of state member banks and forty 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 appropriate, the examinations
were coordinated with the Office of
the Comptroller of the Currency. Also,
examiners made 16 visitations to overseas offices to obtain current financial
and operating information and, in some
instances, to evaluate their compliance
with corrective measures or test-check
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 1993, 295 foreign banks
from 61 countries operated 481 state


licensed branches and agencies, of
which 33 are insured by the Federal
Deposit Insurance Corporation. These
foreign banks also operated 73 branches
and agencies licensed by the Office of
the Comptroller of the Currency, of
which 8 have FDIC insurance. Foreign
banks also operated 245 representative
offices and directly owned 16 Edge Act
corporations and 8 commercial lending
companies. In addition, foreign banks
held an equity interest of at least 25 percent in 88 U.S. commercial banks. Altogether, these U.S. offices of foreign
banks control approximately 22 percent
of U.S. banking assets.
The Federal Reserve has broad
authority to supervise and regulate foreign banks that engage in banking and
related activities in the United States
through branches, agencies, commercial lending companies, representative
offices, Edge Act corporations, banks,
and certain nonbanking companies. The
Federal Reserve conducted or participated with state and federal regulatory
authorities in the examination of 784
such offices during 1993.
Before the December 1991 passage of
the Foreign Bank Supervision Enhancement Act of 1991 (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.
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 state and
federally licensed branches and agencies receive an on-site examination at
least once during each twelve-month

238 80th Annual Report, 1993
period. These examinations are coordinated with other state and federal regulators to eliminate duplication whenever
possible. FBSEA requires Federal
Reserve approval to establish foreign
bank branches, agencies, commercial
lending subsidiaries, and representative
offices in the United States.
In 1993, applications by twelve banks
from eight foreign countries were
approved to establish branches, agencies, and representative offices.
Charging for Examinations
of U.S. Offices of Foreign Banks
In December 1993 the Board published
for comment a proposal to implement
provisions of FBSEA that require the
Board to charge foreign banks for the
cost of examinations of their branches,
agencies, and representative offices in
the United States. This notice of proposed rulemaking asked specifically for
public comment regarding the methods
developed by the Board for assessing
the cost of examinations against foreign
banks. The Board also sought comment
on whether implementation of this provision of FBSEA was consistent with
the policy of national treatment established in the International Banking Act
of 1978.
Examination Manual
In 1993 the federal bank regulatory
agencies began developing a comprehensive interagency manual for examiners of individual branches and agencies
of foreign banking organizations. The
goal is to complete the manual in early
1994 and also make it available to foreign banking organizations and other
interested parties. Some of the policy
concepts that are being incorporated in
the examination manual are part of a
larger group of policy initiatives seeking to enhance the overall supervision



of the U.S. operations of foreign banking organizations in accordance with
FBSEA.
Representative Offices
FBSEA gave the Board supervisory
responsibility, including examination
authority, over the activities of representative offices of foreign banks. As
of year-end 1993, 245 representative
offices of foreign banks were registered
with the Federal Reserve System. In
order to determine the various activities
undertaken by these offices, the Board
issued a policy directive to examine all
registered representative offices by yearend 1993. The findings from these
examinations will assist the Board in
finalizing an ongoing supervisory and
regulatory program for representative
offices.
Technical Assistance
In 1993 the System provided staff on a
number of technical assistance missions
and training sessions on bank supervisory matters to numerous central banks
in Russia, Eastern Europe, and Latin
America.

Supervisory Policy
During 1993 the Federal Reserve undertook several initiatives in supervisory
and regulatory policy related to the continuing implementation of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Other initiatives included guidance on the use of
and examination of derivatives and
amendments to the Board's risk-based
capital guidelines and other rules and
policies.
FDICIA
The major Board actions of 1993 to
implement FDICIA as it relates to super-

Banking Supervision and Regulation 239
visory policy covered the following sections of the act:
Section 132. On November 18 the
federal banking agencies issued an
interagency notice of proposed rulemaking requesting public comment on
safety and soundness standards with
regard to operations and management,
asset quality, earnings, stock valuation,
and compensation. The proposal prescribes standards specific enough to
identify emerging operational and managerial problems and to require submission of a compliance plan before those
problems become serious. The proposed
standards generally establish the ends
that proper operations and management
should achieve, leaving the means to
each institution. A final rulemaking is
expected in 1994.
Section 305. On September 14 the
federal banking agencies issued an
interagency notice of proposed rulemaking, requesting comment on the
incorporation of interest rate risk into
the risk-based capital framework. A
final rulemaking is expected in 1994.

Trading Activities Manual codifies
existing practices and addresses these
topics in significant detail. The manual
outlines procedures for evaluating the
trading function's organizational structure and front- and back-office operations and systems; approaches to market
and credit risk measurement; and overall risk management.

Risk-Based Capital Standards
The risk-based capital standards, phased
in over a four-year period, became fully
effective at the end of 1992. Consequently, 1993 was the first full year that
banking organizations were expected to
maintain capital equal to at least 8 percent of risk-adjusted assets. The riskbased capital standards were developed
by the Board, in conjunction with the
FDIC and the OCC, to implement the
Basle Accord, which was proposed by
the Basle Committee on Banking Regulations and Supervisory Practices (Basle
Supervisors' Committee) and endorsed
by the central bank governors of the
Group of 10 (G-10) countries in July
1988.

Trading Activities Guidance

Amendments

Trading in derivatives and cash investments is becoming increasingly important to the overall risk profile and profitability of certain banking organizations.
Accordingly, the Federal Reserve has
given examiners guidance on the issue
in a supervision letter and through the
development and field testing of a Capital Markets and Trading Activities Manual. The supervisory letter, issued on
December 22, highlights the key considerations in examining the risk management and internal controls of trading
activities in both cash and derivative
instruments. The Capital Markets and

During 1993 the Board adopted amendments to its risk-based capital guidelines
in the following areas:




Intangible assets. The Board adopted
an amendment to provide guidance on
the types and amounts of intangible
assets that may be included in tier 1
capital. The amendment incorporates
limits and discounts on includable intangible assets in a manner that is consistent with the requirements of section
475 of FDICIA and achieves uniformity
in the banking agencies' capital treatment of intangible assets.

240 80th Annual Report, 1993
Presold one- to four-family residential construction loans. The Board
adopted a final rule amending the riskbased capital guidelines to lower the
risk weight from 100 percent to 50 percent for presold one- to four-family residential construction loans that meet certain criteria. This action was mandated
by section 618(a) of the Resolution
Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991
(RTCRRIA).

measure interest rate risk and two alternative methods, one quantitative and
one qualitative, for determining the
additional capital, if any, an institution
may be required to have for interest rate
risk. The approach taken in the proposal
seeks to balance the regulatory burden
associated with more precise measures
of interest rate risk and the commercial banking industry's favorable experience in adapting to changing rate
environments.

Multifamily housing loans. The Board
adopted a final rule, effective December
31, 1993, lowering the risk weight from
100 percent to 50 percent for qualifying
multifamily housing loans and securities
backed by such loans that meet certain
criteria. This amendment was mandated
by section 618(b) of RTCRRIA and also
fulfills the requirements of section
305(b)(l)(B) of FDICIA, which requires
the agencies to revise their capital standards to ensure that the treatment of
multifamily housing loans reflects their
actual risk.

Securities accounting. In December
1993 the Board issued a proposed rule
seeking public comment on the inclusion in tier 1 capital of net unrealized
holding gains and losses on securities
available for sale. This rule was proposed in light of the recently adopted
Financial Accounting Standards Board
(FASB) Statement No. 115, "Accounting for Certain Investents in Debt and
Equity Securities." A final rule is
expected in 1994.

Proposals
The Board in 1993 issued for public
comment several proposals regarding
risk-based capital:
Interest rate risk. Section 305 of
FDICIA requires the bank regulatory
agencies to incorporate interest rate in
risk the risk-based capital framework.
Accordingly, in September 1993 the
Board issued a proposal for incorporating interest rate risk into the assessment
of capital adequacy. The proposal would
impose additional capital requirements
on institutions having interest rate risk
in excess of a defined threshold level.
The proposal outlines the use of a
reporting exemption test, an option for
institutions to use internal models to



Recourse. In December 1993 the
Board approved a recommendation from
the Federal Financial Institutions Examination Council that its members issue a
proposed rulemaking, together with an
advance notice of proposed rulemaking,
requesting comment on various recourse
issues. The proposed rulemaking would
lower the capital requirement for assets
sold with low levels of recourse. The
advance notice of proposed rulemaking
outlines an approach to the capital treatment of structured-finance transactions
that would take into account various
levels of recourse exposure.
Risk-based capital. The Board has
been working with banking supervisors
of the other G-10 countries to broaden
the scope of the international risk-based
capital framework. The Board released
for public comment in May 1993 a con-

Banking Supervision and Regulation 241
sultative paper developed by the Basle
Supervisors' Committee. The paper contained proposals to incorporate interest
rate risk, market risk, and netting into
the Basle Accord. The comment period
for the consultative paper ended on
December 31, 1993.

Real Estate Appraisals
On June 4, 1993 the Board and the other
banking agencies issued for public comment an interagency proposal to revise
their appraisal regulations. This proposal
was initiated as part of an interagency
effort to increase credit availability,
especially for small and medium-sized
businesses, by reducing regulatory
impediments to lending consistent with
safe and sound banking practices. The
proposed amendments would increase
to $250,000 the threshold level at or
below which appraisals are not required,
expand and clarify existing exemptions
to appraisal requirements, and identify
additional circumstances when appraisals are not required. The Board received
more than 2,000 letters on the proposal.
As a result of the comments, the
Board and the other agencies reopened
the public record on the proposal on
November 10, 1993, and placed into the
public file supplemental information that
relates to the proposed increase in the
appraisal threshold. The Board received
more than 2,000 additional letters on
this supplemental information. The
Board is expected to consider in the first
quarter of 1994 a final rule to amend the
appraisal regulation.
In July 1993 the Board in conjunction
with the other federal banking agencies
issued an order granting relief from certain real estate appraisal requirements
for financial institutions affected by the
flooding in the Midwest. The Board
acted under provisions of the Deposi


tory Institutions Disaster Relief Act of
1992.

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 included
reducing unnecessary documentation
requirements for loans to small- and
medium-sized businesses and small
farms, improving regulatory treatment
related to in-substance foreclosures, and
permitting certain partially performing
loans to be placed on accrual status. The
agencies also conformed with generally
accepted accounting principles the regulatory reporting requirements for sales
of other real estate owned; reaffirmed
that examiners should review commercial real estate loans in a consistent,
prudent, and balanced manner; and
developed a common definition for
"Special Mention" assets that separates
these loans from loans warranting
adverse classification.
Interagency Coordination
The Federal Reserve together with the
FDIC, the OCC, and the OTS adopted a
Uniform Core Report of Examination in
1993. This report will be used by each
agency for its reports of examination of
financial institutions. Each agency is
scheduled to implement the report
during 1994 and the use of a common
report by each agency will significantly
reduce the burden on institutions that
are subject to examination by different
agencies. Furthermore, the agencies
issued guidelines to coordinate the
supervision and examination of banking
organizations in order to minimize the
disruptions and burdens associated with
the examination process, and provided

242 80th Annual Report, 1993
guidance on fair lending initiatives. The
Federal Reserve also reiterated its longstanding policy for resolving differences
between bankers and examiners regarding examination findings.

Staff Training
The training of System staff members
emphasizes analytical and supervisory
themes common to the four areas
of supervision and regulation—
examinations, inspections, applications,
and surveillance—and stresses the interdependence among these areas. During
1993 the Federal Reserve conducted a
variety of schools and seminars, and
Federal Reserve staff members participated in several courses offered by, or

co-sponsored with, other agencies, as
shown in the accompanying table. One
new school was added to the curriculum during the year, a senior level
continuing education seminar for EDP
examiners.
In 1993 the Federal Reserve trained
3,045 persons in System schools, 1,291
in schools sponsored by the Federal
Financial Institutions Examination
Council (FFIEC), and 145 in other
schools, for a total of 4,481 students,
including 230 representatives from foreign central banks. The number of student days of training in 1993 was
26,938, compared with 20,555 in 1992.
The Federal Reserve System also
gave scholarship assistance to the states
for training their examiners in Federal

Training Programs for Banking Supervision and Regulation, 1993
Number of sessions
Program
Total
Schools or seminars conducted by the Federal Reserve
ETS I, Introduction to examinations
ETS II, Financial institution analysis
ETS III, Loan analysis
ETS IV, Bank management
Effective writing for banking supervision staff
Management skills
Conducting meetings with management
Abbreviated cash flow seminar
Real estate lending seminar
Senior lending seminar
Senior forum for current banking and regulatory issues
Bank operations
Bank holding company applications
Bank holding company inspection
Basic entry-level trust
Advanced trust
Consumer compliance examination I
Consumer compliance examination II
Advanced CRA examination techniques
Advanced EDP examination
EDP continuing education
Section 20 securities seminar
Securities activities and interest rate risk
Seminar for senior supervisors of foreign central banks'
Other agencies conducting courses2
Federal Financial Institutions Examination Council
Federal Deposit Insurance Corporation or
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. Co-sponsored by the Federal Reserve, Federal




14
17
17
9
26
12
17
2
6
5
3
6
2
8
1
1
2
2
1
1
1
1
3
3

Regional

13
1
26
9
17
2
2

78

15

12
4

4

Deposit Insurance Corporation, Office of Thrift Supervision, Office of the Comptroller of the Currency, and the
Resolution Trust Corporation.

Banking Supervision and Regulation 243
Reserve and FFIEC schools. Through
this program, 537 state examiners were
trained; 276 in Federal Reserve courses,
239 in FFIEC programs, and 22 in other
courses.
During 1993 the Federal Reserve continued to integrate its core supervision
schools with those of the FDIC. This
effort began in 1992 with the integrating
of the curriculum for the first two
schools attended by newly hired examination and inspection staff. The pilot
session of the joint Loan Analysis
School, sequentially the third school,
was held in July 1993, and ten sessions
of the joint schools were offered during
the remainder of the year.
During 1993 the Federal Reserve
trained examiners on capital markets
topics using a variety of forums. Such
training focused on issues related to
interest rate risk, investment activities,
financial derivatives and mortgage securities. One effort involved the development of separate training modules on
these topics that are to be offered to
examiners throughout the Federal
Reserve System during 1994. Other
efforts included seminars for capital
markets specialists on examining internal interest rate risk models and on the
concepts underlying the Basle proposals
regarding market risk. These seminars
were tailored to provide the specialists
with the resources and materials to
train staff members at their respective
Reserve Banks and to enable them to
provide supplemental examination support when special issues arise.
In addition, the Federal Reserve has
revised and updated both the Commercial Bank Examination Manual and the
Bank Holding Company Supervision
Manual. The revised manuals reflect
certian provisions of FDICIA as well
as the Federal Reserve's current practices in examining banks and holding
companies.



Federal Financial Institutions
Examination Council
In December 1993 the Federal Reserve
and the other bank regulatory agencies
issued, under the auspices of the FFIEC,
a joint policy statement that provides
comprehensive guidance on the maintenance of an allowance for loan and lease
losses (ALLL) and an effective loan
review system.4 The policy statement
discusses the nature and purpose of the
ALLL, defines an adequate ALLL, and
covers the responsibilities of the board
of directors, the institution's management, and the examiner. The policy
statement emphasizes that it is the
responsibility of the board of directors
and management of each institution to
maintain the ALLL at an adequate level.
The policy statement also discusses the
analysis of the loan and lease portfolio,
factors to consider in estimating credit
losses, and the characteristics of an
effective loan review system.
In response to an FFIEC recommendation, the Federal Reserve Board on
February 11, 1993, issued for public
comment a proposal to amend its capital
guidelines for deferred tax assets. The
proposed rule would limit the amount of
deferred tax assets that can be included
in capital. The FFIEC's recommendation and the Board's proposal were
issued in response to FASB Statement
109, "Accounting for Income Taxes,"
issued in February 1992. Final action on
the rule will be considered when all of
the other federal banking agencies have
completed their comment process.
In addition, on April 16, 1993 the
FFIEC issued optional worksheets to
4. 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.

244 80th Annual Report, 1993
assist smaller banks in the implementation of FASB Statement 109 for purposes of the Call Reports, which are
filed quarterly by all insured commercial banks. Banks can use these worksheets to determine the amount of
income taxes they should show in the
Call Report.
The FFIEC also approved a number
of revisions to the Call Report. These
modifications, effective as of the
March 31, 1994, reporting date, cover
the following items: the reporting of
securities in the Call Report as required
by FASB Statement 115, "Accounting
for Certain Investments in Debt and
Equity Securities;" sales of mutual
funds and annuities and their related
income; the original maturity of other
borrowed money; the disclosure of
"Depository Institution Investment Contracts" for deposit assessment purposes;
and trading account assets and liabilities
to reflect ongoing developments in the
trading area. In addition, changes were
made to collect information about past
due derivatives, to provide instructional
guidance on the offsetting of amounts
associated with derivative contracts, and
to set forth instructional clarifications
regarding loans to small businesses and
small farms. Furthermore, the revisions
include deleting certain items related to
loan sales and purchases and certain
items related to taxable securities and
debt securities held for sale.
On April 14, 1993, the FFIEC issued
for public comment proposals for certain fair value disclosure requirements
mandated by section 121 of FDICIA.
The FFIEC received more than 180
comment letters during the comment
period. The proposal provided a method
for disclosing fair values of assets and
liabilities that is similar to that set forth
in FASB Statement 107, "Disclosure
about Fair Values of Financial Instruments." These disclosures would be



required annually by financial institutions that are required to submit audited
financial statements to the federal banking agencies under FDICIA section 112.
In addition, the FFIEC requested comment on whether it was "feasible and
practicable" to include these fair value
disclosures in certain other regulatory
reports and on a quarterly basis. The
FFIEC continues to study the responses
received on the proposal and expects to
issue a final rule in the first half of
1994o for disclosure of fair values of
assets and.
In 1993 the FFIEC implemented a
supplement to the Reportftrf Assets and
Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002) to
obtain improved data for supervisory
purposes and for the analysis of U.S.
credit and deposit flows in connection
with international indebtedness.

Regulation of the U.S.
Banking Structure
The Board administers the Bank Holding Company Act, the Bank Merger Act
for state member banks, 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. The
Board has established regulations for the
interstate banking activities of these foreign banks and for foreign banks that
control a U.S. subsidiary commercial
bank.

Banking Supervision and Regulation 245

Bank Holding Company Act
By law, a company must obtain the Federal Reserve's approval if it is to form a
bank holding company by acquiring
control of one or more banks. Moreover,
once formed, a bank holding company
must receive the Federal Reserve's
approval before acquiring additional
banks or nonbanking companies.
In reviewing an application filed by a
bank holding company, the Federal
Reserve considers factors such as 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 1993 the Federal Reserve acted on
1,180 bank holding company and
related applications. The Federal
Reserve approved 282 proposals to
organize bank holding companies and
denied 2; approved 111 proposals to
merge existing bank holding companies;
approved 326 bank acquisitions by
existing bank holding companies and

denied 3; approved 432 requests by
existing companies to acquire nonbank
firms engaged in activities closely
related to banking and denied 1; and
approved 23 other applications. Data on
these and related bank holding company
decisions are shown in the accompanying table.
Bank Merger Act
The Bank Merger Act requires that all
proposed mergers of insured depository
institutions be acted upon by the appropriate Federal banking agency. If the
institution surviving the merger is a state
member bank, the Federal Reserve has
primary jurisdiction. Before acting on a
proposed merger, the Federal Reserve
considers factors relating to the financial
and managerial resources 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.

Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1993
Action under authority delegated
by the Board of Governors
Proposal

Direct action
by the
Board of Governors

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

Director of the
Division of Banking
Supervision and
Regulation

Denied

Approved

Denied

19

2

0

0

19
0

0
0

41
115

3
1

0
1

0
0

195

6

Office
of the
Secretary




0
0
0
0
0

4

259

16
0

0
0
0

Total

Approved Approved Permitted

0
0

Federal
Reserve Banks

19
37

284

0

111
0

0
131

76
0

0

0

329
433

0
266
149

20

0

0

0
0

2
0

2
21

20

0

76

750

133

1,180

246 80th Annual Report, 1993
During 1993 the Federal Reserve
approved ninety-seven merger applications. As required by law, each merger
is described in this REPORT (in table 16
of the Statistical Tables section).
When the FDIC, the OCC, 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 Federal Reserve
and those agencies have adopted standard terminology for assessing competitive factors in merger cases to assure
consistency in administering the act.
The Federal Reserve submitted 882
reports on competitive factors to the
other federal banking agencies in 1993.
Change In Bank Control Act
The Change in Bank Control Act requires persons seeking control of a bank
or bank holding company to obtain
approval from the appropriate federal
banking agency before the transaction
occurs. Under the act, the Federal
Reserve is responsible for reviewing
changes in the control of state member
banks and of bank holding companies.
In so doing, the Federal Reserve must
review the financial condition, competence, experience, and integrity of the
acquiring person; consider the effect on
the financial condition of the bank or
bank holding company to be acquired;
and determine the effect on competition
in any relevant market.
The appropriate federal banking agencies are required to publish notice of
each proposed change in control and to
invite public comment, particularly from
persons located in the markets served by
the institution to be acquired. The federal banking agencies are also required
to assess the qualifications of each person seeking control; the Federal Reserve
routinely makes such a determination



and verifies information contained in the
proposal.
In 1993 the Federal Reserve acted
on 192 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
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
contains the announcement of applications and notices received by the Federal Reserve but not yet acted on.
Timely Processing of Applications
The Federal Reserve maintains target
dates and procedures for the processing
of applications filed under the Bank
Holding Company Act, the Bank
Merger Act, and the Change in Bank
Control Act. 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 1993, 91 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

Banking Supervision and Regulation 247
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 1993, 83 percent of the applications processed were acted on under delegated authority. The Board continued
its efforts during the year to streamline
its processing procedures. In particular,
the Board permitted the Reserve Banks
to act on more applications by bank
holding companies to initiate or expand
their futures commission merchant
activities.

