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^Report
X^f
1994
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 of Transmitted
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., May 25, 1995
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 Eighty-First Annual Report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1994.
Sincerely,
Chairman
Contents
Part 1
3
7
8
11
15
16
20
Monetary Policy and
the U.S. Economy in 1994
INTRODUCTION
THE ECONOMY IN 1994
The household sector
The business sector
The government sector
Labor markets
Price developments
23 MONETARY POLICY AND FINANCIAL MARKETS IN 1994
25 The course of policy and interest rates
29 Credit and money flows in 1994
35
36
38
40
41
41
INTERNATIONAL DEVELOPMENTS
Foreign economies
U.S. international transactions
Foreign exchange developments
Foreign exchange operations
Bank for International Settlements
43
MONETARY POLICY REPORTS TO THE CONGRESS
43
69
Report on February 22, 1994
Report on July 20, 1994
Part 2
99
Records, Operations,
and Organization
RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
99 Regulation C (Home Mortgage Disclosure)
99 Regulation D (Reserve Requirements of Depository Institutions)
100 Regulation E (Electronic Fund Transfers)
RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS—Continued
101 Regulation H (Membership of State Banking Institutions in the Federal
Reserve System)
101 Regulation H and Regulation Y (Bank Holding Companies and Change
in Bank Control)
103 Regulation J (Collection of Checks and Other Items by Federal Reserve Banks
and Funds Transfers through Fedwire)
103 Regulation K (International Banking Operations)
104 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders
of Member Banks)
104 Regulation S (Reimbursement to Financial Institutions
for Assembling or Providing Financial Records)
104 Regulation T (Credit by Brokers and Dealers)
105 Regulation Y
106 Regulation Y and Rules Regarding Delegation of Authority
106 Regulation DD (Truth in Savings)
107 Regulation EE (Netting Eligibility for Financial Institutions)
107 Rules of Practice for Hearings
107 Rules Regarding Equal Opportunity
108 Policy statements and other actions
110 1994 discount rates
115
MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS
115
117
117
119
120
120
139
151
160
172
181
191
201
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 ?>-4, 1994
Meeting held on March 22, 1994
Meeting held on May 17, 1994
Meeting held on July 5-6, 1994
Meeting held on August 16, 1994
Meeting held on September 27, 1994
Meeting held on November 15, 1994
Meeting held on December 20, 1994
213
CONSUMER AND COMMUNITY AFFAIRS
213
213
214
217
219
222
223
224
227
228
230
231
232
CRA reform
Fair lending
HMDA data and fair lending
Community development
Other regulatory matters
Economic effects of the Electronic Fund Transfer Act
Compliance examinations
Agency reports on compliance with consumer regulations
Applications
Consumer complaints
Consumer Advisory Council
Testimony and legislative recommendations
Recommendations of other agencies
233
LITIGATION
233
233
234
Bank Holding Company Act—review of Board actions
Litigation under the Financial Institutions Supervisory Act
Other actions
237
LEGISLATION ENACTED
237
241
247
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
Riegle Community Development and Regulatory Improvement Act of 1994
Bankruptcy Amendments of 1994
249
BANKING SUPERVISION AND REGULATION
250
256
263
267
268
271
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
273
REGULATORY SIMPLIFICATION
273
273
274
274
274
Requirements for real estate appraisals
Relaxation of restrictions on bank holding companies
Netting arrangements
Receipts for ATM transactions
Government securities transactions
277
FEDERAL RESERVE BANKS
278
282
283
Developments in Federal Reserve services
Examinations
Income and expenses
284
284
284
285
FEDERAL RESERVE BANKS—Continued
Holdings of securities and loans
Volume of operations
Federal Reserve Bank premises
Pro forma financial statements for Federal Reserve priced services
291
BOARD OF GOVERNORS FINANCIAL STATEMENTS
299
STATISTICAL TABLES
300
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1994
2. Statement of condition of each Federal Reserve Bank,
December 31, 1994 and 1993
3. Federal Reserve open market transactions, 1994
4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities,
December 31, 1992-94
5. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1994
6. Income and expenses of Federal Reserve Banks, 1994
7. Income and expenses of Federal Reserve Banks, 1914-94
8. Acquisition costs and net book value of premises of Federal Reserve
Banks and Branches, December 31, 1994
9. Operations in principal departments of Federal Reserve Banks, 1991-94
10. Federal Reserve Bank interest rates, December 31, 1994
11. Reserve requirements of depository institutions, December 31, 1994
12. Initial margin requirements under Regulations T, U, G, and X
13. Principal assets and liabilities and number of insured commercial banks
in the United States, by class of bank, June 30, 1994 and 1993
14. Reserves of depository institutions, Federal Reserve Bank credit,
and related items—year-end 1918-94, and month-end 1994
15. Number of banking offices in the United States, December 31, 1993 and 1994
16. Mergers, consolidations, and acquisitions of assets or assumptions
of liabilities approved by the Board of Governors, 1994
302
306
308
309
310
314
318
319
320
321
322
323
324
330
331
345
FEDERAL RESERVE DIRECTORIES AND MEETINGS
346
348
349
350
351
352
354
354
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 and Branches
Conferences of chairmen, presidents, and first vice presidents
Directors
374
MAPS OF THE FEDERAL RESERVE SYSTEM
376
INDEX
Parti
Monetary Policy and
the U.S. Economy in 1994
Introduction
The U.S. economy turned in a strong
performance in 1994. Real gross domestic product increased 4 percent over the
four quarters of the year. The employment gains associated with this rise in
production outpaced growth of the labor
force by a sizable margin, and the unemployment rate thus declined substantially. Price increases picked up in
some sectors of the economy in 1994
as labor and product markets tightened,
but broader measures of price change
showed inflation holding fairly steady:
The consumer price index increased
about 23/4 percent over the year, the
same as in 1993.
Federal Reserve policy during 1994
was aimed at fostering a financial environment conducive to sustained economic growth. As the economy moved
back toward high rates of resource utilization, pursuit of this aim necessitated
acting to prevent a buildup of inflationary pressures. Federal Reserve policy
had remained very accommodative in
1993 in order to offset factors that had
been inhibiting economic growth. By
early 1994, however, the expansion
clearly had gathered momentum, and
maintenance of the prevailing stance of
policy would eventually have led to rising inflation that, in turn, would have
jeopardized economic and financial stability. Taking account of anticipated lags
in the effects of policy changes, the Fed-
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 1995). Data cited
here and in the next three chapters are those available as of mid-March 1995.
eral Reserve began to firm money market conditions in February 1994. Additional tightening followed over the
course of the year, as economic growth
remained unexpectedly strong, eroding
remaining margins of unused resources
and intensifying price increases at early
stages of production. During this period,
the economic effects of the tightening of
monetary policy may have been muted
by developments in financial markets—
for example, easier credit availability
through banks and a decline in the foreign exchange value of the dollar.
Short-term interest rates increased
about 2Vi percentage points during
1994, with the federal funds rate rising
from 3 percent to 51/2 percent. Other
market interest rates rose between
11/2 percentage points and 3 Vi percentage points, on net, with the largest
increases coming at intermediate
maturities. Through much of the year,
intermediate- and long-term rates were
lifted by more rapid actual and expected
economic growth, fears of a pickup in
inflation, and market expectations of
additional policy moves. However, a
further substantial tightening in November and, near year-end, some tentative
signs of moderation in economic activity appeared to reduce market concerns
about increased inflation pressures
and additional Federal Reserve policy
actions. As a result, long-term rates
declined, on net, from mid-November
through the end of December.
The foreign exchange value of the
dollar in terms of other Group of Ten
currencies declined about 6I/2 percent
during 1994, even as the economy
picked up and interest rates rose. The
positive effects on the dollar that would
81st Annual Report, 1994
normally have been expected from
higher U.S. interest rates were offset in
large part by upward movements in
long-term interest rates abroad. Indeed,
foreign long-term rates increased as
much, on average, as U.S. rates during
1994, because growth abroad, especially in Europe, was more rapid than
expected. Concerns about U.S. inflation
may have contributed to weakness in the
dollar in the middle part of 1994; late
in the year, the dollar rallied, as tighter
monetary policy apparently reduced
investors' inflation fears.
Despite the rise in U.S. interest rates
in 1994, private-sector borrowing,
abetted in part by more aggressive lending by intermediaries, picked up in support of increased spending. The debts
of both households and businesses grew
at their fastest rates in five years. The
step-up in growth of private debt was
accompanied by changes in its composition. As bond yields rose, businesses
shifted toward short-term funding
sources, increasing their bank borrowing and commercial paper issuance
while cutting back on new bond issues.
Similarly, households turned increasingly to adjustable rate mortgages as
rates on fixed rate mortgages increased
substantially. Banks encouraged the shift
of households and businesses to bank
borrowing by easing lending standards
and not allowing all of the rise in market
rates to show through to loan rates. In
contrast to the trend in private-sector
borrowing, federal borrowing was
slowed in 1994 by policies adopted in
previous years to narrow the federal
deficit, as well as by the effects of the
strong economy on tax receipts and
spending. Taken together, the debt of all
nonfinancial sectors expanded 5VA percent, a rise that was the same as the
increase of a year earlier and that was in
the middle portion of the 1994 monitoring range of 4 percent to 8 percent.
Growth in the broad monetary aggregates remained subdued in 1994. The
expansion of M3, about VA percent,
was well within the 0 percent to 4 percent range established by the Federal
Open Market Committee and slightly
more than its increase in 1993. M3 was
buoyed by growth of 7 percent in large
time deposits, as banks turned to wholesale markets to fund credit expansion.
For the year, M2 rose about 1 percent,
the lower bound of its 1 percent to 5 percent range. In contrast to 1992 and 1993,
the slow growth in M2, and the resulting further substantial increase in its
velocity (the ratio of nominal GDP to
the money stock), was not a consequence of unusually large shifts from
M2 deposits to bond and stock mutual
funds. Rather, it seemed to reflect behavior similar to that in earlier periods of
rising short-term market interest rates.
During such periods, changes in the
rates available on retail deposits usually
lag changes in market rates, providing
an incentive to redirect savings from
these deposits to market instruments.
These shifts tend to have an especially
marked effect on M1 because yields on
its components either cannot adjust or
adjust quite slowly to shifts in market
rates. Growth of Ml during the year was
2lA percent; it had been 10Vi percent in
1993. Only continued strong growth in
currency, much of which likely reflected
increased use abroad, supported Ml.
In 1995 the Federal Reserve will seek
to promote continued economic expansion while avoiding the provision of so
much liquidity that a sustained step-up
in inflation might begin to develop.
Much progress has been made over the
past couple of business cycles in reducing the role that inflation plays in the
economic decisions of households and
businesses. Moving forward, the challenge will be to preserve and extend this
progress, given that the Federal Reserve
Introduction
can best contribute to long-run prosperity by establishing an environment of
effective price stability.
Economic prospects for the long run
will be further enhanced if the Congress
and the Administration succeed in
making further progress in reducing the
federal budget deficit. An improved outlook for the federal deficit over the
remainder of this decade and beyond
could have significant favorable effects
in financial markets, including a shift in
long-term interest rates to a trajectory
lower than that which would otherwise
prevail. Such a shift in long-term rates
would be an essential part of a process
in which a larger share of the nation's
limited supply of savings would be
channeled to productivity-improving
investment, thereby boosting growth in
output and living standards.
•
The Economy in 1994
The economy recorded a third year of
strong expansion in 1994. Real GDP
grew 4 percent over the four quarters of
the year, industrial output rose 6 percent, and the number of nonfarm payroll jobs increased about 3Vi million,
the largest gain in ten years. Labor and
product markets tightened appreciably.
Price pressures intensified in the markets for materials, but broader measures
of price change showed inflation holding steady.
As in 1992 and 1993, the economic
advance during 1994 was driven mainly
by sharp increases in the real expenditures of households and businesses.
Consumer purchases of motor vehicles
rose further in 1994, and purchases of
other consumer durables increased
even faster than they had in the two
previous years. Residential investment
posted a small gain, on net, over the
four quarters of the year, despite sharp
increases in mortgage interest rates.
Business investment in office and
computing equipment slowed from the
spectacular pace of 1993 but continued
to rise rapidly nonetheless, and business investment in other types of equipment accelerated. Real outlays for nonresidential construction, which had been
a weak sector of the economy in previous years, picked up in 1994; outlays
for office construction ended a long slide
that had stretched well back into the
1980s. Business investment in inventories, which had been quite restrained
in previous years of the expansion,
increased appreciably in 1994. Much of
the inventory buildup apparently was
intentional and reflected the desires of
firms to stock up in anticipation of
continued strength in sales or to build
stronger buffers against potential delays
in supply.
In contrast to the strength in private
expenditures, government purchases of
goods and services edged down on
net over the four quarters of 1994. Federal purchases of goods and services,
which had declined sharply in 1993,
fell further in 1994 as a consequence of
actions taken in recent years to reduce
the size of the federal deficit. Meanwhile, the real purchases of state and
local governments rose only modestly.
Although the expanding economy provided states and localities with a
stronger revenue base, many of these
jurisdictions continued trying to hold
spending in check; a number of states
chose to cut taxes.
As in the two previous years, a significant portion of the rise in domestic
spending in 1994 went for imports of
goods and services, which increased
about 14 percent in real terms during the
Change in Real GDP
Percent, annual rate
1
,1
T
1990
1992
1994
NOTE. The data are seasonally adjusted and come from
the Department of Commerce; they are measured in terms
of 1987 dollars.
8
81st Annual Report, 1994
year. Meanwhile, growth of real exports The Household Sector
of goods and services picked up noticeably, with gains cumulating to about Real personal consumption expenditures
11 Vi percent over the year.
advanced VA percent over the four quarLabor and product markets tightened ters of 1994, a rate about in line with the
in 1994. After ticking up in January average of the two previous years. Supin conjunction with the introduction port for the rise in spending came from
of a new labor market survey, the rapid income growth, and, according to
civilian unemployment rate fell sharply surveys, from sharp increases in conover the remainder of the year, to sumer confidence. Outlays for durable
5.4 percent in December. In manufac- goods continued to rise especially rapturing, gains in production exceeded idly, seemingly little affected by rising
the growth of capacity by a sizable interest rates. Nor did spending appear
margin during 1994, and the rate of to be much affected, in the aggregate, by
capacity utilization climbed 3 percent- poor performance of the stock and bond
age points. Its level at year-end was in markets, which cut into the real value of
line with the highest level achieved household assets. Credit generally was
during the economic expansion of the readily available during 1994; growth of
1980s.
consumer installment debt picked up
Inflation pressures picked up in some substantially, to a pace comparable with
markets in 1994. Prices of raw indus- some of the larger increases that were
trial commodities rose even more rap- observed during the expansions of the
idly than in 1993, and prices of inter- 1970s and 1980s.
mediate materials accelerated sharply,
Real consumer expenditures for
especially after midyear. However, the durable goods increased about 814 perinflation impulse in these markets did cent in 1994, bringing the cumulative
not carry through with any visible force rise in these outlays over the past three
to the consumer level, probably because years to nearly 30 percent. The stock of
unit labor costs, which make up by durable goods that households wish to
far the largest part of value added in hold apparently continued to rise quite
production and marketing, continued to rapidly in 1994, and at least some houserise at a low rate. The employment cost holds probably were still making up for
index of hourly compensation in private purchases that had been put off earlier in
nonfarm industries actually slowed the 1990s, when the economy was slugnoticeably from the pace of 1993, and gish and concerns about job prospects
productivity gains in 1994 held close to were widespread. Real expenditures for
the pace of the previous year.
motor vehicles moved up an additional
As for retail prices, 1994 was the 3Vi percent over the four quarters of
fourth year in a row in which the rise in 1994, after gains of about 9 percent
the total consumer price index has been in each of the two preceding years;
around 3 percent. The CPI excluding increases in sales of vehicles in 1994
food and energy rose just 2.8 percent might have been a bit stronger still but
over the four quarters of 1994, after an for capacity constraints and various supincrease of 3.1 percent in 1993; the rate ply disruptions that sometimes limited
of rise in this index, which is widely the availability of certain models. Real
used as an indicator of underlying outlays for durable goods other than
inflation trends, was nearly halved from motor vehicles rose about 12 percent
1990 to 1994.
over the four quarters of 1994, a pickup
The Economy in 1994
from the already rapid rates of expansion of the two previous years. Purchases of personal computers and other
electronic equipment continued to surge
in 1994, and spending on furniture and
household appliances moved up further.
Consumer expenditures for nondurables and services exhibited mixed
patterns of change in 1994. Real outlays
for nondurables increased more than
3 percent over the year, a pickup from
the subdued rate of growth recorded
in the previous year and, for this category, a larger-than-average advance by
historical standards. By contrast, real
expenditures for services increased
roughly 214 percent, a slightly smaller
gain than that of 1993; growth of outlays for services was held down, to some
degree, by a decline in real outlays for
energy, as warm weather late in 1994
reduced the amount of fuel needed for
heating.
Real disposable personal income rose
nearly 41/2 percent during 1994. Except
for a couple of occasions in previous
years when income growth was boosted
temporarily by special factors, the rise
Change in Real Income and Consumption
Percent, annual rate
Personal consumption expenditures
Disposable personal income
ElJI
rp •
1990
1992
1994
NOTE. The data are seasonally adjusted and come from
the Department of Commerce; they are measured in terms
of 1987 dollars.
in real disposable income in 1994 was
the largest increase since the 1983-84
period. Growth of wages and salaries
accelerated in 1994 in conjunction with
the step-up of employment growth.
Income from capital also rose: Dividends moved up along with corporate
profits, and interest income turned
back up after three years of decline. By
contrast, transfer payments, the growth
of which tends to slow as the economy
strengthens, registered the smallest
annual increase since 1987. The net
income of nonfarm proprietors appears
to have about kept pace with the average
rate of growth in other types of income.
Farm income rose moderately on an
annual average basis, as an increase in
the volume of output more than offset
the effects of sharp declines in farm
output prices that developed over the
course of the year.
Consumers' perceptions of economic
and financial conditions brightened considerably during 1994. By year-end, the
composite measures of consumer confidence that are prepared by the Conference Board and the University of Michigan Survey Research Center had both
moved to new highs for the current business expansion. Consumers became
more optimistic over the year in regard
both to current and to future economic
conditions. Perceptions of employment
prospects also improved, with a growing
proportion of respondents saying that
jobs were plentiful and a reduced proportion saying that jobs were hard to
find.
In contrast to most other indicators
for the household sector of the economy,
household balance sheets—which had
strengthened appreciably in previous
years—showed little or no improvement
in 1994. According to preliminary data,
the aggregate net worth of households
recorded a relatively small increase in
nominal terms over the year, and, in real
10
81st Annual Report, 1994
terms, net worth may have declined. the number of houses on which conHousehold assets rose only moderately struction was started fell back from
in nominal terms, and the growth of the exceptionally high peaks that were
nominal liabilities picked up a bit as a reached briefly in late 1993, but they
result of the sharp increase in use of remained at elevated levels. In total,
consumer credit.
construction began on 1.20 million
With personal income growing faster single-family units in 1994, a figure that
than net worth during 1994, the ratio of was slightly above the highest annual
wealth to income fell over the course of total of the 1980s. The number of sales
the year. In the past, declines in this of existing homes nearly matched
ratio sometimes have prompted house- the previous annual peak, reached in
holds to boost the proportion of current 1978; and although sales of new homes
income that is saved, in an attempt to remained well short of previous highs,
restore wealth to more desirable levels, the 1994 total was in line with the numand this same tendency may have been ber sold in the brisk market of 1993.
at work, to some extent, in 1994. After
Declines in the starts and sales of
dipping in the first quarter of the year to single-family houses in early 1994 basithe lowest level of the current expan- cally reversed the huge gains of late
sion, the personal saving rate rose a full 1993. Whatever tendency there may
percentage point over the remainder have been for these indicators to exhibit
of the year, to a fourth-quarter level at least a temporary setback after a
of 4.6 percent. Even then, however, the period of unusual strength was probably
saving rate remained quite low by reinforced by the initial reactions of
historical standards. Rising levels of builders and homebuyers to increases in
income and employment and increased mortgage interest rates that had begun in
confidence in the outlook apparently the final quarter of 1993. Exceptionally
convinced consumers to push ahead severe winter weather in the Northeast
with increases in outlays, most notably and Midwest early in 1994, coming on
on consumer durables.
the heels of favorable conditions in late
Despite the apparent flagging in the 1993, probably also helped to account
improvement in household balance for the sharpness of the downturn. In
sheets, signs of outright stress in household financial conditions were not much Private Housing Starts
Millions of units, annual rate
in evidence in 1994. Delinquency rates
on mortgages and most other types of
household loans generally remained
quite low relative to their historical
ranges. Credit card delinquencies moved
up toward the end of the year, however.
Residential investment held up remarkably well in 1994 in the face of
0.5
sharp increases in mortgage interest
rates. In real terms, these investment
outlays were up about 3 percent, on net,
over the four quarters of the year, after
gains of 17 percent in 1992 and 8 per1988
1990
1992
1994
cent in 1993. In the market for singleNOTE. The data are seasonally adjusted and come from
family houses, the number of sales and the Department of Commerce.
The Economy in 1994
any event, starts of single-family homes
ticked back up a bit in the second quarter of the year, sales of existing homes
essentially flattened out, and the rate of
decline in sales of new homes slowed.
After midyear, sales of existing
homes began to exhibit a clear downtrend. However, sales of new homes
strengthened through the summer and
into the autumn, and single-family starts
held firm. Sizable gains in employment
and income and rising optimism about
the future of the economy apparently
helped to blunt the effects of increases
in interest rates during this period. In
addition, the availability of a widening
variety of alternative mortgage instruments and, perhaps, some easing of loan
qualification standards may have permitted some buyers, who otherwise would
not have been able to obtain financing,
to go ahead with their purchases.
Toward year-end a softer tone seemed
to be emerging in some key indicators
of single-family housing activity. Sales
of new homes tailed off sharply in
November and December, and the ratio
of the number of unsold homes to the
number of sales, which had turned
upward in early 1994, continued to rise.
By December the ratio had moved up to
a level that was a little above its historical average. Nonetheless, starts of new
single-family houses remained strong
through year-end, rising to a December
level that was moderately above the
average for the year as a whole.
Increases in the various measures of
house prices were of small to moderate
size in 1994. The median transaction
prices of new and existing homes that
were sold in the first half of the year
were roughly 3V6 percent above the
level of a year earlier, and a similar rise
was reported during that period in price
indexes that adjust for changes in the
quality and regional mix of homes that
are sold. After midyear, the four-quarter
\\
changes in median transaction prices
slowed, but the rate of rise in the
quality-adjusted indexes picked up
somewhat. All told, prices have been
firmer in the past couple of years than
they were earlier in the 1990s.
After falling to exceptionally low
levels in late 1992 and early 1993, construction of multifamily housing units
increased throughout 1994. Although
the level of activity in this part of the
housing sector was not especially high,
gains during the year were large in
percentage terms: Starts of these units
moved up about 65 percent from the
fourth quarter of 1993 to the fourth
quarter of 1994, at which point they
were more than double the lows of a
couple of years ago. The national average vacancy rate for multifamily rental
units remained relatively high in 1994,
but markets in some areas of the country
had tightened enough to make construction of new multifamily units economically attractive. The August 1993 reauthorization of a tax credit on low-income
housing units also provided some incentive for new construction. The financing
of multifamily projects was facilitated
through more ready availability of credit
and increased equity investment.
The Business Sector
Robust expansion was evident in most
of the economic indicators for the business sector of the economy in 1994.
Real output of nonfarm businesses
increased about 4lA percent over the
four quarters of the year, according
to preliminary estimates. For a second
year, business investment in fixed
capital advanced exceptionally rapidly.
Inventory investment also picked up
appreciably, spurred by large, sustained
increases in sales. Business finances
remained on a sound footing: Invest-
12
81st Annual Report, 1994
ment expenditures continued to be
financed predominantly with internal
funds, and signs of financial stress were
largely absent.
Industry entered 1994 with considerable momentum and maintained a rapid
pace of expansion throughout the year.
Industrial production rose 6 percent
over the four quarters of 1994, a growth
rate exceeded in only one of the past
ten years. The production of business
equipment advanced especially rapidly,
buoyed by rising investment in the
domestic economy and further large
increases in exports of capital goods.
Production of intermediate products—
which consist mainly of supplies used in
business and construction—also moved
up substantially during 1994, as did the
output of materials, especially those
used as inputs in the production of
durable goods.
The rate of capacity utilization in
industry increased about 2Vi percentage
points over the twelve months of 1994,
to a level that was about Vi percentage
point above the peak of the late 1980s.
In manufacturing, the operating rate rose
3 percentage points during the year. By
year-end, utilization rates in some industries had moved to exceptionally high
levels. Most notably, the average operating rate among manufacturers engaged
in primary processing (basically, the
producers of materials) had climbed to
the highest level since the end of 1973,
surpassing, by a percentage point or
more, the peaks of the late 1970s and
late 1980s.
After rising 2V/i percent during 1993,
corporate profits increased another
4 percent over the first three quarters of
1994 (and as of mid-March 1995, indications are that profits also rose in the
fourth quarter). The profits earned by
nonfinancial corporations from their
domestic operations increased about
IVi percent over the first three quarters
of 1994, after a gain of 2\Vi percent in
1993. Although these 1994 gains were
partly the result of increased volume,
profits per unit of output also rose. In
the second and third quarters, before tax profits of nonfinancial corporations amounted to nearly 11 percent
of the gross domestic output of those
businesses—the highest level for this
measure since the late 1970s. A reduced
corporate reliance on debt, as well as
the cyclical recovery of the economy,
helped push up the profit share. In contrast to the experience of nonfinancial
corporations, the profits of private financial institutions from their domestic
operations fell about 7 percent over the
first three quarters of the year, as net
interest margins narrowed. The decline
reversed some of the large rise in profits
that these institutions had reported in
1993.
Business fixed investment increased
nearly 13 percent in real terms over
Industrial Production
Index, 1987 = 100
Perc
-
J
120
85
/
115
110
/
/
105
1
I
1990
1
1
1992
1994
80
J
1988
I
1
1990
/ * *
1
1992
\
i
1994
The Economy in 1994
the four quarters of 1994, after a gain
of 16 percent during 1993. Real expenditures for equipment, which had
increased more than 20 percent in 1993,
moved up an additional 15 percent over
the four quarters of 1994, and investment in structures scored its biggest gain
in several years.
In the equipment category, expenditures for office and computing equipment, which had registered an astonishing gain in 1993, slowed in 1994, but
the rise in these outlays still amounted
to nearly 20 percent in real terms. Meanwhile, the growth of real expenditures
for most other types of business equipment picked up. Business investment
in motor vehicles rose about 17 percent
over the four quarters of 1994. With
this gain coming on top of big increases
in each of the two previous years,
annual business outlays for vehicles
reached a level nearly one-third higher
than the peak year of the 1980s. Outlays
for communications equipment also
scored an especially big gain in 1994,
more than 25 percent in real terms. Business purchases of industrial equipment
advanced about 12 percent during 1994,
one of the larger gains of the past two
decades. By contrast, commercial aircraft once again was a notable area of
13
weakness; the investment cycle in that
sector has been sharply out of phase
with those of most other industries
because of persistent excess capacity
and poor profitability in the airline
business.
Business investment in nonresidential
structures rose more than 4 percent during 1994, after an increase of V/i percent in 1993 and declines in each of
the three preceding years. Investment in
industrial structures rose for the first
time since 1990, more than likely in
response to high—and rising—rates of
capacity utilization. Investment in office
buildings also picked up in 1994 after a
long string of declines that, in total, had
brought spending on these structures
down about 60 percent from the peak of
the mid-1980s; declining vacancy rates
and a firming of property values provided additional evidence of improvement in this sector of the economy in
1994. The investment data for other
types of structures showed a mix of
pluses and minuses: Expenditures on
commercial structures other than offices
moved up further, after large gains in
1992 and 1993; however, outlays for
drilling declined for a fourth year, to the
lowest level since the early 1970s.
Change in Real Business Fixed Investment
Percent, annual rate
Corporate Profits before Taxes
Percentage of nominal product
Structures
Producers' durable equipment
10
_J
I
J_
J_
1994
1988
1990
1992
NOTE. Profits of nonfinancial corporations from domestic operations, with adjustments for inventory valuation
and capital consumption, divided by GDP of nonfinancial
corporate sector.
1990
1992
1994
NOTE. The data are seasonally adjusted and come from
the Department of Commerce; they are measured in terms
of 1987 dollars.
14
81st Annual Report, 1994
Because a large share of the growth
in business fixed investment in recent
years has gone for items that depreciate relatively quickly—computers
being a prime example—net additions
to the stock of productive capital have
not been as impressive as the data on
gross investment expenditures might
seem to indicate. Nonetheless, with
the further increase in gross investment
in 1994, net additions to the capital
stock appear to have become more
substantial. Still unclear is the degree
to which these increases will ultimately translate into faster gains in
output per worker and in living standards; as discussed in more detail below,
the trend of growth in labor productivity, which is affected by the amount
and quality of capital that workers have
available, seems to have picked up in
recent years but by a relatively small
amount.
Business investment in inventories
rose sharply in 1994. Earlier in the
expansion, firms had refrained from
building stocks, even as the economy
strengthened. Increased reliance on
"just in time" systems of inventory control reduced the level of stocks that firms
needed to maintain their normal operations, and, with a degree of slack
still present in the economy, businesses
Change in Real Business Inventories
Billions of 1987 dollars, annual rate
50
I. . 1 1 .lll.ll
J
25
in i
1
L
1990
1992
1994
NOTE. Total nonfarm sector. The data are seasonally
adjusted and come from the Department of Commerce.
usually were able to quickly obtain
goods from their suppliers and thus were
probably reluctant to hold stocks in
house. At the end of 1993, the level of
real inventories in the nonfarm business
sector was only 2 percent higher than it
had been at the start of the recovery in
early 1991.
Circumstances changed in 1994, however. Markets tightened as demand
continued to surge, and delays in the
delivery of supplies became more
common. Anticipation of further growth
in demand and increased concern
about possible bottlenecks apparently
prompted businesses to begin investing more heavily in inventories. Some
firms may also have been trying to
stock up on materials in advance of
anticipated price increases. For the
year as a whole, accumulation of nonfarm inventories was more than twice
what it had been in 1993. This additional accumulation brought to a halt
the previous downtrend in the ratio
of nonfarm inventories to business
sales, but the ratio remained quite low
by the standards of the past quartercentury.
Inventory accumulation in the farm
sector of the economy also picked up
in 1994. Stocks of farm products had
been drawn down in 1993, when farm
production fell sharply because of floods
in the Midwest and droughts in some
other regions of the country. However,
crop conditions in 1994 were unusually
favorable throughout the year, and the
output of some major crops climbed
to levels considerably above previous
peaks. With the demand for farm output rising much less rapidly than production, inventories of crops increased
sharply. Livestock production also rose
appreciably in 1994; inventories of livestock, which consist mainly of the cattle
and hogs on farms and ranches, continued to expand.
The Economy in 1994
The Government Sector
Federal purchases of goods and services, the part of federal spending that is
included in GDP, fell almost 6 percent
in real terms over the four quarters of
1994. Real outlays for defense remained
on a sharp downtrend, and nondefense
outlays, which had declined moderately
in 1993, were little changed, on net,
over the four quarters of 1994.
Total federal outlays, measured in
nominal dollars in the unified budget,
increased 3.7 percent in fiscal 1994
after a rise of 2.0 percent the previous
fiscal year. These increases are among
the smallest of recent decades. Nominal
outlays for defense fell again in fiscal
1994. In addition, the growth of outlays
for income security (a category that
includes the expenditures on unemployment compensation and welfare benefits) slowed further as the economy continued to strengthen. Increases in social
security outlays also slowed somewhat
in fiscal 1994; the rise was about 1 percentage point less than that of nominal
GDP. Outlays for Medicaid slowed as
well, but the rate of rise in those expenditures once again exceeded the growth
of nominal GDP.
Federal receipts were up 9 percent in
fiscal 1994, the largest rise in several
years. With rapid expansion of the economy giving a strong boost to almost
all types of income, the major categories
15
of federal receipts all showed sizable
gains. Combined receipts from individual income taxes and social insurance taxes increased a bit more than
7 percent in fiscal 1994, after moving up
5.4 percent in the previous fiscal year.
Receipts from taxes on corporate profits
increased nearly 20 percent, slightly
more than the gain of 1993.
The federal budget deficit declined to
$203 billion in fiscal 1994, an amount
that was equal to 3.1 percent of nominal
GDP. Earlier in the 1990s, when the
economy was sluggish, the federal deficit had climbed to a cyclical peak of
4.9 percent of nominal GDP. The previous cyclical low in the ratio of the deficit to nominal GDP, 2.9 percent, was
reached in fiscal 1989. Since fiscal 1989,
defense spending as a share of GDP has
dropped appreciably, but this source of
deficit reduction has been essentially
offset by increased outlays for health
and social insurance. Thus, the ratio of
total federal outlays to GDP has changed
little, on net; it was about 22 percent in
both fiscal 1989 and fiscal 1994. The
ratio of federal receipts to nominal GDP
was about 19 percent in both of those
fiscal years.
The stronger economy of recent years
has provided state and local governments with a growing revenue base and
a broadening set of fiscal options. Some
Federal Budget Deficit
Billions of dollars
Change in Real Federal Purchases
Percent, Q4 to Q4
300
• 1111
200
100
1990
1990
1992
1994
NOTE. The data are from the Department of Commerce.
1992
1994
NOTE. The data are for fiscal years. They are on a
unified budget basis and are from the Department of the
Treasury.
16
81st Annual Report, 1994
governments have responded to these
developments by cutting taxes, in most
cases by small amounts. Effective tax
rates of state and local governments
appear to have edged down a bit, on
average, over the four quarters of 1994,
and nominal receipts apparently rose
somewhat less rapidly than nominal
GDP over that period.
Many states and localities also have
been trying to restrain the growth of
expenditures, but success on that score
has been difficult to achieve because of
increased outlays for entitlements and
rising demand for many of the public
services that traditionally have been provided by state and local governments.
Transfers of income from state and local
governments to persons rose about
9 percent in nominal terms over the four
quarters of 1994, roughly the same as
the rise during 1993 but less than the
increases of previous years; from 1988
to 1992, the average compound rate of
growth in these transfers was about
15 percent a year. In categories other
than transfers, increases in spending
have been fairly restrained in recent
years; nominal purchases of goods and
services (which account for about
80 percent of the total expenditures of
state and local governments) have been
trending up less rapidly than nominal
GDP since the early 1990s.
Change in Real State and Local Purchases
Percent, Q4 to Q4
I I •-I I
1990
1992
1994
NOTE. The data are from the Department of Commerce.
In real terms, the 1994 rise in purchases of goods and services by state
and local governments amounted to just
2 percent. Compensation of employees,
which accounts for about two-thirds of
total state and local purchases, increased
11/2 percent in real terms over the four
quarters of 1994. Construction outlays
declined slightly in real terms, as gains
over the final three quarters of the year
were not sufficient to offset a firstquarter plunge. Nonetheless, real outlays for structures remained at high
levels; a strong uptrend in construction
expenditures over the past ten or twelve
years has more than reversed a long
contraction that began in the latter half
of the 1960s and bottomed out in the
first half of the 1980s.
The deficit in the combined operating
and capital accounts of all state and
local governments (a measure that
excludes the surpluses in state and local
social insurance funds) amounted to
about 0.6 percent of nominal GDP in
calendar 1994, little changed from the
corresponding figure for 1993 and down
only slightly from a cyclical peak of
0.8 percent in 1991. The recent cyclical
peak in this measure was larger than the
peaks reached in recessions of the 1970s
and 1980s, and declines in the deficit
during this expansion have not been
as large as the declines that occurred
during other recent expansions. Historically, the combined operating and capital accounts of state and local governments have been in deficit more often
than they have been in surplus; as a
share of nominal GDP, the annual surpluses and deficits since World War II
have averaged out to a deficit of
0.3 percent.
Labor Markets
Employment rose substantially in 1994.
The total number of jobs in the nonfarm
The Economy in 1994
Labor Market Conditions
Net change, millions of jobs
Payroll employment
Total nonfarm
i
1
1
t
1
i
1
Percent
Civilian unemployment rate
\
1
1
I
1
I
I
1
Percent, Q4 to Q4
Change in output per hour
Nonfarm business sector
1
I
I
I
I
1
Change in employment cost index
Total compensation, private industry
llllllll
1988
1990
1992
1994
NOTE. The data are from the Department of Labor.
The department introduced a new survey of households in
January 1994; unemployment data from that point on are
Digitizednot directly comparable with those of earlier periods.
for FRASER
17
sector of the economy increased 3.5 million over the twelve months ended in
December, after a gain of 2.3 million
during 1993.' About a quarter of a million of the rise in jobs during 1994 was
in the government sector, mostly at the
local level. Job growth in the private
nonfarm sector amounted to 3.3 million,
the largest gain since 1984. Increases in
employment at nonfarm establishments
were sizable in each quarter of 1994.
Producers of goods boosted employment more than half a million in 1994.
The job count in construction increased
about 310,000 over the year; employment at general building contractors rose
briskly for a second year, as did the
number of jobs at firms involved in
special trades related to construction.
The number of jobs in manufacturing
increased about 285,000 during 1994,
after five years of decline. Producers of
durables accounted for most of the rise
in manufacturing employment; among
these producers, job gains were widespread. Employment at factories that
produce nondurables rose slightly in
total, as advances in some industries—
such as printing and publishing and rubber and plastics—were partly offset by
continued secular declines in the number of jobs in industries such as apparel,
tobacco, and leather goods. The average
workweek in manufacturing, which had
stretched out in 1992 and 1993 when
factory employment was declining,
lengthened further in 1994, rising to new
highs for the postwar period. The high
fixed costs that are associated with
adding new workers probably continued to be an important factor in firms'
1. The Bureau of Labor Statistics has announced that the level of nonfarm payroll employment in March 1994 will be raised 760,000 when
revised estimates are released in the summer of
1995. The revision may lead to larger estimates of
job growth in both 1993 and 1994.
18
81st Annual Report, 1994
decisions to rely still more heavily on
a longer workweek as a way to boost
labor input. Growth of factory output
surpassed the rise in labor input by a
sizable amount in 1994, a reflection of
substantial gains in productivity that
were realized in this sector of the economy in the most recent year.
Employment in the private serviceproducing sector rose nearly 23/4 million
during 1994, after a gain of 2 million in
1993. The number of jobs in retail trade
increased about 820,000 over the year.
Auto dealers, stores that sell building
materials, and those that sell general
merchandise were among the retail outlets that reported impressive gains. Hiring at eating and drinking places also
moved up briskly; after three years of
slow growth around the start of the
decade, hiring at these establishments
has increased substantially in each of
the past three years. Employment at
firms that supply services to other businesses rose about 710,000 in 1994, even
more than in 1993. Once again, job
growth within this category was especially rapid at personnel supply firms—
those that essentially lease the services
of their workers to other employers,
often on a temporary basis. Employment
at businesses that supply health services
increased a quarter of a million in 1994,
about the same as the gain in 1993;
hiring at hospitals has flattened out over
the past couple of years, but elsewhere
in the health sector job growth has continued at a rapid clip.
Strength also was evident in 1994 in
data from the monthly survey of households. After ticking up in January 1994,
when a redesigned household survey
was implemented and new population
estimates were introduced, the civilian
unemployment rate turned back down
in February and declined in most
months thereafter. The rate in December, 5.4 percent, was 1.3 percentage
points below that of January.2 Appreciable net declines in unemployment
rates were reported over that period for
nearly all occupational and demographic
groups.
Data on the reasons why individuals
are unemployed have been tracing out
patterns fairly similar to those seen in
previous business cycles. Most notably,
the number of persons who are unemployed because they lost their last job
declined sharply, on net, during 1994.
The number of individuals in this category had soared earlier in the 1990s,
when the economy was struggling to
gain momentum and many large companies were restructuring their operations.
However, with the more recent decline,
the number of these "job losers," measured as a percentage of the labor force,
moved back toward the lows of the late
1980s. Much of the decline in the number of job losers in 1994 was among
workers who were permanently separated from their previous jobs. The number of persons unemployed for reasons
other than the loss of a job (that is, the
sum of "job leavers" and new entrants
or re-entrants unable to find work) also
declined in 1994. As in other business
cycles, the number of these individuals,
measured relative to the size of the labor
force, has been displaying a cyclical pattern considerably more muted than that
of job losers.
Growth of the civilian labor force—
which consists of the individuals who
are employed and those who are seeking
2. Research by the Bureau of Labor Statistics
suggests that the unemployment rate would have
run about two-tenths of a percentage point lower
in 1994 but for the changes that were introduced
in January of that year. Other series from the
household survey were also affected by the introduction of the new survey and the revised population estimates; therefore, data for the period starting in January 1994 are not directly comparable
with those for the period ended in December 1993.
The Economy in 1994
employment but have not yet found it—
picked up a bit in the second half of
1994. However, even with this increase,
the cumulative rise in the labor force in
the current business expansion has been
relatively small compared with the gains
recorded in other recent expansions;
growth of the working-age population
has been slower this decade than it was
in the expansions of the 1970s and
1980s, and the share of the population
participating in the labor force, which
trended up in earlier expansions, has
changed little, on net, during this one.
According to preliminary data, output
per hour of labor input in the nonfarm
business sector increased 1.4 percent
over the four quarters of 1994, after a
rise of 1.8 percent in 1993 and still
larger gains in 1992 and 1991. Over the
business cycle, productivity gains typically are largest in the early years of
expansion, and, in that regard, the recent
experience does not appear to be
unusual. Abstracting from cyclical
variation, the trend of productivity
growth in recent years seems to have
picked up somewhat from the unusually
sluggish pace that prevailed through
much of the 1970s and 1980s, but, at
the same time, the pickup has not
been nearly so large as some anecdotal
reports might appear to suggest. For
example, from late 1988 to late 1994, an
interval of time that is long enough to
capture all the phases that productivity
goes through during the business cycle,
the average rate of rise in output per
hour in the nonfarm business sector
amounted to slightly more than 1 lA percent, up only modestly from an average
rate of rise of about 3A percent during
most of the 1970s and 1980s.3
3. Whether even this small degree of improvement in the productivity trend will withstand
future revisions of the data is not clear. For
example, among the many difficult issues that are
19
The rate of increase in hourly compensation moved down another notch in
1994. The employment cost index for
private industry, a measure of hourly
labor costs that comprises both wages
and benefits, rose 3.1 percent during the
twelve months ended in December
1994, after increases of 3.6 percent in
1993 and 3.5 percent in 1992. The rise
in the wage component of compensation
was slightly less than that of 1993, and
the rate of increase in hourly benefits
slowed appreciably. Increases in benefits were restrained, in large part, by
another year of deceleration in health
care costs and a further slowing in workers' compensation insurance costs. The
rise in nominal compensation per hour
in 1994 was the smallest yearly increase
in the fifteen-year history of the series,
the previous low of 3.2 percent having
come midway through the expansion
of the 1980s. Toward the end of that
decade, as bidding for labor resources
intensified, increases in compensation
moved up for a time to around 5 percent
a year.
Unit labor costs in the nonfarm business sector rose 1.9 percent over the
four quarters of 1994, after an increase
of just 0.6 percent over the four quarters
of 1993. In manufacturing, a sector of
the economy in which productivity has
advanced quite rapidly in recent years, a
rise in output per hour of 4.6 percent
during 1994 more than offset a modest
involved in the measurement of productivity is the
choice of an appropriate set of prices for valuing
the output of goods and services. Currently, aggregate output is tallied by using the prices of 1987,
but some major changes in relative prices have
taken place since then, the most notable of which
is the huge decline in the price of office and
computing equipment. Using the prices of a more
recent year to gauge real output would result in a
reduced increment to growth from office and computing equipment. All else equal, the growth of
productivity would also be negatively affected by
a switch to the prices of a more recent year.
20
81st Annual Report, 1994
increase in hourly compensation, and
unit labor costs declined noticeably for a
second year.
Price Developments
Although price increases picked up in
some parts of the economy in 1994, the
broader measures of price change continued to yield readings that were quite
favorable. The rise in the total CPI was
about 23/4 percent in 1994, the same
as the increase during 1993. The CPI
excluding food and energy also rose
about 23/4 percent over the four quarters
of 1994, after increasing slightly more
than 3 percent in 1993. The producer
price index for finished goods increased
11/4 percent during 1994, after edging up
just 14 percent during the previous year.
/
As in 1992 and 1993, the past year's
increases in all these price indexes were
among the lowest readings of the past
quarter-century. Measures of inflation
expectations held steady in 1994, but
continued to show readings that were
somewhat higher, on average, than the
actual rates of price increase.
The pickup of price increases in 1994
was confined largely to markets for
materials. Prices of primary industrial
inputs, which had moved up sharply
during 1993, continued to surge in 1994,
and price increases for intermediate
materials accelerated as the year progressed. By year-end, the PPI for intermediate materials other than food and
energy had moved to a level more than
5 percent above that of a year earlier, the
largest such increase since the late
1980s. Prices of imports also picked up
somewhat in 1994, influenced by the
depreciation in the exchange value of
the dollar; as was true in the domestic
economy, the largest price increases for
imported goods were those for materials. Gains in productivity apparently
enabled manufacturers of finished goods
to absorb these increases in the costs of
domestically produced and imported
materials without raising their own
prices very much.
In the CPI, the prices of commodities
other than food and energy rose 1V2 percent over the four quarters of 1994,
about the same as the rise of 1993.
Prices of new cars and new trucks,
responding to strong demand and, at
times, shortages in the supply of some
models, moved up faster than prices in
general; prices of used cars rose especially rapidly for a third year. The prices
of tobacco products, which had fallen
sharply in 1993 when producers made
steep one-time price reductions, turned
Change in Prices
Percent, Q4 to Q4
Consumer
Consumer excluding food and energy
1988
1990
1992
1994
NOTE. Consumer price index for all urban consumers.
The data are seasonally adjusted and are from the Department of Labor.
The Economy in 1994
back up in 1994, rising moderately
over the four quarters of the year. By
contrast, prices of home furnishings
changed little over the year, and the CPI
for apparel fell noticeably.
The CPI for non-energy services, a
category that accounts for about half of
the total CPI, rose slightly less than
3!/2 percent over the four quarters of
1994, after an increase of about VA percent in 1993. The increase in these
prices in 1994 was just a bit more than
half the rise that was recorded in 1990,
when CPI inflation hit its most recent
peak. Prices of medical services continued to slow in 1994, and airline fares,
which have been an especially volatile
category in the CPI in recent years, fell
appreciably after having risen sharply
the previous year. However, auto finance
charges turned up, and the rate of rise in
owners' equivalent rent, a category that
has a weight of nearly 20 percent in the
total CPI, rose slightly faster over the
four quarters of 1994 than it had during
the corresponding period of 1993.
In 1994, for a fourth year, neither
food prices nor energy prices provided
much impetus to the inflation process.
The consumer price index for food rose
a shade more than 2!/2 percent over the
four quarters of 1994, about the same
as the rise of 1993. Food prices in
1994 were restrained, in part, by sharp
declines in the prices of domestically
produced farm products, which, in turn,
were pulled down by the huge increases
in crop and livestock production noted
previously. With beef and pork prices
declining over the year, the CPI for
meats, poultry, fish, and eggs changed
little in total. Retail prices of dairy products rose only a small amount. Prices
of foods that are more heavily influenced by the costs of nonfarm inputs
also showed only small to moderate
advances in 1994: The increase in the
CPI for prepared foods amounted to
21
about 2'/2 percent, slightly less than the
previous year's increase, and, for a third
year, the rise in the price index for food
away from home was less than 2 percent. Coffee was the only item in the
CPI for food to show sustained price
acceleration; freeze damage to the crop
in Brazil caused world prices of raw
coffee to surge and led to a price rise of
more than 50 percent at retail over the
four quarters of 1994. Prices for fresh
vegetables jumped toward year-end after
Hurricane Gordon had damaged crops
in Florida; run-ups in these prices typically are reversed within a few months
as new supplies become available.
The CPI for energy rose about
V/i percent during 1994, after edging
down V2 percent in 1993. Gasoline
prices increased 41/2 percent over the
four quarters of 1994, reversing the
decline of the previous year. Much of
the increase in gasoline prices came in
the third quarter and followed, with a
short lag, a second-quarter rise in crude
oil prices, which were moving back up
from the low levels of late 1993 and
early 1994. Prices of other energy products exhibited brief periods of rapid
increase, but sustained upward pressures
in these prices did not materialize. Fuel
oil prices shot up temporarily early in
1994, when stocks were pulled down for
a time by cold weather in the Midwest
and the Northeast; later in the year, however, stocks were replenished and the
earlier price increases were more than
reversed. Natural gas prices followed a
pattern similar to the price of fuel oil,
rising sharply in the first quarter of the
year but falling back thereafter, to a
fourth-quarter level that was about
214 percent lower than that of a year
earlier. Electricity prices rose only
slightly during the year.
With the favorable inflation performance of 1994, the average rate of rise
in the total CPI from the business cycle
22
81st Annual Report, 1994
trough in early 1991 to December 1994
amounted to 2.9 percent at an annual
rate. Excluding food and energy, the rate
of rise was 3.2 percent at an annual rate.
Inflation rates lower than these have not
been sustained through the first few
years of any business expansion since
that of the 1960s, when both the CPI
and the CPI excluding food and energy
showed average rates of increase of less
than 1.5 percent during the first four
years after the business cycle trough of
early 1961. Average rates of price
increase during the current expansion
have been much smaller than those
reported during the expansion that
began in the mid-1970s. They also have
been somewhat smaller than those
reported during the first few years of
the expansion that began in late 1982, a
period when price increases were braked
in part by unusually steep declines in oil
prices. In measuring the progress that
has been made toward bringing the
economy closer to the goal of long-run
price stability, the ratcheting down of
the rate of price advance from cycle to
cycle since the 1970s is perhaps an even
more meaningful indicator than the
favorable trends in the annual price data
of recent years.
•
23
Monetary Policy and Financial Markets in 1994
With the economy generally strong,
financial markets in 1994 were characterized by somewhat more rapid growth
in private debt and by higher interest
rates. The increase in interest rates reflected, in part, the policy actions of the
Federal Reserve. Concerned about inflationary pressures resulting from rapid
economic growth and dwindling margins of available resources, the Federal
Reserve firmed policy on six occasions
during the year. These actions were
taken to foster a financial environment
more likely to be consistent with sustained economic growth and low inflation. In total, the policy tightenings
raised the federal funds rate a cumulative 2!/2 percentage points between early
February 1994 and the end of December. Other short-term rates rose similar
amounts. Over this span, the Board of
Governors increased the discount rate
on three occasions, raising it a total of
\3A percentage points.
Longer-term rates increased IV2 percentage points to 3Vi percentage points
on balance from early February through
the end of December, with the largest
increases posted at intermediate maturities. In addition to the policy actions,
these rates were boosted through much
of 1994 by greater-than-expected underlying strength in the economy and the
resulting higher demand for credit, as
well as by upward revisions to expectations in financial markets about the policy tightenings that would be required
to counter an incipient increase in inflation. Beginning in late autumn, however, the extent of Federal Reserve
actions, along with incoming data suggesting some moderation in the pace of
expansion, calmed inflation fears and
trimmed estimates of the eventual rise in
short-term interest rates. As a conseU.S. Interest Rates
Percent
Short-term
Treasury bills
Three-month
1
i
i
i
j
I
Long-term
U.S. government bonds
_ J
1982
1986
1990
1994
NOTE. 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.
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.
24
81st Annual Report, 1994
Annual Rate of Change in Reserves, Money Stock, and Debt Aggregates
Percent
1994
Item
1991
1992
1993
Year
Depository institution reserves'
Total
Nonborrowed
Required
Monetary base2
Concepts of money3
Ml
Currency and travelers checks .
Demand deposits
Other checkable deposits
M2
Non-Mi components
MMDAs, savings, and smalldenomination time deposits
General-purpose and broker-dealer
money market mutual fund assets
Overnight RPs and Eurodollars (n.s.a.) . . .
M3
Non-M2 components
Large-denomination time deposits
Institution-only money market mutual
fund assets
Term RPs (n.s.a.)
Term Eurodollars (n.s.a.)
Domestic nonfinancial sector debt .
Federal
Nonfederal
Q2
Q3
Q4
8.7
9.1
9.4
8.2
20.1
20.3
20.3
10.4
12.2
12.2
12.5
10.4
-1.3
-1.5
-1.1
8.4
3.3
3.9
2.7
9.8
-3.2
-4.2
-2.3
8.4
-1.8
-3.5
-1.9
7.5
-3.3
-2.1
-3.0
6.9
7.9
7.9
3.3
12.3
14.3
9.1
17.7
15.6
10.5
9.9
13.3
8.6
2.3
10.1
.4
-2.1
5.5
11.0
7.1
-.5
2.6
10.3
-1.3
.2
2.4
9.3
.3
-1.4
-1.2
8.5
-4.2
-6.7
2.9
1.2
2.0
-2.3
1.7
-1.9
.9
.3
1.8
.1
1.7
1.3
.7
-.1
-.4
.0
.8
-2.4
-2.8
-1.9
-1.0
-2.4
-2.4
-1.9
4.9
-4.6
-3.8
7.4
-.4
14.6
7.5
20.1
3.5
10.5
11.9
20.9
5.0
30.8
8.8
13.0
1.2
-6.3
-13.1
.5
-6.3
-15.5
1.0
-2.5
-6.8
1.4
3.6
7.0
.6
-5.8
-2.2
1.3
-1.2
.0
1.9
8.6
11.9
1.7
13.1
18.0
33.9
-20.4
-13.8
18.4
8.3
-22.8
-4.3
18.5
-.4
-8.2
7.0
16.1
-20.5
-12.8
.0
-15.6
25.6
14.6
-4.5
9.6
26.6
7.2
5.9
20.2
4.6
11.3
2.6
4.8
10.7
2.8
5.2
8.5
4.0
5.2
5.7
5.0
5.6
7.3
5.0
4.8
5.4
4.5
4.7
3.9
4.9
5.5
5.9
5.3
NOTE. Changes for quarters are calculated from the
average amounts outstanding in each quarter. Changes for
years are measured from Q4 to Q4. Based on seasonally
adjusted data except as noted.
n.s.a. Not seasonally adjusted.
1. Data on reserves and the monetary base incorporate
adjustments for discontinuities associated with regulatory
changes in reserve requirements.
2. 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.
3. 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.
Monetary Policy and Financial Markets
quence, longer-term rates reversed some
of their earlier upward movements.
Increases in intermediate- and longterm rates over the course of the year
caused significant capital losses for
some investors. Well-publicized losses
at a number of investment funds in the
first half of the year, along with substantial portfolio reallocations in view
of the changed economic and financial outlook, may have contributed to
increased financial market volatility at
that time. On the whole, however, risk
premiums remained modest, and volatility ebbed over the course of the year.
Late in the year, following the bankruptcy of Orange County, California,
which resulted from losses in its investment fund, the tax-exempt securities
market dipped; but the effects, beyond
those on the investors in the Orange
County fund, proved to be small and
short-lived.
One consequence of the higher and
more volatile long-term interest rates
was a shift in business borrowing away
from the capital markets and toward
shorter-term sources, such as banks.
This shift, which reversed the move toward long-term financing that occurred
as bond yields fell in 1992 and 1993,
was marked by the first annual increase
in bank business loans in several years.
Consumer lending also accelerated in
1994, as the improved economic outlook encouraged increased use of consumer credit. Higher interest rates limited the ability of households to "cash
out" some of the equity in their homes
when refinancing existing mortgages
and thereby likely held down the growth
of mortgage debt. Higher rates also encouraged households to shift to adjustable rate mortgages, which carried lower
initial interest costs. The debt of all nonfinancial sectors increased 5!A percent
in 1994, the same as the increase in
1993, as the pickup in business and
25
household borrowing was offset by
lower growth in government debt. The
effects of the strong economy on government expenditures and receipts, policy moves to reduce the federal deficit,
and retirements of tax-exempt securities
that had been advance-refunded all contributed to the slowdown in government
borrowing.
Banks funded much of the pickup in
their loans with nondeposit funds and, in
the second half of the year, with sales of
securities. As a result, the faster rate of
loan growth was not reflected in significantly stronger expansion of the monetary aggregates. M3, which was boosted
by relatively heavy issuance of large
certificates of deposit, rose 1 Vi percent,
a somewhat larger increase than in 1993.
With banks pricing savings and small
time deposits unaggressively as market
interest rates rose, M2 grew about 1 percent over the year, somewhat below its
l3/4 percent pace in 1993. The increase
in market interest rates relative to rates
on transaction deposits slowed the
growth of Ml to just 214 percent from
the double-digit increases posted in
1992 and 1993.
The Course of Policy
and Interest Rates
In early 1994, short-term interest rates
remained at the very low levels reached
in late 1992, with the federal funds
rate—fluctuating around 3 percent—
roughly in line with the rate of inflation.
The Federal Reserve had maintained
an accommodative monetary policy
throughout 1993, a stance that was
believed to be necessary because of a
number of extraordinary factors that
seemed to be inhibiting growth during
the early years of the expansion. These
factors included efforts by households,
firms, and financial intermediaries to
repair strained balance sheets, business
26
81st Annual Report, 1994
restructuring activities, and the fiscal
contraction associated, in part, with the
downsizing of defense industries.
During the recovery and expansion,
however, considerable progress had
been made by households and businesses in decreasing their debt-service
burdens, and lending institutions had
succeeded in rebuilding their capital
positions. By late 1993, the economy
was expanding rapidly, and incoming
data early in 1994 suggested that much
of that momentum had likely carried
over into the new year. In the circumstances, continued monetary accommodation risked pushing the demands on
productive resources to levels that
ultimately would be associated with
increased inflation. Consequently, the
Federal Open Market Committee, at its
meeting in early February 1994, agreed
that policy should be moved to a less
stimulative stance.
The pace at which the adjustment to
policy should be made was less clear:
A rapid shift would minimize the risk
of allowing inflation pressures to build,
while a more gradual move would allow
financial markets time to adjust to the
changed environment. Although many
market participants seemed to anticipate
a firming move fairly soon, it would
be the first tightening in many years,
and some investors would undoubtedly
reconsider their portfolio strategies, possibly causing sharp movements in bond
and stock prices. In addition, a slower
initial shift would allow more time to
assess the strength of the economy and
the effects of the change in policy.
In the event, the Committee tightened
policy gradually through the winter and
early spring. Pressures on reserve positions were increased by relatively small
amounts in February, March, and April;
once market participants seemed to have
made substantial adjustments to the new
direction of policy, a larger tightening
move was implemented in May. Taken
together, the four policy actions raised
the federal funds rate about 1 ]A percentage points. The May policy action was
accompanied by a vote of the Board of
Governors to increase the discount rate
Vi percentage point.
Other interest rates moved up
between 1 percentage point and 2 percentage points as a result of these policy
U.S. and Foreign Interest Rates
Percent
Three-month
Average foreign
Ten-year
12
Average foreign
U.S. Treasury^1
J_
1984
1986
1988
J
L
1990
J_
1992
1994
NOTE. The average foreign rates are the tradeweighted averages, for the non-U.S. G-10 countries, of
bank rates (for the three-month comparison) and government bond yields (for the ten-year comparison) on instruments that are comparable to the U.S. instruments shown.
The data are monthly.
Monetary Policy and Financial Markets
27
moves, with the largest increases coming at intermediate maturities. Besides
the effect of the policy actions, longerterm rates were boosted by incoming
data suggesting continued robust
growth, which heightened market concerns about a pickup in inflation and
expectations of further tightening by the
Federal Reserve. In addition, uncertainty
about the timing and magnitude of
future policy actions, as well as the capital losses that followed the tightenings,
encouraged investors to shorten the
maturity of their investments and reduce
their degree of leverage. The resulting
portfolio adjustments likely contributed
to increased market volatility and may
have intensified the upward pressure on
longer-term interest rates.
Incoming data in the late spring and
early summer suggested that the economy still was expanding at an appreciable rate, led by increased sales of
business equipment, a rebound in nonresidential construction following bad
weather earlier in the year, and a pickup
in inventory investment. Inflation was of
growing concern, as commodity prices
increased rapidly, and measures of slack
suggested that the economy was entering a range in which pressures on broad
price indexes might begin to build. In
part reflecting this concern, long-term
rates moved up, and the dollar weakened. Given the relatively large policy
action in May, however, the Committee
decided to take no action at the July
meeting and to wait for more information on the performance of the economy.
The Committee saw the possible need
for tighter policy, however, and issued
an asymmetric directive to the Federal Reserve Bank of New York suggesting that policy would respond
promptly to evidence of increased inflation pressures.
In the interval between the Committee meetings in early July and midAugust, the economy continued to
expand robustly, and, coming into the
August meeting, it appeared that the
markets expected a small further
increase in reserve pressures. At its
meeting, the Committee agreed that a
prompt further tightening move was
needed to provide greater assurance that
inflationary pressures in the economy
would remain subdued, and the members chose a tightening action somewhat
larger than had been expected by the
markets. A rise of V2 percentage point
in the discount rate, voted by the Board
of Governors, was allowed to show
through fully to the federal funds rate.
Real Federal Funds Rate
Market Rates on Selected
Treasury Instruments
Percent
Percent
1960
1970
1980
1990
NOTE. The real federal funds rate is the nominal federal funds rate minus the change in the consumer price
index less food and energy over the past four quarters.
The data are quarterly.
12/31
2/4*
3/22*4/18 5/17*
7/6*
8/16*
9/27*
11/15*12/20*
NOTE. Asterisks indicate days in 1994 on which the
Federal Open Market Committee held scheduled meetings. Dashed lines indicate days on which the Committee
announced a monetary policy action. The data are daily.
28
81st Annual Report, 1994
Short-term market rates rose following
the policy move, while long-term yields
declined slightly, perhaps as a result of
downward revisions to expectations of
future tightening.
In advance of the late-September
meeting, most market rates increased as
incoming economic data were seen in
the market as raising the likelihood of
higher inflation and the resulting need
for tighter reserve conditions. The data
suggested that the economy had not yet
been greatly affected by the tightening
in monetary policy: Employment was
growing strongly, and final sales, especially of consumer goods, appeared to
have firmed. Manufacturing activity had
continued to expand rapidly, boosted in
part by an increase in motor vehicle
production. Given the uncertain duration of lags between changes in monetary policy and the resulting effects on
the economy, however, it was not clear
whether the effects of the earlier interest
rate increases were smaller than had
been expected or were still in train.
Another possibility was that the underlying momentum of the expansion was
greater than had been evident earlier.
Given these uncertainties, the Committee took no immediate tightening action
at its September meeting. As in July,
however, the Committee agreed to an
asymmetric directive suggesting that the
likely direction of any move over the
Bond Market Volatility
Percent
20
15
10
J
L_J
L
1984
1986
1988
1
1990
1 1
1992
1994
NOTE. Expected volatility, derived from prices of
options on Treasury bond futures. Month-end data.
intermeeting period would be toward
additional restraint.
Broad measures of inflation remained
moderate through the fall in spite of
continued substantial economic growth
in an economy that was running close
to its estimated potential. Nonetheless,
strong economic data and continued
upward pressure on prices at earlier
stages of production apparently heightened investors' inflation concerns and
expectations of future policy tightenings. Consequently, most market interest rates rose considerably between the
September and November meetings,
with intermediate maturities showing
the largest increases. At the November meeting, the Committee members
agreed that the stance of policy was not
sufficiently restrained given the clear
risks of higher inflation. As a result,
they chose a sizable firming of monetary
policy, tightening reserve conditions in
line with the increase of 3A percentage
point in the discount rate approved by
the Board of Governors.
The yield curve flattened appreciably
in response to the larger-than-expected
policy action. The increase in the federal
funds rate pushed up most short-term
interest rates, and although long-term
rates increased initially, they had, by
early December, more than reversed
their earlier increases. Evidently, market
participants ultimately interpreted the
substantial policy tightening as demonstrating the Committee's intention
to take the actions necessary to contain inflation at relatively low levels.
By contrast, intermediate-term rates
increased over the weeks following
the November meeting as a variety
of incoming data indicated that the
economy's growth had accelerated
further in the fourth quarter and that
additional tightenings might be required
to slow growth to a more sustainable
pace. By the time of the December
Monetary Policy and Financial Markets
meeting, rates on two-year Treasury
notes were only a little below those on
thirty-year Treasury bonds, although the
yields on both instruments remained
well above short-term rates.
Financial markets were focused in
early December on the failure of an
investment fund run by Orange County,
California, and the subsequent bankruptcy of the county itself. The municipal securities market bore the brunt of
these developments, with rates rising for
a time relative to those on comparable
Treasury issues. The failure had a substantial effect on the finances of the
municipalities that had invested in the
fund. In addition, investors had to consider the likelihood of other state and
local governments having similar investment difficulties. In the period that followed, however, only a few other problem situations emerged, and they were
on a much smaller scale.
In the period leading up to the
December meeting, incoming data continued to show robust growth and subdued inflation. The Committee felt that
the effects on economic activity of the
policy actions during the year, and especially the substantial tightening moves
in the second half of the year, were not
yet visible because of the lags in the
economic effects of monetary policy. As
a result, the Committee decided to take
no new policy action at the meeting,
waiting instead for additional information on the underlying strength in the
economy and the effects of the earlier
policy actions. This decision was reinforced by concerns that the financial
markets might be somewhat unsettled
not only as a result of the usual year-end
adjustments but by the uncertain effects
and incidence of the sizable market
losses sustained by some investors over
the year. In view of the substantial
strength evident in the incoming data,
however, the Committee again chose an
29
asymmetric directive pointing toward
further restraint.
Credit and Money Flows in 1994
The debt of all nonfinancial sectors grew
5]A percent in 1994, somewhat below
the middle of its monitoring range of
4 percent to 8 percent and the same as
the increase of a year earlier. More rapid
growth of private-sector debt was offset
by slower growth of public-sector debt.
As long-term rates rose well above their
late 1993 lows, private-sector borrowing
shifted toward shorter-term sources of
funds. In part as a result of this shift, the
proportion of new debt supplied by
financial intermediaries was larger than
it had been for several years. Much of
the growth in depository credit was
funded with nondeposit funds, however,
and growth in the broad monetary aggregates, which consist primarily of deposits, remained subdued.
Debt growth both in the federal sector
and in the state and local government
sector slowed in 1994. Growth of federal government debt was smaller because of the narrowing of the federal
budget deficit. The outstanding volume
Total Domestic Nonfinancial Debt
Trillions of dollars
13.0
12.5
Monitoring range
1993
1994
NOTE. The range was adopted by the FOMC for the
period from 1993:Q4 to 1994:Q4.
30
81st Annual Report, 1994
of state and local government debt actually declined, as bonds that previously
had been refunded in advance of their
earliest call date were retired. Much of
the bulge in tax-exempt issues in 1993
had been for the advance refunding of
higher-cost debt issued in the 1980s.
These offerings subsided early in 1994
as the amount of bonds eligible for
advance refunding dwindled and borrowing costs rose.
The growth of household debt picked
up slightly in 1994 as an acceleration
in consumer credit was partly offset by
slower growth in mortgage debt. The
pickup in consumer debt reflected, in
part, increased demand for consumer
durables. In addition, responses to Federal Reserve surveys of banks indicated
that many respondents were more
willing to extend credit to households,
which may have led them to ease terms
and standards on consumer loans.
Indeed, spreads between consumer loan
rates and market rates narrowed significantly in 1994 as increases in loan rates
lagged those in market interest rates.
Consumer credit may also have been
boosted somewhat by the increased use
of credit cards offering rebates or other
incentives.
Rising mortgage rates in 1994 greatly
reduced the volume of mortgage refinancings from the very high levels
reached in 1993. The refinancings had
contributed to an increase in mortgage
debt because some households had taken
the opportunity afforded by refinancing
to borrow against a portion of the equity
in their properties. Higher rates on fixed
rate mortgages also induced many borrowers to shift to adjustable rate mortgages, which carried much lower initial
rates. Concessional starting rates and the
growing use of adjustable rate contracts
with initial fixed rate periods lasting
several years also may have contributed
to this shift. Over the last few months
of the year, about half of all new home
mortgages carried adjustable rates. The
shift to adjustable rates and the sluggish
adjustment of consumer loan rates mitigated the effect of higher market interest
rates on household debt-service burdens.
The debt of nonfinancial businesses
expanded in 1994 after three years of
stagnation. Earlier efforts to restructure
balance sheets by increasing equity capital and refinancing higher-cost credit
appeared to leave businesses in a better
position to increase debt in 1994, as the
sector's debt-service burden had fallen
about one-third from the peak reached
five years earlier. Increased spending on
capital and inventories in 1994 raised
the funding needs of business. Funding
requirements also were boosted by a
substantial increase in the total value of
mergers and acquisitions; the share of
such activity requiring cash payments to
shareholders—rather than swaps of
shares—rose sharply, although it remained below the levels reached in the
late 1980s. Combined with a decline in
equity issuance—perhaps resulting from
the lackluster performance of the stock
market—the increased funding needs
of business translated into a step-up in
borrowing.
Rising and more volatile long-term
interest rates encouraged businesses to
rely more heavily on short-term debt
in 1994. This shift was reinforced by
changes in supply conditions in various
markets. Capital losses early in the year
likely caused some of those supplying
long-term funds to become more cautious; for example, some savers backed
away from bond mutual funds. At the
same time, banks were loosening terms
on business loans as well as easing their
underwriting standards. Banks attributed
the easing of loan terms and standards to
increased competition for business customers from other banks and also from
nonbank lenders. The competitive pos-
Monetary Policy and Financial Markets
ture of banks likely reflected, in part, the
high level of profits earned by banks in
recent years and the resultant strengthening of their balance sheets. As a result
of these factors, bank business loans
increased more than 9 percent, their first
annual increase in several years. Other
sources of short-term business finance,
including commercial paper and finance
company loans, also expanded over the
year.
The effect of the pickup in business
and consumer loans on bank credit
growth was partially offset by slower
growth in bank securities holdings.
Early in the year, banks purchased a
significant volume of government securities, and reported holdings of other
securities were boosted by an accounting change.1 Much of this growth was
reversed later in the year, however, as
banks used sales of securities to fund
loan growth. Reported securities growth
1. New rules of the Financial Accounting Standards Board, effective at the start of 1994, limited
the ability of banks to net off-balance-sheet items
for reporting purposes. The new rules affected
items such as swaps and options, the cash values
of which are reported on balance sheets in the
"other securities" category.
Changes in Business Lending Standards
at Selected Large Commercial Banks,
by Size of Borrower
Percent
1990
1991
1992
1993
1994
NOTE. Data show percentage of domestic loan officers
reporting tightening standards over the past three months
less the percentage reporting easing.
SOURCE. Federal Reserve, Senior Loan Officer Opinion Survey on Bank Lending Practices.
31
was also damped by declining securities
prices.2
In 1994, credit extended by thrift
institutions expanded for the first time
in several years, as the Resolution Trust
Corporation virtually completed its liquidation of insolvent thrift institutions.
In part, the increase in credit from this
sector also likely reflected the shift by
households toward adjustable rate mortgages. Thrift institutions and banks find
holding adjustable rate mortgages less
risky than holding fixed rate mortgages,
and so adjustable rate loans are less
likely to be securitized or sold.
With the expansion of credit from
banks and thrift institutions, the growth
of depository credit in 1994 nearly
matched that of total nonfinancial debt.
Thus, the share of credit provided by
these intermediaries stabilized after having declined substantially since 1988.
Despite the growth in depository credit,
the broad monetary aggregates continued to expand sluggishly. Domestic banks funded much of their credit
expansion from nondeposit sources—
such as borrowings from their foreign
offices—that are not included in the
monetary aggregates. Funds from these
sources are not subject to deposit insurance premiums, which may help account
for their recent rise.
The broadest monetary aggregate,
M3, did pick up a bit as banks funded
their asset growth in part from large
time deposits. M3 expanded about
1 Vi percent, well above the lower bound
of the 0 percent to 4 percent range established by the FOMC and a somewhat
2. A rule of the Financial Accounting Standards Board, implemented at the start of 1994,
required each bank to divide its investment
account securities into those that it intended to
hold to maturity (which could be reported at book
value) and those that were available for sale
(which had to be marked to market).
32
81st Annual Report, 1994
larger increase than that in 1993.
Growth in large time deposits was about
7 percent for the year, the first annual
increase in this component since 1989.
Much of the increase in large time
deposits was in senior bank notes, on
which banks are not required to pay
deposit insurance premiums.
M2 grew about 1 percent in 1994.
The slow growth of the aggregate
reflected, in part, a relatively sluggish
upward adjustment of retail deposit
rates. Rates on savings accounts and
other checkable deposits (OCDs),
including NOW accounts, responded
about as slowly as they have in the past
to the increase in market rates, while the
response of rates on small time deposits was sluggish relative to historical
norms. Evidently, banks believed that
generating increased retail deposits
would be more expensive than raising
wholesale funds, given that the offering
of higher rates to attract new retail
deposits would also mean paying those
higher rates on existing liquid deposits
and on time deposits as they were rolled
over. Generating new and larger retail
deposits would also require larger
expenses for advertising, administration,
and deposit insurance.
In 1994, for the first time in several
years, M2 followed patterns that were
broadly consistent with the aggregate's
longer-run historical relationship to
nominal income and opportunity cost—
traditionally defined as the difference
between rates on short-term instruments
(for example, Treasury bills) and rates
on retail balances. Rising opportunity
costs during the year helped to damp
the growth of M2, offsetting a part of
the impetus from increases in nominal
income. By contrast, slow growth of M2
in the years leading up to 1994 had
resulted from large portfolio shifts from
M2 deposits to bond and equity mutual
funds. With these portfolio shifts
slowing in 1994, the growth in M2 plus
long-term mutual funds ran slightly
below the 1 percent growth rate of M2
itself.
Net sales of shares in equity mutual
funds continued at a high level in 1994,
although the pace slowed somewhat late
in the year. The sales of equity fund
shares were partly offset, however, by
outflows from bond mutual funds in the
last three quarters of the year. Apparently, falling bond prices and greater
market uncertainty, and, perhaps, reports
of derivatives losses at some funds, led
households to scale back their holdings
of bond mutual funds in favor of investments that posed less risk of capital loss.
With deposit rates lagging, however,
Stock of M3
Stock of M2
Billions of dollars
Billions of dollars
Actual
Actual
4,400
3,700
4,300
3,600
Range
i
1993
i
i
i
i
i
t
i
i
i
1994
NOTE. The range was adopted by the FOMC for the
period from 1993:Q4 to 1994:Q4.
1993
1994
NOTE. The range was adopted by the FOMC for the
period from 1993:Q4 to 1994:Q4.
Monetary Policy and Financial Markets
these outflows did not translate into
faster M2 growth. Some of the withdrawals from bond funds may have been
invested directly in Treasury securities.
Reflecting such portfolio shifts, net noncompetitive tenders for Treasury bills,
which had been negative in 1993,
totaled more than $16 billion in 1994,
and net noncompetitive tenders for Treasury notes also increased substantially.3
Growth of Ml slowed considerably
in 1994, much as it has in past periods
when differentials between market
interest rates and rates offered on transaction deposits were widening. The
aggregate expanded only 2!/4 percent
over the year—down substantially from
the double-digit increases of the previous two years. As is typical, the rates
3. The Treasury permits noncompetitive bids at
its auctions to make it easier for smaller, less
sophisticated bidders to participate. Those submitting noncompetitive tenders are assured of receiving the security, and the yield on the security they
obtain is the average issue rate established at the
auction. The level of net noncompetitive tenders
during a period is the dollar volume of securities
purchased under noncompetitive tenders less the
volume of repayments of maturing securities that
had been purchased under noncompetitive tenders.
M2 Velocity and M2 Opportunity Cost
Ratio scale
Percentage points, ratio scale
-4
33
Net Monthly Average Sales of Shares
in Long-Term Mutual Funds
Millions of dollars
Total
Equity
funds
Bond
funds
Year
1991
1992
1993
1994
10,820
16,844
23,378
9,097
3,821
7,268
11,738
10,732
7,000
9,576
11,640
-1,636
Quarter
I994:Q1
Q2
Q3
Q4
17,286
10,089
9,826
-814
13,697
10,944
11,166
7,122
3,589
-856
-1,340
-7,936
Period
NOTE. Net sales are gross sales less redemptions.
SOURCE. Investment Company Institute.
offered on OCD accounts adjusted
slowly to higher market rates, encouraging households with OCDs to shift
funds into higher-yielding assets. OCD
balances also were depressed by the
introduction of sweep accounts at some
large banks. In these programs, the
portion of customers' OCD balances
in excess of a predetermined level are
swept into money market deposit
accounts at the end of each day.
Higher market rates also encouraged
holders of demand deposits—accounts
that earn no interest—to economize on
such assets. On balance, demand deposits edged up only about V2 percent in
1994, compared with 13 VA percent in
1993. The slide in the growth of demand
deposits also reflected the decline in
home mortgage refinancing activity
in 1994: Demand deposits had been
Stock of Ml
Billions of dollars
1.6
1,250
1978
1982
1986
1990
1,200
1994
NOTE. The velocity of M2 is the ratio of nominal gross
domestic product to the stock of M2. The opportunity
cost of M2 is a two-quarter moving average of the threemonth Treasury bill rate less the weighted average return
on assets included in M2.
1,150
1993
1994
34
81st Annual Report, 1994
boosted in 1993 because prepayments of
securitized mortgages were held primarily in such deposits for a time before
they were distributed.
In contrast to transaction deposits, the
currency component of Ml continued
to register strong growth in 1994. Currency increased 10 percent, about the
same as the rise in 1993 and close to the
record increase in 1990. As has been the
case since 1990, much of the currency
growth appeared to reflect the rapid
expansion in U.S. currency circulating
abroad. Informal reports suggest that
foreign demand in 1994 was particularly
strong in Russia and the other former
Soviet republics.
•
35
International Developments
Economic activity in the major foreign
industrial countries rebounded sharply
during 1994, generally at a faster pace
than most observers had expected at
the start of the year. Although recoveries
had begun during the previous year in
the United Kingdom and Canada, activity in 1993 had been sluggish in Germany, France, and other continental
European countries. Recovery was evident in Japan as well, if somewhat subdued in comparison with developments
in the other industrial countries.
The expansionary climate notwithstanding, considerable slack persisted
in most of the foreign industrial economies. As a result, consumer price inflation generally remained low or even
subsided further. On average, consumer
prices in the six major foreign industrial
countries rose 2 percent over the year.!
Economic activity in developing
countries remained robust in most parts
of the world during 1994. Toward yearend, Mexico abandoned its exchange
1. The six countries are Canada, France, Germany, Italy, Japan, and the United Kingdom.
Exchange Value of the Dollar
versus Selected Currencies
December 1993 = 100
Canadian dollar
1994
NOTE. Foreign currency units per dollar. The data are
monthly.
rate regime in the face of an unsustainable current account position and
severely depleted international reserves.
A substantial decline in the exchange
rate ensued, and policies aimed at restoring confidence in prospects for Mexico
were subsequently adopted.
The U.S. international trade deficit
in goods and services increased to
$106 billion in 1994, compared with
$76 billion in 1993. U.S. output expanded at about the same rate as that of
the country's major trading partners, but
U.S. imports are more responsive to
increases in the growth of U.S. income
than are U.S. exports to the growth in
foreign income. Lagged effects of the
dollar's appreciation during 1993 also
continued to be felt. The current account
deficit increased $52 billion, to $156 billion. Net investment income shifted
from a small inflow to a moderate outflow in 1994. After several years of stagnation, foreign earnings on direct investment in the United States improved
sharply with the expanding U.S. economy; U.S. earnings on direct investment abroad also rose, but at a more
measured pace. In addition, net interest
payments to foreigners increased with
growing U.S. indebtedness and the rise
in interest rates during the year.
A large increase in net capital inflows
in 1994 was more than accounted for
by flows through private channels. Net
inflows reported by banks increased
sharply, as did foreign direct investment
in the United States; in addition, U.S.
net purchases of foreign securities fell
sharply. Official inflows fell this year,
from a very high level in 1993.
The foreign exchange value of the
dollar declined about 6I/2 percent on bal-
36
81st Annual Report, 1994
ance from December 1993 to December
1994 in terms of a trade-weighted average of the other G-10 currencies.2 After
showing some strength at the start of
the year, the dollar's value fell about
10 percent from February through early
November. As the year progressed,
increasingly positive assessments of
economic expansion in the other industrial countries led market participants to
raise their estimates of prospective market interest rates abroad. This development, together with increased concerns
over potential inflation pressures in the
U.S. economy, put downward pressure
on the dollar in terms of most foreign
currencies. Toward the end of the year
the dollar's value rebounded somewhat
as the Federal Reserve tightened credit
2. The Group of Ten consists of Belgium,
Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.
Exchange Value of the Dollar
and Interest Rate Differential
Percentage points
Ratio scale, March 1973 = 100
Long term
real interest
rate differential
U.S. minus foreign
i
1 it
1975
Price adjusted
exchange value
of the dollar
- 160
— ] 40
~
12
«
i 1 t 1 i 1
1980
1985
1990
NOTE. The exchange value of the U.S. dollar is its
weighted average exchange value in terms of the currencies of the other 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 weighted-average rate
on comparable foreign securities, both adjusted for
expected inflation; expected inflation is estimated by a
thirty-six-month moving average of actual consumer price
inflation or staff forecasts of inflation where needed.
The data are monthly.
conditions in November more than had
been expected, reassuring market participants that U.S. inflation risks were
being addressed.
Foreign Economies
Economic activity in the major foreign
industrial countries accelerated in
1994 as recoveries became more firmly
established and widespread. Almost all
countries experienced growth in gross
domestic product at rates close to, or
even somewhat above, the highest that
are likely to prove sustainable for long
periods. In many countries, exports continued to be a key factor, responding to
strong demand from the United States
and a number of developing countries
where economic activity was robust.
Much of the overall strength in demand,
however, also came from domestic
sources. Even in Japan, domestic demand and overall activity picked up
somewhat in 1994, although the recovery remained tentative partly because
external demand was held back by the
yen's appreciation.
Even with strong growth in output,
labor market conditions in most foreign
industrial countries were slack, and levels of economic activity remained well
below estimated potential levels. The
exception was Germany, where the
recent recession was not as deep as elsewhere. These conditions helped keep
inflationary pressures low despite the
acceleration of activity in most countries and sizable increases in commodity
prices in global markets. In many countries, an improvement in productivity
also was an important factor contributing to low inflation. On average,
consumer prices in the major foreign
industrial countries rose only about
2 percent, slightly below the increase of
the previous year. In Japan, inflation was
less than 3A percent, in part because the
International Developments
appreciation of the yen damped upward
pressure on prices of tradable goods.
Increased retail competition and discounting may also have helped limit
inflation there.
Unemployment declined noticeably in
the United Kingdom and Canada, where
recoveries had been underway for several years, but continental Europe saw
little change in labor market conditions.
In some countries, the rate of unemployment actually rose. These developments
heightened concerns about structural unemployment in Europe, which is thought
to have increased significantly during
the past decade, including during the
Changes in GDP, Demand, and Prices
Percent, from previous year
Gross domestic product
Constant prices
Foreign G-10
Total domestic demand
Constant prices
1990
1992
1994
NOTE. Data for the foreign G-10 countries are
weighted by the countries' GDP as valued after adjusting
for differences in the purchasing power of their currencies; the data are from foreign official sources.
Data for the United States are from the Departments of
Commerce and Labor.
For GDP and domestic demand, the data are quarterly;
for consumer prices, the data are monthly.
37
recent recession. In Japan, deterioration
in labor market conditions appeared to
level off in 1994, but the unemployment
rate was still high by Japanese standards, and other indicators suggested
that substantial slack persisted in Japan
through the end of the year.
Government budget deficits narrowed
as activity picked up in many countries,
but progress in reducing structural budget deficits was more limited. Among
the major industrial countries, only Germany narrowed its structural deficit
substantially; this gain was achieved
largely by imposing new taxes. In
Japan, the structural budget deficit
widened as further expansionary measures were introduced. Nonetheless, the
Japanese budget deficit remained the
smallest among the major industrial
countries.
Long-term interest rates in major foreign industrial countries generally rose
during the year. On average, foreign
rates on instruments with a maturity
of ten years increased 200 basis points
in the twelve months to December,
about the same as U.S. rates. In Japan,
where evidence of a buoyant recovery
remained somewhat mixed, long-term
rates rose less. In contrast, foreign shortterm rates were little changed on average and even declined slightly in several
countries, including France and Germany. Major exceptions were Canada,
where short-term market rates rose more
than 250 basis points, and the United
Kingdom, where they rose 100 basis
points. In both of these countries, official lending rates were increased during
the year to contain inflation risks attendant on the continuing vigorous growth
of their economies.
The current account balance moved
in the direction of surplus in several
countries, notably Italy, Canada, Sweden, and the United Kingdom. Currency depreciations in recent years in
38
81st Annual Report, 1994
these countries together with recovering demand in key trading partners
accounted for most of this movement.
Japan's large surplus of about $130 billion was similar to that for the previous
year, while Germany's current account
deficit expanded.
Economic growth in the major developing countries maintained the strength
established in recent years. The newly
industrializing economies in Asia benefited from recovery in industrial countries; in addition, their currencies' earlier depreciations versus the yen helped
stimulate external demand in 1994.
Although activity in China also continued to expand rapidly, the authorities
succeeded in moderating the rate of
growth somewhat by tightening credit
conditions and imposing other measures
to dampen demand. In Argentina, a
rapid increase in investment, spurred by
tariff reductions and other structural
reforms, helped sustain growth. The
growth of output was moderately strong
in Brazil, where implementation of the
Plan Real in July brought price increases
down from near-hyperinflation rates to
an average of about 3 percent per month
during the second half of 1994. However, a substantial real appreciation of
the currency contributed to a swing in
the trade balance to deficit in November
and December.
In Mexico, output expanded markedly during the second and third quarters after having been almost stagnant
in 1993. The burst of activity was due
partly to fiscal stimulus and generally
lower interest rates in late 1993 and
early 1994; it proved unsustainable
when the peso came under severe pressure late in the year. Mexico was forced
to devalue its currency after it had
depleted much of its international
reserves. Weakened investor confidence
in the aftermath of the initial devaluation led to a further substantial decline
in the exchange rate, more reserve
losses, and a large rise in interest rates.
Subsequently, restrictive policies were
adopted in an effort to restore balance to
the Mexican economy under a program
supported by the International Monetary
Fund with additional financial support
from the U.S. government.
U.S. International Transactions
With brisk economic activity this year
both in the developing and industrial
trading partners of the United States, the
volume of U.S. exports of goods and
services rose 11 Vi percent, and U.S.
merchandise exports increased 14 perU.S. International Trade
Billions of dollars
Balances
Ratio scale, billions of 1987 dollars
Trade in goods and services
800
Ratio scale, 1987 = 100
GDPfixed-weightprice index
Non-oil merchandise imports
Total merchandise exports
J
|
1990
1
|
1992
L
1994
NOTE. The data are from the Department of Commerce; they are quarterly at annual rates and seasonally
adjusted.
International Developments
cent. An important contribution to this
development came from exports of capital goods, including computers and a
wide variety of other machinery. After
declining in 1993, agricultural exports
bounced back primarily because of a
much better U.S. harvest.
Imports of goods and services rose
nearly 14 percent in volume, and merchandise imports increased 16 percent,
reflecting the vigorous growth of U.S.
income during the year. Imports of computers continued to expand rapidly, and
imports of other machinery, automotive
products, industrial supplies, and con-
39
sumer goods were also buoyant. Import
prices rose about 4 percent as world
commodity prices increased sharply and
oil prices moved back up after declining
in 1993 and early 1994.
Recorded net capital inflows were
substantially larger in 1994 than in
1993. Part of this development corresponded to the widening current account
deficit, but the remainder was the counterpart of a large swing in net unrecorded transactions from inflows to
outflows between 1993 and 1994. The
source of this negative discrepancy is
perforce unknown and is all the more
U.S. Internationa] Transactions
Billions of dollars, seasonally adjusted
Quarter
Year
1993
Transaction
1994
1993
1994P
Q4
Ql
Q2
Q3
Q4
-76
642
457
185
717
589
128
4
52
-49
-32
-106
698
503
195
804
669
135
-15
41
-57
-34
-20
166
120
47
186
153
33
-1
12
-13
-10
-24
165
118
47
189
155
34
-1
12
-12
-27
170
123
48
197
164
33
-3
11
-14
-29
177
128
50
206
172
34
-4
10
-14
-27
186
135
51
212
178
35
-8
9
-16
Current account balance
-104
-156
-31
-32
-38
-41
-45
Private capital flows, net
Bank-related capital, net (outflows, -)
U.S. net purchases (-) of foreign securities
Foreign net purchases (+) of U.S. securities
Treasury securities
Corporate and other non-Treasury bonds
Corporate stocks
U.S. direct investment abroad
Foreign direct investment in United States
Other corporate capital flows, net
13
51
-120
145
104
-61
4
-2
-30
35
34
-25
30
41
-14
35
20
-8
46
10
-14
25
61
19
-58
21
14
33
56
3
-58
60
26
12
-23
9
15
7
-25
12
-7
15
-2
-8
5
-1
5
13
-11
15
1
26
13
-3
-14
28
n.a.
Foreign official assets in United States (increase, +)
72
39
24
12
20
-1
U.S. official reserve assets, net (increase, -)
-1
Goods and services, net
Exports
Merchandise
Services
Imports
Merchandise
Services
Investment income, net
Direct investment, net
Portfolio investment, net
Unilateral transfers, private and government, net
-1
U.S. government foreign credits and other claims, net
Total discrepancy
Seasonal adjustment discrepancy
Statistical discrepancy
NOTE. Components may not sum to totals because of
rounding.
* In absolute value, greater than zero and less than
$500 million.
-1
20
0
20
-33
0
-33
4
*
4
-14
6
-20
-4
1
-5
-14
-7
-7
-1
n.a. Not available.
p Preliminary.
S O U R C E . Department of Commerce, Bureau of Economic Analysis.
40
81st Annual Report, 1994
puzzling given the increase in net out- reserve accumulations by certain develflows of U.S. currency to foreigners in oping countries in Latin America that
1994: Net currency shipments—which experienced massive private capital
are not recorded in the U.S. international inflows in 1993 were not repeated. A
accounts, whereas the corresponding significant part of the 1994 inflows were
payment for them is generally funds acquired by foreign industrial
recorded—tend to make the discrepancy countries as the consequence of interpositive.
vention in foreign exchange markets.
Much of the recorded capital inflow
took the form of a substantial increase in Foreign Exchange Developments
net inflows reported by banks in the
United States. Euromarket borrowing During 1994 the dollar depreciated
was apparently an attractive source of 8 percent versus the mark and declined
funding for banks expanding their similar amounts in terms of the other
domestic lending.
currencies in the exchange rate mechaDirect investment in the United States nism (ERM) of the European Monetary
also surged during 1994, while U.S. System. The appreciation of the mark
direct investment in other countries was associated with an unexpectedly
remained relatively static albeit at record strong recovery in real output in Gerlevels. Direct investment from abroad many and rather rapid growth of the
took the form of takeovers of U.S. com- Bundesbank's targeted monetary aggrepanies as well as the reinvestment of gate, M3, during much of the year. Marrevived profits by affiliates of foreign ket participants revised their expectations of further declines in official
companies in the United States.