Board Policy Decisions
and Developments
in Bank-Related and
Nonbanking Activities
In January 1993 the Board approved an
indexed revenue test as an alternative to
the 10 percent revenue limit applicable
to the ineligible securities activities of
section 20 subsidiaries of bank holding
companies. This modification was effective immediately and applied to all section 20 subsidiaries. It did not in any
other way affect the authorizations to
engage in securities underwriting and
dealing granted by the Board in its previous section 20 orders and was subject
to the Board's continuing authority to
reexamine limitations on such activities.
In 1993 the Board approved an application by a foreign bank to clear futures
transactions that generally were executed by other pre-approved execution
groups. In addition, the Board approved
applications by a foreign bank and by a
U.S. bank holding company to act as a
futures commission merchant (FCM) for
unaffiliated customers in executing and
clearing, and clearing without execut


ing, certain futures, and certain options
on futures, on nonfinancial commodities. Previously, the Board had limited
its consideration of FCM activities to
futures and options on futures on financial commodites (such as bullion and
coin) and other financial instruments.
During the year, the Board also permitted one bank holding company to
offer career counseling services to
unaffiliated parties and another bank
holding company to provide inventory
inspection services on a stand-alone
basis. In addition, the Board approved
a proposal by a bank holding company
to provide administrative services to
mutual funds and closed-end funds.
Three rulemakings were under consideration at year-end. One proposal
would ease the restrictions on the underwriting and dealing activities of bank
holding companies to permit certain
joint marketing efforts and common
management officials. A 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. A third
rulemaking would permit bank holding companies to engage in real estate
investment activities within certain
limits.
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 from sales of subordinated debt. State member banks must
also give six months' notice of their
intention to withdraw from membership

248 80th Annual Report, 1993
in the Federal Reserve, although the
notice period may be shortened or eliminated in specific cases.

Stock Repurchases By Bank
Holding Companies
A bank holding company sometimes
purchases its own shares from its shareholders. When the company borrows the
money to buy the shares, the transaction
increases the debt of the bank holding
company and simultaneously decreases
its equity. Relatively 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 1993 the Federal Reserve
reviewed sevety-one proposed stock
repurchases by bank holding companies,
all of which were acted on by the
Reserve Banks on behalf of the Board.

International Activities of U.S.
Banking Organizations
The Board has several statutory responsibilities in supervising the international
operations of U.S. banking organizations. The Board must provide authorization and regulation of foreign
branches of member banks; of overseas
investments by member banks, Edge
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 the Board's Regulation K



(International Banking Operations),
member banks must obtain 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 1993 the
Board approved the opening of three
foreign branches.
By the end of 1993, 114 member
banks were operating 739 branches in
foreign countries and overseas areas of
the United States; 84 national banks
were operating 640 of these branches,
and 30 state member banks were operating the remaining 99 branches. In addition, 18 nonmember banks were operating 36 branches in foreign countries.
Edge Act Corporations
and Agreement Corporations
Under sections 25 and 25(a) of the Federal Reserve Act, Edge Act 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 1993 the Federal Reserve approved
two new agreement corporations. At
year-end, there were eighty-seven Edge
Act and agreement corporations, which
together had thirty-six domestic
branches. Effective January 1, 1993, the
Board, in line with the latest revision to
Regulation K, requires each Edge Act
corporation that is "engaged in bank-

Banking Supervision and Regulation 249
ing" to maintain a minimum ratio of
qualifying total capital to weighted risk
assets of 10 percent.

cally related to bank safety and soundness and the integrity of the banking
structure.

Foreign Investments

Bank Secrecy Act

The Currency and Foreign Transactions
Reporting Act (the Bank Secrecy Act)
was originally proposed as a means by
which to identify and track proceeds of
illegal activity by creating and maintaining records of various financial transactions that otherwise would not be identifiable. More recently, the Bank Secrecy
Act has been regarded as a tool in the
fight against money laundering. The
records required by the Bank Secrecy
Act provide useful data for aiding in the
detection of unlawful activity as well as
for determining the safety and soundExport Trading Companies
ness of financial institutions. The FedIn 1982 the Bank Export Services Act eral Reserve monitors compliance with
amended section 4 of the Bank Holding the requirements of the Bank Secrecy
Company Act to permit bank holding Act by the institutions it supervises.
companies, their subsidiary Edge Act or
During 1993 the Federal Reserve
agreement corporations, and bankers'
tested new Bank Secrecy Act examinabanks to invest in export trading compation procedures during its regularly
nies, subject to certain limitations and
scheduled Bank Secrecy Act examafter Board review. The purpose of this
inations of financial institutions under
amendment was to allow effective parits supervision. Some examinations
ticipation by bank holding companies in
resulted in the issuance of cease and
the financing and development of export
desist orders and the assessment of civil
trading companies. The Export Trading
money penalties for failure to comply
Company Act Amendments of 1988
with the requirements of the Bank
provide additional flexibility for bank
Secrecy Act.
holding companies engaging in export
The Federal Reserve also appointed a
trading company activities. Since 1982
representative to the Bank Secrecy Act
the Federal Reserve has acted affirmaAdvisory Council, a committee created
tively on notifications by 48 bank holdunder recent legislation to propose addiing companies to establish export tradtional anti-money-laundering measures
ing companies.
to be taken under the Bank Secrecy Act:
created a Special Investigations and
Examinations Section to, among other
Enforcement of Other Laws
things, assist in the investigation of
and Regulations
money laundering activities; and desigThe Board is also responsible for the nated staff members at each Reserve
enforcement of various laws, rules, and Bank to assist examiners in reviewing
regulations other than those specifi- compliance procedures under the Bank
Under authority of the Federal Reserve
Act and the Bank Holding Company
Act, U.S. banking organizations may
engage in activities overseas with the
authorization of the Board. Significant
investments require advance review by
the Board, although pursuant to Regulation K, most foreign investments may be
made under general-consent procedures
that involve only after-the-fact notification to the Board.




250 80th Annual Report, 1993
Secrecy Act during regularly scheduled
examinations.
During 1993 the Federal Reserve also
provided assistance to law enforcement
agencies conducting criminal investigations under 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 Board's 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 OTS,
according to the jurisdiction involved.
At the end of 1993, 677 lenders were
registered under Regulation G, and 377
came under the Board's supervision. Of
these 377, the Federal Reserve regularly
inspects 229 either biennially or triennially, according to the type of credit they
extend. The others are exempted from
periodic on-site inspections by the Federal Reserve but are monitored through



the filing of periodic regulatory reports.
During 1993, Federal Reserve examiners inspected 67 lenders for compliance
with Regulation G.
In general, Regulations G and U
impose credit limits on loans secured by
publicly held securities when the purpose of the loan is to purchase or carry
those or other publicly held equity securities. Regulation T limits the amount of
credit that brokers and dealers may
extend when the credit is used to purchase or carry publicly held debt or
equity securities. Collateral for such
loans at brokers and dealers must be
securities in one of the following categories: those traded on national securities
exchanges, certain over-the-counter
(OTC) stocks that the Board designates
as having characteristics similar to
those of stocks listed on the national
exchanges, or bonds that meet certain
requirements.
The Federal Reserve monitors the
market activity of all OTC stocks to
determine which of them are subject to
the Board's margin regulations. The
Board publishes the resulting List of
Marginable OTC Stocks quarterly. In
1993 the OTC list was revised in February, May, August, and November.
The November OTC list contained
3,545 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 1993 the foreign list was
revised in February, May, August, and
November. The November foreign list
contained 299 stocks.
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

Banking Supervision and Regulation 251
comply with all the statutes, rules, and
regulations applicable to member banks
regarding credit on securities. The
Board processed one new agreement in
1993.
In 1993 the Securities Regulation
Section of the Board's Division of
Banking Supervision and Regulation
issued 53 interpretations of the margin
regulations. Those that presented sufficiently important or novel issues were
published in the Securities Credit Transactions Handbook which is part of the
Federal Reserve Regulatory Service.
These interpretations serve as a guide to
the margin regulations.
Financial Disclosure
by State Member Banks
State member banks must disclose certain information of interest to investors,
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 1993, forty-two 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 Call Report
all extensions of credit made by the
bank to its executive officers since the
date of the bank's previous report. The
accompanying table summarizes this
information.
Federal Reserve Membership
At the end of 1993, 4,338 banks were
members of the Federal Reserve System, a decrease of 281 from the previous year-end. Member banks operated
35,564 branches on December 31, 1993,
a net increase of 95 for the year.
Member banks accounted for 39 percent of all commercial banks in the
United States and for 67 percent of
all commercial banking offices; the figures for year-end 1992 were 39 percent
of banks and 66 percent of banking
offices.
•

Loans bv Stare Member Banks tc iheir Executive Officers. 1992-93
Number

Amount (dollars)

Range of interest
rates charged
(percent)

7992
October 1-December 31

704

18,286,000

4.0-19.8

1993
January 1-March 31
April 1-June 30
July 1-September 30

611
752
760

18,324,000
25,072,000
20,705,000

3.0-21.0
3.9-21.0
3.0-21.0

Period

SOURCE. Call Report.




253

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 1993 the Board took a variety
of actions to reduce the regulatory burden on supervised institutions; among
these actions were changes to Regulation O to ease compliance for some
small banks and the start of a review
of Regulation M under the Board's
program of periodic reviews of its
regulations.
Loans to Officers, Directors,
and Principal Shareholders
Under the Federal Deposit Insurance
Corporation Improvement Act of 1991,
a bank's total lending to insiders cannot
exceed 100 percent of its unimpaired
capital and surplus. The statute authorizes the Board, however, to establish a
higher limit for banks with less than
$100 million in deposits if the Board
determines that the exception is "impor


tant to avoid constricting the availability of credit in small communities or
to attract directors to such banks."
Through an interim rule in May 1992,
the Board allowed banks with deposits
under $100 million to extend credit of
up to 200 percent of capital and surplus
if the bank's board of directors adopted
a resolution certifying that the bank
meets the statute's criteria for the exception. Shortly after the end of 1993, after
a period of public comment, the Board
made the interim rule permanent.
During September the Board issued
for comment (and, shortly after the end
of the year, adopted) some additional
amendments to Regulation O to reduce
the burden and complexity of the regulation. The amendments clarified the "tangible economic benefit" rule, adopted
certain exceptions to the lending limit
for insiders, permitted banks to follow
alternative record keeping procedures,
and narrowed the definition of "extension of credit."
Consumer Leasing
In November the Board issued for comment an advance notice of proposed
rulemaking concerning review of Regulation M. The purpose of periodic
reviews is to determine whether the regulation in question can be eliminated,
simplified, or modified to ease any burdens of compliance it may impose. The
advance notice was to give the leasing
industry, consumer interest groups, state
and federal regulators, and other interested parties the opportunity to comment on revisions to the regulations that
might be beneficial (with or without
corresponding statutory changes). The

254 80th Annual Report, 1993
notice indicated that the Board would be
considering some specific areas, but it
asked for public comment on these and
any other issues which the Board should
consider in preparing a more detailed
proposal for comment in 1994.
•




255

Federal Reserve Banks
In 1993 the Federal Reserve Banks continued a variety of programs to improve
the payment services they provide to
depository institutions. The Banks also
began to prepare for the January 1994
implementation of the same-day settlement amendments to Regulation CC,
which were approved by the Board of
Governors in 1992. Under same-day settlement, private collecting institutions
will be able to present checks directly to
payor institutions and to demand settlement in same-day funds. Many institutions currently using intermediaries,
such as the Reserve Banks, to collect
checks are expected to begin presenting
checks directly to payor institutions.
The Reserve Banks made substantial
progress during the year in consolidating their mainframe data processing
operations. The objectives of consolidation are greater reliability and security,
increased control of payment system
risk in a national banking environment,
and improved efficiency. The Federal
Reserve Automation Services (FRAS)
organization substantially completed
establishment of the three designated
data centers at the head offices of the
Richmond and Dallas Banks and the
East Rutherford (New Jersey) Operations Center of the New York Bank.
The Philadelphia, Richmond, Atlanta,
St. Louis, Kansas City, Dallas, and
San Francisco Banks moved their funds
transfer and book-entry securities
transfer applications to the data centers
in 1993. In addition, the Richmond,
Atlanta, Kansas City, and Dallas Banks
completed the move of all other mainframe workloads to the data centers.
Work continued on new centralized
applications software that will support



the Reserve Banks' operations in the
consolidated environment. During 1993
all twelve Banks began using the new
daylight overdraft reporting and pricing
system and two Banks implemented the
new integrated accounting system. In
addition, development of the new funds
transfer and account balance monitoring
applications was substantially completed, and work continued on development of the new automated clearinghouse and book-entry securities transfer
applications.
During 1993 the Reserve Banks
began implementing the System's new
national communications network, Fednet. When it is fully implemented in
1995, Fednet will replace the current
FRCS-80 backbone network and the
twelve District networks with a single
unified network that will provide a
standard level of service throughout the
System. Fednet is designed to improve
reliability, security, and disaster recovery capabilities for the Reserve Banks
and the depository institutions that use
Federal Reserve services. The majority
of Fednet's telecommunications circuits
and circuit switching infrastructure were
deployed in 1993; depository institutions will begin using the new network
in 1994.

Developments in Federal
Reserve Services
The Monetary Control Act of 1980
requires the Federal Reserve System to
establish fees that, over the long run,
recover all direct and indirect costs of
providing services to depository institutions, plus imputed costs that reflect the
taxes that would have been paid and the

256 80th Annual Report, 1993
return on capital that would have been
earned had the services been provided
by a private firm. These imputed costs
are referred to as the private sector
adjustment factor (PSAF). In 1993,
income from priced services totaled
$945.1 million and costs totaled
$906.8 million, resulting in net revenue
of $38.3 million and a recovery rate of
104.2 percent of expenses, including the
PSAF but before the cumulative effect
of a change in accounting principle. The
one-time charge for the cumulative
effect on prior years of the retroactive
application of the accrual method of
postretirement benefits resulted in a
net loss of $33.1 million. In 1992, the
System had net income of $26.6 million
and recovered 105.1 percent of its total
expenses, including the PSAF.1

Check Collection
The Federal Reserve's operating expenses and imputed costs for commercial check services in 1993 totaled
$555.0 million (see the second pro
forma income statement for priced
services, at the end of this chapter).
Income from check operations totaled
$583.2 million and other income (net
of expenses) amounted to $13.7 million,
for income after imputed costs of
$28.3 million. The Reserve Banks handled 19.0 billion checks, a decrease of
0.2 percent from 1992 volume.
During the year, the Board approved
several changes to the check services
provided by the Reserve Banks. In June,
after extensive analysis of comments
from the public, the Board adopted new
1. See the pro forma statements at the end of
this chapter. Income 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.



Federal Reserve Bank check services
designed to facilitate implementation of
the same-day settlement provisions of
Regulation CC. Specifically, a paying
bank may now designate a Federal
Reserve office as the place at which
private sector banks may present checks
to it. In addition, the Reserve Banks will
provide information services to paying
banks, enabling them to continue to provide timely cash-management information to their corporate customers. In
November, the Board approved, subject
to additional staff analysis and public
comment, volume-based pricing for certain check deposit products and payor
bank services in two Districts. Volumebased pricing offers lower per-item fees
to high-volume users, allowing those
users to realize, through the fees they
pay, the cost efficiencies that can be
achieved in handling a large volume of
transactions. Also during the year, the
Board approved adjustments to deposit
deadlines at several Reserve Banks as
the Banks continued their efforts to enhance funds availability for depositors.
During 1993 the Federal Reserve
continued to encourage the development
and use of electronic mechanisms to
enhance or replace paper check processing. Furthering this effort, all Reserve
Banks will offer basic electronic check
presentment and local truncation services in 1994. Nearly 248 million
checks were presented to payor banks
for settlement electronically during
1993, an increase of approximately
60 percent over the 1992 level. One
Bank instituted a fully electronic check
collection service that permits collecting
banks to deposit, in electronic form,
checks destined for paying banks that
currently use the Reserve Bank's truncation services. The Federal Reserve also
continued to develop and test mediumspeed and high-speed imaging technologies. One District introduced the first

Federal Reserve Banks 257
Federal Reserve check service that
applies imaging technology. The service
allows a paying bank that uses truncation or other electronic check presentment services to obtain check images
for its information-processing needs.
Testing of intra- and inter-District transmission of requests for adjustment of
check transactions via Fedline also continued, and several Districts have begun
to implement this service.

Automated Clearinghouse
In 1993 the operating expenses and
imputed costs of providing commercial
automated clearinghouse (ACH) services totaled $65.0 million. Income from
operations was $58.9 million and other
income was $1.2 million, resulting in a
loss after imputed expenses of $6.2 million. The Reserve Banks processed
1,545 million commercial transactions
during the year, an increase of 16.5 percent over 1992 volume.
By mid-1993 all depository institutions that originate or receive commercial transactions through the Federal
Reserve Banks had established electronic connections. By the end of 1993
only 660 depository institutions that
receive only government transactions
were not connected electronically. The
Department of the Treasury is requiring
that all these institutions establish electronic connections by July 1, 1994.
The conversion of all users of commercial ACH services to electronic connections enabled the Reserve Banks to
improve their ACH services significantly during 1993. On October 1, 1993,
the Banks added two processing exchanges each day, enhancing the flexibility of the ACH services for institutions that originate transactions. The
increase in the number of times during
the day that ACH transactions may be
deposited should make the service



attractive for more types of payments
than previously. The new processing
exchanges also permit depository institutions to decrease the interval between
the origination of ACH transactions and
the time they are available to receiving
depository institutions.
Funds Transfer
The operating expenses and imputed
costs of providing funds transfer services in 1993 totaled $75.3 million.
Income from operations was $88.4 million and other income was $1.8 million,
resulting in income after imputed
expenses of $13.1 million. The number
of Fedwire funds transfers originated
increased 2.0 percent over the 1992
volume, to 71.2 million transfers.2
In July 1993 the Board announced a
delay in taking final action on its proposal to change the opening time for the
Fedwire funds transfer system from
8:30 a.m. to 6:30 a.m. Eastern time.
Commenters raised a number of complex issues concerning the proposal,
questioned whether expanded operating
hours would reduce risk, and requested
that the Federal Reserve share its longterm plans regarding Fedwire operating
hours with the public. As a result, the
Board's staff began a thorough study of
the issues raised by extending Fedwire
operating hours and the associated public policy concerns.
In August 1993 the Board and the
Department of the Treasury jointly requested public comment on a proposal
to impose recordkeeping requirements
for certain wire transfers sent by financial institutions. The proposal was
developed to implement revisions to the
Bank Secrecy Act as required by the
Annunzio-Wylie Anti-Money Launder2. Transfers originated include 69.7 million
value transfers and 1.5 million nonvalue transfers.

258 80th Annual Report, 1993
ing Act of 1992 and is intended to
facilitate investigations of money laundering. In response to commenters' concerns about implementing the required
changes by year-end 1993, Treasury in
December announced that the proposed
implementation would be delayed until
it could complete a review of its
anti-money laundering programs. Final
action is expected in 1994.
In November 1993 the Board requested public comment on a proposal
to expand the Fedwire funds transfer
format and adopt a more comprehensive
set of data elements by late 1996. The
change would facilitate compliance with
regulations proposed by Treasury to
include, with each transfer, complete
name and address information for all
parties to the transfer. The proposed format would also be more consistent with
the formats used for other large-value
funds transfer systems. Comments are
expected in early 1994.
Net Settlement
The Federal Reserve provides net settlement services to four national, and
numerous local, private sector clearing
arrangements. These arrangements enable participants to settle their 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, respectively, with
interbank funds transfers and with
payments related to the settlement of
mortgage-backed securities transactions. The other two national arrangements, Visa and Chexs, process and net



small-dollar transactions associated,
respectively, with automated clearinghouse and check payments. The majority of local arrangements are check
clearinghouses.
In 1993 the Reserve Banks processed
about 600,000 net settlement entries for
local netting arrangements; the value of
these entries was about $600 billion.
Securities and Fiscal Agency
Services
The Federal Reserve provides bookentry securities account maintenance
and transfer services for debt issues of
the U.S. Treasury and of 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 1993, operating
expenses and imputed costs totaled
$11.8 million and income was
$14.2 million, for income after imputed
expenses of $2.4 million. The Federal
Reserve processed 3.7 million transfers
of government agency securities during
the year, a 10.4 percent increase over
1992 volume.
Eight Federal Reserve Banks currently offer purchases and sales services
to depository institutions. Under the program, the Banks will purchase or sell,
on the secondary market, securities that
are book-entry-eligible at the Federal
Reserve. Because of declining demand
and other factors, the Board in November 1993 decided to consolidate this
service at the Federal Reserve Bank of
Chicago. Consolidation will provide an
opportunity to reduce cost with little, if
any, effect on the services offered.
The Federal Reserve continues to
operate Treasury Direct, the book-entry
securities safekeeping system for individuals who invest in Treasury securi-

Federal Reserve Banks 259
ties and use the Treasury Department as
custodian. Treasury Direct has grown to
more than 1.2 million accounts with a
total par value of more than $60 billion.
During 1993 the Reserve Banks processed 311,756 applications to purchase
securities, issued almost 5.2 million
Treasury Direct payments to investors,
and handled more than 1.2 million telephone, walk-in, and written inquiries
from Treasury Direct account holders.
Early in 1993 the Federal Reserve
Bank of New York began using its
recently developed Treasury Automated
Auction Processing System (TAAPS).
TAAPS enables bidders that have an
electronic connection to a Federal
Reserve Bank to submit bids for new
issues of Treasury securities electronically instead of on paper and facilitates
the Federal Reserve's review of the bids.
In 1993 the Federal Reserve System
printed more than 89 million savings
bonds, representing over-the-counter,
payroll, and other types of savings bond
purchases. By the end of the year, eight
Federal Reserve Districts had consolidated their savings bond operations at
one of five consolidation sites: the
Buffalo Branch of the New York Bank,
the Pittsburgh Branch of the Cleveland
Bank, and the Richmond, Minneapolis,
and Kansas City Banks. The remaining
four Districts will consolidate their savings bond operations at one of these
sites within two years.
The Federal Reserve Banks of Minneapolis, St. Louis, and Atlanta are participating in a test of an Electronic Federal
Tax Deposit (EFTD) system, a nationwide system to collect federal business
and individual tax payments electronically. EFTD was designed by the Treasury Department's Internal Revenue
Service and Financial Management Service to automate the tax collection
system further and to reduce paper
handling.



Noncash Collection and Definitive
Securities Safekeeping
The operating expenses and imputed
costs of providing definitive safekeeping services in 1993 totaled $3.9 million. Income was $1.5 million, for a
loss, after imputed expenses, of
$2.4 million. In keeping with the
Board's 1992 decision to discontinue
definitive safekeeping services, the
Reserve Banks ceased providing these
services at the end of 1993. The operating loss largely reflects the costs of
withdrawing from the service.
The operating expenses and imputed
costs of providing the noncash collection service in 1993 totaled $5.6 million
and income was $4.8 million, resulting in a loss after imputed expenses
of $0.7 million. The number of noncash
collection items processed decreased
37.7 percent, to 1.0 million items.
Because of declining volumes, the
Reserve Banks in 1993 consolidated
their noncash collection operations at
four sites. By the end of 1994, noncash
collection transactions will be processed
at only three sites—the Cleveland and
Chicago Banks and the Jacksonville
Branch of the Atlanta Bank. In November 1993 the Board approved the use
of a volume-based pricing structure for
the noncash collection service, which is
designed to reduce the burden on lowvolume users resulting from the fee
increases necessary for Reserve Banks
to recover costs while transaction volume continues to decline.

Currency and Coin
In 1993, income from priced cash services was $6.3 million and the cost of
providing the service was $6.2 million,
for income after imputed expenses of
$0.1 million. Only three Federal Reserve
offices—the Minneapolis Bank, its

260 80th Annual Report, 1993
Helena Branch, and the Pittsburgh
Branch of the Cleveland Bank—
continued to arrange transportation of
cash by armored carrier; the Cleveland
Bank and the Branches in the San Francisco District discontinued the service
during the year. Two Districts provided
coin wrapping services, offices in two
Districts provided nonstandard packaging of currency, and offices in two
Districts offered nonstandard frequency
of access to services; all are priced
services.
The Reserve Banks continued to work
closely with Treasury and other agencies to deter counterfeiting and laundering of U.S. currency. One important
aspect of these efforts was the distribution of $10 through $100 notes that
incorporate two new features, a security
thread and microprinting, to discourage
photocopied counterfeits. The securityenhanced notes account for 17 percent
of all notes now in circulation. Distribution of a new series $5 note with these
same security features is scheduled for
1994.
In 1993 the Reserve Banks installed
twenty-five ISS 3000 currency processing machines. Over the next four years
an additional 133 processors will be
installed to improve efficiency and enhance currency processing capabilities.
Float
Federal Reserve float increased to a
daily average of $821 million in 1993,
up from $417 million in 1992. The costs
of Federal Reserve float associated with
priced services are recovered each year
through fees for priced services.

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 1993 the
Board also engaged two certified public
accounting (CPA) firms to examine two
of the twelve Federal Reserve Banks.
The findings of all examinations 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 1993 and 1992.
Income was $18,914 million in 1993
and $20,235 million in 1992. Expenses
in 1993 totaled $1,798 million
($1,475 million in operating expenses,
$183 million in earnings credits
granted to depository institutions, and
$140 million in assessments for expenditures by the Board of Governors). The
cost of currency was $356 million.
Revenue from financial services was
$757 million.
The profit and loss account showed a
net loss of $201 million. The loss was a
result primarily of the initial accrual

Federal Reserve Banks 261
of postretirement employee benefits
required by the adoption of Statement of
Financial Accounting Standards (SFAS)
No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." This accrual was partially offset
by realized and unrealized gains on
assets denominated in foreign currencies and gains on the sales of securities
from the System Open Market Account
portfolio. Statutory dividends to member banks totaled $195 million, $23 million more than in 1992. The rise reflected an increase in the capital and
surplus of member banks and a consequent increase in the paid-in capital
stock of the Reserve Banks.
Payments to the U.S. Treasury in the
form of interest on Federal Reserve
notes totaled $15,987 million, compared
with $16,774 million in 1992. The payments consist of all net income after the
deduction of dividends and 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 1993 and table 7 shows a condensed

statement for each Bank for 1914-93. A
detailed account of the assessments and
expenditures of the Board of Governors
appears in the next section, Board of
Governors Financial Statements.
Holdings of Securities and Loans
Average daily holdings of securities and
loans by the Reserve Banks during 1993
were $320,528 million, an increase of
$37,424 million over 1992 (see accompanying table). From 1992 to 1993,
holdings of U.S. government securities
increased $37,420 million and loans
increased $4 million.
The average rate of interest on holdings of U.S. government securities
decreased from 6.13 percent in 1992 to
5.27 percent in 1993, and the average
rate of interest on loans decreased from
3.43 percent to 3.08 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 1990-93.

I n c o m e ! M v n - ' . v .md OisinhutMw :»!" N\-i I'.irning
of f v d r r a k . s e r u B a r h ^ I<•>«)"• :«nu
\^2
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. Includes a net periodic credit for pension costs of
$131 million in 1993 and $141 million in 1992.




1993

1992

18,914
1,658
1,475
183
17,256
-201
29
496
140
356
16,530
195
15,987
348

20,235
1,475
1,298
177
18,760
-959
29
424
129
295
17,348
172
16,774
402

262 80th Annual Report, 1993

Federal Reserve Bank Premises
In 1993 the New York Reserve Bank
completed the relocation of its staff and
operations to its new East Rutherford
Operations Center, and the Dallas Bank
completed its move to its new head
office building. In addition, modifications to accommodate the new Federal
Reserve Automation Services organization at the three consolidated processing
sites—the East Rutherford Operations
Center and the Richmond and Dallas
Banks—were completed.
The design activities for the new
headquarters building for the Minneapo-

lis Bank and renovation of the headquarters building of the Cleveland Bank
continued during 1993.
The Board approved projects to renovate the cash departments at several
Reserve Banks in preparation for installation of new currency-processing
equipment. Also approved were multiyear renovation programs for the
San Francisco Bank's Seattle and Portland Branches.
Table 8, in the Statistical Tables chapter, shows the cost and book values of
premises owned and occupied by the
Federal Reserve Banks and the cost of
other real estate owned by the Banks.

Securities and Loans of Federal Reserve Banks, 1991-93
Millions of dollars, except as noted
Item and year
Average daily holdings3
1991
1992
1993
Earnings
1991
1992
1993
Average interest rate (percent)
1991
1992
1993
1. Includes federal agency obligations.
2. Does not include indebtedness assumed by FDIC.




Total

U.S.
government
securitiesl

256,929
283,104
320,528

256,559
282,927
320,347

370
177
181

19,283
17,342
16,896

19,262
17,336
16,891

21
6
6

7.51
6.13
5.27

7.51
6.13
5.27

5.73
3.43
3.08

Loans 2

3. Based on holdings at opening of business.

Federal Reserve Banks

263

Pro Forma Balance Sheet for Priced Services, December 31 ! 993 and ! 992 •
Millions of dollars
Item

1993

1992

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
Long-term assets3
Premises
Furniture and equipment
Leases and leasehold improvements
Prepaid pension costs

385.4
211.2
18.0
179.9

Total long-term liabilities
Total liabilities
Equity
Total liabilities and equity4
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
Digitized to be recovered under the Monetary Control Act is the
for FRASER



378.5
176.2
51.3
141.7
794.4

747.6

10,595.5

Total assets

Long-term liabilities
Obligations under capital leases
Long-term debt
Postretirement benefits obligation

9,974.7

9,801.1

Total long-term assets

Short-term liabilities
Clearing balances and balances arising from early
credit of uncollected items
Deferred-availability items
Short-term debt
Total short-term liabilities

699.2
5,127.8
66.6
6.5
12.3
4,062.4

749.8
5,498.2
67.4
9.9
17.2
3,458.6

10,722.4

7,039.0
2,667.6
94.5

8,820.7
1,068.8
85.3
9,801.1

1.2
195.0
121.2

9,974.7
1.2
192.3

317.4

193.5

10,118.5

10,168.3

477.0

554.1

10,595.5

10,722.4

cost of float, or net CIPC during the period (the difference
between gross CIPC and deferred-availability items,
which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate.
3. Long-term assets used solely in priced services, the
priced-services portion of long-term assets shared with
nonpriced services, and an estimate of the assets of the
Board of Governors used in the development of priced
services. Effective Jan. 1, 1987, the Reserve Banks implemented Financial Accounting Standards Board Statement
No. 87, Employers' Accounting for Pensions. Accordingly, in 1993 the Reserve Banks recognized a credit to
expenses of $54.6 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.

264 80th Annual Report, 1993
Pro Forma Income Statement for Federal Reserve Priced Services.
Calendar Years 1993 and 1992 '
Millions of dollars
1993

Item
2

Income from services provided to depository institutions ..
Operating expenses3
Income from operations
Imputed costs 4
Interest on float
Interest on debt
Sales taxes
FDIC insurance
Income from operations after imputed costs
Other income and expenses5
Investment income
Earnings credits
Income before income taxes
Imputed income taxes 6
Income before cumulative effect of a change
in accounting principle
Cumulative effect on prior years of retroactive application
of accrual method of postretirement benefits
(net of $29.9 million tax) 7
Net income
MEMO: Targeted return on equity8
1. Details may not sum to totals because of rounding.
2. Income from priced services is realized from direct
charges to an institution's account or from charges against
accumulated earnings credits.
3. Operating expenses include direct, indirect, and
other general administrative expenses of the Reserve
Banks for priced services and the expenses of staff members of the Board of Governors working directly on the
development of priced services, which were $2.3 million
in 1993 and $1.9 million in 1992. 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 1993 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

641.1
8.6
632.5
63.2
291.7
134.9
142.7

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




1992
758.4
606.1
152.3

757.3
633.4
123.9
10.6
21.3
12.2
18.0

187.8
170.6

62.0
61.9
17.2
79.1
23.3

14.5
19.8
11.2
8.9

180.2
177.8

54.4
97.9
2.4
100.3
29.5

55.8
-71.4
-15.6
17.5

70.8
24.9

for cash items in process of collection, which reduces
imputed reserve requirements. The income on clearing
balances reduces the float to be recovered through other
means. As-of adjustments and direct charges are midweek closing float and interterritory check float, which
may be recovered from depositing institutions through
adjustments to the institution's reserve or clearing balance or by valuing the float at the federal funds rate and
billing the institution directly. Float recovered through
per-item fees is valued at the federal funds rate and has
been added to the cost base subject to recovery in 1993.
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. Effective January 1,1993, the Reserve Banks implemented Financial Accounting Standards Board Statement
No. 106, Employers' Accounting for Postretirement
Benefits Other than Pensions. Accordingly, in 1993 the
Reserve Banks recognized a one-time cumulative charge
of $101.3 million to reflect the retroactive application of
this change in accounting principle.
8. 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 $7.4 million
and $1.1 million respectively for 1993 and 1992 automation consolidation, an amount that the Reserve Banks
plan to recover, along with a finance charge, by the end of
1999.

Federal Reserve Banks 265
••i..- '"-t.'i- •*•; -v v-

! <\icM< K-.'^rve Priced S e r v i c e s , by S e r v i c e , 1993

!

Millions of dollars

Item

Total

ComFunds
mercial
transfer
check
and net
collection settlement

Commercial
ACH

BookDefinitive Noncash
entry
safekeeping collection
securities

Cash
services

[ncome from services ..

757.3

583.2

88.4

58.9

1.5

4.8

14.2

6.3

Operating expenses

633.4

504.4

69.1

59.8

3.9

5.5

11.8

6.2

Income from
operations

123 9

78 9

19 3

-1 0

-2 4

-6

24

1

62.0

50.6

6.2

5.2

.0

.1

.0

.0

Income from
operations after
imputed costs

61.9

28.3

13.1

-6.2

-2.4

-.7

2.4

.1

Other income and
expenses, net3

17.2

13.7

1.8

1.2

.0

.1

.3

.1

Income before
income taxes

79.1

42.0

14.9

-4.9

-2.4

-.6

2.6

.2

Imputed costs

2

1. Details may not sum to totals because of rounding.
The amortization of the initial effect of implementing
FASB 87 is reported only in the "Total" column of this
table and has not been allocated to individual priced
services, whereas the portion of the credit related to 1993
has been allocated (see pro forma balance sheet, note 3).
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.

dai \ _ d f s 1993. 1992. and 199)
Thousands of items, except as noted
Percent change
Service

1993

1992

1991
1992-93

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

71,199
1,544,848
19,008,808
3,604
17
1,020
65

69,803
1,326,632
19,052,928
3,266
41
1,636
282

1. Activity is defined as follows: for funds transfers,
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;




66,921
1,119,073
18,742,950
2,800
57
2,243
338

1991-92

2.0
16.5
-.2
10.4
-58.5
-37.7
-77.0

4.3
18.5
1.7
16.6
-28.1
-27.1
-16.6

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.

266

80th Annual Report, 1993

Income and Expenses for Locally Priced Federal Reserve Services, by District, 1993 [
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

34.3
69.7
31.9
32.4
55.2
77.8
79.5
24.1
32.2
37.0
43.1
65.9

32.1
62.5
27.4
28.0
48.4
67.7
66.4
20.8
27.7
31.8
34.5
55.6

.6
1.6
1.0
1.1
.7
1.2
1.1
.8
.2
.9
1.1
.2

32.7
64.1
28.4
29.1
49.1
68.9
67.5
21.6
27.9
32.7
35.6
55.8

1.6
5.6
3.5
3.3
6.1
8.9
12.0
2.5
4.3
4.3
7.5
10.1

System total

583.1

502.9

10.5

513.4

69.7

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

.1
.1
.1
.2
.1
.2
.4
.1
.1
.1
.1
.0

.3
.2
.4
.5
.2
.3
.7
.1
.1
.5
.2
.0

System total

1.6

3.5

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

.3
.2
.4
.5
.2
.3
.7
.1
.1
.5
.2
.0

-.2
-.1
-.3
-.3
-.1
-.1
-.3
.0
.0
-.4
-.1
.0

.0

3.5

-1.9

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.

Federal Reserve Banks

267

Income and Expenses for Locally Priced Federal Reserve Services—Continued
Millions of dollars
District

Total

Operating
expense

Float
expense

Total
expense

Net
revenue

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

.1
1.5
.1
.9
*
1.4
.7
.2
.0
.0

.1
1.5

.0

.0

1.5
.0
.7
*
1.8
.5
.3
*
.0
.0
.0

System total

4.9

4.9

.0

4.9

1.8
.5
.3

.0
.0
.1
.2
*
-.4
.2
-.1
*
.0
.0
.0

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

.0
.0
1.9
.0
.0
.4
.1
2.9
.6

System total

6.3




.0
.0
1.9
*
.0
.4
.1
2.7
.5

.0
.0
.0
.0
.0
.0
.2
.1
*
-.1

6.1

269

Board iff Governors Financial Statements
The financial statements of the Board were audited by Price Waterhouse, independent public accountants, for 1993.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Governors of the
Federal Reserve System
In our opinion, the accompanying balance sheet and the related statements of
revenues and expenses and fund balance and of cash flows present fairly, in all
material respects, the financial position of the Board of Governors of the Federal
Reserve System (the Board) at December 31, 1993, and the results of its operations
and its cash flows for the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Board's management; our responsibility is to express an opinion on these statements based on our
audit. We conducted our audit of these statements in accordance with generally
accepted auditing standards and the financial audit standards in Government
Auditing Standards issued by the Comptroller General of the United States. These
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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for
the opinion expressed above. The financial statements of the Board of Governors of
the Federal Reserve System for the year ended December 31, 1992, were audited
by other independent accountants whose report dated February 12, 1993, expressed
an unqualified opinion on those statements.
As discussed in Note 1 to the financial statements, the Board implemented
Statement of Financial Accounting Standard No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, effective January 1, 1993.

Washington, D.C.
February 18, 1994




270 80th Annual Report, 1993
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
As of December 31,
1993
1992
ASSETS
CURRENT ASSETS

Cash
Accounts receivable
Prepaid expenses and other assets

$12,186,714
1,555,026
1,130,894

$ 9,853,172
2,543,876
1,462,101

Total current assets

14,872,634

13,859,149

50,121,444

48,968,026

$64,994,078

$62,827,175

Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Unearned revenues and other liabilities

$ 5,308,176
2,718,512
5,871,643
1,504,663

$ 5,311,460
1,978,051
5,612,406
1,366,877

Total current liabilities

15,402,994

14,268,794

PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 4)
Total assets

LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES

ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3)

15,880,742

FUND BALANCE

33,710,342

48,558,381

$64,994,078

$62,827,175

Total liabilities and fund balance

The accompanying notes are an integral part of these statements.




—

Board Financial Statements 271
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31,
1993
1992
BOARD OPERATING REVENUES

Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 5)
Total operating revenues

$140,465,600
5,452,588

$128,955,300
6,795,747

145,918,188

135,751,047

90,339,090
14,945,349
7,124,330
5,811,359
4,718,069
4,207,146
3,744,162
3,684,542
2,878,660
2,374,942
2,287,576
3,584,471

81,981,637
13,106,634
6,079,387
7,527,562
3,953,838
3,687,785
3,607,431
3,757,815
2,751,537
2,089,901
873,672
3,573,879

145,699,696

132,991,078

218,492

2,759,969

355,947,291

295,400,650

355,947,291

295,400,650

BOARD OPERATING EXPENSES

Salaries
Retirement and insurance contributions
Depreciation and net losses on disposals
Contractual services and professional fees
Travel
Postage and supplies
Utilities
Repairs and maintenance
Software
Printing and binding
Equipment and facilities rental
Other expenses (Note 5)
Total operating expenses
BOARD OPERATING REVENUES OVER EXPENSES
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 EXPENSES BEFORE EFFECT OF
CHANGE IN ACCOUNTING FOR POSTRETIREMENT BENEFITS

—

218,492

—

2,759,969

Less: Effect on prior years (to December 31, 1992) of change
in accounting for postretirement benefits (Note 3)
TOTAL REVENUES (UNDER) OVER EXPENSES

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

15,066,531
(14,848,039)

2,757,969

48,558,381

45,798,412

$ 33,710,342

$ 48,558,381

The accompanying notes are an integral part of these statements.




—

272 80th Annual Report, 1993
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
For the years ended December 31,
1993
1992
CASH FLOWS FROM OPERATING ACTIVITIES

Board operating revenues (under) over expenses

$(14,848,039)

$2,759,969

Adjustments to reconcile operating revenues (under) over expenses to net cash
provided by operating activities:
Effect of change in accounting for postretirement benefits
Depreciation and net losses on disposals
Increase in accrued postretirement benefits
Decrease (Increase) in accounts receivable, and prepaid expenses
and other assets
Increase in accrued annual leave
(Decrease) Increase in accounts payable
Increase in payroll payable
Increase in unearned revenue and other liabilities
Net cash provided by operating activities

15,066,531
7,124,330
814,211
1,320,057
259,237
(3,284)
740,461
137,786

—
6,079,387
—
(2,000,125)
555,041
1,702,068
857,719
109,435

10,611,290

10,063,494

Proceeds from disposals of furniture and equipment
Capital expenditures

3,723
(8,281,471)

15,104
(4,723,564)

Net cash used in investing activities

(8,277,748)

(4,708,460)

NET INCREASE IN CASH

2,333,542

5,355,034

CASH BALANCE, Beginning of year

9,853,172

4,498,138

$ 12,186,714

$ 9,853,172

CASH FLOWS FROM INVESTING ACTIVITIES

CASH BALANCE, End of year

The accompanying notes are an integral part of these statements.