The rest of the identifiable net private German lending rates, and German
capital inflow was the result of a sharp long-term interest rates rose. The dollar
retrenchment in U.S. net purchases of depreciated less in terms of the pound
foreign securities, particularly bonds. By and the lira, both of which had been
contrast, private foreign net purchases withdrawn from the ERM in 1992. The
of U.S. securities fell only slightly. Ris- extended strong recovery in the United
ing interest rates on bonds denominated Kingdom began to raise concerns about
in many major currencies, including dol- inflation and, by extension, the pound;
lars, produced capital losses for U.S. in Italy, political uncertainties weighed
holders of long-term bonds and led to on the currency.
The dollar depreciated about 8 peroutflows from U.S. global bond funds.
Although U.S. investors proceeded more cent on balance in terms of the yen. As
cautiously in their acquisition of foreign market perceptions developed that a
securities, the slowdown was concen- recovery was under way in Japan, it
trated in bonds rather than in stocks; began to look less likely that the JapaU.S. investors expanded their net pur- nese authorities would continue to ease
chases of shares of firms in Japan and in financial conditions as they had been
a wide assortment of developing coun- doing for the past two years. In addition,
tries, many of which had received much fluctuations during the year in the status
of trade negotiations between the United
smaller inflows in 1993.
Foreign official assets in the United States and Japan were mirrored in moveStates expanded substantially, although ments in the exchange rate.
By contrast, the dollar appreciated
these accumulations were much smaller
than in 1993. In particular, the large nearly 4!/2 percent in terms of the Cana
International Developments
41
dian dollar during 1994. The relative
weakness of the Canadian currency
appeared to reflect pressures arising
from increases in U.S. short-term rates,
concerns over large fiscal deficits of the
central government and the provinces,
and, at times, the risk of secession by
Quebec.
Adjusted for relative changes in consumer prices, the dollar depreciated in
terms of the currencies of most of the
major U.S. trading partners in Latin
America and East Asia. The major
exception was the Mexican peso; the
dollar appreciated versus the peso, especially at the end of the year, when the
Mexican authorities relaxed support for
the peso and subsequently allowed the
currency to float.
Intervention in dollars by fifteen
major foreign central banks amounted
to net purchases of about $35 billion in
1994. In March, a $6 billion temporary
bilateral swap facility was established
for the Bank of Mexico in the aftermath
of the assassination of a Mexican presidential candidate. This facility was
replaced by an increase from $700 million to $3 billion in the conventional
swap facility with the Bank of Mexico
when a swap facility involving Canada,
Mexico, and the United States was
established in April. On December 30,
Federal Reserve participation in the latter arrangement was activated and temporarily enlarged to $4.5 billion.3
Foreign Exchange Operations
On September 13 the Chairman of the
Board of Governors assumed the ex officio seat reserved for the U.S. central
bank on the Board of Directors of the
Bank for International Settlements
(BIS).4 Ex officio members have the
right to appoint another person of the
same nationality to a three-year seat on
the BIS board; the Chairman appointed
the President of the Federal Reserve
Bank of New York. The Federal Reserve
has had the right of representation on
the BIS board since the founding of the
BIS in 1930 but had not exercised that
right until this year for a variety of
reasons. In taking its seat the Federal
Reserve recognized the increasingly
During 1994 the U.S. monetary authorities conducted three major interventions
to support the dollar, in each case selling
marks and yen. The first two episodes,
in early May and late June, involved
coordinated intervention with several
foreign central banks. The last episode
was in early November. For the year as
a whole, U.S. monetary authorities sold
a total of $3,500 million of marks and
$2,610 million of yen. In the three
months from February through April,
U.S. monetary authorities sold all their
holdings of foreign currencies other than
marks and yen, resulting in sales totaling $768 million.
At year-end, the System held foreign
currencies valued at $22,031 million
at current exchange rates. No Treasury
balances were warehoused with the System during 1994. The System realized
$706 million in profits on sales of foreign currency during 1994 and recorded
a translation gain of $1,717 million on
foreign currency balances.
Bank for International
Settlements
3. Early in 1995, Federal Reserve particpation
in the trilateral facility was temporarily enlarged
further, to $6 billion, and the additional portion
was activated.
4. See Charles J. Siegman, "The Bank for
International Settlements and the Federal
Reserve," Federal Reserve Bulletin, vol. 80 (October 1994), pp. 900-906.
42
81st Annual Report, 1994
important role of the BIS as the principal forum for consultation, cooperation,
and exchange of information among
central bankers and the likely broadening of that role.
•
43
Monetary Policy Reports to the Congress
Given below are reports submitted to
the Congress on February 22 and July
20, 1994, pursuant to the Full Employment and Balanced Growth Act of 1978.
Report on February 22, 1994
Monetary Policy and
the Economic Outlook
Nineteen ninety-three turned out to be 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 the burden of servicing
debt, 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 GDP picked up sharply in the second half, and the increases for all of
1993 cumulated to about 23A percent
according to initial estimates. In the
labor market, employment moved up at
a moderate 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 last year, as unfavorable
reports in the first few months of 1993
gave way to more subdued readings
thereafter. 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 trade-weighted value of the
dollar on foreign exchange markets.
In conducting policy through 1993,
the Federal Open Market Committee
recognized that it was maintaining a
very accommodative stance in reserve
markets. Reserve conditions had been
eased to this degree over the preceding
four years to counter the effect of some
unusual factors restraining aggregate
demand. The Committee recognized that
as these forces abated, short-term interest rates would likely have to rise to
forestall inflationary pressures that
would eventually undermine the
expansion.
Toward the end of 1993 and into early
1994, incoming data on the economy
and credit flows have increasingly conveyed a picture of considerable underlying strength. The marked speedup of
growth in the economy has been reducing spare capacity, as is evident in the
recent declines in unemployment and
increases in capacity utilization rates in
industry. Moreover, while movements
in broadly based price indexes have
remained relatively favorable, there also
have been undercurrents suggesting that
the process of disinflation might be stall-
44
81st Annual Report, 1994
ing out. In particular, after slowing considerably in 1992, nominal increases
in hourly compensation—comprising
wages and benefits—fell no further in
1993, and long-term inflation expectations remain stubbornly above recent
inflation rates. Also, commodity prices
generally have firmed in recent months.
Earlier this month, the Federal
Reserve concluded that the weight of
the evidence indicated that undiminished monetary stimulus posed the threat
that capacity pressures would build in
the foreseeable future to the point where
imbalances would develop and inflation
would begin to pick up. At its February
1994 meeting, the Federal Open Market
Committee determined that it was time
to move to a slightly less accommodative stance. While the discount rate
remained at 3 percent, the federal funds
rate edged up to trade around VA percent, a little above the prevailing rate of
inflation.
Strength in spending last year 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. The total
debt of all nonfinancial sectors is estimated to have grown about 5 percent
last year, 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
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 a shade more than 5 percent, or
33/4 percentage points above the rate of
expansion of M2 and AVi percentage
points above that of M3.
Most of the increase in the broad
aggregates was recorded in their Ml
component, which grew IOV2 percent in
1993, as low money market and deposit
interest rates provided little reason to
forgo the liquidity of transaction depos-
Monetary Policy Reports, February
its. At times during the year, declines
in longer-term market rates produced
waves of mortgage refinancing, an activity that is associated with temporary
flows through the transaction deposits
that are counted in Ml. In addition, the
currency component expanded at about
the same rate as the Ml total, spurred by
considerable demands from abroad. The
double-digit expansion of Ml deposits
pushed reserves up at a HV2 percent
rate in 1993, while the monetary base,
which includes reserves and currency,
increased lO1/^ percent, the same rate as
was posted in the previous year.
Money and Debt Ranges for 1994
At its July 1993 meeting, the Committee
provisionally chose the same ranges for
1994 as it had established for 1993—
1 percent to 5 percent for M2 and 0 percent to 4 percent for M3 and a monitoring range of 4 percent to 8 percent for
the domestic nonfinancial debt aggregate. At that time, the Committee noted
that disturbances to the historical relationships between the aggregates and
spending required that the actual determination of these ranges for 1994, in
February of this year, be made in light
of additional experience and analysis.
As noted above, the velocities of M2
and M3 increased further in 1993, but at
Ranges for Growth of Monetary
and Debt Aggregates
Percent
Aggregate
M2
M3
Debt
1992
1993
1994
2'/2-6'/2
1-5
4'/2-8'/2
1-5
0-4
4-8
1-5
0-4
4-8
NOTE. 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. Debt is of the domestic
nonfinancial sector.
45
a slower rate than in the previous year.
This deceleration might indicate that the
forces that had distorted the aggregates
over the past few years, while still
potent, were beginning to wane. The
yield curve, although quite steep, now
offers investors less inducement to move
outside M2 in search of better returns
than at any time in the past three years.
Additionally, firms, having strengthened
their financial positions, may feel more
comfortable taking on shorter-term obligations and, therefore, may direct more
of their business to depositories. Banks,
which are better capitalized and whose
assets are more liquid, should be in a
strong position to meet those needs.
Still, capital markets will provide attractive alternatives to the depository sector,
suggesting that the forces tending to
divert funds from depositories—and to
raise the velocities of the monetary
aggregates—will continue to be important. However, the strength of these
forces, and whether or how quickly they
might be abating, remain difficult to
judge.
Against this background, the Federal
Open Market Committee at its most
recent meeting reaffirmed the annual
growth ranges for the money and credit
aggregates that it had chosen provisionally last July (table 1). The annual
ranges appear to be sufficiently wide
to encompass growth of M2 and M3
consistent with Committee members'
expectations for nominal income under
a variety of alternatives for the behavior
of the velocities of the aggregates. If the
forces depressing the demand for money
relative to income were to persist
unabated in 1994, M2 and M3 might be
in the lower portion of their cones;
should M2 and M3 move closer to their
former alignments with spending—
buoying the demands for those aggregates and depressing their velocities—
then outcomes in the upper portion of
46
81st Annual Report, 1994
the ranges would be expected. The
Committee will watch the monetary
aggregates closely during the course of
the year for evidence on unfolding economic and financial conditions. Given
uncertainties about velocity behavior,
however, that information will necessarily be assessed in combination with a
variety of other financial and economic
indicators as the Committee formulates
policy. Through 1994, as was true last
year, the Committee's primary concern
will be to foster financial conditions that
help contain price pressures and sustain
economic expansion, and it will have to
assess the rates of money growth consistent with these objectives as the year
goes on.
Debt growth, which has moved in
closer alignment with nominal income
over the past few years than have the
monetary aggregates, will again be monitored in light of a 4 percent to 8 percent
annual range. With the federal sector's
demands on the pool of saving diminishing, the Committee envisions that an
unchanged range would be associated
with some pickup in borrowing by the
private sector. Healthier balance sheets,
lighter debt service burdens, heavier
capital spending, and more eager lenders should all act to boost the expansion
of nonfederal debt. Overall, the debt of
the nonfinancial sectors is expected to
grow again at about the pace of nominal
income.
The Federal Reserve officials' forecasts of real GDP growth over the four
quarters of 1994 span a range of 2x/i percent to 33/4 percent, with the central
tendency of the forecasts being 3 percent to 3V4 percent (table 2). The governors and Reserve Bank presidents
anticipate that the rise in real GDP will
be accompanied by a further increase
in labor productivity. Nonetheless,
employment gains are expected to be
sufficient to bring about some further
reduction in the degree of labor market
slack over the four quarters of the year.
Forecasts of the unemployment rate in
the fourth quarter of 1994 span a range
of 6Vi percent to 63/4 percent. Because
of changes in survey design, a comparable rate for the fourth quarter of last year
is not available; however, the Bureau of
Labor Statistics has estimated that the
fourth-quarter rate would have exceeded
7 percent on the new basis.
The sectoral composition of growth
in 1994 may well resemble that of 1993.
The financial adjustments of recent
years have left households better positioned and more willing to boost spending. Moreover, with employment rising,
real income growth should be support-
Economic Projections of FOMC Members
and Nonvoting Reserve Bank Presidents
for 1994
Percent
Range
Central
tendency
Change, fourth quarter
to fourth quarter{
Nominal GDP
Real GDP
Consumer price index2
4-y4-7'/2
Vh-VA
2'/ 4 -4
5'/2-6
3-3 «/4
About 3
Average level,
fourth quarter
Unemployment rate 3
6'/2-63/4
6'/2-63/4
Measure
Economic Projections for 1994
In general, the governors and Reserve
Bank presidents anticipate that 1994 will
be another year of progress for the economy, with low inflation and financial
market conditions continuing to provide
a setting conducive to sustaining moderate economic growth and rising employment opportunities.
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.
Monetary Policy Reports, February
ive of increased consumer expenditures
in the coming year, despite the higher
taxes confronting some households.
Business investment seems likely to be
pushed ahead by ongoing efforts to
modernize and by further declines in
computer prices. By contrast, further
cuts in federal outlays for defense likely
will continue to be a factor restraining
the growth of aggregate demand. With
the passage of time, the more accommodative monetary policies now in place in
a number of countries, together with the
moderate fiscal stimulus in Japan, are
likely to lead to a gradual pickup in the
rates of growth of foreign industrial
countries and U.S. exports. However,
U.S. imports from abroad will likely
continue to move up at a brisk pace. Net
exports of goods and services thus may
decline somewhat further, albeit at a
slower rate than they have over the past
year.
The majority of the governors and
Bank presidents expect inflation in 1994
to run a shade higher than in 1993. Most
of their forecasts for the rise in the consumer price index are close to 3 percent,
although the full range of forecasts
extends from a low of 2lA percent to a
high of 4 percent. Several developments
are likely to work against better inflation
performance in 1994. In agriculture, a
poor harvest in 1993 has left some crops
in very tight supply, and the risk of
unfavorable food price developments is
greater than it has been in recent years.
In addition, although the future course
of energy prices is uncertain, a repeat of
last year's declines, which helped to
hold down the overall CPI, cannot be
counted on. More fundamentally, the
recent narrowing of the degree of slack
in the labor and product markets suggests that competitive pressures damping wage and price increases will be less
strong and less pervasive than they have
been recently.
47
The central tendencies of the forecasts of GDP growth, unemployment,
and inflation are quite similar to the
projections put forth by the Administration in its recent reports. Moreover, insofar as the Administration's numbers
were predicated, in part, on the assumption that short-term interest rates would
rise modestly in 1994, the recent tightening action by the Federal Reserve
does not appear to be inconsistent with
the Administration's outlook.
Prospects for sustained growth over
the longer run have been bolstered by
policy actions on a number of fronts.
Considerable work remains to be done,
however. Although recent fiscal measures have been helpful in bringing
about declines in the federal budget deficit, the Congress and the Administration still must deal with some difficult
issues to ensure that the deficit is kept
on a downward course through the latter
part of the 1990s and into the next
century. In the area of trade policy,
the nation's long-standing support of
an open world trading system was
reaffirmed this past year in the form of
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. Nonetheless, serious
obstacles to free trade remain. On a wide
range of regulatory issues, the Congress
and the Administration face decisions
that have the potential to promote—or
to damage—the flexibility in labor and
product markets and the processes of
innovation and investment that are so
critical to long-run economic progress.
In the area of monetary policy, the challenge is to build on the favorable price
performance of late in a situation in
which the economy will likely be operating closer to full capacity than it has in
recent years. With success in keeping
48
81st Annual Report, 1994
the economy on course toward the longrun goal of price stability, the prospects
for sustained expansion will be greatly
enhanced.
The Performance of
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 GDP over the year
amounted to 2.8 percent, according to
the Commerce Department's first estimate. 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 last
year. Bolstered by the gains in these
sectors, the four-quarter rise in the final
purchases of households and businesses
amounted to about 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
remained quite large both in absolute
terms and relative to nominal GDP. 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 slow the rise
of 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
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
Monetary Policy Reports, February
amounted to about 3 percent, measured
to the year's fourth quarter from the
fourth quarter of the previous year. 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. Data for January
of this year showed strong gains in the
unit sales of both cars and trucks.
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 nearly 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
49
increased about \3A percent, after a jump
of more than 3'/2 percent in 1992.
Spending for services rose 23A percent
during 1993, the same increase as
reported for 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
paid to workers in early 1993 to be
shifted into the latter part of 1992.
Abstracting from these shifts in timing,
the beneficial effects of continued economic expansion showed through in
most categories of income, much as they
had in 1992. Wage and salary accruals,
a measure of income as it is earned
rather than as it is disbursed, rose about
4Vi percent in nominal terms over the
four quarters of 1993, considerably outpacing the rate of inflation for the second year in a row. Further gains also
were reported over the course of 1993 in
dividends and in the income of proprietors, both farm and nonfarm. Transfer
payments, which tend to vary inversely
with the state of the economy, slowed in
1993 after rising at rates of 10 percent or
more in each of the four previous years.
Interest income, which had declined on
net in 1991 and 1992, edged up slightly
over the four quarters of 1993. Because
of the shift in timing of bonuses, growth
of real disposable income in 1993 was
less than in 1992. However, the cumulative gain over the two-year period was
about 6 percent, a clear step-up from the
performance of the three previous years,
when real income growth had averaged
less than 1 percent per year.
The personal saving rate—measured
as the percentage of nominal after-tax
income disbursements that are not used
for consumption or other outlays—
declined nearly 2 percentage points, on
net, over the course of 1993. However,
the saving rate in late 1992 had been
temporarily elevated by the aforemen-
50
81st Annual Report, 1994
tioned speedup of bonus payments.
Looking through that blip of late 1992, a
downward drift still is evident in the
saving rate from mid-1992 to the end of
1993. Such a pattern is not uncommon
when economic recovery is taking hold
and consumer purchases of durable
goods are rising rapidly. In effect, households have been holding part of their
saving in the form of consumer durables, which, at the time of purchase, are
counted fully as consumption in the
national accounts, but which in reality
will yield households a flow of services
over time.
Consumer reliance on credit picked
up in 1993. The volume of consumer
credit outstanding rose 53/4 percent during the year, after three years in which
credit growth had been quite subdued.
Growth of consumer credit was especially rapid in the final quarter of the
year—about 9 percent at an annual rate.
The mortgage debt of households rose
about 7 percent from the end of 1992 to
the end of 1993, slightly more than in
either of the two previous years.
Continued improvement was evident
on the asset side of household balance
sheets in 1993. As in 1992, the total
nominal value of household assets
increased at a pace moderately faster
than the rate of inflation. Large increases
in stocks and bonds boosted the nominal
holdings of financial assets, more than
offsetting a reduction in the aggregate
holdings of deposits and credit market
instruments. The nominal value of tangible assets was lifted by heavy investment in consumer durables and residential structures and by a rise in the
average price of existing residential
properties. With the jump in growth of
consumer credit and the slight pickup in
the growth of home mortgage debt,
household liabilities rose somewhat
faster than in 1992. Nonetheless, net
worth appears to have increased, proba
bly in real terms as well as in nominal
terms. The incidence of financial stress
among households diminished further in
1993, as delinquency rates on various
types of household debt continued to
decline, in some cases to the lowest
levels since the first half of the 1970s.
According to survey data, households'
own assessments of their financial situations have improved of late, with some
survey readings the most upbeat in more
than three years.
Residential investment increased
about 8 percent in real terms over the
four quarters of 1993, building on the
18 percent rise of 1992. As in 1992,
most of the advance came from
increased construction of new singlefamily homes. The construction of
multifamily housing continued to be
adversely affected by a persistent overhang of vacant rental units.
In the single-family market, impetus
for activity continued to come mainly
from declines in mortgage interest rates,
which by autumn had dropped to the
lowest levels in more than two decades.
Fairly sharp declines in mortgage interest rates took place early in the year, but
the effect of those declines 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
Monetary Policy Reports, February
indicators of single-family housing
activity. Sales of existing homes rose
almost without interruption from April
on. By the fourth quarter they had
climbed to the highest level on record
(the series goes back to 1968). Sales of
new homes proceeded in somewhat
choppier fashion from month to month,
but by the end of the year they had
moved well toward the upper end of
their historical range. Housing construction also strengthened. The number of
single-family starts increased about
18 percent from the second quarter to
the fourth quarter, rising to the highest
quarterly level since 1979. Although
housing starts fell sharply in January,
the decline probably was in large measure a reflection of the unusually bad
weather across the country that month.
According to survey data, consumers'
assessments of home-buying conditions
continued to be very upbeat in January
and early February. Builders' ratings of
the market edged down a touch in early
1994 but remained at a very favorable
level.
Activity in the multifamily housing
market remained depressed in 1993.
In the mid-1980s, tax incentives and
relatively easy availability of credit
encouraged overbuilding in many
locales. The proportion of multifamily
rental units that were vacant soared and
has remained high subsequently, even as
construction of multifamily units has
dwindled. Starts of these units reached
the lowest levels on record early in
1993, and they picked up only modestly
thereafter, despite restoration of tax
credits for low-income units.
The Business Sector
The year 1993 saw appreciable gains in
most important barometers of business
activity. Output of the nonfarm business
sector increased 33A percent during the
51
year, the same as the rise during 1992.
Profits rose further, and business balance sheets continued to strengthen.
Capital spending surged.
In the industrial sector, production
rose 414 percent during 1993, the largest
advance in six years. Gains of at least
moderate proportions were reported in
each quarter of 1993. The gain in the
year's final quarter was quite large—on
the order of 6I/2 percent at an annual
rate. Output of business equipment held
to a strong uptrend throughout the year,
as did the production of materials that
are used as inputs in the durable goods
industries. 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 modestly, and production of
defense and space equipment fell
9Vi percent further, extending a downward trend that began in 1987. In January of this year, industrial production
rose 0.5 percent. Severe winter weather
and the California earthquake cut into
the growth of production in the manufacturing sector in January, but the output of utilities was boosted by increased
heating requirements. Underlying support for industrial production is coming
from large gains in new orders that were
reported toward the end of 1993.
The amount of spare capacity in the
industrial sector continued to diminish
in 1993 and early 1994. The utilization
rate in January was 83.1 percent. The
rate has increased more than two percentage points during the past year, to
the highest level since the second half of
1989. In manufacturing, capacity use in
primary processing industries has been
52
81st Annual Report, 1994
running above its long-run average for
more than a year, and tbe rate of utilization in advanced processing industries
recently has moved up into line with its
long-run average.
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 decline.
Business fixed investment increased
about 15 percent in real terms over the
four quarters of 1993, after a rise of
IV2 percent in 1992. A spectacular
increase in outlays for office and computing equipment accounted for about
one-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. Technological advances embodied in the latest computers
made them far more powerful than
equipment that was at the forefront
only a few years ago, and highly com
petitive market conditions kept prices
on a downward course. More real computing power thus continued to become
ever more accessible, and 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 11 percent in real
terms during 1993, the biggest rise in
ten years. Business expenditures for
motor vehicles advanced about 13 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. Ample cash flow from
internal operations 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 suggest that
spending will remain weak in 1994. The
reductions in outlays had been foreshadowed by earlier declines in new orders
for commercial aircraft, and producers
of aircraft have been scaling back their
operations for some time.
Business investment in structures rose
nearly 5 percent in 1993, 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
Monetary Policy Reports, February
level two-thirds below the peak of the
mid-1980s. Several indicators suggest,
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; 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 1993. Prices
of office buildings continued to trend
lower, but survey data suggest that the
rate of decline has eased in at least some
markets.
Investment increased for most other
types of structures in 1993. Outlays for
industrial structures, which had declined
sharply in 1991 and 1992, rose about
8 percent, on net, over the four quarters of 1993. Outlays for commercial
structures other than office buildings
increased fairly briskly for a second
year; by the fourth quarter, they had
retraced about 40 percent of the steep
decline that took place during 1990 and
1991. Investment in drilling also rose in
1993, 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.
Swings in business inventory investment played only a small role in the
economy in 1993. Inventory accumulation in the nonfarm business sector
picked up in the early part of the year,
but thereafter, the rate of stockbuilding
slowed. 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
53
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 have scheduled a
further hefty rise in production for the
current quarter, with assemblies slated
to move up to the highest quarterly rate
in more than fifteen years.
In the farm sector, inventories declined in 1993. Stocks were pulled down
by weather-related reductions in crop
output, especially in parts of the Midwest, where the worst flood of the century caused millions of acres to be left
idle and cut deeply into yields on the
acres that were planted. Inventories of a
number of major field crops are in tight
supply, in some cases the tightest since
the mid-1970s. 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 thus 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 in 1993. 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. Growth
of debt was slow, both in absolute terms
and relative to the high rates of debt
54
81st Annual Report, 1994
growth 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 in 1993. All
this seemed to augur well for sustained
expansion of the business sector and the
economy.
The Government Sector
Federal purchases of goods and services, the portion of federal outlays that
are included in GDP, fell more than
6 percent in real terms over the four
quarters of 1993. Real outlays for
national defense, which have been
trending down since 1987, declined
nearly 9 percent over the year. Growth
of nondefense outlays fell slightly, on
net, after fairly sizable increases in each
of the three previous years. The level of
real federal purchases in the fourth quarter of 1993 was down about 10 percent
from the level 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.
Growth in federal expenditures for
Medicare and other health programs also
slowed, but their rate of increase continued to exceed the growth of nominal
GDP by a considerable margin.
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 5Vz 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 63/4 percent
over the four quarters of the year. State
and local transfer payments to persons
have 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 in excess of 10 percent in
1993. Nominal purchases of goods and
services rose moderately, but at a pace
Monetary Policy Reports, February
somewhat faster than that of 1992. The
deficit in the combined operating and
capital accounts of state and local governments widened further during the
first three quarters of the year, from an
end-of-1992 level that already was quite
sizable; in the fourth quarter, the deficit
apparently shrank, but not by enough to
fully retrace the earlier increases.
In real terms, purchases of goods and
services by state and local governments
increased 3 percent over the four quarters of 1993, after gains of about
V/2 percent per year in both 1991 and
1992. State and local expenditures for
structures rose more than 9 percent in
real terms over the year, according to
preliminary data. Some of the spending
went for the repair or replacement of
structures that had been damaged in
recent natural disasters, such as the
summer flooding in the Midwest. In
addition, the efforts of state and local
governments to cope with the needs
of growing populations prompted
increased investment in schools, highways, and other state and local facilities.
Low interest rates probably convinced
state and local officials to undertake
more of this new construction in 1993
than they would have otherwise. Growth
in other types of state and local purchases continued to be fairly restrained
in 1993. Employee compensation, which
makes up roughly two-thirds of state
and local purchases, rose about 1 ]A percent in real terms during the year, the
same as in 1992. Employment growth in
the state and local sector was slow by
historical standards again in 1993, and
increases in hourly compensation were
relatively small. State and local purchases of goods rose only moderately.
The External Sector
The trade-weighted foreign exchange
value of the U.S. dollar, measured in
55
terms of the other Group of Ten (G-10)
currencies, rose nearly 6 percent on balance from December 1992 to December
1993. The dollar's 1993 rise in real
terms (that is, adjusted for movements
in relative consumer prices) was slightly
greater than its rise in nominal terms,
as U.S inflation exceeded weightedaverage inflation in the other G-10 countries by about V2 percent. The dollar's
rise continued into the early weeks of
1994, but by mid-February it had fallen
back to a level a bit below its average in
December 1993.
The main factor behind the strengthening of the dollar last year appears
to have been the general downward
revision in perceptions of the strength
of economic activity in a number of
foreign countries while activity in the
United States seemed to be improving
on balance, especially in the latter part
of the year. The weakening of activity
abroad contributed to large declines in
interest rates in the foreign G-10 countries, both in absolute terms and relative
to levels of interest rates in the United
States. On average, foreign short-term
rates fell nearly 3 percentage points
relative to U.S. rates last year, and foreign long-term rates fell about 1 percentage point relative to U.S. rates. Foreign
short-term rates have changed little on
average during the first few weeks of
1994, while long-term rates have edged
higher.
The dollar rose 8 percent against the
mark and by similar amounts against
other currencies in the exchange rate
mechanism (ERM) of the European
Monetary System during 1993. It appreciated a bit further, on balance, in early
1994. Potential existed for much greater
divergence of dollar exchange rates
against these currencies as the result of a
widening of permitted fluctuation margins following the ERM crisis last summer. Strains developed in the ERM in
56
81st Annual Report, 1994
July and August on growing expectations that weakness in the French economy and an anticipated recovery of the
German economy would cause French
authorities to reduce interest rates ahead
of German rates. Growing pressure on
the French, Belgian, Danish, and Iberian
currencies led to massive foreign exchange intervention, sharp increases in
short-term interest rates in those countries, and in early August, a substantial
widening of the ERM margins. Later,
market pressures eased and interest rates
returned to their pre-crisis levels as it
became clear that these countries would
not make use of the wider margins to
ease policy, and as the German economy
showed signs of weakening further.
The pound, which had depreciated
sharply against the dollar in late 1992
after U.K. authorities pulled it from the
ERM and substantially lowered interest
rates, fell an additional 4 percent relative to the dollar during 1993. The
Italian lira depreciated nearly 20 percent
against the dollar last year, reflecting
market concerns over political uncertainties and massive budget deficits in
Italy. Similar concerns, although on a
smaller scale, contributed to the Canadian dollar's depreciation against the
U.S. dollar of about 4 percent during
1993.
The Japanese yen was the only currency of a foreign G-10 country to
appreciate against the dollar in 1993,
rising on balance about 11 percent. The
dollar-yen exchange rate appeared to be
subject to two conflicting sets of pressures last year. During the first eight
months of the year, the dollar depreciated nearly 20 percent against the
yen, as market attention appeared to be
focused mainly on the rising Japanese
external trade surplus and perceived
political pressures from abroad, particularly from the United States, to reduce
this surplus. The dollar reached a low of
almost 100 yen per dollar last August.
At that point, statements by U.S.
officials expressing concern over the
implications of the yen's strength for
Japanese growth, accompanied by U.S.
intervention support for the dollar,
appeared to shift the market's main
focus from these external considerations
back toward the Japanese domestic
economy. Over the latter part of the
year, as economic activity in Japan continued to weaken and Japanese interest
rates moved lower, the dollar rose
against the yen, partially offsetting its
earlier decline. That uptrend was halted
in February 1994, however, in the face
of renewed trade tensions between the
United States and Japan, and the dollar
fell back close to the low reached in
August.
The dollar depreciated slightly in real
terms on average against the currencies
of major U.S. trading partners among
developing countries in Latin America
and East Asia in 1993. The Mexican
peso rose 6 percent, despite a period of
downward pressure amid uncertainty
about the outcome of the U.S. congressional vote on the North American Free
Trade Agreement as that vote drew near.
The rise in the peso's inflation-adjusted
exchange value has cumulated to nearly
35 percent since 1989, reflecting in part
a strong inflow of capital from abroad
stimulated by domestic reforms, declining world interest rates, and the anticipated positive influence of NAFTA on
Mexico's real growth. The Brazilian
cruzeiro rose fairly strongly in real terms
against the dollar, as substantial nominal
depreciation of the cruzeiro did not keep
pace with the even more rapid domestic
inflation in that country. Meanwhile, the
Hong Kong dollar rose in real terms and
the Taiwan dollar fell.
Growth of real GDP in the major
industrial countries picked up somewhat, on average, during 1993 from
Monetary Policy Reports, February
depressed levels in 1992. Growth was
lifted as economic recoveries in Canada
and the United Kingdom gained some
momentum. However, output in Japan
and most of continental Europe
remained sluggish at best, showing
either small increases or small declines
for most of the year. The weakness of
real activity in the foreign Group of Six
industrial countries put further downward pressure on CPI inflation, which
receded to roughly 2 percent on average
in those countries last year. Further
declines in interest rates in most of these
countries during the past year should
enhance the prospects of recovery in the
coming year. The economies of the
major developing countries in Asia continued to grow rapidly, fueled in part by
exceptionally strong growth in China.
Real growth in Mexico fell to near zero,
however, reflecting the depressing
effects of policy restraint aimed at containing inflationary pressures and, for a
time, growing uncertainty about whether
NAFTA would be implemented.
The nominal U.S. merchandise trade
deficit widened to more than $130 billion in 1993, compared with $96 billion
in 1992. Imports grew much faster
than exports, partly because the U.S.
economic recovery gained momentum
while economic growth in U.S. export
markets was sluggish on average. The
appreciation of the dollar also tended to
depress real net exports. The current
account worsened about in line with the
trade deficit, moving from a deficit of
$66 billion in 1992 to nearly $105 billion at an annual rate over the first three
quarters of 1993. Net service receipts
and net investment income receipts both
remained little changed over this period.
U.S. merchandise exports grew
33/4 percent in real terms over the four
quarters of 1993, based on the initial
fourth-quarter estimate from the national
income and product accounts. Exports
57
changed little, on net, over the first three
quarters of the year but strengthened
in the fourth quarter as shipments of
machinery and automotive products
increased. The growth of computer
exports in real terms slowed from the
very rapid pace of recent years but still
posted an increase of more than 15 percent. Agricultural exports declined as a
result of reduced U.S. output in the 1993
crop year. By region of the world, the
rise in merchandise exports during
1993 was more than accounted for by
increased shipments to Canada, the
United Kingdom, and Mexico. Shipments to the sluggish economies in continental Europe and Japan declined
somewhat, while the growth of exports
to developing countries in Asia slowed
from the rapid pace of 1992.
Merchandise imports grew about
14 percent in real terms during 1993.
The growth in imports was broadly
based across commodity categories.
Computers accounted for one-third of
the growth in real terms, but imports of
consumer goods, machinery, automotive
products, and industrial supplies all rose
strongly as well. Import prices declined
slightly during 1993, reflecting a sharp
decline in the price of oil imports. The
average price of non-oil imports rose
only slightly, reflecting low inflation
abroad and the rise of the dollar.
In the first three quarters of 1993,
recorded net capital inflows balanced
only part of the substantial U.S. current
account deficit, as net statistical errors
and omissions were positive and large.
Sizable net shipments of U.S. currency
to foreigners, which are not recorded
in the U.S. international accounts, contributed to the positive net errors and
omissions.
Net official capital inflows amounted
to $48 billion. G-10 countries accounted
for part of the inflows. In addition, various developing countries, particularly in
58
81st Annual Report, 1994
Latin America, experienced large private capital flows into their countries
and added substantially to their official
holdings in the United States.
Net private capital inflows into the
United States were negligible in the first
three quarters of 1993. However, reflecting the continued internationalization of
financial markets, both inflows and outflows grew. U.S. net purchases of foreign securities reached a record $96 billion, about evenly divided between
stocks and bonds. Most of these net
purchases were accounted for by Western Europe, Canada, and Japan; developing countries in Asia and Latin America accounted for a small but growing
share of total U.S. net purchases of foreign stocks and bonds. Foreign private
net purchases of U.S. government securities and corporate bonds remained
strong; foreign asset holders also resumed making net purchases of U.S.
corporate stocks. In addition, capital inflows from foreign direct investors in
the United States resumed in the first
three quarters of 1993, while capital outflows by U.S. direct investors abroad
remained strong.
Labor Market Developments
The labor market strengthened in 1993,
as economic expansion began to translate more forcefully into increased job
creation. Payroll employment, a measure of jobs that is derived from a
monthly survey of establishments, rose
almost 2 million over the twelve months
of the year. Although this gain was
only moderate compared with annual
increases in many years of the 1970s
and 1980s, it was about twice the
increase of 1992. The increase in employment in January of this year apparently was held down by bad weather.
Hiring picked up in most major sectors in 1993. The number of jobs in
retail and wholesale trade increased
about one-half million, the largest
annual rise since 1988. The number of
jobs in finance, insurance, and real
estate picked up a bit after a five-year
period that had encompassed three years
of sluggish growth and two years of
unprecedented reductions. Construction
employment rose 200,000 after three
years of sharp declines.
The services industry added about
1.2 million new jobs in 1993. More than
one-third of the increase came at firms
that supply services to other businesses.
Of these firms, the ones exhibiting by
far the most rapid growth were 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 the short run. 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 the gain took the form
of a lengthened workweek rather than
increased hiring. By the latter part of the
year, the average workweek in manufacturing had reached A\3A hours, the longest since World War II. Hiring did pick
up late in the year, however, and a
Monetary Policy Reports, February
further rise in the number of factory jobs
was reported in January of this year.
Reliance by manufacturers on workers
from personnel supply firms reportedly
has increased; because these workers are
carried on the payrolls of the personnel
firms, actual labor input in manufacturing was greater than the data indicate.
Significant improvement in labor
market conditions also was evident in
data from the monthly survey of households. The measure of employment that
is derived from this survey rose 2l/z 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. Because of changes in the
design of the monthly survey of households, the official rate reported for
January of this year—6.7 percent—is
not comparable with the official rates for
1993 or previous years. However, the
Bureau of Labor Statistics has indicated
that, abstracting from the changes in
survey design, the unemployment rate
probably fell in January, with estimates
of the size of the decline ranging from
0.1 percentage point to 0.3 percentage
point. The aim of the new survey is to
achieve more precise classification of
individuals whose labor market situations may not have been accurately captured by the questions included in the
old survey.
Growth of the civilian labor force—
the sum of persons who are employed
and those who are looking for work—
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 past four years,
labor force growth has averaged less
than 1 percent per year, and the labor
59
force participation rate has edged down
slightly, on net. Based on data from the
old survey, the number of persons 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 persons 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,
according to data from the old survey.
To the extent that these individuals have
been honing 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 of 1992 to December of
1993, about the same as the rise of the
previous year. Wages rose 3.1 percent
over the year, one-half 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 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
60
81st Annual Report, 1994
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 1.5 percent during
the year, after large increases in both
1991 and 1992. Although part of the
gain in output per hour over this threeyear period is no doubt a reflection of
normal cyclical processes, the data 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, of the
rising skill of workers in exploiting
those technologies, and, perhaps, of 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 1.3 percent, a shade less
than in 1992.
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
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 and early in 1994, these
increases became more widespread. Producer prices picked up somewhat in January, but prices at the retail level were
unchanged, on balance.
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 a percentage point less than in
1992. Within this category, the CPI for
tobacco fell 5 percent in 1993 after
many years of large increases, as the
inroads being made by generic brands in
that market forced major suppliers to
alter their basic pricing strategies. Prices
of apparel rose less than 1 percent during 1993, 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 nonenergy 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 small deceleration for
some items and 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 a 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,
Monetary Policy Reports, February
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
output of some of the nation's 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 account for by far the larger share
of total food in the CPI, showed almost
no acceleration 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 it 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 in electricity
prices over the year 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
61
natural gas has picked up in recent
years, after trending lower through
much of the 1970s and a large part of
the 1980s. Since the end of last year, oil
prices have changed little, on net, as an
upswing in prices during the first few
weeks of 1994 has been reversed by
more recent declines. The CPI for
energy continued to fall in January.
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
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 1.6 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 and into early 1994. The
producer price index for crude materials
excluding food and energy thus moved
up sharply over the year, by about
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.
62
81st Annual Report, 1994
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. According to one such survey,
conducted by the University of Michigan Survey Research Center, 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.
A similar but much less pronounced
swing in expectations was evident in
some other surveys as well. The surveys
have 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 have remained higher still,
with the Survey Research Center's
series on average inflation rates that are
expected over a five- to ten-year horizon
holding in a range of 4!/2 percent to
5 percent, according to surveys conducted in the second half of 1993 and
early 1994.
Monetary and Financial
Developments 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 thrifts. In part spurred by the higher
returns available in those markets,
investors found bonds and stocks to be a
more attractive alternative than deposits; flows into bond and stock mutual
funds were at record levels last year. 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 (FOMC) in February and July
1993 lowered the annual ranges for M2
and M3 for 1993 in two technical adjustments totaling 1 Vi 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
FOMC continued to use a wide variety
of information about financial and economic conditions for this purpose.
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 FOMC viewed that a tightening in
reserve conditions at some point would
likely be needed to avoid pressures on
capacity and a pickup in inflation.
Concerns about a buildup of inflationary momentum increased in the spring,
and, over the three months from midMay until mid-August, instructions from
the FOMC to the Federal Reserve Bank
of New York indicated that there was a
greater likelihood that money market
conditions should be tightened rather
than eased before the next scheduled
meeting of the FOMC. Those concerns
Monetary Policy Reports, February
again came to the fore as 1994 opened.
Considerable underlying strength in
aggregate demand and dwindling levels
of excess capacity to meet that demand
raised the risk that inflation pressures
would strengthen down the road, derailing the expansion. Consequently, in February, the FOMC tightened reserve conditions for the first time in five years,
nudging short-term rates up ]A percentage point.
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
FOMC meeting of the year, incoming
information suggested that the economy
had exhibited considerable strength in
the fourth quarter of 1992. Final estimates for that quarter put the increase in
real GDP 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
63
considerable—the unemployment rate
averaged 1]A percent (on the old
basis)—price pressures were not perceived to be likely. The expansion of the
monetary aggregates had faltered around
the turn of the year, but the sense
was that special factors—importantly
including a decline of mortgage prepayments that constricted the level of transactions deposits—accounted for some of
the weakness. Against this backdrop, it
appeared to the members of the FOMC
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,
owing in part to 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
64
81st Annual Report, 1994
relatively steady, the FOMC 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, although many analysts
thought that the major indexes were distorted by difficulties in seasonal adjustment, data releases showing a variety of
price and labor compensation indexes
on the high side of investor expectations
still roiled financial markets. Slack in
the economy remained appreciable,
which weighed against any pickup in
inflation, but inflation expectations were
in danger of ratcheting higher, with possible adverse consequences for inflation
itself. Meanwhile, 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 FOMC, 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
FOMC, the unemployment rate had
moved back up to 7 percent (on the old
basis), while 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 deficit-reduction 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 FOMC decided to retain the
current degree of restraint in the reserve
market and an asymmetric tilt toward
tightening in the policy directive.
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,
while 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.
The resulting capital gains apparently
added to the allure of stock and bond
mutual funds, thereby weakening M2,
Monetary Policy Reports, February
which only edged up 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 FOMC
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.
Leading up to the September FOMC
meeting, the unemployment rate had
edged lower, to 6.7 percent (old basis),
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 of 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. Although there was a sense
that 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
65
be to tighten, 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 about
Vs percentage point from their yearly
lows set in mid-October. Over that same
span, the dollar showed notable strength
on foreign exchange markets.
Most market rates held at these higher
levels as the FOMC met for the first
time in 1994. Readings on activity suggested that 1993 had ended on a very
strong note, with real GDP expanding
about 6 percent at an annual rate in the
fourth quarter and reports suggesting
that some of this momentum had carried
over into 1994. Slack in labor and product markets had been reduced considerably, and the prices of a number of
commodities important in the production of durable goods and in construction had begun to move higher. With
that backdrop, the Committee decided
that it was time to trim back some of the
stimulus provided by the current low
level of short-term interest rates before
it fed through to higher inflation. The
Account Manager was directed to
tighten reserve conditions, and the federal funds rate moved up to a range
around VA percent, while the discount
rate remained at 3 percent.
Money and Credit Flows
The long expansion of the 1980s was
associated with growth of total debt of
domestic nonfinancial sectors that was
about IV2 times the pace of nominal
GDP growth. In the wake of this phenomenal leveraging, the recession and
tepid economic recovery from 1990 to
1992 were importantly a balance-sheet
phenomenon that was reflected in a
slowing in debt growth. In retrospect, it
66
81st Annual Report, 1994
is apparent that this deceleration in debt
was 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, about in line with nominal
GDP. 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, though net
equity issuance remained sizable as
well. However, the debt markets in 1993
saw far more activity than the net
requirements for external funds implied.
Low longer-term rates induced many
firms to refinance existing obligations,
pushing gross public debt issuance 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 with 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
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
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
43/4 times that of disposable income.
Within those 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 post-World War II
low. Much of the declining role for
deposits probably owed to the pattern of
financial returns, with investors, confronted by a steep yield curve, seeking
out the higher yields provided by longermaturity instruments that were mostly
available from outside the depository
sector.
Depository institutions, pressed by
their own balance-sheet problems, were
unaggressive in seeking deposits and
extending credit in the early 1990s. By
1993, however, commercial banks had
made substantial strides in improving
their capital standing. About threequarters of the assets at commercial
banks were on the books of wellcapitalized institutions as of September
1993, 2!/2 times the proportion at the
end of 1990 (table 3). Partly as a consequence, banks reported on Federal
Reserve surveys a substantial easing of
Monetary Policy Reports, February
terms and standards on business and
consumer loans during the year. However, borrowers, 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 modestly in 1993, marking a
substantial rebound from the declines
posted in the previous three years. The
increase in depository credit 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 in the neighborhood of 3 Vi percent, while thrift credit contracted only
modestly. 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.
Slow expansion of depository credit,
together with the increased reliance by
banks on nondeposit funds, damped the
growth of M3 in 1993. From the fourth
quarter of 1992 to the fourth quarter of
1993, M3 grew Vi percent, ending the
year a little above the lower bound of its
Distribution of Assets of Domestic
Commercial Banks, by Adjusted
Capital Category
Percent
End of year
1991
1992
September
1993
30.4
34.4
67.8
73.3
38.5
31.1
45.1
20.5
21.8
10.3
17.8
8.9
Category
1990
Well capitalized ..
Adequately
capitalized ..
Undercapitalized .
NOTE. Adjustments to capital categories were made
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).
67
annual range of 0 percent to 4 percent
(table 4). 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 V/i percent on a fourthquarter-to-fourth-quarter basis, held
down by a steep drop in institution-only
money market mutual funds. Overall,
M3 velocity rose at a AV2 percent annual
rate in 1993, down almost 2 percentage
points from the previous year.
The velocity of M2 rose at a 33/4 percent annual rate in 1993 after increasing
nearly 5 percent in 1992. The rise in
velocity last year 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 2 percent to 6 percent spread that
was set in February to the 1 percent to
5 percent range that was ultimately in
effect. In the event, M2 grew \Vi 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 a surge in mortgage refinancings
that followed when mortgage rates
fell to levels not seen in a generation.
Refinancings are associated with the
temporary parking of funds in transactions and other highly liquid deposit
accounts.
Especially after taking account of
such special factors, the growth of M2
was quite subdued in 1993, owing in
large part to the attractiveness of capital
68
81st Annual Report, 1994
market instruments. Although the bond
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
those 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, undoubtedly encouraging the
diversion of deposits to mutual funds.
Growth of Money and Debt
Percent
Ml
M2
M3
Domestic
nonfinancial
debt
7.4
5.4
2.5 2
8.8
10.4
5.5
8.9
9.3
9.6
12.4
9.1
9.9
9.2
12.2
8.1
9.9
9.9
10.9
9.6
12.0
14.0
1985
1986
1987
1988
1989
12.0
15.5
6.3
4.3
.6
8.7
9.3
4.3
5.3
4.8
7.6
8.9
5.7
6.3
3.8
14.2
13.4
10.3
9.0
7.8
1990
1991
1992
1993
4.2
7.9
14.3
10.5
4.0
2.9
1.9
1.4
1.7
1.2
.5
.6
6.6
4.6
5.0
4.9
Quarter
(annual rate)3
1993: 1
2
3
4
8.3
10.7
12.0
9.4
-1.3
2.2
2.6
2.1
-3.2
2.1
1.1
2.4
4.0
4.5
5.7
5.2
Measurement
period
Year'
1980
1981
1982
1983
1984
....
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.
At the end of 1993, assets in stock
and bond mutual funds totaled about
$l'/2 trillion, up $400 billion from the
end of 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 5 I/2 percent annual
rate in 1993, roughly in line with nominal GDP over that period.
Ml grew at a 10Vi percent pace last
year, spurred on by double-digit
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 in mortgage refinancing. Ml velocity declined at a 43/4 percent annual rate, 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 M1 velocity in recent years illustrates both its high interest-rate sensitivity and the fairly loose relationship of
Ml to interest rates and income. With
the rapid expansion of transactions
deposits, total reserves grew at a
1214 percent annual rate last year, down
from the 20 percent pace posted in 1992.
Adding in the increase in currency
results in a 10^2 percent growth rate for
the monetary base in 1993, the same
performance as the previous year.
Confronted with this rapid expansion
in transaction deposits, and therefore
required reserves, and directed by
the Federal Open Market Committee
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
Monetary Policy Report, July
instructions, those purchases were
weighted more heavily than in the past
toward longer-maturity instruments. As
a result, the average maturity of the
Treasury securities held by the Federal
Reserve moved up slightly over 1993, to
3.2 years.
Report on July 20, 1994
Monetary Policy and
the Economic Outlook
for 1994 and 1995
The favorable performance of the U.S.
economy continued in the first half of
1994. Economic activity advanced at a
brisk pace, building on the substantial
gains in late 1993, and broad measures
of inflation moved still lower. Unemployment declined and industrial capacity utilization rose, substantially reducing the remaining slack in resource use.
In this context, monetary policy has
been directed this year at heading off a
buildup of inflationary pressures that
could jeopardize the continuation of the
economic expansion. To do so, the Federal Reserve has had to move away from
its highly accommodative policy stance
of recent years. That stance had been
adopted to counteract unusual restraint
on domestic spending associated in large
part with the efforts of both borrowers
and lenders to strengthen their financial
condition. Data available in late 1993
and early 1994 suggested that the restraint on spending had dissipated and
that the economic expansion had
become strong and self-sustaining.
Against this background, the Federal
Reserve has firmed money market conditions in four steps this year.
Despite disruptions caused by severe
winter storms, real gross domestic product (GDP) rose at an annual rate of
31/2 percent in the first quarter, and available indicators point to another sizable
69
gain in the second quarter. Business
fixed investment has continued to grow
rapidly this year, as firms have sought to
improve efficiency by installing state-ofthe-art equipment; rising utilization rates
have spurred interest in expansion of
capacity as well. Consumer outlays have
trended higher this year, buoyed by the
considerable gains in income and an
increased willingness to borrow or use
savings; lately, though, spending growth
appears to have moderated somewhat.
The rise in long-term interest rates that
began last fall has damped the growth of
housing activity this year, but the effect
has been relatively mild, in part because
homes remain quite affordable by the
standards of the past two decades. In the
labor market, the employment gains during the first half of this year were substantially more rapid than those in 1993,
and the unemployment rate has continued to move lower.
Inflation generally was moderate during the first half of 1994. Retail food
and energy prices changed little, on balance, over the period, holding the rise
in the consumer price index (CPI) to
2V2 percent at an annual rate. At the
same time, the prices of a wide range of
materials used in manufacturing and
construction have been boosted considerably by strong demand and the
resulting higher rates of resource utilization. Looking ahead, retail energy prices
likely will rise over the summer, pushed
up by the rebound in crude oil prices in
recent months; in addition, the decline
in the dollar since the beginning of the
year, if not reversed, probably will exert
some upward pressure on prices.
The Federal Reserve's policy actions
this year have raised the federal funds
rate to around 414 percent, from 3 percent, and have boosted the discount rate
to 31/2 percent, also from 3 percent.
Other market interest rates have risen
114 to P/4 percentage points since the
70
81st Annual Report, 1994
beginning of the year. Increases in
intermediate- and long-term rates have
been unusually large relative to the
adjustment of short-term rates, reflecting stronger-than-anticipated economic
growth and market expectations of
greater inflationary pressures as well as
actual and expected tightening actions
by the Federal Reserve to contain those
pressures. On occasion, the declining
value of the dollar also appeared to contribute to higher yields. Markets have
been volatile at times this year as investors have adjusted to a changing economic and policy outlook. The uncertain
conditions encouraged investors to try
to reduce their risk exposure, and the
associated attempts to make large shifts
in portfolios over short periods seemed
to add to the upward pressure on longterm rates at times.
Despite the rise in U.S. interest rates,
the dollar has declined considerably this
year, with its trade-weighted foreign
exchange value against the Group of
Ten (G-10) countries falling about 8 percent. Rising long-term interest rates
abroad, associated with brighter prospects for economic growth, tended to
offset the effect on the dollar of higher
U.S. rates. Moreover, other factors,
including diminished hopes for a prompt
resolution of trade tensions with Japan
and market concerns about future inflation in the United States, fostered downward pressure on the dollar. This pressure was especially intense in late April
and early May and again in the second
half of June and first half of July. The
U.S. Treasury and the Federal Reserve
made substantial dollar purchases on
three occasions during these periods to
deal with volatile trading conditions and
movements in the dollar judged to be
inconsistent with economic fundamentals. Other governments shared the concern of U.S. officials, and the more
recent operations were coordinated with
the monetary authorities of a large number of other countries, including the
other members of the Group of Seven
(G-7).
The strength of spending and a
renewed willingness to use and extend
credit contributed to a pickup in borrowing by households and businesses in the
second half of last year, and this trend
extended into the first half of 1994.
However, the composition of borrowing
has been affected by financial market
conditions. Rising and more volatile
long-term interest rates have encouraged businesses to rely more heavily on
sources of shorter-term financing, such
as finance companies and banks, and
have prompted households to shift to
adjustable rate mortgages. Banks, which
had been hampered by balance sheet
problems of their own in recent years,
sought business and household loans
more aggressively by continuing to ease
credit standards and the nonprice terms
of lending. Total commercial bank credit
has increased moderately this year, and
thrift institution credit, which contracted
sharply between 1989 and 1993, appears
to have expanded a bit. In contrast to
the strength of private borrowing, the
growth of federal government debt has
slowed this year, reflecting the subdued
growth of expenditures and sharply
higher tax receipts associated with fiscal
policy actions and the robust economy.
As a result, the total debt of the domestic nonfinancial sectors expanded at
about a 514 percent annual rate from the
fourth quarter of 1993 through May,
close to its pace over the second half of
last year and well within its monitoring
range of 4 to 8 percent.
Growth of the broad money aggregates has not kept pace with that of
nominal GDP again this year. M2
increased at about a 1 lA percent annual
rate from the fourth quarter of last year
through June, while M3 fell slightly,
Monetary Policy Report, July
71
placing these aggregates around the slower flows on M2 has been offset by
lower bounds of their respective annual shifts into direct holdings of market
growth ranges. In the usual pattern, instruments, such as Treasury bills. As a
increases in rates on retail deposits and consequence, the sum of M2 and houseon money market mutual funds have hold holdings of bond and stock mutual
lagged the rise in market interest rates, funds has decelerated sharply this year.
inducing a redirection of savings from
M2 into market instruments and boosting M2 velocity. With returns on
Money and Debt Ranges
interest-paying checking accounts virtufor 1994 and 1995
ally unchanged, compensating balance
requirements for demand deposits re- At its July 1994 meeting, the Federal
duced by rising rates, and transactions Open Market Committee reviewed the
balances also depressed by several spe- annual ranges for money growth for
cial influences, Ml growth this year 1994 that it had established in Februhas slowed to less than half its rate ary. In light of the experience of the first
of advance in 1993; through June, half of the year and the likelihood that
this aggregate had expanded at about a funds would continue to be diverted
4 percent annual rate since the fourth from deposits to higher-yielding market
quarter of last year. Owing to the instruments, the Committee expected a
anemic expansion of transactions depos- substantial increase in the level of M2
its, total reserves fell slightly over the velocity over 1994. M3 velocity also
first half of the year. Only continued was seen as likely to rise quite sharply,
strong demand for currency, much of given the funding patterns of depository
which reflected use abroad, has sup- institutions, which had been favoring
ported growth of Ml and the monetary sources of funds not included in M3,
such as capital and borrowing from
base.
overseas offices. As a consequence, the
In contrast to 1992 and 1993, shifts
Committee continued to expect that
into bond and stock mutual funds were
money growth within, though perhaps
not a major factor in the rise in M2
toward the lower end of, the ranges of
velocity this year. Falling securities
1 percent to 5 percent for M2 and 0 perprices created capital losses for bond
cent to 4 percent for M3 would be
and equity mutual funds, prompting
consistent with its broader objective of
some fund holders to reevaluate the risks
and prospective returns of such investments. Bond mutual funds experienced
outflows this spring, and a portion of Ranges for Growth of Monetary
the proceeds was directed to less-risky and Credit Aggregates
money market mutual funds, thus ele- Percent
vating M2 for a time. Even with more
Provisional
subdued moves in securities prices since
Aggregate
1994
1993
for
1995
the late spring, many small investors
have retained a more cautious view of M2
1-5
1-5
1-5
0-4
0-4
0-4
the possible risks and rewards of hold- M3
Debt
3-7
4-8
4-8
ing capital market instruments, and total
NOTE. Change from average for fourth quarter of
inflows to bond and stock mutual funds
year to average for
have remained considerably weaker than preceding Figures for debt of thefourth quarter of year
indicated.
domestic nonfinancial
in the past few years. The effect of these sector are monitoring ranges.
72
81st Annual Report, 1994
fostering financial conditions that would Economic Projections
sustain economic expansion and contain for 1994 and 1995
price pressures. It therefore voted to The members of the Board of Governors
retain these ranges for 1994 (table 1). and the Reserve Bank presidents, all of
With little information to suggest any whom participate in the deliberations of
new trends in velocity for 1995, the the Federal Open Market Committee,
Committee chose simply to carry for- generally anticipate that the growth of
ward the 1994 ranges for M2 and M3 as real GDP will moderate during the secprovisional ranges for those aggregates ond half of this year and into 1995 from
for 1995. The Committee noted that the unsustainable pace in recent quarters
these ranges, especially that for M2, (table 2). Employment gains through the
provided an indication of the longer- end of 1995 are expected to roughly
run growth of this aggregate that might balance the net flow of individuals into
be expected with the attainment of the labor force, leaving the unemployreasonable price stability and a return to ment rate about unchanged from its
the past pattern of velocity fluctuating average level in the second quarter of
around a constant long-run level. Con- this year. Inflation is expected to pick up
siderable uncertainty about the behavior a little over the next year and one-half.
of velocity is likely to persist, however,
The forecasts of the Board members
and the Committee will continue to and Reserve Bank presidents for ecomonitor a broad range of financial and nomic growth in 1994 are quite close to
economic indicators in addition to the those made in February. Most continue
monetary aggregates when determining to expect that real GDP will rise 3 perthe appropriate stance of policy.
cent to 3lA percent over the four quarThe Committee also decided to retain ters of this year. For 1995, the central
its current monitoring range of 4 percent tendency of the forecasts is a range of
to 8 percent for growth of the debt 21/2 percent to 23A percent. The unemaggregate during 1994. With debt ployment rate anticipated for the fourth
expanding at a rate close to that of nom- quarter of 1994 has been revised down
inal income, the Committee's expecta- about !/2 percentage point from that protion for the growth of nominal GDP for jected in February.1 The forecasts of the
the year suggested that the debt aggre- unemployment rate in the fourth quarter
gate would finish the year comfortably of 1994 are now bunched between 6 perwithin this range. However, the Com- cent and 6lA percent; this range is also
mittee expected that in 1995, macro- the central tendency of the projections
economic performance consistent with for the fourth quarter of 1995.
These forecasts are based on the
sustainable expansion would involve
some slowing of the growth of nominal expectation that the next several quarspending and moderate growth of debt;
indeed, rapid credit growth might
1. The unemployment forecast in February was
suggest the possibility of a borrow-andsubject to an unusual degree of uncertainty, as it
spend psychology typical of strength- was made shortly after the introduction of major
ening inflation. Consequently, the revisions to the survey that generates the unemCommittee voted to set a provisional ployment data. In February, the revised survey
monitoring range for debt growth for was believed to have boosted the unemployment
January 1994 forward by
per1995 of 3 percent to 7 percent, a reduc- rate frompoint. Subsequent analysisroughly V2that
centage
indicates
tion of 1 percentage point at each end of the upward shift caused by the new survey probathe range.
bly was smaller than originally thought.
Monetary Policy Report, July
ters will be a period of transition to a
more moderate expansion accompanied
by reasonably full use of available
resources. This transition is already evident in the housing market and, perhaps,
in consumer outlays as well. The resulting deceleration in private domestic
spending is expected to be offset, in
part, by a smaller decline in net exports
than that registered over the past several
quarters; this projection for the external
sector largely reflects an expectation of
stronger economic expansion abroad.
The Board members and Reserve
Bank presidents generally expect the
rise in the consumer price index over the
four quarters of 1994 to end up in the
range of 23A percent to 3 percent. So far
this year, retail energy prices have been
flat on balance and retail food prices
have moved up only a little, restraining
the rise in the total CPI. However, given
the run-up in crude oil prices of late and
the improbability of another large drop
in the prices of fruits and vegetables, the
rate of inflation projected for the next
year and one-half is slightly higher than
that posted recently. The decline in the
dollar to date, if not reversed, also could
exert some mild upward pressure on
inflation.
The Administration recently released
its mid-year update of economic and
budgetary projections. The projections
for nominal and real GDP growth, inflation, and unemployment for 1994 and
1995 fall within the ranges anticipated
by Federal Reserve officials and are
essentially consistent with the central
tendency of those ranges. Thus, it
appears that the monetary ranges set by
the Federal Open Market Committee
are compatible with the goals of the
Administration.
Both Federal Reserve policymakers
and the Administration anticipate further economic expansion accompanied
by relatively low inflation. The Federal
Economic Projections for 1994 and 1995
Percent
FOMC members and
nonvoting Reserve
Bank presidents
Measure
Range
Administration
Central
tendency
1994
Change, fourth quarter to fourth quarter'
Nominal GDP
Real GDP
Consumer price index2
5'/4-6'/2
3-3 '/2
2'/2-3I/2
5'/2-6
3-3'/4
23/4-3
5.8
3.0
2.9
6-6'/4
6-6'/4
6.2
Average level, fourth quarter
Unemployment rate 3
1995
Change, fourth quarter to fourth quarter'
Nominal GDP
Real GDP
Consumer price index2
4'/2-6'/4
2'/4-23/4
2-4 '/2
Average level, fourth quarter
Unemployment rate 3
53/4-6'/2
1. Change from average for fourth quarter of preceding year to average for fourth quarter of year indicated.
73
5-5»/2
2'/2-23/4
3
2 /4-3'/2
5.6
2.7
3.2
6-6'/4
6.2
2. All urban consumers.
3. Civilian labor force.
74
81st Annual Report, 1994
Reserve can do its part to prolong and
enhance this favorable performance of
the economy by continuing to set monetary policy in accord with the long-run
objective of price stability. An environment of stable prices is a necessary
condition for attaining the maximum
sustainable growth of productivity and
living standards. However, the outcome
for the economy will also depend on
government policy in other areas. In this
regard, the Congress and the Administration can help ensure that the nation's
economy reaches its full potential by
working to keep the federal budget deficit on a downward course, by promoting
an open world trading system, and by
adopting regulatory policies that preserve the flexibility of labor, product,
and financial markets and minimize the
costs imposed on the private sector.
The Performance of
the Economy in 1994
hours worked, and the civilian unemployment rate fell further. The indicators
of spending, although less robust on balance than those for the labor market,
still point to a sizable increase in economic activity.
Inflation trends remained favorable
over the first half of this year, with the
consumer price index rising at an annual
rate of only 2!/2 percent over the period.
Inflation has been damped by the
healthy uptrend in productivity—which
has offset much of the increase in compensation rates—and by the minimal
rise in non-oil import prices. In addition,
the decline in crude oil prices through
this spring held down retail energy
prices. However, oil prices have since
moved up considerably, and the rise
likely will boost retail energy prices
over the summer. Prices have also risen
substantially for many industrial materials, but these increases have not had
a noticeable effect on the prices of finished goods.
The economy entered 1994 with a considerable amount of forward momentum. Severe winter weather disrupted
activity, but real GDP still posted a solid
gain in the first quarter, amounting to
Vh percent at an annual rate. As had
been the case during 1993, domestic
private-sector spending was robust in
the first quarter, with consumer purchases of motor vehicles and investment
in business equipment both increasing at
double-digit annual rates. At the same
time, the ongoing cutbacks in defense
spending depressed total purchases by
the federal government, and the sluggish economic performance of some
major foreign industrial countries held
down the growth of U.S. exports.
The data in hand suggest that real
GDP increased substantially further in
the second quarter. In the labor market,
gains in payroll employment and longer
workweeks appreciably boosted total
The Household Sector
Household balance sheets strengthened
over 1992 and 1993, and the setback in
stock and bond markets this year has not
made a major dent in the sector's financial position. In addition, real income
has continued to trend up at a healthy
pace. Averaging through the monthly
ups and downs, consumer spending
appears to have posted a sizable
advance over the first half of 1994, with
most of the gain coming in the first
quarter. Higher mortgage rates have
cooled the growth of housing demand,
but the level of activity remains strong.
In the first quarter of 1994, real consumer spending rose at an annual rate of
about 5lA percent, building on the large
increases registered during the second
half of 1993. Real outlays for motor
vehicles were particularly strong in the
Monetary Policy Report, July
first quarter. Spending on other durable
goods, which had advanced robustly
during most of 1993, rose only slightly
in the first quarter, whereas outlays for
nondurable goods and services remained
on a solid uptrend. The severe weather
that gripped much of the country this
winter left its mark on the monthly pattern of outlays but appears to have had
little effect on the level of consumer
spending for the first quarter as a whole.
Outlays for furniture and appliances,
clothing, and food all tumbled in January but then rebounded smartly over the
remainder of the first quarter. This pattern was reversed for energy consumption, which soared in January and then
turned down.
The growth of real consumer spending appears to have slowed in the second quarter, with much of the deceleration reflecting declines in two areas.
First, consumer outlays for motor vehicles softened in April and May, and
the level of spending probably did not
move up much, if at all, in June. However, underlying consumer demand has
remained firmer than the recent spending data would suggest, as vehicle sales
in the second quarter were held down by
shortages of popular models. Second,
household use of electricity and gas for
the second quarter as a whole likely will
turn out to have been below the weatherboosted level of the first quarter. Apart
from these two categories, real consumer outlays evidently posted a moderate increase in the second quarter.
On a pre-tax basis, real income
growth has been brisk over the past year,
buoyed by a considerable gain in wages
and salaries, a sharp increase in the net
income of nonfarm proprietorships, and
an upturn in interest income. However,
the higher personal income taxes
imposed on upper-bracket taxpayers by
the 1993 Budget Act have cut into the
growth of disposable income. All told,
75
the average level of real disposable
income in April and May was about
3Vi percent above the level during the
same period in 1993. This rise in real
income was slightly smaller than the
advance in real consumer spending over
the same time span.
According to preliminary estimates
(which are subject to potentially large
revisions), the personal saving rate averaged a bit less than 4 percent during the
first five months of this year—quite a
low rate by historical standards. The
level was so low partly because of a
one-time charge against income to
account for the wealth lost in the Los
Angeles earthquake. In addition, the
higher taxes due on returns filed this
spring probably pushed down the
amount of personal saving. Still, a good
part of the decline in the saving rate
from the 5 percent level prevailing two
years ago reflects a burst of spending on
motor vehicles and other durable goods.
Such a decline in the saving rate often
accompanies cyclical surges in outlays
for consumer durables, which are
counted as consumption in the national
accounts; in reality, much of the initial
expenditure on durables is a form of
saving, as these goods are assets that
provide a flow of services for years to
come.
Household balance sheets have remained relatively strong despite the
lower prices in financial markets this
year. The total value of household
assets—which includes not only financial assets, but also housing and consumer durables—rose moderately on
balance over the year ended in the first
quarter of 1994. Moreover, survey data
indicate that households, in the aggregate, continue to view their current and
expected financial positions in a favorable light. This greater sense of financial
security, and the attendant willingness to
take on debt, help explain the rapid
76
81st Annual Report, 1994
growth of consumer credit since the
middle of last year. Other measures of
household financial conditions also
remain positive. Debt-service burdens,
measured as a percentage of disposable
income, held about steady in the first
quarter at a level well below the peak
reached several years ago. Delinquency
rates for consumer loans and home
mortgages were little changed in the first
quarter, with most measures of delinquencies holding near their lowest
levels in a decade or more.
The market for single-family housing
has softened in recent months. Starts of
single-family homes, which strengthened over the course of 1993, plummeted in January and remained low in
February. Much of this sharp decline
can be attributed to adverse weather.
With the return to more normal weather
in the spring, starts did recover, but the
rebound was relatively weak, leaving
the May level below that in the fourth
quarter of last year. Sales of both new
and existing homes in May also were
down from their respective fourthquarter levels. In addition, consumer
attitudes toward homebuying have deteriorated somewhat since late winter.
Nonetheless, the level of sales and
building activity in the single-family
market has remained fairly high. Even
with the rise in mortgage rates, new
homes continue to be quite affordable
by the standards of recent decades. A
simple measure of affordability is the
monthly payment on a fixed-rate mortgage for a new home having a given set
of attributes, divided by average household income. By this measure, the cost
burden of homeownership in the second
quarter of this year was lower than at
any time from mid-1973 to early 1992.
Moreover, in response to the rise in
long-term rates, an increasing share of
households have financed home purchases this year with adjustable-rate
mortgages (ARMs); the lower initial
rates on ARMs allow some households
to obtain financing when they would
be unable to qualify for a fixed-rate
mortgage. As another support for
housing demand, the strong labor market in recent quarters has lessened
the perceived likelihood of job loss,
encouraging many households to
assume the financial commitment of
homeownership.
Starts of multifamily housing units
this year have picked up from the
extraordinarily low levels registered
from 1991 through 1993. This rise likely
reflects an improving balance between
demand and supply in some local markets. Lenders have shown a greater willingness to fund multifamily projects,
owing not only to the firming real estate
market, but also to their own improved
financial conditions; equity investors—
including real estate investment trusts—
also have been participating more
actively in this market. However, for the
nation as a whole, vacancy rates for
multifamily rental units remain high and
rent increases continue to be relatively
small, suggesting that a major recovery
in this sector is unlikely in the near
term.
The Business Sector
Developments in the business sector
remained favorable during the first half
of 1994. Apart from losses from the
Los Angeles earthquake, earnings have
continued to be strong, and the repair of
balance sheets over the past few years
has improved the access to credit for
many businesses. Fixed investment has
moved up further, supported by widespread efforts to boost productivity.
Business output, excluding that in the
farm sector, continued to increase at a
brisk pace in the first quarter. In real
terms, the gross domestic product of this
Monetary Policy Report, July
sector rose in the first quarter at an
annual rate of 4lA percent, about the
same rate of advance recorded in
1993. Focusing on the industrial
sector—for which output data are
available on a more timely basis—
production advanced at an annual rate
of 5 percent over the first half of 1994,
with the strongest gains registered early
in the year. This pattern largely reflects
developments in the motor vehicle
industry, where production rose sharply
from last August to February of this
year in response to strengthening demand and dwindling inventories. Since
February, assembly rates have moved
lower on a seasonally adjusted basis, as
capacity constraints have hindered automakers from achieving their normal seasonal gains. Excluding motor vehicles
and parts, industrial production continued to advance strongly in the second
quarter.
After having risen sharply over 1993,
the profits of U.S. corporations from
current operations fell back in the first
quarter of 1994. However, this decline
in economic profits appears to have
been due entirely to the effects of the
Los Angeles earthquake and the severe
weather last winter; these events greatly
increased the volume of claims against
insurance companies and also resulted
in uninsured damage to plant and equipment. Abstracting from these losses,
pre-tax economic profits in the first
quarter rose slightly from the already
high fourth-quarter level. Profits of nonfinancial corporations have been boosted
by the strong growth in sales and by
continued tight control of costs. For
financial corporations, domestic profits
surged over 1993 and remained high in
the first quarter (after adjustment for the
jump in insurance payouts), buoyed by
the relatively wide margin between their
cost of funds and the interest rates
earned on their assets.
77
Real outlays for business equipment
continued to rise rapidly in the first
quarter, increasing about 17 percent at
an annual rate. This was the eighth consecutive quarter that showed a doubledigit advance. Monthly data through
May on orders and shipments of business capital goods point to further sizable gains in real equipment purchases.
The increase in equipment investment
this year has been quite broad, as firms
have attempted to cut costs and improve
product quality through the use of more
advanced technology. Real outlays for
computers and related devices climbed
at an annual rate of 20 percent in the
first quarter, reaching a level more than
double that of three years earlier. Businesses have invested heavily in computers to take advantage of the increasingly
powerful equipment available at everlower prices. Outlays for industrial and
other types of machinery, which turned
up in the middle of 1992, continued to
expand at a solid pace early this year.
Business spending for motor vehicles
also rose substantially in the first quarter, led by another large increase in
purchases of trucks; these purchases
have likely been bolstered by improvements in the safety and efficiency of
new models and by the increased
demand for shipping to support just-intime inventory management. In contrast
to this widespread strength in investment, domestic purchases of commercial aircraft dropped in the first quarter
to a very low level, reflecting the excess
capacity in the airline industry.
Business investment in nonresidential
structures fell sharply in the first quarter
after having posted a moderate gain over
1993. Severe weather was responsible
for the skid in activity during January
and February. Construction spending
then recovered during the spring, leaving the level in May about the same as
that registered in December of last year.
78
81st Annual Report, 1994
The absence of growth, on net, over this
period might suggest that the sector has
lost some momentum, quite apart from
the effects of weather. However, the
monthly construction data are prone to
large revisions, which limits the usefulness of the initial estimates. Two leading indicators of private nonresidential
construction—permit issuance and
contract awards—remained on a choppy
uptrend through May.
Looking at the major components
of nonresidential construction, some
progress has been made in reducing the
huge stock of unoccupied office space,
and the plunge in prices for office properties appears to have abated. Nonetheless, the national vacancy rate remains
high by historical standards, and starts
of new office buildings continue to be
limited. In contrast, outlays for commercial structures other than offices moved
up smartly last year. Financing for these
projects has become more readily available, and the proliferation of large-scale
discount stores in suburban locations has
been a major source of construction
activity. In the industrial sector, utilization rates have risen considerably over
the past year, but little sign has yet
emerged of a significant rise in construction of new plants. Public utilities,
according to surveys taken this spring,
anticipate only a small rise in investment this year, in part because of the
perceived difficulty in gaining approval
for rate hikes and because of new rules
requiring utilities to purchase power
generated by other sources. Meanwhile,
real investment in petroleum drilling
structures fell somewhat in the first
quarter, to a level about unchanged from
that of a year earlier.
Nonfarm inventory investment during
the first five months of 1994 picked up
substantially from the pace of late last
year. Part of the pickup reflected efforts
to replenish stocks at automotive deal
ers, which had been depleted during the
third quarter of 1993. In addition, the
rate of inventory accumulation increased
this year for producers of machinery,
likely in response to the robust orders
for these goods. At the wholesale level,
stocks of machinery and other durable
goods increased considerably during the
spring; the pace of stockbuilding in the
retail sector spurted at about the same
time.
In the farm sector, output last year
was depressed by floods in the Midwest
and by drought conditions farther east.
As a result, inventories of some major
field crops—principally corn and
soybeans—currently are unusually low.
This year, changes in government subsidy programs encouraged farmers to
increase their planted acreage, and
favorable weather during the spring
facilitated rapid planting. Although the
harvest is still several months away,
field conditions appear to be reasonably
good at present.
Farmers hurt by bad weather last year
suffered income losses, and the financial
positions of some may have weakened.
Nonetheless, the financial condition of
the farm sector as a whole appears to be
sound. Delinquency rates for farm loans
at the end of 1993 were quite low compared with the experience of the past
decade, and land values rose noticeably
last year across most of the farm belt.
Reflecting these favorable conditions,
investment in farm machinery has been
relatively strong this year.
The Government Sector
Federal purchases of goods and
services—the part of federal spending
included in gross domestic product—
fell at an annual rate of 5lA percent in
real terms in the first quarter. Real federal purchases have been trending down
since the first half of 1991, and the level
Monetary Policy Report, July
of outlays in the first quarter of this year
stood roughly 12 percent below the peak
reached three years earlier. This decline
has been driven by the ongoing reduction in military outlays. Real defense
spending plunged at an annual rate of
about 15 percent in the first quarter after
having declined more than 9 percent
over 1993. Real nondefense outlays
jumped in the first quarter, more than
reversing the drop in late 1993; however, given the appropriations for nondefense spending in the fiscal year 1994
budget, these outlays are not likely to
increase much further in the near term.
As measured in nominal terms in the
unified budget, total federal expenditures during the first eight months of
fiscal 1994—the period from October
through May—were only 2l/z percent
above the level during the comparable
part of fiscal 1993. Although the drop in
defense spending has figured importantly in the overall restraint on outlays,
other factors have contributed as well.
First, substantial gains in income and
the expiration of the emergency unemployment compensation program have
tempered the growth of income security
payments. Second, net interest payments
on the national debt have been about
flat thus far in fiscal 1994, as a further
decline in the average interest rate paid
on federal debt has offset the effect of
increases in the stock of debt. In addition, farm subsidy payments have fallen
because of the rise in crop prices. The
main stimulus to federal outlays still
comes from spending on Medicare,
Medicaid, and other health programs.
Health-related outlays during the first
eight months of fiscal 1994 were up
10 percent from the same period in fiscal 1993; this increase, although about
the same as that during fiscal 1993, is
considerably smaller than the increases
registered during the preceding three fiscal years.
79
The growth of federal receipts was
strong during the first eight months
of fiscal year 1994, with all major categories posting solid gains. The 93A percent rise in receipts over the comparable part of fiscal 1993 exceeded the
increase in nominal GDP by a wide
margin. Receipts from corporate
income taxes have been especially
robust, reflecting the upswing in corporate profits and various provisions
of the 1993 Budget Act. Receipts from
individual income and social insurance taxes have also been boosted by
the tax hikes in the 1993 act. In addition, revenues from excise taxes thus
far in fiscal 1994 are up markedly
from the year-earlier level, in part
because of the higher tax on transportation fuels that became effective last
October.
As a result of the slow growth in
federal outlays and the robust rise in
receipts, the federal budget deficit narrowed during the first eight months of
fiscal 1994. The deficit, as measured in
the unified budget, totaled $165 billion
during this period, down from the
$212 billion deficit recorded over the
same part of fiscal 1993.
In contrast to the improved budget
picture at the federal level, the fiscal
pressures facing state and local governments have not abated much. It is true
that for most states, receipts during the
past year have matched or exceeded projected levels, as economic growth turned
out to be somewhat more buoyant than
anticipated. Even so, as measured in the
national income accounts, the deficit
(net of social insurance funds) in state
and local operating and capital accounts
has remained large. The $57 billion
deficit during the year ended in the first
quarter of 1994 amounted to 6!A percent
of the sector's expenditures, about the
same percentage as in the preceding
three years.
80
81st Annual Report, 1994
State and local outlays have contin- The External Sector
ued to rise at a fairly rapid pace despite Since December 1993, the tradeefforts to curb spending. Over the weighted foreign exchange value of the
year ended in the first quarter of 1994, dollar has declined about 8 percent relathese outlays increased 63A percent in tive to the currencies of the other memnominal terms, about 1 percentage point bers of the G-10. In terms of the currenfaster than the rise in nominal GDP. cies of a wider group of major U.S.
Transfer payments to individuals have trading partners, the value of the dollar
remained the fastest growing compo- has dropped roughly 4 percent since last
nent of state and local spending, reflect- December, when adjusted for changes in
ing large increases for Medicaid. consumer prices here and abroad. TakAlthough the growth in Medicaid ing a longer view, the exchange value
spending has slowed markedly from of the dollar—adjusted for these price
the 30 percent jump during 1991, these changes—has held within a rather naroutlays still rose 13 percent over the row range since the end of 1992 despite
year ended in the first quarter. In addi- the decline this year. (See the final section, state and local governments remain tion of this report for a discussion of
under pressure to fight crime, to repair developments in foreign exchange
aging infrastructure, and to meet the markets.)
needs of a growing school-age populaEconomic activity appears to be
tion. Boosted by higher spending on strengthening in the major foreign
highways and schools, outlays for con- industrial countries. In Canada and the
struction rose almost 7 percent in real United Kingdom, where recovery has
terms over the year ended in the first been under way for some time, real GDP
quarter. This rise occurred even though continues to expand at a fairly steady
adverse weather depressed construc- pace. Continental European countries,
tion activity early this year, dragging most of which were in recession during
down total state and local purchases in 1993, are showing signs of a turnaround.
the first quarter in real terms. Apart from In western Germany, real GDP rose
transfer payments and construction moderately in the first quarter; although
spending, state and local outlays— indicators suggest that growth may have
mainly compensation for employees— slowed somewhat in the second quarter,
have continued to grow at a relatively economic activity continues to move
slow pace.
back toward pre-recession levels. There
The receipts of state and local gov- is also some evidence of a turnaround in
ernments moved up about 6V2 percent Japan: After no growth on net in 1993,
in nominal terms over the year ended real GDP moved up strongly in the first
in the first quarter, also outpacing quarter; data for the second quarter point
the growth in nominal GDP. As to continued, albeit slower, expansion.
noted earlier, this outcome was someThe level of real GDP remains subwhat better than most states had stantially below potential in all the
anticipated. In response, tax cuts are major foreign industrial countries, and
now on the agenda in about one-third inflation generally has continued to
of the states. However, most of these slow. In western Germany, the twelveproposals are fairly narrow in scope month change in the consumer price
and, in the aggregate, would have index was 3 percent in June, down from
only a small effect on expected more than 3!/2 percent at the end of
revenues.
1993. In Japan, consumer prices rose
Monetary Policy Report, July
less than 1 percent over the twelve
months ended in June, an even more
modest increase than that recorded over
the twelve months of 1993. Jobless rates
remain very high in France and drifted
somewhat higher in western Germany
over the first half of this year. The unemployment rate in Japan is essentially
unchanged from its level at the end of
1993; the number of job offers per applicant, a more sensitive indicator of labor
market conditions in Japan, also has
shown no improvement since the end of
last year. In contrast, in both the United
Kingdom and Canada, the unemployment rate has continued to edge down
from the peaks reached in mid-1993.
So far this year, growth in the major
developing countries appears to have
slowed slightly, on balance, from its
rapid pace in 1993. The growth of real
output in China has moderated from
its previously very strong—and
unsustainable—pace in response to
tighter macroeconomic policy, while
real growth in the other Asian developing countries has remained robust on
average. Real output in Mexico has
rebounded somewhat this year after having declined during the second half of
1993. The rebound appears to have been
due in part to the somewhat more expansionary fiscal policy in Mexico and to
the ratification of the North American
Free Trade Agreement, which resolved
uncertainty that had held down investment activity during 1993.
After having surged in the fourth
quarter of last year, real U.S. exports of
goods and services fell back in the first
quarter of this year; however, they
remained about 43A percent above the
year-earlier level. Preliminary data indicate that real exports in April were
somewhat above the first-quarter average. The uptrend largely reflects a boom
in sales of capital goods; for other
goods, and for services as well, exports
81
have risen only slightly over the past
year. Looking across our major trading
partners, exports to Canada and Latin
America remained on an upward path
through the first quarter. Although
exports to Asia dropped back in the first
quarter, they also remain on a strong
upward trend. Exports to continental
Europe continued to expand sluggishly
through the first quarter.
Real imports of goods and services
posted another sizable increase in the
first quarter, reflecting the strength in
U.S. economic activity. Over the year
ended in the first quarter, real imports
jumped more than 11 percent, and the
level of imports in April stood somewhat above that in the first quarter.
Imports of capital goods and industrial
supplies have continued to be especially
robust. Prices of non-oil imports rose
relatively little over the twelve months
ended in May, as inflation abroad generally remained subdued and the dollar's
foreign exchange value against the currencies of the other G-10 countries was
little changed on net over this twelvemonth period.
The nominal trade deficit on goods
and services widened to $97 billion (at
an annual rate) in the first quarter, significantly larger than in any recent quarter,
and remained at about that level in
April. Net investment income showed a
small deficit in the first quarter, somewhat weaker than the average performance in 1993. The current account
deficit widened to $128 billion (at an
annual rate) in the first quarter, compared with $104 billion for all of 1993.
Recorded net capital inflows for the
first quarter about balanced the current
account deficit. Foreign official inflows
slowed, particularly on the part of some
developing countries that had substantial accumulations of reserves in 1993.
Net inflows of private capital into the
United States picked up in the first
82
81st Annual Report, 1994
quarter of 1994. Private foreign net purchases of U.S. securities were strong, as
foreign investors added to their holdings
of U.S. government securities, corporate
bonds, and stocks. U.S. net purchases of
foreign securities also remained very
high in the first quarter. Banking offices
in the United States reported substantial inflows, as foreign-chartered banks
in particular continued to substitute borrowing abroad for funding in the United
States. Foreign branches of U.S. banks
also became net providers of funds to
their U.S. offices. Direct investment
inflows and outflows were spurred by a
revival of mergers and acquisitions. U.S.
direct investment abroad continued at
near-record levels; foreign direct investment in the United States was also significant, although far below the peaks
reached in the late 1980s.
Labor Market Developments
The labor market continued to
strengthen in the first half of 1994. Nonfarm payroll employment increased at
an average rate of about 285,000 per
month during the period, up from the
average monthly gain of roughly
200,000 during 1993. These increases
brought the total rise in payrolls to about
5 million since the beginning of the
current expansion in early 1991.
The job gains this year have been
spread across most major sectors of the
economy. In manufacturing, employment turned up last October, and a
choppy advance continued during the
first half of 1994. Hiring has been concentrated in two industries that have
experienced robust sales growth,
machinery and motor vehicles; payrolls
also have expanded in industries that
supply materials and parts to these producers. In contrast, employment in
defense-related industries has continued
to drop this year. Meanwhile, construc
tion employment, held down early in the
year by the severe weather, moved up
sharply in March and April and rose
somewhat further in May and June.
Considerable employment growth has
also taken place this year in the serviceproducing sector. Continuing the pattern
of recent years, employment in business
services rose at a rapid clip in the first
half of 1994. Employment in health services has remained on a fairly brisk
uptrend, and job gains have been widespread in other service industries.
Another area of strength has been
wholesale and retail trade, where the
sizable employment gains recorded during 1993 and again this year contrast
with the lack of job growth on net over
the preceding four years.
In addition to boosting the pace of
hiring, employers have continued to rely
on a longer workweek to increase aggregate labor input. Indeed, in April, the
workweek of production or nonsupervisory workers in manufacturing
reached a record high for the post-World
War II period; it has since edged off
only slightly. Before this expansion, the
typical pattern had been for the workweek to rise as the recovery got under
way but to drift back down with the
eventual pickup in hiring.
Firms have also shown an increased
preference for using temporary workers.
In the employment data, these workers
appear on the payrolls of personnel
supply agencies (a component of business services), where employment
growth continued to be extremely fast
in the first half of 1994. Although these
agencies represent only about 2 percent of total payroll employment, they
accounted for more than 15 percent of
the total rise in employment in 1993 and
for nearly that share so far this year.
Manufacturing firms in particular have
increased their use of temporary workers. Both the growing employment of
Monetary Policy Report, July
temporary workers and the lengthening
of the workweek may be motivated, in
part, by the desire to avoid the rising
costs of health insurance and other
fringe benefits, which typically are
granted to new permanent workers.
Moreover, given the greater costs now
associated with hiring and firing
employees, such behavior may be a
response to uncertainty about future
staffing needs.
In January, the introduction of the
redesigned household survey, along with
the incorporation of population estimates from the 1990 census, created
a break in the household measure of
employment, the civilian unemployment
rate, and numerous other series. The
decline in the unemployment rate from
January to June of 6.7 percent to 6 percent provides additional evidence of
strong labor demand this year. Unemployment rates by region have generally
moved lower since January, and the
dispersion across regions also has narrowed; the declines since January have
been largest in California and other
states in the Pacific region and in
New England.
The strength in hiring has not drawn
many workers into the civilian labor
force. In fact, between January and
June the labor force contracted a bit,
pushing down the labor force participation rate—which measures the percentage of the working age population
that is either employed or looking for
work. The participation rate has changed
little on net during the current expansion, in contrast to the upswing that
typically occurs with a strengthening of
labor demand. The reasons for this
departure from the usual pattern are not
entirely clear. It appears that more
young women are opting for activities outside the labor market. Also,
according to survey data, many individuals still perceive jobs as hard to find,
83
which may be limiting their desire to
search for employment.
Output per hour in the nonfarm business sector rose at an annual rate of
1XA percent in the first quarter after having advanced at a far more rapid pace
over the second half of 1993. Averaging
through these movements, labor productivity rose about 2Vi percent over the
year ended in the first quarter of 1994,
roughly in line with the increases during
the first two years of the current expansion. Most of the productivity gain over
this three-year period likely reflects the
normal cyclical upswing that accompanies the strengthening of output after
a recession. Nonetheless, there does
appear to have been some speedup in
the trend rate of productivity growth
from the relatively slow pace in the
1970s and 1980s.
The growth in labor compensation
remained subdued early this year. The
employment cost index (ECI) for private industry—a measure that includes
both wages and benefits—rose VA percent over the twelve months ended in
March 1994, a shade below the increase
registered over the preceding twelve
months. The cost of employee benefits
decelerated quite a bit over the past
year, largely because of more moderate
increases in employer costs for health
insurance and workers' compensation.
In contrast, wage increases have held
fairly stable. The ECI for wages and
salaries rose almost 3 percent over the
twelve months ended in March, a figure
at about the midpoint of the twelvemonth changes recorded over the past
two years. Separate data through June
on average hourly earnings of production or nonsupervisory workers also
show no significant change in the rate of
wage inflation. With the rise in labor
compensation largely offset by improvements in productivity, unit labor costs in
nonfarm business rose only a little more
84
81st Annual Report, 1994
than xh percent over the year ended in
the first quarter of 1994.
Price Developments
Inflation slowed slightly further during
the first half of 1994. The CPI excluding
food and energy—a measure of the
underlying trend of inflation—rose
3 percent during the period, down a bit
from the 3!/4 percent increases recorded
in 1992 and 1993. "Core" inflation has
not been this low for an extended period
since the early 1970s, when wage and
price controls were in place; apart from
that episode, the core inflation rate over
a twelve-month span was last below
3 percent in 1966. Food prices have
risen only slightly this year, and energy
prices have been flat on net, holding the
increase in the total CPI over the first
half of the year to 2x/i percent at an
annual rate. Price pressures have been
evident in the markets for raw materials,
but these increases have not had an
obvious effect on inflation at the retail
level.
The news on food prices so far this
year has been quite favorable. After having risen at close to a 4 percent annual
rate during the second half of last year,
the CPI for food edged up at an annual
rate of less than 1 percent over the first
half of 1994. This moderation largely
reflects a decline in the prices of fruits
and vegetables over the first few months
of the year, which retraced much of the
run-up that occurred over the second
half of 1993. In addition, plentiful supplies of beef and pork pushed down
retail meat prices a bit on balance over
the first half of 1994. Prices of other
foods—which represent about twothirds of total food in the CPI—
increased at an annual rate of 2lA percent during the first half of the year.
Looking ahead, the path for retail food
prices will depend heavily on the out
come of this year's harvest. As discussed earlier, planting proceeded fairly
smoothly this spring, and crops generally were in good condition as of midJuly.
The CPI for energy was about
unchanged on balance over the first half
of 1994, but this measure has yet to
reflect the rise in crude oil prices since
March. As the year began, consumer
energy prices were still on a downward
path, owing to the persistent oversupply
of crude oil in world markets. Energy
demand then soared when the frigid
weather hit in January and February,
depleting inventories of fuel oil, gasoline, and natural gas. In response, the
CPI for energy jumped in February and
rose slightly further in March, but most
of this increase was reversed in April
and May. Quite apart from any effects of
abnormal weather, world oil markets
have tightened since March, boosting
the price of crude oil by as much as
$6 per barrel. This increase appears to
have resulted from the expectation of
improved economic conditions—and
hence stronger demand—in Western
Europe and Japan, combined with flat
OPEC production and supply disruptions in the North Sea and other areas.
Retail energy prices were little changed
in June, but the higher costs of crude oil
are likely to be passed through to the
retail level over the summer.