Board Financial Statements

273

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 4 to 10 years for furniture and
equipment and from 10 to 50 years for building equipment and structures. Upon the sale or other disposition of
a depreciable asset, the cost and related accumulated
depreciation are removed from the accounts and any gain
or loss is recognized.
Accounting Change—Effective January 1, 1993, the
Board adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions (FAS 106), using the immediate recognition method. Under this accounting method,
the Board records the cost of these benefits during the
employee's years of service rather than the previous
pay-as-you-go method. Consistent with this method of
implementation option allowed in FAS 106, prior year
financial statements have not been restated.
Reclassification—Certain prior year amounts have
been reclassified to conform with current year
presentation.
(2)

RETIREMENT BENEFITS

Substantially all of the Board's employees participate
in the Retirement Plan for Employees of the Federal
Reserve System (System Plan). The System's Plan is a
multiemployer plan which covers employees of the Federal Reserve Banks, the Board, and the Plan Administrative Office. Employees of the Board who entered on duty
prior to 1984 are covered by a contributory defined benefits program under the Plan. Employees of the Board who
entered on duty after 1983 are covered by a noncontributory defined benefits program under the Plan.
Contributions to the System's Plan are actuarially determined and funded by participating employers at amounts
prescribed by the Plan's administrator. Based on actuarial
calculations, it was determined that employer funding
contributions were not required for the years 1993 and
1992, and the Board was not assessed a contribution for
these years. Excess Plan assets will continue to fund
future years' contributions. The Board is not accountable
for the assets of this plan.
A relatively small number of Board employees participate in the Civil Service Retirement System (CSRS) or




the Federal Employees' Retirement System (FERS). The
Board matches employee contributions to these plans.
These defined benefits plans are administered by the
Office of Personnel Management. The Board's contributions to these plans totalled $867,600 and $898,000 in
1993 and 1992, respectively. The Board has no liability
for future payments to retirees under these programs, and
it is not accountable for the assets of the plans.
(3) OTHER BENEFIT PLANS

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
$3,831,700 in 1993 and $3,419,000 in 1992.
The Board also provides certain defined benefit health
and life insurance for its active employees and retirees
under Federal and Board sponsored programs. As discussed in Note 1, the Board adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions
(FAS 106), effective January 1, 1993. The Board elected
to immediately recognize the accumulated postretirement
benefit obligation upon adoption of FAS 106; as of January 1, 1993, the Board recorded an accumulated postretirement benefit obligation of $15,066,531. The net periodic postretirement benefit cost for 1993 included the
following components:
Service cost (benefits attributed to
employee services during the year) . . .
Interest cost on accumulated
postretirement benefit obligation
Net periodic postretirement benefit cost . . .

$ 248,662
1,181,104
$1,429,766

Since postretirement benefit costs for the year ended
December 31, 1992, were recorded on the cash basis, the
amount recognized as expense in 1992 is not comparable
with the current year. Although postretirement benefits
are recorded using the accrual basis of accounting in
accordance with FAS 106, the Board's current policy is to
fund the cost of these benefits on a pay-as-you-go basis.
The FAS 106 accumulated postretirement benefit obligation at December 31, 1993, is comprised of:
Retirees
Fully eligible active plan participants
Other active plan participants
Unrecognized net loss

$ 9,971,023
2,297,911
5,092,539
17,361,473
(1,480,731)

Liability for accumulated
postretirement benefit obligation

$15,880,742

The liability for the accumulated postretirement benefit
obligation and the net periodic expense was determined
using an 8-percent discount rate. Unrecognized losses of
$1,480,731 result from applying a discount rate of 7 percent as of December 31, 1993. Under FAS 106, the Board
may have to record some of these unrecognized losses
in operations in future years. The assumed health care

274 80th Annual Report, 1993
cost trend rate for measuring the increase in costs from
1993 to 1994 was 12.5 percent for those under age 65,
and 11 percent for those over age 65. These rates were
assumed to gradually decline to an ultimate rate of
6.4 percent in the year 2004 for the purpose of calculating
the January 1, 1993, transition amount and the 1993
expense, and to 6.0 percent in 2004 for the purpose of
calculating the December 31, 1993, accumulated postretirement benefit obligation. The effect of a 1-percent
increase in the assumed health care cost trend rate would
increase the accumulated postretirement benefit obligation by $1,947,400 at December 31, 1993, and the
net periodic benefit cost by $173,400 for the year. The
assumed salary trend rate for measuring the increase
in postretirement benefits related to life insurance was
4 percent.
The above accumulated postretirement benefit obligation is related to the Board sponsored health benefits and
life insurance programs. The Board has no liability for
future payments to employees who continue coverage
under the federally sponsored programs upon retiring.
Contributions for active employees participating in federally sponsored programs totalled $3,353,200 and
$1,149,700 in 1993 and 1992, respectively.
(4) 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,
1993
1992
Land and
improvements
Buildings
Furniture and
equipment
Less accumulated
depreciation ..
Total property,
buildings, and
equipment

; 1,301,314
64,891,700

$

1,301,314
63,856,738

43,055,132
109,248,146

38,550,995
103,709,047

59,126,702

54,741,021

$ 50,121,444

$ 48,968,026




(5) 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
1993
Other Revenues
Data processing
revenue
Subscription
revenue
Reimbursement
of regulatory
investigation
costs
Reimbursable
services to
other agencies .
Miscellaneous
Total other
revenues
Other Expenses
Cafeteria operations,
net
Tuition, registration,
and membership
fees
Subsidies and
contributions . . .
Miscellaneous
Total other
expenses

$3,152,492

$2,737,073

1,579,653

1,537,013

—

1,500,000

319,938
400,505

471,590
550,071

$5,452,588

$6,795,747

$ 740,900

$ 765,478

1,015,507

866,965

768,186
1,059,878

735,835
1,205,601

$3,584,471

$3,573,879

(6) 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, 1993, are as follows:
1994
1995
1996
1997
1998
after 1998

$ 2,985,900
3,179,900
3,212,000
3,194,500
1,390,000
5,947,200
$19,909,500

Rental expenses under these operating leases were
$1,927,600 and $644,600 in 1993 and 1992, respectively.
(7) FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL

The Board is one of the five member agencies of the
Federal Financial Institutions Examination Council (the
"Council"). During 1993 and 1992, the Board paid
$371,200 and $324,300, respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1993 and
1992. During 1993 and 1992, the Board paid $124,500
and $92,000, respectively, for office space sub-leased
from the Council.
•

Statistical Tables




276

80th Annual Report, 1993

1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31, 1993 ]
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

11,053,286
8,018,000
372,129
93,975
4,638,425
1,025,000
160^67,594
132,076,127
39,571,572

Total bought outright

332,015,293

Held under repurchase agreement

12,187,000

Total securities

344,202,293

Total loans and securities

349,959,693

Items in process of collection
Transit items

5,980,549

Other items in process of collection

1,192,782

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

7,173,331
156,810
872,266
228,729
61,110
1,162,105
263,731

898,374

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




1,055,184
1,057,335
608,399
448,935
22,339,560
3,406,080
5,086,337
25,271
643,300
37,753
27,769
323,883
32,338,887
409,970,511

Tables 277

LIABILITIES

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

409,264,572
65,339,274

Total Federal Reserve notes, net

343,925,298

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

34,951,224
14,809,011
386,345

Other deposits
Officers' and certified checks
International organizations
Other3

23,255
111,905
261,403

Total other deposits
Deferred credit items

396,563
6,210,168

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

1,837,782
68,370
10,378
572,851

Total other liabilities

2,489,380

Total liabilities

403,167,988
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 $10,447.8 million was invested in
securities issued by foreign governments, and the balance
was invested with foreign central banks and the Bank for
International Settlements.




3,401,261
3,401,261
0
409,970,511
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.

278 80th Annual Report, 1993
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1993 and 1992
Millions of dollars'
Total

Boston

Item
1993

1992

1993

11,053
8,018
372

11,056
8,018
446

94
0

675
0

Federal agency obligations
Bought outright
Held under repurchase agreements

4,638
1,025

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

1992

ASSETS

Gold certificate account
Special drawing rights certificate account
Coin

705
511
19

5,413
631

274
0

346
0

332,015
12,187
349,960

295,011
7,463
309,192

19,592
0
19,870

18,843
0
19,189

7,173
1,055

8,911
1,026

353
91

634
90

22,339
10,000

21,514
7,738

793
460

794
376

0

0

-2,195

-1,634

409,971

Loans
To depository institutions
Other

660
511
10

367,901

20,553

20,683

343,925

314,208

17,254

18,572

34,951
14,809

32,079
7,492

2,555

1,442

386
397

206
372

0
5
15

0
5
21

50,543

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

Other liabilities and accrued dividends4
Total liabilities
CAPITAL ACCOUNTS

2,575

1,468

5,561
1,876

326
152

311
115

403,168

Deferred credit items

40,148

6,210
2,489

361,793

2037

20,466

3,401
3,401

3,054
3,054

108
108
0

0

0

123
123
0

409,971

367,901

20,553

20,683

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

409,265
65,339

363,479
49,271

19,706
2,452

21,432
2,860

Federal Reserve notes, net

343,925

314,208

17,254

18,572

11,053

11,056
8,018

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

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

0

0

324,854

295,134

Total collateral

343,925

314,208




8,018

Tables 279
2.-—Continued

New York

Philadelphia

1992

1993

3,753
2,808
11

1993

Cleveland

1992

1993

Richmond

1992

1993

1992

941

26

899
652
67

4,042
2,808
13

399
303
15

347
303
24

701

658

556

556

21

652
95

9

0

0

0

8
0

592
0

0
0

0
0

65
0

0
0

1,602
1,025

2,106
631

176
0

165
0

312
0

341
0

362
0

423
0

114,654
12,187
129,477

114,769
7,463
124,969

12,583
0
12,766

8,979
0
2,736

22,303
0
22,614

18,569
0
18,909

25,898
0
26,325

23,068
0
23,492

789
140

1,352
137

445
47

538
45

275
37

442
36

502
139

760
128

6,474
4,529

6,258
3,421

858
306

852
199

1,289
512

1,308
375

1,537
835

1,383
876

12,726

-19,514

921

2,183

-3,321

1,420

598

-220

160,707

123,485

16,060

14,227

22,684

23,731

31,553

28,106

134,964

105,028

13,026

11,341

20,161

21,680

28,035

25,083

6,969
14,809

7,531
7,492

2,248

2,207

1,556

1,341

2,357

2,025

288
196

107
195

0
5
7

0
6
8

0
8
14

0
9
15

0
10
32

0
9
32

22,261

15,324

2,261

2,221

1,578

1,364

2,398

2,068

747
798

629
733

432
114

368
62

340
158

220
114

477
186

392
144

158,769

121,715

15,832

13,992

22,237

23,378

31,096

27,686

969
969
0

885
885
0

114
114
0

117
117
0

224
224
0

176
176
0

229
229
0

210
210
0

160,707

125,485

16,060

14,227

22,684

23,731

31,553

28,106

157,408
22,444

119,266
14,238

14,472
1,446

13,058
1,717

23,474
3,313

23,683
2,003

34,012
5,978

29,944
4,861

134,964

105,028

13,026

11,341

20,161

21,680

28,035

25,083




280 80th Annual Report, 1993
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1993 and 1992—Continued
Millions of dollars'
Chicago

Atlanta
Item
1993

1992

1993

1992

ASSETS

509
318
55

503
318
38

1,186
1,036
32

1,270
1,036
30

Federal agency obligations
Bought outright
Held under repurchase agreements

189
0

184
0

539
0

670
0

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

13,507
0
13,697

10,043
0

10,229

38,585
0
39,124

36,537
0
37,210

775
61

1,305
57

674
113

923
112

Other assets
Denominated in foreign currencies3
All other

2,120
380

1,971
326

2,531
960

2,603

Interdistrict Settlement Account

2,185

3,833

1,743

20,101

18,579

47,400

14,960

13,232

41,541

35,485

3,617
0
13
2
3,632

4,083
0
13
5
4,101

4,022
0
16
81
4,118

3,422
0
17
49
3,489

736
132

600
67

679
282

621
231

9,461

18,000

46,620

39,825

320
320
0

290
290
0

390
390
0

346
346
0

20,101

18,579

47,400

40,517

19,797
4,837

17,318
4,086

45,621
4,081

38,700
3,215

14,960

13,232

41,541

35,485

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

Total assets

111
-3,444
40,517

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
bought back under matched sale-purchase transactions.




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

Tables 281

St. Louis
1993

Minneapolis

1992

1993

Kansas City

San Francisco

Dallas

1992

1993

1992

243
186
15

195
186
16

409
199
21

329
199
36

510
377
42

463
377
27

4
0

1
0

1
0

5
0

0
0

0

1993

1992

1992

1993
1,392
904
61

1,299
904
98

0
0

69
0

199
0

542
0

616
0

14,219
0
14,418

10,823
0
11,021

38,761
0
39,303

33,583
0
34,268

482
51

511
158

418
161

1,555
151

1,349
146

795
292

807
169

1,550
380

1,717
282

3,295
895

2,724
667

2,555

1,442

5,062

-2,831

2,314

-12,122

2,134

8,418

8,768

16,561

15,266

15,115

16,781

35,433

43,589

12,824

7,048

7,458

14,511

13,544

12,097

14,082

26,323

35,878

907
0
3
9
919

952
0
3
3
958

677
0
4
5
686

721
0
4
5
730

1,233
0
5
11
1,249

1,079
0
5
6
1,090

2,021
0
10
4
2,034

1,808
0
11
27
1,846

6,791
0
21
21
6,833

5,466
0
18
6
5,490

215
99

204
44

435
67

390
29

427
118

381
112

14,031

8,236

8,608

16,305

14,623

356
73
16,357

1,016
272
34,443

1,108
212

15,238

362
53
15,049

42,688

74
74
0

70
70
0

91
91
0

80
80
0

128
128
0

109
109
0

246
246
0

212
212
0

495
495
0

450
450
0

15,387

14,171

8,418

8,768

16,561

15,266

15,115

16,781

35,433

43,589

16,735
2,729

14,440
1,617

8,219
1,171

8,191
733

16,022
1,511

15,086
1,542

16,082
3,986

16,914
2,831

37,716
11,393

45,448
9,570

14,006

12,824

7,048

7,458

14,511

13,544

12,097

14,082

26,323

35,878

392
168
22

304
168
25

1
0

5

164
0

132
0

106
0

84
0

176
0

146
0

199
0

11,723
0
11,888

7,218
0
7,356

7,600
0
7,710

4,598
0
4,683

12,592
0
12,769

7,981
0
8,131

246
31

294
30

465
35

415
33

583
51

512
271

531
152

585
181

566
120

1,857

5,311

-1,004

1537

14,171

14,006

0




0

282

80th Annual Report, 1993

3. Federal Reserve Open Market Transactions, 1993 '
Millions of dollars
Jan.

Feb.

Mar.

Apr.

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

0
0
24,542
0

0
0
19,832
0

0
0
23,796
0

121
0
30,124
0

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

0
0
561
-1,202
0

0
0
2,892
-6,044
0

279
0
4,303
-2,602
0

244
0
1,950
-1,100
0

1 to 5 years
Gross purchases
Gross sales
Maturity shift
Exchanges

0
0
-64
882

0
0
-2,617
4,564

1,441
0
-4,303
2,602

2,490
0
-1,630
800

5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges

0
0
^97
0

0
0
-98
1,000

716
0
0
0

1,147
0
-320
300

More than 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges

705
0
0
0

oooo

Type of transaction

All maturities
Gross purchases
Gross sales
Redemptions

5,111
0
0

Net change in U.S. Treasury securities

ooo

Repurchase agreements
Gross purchases
Gross sales

oooo

Matched transactions
Gross sales
Gross purchases

0
0
-177
480

ooo

U.S. TREASURY SECURITIES

3,141
0
0

114,543
116,510

111,491
113,349

146,563
143,049

127,115
128,924

34,768
42,231

28,544
25,889

37,815
33,714

30,197
36,953

-5,497

4,513

3,728

163

0
0
103

0
0
85

0
0
101

0
0
28

2,237
2,868

1,107
832

1,811
1,519

197
764

-734

190

11
9

-595

-6,231

4,703

3,918

-431

FEDERAL AGENCY OBLIGATIONS

Outright transactions
Gross purchases
Gross sales
Redemptions
Repurchase agreements
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.

Tables 283

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Total

349
0
26,610
0

7,280
0
24,821
0

0
0
35,943
0

902
0
27,775
0

366
0
31,128
0

1,396
0
25,783
468

5,931
0
27,641
0

1,394
0
30,836
0

17,737
0
328,829
468

0
0
4,108
-4,013
0

0
0
4,002
-2,152
0

0
0
0
0
0

100
0
1,497
-5,491
0

411
0
3,074
-1,861
0

0
0
913
-1,566
0

0
0
5,158
-7,641
0

189
0
2,910
-2,910
0

1,223
0
0
0
0

0
0
-3,652
3,245

0
0
-4,002
2,152

200
0
666
0

1,100
0
-834
3,866

2,400
0
-3,074
1,861

0
0
-31
1,566

100
0
^,689
5,341

2,619
0
-2,910
2,910

10,350
0
-27,140
0

0
0
-333
468

0
0
0
0

0
0
-666
0

500
0
-432
1,100

797
0
0
0

0
0
-882
0

0
0
-272
2,300

1,008
0
0
0

4,168
0
0
0

0
0
-123
300

0
0
0
0

0
0
0
0

100
0
-231
525

717
0
0
0

0
0
0
0

0
0
-197
0

826
0
0
0

3,457
0
0
0

349
0
0

7,280
0
0

200
0
0

2,702
0
0

4,691
0
0

1,396
0
468

6,031
0
0

6,035
0
0

36,935
0
468

124,462
123,227

111,726
113,095

115,504
117,074

136,037
135,705

124,898
122,578

115,160
112,837

109,941
112,772

137,645
136,821

1,475,085
1,475,941

33,987
28,640

53,051
43,342

41,190
56,246

53,053
48,263

62,905
61,399

27,693
30,397

38,493
34,072

33,751
29,577

475,447
470,723

4,461

18,357

-13,286

7,160

3,878

-4,099

13,283

9,386

42,047

0
0
41

0
0
22

0
0
366

0
0
125

0
0
35

0
0
70

0
0
15

0
0
81

0
0
1,072

2,105
2,105

2,968
2,019

3,479
4,428

2,485
2,415

9,810
7,734

3,812
5,509

2,841
2,861

2,211
1,615

35,063
34,669

-41

927

-1,315

-55

2,041

-1,767

-35

515

-678

4,420

19,284

-14,601

7,105

5,919

-5,866

13,248

9,901

41^68




284 80th Annual Report, 1993
4. Federal Reserve Bank Holdings of L.S. i.'reasury and Federal Agency Securities,
December 31, 1991-93 !
Millions of dollars
Change

December 31
Description
1993

1992

1991

1992-93

1991-92

339,584

303,435

272,583

36,149

30,852

90,186
77,749

79,988
70,231

74,888
63,844

10,198
7,518

5,100
6,387

35,423
79,826
24,659
31,739

37,758
68,750
18,903
27,805

30,542
64,299
14,469
24,540

-2,335
11,076
5,756
3,934

7,216
4,451
4,434
3,265

167,936
132,076
39,572

150,219
118,179
35,037

138,732
101,520
32,331

17,717
13,897
4,535

11,487
16,659
2,706

12,187
7,568
0

7,463
8,424
0

15,345
6,097
0

4,724
-856
0

-7,882
2^27
0

Held outright2

4,638

5,413

6,045

-775

-632

By remaining maturity
1 year or less
More than 1 year through 5 years
More than 5 years through 10 years
More than 10 years

1,823
2,105
569
142

2,064
2,511
696
142

2,340
2,508
1,008
189

-241
-406
-127
0

-276
3
-312
-47

1,201
1,249
66
2,005
0

1,296
1,766
66
2,167
0

1,440
2,029
66
2,342
37

-95
-517
0
-162
0

-144
-263
0
-175
-37

117
0

117
0

117
12

0
0

0
-12

1,025

631

553

394

78

U.S. TREASURY SECURITIES

Held outright2
By remaining maturity
Bills
1-91 days
92 days to 1 year
Notes and bonds
1 year or less
More than 1 year through 5 years
More than 5 years through 10 years . . .
More than 10 years
By type
Bills
Notes
Bonds
Repurchase agreements
MSPs, foreign accounts
MSPs, in the market
FEDERAL AGENCY SECURITIES

By issuer
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
Repurchase agreements
1. Details may not sum to totals because of rounding.
The categories have been revised since last year's
REPORT.




2. Excludes the effects of temporary transactions—
repurchase agreements and matched sale-purchase agreements (MSPs).

Tables 285
,iks.