The CPI for commodities excluding
food and energy increased at an annual
rate of 2!/2 percent over the first half of
1994, a somewhat faster rise than during
1993. However, the increase last year
was held down by a huge drop in the
price of tobacco products. Excluding
tobacco as well as food and energy,
goods prices rose at an annual rate of
2lA percent during the first half of this
year, about the same rate of advance as
in 1993. Price increases for most consumer commodities have been modest
Monetary Policy Report, July
85
this year, owing in part to the very lim- June, after an increase of \Vi percent
ited increases in the prices of imported over the preceding twelve months.
In contrast, inflation pressures congoods. The only major area in which
prices have clearly accelerated is motor tinue to be evident in the markets for
vehicles. Reflecting strong demand and raw commodities. With the exception of
the weakness of the dollar vis a vis the steel scrap, prices of industrial metals
yen, the CPI for new motor vehicles have moved up from their lows last fall,
rose 43/4 percent over the first half of in some cases quite substantially. Lum1994, up from the VA percent increase ber prices, which have swung widely
over the past few years, have been at
during 1993.
Inflation for consumer services other relatively high levels for most of this
than energy has continued to trend year. Prices of other raw materials have
lower. During the first half of the year, been firm as well. As a summary meathe CPI for this aggregate rose at sure of these movements, the PPI for
an annual rate of 3lA percent, after crude materials excluding food and
increases of nearly 4 percent in 1992 energy rose about 7 percent over the
and 1993 and AVi percent in 1991. twelve months ended in June. However,
Shelter costs—which represent about crude materials constitute a relatively
half of non-energy services—have con- small part of the value of finished goods,
tinued to rise at a relatively subdued and price increases for these inputs usurate, while price increases in a variety of ally have a limited effect on the prices of
other areas have slowed. Indeed, the CPI finished goods in the absence of more
for medical care services rose only general cost pressures.
5 percent over the year ended in June,
Expectations of inflation appear to
the smallest twelve-month change in this have changed little on net since the end
series in twenty years. Tuition costs, of 1993. According to the survey of
which posted increases of 8 percent to households conducted by the Survey
9 percent annually for several years, Research Center of the University of
have decelerated as well, rising 63/4 per- Michigan, the mean expected increase
cent over the twelve months ended in in the CPI over the coming year rose
June.
from 33/4 percent in the fourth quarter of
The producer price index (PPI) for 1993 to AVi percent in March and April;
finished goods excluding food and however, the readings for May through
energy, which covers domestically pro- early July dropped back to an average
duced consumer goods and capital of about 4 percent. In the Conference
equipment, rose only Vi percent over the Board survey of households, the
twelve months ended in June 1994. As expected rate of inflation over the comwith the CPI, this measure of inflation ing year has held fairly steady at
has been held down by the plunge in 4!/4 percent since last November. Expectobacco prices; excluding tobacco, the tations of inflation over longer periods
P/4 percent rise over the twelve-month also have not changed much on balance
period was about the same as that over this year. In the University of Michigan
the preceding twelve months. At earlier survey, the expected rate of CPI inflastages of processing, price increases tion over the next five to ten years
have remained fairly small on balance. jumped in March but has since retraced
The PPI for intermediate materials the increase. Finally, the June 1994
excluding food and energy rose 2 per- survey of professional forecasters concent over the twelve months ended in ducted by the Federal Reserve Bank of
86
81st Annual Report, 1994
Philadelphia produced the same expectation of inflation over the coming ten
years—3.5 percent—as did the survey
taken last December.
Monetary and Financial
Developments in 1994
Interest rates have increased substantially in 1994. Short-term rates started
the year at the unusually low levels that
prevailed throughout 1993, but they
have subsequently risen in response to
the Federal Reserve's monetary policy
actions and market expectations about
future actions. The Federal Reserve has
moved away from its previously very
accommodative policy posture in four
steps, which lifted the federal funds rate
a total of VA percentage points. Other
short-term rates increased commensurately, and banks raised their prime lending rate, also by 1XA percentage points.
Longer-term interest rates have risen
about VA to l3/4 percentage points.
These rates have been boosted by
stronger-than-expected economic
growth, market concerns about higher
inflation, and actual and anticipated
tightening moves. In addition, a shift in
the financial setting, from one marked
by yields that were stable or declining to
one characterized by rising rates, was
accompanied by greater market volatility and a reevaluation of the risks of and
returns on long-term securities. Investors seemed to become more uncertain
about the future path of interest rates,
and the resulting portfolio shifts and volatility have contributed to the upward
pressure on long-term yields at times.
Despite the rise in interest rates, overall borrowing has remained fairly
strong. The composition of private borrowing, however, has been affected by
financial market conditions. Businesses,
in particular, have reduced their issuance of long-term debt and stepped up
their use of bank loans. Nonetheless,
overall bank lending has increased only
slightly, as growth in real estate loans
has slowed. The expansion of bank
securities holdings, after adjustment for
certain accounting rule changes, has
eased slightly, and bank credit growth
has remained close to the pace recorded
last year. Higher short-term market
interest rates have also restrained the
monetary aggregates. Growth of the
broader aggregates has slowed somewhat from last year, and growth of Ml
has decelerated substantially.
Since December 1993, the dollar has
declined about 10 percent against the
German mark and about 11 percent
against the Japanese yen, although it has
appreciated against the Canadian dollar.
Over the same period, stronger growth
prospects abroad as well as portfolio
adjustments by globally diversified
investors have lifted long-term interest rates in the G-10 countries about
1 Vi percentage points, similar to the rise
in U.S. longer-term yields. By contrast,
foreign short-term rates, which largely
reflect the thrust of monetary policy
in individual countries, are about
unchanged on a trade-weighted basis;
rates have declined substantially in
Germany and a number of continental
European countries, have changed little
in Japan, and have risen more in Canada
than in the United States. Dollar weakness against the yen and mark was
intense from time to time and seemed to
reflect, in part, difficulty in resolving
trade tensions, changing expectations
about macroeconomic developments in
Japan and Germany, and investor concerns that U.S. inflation prospects were
no longer improving while inflation
abroad seemed likely to continue to
move lower. On three occasions when
conditions warranted, the U.S. Treasury
and the Federal Reserve intervened to
buy dollars.
Monetary Policy Report, July
The Course of Policy
and Interest Rates
At the beginning of 1994, financial markets had been characterized for several
years by falling and then persistently
low short-term interest rates, declining
long-term rates, and unusually wide
spreads between long- and short-term
yields. Moreover, the volatility of bond
prices had been quite low by recent historical standards. In this environment,
investors had taken on riskier assets in
pursuit of higher returns. For example,
small investors had switched out of
low-yielding, but low-risk, assets such
as deposits and money market mutual
funds and into such investments as bond
and equity mutual fund shares.
In February, when the Federal Open
Market Committee gathered for its first
meeting of the year, the available data
suggested that the economic expansion
was solid and self-sustaining. Spending
had picked up considerably, partly reflecting declines in long-term interest rates
and the improved financial condition of
businesses and households. Short-term
interest rates had been at historically
low levels for some time, measured both
absolutely and relative to inflation, and
banks and other lenders had been loosening their terms and standards for
extending credit. In this environment,
the Committee was concerned that keeping policy so accommodative risked elevating demands on productive capacity
to the point where inflation pressures
might emerge. Even though current
inflation readings were favorable, delaying a policy move until these indicators
signaled an actual acceleration of prices
would permit an inflationary process to
become embedded in the economy. In
that event, larger and possibly disruptive
actions eventually would be needed to
bring inflation back under control.
Against this backdrop, the Committee
decided to take steps toward eliminating
87
the considerable degree of monetary
accommodation that had prevailed for
some time.
When discussing how to implement
this decision, the Committee considered
the possible reaction of financial markets. Market participants, while anticipating that interest rates would rise at
some point, generally did not expect a
tightening of policy at this meeting. The
Committee was concerned that the
capital losses engendered by the firming
action might unsettle many investors,
who had not faced a policy firming in
nearly five years and whose portfolio
choices in some cases seemed not to
anticipate the consequences of rising
rates. In these circumstances, the
response to the policy action might be
outsized, especially if a large adjustment
were made. Consequently, the Committee decided to initiate its move
toward a less accommodative stance
with a small step, although it thought
that additional firming steps likely
would be necessary in the months ahead.
The Committee instructed the Domestic Trading Desk to increase slightly
the degree of pressure on reserve positions and authorized the Chairman to
announce the action so as to avoid any
misinterpretation of its action or purpose. The tightening of reserve conditions pushed up the federal funds rate
about ]A percentage point, to a range
around 3 lA percent.
Although a policy firming in the
months ahead was built into the structure of market interest rates, the timing
of the move caught many market participants by surprise and, by itself, seemed
to precipitate a substantial shift in
expectations. When the move was followed by information indicating a much
stronger path for U.S. economic activity
than had been anticipated and by an
associated heightening of concerns
about inflationary pressures, short- and
88
81st Annual Report, 1994
long-term interest rates moved sharply
higher throughout the remainder of the
winter. International developments—
such as trade tensions, improving economic prospects, rising long-term interest rates, and a declining value of the
dollar—also may have played a role in
elevating yields by raising investor concerns about price pressures in the United
States and about foreign investor appetite for dollar-denominated assets. Rates
were volatile on occasion, owing to
shifting perceptions about the future
course of economic and financial developments. Market participants generally
believed that the System's firming
action was the first of a series, but they
were unsure of the timing and cumulative magnitude of future policy steps.
This heightened uncertainty, as well as
the capital losses in the wake of the
firming action, prompted market participants to reduce their risk exposure
by attempting to shorten the maturities
of their investments and by trimming
the degree to which positions were leveraged. They sold long-term assets
denominated not only in dollars but in
other currencies as well. This rebalancing of portfolios contributed to sharp
rate swings and may have exacerbated
the upward pressure on long-term interest rates, both in the United States and
abroad.
When the Federal Open Market Committee convened in mid-March, the
evidence suggested that the expansion
of economic activity remained robust.
There was a small risk that the weakness
and volatility in financial markets might
have significantly affected household
and business confidence and spending.
However, the Committee believed that,
on balance, its policy stance still was
overly accommodative and likely to promote inflationary pressures. It therefore
decided to continue the process begun in
February to remove the excess degree of
monetary accommodation and, in light
of recent financial market conditions,
chose to take another small step. The
resultant increase in reserve pressures
lifted the federal funds rate lA percentage point, to about Vh percent.
Data released over the next several
weeks indicated considerable strength in
economic activity. Yields increased
across the maturity spectrum, with longterm rates rising especially sharply into
early April before settling back somewhat. On April 18, the Committee
reviewed the incoming data, as well as
the apparently more stable conditions in
financial markets, during a telephone
consultation. Following that review,
Committee members supported the
Chairman's decision to continue the process of reducing the degree of monetary
accommodation. Reserve pressures were
tightened slightly further, and the federal funds rate again rose lA percentage
point.
Yields continued to increase, on balance, through mid-May. Short-term rates
were affected by expectations of additional firming actions, while long-term
rates were subject to countervailing
forces. Incoming data that showed signs
of a possible cooling in the pace of the
economic expansion, favorable price
reports, and more stable trading conditions helped push bond yields down for
a time. Later, however, a falling dollar,
especially in late April and early May,
and the release of a stronger-thanexpected employment report caused
long-term yields to retrace some of the
earlier decline.
Despite the earlier firming actions,
real short-term rates were still fairly low
at the time of the May Committee meeting. The economy continued to exhibit
forward momentum, and a considerable
portion of the remaining margin of slack
in resource utilization had eroded. In
financial markets, many of the more risk
Monetary Policy Report, July
averse investors had made the initial
portfolio adjustments to a rising rate
environment. Under these circumstances, the Federal Reserve thought
that conditions warranted eliminating
much of the remaining degree of monetary stimulus. The Board of Governors,
therefore, approved an increase in the
discount rate to 3 V2 percent, from 3 percent, and the Committee directed the
Domestic Trading Desk to permit the
entire Vi percentage point rise to show
through to the federal funds rate, which
moved up to AXA percent. These moves,
along with the three earlier steps, were
judged to have substantially removed
the degree of monetary accommodation
that had prevailed throughout 1993.
Still, the Committee would have to
monitor incoming financial and economic data carefully to determine
whether additional policy adjustments
were needed to accomplish its objective
of maintaining favorable trends in inflation and thereby sustaining the economic expansion.
Long-term interest rates dropped
immediately following the May 17 policy moves, but since that time they have
retraced the decline. Market participants initially interpreted the Federal
Reserve's policy announcement as signaling that it had completed its firming
actions, at least for a while. In addition,
investors apparently viewed the actions
as reducing the degree and frequency of
tightening that might be needed in the
future. Long-term yields began to move
up in June, however, reflecting the further depreciation of the dollar, intermittent jumps in commodities prices, less
sanguine inflation reports, and rising
foreign long-term interest rates.
At the time of the July Committee
meeting, data on employment and hours
worked suggested that the economy was
still growing at a brisk rate, and there
remained a risk that an inflationary pro
89
cess could begin to build. However, data
on spending showed some signs of moderation, and growth of money and credit
had not picked up. In these circumstances, the Committee decided to maintain the existing degree of reserve pressure and await additional information to
judge the trajectory of the economy and
prices and the appropriateness of its
policy stance.
Credit and Money Flows
Since mid-1993, credit expansion has
picked up as the economy has strengthened and the restraint exerted by financial restructuring has ebbed. Lower
debt-service burdens and improved balance sheets have encouraged businesses
and households to take on new debt,
while stronger capital positions and
more robust economic conditions apparently have made banks and other lenders
more willing to extend credit. Growth of
the debt of nonfederal nonfinancial sectors (nonfinancial businesses, households, and state and local governments)
picked up in the second half of 1993 and
has increased a bit more this year—to a
5 percent annual rate. Total domestic
nonfinancial sector debt, which includes
the debt of the federal government, rose
at a 514 percent annual rate between the
fourth quarter of last year and May,
close to its pace over the second half of
1993 and a little below the midpoint of
its monitoring range of 4 percent to
8 percent. (Historical data on the growth
of the money and debt aggregates
appear in table 3.)
Rising market interest rates and lesshospitable capital market conditions
have affected the growth and composition of borrowing by nonfinancial businesses. The debt of such firms has
expanded at a somewhat faster pace in
1994 after three years of very little
growth, in part reflecting a shift away
90
81st Annual Report, 1994
from equity issuance as stock prices fell.
Moreover, rising and more-volatile interest rates have played a role in discouraging businesses from issuing long-term
debt securities. Such issuance had been
strong in 1993 as businesses took advantage of relatively low interest rates to
refinance high-rate longer-term debt and
replace shorter-term debt, such as bank
loans. In 1994, however, businesses
have turned more to banks and finance
companies to meet their financing needs.
Interest rate developments have also
affected borrowing by households. The
growth of household mortgage debt has
slowed a bit from the pace recorded in
Growth of Money and Debt
Percent
Ml
M2
M3
Domestic
nontinancial
debt
8.9
9.3
9.6
12.4
9.1
9.9
1982
1983
1984
7.4
5.4
2.5 2
8.8
10.4
5.5
9.2
12.2
8.1
9.9
9.9
10.9
9.6
12.0
14.0
1985
1986
1987
1988
1989
12.0
15.5
6.3
4.3
.6
8.7
9.3
4.3
5.3
4.8
7.6
8.9
5.7
6.3
3.8
14.2
13.4
10.3
9.0
7.8
1990
1991
1992
1993
4.2
7.9
14.3
10.5
4.0
2.9
1.9
1.4
1.7
1.2
.5
.6
6.6
4.6
5.0
5.0
Half year
(annual rate)3
1994:H1
4.0
1.6
-.1
5.4
Quarter
(annual rate)4
1994:Q1
Q2
6.0
2.0
1.8
1.5
.2
-.3
5.9
4.7
Measurement
period
Year*
1980
1981
1. From average for fourth quarter of preceding year to
average for fourth quarter of year indicated.
2. Adjusted for shift to NOW accounts in 1981.
3. From average for fourth quarter of 1993 to average
for second quarter of 1994. For debt aggregate, data for
second quarter are through May.
4. From average for preceding quarter to average for
quarter indicated. For debt aggregate, data for second
quarter are through May.
the second half of 1993, reflecting the
rise in mortgage rates that began late in
that year. Higher rates have curbed refinancing, a practice that tended to boost
mortgage debt growth as some borrowers took the opportunity to liquefy some
of the capital in their homes. In contrast
to the behavior of mortgage debt, consumer credit growth has remained brisk,
reflecting strong demand for consumer
durable goods and relatively attractive
rates on many consumer loans. Generally, rates on such loans have risen much
less than market rates. Consumer credit
at both finance companies and banks has
picked up in 1994.
Total loans at commercial banks have
risen at about a AVA percent annual rate,
a bit above last year's pace. The faster
growth of business and consumer loans
has been offset by slower expansion of
other types of loans, such as those for
real estate. In addition, security loans
have dropped off as the more subdued
pace of debt issuance and the paring
of dealer long positions in a rising rate
environment have reduced dealer
financing needs.
The expansion of bank lending in
1993 and 1994, following two years of
virtually no growth, has reflected not
only stronger loan demand but also an
increased willingness on the part of
banks to make loans. This heightened
desire to extend credit stems from the
improved financial condition of banks
as well as their borrowers. In the early
1990s, banks had been pressed by balance sheet problems and the need to
meet more stringent requirements for
capital-asset ratios. By early 1993, however, the capitalization ratios of many
banks were considerably stronger, and
they have continued to improve since
then as banks issued sizable volumes of
equity and retained a high proportion of
their record earnings. In mid-1993, some
banks began to report an easing of their
Monetary Policy Report, July
standards and terms for business loans
and residential mortgages, and this easing has continued, albeit at a reduced
rate, into the first two quarters of 1994.
Measured growth of holdings of bank
securities this year has been affected by
two accounting changes. One change
affects how banks report, on their balance sheets, the fair market value of
off-balance-sheet items. Banks are no
longer permitted to net positions in these
items across customers; this change has
appreciably boosted the "other securities" component, where these positions
are booked. The other change in
accounting rules requires banks to value
at market prices those securities that
they do not plan to hold to maturity.
With the decline in securities prices this
year, the requirement of "marking to
market" likely has restrained the measured growth of bank securities portfolios, although to an uncertain extent.
Abstracting from these special factors,
growth of bank securities holdings likely
has slowed slightly further in 1994. This
slowing has been about offset by the
pickup in loan growth, leaving underlying bank credit growth close to the
pace recorded last year. Meanwhile,
thrift institution credit has resumed
expanding this year, albeit modestly,
after declining over the past five years.
Expansion at credit unions has been
robust, while the contraction of the
remainder of the thrift sector has slowed
somewhat further.
Despite the expansion of depository
credit, the broadest monetary aggregate,
M3, has edged a bit lower since the
fourth quarter of last year, as depository
institutions have chosen to fund growth
in assets with nondeposit sources. In
June, M3 was around the bottom of the
0 percent to 4 percent growth range
established by the Federal Open Market
Committee, and its velocity seems to be
increasing faster this year than in 1993.
91
The weakness in M3 partly reflects an
exodus of investors from institutiononly money market mutual funds, whose
returns have lagged the rise in market
rates. M3 has also been held back by
declines in large time deposits. The runoff in this component has been concentrated at U.S. branches and agencies of
foreign banks, which have stepped up
their borrowings from affiliated foreign
offices. Domestic banks have also
boosted such borrowings. In December
1993, domestic banks for the first time
borrowed more from their foreign affiliates than they lent to them. This net
borrowed position has expanded considerably since that time. Apparently,
weaker credit demands abroad have held
down the costs of borrowing overseas
relative to the costs of obtaining funds
in the United States.
M2 growth has slowed a bit in 1994,
and its velocity appears to have registered another sizable increase. The
major factor behind the rise in velocity
this year has been higher short-term
market interest rates. In the usual pattern, the increases in rates paid on M2
deposits and money market mutual
funds have lagged behind the rise in
market rates, boosting the earnings forgone (opportunity costs) by holding the
components of M2 and thus inducing
shifts out of the aggregate. For example,
noncompetitive bids at Treasury auctions have increased sharply this year,
and some of the funds likely were drawn
from the instruments included in M2.
Moreover, the composition of M2 has
been affected by the varying speed with
which rates on different components
have adjusted to higher market yields.
Rates on money market mutual funds
and retail certificates of deposit (CDs)
have moved up considerably since February, while rates on liquid deposits,
such as savings and NOW accounts,
have been virtually unchanged. Partly as
92
81st Annual Report, 1994
a consequence, holdings of money market mutual funds have increased, small
CDs have turned around, and liquid
deposit growth has languished. From the
fourth quarter of 1993 through June, M2
expanded at a 1 lA percent annual rate,
placing this aggregate around the lower
bound of the 1 percent to 5 percent
growth range set by the Committee.
The depressing effect of higher interest rates on M2 was offset for a time by
flows from bond and equity (or longterm) mutual funds into money market
mutual funds. Declining securities prices
and higher volatility prompted households to reconsider their investments in
long-term mutual funds and encouraged
many to liquidate some of their bond
and equity mutual fund holdings. Over
the March-to-May period, households
pulled more money out of bond funds
than they invested. A portion of the proceeds from the redemptions likely was
placed in money market mutual funds,
which grew quite rapidly. As changes in
securities prices became more subdued
in late May, flows into long-term mutual
funds began to pick up, but they have
remained weak by the standards of
recent years. Shifts from M2 into direct
holdings of securities, such as Treasury
bills, as well as the capital losses on
long-term mutual funds, have damped
the growth of a measure that adds to M2
the net assets of mutual funds not held
by institutional investors or in retirement accounts. This series has grown at
an estimated 1 percent annual rate this
year, well below its 5*/2 percent advance
in 1993. Its velocity therefore also has
increased, after several years of rough
stability.
Ml growth has been restrained by
wider opportunity costs as well as some
special factors. From the fourth quarter
of last year through June, Ml expanded
at about a 4 percent annual rate, less
than half of its lO1^ percent rise in 1993.
Ml velocity, which fell at a 5 percent
rate last year, appears to have increased
this year. The growth of Ml has
stemmed primarily from the continued
rapid rise in currency, as overseas
demand has remained robust and domestic demand has expanded with sales. In
contrast, increases in transactions deposits have been quite weak. Growth of
demand deposits, which pay no interest,
has been reined in by higher market
rates, the associated rise in earnings
credits on compensating balances, and
a drop-off in mortgage refinancings.
Refinancings boost liquid deposits—
especially demand deposits—because
they are accompanied by a temporary
parking of funds in such accounts; however, as the volume of refinancings
declines, deposits return to more normal
levels. Rate spreads have also depressed
the growth of other checkable deposits,
whose offering rates have changed little
since the beginning of the year. In addition, growth has been restrained by a
large bank's introduction of a program
that sweeps excess balances out of
NOW accounts and into money market
deposit accounts. (The program, therefore, has no impact on M2.) The anemic
expansion of transactions deposits has
contributed to a decline in total reserves.
This reserve measure has contracted at a
1 lA percent annual rate so far this year, a
stark contrast with its 12 percent expansion in 1993. The continued strong
demand for currency has propped up
growth of the monetary base, whose
growth has slowed only slightly this
year, to a 9VA percent annual rate.
Foreign Exchange Developments
After starting the year with a firm tone,
the dollar declined on balance from February through late April. The dollar was
supported initially by market expectations that it would rise over the near
Monetary Policy Report, July
term as the U.S. economy strengthened
and U.S. interest rates rose, in contrast
to expected developments abroad. Following the Committee's firming action
on February 4, the dollar rose only modestly and briefly, in part because foreign
long-term rates increased with U.S.
rates. In the weeks that followed, the
dollar weakened with respect to the yen,
especially in mid-February, when market participants became more concerned
about the sizable external surpluses in
Japan in the wake of the lack of progress
in the framework talks between the
United States and Japan. The dollar also
came under downward pressure against
the German mark, particularly in February and March. Continued strong growth
in German M3, amid signs of economic
revival, suggested that further sizable
cuts in German and other European rates
were not as likely as had been previously thought, and long-term rates in
these countries increased further. In
early April, the dollar came under
renewed downward pressure in terms of
the yen. The resignation of Prime Minister Hosokawa rejuvenated concerns that
progress on negotiations to open Japanese markets would stall and that plans
to stimulate the Japanese economy
would not be implemented.
Market sentiment against the dollar
became particularly strong in late April
and early May, in sometimes disorderly
markets. On April 28, with U.S. bond
prices falling, the dollar approached its
postwar low against the yen in thin trading, and on the following day it started
to drop sharply against the mark as trading became more volatile. In response,
the Foreign Trading Desk at the Federal
Reserve Bank of New York entered the
market and purchased dollars against
both marks ($500 million) and yen
($200 million). Treasury Secretary Bentsen confirmed the intervention and
explained that it was prompted by dis
93
orderly market conditions. The dollar
recovered briefly but resumed falling
over the next several days. On May 4,
the U.S. Treasury and the Federal
Reserve joined other monetary authorities in substantial, coordinated intervention in support of the dollar. Secretary Bentsen again confirmed the
intervention and said it was in response
to exchange market developments that
were inconsistent with economic fundamentals. These actions stemmed the
slide of the dollar and contributed to a
partial recovery over the subsequent two
weeks.
The dollar fluctuated in a narrow
range following the May 17 policy
actions by the Federal Reserve, but it
later lost ground. These policy actions
were consistent with the view expressed
in the statement accompanying the
May 4 intervention that the U.S. Administration did not believe that the prospects for the U.S. economy warranted a
weak dollar. However, in mid-June,
the dollar declined against the yen as
market perceptions resurfaced that the
United States was not concerned about a
weak dollar, despite official statements
to the contrary, and as an easing of trade
frictions with Japan appeared less likely
following the resignation of Prime
Minister Hata on June 24. Downward
pressure on the dollar in terms of the
German mark intensified at this time
as additional data confirmed that an
economic recovery was under way in
Germany. These data contributed to
higher long-term rates and reinforced
views that Bundesbank official rates
were not likely to be reduced further
following the substantial adjustment on
May 11. The selling pressure on the
dollar may also have been exacerbated
by a rise in dollar-denominated commodity prices, which market participants
viewed as indicative of a risk of higher
U.S. inflation. With the dollar hovering
94
81st Annual Report, 1994
around a postwar low against the yen on
June 24, the United States led substantial coordinated intervention with the
monetary authorities of the G-7 countries and a number of other countries.
Secretary Bentsen confirmed the
intervention, citing shared concerns
over recent developments in foreign
exchange markets. Since that time, sentiment against the dollar has continued,
with the dollar recording a new postwar
low against the yen on July 12 before
rebounding moderately in subsequent
days.
Federal Reserve Foreign
Currency Transactions
The Federal Reserve has undertaken
other foreign currency transactions in
1994 in addition to the intervention
actions of April 29, May 4, and June 24.
The Federal Open Market Committee
has authorized a restructuring of the
System's portfolio of foreign currencies
and has approved three reciprocal currency arrangements, also known as swap
arrangements.
At its December 1993 meeting, the
Committee authorized the Manager for
Foreign Operations to sell all non-mark
and non-yen foreign exchange reserves
held by the Federal Reserve. The Manager sold these reserves, which were
equivalent to $750 million, during the
first few months of 1994. These holdings along with those of the Exchange
Stabilization Fund of the U.S. Treasury
were eliminated in light of the practice
of U.S. monetary authorities in recent
years to conduct intervention operations
exclusively in marks and yen.
On March 24, the Committee approved a temporary increase to $3 billion, from $700 million, in the System's
swap arrangement with the Bank of
Mexico. The value of the Mexican peso
against the dollar had been nearly stable
during the initial weeks of the year, following ratification of the North American Free Trade Agreement by the United
States in November. The peso began to
weaken in late February, however, in
response to disappointing economic
news and political unrest in Mexico.
The assassination of presidential candidate Luis Donaldo Colosio on March 23
further undermined the peso, which fell
to the lower intervention limit against
the dollar set by the Bank of Mexico.
Mexican authorities then intervened
heavily to support the peso. At the
request of the Mexican government and
the Bank of Mexico, U.S. monetary
authorities established a $6 billion
temporary bilateral swap facility for the
Bank of Mexico, which was split
between the U.S. Treasury and the Federal Reserve. The swap was intended to
help prevent any turmoil in Mexican
markets, which could have spilled into
U.S. financial markets. In the event, no
drawings were made on this facility. In
late April, the peso moved away from
its lower intervention limit as the substantial increase in Mexican interest
rates persuaded market participants of
the commitment of the Mexican government to maintain the value of the peso.
On April 26, the monetary authorities
of the United States, Canada, and
Mexico announced the creation of the
North American Financial Group to
provide an opportunity for more regular
consultation on economic and financial
developments. Plans for this group had
been under way for several months in
recognition of the increasing interdependence of the three economies. In connection with the formation of the group,
the authorities of the three countries
established a trilateral foreign exchange
swap facility. The United States and
Mexico put in place swap arrangements
for up to $6 billion, with the Treasury
and the Federal Reserve each partici-
Monetary Policy Report, July
pating up to $3 billion. The Federal
Reserve and the Bank of Canada
reaffirmed their existing swap agreement of $2 billion and extended its
maturity to December 1995. The Bank
of Canada increased its swap line with
the Bank of Mexico to 1 billion Canadian dollars. These arrangements expand the pool of potential resources
available to the monetary authorities
of each country to maintain orderly
exchange markets. The Federal Open
Market Committee approved the Federal Reserve's participation in these
arrangements effective April 26.
•
95
Part 2
Records, Operations,
and Organization
99
Record of Policy Actions
of the Board of Governors
Regulation C (Home Mortgage
Disclosure)
November 23, 1994—Amendments
The Board approved amendments to
Regulation C, effective January 1, 1995,
to facilitate the availability, and improve
the quality, of information disclosed to
the public under the Home Mortgage
Disclosure Act.
Votes for this action: Messrs. Greenspan,
Blinder, and Kelley and Mses. Phillips
and Yellen. Absent and not voting:
Messrs. La Ware and Lindsey.
The amendments require that most
financial institutions report data required
under the Home Mortgage Disclosure
Act in machine-readable form and
update quarterly their reports to regulatory agencies. Institutions may comply
with the amendments at their option
beginning January 1, 1995. Compliance
is mandatory for the collection of data
that begins January 1, 1996.
Regulation D (Reserve
Requirements of Depository
Institutions)
November 17, 1994—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,
Blinder, Kelley, and LaWare and Mses.
Phillips and Yellen. Absent and not voting: Mr. Lindsey.
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 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 1994, that amount was
$51.9 million. Recent increases in transaction balances warranted an increase
to $54 million, and the Board amended
Regulation D accordingly.
The Garn-St Germain Depository
Institutions Act of 1982 established a
zero percent reserve requirement on the
first $2 million of an institution's reservable liabilities. The act also provides for
annual adjustments to that exemption
based on nationwide deposit growth. By
the beginning of 1994, that amount had
been increased to $4 million. Recent
growth in deposits warranted an increase
to $4.2 million, and the Board amended
Regulation D accordingly.
The amendments are effective with
the reserve computation period beginning December 20, 1994, for institutions
reporting either weekly or quarterly.
To reduce the reporting burden for
small institutions, the Board requires
that depository institutions with total
deposits below specified levels report
100 81st Annual Report, 1994
their deposits and reservable liabilities
quarterly, or less frequently, although
larger institutions must report weekly.
To reflect increases in the growth rate of
total deposits at all depository institutions from June 30, 1993, to June 30,
1994, the Board increased the deposit
cutoff levels used in conjunction with
the exemption level to determine the
frequency and detail of deposit reporting required for each institution from
$55 million to $55.4 million for nonexempt depository institutions and from
$44.8 million to $45.1 million for
exempt depository institutions beginning September 1995.
Regulation E (Electronic Fund
Transfers)
February 16, 1994—Amendments
The Board approved amendments to
Regulation E, effective February 28,
1994, to make the regulation applicable
to electronic benefit transfer programs
established by federal, state, or local
agencies.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Ms. Phillips.
Absent and not voting: Mr. LaWare.1
The Electronic Fund Transfer Act
governs any transfer of funds that is
electronically initiated and that debits
or credits a consumer's account. The
statute, which is implemented by the
Board's Regulation E, creates a legal
framework of rights and responsibilities
for consumers and for providers of electronic fund transfer services. Among
other things, Regulation E requires
1. Throughout this chapter, note 1 indicates that
two vacancies existed on the Board when the
action was taken.
documentation of electronic fund transfer services through terminal receipts
and periodic account statements, establishes limitations on consumer liability
for unauthorized transfers, and provides
procedures for error resolution.
The amendments to Regulation E
make the regulation applicable to electronic benefit transfer programs established by federal, state, or local agencies. The amendments apply the
unauthorized transfer liability and error
resolution provisions of Regulation E
to electronic benefit transfer programs,
provide an exception for the periodic
statement requirements under certain
conditions, and apply most other provisions of Regulation E to electronic benefit transfer programs.
In response to a request by a federal
task force working to establish a nationwide system for electronic delivery of
government benefits, the Board delayed
mandatory compliance with the amendments until March 1, 1997.
November 23, 1994—Interim Rule
The Board approved an interim amendment to Regulation E to revise the
requirements for receipts at automated
teller machines, effective December 1,
1994.
Votes for this action: Messrs. Greenspan,
Blinder, and Kelley and Mses. Phillips
and Yellen. Absent and not voting:
Messrs. LaWare and Lindsey.
The interim rule gives financial institutions flexibility in identifying account
numbers on receipts for transactions at
automated teller machines. It eliminates
the requirement that a receipt from an
electronic terminal disclose a number or
code that uniquely identifies the consumer, the consumer's account, or the
Board Policy Actions
access device. In connection with this
action, the Board also sought public
comment on the interim rule.
Regulation H (Membership
of State Banking Institutions
in the Federal Reserve)
May 23, 1994—Amendment
The Board approved an amendment to
Regulation H to raise the threshold at
which certain state member banks must
apply to the Board for approval to invest
in bank premises, effective July 5, 1994.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Ms. Phillips.
Absent and not voting: Mr. LaWare.1
The amendments allow a state member bank that meets certain conditions to
invest in bank premises in an amount up
to 50 percent of its tier 1 capital without
applying for the Board's approval.
101
reports will continue to be available to
the public through the National Technical Information Service of the U.S.
Department of Commerce under the
Board's Rules Regarding Availability of
Information.
Regulation H (Membership of
State Banking Institutions in the
Federal Reserve System) and
Regulation Y (Bank Holding
Companies and Change in Bank
Control)
August 3, 1994—Amendments
The Board approved amendments to
Regulations H and Y to revise its riskbased capital guidelines for state member banks to take into account concentration of credit risk and the risks of
nontraditional activities, effective January 17, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Ms. Phillips.2
November 2, 1994—Amendment
The Board approved an amendment to
Regulation H to remove the requirement
that a state member bank publish its
reports of condition, effective November 10, 1994.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The Riegle Community Development
and Regulatory Improvement Act of
1994 includes measures to reduce the
regulatory burden of federal regulation
on depository institutions. The amendment to Regulation H implements section 308 of the act, which amended
the Federal Reserve Act to repeal the
requirement that state member banks
publish their reports of condition. The
The Board revised its risk-based capital guidelines to explicitly identify concentrations of credit risk and an institution's ability to manage them as
important factors in assessing its overall
capital adequacy. The revision also identifies an institution's ability to manage
the risks posed by nontraditional activities as an important factor in assessing
its overall capital adequacy.
November 23, 1994—Amendments
The Board approved amendments to
Regulations H and Y to revise its riskbased capital guidelines to recognize
2. Throughout this chapter, note 2 indicates that
one vacancy existed on the Board when the action
was taken.
102 81st Annual Report, 1994
the risk-reducing benefits of netting
arrangements, effective December 31,
1994.
Votes for this action: Messrs. Greenspan,
Blinder, and Kelley and Mses. Phillips
and Yellen. Absent and not voting:
Messrs. LaWare and Lindsey.
The revised guidelines allow state
member banks and bank holding companies to net positive and negative markto-market values of interest rate and exchange rate contracts in determining the
current exposure portion of the creditequivalent amount of such contracts to
be included in risk-weighted assets.
November 30, 1994—Amendments
The Board approved amendments to
Regulations H and Y to revise its riskbased capital guidelines to direct state
member banks and bank holding companies not to include in regulatory capital
the net unrealized holding gains or
losses on debt securities available for
sale, effective December 31,1994.
Votes for this action: Messrs. Blinder,
Kelley, LaWare, and Lindsey and Mses.
Phillips and Yellen. Absent and not voting: Mr. Greenspan.
The Statement of Financial Accounting Standards Number 11 (FAS 11)
from the Financial Accounting Standards Board created a new common
stockholders' equity account for net
unrealized holding gains or losses on
debt securities available for sale. The
amendments to Regulations H and Y
instruct institutions not to include in
tier 1 capital the component of common
stockholders' equity. Net unrealized
losses on marketable equity securities
will continue to be deducted from tier 1
capital.
November 30, 1994—Amendments
and Revised Interpretation
The Board approved amendments to
Regulation H to allow state member
banks to make certain investments designed primarily to promote the public
welfare, effective January 9, 1995. The
Board also approved a related revision
of an interpretation of Regulation Y.
Votes for this action: Messrs. Blinder,
Kelley, LaWare, and Lindsey and Mses.
Phillips and Yellen. Absent and not voting: Mr. Greenspan.
The Depository Institutions Disaster
Relief Act of 1992 amended the Federal
Reserve Act to relax the restriction on
the ability of state member banks to
purchase, sell, underwrite, and hold
investment securities; it also allows state
member banks to make certain investments designed primarily to promote
the public welfare. The Board amended
Regulation H to permit state member
banks to make certain public welfare
investments without prior Board
approval and to make other public welfare investments with specific Board
approval.
The
amendment
also
addresses the procedural aspects of
those investments.
The revised interpretation of Regulation Y provides that bank holding companies that have received approval to
engage in activities that promote community welfare may make similar
investments permissible for state member banks.
December 14, 1994—Amendments
The Board approved amendments to
Regulations H and Y revising its capital
adequacy guidelines to establish a limit
on the amount of certain deferred-tax
assets that may be included in tier 1
Board Policy Actions
capital for risk-based and leverage capital purposes, effective April 1, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and LaWare and Mses.
Phillips and Yellen. Absent and not voting: Mr. Lindsey.
The Board revised its risk-based and
leverage capital guidelines for state
member banks and bank holding companies. Under the new rule, deferred-tax
assets that can be realized only if an
institution earns taxable income in the
future are limited for regulatory capital
purposes to the amount the institution
expects to realize within one year of the
quarter-end report date or 10 percent of
tier 1 capital, whichever is less.
Regulation J (Collection of
Checks and Other Items by
Federal Reserve Banks)
April 28, 1994—Amendments
The Board approved amendments to
subpart A of Regulation J to conform
the warranties and various other provisions of the regulation to Regulation CC
(Availability of Funds and Collection of
Checks) or to the Uniform Commercial
Code, effective June 6, 1994.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Ms.
Phillips.1
Regulation CC warranties require
private-sector collecting, returning, and
presenting banks to warrant the accuracy of cash letter totals and check
encoding. The amendments to Regulation J clarify that Federal Reserve Banks
and institutions that send items to
Reserve Banks must also make the
Regulation CC warranties, to conform
certain Regulation J provisions to the
1990 version of the Uniform Commer
\ 03
cial Code, and to make other minor
changes in the regulation.
Regulation K (International
Banking Operations)
October 19, 1994—Amendments
The Board approved amendments to
Regulation K concerning the permissible activities of state-licensed branches
or agencies of foreign banks, effective
January 1, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
A provision in the Foreign Bank
Supervision Enhancement Act of 1991
prohibits a state-licensed branch or a
state-licensed agency of a foreign bank
from engaging in any type of activity
not permissible for a federal branch of a
foreign bank unless the Board has determined that the activity is consistent with
sound banking practice and, in the
case of a state-licensed insured branch,
unless the Federal Deposit Insurance
Corporation has determined that the
activity would pose no significant risk to
the deposit insurance fund.
The amendment to Regulation K sets
forth procedures that state-licensed
branches and agencies of foreign banks
are required to follow in requesting the
Board's permission to engage, or continue to engage, in an activity not permissible for a federal branch of a
foreign bank and to set forth the requirements for divestiture and cessation
plans. The Board also amended Regulation K to clarify that the conversion of a
U.S. branch or agency of a foreign bank
from a federal license to a state license
would not require an application to the
Board.
104 81st Annual Report, 1994
Regulation O (Loans to Executive
Officers, Directors, and Principal
Shareholders of Members Banks)
January 26, 1994—Amendments
The Board approved amendments to
Regulation O to increase the aggregate
lending limit for small adequately capitalized banks and made certain other
amendments designed to reduce the burden and complexity of the regulation,
effective February 18, 1994.
Votes for this action: Messrs. Greenspan,
Mullins, Kelley, LaWare, and Lindsey and
Ms. Phillips. Absent and not voting:
Mr. Angell.
The Board's amendment to Regulation O makes permanent an interim rule
increasing the aggregate lending limit
for small, adequately capitalized banks
from 100 percent of the bank's unimpaired capital and surplus to 200 percent; clarifies the rule on tangible
economic benefits; provides certain
exceptions to the lending limit for insiders; permits banks to follow certain
alternative procedures for recordkeeping; narrows the definition of extension
of credit; and makes certain technical
amendments in the regulation to make it
more understandable and somewhat
shorter.
Regulation S (Reimbursement
to Financial Institutions for
Assembling or Providing
Financial Records)
December 21, 1994—Amendments
The Board approved amendments to
Regulation S to incorporate enhanced
recordkeeping requirements for certain
wire transfers by financial institutions,
effective January 1, 1996.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Mses.
Phillips and Yellen. Absent and not voting: Mr. Blinder.
The Annunzio-Wylie Anti-Money
Laundering Act of 1992 requires the
Board and the Department of the Treasury to adopt joint regulations for recordkeeping in international funds transfers and authorizes the two agencies to
adopt additional recordkeeping rules
that promote law enforcement in connection with domestic funds transfers.
The Board and the Department of the
Treasury jointly approved a rule that
requires that domestic financial institutions involved in a wire transfer collect
and retain certain information on transfers of $3,000 or more. The amount and
type of information that are required
depend on the type of financial institution, its role in the transfer, and the
relationship of the parties to the transaction with the financial institution. The
rule also clarifies the requirements for
verification and retrieval of information
and clarifies and expands the types of
transfers that are exempt.
Regulation T (Credit by Brokers
and Dealers)
October 17, 1994—Amendments
The Board approved amendments to
Regulation T concerning the payment
for securities purchases and the status
of government securities transactions,
effective November 25, 1994.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The amendment requires that, within
two business days of the standard settlement period, customers meet initial margin calls or make cash payment in full
Board Policy Actions
for securities purchased from a brokerdealer.
The Board approved related amendments to Regulation T to raise the
amount below which liquidation of an
unpaid transaction is not required, to
require that brokers seeking extensions
of the payment periods obtain them from
their designated examining authority,
and to clarify that the time periods provided for certain securities with
extended settlement periods are the time
periods used to determine procedures
and penalties when payment is not
made.
The Board also approved amendments to Regulation T to exempt
broker-dealers whose business is limited to transactions in government securities and to provide a mechanism for
other broker-dealers to effect customer
transactions in government securities
without regard to other provisions in the
regulation.
Regulation Y (Bank Holding
Companies and Change in Bank
Control)
March 9, 1994—Amendments
The Board approved amendments to
provisions of Regulation Y pertaining to
real estate appraisals, effective June 7,
1994.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Ms.
Phillips.1
The amended real estate appraisal
provisions increase to $250,000 the
transaction-value threshold above which
real estate appraisals are required;
expand and clarify existing exemptions
to the appraisal requirements; specify
when exempt transactions require evaluations; and revise the requirements governing appraisal content and the use of
105
appraisals prepared by other financial
services institutions. The amendments
were issued jointly with amendments
to the rules of other bank and thrift
regulators.
July 27, 1994—Amendments
The Board approved amendments to
Regulation Y to permit banks to offer
discounts on traditional bank products
and brokerage services for customers
obtaining traditional bank products from
affiliates, effective September 2, 1994.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey.
Absent and not voting: Ms. Phillips.2
With certain exceptions, the Bank
Holding Company Act prohibits a bank
from tying a product or service to
another product or service offered by the
bank or any of its affiliates. A statutory
exception allows a bank to discount any
product or service on condition that a
customer obtain a traditional bank product from that bank.
The Board's amendments extend the
statutory exception to allow bank holding company affiliates to offer package
discounts on traditional bank products,
provided that all products in the package
are separately available. The Board also
amended the regulation to permit bank
holding company affiliates to offer a discount on securities brokerage services
on condition that a customer obtain a
traditional bank product from the holding company or from an affiliate.
October 24, 1994—Interim
Amendments
The Board approved interim amendments to Regulation Y to implement
provisions of the Riegle Community
Development and Regulatory Improve-
106 81st Annual Report, 1994
ment Act of 1994 that revised certain
of the Board's application procedures,
effective October 26, 1994.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The Riegle Community Development
and Regulatory Improvement Act of
1994 establishes a prior notice procedure to replace the current application
process for all proposals by bank holding companies to engage in nonbanking
activities; establishes a streamlined
notice procedure for the formation of a
new bank holding company as part of a
reorganization by the existing shareholders of a bank; permits the Board,
with the consent of the Department
of Justice, to shorten the time after
approval of an application in which the
department can file a court challenge
to a bank acquisition on competitive
grounds; and eliminates the need for
prior Board approval of certain transactions under which a bank acquires a
thrift institution or assets of a thrift institution. Because the amendments became
effective upon passage of the act, the
Board adopted interim rules implementing those changes and requested public
comment on the rules.
December 14, 1994—Amendments
The Board approved an amendment to
Regulation Y, effective January 23,
1995, to remove restrictions on tying
between nonbank subsidiaries when
the products are separately available.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and LaWare and Mses.
Phillips and Yellen. Absent and not voting: Mr. Lindsey.
The amendment to the anti-tying provisions of Regulation Y permits a bank
holding company or its nonbank subsidiary to offer a discount on a product
or service on condition that a customer
obtain any other product or service
from that company or from any of
its nonbank affiliates. The amendment
generally lifts the regulation's anti-tying
provisions when no bank is involved
in the arrangement and products are
separately available for purchase by the
customer.
Regulation Y (Bank Holding
Companies and Change in Bank
Control) and Rules Regarding
Delegation of Authority
April 25, 1994—Amendments
The Board approved amendments to
Regulation Y and to its Rules Regarding
Delegation of Authority to make final
previously approved initiatives to reduce the regulatory burden associated
with certain application and notice procedures, effective May 4, 1994.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Ms.
Phillips.1
The Board amended Regulation Y to
reflect changes that had been in effect
since 1992, when the Board eliminated
the requirement in Regulation Y for
stock redemptions by well capitalized
bank holding companies. The Board
also modified certain provisions in its
Rules Regarding Delegation of Authority pertaining to competition and market
concentration.
Regulation DD (Truth in Savings)
October 12, 1994—Amendments
The Board approved amendments to
Regulation DD to decrease the number
Board Policy Actions
of accounts subject to the Truth in Savings Act, effective September 23, 1994.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The Truth in Savings Act and the
Board's implementing Regulation DD,
which require that depository institutions provide consumers with information about deposit accounts, initially
applied to accounts held by individuals
and accounts held by unincorporated
associations of individuals that are not
businesses. A provision of the Riegle
Community Development and Regulatory Improvement Act of 1994 limits the
act's coverage to accounts held by individuals for personal, family, or household purposes. To implement that provision, the Board amended Regulation DD
to exclude from the requirements of the
regulation unincorporated associations
of individuals that are not businesses.
Regulation EE (Netting Eligibility
for Financial Institutions)
January 26, 1994—New Rule
The Board adopted Regulation EE to
expand application of the netting provisions in the Federal Deposit Insurance
Corporation Improvement Act of 1991
to a broader range of financial market
participants, effective March 7, 1994.
Votes for this action: Messrs. Greenspan,
Mullins, Angell, Kelley, LaWare, and
Lindsey and Ms. Phillips.
The Federal Deposit Insurance Corporation Improvement Act of 1991 validates netting contracts among members
of clearing organizations and between
financial institutions to increase efficiency and reduce systemic risk in the
banking system and financial markets.
107
The act defines financial institution to
include depository institutions, securities brokers or dealers, futures commission merchants, and any other institutions so determined by the Board.
The new regulation expands application of the netting provisions by including in the definition of financial institution those financial market participants
meeting certain tests based on market
activity.
Rules of Practice for Hearings
December 14, 1994—Amendment
The Board approved an amendment to
its Rules of Practice for Hearings to
make its rules on ex parte communications conform to the Administrative Procedure Act, effective January 18, 1995.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, and LaWare and Mses.
Phillips and Yellen. Absent and not voting: Mr. Lindsey.
The amendments clarify that the
Board's rules governing ex parte communications do not apply to intraagency communications, which are governed by a separate provision of that act.
Rules Regarding Equal
Opportunity
March 28, 1994—Amendments
The Board approved as a final rule its
Rules Regarding Equal Opportunity,
effective March 29, 1994, after having
received comments on its interim rules.
The final rule conforms the Board's
rules to those of the Equal Employment
Opportunity Commission.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Ms.
Phillips.1
108 81st Annual Report, 1994
The Board's final rule closely follows
the rules of the Equal Employment
Opportunity Commission. It differs only
when necessary to take account of the
Board's independent status under section 10(4) of the Federal Reserve Act, to
clarify the processing of complaints in
light of the Board's organizational structure, and to exclude matters that do not
apply to the Board. The final rule also
covers issues addressed by laws such as
the Rehabilitation Act and the Equal
Pay Act.
Policy Statements
and Other Actions
January 3, 1994—Policy Statement
on Payments System Risk
Votes for this action: Messrs. Greenspan,
Angell, LaWare, and Lindsey and Ms.
Phillips. Absent and not voting: Messrs.
Mullins and Kelley.
The Board expanded the operating
hours of Fedwire to eighteen hours per
day, 12:30 a.m. to 6:30 p.m. eastern
time, five days per week. Intraday credit
from the Federal Reserve will be available during the expanded hours on
the same terms on which it is currently
provided. On December 21, 1994, the
Board delayed implementation of the
expanded operating hours (see below).
February 16, 1994—Policy
Statement on Payments
System Risk
The Board approved certain revisions of
its policy on payments system risk,
effective April 14, 1994.
The Board approved penalty fees for
daylight overdrafts by institutions that
do not have regular access to the discount window, effective April 14, 1994.
Votes for this action: Messrs. Greenspan,
Angell, and Kelley and Ms. Phillips.
Absent and not voting: Messrs. Mullins,
LaWare, and Lindsey.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Ms. Phillips.
Absent and not voting: Mr. LaWare.1
As part of its payments system risk
reduction program, the Board revised its
policy statement to streamline the procedures that depository institutions are
required to use if they choose to complete a self-assessment to establish a
daylight overdraft net debit cap. The
Board also eliminated the requirement
that branches and agencies of foreign
banks provide certain information that
had been used in determining their daylight overdraft net debit caps.
February 9, 1994—Expansion of
Fedwire Operating Hours
The Board approved the expansion,
beginning in early 1997, of the operating hours of the Fedwire on-line funds
transfer service.
The revised penalty rate for daylight
overdrafts, which is equal to the regular
daylight overdraft rate plus 100 basis
points, applies to bankers' banks that
do not maintain reserves, Edge Act and
agreement corporations, and limitedpurpose trust companies.
February 16, 1994—Policy on
Overnight Overdrafts
The Board adopted a new penalty rate
structure for overnight overdrafts to
make the structure more consistent with
current market rates, effective April 1,
1994.
Votes for this action: Messrs. Greenspan,
Kelley, and Lindsey and Ms. Phillips.
Absent and not voting: Mr. LaWare.1
Board Policy Actions
The Board eliminated the penalty-fee
floor for overnight overdrafts, adopted
a penalty fee for overnight overdrafts
equal to the federal funds rate plus
4 percentage points, established a minimum penalty of $100 for all overnight
overdrafts, and increased the penalty fee
1 percentage point for each overnight
overdraft after the third in a twelvemonth period.
March 4, 1994—Interagency Policy
Statement on Discrimination in
Lending
The Board approved issuance of an
interagency policy statement on discrimination in lending, effective
April 15, 1994.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Ms.
Phillips.1
The policy statement describes the
general principles the agencies will use
in identifying lending discrimination
that violates the Equal Credit Opportunity Act or the Fair Housing Act. The
Board also sought public comment on
the application of the principles to specific policies and practices.
September 29, 1994—Policy
Statement on Payments System Risk
The Board approved a revision of the
portion of its policy statement on payment system risk concerning net debit
caps, effective October 13, 1994.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen.
The revised policy
statement
increases the multiple associated with
the de minimis net debit cap from
109
20 percent to 40 percent of risk-based
capital. The Board also approved a program of administrative counseling flexibility for institutions that continue to
exceed their net debit caps because of
the posting of non-Fedwire transactions.
December 21, 1994—Policy
Statement on Privately Operated
Large-Dollar Multilateral Netting
Systems
The Board approved the adoption of a
policy statement on privately operated
large-dollar multilateral netting systems, effective December 21, 1994, to
update and integrate certain existing
policies and to incorporate certain minimum standards for multilateral netting
systems.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Mses.
Phillips and Yellen. Absent and not voting: Mr. Blinder.
The policy statement updates and
integrates existing policies on privately
operated large-dollar multilateral payment netting systems and on offshore
large-dollar multilateral payment netting
systems. The policy statement now also
addresses multilateral foreign exchange
clearinghouses involving settlements in
U.S. dollars and multicurrency payment
netting systems involving settlement in
U.S. dollars. The policy applies to such
arrangements the minimum standards
for multilateral netting systems identified in the report of the Committee on
Interbank Netting Schemes of the central banks of the Group of Ten countries.
The policy statement is designed to
cover more completely the range of
multilateral netting systems involving
settlements in U.S. dollars that might
increase systemic risk in the financial
markets.
110 81st Annual Report, 1994
December 21, 1994—Fedwire
Funds Transfer Format
The Board approved an expanded format for Fedwire funds transfers, to be
fully implemented by the end of 1997.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Mses.
Phillips and Yellen. Absent and not voting: Mr. Blinder.
with policy actions of the Federal Open
Market Committee (FOMC) and in the
context of economic and financial developments that are covered in more detail
elsewhere in this REPORT. A listing of
the Board's actions on the basic rate
during 1994, including the votes on
those actions, concludes this review.
Actions on the Basic Discount Rate
The expanded format contains a more
comprehensive set of data elements
intended to reduce the need for manual
intervention when transfers are processed and posted.
December 21, 1994—Delay
in Expansion of Fedwire
Operating Hours
The Board delayed, until the fourth
quarter of 1997, implementation of the
expansion of Fedwire operating hours
that it had approved on February 9,
1994. The specific implementation date
is to be announced a year before the
effective date.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Mses.
Phillips and Yellen. Absent and not voting: Mr. Blinder.
1994 Discount Rates
The Board approved three increases in
the basic discount rate during 1994;
these actions raised the rate from 3 percent at the start of the year to 43/4 percent by year-end. Rates charged by the
Federal Reserve Banks for seasonal and
for extended credit also rose in 1994;
rates for both types of credit are set on
the basis of market-related formulas that
are approved by the Board.
The reasons for the Board's decisions
on the basic rate are summarized below.
The decisions were made in conjunction
January through April:
No Change in the Basic Rate
During the first four months of 1994 the
Board considered but took no action on
requests from an increasing number of
Federal Reserve Banks—a total of ten
by late April—to raise the basic rate.
The economy appeared to be expanding
at a brisk pace after posting substantial
gains in late 1993, and broad measures
of wages and prices indicated a generally moderate rate of inflation. During
this period, however, the low level of
short-term interest rates together with
diminishing margins of unemployed
labor and other producer resources and
sizable increases in the prices of a wide
range of materials used in manufacturing and construction led to increasing
concerns about the potential for higher
inflation. Against this background, the
FOMC acted on three occasions beginning in early February to head off the
threat of a more general buildup of inflationary pressures and to maintain conditions conducive to sustained economic
expansion by reducing the degree of
accommodation in the stance of monetary policy. The Board considered
approval of the pending increases in the
discount rate, but the members generally
concluded that it was preferable to permit the gap that had emerged in early
February between the discount rate and
the federal funds rate to widen a little
further; a wider gap was normal and
Board Policy Actions
helped to provide flexibility in setting
monetary policy. The basic discount rate
and the average federal funds rate had
been identical from September 1992 to
early February 1994.
May to Mid-November:
Basic Rate Increased
By the middle of May, eleven Reserve
Banks had proposed increases of Vi percentage point in the basic rate and
one Reserve Bank an increase of 1 percentage point. On May 17 the Board
approved the pending increases of
Vi percentage point. This action was
taken in conjunction with the FOMC
decision on the same day to remove
most of the remaining degree of accommodation in the stance of monetary policy. These decisions reflected increasing
concerns that continued policy accommodation could lead before long to
growing pressures on production
resources and to a renewed outbreak of
inflation.
On August 16 the Board approved a
further increase of V2 percentage point
in the basic rate for seven Reserve
Banks that already had acted on such an
increase. Growth in aggregate demand
appeared to have moderated somewhat
in previous months, and broad measures
of wages and prices suggested little
change in inflation trends. Nonetheless,
the evidence of continuing strength in
the economic expansion and high levels
of resource utilization were seen as
pointing to a considerable risk of further
inflation in the absence of additional
policy restraining measures. As in May,
the increase in the discount rate was
associated with some further tightening
of reserve conditions by the FOMC.
The final increase in the basic rate
during 1994, a rise of 3A percentage
point on November 15, was approved in
the light of indications that the expansion retained strong momentum at a time
1 11
when the utilization of labor and other
producer resources had reached levels
that in the past had often been associated with some increase in inflation. As
in the case of the two previous actions in
1994, this larger-than-usual increase in
the basic rate accompanied the implementation of a corresponding tightening
of reserve conditions by the FOMC. On
the date of this approval, all the Reserve
Banks had pending rate increases ranging from V2 to 1 percentage point; by
November 17, all had submitted, and
the Board had approved, conforming
increases of VA percentage point.
Mid-November to Year-End:
No Change
Beginning in the first part of December,
a number of Reserve Banks submitted
requests for further increases of VA or
Vi percentage point in the basic rate.
Pending an evaluation of the lagged
effects of the considerable tightening
measures already implemented, the
Board took no action on these proposals.
Four proposed increases were outstanding at year-end.
Structure of Discount Rates
The basic rate is the rate charged
on loans to depository institutions for
short-term adjustment credit, while flexible, market-related rates generally are
charged on seasonal and extended
credit. These flexible rates are calculated periodically in accordance with
formulas that are subject to Board
approval.
Under the seasonal program, whose
purpose is to assist smaller institutions
in meeting regular needs arising from a
clear pattern of intra-yearly movements
in their deposits and loans, funds may
be provided for periods longer than
those permitted under adjustment credit.
Since its introduction on January 9,
112 81st Annual Report, 1994
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
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 1994 the structure of
discount rates was as follows: a basic
rate of 4.75 percent for short-term
adjustment credit, a rate of 5.90 percent
for seasonal credit, and a rate of
6.40 percent for extended credit. During
1994 the flexible rate on seasonal credit
ranged from a low of 3.10 percent to
a high of 5.90 percent, and the flexible rate on extended credit ranged
from a low of 3.60 percent to a high of
6.40 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. Reserve Bank proposals on the discount rate include requests to renew the
formulas for calculating the flexible
rates on seasonal and extended credit.
Votes on the reestablishment of existing
rates or the updating of market-related
rates under the seasonal and extended
credit prgrams are not shown. All
votes on discount rates taken by the
Board of Governors during 1994 were
unanimous.
Votes on the Basic Discount Rate
May 17. Effective this date, the
Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, Dallas, and
San Francisco to increase the basic
discount rate by Vi percentage point, to
31/2 percent.
Votes for this action: Messrs. Greenspan,
Kelley, LaWare, and Lindsey and Ms.
Phillips. Votes against this action: None.]
The Board subsequently approved a
similar action taken by the directors of
the Federal Reserve Bank of Cleveland,
effective May 18.
August 16. Effective this date, the
Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Richmond, Chicago, St. Louis, Kansas City, and Dallas
to increase the basic discount rate
Vi percentage point, to 4 percent.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen. Votes against
this action: None.
The Board subsequently approved
similar actions taken by the directors of
the Federal Reserve Banks of Cleveland
Board Policy Actions
and San Francisco, effective August 17,
and Philadelphia, Atlanta, and Minneapolis, effective August 18.
November 15. Effective this date, the
Board approved actions taken by the
directors of the Federal Reserve Banks
of New York, St. Louis, Kansas City,
and San Francisco to increase the basic
discount rate by 3A percentage point, to
43/4 percent.
Votes for this action: Messrs. Greenspan,
Blinder, Kelley, LaWare, and Lindsey and
Mses. Phillips and Yellen. Votes against
this action: None.
The Board subsequently approved
similar actions taken by the directors of
the Federal Reserve Banks of Boston,
Cleveland, Richmond, Atlanta, Minneapolis, and Dallas, effective November 16, and Philadelphia and Chicago,
effective November 17.
•
\\3
115
Minutes of Federal Open Market
Committee Meetings
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.
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 instructions
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 1994. Changes in the instruments during the year are reported in the
records for the individual meetings.
Authorization for Domestic Open
Market Operations
In Effect January 1, 1994
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
116 81st Annual Report, J 994
to securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System
Open Market Account at market prices, and,
for such Account, to exchange maturing U.S.
Government and Federal agency securities
with the Treasury or the individual agencies
or to allow them to mature without replacement; provided that the aggregate amount of
U.S. Government and Federal agency securities held in such Account (including forward
commitments) at the close of business on the
day of a meeting of the Committee at which
action is taken with respect to a domestic
policy directive shall not be increased or
decreased by more than $8.0 billion during
the period commencing with the opening of
business on the day following such meeting
and ending with the close of business on the
day of the next such meeting;
(b) When appropriate, to buy or sell in
the open market, from or to acceptance
dealers and foreign accounts maintained at
the Federal Reserve Bank of New York, on a
cash, regular, or deferred delivery basis, for
the account of the Federal Reserve Bank of
New York at market discount rates, prime
bankers acceptances with maturities of up to
nine months at the time of acceptance that
(1) arise out of the current shipment of goods
between countries or within the United
States, or (2) arise out of the storage within
the United States of goods under contract of
sale or expected to move into the channels of
trade within a reasonable time and that are
secured throughout their life by a warehouse
receipt or similar document conveying title
to the underlying goods; provided that the
aggregate amount of bankers acceptances
held at any one time shall not exceed
$100 million;
(c) To buy U.S. Government securities,
obligations that are direct obligations of, or
fully guaranteed as to principal and interest
by, any agency of the United States, and
prime bankers acceptances of the types
authorized for purchase under l(b) above,
from dealers for the account of the Federal
Reserve Bank of New York under agreements for repurchase of such securities, obligations, or acceptances in 15 calendar days
or less, at rates that, unless otherwise
expressly authorized by the Committee, shall
be determined by competitive bidding, after
applying reasonable limitations on the volume of agreements with individual dealers;
provided that in the event Government securities or agency issues covered by any such
agreement are not repurchased by the dealer
pursuant to the agreement or a renewal
thereof, they shall be sold in the market or
transferred to the System Open Market
Account; and provided further that in the
event bankers acceptances covered by any
such agreement are not repurchased by the
seller, they shall continue to be held by the
Federal Reserve Bank or shall be sold in
the open market.
2. In order to ensure the effective conduct
of open market operations, the Federal Open
Market Committee authorizes and directs the
Federal Reserve Banks to lend U.S. Government securities held in the System Open
Market Account to Government securities
dealers and to banks participating in Government securities clearing arrangements conducted through a Federal Reserve Bank,
under such instructions as the Committee
may specify from time to time.
3. In order to ensure the effective conduct
of open market operations, while assisting in
the provision of short-term investments for
foreign and international accounts maintained at the Federal Reserve Bank of New
York, the Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York (a) for System Open
Market Account, to sell U.S. Government
securities to such foreign and international
accounts on the bases set forth in paragraph
l(a) under agreements providing for the
resale by such accounts of those securities
within 15 calendar days on terms comparable to those available on such transactions
in the market; and (b) for New York Bank
account, when appropriate, to undertake with
dealers, subject to the conditions imposed on
purchases and sales of securities in paragraph l(c), repurchase agreements in U.S.
Government and agency securities, and to
arrange corresponding sale and repurchase
agreements between its own account and
foreign and international accounts maintained at the Bank. Transactions undertaken
with such accounts under the provisions of
this paragraph may provide for a service fee
when appropriate.
Minutes of FOMC Meetings
Domestic Policy Directive
In Effect January 1, 19941
The information reviewed at this meeting
suggests a strong advance in economic activity 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
1. Adopted by the Committee at its meeting on
December 21, 1993.
\17
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.
Authorization for Foreign
Currency Operations
In Effect January 1, 1994
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:
118 81st Annual Report, 1994
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 the Federal Reserve
Bank of New York with the foreign banks
Minutes of FOMC Meetings
\ \9
designated by the Board of Governors under
Section 214.5 of Regulation N shall be
referred for review and approval to the
Committee.
C. From time to time, to transmit
appropriate reports and information to the
National Advisory Council on International
Monetary and Financial Policies,
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.
8. Staff officers of the Committee are
authorized to transmit pertinent information on System foreign currency operations
to appropriate officials of the Treasury
Department.
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;
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, 1994
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.
120 81st Annual Report, 1994
4. System foreign currency operations
shall be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with
foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange
arrangements under the IMF Article IV.
Procedural Instructions with
Respect to Foreign Currency
Operations
In Effect January 1, 1994
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.
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 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 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.
1. The Manager shall clear with the Sub- Meeting Held on
committee (or with the Chairman, if the February 3-4, 1994
Chairman believes that consultation with the
Subcommittee is not feasible in the time A meeting of the Federal Open Market
available):
Committee was held in the offices of the
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.
Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Thursday, February 3, 1994, at 2:30
p.m. and was continued on Friday, February 4, 1994, at 9:00 a.m.
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.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Broaddus
Mr. Forrestal
Minutes of FOMC Meetings, February
Mr. Jordan
Mr. Kelley
Mr. La Ware
Mr. Lindsey
Mr. Parry
Ms. Phillips
Messrs. Hoenig, Keehn, Melzer,
Oltman,2 and Syron, Alternate
Members of the Federal Open
Market Committee
Messrs. Boehne, McTeer, and Stern,
Presidents of the Federal Reserve
Banks of Philadelphia, Dallas, and
Minneapolis respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Beebe, J. Davis, R. Davis,
Goodfriend, Lindsey, Promisel,
Siegman, Simpson, and Stockton
and Ms. Tschinkel, Associate
Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Hooper, Assistant Director,
Division of International Finance,
Board of Governors2
2. Attended the Thursday session only.
121
Mr. Reinhart, Section Chief, Division
of Monetary Affairs, Board of
Governors3
Mr. Rosine, Senior Economist,
Division of Research and
Statistics, Board of Governors3
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. T. Davis, Dewald, Lang,
Rolnick, Rosenblum, and Scheld,
Senior Vice Presidents, Federal
Reserve Banks of Kansas City,
St. Louis, Philadelphia,
Minneapolis, Dallas, and
Chicago respectively
Mr. McNees, Vice President, Federal
Reserve Bank of Boston
Ms. Krieger, Assistant Vice President,
Federal Reserve Bank of
New York
In the agenda for this meeting, it was
reported that advices of the election of
the following members and alternate
members of the Federal Open Market
Committee for the period commencing
January 1, 1994, and ending December 31, 1994, had been received and that
the named individuals had executed
their oaths of office.
The elected members and alternate
members were as follows:
William J. McDonough, 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;
J. Alfred Broaddus, Jr., President of the
Federal Reserve Bank of Richmond,
with Richard F. Syron, President of the
Federal Reserve Bank of Boston, as
alternate;
Jerry L. Jordan, President of the Federal
Reserve Bank of Cleveland, with Silas
3. Attended portion of meeting relating to the
Committee's discussion of the economic outlook
and its longer-run objectives for monetary and
debt aggregates.
122 81st Annual Report, 1994
Keehn, President of the Federal Reserve
Bank of Chicago, as alternate;
Robert P. Forrestal, President of the Federal
Reserve Bank of Atlanta, with Thomas
C. Melzer, President of the Federal
Reserve Bank of St. Louis, as alternate;
Robert T. Parry, President of the Federal
Reserve Bank of San Francisco, with
Thomas M. Hoenig, President of the
Federal Reserve Bank of Kansas City,
as alternate.
By unanimous vote, the following
officers of the Federal Open Market
Committee were elected to serve until
the election of their successors at the
first meeting of the Committee after
December 31, 1994, 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
Chairman
William J. McDonough
Vice Chairman
Donald L. Kohn
Secretary and
Economist
Deputy Secretary
Assistant
Secretary
Assistant
Secretary
General Counsel
Deputy General
Counsel
Economist
Economist
Normand R. V. Bernard
Joseph R. Coyne
Gary P. Gillum
J. Virgil Mattingly, Jr.
Ernest T. Patrikis
Michael J. Prell
Edwin M. Truman
Jack H. Beebe, John M. Davis, Richard G.
Davis, Marvin S. Goodfriend, David E.
Lindsey, Larry J. Promisel, Charles J.
Siegman, Thomas D. Simpson, David J.
Stockton, and Sheila L. Tschinkel,
Associate Economists
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, 1994.
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 board of directors of
the Federal Reserve Bank of New York.
On January 24, 1994, the continuing
rules, regulations, authorizations, and
other instruments of the Committee had
been 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 3^X 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, and no requests for substantive
consideration were received.
At this meeting, the members agreed
to update the references to the Management of the System Open Market
Account in the following FOMC documents to reflect the new titles of Manager for Domestic Operations, System
Open Market Account, and Manager for
Foreign Operations, System Open Market Account: (1) FOMC Rules of Organization, (2) Procedures for Allocation
of Securities in the System Open Market
Account, and (3) Program for Security
Minutes of FOMC Meetings, February
of FOMC Information. Except for this
change, all of the instruments identified
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.
3. Resolution to Provide for the Continued Operation of the Federal Open Market
Committee During an Emergency.
4. Resolution
Authorizing
Certain
Actions by Federal Reserve Banks During
an Emergency.
5. Resolution Relating to Examinations of
the System Open Market Account.
6. Guidelines for the Conduct of System
Operations in Federal Agency Issues.
7. Regulation Relating to Open Market
Operations of Federal Reserve Banks.
8. Program for Security of FOMC
Information.
9. Federal Open Market Committee
Rules of Organization, Rules of Procedure,
and Rules Regarding Availability of
Information.
By unanimous vote, the Authorization for Domestic Open Market Operations shown below was reaffirmed.
Authorization for Domestic Open
Market Operations
Reaffirmed February 3, 1994
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
\ 23
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 secu-
124 81st Annual Report, 1994
rities or agency issues covered by any such
agreement are not repurchased by the dealer
pursuant to the agreement or a renewal
thereof, they shall be sold in the market or
transferred to the System Open Market
Account; and provided further that in the
event bankers acceptances covered by any
such agreement are not repurchased by the
seller, they shall continue to be held by the
Federal Reserve Bank or shall be sold in
the open market.
2. In order to ensure the effective conduct
of open market operations, the Federal Open
Market Committee authorizes and directs the
Federal Reserve Banks to lend U.S. Government securities held in the System Open
Market Account to Government securities
dealers and to banks participating in Government securities clearing arrangements conducted through a Federal Reserve Bank,
under such instructions as the Committee
may specify from time to time.
3. In order to ensure the effective conduct
of open market operations, while assisting in
the provision of short-term investments for
foreign and international accounts maintained at the Federal Reserve Bank of New
York, the Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York (a) for System Open
Market Account, to sell U.S. Government
securities to such foreign and international
accounts on the bases set forth in paragraph
l(a) under agreements providing for the
resale by such accounts of those securities
within 15 calendar days on terms comparable to those available on such transactions
in the market; and (b) for New York Bank
account, when appropriate, to undertake with
dealers, subject to the conditions imposed on
purchases and sales of securities in paragraph l(c), repurchase agreements in U.S.
Government and agency securities, and to
arrange corresponding sale and repurchase
agreements between its own account and
foreign and international accounts maintained at the Bank. Transactions undertaken
with such accounts under the provisions of
this paragraph may provide for a service fee
when appropriate.
By unanimous vote, the Authorization for Foreign Currency Operations
was amended to reflect the new title of
Manager for Foreign Operations, System Open Market Account.
Authorization for Foreign Currency
Operations
Amended February 3, 1994
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, for System Open Market
Account, to the extent necessary to carry out
the Committee's foreign currency directive
and express authorizations by the Committee
pursuant thereto, and in conformity with
such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following
foreign currencies in the form of cable transfers through spot or forward transactions on
the open market at home and abroad, including transactions with the U.S. Treasury, with
the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve
Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial
institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have
outstanding forward contracts to receive or
to deliver, the foreign currencies listed in
paragraph A above.
C. To draw foreign currencies and to
permit foreign banks to draw dollars under
the reciprocal currency arrangements listed
in paragraph 2 below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months
after any amount outstanding at that time
was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding
$25.0 billion. For this purpose, the overall
open position in all foreign currencies is
defined as the sum (disregarding signs) of
net positions in individual currencies. The
net position in a single foreign currency is
Minutes of FOMC Meetings, February
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 LA. 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.
\ 25
4. It shall be the normal practice to
arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign currencies, the Federal
Reserve Bank of New York shall not commit
itself to maintain any specific balance, unless
authorized by the Federal Open Market
Committee. Any agreements or understandings concerning the administration of the
accounts maintained by the Federal Reserve
Bank of New York with the foreign banks
designated by the Board of Governors under
Section 214.5 of Regulation N shall be
referred for review and approval to the
Committee.
5. Foreign currency holdings shall be
invested insofar as practicable, considering
needs for minimum working balances. Such
investments shall be in liquid form, and
generally have no more than 12 months
remaining to maturity. When appropriate in
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, System Open Market Account
("Manager"), 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.
126 81st Annual Report, 1994
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or
understanding with the Secretary of the Treasury about the division of responsibility for
foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with
the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit
appropriate reports and information to the
National Advisory Council on International
Monetary and Financial Policies.
8. Staff officers of the Committee are
authorized to transmit pertinent information
on System foreign currency operations to
appropriate officials of the Treasury
Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations
for System Account in accordance with paragraph 3.G(1) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.
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 Foreign
Currency Directive shown below was
reaffirmed.
Procedural Instructions with
Respect to Foreign Currency
Operations
By unanimous vote, the Procedural
Instructions with Respect to Foreign
Currency Operations shown below were
amended to reflect the new title of Manager for Foreign Operations, System
Open Market Account.
Amended February 3, 1994
Foreign Currency Directive
Reaffirmed February 3, 1994
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:
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 ("Manager"),
shall be guided by the following procedural understandings with respect to consultations and clearances 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):
Minutes of FOMC Meetings, February
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 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 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.
Agreement to "Warehouse"
Foreign Currencies
At its meeting on February 2-3, 1993,
the Committee had reaffirmed the $5 billion limit on the amount of eligible foreign currencies that the System was prepared to "warehouse" for the Treasury
and the Exchange Stabilization Fund
(ESF). The purpose of the warehousing
127
facility is to supplement, at the discretion of the Federal Reserve, the U.S.
dollar resources of the Treasury and the
ESF for financing their purchases of foreign currencies and related international
operations. There had been no use of
this facility since an ESF repayment of
$2 billion on April 2, 1992. The Committee decided at this meeting to
reaffirm the $5 billion ceiling, which it
viewed as providing adequate operational flexibility to respond on short
notice to unanticipated developments.
Votes for this action: Messrs. Greenspan,
McDonough, Broaddus, Forrestal, Kelley,
LaWare, Lindsey, and Parry and Ms. Phillips. Vote against this action: Mr. Jordan.
Absent and not voting: Messrs. Angell
and Mullins.
Mr. Jordan dissented because he felt
that providing funds to the Treasury
using a warehousing arrangement was,
in effect, a loan to the Treasury. In his
opinion, direct financing of government
operations by the central bank is inappropriate and could compromise the
effective conduct of monetary policy.
He did not rule out the possible efficacy
of some warehousing transactions in
very exceptional circumstances in the
future, but he believed that the latter
should be approved only after full Committee discussion. Accordingly, he did
not want to retain the standing $5 billion
authorization.
By unanimous vote, the minutes of
actions taken at the meeting of the Federal Open Market Committee held on
December 21, 1993, were approved.
The Manager for Foreign Operations
reported on developments in foreign
exchange markets during the period
since the December meeting. There
were no System open market transactions in foreign currencies during this
period, and thus no vote was required of
the Committee.
128 81st Annual Report, 1994
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 December 21,
1993, through February 3, 1994. By
unanimous vote, the Committee ratified
these transactions.
The Committee then turned to a discussion of the economic and financial
outlook, the ranges for the growth of
money and debt in 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 indicated that economic activity recorded a strong advance during the
closing months of 1993, and the limited
data available on production and employment suggested appreciable further
gains in the early weeks of this year.
Housing starts had strengthened substantially in the fourth quarter of last
year, and business fixed investment had
registered a sharp rise. Increases in
broad indexes of consumer and producer prices, excluding their food and
energy components, had been somewhat
larger in recent months than earlier in
1993, and prices of a number of commodities had turned up.
Assessment of the January labor market data was complicated by statistical
revisions and weather-related reporting
problems, but a variety of indicators
pointed convincingly to a further
strengthening in the demand for labor.
Total nonfarm payroll employment
posted a small gain in January after a
sizable December increase. Manufac
turing employment rose for a fourth
consecutive month, with gains again
concentrated in motor vehicles. Construction payrolls edged down, evidently
reflecting the adverse effects of severe
winter weather. The total number of jobs
in the services industries was unchanged
in January, but the inclement weather
apparently held down employment in
some segments of this sector as well.
The average workweek of production or
nonsupervisory workers rose in January
to its highest level in almost five years;
for manufacturing, the average workweek remained at its post-World War II
high for a third consecutive month. The
civilian unemployment rate, calculated
on a new basis, was 6.7 percent in
January.
Industrial production increased appreciably further in December, and the
available information suggested a considerable rise in January. In December,
the advance in manufacturing was led
by the motor vehicle and computing
equipment industries. Sizable increases
in materials and construction supplies
also were recorded. On the other hand,
the output of consumer goods other than
motor vehicles was sluggish, and the
production of aircraft and defense and
space equipment continued to shrink.
Total utilization of manufacturing
capacity rose again in December and
reached a relatively high level, judged
against historical experience.
Consumer spending, as measured by
real personal consumption expenditures,
posted another solid increase in the
fourth quarter, and strong sales of motor
vehicles in January suggested continued
buoyancy in consumer demand. In the
fourth quarter, real outlays on motor
vehicles surged, and spending on other
durable goods—notably furniture, appliances, and other household equipment—
registered further large gains. By contrast, real outlays for nondurable goods
Minutes of FOMC Meetings, February
and services rose only moderately.
Housing starts jumped in December,
with both single-family and multifamily
starts sharing in the advance. For 1993
as a whole, housing starts were at their
highest annual total in four years. Sales
of new homes were up sharply in
November, and sales of existing homes
ended the year at the highest monthly
level in the twenty-five-year history of
the series.
Real business fixed investment recorded a very large increase in the fourth
quarter. Business spending for equipment, notably for information processing equipment, was up sharply for a
seventh straight quarter. The strength
evident in recent orders for nondefense
capital goods pointed to further gains in
shipments of these goods in early 1994.
Outlays for nonresidential structures in
the fourth quarter posted their largest
quarterly rise in six years; the increases
were spread across a broad array of categories other than office buildings. Construction permits continued to rise in the
fourth quarter, suggesting further growth
of investment in nonresidential structures in the near term.
Business inventories remained generally well aligned with sales through
November, the most recent month for
which complete data were available. In
manufacturing, inventory stocks fell in
December after edging lower in November; with brisk gains in shipments in
both months, the ratio of stocks to
shipments fell further from levels that
already were low by historical standards. At the wholesale level, inventories rose moderately in November after
little change in the preceding two
months. The inventory-to-sales ratio for
this sector had changed little since May.
Retail inventories expanded substantially in November for a third straight
month. The buildup of stocks might
have been in anticipation of robust holi
\ 29
day sales, but for some retail businesses,
particularly general merchandise stores,
the increases coincided with weak sales.
For the retail sector as a whole, the
inventory-to-sales ratio was up slightly
in November.
The average nominal U.S. merchandise trade deficit for the OctoberNovember period was about the same as
its average rate in the third quarter. The
value of exports was up for the twomonth period, with the increase occurring largely in machinery, automotive
products, and aircraft. The higher value
of imports for the two-month period
reflected, as had been the case earlier in
1993, greater imports of consumer
goods, automotive products, and machinery. Trends in economic activity in
the major foreign industrial countries
appeared to have diverged further in
the fourth quarter. Moderate growth
appeared to be continuing in Canada
and the United Kingdom, but economic
activity seemed to be growing more
slowly or to have turned down in Japan,
western Germany, and France.
Producer prices of finished goods
were down slightly in December after
being unchanged in November. Excluding the food and energy components,
producer prices edged higher in December and were up slightly for the year as a
whole. At the retail level, consumer
prices rose modestly in November and
December, with energy price declines
holding down the increase in the overall
index. For items other than food and
energy, prices advanced in the two
months at a slightly faster pace than that
seen over previous months of the year;
for 1993 as a whole, the increase was
about the same as in 1992. Hourly compensation of private industry workers
increased in the fourth quarter at the
same pace as in the third quarter. For
1993, the rise in hourly compensation
was little changed from the previous
130 81st Annual Report, 1994
year. Average hourly earnings of production or nonsupervisory workers rose
sharply in January, but for the twelve
months ended in January, the increase
was the same as that recorded for the
previous twelve months.
At its meeting on December 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
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 following months.
Open market operations were directed
toward maintaining the existing degree
of pressure on reserve positions throughout the intermeeting period. Additional
reserves were supplied to the banking
system on a temporary basis around
year-end to meet seasonal movements in
currency and required reserves as well
as an enlarged demand for excess
reserves. For the intermeeting period as
a whole, the federal funds rate remained
close to 3 percent while adjustment plus
seasonal borrowing averaged somewhat
more than anticipated.
Most market interest rates declined
slightly during the intermeeting period,
and major indexes of stock prices posted
new highs. Market participants saw the
incoming news on inflation as encouraging; still, they viewed the economy as
relatively robust, and on balance they
deemed a firming of monetary policy to
counteract a potential buildup of inflation pressures as likely in the next few
months, but probably not in the very
near term.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
changed little on balance over the intermeeting period. The dollar fell against
the yen in the context of somewhat
higher Japanese interest rates -and
renewed expressions of U.S. concern
about bilateral trade issues. The dollar
appreciated slightly relative to the German mark and other European currencies against the background of relatively
strong U.S. economic data and generally
sluggish economic activity in continental Europe.
Growth of the broad monetary aggregates, though a little faster than in most
of 1993, remained relatively slow over
December and January. Investors evidently continued to find low-yielding
deposits less appealing than stock and
bond mutual funds, although recent
inflows to bond funds appeared to have
been at a slower rate than that seen over
most of 1993. For the year 1993, growth
of both M2 and M3 was estimated to
have been slightly above the lower ends
of the Committee's ranges. Private borrowing had picked up in recent months,
and total domestic nonfinancial debt
expanded at a somewhat faster, though
still moderate, pace in the fourth quarter; for the year, nonfinancial debt was
estimated to have been in the lower half
of the Committee's monitoring range.
The staff forecast prepared for this
meeting suggested that economic expansion would slow from the very strong
pace of the fourth quarter, but that the
economy still would advance in 1994 at
a rate somewhat in excess of the growth
of potential. The severe winter weather
over much of the country and the California earthquake would tend to distort
Minutes of FOMC Meetings, February
economic indicators for the early part of
the year; however, taken together, these
developments were not expected to have
a material or lasting effect on the overall
level of activity or prices. Consumer
spending, which for some time had
tended to outpace the growth of disposable income, was projected to increase
at a rate more in line with incomes.
Business fixed investment was expected
to decelerate gradually from the very
rapid rate of 1993, reflecting the diminishing effect of the earlier pickup in
output growth, the slower growth of
corporate cash flow, and a less rapid
decline in the cost of capital. Homebuilding activity, driven by the greatly
improved affordability of housing and
increased confidence in employment
prospects, was anticipated to continue at
a relatively brisk pace through much of
the year. Exports were projected to
strengthen somewhat, bolstered by some
pickup in foreign economic growth, and
fiscal restraint was expected to exert a
reduced drag on spending. In light of the
limited margins of slack in labor and
product markets that were anticipated to
prevail over the forecast horizon, the
ongoing expansion was projected to be
associated with only a slight further
reduction in the core rate of inflation.
In the Committee's discussion of current and prospective economic developments, members commented that the
economy had entered the new year with
appreciable forward momentum and that
the expansion was likely to be sustained
over the year ahead at a pace somewhat
above the economy's long-run potential.
The very rapid rate of economic growth
now indicated for the fourth quarter of
1993 clearly could not be maintained.
Much of the recent impetus to the expansion stemmed from a surge in expenditures on housing, business equipment,
and consumer durables. Such spending
had reached a very high level in relation
\ 31
to underlying demands so that the pace
of additional increases undoubtedly
would moderate during the course of
1994. Still, the economic expansion
seemed to have considerable momentum, largely as a consequence of diminishing balance sheet constraints and
generally favorable financial conditions
spurred by a highly accommodative
monetary policy. As a consequence, a
number of members expressed the view
that the risks were on the upside of a
moderate growth forecast. In the context
of low and decreasing slack in the economy, little further progress would be
made toward price stability in 1994, and
there was a distinct risk of higher inflation at some point if monetary policy
were not adjusted. While broad measures of inflation did not on the whole
suggest any changes in inflation trends,
some members noted that a number of
commodity prices had turned up in
recent months, and they referred to
still scattered but increasing anecdotal
reports that some business firms were
paying slightly higher prices for various
materials purchased for use in the production process.
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 1994. The central
tendency of the forecasts pointed to
somewhat faster economic growth this
year than currently was estimated for
1993. The anticipated rate of economic
expansion was expected to foster a limited further drop in the rate of unemployment by the fourth quarter of this
year. With the slack in productive
resources expected to diminish further
to a quite low level, price and cost pres-
132 81st Annual Report, 1994
sures were unlikely to abate significantly; indeed, price increases in 1994
could exceed those of 1993 when inflation had been held down by favorable
developments in energy prices. Measured from the fourth quarter of 1993 to
the fourth quarter of 1994, the forecasts
for growth of real GDP had a central
tendency of 3 to VA percent and a full
range of 2Vi to VA percent. Projections
of the civilian rate of unemployment in
the fourth quarter of 1994 were all in a
range of 6'/2 to 6V* percent calculated on
the basis of the new survey recently
introduced by the Bureau of Labor Statistics. For the CPI, the central tendency
of the forecasts for the period from the
fourth quarter of 1993 to the fourth
quarter of 1994 was centered on
increases of about 3 percent within a
range of 2lA to 4 percent, and for nominal GDP the forecasts were clustered
in a range of 5!/2 to 6 percent for the
year.
In the Committee's review of factors
underlying recent developments, members observed that generally favorable
financial conditions provided a backdrop conducive to further robust expansion in business activity. Much of the
recent strengthening in economic
growth was generated by increased
spending in interest-sensitive sectors of
the economy such as housing in response to relatively low interest rates.
Generally buoyant equity markets, a
readier availability of financing from
lending institutions, and the strengthened financial condition of businesses
and households also were cited as factors tending to boost economic activity.
Balance sheet restructuring activities
appeared to have slackened markedly,
and while balance sheet adjustments
probably were still being made, the
latter seemed to be exerting much less
restraint on the willingness of businesses
and especially households to spend and
to incur new debt to finance growing
expenditures.
In their reports on developments
across the nation, members commented
on widespread indications of improving
economic activity, including some
strengthening in regions that earlier
were characterized by stagnant business
conditions. Some areas continued to be
affected adversely by special factors,
especially by spending cutbacks in
defense and aerospace industries. California was a notable example, but a
range of indicators suggested that the
California economy might be stabilizing, albeit at a depressed level, after an
extended period of declining activity.
Mirroring these developments, business
sentiment was characterized as generally optimistic around the nation. While
business executives remained cautious
in their hiring practices, the expansion
in business activity was fostering sizable overall gains in employment even
in areas where some major business
concerns were reducing their workforces. A few large firms that previously
had frozen or reduced their payrolls
were now reported to be hiring additional workers.
Turning to prospective developments
in key sectors of the economy, the members anticipated that the expansion in
consumer expenditures would be well
maintained during 1994, though the
growth in such spending probably would
moderate to a pace more in line with
gains in disposable income. The available data on retail sales since the holiday period were still limited, but anecdotal reports pointed to continuing
momentum in several parts of the country. Winter storms had hindered sales in
a number of areas, but according to
some retail contacts the adverse effects
were likely to be temporary. In any
event, the very rapid rates of growth in
sales of automobiles and other consumer
Minutes of FOMC Meetings, February
durables were not sustainable, and
already high consumer debt ratios would
be a further inhibiting factor. It was
noted in this connection that consumer
debt had become more concentrated
over the course of recent years among
consumer groups that were most likely
to borrow to help finance their spending,
with the result that the ability of such
consumers to incur additional indebtedness could be diminished. Higher taxes
confronting some households also were
cited as a negative factor in the outlook
for the consumer sector. On balance,
however, while the prospects for consumer spending clearly were not free of
uncertainty, the marked improvement in
consumer confidence and favorable
financial conditions would provide a setting conducive to sustained moderate
growth in consumer expenditures.
The improvement in consumer sentiment together with the availability of
relatively low cost financing had fostered very strong growth in housing construction over the closing months of
1993 and, adjusting for seasonal weather
conditions, anecdotal reports from many
areas suggested a continued robust performance in this sector of the economy
in the early weeks of this year. The
strength in housing activity had induced
increases in the costs of lumber and
other building materials, and shortages
of skilled construction workers were
reported in some areas. Despite these
developments, prices of new homes did
not appear at this point to be under
significant upward pressure. Looking
ahead, with housing construction already at high levels, further gains over
the course of 1994 were expected to be
substantially below those recorded in
recent quarters.
Business fixed investment was likely
to be sustained by continuing efforts to
modernize production facilities in order
to achieve more efficient operations in
133
highly competitive domestic and world
markets. The gains in such investment
had been concentrated in expenditures
for equipment, and while new orders
pointed to further brisk growth in the
months ahead, increases in such expenditures were likely to moderate over
time. At the same time, growing economic activity and associated declines
in commercial and industrial vacancy
rates, at least in some parts of the country, suggested that nonresidential building construction other than office structures would post sizable increases over
the year. Rebuilding activity following
the earthquake in California would
stimulate engineering and construction
in the Los Angeles area over the quarters ahead.
Fiscal policy and foreign trade had
exerted retarding effects on the economy in 1993. While the response of the
economy to fiscal restraint and the outlook for export markets remained subject to substantial uncertainty, both
fiscal policy and the trade deficit were
expected at this point to be less negative
factors in the performance of the economy during 1994. With regard to the
outlook for fiscal policy, the downtrend
in defense spending was projected to
moderate and to contribute to a smaller
net decline in overall federal government expenditures on goods and services in 1994. It was noted that the
widespread political support of efforts to
curtail federal government deficits could
be expected to continue to contain new
federal spending initiatives. With regard
to the outlook for U.S. exports, more
accommodative fiscal or monetary policies abroad were expected to foster a
gradual improvement in rates of economic growth in major foreign industrial countries with beneficial effects on
the demand from those countries for
U.S. goods and services. One member
also commented that NAFTA already
134 81st Annual Report, 1994
seemed to be having a favorable effect
on some exports to Mexico.
One sector of the economy that was
viewed as a source of particular uncertainty was the outlook for inventories.
Business firms continued to maintain
tight control over their inventories, and
in general the latter were at quite low
levels in relation to sales. Indeed, there
were some anecdotal reports that inventory shortfalls had resulted in the loss of
sales in recent months. Lean inventory
levels in the context of diminishing
slack in labor and product markets
raised concerns about the potential for
increasing capacity pressures should
strong demands persist that would tend
to deplete existing inventories and lead
to efforts not only to rebuild but to
increase them. Thus far, there were few
signs of developments such as significant increases in delivery lead times or
in the costs of goods purchased by business firms that in the past had triggered
substantial inventory buildups. However, there were ample precedents in the
history of business-cycle expansions of
efforts to accumulate large inventories
in periods when strong final demands
already were exerting inflationary pressures in the economy.
The members generally expressed
concern about a buildup in inflationary
pressures during the year ahead, especially if what they currently viewed as a
very accommodative monetary policy
were maintained. A number of members
emphasized that even with the substantial slowing that they anticipated in the
rate of economic expansion from the
very rapid growth in the fourth quarter,
overall margins of slack in labor and
product markets, already reduced to
fairly modest levels, would shrink further in the quarters ahead with the clear
possibility that various imbalances and
added inflation would emerge in the
absence of monetary tightening actions.
Continuing upward impetus to food
prices, resulting from the adverse
weather conditions during 1993, and the
likelihood that energy prices would not
decline further and might in fact turn up
in an environment of somewhat stronger
worldwide demand for energy products
could add to overall price pressures.
The members acknowledged that
broad measures of prices and wages had
displayed mixed patterns over recent
months and that on the whole they did
not yet point to any clear change in
inflation trends. However, some other
indicators were more disquieting. One
example was the growing, though still
limited, number of anecdotal reports of
shortages of skilled workers in some
parts of the country or occupations,
notably construction. Moreover, there
were more reports of rising prices for
products being purchased by business
firms for use in the production process
and in turn of successful efforts by businesses to raise their own prices in order
to pass on higher costs or to improve
their profit margins. More generally,
many commodity prices had increased
over the past several weeks. On the
positive side, competitive pressures
remained intense in many markets, augmented in markets for numerous products by competition from foreign producers. Some members also commented
that the tradeoff between economic
growth and inflation would be improved
over the year ahead to the extent that
the credibility of the System's antiinflationary policy was maintained.
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
1994 that it had established on a tentative basis at its meeting on July 6-7,
1993. The tentative ranges included
Minutes of FOMC Meetings, February
expansion of 1 to 5 percent for M2 and
0 to 4 percent for M3, measured from
the fourth quarter of 1993 to the fourth
quarter of 1994. The monitoring range
for growth of total domestic nonfinancial debt had been set provisionally at 4
to 8 percent for 1994. All of these ranges
were unchanged from those that the
Committee had set for 1993; the latter
had been adjusted down to take account
of ongoing increases in velocity.
In the Committee's discussion of the
ranges for 1994, which tended to focus
on M2, all the members expressed a
preference for affirming the M2 and M3
ranges that had been established on a
provisional basis in July and all but one
favored adopting the provisional monitoring range for nonflnancial debt; that
member preferred a lower range. Many
of the members commented on the
uncertainties that surrounded the establishment of ranges that were consistent
with the Committee's goals for the
economy. They noted that a variety of
developments had altered the historical
relationships between the monetary
aggregates and broad measures of economic performance over the past several
years. The resulting uncertainty implied
that the Committee needed to retain a
flexible approach to the behavior of the
monetary aggregates in relation to their
ranges, including the need to assess a
broad array of other indicators to gauge
the implications of monetary growth
developments. Nonetheless, the members concluded that as best they could
evaluate evolving financial conditions at
this point, monetary growth within the
tentative ranges would be likely to promote the Committee's objectives of sustained economic expansion and subdued
inflation.
In 1993, both M2 and M3 had grown
at rates about V2 percentage point above
the lower bounds of the ranges that the
Committee now contemplated retaining
\ 35
for 1994. According to a staff analysis
prepared for this meeting, somewhat
faster growth in both of these aggregates
could be expected in 1994. But with
nominal GDP also expected to be
stronger, as indicated by the central
tendency of the members' forecasts, the
velocity of M2 would continue to rise at
an appreciably faster rate than historical
relationships would have suggested.
This assessment assumed that households would continue to redirect savings from M2-type accounts to higheryielding investments, especially bond
and stock mutual funds. However, such
redeployments of funds should moderate this year to the extent that some
investors already had accomplished a
considerable portion of their desired
portfolio reallocations and in light of the
possibility that changes in the prices of
stocks and bonds, including the drop in
bond prices in recent months, would
underline the risks of holding such
instruments. Moreover, depository institutions had strengthened their capital
positions markedly and were likely to
compete more aggressively for M2 and
especially for M3-type deposits in an
effort to maintain or increase their role
in the financing of expanding economic
activity. While these developments and
their implications for monetary growth
could not be forecast with confidence,
the members believed that the ranges
under consideration would probably be
sufficiently wide to accommodate M2
and M3 growth rates under a variety of
likely velocity scenarios. For example,
if the factors that had tended to depress
the growth of the broad aggregates in
relation to income did not abate as
expected this year, M2 and M3 growth
would again be near the lower bounds of
the Committee's ranges. Alternatively,
if the behavior of these aggregates were
to move closer to earlier patterns,
growth in the upper portions of the
136 81st Annual Report, 1994
ranges would foster an economic performance in line with the members'
forecasts.
From the perspective of a longer time
horizon, many of the members noted
that the provisional range for M2 was
essentially at a level that could well
prove to be consistent with sustained
and noninflationary economic expansion. This conclusion assumed that historical relationships between money
growth and the expansion of broad measures of economic performance would
be restored at some point. In the absence
of such a development or the emergence
of new, reasonably stable relationships,
the Committee would have to continue
to place diminished reliance on the monetary aggregates in the formulation of
monetary policy.
With regard to the range for nonfinancial debt, the members anticipated that
its growth this year would remain within
the contemplated range. A staff analysis
suggested that its federal borrowing
component would decrease as a result of
the ongoing effects of deficit reduction
measures that had been enacted and the
rise in tax receipts stemming from economic growth. At the same time, borrowing by the nonfederal sectors should
strengthen further against the backdrop
of more comfortable financial positions
and the expected pickup in GDP expansion. In one view, however, a somewhat
lower range was desirable for nonfinancial debt. In light of the shift in business
preferences away from debt and toward
equity, debt velocity could increase and
slower growth in debt would be consistent with the Committee's objectives.
However, this member could accept the
higher range favored by the other members for 1994.
At the conclusion of the Committee's
disqussion, all the members indicated
that they favored or could accept the
ranges for 1994 that the Committee had
established on a tentative basis at its
meeting in July 1993. In keeping with
the Committee's usual procedures under
the Humphrey-Hawkins Act, the ranges
would be reviewed at midyear, or sooner
if deemed necessary, in light of the
behavior of the aggregates and interim
economic and financial developments.
The Committee approved the following
paragraph for inclusion in the domestic
policy directive:
The Federal Open Market Committee
seeks monetary andfinancialconditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at this meeting established ranges for growth of M2 and
M3 of 1 to 5 percent and 0 to 4 percent
respectively, measured from the fourth quarter of 1993 to the fourth quarter of 1994. The
Committee anticipated that developments
contributing to unusual velocity increases
could persist during the year and that money
growth within these ranges would be consistent with its broad policy objectives. The
monitoring range for growth of total domestic nonfinancial debt was set at 4 to 8 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.
Votes for this action: Messrs. Greenspan,
McDonough, Broaddus, Forrestal, Jordan,
Kelley, LaWare, Lindsey, and Parry and
Ms. Phillips. Votes against this action:
None. Absent and not voting: Messrs.
Angell and Mullins.
In the Committee's discussion of policy for the intermeeting period ahead,
the members favored an adjustment
toward a less accommodative policy
stance, though views differed to some
extent with regard to the amount of the
adjustment. The current policy posture,
which had been in effect since the late
summer of 1992, was highly stimulative
as evidenced, for example, by very low
Minutes of FOMC Meetings, February
or even slightly negative real short-term
interest rates and, in the view of at least
some members, the relatively rapid
growth over an extended period in narrow measures of money and reserves.
Such a policy had been appropriate in a
period when various developments had
tended to inhibit the expansion, including widespread efforts to repair strained
balance sheets and a variety of business
restructuring activities that had tended
to depress confidence and spending.
More recently, the considerable progress
made by households and businesses in
decreasing their debt service burdens
and the much strengthened capital positions of lending institutions had provided a financial basis, in the context
of low interest rates, for growth in demands on productive capacity that could
generate inflation pressures. In this situation, the members agreed that monetary policy should be adjusted toward a
more neutral stance that would encourage sustained economic growth without
a buildup of inflationary imbalances.
The members recognized that timely
action was needed to preclude the necessity for more vigorous and disruptive
policy moves later if inflationary pressures were allowed to intensify. The
history of past cyclical upswings had
demonstrated the inflationary consequences and adverse effects on economic activity of delayed anti-inflation
policy actions.
In the course of the Committee's discussion, a number of members endorsed
a policy move that would involve only a
slight adjustment toward a less accommodative degree of reserve pressure.
These members recognized that evolving economic conditions might well
justify a somewhat greater policy adjustment. They believed, however, that even
a slight move at this time was likely to
have a particularly strong impact on
financial markets because it would be
\ 37
the first policy change after a long hiatus
and indeed the first tightening action
in about five years. The market effect
might be amplified by a contemplated
decision to authorize the Chairman to
announce the policy action (discussed
below). In the circumstances, these
members felt that a somewhat greater
policy adjustment would incur an unacceptable risk of dislocative repercussions in financial markets. A relatively
small move would readily accomplish
the purposes of signaling the Committee's anti-inflation resolve and together
with expected further action should help
to temper or avert an increase in inflation expectations and speculative developments in financial markets.
Other members indicated a preference for a somewhat greater firming
action that would move monetary policy
closer to a desirable neutral stance. In
this view, recent developments in the
economy had demonstrated that monetary policy was much too accommodative and that slow, gradual tightening
moves risked allowing inflation pressures to build. A more decisive policy
move at this juncture would in fact
reduce uncertainty, because fewer discrete actions would be required and they
would have a more pronounced and
desirable effect in curbing inflationary
sentiment and thus in minimizing upward pressures on longer-term interest
rates over time. The result would be a
policy stance that was more consistent
with sustained economic expansion and
progress toward price stability.
In further discussion, all the members indicated that they could accept
the proposed slight policy adjustment at
this point, but many observed that additional finning probably would be desirable later. The members did not see any
unusual likelihood that a further policy
action would be needed during the
intermeeting period, and the Commit-
138 81st Annual Report, 1994
tee therefore decided to retain an
unbiased intermeeting instruction in
the directive. In this connection, it was
understood that the Committee would
be prepared to review its policy stance
and take further action, if warranted by
intermeeting developments, at a telephone conference during the period
ahead.
At this meeting, Committee members
discussed and agreed on a proposal to
have the Chairman announce the Committee's short-term policy decision
promptly. The purpose of such an
announcement, which would be a departure from past Committee practice, was
to avoid any misinterpretation of the
Committee's action and its purpose.
Because this would be the first tightening policy action in a long time, it was
likely to attract considerable attention.
The Committee did not intend this
announcement to set any precedents or
to imply any commitments regarding the
announcement of its decisions in the
future. That matter would be reviewed
along with other issues relating to the
disclosure of Committee information at
a later meeting.
At the conclusion of the Committee's
discussion, all the members indicated
that they could support a directive that
called for a slight increase in the 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 Committee decided
that in the context of its long-run objectives for price stability and sustainable
economic growth, and giving careful
consideration to economic, financial,
and monetary developments, slightly
greater or slightly lesser reserve restraint
might be acceptable during the intermeeting period. The reserve conditions
contemplated at this meeting were expected to be consistent with moderate
growth in M2 and M3 over the first half
of 1994.
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
indicates a strong advance in economic
activity during the closing months of 1993,
and the limited data available for the early
weeks of this year suggest appreciable further gains. The January labor market data
were complicated by statistical revisions and
weather-related reporting problems; however, a variety of indicators pointed convincingly to a continuing expansion of employment. Industrial production increased sharply
in the fourth quarter and appears to have
risen considerably further in January. Consumer spending and housing activity posted
solid gains in late 1993, and strong sales of
motor vehicles in January suggested continued buoyancy in consumer demand. Trends
in contracts and orders point to further sizable gains in business fixed investment. The
average nominal U.S. merchandise trade
deficit in October-November was about the
same as its average rate in the third quarter.
Over the latter part of 1993, increases in
broad indexes of consumer and producer
prices, excluding their food and energy components, were somewhat larger than earlier
in the year and prices of a number of commodities also turned up recently.
Most market interest rates have declined
slightly since the Committee meeting on
December 21, 1993. In foreign exchange
markets, the trade-weighted value of the dollar in terms of the other G-10 currencies is
about unchanged over the intermeeting
period.
Growth of M2 and M3 was relatively slow
over December and January. From the fourth
quarter of 1992 to the fourth quarter of 1993,
M2 and M3 are estimated to have grown at
rates slightly above the lower ends of the
Committee's ranges for the year. Private borrowing has picked up in recent months and
total domestic nonfinancial debt expanded at
a moderate rate in the fourth quarter; for the
Minutes of FOMC Meetings, March 139
year, nonfinancial debt 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 this meeting established ranges for growth of M2 and
M3 of 1 to 5 percent and 0 to 4 percent
respectively, measured from the fourth quarter of 1993 to the fourth quarter of 1994. The
Committee anticipated that developments
contributing to unusual velocity increases
could persist during the year and that money
growth within these ranges would be consistent with its broad policy objectives. The
monitoring range for growth of total domestic nonfinancial debt was set at 4 to 8 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
increase slightly 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 the first half of
1994.
Votes for this action: Messrs. Greenspan,
McDonough, Broaddus, Forrestal, Jordan,
Kelley, LaWare, Lindsey, and Parry and
Ms. Phillips. Votes against this action:
None. Absent and not voting: Messrs.
Angell and Mullins.
It was agreed that the next meeting of
the Committee would be held on Tuesday, March 22, 1994.
The meeting adjourned at 11:45 a.m.
Donald L. Kohn
Secretary
Meeting Held on
March 22, 1994
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 22, 1994, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Broaddus
Mr. Forrestal
Mr. Jordan
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Parry
Ms. Phillips
Messrs. Hoenig, Keehn, Melzer, and
Oltman, Alternate Members of the
Federal Open Market Committee
Messrs. Boehne, McTeer, and Stern,
Presidents of the Federal Reserve
Banks of Philadelphia, Dallas, and
Minneapolis respectively
Ms. Minehan, First Vice President,
Federal Reserve Bank of Boston
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. Beebe, J. Davis, Goodfriend,
Promisel, Siegman, Simpson, and
Stockton and Ms. Tschinkel,
Associate Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
140 81st Annual Report, 1994
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
from $8 billion to $11 billion the dollar
limit on intermeeting changes in System
Account holdings of U.S. government
and federal agency securities for the
intermeeting period ending with the
close of business on May 17, 1994.
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 availMr. Bennett, Ms. Browne, Messrs.
T. Davis, Dewald, Lang, Rolnick,
able at the time of the meeting and of
and Scheld, Senior Vice
the Committee's discussion is provided
Presidents, Federal Reserve Banks below, followed by the domestic policy
of New York, Boston, Kansas City,
directive that was approved by the ComSt. Louis, Philadelphia,
mittee and issued to the Federal Reserve
Minneapolis, and Chicago
Bank of New York.
respectively
The information reviewed at this
Mr. Cox, Vice President, Federal
meeting indicated that economic activReserve Bank of Dallas
ity had expanded appreciably further in
Mr. Hilton, Manager, Open Market
Operations, Federal Reserve Bank the early months of 1994, despite unusually severe winter weather. Consumer
of New York
spending and construction activity had
By unanimous vote, the minutes of been held down to some extent by the
actions taken at the meeting of the Fed- adverse weather conditions, but motor
eral Open Market Committee held on vehicle production had continued at a
February 3-4, 1994, were approved.
very strong pace and business fixed
The Manager for Foreign Operations investment appeared to be headed for a
reported on developments in foreign significant gain in the first quarter. Facexchange markets and on System tory utilization rates had moved still
transactions in foreign currencies dur- higher, and labor demand seemed to
ing the period February 4, 1994, have grown moderately further. Outside
through March 21, 1994. By unani- of a surge in energy prices, increases in
mous vote, the Committee ratified these broad indexes of consumer and protransactions.
ducer prices remained moderate.
The Manager for Domestic OperaNonfarm payroll employment was
tions reported on developments in unchanged in January but posted a Febdomestic financial markets and on ruary advance comparable to the sizable
System open market transactions in monthly increases recorded in the final
government securities and federal quarter of 1993. Employment in the seragency obligations during the period vice industries declined slightly in JanuFebruary 4, 1994, through March 21, ary, then rebounded substantially in Feb1994. By unanimous vote, the Commit- ruary. Manufacturing payrolls rose in
tee ratified these transactions.
January and February, but the number of
By unanimous vote, paragraph 1 (a) of jobs in construction declined in both
the Authorization for Domestic Open months, reflecting that industry's vulnerMarket Operations was amended to raise ability to weather disruptions. The civil
Minutes of FOMC Meetings, March 141
ian unemployment rate, calculated on
the new basis, fell to 6.5 percent in
February; however, the Bureau of Labor
Statistics cautioned that a variety of
technical factors might have exaggerated the decline in joblessness in early
1994.
After a sharp rise in the fourth quarter, industrial production increased considerably further in January and February. Manufacturing output continued to
rise, despite the apparent damping effect
of adverse weather on a number of
industries. Assemblies of motor vehicles
remained quite buoyant, accounting for
more than half of the increase in manufacturing production in the first two
months of the year and reaching in
February their highest level since the
late 1970s. Production of manufactured
goods other than motor vehicles also
was up in the two months, but the
advances were smaller than those of
late 1993. Output of utilities surged in
January, reflecting the heating demand
resulting from abnormally cold temperatures, but a portion of that gain was
retraced in February. Total utilization of
industrial capacity increased in both
January and February and was at relatively elevated levels, judged by historical norms; operating rates in primary
processing industries were especially
high.
Retail sales were little changed on
balance over the first two months of the
year, with sales recovering in February
from a large January decline. By contrast, sales of motor vehicles remained
quite brisk on average over the two
months, despite the California earthquake and the severe weather. Soaring
outlays for home heating contributed
to rapid growth of consumer spending
on services in January. The unusual
weather also affected housing activity;
starts were down considerably in January and February from the very high
levels of late 1993, and new home sales
plunged in January. Sales of existing
homes in January were only slightly
below their high December level.
The limited available evidence
pointed to a noticeably smaller gain in
business fixed investment in the first
quarter of 1994 after a very large
increase in the previous quarter. Shipments of nondefense capital goods
slowed in January, retracing part of the
sharp rise of the fourth quarter, but the
buoyancy of orders in recent months
pointed to a further increase in shipments in coming months. Sales of heavy
trucks were strong in January, and the
backlog of orders for such vehicles
remained large. Nonresidential construction activity, perhaps owing in part to
bad weather, was down in January after
trending up over most of 1993. The largest decline was in office building, which
had posted large increases in the preceding two months.
Business inventories fell slightly in
January, and stocks were lean, especially at manufacturing firms. Inventories in manufacturing rose, retracing
in January part of a large December
decline; much of the January increase
was at producers of machinery, where
stocks had fallen to very low levels relative to shipments. At both the wholesale
and retail levels, inventories posted sizable decreases. In the wholesale sector,
the inventory-to-sales ratio edged down
and had changed little since May of last
year. The inventory-to-sales ratio for the
retail sector was up slightly, reflecting
weak sales in January.
The nominal deficit on U.S. trade in
goods and services, measured on the
new balance-of-payments basis, was
slightly smaller in January than the average for the fourth quarter. However, the
January deficit was substantially larger
than that of December, with exports
down by more than imports. Much of
142 81st Annual Report, 1994
the reduction in exports was in agricultural goods, aircraft, and gold; the drop
in imports mainly reflected both lower
quantities and lower prices of imported
oil. The limited available data suggested
that economic activity in the major foreign industrial countries picked up in
early 1994 after a mixed performance in
the fourth quarter of 1993.
Producer prices of finished goods
were boosted in February by a surge in
energy prices, especially for gasoline
and heating oil, that more than offset a
further decline in food prices. Excluding
the food and energy components, producer prices edged higher in February;
for the twelve months ended in February, producer prices increased by a significantly smaller amount than in the
twelve-month period ended in February
1993. At the consumer level, higher
energy prices in February were offset by
lower food prices. For items other than
food and energy, consumer prices also
rose less over the twelve months ended
in February than in the previous twelve
months. Average hourly earnings of
production or nonsupervisory workers
increased more slowly in February, but
for the twelve months ended in February, the advance was about the same as
that recorded for the previous twelve
months.
At its meeting on February 3-4, 1994,
the Committee adopted a directive that
called for a slight increase in the 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. The
directive stated 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 moderate growth of M2 and M3
over the first half of 1994.
Immediately following the February
meeting, Chairman Greenspan announced the Committee's decision, and
open market operations were directed
toward implementing the slightly less
accommodative degree of reserve pressures sought by the Committee. The
federal funds rate increased by lA percentage point and then remained close
to VA percent over the intermeeting
period, while adjustment plus seasonal
borrowing averaged a little less than
anticipated.
Most other market interest rates rose
considerably more than the federal funds
rate in frequently volatile markets. Market participants generally had anticipated a tightening of monetary policy,
but the Committee's action apparently
came a little sooner than had been expected. Strong fourth-quarter economic
data and evidence of solid growth in
early 1994 were seen as suggesting
greater credit demands and the need for
higher interest rates in the future to contain inflation. Heightened trade tensions
and unsettled market conditions abroad
also contributed to market concerns. In
these circumstances, intermediate- and
longer-term interest rates increased by
appreciably more than short-term money
market rates. Major indexes of stock
prices had fallen on balance since early
February in sometimes volatile trading.
The trade-weighted value of the dollar in terms of the other G-10 currencies
initially rose following the tightening of
monetary policy on February 4. The dollar depreciated over the balance of the
intermeeting period, however, despite
higher U.S. interest rates and the release
of data indicating generally strong U.S.
economic activity. The dollar declined
against both the Japanese yen and the
Minutes of FOMC Meetings, March 143
German mark; trade frictions between
the United States and Japan and disappointment over the pace of monetary
easing in Germany appeared to be contributing factors in the depreciation of
the dollar. Bond yields in all the major
foreign industrial countries rose on average by almost as much as yields on
comparable U.S. bonds.
M2 declined somewhat and M3 was
down sharply in February. A substantial
drop in mortgage refinancings since late
1993 that depressed demand deposits,
and to a lesser extent savings deposits,
contributed to the weakness of M2 in
February. M3 also was affected by a
precipitous decline in institution-only
money funds as investors reacted
quickly following the monetary tightening to widening spreads between returns
on these funds and higher-yielding
short-term instruments. Data for early
March pointed to some rebound in both
monetary aggregates, perhaps owing to
portfolio readjustments that involved
sizable net redemptions of bond funds
and apparently weaker inflows to stock
funds. Total domestic nonfinancial debt
expanded at a moderate rate in recent
months.
The staff forecast prepared for this
meeting suggested that economic expansion would slow from the very strong
pace of the fourth quarter but that the
economy would advance in 1994 at a
rate slightly in excess of the growth of
potential. Consumer spending, which
had tended for some time to outpace
income growth, was projected to
increase at a rate more in line with disposable incomes; spending on durable
goods, in particular, was projected to
slow markedly as stock-adjustment
motives diminished and higher interest
rates exerted some restraint. Business
fixed investment was expected to
increase less rapidly in 1994, reflecting
the diminishing effect of the earlier
pickup in output growth and the slower
growth of corporate cash flow. Homebuilding activity was anticipated to continue at a relatively brisk pace, spurred
by the greater cash-flow affordability
of housing and the good prospects for
continued growth in employment and
incomes. The restraint on output growth
from federal spending cutbacks and
weak export demand was projected to
diminish somewhat. In light of the limited margins of slack in labor and product markets that were expected to prevail over the forecast horizon, little
further reduction in the core rate of
inflation was expected.
In the Committee's discussion of current and prospective economic developments, members referred to widespread
indications of appreciable momentum in
the economic expansion and decreasing
margins of unemployed labor and other
producer resources. While the members
continued to anticipate a marked slowing in economic growth from the very
rapid pace of the fourth quarter, some
commented that despite unusually
severe winter weather in large parts of
the country the deceleration in the current quarter appeared to be less than
they had expected. The indications of
continuing strength in aggregate demand
along with a still-accommodative monetary policy suggested a much reduced
risk that the economic expansion would
stall. Indeed, members continued to
expect moderate economic growth,
though perhaps for a time at a rate somewhat above the economy's potential.
The amount of resources that could be
mobilized readily to meet this demand
was subject to substantial uncertainty,
but the degree of slack in the economy
clearly had diminished considerably in
recent quarters to relatively low levels
and likely would shrink further. The immediate outlook for inflation remained
favorable: Costs and prices were being
144 81st Annual Report, 1994
contained by moderate wage increases,
continuing pressures for productivityenhancing investment, and competitive
prices from abroad where slack was
still quite ample; and broad measures of
money and credit, though strengthening
over the last half of 1993, remained
moderate by historical standards. Nevertheless, looking ahead, members were
concerned that, unless monetary policy
were adjusted further from its stillaccommodative stance, pressures on
resources would intensify and inflation
would pick up.
Members assessed the outlook for
economic activity and prices against the
backdrop of sharp changes in bond and,
to a lesser extent, equity prices over the
intermeeting period. Clearly, the tightening of reserve conditions announced on
February 4 had played a role in market
movements, but other factors had been
at work as well. Members variously
stressed the possibility that the backup
in interest rates had reflected much
stronger aggregate demand, added
uncertainty about the course of interest
rates, influences from foreign exchange
and foreign capital markets, changes in
trading strategies by wary participants,
and rising inflation expectations. On balance, financial conditions were still seen
as supportive of solid economic expansion, and a number of members referred
in particular to the more accommodative
lending policies of many depository
institutions; however, some commented
on the risk, which they viewed as having a low probability, that weakness and
volatility in financial markets could at
some point have a significantly inhibiting effect on business and consumer
confidence and spending. To date,
business sentiment was described as
quite positive in most parts of the country, and although there were some
exceptions—notably in California—
members commented on numerous
indications of improving regional
economies.
A number of members observed that
they expected consumer spending to be
relatively well maintained, buttressed
by considerable strength in expenditures
for motor vehicles and other consumer
durables. Reports on retail sales from
various parts of the country tended to
support such assessments, and many
contacts among retailers were expressing optimism about the outlook for their
sales. At the same time, some members
observed that a number of factors were
likely to limit the potential strength of
consumer spending. They referred in
particular to the already low saving rate,
relatively high consumer indebtedness,
and recent declines in the value of securities held by households. More importantly, however, consumer confidence
and spending would continue to depend
heavily on the outlook for further
growth in employment and incomes.
Business investment expenditures
remained on a solid uptrend as firms
continued to focus on the need to control costs and improve operating efficiencies in the face of vigorous competitive pressures. Members also cited
some examples of investment spending
induced by rising demands pressing
against limitations in production capacity. While business investment had
tended to be concentrated in new, more
productive equipment, nonresidential
construction also had strengthened and
anecdotal reports from numerous areas
tended to confirm more positive nationwide statistics. The rising levels of nonresidential construction activity tended
to be concentrated in commercial and
industrial facilities and public works
projects; the construction of office buildings continued to lag but this sector
appeared to have stabilized or perhaps
improved marginally after a long period
of decline. More generally, currently
Minutes of FOMC Meetings, March 145
positive business attitudes augured well
for further growth in overall business
investment, but on the negative side it
was noted that further turbulence in
financial markets could erode confidence with adverse implications for
investment spending. Residential construction was described as quite strong
in numerous areas, although overall
housing construction had been held
down thus far this year by severe winter
weather in numerous parts of the country. Shortages of skilled construction
workers and building materials were
reported in many areas.
Despite generally rising final demands, business firms were continuing
to maintain lean inventory positions in
their ongoing efforts to hold down costs.
Nonetheless, with production levels in
many industries approaching or reaching full capacity utilization, prices of
some materials and other business purchases coming under increasing pressure, and delivery lead times tending to
lengthen at least in some industries,
efforts to build inventories could be
expected to materialize and in one view
the potential for such a development
represented a key upside risk from current forecasts. In this connection, some
members referred to scattered indications of efforts to increase inventories,
notably of steel products. Manufacturers
of motor vehicles also were in the process of rebuilding depleted inventories,
though the currently stimulative impact
of such rebuilding on overall production
was likely to be reversed when motor
vehicle stocks reached desired levels in
the months ahead.
The foreign trade sector was expected
to remain a negative factor in the economic outlook. However, the members
anticipated some improvement in the
economies of major foreign industrial
nations which, together with some moderation in the growth of domestic final
demands, was likely to slow the decline
in real net exports. A few members cited
growing indications that last year's
NAFTA legislation would have quite
positive effects on U.S. foreign trade,
though those effects were still largely in
the future.
In the discussion of the outlook for
prices and wages, many of the members
expressed concern about the potential
for a pickup in inflation if, as they anticipated, margins of unemployed resources
narrowed further or disappeared. The
members acknowledged that broad measures of prices relating to final purchases and of wages currently did not
suggest any increase in inflation. Indeed,
in the view of at least some members,
those measures still suggested on balance that the inflation trend had retained
a downward tilt thus far. In this connection, some commented that the overall
performance of the broad measures had
been somewhat better in recent months
than they had anticipated, especially
given the very rapid expansion of the
economy over the closing months of
1993 and the less than expected moderation thus far this year. Developments
that had been exerting a favorable effect
on prices included above-trend growth
in productivity, relatively low prices in
world oil markets, and strong competition in many markets from both domestic and foreign firms. Moreover, the
strong rise in credit usage that often had
accompanied intensified inflation pressures in the past had yet to materialize.
To date, the pickup in price increases
had been uneven and had tended to be
concentrated in some regions or industries and in the early stages of the production process, and a number of members reported that they saw little change
in inflation trends in their areas. Nonetheless, warning signs had emerged of
the prospect of greater inflation, though
perhaps not over the nearer term. These
146 81st Annual Report, 1994
included increases in a wide range of
commodity prices and anecdotal reports
from various parts of the country suggesting a further rise in the number of
business firms that were facing somewhat higher prices of materials and other
purchases and in turn were able, often
for the first time in recent years, to raise
their selling prices. Price and wage pressures appeared to be especially pronounced in the construction industry,
where capacity constraints had been
encountered in many localities. Members also referred to the potential for
higher prices in the food and energy
sectors; low crop carryovers for some
grains made food prices vulnerable to
unfavorable growing conditions, should
they materialize; oil prices currently
were at relative lows but were likely to
come under some upward pressures as
world economic growth accelerated and
if political developments led to disruptions in world supplies. More fundamentally, the relatively robust economic
expansion over the second half of 1993
and the further advance in early 1994
appeared in the view of many members
to have appreciably diminished the gap
between actual and potential GDP and
to have reduced the rate of unemployment to a level that could well be not far
from the natural rate. If this assessment
proved to be correct, further economic
expansion at a pace above the economy's potential would bring more industries and the economy more generally to
capacity production levels before very
long and could well generate growing
inflation thereafter.
In the Committee's discussion of policy for the intermeeting period ahead, all
the members supported a further move
toward a less accommodative policy
stance. An initial move in that direction
had been made in early February, but
the members still viewed monetary policy as too stimulative. In this regard,
members cited the very low inflationadjusted interest rates in short-term debt
markets as an indicator of excessive
policy accommodation, and one member also referred to the rapid growth in
reserves and narrow measures of money
over an extended period. While a quite
accommodative policy stance had been
entirely appropriate earlier in the economic recovery, when constraints such
as the widespread rebuilding of balance
sheets and business restructuring activities were strongly inhibiting the expansionary forces in the economy, those
constraints had greatly diminished and
the expansion clearly had gained considerable momentum. In the circumstances,
maintaining an accommodative monetary policy could be expected before too
long to foster growing pressures on
labor and capital resources with a resulting pickup in inflation. While actual
inflation remained subdued and credit
growth was still damped, it was only
a matter of time before the current
monetary policy induced a surge in
credit extensions that could fuel an
outbreak of inflation.
In these circumstances, the members
concluded that monetary policy needed
to move fairly quickly toward what
might be characterized as a more neutral
position. Such a policy posture could
not be defined with precision and it
undoubtedly varied to some extent with
changing circumstances. Nonetheless, it
provided a useful conceptual approach
to policy in current circumstances and
could be identified as a policy stance
that sought to foster sustained noninflationary expansion consistent with the
economy's potential. The members
generally concluded that such a policy
stance was still some distance away, and
the key issue facing the Committee was
not whether but how promptly the
necessary policy adjustment should be
completed. Whether further tightening
Minutes of FOMC Meetings\ March 147
beyond that point would be needed later
could not be determined at this time but
would depend on the potential emergence of conditions pointing to an acceleration of inflation.
As had been the case at the February
meeting, views differed on how much
further current monetary policy should
be adjusted at this meeting. Many members noted that money market interest
rates would have to rise by a relatively
sizable amount from current levels,
given underlying economic conditions,
but a majority indicated a preference for
another small move at this time. Many
were concerned about a possible overreaction in financial markets that had
become quite sensitive and volatile since
early February. A few also placed some
emphasis on their expectations of a considerable slowdown in the rate of economic growth and the possibility that
the moderation of the expansion might
prove to be somewhat more pronounced
than was currently projected. In this
view, a degree of caution was advisable
to permit an assessment of ongoing
developments.
Members who preferred a more sizable policy adjustment, or perhaps a
small move through open market operations that was associated with a rise in
the discount rate, believed that the
increasing risks of greater inflation
pointed to the need to move more
promptly and decisively away from a
policy stance that had become overly
accommodative. A stronger policy
action at this point would serve to
underscore the Committee's commitment to its price stability objective and
would help to counteract what some
members interpreted as a significant
increase in inflationary expectations
since earlier in the year. A reduction in
such expectations would over time have
beneficial implications for bond markets
and the economy. In the view of some
members, continued market expectations of further actions to tighten reserve
conditions were themselves contributing
to market instability. Some members
also commented that any policy choice
incurred the risk of proving to be wrong,
but they viewed the greatest risk at this
juncture to be a policy that allowed
inflationary pressures to gather momentum. A policy decision that in hindsight
led to the implementation of too much
restraint could be corrected more readily
and with less damage to the economy in
this view.
In the Committee's discussion of possible intermeeting adjustments to the
degree of reserve pressure, a majority of
the members indicated a preference for
retaining a symmetric directive. While
the probability of an easing action during this period was deemed to be very
low, the members also did not see as
very likely any firming over the intermeeting period beyond that to be implemented after today's meeting. The Committee had embarked on a course of
moving away from an accommodative
stance toward one that was more neutral. The timing of the actions to implement this policy was not independent of
the behavior of the economy, of course,
but it was not as dependent on the
nuances of incoming data as policy
might be at other times when the course
of policy was less clear. Symmetry did
not rule out an intermeeting adjustment
of policy by the Chairman on behalf of
the Committee, as had been done with
some frequency in the past when that
seemed warranted by intermeeting
developments. Members who favored
an asymmetric directive observed that
such a directive seemed more consistent
with the current thrust of monetary policy toward less accommodation and the
related need to respond promptly to indications of accelerating inflation. These
members indicated, however, that they
148 81st Annual Report, 1994
could support a symmetric directive that
was associated with the prospect of
intermeeting consultations.
At the conclusion of the Committee's
policy discussion, all but two of the
members indicated that they could
accept a directive that called for a slight
increase in the 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 first half of 1994.
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 expanded appreciably further in the early
months of 1994. Severe weather and changes
in statistical methodology distorted movements in official labor market data in January
and February, but it appears that employment increased somewhat on balance over
the two months and that unemployment fell.
Industrial production also increased substantially over this period after a sharprisein the
fourth quarter. Consumer spending and housing activity apparently have been held down
to some extent by adverse weather in January and February; retail sales were little
changed on balance over the two months and
housing starts fell considerably. Trends in
contracts and orders point to a sizable
increase in business fixed investment but at a
rate well below that for the fourth quarter of
1993. The nominal deficit on U.S. trade in
goods and services in January was slightly
smaller than the average in the fourth quarter. Increases in broad indexes of consumer
and producer prices have remained moderate
in recent months despite a surge in energy
prices.
Most market interest rates have risen considerably since the Committee meeting on
February 3-4, 1994. In foreign exchange
markets, the trade-weighted value of the dollar in terms of the other G-10 currencies
depreciated over the intermeeting period.
M2 declined somewhat and M3 was down
sharply in February, but data for early March
point to some rebound in both aggregates.
Total domestic nonfinancial debt has expanded at a moderate rate in recent months.
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 1 to 5 percent and
0 to 4 percent respectively, measured from
the fourth quarter of 1993 to the fourth quarter of 1994. The Committee anticipated that
developments contributing to unusual velocity increases could persist during the year
and that money growth within these ranges
would be consistent with its broad policy
objectives. The monitoring range for growth
of total domestic nonfinancial debt was set at
4 to 8 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
increase slightly 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
Minutes of FOMC Meetings, March 149
growth in M2 and M3 over the first half of
1994.
Votes for this action: Messrs. Greenspan,
McDonough, Forrestal, Kelley, LaWare,
Lindsey, and Parry and Ms. Phillips. Votes
against this action: Messrs. Broaddus and
Jordan.
Messrs. Broaddus and Jordan dissented because they preferred a stronger
move toward a more neutral policy
stance. In their view, the recent sharp
increases in longer-term interest rates
indicated clearly that inflationary expectations were rising and that the principal policy risk had become one of
remaining accommodative for too long
a period. In this environment, they
believed that a more aggressive move
would underscore the Committee's commitment to fostering sustainable longerterm growth and reduce the risk that
a highly restrictive policy might be
required at a later date to contain
inflation.
The Committee then turned to a
discussion of the desirability of making
an immediate announcement of today's
policy decision. All the members
favored prompt disclosure in principle,
but some expressed reservations about
announcing today's decision immediately after the meeting. These members
preferred to consider a decision on
announcements of policy actions in the
context of a broad range of disclosure
issues, some of which had yet to be
fully explored. Some stressed that they
remained concerned about the inhibiting
effects of some types of disclosures on
the Committee's deliberations, and one
member emphasized that the Committee
also needed to consider the implications
of immediate announcements of changes
in open market policy for the role of
the discount rate. Several members
commented that announcing a decision
reached at this meeting, because it
would come after a similar announcement following the most recent meeting
in early February, would in effect set a
precedent that would tend to limit the
Committee's future options. A majority
of the members concluded, however,
that while the Committee was not making a formal, binding decision on this
issue at this meeting, the Chairman
would be authorized to release a short
press statement regarding today's policy
decision. A useful purpose would be
served in reducing or eliminating potential misinterpretation of the Committee's policy decision and the related risk
of overreactions in financial markets at a
time of considerable uncertainty and
volatility in those markets. The news of
the Committee's action would be conveyed unambiguously to the entire public at once and not filtered through the
financial markets' interpretation of open
market operations. Moreover, the Committee would retain the option of specifying the exact contents and timing of
future policy announcements, including
intermeeting policy actions. Most of the
members concluded that the advantages
to the public of prompt release today
outweighed the potential disadvantages.
It was agreed that the next meeting
of the Committee would be held on
Tuesday, May 17, 1994. This meeting
adjourned at 2:05 p.m.
At a telephone conference held on
March 24, 1994, the Committee
approved a temporary increase, from
$700 million to $3.0 billion, in the Federal Reserve System's reciprocal currency ("swap") arrangement with the
Bank of Mexico. Concurrently, the U.S.
Treasury announced a $3 billion swap
arrangement between the U.S. Exchange
Stabilization Fund and the Bank of
Mexico and the Mexican Ministry of
Finance. The System's action was effective immediately and, subject to certain
conditions, it authorized the Bank of
150 81st Annual Report, 1994
Mexico to draw on the enlarged
arrangement until April 29, 1994, with
full repayment of any drawings to be
made by July 29, 1994.
A permanent increase in the System's
swap arrangement with the Bank of
Mexico had been discussed at the Committee's recent meeting on March 22,
and it had been contemplated at that
meeting that the Committee would vote
on such an increase during April in the
context of the establishment of a consultative mechanism involving the finance
ministries and central banks of Canada,
Mexico, and the United States. However, the assassination of a major candidate for the presidency of Mexico on the
evening of March 23 had prompted the
closing of Mexican financial markets on
March 24 and had given rise to concerns
regarding possible financial market disorder in reaction to unfolding political
developments when those markets
reopened. Against this background, the
Committee decided to join the U.S.
Treasury in an action that would help
confirm continued U.S. support for
Mexico's economic policies at a potentially critical time for Mexican financial
markets.
Votes for this action: Messrs. Greenspan,
McDonough, Forrestal, Jordan, Kelley,
LaWare, Lindsey, and Parry and Ms.
Phillips. Vote against this action: Mr.
Broaddus.
Effective April 26, 1994, the Committee by notation vote approved a recommendation by Chairman Greenspan to
establish an enlarged swap arrangement
of $3 billion on a permanent basis. As
is the case for all swap arrangements,
this arrangement is subject to periodic
annual review after an initial maturity
date of December 15, 1995. Simultaneously, the maturity date of the System's swap facility with the Bank of
Canada was extended by one year to
December 15, 1995.
Votes for this action: Messrs. Greenspan,
McDonough, Forrestal, Jordan, Kelley,
LaWare, Lindsey, and Parry and Ms.
Phillips. Vote against this action: Mr.
Broaddus.
The enlarged foreign exchange swap
arrangement with the Bank of Mexico
constituted part of a new trilateral foreign exchange swap facility established
in connection with the newly formed
consultative group called the North
American Financial Group and comprised of the Finance Ministers and Central Bank Governors of Canada, Mexico,
and the United States. The purpose of
this standing facility is to expand the
pool of potential resources available to
the monetary authorities of each country
to maintain orderly exchange markets.
Its establishment at this time was
deemed desirable in light of the outlook for expanding and increasingly
interdependent economic relationships
among the three economies after the
successful conclusion of the North
American Free Trade Agreement.
The components of the trilateral facility include (1) swap agreements between
the United States and Mexico for up to
$6.0 billion, with the Treasury and the
Federal Reserve each participating up to
$3.0 billion; (2) an expansion of the
swap agreement between the Bank of
Canada and the Bank of Mexico to
Can$1.0 billion; and (3) a reaffirmation
of the existing swap agreement between
the Bank of Canada and the Federal Reserve in the amount of $2.0 billion, with the above-noted maturity
extension.
Mr. Broaddus dissented because he
was concerned about the appropriateness of the System's involvement in this
type of foreign currency operation. In
Minutes of FOMC Meetings, May
his view, the System's swap network
raised a number of broad issues that he
felt the Committee needed to review at
some point. Accordingly, he would not
favor increasing any existing swap
arrangement until such a review had
taken place.
At a telephone conference on
April 18, Committee members reviewed
economic and financial developments
since the March meeting and discussed
the desirability of taking further action
to move policy away from its still
accommodative stance. Broad indicators
of economic activity, supported by
widespread anecdotal evidence, pointed
to considerable momentum in economic
activity and further reductions in
already limited margins of unutilized
labor and other production resources. In
financial markets, sharp declines in bond
and stock prices suggested that speculative excesses had been reduced, and
ongoing portfolio realignments probably
were shifting long-term financial assets
to firmer hands. As a result, financial
markets now appeared to be less likely
to overreact to adverse developments or
to policy actions. In the circumstances,
the members supported the Chairman's
decision to reduce the degree of accommodation in reserve markets slightly further at this time rather than to await the
next regularly scheduled meeting in
mid-May. Some members expressed the
view that an increase in the discount rate
would provide a desirable supplement to
this policy action.
Donald L. Kohn
Secretary
Meeting Held on
May 17, 1994
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
1 51
Reserve System in Washington, D.C.,
on Tuesday, May 17, 1994, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Broaddus
Mr. Forrestal
Mr. Jordan
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Parry
Ms. Phillips
Messrs. Hoenig, Keehn, and Melzer,
Alternate Members of the Federal
Open Market Committee
Messrs. Boehne, McTeer, and Stern,
Presidents of the Federal Reserve
Banks of Philadelphia, Dallas,
and Minneapolis respectively
Ms. Minehan, First Vice President,
Federal Reserve Bank of Boston
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. Goodfriend, Lindsey,
Promisel, Simpson, and Stockton
and Ms. Tschinkel, Associate
Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
152 81st Annual Report, 1994
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Ms. Johnson, Assistant Director,
Division of International Finance
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Bennett, Ms. Browne, Messrs.
Davis, Lang, Rolnick,
Rosenblum, and Scheld, Senior
Vice Presidents, Federal Reserve
Banks of New York, Boston,
Kansas City, Philadelphia,
Minneapolis, Dallas, and Chicago
respectively
Mr. Judd and Ms. White, Vice
Presidents, Federal Reserve Banks
of San Francisco and New York
respectively
Messrs. Altig and Coughlin, Assistant
Vice Presidents, Federal Reserve
Banks of Cleveland and St. Louis
respectively
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on March 22, 1994,
were approved.
The Manager for Foreign Operations
reported on developments in foreign
exchange markets and on System open
market transactions in foreign currencies during the period March 22, 1994,
through May 16, 1994. By unanimous
vote, the Committee ratified these
transactions.
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 March 22, 1994,
through May 16, 1994. 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 expanded substantially on balance thus far in 1994. Favorable business expectations and buoyant consumer
sentiment in the context of stronger
gains in employment appeared to have
sustained strong growth in domestic
final demand. Broad measures of inflation had remained subdued and labor
cost increases had been moderate,
though prices of industrial materials had
continued to rise.
Nonfarm payroll employment increased sharply in March and April, in
part reflecting a rebound in industries
affected by earlier severe winter
weather; for the first four months of the
year, the average monthly rise exceeded
the improved pace of the fourth quarter.
Further large advances in employment
in the March-April period were recorded in the services sector, notably at
personnel supply services firms; hiring
in construction was strong after earlier
weather-related losses; and the number
of jobs in manufacturing continued to
expand, although at a somewhat slower
pace than in previous months. The
civilian unemployment rate registered
another slight decline in April, to
6.4 percent, and the average workweek
of production or nonsupervisory workers remained at an unusually high level.
Industrial production was up appreciably further in April, with increases
widespread across sectors. The pace
of motor vehicle assemblies slowed,
but much of the indicated slowdown
Minutes of FOMC Meetings, May
reflected the effects of seasonal adjustment, which called for increases at a
time when manufacturing operations
already were at levels close to capacity.
Output of public utilities fell again, as
electricity generation dropped with the
return to less severe weather patterns.
Rates of industrial capacity utilization
had risen rapidly in recent months
and were at very high levels in many
industries—especially in motor vehicles,
petroleum refining, lumber, and primary
metals.
Retail sales were estimated to have
fallen in April after two months of very
large increases. Despite the April decline, which was widespread by type of
retail outlet, outlays were considerably
above the first-quarter average. Sales of
new and existing homes posted significant gains in March although they
remained below their fourth-quarter
averages. Housing starts decreased
slightly in April but were well above the
depressed winter pace. The third consecutive monthly gain in multifamily
starts was more than offset by a decline
in single-family starts.
Real business fixed investment continued to increase rapidly in the first
quarter, but at a less robust pace than in
the fourth quarter of 1993. Outlays for
producers durable equipment posted
another sizable advance, spending for
computing equipment surged again, and
purchases of most other types of equipment also continued to trend up. Moreover, business demand for automobiles
and trucks remained strong. Outlays
for nonresidential structures declined
sharply in the first quarter, although construction activity showed some recovery
in March after the disruptions associated
with severe weather during January and
February.
Business inventories declined in
March, reversing part of the large run-up
in stocks that had occurred in the first
153
two months of the year. For the first
quarter as a whole, inventories rose at a
slightly slower pace than in the second
half of last year. In manufacturing, the
accumulation in the first quarter retraced
much of the drawdown that had taken
place in previous months; the inventoryto-shipments ratio, already at a low
level, edged still lower. Wholesale
inventories were down on balance over
the first quarter, with a large March
decline more than retracing increases
earlier in the year; the ratio of inventories to sales was well below the range
prevailing over the last several years.
Retail inventories expanded modestly in
the first quarter, and the inventory-tosales ratio fell slightly.
The nominal deficit on U.S. trade in
goods and services was larger on average in January and February than it had
been in the fourth quarter. The value of
exports in the January-February period
was sharply below the unusually strong
level in the fourth quarter but was
slightly higher than the levels recorded
in the first three quarters of 1993.
Exports were down in virtually all major
trade categories; one important exception was semiconductors, for which
exports continued to trend higher.
Imports in the two-month period fell
by less than exports; nearly all of the
decline reflected reduced oil imports.
Available indicators for the first quarter
pointed to recovery in economic activity
at a moderate pace on average in the
major foreign industrial countries. Signs
of recovery ranged from quite tentative
in Japan to relatively well established in
the United Kingdom and Canada.
Indexes of consumer and producer
prices had increased slightly thus far in
1994. In April, consumer prices posted
their smallest rise since January; food
prices were up a bit further, but energy
prices retraced their March run-up.
Excluding the food and energy compo-
154 81st Annual Report, 1994
nents of the index, consumer prices
edged up in April, and over the twelve
months ending in April these prices
increased less than they had over the
previous twelve months. Producer prices
of finished goods declined a little in
April as prices of finished foods and
energy moved down; for items other
than food and energy, prices were up
slightly in April and for the twelve
months ending in April. At earlier stages
of processing, the index of producer
prices of crude materials other than food
and energy was substantially above its
year-ago level, despite a small drop in
April. At the intermediate stage, the
prices of some important construction
materials had increased sharply although, overall, prices of nonfood, nonenergy goods had risen only modestly
over the past twelve months.
Increases in labor costs continued to
moderate in early 1994. The employment cost index for private industry
workers rose more slowly in the first
quarter of 1994 than in any quarter
of 1993. The slowdown reflected more
moderate growth in both wages and
salaries and benefit costs. Hourly compensation increased at a slightly slower
pace over the twelve months ending in
March 1994 than over the previous year.
In April, average hourly earnings of production or nonsupervisory workers on
nonfarm payrolls increased moderately
after having changed little over February and March.
At its meeting on March 22, 1994,
the Committee adopted a directive that
called for a slight increase in the 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. The
directive stated 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 moderate growth of M2 and M3
over the first half of 1994.
Immediately after the meeting, open
market operations were directed toward
implementing the slightly less accommodative degree of reserve pressure
sought by the Committee. Subsequently,
on April 18, against the background of
incoming data suggesting considerable
momentum and diminishing slack in the
economy and of indications that financial markets were less likely to be destabilized by a further policy action, the
degree of accommodation in reserve
pressures was reduced a little further.
The federal funds rate rose XA percentage point, to V/i percent, after the initial
policy action; following the second
policy move, the funds rate went up
another XA percentage point and generally remained near 33A percent. Over the
intermeeting period, adjustment plus
seasonal borrowing averaged slightly
above anticipated levels.
Most market interest rates increased
by more than the federal funds rate over
the period since the March meeting,
with the largest increases occurring at
intermediate maturities. Weakness in the
dollar as well as the release of data
suggesting considerable vigor in economic activity appeared to have contributed to the upward pressure on market
rates. The bank prime rate was raised
3
A percentage point, to 63A percent,
while major indexes of stock prices fell
substantially.
In foreign exchange markets, the
trade-weighted value of the dollar in
terms of the other G-10 currencies
declined somewhat further on balance
over the intermeeting period. The dol-
Minutes of FOMC Meetings, May
lar's depreciation occurred despite the
implementation of less accommodative
policy actions in the United States and
monetary easing moves in several key
foreign countries. Market concerns
about political developments in Japan as
well as a worsened outlook for progress
toward more open trading relationships
and for a more stimulative fiscal policy
in that country contributed to downward
pressure on the dollar. Against the backdrop of a falling dollar, U.S. authorities
conducted intervention operations on
April 29 and again on May 4. The latter
operations were coupled with a statement by Treasury Secretary Bentsen
indicating that intervention was being
undertaken in response to recent movements in exchange markets that had
gone beyond what could be justified by
economic fundamentals and was being
conducted in concert with operations by
other major countries. Subsequent to
these actions, the dollar retraced part of
its earlier decline.
Growth of M2 and M3 turned up, on
balance, in March and April despite the
rising short-term opportunity costs of
holding deposits. The strengthening of
these aggregates seemed to be related to
a reassessment by households of the
relative attractiveness of investing in
capital market instruments; capital
losses sparked substantial net redemptions at bond mutual funds over March
and April that were accompanied by a
surge in flows to retail money market
funds and slower runoffs of small time
deposits. For the year through April, M2
expanded at a rate somewhat below the
middle of its range for 1994, and M3 at
a pace somewhat above the lower end of
its range. Total domestic nonfinancial
debt continued to expand at a moderate
rate over recent months.
The staff forecast prepared for this
meeting suggested that economic activity, after rebounding from the disrup
155
tions caused by adverse weather conditions earlier in the year, would expand
in the second half of 1994 at a rate close
to the growth of the economy's potential. Consumer spending, which had outpaced gains in household income for
some time, was projected to slow to a
growth rate more in line with the expansion of income; with pent-up demands
apparently reduced and somewhat
higher interest rates exerting a damping
effect, much of the slowing was expected to be centered on outlays for
durable goods. Business fixed investment would be restrained by the slower
growth of business output and the associated moderation of corporate cash
flows but would continue to advance at
a faster rate than overall economic activity. Homebuilding was projected to
remain at a pace that was relatively
robust compared with the rate of recent
years, though a bit below that of the
fourth quarter. The restraint on output
growth from federal spending cutbacks
and weak export demand was expected
to diminish somewhat. In light of limited margins of slack in labor and product markets over the forecast horizon,
little or no further reduction in the core
rate of inflation was anticipated.
In the Committee's discussion of
current and prospective developments,
members commented on widespread
indications, both statistical and anecdotal, of considerable momentum in the
economic expansion. Business activity
seemed to be rebounding smartly from
the disruptive effects of unusually
severe winter weather, and it appeared
that the expansion over the first half of
the year was likely to be a little stronger
than had been expected at the time of
the March meeting. A deceleration in
activity still seemed to be in train for the
second half, but the extent of such a
slowing was an important source of
uncertainty in the outlook. The members
156 81st Annual Report, 1994
continued to see moderate growth at a
rate in line with or slightly above the
economy's potential as the most likely
prospect, but the overall momentum of
the expansion and the still accommodative stance of monetary policy suggested
that there was an appreciable risk of
faster growth for a period, with consequent implications for greater pressures
on resources. At the same time, the
members saw relatively few signs of the
kinds of imbalances that would pose a
significant downside potential for the
economy, although some cautioned that
the rise in long-term interest rates,
recently weaker data on production and
sales, and continuing anxiety about job
security in an environment of corporate
restructuring contributed elements of
fragility to what was otherwise a healthy
outlook. The near-term prospects for
inflation were favorable. Wage and price
trends generally remained moderate; the
persisting high rate of business investment bode well for further enhancements of productivity; and competitive
pressures, including those from imported goods, were restraining efforts by
firms to raise prices. The members were
concerned, however, that in an environment in which slack in the economy
already had been reduced to a fairly low
level and could decline further in the
quarters ahead, inflation could begin
to rise unless monetary policy were
adjusted further from its accommodative stance.
In their comments about developments across the nation, members took
note of the considerable strength in
economic conditions in many parts of
the country. However, they also recognized that some parts of the nation were
experiencing relatively subdued growth
and that economic activity remained
depressed in other areas such as Southern California and Hawaii. The strong
forward momentum in the economy was
most clearly evident in interest-sensitive
sectors, including motor vehicles, other
durable goods, and housing. The rise in
interest rates over the course of recent
months was cited by business contacts
as a potential source of restraint on
interest-sensitive expenditures, but thus
far relatively few contacts had reported
actual examples of adverse interest rate
effects on spending. While higher rates
would constrain aggregate demand
going forward, their effects probably
would be offset in part by more aggressive lending practices at banks and other
institutions. At the same time, reports of
industries that were operating at or near
capacity limits were becoming more
numerous, and capacity constraints were
said to be limiting some sales.
With regard to the outlook for key
sectors of the economy, consumer expenditures were viewed by many members as likely to be well maintained,
particularly for motor vehicles and other
consumer durables. Reports from various parts of the country indicated that
sales had tended in many areas to exceed retailers' expectations by a considerable margin in recent months. Some
members noted, however, that sales had
been less ebullient since late winter and
cited factors that might work to restrain
somewhat the growth of consumer
spending. These included high and rising debt levels, declines in household
wealth owing to the drop in stock and
bond prices, and the effects on consumer confidence of ongoing workforce
reductions associated with business
restructuring. Higher interest rates also
might limit the pace at which pent-up
demands would continue to be satisfied.
On balance, in the view of a number of
members, growth in consumer spending
seemed likely to moderate to a pace
close to the growth in incomes.
Members expected business fixed
investment to continue to expand at a
Minutes of FOMC Meetings, May
pace substantially above that of the
economy as a whole. With production
straining capacity limits in a number of
industries and firms striving for cost savings and productivity improvements to
maintain their competitiveness, real outlays for producers' durable equipment
were likely to stay on a strong upward
trend despite an anticipated deceleration
in business output and the recently
increased cost of external capital associated with higher interest rates and lower
equity prices. It was noted in this connection that order books at producers
of capital equipment had grown considerably. Nonresidential construction
appeared to be rebounding from the disruptive effects of unusually severe winter weather conditions; however, the pattern of construction activity across the
nation was mixed, with some areas of
the country displaying considerable
strength in activity and other areas still
depressed. The construction of office
buildings for the most part remained at
very low levels, but anecdotal reports
indicated that markets for office space,
especially those that had been hard hit in
recent years, seemed to be improving
considerably in some locales. Business
inventories remained quite lean by historical standards, and some reports suggested that efforts to augment stocks had
been negated by strong sales. With survey reports indicating that order backlogs had grown and lead times on materials deliveries had lengthened, the
possibility was increasing that desired
inventory ratios might be adjusted
upward and some pickup in inventory
investment might get under way, especially in manufacturing where stocks-tosales ratios recently had fallen to new
lows.
Residential construction was indicated to be robust across much of the
country, with activity picking up rapidly
in the aftermath of the unusually severe
157
winter. The affordability of housing
remained high by historical standards,
and the appeal of home ownership had
been enhanced somewhat by the apparent firming of house prices over the
past year. In these circumstances, housing activity had been well sustained,
although there were some indications
that the higher mortgage rates now prevailing had begun to damp residential
investment.
The foreign trade sector was expected
to continue to exert some drag on economic growth, but the members saw this
as likely to lessen as an anticipated
gradual pickup in economic activity
among key trading partners bolstered
demand for U.S. exports while imports
were restrained by a projected moderation in the growth of U.S. domestic
demand. In the view of one member, the
export sector would tend to sustain and
perhaps become an important stimulus
to growth in the United States as earlier
declines in the dollar, taken in conjunction with technological improvements
and higher product quality, enhanced the
competitiveness of U.S. exports.
In their discussion of the outlook for
prices and wages, the members noted
that broad measures of inflation remained subdued and increases in labor
costs had been moderate. Nevertheless,
they continued to be concerned that
inflation could begin to rise if growth
in excess of potential were to persist
and margins of unutilized production
resources were to shrink further, or
even disappear. Production already had
reached capacity limits in a number of
industries, including motor vehicles and
steel, and prices of some raw materials
and intermediate goods had risen substantially over the past year. Ongoing
efforts to expand production capacity
through productivity-enhancing investment and the hiring of additional workers were likely to be of some help in
158 81st Annual Report, 1994
meeting growing demands, but an
increasing number of contacts were
reporting that business firms were taking advantage of opportunities to adjust
prices upward. There also were indications of shortages of qualified workers
in some labor markets or industries, but
to date there were only limited signs of
upward wage pressures and these did
not seem to signal a near-term emergence of general upward cost pressures
on prices. Indeed, even with sales
strong, many business contacts were
reporting that intense competition, in
part from imports, was curbing or negating efforts to raise prices. Firms were
continuing to look primarily to improvements in productivity and quality to bolster their profit margins, although there
also were reports that price discounting
was lessening and that sales promotions
were becoming less frequent. Price and
wage pressures were most clearly evident and widespread in the construction
industry, where resource constraints
appeared to be most pronounced.
In the Committee's discussion of
monetary policy for the period until the
meeting in early July, the members
favored prompt further action to remove
much of the remaining accommodation
in the stance of monetary policy, at least
as measured by real short-term interest
rates. Many members commented that
the expansion was on a solid and selfsustaining basis and appeared to have
more underlying strength than they
had foreseen earlier. The stimulative
effects of an expansionary monetary policy had become increasingly apparent—
especially in business purchases of capital equipment and consumer spending
on housing, motor vehicles, and other
consumer durables. At the same time,
the constraints on economic expansion
that had been associated with business
restructuring activities, widespread
efforts to strengthen balance sheets, and
other retarding forces had diminished
considerably. The financial health of the
banking system was greatly improved,
and banking institutions had evidenced
a growing willingness to make new
loans. Moreover, the demand for bank
loans, which had been sluggish for several years, now appeared to be on the
rise. While a series of small steps earlier
this year had already reduced the degree
of accommodation in monetary policy
and inflation was subdued for the time
being, the members were concerned that
continued policy accommodation could
be expected to lead before long to growing pressures on production resources
and to a fresh outbreak of inflation.
In the circumstances, all the members
agreed that a further tightening action
was needed at this point; and, in order to
better ensure that the remaining degree
of policy accommodation had been
largely removed, the adjustment should
fully reflect the Vi percentage point
increase in the discount rate that the
Board of Governors was expected to
approve later in the day. The actions
taken earlier in the year had been modest in size because of concerns that more
aggressive steps might generate substantial uncertainty and undue disruptions in financial markets, with adverse
consequences for the economy. Even
though financial markets remained volatile, speculative sentiment and holdings
seemed to have been reduced to a
marked extent, and financial markets
appeared to be in a much better position
to absorb needed policy adjustments.
Accordingly, a stronger action probably
would not produce an unduly adverse
market response and could well have a
settling effect on the markets. A number
of members cautioned that the Committee could not be sure that today's policy
actions, along with those implemented
earlier this year, had produced a policy
stance that would foster economic
Minutes of FOMC Meetings, May
growth at a sustainable, non-inflationary
pace. Thus, the Committee would have
to remain alert to economic and financial developments that might signal the
need for further tightening.
In the Committee's discussion of possible intermeeting adjustments to the
degree of reserve pressure, all but one of
the members indicated a preference for
retaining a symmetric directive. Symmetry would be consistent with a judgment that further policy adjustment
likely would not be needed during the
intermeeting period ahead and, in particular, that additional tightening would
not be triggered unless inflation pressures greater than those currently anticipated were to emerge. The adoption of a
symmetric directive would not preclude
an intermeeting consultation and possible adjustment by the Chairman on
behalf of the Committee if such were
warranted by intermeeting developments. One member expressed a preference for an asymmetric directive. In
his view, a symmetric directive might
be mistakenly interpreted both in the
United States and abroad as a signal that
the Committee believed that policy neutrality definitely had been achieved and
that there was no need to allow for the
possibility of further tightening.
At the conclusion of the Committee's
policy discussion, all the members indicated they could support a directive that
called for increasing somewhat the
degree of pressure on reserve positions,
taking account of a possible increase in
the discount rate, 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
159
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 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 that economic activity has
expanded substantially on balance thus far
in 1994. Nonfarm payroll employment
increased sharply in March and April, in part
reflecting a rebound in sectors affected by
severe winter weather; the civilian unemployment rate fell slightly further in April, to
6.4 percent. Industrial production was up
appreciably in April after a strong rise over
the previous two quarters. Advance data on
retail sales indicate a decline in April, after
very large increases in February and March.
Housing starts fell slightly in April but
remained well above the depressed winter
pace. Orders for nondefense capital goods
point to a continued strong uptrend in spending on business equipment, while nonresidential building has shown some recovery
after severe weather disrupted construction
during January and February. The nominal
deficit on U.S. trade in goods and services
widened on average in January and February
from the fourth-quarter rate. Increases in
broad indexes of consumer and producer
prices remained moderate through April,
though prices of industrial materials continued to rise.
Market interest rates have posted large
additional increases since the Committee
meeting on March 22, 1994. In foreign
exchange markets, the trade-weighted value
of the dollar in terms of the other G-10 currencies declined somewhat further on balance over the intermeeting period.
Growth of M2 and M3 picked up on average in March and April; for the year through
April, M2 expanded at a rate somewhat
below the middle of its range for 1994 and
160 81st Annual Report, 1994
M3 at a pace somewhat above the bottom of
its range. Total domestic nonfinancial debt
has expanded at a moderate rate in recent
months.
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 1 to 5 percent and
0 to 4 percent respectively, measured from
the fourth quarter of 1993 to the fourth quarter of 1994. The Committee anticipated that
developments contributing to unusual velocity increases could persist during the year
and that money growth within these ranges
would be consistent with its broad policy
objectives. The monitoring range for growth
of total domestic nonfinancial debt was set at
4 to 8 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
increase somewhat the existing degree of
pressure on reserve positions, taking account
of a possible increase in the discount rate.
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, Broaddus, Forrestal, Jordan,
Kelley, LaWare, Lindsey, and Parry and
Ms. Phillips. Votes against this action:
None.
Meeting Held on
July 5-6, 1994
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.,
beginning on Tuesday, July 5, 1994, at
2:30 p.m. and continuing on Wednesday, July 6, 1994, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Broaddus
Mr. Forrestal
Mr. Jordan
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Parry
Ms. Phillips
Messrs. Hoenig, Keehn, and Melzer,
Alternate Members of the Federal
Open Market Committee
Messrs. Boehne, McTeer, and Stern,
Presidents of the Federal Reserve
Banks of Philadelphia, Dallas,
and Minneapolis respectively
Mr. Conrad and Ms. Minehan, First
Vice Presidents, Federal Reserve
Banks of Chicago 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
It was agreed that the next meeting of
the Committee would be held on
Tuesday-Wednesday, July 5-6, 1994.
The meeting adjourned at 12:45 p.m.
Messrs. Beebe, Goodfriend, Lindsey,
Promisel, Siegman, and Simpson
and Ms. Tschinkel, Associate
Economists
Donald L. Kohn
Secretary
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Minutes of FOMC Meetings, July
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
Mr. Winn, Assistant to the Board,
Office of Board Members, Board
of Governors
Mr. Ettin, Deputy Director, Division of
Research and Statistics, Board of
Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Struckmeyer and Ms. Zickler,
Assistant Directors, Division of
Research and Statistics, Board of
Governors
Ms. Edwards4 and Mr. Oliner,4
Economists, Divisions of
Monetary Affairs and Research
and Statistics respectively, Board
of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Bennett, Ms. Browne, Messrs.
Davis, Dewald, Lang, Rolnick,
Rosenblum, and Scheld, Senior
Vice Presidents, Federal Reserve
Banks of New York, Boston,
Kansas City, St. Louis,
Philadelphia, Minneapolis, Dallas,
and Chicago respectively
Messrs. Guentner and Sniderman,
Vice Presidents, Federal Reserve
Banks of New York and
Cleveland respectively
Secretary's Note: Advice had been
received that Alan S. Blinder had executed
his oath of office as a member of the Federal
Open Market Committee.
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on May 17, 1994, were
approved.
4. Attended portion of the meeting relating to
the Committee's discussion of the economic outlook and its longer-run growth objectives for
monetary and debt aggregates.
\ 61
The Manager for Foreign Operations
reported on developments in foreign
exchange markets and on System open
market transactions in foreign currencies during the period May 17, 1994,
to July 5, 1994. The Committee ratified
these transactions.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Broaddus, Forrestal,
Kelley, LaWare, and Parry and Ms. Phillips. Votes against this action: Messrs.
Jordan and Lindsey.
Messrs. Jordan and Lindsey dissented
from this action, although they agreed
that the foreign exchange transactions
conducted during the intermeeting
period were authorized under the Committee's rules. Their dissents were based
on their strong reservations about the
efficacy of sterilized intervention in
most circumstances, including those prevailing during the intermeeting period.
In their view, to the extent that repeated
intervention failed to achieve stated or
perceived objectives, questions would
tend to arise about the credibility of
monetary policy more generally.
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 May 17, 1994, to
July 5, 1994. 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.
162 87 st Annual Report, 1994
The information reviewed at this
meeting suggested that economic activity recorded another substantial gain in
the second quarter. Although consumer
spending and homebuying apparently
had increased at a slower pace, business spending on durable equipment
remained quite strong and investment
in nonresidential structures rebounded
from a weather-depressed level in the
first quarter. In addition, the rate of nonfarm inventory investment evidently had
picked up in the second quarter. Levels
of resource utilization had risen further:
Factory operating rates were at relatively high levels, and the slack in
labor markets had narrowed considerably over the first half of the year to
what appeared to be very low levels.
Increases in consumer and producer
prices had remained moderate in recent
months, but prices of many basic industrial materials had risen.
Nonfarm payroll employment advanced somewhat less rapidly in May
after the brisk increases of recent
months; however, the average workweek of production and nonsupervisory
workers reached its highest level since
1987. The reduction in job gains was
widespread by sector—including business services; finance, insurance, and
real estate; manufacturing; and construction. Employment in transportation
rebounded, reflecting the end of a Teamsters strike. The civilian unemployment
rate, measured on the new basis introduced in January, declined sharply in
May, to 6.0 percent; the decline might
have been overstated as a result of seasonal adjustment problems, but even
after correcting for these factors, the
unemployment rate had fallen sharply
since late 1993.
The rise in industrial production
slackened in April and May after strong
first-quarter gains. Much of the slowing
was the result of capacity constraints
that prevented normal seasonal increases
in the production of motor vehicles.
Growth of output of manufactured
goods other than motor vehicles and
parts was at a slightly less robust pace
than in the first quarter but close to the
rapid rate seen in 1993; business equipment and construction supplies continued to be areas of strength. The overall
rate of utilization in manufacturing
stayed at a high level in May, with most
major industry groups operating at or
near capacity. In addition to motor
vehicles, capacity constraints were evident in the petroleum products and nonelectrical machinery industry groups and
in some individual product lines in other
industries.
Real personal consumption expenditures fell on balance in April and May
after a strong advance earlier in the year,
but the level of expenditures for the two
months combined was a little above the
first-quarter average. The recent slowdown in consumer spending in large part
reflected reduced outlays for motor
vehicles. Spending for durable goods
other than motor vehicles increased over
April and May at about the first-quarter
pace. Outlays for nondurable goods
were down on balance in April and May,
while spending for services in May more
than reversed a small April decline.
Housing activity had rebounded from
weather disruptions early in the year to a
pace close to the elevated fourth-quarter
rate. Single-family starts edged down
in May after declining substantially in
April but were still at a relatively high
level. While the cash-flow affordability
of home ownership had fallen since late
last year, it remained at favorable levels
in comparison with recent years. Multifamily starts in May were at their highest level in more than three years; most
of the pickup occurred in the South,
where vacancy rates had declined
recently.
Minutes of FOMC Meetings, July
Shipments of nondefense capital
goods other than aircraft and parts
posted a further solid gain in May,
although the upward trend appeared to
have moderated in recent months. Sales
of heavy trucks also were strong in April
and May. Shipments of aircraft declined
sharply in April (latest available data),
retracing much of a March surge. Available data on orders for nondefense capital goods pointed to a continued strong
uptrend in business spending on durable
equipment. Nonresidential construction
picked up in April and May from a
weather-depressed slump in the first
quarter.
Business inventories increased in
April, more than reversing a March
runoff; the overall pace of accumulation
remained moderate, and buildups were
largely concentrated in segments of the
economy where market demand was
robust. In manufacturing, inventories
increased in April and May after a small
drawdown in March. The rise in stocks
was in line with shipments, and the ratio
of stocks to shipments stayed at a very
low level. In April (latest available
data), wholesale inventories retraced
most of the sizable March drawdown.
The ratio of inventories to sales in this
sector remained below the range that
has prevailed in recent years. At the
retail level, inventory stocks again
edged higher; the inventory-to-sales
ratio for this sector was well within the
range observed over the past year.
The nominal deficit on U.S. trade in
goods and services widened in April but
was little changed from the average for
the first quarter; over the first four
months of 1994, the deficit was significantly larger than that recorded in the
fourth quarter of last year. The value of
exports of goods and services was down
somewhat in April, retracing part of a
sharp runup in March. The uptrend in
exports since last fall has been led by
163
shipments of machinery, especially to
expanding markets in Asia. The value of
imports of goods and services was about
the same in April as in March; increases
in consumer goods, machinery, and oil
were offset by declines in other categories. The economies of all the major
foreign industrial countries expanded
in the first quarter of 1994. Growth
resumed in Japan, western Germany,
and France, while economic expansion
continued at a healthy pace in the
United Kingdom and Canada.
Broad indexes of consumer and producer prices had risen moderately
through the first five months of the year.
In May, the rise in the overall index of
consumer prices continued to be held
down by declines in energy prices.
Excluding the food and energy components, the increase in consumer prices in
the twelve months ending in May was
smaller than that for the previous twelve
months. Producer prices of finished
goods continued to edge lower in May,
reflecting further declines in prices of
finished foods and energy goods. Producer prices for items other than food
and energy increased at a faster rate in
May, but the change over the twelvemonth period ending in May was very
small. At an earlier stage of processing,
producer prices of crude materials other
than food and energy registered another
small decline in May, although the
index was substantially higher in May
than a year ago. Furthermore, prices
of many basic industrial materials
remained under upward pressure. Average hourly earnings of production or
nonsupervisory workers increased by a
larger amount in May than in April, but
the rise over the twelve months ended in
May was about the same as in the previous twelve months.
At its meeting on May 17, 1994, the
Committee adopted a directive that
called for increasing somewhat the
164 81st Annual Report, 1994
degree of pressure on reserve positions,
taking account of a possible increase in
the discount rate. The directive did not
include a presumption about the likely
direction of any further adjustment to
policy during the intermeeting period.
The directive stated 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 coming months.
Immediately after the conclusion of
the May meeting, the Board of Governors approved a Vi percentage point
increase in the discount rate, to 3!/2 percent, and the Committee permitted
the full amount of the increase to pass
through to interest rates in reserve markets. Thereafter, open market operations
were conducted with a view to maintaining the less acommodative degree of
reserve pressure sought by the Committee. After the policy change, the federal
funds rate rose Vi percentage point, to
4lA percent, and remained at about that
level over the intermeeting period.
Adjustment plus seasonal borrowing
trended higher over the intermeeting
period, reflecting the usual seasonal
pickup in lending activity, and averaged
close to anticipated levels.
Market interest rates on instruments
with more than three-month maturities
moved lower immediately following
the announcement of the Committee's
action, although some very short-term
interest rates moved up. The commercial bank prime rate also was raised by
Vi percentage point, to 7 lA percent. Market participants apparently interpreted
the policy actions and the accompany
ing announcement as signaling that the
System would not take further tightening actions as soon as they had anticipated earlier. Incoming data suggesting
sluggish spending and subdued inflation
tended to confirm these market assessments. Late in the intermeeting period,
however, bond yields retraced their earlier declines, partly in association with a
weakening dollar in foreign exchange
markets and rising commodity prices.
Most major indexes of equity prices rose
early in the intermeeting period, but they
then moved lower in sympathy with the
declines in bond prices and the dollar
and ended the period with small losses.
The trade-weighted value of the dollar in terms of the other G-10 currencies
fell significantly further on balance over
the intermeeting period. The renewed
decline, which began toward the middle
of June, occurred in response to indications of an improved economic outlook
abroad, associated increases in foreign
bond yields, and heightened concerns
about possible increases in U.S. inflation. Developments suggesting less
favorable prospects for progress in
U.S.-Japanese trade negotiations also
tended to strengthen the yen against the
dollar.
The broad monetary aggregates were
weaker than the Committee anticipated
at the time of its previous meeting, with
both M2 and M3 declining on average
over May and June. The declines
appeared to be related in part to the
continuing appeal of capital market
instruments. More generally, however,
the rise in short- and long-term interest
rates since the beginning of 1994,
coupled with the reluctance of banks
and other depository institutions to
adjust their offering rates promptly, had
produced a widening of the opportunity
costs of holding deposits and had led
households to move deposit monies into
direct and indirect holdings of market
Minutes of FOMC Meetings, July
instruments. For the year through June,
both M2 and M3 were at the bottom
of the Committee's ranges for 1994, and
total domestic nonfinancial debt had
expanded at a moderate rate in the lower
half of its monitoring range.
The staff forecast prepared for this
meeting suggested that the economy was
operating at a level close to capacity and
that the expansion would slow over the
next several quarters to a rate generally
in line with the growth of the economy's
potential. To the extent that aggregate
demand tended to expand at a pace that
could foster higher inflation, it would
not be accommodated by monetary policy, and pressures would be generated
in financial markets that would restrain
domestic spending. Consumer spending,
which had been increasing faster than
household income for some time, was
expected to moderate as smaller gains
in employment and income, coupled
with higher interest rates and reductions
in the value of household financial
assets, exerted a restraining influence on
consumption patterns. Business fixed
investment was projected to continue at
a brisk pace, although growth would be
damped somewhat by the expected
deceleration in economic activity, a
growing shortfall of corporate cash flow
relative to capital outlays, and higher
financing costs. The effects of higher
mortgage interest rates were expected to
cause some slowing in the relatively
robust pace of single-family homebuilding. The restraint on output growth
exerted by weak export demand was
expected to diminish because of the
lower value of the dollar and the somewhat faster recovery now projected in
economic activity abroad. The staff
analysis suggested that, with the economy already operating close to its longrun potential, no further reduction in the
core rate of inflation was likely over the
forecast horizon.
165
In the Committee's discussion of current and prospective economic developments, members commented that the
expansion continued to display considerable momentum, with business activity apparently still increasing at a pace
above the economy's long-run growth
potential. At the same time, indications
of some slowing in aggregate demand
had tended to increase over the past few
months. The extent of that slowing
remained subject to considerable uncertainty, especially in light of somewhat
disparate data on employment and
spending. Nonetheless, it was generally
agreed that, in the context of appropriate
fiscal and monetary policies, some moderation in economic growth to a pace
closer to that of the economy's long-run
potential was a reasonable expectation.
Such a slowing seemed necessary to
forestall a buildup of inflation pressures
in the view of many members. A number of members emphasized that remaining margins of unemployed labor and
other production resources, while difficult to assess, now appeared to be quite
limited. Although views differed to
some degree, the members generally
concluded that the various factors affecting the course of inflation were likely to
result, on balance, in little change, or
perhaps a small rise, in inflation over the
1994-95 forecast horizon. Some members regarded the risks of a significant
divergence from their forecasts of economic growth and inflation as fairly
evenly balanced in either direction, but
most believed that those risks were tilted
to the upside.
In keeping with the usual practice at
meetings when the Committee considers
its long-run objectives for growth of the
money and debt aggregates, the members of the Committee and the Federal
Reserve Bank presidents not currently
serving as members provided specific
individual projections of growth in real
166 81st Annual Report, 1994
and nominal GDP, the rate of unemployment, and the rate of inflation for the
years 1994 and 1995. The central tendency of the forecasts of the rate of
expansion in real GDP for 1994 as a
whole was 3 to 3lA percent, a little
below the rate of growth estimated for
the first half of the year; for 1995, the
projections had a central tendency of
2*/2 to 23/4 percent. With regard to the
expansion of nominal GDP, the forecasts centered on growth rates of 5 Vi to
6 percent for 1994 and 5 to 5Vi percent
for 1995. The projections of more moderate growth in economic activity were
associated with rates of unemployment
in a range of 6 to 614 percent in the
fourth quarters of both 1994 and 1995,
about the same as the average unemployment rate in recent months. For the
rate of inflation, as measured by the
CPI, the projections had a central tendency of 23/4 to 3 percent for 1994 and
23/4 to VA percent for 1995; both ranges
represented a slight increase from the
average rate over the past year. Favorable developments in the food and
energy sectors, which had held down
overall inflation measures over the past
several quarters, were not expected to
continue and the drop in the dollar
would be exerting upward pressures on
prices in coming quarters.
Pursuant to a request from the Chairman of the Senate Banking Committee,
the members considered extending their
specific forecasts by an additional year.
Many expressed reservations about the
reliability and thus the usefulness of
numerical forecasts extending relatively
far into the future. Moreover, they were
concerned about misunderstandings of
specific long-range forecasts in relation to the Committee's goals and the
ongoing formulation of monetary policy. The members concluded that, on
balance, the Committee's policy intentions and expectations would be con
veyed more effectively by the Chairman
in his upcoming congressional testimony through a discussion of the important factors bearing on trends in
economic growth, prices, and unemployment; the uncertainties involved in
projecting such variables; and the role
of monetary policy in achieving desired
economic goals. Committee members
noted that the Administration's mediumterm outlook contained reasonable estimates of the trend growth in output.
In their review of developments in
different parts of the country and sectors
of the economy, members referred to
indications of continuing growth in
regional business activity ranging from
relatively modest to quite robust across
much of the nation; at the same time,
some areas such as California continued
to experience generally stagnant economic conditions. While solid growth
seemed to characterize the overall economy, the members saw increasing signs
of some slowing in many areas. Business and consumer sentiment generally
remained quite positive, although a
number of members commented on a
new note of caution among some of
their business contacts and some shaving of industry forecasts for the balance
of the year.
Turning to the key consumer sector,
members commented on various indications of some moderation in the growth
of expenditures. Higher interest costs
were cited by some business contacts
as constraining purchases of consumer
durables, but members also referred to
the negative impact of persisting, highly
visible cutbacks in workforces by some
major business firms and of growing
consumer debt. Some members also
noted that supply constraints, such as
limitations on the availability of some
popular automobile models, had tended
to curb the expansion in sales. Looking
ahead, more moderate growth in con-
Minutes of FOMC Meetings, July
sumer spending seemed likely; apart
from the direct effects of higher interest
rates on such spending, the prospectively less ebullient housing sector was
likely to retard demands for household
furnishings.
Business fixed investment was
thought likely to continue to provide
appreciable stimulus to the expansion,
though to a diminishing extent in the
context of slower overall growth in
economic activity and higher financing
costs. While spending for equipment
was likely to moderate considerably
from the extraordinarily rapid increases
recorded over an extended period,
ongoing business efforts to improve
operating efficiencies would probably
sustain substantial further growth in
equipment outlays. Nonresidential construction expenditures were expected to
post moderate increases after stagnating
earlier; in this connection, a number of
members observed that commercial
vacancy rates were declining in various
metropolitan areas and improved
demand for space was likely to generate increased construction activity.
Although higher interest costs could
have some restraining effect, financing
for such projects was more readily available than earlier. The outlook for inventory investment remained uncertain.
Some buildup in inventories was occurring, but business firms were continuing
to resist sizable increases and inventoryto-sales ratios remained at unusually low
levels. Developments that might be
expected to foster a faster buildup, such
as some lengthening of order lead times
and rising pressures on capacity in
some industries, had not led to the
strengthening in inventory investment
that had characterized comparable
stages of previous business cycle
expansions.
Members observed that the outlook
for exports appeared to have improved
1 67
and that foreign trade, on net, probably
would make a small contribution to economic growth over the next several
quarters. Some noted that business
contacts were reporting strong foreign
demand for various U.S. products. As
members had noted at previous meetings, the North American Free Trade
Agreement appeared to have stimulated
increased trade between Mexico and the
United States, although it was still too
early to gauge the extent of this development. More generally, the decline in the
foreign exchange value of the dollar and
a somewhat greater strengthening in the
economies of major trading partners
than was expected earlier had enhanced
the prospects for appreciable growth in
U.S. exports, and in the view of at least
some members that growth might prove
to be considerably greater than was currently projected.
Members remarked that uncertainties
about remaining margins of slack in the
economy, accentuated by the change in
the household employment survey, and
about potential levels of economic activity over the quarters ahead made it particularly difficult to assess the outlook
for inflation. However, based on what
seemed to be reasonable estimates of
resource utilization levels and their own
projections that the rate of economic
growth would slow to a pace nearer the
economy's growth potential, the members generally concluded that the rate of
inflation, as measured by the CPI, might
remain about unchanged or tilt slightly
higher over the forecast horizon. This
conclusion took into account the effects
of the decline in the foreign exchange
value of the dollar, the increase in oil
prices on world markets, and the atleast-temporary rise in food prices.
Some members observed that the overall behavior of prices had been somewhat more favorable than they would
have predicted, given the strength of the
168 81st Annual Report, 1994
expansion and the level of resource utilization. One explanation could be that
increases in overall capacity and productivity stemming from business restructuring activities and investments in
new equipment and facilities had been
greater than expected. Comments from
numerous business contacts around
the country continued to indicate that
despite the rising costs of many materials used in the production process,
highly competitive markets rendered it
very difficult or impossible to pass these
higher costs through to prices of finished goods. At the same time, labor
compensation increases had remained
subdued despite indications of shortages
of some types of labor in many parts of
the country. Exceptions involving sizable wage increases continued to be
cited for some industries, such as construction and trucking, that were operating at full capacity. Nonetheless, in the
absence of an uptrend thus far in consumer price inflation and given continuing uncertainties about job prospects
despite large job gains, wage pressures
had remained restrained.
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 1994
and it decided on tentative ranges for
growth in those aggregates in 1995. The
current ranges set in February for the
period from the fourth quarter of 1993
to the fourth quarter of 1994 included
expansion of 1 to 5 percent for M2 and
0 to 4 percent for M3. A monitoring
range for growth of total domestic nonfinancial debt had been set at 4 to 8 percent for 1994.
In the Committee's discussion, which
as in the past tended to focus on M2, all
the members indicated that they were in
favor of retaining the current ranges for
M2 and M3 for 1994 and extending
those ranges on a provisional basis to
1995. In their evaluation of appropriate
growth ranges for 1994, the members
anticipated that the projected moderation in the expansion of nominal GDP
and the likelihood that funds would
continue to be diverted from deposits
to higher yielding market instruments
would be reflected in relatively sluggish
growth in M2 and M3 and further
increases in their velocity—the ratio of
nominal GDP to these monetary measures. In the circumstances, expected
growth in M2 and M3 at rates around
the lower end of their ranges would be
consistent with the Committee's overall
objective of fostering financial conditions that would promote sustainable
economic growth and contain pressures
on prices. Indeed, that objective might
even imply a shortfall from current
ranges, but a shortfall could be tolerated
and explained if it reflected a greaterthan-expected rise in velocities associated with an acceptable economic performance. While growth of the broad
monetary aggregates might pick up
somewhat next year, it probably would
remain damped relative to income. In
light of this prospect, and of the uncertainties about appropriate monetary
growth in 1995, the Committee decided
to carry forward the 1994 ranges, subject to a review early next year. The
Committee noted that the current ranges,
which had been reduced greatly over the
years, could be viewed as long-run
benchmarks for monetary growth consistent with maximum sustainable economic expansion in a noninflationary
environment, if there were a return
to more normal velocity behavior. The
Committee recognized that considerable
uncertainty about the behavior of velocity was likely to persist and that a broad
range of financial and economic indica-
Minutes of FOMC Meetings, July
tors, in addition to the monetary aggregates, would need to be monitored in
determining the appropriate course for
monetary policy.
In their review of the Committee's
monitoring range for the growth of total
domestic nonfinancial debt, the members agreed that the current range for
1994 should be retained. This view took
into account staff projections indicating
that the debt aggregate was likely to
grow within its present range this year,
albeit the lower half of that range.
Considerable sentiment was expressed,
however, for reducing the debt monitoring range for 1995. Debt growth was
expected to remain relatively subdued in
association with projections of a slower
rate of expansion in nominal GDP. Lowering the range would underscore the
Committee's view that rapid debt
growth, should it materialize and be sustained, could have adverse implications
for inflation and financial stability.
Members emphasized, however, that
action to adjust the debt range did not
imply increased Committee emphasis on
the debt aggregate, and most believed
that the risks of any misinterpretation
could be minimized by including an
appropriate explanation in the report to
the Congress.
At the conclusion of this discussion,
the Committee voted to reaffirm the
ranges for growth of M2 and M3 and the
monitoring range for growth of total
domestic nonfinancial debt that it had
established in February for 1994. The
following statement was approved for
inclusion in the Committee's domestic
policy directive:
169
5 percent and 0 to 4 percent respectively,
measured from the fourth quarter of 1993 to
the fourth quarter of 1994. The Committee
anticipated that developments contributing
to unusual velocity increases could persist
during the year and that money growth
within these ranges would be consistent with
its broad policy objectives. The monitoring
range for growth of total domestic nonfinancial debt was maintained at 4 to 8 percent for
the year.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Broaddus, Forrestal,
Jordan, Kelley, LaWare, Lindsey, and
Parry and Ms. Phillips. Votes against this
action: None.
For the year 1995, the Committee
approved provisional ranges for M2 and
M3 that were unchanged from the 1994
ranges. The Committee reduced the
monitoring range for growth in total
domestic nonfinancial debt by 1 percentage point from 1994 to a range of 3 to
7 percent. Accordingly, the Committee
voted to incorporate the following statement regarding the 1995 ranges in its
domestic policy directive:
For 1995, the Committee agreed on tentative ranges for monetary growth, measured
from the fourth quarter of 1994 to the fourth
quarter of 1995, of 1 to 5 percent for M2 and
0 to 4 percent for M3. The Committee provisionally set the associated monitoring range
for growth of domestic nonfinancial debt at
3 to 7 percent for 1995. The behavior of the
monetary aggregates will continue to be
evaluated in the light of progress toward
price level stability, movements in their
velocities, and developments in the economy
and financial markets.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Broaddus, Forrestal,
Jordan, Kelley, LaWare, Lindsey, and
Parry and Ms. Phillips. Votes against this
action: None.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
In the Committee's discussion of polthese objectives, the Committee reaffirmed
at this meeting the ranges it had established icy for the intermeeting period ahead,
in February for growth of M2 and M3 of 1 to most members endorsed a proposal to
170 81st Annual Report, 1994
maintain an unchanged degree of pressure in reserve markets. The economy
seemed to be slowing, although to an
uncertain extent. Earlier policy tightening actions were being reflected in
the sluggish behavior of money and
reserves, although the extent of their
effects on spending were still in question. Inflation was a concern, but direct
evidence of additional pressures on costs
and prices was quite fragmentary. In
these circumstances, all but one of the
members concluded that it would be
prudent for the Committee to assess further developments before taking any
action. One member believed that
prompt further tightening was needed
to avert the development of greater
inflation.