\Ii irnhni

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

Ibtal

Employees

Other officers

Number

Annual
salaries
(dollars)

Number

Annual
salaries
(dollars)

46,884,828
162,281,650
40,315,639
39,172,150
58,550,532
69,127,082
82,937,284
32,122,551
35,012,882
48,633,867
46,868,099
86,783,392

1,467
4,294
1,423
1,399
2,135
2,414
2,551
1,212
1,238
1,675
1,591
2,535

53,067,278
182,868,250
45,939,139
44,198,680
65,685,432
76,205,282
92,387,184
36,412,751
39,541,182
54,058,167
52,092,403
96,878,305

Number

Annual
salaries
(dollars)

177,600
205,000
184,500
165,500
159,600
212,000
221,700
190,900
175,200
159,800
161,500
229,600

62
189
60
50
80
79
103
51
49
60
58
96

6,004,850
20,381,600
5,439,000
4,861,030
6,975,300
6,866,200
9,228,200
4,099,300
4,353,100
5,264,500
5,062,804
9,865,313

25

2,482,100

360

5

17,048,727

390

19,530,827

2,242,900

962

90,883,297

22,299

1,051

765,738,683

24,324

858,864,880

Annual
salary
(dollars)




Fulltime
1,190
4,044
1,304
1,279
1,929
2,273
2,392
1,055
1,076
1,553
1,480
2,364

Parttime
214
60
58
69
125
61
55
105
112
61
52
74

286 80th Annual Report, 1993
6. Income and Expenses of Federal Reserve Banks, 1993
Dollars
Item1

Total

Boston

New York

Philadelphia

Cleveland

CURRENT INCOME

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

5,564,193

75,142

784,389

269,540

181

16,890,720,955
1,249,248,686
757,299,472
11,417,269

1,014,558,922
44,484,936
43,728,635
331,696

6,128,066,220
362,139,604
107,985,749
7,835,815

598,122,497
48,088,241
39,574,727
213,306

1,105,592,400
72,384,137
44,464,874
229,592

Total

18,914,250,574

1,103,179,331

6,606,811,777

686,268,311

1,222,671,184

918,424,802
123,643,287
30,598,366
44,266,367
42,818,464

55,083,540
15,560,945
3,065,541
2,353,408
1,917,492

188,872,094
52,377,963
3,622,890
5,890,137
8,006,978

50,240,255
14,879,105
885,679
2,258,335
2,049,311

47,423,217
13,098,353
1,663,506
2,462,776
1,955,385

79,172,820
10,342,162
56,718,191

4,616,997
457,345
3,270,334

11,392,724
2,078,431
9,766,938

3,470,908
439,147
3,294,703

6,200,669
789,999
3,119,800

26,095,361
44,102,286
32,184,538
26,654,949
23,995,451

3,445,646
3,311,943
2,567,002
654,085
752,127

4,245,810
7,445,546
6,524,026
13,817,274
4,518,651

1,867,048
2,004,877
2,856,679
366,110
1,205,779

1,436,091
1,745,684
1,840,594
343,016
838,200

8,642,796
29,006,750
118,576,407
61,670,630
182,588,684
37,931,989
0
(46,974,192)
(3,399,758)

261,294
913,164
4,827,820
3,629,508
11,330,964
2,418,358
1,178,016
(9,572,696)
(316,416)

1,552,210
5,262,208
20,272,801
11,313,329
41,389,736
6,654,606
(2,599,142)
(5,471,428)
(18,717)

415,939
801,363
4,404,454
2,674,606
23,892,111
1,651,681
4,903,908
(3,076,407)
(187,038)

247,956
888,906
5,556,610
3,655,485
10,756,841
2,484,371
4,294,432
(3,339,219)
(295,864)

1,847,060349
(189,260,435)
1,657,799,914

111,726,417
(9,152,913)
102,573,504

396,915,065
(39,459,321)
357,455,744

121,298,553
(20,096,109)
101,202,444

107,166,808
(17,177,478)
89,989,330

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 287
6,— Continued
Richmond

Atlanta

Chicago

St. Louis

Minneapolis Kansas City

Dallas

San Francisco

334,916

97,125

833,959

347,124,853 581,368,658
32,740,073 44,658,649
41,659,094 48,114,654
101,457
128,893

687,482,280
87,712,656
54,170,503
236,070

1,943,929,922
182,224,829
86,369,801
622,909

1,460,738,911 861,700,654 2,233,359,669 597,859,947

423,402,401

674,578,334

829,698,634

2,213,981,421

230,416

351,679

144,962

1,309,605,453 648,986,059
85,509,215 118,231,697
65,142,479 93,871,686
466,250
251,348

692,396

1,988,279,841 537,603,849
142,291,217 28,783,433
101,646,876 30,570,393
209,876
790,056

1,749,488

91,935,994
23,657,995
13,941,639
5,522,976
12,395,381

85,184,076
24,418,047
1,197,813
4,602,075
1,972,904

97,304,524
26,957,750
1,231,198
5,451,591
4,566,038

40,174,380
11,825,720
663,097
2,064,642
1,761,629

43,306,573
10,512,847
1,525,252
2,727,575
2,142,749

58,186,606
17,831,515
496,466
3,003,613
1,163,537

56,339,181
15,540,235
994,598
2,876,279
1,150,954

104,374,362
28,333,072
1,310,687
5,052,960
3,736,106

7,432,219
936,681
6,884,473

10,530,374
1,318,703
5,985,768

9,497,409
931,954
6,084,905

3,975,228
598,118
3,408,515

5,814,473
499,649
2,431,160

6,012,414
818,655
3,267,861

4,383,275
861,461
3,413,271

5,846,130
612,019
5,790,463

2,184,823
4,707,131
3,045,710
5,429,269
2,730,934

1,668,282
3,265,448
2,420,586
2,053,958
2,489,320

3,876,771
4,808,628
2,533,702
1,977,958
5,228,823

481,137
2,022,685
1,634,318
422,803
805,944

865,808
1,149,274
1,046,076
752,589
687,548

843,395
3,145,825
1,602,171
327,913
854,559

2,572,993
4,719,212
2,508,107
163,835
1,784,191

2,607,557
5,776,033
3,605,567
346,139
2,099,375

848,098
1,866,166
40,635,291
7,655,027
10,500,338
4,258,019
(27,826,938)
(9,324,124)
(895,734)

866,100
2,305,213
7,747,233
6,695,941
8,436,001
4,424,451
2,847,825
(2,569,051)
(323,383)

1,065,739
9,964,700
11,869,680
10,234,537
32,414,846
4,688,365
(6,956,708)
(3,091,860)
(149,290)

260,369
672,247
3,320,756
2,019,383
3,602,738
1,727,848
4,570,892
(1,518,036)
(59,088)

1,114,640
970,110
4,015,268
3,028,852
3,944,819
1,690,120
(870,118)
(833,480)
(333,731)

351,573
2,074,696
2,472,037
1,969,669
8,588,564
2,298,782
6,734,630
(704,234)
(657,274)

742,502
1,098,794
4,203,869
2,664,934
7,932,378
2,559,203
10,267,831
(3,468,669)
(135,188)

916,376
2,189,183
9,250,588
6,129,359
19,799,348
3,076,185
3,455,372
(4,004,988)
(28,035)

230,491,260 84,435,325 86,188,053 120,682,973 123,173,246
(9,317,353)
(19,478,772) (10,541,249) (8,783,775) (13,066,460)
211,012,488 73,894,076 77,404,278 107,616,513 113,855,892

210,273,858
(15,584,168)
194,689,690

208,521,368 177,537,684
(12,548,330) (14,054,507)
195,973,038 163,483,177




288 80th Annual Report, 1993
6. Income and Expenses of Federal Reserve Banks, 1993—Continued
Dollars
Item1

Total

Boston

New York

Philadelphia

Cleveland

17,256,450,656

1,000,605,827

6,380,706,293

585,065,867

1,132,681,854

PROFIT AND LOSS

Current net income
Additions to and deductions
from current net income5
Profit on sales of U.S.
Treasury and federal
agency securities
Net profit on foreign
exchange transactions
Other additions
Total additions
Total deductions6 . . . .
Net additions to or
deductions (-) from
current net income
Cost of unreimbursed Treasury
services
Assessments by Board
Board expenditures7
Cost of currency
Net income before payment to
U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)

38,910,354

2,362,418

14,033,132

1,372,820

2,556,007

265,499,308
179,019
304,588,682
(505,508,552)

9,425,225
1,803
11,789,446
(32,979,239)

76,941,700
74,740
91,049,572
(96,561,073)

10,195,173
14,126
11,582,120
(33,108,635)

15,319,310
13,958
17,889,275
(30,269,967)

(200,919,870)

(21,189,793)

(5,511,501)

(21,526,515)

(12,380,692)

29,348,049

1,157,577

3,139,404

1,634,962

1,685,404

140,465,600
355,947,291

5,006,300
20,988,078

40,674,400
116,794,492

5,218,700
12,787,760

8,215,500
23,192,101

16,529,769,846

952,264,079

6,214,586,496

543,897,930

1,087,208,158

195,422,234

7,076,855

55,967,417

6,873,347

12,010,618

15,986,764,712

930,501,974

6,074,995,179

540,619,683

1,027,887,290

Transferred to surplus

347,582,900

14,685,250

83,623,900

(3,595,100)

47,310,250

Surplus, January 1
Surplus, December 31

3,053,622,100
3,401,205,000

108,310,750
122,996,000

885,020,600
968,644,500

117,317,900
113,722,800

176,218,550
223,528,800

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 $131,350,260.
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. See the
extract on pp. 290-91 for correction to last year's data.
6. Includes initial accrual of postretirement employee
benefits required by the adoption of the Statement of
Financial Accounting Standards (SFAS) No. 106,
"Employers' Accounting for Postretirement Benefits
Other Than Pensions." The effect of SFAS 106 on the
Reserve Banks was ($503,725,767).
7. For additional details, see the last four pages of
the preceding section: Board of Governors, Financial
Statements.

Tables 289

Richmond

Atlanta

1,264,765,873

698,217,478

3,037,703

Chicago

1,492,373

St. Louis

2,022,347,181 523,965,870

4,626,090

1,225,942

Minneapolis Kansas City

Dallas

San Francisco

345,998,122

566,961,821

715,842,741

2,019,291,730

790,987

1,327,376

1,582,614

4,502,890

18,266,352 25,195,884
4,334
9,217
21,308,390 26,697,474
(36,520,950) (45,491,325)

30,081,072
6,079,934
6,956,082
9,451,775
18,425,652
13,264
67
29,654
46
10,417
34,720,426
7,305,944
7,776,723 10,779,197
20,018,683
(55,108,616) (31,391,290) (20,924,316) (40,079,091) (29,448,056)

(15,212,560) (18,793,851)

(20,388,189) (24,085,346) (13,147,593) (29,299,894)

39,161,148
7,393
43,671,431
(53,625,994)

(9,429,373)

(9,954,563)

2,875,705

3,084,435

3,073,702

1,774,207

1,890,219

2,402,305

2,370,626

4,259,504

9,619,500
29,323,293

13,209,600
16,958,398

15,939,100
37,898,065

3,186,600
14,141,071

3,739,300
8,021,270

5,031,000
14,773,237

9,932,200
16,563,299

20,693,400
44,506,227

646,171,194 1,945,048,124 480,778,646 319,199,740 515,455,385

1,207,734,815
13,061,399

1,176,241,766 597,512,673
18,431,650

677,547,243

1,939,878,036

7,103,256

14,333,677

28,757,435

1,879,027,386 472,141,134 303,003,282 489,172,679

629,121,366

1,866,540,300

19,179,450

34,092,200

44,580,300

79,968,800 108,819,900
90,843,950 127,999,350

211,943,300
246,035,500

450,294,650
494,874,950

18,375,321

22,248,839

4,292,762

30,283,200

43,771,900

4,344,750

210,062,000 289,640,200
228,493,650 319,923,400

346,093,200
389,865,100

69,932,250
74,277,000




5,321,308

10,875,150

290

80th Annual Report, 1993

Errata

79th Annual Report, 1992

The portion of table 6 on pp. 272-73 of the 1992 REPORT covering "Additions to and
deductions from current net income" contains incorrect data. The corrected data appear in
bold type in the excerpt below.
6.

Income and Expenses of Federal Reserve Banks, 1992—Continued
Dollars
Item

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




Total

121,119,028
518,036
121,637,064

Boston

New York

Philadelphia

Cleveland

7,919,191
336,269
8,255,461

47,361,641
39,331
47,400,973

3,494,576
9,953
3,504,528

7,605,686
4,203
7,609,888

(1,078,709,567)
(2,003,418)
(1,080,712,986)

(39,804,383)
(74,297)
(39,878,680)

(313,796,613)
(729,155)
(314,525,769)

(42,716,899)
(54,974)
(42,771,873)

(65,585,542)
(10,279)
(65,595,821)

(959,075,922)

(31,623,219)

(267,124,796)

(39,267,344)

(57,985,932)

Tables 291

6.— Errata, continued
Richmond

9,514,182
11,215
9,525,397

Atlanta

Chicago

St. Louis

4,094,691
3,353
4,098,044

15,087,036
1,612
15,088,647

3,059,936
4,818
3,064,754

Minneapolis Kansas City

1,760,568
91,948
1,852,516

3,308,309
6,055
3,314,363

Dallas

4,565,278
4,244
4,569,522

San Francisco

13,347,935
5,036
13,352,971

(69,361,025) (98,809,796) 130,523,858) (26,644,126) (28^70,062) (40,451,609) (86,081,023) (136,564,631)
(120,020)
(34,020)
(36,341)
(440,742)
(117,722)
(10,180)
(92,463)
(283,224)
(69,481,045) (98,902,259) (130,557,878) (26,654,306) (28,487,784) (40,892,351) (86,117,364) (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)




292 80th Annual Report, 1993
7. Income and Expenses of Federal Reserve Banks. 1914-93 '
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 293

Payments to U.S. Treasury
Dividends
paid

Franchise
tax

Under
section 13b

Interest on
Federal Reserve
notes

to surplus
(section 13b)

Transferred
to surplus
(section 7)

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

1,134,234

' '. '.

2,703,894

'. '. '.

5.654,018
6,119,673
6,307,035
6.552.717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911

60,724,742
59,974,466
10,850,605
3.613.056
113,646
59,300
818,150
249,591
2,584,659
4,283,231

82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597

10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462

17,308

-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071
607,422
352,524
2,616,352
1,862,433
4,533,977

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

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

'. '. '.
-60,323
27,695
102,880
67,304
^19,140
^25,653

291,661
227,448
176,625
119,524
24,579

42,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605

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

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

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




294 80th Annual Report, 1993
7. Income and Expenses of Federal Reserve Banks. 1914-93—Continued
Dollars

Federal Reserve Bank
and period

Current
income

Net
expenses

Net additions
or
deductions (-)

Assessments by
Board of Governors
Board
expenditures

Costs
of currency

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

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

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

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

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

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

1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993

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
18,914,250,574

718,032,836
814,190,392
926,033,957
1,023,678,474
1,102,444,454
1,127,744,490
1,156,867,714
1,146,910,699
1,205,960,134
1,332,160,712
1,349,725,812
1,429,322,157
1,474,530,523
1,657,799,914

(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)
(200,919,870)

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
140,465,600

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
295,400,692
355,947,291

Total, 1914-93

345,938,644,285

24,985,375,340

Aggregate for each Bank,
1914-93
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

18,613,420,920
107,548,933,556
13,225,644,800
22,731,714,462
27,414,783,831
14,826,850,937
47,871,002,837
11,292,498,289
6,318,691,261
14,045,187,169
18,714,096,795
43,335,819,429

1,639,334,224
5,012,056,041
1,359,916,750
1,614,879,766
2,079,903,128
2,252,713,406
3,254,187,995
1,279,601,235
1,174,727,956
1,612,710,483
1,515,667,037
2,701,371,440

Total

345,938,644,285

155,627,514
1,356,577,841
205,290,910
217,242,707
271,921,382
440,233,955
593,806,937
107,009,268
147,156,772
176,301,137
408,499,610
752,852,952

67,082,986
490,173,186
86,203,818
130,716,190
102,915,176
148,880,760
249,781,772
54,212,872
53,877,715
76,058,509
125,663,173
257,832,351

197,265,169
936,268,463
132,025,678
205,468,574
292,233,490
177,181,330
429,784,923
115,753,225
59,267,890
139,051,995
176,558,810
387,366,517

24,985,375,3404 4,832,520,986

1,843,398,508

3,248,226,064

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 $3,529,877,199 transferred to surplus was
reduced by direct changes of $500,000 for charge-off on
Bank premises (1927), $139,299,557 for contributions to




4,832,520,986 1,843,398,508 3,248,226,064

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 $3,401,204,998 on December 31, 1993.
4. See note 2, table 6.

Tables 295

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
195,422,234

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
15,986,764,712

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
347,582,900
3,529,877,1993

2,950,412,027

149,138,300

2,188,893

313,770,870,360

(3,657)

118,157,958
808,430,647
149,140,400
221,463,390
159,849,550
223,669,318
393,168,780
88,382,056
83,061,582
119,766,409
191,229,424
394,092,512

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

16,593,044,628
101,056,342,370
11,535,384,767
20,506,402,265
24,789,464,998
12,106,937,089
43,677,063,350
9,764,663,347
4,981,452,579
12,113,664,108
16,846,432,420
39,800,018,437

135,411
(433,412)
290,661
(9,906)
(71,517)
5,491
11,682
(26,515)
64,874
(8,674)
55,337
(17,089)

133,090,825
1,055,801,071
128,053,022
236,762,593
234,373,458
325,189,940
405,193,854
79,396,628
94,721,163
132,139,300
250,312,978
504,742,367

2,950,412,027

149,138,300

2,188,893

313,770,870,360

(3,657)

3,529,877,199




296 80th Annual Report, 1993
8. Acquisition Costs and Net Book Vitiiu:
and Branches, December 31. 1993 ]

Premises of Federal Reserve Banks

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

86,118,643

5,919,179

114,111,322

90,943,976

NEW YORK.
Buffalo
PHILADELPHIA

20,354,440
887,844
2,251,556

99,526,036
2,775,173
55,497,145

43,528,039
2,767,406
5,903,704

163,408,514
6,430,424
63,652,405

136,215,094
4,136,601
47,217,109

CLEVELAND .
Cincinnati
Pittsburgh

1,074,281
2,246,599
1,658,376

11,606,243
13,752,555
9,535,710

6,969,480
8,235,221
4,347,570

19,650,005
24,234,375
15,541,656

13,906,160
11,562,935
11,904,502

RICHMOND.
Baltimore
Charlotte

5,812,396
6,476,335
3,129,645

80,449,462
26,826,903
27,402,251

18,295,193
3,842,189
4,737,485

104,557,050
37,145,427
35,269,381

77,796,619
28,948,142
31,873,809

ATLANTA...
Birmingham..
Jacksonville..
Miami
Nashville . . . .
New Orleans.

1,209,360
3,197,830
1,665,439
3,717,791
592,342
3,087,693

14,312,239
1,905,770
16,395,261
12,099,721
1,474,678
4,549,849

4,319,451
1,303,037
2,863,295
2,706,338
2,219,668
2,598,505

19,841,050
6,406,637
20,923,995
18,523,850
4,286,688
10,236,047

CHICAGO.
Detroit

4,565,008 113,070,421
797,734 4,431,451
700,378 15,832,985
1,148,492 2,080,669
700,075
2,907,002
1,135,623 4,216,382

19,226,634
5,120,023

136,862,063
10,349,208

105,034,915
8,344,944

5,298,206
1,003,022
1,131,238
2,280,473

21,831,569
4,232,183
4,738,315
7,632,478

18,601,949
3,220,696
3,815,201
5,222,711

1,394,384 33,252,859
1,954,514 9,042,980
1,829,420 16,015,019
3,187,962 4,625,568
646,386 4,296,538
6,534,583 10,987,009

7,851,532
501,857

42,498,775
11,499,351

24,445,460
10,867,325

11,638,819
3,185,925
861,305
1,401,083

29,483,258
10,999,455
5,804,229
18,922,675

21,760,171
8,194,847
4,264,366
16,723,865

DALLAS
El Paso
Houston
San Antonio .

29,102,860 108,688,568
262,477
1,662,527
2,205,500 3,631,039
482,284 2,610,854

11,969,538
404,946
1,150,965
1,626,589

149,760,966
2,329,950
6,987,504
4,719,728

SAN FRANCISCO
Los Angeles
Portland
Salt Lake City . . . .
Seattle

15,599,928
3,891,887
415,924
494,556
324,772

67,895,364
51,200,999
5,163,133
4,619,366
2,918,056

17,887,493
8,842,898
1,776,067
2,441,387
2,573,283

101,382,785
63,935,784
7,355,124
7,555,310
5,816,111

Other
real
estate4

ST. LOUIS..
Little Rock..
Louisville...
Memphis
MINNEAPOLIS.
Helena
KANSAS CITY.
Denver
Oklahoma City..
Omaha

Total

1,224,363

14,928,470 13,086,575
4,449,752
18,419,483
951,603
14,000,195
2,107,059
7,207,467
283,753

149,948
1,412,500

145,766,078 10,533,831
2,134,716
6,562,297
3,732,234
79,582,418
54,684,516
6,685,697
5,504,171
4,418,652

126,444

156,810,174 933,376,429 228,729,045 1,318,915,647 1,055,184,604 27,769,016

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.




4. Covers acquisitions for banking-house purposes
and bank premises formerly occupied and being held
pending sale.

Tables 297
c

> Operaiions in Principal Departments of Federal Reserve Banks. 1990-93

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
Commercial'
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
Commercial'
Government
Food stamps redeemed

6
20,768
7,376
7,690

8
20,166
7,506
8,660

11
19,711
6,254
9,462

15
19,462
6,561
12,072

480
192
19,009

493
181
19,053 r

503
166
18,743

547
162
18,595

79
70

77 r
68

52
65

44
63

1,545
555
4,198

1,327
531
4,183

1,119
521
3,439

915
520
2,875

20,760
290,989
79,599
1,143

29,427
277,681
96,744
1,275

64,597
265,473
77,496
1,354

194,538
252,430
65,863
1,734

534,236
22,207
14,066,518

588,311
20,188
13,241,785

610,106
17,716
12,164,175

623,008
16,485
12,514,201

151,042,782
207,629,814

142,761,160 r
199,175,034

119,114,811
192,254,895

102,332,172
199,067,200

6,188,185
723,426
17,888

4,173,667
486,809
14,517

7,862,307
885,011
21,661

1. Data for years preceding 1991 do not include items
sent to the Reserve Banks by the New York Automated
Clearing House.




1990

1991

1992

1993

7,597,811
859,774
21,452
Revised.

298 80th Annual Report, 1993
10. Federal Reserve Bank Interest Rates, December 31, 1993

Loans to depository institutions
Bank

All Federal Reserve Banks

Extended credit3
Adjustment
credit'

Seasonal
credit2

3.0

3.1

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

3.6

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(c) 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 299
11. Reserve Requirements of Depository Institutions1

Requirements
Type of deposit2
Percent of deposits

Effective date

3
10

12/21/93
12/21/93

0

12/27/90

0

12/27/90

3

Net transaction accounts
$0 million-$51.9 million
More than $51.9 million4

Nonpersonal time deposits5
Eurocurrency liabilities6
1. Reserve requirements in effect on December 31,
1993. 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 Act 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 21, 1993, the exemption was
raised from $3.8 million to $4.0 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 may 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 21, 1993 for
institutions reporting quarterly and weekly, the amount
was increased from $46.8 million to $51.9 million.
4. The reserve requirement was reduced from 12 percent to 10 percent on April 2, 1992, for institutions that
report weekly, and on April 16, 1992, for institutions that
report quarterly.
5. 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 xh 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 Vi years or more has been zero since Octob e r ^ 1983.
For institutions that report quarterly, the reserve requirement on nonpersonal time deposits with an original
maturity of less than 1 xh years was reduced from 3 percent to zero on January 17, 1991.
6. The reserve requirement on Euroccurency liabilities
was reduced from 3 percent to zero in the same manner
and on the same dates as was the reserve requirement on
nonpersonal time deposits with an original maturity of
less than 1 Vi years (see note 4).

300 80th Annual Report, 1993
12. Initial Margin Requirements under Regulations T, U, G, and X !
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. 20..
1955, Jan. 4 ...
Apr. 2 3 . .
1958, Jan. 16 ..
Aug. 5 . . .
Oct. 1 6 . .
1960, July 28 ..
1962, July 10 ..
1963, Nov. 6 . . .
1968, Mar. 11..
June 8 . . .
1970, May 6 . . .
1971, Dec. 6 . . .
1972, Nov. 24..
1974, Jan. 3 . . .

25^5
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 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 301
' J rmu|\.<i V"* ! s diic i/ahili'u*^ and N u m b e r of Insured C o m m e r c i a l B a n k s ,
• \ i 1 is- *! K nk. hi':: M> !•'-.* j u d M W
Asset and liability items shown in millions of dollars
Member banks
Item

Total
Total

National

State

Nonmember
banks

June 30, 1993
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

2,589,765
1,829,457
1,822,977
760,308

1,887,748
1,348,320
1,344,351
539,428

1,469,708
1,066,867
1,064,062
402,841

418,041
281,453
280,289
136,587

702,016
481,137
478,626
220,880

620,719
139,589
184,607

445,135
94,294
143,027

335,555
67,286
111,514

109,579
27,008
31,513

175,585
45,295
41,580

Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital

2,331,857
45,538
742,464
1,832,239
276,357

1,679,272
37,536
549,842
1,294,118
202,248

1,320,636
27,669
432,025
1,025,163
155,024

358,636
9,867
117,817
268,955
47,224

652,585
8,002
192,623
538,122
74,109

11,126

4,404

3,435

969

6,722

Number of banks

June 30, 1992
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

2,483,478
1,796,571
1,788,168
686,907

1,796,867
1,319,239
1,314,068
477,628

1,440,629
1,072,473
1,068,465
368,156

356,238
246,766
245,603
109,473

686,611
477,332
474,101
209,279

549,316
137,591
189,611

386,440
91,188
147,732

300,159
67,996
119,426

86,281
23,192
28,306

162,876
46,403
41,879

Deposits, total
Interbank
Other demand
Other time and savings
Equity capital

2,316,586
48,504
669,361
1,855,420
243,062

1,661,042
41,429
493,488
1,303,164
174,420

1,344,573
30,236
396,539
1,064,842
136,404

316,468
11,193
96,948
238,322
38,016

655,544
7,076
175,874
552,256
68,642

11,598

4,634

3,686

Number of banks

1. All insured commercial banks in the United States.
Details may not sum to totals because of rounding.




6,964

302 80th Annual Report, 1993
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related ItemsYear-End 1918-93, and Month-End 1993 J
Factors supplying reserve funds
Federal Reserve Bank credit outstanding

Period

U.S. Treasury and
federal agency securities

Total

Bought
outright

Held
under
repurchase
agreement

Loans

Float2

Other
Federal
All
other3 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




Tables 303

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
liabilities
and
capital4

Member bank
reserves8

With
Federal
Reserve
Banks

Currency
and

Required 1(

Ex-

4,951
5,091

288
385

51
51

96
73

25
28

118
208

0
0

0
0

1,636
1,890

0
0

1,585
1,822

5,325
4,403
4,530
4,757
4,760

218
214
225
213
211

57
96
11
38
51

5
12
3
4
19

18
15
26
19
20

298
285
276
275
258

0
0
0
0
0

0
0
0
0
0

1,781
1,753
1,934
1,898
2,220

0
0
0
0
0

0
1,654
0
1,884
2,161

0
99
0

4,817
4,808
4,716
4,686
4,578

203
201
208
202
216

16
17
18
23
29

8
46
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

253

160
235
242
256

261
263
260
251

0
0
0
0
0

0
0
0
0
0

5,587
6,606
7,027
8,724
11,653

0
0
0
0
0

2,743
4,622
5,815
5,519
6,444

2,844
1,984
1,212
3,205
5,209

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
642
767

446
314
569
547
750

495
607
563
590
106

0
0
0
0
0

0
0
0
0
0

15,915
16,139
17,899
20,479
16,568

0
0
0
0
0

14,457
15,577
16,400
19,277
15,550

1,458
562
1,499
1,202
1,018

27,741
29,206
30,433
30,781
30,509

1,293
1,270
1,270
761
796

668
247
389
346
563

895
526
550
423
490

565
363
455
493
441

714
746
111
839
907

0
0
0
0
0

0
0
0
0
0

17,681
20,056
19,950
20,160
18,876

0
0
0
0
0

16,509
19,667
20,520
19,397
18,618

1,172
389
-570
763
258

31,158
31,790
31,834
32,193
32,591

767
775
761
683
391

394
441
481
358
504

402
322
356
272
345

554
426
246
391
694

925
901
998
1,122
841

0
0
0
0
0

0
0
0
0
0

19,005
19,059
19,034
18,504
18,174

0
0
0
0
310

18,903
19,089
19,091
18,574
18,619

102
-30
-57
-70
-135

32,869
33,918
35,338
37,692
39,619

377
422
380
361
612

485
465
597
880
820

217
279
247
171
229

533
320
393
291
321

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
645
471
574

5




51
68

14
59

304 80th Annual Report, 1993
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-93 and Month-End 1993 ! —Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding

Period

U.S. Treasury and
federal agency securities

Total

Other
Federal
All
3
other Reserve
assets4

Gold
stock5

Bought
outright11

Held
under
repurchase
agreement 12
290
661
170
0
0

137
173
141
186
183

2,248
2,495
2,576
3,443
3,440

187
193
164
58
64

0
0
0
0
2,743

43,340
47,177
52,031
56,624
64,584

Special
drawing
rights
certificate
account

13,733
13,159
11,982
10,367
10,367

Loans

Float2

Total

Treasury
currency
outstanding 6

5,575
6,317
6,784
6,795
6,852

1965
1966
1967
1968
1969

40,768
44,316
49,150
52,937
57,154

40,478
43,655
48,980
52,937
7,1543

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
111
918
3,577

4,467
1,762
2,735
1,605
833

776
195
1,480
418
0

8,739
9,230
9,890
8,728
12,347

146,383
153,136
63,659
172,464
186,384

11,160
11,151
11,148
11,121
11,096

2,518
3,318
4,618
4,618
4,618

13,427
13,687
13,786
15,732
16,418

1985
1986
1987
1988
1989

191,248
221,459
231,420
247,489
235,417

186,025
205,454
226,459
240,628
233,300

5,223
16,005
4,961
6,861
2,117

3,060
1,565
3,815
2,170
481

988
1,261
811
1,286
1,093

0
0
0
0
0

15,302
17,475
15,837
18,803
39,631

210,598
241,760
251,883
269,748
276,622

11,090
11,084
11,078
11,060
11,059

4,718
5,018
5,018
5,018
8,518

17,075
17,567
18,177
18,799
19,620

1990
1991
1992
1993

259,786
288,429
308,518
349,865

241,432
272,531
300,424
336,653

18,354
15,898
8,094
13,212

190
218
675
94

2,566
1,026
3,350
909

0
0
0
0

39,880
34,524
30,278
33,394

302,421
324,197
342,820
384,262

11,058
11,059
11,056
11,053

10,018
10,018
8,018
8,018

20,404
21,038
21,503
22,053




Tables 305

J 4. •-—("( >m inucd

Factors absorbing reserve funds

Currency
in
circulation

42,056
44,663
47,226
50,961
53,950

Deposits, other
than reserves, with
Federal Reserve Banks
Treasury
cash
holdings7

Other

355
588
563
747
807

3,062
4,301
5,033
3,661
5,316

550
447
454
395
450

9,351
7,588
5,313
8,656
6,217

480
287
244
347
589

1,041

561
636
508
377

8,960
17,697
7,492
14,809

369
968
206
386

242

136,829
144,774
154,908
171,935
183,796
197,488
211,995
230,205
247,649
260,453
286,965
307,780
334,757
365,229

86,547
93,717
103,811
114,645
125,600

Foreign

150
174
135
216
134
148
294
325
251
418
353
352
379
368
429
411
505
328
191
253

760

1,176
1,344

695
596
431
460
345
317
185
483
460
392
240
494
441
443
429
479
513

57,903
61,068
66,516
72,497
79,743

Treasury

668
416
1,123

703
1,312
1,156
2,020
1,855
2,542
2,113
7,285
10,393
7,114
4,196
4,075




1,233

999
84014

1,419
1,275 14
1,090
1,357
1,187
1,256
1,412

617
781
1,033

851
867
917
1,027

548
1,298
1,706

372
397

Other
Federal
Reserve
accounts4

Required
clearing
bal-

211

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
117
436

-147
-773
-1,353

Other
Federal
Reserve
liaWith
bilities
Federal
and
capital4 Reserve
Banks

Member bank
reserves8

Currency
and

Required l0

Ex-

4,163 22,848

-238
-232
-182
-700
-901

0
0
0
0
0

18,447
19,779
21,092
21,818
22,085

4,310
4,631
4,921
5,187

24,321
25,905
27,439
28,173

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

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

27,456
25,111
26,053
20,413
20,693

13,654
15,576
16,666
17,821

40,558
675
42,145 -1,442
1,328
41,391
-945
39,179
k
ii

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

1,013
1,126

4,671
5,261
4,990
5,392
5,952

0
0
0
0
0

1,490
1,812
1,687
1,605
1,626

5,940
6,088
7,129
7,683
8,486

27,141
46,295
40,097
37,742
36,701

0
0
0
0

1,963
3,955
5,901
6,336

8,147
8,113
7,984
9,292

36,695
25,458
26,178
28,285

i

n.a.

n.a.

-1,103 15
-1,535
-1,265
-893
-2,835

n.a.

III

306 80th Annual Report, 1993
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-93, and Month-End 1993'—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding

Gold
stock5

Special
drawing
rights
certificate
account

Treasury
currency
outstanding 6

11,055
11,055
11,054
11,054
11,053
11,057
11,057
11,057
11,057
11,056
11,054
11,053

8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018

21,490
21,528
21,578
21,629
21,674
21,711
21,748
21,808
21,871
21,927
21,983
22,053

U.S. Treasury and
federal agency securities
Period

Total

1993
Jan. . . .
Feb. ...
Mar. . . .
Apr. . . .
May ...
June . . .
July . . . .
Aug. . . .
Sept. . . .
Oct. ...
Nov. ...
Dec. . . .

Bought
outright'l

Held
under
repurchase
agreement n

302,287
306,990
310,907
310,476
314,895
334,180
319,578
326,684
332,603
326,736
339,965
349,865

302,287
304,060
303,584
310,476
309,548
318,175
319,578
321,824
324,161
322,695
331,523
336,653

0
2,930
7,323
0
5,347
16,005
0
4,860
8,442
4,041
8,442
13,212

Loans

Float2

35
57
753
84
129
1,534
234
236
2,918
145
55
94

226
784
337
735
115
221
539
850
74
502
643
909

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.




Other
Federal
All
3
other Reserve
assets4

0
0
0
0
0
0
0
0
0
0
0
0

30,578
29,865
31,450
32,627
32,002
32,989
31,731
31,428
33,089
32,857
31,186
33,394

Total

333,126
337,696
343,447
343,922
347,141
368,924
352,082
359,198
368,684
360,240
371,849
384,262

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 ;307
14.—C ontinued

Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks

Currency
in
circulation

Treasury
cash
holdings7

326,573
329,621
332,822
335,907
340,856
344,123
346,113
349,169
351,530
352,815
359,697
365,229

508
463
515
505
489
432
386
383
384
379
370
377

Treasury

Foreign

Other

Other
Federal
Reserve
accounts 4

9,572
5,350
6,752
7,273
5,787
28,386
5,818
7,975
17,289
6,032
6,334
14,809

244
296
318
221
194
286
284
187
501
390
596
386

282
302
314
291
300
297
232
272
306
325
297
397

0
0
0
0
0
0
0
0
0
0
0
0

11. 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.
12. Beginning December 1, 1966, includes federal
agency obligations held under repurchase agreements and
beginning September 29, 1971, includes federal agency
issues bought outright.
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.




Required
clearing
balances

5,881
6,005
5,904
5,849
6,111
6,046
6,145
5,922
6,017
6,094
6,157
6,336

Other
Federal
Reserve
liaWith
bilities
Federal
and
capital4 Reserve
Banks

9,141
9,180
8,844
291
9,263
8,705
9,349
10,164
9,687
8,879
9,561
9,292

21,652
27,080
28,629
24,730
24,888
21,132
24,580
26,009
23,917
26,329
29,893
28,285

Member bank
reserves8

Currency
and
coin9

ii

n.a.

ReExquired l0 cess 10 - 13

i

n.a.

i

n.a.

I I J

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.

308

80th Annual Report, 1993

15. Changes in Number of Banking Offices in the United States, 1993!
Commercial banks2
Type of office
and change

Member

Total

4

Banks, Dec. 31, 1992
Changes during 1993
New banks
Ceased banking
operation6
Banks converted
into branches7 ..
Other8

Nonmember

Total
Total
12,118

11,689

National

4,608

3,641

State

Insured

Noninsured-

967

6,815

266

Banks, Dec. 31,1993

71

21

16

5

33

17

0

-86

-57

-52

-5

-22

-7

-6

-484
97

-470

-225
-9

-191

-34
45

-245
15

0

-14
89

2

-408

-477

11

-270

-219

11,710

11,212

4338

Net change8
Branches and
additional offices,
Dec. 31, 1993 . . .

69
12

978

6,596

498
278

3^60

Changes during 1993
De novo
Banks converted
into branches
Discontinued
Other8

Noninsured

429

71

-281
Branches and
additional offices,
Dec. 31, 1992 ...

Insured

-92

-54
Net change

State-chartered
savings
banks 3

55,006

52,218

35,213

27,956

7,257

16,924

1,732

1,499

1,017

805

212

478

484
-1,287
86

473
-1,215
74

311
-1,004
27

263
-886
22

48
-118
5

162
-208
47

1,015

831

351

204

147

479

56,021

53,049

35,564

28,160

7,404

17,403

1. Preliminary. Final data will be available in the
Annual Statistical Digest, 1993, forthcoming.
2. Includes nondeposit trust companies, private banks,
industrial banks, and nonbank banks. Member institutions
are those that are members of the Federal Reserve
System.
3. Formerly called mutual savings banks.
4. As of Dec. 31, 1988, includes noninsured trust
companies that are members of the Federal Reserve
System.




81

2,788
233

0
-3
0

11
-72
12

0
0
0

184

82

2,972

0

5. Includes three workout national banks.
6. Includes five banks that converted to thrift
institutions.
7. Includes three banks that converted to thrift institution branches.
8. Includes interclass changes and sale of branches.

Tables 309
01

of Liabilities

\ppii

BancFirst, Oklahoma City, Oklahoma to merge
with United Bank and Trust Company of Norman, Norman, Oklahoma'

Sun Bank/Gulf Coast, Sarasota, Florida to
acquire assets and liabilities of the Coast Bank,
FSB, Sarasota, Florida

SUMMARY REPORT BY THE ATTORNEY

GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(1/22/93)
The proposed transaction would not be significantly adverse to competition.

(2/12/93)
The proposed transaction would not be significantly adverse to competition.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(1/5/93)
The applicant has assets of $700 million; the target
has assets of $33.7 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.

(1/20/93)
The applicant has assets of $304 million; the target
has assets of $1.2 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.

Fifth Third Bank, Cincinnati, Ohio to acquire
the assets and liabilities of six branch offices of
The First National Bank, Dayton, Ohio

Alice Bank of Texas, Alice, Texas to merge with
New First City Bank, Alice, Texas

SUMMARY REPORT BY THE ATTORNEY

GENERAL

(2/12/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(1/7/93)
The applicant has assets of $5.6 billion; the targets
have assets of $117 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 Community Bank, Inc., Princeton, West
Virginia to merge with Peoples Bank of Richwood, Inc., Richwood, West Virginia
SUMMARY REPORT BY THE ATTORNEY

GENERAL

SUMMARY REPORT BY THE ATTORNEY

GENERAL

No report received. Request for report on the
competitive factors was dispensed with, as authorized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safeguard the depositors of New First City Bank.2
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/8/93)
The applicant has assets of $138 million; the target
has assets of $106 million. The OCC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.
Humboldt Bank, Eureka, California to acquire
assets and liabilities of the Arcata and McKinleyville branches of HomeFed Bank, F.A., San
Diego, California
SUMMARY REPORT BY THE ATTORNEY

GENERAL

(12/4/92) The proposed transaction would not be
significantly adverse to competition.

Request for report dispensed with as authorized by
the Bank Merger Act.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(1/19/93)
The applicant has assets of $393 million; the target
has assets of $32 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.

(2/19/93)
The applicant has assets of $66 million; the targets
have assets of $57 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.

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.

310 80th Annual Report, 1993
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1993—Continued
Tri-City Bank and Trust Company, Blountville,
Tennessee to acquire assets and liabilities of the
Rhea Parkway Branch of Home Federal Bank,
FSB, Johnson City, Tennessee

Fleet Bank of New York, New York, New York
to merge with Jefferson National Bank, Watertown, New York

SUMMARY REPORT BY THE ATTORNEY GENERAL

Request for report dispensed with as authorized by
the Bank Merger Act.

(2/26/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/23/93)
The applicant) has assets of $198 million; the
target has assets of $25.6 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.

SUMMARY REPORT BY THE ATTORNEY GENERAL

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/26/93)
The applicant has assets of $9.9 billion; the target
has assets of $216 million. The OCC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.
Shelby County State Bank, Shelbyville, Illinois
to merge with Bank of Findlay, Findlay, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL

First Interstate Bank of California, Los Angeles, California to merge with HomeFed Bank,
F.A., San Diego, California
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/19/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(2/25/93)
The applicant has assets of $20 billion; the target
has assets of $149 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.
Farmers State Bank (formerly Jewell County
Bank), Mankato, Kansas to merge with Traders
State Bank, Glen Elder, Kansas, and Tipton
State Bank, Tipton, Kansas
SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/26/93)
The proposed transaction would not be significantly adverse to competition.

(1/22/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(03/09/93)
The applicant has assets of $76.9 million; the
target has assets of $9.3 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.
SouthTrust Bank of West Florida, St. Petersburg, Florida to merge with Gulf Bank of Dunedin, Dunedin, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/12/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/10/93)
The applicant has assets of $452 million; the target
has assets of $41 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

(2/26/93)
The applicant has assets of $29 million; the target
has assets of $21 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.



Central Bank of the South, Birmingham, Alabama to merge with Altus Federal Savings Bank,
Mobile, Alabama
SUMMARY REPORT BY THE ATTORNEY GENERAL

Request for report dispensed with as authorized
by the Bank Merger Act.

Tables

311

16.—Continued

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/22/93)
The applicant has assets of $5.1 billion; the target
has assets of $12.6 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.
PremierBank & Trust, Elyria, Ohio to acquire
assets and liabilities of one branch office of
Home Savings of America, FSB, Irwindale,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/12/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/26/93)
The applicant has assets of $489 million; the target
has assets of $28 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.

has assets of $29.1 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.
Commonwealth Bank, Williamsport, Pennsylvania to merge with Valley Community Bank,
Kingston, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/12/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(4/20/93)
The applicant has assets of $2.0 billion; the target
has assets of $45.8 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.

Crestar Bank, Richmond, Virginia to merge with
Continental Federal Savings Bank, Fairfax,
Virginia

Banco Popular de Puerto Rico, Hato Rey,
Puerto Rico to acquire the assets and liabilities of
the Third Avenue branch of North Side Savings
Bank, Bronx, New York, and four branches
of Bank of Leumi Trust Company, New York,
New York

SUMMARY REPORT BY THE ATTORNEY GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(2/26/93)
The proposed transaction would not be significantly adverse to competition.

(3/26/93)
The proposed transaction would not be significantly adverse to competition.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(3/26/93)
The applicant has assets of $10 billion; the target
has assets of $926 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.

(4/30/93)
The applicant has assets of $9.5 billion; the targets
have assets of $16.0 million and $14.8 million,
respectively. 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.