In the discussion of the near-term
course of policy, the members took
account of the substantial weakness of
the dollar in foreign exchange markets
over the course of recent weeks. By
itself, the drop in the dollar could put
some pressure on resources and prices.
However, the members agreed that these
effects needed to be considered in the
context of overall prospects for the
economy and financial markets, and policy should not be focused narrowly on
the dollar alone. In any case, given
the negative sentiment in the foreign
exchange markets, the effects on the dollar that would flow from a small change
in policy were uncertain. Ultimately, the
most effective support that monetary
policy could provide for the dollar was
to foster the objectives of sustainable
economic growth and progress toward
price stability.
With regard to possible changes in
policy during the intermeeting period,
a majority favored a change in the
intermeeting instruction in the directive
from symmetry to asymmetry toward
restraint. Some of the members indicated that near-term developments were
not likely to call for an adjustment to
policy. Nonetheless, the risk of inflationary momentum in the expansion
remained high, given an economy that
appeared to be operating at or very close
to full capacity, and they believed that
the probable direction of the next policy
move was likely to be in the direction of
restraint. Some emphasized that such a
move should be made promptly in
response to information suggesting a
greater potential for inflation. In the
view of many though not all members,
the costs of policy errors were asymmetrical at this point. The costs of
reversing a policy stance that turned out
to be slightly too tight would be limited
to somewhat slower economic growth
for a time; the expansion appeared to be
so well established at this juncture that
the risks of a greater economic adjustment were remote. On the other hand,
a policy that turned out to be unduly
stimulative would foster greater inflation and inflationary expectations that
probably could be reversed only at the
cost of considerable disruption in financial markets and the economy. It also
was noted that an asymmetric directive
would underscore the Committee's
determination to resist greater inflation;
the asymmetry could be viewed as a
logical extension of the strategy adopted
in February to move to a policy stance
consistent with averting inflationary
pressures in a firmly established
expansion.
Some members indicated a preference for retaining a symmetric directive.
These members did not rule out the possible need for further policy tightening,
but they believed that the risks surrounding current forecasts were about evenly
weighted in both directions. One member expressed strong reservations about
the use of an asymmetric directive on
the grounds that such language made
intermeeting changes more likely and
Minutes of FOMC Meetings, July
in the view of that member markets
reacted more favorably when actions
were taken and announced at regular
meetings. However, all those favoring a
symmetric directive with an unchanged
policy stance could accept an asymmetric intermeeting instruction.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they could support a directive that called for maintaining the existing degree of pressure on reserve positions and that included a bias toward the
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 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 that economic activity recorded
another substantial gain in the second quarter, causing levels of resource utilization to
rise further. Increases in nonfarm payroll
employment have been relatively large on
average in recent months; the civilian unemployment rate is reported to have declined to
6.0 percent in May. The rise in industrial
production slackened in April and May, primarily because capacity constraints prevented normal seasonal increases in the
171
production of motor vehicles. Growth in consumer spending has slowed in recent months
after very large increases in February and
March. Housing starts have rebounded from
winter disruptions to a pace close to the
elevated fourth-quarter level. Orders for nondefense capital goods point to a continued
strong uptrend in spending on business
equipment, while nonresidential construction
has recovered from a weather-depressed
level in the first quarter. The nominal deficit
on U.S. trade in goods and services was
larger in April than in March but about
unchanged from the average for the first
quarter. Increases in broad indexes of consumer and producer prices have remained
moderate in recent months, though prices of
many basic industrial materials have risen.
On May 17, 1994, the Board of Governors
approved an increase in the discount rate
from 3 to 3'/2 percent. Most market interest
rates were up slightly on balance since the
May meeting; declines in bond yields early
in the intermeeting period were offset later
by market reactions to a weakening dollar
in foreign exchange markets andrisingcommodity prices. The trade-weighted value of
the dollar in terms of the other G-10 currencies was down significantly further on balance over the intermeeting period, reflecting
a sizable drop since early June.
M2 and M3 declined on average over May
and June; for the year through June, both M2
and M3 are at the bottom of their ranges for
1994. Total domestic nonfinancial debt has
continued to expand at a moderate rate in
recent months.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee reaffirmed
at this meeting the ranges it had established
in February for growth of M2 and M3 of 1 to
5 percent and 0 to 4 percent respectively,
measured from the fourth quarter of 1993 to
the fourth quarter of 1994. The Committee
anticipated that developments contributing
to unusual velocity increases could persist
during the year and that money growth
within these ranges would be consistent with
its broad policy objectives. The monitoring
range for growth of total domestic nonfinancial debt was maintained at 4 to 8 percent for
the year. For 1995, the Committee agreed on
tentative ranges for monetary growth, mea-
172 81st Annual Report, 1994
sured from the fourth quarter of 1994 to the
fourth quarter of 1995, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the associated monitoring range for growth of domestic nonfinancial debt at 3 to 7 percent for 1995. 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 M2 and M3 over coming months.
and informal indication that the meeting
had ended and that there would be no
further announcements. Since early February, a statement had been released
after each meeting, all of which had
involved policy changes; failure to take
some step after this meeting to make
clear that there was no change to
announce would lead for a time to
a heightened degree of uncertainty.
With regard to future announcements,
it was understood that this issue along
with other public disclosure questions
would be considered at a later meeting.
The Committee's decision regarding
announcements would then be made
public.
It was agreed that the next meeting of
the Committee would be held on Tuesday, August 16, 1994.
The meeting adjourned at 12:35 p.m.
Donald L. Kohn
Secretary
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Forrestal, Jordan,
Kelley, LaWare, Lindsey, and Parry and
Ms. Phillips. Votes against this action:
Mr. Broaddus.
Mr. Broaddus dissented because he
believed that additional near-term tightening was necessary to contain inflation.
The tightening actions implemented thus
far this year were moderate by historical standards, and he doubted that they
would prove sufficient to prevent higher
inflation given the strength of the economic expansion, the minimal remaining margins of unemployed labor and
other producer resources, and inflationary expectations that he feared might
already be rising.
Before the conclusion of this meeting, the members discussed the desirability of announcing the outcome of
a meeting when no action to change
policy was taken. Views differed on
this issue, but most of the members
supported a proposal to provide a brief
Meeting Held on
August 16, 1994
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 16, 1994, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Broaddus
Mr. Forrestal
Mr. Jordan
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Parry
Ms. Phillips
Ms. Yellen
Minutes of FOMC Meetings, August
Messrs. Conrad, Hoenig, Melzer, and
Ms. Minehan, Alternate Members
of the Federal Open Market
Committee
Messrs. Boehne, McTeer, and Stern,
Presidents of the Federal Reserve
Banks of Philadelphia, Dallas,
and Minneapolis 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. Beebe, Goodfriend, Lindsey,
Promisel, Siegman, Simpson,
Stockton, and Ms. Tschinkel,
Associate Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
Mr. Ettin, Deputy Director, Division
of Research and Statistics, Board
of Governors
Mr. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Bennett, Davis, Dewald,
Rosenblum, and Vander Wilt,
Senior Vice Presidents, Federal
Reserve Banks of New York,
Kansas City, St. Louis, Dallas,
and Chicago respectively
Messrs. McNees, Meyer, and
Sniderman, Vice Presidents,
Federal Reserve Banks of Boston,
Philadelphia, and Cleveland
respectively
173
Ms. Meulendyke, Assistant Vice
President, Federal Reserve Bank
of New York
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis
Secretary's Note:
Advice had been received that Janet L.
Yellen had executed her oath of office
as member of the Federal Open Market
Committee.
Advice also had been received of the election of Cathy E. Minehan by the boards of
directors of the Federal Reserve Banks of
Boston, Philadelphia, and Richmond as alternate member of the Federal Open Market
Committee for the period ending December 31, 1994, and that she had executed
her oath of office; and of the election of
William C. Conrad by the boards of directors
of the Federal Reserve Banks of Cleveland
and Chicago as alternate member of the Federal Open Market Committee for the period
ending with the appointment of a president
for the Federal Reserve Bank of Chicago or
December 31, 1994, whichever comes first,
and that he had executed his oath of office.
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on July 5-6, 1994, were
approved.
The 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 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 6, 1994,
through August 15, 1994. By unanimous vote, the Committee ratified these
transactions.
The Committee then turned to a discussion of the economic and financial
174 87st Annual Report, 1994
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 the pace of economic expansion, though still substantial, might have slowed somewhat
recently. Consumer spending continued
to post moderate gains, supported by
rising labor income and favorable sentiment. Business outlays for plant and
equipment remained on a steep uptrend,
but higher interest rates seemed to be
having some restraining effect on homebuilding activity. Resource utilization
was at elevated levels, with factories
operating at relatively high rates and
labor markets evidencing very low levels of slack. Increases in broad indexes
of consumer and producer prices had
remained moderate in recent months,
apart from the effects of short-run
swings in the volatile food and energy
components.
Nonfarm payroll employment continued to advance at a robust pace in
July. Hiring in the services industries
remained strong, with personnel supply
agencies posting another sizable increase. Jobs also were up substantially
in retail trade and construction. By contrast, employment in manufacturing was
held down by strike activity. The civilian unemployment rate edged up to
6.1 percent in July, little changed from
the average for the second quarter.
Industrial production rose moderately
in July after a sizable gain in June; a
decline in electricity generation from its
unusually high weather-related level in
June damped the July advance. Manu
facturing output was up considerably in
July, despite a drop in the production of
motor vehicles and parts; outside of
motor vehicles, increases were widespread, with a very large rise recorded
in the output of durable consumer
goods. The overall rate of capacity utilization in manufacturing remained at a
high level, with most major industry
groups operating at or near capacity.
Growth in consumer spending had
slowed in recent months, owing in part
to constraints on the supply of motor
vehicles. Nominal retail sales edged
lower in July after expanding at a
slightly reduced pace in the second quarter. Sales at general merchandise and
furniture and appliance stores increased
further in July, while purchases at
apparel outlets were down after large
June increases. Sales at automotive dealerships fell appreciably in July after
edging lower in the second quarter;
these sales declines apparently resulted
in part from the inability of manufacturers to produce enough of the most popular models. Housing starts in July
retraced part of a large June decline but
remained below their elevated rate in
the fourth quarter of 1993.
Business fixed investment expanded
in the second quarter at about the same
brisk pace as in the first quarter but well
below the rate recorded in 1993. In the
second quarter, a strong recovery in nonresidential construction activity from the
weather-related decline of the first quarter offset a marked slowing in business
purchases of durable equipment. Much
of the slowdown in the growth of outlays for equipment reflected a reduction
in the pace of acquisition of office and
computing equipment. Other categories
of durable equipment, with the exception of aircraft and motor vehicles, continued to show solid increases. Most
indicators of business investment activity suggested further large gains in com-
Minutes of FOMC Meetings, August
ing months: Orders for nondefense capital goods pointed to a continued strong
expansion in spending on business
equipment, and permits for nonresidential construction had been rising as well.
Business inventory investment
slowed in June after a sharp acceleration
in April and May; for the second quarter
as a whole, inventories were up substantially, but they appeared to have
remained broadly in line with sales. In
manufacturing, recent inventory buildups had been concentrated in a few
industries in which orders had been particularly strong. For manufacturing as a
whole, the ratio of stocks to shipments
declined from an already low level. At
the wholesale level, the accumulation of
inventories in the second quarter was
largely in durable goods, which were in
strong demand; the inventory-to-sales
ratio for this sector remained below the
range that has prevailed in recent years.
A large part of the buildup of retail
inventories in the second quarter was in
nondurable goods, especially in stocks
of general merchandise. For the retail
sector as a whole, the inventory-to-sales
ratio at the end of June was near the
high end of the range observed in recent
years.
The nominal deficit on U.S. trade in
goods and services widened slightly in
May; for April and May combined, the
deficit was significantly larger than in
the first quarter. Exports of goods and
services were about the same in May as
in April, with increased shipments of
machinery and industrial supplies offset
by reduced exports of aircraft and gold.
Imports of goods and services were
slightly higher in May than in April.
Most of the increase was in imports of
oil, as a consequence of higher prices,
and consumer goods. The economies of
all the major foreign industrial countries
continued to expand in the second quarter. Growth remained at a healthy pace
175
in the United Kingdom and Canada and
appeared to have firmed in continental
Europe. In Japan, growth apparently
slowed somewhat in the second quarter.
Trends in broad measures of prices
and labor costs had shown no change
thus far in 1994. In July, the overall
index of consumer prices rose at the
same pace as in June, despite larger
monthly increases in the food and
energy components of the index. The
jump in energy prices reflected the
effects of the earlier run-up in crude oil
prices. For the twelve months ended in
July, both the overall index and the
index excluding food and energy rose
by about the same amounts as during the
preceding twelve-month period. At the
producer level, prices of finished goods
were up significantly in July after no
change in June; large price increases
were recorded for coffee and finished
energy goods. Prices of finished goods
other than food and energy were
unchanged on balance over June and
July and registered only a small rise
over the twelve months ended in July.
At an earlier stage of processing, producer prices of intermediate materials
posted another sizable gain in July.
These prices had increased at a faster
rate thus far this year than in 1993,
mirroring a similar pattern in prices of
nonfood, non-energy crude materials.
The employment cost index for private
industry workers rose more rapidly in
the second quarter after a sharp slowing
in the first quarter, with the acceleration
in compensation largely reflecting a
pickup in wage and salary growth. The
increase in total compensation over the
last four quarters was little changed
from the advance over the previous fourquarter period.
At its meeting on July 5-6, 1994, the
Committee adopted a directive that
called for maintaining the existing
degree of pressure on reserve positions
176 81st Annual Report, 1994
but that included a bias toward the possible firming of reserve conditions during the intermeeting period. The directive stated 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 in 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 rose over
the period in accommodation of the
usual summer pickup in demands for
seasonal credit and averaged near anticipated levels. The federal funds rate
remained close to 4!/4 percent.
Other market interest rates were
unchanged to up slightly on balance
over the intermeeting period. Rates generally edged lower during the early part
of the period as incoming data were
viewed by market participants as being
consistent with continued moderation in
final demands and a reduced need for
any further monetary tightening actions.
In early August, however, interest rates
began to erase their previous declines,
partly in response to the strong employment report, which generated expectations that monetary policy might need
to be tightened substantially in the near
term. Most major indexes of equity
prices were up on balance over the intermeeting period, with second-quarter corporate profits generally better than had
been expected.
The trade-weighted value of the dollar in terms of the other G-10 currencies
declined early in the intermeeting period
but later recouped its losses and ended
the period unchanged on balance. The
fluctuations in the dollar partly reflected
evolving perceptions of the degree to
which U.S. authorities were concerned
about further weakness in the currency.
Over the intermeeting period, the dollar
depreciated slightly against the mark but
edged higher against the yen.
Both M2 and M3 expanded in July
after declining on average over May and
June. The growth of M2 in July owed in
part to a sizable increase in liquid deposits, but in light of a resumption of runoffs at bond mutual funds it also may
have reflected a renewed preference by
households for the protection of principal provided by money market mutual
funds. The strength in M2 showed
through to M3, which also was boosted
by funds garnered from wholesale
sources to finance a surge in bank credit.
For the year through July, M2 and M3
grew at rates slightly above the bottom
of their ranges for 1994. Total domestic
nonfinancial debt continued to expand at
a moderate pace.
The staff forecast prepared for this
meeting suggested that the economy was
operating close to its long-run capacity
and that growth would trend lower over
the next several quarters to a rate generally in line with the increase in its potential. Under these circumstances, trends
in the core rate of inflation would not
deviate significantly from recent experience, but there was a risk that such an
outcome might require further monetary
policy tightening. Growth in consumer
spending was projected to slow in
response to smaller gains in employment and income, some reductions in
pent-up demands, and the adverse
effects on household financial wealth of
earlier increases in interest rates and
declines in stock market prices. Business fixed investment, while remaining
Minutes of FOMC Meetings, August
relatively brisk, was expected to decelerate somewhat over the forecast horizon, primarily owing to smaller projected gains in sales, a growing shortfall
of corporate cash flow relative to capital outlays, and higher financing costs.
Single-family housing construction
would continue to be damped by the
higher mortgage rates; however, the
pace of homebuilding was expected to
remain relatively robust compared with
the rate of recent years, reflecting still
unsatisfied demand for home ownership
and the relatively favorable cash-flow
affordability of housing, as judged by
the standards of the past two decades.
The restraint on economic activity
exerted by weak export demand was
projected to diminish as economic conditions improved abroad, given the competitiveness of U.S. produced goods.
In the Committee's discussion of current and prospective economic developments, members commented that final
aggregate demand appeared to have
slowed somewhat in recent months but
that the expansion still seemed to have
considerable underlying momentum.
Indeed, available data on the various
components of spending taken together
might in fact be understating the growth
in economic activity; the strength of
labor markets and measures of gross
domestic income suggested a somewhat
stronger economic performance. Sustained expansion, perhaps at a pace
broadly in line with or a bit above the
economy's long-run growth potential,
remained a reasonable expectation, but
many members observed that they saw
the risks as being on the upside of such
a projection in the absence of some further policy tightening. Views varied to
some degree with regard to available
margins of unemployed resources, but
the members agreed that the economy
probably was operating very close to,
and in the view of some might have
177
reached, its long-run potential. In these
circumstances, the members saw appreciable risks of intensifying pressures on
resources and higher inflation. Broad
measures of wages and prices suggested
little change in inflation trends in recent
quarters, but worrisome signs of greater
inflation were evident in the prices of
materials purchased by business firms
and in anecdotal reports of successful
efforts by an increasing number of businesses to pass on rising costs by raising
prices.
In their comments on business conditions in different parts of the nation,
members reported continuing expansion
ranging from modest to solid growth in
most regions, however, the rise in business activity appeared to have slowed in
some areas and business conditions had
remained essentially unchanged in a
number of others, notably in California.
In the course of their review, members
pointed to the general strength in labor
markets as evidenced, for example, by
statistical indications of large and persisting gains in employment and relatively low initial claims for unemployment compensation. These data for the
national economy were reinforced by
reports of sizable employment increases
in numerous industries and parts of the
country and associated indications of
growing labor shortages in a number of
areas and some occupations.
The financial climate remained supportive of sustained economic growth. It
was clear that the rise in interest rates
since the start of the year had had some
restraining effects on interest-sensitive
expenditures, notably housing and perhaps to a lesser extent some consumer
durables, but to date these effects had
not been large. Moreover, surveys and
anecdotal reports suggested that banking institutions were becoming increasingly aggressive in their efforts to foster
loan growth by easing many terms and
178 81st Annual Report, 1994
standards for lending. In financial markets more generally, risk spreads had
remained relatively narrow and both
debt and equity markets appeared to be
well positioned to provide ample financing for further economic expansion.
In their review of developments in
key sectors of the economy, members
saw widespread evidence of a well
established expansion. Some signs of
moderation from the rapid advance in
recent quarters had emerged, including
statistical and anecdotal indications of
somewhat slower growth of consumer
spending. Members noted, however, that
an apparently significant portion of
the recent weakness in sales of motor
vehicles appeared to be related to supply
shortages that were in the process of
being corrected. Consumer confidence
remained at a high level and likely
reflected, among other factors, the
strength in job markets in many parts of
the country. Nonetheless, more moderate consumer spending was a reasonable
expectation in the context of a low saving rate, increased consumer debt levels,
and higher interest rates. One member
commented that some pause in the
expansion of overall consumer spending
would not be unusual after several quarters of robust growth, and another
remarked that the rise in household
expenditures had been larger than the
increase in household cash incomes by
an appreciable margin over the past
year.
Further marked expansion in business
fixed investment was likely to make a
sizable contribution to continuing economic growth. Ongoing strength in
orders, including foreign demand,
pointed to rapid further growth in expenditures for business equipment over
coming months. Some moderation in the
growth of such spending appeared likely
later in the context of projected slower
expansion in sales and the rise in financ
ing costs. The outlook for nonresidential
construction, while not ebullient, nonetheless seemed likely to become a more
positive factor in fostering further economic growth. Demand for commercial
real estate space, including office space,
had begun to improve in many areas.
Against this background and given the
apparent availability of financing for
soundly based projects, nonresidential
construction activity, while displaying
considerable local variation, appeared to
be on a moderate uptrend for the nation
as a whole.
Prospective developments in foreign
trade also were expected to have a positive effect on the expansion of the
domestic economy and indeed to offset
some of the anticipated slowing in the
overall growth of domestic demand.
Economic conditions abroad were
improving faster than had been anticipated, and this development along with
the decline in the foreign exchange
value of the dollar was projected to
stimulate faster growth in exports while
curbing that of imports over the next
several quarters.
Members focused on recent inventory
developments, which in the context of
some moderation in the growth of final
demand had accounted for a considerable portion of the overall expansion in
GDP reported for the second quarter.
While the rate of inventory accumulation could be expected to slow in the
current quarter, the extent of that slowing and its retarding effects on near-term
economic growth were uncertain. Partly
on the basis of anecdotal reports, the
members concluded that much of the
inventory buildup in the second quarter
was voluntary, thereby reducing the
probability of a sharp reversal. Indeed,
to the degree that delivery lead times
might edge up in various industries as
capacity constraints were encountered,
stronger efforts to build inventories
Minutes of FOMC Meetings, August
could emerge, especially against the
background of currently low inventoryto-sales ratios. Some business contacts
reported that they were planning to add
to their inventories over the months
ahead. At the same time, ongoing business efforts to maintain relatively lean
inventories undoubtedly would tend to
limit any broad buildup in inventories.
With regard to the outlook for residential construction, members reported
some slowing in single-family housing
demand in many parts of the country as
homebuyers reacted to the rise in mortgage interest rates. However, singlefamily homebuilding activity was being
maintained at relatively robust levels in
some areas and multifamily housing
construction was improving in numerous local markets. On balance, the housing sector probably would contribute
little, if any, impetus to the expansion
but homebuilding was likely to remain
well above its earlier depressed levels.
In their assessment of the outlook for
inflation, many members focused on the
prospects for further growth in output in
the context of diminishing margins of
unemployed production resources. It
was difficult to assess the extent of remaining margins of available resources,
in part because of uncertainty about the
effects on capacity of ongoing efforts to
improve productivity through business
restructurings and sharp increases in
business investment expenditures. Despite somewhat differing views, the
members generally concluded that the
economy probably was operating at a
level that was quite close to, if not
already at, its long-run potential. In the
circumstances, many of the members
commented that the risks of intensifying
inflation clearly were on the upside if
the economic expansion did not moderate from its pace in recent quarters. Indications of accelerating cost and price
pressures were not yet visible in broad
179
measures of inflation and wages. Those
measures, while subject to fluctuations
largely associated with swings in food
and energy prices, had not displayed any
discernible trend over the past several
quarters. At the same time, signs of
increasing prices and costs at earlier
stages of production appeared to be
multiplying, including sizable price
increases for a wide range of industrial
commodities. More generally, members
cited a growing number of reports by
business firms of rising input costs and
of more successful efforts by some firms
to raise prices. It also was noted that the
decline in the value of the dollar would
contribute, directly and indirectly, to
some upward pressures on prices. However, business contacts, notably at the
retail level, indicated that competition
remained intense and made it very difficult to pass on cost increases through
higher prices, thereby placing a premium on continued efforts to contain
costs through improvements in productivity. From a differing perspective, one
member noted that decelerating growth
in money measures such as Ml, the
monetary base, and reserves—which
had been expanding rapidly for several
years—implied that monetary policy
had been moved substantially to curtail
any increase in inflation pressures,
though more action might still be
required.
In the Committee's discussion of policy for the intermeeting period ahead,
the members agreed that a prompt further tightening move was needed to provide greater assurance that inflationary
pressures in the economy would remain
subdued. The members recognized that
the Committee's earlier policy actions
were exerting some restraining effects
and that further lagged effects from
those actions could be expected. Even
so, the underlying strength in demand
and narrow margins of slack in the econ-
180 81st Annual Report, 1994
omy pointed to a considerable risk of
further inflation pressures in the absence
of additional policy tightening.
With regard to the size of the policy
adjustment, the members were apprised
of a disposition on the part of the Board
of Governors to approve the ^-percentage-point increase in the discount rate
that was pending at several Federal
Reserve Banks. The Committee members endorsed a proposal to allow the
effects of such a rise in the discount rate,
should it be approved, to be reflected
fully in reserve markets. Consideration
was given to a lesser adjustment in
reserve conditions, but the members
concluded that a smaller step was
unlikely to be adequate, and on perceiving this, financial markets would quickly
build in further monetary tightening, the
unknown size and timing of which
would add to market uncertainty and
volatility. A more decisive policy move
might reduce the need for further tightening later, or possibly even avert that
need entirely, by moderating or arresting
the inflationary momentum in the economy more promptly and by helping to
curb inflationary expectations more
effectively.
In considering possible adjustments
to policy during the period before the
next meeting, all the members favored
moving to a symmetric intermeeting
instruction. Such a directive would be
consistent with the members' expectations that a further policy action was not
likely to be needed for some time, given
the substantial nature of today's policy
move. However, a symmetrical directive
would not rule out the possibility of a
policy move in the event that intermeeting developments differed substantially
from expectations.
At the conclusion of the Committee's
policy discussion, all the members indicated they could support a directive that
called for increasing somewhat the
degree of pressure on reserve positions,
taking account of a possible increase
in the discount rate, and that did not
include a presumption about possible
adjustments to policy during the intermeeting period. Accordingly, in the context of the Committee's long-run objectives for price stability and sustainable
economic growth, and giving careful
consideration to economic, financial,
and monetary developments, the Committee decided that slightly greater or
slightly lesser reserve restraint would
be acceptable during the intermeeting
period. According to a staff analysis, the
reserve conditions contemplated at this
meeting would 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 that the pace of economic expansion, though still substantial, may have moderated somewhat recently, while resource
utilization has remained at high levels.
Nonfarm payroll employment continued to
advance at a robust pace in July, but the
civilian unemployment rate edged up to
6.1 percent—about the same as the average
for the second quarter. Industrial production
rose appreciably over June and July. Growth
in consumer spending has slowed in recent
months, owing in part to constraints on the
supply of motor vehicles. Housing starts rose
in July. Orders for nondefense capital goods
point to a continued strong expansion in
spending on business equipment; permits for
nonresidential construction have been rising
as well. Business inventories registered a
large increase in the second quarter, but
inventories appeared to have remained
broadly in line with sales. The average
nominal deficit on U.S. trade in goods and
services was larger in April and May than
Minutes of FOMC Meetings, September
the average for the first quarter. Increases
in broad indexes of consumer and producer prices have remained moderate in
recent months, apart from the effect of
short-run swings in volatile food and energy
components.
Most market interest rates are unchanged
to up slightly on balance since the July meeting. The trade-weighted value of the dollar
in terms of the other G-10 currencies was
unchanged on balance over the inter-meeting
period.
M2 and M3 turned up in July following
declines on average in both aggregates over
May and June; for the year through July,
M2 and M3 grew at rates slightly above
the bottom of their ranges for 1994. Total
domestic nonfinancial debt has continued to
expand at a moderate rate in recent months.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3
of 1 to 5 percent and 0 to 4 percent respectively, measured from the fourth quarter of
1993 to the fourth quarter of 1994. The Committee anticipated that developments contributing to unusual velocity increases could persist during the year and that money growth
within these ranges would be consistent with
its broad policy objectives. The monitoring
range for growth of total domestic nonfinancial debt was maintained at 4 to 8 percent for
the year. For 1995, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1994 to the
fourth quarter of 1995, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the associated monitoring range for growth of domestic nonfinancial debt at 3 to 7 percent for 1995. 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
increase somewhat the existing degree of
pressure on reserve positions, taking account
of a possible increase in the discount rate. In
the context of the Committee's long-run
objectives for price stability and sustainable
181
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 modest
growth in M2 and M3 over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Broaddus, Forrestal,
Jordan, Kelley, LaWare, Lindsey, and
Parry and Mses. Phillips and Yellen. Votes
against this action: None.
It was agreed that the next meeting of
the Committee would be held on Tuesday, September 27, 1994.
The meeting adjourned at 12:30 p.m.
Donald L. Kohn
Secretary
Meeting Held on
September 27, 1994
A meeting of the Federal Open Market
Committee was held in the orifices of
the Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, September 27, 1994, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Broaddus
Mr. Forrestal
Mr. Jordan
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Parry
Ms. Phillips
Ms. Yellen
Messrs. Hoenig, Melzer, and Moskow,
and Ms. Minehan, Alternate
Members of the Federal Open
Market Committee
182 81st Annual Report, 1994
Messrs. Boehne, McTeer, and Stern,
Presidents of the Federal Reserve
Banks of Philadelphia, Dallas, and
Minneapolis 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. Beebe, Goodfriend, Lindsey,
Mishkin, Promisel, Simpson,
Stockton, and Ms. Tschinkel,
Associate Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
Mr. Ettin, Deputy Director, Division
of Research and Statistics, Board
of Governors
Mr. Slifman, Associate Director, Division
of Research and Statistics, Board
of Governors
Mr. Madigan, Associate 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
Ms. Browne, Messrs. Davis, Dewald,
Lang, Rolnick, Rosenblum, and
Vander Wilt, Senior Vice Presidents,
Federal Reserve Banks of Boston,
Kansas City, St. Louis, Philadelphia,
Minneapolis, Dallas, and Chicago
respectively
Mr. Sniderman, Vice President, Federal
Reserve Bank of Cleveland
Ms. Krieger, Assistant Vice President,
Federal Reserve Bank of New York
Secretary's Note:
Advice had been received of the election
of Michael H. Moskow by the boards of
directors of the Federal Reserve Banks of
Cleveland and Chicago as alternate member
of the Federal Open Market Committee for
the period September 1, 1994, through
December 31, 1994, and that he had executed his oath of office.
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on August 16, 1994,
were approved.
By unanimous vote, the Committee
elected Frederic S. Mishkin as Associate
Economist from the Federal Reserve
Bank of New York, to serve until the
next election at the first meeting of the
Committee after December 31, 1994,
with the understanding that in the event
of the discontinuance of his official connection with the Federal Reserve Bank
of New York he would cease to have
any official connection with the Federal
Open Market Committee.
The Manager for Foreign Operations
reported on developments in foreign
exchange markets during the period
since the August meeting. There 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 August 16, 1994,
through September 26, 1994. 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
Minutes of FOMC Meetings, September
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 economic expansion remained substantial,
though it appeared to have moderated
slightly in recent months. Final sales,
especially of consumer goods, had
firmed during the summer months while
inventory investment apparently had
slowed after a second-quarter surge.
Manufacturing activity, bolstered by a
pickup in production of motor vehicles,
had been rising briskly, and the trend
of payroll hiring remained strong.
Increases in broad indexes of consumer
and producer prices had been somewhat
larger in recent months, and prices of
materials had remained under considerable upward pressure.
Nonfarm payroll employment advanced appreciably further in August,
though at a somewhat less rapid rate
than the average pace in earlier months
of the year. The slowdown in hiring in
August was concentrated in retail trade,
where employment was little changed
after large gains in the two preceding
months, and in construction, where it
fell slightly. In manufacturing, employment was up considerably after essentially no change in July; while much
of the strength was related to a pickup
in the production of motor vehicles,
hiring was up in a number of other
industries as well. The average workweek of production or nonsupervisory workers declined in August
from July's relatively high level, but
for the two months combined the
average hours worked was well above
the second-quarter level. Both household employment and the labor force
surged in August, and the civilian
183
unemployment rate was unchanged at
6.1 percent.
Industrial production rose sharply in
August after sizable gains in previous
months. The August advance reflected a
large increase in manufacturing output
that was partly offset by declines in mining production and electricity generation; much of the strength in manufacturing resulted from a large rise in the
output of motor vehicles stemming from
unusually rapid retooling for the new
model year. Elsewhere in manufacturing, production of office and computing equipment continued to expand
briskly, and output of industrial equipment was up significantly. Total utilization of industrial capacity rose further in
August from already high levels.
Consumer spending remained on a
solid upward trend. Retail sales rose
considerably in August after holding
steady in July. Sales of goods other than
motor vehicles registered sizable increases in both July and August. Sales
of motor vehicles, which had been constrained in recent months by shortages
of popular domestic models, rebounded
in August. Housing starts in July and
August averaged slightly less than their
second-quarter rate. Single-family starts
had leveled off in recent months after
declining earlier in the year; multifamily
starts, though erratic from month to
month, had been drifting higher.
The limited data available for the
third quarter suggested that growth of
real business fixed investment, though
still strong, continued to slow from the
very rapid pace of 1993. Shipments of
nondefense capital goods declined in
July, offsetting much of a large June
advance. However, orders for nondefense capital goods were up significantly
on balance in June and July, pointing to
continued brisk expansion in business
spending on durable equipment. Nonresidential construction activity in-
184 81st Annual Report, 1994
creased further in July, and permits for
such construction remained on a mild
uptrend.
The growth in business inventories
slowed markedly in July after surging in
the second quarter. The July deceleration reflected a sizable reduction in
retail inventories, principally automotive and general merchandise stocks.
For the retail sector as a whole, the
inventory-to-sales ratio declined sharply
in July to about the middle of the range
seen in recent years. At the wholesale
level, inventories increased substantially, both in July and over the second
quarter, and the overall inventory-tosales ratio edged up in July toward the
middle of the range for this ratio in
recent years. Inventory investment also
picked up in manufacturing, where
much of the July accumulation represented stocks of materials, supplies, and
work-in-progress. The run-up in stocks
was accompanied by a drop in factory shipments, and as a result, the
inventory-shipments ratio recorded an
unusually steep rise.
The nominal deficit on U.S. trade in
goods and services widened substantially further in July after a large increase in the second quarter. The value
of exports of goods and services slipped
in July from a relatively high level in
June, while the value of imports in July
changed little from June. Economic
activity in all of the foreign G-7 industrial countries except Japan expanded
rapidly in the second quarter, and available indicators suggested that strong
growth continued on average in the third
quarter. In Japan, activity contracted in
the second quarter, reflecting weakness
in consumption and business investment; the limited data available for the
third quarter suggested that growth in
that country might have resumed.
Consumer prices rose a little faster in
July and August than their average pace
for the first half of the year. The recent
pickup in consumer inflation reflected
large increases in energy prices as well
as somewhat higher food prices; excluding the food and energy components,
consumer price advances had remained
moderate. Prices rose briskly at the producer level in July and August as prices
of finished energy goods surged and
prices of finished foods turned up after
declining over the first half of the year.
For items other than finished foods
and energy, the increase over the JulyAugust period was a little faster than in
the first half of the year. Recent data
indicated little change in wage trends.
Average hourly earnings of production
or nonsupervisory workers rose in
August at about the rate observed over
the previous twelve months.
At its meeting on August 16, 1994,
the Committee adopted a directive that
called for increasing somewhat the
degree of pressure on reserve positions,
taking account of a possible rise in the
discount rate. The Committee did not
include in the directive any presumption
about further adjustments to policy during the intermeeting period. Accordingly, the directive stated 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 modest growth in M2 and M3 over
coming months.
Immediately after the conclusion of
the August meeting, the Board of Governors approved a ^-percentage-point
increase in the discount rate to a level of
4 percent. The Committee permitted the
full amount of the increase to pass
Minutes of FOMC Meetings, September
through to interest rates in the market
for reserves, and the federal funds rate
rose about Vi percentage point to an
average of around 43/4 percent. As indicated in an announcement released on
the day of the meeting, the Committee
did not anticipate that further policy
tightening was likely to be needed for a
time, given the substantial nature of the
policy move. Accordingly, open market
operations over the intermeeting period
were conducted with a view to maintaining the less accommodative degree of
pressure on reserve positions implemented just after the August meeting,
and the federal funds rate remained near
43/4 percent. In accordance with the
usual cresting of seasonal demands for
discount credit at this time of the year,
adjustment plus seasonal borrowing rose
over much of the period but began to
edge lower subsequently. Borrowing
averaged near anticipated levels.
Most market interest rates were up
somewhat on balance since the August
meeting. Short-term rates, which had
risen before the meeting in anticipation
of a smaller policy move, increased
modestly further after the Federal
Reserve tightened and then changed
little over the next several weeks. Subsequently, however, these rates began to
move higher in response to incoming
economic data that were seen as pointing to the potential for greater inflation
in the future and hence to further firming in reserve conditions. Long-term
yields fell after the policy tightening,
but these declines were erased within a
few days, and rates later rose noticeably
further in response to the incoming data.
Most major indexes of equity prices
were up on balance over the intermeeting period despite price declines near
the end of the period.
The trade-weighted value of the dollar in terms of the other G-10 currencies
depreciated somewhat over the inter
185
meeting period. Bearish sentiment
toward the dollar in the foreign
exchange markets appeared to be influenced importantly by continuing concerns about inflation trends in the United
States compared with those in other major industrial countries.
M2 and M3 declined in August after
expanding moderately in July, and data
available for September pointed to little
further change in either aggregate. The
August decline in M2 reflected weakness in most of its liquid components
that may have been induced to a considerable extent by the rise, which began
early this year, in the opportunity costs
of holding such accounts. The decline in
M3 was associated with a sharp drop
in institution-only money funds in
response to the increase in market
yields, but the weakness in this broader
aggregate was limited by the brisk
issuance of large-denomination time
deposits as banks continued to rely on
managed liabilities to fund credit
growth. For the year through August,
M2 and M3 grew at rates slightly above
the lower ends of their respective ranges
for 1994. Total domestic nonfinancial
debt continued to expand at a moderate
rate in recent months.
The staff forecast prepared for this
meeting suggested that growth in economic activity would slow appreciably
over the next several quarters, dropping
briefly below the rate of increase in the
economy's potential output. According
to a staff analysis, the economy already
was operating at its long-run capacity,
and the forecast assumed that monetary
policy would not accommodate any continuing tendency for aggregate demand
to expand at a pace that could foster
sustained higher inflation. Growth in
consumer expenditures was projected to
moderate next year as spending on consumer durables lost some momentum
in the context of diminishing pent-up
186 81st Annual Report, 1994
demands, the rise in borrowing costs,
and smaller gains in income. After an
extended period of very rapid increases,
growth in business fixed investment also
was expected to slow appreciably, partly
reflecting less favorable financial conditions and partly the slower pace of
output growth. Homebuilding would
be damped by higher financing costs,
though activity in this sector was
expected to remain well above the
depressed levels reached in recent years.
With the economy operating close to its
long-run potential, no further reduction
in the core rate of inflation was anticipated over the forecast horizon. Consumer price inflation was projected to be
elevated over the near term—by some
pass-through of the ongoing run-up in
materials prices and by higher import
prices—before settling down again.
In the Committee's discussion of current and prospective economic conditions, members commented on continuing indications of a robust expansion
in business activity, with output near
maximum sustainable levels. They still
viewed significant slowing in the pace
of the expansion as a reasonable expectation, though they acknowledged that
signs of such slowing currently were
limited and in particular that the most
recent data indicated a greater probability of somewhat more strength in aggregate demand than had appeared to be
developing during the late spring and
early summer. The policy tightening
actions implemented earlier in the year
seemed to have elicited only a mild
response thus far in interest-sensitive
sectors of the economy. However, much
of the retarding effects of those actions,
including the recent sizable tightening
in August, probably had not yet been
felt in the economy. In light of the
strength of aggregate demand and lags
in the effects of policy, the risks of some
rise in inflation rates probably had
increased. How large this rise might be
or when it might be reversed was very
difficult to predict at this point. However, indications of a persisting pickup
in inflation would be a matter of considerable concern, and further developments would need to be monitored with
special care in light of the Committee's
longstanding commitment to containing inflation and moving over time
toward price stability to foster the maximum, sustainable performance of the
economy.
In their review of developments
across the nation, members commented
on high levels of business activity in
many regions and many of them referred
to increasing reports of scarcities of specific types of labor resources. After softening earlier in many areas, business
conditions appeared to have strengthened in a number of regions during
recent weeks while displaying little
change or continued moderate growth
elsewhere. Robust expansion in manufacturing activity, especially in the
motor vehicle and related industries,
was a notable feature of recent business
developments. On the financial side, the
overall expansion of credit had remained
moderate, but many members stressed
the ready availability of financing from
increasingly aggressive bank lenders.
Moreover, despite higher interest rates,
capital markets were providing continued support to a wide variety of borrowers. The constraints on the availability
of credit and the reluctance of many
borrowers to incur new debt, factors that
had tended to retard the recovery during
its earlier stages, had given way to a
financial climate that might even be providing an extra impetus to spending.
With regard to the outlook for activity
in key sectors of the economy, consumer
spending had been more buoyant than
expected over recent months and members saw such spending as likely to be
Minutes of FOMC Meetings, September
reasonably well maintained. Some moderation in its growth over the quarters
ahead seemed likely, however, as
pent-up demands increasingly were satisfied and housing-related purchases of
consumer durables tended to moderate.
Members cited anecdotal evidence of
fairly brisk retail sales in many areas
recently and associated optimism
among retail business contacts. Recent
survey results indicated that consumer
sentiment remained favorable. Sales of
motor vehicles were expected to continue the improvement noted in August
as supply shortages were met through
increased production.
Business fixed investment was
viewed as likely to rise substantially further over the next several quarters, but
the rate of growth had been moderating
this year and probably would diminish
further in conjunction with the projected
slowing in overall demand. The expansion in expenditures for business equipment had slowed considerably this year
from an extremely rapid rate in 1993
and could be expected to moderate
somewhat further. At the same time,
nonresidential construction was slowly
trending higher as firms facing capacity
constraints sought to expand their production facilities.
The prospects for inventory investment remained a key uncertainty in the
outlook in that developments in this sector could well have an important bearing
on the extent of the anticipated slowing
in the expansion of overall economic
activity over the next few quarters. The
surge in inventory investment in the second quarter clearly was unsustainable,
but some members questioned whether
the expected cutback in inventory accumulation would be sizable over the near
term. Continuing strength in new orders
and anecdotal reports did not point to a
desire to reduce inventories and suggested that much of the second-quarter
\ 87
buildup probably had been intended.
Indeed, in the context of increasing
backlogs and lagging deliveries that
pointed to growing capacity constraints,
many business firms might seek to build
"safety stocks" to avoid supply disruptions that would interfere with
production schedules. At the same time,
the trend toward "just in time" inventory management—even if temporarily
arrested as safety stocks were
increased—would help to limit a potentially excessive buildup in inventories
that would present a threat later to the
sustainability of the expansion.
Members cited anecdotal evidence
tending to support statistical indications
of some weakening in housing markets,
and they generally anticipated that the
rise that had occurred in mortgage interest rates would exert a further damping
effect on housing activity over the year
ahead. However, against the background
of the still relatively favorable affordability of housing and the likelihood of
some further pent-up demand, only a
moderate drop in overall homebuilding
activity seemed likely.
A number of members expressed the
view that the external sector was likely
to contribute to the expansion of domestic economic activity in light of the
depreciation in the value of the dollar
and indications of stronger economic
growth in foreign industrial nations.
However, relatively rapid expansion in
foreign economic activity would add to
pressures on world commodity prices at
least for a time. One member expressed
concern about the potential, albeit
uncertain, effects on the exchange value
of the dollar of developments unrelated
to the conduct of monetary policy, such
as the ongoing trade negotiations with
Japan and forthcoming elections in
Germany.
In their discussion of various factors
bearing on the outlook for inflation,
188 81st Annual Report, 1994
members noted that some measures of
inflation had picked up recently and that
many private forecasters anticipated
higher inflation in 1995 than in 1994.
The worsening of inflation could perhaps be viewed as reflecting increasing
capacity constraints in the face of recent
growth in overall demand at a pace
above the economy's long-run potential.
From this perspective, the future path of
inflation would depend importantly on
the extent to which the expansion in
overall activity would in fact abate from
an unsustainable pace. Some members
expressed particular concern that if
above-trend growth did not moderate
soon, existing inflationary pressures and
inflationary expectations would quickly
become more pronounced and inflation
would gather momentum. Thus far,
however, price pressures remained concentrated in the early stages of production. As evidenced by broad measures
of prices and anecdotal information
obtained from numerous business contacts, the pass-through of the higher
costs of materials to the prices of final
goods had been muted in what business
executives continued to describe as
highly competitive markets. The ability
of business firms to hold down price
increases in turn reflected to a marked
degree their successful efforts to control
unit costs through ongoing gains in productivity. Moreover, with profit margins
currently at high levels, business firms
facing competitive market conditions
had some leeway to absorb rising costs.
Increasingly tight labor markets in many
parts of the country had not resulted in
higher overall wage inflation, but members reported some upward pressure on
the wages of certain categories of workers in strong demand. One member
expressed the view that continued moderation in price and wage increases also
might reflect in some measure a shift in
price and wage-setting behavior attribut
able to the credibility of the Committee's anti-inflationary stance in recent
years. A number of members commented that the sluggish-to-moderate
growth of a wide variety of money and
credit measures provided some assurance that, to date, monetary policy had
not laid the basis for a sustained upturn
in inflation. Nonetheless, the members
concluded that the potential for additional inflation remained substantial and,
from a monetary policy standpoint, rendered especially urgent the ongoing
assessment of inflation trends.
In the Committee's discussion of policy for the period ahead, most of the
members agreed on the desirability of
maintaining a steady policy course, at
least for the near term. In light of
the appreciable tightening of policy
approved in August, the members had
anticipated that no further policy change
was likely to be required for a period,
and at this juncture they generally continued to feel that the recent evidence
did not warrant an immediate further
tightening. Even so, the ongoing inflow
of information on the performance of
the economy continued to indicate a significant potential for higher inflation
down the road, and for many members
this suggested that additional monetary
restraint could well be needed at some
time. A key uncertainty in this regard
related to the restraining effects of the
policy moves implemented earlier this
year; these actions appeared to have
exerted less restraint to date than had
been anticipated, but appreciable lagged
effects from those actions—indeed, perhaps a large part of those effects—could
still be expected. At this time, it was
extremely difficult to evaluate whether
the earlier tightening moves were exerting a lesser effect than usual or it simply
was more delayed, or whether the members might have misjudged the underlying strength of the expansion. In the
Minutes of FOMC Meetings, September
view of many members, the information
that would become available during the
intermeeting period should provide a
firmer basis for judging the course of the
economy and the risks of greater inflation. Should incoming information point
to a greater likelihood that price pressures would intensify, the Committee
would need to act promptly and forcefully to avert an upward ratcheting of
inflationary expectations and actual
inflation that would be difficult to
reverse. Consequently, while views differed with regard to the likely need for
some policy tightening over the weeks
immediately ahead, the members generally supported a shift from the symmetry in the August directive to asymmetry
toward restraint. Some members indicated that they could accept an asymmetric directive, but they expressed
misgivings about the use of such an
instruction in the directive because they
felt it was subject to misunderstanding
in financial markets and could add to
uncertainty about Committee intentions.
One member favored an immediate
move to somewhat greater reserve
restraint because" the available evidence
in his view already suggested an upturn
in inflationary expectations and the prospect of a significant rise in inflation.
In the course of the Committee's discussion, a number of members commented that the behavior of the monetary and credit aggregates should be
taken into account in the evaluation of
the current stance of monetary policy.
While various money and related measures had for many years proved unreliable to a greater or lesser extent in
gauging economic prospects, the weak
growth in a wide array of these measures could not be entirely disregarded
as a possible indicator of the degree of
monetary restraint and argued for caution in implementing any further policy
tightening. One member noted, how
\ 89
ever, that the slow growth in the narrow
measures of reserves and money followed an extended period of rapid
expansion and their recent weakness
might not be indicative of constrained
liquidity at this point. Moreover, the
ready availability of bank credit and
the receptivity of financial markets more
generally argued that many borrowers,
including small and medium-sized businesses, currently had access to ample
financing.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they could support a directive that called for maintaining the existing degree of pressure on reserve positions and that included a bias toward the
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
somewhat 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 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 the pace of economic expansion, though perhaps moderating slightly in
recent months, remains substantial. Nonfarm
payroll employment advanced appreciably
190 81st Annual Report, 1994
further in August, and the civilian unemployment rate was unchanged at 6.1 percent.
Reflecting strength in motor vehicles, industrial production rose sharply in August after
posting sizable gains in other recent months,
and capacity utilization moved up further
from already high levels. Retail sales were
up considerably in August, boosted by a
rebound in sales of durable goods, including
motor vehicles. Housing starts rose in
August but were unchanged from their
second-quarter level. Orders for nondefense
capital goods point to a continued strong
expansion in spending on business equipment; permits for nonresidential construction
remain on a mild uptrend. Inventory accumulation appears to have moderated recently
after surging in the second quarter. The
nominal deficit on U.S. trade in goods and
services widened in July from its secondquarter average. Prices of materials have
remained under upward pressure, and
increases in broad indexes of consumer and
producer prices have been somewhat larger
in recent months.
On August 16, 1994, the Board of Governors approved an increase in the discount
rate from V/i to 4 percent, and the Committee agreed that this increase would be
allowed to show through completely to interest rates in reserve markets. Most market
interest rates are up somewhat on balance
since the August meeting. The tradeweighted value of the dollar in terms of the
other G-10 currencies depreciated somewhat
over the intermeeting period.
M2 and M3 declined in August after
expanding moderately in July; for the year
through August, M2 and M3 grew at rates
slightly above the bottom of their ranges for
1994. Total domestic nonfinancial debt has
continued to expand at a moderate rate in
recent months.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3
of 1 to 5 percent and 0 to 4 percent respectively, measured from the fourth quarter of
1993 to the fourth quarter of 1994. The Committee anticipated that developments contributing to unusual velocity increases could persist during the year and that money growth
within these ranges would be consistent with
its broad policy objectives. The monitoring
range for growth of total domestic nonfinancial debt was maintained at 4 to 8 percent for
the year. For 1995, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1994 to the
fourth quarter of 1995, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the associated monitoring range for growth of domestic nonfinancial debt at 3 to 7 percent for 1995. 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,
somewhat greater reserve restraint would or
slightly lesser reserve restraint might be
acceptable in the intermeeting period. The
contemplated reserve conditions are expected to be consistent with modest growth
in M2 and M3 over the balance of the year.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Forrestal, Jordan,
Kelley, LaWare, Lindsey, and Parry and
Mses. Phillips and Yellen. Vote against
this action: Mr. Broaddus.
Mr. Broaddus dissented because he
believed that a prompt move to somewhat greater monetary restraint was
needed at this point. In his view, the
current stance of monetary policy was
overly accommodative in light of the
signs of increasing price pressures and
rising inflationary expectations that were
associated with the continuing strength
of the economic expansion and high
levels of capacity utilization. In this situation, a delay in implementing some
monetary policy tightening would incur
a substantial risk of a further increase
in inflationary expectations and could
Minutes of FOMC Meetings, November 191
make it more costly to achieve the Committee's longer-term anti-inflationary
goals.
It was agreed that the next meeting of
the Committee would be held on Tuesday, November 15, 1994.
The meeting adjourned at 1:00 p.m.
Donald L. Kohn
Secretary
Meeting Held on
November 15, 1994
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 15, 1994, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Broaddus
Mr. Forrestal
Mr. Jordan
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Parry
Ms. Phillips
Ms. Yellen
Messrs. Hoenig, Melzer, and Moskow
and Ms. Minehan, Alternate
Members of the Federal Open
Market Committee
Messrs. Boehne, McTeer, and Stern,
Presidents of the Federal Reserve
Banks of Philadelphia, Dallas,
and Minneapolis 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. Goodfriend, Lindsey, Mishkin,
Promisel, Siegman, and Simpson
and Ms. Tschinkel, Associate
Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account
Mr. Fisher, Manager for Foreign
Operations, System Open Market
Account
Mr. Ettin, Deputy Director, Division
of Research and Statistics, Board
of Governors
Mr. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
Mr. Madigan, Associate Director,
Division of Monetary Affairs,
Board of Governors
Mr. Brayton, Assistant 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
Ms. Browne and Messrs. Davis,
Dewald, Lang, Rolnick,
Rosenblum, and Vander Wilt,
Senior Vice Presidents, Federal
Reserve Banks of Boston,
Kansas City, St. Louis,
Philadelphia, Minneapolis, Dallas,
and Chicago respectively
Mr. Judd, Vice President, Federal
Reserve Bank of San Francisco
Mr. Guentner, Assistant Vice
President, Federal Reserve
Bank of New York
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on September 27, 1994,
were approved.
The Report of Examination of the
System Open Market Account, con-
192 81st Annual Report, 1994
ducted by the Board's Division of
Reserve Bank Operations and Payment
Systems as of the close of business on
June 30, 1994, was accepted.
The Manager for Foreign Operations
reported on developments in foreign
exchange markets and on System open
market transactions in foreign currencies during the period September 27,
1994, through November 14, 1994. By
unanimous vote, the Committee ratified
these transactions.
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 September 27,
1994, through November 14, 1994. 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 the growth of
the economy remained substantial. Consumer spending was robust, business
fixed investment continued on a strong
upward trend, and housing activity had
been well sustained despite the increase
in mortgage interest rates over the past
year. Business inventory investment had
been brisk since the spring, apparently
in response to the strong growth in final
sales. Further sizable gains had been
recorded in industrial production and
employment. Increases in labor compensation were still moderate, although
there were some tentative signs of wage
acceleration associated with the further
tightening of labor markets. Prices of
many materials continued to move up
rapidly, but broad indexes did not indicate a pickup in consumer inflation.
Nonfarm payroll employment rose
appreciably further in October, with job
gains widespread by industry. In the
service-producing sector, retail trade
posted a particularly large advance
while health and business services continued to record moderate increases.
Manufacturing employment was up in
October after having been unchanged in
September; the rise was related partly to
continued job growth in automobile- and
construction-related industries, but payrolls also expanded in a number of other
industries, including textiles, paper, rubber, and plastics. Construction hiring
slowed after a large rise in September.
Employment, as measured by the household survey, increased by more than the
labor force in October, and the civilian
unemployment rate edged down to
5.8 percent.
Industrial production increased substantially in October after having posted
appreciable advances on balance in
previous months. Manufacturing output
accounted for all of the October rise as
production declined again in the mining
and utilities components. In manufacturing, the pace of motor vehicle assemblies was unchanged, but production
in automotive-related industries was
stepped up noticeably and output of
business equipment continued to expand
vigorously. Total utilization of industrial
capacity climbed further in October
from already elevated rates.
Consumer confidence remained at a
high level, and retail sales continued
to rise rapidly in October. Automotive
dealers reported a large increase in
sales, but strength also was evident
elsewhere: Furniture and appliance
Minutes of FOMC Meetings, November
stores posted another appreciable gain;
apparel outlets registered a brisk rise;
and spending at food and general
merchandise stores grew moderately.
Housing starts rose appreciably in
September, reaching their highest level
of the year. Sales of new and existing homes were stronger in September, despite the higher interest rates on
both fixed- and adjustable-rate mortgages that had prevailed since earlier in
the year.
Business capital spending remained
on a solid uptrend. Shipments of nondefense capital goods were brisk during
the third quarter, and with orders continuing to exceed shipments, already
large backlogs increased further for
most types of business equipment.
Spending for transportation equipment
grew at a healthy rate in the third quarter; purchases of heavy trucks persisted
at a very high level, and spending for
motor vehicles picked up after a secondquarter lull. Nonresidential construction
activity advanced at a reduced pace in
the third quarter; however, permits for
new construction continued to trend
higher.
Business inventory investment apparently continued at a brisk pace in the
third quarter, with much of the accumulation occurring in types of goods
where sales were strong. Manufacturing
stocks fell in September, but for the
third quarter as a whole they increased
at the same moderate rate as in the second quarter; the inventory-to-shipments
ratio for manufacturing in September
remained near the historical low reached
the previous month. At the wholesale
level, inventory accumulation slowed
slightly in the third quarter, and the
inventory-to-sales ratio was in the
lower end of its range over recent years.
Retail inventories surged in August
(latest data available) after having declined slightly in July. Nonetheless, the
193
inventory-to-sales ratio for this sector
remained near the middle of its range in
recent years.
The nominal deficit on U.S. trade in
goods and services narrowed in August,
but for July and August combined the
deficit was substantially larger than its
second-quarter average. The value
of exports of goods and services rebounded in August, with increases
spread widely among automotive products, aircraft, agricultural products,
machinery, and consumer goods. The
value of imports also increased in
August, but by a lesser amount than that
of exports; much of the rise reflected
greater imports of automotive vehicles
from Canada. Economic activity continued to expand in the major foreign
industrial countries in the third quarter,
but growth apparently was at a more
moderate pace than in the first half of
the year.
Consumer price inflation remained
moderate in September. For items other
than the food and energy components,
the increase in consumer prices over
the twelve months ending in September
was slightly smaller than the rise over
the previous twelve months. At the producer level, prices of finished goods
declined, largely reflecting a sharp fall
in prices of finished energy goods.
Excluding food and energy items, producer prices edged up in September
and had risen slowly over the twelve
months ending in September. At intermediate stages of processing, prices of
many materials, notably industrial materials, had continued to move up rapidly.
Total compensation of private industry
workers rose significantly less over the
four quarters ending in September than
over the previous four quarters, primarily reflecting a sharply smaller
increase in benefit costs. Average hourly
earnings of production or nonsupervisory workers recorded a large gain
194 81st Annual Report, 1994
in September after having expanded
moderately over previous months.
At its meeting on September 27,
1994, the Committee adopted a directive
that called for maintaining the existing
degree of pressure on reserve positions
but included a bias toward possible firming during the intermeeting period. The
directive stated 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, somewhat 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 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. As the
need for seasonal credit waned over the
period, adjustment plus seasonal borrowing declined substantially, with actual borrowing remaining close to anticipated levels. Apart from some tightness
in reserves markets around the end of
the third quarter, the federal funds rate
averaged close to 43A percent.
Most market interest rates rose appreciably over the period since the September 27 meeting in response to incoming
economic data that generally indicated
sustained momentum in final sales and
inventory investment and high levels of
aggregate output relative to the economy's potential. The strong economic
data and persisting upward pressures on
prices at earlier stages of production
appeared to heighten concerns among
market participants about inflationary
pressures and prospects for even more
monetary tightening than had previously
been anticipated. Most major indexes of
equity prices were little changed on balance over the intermeeting period.
The trade-weighted value of the dollar in terms of the other G-10 currencies
changed little on net over the intermeeting period. The dollar trended lower
over much of the period, apparently reflecting market perceptions that inflation
risks in the United States were on the
rise. In early November, after reaching a
new post-World War II low against the
yen and a two-year low against the
mark, the dollar began to recover. The
rebound in the value of the dollar apparently was in part a response to U.S.
intervention in support of the dollar and
heightened expectations of further monetary tightening in the United States.
M2 continued to edge lower in October; the weakness was concentrated in
its more-liquid deposit components, for
which opportunity costs had risen very
substantially this year. M3 expanded at a
moderate pace, buoyed by continued
rapid growth in large-denomination time
deposits issued to finance rapid loan
growth and to counter runoffs of nondeposit sources of funds. For the year
through October, M2 grew at a rate at
the bottom of the Committee's range for
1994 and M3 at a rate in the lower half
of its range for the year. Total domestic
nonfinancial debt continued to expand at
a moderate rate in recent months.
The staff forecast prepared for this
meeting suggested that growth in economic activity would slow markedly
over the next several quarters and for a
period would average less than the rate
of increase in the economy's potential
output. In the staff's judgment, the
economy currently was operating at or
beyond its long-run capacity, and the
forecast assumed that monetary policy
would not accommodate any continuing tendency for aggregate demand to
expand at a pace that could foster sustained higher inflation. The expansion of
Minutes of FOMC Meetings, November
consumer spending was projected to
slow considerably in response to diminishing pent-up demands, higher borrowing costs, and reduced income growth.
Business fixed investment also was
anticipated to decelerate appreciably in
the context of smaller increases in sales
and less favorable financial conditions.
Homebuilding was expected to be
damped by higher financing costs,
although housing activity likely would
remain well above the depressed levels
of recent years when cash-flow affordability had been less favorable. The
lower value of the dollar and the favorable prospects for faster economic
recovery abroad were projected to
bolster the demand for U.S. exports.
With the economy having reached or
exceeded its long-run potential in the
staff's judgment, wage and price inflation was projected to pick up for a
period before turning down as pressures
on productive resources eased.
In the Committee's discussion of
current and prospective economic developments, members commented on
widespread statistical and anecdotal
indications of considerably greater
strength in the business expansion than
they had anticipated earlier, with numerous industries now operating at or
beyond historic, long-run capacity levels. They saw few signs that growth in
aggregate demand might be moderating
toward a more sustainable pace; nonetheless, they continued to view some
slowing as a reasonable expectation as
the monetary policy tightening actions
implemented earlier exerted their lagged
effects on interest-sensitive sectors of
the economy. At this point, increases in
prices of final goods and services and of
wages generally did not appear to be
trending higher, but the members were
concerned that inflation would worsen
as the effects of continuing strong
demand, rising production costs, and
\ 95
higher import prices increasingly were
felt in an environment where the utilization of labor and other producer
resources was already at, if not above,
sustainable full employment levels.
The evidence of persisting growth in
aggregate demand at a pace appreciably
above that of the economy's long-run
potential and of developing pressures
on resources tended to be confirmed
by anecdotal reports of robust business
expansion in many parts of the country
and growing difficulties in hiring and
retaining some types of labor. Ongoing
cutbacks in some industries, such as
defense, were tending to hold down
overall economic activity in a few
regions, but all parts of the country
appeared to be experiencing at least
modest economic growth, including
California where economic activity now
seemed to have turned up after an
extended period of weakness. Sentiment
among retailers and other business contacts was widely reported to be quite
favorable. In addition, some members
commented that despite higher interest
rates financial conditions generally
remained conducive to further business
expansion. The lending constraints that
had tended to retard the expansion
earlier seemed to have given way to
increasingly accommodative loan policies by depository institutions and ready
access to market sources of financing
for many business firms.
In their assessment of the contribution of key sectors of the economy to the
expansion, members commented on the
current strength of consumer spending
and also noted that business contacts
were expressing considerable optimism
about the prospects for retail sales over
the holiday season. Consumer sentiment, as evidenced by survey results
and retailer comments, appeared to be at
a high level. Some moderation in the
growth of consumer spending could be
196 81st Annual Report, 1994
expected to emerge next year for a
variety of reasons, including reduced
pent-up demands and some anticipated
slowing in the growth of employment
and consumer incomes. Members also
noted that rising interest rates were
likely to damp consumer spending, notably for durable goods, though there was
little evidence of such a development
thus far. A projected softening in housing markets would contribute to slower
growth in demand for housing-related
consumer durables.
Expanding sales and favorable profit
margins were fostering strong growth in
business fixed investment, and much of
the momentum in this sector probably
would carry over into 1995. Some business contacts reported that they were
developing plans for major capital outlays over coming months. As the year
progressed, however, the increases that
had occurred in interest rates, and the
possibility of less receptive financial
conditions more generally, should begin
to exert some inhibiting effects on business fixed investment, especially if
profit margins also were to fall in the
context of rising labor and other costs.
With regard to the outlook for housing, members reported that conditions
were somewhat uneven across the country but that for the nation as a whole
rising mortgage rates had had surprisingly little effect thus far on this typically interest-sensitive sector of the
economy. One reason, it was suggested,
was the apparent willingness of some
homebuyers to accept higher mortgage
rates at this point because they expected
rates to rise further later. Even so, the
members continued to anticipate some
slowdown in housing construction over
coming quarters. Overall construction
activity was likely to be supported to
some extent, however, by further
gradual gains in nonresidential construction, notably commercial and industrial
structures, and perhaps some continuing
strength in multifamily housing.
After a surge in the second quarter,
inventory investment remained substantial in the third quarter and appeared to
be continuing at a robust pace in the
current quarter. For a variety of reasons,
inventory accumulation might well be
relatively brisk for some period of time,
given the favorable sales experience of
numerous business firms and the still
quite low levels of inventories relative
to sales. Moreover, with capacity pressures in many industries leading to some
lengthening in delivery times, businesses would tend to build inventories
to support sales and avoid disruptions
to production schedules. Tending to confirm such an assessment were anecdotal
reports suggesting that recent additions
to inventories were largely intended and
not the result of disappointing sales. An
inventory buildup at the pace recorded
on average in the second and third
quarters would not be sustainable, but
inventory investment was likely to be
relatively well maintained over coming
months if aggregate demand were to
expand in line with current expectations.
The members generally anticipated
that the external sector of the economy
would provide some impetus to the
expansion. The recent depreciation of
the dollar and strength in foreign economic activity could be expected to
boost real exports at a time when growth
in real imports was likely to moderate.
The resulting improvement in the
nation's net trade position would, however, tend to exacerbate any tendency
for domestic demand to outrun the
economy's output potential.
In the Committee's discussion of the
outlook for prices, the members saw a
considerable risk of higher inflation if
growth in demand and output continued
at an unsustainable pace, placing added
pressures on labor and other producer
Minutes of FOMC Meetings, November
resources. They noted indications of
greater inflation pressures, especially in
the rising prices of many materials used
in the production process and the increasing number of reports of labor
shortages. To date, prices of finished
goods and services did not reflect those
pressures and overall wage inflation did
not appear to be trending higher. Even
so, at least some modest worsening of
inflation seemed quite likely over the
quarters immediately ahead, despite the
persistence of strong competition that
continued to limit attempts to raise
prices in most markets. This view
seemed to be reinforced by increasing
reports of successful efforts by some
business firms to establish and sustain
higher prices and by numerous indications of business plans to raise prices
around year-end or the early part of next
year. Other factors that appeared to have
adverse implications for the inflation
outlook included faster increases in
import prices, and in the view of at least
some members the prospect of diminishing gains in productivity. Moreover, as
evidenced by the comments of some
business contacts and the behavior of
financial markets, inflationary expectations might be in the process of worsening, though such a development could
not be seen in broad survey results. To
what extent such expectations would
become more pervasive and foster
greater inflation momentum was very
difficult to gauge at this point. One
member suggested that some further rise
in inflation might reflect a typical development in a maturing cyclical expansion
but that such a rise would not necessarily augur a permanent uptick in inflation
or even that progress toward price stability would not continue to be made over
time, provided appropriate monetary
policies were pursued.
In the Committee's discussion of policy for the intermeeting period ahead, all
197
the members agreed that the current
stance of monetary policy presented
unacceptable risks of embedding higher
inflation in the economy. The expansion
retained appreciably more forward
momentum and greater inflationary
potential than the members had anticipated, given the policy restraint implemented earlier this year. The reasons for
that outcome remained unclear. Among
the suggested explanations were that the
earlier restraint appeared to have had
a less-than-expected effect on current
economic conditions and, in particular,
on the more interest-sensitive sectors of
the economy. Some members also suggested that the underlying expansion
was stronger than they had anticipated,
and a couple referred to the possibility that the lingering effects from the
accommodative policy stance maintained through last year were larger than
had been expected. Moreover, additional
monetary restraint seemed to be needed
to counteract the stimulative effects on
domestic economic activity of a number
of atypical financial developments in a
period of rising interest rates; these
included the easing of nonprice credit
terms by depository institutions, the
ample availability of funds in debt and
equity markets, and the depreciation of
the dollar in foreign exchange markets.
The members recognized that monetary
policy actions exerted much of their
effects after relatively long lags and that
a substantial portion of the restraint
stemming from the earlier policy actions
undoubtedly had not yet been felt in the
economy. They agreed, nonetheless, that
monetary policy was still insufficiently
restrictive in light of emerging inflationary signals in the economy. Views differed to some extent, however, regarding the degree of additional restraint that
might be needed to foster the Committee's objectives for sustainable, noninflationary economic growth.
198 81st Annual Report, 1994
A majority of the members believed
that an unusually sizable firming of
monetary policy was desirable at this
time, and they endorsed a proposal to
tighten reserve conditions in line with
a 3/4 percentage point increase in the
discount rate that a number of Federal
Reserve Banks had proposed for
approval by the Board of Governors. In
this view, the data becoming available
in recent months had suggested considerable resilience and underlying
strength in economic activity and rising
risks of greater inflation pressures. A
somewhat aggressive tightening action
would improve the prospects for curbing intensifying inflationary pressures
before they gathered further momentum and would help position the economy on a sustainable growth path consistent with the economy's long-run
potential. The members acknowledged
the difficulty of judging the precise
degree of monetary restraint that would
be needed to attain the Committee's
objectives and in particular the risk
that further efforts to control inflation
at this juncture might foster greaterthan-intended weakening of the expansion. The Committee could not prejudge how much, if any, additional
monetary restraint might be needed in
the future. That would depend on further developments, but for most members a sizable move at this point represented the most appropriate balance
among the competing risks. During this
discussion, it was noted that recent
developments were having an unsettling
effect on financial markets, and a tightening move of this magnitude might
contribute to market stability by reducing expectations of higher inflation
and a further near-term policy action.
Some members also commented that the
action would tend to reinforce the recent
intervention in the foreign exchange
markets.
Other members indicated that they
preferred a less forceful policy move at
this point, one that would be consistent
with the Vi percentage point increase in
the discount rate that had been proposed
by several Federal Reserve Banks. In
their view, substantial further restraint
could be expected from the combined
effects of the policy tightening actions
implemented earlier this year and the
inevitable waning of the stimulative
effects of policy actions taken in previous years. While the need for further
monetary restraint could not be ruled
out, a more limited policy move at this
point could reasonably be expected
in this view to accomplish the greater
part or all of the Committee's antiinflationary objectives over time and
would minimize the risk of setting policy on an overly restrictive course with
undesired consequences for the business
expansion later. Moreover, a cautious
approach could lessen the risk that the
Committee's policy intentions would
be misinterpreted, with some resulting
damage to consumer and business confidence and dislocation in financial
markets. Despite their reservations,
these members indicated that they could
accept the degree of restraint preferred
by the majority because of the quite
small difference in the effects of the
alternative moves on the economy over
time.
With regard to possible changes in
policy during the period until the next
meeting, a majority of the members
favored associating the more substantial
policy adjustment with a symmetric
intermeeting instruction. This preference was based on expectations that a
further policy action was not likely to
be called for over the near term,
although a symmetric directive would
not prevent an intermeeting adjustment
if near-term developments differed substantially from expectations. One mem-
Minutes of FOMC Meetings, November
ber expressed the view that the unusually large move made it especially
important to follow a steady policy
course for some period of time and to
undertake any further firming only if
new information of a surprisingly strong
nature were to be received. Another
member indicated a preference for an
asymmetric directive toward restraint
because such a directive would be more
consistent with the likely need in his
view for further monetary restraint to
contain inflationary forces in the
economy.
At the conclusion of the Committee's
policy discussion, all the members indicated that they could support a directive
that called for a significant increase
in the degree of pressure on reserve
positions, taking account of a possible
increase of 3A percentage point in the
discount rate, 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 somewhat greater or
somewhat lesser reserve restraint would
be acceptable during the intermeeting
period. According to a staff analysis, the
reserve conditions contemplated at this
meeting would 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 that the growth of the economy
\ 99
has remained substantial. Nonfarm payroll
employment advanced appreciably further in
October, and the civilian unemployment rate
edged down to 5.8 percent. Industrial production registered a large increase in October after posting sizable gains on average
over other recent months, and capacity utilization moved up further from already high
levels. Retail sales have continued to rise
rapidly. Housing starts rose appreciably in
September. Orders for nondefense capital
goods point to a continued strong expansion
in spending on business equipment; permits
for nonresidential construction have been
trending higher. Inventory accumulation
appears to have continued at a brisk pace in
the third quarter. For July and August combined, the nominal deficit on U.S. trade in
goods and services widened from its secondquarter average. Prices of many materials
have continued to move up rapidly, but broad
indexes of prices for consumer goods and
services have increased moderately on average over recent months.
Most market interest rates have risen
appreciably since the September meeting.
The trade-weighted value of the dollar in
terms of the other G-10 currencies was
essentially unchanged on balance over the
intermeeting period, though it was weaker
through much of the period.
M2 contracted further in October while
M3 expanded at a moderate pace, buoyed
by continued rapid growth in largedenomination time deposits. For the year
through October, M2 grew at a rate at the
bottom of the Committee's range for 1994
and M3 at a rate in the lower half of its range
for the year. Total domestic nonfinancial debt
has continued to expand at a moderate rate in
recent months.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3
of 1 to 5 percent and 0 to 4 percent respectively, measured from the fourth quarter of
1993 to the fourth quarter of 1994. The Committee anticipated that developments contributing to unusual velocity increases could persist during the year and that money growth
within these ranges would be consistent with
its broad policy objectives. The monitoring
200 81st Annual Report, 1994
range for growth of total domestic nonfinancial debt was maintained at 4 to 8 percent for
the year. For 1995, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1994 to the
fourth quarter of 1995, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the associated monitoring range for growth of domestic nonfinancial debt at 3 to 7 percent for 1995. 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
increase significantly the existing degree of
pressure on reserve positions, taking account
of a possible increase in the discount rate.
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, somewhat greater reserve
restraint or somewhat lesser reserve restraint
would be acceptable in the intermeeting
period. The contemplated reserve conditions
are expected to be consistent with modest
growth in M2 and M3 over coming months.
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Broaddus, Forrestal,
Jordan, Kelley, LaWare, Lindsey, and
Parry and Mses. Phillips and Yellen. Votes
against this action: None.
Secretary's note. The meeting was recessed briefly at this point and the members
of the Board of Governors convened to consider pending Reserve Bank proposals for
increases in the discount rate. After the conclusion of that meeting, the Presidents of the
Federal Reserve Banks were informed that
the Board of Governors had approved an
increase of 3A percentage point in the discount rate, effective immediately, and the
meeting of the Federal Open Market Committee then resumed.
System Foreign Currency
Arrangements
The Committee considered the renewal
of the System's currency ("swap")
arrangements with foreign central banks.
These arangements normally have oneyear maturities and, except for those
with the Bank of Canada and the Bank
of Mexico, were due to mature on various dates in December 1994.
In the course of their review, the
members discussed sterilized intervention by the Federal Reserve in the
foreign exchange markets. They generally agreed that in certain circumstances such intervention serves a useful
purpose, such as helping to counter disorderly market conditions, but it normally would not be expected to have
lasting effects on the foreign exchange
value of the dollar in the absence of
other policy adjustments. In the overwhelming number of instances for more
than a decade, the Federal Reserve has
participated jointly with the U.S. Treasury in foreign exchange operations.
In the view of most members it seemed
advisable to continue that procedure,
especially given the System's responsibilities for the overall financial health
of the economy and ongoing cooperation with the Treasury regarding the
nation's broad financial objectives.
Nonetheless, the apparently limited and
temporary effectiveness of sterilized
intervention counseled a cautious reliance on such transactions. Against this
background, nearly all the members
believed that the System's reciprocal
currency arrangements, which were a
potential source of foreign currencies
that might be used for intervention purposes as well as an ongoing symbol
of cooperation with other participating
central banks, should be renewed for
another year.
At the conclusion of this discussion, the Committee authorized the
renewal for further periods of one year
of the System's reciprocal currency
arrangements with twelve foreign central banks and the Bank for Interna-
Minutes of FOMC Meetings, December 201
tional Settlements. The amounts and
existing maturity dates of the 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
Amount of
arrangeMaturity
Term
ment
date
(millions (months)
of dollars
equivalent)
250
3,000
5,000
3,000
250
300
4,000
12
20
12
12/04/94
12/04/94
12/04/94
12/15/95
12/04/94
12/04/94
12/04/94
600
12/04/94
1,250
policy actions to support short-term
foreign exchange objectives set by the
Treasury. Alternatively, the credibility
of monetary policy is damaged if the
System does not follow interventions
with compatible policy actions, the
interventions consequently fail to
achieve their objectives, and the System is associated in the mind of the
public with the failed operations. In
these circumstances, he did not view
renewal of the existing swap lines as
desirable because they are used primarily to facilitate market intervention.
It was agreed that the next meeting of
the Committee would be held on Tuesday, December 20, 1994.
The meeting adjourned at 2:05 p.m.
12/04/94
1,000
2,000
"
20
12/18/94
12/15/95
250
2,000
12
12/28/94
12/28/94
6,000
3,000
500
12/28/94
12/28/94
12/28/94
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Forrestal, Jordan,
Kelley, LaWare, Lindsey, and Parry and
Mses. Phillips and Yellen. Vote against
this action: Mr. Broaddus.
Mr. Broaddus dissented because he
believed that the Federal Reserve's participation in foreign exchange market
intervention compromises its ability to
conduct monetary policy effectively.
Because sterilized intervention cannot
have sustained effects in the absence
of conforming monetary policy actions,
Federal Reserve participation in foreign exchange operations risks one of
two undesirable outcomes. First, the
independence of monetary policy is
jeopardized if the System adjusts its
Donald L. Kohn
Secretary
Meeting Held on
December 20, 1994
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 20, 1994, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Broaddus
Mr. Forrestal
Mr. Jordan
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Parry
Ms. Phillips
Ms. Yellen
Messrs. Hoenig, Melzer, and Moskow
and Ms. Minehan, Alternate
Members of the Federal Open
Market Committee
202 81st Annual Report, 1994
Messrs. Boehne,5 McTeer, and Stern,
Presidents of the Federal Reserve
Banks of Philadelphia, Dallas,
and Minneapolis 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. Beebe, Goodfriend, Lindsey,
Mishkin, Promisel, Siegman,
Simpson, Sniderman, and
Stockton and Ms. Tschinkel,
Associate Economists
Ms. Lovett, Manager for Domestic
Operations, System Open Market
Account 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. Slifman, Associate Director,
Division of Research and
Statistics, Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Davis, Lang, Rolnick, and
Rosenblum, Senior Vice
Presidents, Federal Reserve
Banks of Kansas City,
Philadelphia, Minneapolis,
and Dallas respectively
Messrs. Gavin and McNees, Vice
Presidents, Federal Reserve
Banks of St. Louis and Boston
respectively
Mr. Kuttner, Assistant Vice President,
Federal Reserve Bank of Chicago
5. Left before discussion of the economic
situation.
Mr. Hilton, Manager, Open Market
Operations, Federal Reserve Bank
of New York
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on November 15, 1994,
were approved.
By unanimous vote, the Committee
elected Mark S. Sniderman as Associate
Economist from the Federal Reserve
Bank of Cleveland to serve until the
next election at the first meeting of the
Committee after December 31, 1994,
with the understanding that in the event
he discontinued his official connection
with the Federal Reserve Bank of Cleveland, he would cease to have any official
connection with the Federal Open Market Committee.
The Manager for Foreign Operations
reported on developments in foreign
exchange markets since the November
meeting. There 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 15,
1994, through December 19, 1994. 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.
Minutes of FOMC Meetings, December 203
The information reviewed at this
meeting suggested a further pickup in
economic growth in recent months.
Consumer spending, supported by
strong expansion of employment and
income and by buoyant consumer sentiment, remained robust. Business capital spending and exports were rising
briskly. Payroll employment remained
on a strong upward trend, and industrial
output posted further substantial gains.
Broad indexes of prices of consumer
goods and services increased moderately on average over recent months,
although prices of many industrial materials and intermediate supplies continued to move up rapidly.
Nonfarm payroll employment rose
sharply in November after an appreciable expansion in October. Job gains
in the service-producing sector were
stronger in November than in October,
as a pickup in hiring in business services
more than offset slower growth in health
services and retail trade. Employment in
manufacturing recorded another sizable
advance in November, with increases
widespread by industry. Hiring in
construction was up considerably in
November after a small gain in October.
Job growth outpaced the expansion of
the labor force in November, and the
civilian unemployment rate declined to
5.6 percent.
Industrial production, led by further
increases in manufacturing output, registered another large gain in November.
Among major market groups, production of business equipment surged and
sizable increases were recorded for the
output of materials and construction
supplies. With the growth of production
outpacing the expansion of capacity in
November, the rate of utilization of total
industrial capacity moved up further
from an already high level.
Retail sales continued to rise rapidly
in November. Sales were up solidly at
most types of stores, but gains were
particularly large at durable goods outlets. Consumer spending on services
also had grown significantly in October
(latest data), with advances widespread
among categories of services. Housing
starts increased appreciably in November, when construction activity apparently was boosted by favorable weather
in some parts of the country. Multifamily starts rose in November to their
highest level in four years, while singlefamily starts retraced a large part of
their October decline.
Business capital spending remained
on a pronounced upward trend. Shipments of nondefense capital goods other
than aircraft were up slightly further in
October after having advanced sharply
in the two previous months; shipments
of computing equipment were brisk
in October, while shipments of other
capital goods were little changed. With
regard to transportation equipment, outlays for aircraft continued to trend lower
in October, while sales of heavy trucks
rose appreciably. Recent data on orders
for nondefense capital goods pointed to
continued vigorous expansion of spending on business equipment. Nonresidential construction activity advanced
further in October, led by higher spending for institutional and public utility
structures. The uptrend in permits suggested further advances in nonresidential construction.
Business inventory investment was
relatively robust in October. Manufacturing inventories rebounded after a
small decline in September; a sizable
amount of the October increase occurred
at firms producing computers, office
machinery, and telecommunications
equipment for which demand had been
strong. For manufacturing as a whole,
the stocks-to-shipments ratio remained
near a historically low level. Wholesale
inventories continued to climb at a pace
204 81st Annual Report, 1994
in line with sales, and the inventory-tosales ratio for this sector stayed near the
middle of its range over recent years.
Retail inventory accumulation slowed
substantially in October; much of the
slowdown reflected a sharp drop in
stocks at automotive dealerships. With
sales up sharply, the inventory-to-sales
ratio for the retail sector fell in October
and remained near the middle of its
range over recent years.
The nominal deficit on U.S. trade in
goods and services widened somewhat
in October from its September level and
from its average rate for the third quarter. The increase in the deficit from September's level reflected a small decline
in the value of exports of goods and
services, which resulted primarily from
reduced aircraft shipments, and a small
rise in the value of imports. Economic
activity in the major foreign industrial
countries continued to expand rapidly in
the third quarter, and available indicators generally suggested further substantial gains in the fourth quarter.
Despite further sizable increases in
the prices of many goods at the early
stages of processing, inflation at the consumer level remained moderate in October and November. Energy prices were
unchanged on balance over the two
months, while food prices edged higher.
Excluding food and energy items,
consumer prices advanced at a slightly
slower rate over October and November
than in earlier months of the year and
also increased a little less over the
twelve months ended in November than
over the comparable year-earlier period.
At the producer level, prices of finished goods other than food and energy
were down over the October-November
period, but they rose by a little larger
amount for the twelve months ended in
November than they had in the yearearlier period. The increase in average
hourly earnings of production or non
supervisory workers over the OctoberNovember period remained in the moderate range that had prevailed for some
time, although a pickup in earnings
growth was evident in a few sectors,
notably construction and services. Over
the past twelve months, hourly earnings
increased at a slightly faster pace than
they had over the year-earlier period.
At its meeting on November 15,
1994, the Committee adopted a directive
that called for a significant increase in
the degree of pressure on reserve positions, taking account of a possible rise
of 3A percentage point in the discount
rate. The Committee did not include in
the directive a presumption about likely
further adjustments to policy during the
intermeeting period. Accordingly, the
directive stated 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, somewhat greater or
somewhat lesser reserve restraint would
be acceptable during the intermeeting
period. The reserve conditions associated with this directive were expected to
be consistent with modest growth in M2
and M3 over coming months.
On the day of the meeting, the Board
of Governors approved a 3A percentage
point rise in the discount rate, to a
level of 43/4 percent. The increase in
the discount rate was made effective
immediately and was passed through
fully to interest rates in the market
for reserves. Open market operations
during the intermeeting period were
conducted with a view to maintaining
the tighter policy stance implemented
immediately after the meeting, and the
federal funds rate remained near
5V2 percent. Adjustment plus seasonal
borrowing, reflecting the usual lateautumn pattern of ebbing demand for
seasonal credit, declined over the inter-
Minutes of FOMC Meetings, December 205
meeting period; actual borrowing was
close to anticipated levels.
Short-term interest rates rose considerably over the period after the November meeting. These rates had increased
before the meeting in anticipation of a
policy tightening move, but the size of
the move was larger than expected and
rates firmed a little further as a result.
Over the remainder of the intermeeting
interval, short-term rates responded to
incoming economic data, for a time
rising in reaction to indications of continuing strength in economic activity
and later retracing a portion of these
increases in response to favorable news
on inflation. Rates on private moneymarket instruments with very short
maturities also were lifted somewhat in
anticipation of the usual year-end pressures. Long-term rates declined slightly
over the intermeeting period. The more
favorable inflation data, together with
the relatively aggressive tightening
action, apparently were viewed by many
market participants as indicating that
monetary policy would be sufficiently
firm to hold inflation in check. The revelations in early December of financial
difficulties in Orange County, California and concerns about their potential
spread had a disruptive effect on financial markets, notably those for municipal securities, but aside from the securities of the affected communities, the
disruption generally was brief. Most
major indexes of equity prices fell, on
balance, over the intermeeting period.
The trade-weighted value of the dollar in terms of the other G-10 currencies
increased further over the intermeeting
period, with the dollar gaining about
equally against the mark and the yen.
The unexpected size of the monetary
policy move in November, the economic
news received over the period, and the
growing expectation that policy would
be tightened again before long all
appeared to contribute to the dollar's
rise.
Growth of M2 resumed in November
after several months of decline. M2's
expansion largely reflected sizable
inflows to small time deposits and retail
money market funds that in part might
have been associated with accelerated
outflows from bond mutual funds and
reduced inflows to stock mutual funds.
M3 growth slowed a little in November
as some investors shifted funds from
institution-only money market accounts,
whose opportunity costs had widened
after the November policy tightening,
into direct holdings of securities. For the
year through November, M2 grew at a
rate at the bottom of the Committee's
range for 1994 and M3 at a rate in the
lower half of its range for the year. Total
domestic nonfinancial debt had continued to expand at a moderate rate in
recent months, and through October
(latest data) this debt measure had
grown at a rate in the lower half of its
monitoring range.
The staff forecast prepared for this
meeting suggested that growth of economic activity would slow markedly
over the next few quarters and then
would average less than the rate of
increase in the economy's potential output over the remainder of the forecast
horizon. In the staff's judgment, the
economy currently was operating
beyond its long-run noninflationary
capacity, and the forecast assumed that
monetary policy would not accommodate any continuing tendency for aggregate demand to expand at a pace that
could foster sustained higher inflation.
Growth of consumer spending was
expected to decline substantially in
response to slower income growth,
higher borrowing costs, and reductions
in household net worth associated with
lower asset values. Business outlays for
new equipment were projected to be
206 81st Annual Report, 1994
damped considerably by slower growth
in sales, higher financing costs, and
declining profits. Homebuilding also
was expected to soften in response to
higher financing costs, but the relatively favorable cash-flow affordability
of housing was anticipated to act as a
partial offset to those increased costs.
The projected robust pace of economic
activity abroad was expected to bolster
export demand. With the economy having exceeded its noninflationary potential in the staff's judgment, wage and
price inflation was projected to pick
up for a period before turning down as
pressures on productive resources eased.
In the Committee's discussion of current and prospective economic developments, members referred to continuing indications of robust expansion
in employment, output, and spending
and to very high and rising levels of
resource utilization. They saw scant evidence at this point of any moderation in
the growth of overall economic activity,
including little apparent response thus
far in interest-sensitive sectors of the
economy to earlier policy tightening
actions. Several observed that much of
the expansionary momentum in the
economy was likely to carry into at least
the early part of next year, with potential
inflationary consequences, but a number
also commented that appreciable slowing during the year to a more sustainable
and less inflationary pace remained a
reasonable expectation. It was likely that
much of the restraint from the policy
firming actions implemented this year
had not yet been experienced; those
actions had reversed an accommodative
policy that had been in place through
early 1994, the effects of which probably were still being felt in the latter part
of 1994. The members acknowledged
that the timing and extent of the slowing
in the expansion were subject to considerable uncertainty. However, with the
economy now operating at or even
slightly above its noninflationary potential, price and wage pressures were
likely to build unless the anticipated
slowing occurred relatively soon. Key
measures of inflation including consumer prices, wages, and producer
prices of finished goods did not display
any evident uptrend at this juncture, but
this could reflect a delay in the adjustment of inflation to capacity constraints
and possibly some greater productivity
and flexibility in the economy than had
been assumed.
In the course of the Committee's discussion, members reported on regional
business conditions, which continued
to exhibit local variations ranging from
modest expansion in some areas to
robust growth in others. Reflecting
widespread strength in new orders,
manufacturing firms outside the defense
industry typically were operating at high
levels of capacity utilization, and there
were numerous anecdotal reports of
tightening labor markets. As they had at
earlier meetings, members remarked that
despite the increases that had occurred
in interest rates, financial conditions
remained generally supportive of vigorous economic activity. Some noted that
the financial markets were displaying a
great deal of resilience and in particular
that they had on balance weathered
fairly readily the recent financial problems of a number of local governments
and private corporations that had experienced large unanticipated losses on
their investments. Banking institutions
remained aggressive in their efforts
to extend loans to businesses and
consumers.
In their comments on developments
in key sectors of the economy, members
noted that consumer spending had
increased briskly in recent months amid
indications of favorable consumer sentiment that in turn undoubtedly reflected
Minutes of FOMC Meetings, December 207
the rapid growth in employment and
income. It was still too early to form
reliable estimates of retail sales in the
current holiday season. The anecdotal
reports pointed to seasonal increases
ranging from moderate to strong in various regions, but some members emphasized that sales volumes were being buttressed by unusual promotional efforts,
including relatively large discounts.
Some members also commented that
consumer debt was growing rapidly and
that increased debt levels were likely to
exert a retarding effect on consumer
spending, especially if consumer loan
rates were to be adjusted more fully
upward to reflect increases in market
interest rates. Rates on adjustable home
mortages were moving higher to catch
up with market rates, and these increases
along with the wealth effects from losses
suffered on bond and stock holdings
were likely to damp spending. Up to
now, however, the members saw few
signs of any moderation in the growth
of consumer spending, including little
apparent effect from somewhat higher
interest rates on normally interestsensitive spending for motor vehicles
and other consumer durables.
Business fixed investment, which was
contributing substantially to the current
strength of the expansion, was likely to
remain a positive factor in sustaining the
overall growth of the economy during
the year ahead. Even so, as the expansion matured and growth in final
demand tended to moderate, business
investment could be expected to soften.
As in the case of consumer spending,
however, there were few signs of any
slowing in the current data or anecdotal
reports. Indeed, members saw growing
indications of some improvement in
nonresidential construction activity as
brisk economic expansion tended to
absorb increasing amounts of previously
vacant commercial and industrial space
and prices of such facilities tended to
firm. In the homebuilding sector, the
latest available data did not indicate
any weakening in housing construction
despite the rise in mortgage interest
rates. However, anecdotal reports from
different parts of the country suggested
that the single-family sector might be
weakening. At the same time, construction of multifamily units continued to
exhibit strength in a number of areas,
and this sector appeared to be on a
gradual uptrend as falling vacancy rates
brought increases in rents. On balance,
some modest softening in overall housing construction was seen as likely in
response to the rise that had occurred in
mortgage interest rates.
Inventory investment was cited as
another sector of the economy that probably would exert a negative influence on
economic activity over the year ahead,
though inventory developments are
always subject to a great deal of uncertainty. The strength of inventory investment in recent quarters reflected efforts
to accommodate rapid growth in final
demand and avoid disruptions to production in a period when supply delivery times were tending to lengthen.
Inventory accumulation might remain
elevated for a while longer, but as the
projected slowing in the growth of final
demand began to materialize, business
firms were likely to curtail the growth
of their inventories, perhaps sharply
for some period, in order to maintain
desired inventory-to-sales ratios.