Salamanca Trust Company, Salamanca, New
York to acquire assets and liabilities of the West
Main Street branch of Chemical Bank, Allegheny, New York.

California Center Bank, Los Angeles, California to merge with Wilshire Center Bank, N.A.,
Los Angeles, California

SUMMARY REPORT BY THE ATTORNEY GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(3/26/93)
The proposed transaction would not be significantly adverse to competition.

Request for report dispensed with as authorized by
the Bank Merger Act.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(5/7/93)
The applicant has assets of $211 million; the target
has assets of $9 million. The OCC has recom-

(4/9/93)
The applicant has assets of $49 million; the target



BASIS FOR APPROVAL BY THE FEDERAL RESERVE

312 80th Annual Report, 1993
16. Mergers, Consolidations, and Acquisitions o\ Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1993—Continued
mended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.
Rio Blanco State Bank, Rangely, Colorado to
merge with Bank of Rangely, Rangely, Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL

(11/13/92) The proposed transaction would not be
significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(5/26/93)
The applicant has assets of $9 million; the target
has assets of $11 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 Granite Savings Bank, SSB,
Granite Falls, North Dakota
SUMMARY REPORT BY THE ATTORNEY GENERAL

(4/19/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(6/4/93)
The applicant has assets of $2.9 billion; the target
has assets of $100 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.
F&M Bank-Winchester, Winchester, Virginia
to merge with The Farmers and Merchants
National Bank of Hamilton, Hamilton, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(6/11/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(6/30/93)
The applicant has assets of $516 million; the target
has assets of $189 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.

SUMMARY REPORT BY THE ATTORNEY GENERAL

(6/11/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/7/93)
The applicant has assets of $3.1 billion; the target
has assets of $62 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.
Union Bank and Trust Company, Bowling
Green, Virginia to acquire the assets and liabilities of a branch office of Dominion Bank, N.A.,
Roanoke, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(6/11/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/7/93)
The applicant has assets of $234 million; the target
has assets of $12 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 Security Bank of Windsor, Windsor, Colorado to merge with Bank of Windsor, Windsor,
Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL

(5/7/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/12/94) The applicant has assets of $23 million;
the target has assets of $22 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 Commonwealth Bank, Williamsport,
Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

Centura Bank, Rocky Mount, North Carolina
to merge with First Savings Bank of Forest City,
SSB, Forest City, North Carolina



(6/4/93)
The proposed transaction would not be significantly adverse to competition.

Tables 313
—-Continued

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/26/93)
The applicant has assets of $12 billion; the target
has assets of $2.1 billion. The parties do not
operate in the same market.
The banking factors and considerations relating
tot he convenience and needs of the community
are consistent with approval.
Sulphur Springs State Bank, Sulphur Springs,
Texas to merge with Wolfe City National Bank,
Wolfe City, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL

(6/30/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(7/29/93)
The applicant has assets of $210 million; the target
has assets of $32 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.
PremierBank & Trust, Elyria, Ohio to merge
with Crestline Savings and Loan, Crestline,
Ohio
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

(7/30/93)
The applicant has assets of $489 million; the target
has assets of $19 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.
United Bank of Philadelphia, Philadelphia,
Pennsylvania to merge with Chase Federal
Savings and Loan Association, Philadelphia,
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

(7/30/93)
The applicant has assets of $27 million; the target
has assets of $15 million. The RTC has recommended immediate action by the Federal Reserve
to prevent the probable failure of the target.



Bank of Hampton Roads, Chesapeake, Virginia
to merge with New Atlantic Bank, NA, Norfolk,
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

(8/12/93)
The applicant has assets of $76 million; the target
has assets of $16 million. The OCC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.
Banco Popular de Puerto Rico, Hato Rey,
Puerto Rico to acquire the assets and liabilities of
five Virgin Islands branches of CoreStates
Bank, NA, Philadelphia, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

(7/13/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(8/12/93)
The applicant has assets of $9.7 billion; the targets
have assets of $274.5 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.
United Bank of Philadelphia, Philadelphia,
Pennsylvania to acquire assets and liabilities of
three branches of Home Unity Federal Savings and Loan Association, Lafayette Hills,
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

(8/31/93)
The applicant has assets of $94 million; the targets
have assets of $35 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
targets.
Ambassador Bank of the Commonwealth,
Allentown, Pennsylvania to acquire the assets
and liabilities of one branch of Lehigh Valley
Bank, Bethlehem, Pennsylvania

314 80th Annual Report, 1993
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1993—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL

SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/20/93)
The proposed transaction would not be significantly adverse to competition.

(9/10/93)
The proposed transaction would not be significantly adverse to competition.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(9/15/93)
The applicant has assets of $75 million; the target
has assets of $1 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.

(9/29/93)
The applicant has assets of $3.2 billion; the target
has assets of $65 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 First National Bank of Bath, Bethlehem, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

Centura Bank, Rocky Mount, North Carolina
to acquire the assets and liabilities of branches
of First American Federal Savings Bank,
Greensboro, North Carolina

(8/8/93)
The proposed transaction would not be significantly adverse to competition.

Request for report dispensed with as authorized
by the Bank Merger Act.

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(9/21/93)
The applicant has assets of $12.5 billion; the target
has assets of $126 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.

(10/8/93)
The applicant has assets of $3.4 billion; the targets
have assets of $303 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
targets.

Triangle Bank and Trust Company, Raleigh,
North Carolina to acquire the assets and liabilities of New East Banks of Greenville, New Bern,
Goldsboro, Fayetteville, and Elizabeth City,
North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/10/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(9/27/93)
The applicant has assets of $161 million; the targets have assets of $28 million, $16 million,
$28 million, $43 million, and $16 million, respectively. 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.

SUMMARY REPORT BY THE ATTORNEY GENERAL

Mid-South Bank and Trust Company, Sanford,
North Carolina to acquire the assets and liabilities of branches of First American Federal
Savings Bank, Greensboro, 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

(10/8/93)
The applicant has assets of $207 billion; the targets have assets of $11 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Banco Popular de Puerto Rico, Hato Rey,
Puerto Rico to acquire the assets and liabilities of
the Southern Boulevard branch of Emigrant
Savings Bank, Bronx, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

Centura Bank, Rocky Mount, North Carolina
to acquire the assets and liabilities of Canton
Savings Bank, SSB, Canton, North Carolina



(9/28/93)
The proposed transaction would not be significantly adverse to competition.

Tables 315
16.-—Continued

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/15/93)
The applicant has assets of $10 billion; the target
has assets of $50 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.

has assets of $378 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.
Fayette Bank and Trust Company, Uniontown,
Pennsylvania to merge with FirstSouth Savings
Bank, Pittsburgh, Pennsylvania

FCNB Bank, Frederick, Maryland to acquire
the assets and liabilities of the Eldersburg, Maryland branch of The Columbia Bank, Columbia,
Maryland

(10/1/93)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/1/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/26/93)
The applicant has assets of $380 million; the target
has assets of $11 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 THE ATTORNEY GENERAL

(11/1/93)
The applicant has assets of $280 million; the target
has assets of $161 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.
Southlrust Bank of West Florida, St. Petersburg, Florida to merge with Ameribank, Clearwater, Florida, and First National Bank of the
South, Wesley Chapel, Florida

Heartland Bank, Croton, Ohio to acquire the
assets and liabilities of one branch office of
Century Bank, Upper Arlington, Ohio

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

(10/18/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(10/28/93)
The applicant has assets of $87 million; the target
has assets of $23 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.
Fifth Third Bank, Cincinnati, Ohio to merge
with First Financial Savings Association, FA,
Cincinnati, Ohio

SUMMARY REPORT BY THE ATTORNEY GENERAL

(11/8/93)
The applicant has assets of $540 million; the targets have assets of $167 million. The FDIC has
recommended immediate action by the Federal
Reserve to prevent the probable failure of the
targets.
First Interstate Bank of California, Los Angeles, California to merge with California Republic Bank, Bakersfield, California
SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/28/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/18/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(11/1/93)
The applicant has assets of $6.6 billion; the target



(11/9/93)
The applicant has assets of $19 billion; the target
has assets of $569 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.

316 80th Annual Report, 1993
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1993—Continued
Centura Bank, Rocky Mount, North Carolina
to merge with the Robeson Interim Bank,
Lumberton, North Carolina, the successor by
merger and conversion from Robeson Savings
Bank, Inc., SSB
SUMMARY REPORT BY THE ATTORNEY GENERAL

(11/5/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(11/10/93)
The applicant has assets of $3.2 billion; the target
has assets of $99 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 THE ATTORNEY GENERAL

(10/12/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(11/30/93)
The applicant has assets of $124 million; the target
has assets of $29 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 Interstate Bank of California, Los Angeles, California to acquire assets and liabilities
of four branches of HomeFed Bank, F.A.,
San Diego, California
SUMMARY REPORT BY THE ATTORNEY GENERAL

Centura Bank, Rocky Mount, North Carolina
to merge with First Charlotte Bank and IVust
Company, Charlotte, North Carolina

(10/28/93)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(9/20/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(11/12/93)
The applicant has assets of $3 billion; the target
has assets of $168 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.
Omnibank Arvada, Arvada, Colorado to merge
with Denver West Bank and Trust, Golden, Colorado

(12/2/93)
The applicant has assets of $20 billion; the targets
have assets of $248 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 Interstate Bank of California, Los Angeles, California to merge with First State Bank of
the Oaks, Thousand Oaks, California
SUMMARY REPORT BY THE ATTORNEY GENERAL

(9/20/93)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/12/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(11/19/93)
The applicant has assets of $31 million; the target
has assets of $16 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

(12/13/93)
The applicant has assets of $20 billion; the target
has assets of $139 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.
West One Bank, Idaho, Boise, Idaho to merge
with Idaho State Bank, Glens Ferry, Idaho
SUMMARY REPORT BY THE ATTORNEY GENERAL

First United Bank, Boca Raton, Florida to
merge with New River Bank, Oakland Park,
Florida



(8/8/93)
The proposed transaction would not be significantly adverse to competition.

Tables 317

(6.--Continue

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/20/93)
The applicant has assets of $4 billion; the target
has assets of $46 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 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 Grange National Bank of Susquehanna County, New Milford, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL

Crestar Bank, Richmond, Virginia to merge with
Virginia Federal Savings Association, Richmond, Virginia, and Providence Savings and
Loan Association, Vienna, Virginia

(11/26/93)
The proposed transaction would not be significantly adverse to competition.

SUMMARY REPORT BY THE ATTORNEY GENERAL

(12/24/93)
The applicant has assets of $13 billion; the target
has assets of $28 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.

(11/5/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/22/93)
The applicant has assets of $11 billion; the targets
have assets of $1.2 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.
Fleet Bank of New York, Albany, New York
to acquire the assets and liabilities of twentynine branches of Chemical Bank, throughout
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL

(10/12/93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE

(12/23/93)
The applicant has assets of $10 billion; the target
has assets of $786 million. The parties operate in
the same market.

Institution'

BASIS FOR APPROVAL BY THE FEDERAL RESERVE

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.

Assets
(millions
of dollars)

1st Source Bank, South Bend, Indiana
Merger
1st Source Bank of Starke County, Hamlet, Indiana

1,310

First Florida Bank, Tampa, Florida
Merger
Barnett Bank of Tampa, NA, Tampa, Florida

1,900




Date of
approval

1/4/93

44

1,500

1/13/93

318 80th Annual Report, 1993
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1993—Continued
Institution'

Sun Bank/Gulf Coast, Sarasota, Florida
Merger
Sun Bank and Trust/Port Charlotte, Port Charlotte, Florida ....
First National Bank of Venice, Venice, Florida
The Jackson State Bank, Jackson, Wyoming
Merger
The State Bank, West Jackson, Wyoming
First of America Security, Southgate, Michigan
(formerly Security Bank and Trust Company)
Merger
Security Bank of Monroe, Monroe, Michigan
Independent Banks of Arizona, Phoenix, Arizona
Merger
Caliber Bank, Phoenix, Arizona

Assets
(millions
of dollars)

Date of
approval

304

1/20/93

351
372
185

1/25/93

1,700

2/17/93

267
0
1,600

The Bank of Woodward, Woodward, Oklahoma
Merger
Cimmarron Bank, Waukomis, Oklahoma

119

Union Colony Bank, Greeley, Colorado
Merger
Union Colony Bank of Loveland, NA, Loveland, Colorado ....

142

Chemical Bank, New York, New York
Merger
Texas Commerce Banks, Newark, Delaware
Meridian Bank, Reading, Pennsylvania
Merger
The First National Bank of Pike County, Milford, Pennsylvania

109,000

1,060

5/25/93

155

439




5/17/93

63

Bank of Montana Great Falls, Great Falls, Montana
Merger
Montana Bank, Billings, Montana

Bank of Colorado-Western Slope, Grand Junction, Colorado ..
Merger
Bank of Colorado, Glenwood Springs, Colorado

4/30/93

11

231

NBD Bank, Elkhart, Indiana
Merger
NBD Bank, NA, Gary, Indiana

4/9/93

17

Texas Bank, Weatherford, Texas
Merger
Texas Bank, Grapevine, Texas

Sunbank of Tampa Bay, Tampa, Florida
Merger
The Hillsboro Sun Bank, Plant City, Florida

2/17/93

6/11/93

35
6/18/93

319
1,701

6/30/93

190
694

6/30/93

2,271
57
57

6/30/93

Tables

319

16.—Continued
Assets
(millions
of dollars)

Institution'

Wesbanco Bank Wheeling, Wheeling, West Virginia .
Merger
Wesbanco Bank Sisterville, Sisterville, West Virginia

379

Vectra Bank, Denver, Colorado
Merger
Vectra Bank of Denver, Englewood, Colorado

127

Barnett Bank of West Florida, Pensacola, Florida
Merger
The Citizens and Peoples National Bank of Pensacola,
Pensacola, Florida

389

9/3/93

54
10/25/93

415
234

BancFirst, Oklahoma City, Oklahoma
Merger
Security Bank, Coweta, Oklahoma
United Community Bank, Weatherford, Oklahoma
First American Bank, Stratford, Oklahoma
Security Bank, Coweta, Oklahoma

738

10/28/93

111
11/5/93

23
35
15
23

Compass Bank, Birmingham, Alabama
Merger
Compass Bank of Calhoun County, Anniston, Alabama

5,100

11/29/93

126
52

Nevada Community Bank, Las Vegas, Nevada ...
Merger
Continental National Bank, Las Vegas, Nevada ...

12/2/93

211

First Interstate Bank of California, Los Angeles, California .
Merger
First State Bank of the Oaks, Thousand Oaks, California ...
Arkansas Bank and Trust Company, Hot Springs, Arkansas ..
Merger
Hot Springs Village, Arkansas, branch of Benton State Bank,
Benton, Arkansas
Central Bank of Oklahoma City, Oklahoma City, Oklahoma .,
Merger
Friendly Bank of Oklahoma City, Oklahoma City, Oklahoma ,




8/26/93

23

Jefferson Bank of Florida, Miami, Florida
Merger
Jefferson National Bank at Sunny Isles, Miami Beach, Florida

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

Date of
approval

2,010

12/13/93

139
394

12/14/93

201
281

12/17/93

250

include the acquisition of only certain assets and liabilities of the affiliated bank,

320 80th Annual Report, 1993
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1993—Continued
Mergers Approved Involving a Nonoperating
Institution with an Existing Bank
The following transactions have no significant
effect on competition; they merely facilitate the
acquisition of the voting shares of a bank (or
banks) by a holding company. In such cases, the
summary report by the Attorney General indicates
that the transaction will merely combine an existing bank with a nonoperating institution; in conse
quence, and without regard to the acquisition of

the surviving bank by the holding company, the
merger would have no effect on competition. The
Board of Governors, the Federal Reserve Bank, or
the Secretary of the Board, whichever approved
the application, determined that the proposal
would, in itself, have no adverse competitive
effects and that the financial factors and considerations relating to the convenience and needs of the
community were consistent with approval.

Assets
(millions
of dollars)2

Institution'

Barnett Bank of Hillsborough County, Tampa, Florida
Merger
First Florida Bank, Tampa, Florida

1/13/93
1,900
2/5/93

UniSouth Interim Bank, Columbus, Mississippi
Merger
UniSouth Banking Company, Columbus, Mississippi

168
3/26/93

Exchange Interim Bank, Luckey, Ohio
Merger
The Exchange Bank, Luckey, Ohio

67

New Bank, Morristown, Tennessee
Merger
United Southern Bank of Morristown, Morristown, Tennessee
WTC Interim Bank, Wilmington, Pennsylvania
Merger
Freedom Valley Bank, West Chester, Pennsylvania
FB&T Bank, Fairfax, Virginia
Merger
Fairfax Bank and Trust Company, Fairfax, Virginia
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

7/8/93
42
8/13/93
111
8/31/93
141

2. Where no assets are listed, the bank is newly organized and not in operation,

Federal Reserve
Directories and Meetings




322 80th Annual Report, 1993

Board of Governors of the Federal Reserve System
December 31,1993
Members
ALAN GREENSPAN of New York, Chairmanl
DAVID W. MULUNS, JR., of Arkansas, Vice Chairmanl
WAYNE D. ANGELL of Kansas

Term expires
January 31, 2006
January 31, 1996
January 31, 1994

SUSAN M. PHILLIPS of Iowa

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

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
Winthrop P. Hambley, Special Assistant
to the Board
Diane E. Werneke, Special Assistant
to the Board
LEGAL DIVISION

J. Virgil Mattingly, Jr., General Counsel
Scott G. Alvarez, Associate General
Counsel
Richard M. Ashton, Associate
General Counsel
Oliver Ireland, Associate General
Counsel
Kathleen M. O'Day, Associate General
Counsel
OFFICE OF T H E SECRETARY

William W. Wiles, Secretary
Jennifer J. Johnson, Associate Secretary
Barbara R. Lowrey, Associate 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.




DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS

Griffith L. Garwood, Director
Glenn E. Loney, Associate Director
Dolores S. Smith, Associate Director
Maureen P. English, Assistant Director
Irene S. McNulty, Assistant Director
DIVISION OF BANKING SUPERVISION
AND REGULATION

Richard Spillenkothen, Director
Stephen C. Schemering, Deputy Director
Don E. Kline, Associate Director
William A. Ryback, Associate Director
Frederick M. Struble, Associate Director
Herbert A. Biern, Deputy Associate
Director
Roger T. Cole, Deputy Associate Director
James I. Garner, Deputy Associate Director
Howard Amer, Assistant Director
Gerald A. Edwards, Jr., Assistant Director
James D. Goetzinger, Assistant Director
Stephen M. Hoffman, Jr., Assistant
Director
Laura M. Homer, Assistant Director
James 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

Directories and Meetings 323
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, Associate Director
Richard D. Porter, Deputy Associate
Director
Normand R.V. Bernard, Special Assistant
to the Board

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 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




OFFICE OF THE INSPECTOR GENERAL

Brent L. Bowen, Inspector General
Donald L. Robinson, Assistant Inspector
General
Barry R. Snyder, Assistant Inspector
General

324 80th Annual Report, 1993

Federal Open Market Committee
December 31,1993

Members
ALAN GREENSPAN, Chairman, Board of Governors
WILLIAM J. McDoNOUGH, Vice Chairman, President, Federal Reserve Bank of New York
WAYNE D. ANGELL, Board of Governors

EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia
SILAS KEEHN, President, Federal Reserve Bank of Chicago
EDWARD W. KELLEY, JR., Board of Governors

JOHN P. LAWARE, Board of Governors
LAWRENCE B. LINDSEY, Board of Governors

ROBERT D. MCTEER, JR., President, Federal Reserve Bank of Dallas
DAVID W. MULLINS, JR., Board of Governors
SUSAN M. PHILLIPS, Board of Governors

GARY H. STERN, President, Federal Reserve Bank of Minneapolis

Alternate Members
J. ALFRED BROADDUS, JR., President, Federal Reserve Bank of Richmond
ROBERT P. FORRESTAL, President, Federal Reserve Bank of Atlanta
JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland
JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York
ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco

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, JR.,

General Counsel
ERNEST T. PATRIKIS,

Deputy General Counsel
MICHAEL J. PRELL,

Economist
EDWIN M. TRUMAN,

Economist
RICHARD G. DAVIS,

Associate Economist

RICHARD W. LANG,

Associate Economist
DAVID E. LINDSEY,

Associate Economist
LARRY J. PROMISEL,

Associate Economist
ARTHUR J. ROLNICK,

Associate Economist
HARVEY ROSENBLUM,

Associate Economist
KARL A. SCHELD,

Associate Economist
CHARLES J. SIEGMAN,

Associate Economist
THOMAS D. SIMPSON,

Associate Economist
LAWRENCE SLIFMAN,

Associate Economist

JOAN E. LOVETT, Manager for Domestic Operations, System Open Market Account
PETER R. FISHER, Manager for Foreign Operations,
System Open Market Account

During 1993 the Federal Open Market Committee held eight meetings (see Minutes of



the Federal Open Market Committee Meetings in this REPORT.)