The government sector constituted
another source of considerable uncertainty in the outlook for 1995. Members
referred to major fiscal policy initiatives
that were likely to be considered in the
new Congress, and they discussed possible short- and long-term effects on the
economy. However, the shape of any
legislation was still to be determined
and it was not possible at this point to
208 81st Annual Report, 1994
gauge its effects on government or private spending. On the other hand, spending by state and local governments was
clearly trending higher and was likely to
provide a mild impetus to the overall
expansion; the financial difficulties of
some local governments undoubtedly
would serve to curb their spending but
were not seen at this point as having
any significant effect on the growth in
overall expenditures by state and local
governments.
With regard to the external sector of
the economy, members continued to
anticipate strengthening markets for U.S.
exports over the year ahead. Projected
growth in exports would be stimulated
by the further expansion of economic
activity in major U.S. trading partners
and by the delayed effects of the weakening of the dollar that had occurred on
balance over the course of 1994. Some
members cited anecdotal indications of
stronger foreign demand for agricultural
and other goods produced in the United
States.
Despite the evidence of vigorous
expansion in overall economic activity
and very high levels of resource use,
broad measures of inflation in markets
for finished goods and overall wage
inflation had been on the low side of
expectations recently. Anecdotal reports
continued to point to very strong competition in most markets for final goods,
and business firms continued to encounter widespread resistance in their efforts
to increase prices as the costs of their
raw materials and other inputs moved
higher. Likewise, no uptrend currently
was discernible in broad measures of
wages even though labor markets were
widely described as tight and labor
shortages appeared to have increased
further recently in some parts of the
country. While examples of upward
pressures on wages could be found in a
number of industries, such as construc
tion where there were pronounced shortages of skilled labor in many local areas,
most business firms were strongly resisting sizable increases in their wages and
were making use of "hiring bonuses"
and "performance bonuses" instead of
permanently higher wages to attract or
retain workers. At the same time, job
insecurities, including the potential loss
of health and pension benefits, appeared
to be holding down labor mobility and
demands for higher compensation.
However, many members commented
that rising pressures on capacity, should
they persist or intensify, could be
expected to foster greater inflation at
some point. Indeed, there were numerous reports of business plans to raise
prices early in the new year, and a number of members commented that inflation probably would worsen somewhat
over the near term. The subsequent
behavior of prices and wages would
depend importantly on fiscal and monetary policy developments, the extent of
inflationary expectations among businesses and consumers, and the degree of
pressure that further economic expansion would exert on capacity in various
industries and occupations. Given their
projections of some moderation in the
business expansion and assuming appropriate fiscal and monetary policies, the
members generally felt that any added
inflation emerging in 1995 would likely
be mild and could subside gradually
during the year.
In the Committee's discussion of
policy for the intermeeting period
ahead, a majority of the members agreed
on the desirability of maintaining an
unchanged policy posture at least
through the beginning of 1995. Monetary policy had been tightened considerably in a series of steps starting in
February, and much of the restraint
stemming from those policy moves had
not yet been felt in the economy. This
Minutes of FOMC Meetings, December 209
was especially true with regard to the
effects of the latest policy moves in
August and November, which accounted
for half the total tightening. In the circumstances, a pause seemed warranted
to give the Committee more time to
assess the underlying strength of the
economy and the impact of previous
monetary restraint. This would provide
a firmer basis for gauging the appropriate scope and timing of any further
monetary restraint that might be needed
to contain inflation. The level of real
short-term interest rates, which had risen
considerably this year and were now
significantly positive, the uniformly
sluggish behavior of the monetary
aggregates, and the recent appreciation
of the dollar might indicate that policy
was now better positioned to restrain
incipient inflation. It was noted that the
Committee might have gained some
leeway to maintain an unchanged policy
without adverse expectational effects in
light of the relatively large policy tightening implemented just a few weeks ago
and the publication of favorable price
and wage data that probably had alleviated, at least temporarily, concerns about
future inflation. A number of members
also commented that financial markets
might tend to be a bit unsettled over the
balance of the year as a result of the
expected year-end adjustments along
with the uncertainty about the effects
and incidence of the sizable market
losses incurred by some investors in
1994. In these circumstances, where
there did not appear to be an urgent need
for a further policy move, a number of
members viewed conditions in financial
markets as arguing for a steady policy
course pending a reassessment early
next year.
A few members expressed a preference for some additional tightening of
policy at this meeting. In their view, the
considerable strength of the economic
expansion and the high level of resource
utilization argued for further monetary
restraint to counter inflationary pressures; immediate action also would
moderate inflationary expectations by
reinforcing the credibility of the System's anti-inflationary effort. All but one
of these members indicated, however,
that they could accept an unchanged
directive that was biased toward possible firming during the intermeeting
period.
On the issue of possible adjustments
to policy during the period until the next
meeting, a majority of the members
expressed a preference for an asymmetric directive tilted toward restraint.
While most of these members preferred
not to tighten policy at this point, they
believed that the need for further monetary restraint was highly likely, though it
would remain contingent on the tenor of
the new information, including data on
holiday retail sales, that would begin to
arrive shortly after the turn of the year.
Should the need for more restraint
become apparent, it would be desirable
in this view for the appropriate policy
move to be made promptly to arrest any
worsening of inflation and inflationary
expectations, thereby minimizing the
cumulative policy tightening that would
be required and the ultimate cost of
bringing inflation under control. The
Committee always had the option of
adjusting its policy during intermeeting
periods even under a symmetric directive, but the balance of risks in the
outlook argued in the view of these
members for a policy reaction to new
information that was best characterized
by an asymmetric directive.
The other members who favored an
unchanged policy preferred a symmetric
directive. In their view, the information
that would be released in the weeks
immediately ahead was not likely to
depart sufficiently from current expec-
210 81st Annual Report, 1994
tations to warrant a policy tightening
move during the intermeeting period.
Moreover, current forecasts were subject to some risks in both directions.
Those in the direction of appreciably
greater-than-projected slowing in the
expansion might have a relatively low
probability, at least over the quarters
immediately ahead, but that risk could
not be ruled out and argued for a cautious approach to any further tightening.
Accordingly, the Committee should wait
until the next scheduled meeting when
more information, possibly including a
better assessment of the outlook for
fiscal policy, would be available for
evaluating the need for any further firming of monetary policy. One member
expressed the view that it would be
desirable to make any further short-run
policy moves in the context of the Committee's long-run strategy to be considered at the next meeting. Despite their
preferences, these members said that
they would not dissent from an asymmetric directive.
At the conclusion of the Committee's
discussion, all but one of the members
indicated that they could support a directive that called for maintaining the existing degree of pressure on reserve positions and that included a bias toward the
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
somewhat 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 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 a further pickup in economic
growth in recent months. Nonfarm payroll
employment rose sharply in November, and
the civilian unemployment rate declined to
5.6 percent. Industrial production registered
another large increase in November and
capacity utilization moved up further from
already high levels. Retail sales have continued to rise rapidly. Housing starts increased
appreciably in November. Orders for nondefense capital goods point to a continued
strong expansion in spending on business
equipment; permits for nonresidential construction have been trending higher. The
nominal deficit on U.S. trade in goods and
services widened somewhat in October from
its average rate in the third quarter. Prices of
many materials have continued to move up
rapidly, but broad indexes of prices for consumer goods and services have increased
moderately on average over recent months.
On November 15, 1994, the Board of
Governors approved an increase from 4 to
3
4 /4 percent in the discount rate, and in line
with the Committee's decision the increase
was allowed to show through fully to interest
rates in reserve markets. In the period since
the November meeting, short-term interest
rates have risen considerably while longterm rates have declined slightly. The tradeweighted value of the dollar in terms of the
other G-10 currencies recovered further over
the intermeeting period.
Growth of M2 resumed in November
after several months of decline, while M3
expanded moderately further. For the year
through November, M2 grew at a rate at the
bottom of the Committee's range for 1994
and M3 at a rate in the lower half of its range
for the year. Total domestic nonfinancial debt
has continued to expand at a moderate rate in
recent months and for the year-to-date it has
grown at a rate in the lower half of its
monitoring range.
The Federal Open Market Committee
seeks monetary and financial conditions that
Minutes of FOMC Meetings, December
will foster price stability and promote sustainable growth in output. In furtherance of
these objectives, the Committee at its meeting in July reaffirmed the ranges it had established in February for growth of M2 and M3
of 1 to 5 percent and 0 to 4 percent respectively, measured from the fourth quarter of
1993 to the fourth quarter of 1994. The Committee anticipated that developments contributing to unusual velocity increases could persist during the year and that money growth
within these ranges would be consistent with
its broad policy objectives. The monitoring
range for growth of total domestic nonfinancial debt was maintained at 4 to 8 percent for
the year. For 1995, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter of 1994 to the
fourth quarter of 1995, of 1 to 5 percent for
M2 and 0 to 4 percent for M3. The Committee provisionally set the associated monitoring range for growth of domestic nonfinancial debt at 3 to 7 percent for 1995. 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.
211
serious risk of rising inflation. In the
circumstances, he also feared that a failure by the Committee to take restraining action could heighten inflationary
expectations by raising concerns about
the System's commitment to the objective of sustainable, noninflationary economic growth.
Temporary Increase in
Reciprocal Currency Agreement
with the Bank of Mexico
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Broaddus, Forrestal,
Jordan, Kelley, Lindsey, and Parry and
Mses. Phillips and Yellen. Vote against
this action: Mr. LaWare.
At a meeting conducted via a telephone conference on December 30,
1994, the Committee approved a temporary increase from $3 billion to $4]/2 billion in the System's reciprocal currency
(swap) agreement with the Bank of
Mexico; it was understood that all drawings, including those under the permanent tranche of the System's swap
agreement with the Bank of Mexico,
would be subject to a determination that
appropriate terms and conditions had
been met. The U.S. Treasury also
increased its swap facility with the Bank
of Mexico by $l>/2 billion to $41/2 billion, thereby raising the total for official U.S. facilities to $9.0 billion. The
increases were in response to recent
financial developments in Mexico. The
Committee was informed at this meeting that the Bank of Canada would
be considering an increase in its own
Can$1.0 billion facility with the Bank of
Mexico, and that additional official
financing assistance was being negotiated with the other G-10 central banks
and the Bank of Spain.
Mr. LaWare dissented because he
favored an immediate policy tightening
action. In his opinion, the expansion
remained quite strong, with high and
increasing levels of utilization in labor
and capital markets, and he saw a
Votes for this action: Messrs. Greenspan,
McDonough, Blinder, Jordan, Kelley,
LaWare, Lindsey, Melzer, and Parry and
Ms. Yellen. Vote against this action:
Mr. Broaddus. Absent and not voting:
Mr. Forrestal and Ms. Phillips. Mr. Melzer
voted as alternate for Mr. Forrestal.
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,
somewhat greater reserve restraint would
or slightly lesser reserve restraint might
be acceptable in the intermeeting period.
The contemplated reserve conditions are
expected to be consistent with modest
growth in M2 and M3 over coming months.
212 81st Annual Report, 1994
Mr. Broaddus dissented because he
continued to question the desirability of
the System's foreign exchange market
intervention and therefore the desirability of maintaining or enlarging the swap
arrangements that facilitate them. In his
view continued System participation in
such operations with the U.S. Treasury
presented an unacceptable risk of reducing the System's credibility and its ability to conduct monetary policy effectively. He felt this risk was particularly
high in this instance. Moreover, as at
the March 22, 1994, meeting of the
Committee, he had serious concerns
about the appropriateness of the foreign
exchange operations this particular
enlargement would support. In his view,
the expansion of this arrangement was
equivalent in many respects to a fiscal
policy initiative of a kind that should be
explicitly authorized by the Congress.
It was agreed that the next meeting
of the Committee would be held on
Tuesday-Wednesday, January 3 1 February 1, 1995.
The meeting adjourned at 12:45 p.m.
Donald L. Kohn
Secretary
213
Consumer and Community Affairs
In 1994 the Division of Consumer and
Community Affairs continued to devote
considerable resources to concerns
about community development and reinvestment, access to credit by minorities
and low-income households, and possible discrimination in mortgage lending. The Board published for comment,
in conjunction with other federal agencies that regulate financial institutions, a
revised proposal to provide greater guidance to institutions on the regulations
that implement the Community Reinvestment Act. The Community Affairs
staffs of the Board and the Federal
Reserve Banks made numerous presentations to bank executives, community
groups, and other organizations concerning community investment and fair
lending.
These matters are discussed below,
along with other actions by the Board in
the areas of community affairs and consumer protection.
CRA Reform
In 1993 President Clinton directed the
relevant federal regulatory agencies to
reform the implementation of the Community Reinvestment Act (CRA) by
developing new regulations, supervisory
procedures, and standards for assessing
the CRA performance of financial institutions.1 In response to the publication
in December 1993 of proposed amendments to the agencies' CRA regulations
1. Participating agencies in the CRA reform
effort are the Board, the Federal Deposit Insurance
Corporation (FDIC), the Office of the Comptroller
of the Currency (OCC), and the Office of Thrift
Supervision (OTS).
(including the Board's Regulation BB),
the agencies collectively received more
than 6,700 public comments, a record
volume for an interagency regulatory
proposal.
Following a review of the comments
and further analysis of practical consequences associated with the proposal,
the agencies published a revised version
in October 1994. The public comment
period closed in November, and at
year's end the agencies anticipated completing the CRA rules in early 1995.
The proposal is intended to emphasize
performance in lending, service, and
investment rather than an institution's
process of addressing its responsibilities
under the law; promote consistency in
assessments; and reduce unnecessary
compliance burdens for institutions covered by the CRA.
Fair Lending
The member agencies of the Federal
Financial Institutions Examination
Council (FFIEC) continued with the fair
lending activities described in their joint
Interagency Policy Statement on Fair
Lending Initiatives, issued in June
1993.2 They developed and conducted
fair lending seminars in Chicago, San
Francisco, and Washington, D.C., for
senior executives of financial institutions. The seminars were designed to
enhance the familiarity of industry leaders with fair lending regulations and to
make lenders better aware of policies
and practices that may result in the
2. The member agencies are the Board, the
FDIC, the National Credit Union Administration
(NCUA), the OCC, and the OTS.
214 81st Annual Report, 1994
unlawful treatment of applicants. The "best practices" that banks can use to
seminars drew more than 900 execu- help ensure that loan applicants are
tives from banks and thrift institutions. treated equitably. The Reserve Banks
The agencies also jointly issued (along sent the video to the senior management
with the Department of Housing and of all state member banks and bank
Urban Development, the Department of holding companies and made it availJustice, and the Federal Trade Commis- able to others upon request. Nearly
sion) a policy statement on lending dis- 7,000 copies were distributed in 1994.
crimination and a series of questions The video also was used in fair lending
and answers on the Fair Housing Act workshops sponsored by Reserve Bank
and the Equal Credit Opportunity Act.
Community Affairs programs and was
The Board and the Community broadcast to bankers on the American
Affairs offices at each of the Federal Financial Skylink, the American BankReserve Banks also conducted programs ers Association's satellite communicato facilitate constructive responses by tions network.
financial institutions to their communiMultiple sessions of fair lending
ties' credit needs; these programs com- seminars for bankers and others were
bined education, information, research, sponsored by the Boston, Richmond,
and technical assistance. In response to Atlanta, Kansas City, Dallas, and
continuing concerns about discrimina- San Francisco Reserve Banks. The
tion in lending, the Community Affairs Minneapolis and Kansas City Reserve
programs at the Reserve Banks intensi- Banks jointly sponsored several sessions
fied efforts to develop and deliver edu- of a workshop, entitled "Lending in
cational and informational programs Indian Country—Cultural and Legal
designed to help banks ensure equal Issues," for bankers and Native Ameriaccess to credit.
can representatives; and the San FranThe Cleveland Reserve Bank helped cisco Reserve Bank co-sponsored, with
coordinate the Cleveland Residential the National Center for American Indian
Housing and Mortgage Credit Project, Enterprise Development, several sesan ongoing community-wide effort to sions of a seminar entitled "Resolving
bring together key representatives from Legal Issues When Lending on Indian
business, government, and local com- Reservations."
munities to identify and remove barriers
to equal access to credit. Throughout the HMDA Data and Fair Lending
year, task groups focused on critical
aspects of the lending process, such as The Home Mortgage Disclosure Act
contact with lenders, the activities of (HMDA) requires covered mortgage
real estate agents, appraisal issues, and lenders in metropolitan areas to disclose
processes in the secondary market. The data regarding home purchase and home
improvement loans, including refinancprogram will continue in 1995.
The Community Affairs programs of ings. Depository institutions and mortthe Boston, Chicago, and San Francisco gage companies generally are covered
Reserve Banks jointly produced a video, if they are located in metropolitan areas
Closing the Gap: A Guide to Equal and have assets of more than $10 milOpportunity Lending. Based on a publi- lion. Since January 1993, independent
cation developed by the Boston Reserve mortgage companies with lower assets
Bank in 1993 and designed primarily as are also covered if they originated 100
a training tool, the video features ten or more home purchase loans in the
Consumer and Community Affairs 215
preceding calendar year. One consequence of the expanded coverage, as
shown by data released in 1994, is that
the number of independent mortgage
companies that reported HMDA data for
calendar year 1993 increased more than
three-fold from the previous year—to a
total of 962 companies.
Covered lenders collect and submit to
their supervisory agency geographic
information about the property related
to a loan or a loan application. They
report on 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 (HUD) and member agencies of
the FFIEC.
The FFIEC prepared almost 36,000
disclosure statements for the more than
9,650 lenders that reported HMDA data
for calendar year 1993. In August 1994,
individual institutions made these disclosure statements public. The FFIEC
also prepared aggregate reports that
contain data for all lenders in a given
metropolitan statistical area (MSA);
these reports became available in October 1994 at a central depository in each
of the nation's 341 MS As. HMDA data
have been available to the public on
paper, microfiche, magnetic reels and
cartridges, and PC diskettes; to enhance
public access, the FFIEC in 1994 added
CD-ROM to the available formats.
The HMDA data for 1993 covered
more than 15.4 million home loans and
applications.3 The 1993 data continue to
show rates of credit denial that are
higher for black and Hispanic loan
3. A summary of the 1993 HMDA data appears
in Glenn B. Canner and Wayne Passmore, "Home
Purchase Lending in Low-Income Neighborhoods
and to Low-Income Borrowers," Federal Reserve
Bulletin, vol. 81 (February 1995), pp. 71-103.
applicants than for Asian and white
applicants, even when applicants are in
the same income brackets. For neighborhoods, the rate of loan denial generally
increased with an increase in the proportion of minority residents.
For HMDA purposes, the only financial characteristic of applicants that
lenders report is income, and analysis
shows that income accounts for some,
but not all, of the variations in loan
disposition rates among racial groups.
Even after controlling for income, white
applicants for conventional home loans
in all income groups had lower rates of
denial than black or Hispanic applicants.
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 of fair lending
laws.
Mortgage originators—as well as
institutions in the secondary market for
mortgages, such as the Federal National
Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage Corporation (Freddie Mac)—have in recent
years initiated a variety of affordable
home loan programs intended to benefit
lower-income and minority households
and neighborhoods. A year-to-year comparison of the HMDA data suggests
these programs may be making a difference: For calendar year 1992, the number of conventional home purchase
loans extended to lower-income applicants increased 27 percent from the year
before, compared with a 10 percent
increase for higher income households.
The changes in lending from 1992 to
1993 were even larger. Excluding the
216 81st Annual Report, 1994
data reported by the newly covered
mortgage companies, the number of
loans to lower-income households in
1993 rose 38 percent, while loans to
higher-income households rose only
8 percent. Among racial or ethnic
groups, the number of loans to black
households increased 36 percent, and to
Hispanic households 25 percent, compared with an increase of 18 percent for
white households.
new system helps examiners determine
the significance of race in a bank's
lending decisions through a regression
analysis of the HMDA data recorded by
the institution on its Loan/Application
Register. Examiners then supplement
the results of the analysis with other
information drawn from actual loan files
to identify specific cases that may need
further review and possible discussions
with bank management.
Assessing Compliance
with Fair Lending Laws
Other Uses of HMDA Data
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 the institution, in applying its lending criteria, has implemented
standards consistently and fairly and
whether any exceptions suggest differential 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 computer-based system
for obtaining customized HMDA reports. Developed by the Board in consultation with the other agencies, the
system enables examiners to obtain a
more complete picture of an institution's mortgage lending record than was
readily available to them in the past.
Comments by examiners led to improvements in the system in 1994.
In 1994 the Federal Reserve began
using a new statistical analysis system
to aid in the fair lending examination
of large-volume mortgage lenders. The
Since 1990 the HMDA data reported by
lenders have included information about
the race, sex, and income of borrowers
and loan applicants. For loans sold,
lenders also identify secondary-market
purchasers by type of entity. These
expanded data provide 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.4
Under its statutory responsibility to
oversee housing activities, HUD uses
the expanded HMDA data to help assess
the effort of government-sponsored entities like Fannie Mae and Freddie Mac to
attain HUD goals for supporting mortgages for low- and moderate-income
families and for properties in central
cities. HUD also makes extensive use of
the HMDA data as one component of its
fair lending examinations. The data
assist in targeting lenders for further
investigation and in the investigation of
specific allegations of lending discrimination filed with HUD or with certain
4. 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, and Canner
and Passmore, "Home Purchase Lending."
Consumer and Community Affairs 217
state or local agencies. HMDA data also
are being used as part of a large-scale
investigation in three metropolitan areas
where HUD is testing for fair lending
compliance.
In 1994 the FFIEC for the first time
acquired data on mortgage insurance
transactions from the nation's eight private mortgage insurance (PMI) companies. The companies voluntarily provided the data, covering transactions for
the fourth quarter of 1993, for compilation and public release by the FFIEC on
behalf of their national trade association, Mortgage Insurance Companies of
America.5 For 1994 the PMI companies
will submit data for the full year. Along
with HMDA data, the PMI data are
made available for public review at central depositories in each MSA, and are
available on magnetic tape, PC diskette,
and CD-ROM through the FFIEC.
following actions of lenders, beginning
in 1996:
• Keep quarterly records of HMDA
data, thereby allowing the agencies to
catch data collection problems earlier in
the year and to release data for the full
year more promptly
• Submit machine-readable HMDA
data (for example, on a PC diskette or
magnetic tape) to their supervisory
agencies, because the quality of such
data has been superior to the quality of
submissions on paper. Institutions that
report fewer than twenty-five entries are
exempt from this requirement.
In addition, the agencies, through the
FFIEC, revised their Guide to HMDA
Reporting—Getting It Right! to conform
its listings to the latest boundaries of
MSAs, as officially determined by the
Office of Management and Budget.
Accuracy of Data
The important uses of the HMDA data
make accuracy a critical issue. The
FFIECs processing software is programmed to identify errors in the data
submitted by lenders for correction
before disclosure statements and MSA
reports are prepared. During the years
that lenders have submitted their HMDA
data line by line, the quality has improved considerably. The proportion of
1993 loan records containing detected
errors was less than 0.5 percent, down
from about 4.4 percent in 1991.
In other efforts to ensure the accuracy
of HMDA data, the Board in 1994
amended Regulation C to require the
5. A study of the data, conducted jointly by
staff members of the Board's Division of Consumer and Community Affairs and Division of
Research and Statistics, is in Glenn B. Canner,
Wayne Passmore, and Monisha Mittal, "Private
Mortgage Insurance," Federal Reserve Bulletin,
vol. 80 (October 1994), pp. 883-99.
Community Development
During 1994 the Board issued regulations that clarified and enhanced the
capacity of state member banks and
bank holding companies to make community development investments. In
December the Board issued final regulations governing community development investments by state member
banks; the regulations implement provisions of the Depository Institutions
Disaster Relief Act of 1992 that amend
the Federal Reserve Act. Simultaneously, the Board issued a revised policy statement to clarify the community
development investment options of bank
holding companies and to streamline the
application process.
In conjunction with the Reserve
Banks, the Board published a revised
Directory of Bank Holding Company
Community Development Corporations.
218 81st Annual Report, 1994
Several Reserve Banks actively assisted
banks and holding companies in making
community development investments.
The Philadelphia, Richmond, Atlanta,
St. Louis, Kansas City, Dallas, and San
Francisco Reserve Banks sponsored
educational meetings and seminars for
bankers and others on community development finance, affordable housing
finance, and lending to small and
minority-owned businesses. The Boston
Reserve Bank sponsored training programs on the Community Reinvestment
Act for bank directors and senior officers; most of the other Reserve Banks
sponsored at least one major conference
on community development or reinvestment topics.
Regarding specialized topics, the
Chicago Reserve Bank helped develop
a seminar to familiarize bankers with
the financing of exports for small businesses. The Boston Reserve Bank
co-sponsored a seminar for lenders
and community representatives concerning the new federal Empowerment
Zones/Enterprise Communities initiative. Financing earthquake relief was the
topic of a seminar for lenders presented
by the San Francisco Reserve Bank,
HUD, and the Federal Home Loan Bank
of San Francisco. The Atlanta Reserve
Bank and the Martin Luther King, Jr.,
Center for Nonviolent Social Change
together conducted a series of seminars for bankers and community representatives on building community
partnerships.
Overall, during 1994 the Reserve
Bank Community Affairs programs
sponsored or co-sponsored more than
180 conferences, seminars, and informational meetings on fair lending, community development, and reinvestment
topics. Community Affairs staff members from the Board and the Reserve
Banks also made more than 400 presentations at events sponsored by banking,
governmental, business, and community
organizations.
Community Affairs programs responded to a growing demand for
technical assistance and advice on community development and reinvestment
matters. Technical assistance helps
financial institutions and their communities develop particular programs to
address recognized needs; in many
cases, it helps individual institutions
strengthen the programs they undertake
in fulfillment of their responsibilities
under the Community Reinvestment
Act. During 1994 the Federal Reserve's
Community Affairs officers and staff
members held more than 500 meetings with bankers, community groups,
business representatives, and others
to help them better understand and
participate in community development
finance.
The Federal Reserve's Community
Affairs programs in 1994 also provided
other information to bankers, small business, and community groups to further
partnerships for community development. The Philadelphia Reserve Bank
published Community Improvements, a
pictorial guide to more than eighty
examples of bank-assisted community
and economic development projects in
the Philadelphia District.
The New York Reserve Bank published The Credit Process: A Guide for
Small Business Owners, which features
information on sources and types of
funding for new businesses, advice on
preparing business plans and loan requests (noting what lenders will review),
and a summary of other resources available to small businesses. The New York
Reserve Bank and other Reserve Banks
distributed more than 100,000 copies
during 1994. The Atlanta Reserve Bank
issued a compendium of financing programs conducted by each of the six
states in its District.
Consumer and Community Affairs 219
Community Affairs newsletters are
increasingly important to the Reserve
Banks in their effort to keep financial
institutions informed about community
development and community reinvestment. In 1994 the New York Reserve
Bank began publishing Bank Links, and
the Cleveland Reserve Bank published
its first issue of Community Reinvestment Forum. All twelve Reserve Banks
now publish community development
newsletters, reaching a combined distribution of more than 53,000 bankers,
community representatives, government
officials, bank regulators, and others.
Members of the Board's Community
Affairs staff conducted and promoted
research on the community credit delivery system. They worked with staff
members of the Board's Division of
Research and Statistics on the first
major study of the disposition of applications submitted to private mortgage
insurers (see note 5).
In 1994, Community Affairs staff
members taught courses for consumer
examiners on community development
finance and community contacts; for
senior commercial examiners, they conducted eight training sessions for senior
commercial examiners to help them
understand the financing of affordable
housing and of community development
projects.
Other Regulatory Matters
The Board took the following other
actions with regard to consumer and
community affairs regulations.
Regulation C
(Home Mortgage Disclosure)
In addition to the changes to Regulation
C discussed above in regard to HMDA
data, the Board adopted other amend
ments that revised reporting rules for
home improvement loans and refinancings. At the same time, the Board
deferred action on issues related to the
treatment of requests handled under
prequalification programs. Questions
have been raised, for example, about the
reporting of denials and the data to be
entered in such cases for loan amount,
loan type, and property location. The
Board's notice of the amendments in the
Federal Register advised institutions
that for 1994 and 1995 they need not
report action taken on prequalification
requests.
The Board also proposed amendments
to conform Regulation C to requirements for mortgage data collection,
applicable to bank and thrift institutions
with assets greater than $250 million,
that were being offered under the CRA
reform initiative.
Regulation E
(Electronic Fund Transfers)
In February the Board amended Regulation E to apply coverage to electronic
benefit transfer (EBT) programs established by federal, state, and local governments. Under these programs, agencies paying benefits issue access cards
and personal identification numbers to
recipients. With the cards, recipients can
obtain benefits such as food subsidies
and payments under the Aid to Families
with Dependent Children and Supplemental Security Income programs
through automated teller machines and
point-of-sale terminals.
The amendments apply to EBT programs most provisions of Regulation E,
including the rules on liability for unauthorized transfers and resolution of
errors. Thus, recipients of government
benefits will receive essentially the
same protections as consumers using
deposit accounts for electronic transfers.
220 81st Annual Report, 1994
This rulemaking directly affects government agencies that administer EBT programs and indirectly affects depository
institutions and other private-sector
entities.
The Board delayed application of the
rules until March 1, 1997, as requested
by a federal EBT task force that represents all the major federal agencies with
benefit programs. The task force is
developing a nationwide system for
electronic delivery of government benefits and asked for the three-year delay
so that agencies could implement these
EBT programs in compliance with
Regulation E.
In February the Board also published
a proposal to make mostly technical
revisions to Regulation E after a review
pursuant to the Board's regulatory
improvement policy. The proposal's
substantive changes include revisions
to the existing exemptions for transfers
relating to securities or commodities and
for preauthorized transfers to or from
accounts at small institutions.
In November the Board adopted an
interim rule that, as of December 1,
1994, receipts issued at automated teller
machines no longer have to uniquely
identify the consumer's account or card.
This change will help protect consumers
and financial institutions against fraudulent fund withdrawals. At year-end, the
Board expected to take final action in
early 1995 on whether to make the
interim rule final.
Regulation M
(Consumer Leasing)
In January the Board extended the
period for public comment on possible
amendments to Regulation M, which
implements the Consumer Leasing Act.
The Board expects to publish proposed
amendments by mid-1995 to simplify
the regulation and lessen its burden on
business without diminishing consumer
protections in leasing arrangements.
Regulation Z
(Truth in Lending)
In November the Board published for
comment proposed amendments to
Regulation Z to implement changes
made to the Truth in Lending Act by
the Riegle Community Development
and Regulatory Improvement Act of
1994. The law imposes new disclosure
requirements and substantive limitations
on mortgages bearing high rates or high
fees. The law also imposes new disclosure requirements to assist consumers in
comparing the cost of reverse mortgage
transactions, in which homeowners
(typically the elderly) receive periodic
disbursements and the creditor relies
on the ultimate sale of the home for
repayment.
The Board also temporarily amended
Regulation Z, on three occasions, as
allowed under the Depository Institutions Disaster Relief Act of 1993. The
actions declared that conditions for borrowers in disaster-affected communities
in California, Texas, Alabama, Georgia,
and Florida represented bona fide personal financial emergencies; borrowers
seeking to "cash out" some equity in
their home through a new lender could
thereby do so more quickly because they
fit the requirement in Regulation Z that
only in a personal financial emergency
can these borrowers waive the three-day
right to rescind the transaction.
In December the Board published a
notice requesting comments on whether
consumers would benefit from greater
flexibility in waiving the right to a
rescission period on transactions with
new creditors to refinance or consolidate
home-secured loans if no new debt
Consumer and Community Affairs 221
is involved. The Riegle Community
Development and Regulatory Improvement Act of 1994 directs the Board to
seek comment and then make recommendations to the Congress. Currently,
if the transaction is with the existing
lender, the right of rescission does not
apply at all to a refinancing if no new
debt is incurred. But if a new creditor is
involved in the refinancing, consumers
have the three-day right to rescind and
may not waive the right unless a bona
fide personal financial emergency exists,
even if no new debt is incurred.
In July the Board extended the comment period on the May proposal. At the
same time, the Board published an alternative approach for APY calculations
that would allow institutions to disclose
an APY equal to the contract interest
rate on time accounts with maturities
greater than one year that do not compound interest but pay interest at least
annually. At year-end, the Board
expected to take final action on the proposal early in 1995.
Interpretations
Regulation DD
(Truth in Savings)
In January the Board extended the comment period on a proposal published
in December 1993 to revise Regulation DD. Under the proposed revisions,
financial institutions would be required
to use an "internal rate of return" formula to calculate the annual percentage
yield (APY) on deposit accounts; the
yield would thus 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 May the Board withdrew the
December proposal and issued in its
place a proposal specifying that once
interest is credited to an account, it
becomes part of the principal. The proposal also provided a rule applicable to
accounts in which consumers are given
the choice of leaving interest in the
account or taking interest by check or
transfer. Under the proposal, institutions
would have to compound at least as
frequently as they allowed consumers to
receive interest credited by check or
transfer. The proposed revisions also
would have the effect of producing an
APY that reflects the time value of
money.
In 1994 the Board continued to offer
legal interpretations and guidance
through its official staff commentaries.
The commentaries apply and interpret
the requirements of the regulations
and are a substitute for individual staff
interpretations.
In August the Board issued the first
commentary to Regulation DD. It incorporates much of the guidance provided
when the regulation was adopted, and
addresses other questions raised since
that time.
In December the Board proposed
revisions to the commentary to Regulation Z (Truth in Lending). The
proposed revisions would clarify regulatory provisions or provide further
guidance on issues of general interest,
such as the treatment of various fees
and taxes associated with loans secured
by real estate, including charges by
third parties, and a creditor's responsibilities when investigating a claim of
unauthorized use of a credit card. The
Board also proposed revisions to the
commentary to Regulation B (Equal
Credit Opportunity). It addressed
issues such as credit scoring systems,
disparate treatment, special-purpose
credit programs, and marital status
discrimination.
222 81st Annual Report, 1994
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 compliance costs and consumer benefits related
to EFT services. During 1994, the Board
amended Regulation E with regard to
electronic benefit transfer (EBT) programs and receipts from automated
teller machines (ATMs) (see Regulation E, above, under Other Regulatory
Matters).
EBT programs have not yet expanded
much beyond the pilot-program stage,
and reliable estimates of compliance
costs are not available. At the time
the amendments bringing EBT programs under the liability rules of Regulation E were approved, government
program agencies expressed concern
about the potential cost. However, the
one EBT program that operates under
Regulation E liability rules has recorded
loss rates no greater than those of
financial institutions for electronic
fund transfers and lower than loss
rates for paper-based benefit programs.
If compliance costs for EBT programs are similar to those of electronic transactions at financial institutions, coverage under Regulation E
should not significantly inhibit the
growth of EBT programs.
Aside from regulatory changes that
potentially benefit consumers receiving
public benefits or reduce compliance
burdens, the economic effects of the
Electronic Fund Transfer Act increased
because of continued growth in the use
of EFT services. During the 1990s the
proportion of U.S. households using
EFT services has grown at an annual
rate of about 2.5 percent. About 84 percent of households now have one or
more EFT features on accounts at financial institutions.
ATMs are the most widely used EFT
service. Nearly two-thirds of all households currently have ATM access cards,
and most of the nation's depository
institutions offer consumers access to
ATMs. Access to ATMs has been
enhanced by the operation 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 8 percent in the past
year, from about 642 million in 1993 to
about 694 million in 1994. During the
same period, the number of ATMs rose
about 15 percent, to 109,000.
Direct deposit is used by more than
half of all U.S. households. Direct
deposit is particularly widespread in the
public sector, involving more than half
the number of all social security payments and two-thirds the number of all
federal salary and retirement payments.
Direct deposit is less common in the
private sector, but it has grown substantially in recent years. The proportion of
households receiving a direct deposit of
any kind grew about 5.4 percent per
year during the 1990s.
Point-of-sale systems account for a
small share of EFT services, but their
use continued to grow rapidly in 1994.
The number of transactions on point-ofsale systems rose about 43 percent from
the preceding year, to 52 million per
month; the number of point-of-sale
terminals rose about 75 percent, to
343,000.
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 would
have been provided in the absence of
regulation. The available evidence pro-
Consumer and Community Affairs
vides no evidence of serious consumer
problems with electronic transactions at
this time. In 1994 about 90 percent of
depository institutions examined by federal agencies were in full compliance
with Regulation E. Statistics indicate
that the institutions not in full compliance generally had fewer than five violations. The violations primarily involved
failure to provide all required disclosures to consumers.
The Board's database of consumer
complaints and inquiries is another
source of information on potential problems. In 1994, sixty-one of the complaints processed involved electronic
transactions. The System forwarded
thirty-four complaints that did not
involve state member banks to other
agencies for resolution. Investigation of
the remaining twenty-seven complaints
did not show any violation of the act or
regulation.
Compliance Examinations
The Federal Reserve System has maintained a program of specialized examinations of state member banks for
compliance with consumer protection
laws since 1977. Passage of the Federal Deposit Insurance Corporation
Improvement Act of 1991 expanded the
Federal Reserve's authority to enforce
consumer laws beyond state member
banks to include certain types of foreign
banking organizations.6 The Federal
Reserve began conducting compliance
examinations of foreign banking organizations in the first quarter of 1992. The
6. The Federal Reserve System is responsible
for enforcing consumer laws in the case of statechartered 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).
223
degree to which foreign banking organizations conduct activities covered by
consumer protection laws and regulations varies, but often these institutions
conduct far fewer such activities than a
typical state member bank.
During the 1994 reporting period,
from July 1, 1993, to June 30, 1994,
Federal Reserve examiners conducted
865 examinations for compliance with
the consumer laws: 658 for state member banks and 207 for foreign banking
organizations.
The examinations are conducted by
the consumer affairs unit within each of
the twelve Federal Reserve Bank examination departments. 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.
An important aspect of the Federal
Reserve's compliance program is examiner training. Federal Reserve examiners
attend several training sessions for
CRA, fair lending, and consumer compliance during their career. New examiners attend the Board's three-week
basic consumer compliance school;
examiners with eighteen to twenty-four
months of field experience attend the
Board's week-long advanced compliance school, two-week fair lending
school (new in 1994), and one-week
class in advanced CRA examination
techniques.7 As in the case of the twoweek fair lending school, new classes
are incorporated into the training program when needed.
7. The Board did not offer the advanced CRA
examination techniques class during 1994 because
of the ongoing CRA reform effort. The class will
be offered again after a new CRA regulation is
adopted.
224 81st Annual Report, 1994
Examiner training is supplemented
by the Reserve Banks through regular
departmental staff meetings and through
special training sessions. In addition,
the Board's resident examiner program
provides examiners (sixteen of them in
1994) with the opportunity to get a System perspective through working at the
Board for several weeks; they observe
how the division works, how policies
are developed, and how Board staff
members work with other agencies that
supervise financial institutions.
During 1994 the Federal Reserve System conducted two basic consumer compliance schools for sixty-two students,
three advanced consumer compliance
schools for forty-four students, and two
fair lending schools for seventy-one
students.
The FFIEC is the interagency coordinating body charged with development
of uniform examination principles, standards, and report forms (see note 2 for
membership of the FFIEC). In 1994 the
member agencies of the FFIEC collaborated to revise examination procedures
to reflect changes in consumer laws and
regulations. They adopted changes to
examination procedures related to the
Real Estate Settlement Procedures Act
and the treatment of loans with subordinate liens. The FFIEC agencies also
agreed to revised examination procedures reflecting technical changes in the
Expedited Funds Availability Act and
regulations governing exception-based
check holds.
Agency Reports on Compliance
with Consumer Regulations
Data from the member agencies of the
FFIEC and from other federal supervisory agencies indicate that compliance
with the consumer regulations—the
Equal Credit Opportunity Act, the Con
sumer Leasing Act, and the Electronic
Fund Transfer Act—have remained at
levels similar to those reported for 1993.
A small decline in the level of compliance with the Truth in Lending Act was
reported and a slight improvement was
noted for compliance with the Expedited Funds Availability Act. This section summarizes these compliance data
for the reporting period July 1, 1993, to
June 30, 1994.8
Equal Credit Opportunity Act
(Regulation B)
The level of full compliance with the
Equal Credit Opportunity Act (ECOA)
remained relatively stable at approximately 61 percent in the 1993 and
1994 reporting periods.9 The agencies
reported that 72 percent of the institutions examined in 1994 that were not in
full compliance with Regulation B had
between one and five violations (the
lowest frequency category), compared
with 77 percent in 1993. The most frequent violations involved the failure to
take the following actions:
• Provide a written notice of adverse
action that contains a statement of the
action taken, the name and address of
the creditor, an ECOA notice, and the
name and address of the federal agency
that enforces compliance
• Notify the applicant of the action
taken within the time-frames specified
in the regulation
8. Not all the federal agencies that supervise
financial institutions use the same method to compile compliance data. However, the data support
the general conclusions presented here.
9. 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 225
• Give a statement of reasons for
adverse action which is specific and
indicates the principal reasons for the
credit denial or other adverse action.
• Follow the prescribed form of the
ECOA notice
• Request information for monitoring
purposes about race or national origin,
sex, marital status, and age on credit
applications primarily for the purchase
or refinancing of a principal residence.
tation, the Small Business Administration, the Packers and Stockyards
Administration (Department of Agriculture), and the Securities and
Exchange Commission—reported substantial compliance among the entities
they supervise.
The Board issued two written agreements involving violations of Regulation B. The OTS issued seven formal
enforcement actions involving Regulation B. The FDIC issued nine formal
enforcement actions involving consumer
compliance regulations without distinguishing which of those actions
involved Regulation B.
The Federal Trade Commission
(FTC) continued its enforcement efforts
under the ECOA and issued a new consumer brochure on mortgage credit discrimination. The FTC worked with other
government agencies and with creditor
and consumer organizations to increase
awareness and'compliance with regard
to the ECOA. The FTC obtained a consent decree resolving allegations that a
financier of mobile homes discriminated
on the basis of marital status. In addition, the FTC worked with the Department of Justice to obtain a consent
decree resolving allegations that a mortgage company discriminated on the
basis of race and national origin.
The Farm Credit Administration reported a substantial level of compliance
with the ECOA. The most frequent violations it found involved the failure to
provide applicants with timely notification of action taken on loan applications
and the failure to obtain monitoring
information.
The other agencies that enforce the
ECOA—the Department of Transpor-
The five financial regulatory agencies
reported that 90 percent of examined
institutions were in compliance with
Regulation E, the same level of compliance reported for 1993. The following
five rules were the most frequently violated provisions of Regulation E:
Electronic Fund Transfer Act
(Regulation E)
• Provide, at the time a consumer
contracts for an EFT service or before
the first transfer is made, a written
statement outlining the terms and conditions of the electronic fund transfer
service
• Provide a notice of the procedures
for resolving alleged errors at least once
each calendar year
• Provide to customers a statement of
all required information at least quarterly, or monthly if EFT activity
occurred
• Investigate and resolve alleged
errors promptly
• Follow required procedures after
determining that no error occurred.
The OTS issued one formal enforcement action involving Regulation E. The
FTC reported ongoing litigation with
one telemarketing company that allegedly failed to obtain written authorization from consumers for preauthorized
transfers. The Securities and Exchange
Commission examines broker-dealer
organizations for compliance with the
EFT act; it found no violations.
226 81st Annual Report, 1994
Consumer Leasing
(Regulation M)
The FFIEC agencies reported substantial compliance with Regulation M,
which implements the consumer leasing provisions of the Truth in Lending Act. As in the 1993 reporting
period, more than 99 percent of examined institutions were found to be in
full compliance with the regulation.
The violations noted by the agencies
involved the failure to adhere to specific
disclosure requirements detailed in the
regulation.
The FTC updated a publication on
vehicle leasing and issued a publication
for businesses explaining recent amendments to the Consumer Leasing Act,
regarding required disclosures for radio
lease advertisements.
Truth in Lending Act
(Regulation Z)
The FFIEC agencies reported that
48 percent of examined institutions were
in full compliance with Regulation Z,
compared with 49 percent in 1993. The
Board, the NCUA, the FDIC, and the
OTS showed decreases in compliance,
while the OCC reported an increase.
Agencies indicated that of the examined
financial institutions not in full compliance, 56 percent were in the lowfrequency category (between one and
five violations), down from 62 percent
in 1993.
The most frequently observed violations of Regulation Z were 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
an obligation; and the failure to disclose
that the creditor has a security interest in
the property being purchased or in other
identified property.
The Board issued one written agreement involving violations of Regulation Z. The OTS issued twelve formal
enforcement actions. Under the Interagency Enforcement Policy on Regulation Z, 529 institutions supervised by
the Board, the FDIC, the OCC, and the
OTS refunded $6.8 million on 137,504
accounts in 1994; in 1993 roughly
$5.9 million was refunded on 28,786
accounts. The large increase in the number of reimbursed accounts is attributable to the FDIC's requiring one bank to
make restitution on a large number of
credit card accounts.
The FTC issued a complaint against
a department store for several credit
reporting and collection practices
alleged to violate Regulation Z. It also
cited the store for violating Regulation
Z rules that apply when a consumer
declares some charges on a credit card
bill to have been unauthorized. In such
cases, according to the FTC, the store
imposed improper requirements on
consumers; held consumers liable even
when the department store did not
conduct a reasonable investigation of
claims; and failed to inform cardholders
in writing of its reasons when it concluded that there were no unauthorized
charges.
Community Reinvestment Act
(Regulation BB)
The CRA requires the Board to assess
the CRA performance of state member banks during regular compliance
examinations and to take the CRA
record into account, along with other
factors, when acting on applications
from state member banks and bank
holding companies.
The Federal Reserve System maintains a three-faceted program for enforcing and fostering better bank performance under the CRA:
Consumer and Community Affairs 227
• Examination of institutions to
assess compliance
• Dissemination of information on
community development techniques to
bankers and the public through Community Affairs offices at the Reserve Banks
• CRA analyses performed while processing applications from banks and
bank holding companies.
Federal Reserve examiners review the
performance of state member banks in
community revitalization and other relevant areas to assess CRA compliance.
When appropriate, examiners suggest
ways to improve CRA performance.
For the reporting period of July 1,
1993, through June 30, 1994, the Federal Reserve conducted 643 CRA
examinations.10 During the period, 5
institutions were rated as being in
''substantial noncompliance" with the
CRA; 14 were rated as "needs to
improve" in meeting community credit
needs, 493 as "satisfactory," and 131 as
"outstanding."
Expedited Funds Availability Act
(Regulation CC)
The FFIEC agencies reported a slight
improvement in the level of compliance
with Regulation CC for the 1994 reporting period: 75.1 percent of examined
institutions were in full compliance with
the act, compared with 74.1 percent
in 1993. The agencies reported that of
the institutions not in full compliance,
75.5 percent were in the low-frequency
category (between one and five violations). The following five rules were the
most frequently violated provisions of
Regulation CC:
10. Foreign banking organizations and Edge
Act and agreement corporations (see note 6)
accounted for 207 of the institutions examined for
compliance with consumer laws; they are not subject to the CRA.
• Provide next-day availability for
required items
• Provide two-day availability for
local checks
• Adequately train employees and
provide procedures to ensure compliance
• Follow special procedures for large
deposits
• Post the availability policy at locations where employees accept deposits.
The OTS issued two formal enforcement actions involving Regulation CC.
Unfair and Deceptive Acts
or Practices (Regulation AA)
The three financial regulatory agencies with responsibility for enforcing
Regulation AA's Credit Practices Rule
reported that the majority of banks
examined were in compliance. During
the 1994 reporting period, slightly less
than 99 percent of examined banks were
found to be in full compliance with the
regulation. The most frequent violation
involved the failure to provide a clear
and conspicuous disclosure to a guarantor on a credit obligation.
Applications
During 1994, the Federal Reserve System acted on eighty-seven bank and
bank holding company applications
that involved CRA protests or adverse
CRA ratings.11 In addition, the System
reviewed seventeen applications dealing
with fair lending and other issues related
to compliance with consumer regulations. In 1993, ninety-eight applications
involved CRA issues and four involved
compliance issues.
11. Twenty-five applications that involved the
CRA and other compliance issues were pending as
of year-end 1994.
228 81st Annual Report, 1994
Among the eighty-seven applications proved Barnett's applications knowing
acted on in 1994 that involved CRA the conclusion of a Justice Department
concerns, thirty-two involved adverse investigation of compliance with federal
CRA ratings, fifty were protested on fair lending statutes by Barnett and
CRA grounds, and five involved both several of its subsidiaries. At the time
adverse ratings and protests. In compari- the Board acted, however, the Justice
son, the previous year's ninety-eight Department was not able to provide the
applications involved forty with adverse Board with the evidentiary materials
CRA ratings, forty-five that were pro- compiled in its investigation, and the
tested, and thirteen with both adverse department had not filed a formal action
ratings and protests.
in court. The Board found that, on the
During 1994 the Board acted on basis of the facts of record available
applications involving two bank holding to it, the convenience and needs factor,
companies that were subject to fair lend- including the CRA records of Barnett's
ing investigations by the Department of subsidiary banks, and the managerial
Justice. The first (also protested on CRA factor were consistent with approval.
grounds) involved Shawmut National
Corporation (Hartford and Boston) seeking to acquire New Dartmouth Bank Consumer Complaints
(Manchester, New Hampshire). In April The Board and the Federal Reserve
the Board reconsidered an earlier action Banks investigate complaints against
and approved Shawmut's application.12 state member banks and forward to
Among the new facts reviewed by the appropriate enforcement agencies comBoard in its reconsideration were a reso- plaints that involve other creditors or
lution of the Justice Department's alle- businesses. The Federal Reserve also
gations involving discriminatory lend- tracks complaints about unregulated
ing practices by Shawmut's mortgage practices.
company, lending data demonstrating
the effectiveness of Shawmut's initiatives to improve its lending record to Complaints about State
Member Banks
minority and low- and moderate-income
borrowers, the results of Shawmut's In 1994 the System received 2,518 comsubstantial efforts to improve the accu- plaints: 2,150 by mail, 350 by teleracy of its HMDA data, and the respon- phone, and 18 in person. The Federal
siveness of its management to CRA- Reserve investigated and resolved the
related issues.
1,177 complaints that were against state
In September the Board approved member banks. The System also
applications by Barnett Banks, Inc. received 2,143 oral and written inquiries
(Jacksonville, Florida), to acquire Loan about consumer credit and banking
America Financial Corporation (Miami policies and practices. In responding
Lakes, Florida) and certain Florida to these complaints and inquiries, staff
assets of Glendale Federal Bank, FSB members at the Board and at the
(Glendale, California). The Board ap- Reserve Banks gave specific explanations of laws, regulations, and banking
practices and provided printed materials
12. In November 1993, by a vote of three to
on the general issues.
three, the Board did not approve the Shawmut
Of the 1,177 complaints against
application (see Board of Governors, 80th Annual
Report, 1993, p. 215).
state member banks, about 64 percent
Consumer and Community Affairs 229
involved loan functions: of these, oneeighth (8 percent of all complaints)
alleged discrimination on a prohibited
basis, and the rest (56 percent of all
complaints) 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 23 percent of the
1,177 complaints involved disputes
about interest on deposits and general
deposit account practices. The remaining 13 percent concerned disputes about
electronic fund transfers, trust services,
and miscellaneous bank practices.
involving real estate loans (54). Each of
these categories accounts for a small
number (4 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 to a lack of borrowing experience when assessing the applicant's
creditworthiness. Complaints in the
miscellaneous category covered a wide
range of issues, including failure by the
lender to close on a mortgage loan by
the agreed settlement date and property
appraisal values.
Unregulated Practices
Under section 18(f) of the Federal Trade
Commission Act, the Board monitors
complaints about banking practices not
subject to existing regulations to focus
on those that may be unfair or deceptive. Two categories each accounted for
up to 5 percent of the 1,653 complaints
received in 1994: denial of credit card
applications based on credit history (89)
and miscellaneous unregulated practices
Complaints Referred to HUD
In 1994 the Federal Reserve referred
twenty-four complaints to HUD in
accordance with a June 1992 memorandum of understanding between HUD
and the bank regulatory agencies that
encourages cooperation in the investigation of complaints alleging unlawful discrimination in housing. Investigations
completed by the Federal Reserve in
Consumer Complaints to the Federal Reserve System Regarding State Member Banks
and Other Institutions, by Subject, 1994
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)
Regulation DD (Truth in Savings)
Fair Credit Reporting Act
Fair Debt Collection Practices Act
Fair Housing Act
Flood insurance
Holder in due course
Real Estate Settlement Procedures Act
Unregulated practices
Total.
1. Complaints against these institutions were referred
to the appropriate enforcement agencies.
State member
banks
84
27
4
151
6
25
25
41
16
8
Other
institutions'
Total
6
1
1
782
14
194
5
45
24
72
12
3
0
2
9
871
140
53
18
345
11
70
49
113
28
11
6
3
10
1,653
1,177
1,341
2,518
56
26
230 81st Annual Report, 1994
fourteen of the twenty-three complaints
revealed no evidence of discrimination;
nine investigations were pending at
year-end.
Consumer Advisory Council
The Consumer Advisory Council met in
March, June, and November 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 organizations, financial
institutions, academia, and state and
local government. Council meetings are
open to the public. Among the topics the
council considered during 1994 were
reform of the CRA, mandatory arbitration, fair lending matters, sale of mutual
funds and other uninsured investment
products by insured depository institutions, the waiver of consumers' right of
rescission for certain loans, and Truth in
Savings proposals regarding the calculation of the annual percentage yields on
deposit accounts.
Consumer Complaints to the Federal Reserve System, by Function
and Resolution, 1994
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 dispute 4
Possible bank violation5
Matter in litigation 6
Customer error
Pending, December 31
Total
Discrimination
Deposits
Other
Electronic
fund
transfers
Trust
services
Other
32
2
14
9
0
0
7
97
7
59
19
3
3
6
537
53
279
129
17
10
49
91
2
50
26
4
0
9
54
91
39
12
11
23
98
6
2
3
4
1
0
16
36
50
13
6
6
12
57
8
26
20
1
2
9
12
0
4
0
0
0
0
0
0
0
0
2
0
3
4
9
3
1
0
2
10
1,117
100
98
9
663
53
267
24
27
2
19
2
105
10
Complaints referred to
other agencies
1,341
76
734
321
34
13
163
Total
2,518
174
1,397
586
61
32
268
Total, state member banks
Number
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 appeared to be legally correct but chose to
make an accommodation.
0
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. After the Federal Reserve determined that a state
member bank had possibly violated a law or regulation,
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 231
All three council meetings featured
discussion of issues related to CRA
reform, including such alternative measures of local-investment performance
as a market-share test, an asset-based
test, and a loan-to-deposit ratio standard
for streamlined examinations of small
banks. The council also discussed the
role of examiners in the performance
evaluation. The council members agreed
on the need for an interagency program
of training for examiners developed by
the FFIEC with input from the public.
They concluded that interagency cooperation is crucial in (1) developing a
context within which examiners should
assess an institution's performance and
(2) developing a method for coordinating the collection and sharing of baseline data.
In March the council's Depository
and Delivery Systems Committee reviewed the Board's proposal to modify
certain requirements for calculating
an annual percentage yield (APY) and
recommended that it be withdrawn (see
the discussion of Regulation DD above,
under "Other Regulatory Matters"). The
committee suggested that, instead, covered financial institutions consider giving an appropriate advertising notice
stating that some minor variations in the
APY could occur as a result of periodic
interest payments.
In June the council's Community
Affairs and Housing Committee identified key elements of successful programs that provide counseling on home
ownership. This project was undertaken
in part because the CRA reform proposal identifies home ownership counseling by financial institutions as an
activity that would count as a positive
factor under the service test. Committee
members found that key elements were
(1) ongoing efforts to draw individuals
into the programs, (2) credit report
reviews and other activities to prequalify
individuals for the program, (3) training
in home ownership (covering motivation and intellectual and emotional
preparation, budget and financial management skills, home selection criteria,
insurance needs, and the purchase process), and (4) a commitment to work
with the prospective homebuyer, one on
one, until a home has been purchased,
regardless of how long it takes.
Roundtable discussions, known as the
Members Forum and held at each council meeting, gave council members the
opportunity through the year to offer the
Board their views on visible signs of an
economic recovery within their industries or local economies.
Testimony and Legislative
Recommendations
In February the Board testified before
the House Committee on Banking,
Finance and Urban Affairs on matters
relating to CRA reform; in March the
Board testified before the same committee on the sale of mutual funds by banks.
Also in February the Board submitted
written recommendations to the committee on proposed legislation governing
credit and charge cards.
Regarding the CRA reform proposal,
the Board testified about the following
steps the agencies were taking to communicate more clearly with banks and
thrift institutions regarding agency
expectations for CRA performance:
• Creating a more numerically driven
system for assessing CRA performance
in three elements: lending, services, and
investments
• Requiring the collection of data on
the number, amount, and geographic
location of small business, small farm,
and some consumer loans to use in the
assessments
232 81st Annual Report, 1994
• Providing for streamlined review of proposed legislation on credit and
small institutions
charge cards. Because the legislation
• Permitting institutions to submit was driven, in part, by concerns about
their CRA plan in advance for approval the level of credit card rates, the Board
by their regulator as an alternative to wanted the committee to have some curbeing evaluated under the general rent background on credit card pricing
assessment scheme
and profitability.
• Specifying the regulatory sanctions
that might result from noncompliance Recommendations
with the regulation.
of Other Agencies
The Board also discussed interagency
guidelines regarding bank sales of
mutual funds and other nondeposit
investment products. Under the guidelines, banks must take the following
actions:
• Standardize the basic disclosures
that banks provide customers—they
must at a minimum indicate that the
product is not insured by the FDIC, that
it is not a deposit or other obligation of
(and is not guaranteed by) the selling
depository institution, and that it is
subject to investment risks, including
possible loss of the principal amount
invested
• Ensure that sales and other activities relating to nondeposit investment
products are conducted in a physical
location distinct from the area where
retail deposits are taken, except in very
limited situations where physical considerations prevent it
• Bar tellers and other employees in
the deposit-taking area from making
investment recommendations or accepting orders for nondeposit investment
products. Tellers and other employees
not authorized to sell nondeposit investment products may refer customers only
to individuals who are specifically
trained to sell nondeposit investment
products.
In February the Board submitted comments to the House committee regarding
Each year the Board asks the agencies
with enforcement responsibilities under
Regulations B, E, M, Z, CC, and AA for
recommendations of changes to the
regulations or underlying statutes. In
1994 the FTC and the OCC made
recommendations.
The FTC sees an expansion of leasing
transactions in the marketplace and
encourages the Board to continue its
regulatory review of lease requirements
under Regulation M. In addition, the
FTC believes that a review of Regulation Z would help ensure that the
requirements are up-to-date, clear, and
simple without diminishing important
consumer protections, including those
regarding creative financing.
The OCC believes that the Congress
should consider alternatives to current
consumer protection laws that could
provide disclosures at least as useful
as the current ones but less burdensome
to depository institutions. The OCC
encourages the Board likewise to consider changes to the implementing regulations that would achieve the same end.
The OCC believes that the Congress
should also consider modifications to
the referral requirements in the ECOA.
For example, mandatory referrals could
be limited to particular prohibited bases,
the Department of Justice could relieve
a particular agency of the mandatory
referral requirement, or referral could be
waived if detected violations stem from
self-assessments.
•
233
Litigation
During 1994 the Board of Governors
was a party in twenty-two lawsuits, the
same number as in 1993. Seven lawsuits were filed in 1994, two of which
raised questions under the Bank Holding Company Act. A total of nine cases
were pending at year-end 1994.
Bank Holding Company Act—
Review of Board Actions
Scott v. Board of Governors, No. 940104 (D. District of Columbia, filed
January 21, 1994), was a petition for
review of a Board order approving the
application of Society Corporation,
Cleveland, Ohio, to merge with KeyCorp, Albany, New York (80 Federal
Reserve Bulletin 253). The case was dismissed with prejudice on December 7,
1994.
National Title Resource Agency v.
Board of Governors, No. 94-2050 (8th
Circuit, filed April 28, 1994), is a petition for review of a Board order, issued
under section 4 of the Bank Holding
Company Act, approving the application of Norwest Corp., of Minneapolis,
Minnesota, to acquire Double Eagle
Financial Corp., of Phoenix, Arizona,
and its subsidiary and thereby engage
in title insurance agency activities and
real estate settlement services (80 Federal Reserve Bulletin 453). On January 10, 1995, the court affirmed the
Board's order.
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 assessed 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.
First National Bank of Bellaire v.
Board of Governors, No. H-93-1708
(S.D. Texas, filed June 8, 1993), was an
action to enjoin possible enforcement
actions by the Board of Governors and
other bank regulatory agencies. On
March 8, 1994, the District Court
granted the agencies' motion to dismiss.
Board of Governors v. Oppegard, No.
93-3706 (8th Circuit, filed November 1,
1993), was an appeal of a District Court
order that appellant Oppegard comply
with a previous order that required compliance with a Board order for removal,
prohibition, and civil money penalty.
On July 6, 1994, the Court of Appeals
affirmed the District Court order (29
F.3d 627).
In CBC, Inc. v. Board of Governors,
No. 93-1458 (U.S. Supreme Court, filed
March 17, 1994), petitioners sought
review of a civil money penalty
assessed 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 Tenth
Circuit Court of Appeals on November 30, 1993 (13 F3d 404), and the
petition for certiorari was denied on
June 6, 1994(114 S. Ct. 2163).
Board of Governors v. MacCallum,
No. 94 Civ. 5652 (WK) (S.D. New York,
filed August 3, 1994), was an action to
freeze assets of an individual pending
234 81st Annual Report, 1994
administrative adjudication of a civil
money penalty assessed by the Board.
On August 3, 1994, the court issued an
order temporarily restraining the transfer or disposition of the individual's
assets. The order was lifted on December 22, 1994, upon completion of the
underlying enforcement action.
In Cavallari v. Board of Governors,
No. 94^183 (2d Circuit, filed October 17, 1994), a former outside counsel
to a national bank seeks review of a
Board order of prohibition. The case,
which was consolidated with a petition
to review enforcement orders issued by
the Comptroller of the Currency {Cavallari v. OCC, No. 94^151), is pending.
In DLG Financial Corp. v. Board of
Governors, No. 94-891 (U.S. Supreme
Court, filed November 14, 1994), appellants seek review of an order of the Fifth
Circuit Court of Appeals (29 F.3d 993)
affirming two actions: an order, obtained
by the Board in connection with a pending enforcement action, that freezes
appellants' assets; and the District
Court's dismissal of appellants' claims
seeking an injunction and damages
against the Board and the Federal
Reserve Bank of Dallas relating to the
same enforcement action. The case is
pending.
Other Actions
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
release, to a private litigant, of confidential examination material. The subpoena
was issued in a shareholder derivative
suit against the Fleet/Norstar Financial
Groups. On June 26, 1992, the Court of
Appeals affirmed the District Court
order in part, but it also 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.
92-1056 (D. District of Columbia, filed
May 4, 1992), the plaintiff alleged discriminatory practices under the Age Discrimination in Employment Act. The
court granted the Board's motion for
summary judgment on November 29,
1994.
In re Subpoena Duces Tecum, Misc.
No. 92-0365 (D. District of Columbia,
filed August 25, 1992), was a subpoena
enforcement case in which plaintiffs
sought 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
FDIC. 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
(11 F.3d 217). On November 23, 1994,
the District Court ordered the production of a limited amount of factual material to the plaintiff.
In Adams v. Greenspan, No. 93-0167
(D. District of Columbia, filed January 27, 1993), the plaintiff, a former
employee, alleged a violation of the
Civil Rights Act of 1964 and the Rehabilitation Act of 1973 concerning termination of employment. The case was
dismissed after settlement on November 18, 1994.
Litigation 235
In Amann v. Prudential Home Mortgage Co. et ai, No. 93-10320 WD
(D. Massachusetts, filed February 12,
1993), plaintiff alleged fraud and breach
of contract arising out of a home mortgage. The action was dismissed on
June 21, 1994.
Bennett v. Greenspan, No. 93-1813
(D. District of Columbia, filed April 20,
1993), is an employment discrimination
action. A jury verdict for the plaintiff
was rendered on October 13, 1994. The
Board's motion for a new trial on the
issue of damages was denied on January 9, 1995.
In Kubany v. Board of Governors,
No. 93-1428 (D. District of Columbia,
filed July 9, 1993), the plaintiff challenged a Board determination under
the Freedom of Information Act. On
July 19, 1994, the court granted the
Board's motion to dismiss.
In re Subpoena Duces Tecum, Misc.
Nos. 93-261 and 93-260 (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,
No. 94-4020 (10th Circuit, filed January 14, 1994), is an appeal of a dismissal of 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. On September 16, 1994, the court denied the
appeal (36 F.3d 1105).
Beckman v. Greenspan, No. CV
94-41 BCG-RWA (D. Montana, filed
April 13, 1994), is an action against
the Board and others seeking damages
for alleged violations of constitutional
and common law rights. The case is
pending.
Scott v. Board of Governors, No. 944117 (10th Circuit, filed April 28, 1994),
is an appeal of dismissal of action
against the Board and others for damages and injunctive relief for alleged
constitutional and statutory violations
caused by issuance of Federal Reserve
notes. The action was dismissed on
July 21, 1994.
Jackson v. Board of Governors, No.
94-16789 (9th Circuit, filed September 22, 1994), is an action for violation
of a prisoner's civil rights. The action
was dismissed on December 1, 1994.
In re Subpoena Duces Tecum, No.
94-MS-214 (D. District of Columbia,
filed June 27, 1994), is a subpoena
enforcement case in which the plaintiff
in a class action suit alleging securities
fraud seeks examination reports and
internal Board memorandums. The
Board's opposition to the subpoena
was filed on July 8, 1994; the case is
pending.
•
237
Legislation Enacted
The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, Public Law 103-328, was enacted on September 29, 1994. It covers interstate
acquisitions by bank holding companies; interstate bank mergers; interstate
branching by domestic and international
banks; related aspects of reporting, regulatory examination, and preemption
of state law; and miscellaneous other
matters.
deposits of insured depository institutions in the United States or control of
30 percent or more of total deposits in
any state in which both an insured
depository institution affiliated with the
applicant and any bank to be acquired
maintain a home office or branch. States
may impose caps different from 30 percent if they do not discriminate against
out-of-state institutions. In determining
whether to approve an application under
this provision, the Board must consider
the applicant's record under the Community Reinvestment Act (CRA) and
applicable state community reinvestment laws. Federal or state antitrust
laws will continue to apply to proposed
acquisitions.
The Board may approve acquisitions
of troubled banks without regard to
deposit caps, state laws restricting
acquisitions of recently organized banks,
or performance under federal and state
community reinvestment laws.
Interstate Bank Holding Companies
Interstate Bank Mergers
The act amends the Bank Holding Company Act to permit the Board of Governors, as of September 29, 1995, to allow
bank holding companies that are
adequately capitalized and managed to
acquire banks outside their home states,
generally regardless of state laws to the
contrary. States may, however, restrict
acquisitions of banks in existence for
less than five years.
The act prohibits an interstate acquisition under this provision if it would give
to the applicant, together with its affiliated insured depository institutions, control of more than 10 percent of the total
The act amends the Federal Deposit
Insurance Act to permit mergers beginning June 1, 1997, between adequately
capitalized insured banks with different
home states. States may exclude themselves from this provision before that
date by expressly prohibiting mergers
with all out-of-state banks. Interstate
mergers may be approved before June 1,
1997, if the home state of each bank
involved has passed a law expressly
permitting such mergers and the law
applies equally to all out-of-state banks;
such laws may contain conditions that
do not discriminate against out-of-state
The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, the
Riegle Community Development and
Regulatory Improvement Act of 1994,
and the Bankruptcy Amendments of
1994 directly affect the Federal Reserve
System or the institutions it regulates.
Riegle-Neal Interstate Banking
and Branching Efficiency Act
of 1994
238 81st Annual Report, 1994
institutions, are not preempted by federal law, and do not apply after May 31,
1997.
Interstate merger transactions that involve a branch of an insured bank but
not the entire bank are also authorized if
permitted by the state in which the
branch is located.
The federal and state deposit caps
applicable to interstate expansion by
bank holding companies also apply to
interstate bank mergers other than mergers involving only affiliated banks.
States may restrict interstate mergers of
banks in existence for less than five
years. Federal or state antitrust laws will
continue to apply to proposed merger
transactions.
In determining whether to approve an
application for initial entry into a state,
the responsible federal banking agency
must consider the CRA records of the
applicant and of any bank that would be
an affiliate of the resulting bank; the
agency must also consider the record of
the applicant under applicable state
community reinvestment laws. In proposals not involving initial entry, the
agencies may review community reinvestment performance in accordance
with earlier practices.
The responsible federal agency may
approve an interstate merger of a
troubled bank without regard to deposit
caps; performance under federal and
state community reinvestment laws;
adequacy of capital or management
skills; or state laws that restrict mergers
of recently organized banks, prohibit interstate branch acquisitions, or exclude
the state from interstate mergers.
A bank resulting from an interstate
merger may, subject to approval of the
appropriate federal banking agency, continue to operate the banking offices it
operated before the merger and may
acquire or establish additional branches
anywhere any bank involved in the
transaction could have done so in the
absence of the transaction.
Effective June 1, 1997, a national
bank may not acquire, establish, or operate branches outside its home state or
outside states where it already has a
branch except as permitted by the interstate banking statute. Any national bank
that relocates its main office to another
state after May 31, 1997, may retain and
operate branches within its former home
state only to the extent that (1) it would
be authorized to acquire, establish, or
operate them if it had had no branches in
that state, or (2) the branches had been
acquired in an interstate merger, or
(3) the branches had been acquired after
May 31, 1997, in transactions assisted
by the Federal Deposit Insurance Corporation (FDIC).
States retain the right to supervise,
regulate, and examine the operations
of the banks they charter, including
the establishment and maintenance of
branches. In addition, branches of an
out-of-state national bank will be subject to the host state's laws regarding
community reinvestment, consumer protection, fair lending, and intrastate
branching to the extent that such laws
apply to branches of banks chartered by
that state; however, such state laws will
not apply when preempted by federal
law or when the Office of the Comptroller of the Currency (OCC) finds (after
public notice and comment) that such
laws would have a discriminatory effect
on the national bank branch. State laws
applicable to a branch of a national bank
will be enforced by the OCC with
respect to that branch.
The regulatory agencies may permit
an out-of-state bank to establish de novo
branches in any state that adopts legislation expressly permitting all banks to
establish such branches and the out-ofstate bank complies with the requirements (other than deposit caps) that
Legislation Enacted 239
apply to the interstate acquisition by
merger of an existing branch. Any such
out-of-state bank shall have the same
authority to establish, acquire, and operate other branches that it would have if
it had not established such a de novo
branch.
The Riegle-Neal act also amends the
Home Owners' Loan Act to clarify the
fact that it does not affect certain state
constitutional provisions exempting
homesteads from foreclosure or forced
sale.
Interstate Branching by
International Banks
The Riegle-Neal act amends the International Banking Act to permit foreign
banks, subject to the approval of the
Board of Governors and other appropriate bank regulators, to establish and
operate branches or agencies regulated
under federal or state law outside their
home states to the extent permitted
national or state banks with the same
home state as the foreign bank. The
Board and, as appropriate, the OCC
must determine that the foreign bank's
capital resources are equivalent to the
resources required of a domestic bank
and must consult with the Secretary of
the Treasury (Treasury) regarding capital adequacy. The foreign bank shall also
comply with the state's requirements for
establishing a de novo interstate branch
and shall have the same authority to
establish, acquire, and operate other
branches that it would if it had not established such a de novo interstate branch.
The act requires the FDIC and the
OCC to review their regulations under
section 6 of the International Banking
Act to ensure that foreign banking organizations do not receive unfair competitive advantages over domestic ones,
keeping in mind the importance of
improving the availability of credit to all
sectors of the economy, including international trade finance. The act also prohibits a branch or agency of a foreign
bank from managing, through a branch
or agency located outside the United
States, any activity that a domestic bank
is not permitted to manage at a branch
or agency located outside the United
States. Regulations of the Board and
the FDIC under this provision are to be
uniform.
The act clarifies the fact that foreign
bank branches, agencies, and commercial lending companies are subject to the
same federal and state consumer protection laws as national or state banks
doing business in the same state. The
CRA would continue to apply to any
branch that results from the acquisition
of an insured bank or branch by a foreign bank in a state in which the foreign
bank did not previously have a branch,
except for branches that accept only
those deposits permissible for Edge Act
corporations.
Examinations
The act provides a moratorium on fees
under the International Banking Act for
examinations of branches, agencies,
affiliates, and representative offices
commenced before July 25, 1997.
State bank supervisors may examine
in-state branches of out-of-state insured
state banks and undertake the same
enforcement actions that would be permitted if the branches were banks chartered by their state. State bank supervisors from two or more states may
enter into cooperative agreements to
facilitate supervision of state banks with
interstate branches.
Deposit Production
and Community Reinvestment
The act requires the federal banking
agencies to prescribe uniform regula-
240 81st Annual Report, 1994
tions prohibiting the use of interstate
branching authority primarily for deposit production, including guidelines to
ensure that out-of-state branches meet
the credit needs of their communities. If
the loan-to-deposit ratio of an out-ofstate bank in the host state is less than
half the ratio for all host-state banks, the
regulations must require a determination
as to whether such branches are meeting
credit needs. The act specifies a variety
of business, financial, and regulatory
factors that the agency must consider in
making its determination.
The act amends the CRA to require
separate state-by-state performance
evaluations of insured depository institutions with branches in two or more
states and separate evaluations for multistate metropolitan areas in which the
bank has branches.
The act establishes procedures for
community input when an interstate
bank proposes to close a branch in a
low- or moderate-income area, but the
procedures may not affect the authority
of an interstate bank to close a branch or
the timing of the closing.
Preemption of State Laws
The act does not affect the authority of a
state or subdivision to use any constitutional method of taxing a branch,
domestic or foreign bank, bank holding
company, or affiliate (including nondiscriminatory franchise taxes or other nonproperty taxes), nor does it affect certain
federal limitations on state usury laws.
The federal banking agencies must
solicit and consider public comments
before concluding that federal law preempts the application to a national bank
of any state law regarding community
reinvestment, consumer protection, fair
lending, or the establishment of intrastate branches. These requirements also
apply to any determination by the OCC
that applying host state laws to an interstate branch as if it were a bank chartered by such host state would have a
discriminatory effect. The act provides
certain exceptions to the requirements
regarding public notice and comment.
The act also amends the Consolidated
Farm and Rural Development Act so
that loans guaranteed under section
31 OB are no longer subject to state usury
laws, although states may exclude themselves from the provision within three
years of enactment of the act.
The act permits the FDIC to file
certain tort suits in regard to a failed
depository institution for which it has
been appointed conservator or receiver
even if the state's statute of limitations
for such suit expired up to five years
before the FDIC's appointment.
Reports
The Board must conduct seven annual
surveys of retail services provided by
insured depository institutions and of
the fees charged for such services and
report the results to the Congress.
Treasury must study the strengths and
weaknesses of the U.S. financial services system and the adequacy of the
existing regulatory structure to prevent
unfair, discriminatory, or anticompetitive practices. Treasury must develop
recommendations for improvements that
avoid risk to taxpayers and control
systemic risk.
Silver Coins
The act authorizes 2.8 million $1 silver
commemorative coins to be produced in
five series for the benefit of five organizations. The coins will be legal tender,
and their sale price will include a $10
surcharge to benefit the Organizing
Committee for the Special Olympic
Games, the National Community Ser-
Legislation Enacted 241
vice Trust, the National Fund for the
Botanic Garden, the endowment of the
Robert F. Kennedy Memorial, and the
Association of Graduates of the Military
Academy.
Riegle Community Development
and Regulatory Improvement Act
of 1994
The Riegle Community Development
and Regulatory Improvement Act of
1994, Public Law 103-325, was enacted
on September 23, 1994. Title I-A is the
Community Development and Financial
Institutions Act of 1994; title I-B is the
Home Ownership and Equity Protection
Act of 1994.
Title II-A is the Small Business Loan
Securitization and Secondary Market
Enhancement Act of 1994; title II-B
encourages the enhancement access to
capital for small businesses.
Title III relates to paperwork reduction and regulatory improvement.
Title IV is the Money Laundering Suppression Act of 1994. Title V is the
National Flood Insurance Reform Act of
1994, and title VI deals with oversight
hearings and technical amendments.
Title I-A
Title I-A, the Community Development
and Financial Institutions Act of 1994,
establishes the Community Development Financial Institutions Fund as a
wholly owned government corporation
under an administrator appointed by the
President and confirmed by the Senate.
The goal of the act and the fund is to
create a national network of financial
institutions accountable to residents of
their investment area or targeted population, including metropolitan, rural, and
Native American communities. The new
community development institutions are
to aid the economic advancement of
their areas or populations by helping to
fulfill their unmet needs for loans and
equity investments. These new community development institutions, either
alone or in partnership with a community partner, may apply to the new fund
for assistance on projects that are consistent with the requirements of the act.
The fund may provide up to $5 million to any community development
financial institution and its subsidiaries
over three years and may provide an
additional $3.75 million over the same
period for a subsidiary or affiliate set up
to serve an investment area or targeted
population outside the state and metropolitan statistical area already served.
The fund provides technical assistance,
equity investments, deposits, credit
union shares, loans, and grants. Equity
investments by the fund in any community development institution may not
exceed 50 percent of the institution's
equity and must be in the form of transferable nonvoting shares. The fund may
sell its equity investments and loans at
any time. Other than technical assistance, all assistance must be at least
50 percent matched.
The act authorizes a minimum of
$382 million over four years, with twothirds of the funds (after administrative
expenses) earmarked for the new community development financial institutions and one-third for the section 114
program under which depository institutions receive credit against deposit
insurance premiums for private investment in targeted activities in qualified
distressed communities.
The fund must develop standards of
financial responsibility for assisted institutions other than federally insured or
examined depository institutions or their
holding companies. Before it awards
assistance to, or imposes sanctions on,
any federally supervised depository
institution or its holding company, the
242 81st Annual Report, 1994
fund must consult with the appropriate
bank regulatory agency. The fund may
not sanction any such institution if the
agency objects on grounds of safety and
soundness or of enforcement procedure
and proposes an alternative sanction.
Before requesting information directly
from such an institution, the fund shall
attempt to obtain it from the appropriate
agency, but in no case may the fund
request examination reports.
The act also authorizes $10 million
for the Community Development Credit
Union Revolving Loan Fund for the
1995-98 period.
Title I-B
Title I-B, the Home Ownership and
Equity Protection Act of 1994, amends
the Truth in Lending Act to provide
additional protection to consumers who
are subject to unfair terms on home
equity or second mortgage loans on
principal residences through home
improvement contractors, banks, or
finance companies. The act does not
apply to first mortgages, reverse mortgages, or open-end credit plans.
For the types of loans it targets, the
act defines those that are "high-rate" or
"high-fee." A high-rate loan has an
interest rate that is more than 10 percentage points higher than yields on comparable Treasury bonds; a high-fee loan
assesses points and fees in excess of
8 percent of the loan amount or $400,
whichever is the greater (subject to
adjustment by the Board of Governors
after two years). For such loans, the act
requires specific disclosures that the borrower could lose his or her home for
failure to meet the loan obligations and
is not obligated to sign the agreement.
The act also requires disclosure of financial details of the loans, including, for
variable rate loans, disclosure of the
monthly payment at current interest
rates and at the maximum interest rate
allowed under the Competitive Equality
Banking Act. The consumer has a threeyear right of rescission if the disclosures
are not made three business days before
consummation of the transaction.
A pattern or practice of lending based
on the value of collateral without regard
to the consumers' ability to repay is
prohibited. Other restrictions on highrate or high-fee mortgages are that the
interest rate on them may not rise by
virtue of default on the loan; they may
not require balloon payments if their
term is less than five years, nor negative
amortization, nor more than two payments consolidated and paid in advance
from loan proceeds; and they may not
be payable directly to a home improvement contractor. With certain exceptions, no such mortgage loan may be
subject to a prepayment penalty, including any method of computing a refund
of unearned scheduled interest less
favorable to the consumer than the
actuarial method. Inclusion of any of the
above terms is deemed a failure of
required disclosure and creates the
right of rescission. The act authorizes
the Board to exempt from these prohibitions specific mortgage products
that strengthen home ownership and
equity protection and to prohibit
unfair, deceptive, or abusive practices
in connection with mortgage loans or
refinancings.
Title I-B amends the Truth in Lending Act, adding to its civil liability provisions the requirement that a lender's
failure to comply with title I-B's
required disclosures (including the use
of terms deemed a failure of required
disclosure) creates an obligation to
refund all finance charges and fees paid
by the mortgagor. Under the amendments, the disclosure provisions may be
enforced by state attorneys general,
although the responsible federal agency
Legislation Enacted 243
may intervene, remove the case to federal district court, and file an appeal.
The act also eliminates holder-in-duecourse protection for assignees of such
mortgages, thereby subjecting them to
all claims and defenses assertable aginst
the originator, unless the assignee can
prove that a reasonable person exercising due diligence could not have discovered that the mortgage was a high-rate
or high-fee mortgage.
The act also regulates disclosure with
respect to reverse mortgages, defined as
nonrecourse mortgages against a principal dwelling in which payment of principal, interest, and shared appreciation or
equity is not due except upon default,
transfer of the dwelling, death of the
consumer, or the consumer's ceasing to
occupy the residence as a principal
dwelling. Included in the required financial disclosures are three estimates of
the total cost of the mortgage, each
based on a different loan term, the longest of which is to be specified by the
Board of Governors.
The Board of Governors must issue
regulations implementing this subtitle
by March 22, 1995. In addition, the
Board must assess the adequacy of consumer protections under the Truth in
Lending Act with respect to open-end
credit transactions and whether an index
more appropriate than Treasury securities is available for the floating rate disclosure trigger in that act. In addition,
the Board shall conduct hearings within
three years and regularly thereafter on
the adequacy of consumer protections
and related issues in the market for
home equity loans.
Title II-A
Title II-A, the Small Business Loan
Securitization and Secondary Market
Enhancement Act of 1994, removes
impediments to securitizing loans that
have been extended to small businesses.
Under the act, a small-business-related
security is (1) rated in one of the four
highest categories by at least one nationally recognized rating agency, (2) represents an interest in one or more promissory notes on, or leases of, personal
property that are either the obligation of
a small business or secured by such an
interest, and (3) has payments of principal that are related to payments or projected payments on the underlying notes
or leases.
To facilitate the development of a
forward trading and delivery market in
such securities, the act exempts from
margin regulations certain agreements
for delayed delivery of the securities.
The act authorizes national banks,
federal savings associations, and federal credit unions to purchase smallbusiness-related securities for their own
account without limitation on amount
but subject to regulations on minimum
issue size. The act also extends to such
securities the provisions of the Secondary Mortgage Market Enhancement Act
except in states that pass legislation to
exclude themselves from the provisions
that apply to state law.
The act specifies certain accounting
procedures to be followed by depository
institutions and federal banking agencies. Among these provisions is the
requirement that statements filed with
the agencies must apply generally
accepted accounting principles to the
transfer with recourse of small business
loans or leases. In addition, qualified
insured depository institutions must provide reserves against estimated liabilities from with-recourse transfers of such
loans or leases that are accounted for as
sales; such institutions are permitted,
however, to include only the retained
amount of recourse in their riskweighted assets for capital adequacy
purposes.
244 81st Annual Report, 1994
For purposes of prompt corrective
action, the capital condition of an
insured institution is to be calculated
without regard to the accounting principles or capital requirements for securitized small business loans. The federal
banking agencies, which are permitted
to create alternative provisions that
do not increase the amount of capital
required for transfer with recourse of
small business loans and leases, have
180 days from enactment to promulgate
final regulations for such transfers.
The Board of Governors and the
Securities and Exchange Commission
(SEC) must evaluate, among other
things, the effect of the act on businesses generally, on businesses in lowincome and moderate-income areas or
owned by minorities and women, and
on community development efforts.
The study is to be reported to the Congress within two, four, and six years of
enactment.
Title II-B
Title II-B, Small Business Capital
Enhancement, encourages states to
implement programs that help banks and
other depository institutions provide
small businesses with access to loans. It
authorizes $50 million to be administered, if appropriated, by the Community Development Financial Institutions
Fund.
Effective January 6, 1996, a state with
a legal financial commitment to a capital
access fund of at least $0.50 per resident
may apply to participate in, and be partially reimbursed by, the fund. Participating states may enter into participation agreements with appropriate
financial institutions (as determined
after consultation with the relevant federal banking agency). The act specifies
the permitted scope of the participation
agreements, the reports that participat
ing states must file with the fund, and
the conditions of reimbursement to the
states.
Title III
Title III, Paperwork Reduction and
Regulatory
Improvement,
enacts
changes to current law to reduce the
regulatory burden on insured depository
institutions and their customers and calls
for studies in areas where the regulatory
burden might be further reduced. One
provision specifies that the federal banking agencies shall make new regulations
take effect at the start of the calendar
quarter following publication unless
dictated otherwise by an act of the
Congress, or provisions of the Administrative Procedure Act, or the findings
of the agency (including, in the case of
the Board, the exigencies of monetary
policy).
In addition, each federal banking
agency and the National Credit Union
Administration Board must establish an
independent appeals process for material supervisory decisions and create
safeguards to protect appellants from
retribution. Material supervisory determinations do not include the appointment of a conservator, receiver, or liquidating agent or a decision to take prompt
corrective action. The agencies must
also each appoint an ombudsman and
develop alternative processes for resolving disputes.
In the two years commencing September 23, 1994, the federal banking
agencies must review their regulations
and written policies to improve efficiency, reduce unnecessary costs, eliminate unwarranted constraints on credit
availability, and remove inconsistent,
outmoded, and duplicative requirements, particularly with regard to regulations for real estate lending. In that
regard, the act directs the Board of Gov-
Legislation Enacted 245
ernors to seek ways to simplify the disclosures on variable rate mortgages that
it requires under the Truth in Lending
Act to make them more meaningful to
consumers and to report to the Congress
within two years of completing its work.
Unified Regulations, Examinations,
and Call Reports
The federal banking agencies are to
make uniform their regulations and
guidelines implementing common statutes and supervisory policies, eliminate
duplicative requests for information in
connection with applications and notices, and harmonize their requirements
regarding publication and notice. Moreover, within two years of enactment, the
agencies are to establish a system for
determining in most situations which
federal regulator shall be the lead
agency responsible for managing a unified examination of each insured depository institution and its affiliates. The
agencies must report annually to the
Congress on this system and their
progress in implementing it.
The act also specifically liberalizes
the conditions, laid down in the Federal
Deposit Insurance Act, that permit the
extension of the period between full,
on-sight examinations of insured institutions from the normal twelve months to
as long as eighteen months; it adds a
limitation, however, that prohibits an
extension of time between examinations
for any institution that is subject to a
formal enforcement proceeding or order
by its primary regulator or the FDIC.
The federal banking agencies must
jointly develop a system in which
Reports of Condition and Income (Call
Reports) and bank holding company
reports can be filed with the agencies
and made available to the public electronically and make recommendations
to the Congress within one year of
enactment for legislation to enhance
efficiency for filers and users. Also, the
agencies must, in a manner consistent
with safety and soundness, develop a
single form for the filing of core information that is to be submitted to more
than one agency, simplify the instructions for such reports, and eliminate
all unwarranted supplemental noncore
information. The act also eliminates the
requirement for the publication of Call
Reports, although the reports remain
otherwise available to the general
public.
Holding Companies
For qualified transactions, the act expedites the formation of a bank holding
company by replacing the application to
the Board with a thirty-day notice to the
Board. The transaction qualifies for the
notice process if the existing bank is
adequately capitalized, proportionate
ownership is preserved (except for the
exercise of dissenting shareholders'
rights), the holding company meets the
Board's capital standards, and the holding company neither acquires another
bank nor engages in any activity other
than controlling the bank as a result of
the reorganization.
For acquisitions of shares in certain
companies so closely related to banking
or to managing or controlling banks
as to be considered a proper incident
thereto, the act replaces the current
application procedure with a sixty-day
notice procedure. The Board may, by
regulation, provide shorter notice periods and may extend the notice period
for an additional ninety days in the case
of activities not previously approved by
regulation. And the act eliminates the
requirement that bank holding companies obtain Board approval in advance
for mergers or acquisitions of savings,
associations by subsidiary banks; under
the Bank Merger Act, these transactions are already subject to review by
246 81st Annual Report, 1994
the primary regulator of the surviving
bank.
The act similarly exempts from registration with the SEC the formation
of bank or savings association holding
companies if the rights of the security
holders and the underlying assets and
liabilities are unchanged (except for
nominal changes from dissenter's rights
or fractional shares).
Payment of Interest on Reserves
The Board of Governors, in consultation
with the FDIC and the National Credit
Union Administration, must study
whether an effective monetary policy
requires insured institutions to maintain
reserves; consider whether paying a
market rate of interest on reserves, either
to the institutions or to the deposit insurance funds, would be appropriate; and
calculate the income lost by institutions
now required to hold non-interestbearing reserves and the effect of the
requirement on their ability to compete
with nonbank providers of financial
services. The results of the Board's
study—as well as an estimate to be
prepared jointly by congressional and
executive branch research on the
budgetary effect of such interest
payments—are to be reported to the
Congress within 180 days of enactment.
Other Provisions
Title III reduces, from two thirds to a
majority, the number of the directors of
national banks required to reside in the
state, territory, or district where the bank
is located. In other provisions, title III
makes modifications, not mentioned
above, to the Bank Secrecy Act, the
Bank Service Corporation Act, the
Depository Institutions Management
Interlocks Act, the Expedited Funds
Availability Act, the Fair Credit Reporting Act, the Federal Deposit Insurance
Act, the FDIC Improvement Act, the
Federal Reserve Act, the Real Estate
Settlement Procedures Act of 1974, the
Truth in Lending Act, and the Truth in
Savings Act.
Title IV
The goal of title IV, the Money Laundering Suppression Act of 1994, is to reduce the number of transactions reports
by depository institutions by 30 percent,
mainly by requiring Treasury to exempt
institutions from reporting on transactions that have little or no law enforcement value. Under the act, Treasury may
also exempt transactions with qualified
business customers that maintain active
transaction accounts; the criteria for
qualification, to be determined by Treasury, may include descriptions of types
of qualifying business or a list of specific businesses that fail to qualify. Treasury must report to the Congress within
180 days of enactment on the progress
made toward the goal and must further
report to the Congress on progress after
the end of each of the first five calendar
years following enactment.
The act adds checks, drafts, notes,
money orders, and other similar negotiable instruments drawn on or by a foreign financial institution to the list of
monetary instruments subject to record
keeping and reporting requirements.
Among its additional provisions, title
IV calls on the federal banking agencies,
Treasury, and law enforcement agencies
to sharpen and streamline their procedures for sharing information; requires
money transmitting businesses to register with Treasury; adds casinos with
revenues in excess of $1 million (including those operated under the Indian
Gaming Regulatory Act) to the definition of financial institution for purposes
of the money laundering statutes;
expands the application of civil penalties and adds criminal penalties with
Legislation Enacted 247
regard to certain money laundering
activities; encourages states to enact
uniform laws regulating nondepository
businesses that cash checks, transmit
funds, and so on; and orders a study by
the Comptroller General of the United
States concerning the role of cashiers
checks in money laundering schemes.
Title V
Under title V, the National Flood Insurance Reform Act of 1994, federal agencies that accept applications for funds to
restore flood-damaged structures cannot
waive the requirement that current applicants who have received such assistance
in the past must have been covered by
flood insurance at the time of the loss
for which they now seek assistance.
In addition, to assure that areas of
flood hazard are identified, that maps of
such areas are readily available, and that
mortgages on structures built in those
areas carry the proper flood insurance,
title V, among other provisions, establishes procedures for more extensive
coordination among regulatory agencies,
public and private lenders, and the Federal Emergency Management Agency
and tighter flood-related requirements
in property sales, loan originations, and
loan servicing.
As of September 23, 1995, the Federal National Mortgage Association and
the Federal Home Loan Mortgage Association must have procedures in place to
assure that loans they purchase carry
flood insurance if the loans relate to
property in designated flood hazard
areas for which national insurance is
available.
As of the date of enactment, lenders
and loan servicers must buy flood insurance coverage at the expense of the borrower for any property in an area that is
or has become a designated flood hazard
area if the borrower fails to obtain such
coverage within forty-five days' notice.
Within one year of enactment, lenders
that require any escrowing on a loan
that requires flood insurance must also
require the escrowing of flood insurance
premiums on that loan.
The act provides for reasonable fees
to be collected by lenders and loan servicers in making certain determinations
regarding the flood-related requirements
of a particular loan and likewise establishes penalties for violations of the act
by lenders or sellers.
Bankruptcy Amendments of 1994
The Bankruptcy Amendments of 1994,
Public Law 103-394, were enacted on
October 22, 1994. This law makes
numerous adjustments to the balance
among the various classes of debtors,
owners and management in bankruptcy
proceedings.
One provision of particular interest
amends the definition of "swap agreement" under the Bankruptcy Code. The
code provides special protection for certain rights of participants in swap agreements, including the rights of termination, set-off, and netting in forward
foreign exchange contracts.
The amendment adds spot foreign
exchange contracts to the coverage
afforded forward contracts. Because
netting agreements among market participants usually include spot foreign
exchange contracts as well as forward
contracts, this provision confirms the
understanding of market participants
that closing out, setting off, and netting
such spot contracts is valid under the
Bankruptcy Code.
•
249
Banking Supervision and Regulation
During 1994 the U.S. commercial banking system reported record earnings
for the third consecutive year, as general economic conditions continued to
improve both domestically and abroad.
These robust earnings reflected continued progress by the industry in reducing nonperforming loans and their
related costs, while generally maintaining net interest revenues. In addition,
renewed growth in commercial lending and continuing strong demand
for consumer loans produced a solid
expansion of bank loan portfolios
and ended a multi-year period of credit
constraint.
In this generally favorable environment, the number and assets of failed
commercial banks continued to decline,
reaching the lowest levels since the early
1980s. Similarly, the number and assets
of problem banks continued to decline
sharply. These trends, combined with
progress by the industry to strengthen its
asset quality while maintaining its overall capital ratios, reflect favorably on the
industry's condition and its ability to
meet the nation's financial needs.
Despite the industry's general
strength, pockets of weakness persisted,
particularly in Southern California. The
majority of commercial bank failures
for 1994 occurred in Southern California where many banks continued to
have asset quality problems.
In addition, rising market interest
rates throughout most of 1994 increased
pressure on bank net interest margins
and had particularly adverse effects on
the market values of the industry's trading and investment portfolios. Rising
rates and other market uncertainties also
sharply reduced the trading revenues of
most money center banks from their
exceptionally high levels of 1993. These
developments underscored the importance of sound risk management practices at banks and other participants in
financial markets.
The expansion of the securities activities of U.S. banks for trading and for
investment purposes and the increasing
complexity of financial products typified by derivative instruments necessitated the Federal Reserve's placing
greater emphasis on risk management
practices at banks and bank holding
companies. Through its own efforts and
through activities conducted in cooperation with other U.S. and foreign supervisory authorities, the Federal Reserve
took important steps in 1994 to augment
its oversight of market risks. The Federal Reserve adopted a new Trading
Activities Manual, and issued other
advisories to its examiners and regulated institutions to strengthen industry practices and clarify supervisory
standards.
The Federal Reserve, along with other
banking agencies, took steps to adjust
and strengthen the risk-based capital
standards during 1994 in the areas of
market risk and interest rate risk. The
Board also addressed issues related to
mutual funds, structured notes, and netting arrangements for capital purposes;
and it continued the process of implementing the Foreign Bank Supervision
Enhancement Act of 1991, including the
development and implementation of a
comprehensive program for supervising
foreign banking organizations in the
United States.
250 81st Annual Report, 1994
Scope of Responsibilities for
Supervision and Regulation
The Federal Reserve is the 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 safe and sound operation
and their compliance with laws and
regulations, including the Bank Secrecy
Act and consumer and civil rights laws.'
The Federal Reserve also examines the
following specialized activities of these
institutions: electronic data processing,
fiduciary activities, mutual fund activities, government securities dealing and
brokering, municipal securities dealing,
securities clearing activities, and securities underwriting and dealing through
special subsidiaries.
The Federal Reserve also has responsibility 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, and (3) the operations of
foreign banking organizations in the
United States.2 The Foreign Bank
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. To carry out this
responsibility, institutions are examined by specially trained Reserve Bank examiners. The
chapter of this REPORT covering consumer and
community affairs describes these regulatory
responsibilities. Compliance with other statutes
and regulations, which is treated in this chapter, is
the responsibility of the Board's Division of Banking Supervision and Regulation and the Reserve
Banks, whose examiners check for safety and
soundness.
2. Edge Act corporations are chartered by the
Federal Reserve, and agreement corporations are
chartered by the states, to provide all segments of
the U.S. economy with a means of financing international trade, especially exports.
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; it also
undertakes enforcement and other supervisory actions.
Examinations and Inspections
The on-site review is an integral part of
ensuring the safety and soundness of
financial institutions. Examinations of
state member banks, of branches and
agencies of foreign banks, and of Edge
Act and agreement corporations, as well
as inspections of bank holding companies and their subsidiaries, entail (1) an
appraisal of the quality of the institution's assets, (2) an evaluation of man-
Banking Supervision and Regulation 251
agement, including internal policies,
controls, 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 1994, 980 state-chartered
banks belonged to the Federal Reserve
System, an increase of 8 from year-end
1993. These banks represented about
9 percent of all insured commercial
banks and held about 21 percent of all
insured commercial bank assets.
Federal Reserve examination guidelines are fully consistent with section 10
of the Federal Deposit Insurance Act as
amended by section 111 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 and by the Riegle
Community Development and Regulatory Improvement Act of 1994.
In conformance with legislated and
internal examination guidelines, state
member banks were examined as required in 1994. Altogether, the Reserve
Banks conducted 693 examinations
(some of them jointly with the state
agencies), and state banking departments conducted 316 independent
required examinations. Reserve Bank
officials held 291 meetings with directors of large state member banks and
those that displayed significant weaknesses as required under Federal
Reserve examination guidelines.
Bank Holding Companies
At year-end 1994 the number of bank
holding companies totaled 6,019, a
decline of 92 from the preceding year.
These organizations controlled about
7,805 insured commercial banks and
held approximately 94 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, and 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 consult the examination reports of the federal and state
banking authorities that have primary
responsibility for the supervision of
these banks. In 1994, the Federal
Reserve inspected 1,926 bank holding
companies. Altogether, Federal Reserve
examiners conducted 1,984 bank holding company inspections and state
examiners conducted 51 independent
inspections. During 1994, Reserve Bank
officials held 348 meetings with the
boards of directors of bank holding companies to discuss supervisory concerns.
Enforcement Actions,
Civil Money Penalties, and
Significant Criminal Referrals
In 1994 the Federal Reserve Banks recommended, and members of the Board's
staff initiated and worked on, 174 formal enforcement cases involving 399
separate actions such as written agreements, cease and desist orders, removal
and prohibition orders, civil money
penalties and prompt corrective action
directives. Of these, 56 cases involving
117 actions were completed by yearend. Of particular note was the completion of a formal action, in conjunction
with the Securities and Exchange Commission and the Commodities Futures
252 81st Annual Report, 1994
Trading Commission, addressing the
deficiencies of a money center bank's
leveraged derivatives business.
All final enforcement actions issued
by the Board of Governors and all written agreements executed by the Federal
Reserve Banks in 1994 are available to
the public. Besides formal enforcement
actions, the Federal Reserve Banks
completed 128 informal enforcement
actions, such as memoranda of understanding, commitment letters, and board
resolutions.
In 1994 the staff of the Division of
Banking Supervision and Regulation
forwarded 529 criminal referrals to the
Fraud Section of the Criminal Division
of the Department of Justice for inclusion in its significant referral tracking
system.
Federal Reserve also was the lead
agency on three examinations of large
Multiregional Data Processing Servicers
examined on an interagency basis with
the Federal Deposit Insurance Corporation, the Office of the Comptroller of
the Currency, and the Office of Thrift
Supervision.
The Federal Reserve conducts specialized examinations of banking organizations regarding electronic data processing, fiduciary activities, government
securities dealing and brokering, municipal securities dealing, securities clearing, and securities underwriting and
dealing through so-called section 20
subsidiaries. The Federal Reserve also
reviews state member banks and bank
holding companies that act as transfer
agents.
Fiduciary Activities
The Federal Reserve has supervisory
responsibility for institutions that hold
more than $5.7 trillion of discretionary
and nondiscretionary assets in various
fiduciary capacities. This group of institutions includes 291 state-chartered
member banks and trust companies and
71 nonmember trust companies that are
subsidiaries of bank holding companies.
On-site examinations are essential to
ensure the safety and soundness of
financial institutions that have fiduciary
operations. These examinations include
(1) an evaluation of management, policies, audit and control procedures, and
risk management, (2) an assessment 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
1994, Federal Reserve examiners conducted 186 on-site trust examinations of
state member banks and trust companies, which held approximately $3 trillion in fiduciary assets.
Electronic Data Processing
Under the Interagency EDP Examination Program, the Federal Reserve
examines the electronic data processing
(EDP) 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. During 1994, the Federal Reserve
conducted 330 EDP examinations. The
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 and four state
branches of foreign banks have notified
Specialized Examinations
Banking Supervision and Regulation 253
the Board that they are currently government securities dealers or brokers that
are not exempt from Treasury's regulations. During 1994 the Federal Reserve
conducted twenty-eight 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 1994, the Federal Reserve
examined all three of the clearing agencies and twenty-four of the banks that
deal in municipal securities.
Securities Subsidiaries
of Bank Holding Companies
Section 20 of the Banking Act of 1933
(the Glass-Steagall Act) prohibits the
affiliation of a member bank with a company that is "engaged principally" in
underwriting or dealing in securities.
The Board in 1987 approved proposals
by banking organizations to underwrite
and deal on a limited basis in specified
classes of bank "ineligible" securities
(that is, commercial paper, municipal
revenue bonds, conventional residential
mortgage-related securities, and securitized consumer loans) in a manner consistent with 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 subsequently 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
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 1994 thirty-six bank
holding companies had so-called section
20 subsidiaries authorized to underwrite
and deal in ineligible securities. Of
these, sixteen could underwrite any debt
or equity security; four could underwrite
any debt security; and sixteen 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 thirty such inspections in
1994.
Transfer Agents
Federal Reserve examiners also conduct
examinations of state member banks and
bank holding companies that are registered transfer agents. Among other
things, transfer agents counter-sign and
monitor the issuance of securities, register their transfer, and exchange or convert such securities. During 1994, Federal Reserve examiners conducted onsite examinations at 93 of the 195 banks
and bank holding companies registered
as transfer agents with the Board.
254 81st Annual Report, 1994
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 as a whole. 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 an examination rating
model, which is used to track the overall financial condition of individual
organizations.
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.
Edge Act and Agreement Corporations
Edge Act corporations are international
banking organizations chartered by the
Board to provide all segments of the
U.S. economy with a means of financing
international trade, especially exports.
An agreement corporation is a statechartered company that enters into an
agreement with the Board not to exercise any power that is impermissible for
an Edge Act corporation. In 1994, the
Federal Reserve examined all seventy
six Edge Act and agreement corporations, which held about $31 billion in
total assets at year-end.
International Activities
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 1994, the
Federal Reserve conducted full-scope
and targeted-scope examinations of ten
foreign branches of state member banks
and thirty-one 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 5 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.
The Federal Reserve is responsible for
supervising the international activities
of various banking entities.
U.S. Activities of Foreign Banks
Foreign banks continue to be significant
participants in the U.S. banking system.
Banking Supervision and Regulation 255
As of year-end 1994, 277 foreign banks
from 61 countries operated 494 statelicensed branches and agencies of which
33 are insured by the Federal Deposit
Insurance Corporation, as well as 73
branches and agencies licensed by the
Office of the Comptroller of the Currency, of which 8 have FDIC insurance.
These foreign banks also directly owned
12 Edge Act corporations and 4 commercial lending companies. In addition,
they held an equity interest of at least
25 percent in 85 U.S. commercial banks.
Altogether, these U.S. offices of foreign
banks control approximately 21 percent
of U.S. banking assets. These foreign
banks also operated 139 representative
offices. An additional 100 foreign banks
operated in the United States solely
through a representative office.
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
736 such offices during 1994.
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 period. These
examinations are coordinated with other
state and federal regulators to eliminate
duplication whenever possible. FBSEA
requires Federal Reserve approval for
the establishment of branches, agencies,
commercial lending company subsidiaries, and representative offices by foreign banks in the United States.
In 1994, applications by 21 banks
from 13 foreign countries were approved to establish branches, agencies,
and representative offices.
Representative Offices
FBSEA gave the Board supervisory
responsibility, including examination
authority, over the activities of representative offices of foreign banks. As
of year-end 1994, 246 representative
offices of foreign banks were registered
with the Federal Reserve System.
Joint Program for Supervising the U.S.
Operations of Foreign Banking
Organizations
A cooperative effort among the state and
federal banking supervisory agencies
has been developed over the past two
years to provide a more comprehensive
framework for supervising the U.S.
operations of foreign banking organizations (FBOs). This program has taken
supervisory concepts and methods in use
for more than a decade and adapted
them to a framework that will process
and distribute supervisory information
to all U.S. supervisors in a logical, uniform, and timely manner.
The program consists of two major
parts. The first segment of the program,
which is focused primarily on those
FBOs that have multiple U.S. entities, is
256 81st Annual Report, 1994
intended to better coordinate the efforts Technical Assistance
of the various domestic supervisory In 1994 the System provided staff memagencies through the development of a bers for a number of technical assistance
supervision strategy for the total U.S. missions and training sessions on bank
operations of individual FBOs. As part supervisory matters at numerous central
of this process, the U.S. banking agen- banks in countries of the former Soviet
cies will communicate more fully with Union, in Eastern Europe, and in the
each other regarding the individual U.S. Caribbean and Latin America.
operations which they examine and
supervise.
The second part of the program con- Supervisory Policy
sists of a review of the financial and The Board amended its guidelines on
operational profile of each FBO in order risk-based capital and leverage and
to assess the general ability of an FBO released for public comment some other
to support its U.S. operations and to proposals in that area. The Board also
determine what risks, if any, the FBO issued several other statements of guidposes through its U.S. operations. This ance, some in association with the Basle
process, which is separate and distinct Supervisors' Committee.
from the supervisory process conducted
by the FBO's home country supervisor,
is intended to reach basic conclusions Risk-Based Capital Standards
regarding the strength of support that The risk-based capital requirements
individual FBOs can provide to their adopted by the Board in 1989 remained
U.S. operations. Together, the two pro- in effect in 1994. These requirements
cesses will provide critical uniform implement the international risk-based
information to the U.S. supervisors that capital standards that were proposed by
will be used in determining the extent to the Basle Committee on Banking Reguwhich supervisory follow-up action is lation and Supervisory Practices (Basle
warranted for one or more U.S. offices Supervisors' Committee) and endorsed
of an FBO.
by the Group of Ten (G-10) countries
in July 1988. The standards include a
Examination Manual
framework for calculating risk-adjusted
Over the past two years, the U.S. state assets and assigning the assets to broad
and federal banking agencies have categories based primarily on credit risk.
worked together to develop a manual Banking organizations are expected to
for conducting individual examinations maintain capital equal to at least 8 perof the U.S. branches and agencies of cent of their risk-adjusted assets.
FBOs.
To supplement the risk-based capital
It is expected that the manual will standards, the Board in 1990 also issued
serve as a primary, comprehensive refer- leverage guidelines setting forth minience source for examination guidelines mum ratios of capital to total assets to
and procedures for both examiners and be used in the assessment of an instituthe foreign banking community in the tion's capital adequacy.
United States. The manual is to be available to the public in the first quarter of Amendments
1995 and will be updated periodically to During 1994 the Board adopted amendreflect new or revised supervisory poli- ments to its risk-based and leverage
cies and procedures.
capital guidelines in the following areas.
Banking Supervision and Regulation 257
Securities available for sale. The
Board adopted a final amendment, effective December 31, 1994, that generally
directs state member banks and bank
holding companies to not include in
regulatory capital the "net unrealized
holding gains (or losses) on securities
available for sale," the common stockholders' equity account created by
the Financial Accounting Standards
Board's issuance of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments
in Debt and Equity Securities"
(SFAS 115). Net unrealized losses on
marketable equity securities (that is
equity securities with readily determinable fair values), however, are to continue to be deducted from tier 1 capital.
This amendment has, for purposes of
calculating the risk-based and leverage
capital ratios, the effect of valuing
available-for-sale securities at amortized
cost, rather than at fair value.
banks and bank holding companies to
limit the amount of certain deferred tax
assets that may be included in (that
is, not deducted from) tier 1 capital for
risk-based and leverage capital purposes. The capital rule was developed
in response to SFAS 109, "Accounting
for Income Taxes," and is consistent
with recommendations set forth by the
Federal Financial Institutions Examination Council. Under the amendment,
deferred tax assets that can be realized
only if an institution earns taxable
income in the future are limited for
regulatory capital purposes to the
amount that the institution expects,
based on its projection of taxable
income, to realize within one year of the
quarter-end report date or 10 percent
of tier 1 capital, whichever is less.
Deferred tax assets that can be realized
from taxes paid in prior carryback years
would generally not be limited. This
amendment is to become effective
April 1, 1995.
Bilateral netting. The Board adopted
a final rule, effective December 31,
1994, expanding the recognition of
bilateral netting arrangements for riskbased capital purposes. This final
amendment implements a recent revision to the Basle Accord permitting
the recognition of such arrangements.
Under the amendment, state member
banks and bank holding companies with
qualifying, enforceable netting arrangements may net (that is, offset) the positive and negative market values of
interest and exchange rate contracts in
determining the current exposure portion of the credit equivalent amount of
such contracts included in risk-weighted
assets.
Concentration of credit risk and risks
of nontraditional activities. On December 15, 1994, the Board, together with
the other banking regulatory agencies,
issued a final rule implementing portions of section 305 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The final
rule amends the risk-based capital standards by explicitly identifying concentrations of credit risk and certain risks
arising from nontraditional activities, as
well as an institution's ability to manage
these risks, as important factors in
assessing an institution's overall capital
adequacy. This amendment is to become
effective on January 17, 1995.
Deferred tax assets. On December 14,
1994, the Board adopted a final rule
amending the risk-based capital and
leverage guidelines for state member
Proposals
During 1994 the Board issued for public
comment several proposals with regard
to its risk-based capital standards.
258 81st Annual Report, 1994
Recourse. On May 25, 1994, the
Board, along with the other regulatory
banking agencies, published in the Federal Register a notice of proposed rulemaking (NPR) and an advance notice of
proposed rulemaking (ANPR) requesting public comment on various recourse
issues. The proposed rulemaking would
lower the risk-based capital requirement
for assets sold with low levels of
recourse. The advance notice of proposed rulemaking outlined an alternative approach to deal comprehensively
with the capital treatment of recourse
transactions and securitizations. The
comment period ended on July 25, 1994.
Subsequently, on September 23,
1994, the Riegle Community Development and Regulatory Improvement Act
was enacted. Section 350 of the act
requires the federal banking agencies to
issue regulations limiting the amount of
risk-based capital an insured depository
institution can be required to hold for
assets transferred with recourse to the
maximum amount of recourse for which
the institution is contractually liable.
The regulations are required to be in
effect by March 22, 1995. A more specific proposal responding to comments
on the ANPR and taking into account
subsequent staff analysis is also expected to be issued in 1995.
Derivatives transactions. On August
24, 1994, the Board issued a proposal
for public comment based on proposed
revisions to the Basle Accord addressing various issues relating to the capital
treatment of off-balance sheet derivative
transactions. The Board's proposal
would revise and expand the set of conversion factors used to calculate the
potential future exposure of derivative
contracts and recognize the effects of
bilateral netting arrangements in the calculation of potential future exposure for
derivative contracts subject to qualify
ing bilateral netting arrangements. The
comment period for the proposal ended
in October 1994. A final amendment is
expected in 1995 after revisions to the
Basle Accord have been endorsed.
Country transfer risk. Following an
announcement by the G-10 governors in
July 1994 that they intended to modify
the Basle Accord in 1995 with regard
to country transfer risk, the Federal
Reserve Board, in conjunction with the
Office of the Comptroller of the Currency, on October 14, 1994, proposed a
revision to their respective risk-based
capital standards. The revision, like the
proposed modification to the accord,
would retain the OECD-based group of
countries as the principle criterion for
preferential risk-weight status but would
exclude for five years any country that
reschedules its external sovereign debt.
The modification to the accord and the
risk-based capital standards was proposed to ensure that membership in the
OECD-based group of countries coincides with relatively low transfer risk
in order for a country to be eligible for
preferential capital treatment. The Board
expects to issue a final revision sometime in 1995 after a final revision to the
Basle Accord is endorsed.
Interest rate risk. Section 305 of
FDICIA requires the bank regulatory
agencies to incorporate interest rate risk
in the risk-based capital framework.
Accordingly, in September 1993 the
Board issued a proposal for incorporating such risk into the assessment of
capital adequacy. The approach taken in
the proposal sought 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. The Board
has been working with the other bank-
Banking Supervision and Regulation 259
ing agencies to analyze the public comments and refine the proposal. The
banking agencies expect to publicize a
revised and enhanced approach to section 305 later in 1995.
Retail Sales of Nondeposit
Investment Products
The federal banking agencies issued a
joint statement on February 15, 1994,
"Retail Sales of Nondeposit Investment
Products," which provides comprehensive guidance regarding such sales on
the premises of depository institutions.
The interagency statement, which unifies and supersedes the separate statements issued by the banking agencies
in 1993, is designed to ensure that
adequate disclosures are made to consumers regarding the investment characteristics and risks of nondeposit investment products. The disclosures are also
intended to make sure that consumers
understand that these investments are
not insured by the federal government
or the issuing banking organization.
The interagency statement applies to
depository institutions, including state
member banks, and branches and agencies of foreign banks under the Board's
supervision. It emphasizes the importance of adopting comprehensive policies and procedures governing sales
programs. Specifically, it addresses disclosure and advertising; separation of
sales programs from deposit-related
activities; compensation, training, and
supervision of employees; and sales
practice and suitability issues. The statement also addresses third-party arrangements, including the responsibilities
of third parties that conduct retail sales
programs on depository institution
premises.
In May the Federal Reserve issued
finalized examination procedures that
address the guidelines contained in the
interagency statement. It is anticipated
that the examination procedures will be
updated as additional information about
industry practices is obtained from
examiners and as the federal banking
agencies issue additional guidance on
the subject.
On January 3, 1995, the banking
agencies that were party to the interagency statement entered into an
"Agreement in Principle" with the
National Association of Securities Dealers (NASD). The agreement calls for the
interagency coordination of the supervision and examination of bank-affiliated
broker-dealers subject to the joint jurisdiction of a banking agency and the
NASD. The agreement is intended to
avoid duplication of supervisory efforts,
lessen the burden on the broker-dealers
and enhance the overall supervisory
process.
Structured Note Guidance
Recognizing the growing use of structured notes by banking organizations,
the Federal Reserve issued guidance on
these instruments to examiners through
a supervisory letter. The guidance
emphasized the need for examiners to
ensure that banking organizations that
hold structured notes do so according to
their own investment policies and procedures and with a thorough understanding of the risks and price sensitivity of
these instruments under a broad range of
market conditions. As experience has
shown, some of these instruments can
expose investors to significant losses as
interest rates, foreign exchange rates,
and other market indexes change. While
alerting the industry and Federal
Reserve examiners to the potential risk
in structured notes, the statement also
acknowledged that these instruments
can be appropriate investment products
for banks where adequate risk manage-
260 81st Annual Report, 1994
ment systems are in place and where the
institution fully understands its overall
risk profile and the risk profile of its
individual investments.
Derivatives Activities
The Federal Reserve and the Basle
Supervisors Committee (BSC) have a
number of initiatives under way to
ensure that institutions involved in
derivative and capital markets activities
follow safe and sound management
practices, maintain adequate capital levels, and report the results of these activities in a transparent manner. In 1994, the
BSC issued guidance on sound management practices for derivative activities and moved forward on proposals
to revise the capital requirements for
equity, commodity, and long-dated
derivative contracts. Also, the Federal
Reserve is continuing to work with the
BSC to develop an international supervisory reporting framework for offbalance-sheet derivatives. These activities also included consultation with
international working groups on various
initiatives regarding the adequacy of
derivative activities' disclosures and
appropriate application of accounting
standards for both public and supervisory purposes. In 1995, the Federal
Reserve and the BSC plan to expand
these initiatives and develop additional
guidance on derivatives. In addition, the
Federal Reserve is working with other
agencies to develop possible approaches
for improving the accounting and disclosure standards for derivative activities.
Real Estate Appraisals
On June 7, 1994, the Board and the
other banking agencies issued a final
rule amending their appraisal regulations. The amendments furthered federal
financial and public policy interests by
reducing regulatory burden while requiring appraisals when necessary to protect
the safety and soundness of financial
institutions or otherwise advance public policy. The final rule increases to
$250,000 the threshold at or below
which appraisals are not required pursuant to title XI of Financial Institutions
Reform, Recovery, and Enforcement
Act (FIRREA), expands and clarifies
existing exemptions from the agencies'
appraisal requirement, and identifies
additional circumstances in which appraisals are not required. The final rule
also amends existing requirements governing appraisal content and the use of
appraisals prepared by other financial
services institutions.
On October 27, 1994, the agencies
issued conforming revisions to their
appraisal and evaluation guidelines.
These guidelines address supervisory
matters relating to appraisals and evaluations used to support real estate-related
financial transactions and provide guidance to examining personnel and federally regulated institutions about prudent
appraisal and evaluation policies, practices, and standards.
During 1994 the Board, in conjunction with the other banking and thrift
regulatory agencies, issued orders
granting relief from certain real estate
appraisal requirements for areas affected
by three different major natural disasters. The relief was granted to areas
affected by the January 1994 California
earthquake, the July 1994 flooding in
the southeastern United States, and the
October 1994 flooding in and around
Houston, Texas. The Board acted under
provisions of the Depository Institutions
Disaster Relief Act of 1992.
National Information Center
In 1994 the Board's Division of Banking Supervision and Regulation assumed
Banking Supervision and Regulation 261
overall responsibility for the National
Information Center (NIC). The NIC, a
database shared by the Reserve Banks
and maintained at the Board of Governors, comprises structure data for banks,
nonbanks, and holding companies;
financial information, such as Call
Report data for banks and FR-Y report
data for bank holding companies; and
supervisory information. The NIC database enables end-users to analyze institutional structures, together with applicable financial information, and any
supervisory data associated with the
institution.
Critical steps were taken to implement the Supervisory Information System (SIS) as part of the NIC mainframe
environment during 1994. The SIS system also contains supervisory data on
institutions regulated by other banking
agencies, such as state nonmember
banks and national banks. A significant
improvement to the SIS was the addition of international data for U.S. holding companies and foreign banking
organizations with activities in the
United States. Board and Reserve Bank
staff developed a new software release
of the systems during 1994, completed
user documentation that outlined procedures for the input of supervisory data,
and conducted training seminars for staff
members throughout the System.
During 1994 the Board continued to
implement an executive information tool
for the personal computer called the
Federal Reserve Examination Database
(FRED). This application enables endusers to conduct on a personal computer
complex institutional analyses employing all of the information contained
within the NIC.
Staff Training
The Supervisory Education Program is
charged with effectively training staff
members with supervisory or regulatory
responsibilities at the Reserve Banks,
the Board of Governors and state banking departments. The program covers
the four disciplines of bank supervision:
bank examinations, bank holding company inspections, surveillance and
monitoring activities, and the applications process. The program provides
cross training at basic, intermediate,
and advanced levels. Classes may be
conducted in Washington, D.C., or at
regional locations and may be held
jointly with regulators of other financial
institutions. Training is extended to staff
members of the Division of Banking
Supervision and Regulation as well as to
staff members of other divisions whose
activities involve the System's supervisory and regulatory processes. Students
from supervisory counterparts in foreign countries also attend on a spaceavailable basis. The objective of the program is to provide students with an
increased awareness and knowledge of
the total supervision and regulation process, including the interrelationships of
the four functional areas, thus providing
a higher degree of potential substitutability among staff members.
The System participates in Federal
Financial Institutions Examination
Council (FFIEC) training and, to a
limited extent, in the training offered
by certain other regulatory agencies.
Activities include developing and implementing basic and advanced training in
various emerging issues as well as in
such specialized areas as trust activities,
international banking, electronic data
processing, activities of municipal securities dealers, off-balance-sheet risk,
payment systems risk, white collar
crime, preparation and presentation of
testimony, income property lending,
management, and instructor training. It
also co-hosts the World Bank Seminar
for students from developing countries.
262 81st Annual Report, 1994
During 1994 the Federal Reserve conducted a variety of schools and seminars, and Federal Reserve staff participated in several courses offered by
co-sponsored agencies, as shown in the
accompanying table.
In 1994 the Federal Reserve trained
3,402 persons in System schools, 1,219
in schools sponsored by the FFIEC, and
176 in other schools for a total of 4,927
students including 130 representatives
from foreign central banks. The number
of student days of training in 1994 was
25,036, compared with 26,938 in 1993
and 20,555 in 1992.
The Federal Reserve System also
gave scholarship assistance to the states
for training their examiners in Federal
Reserve and FFIEC schools. Through
this program 672 state examiners were
trained; 390 in Federal Reserve courses,
278 in FFIEC programs, and 4 in other
courses. The Federal Reserve continued
its joint core supervision schools with
the FDIC with respect to the three core
schools attended by newly hired examination and inspection staff.
Every staff member wishing to obtain
an examiner's commission is required to
demonstrate mastery of the core curriculum and other specialty areas by passing
the Core Proficiency Examination. In
1994, fifty-seven staff members took the
examination and fifty-two passed.
Training Programs for Banking Supervision and Regulation, 1994
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
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
Fair lending
Advanced EDP examination
EDP continuing education
Capital markets seminar
Section 20 securities seminar
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
NOTE. ETS is Examiner Training School; CRA is the
Community Reinvestment Act; EDP is electronic data
processing.
1. Conducted jointly with the World Bank.
2. Open to Federal Reserve employees.
17
15
6
24
20
27
9
4
4
Regional
13
1
26
9
17
2
1
10
1
1
2
3
'V
1
1
7
7
4
2
'V
67
19
1
7
3. Co-sponsored by the Federal Reserve, Federal
Deposit Insurance Corporation, Office of Thrift Supervision, Office of the Comptroller of the Currency, and the
Resolution Trust Corporation.
Banking Supervision and Regulation 263
Federal Financial Institutions
Examination Council
In November 1994 the Federal Reserve
and the other federal banking agencies
announced, under the auspices of the
FFIEC, improvements to disclosures of
off-balance-sheet derivatives that are
reported in bank Call Reports. Under the
enhanced framework, banks will report
gross or notional amounts of derivative
contracts, broken down by class of
instrument (for example futures, forwards, swaps, and options), type of risk
exposure (for example interest rate, foreign exchange, equity, and commodity),
maturity, and use of the instruments (for
example trading and other than trading).
Information will also be collected on the
gross positive and negative fair values
of derivatives broken down by type of
risk exposure and use of the instruments. In addition, information will be
collected on the net credit exposure
(reflecting legally enforceable bilateral
netting contracts) and the potential
future exposure, and on the earnings
effect of derivatives on bank trading
revenues and net interest margins.
In November 1994 the FFIEC also
announced several deletions to existing
items and other revisions to the Call
Report. These deletions, effective as of
the March 31, 1995, reporting date,
reflect the results of a comprehensive
review of the information collected in
Call Reports for the purpose of eliminating items no longer considered necessary. Based on this review, more than
twenty items were removed from the
Call Report. In addition, new items were
added to permit the agencies to more
effectively monitor bank investments in
high-risk mortgage securities and structured notes, sales of mutual funds and
annuities, and other areas.
During 1994 the FFIEC issued clarifications to the December 1991 "Super
visory Policy Statement on Securities
Activities." The guidance clarifies that,
consistent with SFAS 115, collateralized
mortgage obligations (CMOs) may be
reported as held-to-maturity assets at
amortized cost. The FFIEC also issued
guidance on issues arising from the
adoption, for regulatory reporting purposes, of SFAS 114, "Accounting by
Creditors for Impairment of a Loan."
The guidance clarifies that SFAS 114
sets forth an estimation technique for
calculating part of the general loan loss
allowance, and thus, allowances calculated under SFAS 114 may continue to
be included in tier 2 capital, subject to
current limitations. The guidance also
reaffirms existing supervisory policies
on nonaccrual of interest income and
classification of certain collateralized
lending arrangements.
During 1994 the FFIEC also revised
the supplement to the Report of Assets
and Liabilities of U.S. Branches and
Agencies of Foreign Banks (FFIEC 002)
to reflect SFAS 115 and to maintain
consistency with the bank Call Report.
Regulation of the U.S.
Banking Structure
The Board administers the Bank Holding Company Act, the Bank Merger Act,
and the Change in Bank Control Act
for bank holding companies and state
member banks. In doing so, the Federal
Reserve acts on a variety of proposals
that directly or indirectly affect the
structure of U.S. banking at the local,
regional, and national levels. The Board
also has primary responsibility for regulating the international operations of
domestic banking organizations and the
overall U.S. banking operations of foreign banks, whether conducted directly
through a branch or agency or indirectly
through a subsidiary commercial lending company. The Board has established
264 81st Annual Report, 1994
regulations for the interstate banking
activities of these foreign banks and for
foreign banks that control a U.S. subsidiary commercial bank.
Bank Holding Company Act
By law, a company must obtain the Federal Reserve's approval if it is to form a
bank holding company by acquiring
control of one or more banks. Moreover,
once formed, a bank holding company
must receive the Federal Reserve's
approval before acquiring additional
banks or nonbanking companies.
In reviewing an application or notice
filed by a bank holding company, the
Federal Reserve considers such factors 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 1994 the Federal Reserve acted
on 1,303 bank holding company and
related applications or notices. The Federal Reserve approved 298 proposals
to organize bank holding companies;
approved 108 proposals to merge existing bank holding companies; approved
296 bank acquisitions by existing bank
holding companies; approved 566 requests by existing companies to acquire
nonbank firms engaged in activities
closely related to banking; and approved
35 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
Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1994
Action under authority delegated
by the Board of Governors
Proposal
Direct action
by the
Board of Governors
Director of the
Division of Banking
Supervision and
Regulation
Approved
Formation of holding
company
Merger of holding
company
Retention of bank
Acquisition
Bank
Nonbank
Bank service
corporation . . .
Other
Total
Denied
Approved
Denied
22
0
0
0
15
0
0
0
43
126
0
0
0
4
0
0
210
0
Office
of the
Secretary
0
0
0
0
0
4
272
9
0
0
0
0
Total
Approved Approved Permitted
0
0
Federal
Reserve Banks
23
33
298
0
108
0
0
142
84
0
5
0
296
566
0
230
265
22
0
1
0
0
3
0
8
27
22
0
75
851
145
1,303
Banking Supervision and Regulation 265
also consider the views of certain other
agencies on the competitive factors
involved in the transaction.
During 1994, the Federal Reserve
approved 124 merger applications. As
required by law, each merger is described in this REPORT (in table 16 of
the Statistical Tables section).
When the Federal Deposit Insurance
Corporation, the Office of the Comptroller of Currency, or the Office of Thrift
Supervision has jurisdiction over a
merger, the Federal Reserve is asked to
comment on the competitive factors
to ensure 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 ensure consistency in administering the act. The Federal Reserve
submitted 991 reports on competitive
factors to the other federal banking
agencies in 1994.
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 position, 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 1994 the Federal Reserve acted
on 167 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, or a change in control, is
effected by an order or announcement.
Orders state the decision along with
the essential facts of the application or
notice 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 announcements 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. These target dates promote efficiency at the Board and the
Reserve Banks and reduce the burden
on applicants. The time allowed for a
decision ranges from thirty to sixty days,
depending on the type of application.
During 1994, 94 percent of the decisions
met this standard.
266 81st Annual Report, 1994
Delegation of Applications
Historically, the Board has delegated
certain regulatory functions—including
the authority to approve, but not to deny,
certain types of applications—to the
Reserve Banks, to the Director of the
Board's Division of Banking Supervision and Regulation, and to the Secretary of the Board. The delegation of
responsibility for applications permits
staff members at both the Board and the
Reserve Banks to work more efficiently
by removing routine cases from the
Board's agenda.
In 1994, 86 percent of the applications processed were acted on under
delegated authority. The Board continued its efforts during the year to streamline its processing procedures.
Recent Legislation
The Riegle Community Development
and Regulatory Improvement Act of
1994 (CDR Act) makes certain revisions to the procedures that bank holding companies must follow to gain
approval of bank and nonbank acquisition proposals under the Bank Holding
Company Act. Specifically, the CDR
Act (1) establishes a prior notice procedure that replaces the application process for all proposals by bank holding
companies to engage in nonbanking
activities; (2) establishes a streamlined
notice procedure for the formation of a
new bank holding company as part of a
reorganization by the existing shareholders of a bank; and (3) eliminates the
need for prior Board approval of certain
"Oakar" transactions whereby a bank
acquires a thrift institution or assets and
deposits of a thrift institution.
The CDR Act also permits the Board,
when it has obtained the consent of the
Department of Justice, to shorten from
thirty days to fifteen days the post
approval waiting period during which
the Department of Justice may file a
court challenge to a bank acquisition
proposal on competitive grounds. On
October 27, 1994, the Board issued
interim rules implementing related
changes to the Board's application procedures and requested public comment
on the rules. The comment period ended
on December 5, 1994. Final rules are
expected to be adopted in 1995.
Board Policy Decisions and
Developments in Bank-Related
and Nonbanking Activities
On July 6, 1994, the Board requested
public comment on a proposal to provide an alternative to the current revenue test used to measure whether a section 20 subsidiary is in compliance with
the "engaged principally" criterion of
section 20 of the Glass-Steagall Act.
Section 20 prohibits a member bank
from being affiliated with a company
that is "engaged principally" in underwriting and dealing in ineligible securities. Specifically, the Board sought comment on whether asset values or sales
volume data, or a combination of both
measures, should be used as a new alternative test. The comment period ended
September 9, 1994. No final action has
been taken.
During 1994 the Board approved
several proposals involving securities
underwriting and dealing activities and
modifications to related firewalls, principally pertaining to the cross-marketing
of bank-eligible securities. In addition,
the Board permitted a foreign bank,
through its section 20 subsidiary, to
trade for its own account in derivatives
based on nonfinancial commodities.
In 1994 the Board also approved a
mutual holding company to acquire a
majority, but less than 100 percent interest in a savings bank converting from
Banking Supervision and Regulation 267
mutual to stock form. The Board's
approval relied on a number of commitments, including the mutual holding
company's agreement to make prior
application to the Board for approval to
waive any dividends declared by the
subsidiary bank.
During the year, the Board approved
several bank holding company applications raising fair lending issues, including two involving investigations by the
Department of Justice.
Pending at year-end 1994 were several applications with broad policy
implications involving Texas banks
seeking to convert to a new type of
Texas charter that would permit
partnership-type tax treatment.
Applications by State
Member Banks
State member banks must obtain the permission of the Federal Reserve to open
new domestic branches, to make investments in bank premises that exceed
100 percent of capital stock, and to add
to their capital bases from sales of subordinated debt. State member banks
must also give six months' notice of
their intention to withdraw from membership in the Federal Reserve, although
the notice period may be shortened or
eliminated in specific cases.
Stock Repurchases by Bank
Holding Companies
A bank holding company sometimes
purchases its own shares from its shareholders. When the company borrows the
money to buy the shares, the transaction
increases the debt of the bank holding
company and simultaneously decreases
its equity. Relatively 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 1994, the Federal Reserve
reviewed fifty-three 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 1994, the
Board approved the opening of 18 foreign branches of 11 banks.
By the end of 1994, 105 member
banks were operating 724 branches in
foreign countries and overseas areas of
the United States; 79 national banks
were operating 634 of these branches,
268 81st Annual Report, 1994
and 26 state member banks were operating the remaining 90 branches.
In addition, 23 nonmember banks
were operating 44 branches in foreign
countries.
general-consent procedures that involve
only after-the-fact notification to the
Board.
Edge Act Corporations
and Agreement Corporations
In 1982 the Bank Export Services Act
amended section 4 of the Bank Holding
Company Act to permit bank holding
companies, their subsidiary Edge Act or
agreement corporations, and bankers'
banks to invest in export trading companies, subject to certain limitations and
after Board review. The purpose of this
amendment was to allow effective participation by bank holding companies in
the financing and development of export
trading companies. The Export Trading
Company Act Amendments of 1988
provide additional flexibility for bank
holding companies engaging in export
trading activities. Since 1982 the Federal Reserve has acted affirmatively
on notifications by forty-eight bank
holding companies.
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 1994 the Federal Reserve approved
three new agreement corporations. At
year-end, there were seventy-six Edge
Act and agreement corporations, which
together had thirty-two 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 banking" to maintain a minimum ratio of
qualifying total capital to weighted risk
assets of 10 percent.
Export Trading Companies
Enforcement of Other Laws
and Regulations
The Board is also responsible for the
enforcement of various laws, rules, and
regulations other than those specifically related to bank safety and soundness and the integrity of the banking
structure.
Foreign Investments
Financial Disclosure by State
Member Banks
Under 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
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
Banking Supervision and Regulation 269
Securities and Exchange Commission.
At the end of 1994, forty-four state
member banks, most of which are small
or medium-sized, were registered with
the Board under the Securities Exchange
Act.
Bank Secrecy Act
The Currency and Foreign Transactions
Reporting Act (the Bank Secrecy Act)
was originally designed as a means to
create and maintain records of various
financial transactions that otherwise
would not be identifiable in an effort to
trace the proceeds of illegal activities.
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 and prevention of unlawful activity
as well as for determining the safety
and soundness of financial institutions.
The Federal Reserve monitors compliance with the requirements of the
Bank Secrecy Act by the institutions it
supervises.
During 1994 the Federal Reserve
tested and finalized new Bank Secrecy
Act examination procedures for use during regularly scheduled and targeted
Bank Secrecy Act examinations of
financial institutions under its supervision. Various examinations resulted in
the issuance of cease and desist orders
for failure to establish an internal program that ensures compliance with the
requirements of the Bank Secrecy Act.
The Federal Reserve, through its
appointed representative, continued to
provide expertise and guidance to the
Bank Secrecy Act Advisory Council,
a committee created by congressional
mandate to propose additional antimoney laundering measures to be taken
under the Bank Secrecy Act; through
the Special Investigations and Exam
inations Section, the Board has, among
other matters, assisted in the investigation of money laundering activities and
provided training in anti-money laundering measures to designated staff members at each Reserve Bank responsible
for reviewing compliance procedures
under the Bank Secrecy Act.
The Federal Reserve also provided
assistance to law enforcement agencies conducting criminal investigations
under the Bank Secrecy Act.
The Federal Reserve has participated
extensively in the Financial Action Task
Force, which in 1994 provided training
in anti-money laundering measures to
numerous foreign governments.
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 (SEC), 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
270 81st Annual Report, 1994
National Credit Union Administration,
and the Office of Thrift Supervision,
according to the jurisdiction involved.
At the end of 1994, 691 lenders were
registered under Regulation G, and 275
came under the Board's supervision. Of
these 275, the Federal Reserve regularly
inspects 203 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 1994, Federal Reserve examiners inspected 102 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
1994 the OTC list was revised in February, May, August, and November. The
November OTC list contained 4,056
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 1994 the foreign list was
revised in February, May, August, and
November. The November foreign list
contained 688 stocks.
In October 1994 the Board announced
the adoption of amendments to Regulation T, effective November 25, 1994,
regarding the payment period for securities purchases and the status of government securities transactions. The amendments are part of the Board's review of
Regulation T and respond to the rulemaking by the SEC concerning settlement of securities transactions and
congressional action concerning government securities. One amendment specifies that customers must meet initial
margin calls or make full cash payment
for securities purchased at a brokerdealer within two business days of the
standard settlement period. This amendment reflects the October 1993 adoption
by the SEC of a rule, to become effective in June 1995, that will shorten the
existing standard settlement period of
five days after trade date to three days
(T+3). Thus, when the SEC's T+3 standard settlement period goes into effect,
Regulation T will be in conformity. The
other amendments address transactions
involving U.S. government securities. In
particular, the amendments lessen the
regulatory burden of Regulation T on
participants in the government securities
markets by providing exemptions to
Regulation T for most transactions
involving government securities.
Under section 8 of the Securities
Exchange Act, a nonmember domestic
or foreign bank may lend to brokers or
dealers posting registered securities as
collateral only if the bank has filed an
agreement with the Board that it will
comply with all the statutes, rules, and
regulations applicable to member banks
regarding credit on securities. The
Banking Supervision and Regulation 271
Board processed two new agreements in
1994.
In 1994 the Securities Regulation
Section of the Board's Division of
Banking Supervision and Regulation
issued forty-three 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.
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 1994, 4,115 banks were
members of the Federal Reserve System, a decrease of 223 from the previous year-end. Member banks operated
36,622 branches on December 31, 1994,
a net increase of 1,058 for the year.
Member banks accounted for 38 percent of all commercial banks in the
United States and for 67 percent of
all commercial banking offices; the
figures for year-end 1993 were 39 percent of banks and 67 percent of banking
offices.
•
Loans by State Member Banks to their Executive Officers, 1993-94
Number
Amount (dollars)
Range of interest
rates charged
(percent)
1993
October 1-December 31
728
23,962,000
3.0-21.0
1994
January 1 -March 31
April l-June30
July 1-September 30
689
821
844
19,485,000
28,359,000
39,577,000
4.0-21.0
3.0-21.0
4.8-21.0
Period
SOURCE. Call Report.
273
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 Planning and Review Section and
assigning supervision of its work to the
Board's Committee on Banking Supervision and Regulation.
The purposes of the regulatory improvement and simplification function
are to ensure that the economic consequences for small business are considered when regulations are written, to
afford interested parties the opportunity
to participate in designing regulations
and comment on them, and to ensure
that regulations are written in simple
and clear language. Staff members continually review regulations for their
adherence to these objectives.
During 1994 the Board took a variety
of actions to reduce the regulatory burden on supervised institutions. These
included raising the dollar-amount
threshold above which real estate transactions require a property appraisal,
relaxing restrictions on bank holding
companies and their subsidiaries and
affiliates desiring to market packages of
products and services to customers, and
permitting netting of some exchange
rate and interest rate contracts for capital requirements.
At year-end 1994, staff members were
reviewing Regulations E (Electronic
Fund Transfers), M (Consumer Leasing), T (Credit by Brokers and Dealers),
and U (Credit by Banks for the Purpose
of Purchasing or Carrying Margin
Stocks). Arising from these ongoing
reviews were Board actions in 1994 to
modify Regulation E (allowing banks to
truncate account numbers on automated
teller machine receipts) and amend
Regulation T (exempting from the regulation most transactions in government
securities).
Requirements for Real Estate
Appraisals
In June the Federal Reserve and the
other federal banking agencies enacted
amendments to the regulations governing real estate appraisals. Among other
changes, the amendments increased to
$250,000 the loan transaction amount
above which appraisals are required;
expanded and clarified the type of
transactions that are exempt from the
appraisal requirement; and narrowed the
type of transactions for which evaluations are required. In addition, the
amendments revised the requirements
governing the content of appraisals and
the use of appraisals prepared by other
financial services institutions.
Relaxation of Restrictions
on Bank Holding Companies
Section 106 of the Bank Holding Company Act prohibits, with certain exceptions, tying the sale of bank products to
one another. In July the Federal Reserve
enacted a rule to extend the exceptions
by allowing bank and nonbank affiliates
of bank holding companies to offer
package discounts on traditional bank
products available from the affiliates.
The new rule also permits bank holding
company affiliates to offer a discount on
securities brokerage services (a nonbank
274 81st Annual Report, 1994
product) to a customer who obtains
a traditional bank product from an
affiliate.
In December the Board further
extended the exception to permit a bank
holding company or its nonbank subsidiary to offer a discount on any of its
products or services on condition that
the customer obtain any other product
or service from that company or from
any of its nonbank affiliates. Thus, as
of year-end 1994, the rule carried no
Board-imposed restrictions on tying
when no bank is involved in the arrangement and the products are separately
available for purchase by the customer.
At the same time the Board proposed to
establish a competitive "safe harbor"
for banks, permitting them to offer a
discount on any product or package
of products if a customer maintains a
combined minimum balance in deposits
and other products specified by the
bank. Board action on this proposal is
expected in early 1995.
Netting Arrangements
In December the Federal Reserve
amended its risk-based capital guidelines to recognize the risk-reducing
benefits of netting arrangements. The
amendment provided that, for capital
purposes, institutions regulated by the
Board could net the positive and negative market values of interest and
exchange rate contracts subject to a
qualifying, legally enforceable bilateral
netting contract in order to calculate
one current exposure for that netting
contract.
Receipts for ATM Transactions
Receipts for transactions at automated
teller machines (ATMs) have been
instrumental in some cases of fraud. In
these cases, criminals have been able to
observe a customer's personal identification number as the customer enters it
at an ATM; if the customer leaves the
receipt at the ATM, the criminal then
can manufacture and use a counterfeit
ATM card bearing the valid account
number that was printed on the receipt.
In response to the problem, the Federal Reserve in November adopted a
change to its Electronic Fund Transfers
regulation permitting financial institutions more flexibility in identifying customer accounts on receipts from ATMs.
The change will allow institutions to
truncate the account number printed on
receipts, thereby helping to protect customers and financial institutions against
fraudulent withdrawals.
In February the Board also published
for comment some other revisions arising from review of Regulation E. The
current regulation closely follows the
minimum requirements of the law; most
revisions would clarify and simplify the
text of the regulation, reorganize and
consolidate related material, and delete
obsolete provisions. The commentary
would be revised to follow the more
usable format of the commentaries of
other regulations. These changes would
reduce burden somewhat by making the
regulation and commentary more understandable; a few of the proposals would
also make minor substantive changes.
Government Securities
Transactions
In October the Board amended Regulation T (Credit by Brokers and Dealers)
to effectively exempt from the regulation most transactions involving government securities. Government securities
are subject to another regulatory system,
implemented by the Department of the
Treasury; the system was established
on an interim basis by the Government
Securities Act of 1986 and made perma-
Regulatory Simplification 275
nent by the Government Securities Act
Amendments of 1993.
The amendments to Regulation T
exclude from the regulation those
broker-dealers who limit themselves
to transactions in government securities. For general broker-dealers, the
amendments create a new bookkeeping
account in which to effect customer
transactions in government securities
without regard to other provisions of the
regulation.
•
277
Federal Reserve Banks
In 1994 the Federal Reserve Banks
passed several major milestones on the
way to consolidating mainframe data
processing operations at three data centers. Four Reserve Banks completed the
shift of applications that process funds
transfers and book-entry securities transfers; as a result the three centers now
provide that processing for eleven
Banks. In addition, the shift of Districtunique workloads to the centers, completed by four Banks in 1993, was finished by six more in 1994; the
remaining two, New York and San Francisco, continued the process. The head
offices of the Richmond and Dallas
Banks are the sites for two of the data
centers, and the third site is the New
York Bank's East Rutherford (New Jersey) Operations Center. All three are
managed by Federal Reserve Automation Services (FRAS).
Several centralized applications began processing under FRAS in 1994. All
twelve Reserve Banks finished converting to the new centralized Integrated
Accounting System and the new billing
application, and four finished converting
to the new centralized Planning and
Control System. Four Reserve Banks
began using two other new centralized
applications, one for Fedwire funds
transfers and the other for the monitoring of account balances; in addition, the
New York Bank has implemented these
two new applications in its local data
center, and the seven remaining Reserve
Banks expect to convert to them during
1995. Development work continued on
software for a new centralized automated clearinghouse system and for a
new national transfer system for bookentry securities.
During 1994 FRAS continued to
deploy Fednet, the new national communications network that is replacing
the current FRCS-80 backbone network
and the twelve District networks. The
unified Fednet network will provide a
standard level of service as well as
improved reliability, security, and disaster recovery capabilities for the Reserve
Banks and for the depository institutions
that use Federal Reserve services. The
Fednet circuit switching infrastructure
was installed in 1993. In 1994, all
depository institutions that had Fedline
dial connections began using national
dial center 1-800 telephone services to
access Reserve Bank electronic services.
In addition, the Boston Reserve Bank
converted internal users, as well as
depository institutions that had leasedline connections, to Fednet services. The
process of connecting all Reserve Banks
and depository institutions that have
leased-line connections is continuing.
In other developments, the same-day
settlement amendments to Regulation
CC, which became effective in January,
resulted in a substantial decline in the
number of checks collected by the
Reserve Banks. To support same-day
settlement and to improve the efficiency
of check processing generally, the
Reserve Banks in 1994 introduced
several new products, including sameday settlement presentment services
and image-enhanced electronic check
products.
This chapter details 1994 results in
Federal Reserve priced services and
reports on examinations, income and
expenses, holdings of securities and
loans, and major construction activity at
the Federal Reserve Banks.
278 81st Annual Report, 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 of the direct and indirect
costs of providing services to depository
institutions as well as imputed costs
reflecting the taxes that would have been
paid and the return on capital that would
have been earned had the services been
provided by a private firm. The imputed
costs are referred to as the private-sector
adjustment factor (PSAF). Over the past
ten years the Federal Reserve System
has recovered 101.6 percent of its costs,
including the PSAF.
In 1994 the revenue from priced
services operations was $734.4 million,
other income was $32.8 million, and
costs were $781.2 million, resulting in
negative net revenue of $14.0 million
and a recovery rate of 98.2 percent of
costs, including the PSAF.1 In 1993 the
System had negative net revenue of
$63.4 million and recovered 92.4 percent of costs. In 1992 the System had
net revenue of $25.2 million and recovered 103.4 percent of costs.2
Check Collection
Under new same-day settlement rules,
which became effective on January 3,
1. See the pro forma statements at the end of
this chapter. Other income is the revenue from
investment of clearing balances net of earnings
credits, an amount known as net income on clearing balances. Costs are the sum of operating
expenses, imputed costs, imputed income taxes,
and targeted return on equity. Net revenue is revenue plus net income on clearing balances, minus
cost.
2. For 1993, excluding the one-time effect of a
change in accounting principle, the System had
net revenue of $10.7 million and recovered
101.4 percent of costs, including the PSAF. Financial results for 1993 and 1992 have been revised
from last year's REPORT.
1994, the number of checks cleared
through the Federal Reserve's commercial check service declined 13.3 percent, to 16.5 billion (see accompanying table). For the year, the service
had revenues of $556.8 million. Operating expenses and imputed costs (interest
on float, interest on debt, sales taxes,
and the assessment for insurance from
the Federal Deposit Insurance Corporation) totaled $589.0 million, for a
loss on operations of $32.2 million.
Net income on clearing balances was
$25.6 million.3
The new settlement provisions,
implemented through Regulation CC,
enable a collecting bank to receive
same-day settlement if it presents checks
directly to the paying bank by 8:00 a.m.
(local time of the paying bank). The
resulting overall decline of 13.3 percent
in the volume of checks deposited for
collection with the Reserve Banks
consisted of a 35.7 percent decline in
fine-sort deposits, which require the
depositing bank to presort items by paying bank, and a 4.8 percent decline in all
other check deposits.
At the same time, the Federal Reserve
Banks implemented new services designed to facilitate same-day settlement. For instance, a paying bank
may now designate a Federal Reserve
office as a presentment point for its
same-day-settlement items; the Reserve
Banks also offer information products that enable those banks to continue to provide timely cash management information to their corporate
customers.
The Federal Reserve continued to
encourage the use of electronics to
improve the efficiency of check processing. During the year, all of the Reserve
Banks began to offer basic electronic
3. See the pro forma income statement for Federal Reserve priced services, by service.
Federal Reserve Banks 279
check presentment and local truncation
services.
In electronic check presentment, a
paying bank agrees to accept as legal
presentment an electronic file containing electronic information about each
check instead of the paper checks, which
are subsequently delivered to the paying
bank.
Under local truncation services, the
Reserve Banks microfilm the checks
drawn on an institution, store the paper
checks for up to ninety days before
destroying them, and retain the microfilm images for seven years. During
1994 nearly 647 million checks were
presented to paying banks electronically,
an increase of approximately 162 percent over the 1993 level. The Reserve
Banks also began making it possible for
depository institutions to request adjustments of check transactions via electronic transmissions.
The Federal Reserve continued to
develop and test medium- and highspeed imaging technologies for processing both government and commercial
checks. During the year, two Reserve
Banks introduced image-enhanced commercial check products that allow paying banks that use truncation or other
electronic check presentment products
to obtain images of checks for their
information-processing needs.
Funds Transfer and Net Settlement
The Fedwire funds transfer service
and the net settlement service together
had revenues of $88.0 million and
income, after operating expenses and
imputed costs, of $2.5 million. Net
income on clearing balances was
$3.6 million.
Funds Transfer
The number of Fedwire funds transfers
originated increased 3.4 percent, to
73.6 million (72.0 million value transfers and 1.6 million nonvalue messages).
In February 1994 the Board of Governors announced a plan to expand the
operating hours of the Fedwire on-line
funds transfer service, from ten hours
(8:30 a.m. to 6:30 p.m. eastern time)
to eighteen (12:30 a.m. to 6:30 p.m.
eastern time). The additional operating
hours are expected to aid private-sector
initiatives to reduce settlement risk in
foreign exchange markets; they will also
eliminate an operational barrier to innovation in privately provided payment
and settlement services.
Activity in Federal Reserve Priced Services, 1994, 1993, and 1992
Thousands of items except as noted
Percentage change
Service
1994
1993
1992
1993-94
Commercial checks
Funds transfers
Commercial ACH
Definitive safekeeping
Noncash collection
Securities transfers
Cash transportation
16,479,161
73,611
1,805,095
643
3,663
53
19,008,808
71,199
1,544,848
17
1,020
3,604
65
NOTE. Activity in commercial checks is defined as the
total number of commercial checks collected, including
both processed and fine-sort items; in funds transfers,
the number of basic transactions originated; in ACH,
the total number of commercial items processed; in
19,052,928
69,803
1,326,632
41
1,636
3,266
282
1992-93
-13.3
3.4
16.8
-100.0
-37.0
1.6
-18.5
-.2
2.0
16.5
-58.5
-37.7
10.4
-77.0
definitive safekeeping, the average number of issues or
receipts maintained; in noncash collection, the number of
items on which fees are assessed; in securities, the number of basic transfers originated on line; and in cash
transportation, the number of armored-carrier stops.
280 81st Annual Report, 1994
Initially, the extended hours were to
begin in early 1997. The effective date
was delayed when, in December, the
Board announced a plan to expand the
format of Fed wire funds transfers. To
allow more time for design of the new
format, it also delayed implementation
of the longer operating day until the
fourth quarter of 1997. The exact date of
implementation for the new hours will
be announced one year in advance.
The expanded format for Fedwire
funds transfers will reduce manual interventions in the transfers. It also will
eliminate the need to truncate paymentrelated information when forwarding
payment orders through Fedwire to
other large-value transfer systems. Further, the new format will enable depository institutions to include the additional
information about the originator and
beneficiary of a transfer required under
regulations of the Department of the
Treasury. The new format must be
implemented by the end of 1997.
Net Settlement
The Federal Reserve provides net settlement services to more than 150 local,
private-sector clearing and settlement
arrangements and to 4 such arrangements that operate nationwide. These
arrangements enable participants to
settle their net positions either via Fedwire funds transfers using special settlement accounts at Federal Reserve Banks
or via accounting entries, which are
posted to participants' reserve or clearing accounts by Federal Reserve Banks.
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 ACH and the National Clearinghouse Association, process and net
small-dollar transactions associated,
respectively, with automated clearinghouse and check payments. The majority of local arrangements are check
clearinghouses.
In 1994 the Reserve Banks processed
about 500,000 net settlement entries for
local netting arrangements; the value of
these entries was about $800 billion.
Automated Clearinghouse
The Reserve Banks processed 1.8 billion commercial transactions through
the automated clearinghouse (ACH) during the year, an increase of 16.8 percent
over 1993 volume. The service had
revenues of $64.3 million and a loss,
after operating expenses and imputed
costs, of $6.5 million. Net income on
clearing balances was $2.6 million.
The Federal Reserve's campaign to
institute an all-electronic ACH was
completed. All depository institutions
that use commercial ACH services had
established electronic connections by
July 1993. During 1994, depository
institutions that use only government
ACH services were required by Treasury to establish electronic connections
with the Federal Reserve Banks. An allelectronic ACH provides users with
greater security, enhanced contingency
and disaster-recovery capabilities, and
increased efficiency. In particular, the
all-electronic ACH ensures that ACH
transactions are available to receiving
depository institutions by the opening of
business on the settlement date.
Development work continued on software to support ACH services in the
Federal Reserve's new consolidated data
processing environment. The new software will allow more deposit and delivery options. It will also allow customers
Federal Reserve Banks 281
to trace items or files electronically,
check the status of a file in process, and
obtain limited information from the Federal Reserve's database on other ACH
participants.
Noncash Collection
The number of noncash collection items
(maturing coupons and bonds) processed by the Reserve Banks decreased
37.0 percent, to 643,000. The service
had revenues of $3.9 million and a loss,
after operating expenses and imputed
costs, of $1.2 million. Net income on
clearing balances was $0.2 million.
During the year, the Reserve Banks
continued consolidating noncash operations. By late 1996 only two Federal
Reserve sites will conduct noncash
processing—the Cleveland Bank and the
Jacksonville Branch of the Atlanta
Bank. The New York and Chicago
Banks will continue to present noncash
items payable through members of the
clearinghouses located in those two
cities.
Book-Entry Securities
The Federal Reserve processed 3.7 million transfers of government agency
securities during the year, a 1.6 percent
increase over 1993 volume. The service
had revenues of $15.2 million and a
loss, after operating expenses and imputed costs, of $0.4 million. Net income
on clearing balances was $0.6 million.
In December 1994 the Board requested comment on the potential benefits, costs, and market implications of
expanding the availability of the Fedwire book-entry securities service for
on-line activity beyond the current hours
of 8:30 a.m. to 2:30 p.m. for transfers
and 8:30 a.m. to 3:00 p.m. for reversals.
The Board also requested comment on
new service capabilities that would give
banks the option of participating in earlier Fedwire securities hours and that
would allow them to control their use of
intraday credit during expanded and
core business hours. In addition, the
Board requested comment on establishing a firm closing time for the Fedwire
book-entry securities transfer service,
beginning in January 1996. Comments
were due by April 28, 1995.
The Federal Reserve Bank of Chicago offers to all depository institutions
the secondary-market purchase or sale
of securities that are book-entry-eligible
at the Federal Reserve.
Fiscal Agency Services
As fiscal agent for the Department of the
Treasury, the Federal Reserve Banks
provide book-entry services for Treasury debt issues. In 1994 the Reserve
Banks processed 9.3 million book-entry
Treasury securities transfers.
The Federal Reserve continues to
operate Treasury Direct, the safekeeping
system for book-entry Treasury securities owned by individuals who use Treasury as custodian. Treasury Direct has
grown to more than 1.4 million accounts
with a total par value of more than
$77.9 billion. During 1994 the Reserve
Banks processed 2.4 million applications from Treasury Direct customers to
purchase securities. The Reserve Banks
also processed more than 1.4 million
competitive and noncompetitive bids of
customers seeking to buy securities in
Treasury auctions.
In 1994 the Reserve Banks inscribed
57 million savings bonds for over-thecounter, payroll, and other types of
transactions. The Reserve Banks have
been consolidating their savings bond
operations at five sites: the Buffalo
Branch of the New York Bank, the Pittsburgh Branch of the Cleveland Bank,
and the Richmond, Minneapolis, and
282 81st Annual Report, 1994
Kansas City Banks. Residual processing
is still being performed in the Boston,
Atlanta, and Chicago Districts. Consolidation should be completed during
1996.
The Federal Reserve is helping Treasury implement its Electronic Federal
Tax Deposit System, which is designed
to modernize the collection of federal
taxes from businesses and quarterly
filers. Under the new system, Treasury
will receive tax payments one day
sooner and will be able to manage its
cash flow more efficiently.
Currency and Coin
In 1994 only three Federal Reserve
offices—the Minneapolis Bank, its
Helena Branch, and the Pittsburgh
Branch of the Cleveland Bank—
continued to arrange transportation of
cash by armored carrier. 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. Together, the cash services had revenues of $6.1 million and
income, after operating expenses and
imputed costs, of less than $0.05 million. Net income on clearing balances
was $0.3 million.
The Federal Reserve supplies currency and coin to the public by servicing
the needs of depository institutions
throughout the nation. The value of currency and coin in circulation increased
9 percent in 1994 and exceeded
$400 billion at year-end.
The Reserve Banks continued to work
closely with Treasury and other agencies to deter counterfeiting and laundering of U.S. currency. Work continued on
a new currency design, and a study is
under way to better understand the use
of U.S. currency outside the country.
By year-end 1994, the Reserve Banks
had installed 51 new high-speed currency processors. The Reserve Banks
plan to install a total of 132 of these
processors, with completion expected by
year-end 1997.
Float
Federal Reserve float increased in 1994
to a daily average of $479 million, up
from $349 million in 1993, largely
because of severe weather during the
first quarter of 1994. The cost of Federal
Reserve float associated with priced services is recovered each year through
fees for priced services.
Examinations
Section 21 of the Federal Reserve Act
requires the Board of Governors to
"order an examination of each Federal
reserve bank" at least once per year.
The Board assigns the responsibility to
its Division of Reserve Bank Operations
and Payment Systems. In 1994 the
Board engaged the services of a public
accounting firm to audit, beginning in
1995, the year-end balance sheets of two
or three Reserve Banks each year, completing audits of all twelve Banks over a
five-year period; the division will continue to perform annual financial examinations of the other Reserve Banks during that period.
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 the Bank. The recently contracted
public accounting firm, beginning at
year-end 1994 and continuing through
Federal Reserve Banks 283
1999, will also certify the balance sheet
for the System Open Market Account
and for foreign currency operations for
participated accounts of the twelve
Reserve Banks. Copies of these reports
are furnished to the FOMC.
The examination program used by the
division is reviewed annually 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 1994 and 1993.
Income was $20,911 million in 1994
(including $734 million in revenue from
priced services) and $18,914 million
in 1993. Expenses totaled $1,942 million in 1994 ($1,571 million in operating expenses, $224 million in earnings
credits granted to depository institutions,
and $147 million in assessments for
expenditures by the Board of Governors) versus $1,798 million in 1993.
The Board of Governors also assessed
$368 million for the cost of currency in
1994. Unreimbursed services to Treasury cost $34 million.
In addition, the profit and loss account
showed a net profit of $2,398 million.
The profit was primarily a result of
realized and unrealized gains on assets
denominated in foreign currencies.
These profits were partially offset by
losses on the sales of securities from the
System Open Market portfolio. Statutory dividends to member banks totaled
$212 million, $17 million more than in
1993. 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 Treasury in the form of
interest on Federal Reserve notes totaled
$20,470 million, compared with
$15,987 million in 1993. The payments
consist of all net income after the deduction of dividends and of $282 million,
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 the income
and expenses of each Federal Reserve
Income, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1994 and 1993
Millions of dollars
Item
1994
1993
Current income
Current expenses
Operating expenses'
Earnings credits granted
20,911
1,796
1,572
18,914
1,658
1,475
224
183
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
19,115
2,398
17,256
-201
34
515
147
368
29
496
140
356
Net income before payments to Treasury
Dividends paid
Transferred to surplus
20,964
16,530
212
282
195
348
Payments to Treasury (interest on Federal Reserve notes)
20,470
15,987
NOTE. Components may not sum to totals because of rounding.
1. Includes a net periodic credit for pension costs of $75.6 million
in 1994 and $131.4 million in 1993.
284 81st Annual Report, 1994
Bank for 1994, and table 7 shows a
condensed statement for each Bank for
the years 1914 through 1994. A detailed
account of the assessments and expenditures of the Board of Governors appears
in the next chapter, Board of Governors
Financial Statements.
Holdings of Securities and Loans
Average daily holdings of securities and
loans by the Reserve Banks during 1994
were $354,001 million, an increase of
$33,473 million over 1993 (see accompanying table). From 1993 to 1994, such
holdings of U.S. government securities
increased $33,393 million, and such
holdings of loans increased $80 million.
The average rate of interest on holdings of U.S. government securities
increased, from 5.27 percent in 1993 to
5.44 percent in 1994, and the average
rate of interest on loans increased, from
3.08 percent to 4.39 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
through 1994.
Federal Reserve Bank Premises
Construction of the new headquarters
building for the Minneapolis Bank
began in 1994, as did expansion and
renovation of the current headquarters
building of the Cleveland Bank. In addition, multiyear renovation programs
continued at the Kansas City Bank's
Oklahoma City Branch and the San
Francisco Bank's Branches in Seattle,
Portland, and Salt Lake City.
The Board approved a multiyear
renovation program for the New York
Bank's headquarters building. It also
approved projects to renovate the cash
departments at several Reserve Banks
in preparation for installation of new
currency-processing equipment. In addition, long-range planning studies were
conducted for several Reserve Bank
facilities.
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, 1992-94
Millions of dollars except as noted
Item and year
Average daily holdings3
1992
1993
1994 .
Earnings
1992
1993
1994 .
Average interest rate (percent)
1992
1993
1994
1. Includes federal agency obligations.
2. Doesjiot include indebtedness assumed by the
Federal Deposit Insurance Corporation.
Total
U.S.
government
securities'
283,104
320,528
354,001
282,927
320,347
353,740
177
181
261
17,342
16,896
19,259
17,336
16,891
19,247
6
6
6.13
5.27
5.44
6.13
5.27
5.44
3.43
3.08
4.39
Loans2
3. Based on holdings at opening of business.
Federal Reserve Banks 285
Pro Forma Financial Statements for Federal Reserve Priced Services
Pro Forma Balance Sheet for Priced Services, December 31, 1994, 1993, and 1992
Millions of dollars
Short-term assets (Note 1)
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 assets (Note 2)
Premises
Furniture and equipment
Leases and leasehold improvements ..
Prepaid pension costs
Total long-term assets
Total assets
Long-term liabilities
Obligations under capital leases
Long-term debt
Postretirement benefits obligation
Total long-term liabilities
Total liabilities
385.4
209.3
16.8
191.1
377.6
168.4
8.6
205.4
9,975.8
378.5
176.2
50.2
150.2
760.0
802.5
755.1
7,166.0
10,603.6
10,730.9
7,029.9
2,676.7
94.5
4,133.1
2,186.6
86.3
6,406.0
.6
170.5
140.5
8,813.4
1,077.0
85.3
9,801.1
.0
202.3
122.4
9,975.8
.1
200.5
311.6
324.7
200.6
6,717.6
10,125.8
10,176.3
448.4
477.8
554.5
7,166.0
10,603.6
10,730.9
NOTE. Amounts in bold are restatements due to errors
in previously reported data. Components may not sum to
totals because of rounding.
582.8
5,245.2
66.6
6.5
12.3
4,062.4
9,801.1
6,406.0
Equity
Total liabilities and equity (Note 3 ) . .
1992
624.8
5,623.2
67.4
9.9
17.2
3,458.6
400.3
3 602.7
60.6
10.2
15.5
2,316.7
,
Short-term liabilities
Clearing balances and balances
arising from early credit
of uncollected items
Deferred-availability items
Short-term debt
Total short-term liabilities
1993
1994
Item
The priced services financial statements consist of these
tables and the accompanying notes.
286
81st Annual Report, 1994
Pro Forma Income Statement for Federal Reserve Priced Services, 1994, 1993, and 1992
Millions of dollars
Item
Revenue from services provided
to depository institutions (Note 4)
Operating expenses (Note 5)
Income from operations
Imputed costs (Note 6)
Interest on float
Interest on debt
Sales taxes
FDIC insurance
Income from operations after
imputed costs
Other income and expenses (Note 7)
Investment income on clearing balances .
Earnings credits
Income before income taxes
Imputed income taxes (Note 8)
Income before cumulative effect of a
change in accounting principle
Cumulative effect on previous years
from retroactive application of
accrual method of accounting for
postretirement benefits (net of
$31.1 million tax) (Note 9)
Net income (Note 10)
MEMO: Targeted return on equity (Note 11)
1994
18.6
18.9
10.8
15.8
64.1
10.6
21.3
9.4
19.5
32.8
10.1
3.1
60.8
758.4
622.6
135.8
14.5
19.8
12.3
20.7
22.8
-22.7
241.2
208.4
1992
757.3
673.7
83.6
734.4
693.0
41.4
NOTE. Amounts in bold are restatements due to errors
in previously reported data. Components may not sum to
totals because of rounding.
1993
187.8
170.6
17.2
40.0
11.8
67.3
68.5
180.2
177.8
2.4
70.9
20.8
7.0
28.2
50.0
7.0
21.0
-74.1
-45.9
17.5
50.0
24.9
The priced services financial statements consist of these
tables and the accompanying notes.
Federal Reserve Banks
287
Pro Forma Income Statement for Federal Reserve Priced Services, by Service,
1994, 1993, and 1992
Millions of dollars
Item
Total
ComFunds
mercial
transfer
check
and net
collection settlement
Commercial
ACH
Definitive Noncash
Bookentry
safecollection securities
keeping
Cash
services
1994
Revenue from operations
734.4
556.8
88.0
Operating expenses
(Note 5)
64.3
3.9
15.2
6.1
693.0
536.0
80.4
66.3
4.8
14.7
5.9
Income from operations
41.4
20.8
7.6
-2.0
-.8
.6
.1
Imputed costs (Note 6)
64.1
53.0
5.1
4.5
.4
.9
.1
Income from operations
after imputed costs
-22.7
-32.2
2.5
-6.5
-1.2
-.4
.0
Other income and expenses,
net (Note 7)
32.8
25.6
3.6
2.6
2
.6
.3
Income before income taxes .
10.1
-6.7
6.1
-3.9
-1.1
.3
.3
1993
Revenue from operations . . . .
757.3
583.2
88.4
58.9
1.5
4.8
14.2
6.3
Operating expenses
(Note 5)
673.7
514.4
78.5
66.3
3.9
5.5
13.8
6.2
Income from operations
83.6
68.8
9.9
-7.4
-2.4
-.6
.3
.1
Imputed costs (Note 6)
60.8
47.8
5.9
5.1
.3
.5
.9
.3
Income from operations after
imputed costs
22.8
20.9
4.0
-12.5
-2.7
-1.1
-.5
-.2
Other income and expenses,
net (Note 7)
17.2
13.7
1.8
1.2
.0
.1
.3
.1
Income before income taxes .
40.0
34.6
5.8
-11.3
-2.7
-1.0
-.2
-.1
»
1992
Revenue from operations . . . .
758.4
576.0
85.6
60.1
3.1
7.5
13.1
12.9
Operating expenses
(Note 5)
622.6
506.3
67.8
58.9
3.8
8.3
11.3
12.3
Income from operations
135.8
69.7
17.8
1.3
-.7
-.8
1.8
.6
Imputed costs (Note 6)
67.3
53.2
6.8
5.1
.4
.8
1.0
.2
Income from operations after
imputed costs
68.5
16.5
11.0
-3.8
-1.1
-1.6
.8
.4
Other income and expenses,
net (Note 7)
2.4
2.4
.0
.0
.0
.0
.0
.0
70.9
18.9
11.0
-3.8
-1.1
-1.6
.8
.4
Income before income taxes .
NOTE. Amounts in bold are restatements due to errors
in previously reported data. The Federal Reserve withdrew from the definitive safekeeping service in 1993.
Components may not sum to totals because of rounding.
The priced services financial statements consist of these
tables and the accompanying notes,
288
81st Annual Report, 1994
Revenue and Expenses for Commercial Check Collection, by District,
1994, 1993, and 1992
Millions of dollars
District
Operating
revenue
Expenses of operations
and of float
Operations
Interest
on float
Total
Revenue
less
expense
1994
Boston
New York
Philadelphia ..
Cleveland . . . .
Richmond
Atlanta
Chicago
St. Louis
Minneapolis ..
Kansas City ..
Dallas
San Francisco
30.1
62.1
31.3
32.9
52.7
81.7
75.4
24.6
32.6
37.1
38.9
57.6
30.3
62.0
31.2
30.5
48.9
72.2
69.9
22.8
29.4
34.9
38.2
52.9
System total .
556.8
534.0
3.5
3.2
1.9
.2
.7
.5
.7
.5
18.4
31.1
65.5
34.4
32.5
49.1
73.9
71.5
24.6
29.9
36.0
40.0
53.4
1.1
-1.2
4.2
552.4
4.4
-1.0
-3.4
-3.1
.4
3.6
7.7
3.9
.0
2.7
1993
Boston
New York
Philadelphia ..
Cleveland . . . .
Richmond . . . .
Atlanta
Chicago
St. Louis
Minneapolis ..
Kansas City ..
Dallas
San Francisco
System total
34.3
69.7
31.9
32.4
55.2
77.8
79.5
24.1
32.3
37.0
43.1
65.9
30.1
62.5
27.3
28.0
48.3
67.2
65.6
20.8
27.6
31.4
34.0
55.4
1.6
1.0
1.1
.7
1.2
1.1
.8
.2
.9
1.1
.2
30.7
64.1
28.3
29.1
49.0
68.4
66.6
21.6
27.8
32.3
35.1
55.6
3.6
5.6
3.6
3.3
6.2
9.4
12.9
2.5
4.5
4.7
8.0
583.2
512.7
10.5
523.2
60.1
10.2
1992
Boston
New York . . . .
Philadelphia ..
Cleveland . . . .
Richmond
Atlanta
Chicago
St. Louis
Minneapolis ..
Kansas City ..
Dallas
San Francisco
System total
NOTE. Amounts in bold are restatements due to errors
in previously reported data. Components may not sum to
totals because of rounding; moreover, certain expenses
related to automation consolidation are reported at the
System level, and therefore the sum of expenses for the
twelve Districts may not equal the System total.
The System totals shown for revenue less expense (last
column, bottom row of each panel) differ from the
amounts for check collection income before income taxes,
shown in the preceding statement, income by service
35.3
69.6
31.2
32.0
54.9
76.4
76.6
24.0
31.3
36.8
41.9
66.2
30.8
65.0
27.5
28.4
48.4
64.0
62.6
19.9
26.7
30.6
35.4
59.5
.7
1.6
1.1
1.1
1.6
1.7
1.9
1.0
.4
.8
1.4
31.5
66.6
28.6
29.5
50.0
65.7
64.5
20.9
27.1
31.4
36.8
60.3
3.8
3.0
2.6
2.5
4.8
10.7
12.1
3.1
4.2
5.4
5.0
5.9
576.0
504.9
14.1
519.0
57.0
(second column, last row of each panel), because the
statement shown here does not reflect the following items
included in the income statement by service: imputed
interest on debt, imputed sales taxes, the imputed assesment for Federal Deposit Insurance Corporation (FDIC)
insurance, Board expenses for priced services, and net
income on clearing balances.
The priced services financial statements consist of these
tables and the accompanying notes.
Federal Reserve Banks 289
FEDERAL RESERVE BANKS
NOTES TO FINANCIAL STATEMENTS FOR PRICED SERVICES
(1) SHORT-TERM ASSETS
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 is gross Federal Reserve
cash items in process of collection (CIPC) stated on a
basis comparable to that of a commercial bank. It reflects
adjustments for intra-System items that would otherwise
be double-counted on a consolidated Federal Reserve
balance sheet; adjustments for items associated with nonpriced items, such as those collected for government
agencies; and adjustments for items associated with
providing fixed availability or credit before items are
received and processed. Among the costs to be recovered
under the Monetary Control Act is the 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.
(2) LONG-TERM ASSETS
Consists of 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 the Financial Accounting Standards
Board's Statement of Financial Accounting Standards
No. 87, Employers' Accounting for Pensions (SFAS 87).
Accordingly, the Reserve Banks recognized credits to
expenses of $20.1 million in 1994, $42.2 million in 1993
(revised), and $46.1 million in 1992 (revised) and corresponding increases in this asset account.
(3) LIABILITIES AND EQUITY
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
Digitizedservices been furnished by a private-sector firm. Other
for FRASER
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.
(4)
REVENUE
Revenue represents charges to depository institutions for
priced services and is realized from each institution
through one of two methods: direct charges to an institution's account or charges against its accumulated earnings credits.
(5) OPERATING EXPENSES
Operating expenses consist of the direct, indirect, and
other general administrative expenses of the Reserve
Banks for priced services plus the expenses for staff
members of the Board of Governors working directly on
the development of priced services. The expenses for
Board staff members were $2.7 million in 1994, $2.3 million in 1993, and $1.9 million in 1992. The credit to
expenses under SFAS 87 (see note 2) is reflected in
operating expenses.
The income statement by service reflects revenue, operating expenses, and imputed costs except for income
taxes. Total operating expense does not equal the sum of
operating expenses for each service because of the effect
of SFAS 87. Before 1993 the effect of SFAS 87 was
reported only at the System level and was not allocated to
individual services. Beginning in 1993 the portion of the
credit related to the current year is allocated to individual
services. The amortization of the initial effect of implementation remains reflected only at the System level.
(6)
IMPUTED COSTS
Imputed costs consist of interest on float, interest on debt,
sales taxes, and the FDIC assessment. 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 the debt assumed necessary to
finance priced-service assets. The sales taxes and FDIC
assessment that the Federal Reserve would have paid had
it been a private-sector firm are among the components of
the PSAF (see note 3).
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.
The following list shows the daily average recovery of
float by the Reserve Banks for 1994 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
763.4
26.1
737.3
74.0
284.8
144.6
233.9
290 81st Annual Report, 1994
Unrecovered float includes float generated by services
to government agencies and by other central bank services. Float recovered through income on clearing balances is the result of the increase in investable clearing
balances; the increase is produced by a deduction for float
for cash items in process of collection, which reduces
imputed reserve requirements. The income on clearing
balances reduces the float to be recovered through other
means. As-of adjustments and direct charges are midweek closing float and interterritory check float, which
may be recovered from depositing institutions through
adjustments to the institution's reserve or clearing balance or by valuing the float at the federal funds rate and
billing the institution directly. Float recovered through
per-item fees is valued at the federal funds rate and has
been added to the cost base subject to recovery in 1994.
(7) OTHER INCOME AND EXPENSES
Consists of investment income on clearing balances and
the cost of earnings credits. Investment income on clearing balances represents the average coupon-equivalent
yield on three-month Treasury bills applied to the total
clearing balance maintained, adjusted for the effect of
reserve requirements on clearing balances. Expenses for
earnings credits 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.
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 each service's ratio of income to total
income.
(8) INCOME TAXES
Imputed income taxes are calculated at the effective tax
rate derived from the PSAF model (see note 3). Taxes
have not been allocated by service because they relate to
the organization as a whole.
(9) POSTRETIREMENT BENEFITS
Effective Jan. 1, 1993, the Reserve Banks implemented
SFAS 106, Employers' Accounting for Postretirement
Benefits Other than Pensions. Accordingly in 1993 the
Reserve Banks recognized a one-time cumulative charge
of $105.2 million (revised) to reflect the retroactive application of this change in accounting principle.
(10)
ADJUSTMENTS TO NET INCOME FOR PRICE SETTING
In setting fees, certain costs are excluded in accordance
with the System's overage and shortfalls policy and its
automation consolidation policy. Accordingly, to compare the financial results reported in this table with the
projections used to set prices, adjust net income as follows (amounts shown are net of tax):
1994
Net income
Amortization of the initial
effect of implementing
SFAS 87
Deferred costs of automation
consolidation
Cumulative effect of
retroactive application
of SFAS 106
Adjusted net income
(11)
1993
1992
7.0
-45.9
50.0
-10.5
-10.6
-32.5
13.6
7.4
1.1
^__
10.1
74.1
25.0
^_^
18.6
RETURN ON EQUITY
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 (see note 3). This
amount is adjusted to reflect the deferral, for automation
consolidation costs, of $13.6 million for 1994, $7.4 million for 1993, and $1.1 million for 1992. The Reserve
Banks plan to recover these amounts, along with a finance
charge, by the end of the year 2000. After-tax return on
equity has not been allocated by service because it relates
to the organization as a whole.
291
Board of Governors Financial Statements
The financial statements of the Board were audited by Price Waterhouse, independent public accountants, for 1994 and 1993.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Governors of the
Federal Reserve System
In our opinion, the accompanying balance sheets and the related statements of
revenues and expenses and fund balance and of 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, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with generally
accepted accounting principles. These financial statements are the responsibility of
the Board's management; our responsibility is to express an opinion on these
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards and 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 audits provide a reasonable basis for
the opinion expressed above.
As discussed in Notes 1 and 3 to the financial statements, the Board implemented
Statement of Financial Accounting Standard No. 112, Employers' Accounting for
Postemployment Benefits, effective January 1, 1994, and Financial Accounting
Standard No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions, effective January 1, 1993.
March 3, 1995
292
81st Annual Report, 1994
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
As of December 31,
1994
1993
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Prepaid expenses and other assets
$14,949,285
1,898,061
1,665,345
$12,186,714
1,555,026
1,130,894
Total current assets
18,512,691
14,872,634
54,839,623
50,121,444
$73,352,314
$64,994,078
Accounts payable
Accrued payroll and related taxes
Accrued annual leave
Capital lease payable (current portion)
Unearned revenues and other liabilities
$ 5,450,877
3,920,065
6,223,919
3,119,522
1,852,614
$ 5,308,176
2,718,512
5,871,643
—
1,504,663
Total current liabilities
20,566,997
15,402,994
PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 4)
Total assets
LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES
CAPITAL LEASE PAYABLE (non-current portion)
303,358
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3)
16,274,446
ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 3)
1,320,018
FUND BALANCE
—
15,880,742
—
34,887,495
Total liabilities and fund balance
33,710,342
$73,352,314
$64,994,078
The accompanying notes are an integral part of these statements.
Board Financial Statements 293
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF REVENUES AND EXPENSES
AND FUND BALANCE
For the years ended December 31,
1994
1993
BOARD OPERATING REVENUES
Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 5)
Total operating revenues
$146,866,100
9,134,248
$140,465,600
5,452,588
156,000,348
145,918,188
93,823,248
16,147,049
7,426,406
7,081,892
4,774,914
4,163,095
4,158,650
3,794,986
3,348,643
3,017,536
2,697,789
3,423,987
90,339,090
14,945,349
5,811,359
7,124,330
4,718,069
4,207,146
3,744.162
3,684,542
2,287,576
2,878,660
2,374,942
3,584,471
153,858,195
145,699,696
2,142,153
218,492
368,187,989
355,947,291
368,187,989
355,947,291
BOARD OPERATING EXPENSED
Salaries
Retirement and insurance contributions
Contractual services and professional fees
Depreciation and net losses on disposals
Travel
Postage and supplies
Utilities
Repairs and maintenance
Equipment and facilities rental
Software
Printing and binding
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
CHANGES IN ACCOUNTING
Less: Effect on prior years (to December 31, 1993) of change
in accounting for postemployment benefits (Note 3)
Less: Effect on prior years (to December 31, 1992) of change
in accounting for postretirement benefits (Note 3)
TOTAL REVENUES OVER (UNDER) EXPENSES
FUND BALANCE, Beginning of year
FUND BALANCE, End of year
—
2.142,153
218,492
965,000
15,066,531
1,177,153
(14,848,039)
33,710,342
48,558,381
$ 34,887,495
$ 33,710,342
The accompanying notes are an integral part of these statements.
—
294 81st Annual Report, 1994
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
For the years ended December 31,
1994
1993
CASH FLOWS FROM OPERATING ACTIVITIES
Board operating revenues over (under) expenses
$1,177,153
$(14,848,039)
Adjustments to reconcile operating revenues over (under) expenses to net cash
provided by operating activities:
Effect of change in accounting for postemployment benefits
Effect of change in accounting for postretirement benefits
Depreciation and net losses on disposals
Increase in accrued postretirement benefits
Increase in accrued postemployment benefits
(Increase) Decrease in accounts receivable, and prepaid expenses
and other assets
Increase in accrued annual leave
Increase (Decrease) in accounts payable
Increase in payroll payable .'
Increase in unearned revenue and other liabilities
Net cash provided by operating activities
965,000
—
7,081,892
393,704
355,018
(877,486)
352,276
142,701
1,201,553
347,951
—
15,066,531
7,124,330
814,211
—
1,320,057
259,237
(3,284)
740,461
137,786
11,139,762
10,611,290
Proceeds from disposals of furniture and equipment
Capital expenditures
27,081
(8,404,272)
3,723
(8,281,471)
Net cash used in investing activities
(8,377,191)
(8,277,748)
2,762,571
2,333,542
12,186,714
9,853,172
$14,949,285
$ 12,186,714
CASH FLOWS FROM INVESTING ACTIVITIES
NET INCREASE IN CASH
CASH BALANCE, Beginning of year
CASH BALANCE, End of year
The accompanying notes are an integral part of these statements.
Board Financial Statements 295
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 Changes—Effective January 1, 1994, the
Board adopted Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits (FAS 112). 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 112, prior year
financial statements have not been restated.
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.
(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 1994 and
1993, 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 $838,800 and $867,600 in
1994 and 1993, 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
$3,969,700 in 1994 and $3,831,700 in 1993.
The Board also provides certain defined benefit health
and life insurance for its active employees and retirees
under Federal and Board sponsored programs. 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 Boaru 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 1994 and 1993 included the following
components:
1994
Service cost (benefits
attributed to employee
services during the
year)
Interest cost on accumulated
postretirement benefit
obligation
Amortization of gains
and losses
Net periodic postretirement
benefit cost
1993
S 260,677
$ 248,662
1,191,123
1,181,104
6,542
—
$ 1,458,432 $ 1,429,766
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, 1994 and 1993, is comprised of:
296 81st Annual Report, 1994
1994
Retirees
. . . .
Fully eligible active plan
participants
Other active plan
participants
Unrecognized net loss
Liability for accumulated
postretirement benefit
obligation
1993
$11 301 461 $ 9,971,023
2,419,656
2,297,911
4,392,114
5,092,539
18,113,231 17,361,473
(1,838,785) (1,480,731)
$16,274,446 $15,880,742
The liability for the accumulated postretirement benefit
obligation and the net periodic benefit cost was determined using an 7-percent discount rate. Unrecognized
losses of $1,838,785 result from applying a discount rate
of 7 percent as of December 31, 1993, and a larger than
estimated 1994 cash outlay. Under FAS 106, the Board
may have to record some of these unrecognized losses in
operations in future years. The assumed health care cost
trend rate for measuring the increase in costs from 1994
to 1995 was 11.0 percent. These rates were assumed to
gradually decline to an ultimate rate of 6.0 percent in the
year 2004 for the purpose of calculating the December 31, 1994, 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 $2,113,851 at
December 31, 1994, and the net periodic benefit cost by
$167,400 for the year. The assumed salary trend rate for
measuring the increase in postretirement benefits related
to life insurance was 5.5 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 $3,510,500 and
$3,353,200 in 1994 and 1993, respectively.