Directories and Meetings 325

Federal Advisory Council
December 31,1993

District 1—MARSHALL N. CARTER, Chairman and Chief Executive Officer,
State Street Bank and Trust Company, Boston, Massachusetts
District 2—CHARLES S. SANFORD, JR., Chairman, Bankers Trust Company, New York,
New York
District 3—ANTHONY P. TERRACCIANO, Chairman, President, and Chief Executive Officer,
First Fidelity Bancorporation, Newark, New Jersey
District 4—JOHN B. MCCOY, JR., Chairman, President, and Chief Executive Officer,
Bane One Corporation, Columbus, Ohio
District 5—EDWARD E. CRUTCHFIELD, JR., 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 and Chief Executive Officer,
Comerica Incorporated, Detroit, Michigan
District 8—ANDREW B. CRAIG, III, Chairman, President, and Chief Executive Officer,
Boatmen's Bancshares, Inc., St. Louis, Missouri
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—CHARLES R. HRDLICKA, Chairman and Chief Executive Officer,
Victoria Bank and Trust, Victoria, Texas
District 12—RICHARD M. ROSENBERG, Chairman and Chief Executive Officer,
Bank of America, San Francisco, California

Officers
E. B. ROBINSON, JR., President
JOHN B. MCCOY, JR., Vice President
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVIK, Associate Secretary

Directors
EUGENE A. MILLER

JOHN F. GRUNDHOFER

The Federal Advisory Council met on February 4-5, May 6-7, September 9-10, and
November 4—5, 1993. The Board of Governors met with the council on February 5,
May 7, September 10, and November 5,
1993. The council, which is composed of
one representative of the banking industry




RICHARD M. ROSENBERG

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,

326 80th Annual Report, 1993

Consumer Advisory Council
December 31,1993

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
D. DOUGLAS BLANKE, Director of Consumer Policy, Office of the Attorney General,
St. Paul, Minnesota
GENEVIEVE BROOKS, Deputy Borough President, Office of the Bronx Borough President,
Bronx, New York
TOYE L. BROWN, Deputy Secretary of Transportation and Construction, Intermodal
Transportation Policy, Boston, Massachusetts
CATHY CLOUD, Enforcement Program Director, National Fair Housing Alliance,
Washington, D.C.
MICHAEL D. EDWARDS, President, Prairie Security Bank, Yelm, Washington
MICHAEL FERRY, Staff Attorney, Consumer Unit, Legal Services of Eastern Missouri, Inc.,
St. Louis, Missouri
NORMA L. FREIBERG, Executive Director, New Orleans Neighborhood Development
Foundation, New Orleans, Louisiana
LORI GAY, Executive Director, Los Angeles Neighborhood Housing Services, Los Angeles,
California
DONALD A. GLAS, President, First State Federal Savings and Loan Association,
Hutchinson, Minnesota
BONNIE GUITON, Dean, Mclntire School of Commerce, University of Virginia,
Charlottesville, Virginia
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
RONALD A. HOMER, Chairman and Chief Executive Officer, Boston Bank of Commerce,
Boston, Massachusetts
THOMAS L. HOUSTON, Executive Director, The Dallas Black Chamber of Commerce,
Dallas, Texas
HENRY JARAMILLO, JR., President, Ranchers State Bank, Belen, New Mexico
EDMUND MIERZWINSKI, Consumer Advocate, U.S. Public Interest Research Group,
Washington, D.C.
JOHN V. SKINNER, President and Chief Executive Officer, Jewelers Financial
Services, Inc., Irving, Texas
LOWELL N. SWANSON, President (Retired), United Finance Company, Portland, Oregon
MICHAEL W. TIERNEY, Program Director, Local Initiatives Support Corporation,
Washington,
 D.C.
GRACE W. WEINSTEIN, Financial Writer and Consultant, Englewood, New Jersey
http://fraser.stlouisfed.org/
JAMES L. WEST, President,
Federal Reserve Bank of St. Louis Jim West Financial Group, Inc., Tijeras, New Mexico

Directories and Meetings 327

Consumer Advisory Council—Continued
Officers
DENNY D. DUMLER, Chairman

JEAN POGGE, Vice Chairman

Senior Vice President, Colorado
National Bank, Denver,
Colorado

Vice President, Development
Deposits, South Shore Bank,
Chicago, Illinois

The Consumer Advisory Council met with
members of the Board of Governors on
March 25, June 17, and October 28, 1993.
The council is composed of academics, state
and local government officials, representatives of the financial industry, and repre-

sentatives 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 31,1993

Members
DANIEL C. ARNOLD, Director, Farm & Home Financial Corporation, Houston, Texas
WILLIAM A. COOPER, Chairman and Chief Executive Officer, TCF Bank Savings F.S.B.,
Minneapolis, Minnesota
BEATRICE D'AGOSTINO, Chairman, President, and Chief Executive Officer, New Jersey
Savings Bank, Somerville, New Jersey
PAUL L. ECKERT, Chairman and President, Citizens Federal Savings Bank, Davenport,
Iowa
GEORGE R. GLIGOREA, Chairman, President, and Chief Executive Officer, First Federal
Savings Bank, Sheridan, Wyoming
THOMAS J. HUGHES, President, Navy Federal Credit Union, Merrifield, Virginia
KERRY KILLINGER, Chairman, President, and Chief Executive Officer, Washington Mutual
Savings Bank, Seattle, Washington
CHARLES JOHN KOCH, President and Chief Executive Officer, Charter One Bank, F.S.B.,
Cleveland, Ohio
ROBERT MCCARTER, Chairman and Chief Executive Officer, New Bedford Institution for
Savings, New Bedford, Massachusetts
NICHOLAS W. MITCHELL, JR., President and Chief Executive Officer, Piedmont Federal
Savings and Loan Association, Winston-Salem, North Carolina
STEPHEN W. PROUGH, President and Chief Executive Officer, Western Financial Savings
Bank, Irvine, California
THOMAS R. RICKETTS, Chairman, President, and Chief Executive Officer,
Standard Federal Bank, Troy, Michigan
DANIEL C. ARNOLD, President

The members of the Thrift Institutions Advisory Council met with the Board of Governors on March 5, May 14, September 24, and
December 10, 1993. The council, which
is composed of representatives from credit



BEATRICE D'AGOSTINO, 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.

328 80th Annual Report, 1993

Officers of Federal Reserve Banks, Branches, and Offices
December 31,1993 1

BANK,
Branch, or facility

Chairman2
Deputy Chairman

President
First Vice President

BOSTON3

Jerome H. Grossman
Warren B. Rudman

Richard F. Syron
Cathy E. Minehan

NEW YORK3

Ellen V. Futter
Maurice R.
Greenberg
Joseph J. Castiglia

William J. McDonough
James H. Oltman

PHILADELPHIA

Jane G. Pepper
James M. Mead

Edward G. Boehne
William H. Stone, Jr.

CLEVELAND3

A. William Reynolds
G. Watts
Humphrey, Jr.
Marvin Rosenberg
Robert P. Bozzone

Jerry L. Jordan
Sandra Pianalto

Anne Marie
Whittemore
Henry J. Faison
Rebecca Hahn
Windsor
Anne M. Allen

J. Alfred Broaddus, Jr.
Jimmie R.
Monhollon

Buffalo

Cincinnati
Pittsburgh
RICHMOND3
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 0 . Aston

Charles A. Cerino4
Harold J. Swart4

Ronald B. Duncan4
Walter A. Varvel4
John G. Stoides4
Donald E. Nelson4

Edwin A. Huston
Robert P. Forrestal
Leo Benatar
Jack Guynn
Donald E. Boomershine
Joan D. Ruffier
R. Kirk Landon
James R. Tuerff
Lucimarian Roberts

Fred R. Herr4
James D. Hawkins4
James T. Curry III
Melvyn K. Purcell
Robert J. Musso

Richard G. Cline
Robert M. Healey
J Michael Moore

Silas Keehn
William C. Conrad

Roby L. Sloan4

Robert H. Quenon
Janet McAfee
Weakley
Robert D. Nabholz, Jr.
John A. Williams
Seymour B Johnson

Thomas C. Melzer
James R. Bowen

Delbert W. Johnson
Gerald A.
Rauenhorst
James E. Jenks

Gary H. Stern
Colleen K. Strand




Karl W. Ashman
Howard Wells
John P Baumgartner

John D. Johnson

Directories and Meetings 329
BANK,
Branch, ox facility
KANSAS CITY
Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN FRANCISCO

Chairman2
Deputy Chairman

President
First Vice President

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
W. Thomas Beard III
Judy Ley Allen
Erich Wendl

Robert D. McTeer, Jr.
Tony J. Salvaggio

James A. Vohs
Judith M. Runstad
Donald G. Phelps
William A. Hilliard
Gary G. Michael
George F. Russell, Jr.

Robert T. Parry
Patrick K. Barron

Los Angeles
Portland
Salt Lake City
1. A
Seattle current list of these officers appears each month
in the Federal Reserve Bulletin.
2. The Chairman of a Federal Reserve Bank, by statute, serves as Federal Reserve Agent.
3. Additional offices of these Banks are located at
Lewiston, Maine; Windsor Locks, Connecticut; Cranford,

Conference of Chairmen
The Chairmen of the Federal Reserve Banks
are organized into the Conference of Chairmen, which meets to consider matters of
common interest and to consult with, and
advise, the Board of Governors. Such meetings, attended also by the Deputy Chairmen,
were held in Washington on June 2 and 3,
and on December 1 and 2, 1993.
The members of the Executive Committee
of the Conference of Chairmen during 1993
were Delbert W. Johnson, Chairman;
Ellen V. Futter, Vice Chairman; and
Burton A. Dole, Jr., member.
On December 2, 1993, the Conference
elected its Executive Committee for 1994,
naming Burton A. Dole, Jr. as Chairman,
Jerome H. Grossman as Vice Chairman, and
James A. Vohs, 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.



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. Moore4
E. Ronald Liggett4
Andrea P. Wolcott
Gordon R. G.
Werkema4

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.

Robert T. Parry, President of the Federal
Reserve Bank of San Francisco, served as
Chairman of the Conference in 1993, and
Richard F. Syron, President of the Federal
Reserve Bank of Boston, served as its Vice
Chairman. Robert L. Feinberg, of the Federal Reserve Bank of San Francisco, served
as its Secretary, and Rena DeSisto, of the
Federal Reserve Bank of Boston, served as
its Assistant Secretary.

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. Stone, First Vice President of
the Federal Reserve Bank of Philadelphia,
served as Chairman of the Conference for
1993, and James H. Oltman, First Vice
President of the Federal Reserve Bank of
New York, served as its Vice Chairman.
Milissa M. Tadeo, of the Federal Reserve
Bank of Philadelphia, served as its Secretary,
and Ethan S. Harris of the Federal Reserve

330 80th Annual Report, 1993
Bank of New York, served as its Assistant
Secretary.
On October 5, 1993, the Conference
elected James H. Oltman, First Vice President of the Federal Reserve Bank of New
York, as its Chairman for 1994, and Tony J.
Salvaggio, First Vice President of the Federal Reserve Bank of Dallas, 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 331
Term expires
Dec. 31
DISTRICT 1—BOSTON

Class A
David A. Page

Robert M. Silva
Ira Stepanian

Class B
Stephen R. Levy

Edward H. Ladd
Joan T. Bok
Class C
John E. Flynn
Jerome H. Grossman

Warren B. Rudman, Esq

President and Chief Executive Officer,
Ocean National Bank of Kennebunk,
Kennebunk, Maine
President, Chief Executive Officer, and Director,
The Citizens National Bank, Putnam, Connecticut
Chairman and Chief Executive Officer,
The Bank of Boston Corporation,
Boston, Massachusetts
Chairman and Chief Executive Officer,
Bolt Beranek and Newman, Inc.,
Cambridge, Massachusetts
Chairman and Chief Executive Officer, Standish,
Ayer and Wood, Inc., Boston, Massachusetts
Chairman, New England Electric System,
Westborough, Massachusetts
Executive Director, The Quality Connection,
East Dennis, Massachusetts
Chairman and Chief Executive Officer,
New England Medical Center, Inc.,
Boston, Massachusetts
Sheehan, Phinney, Bass, and Green,
Manchester, New Hampshire

1993

1994
1995

1993

1994
1995

1993
1994

1995

DISTRICT 2—NEW YORK

Class A
Barbara Harding

Thomas G. Labrecque

Robert G. Wilmers

Class B
Rand V. Araskog




Chairman 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, President, and Chief Executive
Officer, Manufacturers and Traders Trust
Company, Buffalo, New York
Chairman, President, and Chief Executive Officer,
ITT Corporation, New York, New York

1993

1994

1995

1993

332 80th Annual Report, 1993
Term expires
Dec. 31

DISTRICT 2, Class B— Continued
Robert E. Allen
William C. Steere, Jr.
Class C
Ellen V. Futter
Maurice R. Greenberg

Herbert L. Washington

Chairman and Chief Executive Officer, AT&T,
Basking Ridge, New Jersey
Chairman and Chief Executive Officer, Pfizer,
Inc., New York, New York
President, American Museum of Natural
History, New York, New York
Chairman and Chief Executive Officer,
American International Group, Inc.,
New York, New York
Owner, HLW Fast Track, Inc.,
Rochester, New York

1994
1995

1993
1994

1995

BUFFALO BRANCH

Appointed by the Federal Reserve Bank
Susan A. McLaughlin
General Credit Manager, Eastman Kodak
Company, Rochester, New York
Charles M. Mitschow
Chairman, Western Region, Marine Midland
Bank, N.A., Buffalo, New York
Richard H. Popp
Operating Partner, Southview Farm,
Castile, New York
George W. Hamlin IV
President and Chief Executive Officer, The
Canandaigua National Bank and Trust
Company, Canandaigua, New York
Appointed by the Board of Governors
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
F. C. Richardson
President, Buffalo State College,
Buffalo, New York

1993
1994
1994
1995

1993
1994

1995

DISTRICT 3—PHILADELPHIA

Class A
Gary F. Simmerman
H. Bernard Lynch

Carl L. Campbell



President and Chief Executive Officer, United
Jersey Bank/South, N.A., Cherry Hill, New Jersey
President and Chief Executive Officer,
The First National Bank of Wyoming,
Wyoming, Delaware
President and Chief Executive Officer, Keystone
Financial, Inc., Harrisburg, Pennsylvania

1993
1994

1995

Directories and Meetings 333
Term expires
Dec. 31

DISTRICT 3—Continued
Class B
J. Richard Jones

James A. Hagen

David W. Huggins
Class C
Jane G. Pepper
Donald J. Kennedy

James M. Mead

President and Chief Executive Officer,
Jackson-Cross Company, Philadelphia,
Pennsylvania
Chairman, President, and Chief Executive
Officer, Consolidated Rail Corporation
(CONRAIL), Philadelphia, Pennsylvania
President and Chief Executive Officer, R M S
Technologies, Inc., Marlton, New Jersey
President, The Pennsylvania Horticultural
Society, Philadelphia, Pennsylvania
Business Manager, International Brotherhood of
Electrical Workers, Local Union No. 269,
Trenton, New Jersey
President and Chief Executive Officer, Capital
Blue Cross, Harrisburg, Pennsylvania

1993

1994

1995

1993
1994

1995

DISTRICT 4—CLEVELAND

Class A
Alfred C. Leist

William T. McConnell
Edward B. Brandon
Class B
Verna K. Gibson
Douglas E. Olesen
I. N. Rendall Harper, Jr.

Class C
John R. Hodges
G. Watts Humphrey, Jr
A. William Reynolds




Chairman, President, and Chief Executive
Officer, Apple Creek Banking Company,
Apple Creek, Ohio
Chairman and Chief Executive Officer, The Park
National Bank, Newark, Ohio
Chairman and Chief Executive Officer, National
City Corporation, Cleveland, Ohio
President, Outlook Consulting International, Inc.,
Columbus, Ohio
President and Chief Executive Officer, Battelle
Memorial Institute, Columbus, Ohio
President and Chief Executive Officer, American
Micrographics Company, Inc., Monroeville,
Pennsylvania
Retired President, Ohio AFL-CIO, Columbus, Ohio
President, GWH Holdings, Inc., Pittsburgh,
Pennsylvania
Chairman and Chief Executive Officer,
GenCorp, Fairlawn, Ohio

1993

1994
1995

1993
1994
1995

1993
1994
1995

334 80th Annual Report, 1993
Term expires
Dec. 31

DISTRICT A—Continued
CINCINNATI BRANCH

Appointed by the Federal Reserve Bank
Jack W. Buchanan
President, Sphar & Company, Inc., Winchester,
Kentucky
John N. Taylor, Jr.
Chairman and Chief Executive Officer,
Kurz-Kasch, Inc., Dayton, Ohio
Marvin J. Stammen
President and Chief Executive Officer, Second
National Bank, Greenville, Ohio
Jerry W. Carey
President and Chief Executive Officer, Union
National Bank and Trust Company,
Barbourville, Kentucky
Appointed by the Board of Governors
Marvin Rosenberg
Partner, Towne Properties, Ltd., Cincinnati, Ohio
Raymond A. Bradbury
Chairman, Martin County Coal Corporation,
Prestonburg, Kentucky
Eleanor Hicks
Hicks & Kinley, International Access
Marketing, Cincinnati, Ohio

1993
1993
1994
1995

1993
1994
1995

PITTSBURGH BRANCH

Appointed by the Federal Reserve Bank
George A. Davidson, Jr.
Chairman and Chief Executive Officer,
Consolidated Natural Gas Company,
Pittsburgh, Pennsylvania
Randall L. C. Russell
President and Chief Executive Officer, Ranbar
Technology, Inc., Glenshaw, Pennsylvania
David S. Dahlmann
President and Chief Executive Officer,
Southwest National Corporation,
Greensburg, Pennsylvania
Frank V. Cahouet
Chairman, President, and Chief Executive Officer,
Mellon Bank, N.A., Pittsburgh, Pennsylvania
Appointed by the Board of Governors
Sandra L. Phillips
Executive Director, Pittsburgh Partnership for
Neighborhood Development,
Pittsburgh, Pennsylvania
Jack B. Piatt
Chairman and President, Millcraft Industries,
Inc., Washington, Pennsylvania
Robert P. Bozzone
President and Chief Executive Officer,
Allegheny Ludlum Corporation,
Pittsburgh, Pennsylvania




1993
1993
1994
1995

1993

1994
1995

Directories and Meetings 335
Term expires
Dec. 31
DISTRICT 5—RICHMOND

Class A
James G. Lindley
Webb C. Hayes IV

Charles E. Weller
Class B
Paul A. DelaCourt
L. Newton Thomas, Jr.
R. E. Atkinson, Jr.
Class C
Stephen Brobeck
Anne Marie Whittemore
Henry J. Faison

Chairman Emeritus, South Carolina National
Corporation, Columbia, South Carolina
Chairman, Palmer National Bancorp, Inc. and
President, The Palmer National Bank,
Washington, D.C.
President, Elkridge National Bank and ENB
Financial Corporation, Elkridge, Maryland
Chairman, The North Carolina Enterprise
Corporation, Raleigh, North Carolina
Retired Senior Vice President, ITT/Carbon
Industries, Inc., Charleston, West Virginia
Chairman, Dilmar Oil Company, Inc.,
Florence, South Carolina
Executive Director, Consumer Federation of
America, Washington, D.C.
Partner, McGuire, Woods, Battle & Boothe,
Richmond, Virginia
President, Faison Associates,
Charlotte, North Carolina

1993
1994

1995

1993
1994
1995

1993
1994
1995

BALTIMORE BRANCH

Appointed by the Federal Reserve Bank
Claudine B. Malone
President, Financial & Management Consulting,
Inc., McLean, Virginia
Thomas J. Hughes
President and Chief Executive Officer, Navy
Federal Credit Union, Vienna, Virginia
F. Levi Ruark
Chairman and President, The National Bank of
Cambridge, Cambridge, Maryland
Richard M. Adams
Chairman and Chief Executive Officer, United
Bankshares, Inc., Parkersburg, West Virginia
Appointed by the Board of Governors
Michael R. Watson
President, Association of Maryland Pilots,
Baltimore, Maryland
Rebecca Hahn Windsor
Chairman and Chief Executive Officer, Hahn
Transportation, Inc., New Market, Maryland
Daniel R. Baker
President and Chief Executive Officer, Tate
Access Floors, Inc., Jessup, Maryland




1993
1994
1994
1995

1993
1994
1995

336 80th Annual Report, 1993
Term expires
Dec. 31

DISTRICT 5—Continued
CHARLOTTE BRANCH

Appointed by the Federal Reserve Bank
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
David B. Jordan
Vice Chairman, Chief Executive Officer, and
Director, Security Capital Bancorp,
Salisbury, North Carolina
Appointed by the Board of Governors
William E. Masters
President, Perception, Inc., Easley,
South Carolina
Harold D. Kingsmore
President and Chief Operating Officer, Graniteville
Company, Graniteville, South Carolina
Anne M. Allen
President, Anne Allen & Associates, Inc.,
Greensboro, North Carolina

1993

1994
1994

1995

1993
1994
1995

DISTRICT 6—ATLANTA

Class A
James B. Williams
Simpson Russell

W. H. Swain
Class B
Andre M. Rubenstein

Victoria B. Jackson
J. Thomas Holton
Class C
Edwin A. Huston
Hugh M. Brown
Leo Benatar



Chairman and Chief Executive Officer, SunTrust
Banks, Inc., Atlanta, Georgia
Chairman and Chief Executive Officer,
The First National Bank of Florence,
Florence, Alabama
Chairman, First National Bank, Oneida, Tennessee
Chairman and Chief Executive Officer,
Rubenstein Brothers, Inc.,
New Orleans, Louisiana
President, DSS/ProDiesel, Nashville, Tennessee
Chairman and President, Sherman International
Corporation, Birmingham, Alabama
Senior Executive Vice President-Finance, Ryder
System, Inc., Miami, Florida
President and Chief Executive Officer, BAMSI,
Inc., Titusville, Florida
Chairman and President, Engraph, Inc.,
Atl