The Board provides certain postemployment benefits to
eligible employees after employment but before retirement. Effective January 1, 1994, the Board adopted
Statement of Financial Accounting Standards No. 112,
Employers' Accounting for Postemployment Benefits
(FAS 112), which requires that employers providing
postemployment benefits to their employees accrue the
cost of such benefits. Prior to January 1994, postemployment benefit expenses were recognized on a pay-asyou-go basis. A one-time charge for the adoption of FAS
112 of $965,000 was recognized as the cumulative effect
of a change in accounting principle in 1994.
(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,
1994
1993
Land and
improvements ...
Buildings
Furniture and
equipment
Less accumulated
depreciation
Total property,
buildings and
equipment
$
1,301,314 $ 1,301,314
65,171,774
64,891,700
45,742,097
112,215,185
43,055,132
109,248,146
57,375,562
59,126,702
$ 54,839,623 $ 50,121,444
(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,
1994
1993
Other Revenues
Data processing
revenue
National
Information
Center
Subscription
revenue
Reimbursable
services to
other agencies .
Miscellaneous
Total other
revenues
Other Expenses
Tuition, registration,
and membership
fees
Cafeteria operations,
net
Subsidies and
contributions ...
Miscellaneous
Total other
expenses
$4,058,655
$3,152,492
2,739,014
—
1,547,628
1,579,653
441,316
347,635
319,938
400,505
$9,134,248
$5,452,588
$1,116,155
$1,015,507
708,394
740,900
676,989
922,449
768,186
1,059,878
$3,423,987
$3,584,471
(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 and, in December 1994, a
capital lease for a new mainframe computer. Minimum
future commitments under those leases having an initial
or remaining noncancelable lease term in excess of one
year at December 31, 1994, are as follows:
1995
1996
1997
1998
1999
after 1999
$ 3,045,750
3,169,926
3,152,561
1,748,090
771,652
116,612
$12,004,591
$3,119,522
75,840
75,840
75,840
75,838
—
$3,422,880
Board Financial Statements 297
Rental expenses under the operating leases were
$2,987,500 and $1,927,600 in 1994 and 1993,
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 1994 and 1993, the Board paid
$197,200 and $371,200, respectively, in assessments for
operating expenses of the Council. These amounts are
included in subsidies and contributions for 1994 and
1993. During 1994 and 1993, the Board paid $125,900
and $124,500, respectively, for office space subleased
from the Council.
•
Statistical Tables
300 81st Annual Report, 1994
1. Detailed Statement of Condition of All Federal Reserve Banks Combined,
December 31, 1994
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
11,050,635
8,018,000
320,320
222,876
3,636,705
1,025,000
177,378,390
144,143,313
42,997,536
Total bought outright
364,519,239
Held under repurchase agreement
9,565,000
Total securities
374,084,239
Total loans and securities
378,968,820
Items in process of collection
Transit items
4,109,320
Other items in process of collection
1,089,912
Total items in process of collection
Bank premises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowance
5,199,231
167,320
878.056
234,938
64,378
1,177,371
268,258
909,114
Bank premises, net
Other assets
Furniture and equipment
Less depreciation
Total furniture and equipment, net
Denominated in foreign currencies '
Interest accrued
Premium on securities
Overdrafts
Prepaid expenses
Suspense account
Real estate acquired for banking-house purposes
Other
Total other assets
Total assets
1,076,434
1,136,824
654,735
482,088
22,031,496
3,841,600
4,476,244
318,716
716,595
33,847
25,360
336,556
32,262,501
436,895,941
Tables 301
1.—Continued
LIABILITIES
Federal Reserve Notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks
454,642,232
-73,137,090
Total Federal Reserve notes, net
381,505,142
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
30,788,596
7,161,095
250,119
Other deposits
Officers' and certified checks
International organizations
Other2
25,737
101,899
645,963
Total other deposits
Deferred credit items
773,600
4,458,817
Other liabilities
Discount on securities
Sundry items payable
Suspense account
All other
3,842,323
85,285
29,022
635,289
Total other liabilities
4,591,919
Total liabilities
429,529,287
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts3
Total liabilities and capital accounts
NOTE. Amounts in boldface type indicate items in the
Board's weekly statement of condition of the Federal
Reserve Banks.
1. Of this amount $9,165.9 million was invested in
securities issued by foreign governments, and the balance
was invested with foreign central banks and the Bank for
International Settlements.
3,683,327
3,683,327
0
436,895,941
2. 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.
3. During the year, includes undistributed net income,
which is closed out on December 31.
302 81st Annual Report, 1994
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1994 and 1993
Millions of dollars
Boston
Total
Item
1994
1994
1993
11,051
8,018
320
11,053
8,018
372
223
0
94
0
3 637
1,025
1993
ASSETS
Gold certificate account
Special drawing rights certificate account.
Coin
553
660
511
15
511
10
4,638
1,025
190
0
274
0
364,519
9,565
378,969
332,015
12,187
349,960
19,082
0
19,278
19,592
0
19,870
5,199
1,076
7,173
1,055
293
93
353
91
22,031
10,231
22,339
10,000
797
450
793
460
0
0
-2,202
-2,195
436,896
409,971
19,788
20,553
381,505
343,925
17,747
17,254
30,789
7,161
250
774
38,973
34.951
14,809
386
397
50,543
1,214
0
5
3
1
1,250
2,555
0
5
1
5
2,575
4,459
4,592
6,210
2,489
284
228
326
12
5
429,529
403,168
19,509
20,307
3,683
3,683
0
3,401
139
3,401
0
139
0
123
123
0
436,896
409,971
19,788
20,553
Federal Reserve notes outstanding (issued to Bank) .
Less: Held by Bank
454,642
73,137
409,265
65,339
22,868
5,121
19,706
2,452
Federal Reserve notes, net.
381,505
343,925
17,747
17,254
Collateral for Federal Reserve notes
Gold certificate account
Special drawing rights certificate account...
Other eligible assets
U.S. Treasury and federal agency securities.
11,051
8,018
0
362,437
11,053
8,018
0
324,854
Total collateral
381,505
343,925
Loans
To depository institutions .
Other
Acceptances held under repurchase agreements
Federal agency obligations
Bought outright
Held under repurchase agreements
U.S. Treasury securities
Bought outright'
Held under repurchase agreements .
Total loans and securities
Items in process of collection .
Bank premises
Other assets
Denominated in foreign currencies2 .
All other
Interdistrict Settlement Account
Total assets
LIABILITIES
Federal Reserve notes .
Deposits
Depository institutions
U.S. Treasury, general account .
Foreign, official accounts
Other
Total deposits
Deferred credit items
Other liabilities and accrued dividends1
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts..
FEDERAL RESERVE NOTE STATEMENT
For notes see end of table.
Tables 303
2.—Continued
New York
1994-
Philadelphia
1993
1994
4,134
2,808
19
3,753
2,808
0
0
Cleveland
1993
1994
Richmond
1993
1994
1993
393
303
19
399
303
15
660
556
17
701
556
21
902
652
56
899
652
67
9
0
17
0
8
0
0
0
0
0
0
0
65
0
1,344
1,025
1,602
1,025
142
0
176
0
229
0
312
0
291
0
362
0
134,693
9,565
146,627
114,654
12,187
129,477
14,256
0
14,416
12,583
0
12,766
22,978
0
23,207
22,303
0
22,614
29,138
0
29,428
25,898
0
26,325
649
137
789
140
332
47
445
47
269
46
275
37
392
134
502
139
6,267
4,160
6,474
4,529
737
353
858
306
1,449
529
1,289
512
1,481
902
1,537
835
5,853
12,726
2,232
921
-1,332
-3,321
-867
598
170,653
160,707
18,833
16,060
25,400
22,684
33,080
31,553
151,608
134,964
16,733
13,026
22,542
20,161
28,847
28,035
7,105
7,161
149
261
14,677
6,969
14,809
288
196
22,261
1,491
0
5
26
1,523
2,248
0
5
7
2,261
1,814
0
9
41
1,864
1,556
0
8
14
1,578
2,782
0
9
70
2,862
2,357
0
10
32
2,398
551
1,843
747
798
32
183
432
114
222
257
340
158
447
332
All
186
168,678
158,769
18,511
15,832
24,885
22,237
32,487
31,096
988
988
0
969
969
0
161
161
0
114
114
0
258
258
0
224
224
0
296
296
0
229
229
0
170,653
160,707
18,833
16,060
25,400
22,684
33,080
31,553
174,495
22,888
157,408
22,444
18,463
1,690
14,472
1,446
26,124
3,581
23,474
3,313
35,331
6,484
34,012
5,978
151,608
134,964
16,773
13,026
22,542
20,161
28,847
28,035
11
304 81st Annual Report, 1994
2. Statement of Condition of Each Federal Reserve Bank,
December 31, 1994 and 1993—Continued
Millions of dollars
Chicago
Atlanta
Item
1994
1993
1994
1993
1,217
1,036
23
1,186
1,036
32
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other...'
542
318
46
509
318
55
28
0
18
0
Acceptances held under repurchase agreements
Federal agency obligations
Bought outright
Held under repurchase agreements
163
0
189
0
417
0
539
0
16,293
0
16,484
13,507
0
13,697
41,758
0
42,193
38,585
0
39,124
753
64
775
61
509
112
674
113
Other assets
Denominated in foreign currencies2
Allother
2,073
423
2,120
380
2,527
1,069
2,531
960
Interdistrict Settlement Account
1,871
2,185
-1,048
1,743
22,573
20,101
47,638
47,400
18,053
14,960
42,265
41,541
3,018
0
13
29
3,060
3,617
0
13
2
3,632
3,397
0
16
148
3,561
4,022
0
16
81
4,118
561
217
736
132
496
479
679
282
21,891
19,461
46,800
46,620
341
341
0
320
320
0
419
419
0
390
390
0
22,573
20,101
47,638
47,400
23,368
5,315
19,797
4,837
48,257
5,992
45,621
4,081
18,053
14,960
42,265
41,541
U.S. Treasury securities
Bought outright'
Held under repurchase agreements
Total loans and securities
Items in process of collection
Bank premises
Total assets
LIABILITIES
Federal Reserve notes
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other
Total deposits
Deferred credit items
Other liabilities and accrued dividends3
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT
Federal Reserve notes outstanding (issued to Bank)
Less: Held by Bank
Federal Reserve notes, net
NOTE. Components may not sum to totals because of
rounding.
1. Includes securities loaned—fully guaranteed by U.S.
Treasury securities pledged with Federal Reserve
Banks—and excludes securities sold and scheduled to be
bought back under matched sale-purchase transactions.
2. Valued monthly at market exchange rates.
3. Includes exchange-translation account reflecting the
monthly revaluation at market exchange rates of foreignexchange commitments.
Tables 305
2.—Continued
Minneapolis
St. Louis
1994
1993
1994
Dallas
Kansas City
1993
1994
1993
1994
San Francisco
1993
1994
1993
429
168
23
392
168
22
230
186
21
243
186
15
436
199
22
409
199
21
453
377
28
510
377
42
1,102
904
33
1,392
904
61
89
0
1
0
0
4
0
20
0
1
0
0
0
0
0
33
0
0
0
0
0
0
0
0
0
0
0
0
0
145
0
164
0
80
0
106
0
156
0
376
0
138
0
199
0
343
0
542
0
14,497
0
14,731
11,723
0
11,888
8,028
0
8,119
7,600
0
7,710
15,637
0
15,813
12,592
0
12,769
13,786
0
13,924
14,219
0
14,418
34,373
0
34,749
38,761
0
39,303
195
30
246
31
380
46
465
35
370
54
583
51
513
157
511
158
544
156
1,555
151
481
334
512
271
589
196
585
181
830
361
795
292
1,594
343
1,550
380
3,207
1,111
3,295
895
4,308
1,857
-1,897
-1,004
-1,929
1,442
-1,303
-2,831
-3,685
-12,122
20,698
15,387
7,870
8,418
16,154
16,561
16,086
15,115
38,122
35,433
19,229
14,006
6,553
7,048
13,948
14,511
12,917
12,097
31,024
26,323
941
0
3
22
966
907
0
3
9
919
612
0
4
1
5
631
677
0
4
5
686
1,336
0
5
23
1,365
1,233
0
5
1
1
1,249
2,140
0
10
26
2,176
2,021
0
10
4
2,034
4,938
0
21
80
5,039
6,791
0
21
21
6,833
158
175
215
99
380
110
435
67
358
205
427
118
332
168
381
112
640
395
1,016
272
20,528
15,238
7,673
8,236
15,876
16,305
15,592
14,623
37,098
34,443
85
85
0
74
74
0
98
98
0
91
91
0
139
139
0
128
128
0
247
247
0
246
246
0
512
512
0
495
495
0
20,698
15,387
7,870
8,418
16,154
16,561
16,086
15,115
38,122
35,433
21,908
2,679
16,735
2.729
8.043
1,491
8,219
1,171
15,280
1,333
16,022
1,511
16,819
3,902
16,082
3,986
43,685
12,662
37,716
11,393
19,229
14,006
6,553
7,048
13,948
14,511
12,917
12,097
31,024
26,323
306
81st Annual Report, 1994
3. Federal Reserve Open Market Transactions, 1994
Type of transaction
Feb.
Mar.
Apr.
0
0
28,986
0
1264
0
28,709
0
900
0
33,163
0
1,101
0
28,881
0
0
0
0
-639
0
0
0
4,063
-1,985
0
147
0
0
-3,605
0
209
0
2,316
-907
0
0
0
776
639
0
0
3,447
1,145
1,413
0
0
3,605
2,817
0
1,607
907
0
0
-776
0
0
0
-616
550
1,103
0
0
0
1,117
0
709
0
oooo
Millions of dollars
Jan.
0
0
0
325
618
0
0
0
896
0
0
0
0
0
616
1,264
0
0
4,181
0
0
6,140
0
440
133 468
132,872
124,270
124,125
155,625
155,950
120,512
120,393
25,818
29,348
33,693
37,425
38,490
38,115
19,741
25,041
-3,550
-2,323
4,232
519
U.S. TREASURY SECURITIES
Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchanges
Redemptions
Others within 1 year
Gross purchases
Gross sales
Maturity shift
Exchanges
Redemptions
1 to 5 years
Gross purchases .
Gross sales
Maturity shift
Exchanges
5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
More than 10 years
Gross purchases
Gross sales
Maturity shift
Exchanges
All maturities
Gross purchases
Gross sales
Redemptions
Matched transactions
Gross purchases
Gross sales
Repurchase agreements
Gross purchases
Gross sales
Net change in U.S. Treasury securities
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
NOTE. Sales, redemptions, and negative figures reduce
holdings of the System Open Market Account; all other
0
0
202
0
0
102
0
0
108
0
0
180
2,600
3,106
3,277
3,636
3,160
3,170
728
878
-708
-461
-118
-330
-4,258
-2,784
4,114
189
figures increase such holdings. Components may not sum
to totals because of rounding.
Tables 307
3.—Continued
Aug.
Sept.
0
0
29,559
0
1,610
0
36,281
0
0
0
29,668
0
0
0
1,197
-3.192
0
0
0
1,692
-1,626
0
0
0
6,131
-4,089
0
0
0
-3,449
-917
0
0
-1,197
3,192
0
0
-1,692
1,626
0
0
-5,506
2,889
0
0
-1,510
0
0
0
0
0
0
0
0
0
0
0
-549
750
0
0
-453
0
0
0
0
0
0
0
0
0
155
0
0
4,143
Nov.
Dec.
Total
518
0
29,361
0
6,109
0
36,543
0
444
0
29,883
0
17,484
0
380,326
0
151
0
961
-2,203
0
450
0
460
0
0
0
0
1,790
-5,795
0
125
0
0
0
0
1,238
0
0
0
0
2,530
0
-837
2,203
0
0
-460
0
200
0
-1,123
4,192
2,208
0
0
0
9,168
0
0
0
938
" 0
-125
0
0
0
0
0
0
0
-278
1,603
660
0
0
0
3,818
0
0
0
0
0
-76
450
840
0
0
0
0
0
0
0
0
0
-389
0
1,252
0
0
0
3,606
0
0
0
1.610
0
0
0
302
0
4,459
0
0
968
0
979
6,309
0
0
4,689
0
0
35,314
0
2,337
135,533
135,796
133,075
133,939
126,677
125,181
169,018
170,356
151,029
151,589
136,556
137,242
148,425
147,858
166,648
166,007
1,700,836
1,701,309
21,517
17,112
10,059
4,405
28,085
35,374
44,948
41,199
4,975
9,354
17,088
15,613
35,456
32,561
29,406
26,351
309,276
311,898
5,691
8,933
-6,095
4,022
-479
778
9,771
8,385
29,882
0
0
70
0
0
58
0
0
20
0
0
63
0
0
31
0
0
62
0
0
70
0
0
37
to o o
July
4,195
2,895
580
1,300
9,472
8,702
8,491
8,109
3,620
4,982
2,868
2,838
8,615
7,360
5,090
5,720
52,696
52,696
1,230
-778
750
319
-1,393
-32
1,185
-667
-1,002
6,921
8,155
-5,345
4,341
-1,872
746
10,956
7,718
28,880
May
June
1,395
0
29,807
0
4,143
0
39,484
0
155
0
5,413
917
0
0
0
Oct.
308 81st Annual Report, 1994
4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 1992-94
Millions of dollars
December 31
Change
Description
1994
1993
1992
1993-94
1992-93
372,561
339,583
303,435
32,978
36,148
98,129
87,291
90,186
77,749
79,988
70,231
7,943
9,542
10,198
7,518
34,978
90,031
27,552
34,845
35,423
79,826
24,659
31,739
37,758
68,750
18,903
27,805
-445
10,205
2,893
3,106
-2,335
11,076
5,756
3,934
185,420
144,143
42,998
167,936
132,076
39,572
150,219
118,179
35,037
17,484
12,067
3,426
17,717
13,897
4,535
9,565
8,041
0
12,187
7,568
0
7,463
8,424
0
-2,622
473
0
4,724
-856
0
3,637
4,638
5,413
-1,001
775
1,737
1,823
2,105
2,064
-86
-718
-81
-117
-241
-406
-774
-95
-517
0
-162
0
U.S. TREASURY SECURITIES
Held outright'
,
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
Held outright'
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
By issuer
Held outright
Federal Farm Credit Banks
Federal Home Loan Banks
Federal Land Banks
Federal National Mortgage Association
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
General Services Administration
Repurchase agreements .
NOTE. Components may not sum to totals because of
rounding.
1,387
488
25
569
142
2,511
696
142
-217
0
3,637
1,050
796
66
1,725
0
4,638
5,412
1,201
1,296
66
66
2,005
0
2,167
0
1,001
-151
-453
0
-280
0
0
0
117
0
117
0
-117
0
0
0
1,025
1,025
631
0
394
1,249
1,766
1. Excludes the effects of temporary transactions—
repurchase agreements and matched sale-purchase agreements (MSPs).
Tables 309
5. Number and Annual Salaries of Officers and Employees of Federal Reserve Banks,
December 31, 1994
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
Other officers
Employees
Number
Ibtal
Number
Salaries
(dollars)
167,500
217,000
194,000
173,800
168,400
223,600
193,000
199,000
184,000
168,600
170,400
241,080
58
187
57
48
75
78
105
51
51
56
58
89
5,656,800
22,021,780
5,264,675
4,636,280
6,677,700
6,957,625
9,613,250
4,373,300
4,576,850
4,956,900
5,136,600
9,451,900
25
2,550,000
452
4
21,577,195
481
24,127,195
2,300,380
938
91,873,660
21,684
1,093
763,537,902
23,727
857,711,942
Salary
(dollars)
Fulltime
1,104
3,937
1,183
1,286
1,861
2,229
2,270
996
1,137
1,533
1,440
2,256
Parttime
198
67
56
75
127
55
58
98
119
102
51
83
Salaries
(dollars)
Number
Salaries
(dollars)
44,033,572
159,996,214
37,712,521
40,975,494
58,122,847
69,370,801
8 U 32^904
31,313,621
37,360,078
48,428,547
46,427,191
87,086,917
1,361
4,192
1,297
1,410
2,064
2,363
2^434
1,146
1,308
1,692
1,550
2,429
49,857,872
182,234,994
43,171,196
45,785,574
64,968,947
76,552,026
90^939^ 154
35,885,921
42,120,928
53,554,047
51,734,191
96,779,897
310 81st Annual Report, 1994
6. Income and Expenses of Federal Reserve Banks, 1994
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
CURRENT INCOME
Loans
U.S. Treasury and federal
agency securities
Foreign currencies
Priced services
Other
11,451,765
120.337
605,303
162,271
137,807
19,247,074,249
894,500,875
734,434,991
23,280,497
1,035,627,770
32,311,828
39,895,330
438,010
7,062,943,725
255,017,462
101,971,655
18,225,155
741,805,133
30,174,859
39,055,693
511,054
1,227,039,616
58,356,750
45,499,574
401,259
Total :
20,910,742377
1,108,393,275
7,438,763,300
811,709,010
1,331,435,006
944,920,187
187,162,458
27,575,957
42,598,270
49,315,104
56,068,356
16,525,760
1,242,715
2,194,912
1,974,356
196,203,006
55,751,627
4,992,712
5,991,764
10,002,097
50,387,881
15,725,445
484,548
2,251,001
2,029,984
49,201,442
13,502,945
1,657,240
2,287,996
1,841,212
78,557,899
9,904,033
55,642,796
4,559,126
454,588
3,049,682
11,044,154
2,012,721
10,237,995
3,575,590
419,309
3,467,055
6,064,350
776,526
3,147,270
26,681,714
47,938,118
31,645,531
29,463,710
25,584,876
3,614,636
3,724,751
2,724,623
680,241
647,282
4,347,904
8,002,578
6,320,932
12,973,873
5,074,716
1,867,562
2,100,187
2,976,331
354,159
1,443,785
1,465,662
2,117,727
1,877,055
355,762
759,222
7,748,282
30,497,363
129,680,117
69,539,516
223,623,378
41,445,945
-8,427
-49,955,735
-3,266,552
212,500
559,597
4,142,715
4,546,252
14,492,606
2,398,038
5,189,184
-9,381,171
-223,564
1,664,397
5,275,273
20,265,464
10,908,975
50,935,940
7,760,585
2,100,213
-6,586,910
-18,008
320,268
651,514
5,602,209
3,378,430
26,331,165
1,383,971
8,299,718
-3,099,775
-185,435
273.846
944,156
4,546,422
4,058,804
12,381,212
2,948,146
8,245,703
-2,472,694
-315.556
2,006,294,540
-210,966,197
1,795,328,343
11937,185
-10,872,323
108,524,862
425,262,108
-43,915,081
381,347,027
129,764,902
-18,540,342
111,224,560
115,664,448
-19,524,831
96,139,617
CURRENT EXPENSES
Salaries and other personnel
expenses
Retirement and other benefits2 .
Fees
Travel
Software expenses
Postage and other shipping
costs
Communications
Materials and supplies
Building expenses
Taxes on real estate
Property depreciation
Utilities
Rent
Other
Equipment
Purchases
Rentals
Depreciation
Repairs and maintenance
Earnings-credit costs
Other
Shared costs, net3
Recoveries
Expenses capitalized4
Total
Reimbursements
Net expenses
For notes see end of table.
Tables 31!
6.—Continued
Richmond
Atlanta
Chicago
Dallas
San Francisco
1,360,596
297,759
611,223
834,211,891 2,199,668,608 737,665,726 425,703,449
84,183,313 102,461,570 19,591,450 23,864,206
98,146,246
98,049,361 31,044,338 42,442,616
369,556
917,915
173,124
313,113
794,847,621
33,554,134
48,063,890
132,808
749,205,127
64,548.577
49,451,009
305,767
1,919,419,883
130,257,077
78,131,275
936,251
1,642,698,846 1,017,405,326 2,402,091,270 790,637,871 496,485,476 877,959,049
863,808,239
2,129,355,709
1,518,935,701
60,179,649
62,684,004
556,485
494,320
2,163,233
Minneapolis Kansas City
4,162,092
343,008
993,816
St. Louis
99,771,610
26,214,572
11,514,202
5082,791
19,997,993
84,805,710
24,520,053
1,033,191
4,244,869
1,722,141
99,602,062
27,086,283
900,061
5,010,872
4,278,412
42,365,910
13,039,245
572,218
2,032,010
1,550,692
45,520,899
11,224,125
1,621,141
2,784,300
1,465,044
56,557,572
17,249,540
801,260
2,934,677
620,634
55,425,373
14,707,212
1,285,179
2,889,822
1,024,256
109,010,366
27,262,496
1,471,490
4,902,256
2,808,283
7,228,865
1,080,412
6,647,627
10,431,098
1,085,133
5,659,885
9,464,009
792,643
5,864,842
3,941,318
544,558
3,198,774
5,830,365
573,068
2,226,063
6,121,255
794,130
3,410,405
4,569,037
756,087
3,520,298
5,728,732
614,858
5,212,900
2,225,152
5,337,327
3,195,531
7,724,761
2,596,436
1,653,805
3,830,213
2,200,612
3,419,479
2,527,942
4,075,397
5,236,287
2,260,465
1,979,022
5,532,700
466,093
2,253,537
1,570,841
393,176
844,645
1,142,673
867,708
965,054
765,617
757,560
817,788
3,269,235
1,450,054
360,366
888,823
2,364,443
4,802,424
2,495,851
1224,407
1,891,196
2,640,599
6,396,144
3,608,182
232,847
2,620,569
691,813
2,805,054
53,835,370
12,396,989
13,602,462
4,868,700
-77,255,676
-11.650,370
-985,637
772,582
1,964,123
6,160,159
7,104,438
12,822,589
3,834,591
14,882,358
-2,436,378
-318,585
1,268,260
13,070,025
14,886,073
11,263,207
43,386,374
5,219,182
-11,187,200
-3,076,173
-177,022
227,140
653,774
2,196,948
2,217,237
4,865,480
1,721,992
9,767,110
-1,298,992
-49,166
777,422
1,003,038
3,416,960
2,873,420
5,388,886
1,560,621
4,839,823
-890,743
-403,474
476,973
824,373
2,263,032
1,894,915
9,729,331
2,553,768
1,837,226
-704,311
-461,510
442,845
838,056
4,221,544
2,775,780
10,150,839
2,911,279
13,407,330
-4,365,567
-95,331
620,236
1,908,380
8,143,221
6,121,069
19,536,494
4,285,072
6,865,684
-3,992,651
-33,264
196,925,984
-16,949,397
179,976,587
191,920,008
-15,630,676
176,289,332
246,735,781 93,065,540 94,309,570 126,689,536
-20,324,772 -11,155,769 -13,213,124 -16,617,685
81,096,446 110,071,851
226,411,009 81,909,771
126,242,360
-8,164,126
118,078,234
215,963,963
-16,058,071
199,905,892
312
81st Annual Report, 1994
6. Income and Expenses of Federal Reserve Banks, 1994—Continued
Dollars
Item1
Total
Boston
New York
Philadelphia
Cleveland
PROFIT AND LOSS
Current net income
Additions to and deductions
from (-) current net income5
Net profit on foreign
exchange
Other additions
Total additions
Losses on sales of U.S.
Treasury and federal
agency securities
Other deductions
Total deductions
Net addition to current
net income
Cost of unreimbursed Treasury
services
Assessments by Board
Board expenditures6 ..
Cost of currency
Net income before payment to
U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)
19,115,414,033
999,868,414
7,133,063,119
700,484,451
1,235,295,386
2,422,626,091
167,302
2,422,793,393
87,608,162
20,757
87,628,919
689,950,602
42,821
689,993,424
81,003,004
3,411
81,006,415
159,216,132
33,927
159,250,059
-24,285,820
-568,357
-24,854,177
-1,237,875
-9,425
-1,247,300
-9,095,296
-71,358
-9,166,654
-955,915
-1,915
-957,830
-1,510,117
-5,063
-1,515,180
2,397,939,216
86,381,619
680,826,769
80,048,585
157,734,879
34,077,119
1,582,808
3,234,295
1,977,891
1,964,554
146,866,100
368,187,068
5,334,800
18,471,633
41,453,600
144,484,979
5,139,600
13,944,751
9,693,400
21,583,556
20,964,222,962
1,060,860,792
7,624,717,014
759,470,794
1,359,788,755
212,090,446
7,849,562
58,789,295
8,328,151
14,283,474
20,470,010,815
1,036,570,880
7,546,939,469
703,722,593
1,311,506,031
Transferred to surplus
282,121,700
16,440,350
18,988,250
47,370,050
33,999,250
Surplus, January 1
Surplus, December 31
3,401,205,000
3,683,326,700
122,966,000
139,436,350
968,644,500
987,632,750
113,722,800
161,092,850
223,528,800
257,528,050
1. Components may not sum to totals because of
rounding.
2. The effect of the 1987 implementation of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions (SFAS 87), 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 SFAS 87 on the Reserve Banks was a reduction
in expenses of $75,646,845.
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 and losses on
the sale of Reserve Bank buildings, counterfeit currency
that is not charged back to the depositing institution, and
stale Reseve Bank checks that are written off.
6. For additional details, see the last five pages of
the preceding section: Board of Governors Financial
Statements.
Tables
313
6.—Continued
Richmond
1,462,722,259
Atlanta
Chicago
841,115,994 2,175,680,261
St. Louis
Minneapolis Kansas City
Dallas
San Francisco
708,728,100
415,389,029
767,887,197
745,730,004
1,929,449,817
162,752,518
22,196
162,774,714
227,876,525
2,914
227,879,439
277,694,924
3,849
277,698,773
52,906,366
53
52,906,420
64,706,751
761
64,707,511
91,171,971
5,876
91,177,848
175,247,308
28,434
175,275,742
352,491,827
2,304
352,494,131
-1,950,982
-15,049
-1,966,031
-1,105,682
-407,261
-1,512,943
-2,773,780
-14,980
-2,788,760
-988,263
-6,880
-995,143
-530,487
-5,681
-536,168
-1,066,735
-6,959
-1,073,694
-893,336
-11,044
-904,380
-2,177,351
-12,741
-2,190,092
160,808,682
226,366,495
274,910,012
51,911,277
64,171,343
90,104,154
174,371,362
350,340,039
4,152,969
3,400,380
4,178,104
1,821,363
2,326,810
2,570,802
2,111,552
4,755,590
10,122,800
30,012,475
13,789,600
16,015,448
16,877,600
44,471,199
3,224,000
14,993,718
3,925,500
7,544,729
5,500,400
15,534,956
10,489,600
12,949,921
21,315,200
28,179,703
1,579,242,698 1,034,277,061 2,385,063,370 740,600,296 465,763,333 834,385,193
894,550,293
2,225,503,363
7,930,022
14,637,864
30,254,653
993,406,487 2,331,628,353 725,337,918 452,660,839 815,269,571
879,116,729
2,177,906,210
15,506,612
1,495,895,736
19,776,874
24,284,767
4,764,528
67,840,350
21,093,700
29,150,250
10,497,850
228,493,650
296,334,000
319,923,400
341,017,100
389,865,100
419,015,350
74,277,000
84,774,850
5,684,644
11,185,600
795,700
17,342,500
90,843,950 127,999,350
98,261,800 139,184,950
7,417,850
246,035,500
246,831,200
494,874,950
512,217,450
314
81st Annual Report, 1994
1. Income and Expenses of Federal Reserve Banks, 1914-94
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
-4,673,446
302,304
192,277
237,795
382,641
594,818
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
181,296,711
122,865,866
50,498,699
50,708,566
38,340,449
41,800,706
47,599,595
43,024,484
64,052,860
70,955,496
27,548,505
33,722,409
28,836,504
29,061,539
27,767,886
26,818,664
24,914,037
24,894,487
25,401,233
25,810,067
-3,743,907
-6,314,796
-4,441,914
-8,233,107
-6,191,143
-4,823,477
-3,637,668
-2,456,792
-5,026,029
-4,861,642
709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644
1,844,840
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
,372,022
,405,898
,679,566
,748,380
,724,924
,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
,704,011
,839,541
,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
I960....
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.
1,714,421
Tables
315
7.—Continued
Payments to U.S. Treasury
Dividends
paid
Franchise
tax
Under
section 13b
Interest on
Federal Reserve
notes
to surplus
(section 13b)
to surplus
(section 7)
217,463
1,742,775
6,804,186
5,540,684
5,011,832
2,703,894
1,134,234
48,334,341
70,651,778
5.654,018
6,119,673
6,307,035
6.552.717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911
60,724,742
59,974,466
10,850,605
3.613.056
113,646
59,300
818,150
249,591
2,584,659
4,283,231
82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597
10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462
17,308
-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071
607,422
352,524
2,616,352
1,862,433
4,533,977
1,134,234
2,011,418
'. '. '.
8,214,971
8,429,936
8,669,076
8,911,342
9,500,126
10,182,851
10,962,160
11,523,047
11,919,809
12.329,373
297^667
227,448
176,625
119,524
24,579
-60,323
27,695
102,880
67,304
-419,140
-425,653
82,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605
-54,456
-4,333
49,602
135,003
201,150
262,133
27,708
86,772
75,283,818
166,690,356
193,145,837
17,617,358
570,513
3,554,101
40,327,237
48,409,795
81,969,625
81,467,013
8,366,350
18,522,518
21,461,770
13,082,992
13,864,750
14,681,788
15,558,377
16,442,236
17,711,937
18,904,897
20,080,527
21,197,452
22,721,687
196,628,858
254,873,588
291,934,634
342,567,985
276,289,457
251,740,721
401,555,581
542,708,405
524,058,650
910,649,768
21,849,490
28,320,759
46,333,735
40,336,862
35,887,775
32,709,794
53,982,682
61,603,682
59,214,569
-93,600,791
23,948,225
25.569,541
27,412,241
28,912,019
30,781,548
32,351,602
33,696,336
35,027,312
36,959,336
39,236,599
896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614
1,296,810,053
1,649,455,164
1,907,498,270
2,463,628,983
3,019,160,638
42,613,100
70,892,300
45,538,200
55,864,300
-465,822,800
27,053,800
18,943,500
29,851,200
30,027,250
39,432,450
316
81st Annual Report, 1994
7. Income and Expenses of Federal Reserve Banks, 1914-94—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
1994
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
20,910,742,377
718,032,836
814,190,392
926,033,957
,023,678,474
,102,444,454
,127,744,490
,156,867,714
,146,910,699
,205,960,134
,332,160,712
,349,725,812
,429,322,157
,474,530,523
,657,799,914
,795,328,343
-115,385,855
-372,879,185
-68,833,150
-400,365,922
-412,943,156
1,301,624,294
1,975,893,356
1,796,593,917'
-516,910,320
1,254,613,3652
2,099,328,4722
405,729,3202
-987,787,6872
-230,267,9192
2,363,862,097
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
146,866,100
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
368,187,068
Total, 1914-94
366,849^86,662
26,780,703,683
Aggregate for each Bank,
1914-94
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
19,721,814,195
114,987,696,856
14,037,353,810
24,063,149,468
29,057,482,677
15,844,256,263
50,273,094,107
12,083,136,160
6,815,176,737
14,923,146,218
19,577,905,034
45,465,175,138
1,747,859,086
5,462,947,836
1,471,141,310
1,711,019,383
2,259,879,715
2,429,002,738
3,480,599,004
1,361,511,006
1,255,824,402
1,722,782,334
1,633,745,271
2,901,277,332
Total
366,849,386,662
226,881,331
1,994,078,541
249,722,297
344,664,111
406,912,980
639,722,208
834,386,003
142,337,562
195,585,548
242,731,626
564,744,325
1,062,934,317
72,417,786
531,626,786
91,343,418
140,409,590
113,037,976
162,670,360
266,659,372
57,436,872
57,803,215
81,558,909
136,152,773
279,147,551
215,736,802
1,080,753,442
145,970,429
227,052,130
322,245,965
193,196,778
474,256,122
130,746,943
66,812,619
154,586,951
189,508,731
415,546,220
26,780,703,6834 6,904,700,850
1,990,264,608
3,616,413,132
NOTE. Components may not sum to totals because of
rounding.
1. For 1987 and subsequent years, includes the cost of
services provided to the Treasury by Federal Reserve
Banks for which reimbursement was not received.
2. Data are revised to reflect services provided to the
Treasury by the Federal Reserve for which reimbursement was not received.
6,904,700,849 1,990,264,608 3,616,413,132
3. The $3,811,998,899 transferred to surplus was
reduced by direct changes of $500,000 for charge-off on
Bank premises (1927), $139,299,557 for contributions to
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 $3,683,326,698 on December 31, 1994.
4. See note 2, table 6.
Tables
317
7.—Continued
Payments to U.S. Treasury
Dividends
paid
Franchise
tax
Under
section 13b
Interest on
Federal Reserve
notes
Transferred
to surplus
(section 13b)
Transferred
to surplus
(section 7)
41,136,551
43,488,074
46,183,719
49,139,682
52,579,643
54,609,555
57,351,487
60,182,278
63,280,312
67,193,615
3,493,570,636
3,356,559,873
3,231,267,663
4,340,680,482
5,549,999,411
5,382,064,098
5,870,463,382
5,937,148,425
7,005,779,497
9,278,576,140
32,579,700
40,403,250
50,661,000
51,178,300
51,483,200
33,827,600
53,940,050
45,727,650
47,268,200
69,141,200
70,354,516
74,573,806
79,352,304
85,151,835
92,620,451
103,028,905
109,587,968
117,499,115
125,616,018
129,885,339
140,757,879
152,553,160
171,762,924
195,422,234
212,090,446
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
20,470,010,815
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
282,121,700
3,811,998,8993
3,162,502,473
149,138,300
2,188,893
334,240,881,175
-3,657
126,007,520
867,219,942
157,468,551
235,746,864
175,356,162
243,446,192
417,453,547
93,146,584
88,746,226
127,696,431
205,867,288
424,347,165
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
17,629,615,508
108,603,281,839
12,239,157,360
21,817,908,296
26,285,360,734
13,100,343,576
46,008,691,703
10,490,001,265
5,434,113,418
12,928,933,679
17,725,549,149
41,977,924,647
135,411
^33,412
290,661
-9,906
-71,517
5,491
11,682
-26,515
64,874
-8,674
55,337
-17,089
149,531,175
1,024,889,321
175,423,072
270,761,843
302,213,808
346,283,640
434,344,104
89,894,478
102,139,013
143,324,900
251,108,678
522,084,867
3,162,502,473
149,138,300
2,188,893
334,240,881,175
-3,657
3,811,998,899
318 81st Annual Report, 1994
Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks
and Branches, December 3 1 , 1 9 9 4
Dollars
Acquisition costs
Federal Reserve
Bank or
Branch
Land
Buildings
(including
vaults)'
Building machinery and
equipment
Total
2
Net
book
value
BOSTON.
22,073,501
86,496,803
6,304,076
117,874,379
93,337,982
NEW YORK
Buffalo
20,354,440
887,844
98,090,019
2,693,268
46,600,282
2,767,406
165,044,740
6,348,518
Other
real
estate3
133,018,170
4,076,438
PHILADELPHIA
2,251,556
54,371,039
5,903,704
62,526,299
47,273,050
CLEVELAND
Cincinnati
Pittsburgh
2,298,643
2,246,599
1,658,376
19,392,191
14,027,505
9,721,591
6,967,450
8,238,036
4,351,756
28,658,284
24,512,139
15,731,723
21,991,102
11,507,150
12,082,351
RICHMOND
Baltimore
Charlotte
6,683,808
6,476,335
3,129,645
62,159,743
27,138,811
27,402,251
18,248,290
3,842,189
4,737,485
87,091,841
37,457,335
35,269,381
74,194,784
28,531,403
31,088,523
ATLANTA...
Birmingham..
Jacksonville..
Miami
Nashville
New Orleans.
1,209,360
3,197,830
1,665,439
3,717,791
592,342
3,371,446
15,497,334
2,285,364
16,910,785
12,214,933
1,692,767
4,894,869
4,319,451
2,056,693
2,851,236
2,719,389
2,360,915
2,602,700
21,026,145
7,539,887
21,427,459
18,652,113
4,646,024
10,869,015
15,870,536 13,086,575
5,510,358
18,430,309
'48,365
13,713,980
2,375,406
7,645,806
CHICAGO.
Detroit
4,565,008 113,679,679
797,734
4,468,358
20,287,785
5,149,902
138,532,472
10,415,994
104,017,798
8,228,700
ST. LOUIS...
Little Rock...
Louisville
Memphis
700,378
1,148,492
700,075
1,135,623
15,689,558
2,460,257
2,859,819
4,216,382
5,298,206
1,003,022
1,131,238
2,280,473
21,688,142
4,611,771
4,691,132
7,632,478
17,893,469
3,503,279
3,624,622
5,075,611
MINNEAPOLIS
9,524,866
1,954,514
1,829,420
3,187,962
646,386
6,534,583
36,836,953
9,064,373
16,261,220
5,457,054
7,952,791
10,987,009
7,851,532
501,857
54,213,351
11,520,744
35,591,897
10,677,318
11,638,819
3,185,925
861,305
1,401,083
29,729,459
11,830,941
9,460,482
18,922,675
21,081,258
8,715,060
7,622,491
16,401,411
DALLAS
El Paso
Houston
San Antonio .
29,102,860 110,804,261
262,477
1,425,210
2,205,500
4,161,578
482,284
2,735,961
11,969,538
404,946
1,150,965
1,669,052
151,876,659
2,092,633
7,518,043
4,887,297
145,114,050
1,850,112
6,801,918
3,631,392
SAN FRANCISCO...
Los Angeles
Portland
Salt Lake City
Seattle
15,599,928
3,891,887
415,924
494,556
324,772
67,649,956
50,756,229
6,226,586
5,005,637
5,745,131
18,105,346
8,847,166
2,267,971
2,441,387
2,619,622
101,355,230
63,495,282
8,910,481
7,941,581
8,689,525
80,090,925
53,566,199
8,140,590
6,890,668
7,267,888
128,644
167^20,184 942,433,273 234,938,201 1,344,691,658 1,076,434,008
25,359,862
Helena
KANSAS CITY..
Denver
Oklahoma City...
Omaha
Total
NOTE. Components may not sum to totals because of
rounding.
1. Includes expenditures for construction at some
offices, pending allocation to appropriate accounts.
149,948
1,412,500
10,533,831
2. Excludes charge-offs of $17,698,968 before 1952.
3. Covers acquisitions for banking-house purposes and
Bank premises formerly occupied and being held pending
sale.
Tables 319
9. Operations in Principal Departments of Federal Reserve Banks, 1991-94
Operation
1994
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
Government securities transfers '
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
....
Government securities transfers '
Transfer of funds
Automated clearinghouse transactions
Commercial
Government
Food stamps redeemed
1992
1991
8
20,166
7,244
6,950
6
20,768
7,376
7,690
8
20,166
7,506
8,660
11
19,711
6,254
9,462
470
200
16,479
13
72
480
192
19,009
12 r
70
493
181
19.053
12 r
68
503
166
18,743
11
65
1,805
574
4,229
1,545
555
4,198
1,327
531
4,183
1,119
521
3,439
22,853
277,685
76,620
1,045
20,760
290,989
79,599
1,143
29,427
277,681
96,744
1,275
64,597
265,473
77,496
1,354
504,479
23,764
12,079 107
144,702,226
211,201,540
534,236
22,207
14,066,518
146,220,304 r
207,629,814
588,311
20,188
13,241,785
139,675,710 r
199,175,034
7,420,499
948,984
21,867
6,710,035 r
885,011
21,661
6,530,731 r
859,774
21,452
r
610,106
17,716
12,164,175
116,315,973 r
192,254,895
5,549,171 r
723,426
17,888
1. Beginning with this Annual Report, "Government
securities transfers" replaces the previous time series that
included "Issues, redemptions, and exchanges of U.S.
Treasury and federal agency securities." This change was
1993
made to enable consistent time series reporting for the
fiscal area, where complex definitional changes have
occurred over the reported years,
r Revised.
320 81st Annual Report, 1994
10. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,
December 31, 1994
Extended credit3
Reserve Bank
All Federal Reserve Banks
Adjustment
credit'
Seasonal
credit2
4.75
5.90
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. As of May 20, 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 2O1.3(b) of
Regulation A.
First thirty days
of borrowing
After thirty days
of borrowing
4.75
6.40
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.
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 50 basis points above the discount
rate applicable to adjustment credit. In no case will the
rate be less than the basic discount rate plus 50 basis
points. The flexible rate is reestablished on the first business day of each two-week reserve maintenance period.
At the discretion of the Federal Reserve Bank, the discount rate applicable to adjustment credit may be charged
on extended-credit loans that are outstanding less than
thirty days.
Tables 321
11. Reserve Requirements of Depository Institutions, December 31, 1994
Requirements
Type of deposit'
Percent of deposits
Effective date
3
10
12-20-94
12-20-94
Nonpersonal time deposits4
0
12-27-90
Eurocurrency liabilities5
0
12-27-90
Net transaction accounts2
$0 million-$51.9 million
More than $51.9 million *
NOTE. 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 the Monetary Control Act of 1980, depository institutions include commercial banks, mutual savings banks, savings and loan associations, credit unions, agencies and branches of foreign
banks, and Edge Act corporations.
1. Under the Garn-St Germain Depository Institutions
Act of 1982, the Board adjusts the amount of reservable
liabilities subject to a 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 made in
the event of a decrease. On December 20, 1994, the
exemption was raised from $4.0 million to $4.2 million.
The exemption applies only to accounts that would be
subject to a 3 percent reserve requirement.
2. 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-vhree 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 savings
deposits, not transaction accounts.
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 20, 1994 for
institutions reporting quarterly and weekly, the amount
was increased from $51.9 million to $54.0 million.
3. 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.
4. For institutions that report weekly, the reserve requirement on nonpersonal time deposits with an original
maturity of less than 1 Vi years was reduced from 3 percent to 1 Vi percent for the maintenance period that began
December 13, 1990, and to zero for the maintenance
period that began December 27, 1990. The reserve requirement on nonpersonal time deposits with an original
maturity of 1 Vi years or more has been zero since October 6, 1983.
For institutions that report quarterly, the reserve requirement on nonpersonal time deposits with an original
maturity of less than 1 Vi years was reduced from 3 percent to zero on January 17, 1991.
5. The reserve requirement on Euroccurency liabilities
was reduced from 3 percent to zero in the same manner
and on the same dates as was the reserve requirement on
nonpersonal time deposits with an original maturity of
less than 1 V2 years (see note 4).
322
81st Annual Report, 1994
12. Initial Margin Requirements under Regulations T, U, G, and X
Percent of market value
Short sales,
T only'
Effective date
1934, Oct. 1
1936, Feb. 1
Apr. 1
1937, Nov. 1
1945, Feb. 5
July 5
1946, Jan. 21
1947, Feb. 21
1949, Mar. 3
1951, Jan. 17
1953, Feb. 20
1955, Jan. 4
Apr. 23
1958, Jan. 16
Aug. 5
Oct. 16
1960, July 28
1962, July 10
1963, Nov. 6
1968, Mar. 11
June 8
1970, May 6
1971, Dec. 6
1972, Nov. 24
1974, Jan. 3
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
NOTE. 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.
1. From October 1, 1934, to October 31, 1937, the
requirement was the margin "customarily required" by
the brokers and dealers.
Tables 323
13. Principal Assets and Liabilities and Number of Insured Commercial Banks
in the United States, by Class of Bank, June 30, 1994 and 1993
Millions of dollars, except as noted
Member banks
Item
Total
Total
National
State
Nonmember
banks
1994
ASSETS
2,791,613
1,960,770
1,955,838
830,843
2,045,606
1,451,030
1,448,050
594,576
1,584,366
1,145,621
1,143,315
438,745
461,240
305,409
304,735
155,831
746,006
509,740
507,788
236,266
347,977
482,865
191,828
229,126
365,451
152,670
175,691
263,054
113,515
53,435
102,396
39,155
118,851
117,415
39,158
2,352,622
38,612
782,168
1,828,562
299,628
1,691,911
31,384
581,690
1,285,994
222,197
1,317,001
22,708
447,626
1,012,928
167,131
374,910
8,676
134,064
273,066
55,066
660,711
7,228
200,478
542,567
77,431
10,646
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
4,141
3,176
965
6,505
LIABILITIES
Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
Number of banks
1993
ASSETS
Loans and investments
Gross loans
Net loans
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
2,589,870
1,829,438
1,822,958
760,431
1,887,794
1,348,353
1,344,383
539,441
1,469,753
1,066,900
1,064,094
402,853
418,042
281,453
280,289
136,588
702,075
481,085
478,575
220,990
620,802
139,629
184,692
445,162
94,279
143,022
335,583
67,270
111,510
109,579
27,009
31,512
175,640
45,350
41,670
2,332,011
45,563
742,565
1,832,291
276,260
1,679,328
37,562
549,807
1,294,208
202,190
1,320,692
27,695
431,990
1,025,253
154,966
358,636
9,867
117,817
268,955
47,224
652,683
8,001
192,758
538,083
74,070
11,117
4,395
3,426
969
6,722
LIABILITIES
Deposits, total
Interbank
Other demand
Other time and savings
Equity capital
Number of banks
N O T E . Components may not sum to totals because of rounding.
324 81st Annual Report, 1994
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-94, and Month-End 1994
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
U.S. Treasury and
federal agency securities
Total
Bought
outright
Held
under
repurchase
agreement
Loans
Float'
Other
Federal
All
other2 Reserve
Total
Gold
stock4
Special
drawing
rights
certificate
account
Treasury
currency
outstanding5
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
,405
,238
,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
,459
,381
,655
,809
,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
,373
,853
2,145
2,688
2,463
4,306
4,173
4,226
4,036
8,238
2,027
2,035
2,204
2,303
2,511
1935
1936
1937
1938
1939
2,431
2,430
2,564
2,564
2,484
2,430
2,430
2,564
2,564
2,484
1
0
0
0
0
5
3
10
4
7
12
39
19
17
91
38
28
19
16
11
0
0
0
0
0
2,486
2,500
2,612
2,601
2,593
10,125
11,258
12,760
14,512
17,644
2,476
2,532
2,637
2,798
2,963
1940
1941
1942
1943
1944
2,184
2,254
6,189
11,543
18,846
2,184
2,254
6,189
11,543
18,846
0
0
0
0
0
3
3
6
5
80
80
94
471
681
815
8
10
14
10
4
0
0
0
0
0
2,274
2,361
6,679
12,239
19,745
21,995
22,737
22,726
21,938
20,619
3,087
3,247
3,648
4,094
4,131
1945
1946
1947
1948
1949
24,252
23,350
22,559
23,333
18,885
24,252
23,350
22,559
23,333
18,885
0
0
0
0
0
249
163
85
223
78
578
580
535
541
534
2
1
1
1
2
0
0
0
0
0
15,091
24,093
23,181
24,097
19,499
20,065
20,529
22,754
24,244
24,427
4,339
4,562
4,562
4,589
4,598
1950
1951
1952
1953
1954
20,778
23,801
24,697
25,916
24,932
20,725
23,605
24,034
25,318
24,888
53
196
663
598
44
67
19
156
28
143
1,368
1,184
967
935
808
3
5
4
2
1
0
0
0
0
0
22,216 22,706
25,009 22,695
25,825 23,187
26,880 22,030
25,885 21,713
4,636
4,709
4,812
4,894
4,985
1955
1956
1957
1958
1959
24,785
24,915
24,238
26,347
26,648
24,391
24,610
23,719
26,252
26,607
394
305
519
95
41
108
50
55
64
458
1,585
1,665
1,424
1,296
1,590
29
70
66
49
75
0
0
0
0
0
26,507
26,699
25,784
27,755
28,771
21,690
21,949
22,781
20,534
19,456
5,008
5,066
5,146
5,234
5,311
1960
1961
1962
1963
1964
27,384
28,881
30,820
33,593
37,044
26,984
30,478
28,722
33,582
36,506
400
159
342
11
538
33
130
38
63
186
1,847
2,300
2,903
2,600
2,606
74
51
110
162
94
0
0
0
0
0
29,338
31,362
33,871
36,418
39,930
17,767
16,889
15,978
15,513
15,388
5,398
5,585
5,567
5,578
5,405
For notes see
end of table.
Tables 325
14.—Continued
Factors absorbing reserve funds
Currency
in
circulation
Deposits, other
than reserves, with
Federal Reserve Banks
Treasury
cash
holdings 6
Treasury
Foreign
Other
Other
Federal
Reserve
accounts 3
Required
clearing
balances
Other
Federal
Reserve
liabilities
and
capital3
Member bank
reserves7
With
Federal
Reserve
Banks
Currency
and
Required9
Excess 9
4,951
5,091
288
385
51
51
96
73
25
28
118
208
0
0
0
0
,636
,890
0
0
1,585
1,822
51
68
5,325
4,403
4,530
4,757
4,760
218
214
225
213
211
57
96
1
1
38
51
5
12
3
4
19
18
1
5
26
19
20
298
285
276
275
258
0
0
0
0
0
0
0
0
0
0
,781
,753
,934
,898
2,220
0
0
0
0
0
0
1,654
0
1,884
2,161
0
99
0
14
59
4,817
4,808
4,716
4,686
4,578
203
201
208
202
216
16
17
18
23
29
8
46
5
6
6
21
19
21
21
24
272
293
301
348
393
0
0
0
0
0
0
0
0
0
0
2,212
2,194
2,487
2,389
2,355
0
0
0
0
0
2,256
2.250
2,424
2,430
2,428
-44
-56
63
-41
-73
4,603
5,360
5,388
5,519
5,536
211
222
272
284
3,029
19
54
8
3
11
2
6
79
19
4
20
22
31
24
128
169
375
354
355
360
241
0
0
0
0
0
0
0
0
0
0
2,471
1,961
2,509
2,729
4,096
0
0
0
0
0
2,375
1,994
1,933
1,870
2,282
96
-33
576
859
1,814
5,882
6,543
6,550
6,856
7,598
2,566
2,376
3,619
2,706
2,409
544
244
142
923
634
29
99
172
199
397
226
160
235
242
256
253
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
:
,336
,325
,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
,293
,270
,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
326 81st Annual Report, 1994
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-94 and Month-End 1994—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
U.S. Treasury and
federal agency securities
Total
Bought
outrightl0
Held
under
repurchase
agreement ''
Loans
Float'
All
other2
Other
Federal
Reserve
assets3
Total
Gold
stock4
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 5
1965
1966
1967
1968
1969
40,768
44,316
49,150
52,937
57,154
40,478
43,655
48,980
52,937
7,154'
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
41 Ml
52,031
56,624
64,584
13,733
13,159
11,982
10,367
10,367
1970
1971
1972
1973
1974
62,142
70,804
71,230
80,495
85,714
62,142
69,481
71,119
80,395
84,760
0
1,323
111
100
954
335
39
1,981
1,258
299
4,261
4,343
3,974
3,099
2,001
57
261
106
68
999
1,123
1,068
1,260
1,152
3,195
67,918
76,515
78,551
86,072
92,208
10,732
10,132
10,410
11,567
11,652
400
400
400
400
400
7,147
7,710
8,313
8,716
9,253
1975
1976
1977
1978
1979
94,124
104,093
111,274
118,591
126,167
92,789
100,062
108,922
117,374
124,507
1,335
4,031
2,352
1,217
1,660
211
25
265
1,174
1,454
3,688
2,601
3,810
6,432
6,767
1,126
991
954
587
704
3,312
3,182
2,442
4,543
5,613
102,461
110,892
118,745
131,327
140,705
11,599
11,598
11,718
11,671
11,172
500
1,200
1,250
1,300
1,800
10,218
10,810
11,331
11.831
13,083
1980
1981
1982
1983
1984
130,592
140,348
148,837
160,795
169,627
128,038
136,863
144,544
159,203
167,612
2,554
3,485
4,293
1,592
2,015
1,809
1,601
717
918
3,577
4,467
1,762
2,735
1,605
833
776
195
1,480
418
0
8,739
9,230
9,890
8,728
12,347
146,383
153,136
63,659
172,464
186,384
11,160
11,151
11,148
11,121
11,096
2,518
3,318
4,618
4,618
4,618
13,427
13,687
13,786
15,732
16,418
1985
1986
1987
1988
1989
191,248
221,459
231,420
247,489
235,417
186,025
205,454
226,459
240,628
233,300
5,223
16,005
4,961
6,861
2,117
3,060
1,565
3,815
2,170
481
988
1,261
811
1,286
1,093
0
0
0
0
0
15,302
17,475
15,837
18,803
39,631
210,598
241,760
251,883
269,748
276,622
11,090
11,084
11,078
11,060
11,059
4,718
5,018
5,018
5,018
8,518
17,075
17,567
18,177
18,799
19,628
1990
1991
1992
1993
1994
259,786
288,429
308,518
349,865
378,746
241,432
272,531
300,424
336,653
368,156
18,354
15,898
8,094
13,212
10,590
190
218
675
94
223
2,566
1,026
3,350
963 r
740
0
0
0
0
0
39,880
34,524
30,278
33,394
33,441
302,421
324,197
342,820
384,316 r
413,150
11,058
11,059
11,056
11,053
11,051
10,018
10,018
8,018
8,018
8,018
20,404
21,017
21,452
22,101
22,912
5,575
6,317
6,784
6,795
6,852
Tables
327
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federa 1 Reserve Banks
Currency
in
circulation
Treasury
cash
holdings6
42,056
44,663
47,226
50,961
53,950
Required
clearing
balances
Other
Federal
Reserve
liaWith
bilities
Federal
and
3 Reserve
capital
Banks
Treasury
Foreign
Other
Other
Federal
Reserve
accounts 3
760
1,176
1,344
695
596
668
416
1,123
703
1,312
150
174
135
216
134
355
588
563
747
807
211
-147
-773
-1,353
0
0
0
0
0
0
0
0
0
0
1,919
57,903
61,068
66,516
72,497
79,743
431
460
345
317
185
1,156
2,020
1,855
2,542
2,113
148
294
325
251
418
1,233
999
840
,419
,275
0
0
0
0
0
86,547
93,717
103,811
114,645
125,600
483
460
392
240
494
7,285
10,393
7,114
4,196
4,075
353
352
379
368
429
,090
,357
,187
,256
,412
0
0
0
0
0
0
0
0
0
0
136,829
144,774
154,908
171,935
183,796
441
443
429
479
513
3,062
4,301
5,033
3,661
5,316
411
505
328
191
253
617
781
1,033
851
867
197,488
211,995
230,205
247,649
260,456
550
447
454
395
450
9,351
7,588
5/H3
8,656
6,217
480
287
244
347
589
286,965
307,759
334,706
365,299
403,762
561
636
508
377
335
8,960
17,697
7,492
14,809
7,161
369
968
206
386
250
Member bank
reserves7
Currency
and
coin8
Required9
Excess9-12
18,447
19,779
21,092
21,818
22,085
4,163
4,310
4,631
4,921
5,187
22,848
24,321
25,905
27,439
28,173
-238
-232
-182
-700
-901
1,986
2,131
2,143
2,669
2,935
24,150
27,788
25,647
27,060
25,843
5,423
5,743
6,216
6,781
7,370
30,033
-460
32,496
1,035
32,044
98 l2
35,268 -1,360
37,011 -3,798
0
0
0
0
0
2,968
3,063
3,292
4,275
4,957
26,052
25,158
26,870
31,152
29,792
8,036
8,628
9,421
10,538
11,429
35,197
35,461
37,615
42,694
44,217
0
0
0
0
()
0
117
436
,013
,126
4.671
5,261
4,990
5,392
5,952
27,456
25,111
26,053
20,413
20,693
13,654
15,576
16,666
17,821
k
40,558
675
42,145 -1,442
41,391
!,328
39,179
-945
k
k
1,041
917
1,027
548
1,298
0
0
0
0
0
,490
,812
,687
,605
,618 r
5,940
6,088
7,129
7,683
8,486
27,141
46,295
40,097
37,742
36,713
n.a.
n.a.
n.a.
242
1,706
372
397
876
0
0
0
0
0
1,963
3,945 r
5,897 r
6,332 r
4,239
8,147
8,113
7,984
9,292
11,959
36,695
25,467 r
26,181 r
28,614 r
26,550
\
yy
r
n
n
r
-1,103 l4
-1,535
-1,265
-893
-2,835
328 81st Annual Report, 1994
14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—
Year-End 1918-94, and Month-End 1994—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
Total
1994
Jan. ...
Feb. ...
Mar. ...
Apr. ...
May ...
June ...
July . . . .
Aug. ...
Sept. ...
Oct. ...
Nov. ...
Dec. ...
Gold
stock 4
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 5
11,053
11,053
11,052
11,053
11,052
11,052
11,052
11,054
11,054
11,053
11,051
11,051
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
8,018
22,160
22,232
22,324
22,382
22,461
22,534
22,604
22,660
22,730
22,786
22,842
22,912
U.S. Treasury and
federal agency securities
Bought
outrightl()
Held
under
repurchase
agreement l '
345,608
342,824
346,937
347,126
354,047
362,203
356,858
361,198
359,326
360,072
371,029
378,746
336,432
337,739
341,487
347,126
348,342
351,564
352,738
352,947
356,816
356,057
362,864
368,156
9,176
5,085
5,450
0
5,705
10,639
4,120
8,251
2,510
4,015
8,165
10,590
Loans
Float'
122
48
463
234
240
701
458
494
504
264
144
223
2,440
687
543
208
550
636
22
540
339
571
346
740
NOTE. For a description of figures and discussion of
their significance, see Banking and Monetary Statistics,
1941-1970 (Board of Governors of the Federal Reserve
System, 1976), pp. 507-23. Components may not sum to
totals because of rounding.
. . . Not applicable.
n.a. Not available.
r Revised.
1. Beginning in 1960, figures reflect a minor change in
concept; see Federal Reserve Bulletin, vol. 47 (February
1961), p. 164.
2. Principally acceptances and, until August 21, 1959,
industrial loans, authority for which expired on that date.
3. 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 is reported as "Other Federal Reserve accounts";
thereafter, "Other Federal Reserve assets" and "Other
Federal Reserve liabilities and capital" are shown
separately.
4. Before January 30, 1934, includes gold held in
Federal Reserve Banks and in circulation.
Other
Federal
All
other2 Reserve
assets3
0
0
0
0
0
0
0
0
0
0
0
0
33,940
32,031
33,372
34,171
32,080
32,799
33,659
32,030
33,482
34,837
31,349
33,441
Total
382,110
375,590
381,315
381,739
386,917
396,339
390,997
394,262
393,651
395,744
402,868
413,150
5. 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.
6. Coin and paper currency held by the Treasury, as
well as any gold in excess of the gold certificates issued
to the Reserve Bank.
7. Beginning in November 1979, includes reserves
of member banks, Edge Act corporations, and U.S. agencies and branches of foreign banks. Beginning on
November 13, 1980, includes reserves of all depository
institutions.
Beginning in 1984, data on "Currency and coin" and
"Required" and "Excess" reserves changed from daily
to biweekly basis.
8. Between December 1, 1959, and November 23,
1960, part was allowed as reserves; thereafter all was
allowed.
9. 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
329
14.—Continued
Factors absorbing reserve funds
Deposits, other
than reserves, with
Federal Reserve Banks
Other
360,919
364,947
369,038
370,701
377,939
382,159
382,244
386,010
385,516
389,604
396,703
403,762
378
365
370
378
361
353
352
368
363
363
389
335
21,541
4,886
6,181
7,965
5,675
9,356
3,683
5,994
6,848
5,164
5,348
7,161
257
191
454
171
174
604
182
188
342
223
230
250
Other
Federal
Reserve
accounts 3
255
373
316
312
278
286
244
289
318
392
302
876
0
0
0
0
0
0
0
0
0
0
0
0
10. 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.
11. Beginning December 1, 1966, includes federal
agency obligations held under repurchase agreements and
beginning September 29, 1971, includes federal agency
issues bought outright.
12. Beginning 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
bal-
6,229
6,223
6,624
6,540
6,053
5,681
5,512
5,350
4,916
4,522
4,347
4,239
Other
Federal
Reserve
liaWith
bilities
Federal
and
3 Reserve
capital
Banks
9,759
10,337
10,618
10,189
10,836
11,825
11,394
10,864
12,012
12,584
11,133
11,959
24,003
29,571
29,110
26,934
27,132
27,677
29,061
26,932
25,138
24,749
26,328
26,550
Member bank
reserves8
Currency
and
coin8
Required 9
Ex-
n.a.
n.a.
n.a.
11 l
13. 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.
14. Adjusted to include waivers of penalties for reserve deficiencies, in accordance with change in Board
policy effective November 19, 1975.
330 81st Annual Report, 1994
15. Number of Banking Offices in the United States, December 31, 1993 and 1994
Commercial banks'
Type of office,
number, and change
Member3
Total
State-chartered
savings
banks2
Nonmember
Total
Noninsured
Total
National
State
Insured
Noninsured4
979
6,613
290
509
0
Insured
BANKS
Number, Dec. 31, 1993 ..
Changes during 1994
New banks
. .
Ceased banking
5
operation
Banks converted
into branches6
Other7
11,751
11,242
4,339
3,360
65
65
21
16
5
27
17
0
0
-25
-11
-2
0
-286
-2
0
3
-22
40
0
0
-58
-545
53
-56
-20
-19
_|
-523
13
-237
12
-191
-34
-46
46
-485
-501
-224
-228
4
-286
9
16
0
11,266
10,741
4,115
3,132
983
6,327
299
525
0
55,891
52,865
35,560
27,853
7,707
17,215
90
3,026
0
2,270
2,057
1,279
995
284
776
2
213
0
545
-1,016
416
539
-940
334
349
-696
130
298
-518
98
51
-178
32
190
-243
204
0
-1
0
6
-76
82
0
0
0
2,215
1,990
1,062
873
189
927
1
225
o
Number, Dec. 31, 1994 .. 58,106
54,855
36,622
28,726
7,896
18,142
91
3,251
0
Net change
Number, Dec. 31,1994 ..
BRANCHES AND
ADDITIONAL OFFICES
Number, Dec. 31, 1993 ..
Changes during 1994
De novo
Banks converted
into branches
Discontinued
Other7
Net change7
NOTE. Preliminary. Final data will be available in the
Annual Statistical Digest, 1994, forthcoming.
1. Includes nondeposit trust companies, private banks,
industrial banks, and nonbank banks. Member institutions
are those that are members of the Federal Reserve
System.
2. Formerly called mutual savings banks.
3. As of Dec. 31, 1988, includes noninsured trust
companies that are members of the Federal Reserve
System.
4. Includes one workout national bank.
5. Includes five banks that converted into thrift
institutions.
6. Includes three banks that converted into thrift institution branches.
7. Includes interclass changes and sales of branches.
Tables 331
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1994
Crestar Bank, Richmond, Virginia to merge with
NVR Federal Savings Bank, McLean, Virginia1
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-22-93)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-3-94)
The applicant has assets of $10.9 billion; the target
has assets of $521.1 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.
First Bank, Creve Coeur, Missouri, through
First Heritage Interim Bank, St. Louis, Missouri to merge with Heritage National Bank,
St. Louis, Missouri
SUMMARY REPORT BY THE ATTORNEY GENERAL
(2-2-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-9-94)
The applicant has assets of $710.4 million; the
target has assets of $60.8 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.
First Interstate Bank of California, Los Angeles, California to merge with San Diego Trust &
Savings Bank, San Diego, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-1-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-16-94)
The applicant has assets of $20.5 billion; the target
has assets of $1.9 billion. The parties do not
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
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.
Premier Bank and Trust, Elyria, Ohio to acquire assets and liabilities of the Worthington
branch of Jefferson Savings Bank, West Jefferson, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-18-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-16-94)
The applicant has assets of $498.1 million; the
target has assets of $4.9 million. The parties operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
BancFirst, Oklahoma City, Oklahoma to merge
with First City Bank, Tulsa, Oklahoma
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-8-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(2-17-94)
The applicant has assets of $738.0 million; the
target has assets of $40.0 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.
Crestar Bank MD, Bethesda, Maryland to
merge with Annapolis Federal Savings Bank,
Annapolis, Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-8-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3-4-94)
The applicant has assets of $884.2 million; the
target has assets of $329.1 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.
1st United Bank, Boca Raton, Florida to merge
with Suburban Bank, Lake Worth, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-8-94)
332 81st Annual Report, 1994
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1994—Continued
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3-9-94)
The applicant) has assets of $124.0 million; the
target has assets of $164.2 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Fairfax Bank & Trust Company, Fairfax, Virginia to merge with Federal Savings Association
of Virginia, Falls Church, Virginia
Fifth Third Bank, Cincinnati, Ohio to acquire
the assets and liabilities of three Ohio branches
of Citizens Federal Bank, Miami, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-18-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4-12-94)
The applicant has assets of $6.9 billion; the target
has assets of $44.2 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
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 Federal Savings Association of Virginia.2
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(3-11-94)
The applicant has assets of $164.8 million; the
target has assets of $1.7 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
First Community Bank, Forest, Virginia to
acquire the assets and liabilities of the Moneta
branch of First Union National Bank of Virginia, Roanoke, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-18-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
The Sun City Bank, Sun City, Arizona to
acquire the assets and liabilities of the Sun City
branch of First National Bank of Arizona,
Phoenix, Arizona
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4-8-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4-13-94)
The applicant has assets of $28.1 million; the
target has assets of $17.9 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Citizens Trust Bank, Atlanta, Georgia to
acquire assets and liabilities of the main office
of Southern Federal Savings Association of
Georgia, Atlanta, Georgia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-31-94)
The applicant has assets of $83.9 million; the
target has assets of $10.9 million. The parties do
not operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
Request for report dispensed with as authorized by
the Bank Merger Act.
2. In such cases 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."
Chemical Bank and Trust Company, Midland,
Michigan to acquire assets and liabilities of the
Edenville branch of First of America BankMid Michigan, NA, Bay City, Michigan
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(4-22-94)
The applicant has assets of $118.0 million; the
target has assets of $14.4 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Tables
333
16.—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
(3-18-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5-3-94)
The applicant has assets of $530.1 million; the
target has assets of $267.0 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Fairfax Bank & Trust Company, Fairfax, Virginia to merge with Commonwealth Federal
Savings Bank, Manassas, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
The applicant has assets of $12.2 billion; the target
has assets of $165.1 million. The RTC has recommended immediate action by the Federal Reserve
System to prevent the probable failure of the
target.
The Peoples Bank & Trust Company, Selma,
Alabama to acquire assets and liabilities of the
Selma branch of Altus FSB, Mobile, Alabama
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
(5-20-94)
The applicant has assets of $278.9 million; the
target has assets of $10.1 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5-6-94)
The applicant has assets of $174.4 million; the
target has assets of $29.7 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Chemung Canal Trust Company, Elmira,
New York to acquire the assets and liabilities
of Bath, Painted Post, and Watkins Glen
branches of Columbia Banking, FSA, Rochester, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
Signet Bank/Virginia, Richmond, Virginia to
merge with Pioneer Federal Savings Bank,
Chester, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4-29-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(5-12-94)
The applicant has assets of $9.0 billion; the target
has assets of $391.8 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.
Crestar Bank, Richmond, Virginia to merge with
Piedmont Federal Savings Association, Manassas, 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
(5-13-94)
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-3-94)
The applicant has assets of $412.9 million; the
target has assets of $46.7 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Wellington State Bank, Wellington, Texas to
merge with First National Bank in Wheeler,
Wheeler, Texas
SUMMARY REPORT BY THE ATTORNEY GENERAL
(4-29-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-16-94)
The applicant has assets of $35.7 million; the
target has assets of $36.3 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.
334 81st Annual Report, 1994
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1994—Continued
Farmers & Merchants Savings Bank, Manchester, Iowa to acquire assets and liabilities of the
Cedar Rapids branch of United Federal Savings Association of Iowa, Des Moines, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-24-94)
The applicant has assets of $45.2 million; the
target has assets of $2.4 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Hawkeye Bank, Des Moines, Iowa to acquire
assets and liabilities of the Waukonda branch
of United Federal Savings Association, Des
Moines, Iowa
SUMMARY REPORT BY THE ATTORNEY GENERAL
Request for report dispensed with as authorized by
the Bank Merger Act.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(6-24-94)
The applicant has assets of $242.7 million; the
target has assets of $700 thousand. 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 acquire assets and liabilities of
one branch of Ukrainian Federal Savings &
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
(6-24-94)
The applicant has assets of $76.3 million; the
target has assets of $18.7 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Ambassador Bank of the Commonwealth,
Allentown, Pennsylvania to acquire assets and
liabilities of one branch of Lafayette Bank, Easton, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-8-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-6-94)
The applicant has assets of $104.8 million; the
target has assets of $8.5 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.
Mid-Peninsula Bank, Palo Alto, California to
merge with WesCal National Bank, San Mateo,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7-1-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-25-94)
The applicant has assets of $138.8 million; the
target has assets of $32.3 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Fifth Third Bank of Kentucky, Inc., Louisville,
Kentucky (formerly Fifth Third Bank of Central Kentucky, Lexington, Kentucky) to merge
with The Cumberland Federal Savings Bank,
Louisville, Kentucky
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-8-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-27-94)
The applicant has assets of $302 million; the target
has assets of $709 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.
Southtrust Bank of West Florida, St. Petersburg, Florida to merge with University State
Bank, Tampa, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-8-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8-10-94)
Tables
335
16.—Continued
The applicant has assets of $758.3 million; the
target has assets of $19.8 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.
United Bank of Philadelphia, Philadelphia,
Pennsylvania to acquire assets and liabilities of
the West Girard branch of Central Pennsylvania Savings Association, FA, Shamokin,
Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-16-94)
The proposed transaction would not be significantly adverse to competition.
tors and considerations relating to the convenience
and needs of the community are consistent with
approval.
Crestar Bank, Richmond, Virginia to merge with
Second National Federal Savings Association,
Salisbury, Maryland
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
(9-16-94)
The applicant has assets of $12.1 billion; the target
has assets of $15.6 million. The RTC has recommended immediate action by the Federal Reserve
to prevent the probable failure of the target.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(8-22-94)
The applicant has assets of $92.1 million; the
target has assets of $7.5 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.
Minden Bank & Trust Company, Minden,
Louisiana to acquire assets and liabilities of the
Minden branch of Oak Tree Federal Savings
Bank, New Orleans, Louisiana
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
(8-29-94)
The applicant has assets of $165.6 million; the
target has assets of $5.7 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Bank of Fresno, Fresno, California to merge
with Mineral King National Bank, Visalia,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9-21-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-21-94)
The applicant has assets of $775.9 million; the
target has assets of $187.8 million. The parties do
no operate in the same market. The banking fac
Premier Bank & Trust, Elyria, Ohio to acquire
assets and liabilities of the Avon and Sheffield
Lake branches of Charter One Bank, FSB,
Cleveland, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL
(8-16-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-19-94)
The applicant has assets of $495.8 million; the
target has assets of $21.2 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
First Interstate Bank of California, Los Angeles, California to merge with Sacramento Savings Bank, Sacramento, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7-1-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-22-94)
The applicant has assets of $20.1 billion; the target
has assets of $3.0 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.
Barnett Bank of Palm Beach County, West
Palm Beach, Florida to acquire assets and liabili-
336 81st Annual Report, 1994
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1994—Continued
ties of eight branches of Glendale Federal Bank,
FSB, Glendale, California
The proposed transaction would not be significantly adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-1-94)
The proposed transaction would not be significantly adverse to competition.
(9-29-94)
The applicant has assets of $2.0 billion; the target
has assets of $34.0 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-29-94)
The applicant has assets of $2.8 billion; the target
has assets of $413.0 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Barnett Bank of Pasco County, Port Richey,
Florida to acquire assets and liabilities of two
branches of Glendale Federal Bank, FSB, Glendale, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7-1-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-29-94)
The applicant has assets of $1.1 billion; the target
has assets of $113.0 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Barnett Bank of Tampa, Tampa, Florida to
acquire assets and liabilities of nine branches
of Glendale Federal Bank, FSB, Glendale,
California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7-1-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-29-94)
The applicant has assets of $2.6 billion; the target
has assets of $406.0 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
FCNB Bank, Frederick, Maryland to acquire
the assets and liabilities o/the Damascus branch
of Bank of Baltimore, Baltimore, Maryland
SUMMARY REPORT BY THE ATTORNEY GENERAL
Barnett Bank of Pinellas County, St. Petersburg, Florida to acquire assets and liabilities of
six branches of Glendale Federal Bank, FSB,
Glendale, California
(9-21-94)
The proposed transaction would not be significantly adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(7-1-94)
The proposed transaction would not be significantly adverse to competition.
(10-6-94)
The applicant has assets of $608.1 million; the
target has assets of $8.9 million. The parties operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(9-29-94)
The applicant has assets of $3.2 billion; the target
has assets of $317.0 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Barnett Bank of Southwest Florida, Sarasota,
Florida to acquire assets and liabilities of one
branch of Glendale Federal Bank, FSB, Glendale, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(7-1-94)
Manufacturers and Traders Trust Company,
Buffalo, New York to acquire assets and liabilities of seven branches of Chemical Bank,
New York, New York, located in Orange and
Rockland counties
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-8-94)
The proposed transaction would not be significantly adverse to competition.
Tables
337
16.—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10-12-94)
The applicant has assets of $8.9 billion; the target
has assets of $163.8 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.
erations relating to the convenience and needs of
the community are consistent with approval.
First Bank North, Freeport, Illinois to acquire
the assets and liabilities of the DeKalb branch of
Home Federal Savings & Loan Association, of
Elgin, Elgin, Illinois
SUMMARY REPORT BY THE ATTORNEY GENERAL
Manufacturers and Traders Trust Company,
Buffalo, New York to merge with Citizens Savings and Loan Association, the successor by
merger to Citizens Savings Bank, FSB, Ithaca,
New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(6-8-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10-12-94)
The applicant has assets of $8.9 billion; the target
has assets of $449.0 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
(8-30-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-7-94)
The applicant has assets of $208.6 million; the
target has assets of $13.5 million. The parties do
no operate in the same market. The banking factors and considerations relating to the convenience
and needs of the community are consistent with
approval.
ValliWide Bank, Fresno, California to merge
with Bank One Fresno, National Association,
Fresno, California
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-18-94)
Commercial Bank of Florida, Miami, Florida to
acquire the assets and liabilities of five Florida
branches of Cartaret Federal Savings Bank,
Newark, New Jersey
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
(10-14-94)
The applicant has assets of $258.0 million; the
target has assets of $131.2 million. The RTC has
recommended immediate action by the Federal
Reserve System to prevent the probable failure of
the target.
Fifth Third Bank, Cincinnati, Ohio to merge
with Mutual Federal Savings Bank of Miamisburg, Miamisburg, Ohio
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-14-94)
The applicant has assets of $540.0 million; the
target has assets of $166.0 million. The parties
compete in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Banco Popular de Puerto Rico, Hato Rey,
Puerto Rico to acquire the assets and liabilities of
the Ridge wood branch of The Chase Manhattan Bank, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9-29-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-22-94)
The applicant has assets of $11.3 billion; the target
has assets of $26.0 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
(10-28-94)
The applicant has assets of $7.2 billion; the target
has assets of $86.1 million. The parties operate in
the same market. The banking factors and consid-
Crestar Bank, Richmond, Virginia to merge with
Jefferson Savings and Loan Association, FA,
Warrenton, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-18-94)
The proposed transaction would not be significantly adverse to competition.
338 81st Annual Report, 1994
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1994—Continued
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10-18-94)
The proposed transaction would not be significantly adverse to competition.
(11-28-94)
The applicant has assets of $140.7 million; the
target has assets of $174.0 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-23-94)
The applicant has assets of $12.2 billion; the target
has assets of $294.6 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Humboldt Bank, Eureka, California to acquire
assets and liabilities of three branches of U.S.
Bank of California, Sacramento, California
Integra Bank/North, Titusville, Pennsylvania
to acquire the assets and liabilities of the Bradford branch of Bucktail Bank & Trust Company, Emporium, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-23-94)
The proposed transaction would not be significantly adverse to competition.
(11-30-94)
The applicant has assets of $136.0 million; the
target has assets of $30.5 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.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-23-94)
The applicant has assets of $2.8 billion; the target
has assets of $5.2 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Chemung Canal Trust Company, Elmira,
New York to merge with Owego National Bank,
Owego, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-3-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(11-28-94)
The applicant has assets of $444.7 million; the
target has assets of $39.1 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.
(10-27-94)
The proposed transaction would not be significantly adverse to competition.
Integra Bank/Pittsburgh, Pittsburgh, Pennsylvania to merge with Lincoln Savings Bank,
Carnegie, Pennsylvania
SUMMARY REPORT BY THE ATTORNEY GENERAL
(9-21-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-2-94)
The applicant has assets of $7.7 billion; the target
has assets of $264 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 of America-West Michigan, Grand Rapids, Michigan to acquire assets and liabilities of
the Grand Rapids branch of Great Lakes
Bancorp, FSB, Ann Arbor, Michigan
First Security Bank, Fort Upton, Colorado to
acquire assets and liabilities of seven Colorado
branches of World Savings & Loan Association,
Oakland, California
(11-4-94)
The proposed transaction would not be significantly adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(10-18-94)
The proposed transaction would not be significantly adverse to competition.
(12-5-94)
The applicant has assets of $1.2 billion; the target
has assets of $11.9 million. The parties operate in
SUMMARY REPORT BY THE ATTORNEY GENERAL
Tables
339
16.—Continued
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Vail Bank, Vail, Colorado to acquire assets and
liabilities of the Vail branch of Colorado Community First State Bank, Vail, Colorado
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-27-94)
The proposed transaction would not be significantly adverse to competition.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-18-94 The proposed transaction would not be
significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-20-94)
The applicant has assets of $22.1 billion; the target
has assets of $625.0 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
(12-7-94)
The applicant has assets of $75.0 million; the
target has assets of $6.0 million. The parties operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Dakota County State Bank, Mendota Heights,
Minnesota to merge with The Phalen Bank,
St Paul, Minnesota
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-14-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-13-94)
The applicant has assets of $46.0 million; the
target has assets of $14.2 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
Crestar Bank, Richmond, Virginia to merge with
Independent Bank, Manassas, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(10-18-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-14-94)
The applicant has assets of $12.2 billion; the target
has assets of $90.3 million. The parties operate in
the same market. The banking factors and considerations relating to the convenience and needs of
the community are consistent with approval.
Centura Bank, Rocky Mount, North Carolina
to merge with Cleveland Interim Bank, the successor to Cleveland Federal Bank, a Savings
Bank, Shelby, North Carolina
SUMMARY REPORT BY THE ATTORNEY GENERAL
(12-14-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-22-94)
The applicant has assets of $4.2 billion; the target
has assets of $87.9 million. The parties do not
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
First Community Bank, Inc., Princeton, West
Virginia to merge with Ameribank, Inc., Welch,
West Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL
(11-23-94)
The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-22-94)
The applicant has assets of $693.7 million; the
target has assets of $77.8 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 Plant State Bank,
Plant City, Florida
SUMMARY REPORT BY THE ATTORNEY GENERAL
First Interstate Bank of California, Los Angeles, California to merge with Bank of A. Levy,
Ventura, California
(12-8-94)
The proposed transaction would not be significantly adverse to competition.
340 81st Annual Report, 1994
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors, 1994—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE
(12-28-94)
The applicant has assets of $827.7 million; the
target has assets of $42.4 million. The parties
operate in the same market. The banking factors
and considerations relating to the convenience
and needs of the community are consistent with
approval.
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, and the convenience and needs
of the community to be served were consistent
with approval.
Institution'
Assets
(millions
of dollars)
WesBanco Bank Wheeling, Wheeling, West Virginia
Merger
WesBanco Bank Wellsburg, Inc., Wellsburg, West Virginia
397
Omnibank Southeast, Denver, Colorado
Merger
Omnibank Denver, Denver, Colorado
Omnibank Leetsdale, Denver, Colorado
208
3-18-94
22
22
6,176
Centura Bank, Rocky Mount, North Carolina
Merger
Mid-South Bank and Trust Company, Sanford, North Carolina
3,937
4-12-94
3,496
1,236
4-19-94
232
131
4-29-94
4,600
First State Bank of Taos, Taos, New Mexico
Merger
First State Bank of Santa Fe, Santa Fe, New Mexico
145
Bank of Fresno, Fresno, California
Merger
Merced Bank of Commerce, Merced, California
526
First Virginia Bank-Shenandoah Valley, Woodstock, Virginia
Merger
First Virginia Bank of Augusta, Staunton, Virginia
First Virginia Bank-Planters, Bridgewater, Virginia
184
3-1-94
55
United Jersey Bank Hackensack, New Jersey
Merger
United Jersey Bank-Central, South Brunswick, New Jersey
United Jersey Bank-South, NA, Cherry Hill, New Jersey
Wilmington Trust of Pennsylvania, West Chester, Pennsylvania
Merger
Wilmington Trust Company (one branch only),
Wilmington, Delaware
Date of
approval
5-2-94
23
5-23-94
64
86
119
5-24-94
Tables 341
16.—Continued
Institution'
The Bank of Mid-Jersey, Bordentown, New Jersey
Assets
(millions
of dollars)
421
Date of
approval
5-24-94
Merger
Mount Holly State Bank, Mount Holly, New Jersey
Fleet Bank of New York, Albany, New York
127
9,607
6-1-94
Merger
Fleet Bank, Melville, New York
2,795
M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin
2,829
6-28-94
Merger
Valley Bank Milwaukee, Milwaukee, Wisconsin
M&I Greater Milwaukee Bank, Milwaukee, Wisconsin
M&I Wauwatosa Bank, Wauwatosa, Wisconsin
454
94
257
Omnibank Southeast, Denver, Colorado
224
7-11-94
Merger
Omnibank Arvada, Arvada, Colorado
Omnibank University Hills, Denver, Colorado
Sun Bank of Ocala, Ocala, Florida
50
32
525
7-18-94
Merger
Sun Bank of Gainesville, Gainesville, Florida
185
Omnibank Southeast, Denver, Colorado
224
8-4-94
Merger
Omnibank Arapahoe, Englewood, Colorado
21
Rocky Mountain Bank, Billings, Montana
24
9-6-94
Merger
Powder River Bank, Broadus, Montana
Security State Bank, Harlem, Montana
Rocky Mount Bank of Plains, Plains, Montana
First State Bank of Stevensville, Stevensville, Montana
WhiteHall State Bank, Whitehall, Montana
Old Kent Bank, Elmhurst, Illinois
24
19
27
26
15
1,600
9-14-94
Merger
Edgemark Bank-Lombard, Lombard, Illinois
Merchandise National Bank, Chicago, Illinois
Edgemark Bank-Rosemont, Rosemont, Illinois (combined assets)
289
First Community Bank, Inc., Princeton, West Virginia
452
9-14-94
Merger
The Flat Top National Bank of Bluefield, Bluefield, West Virginia
Peoples Bank of Bluewell, Bluewell, West Virginia
First Federal Savings Bank, Bluefield, West Virginia
Barton County State Bank, Lamar, Missouri
184
45
20
49
Merger
Citizens State Bank of Nevada, Nevada, Missouri
52
9-23-94
342 81st Annual Report, 1994
16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities
Approved by the Board of Governors—Continued
Institution ]
United Jersey Bank, Hackensack, New Jersey
Merger
Valley Savings Bank, Closter, New Jersey
Capital City Bank (formerly Havana State Bank), Havana, Florida ..
Merger
Capital City First National Bank, Tallahassee, Florida
Capital City Second National Bank, Tallahassee, Florida
City National Bank, Tallahassee, Florida
Industrial National Bank, Tallahassee, Florida
Gadsden National Bank, Quincy, Florida
First National Bank of Jefferson County, Monticello, Florida
Compass Bank, Pensacola, Florida
Merger
Compass Bank, FSB Jacksonville, Florida
F&M Bank-Massanutten, Harrisonburg, Virginia
Merger
F&M Bank-Broadway, Broadway, Virginia
Assets
(millions
of dollars)
Date of
approval
11,754
9-30-94
382
29
361
51
81
57
38
24
91
90
Marine Midland Bank, Buffalo, New York
Merger
Six New York, New York, branches of Hongkong Shanghai
Banking Corporation
16,900
11-18-94
64
4,500
WesBanco Bank Wheeling, Wheeling, West Virginia
Merger
WesBanco Bank Elm Grove, Elm Grove, West Virginia
11-3-94
459
Old Kent Bank, Grand Rapids, Michigan
Merger
Old Kent Bank of Big Rapids, Big Rapids, Michigan
Old Kent Bank of Cadillac, Cadillac, Michigan
Old Kent Bank-Central, Owosso, Michigan
Old Kent Bank-East, Brighton, Michigan
Old Kent Bank of Gaylord, Gaylord, Michigan
Old Kent Bank of Grand Haven, Grand Haven, Michigan
Old Kent Bank-Grand Traverse, Traverse City, Michigan
Old Kent Bank of Hillsdale, Hillsdale, Michigan
Old Kent Bank of Holland, Holland, Michigan
Old Kent Bank of Ludington, Ludington, Michigan
Old Kent Bank of Petoskey, Petoskey, Michigan
Old Kent Bank of St. Johns, St. Johns, Michigan
Old Kent Bank-Southeast, Trenton, Michigan
Old Kent Bank-Southwest, Kalamazoo, Michigan (combined assets).
Integra Bank/South, Uniontown, Pennsylvania
Merger
Branch of Integra Bank/Pittsburgh, Burgettstown, Pennsylvania
10-25-94
11-21-94
3,900
11-21-94
441
2,400
12-2-94
13
445
155
12-6-94
Tables
343
16.—Continued
Assets
(millions
of dollars)
Institution '
1,675
Westamerica Bank, San Rafael, California
Merger
Pacific Valley National Bank, Modesto, California
Date of
approval
12-8-94
171
United Jersey Bank, Hackensack, New Jersey
Merger
Palisade Savings Bank, FSB, Ridgefield Park, New Jersey
12,463
12-14-94
324
1. Each proposed transaction was to be effected under
the charter of the first-named bank. The entries are in
chronological order of approval. Some transactions
include the acquisition of only certain assets and liabilities of the affiliated bank.
Mergers Approved Involving a Nonoperating
Institution with an Existing Bank
The following transactions have no significant
effect on competition; they simply facilitate the
acquisition of the voting shares of a bank (or
banks) by a holding company. In such cases, the
summary report by the Attorney General indicates
that the transaction will merely combine an existing bank with a nonoperating institution; in consequence, and without regard to the acquisition of
the surviving bank by the holding company, the
merger would have no effect on competition. The
Board of Governors, the Federal Reserve Bank, or
the Secretary of the Board, 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'
1-5-94
The Middleburg Bank, Middleburg, Virginia
Merger
The Middleburg National Bank, Middleburg, Virginia
118
United Bank of Philadelphia, Philadelphia, Pennsylvania
Merger
New Bank Philadelphia, Philadelphia, Pennsylvania
5-4-94
171
New Pace American Bank Lawrenceville, Lawrenceville, Virginia ...
Merger
Pace American Bank Lawrenceville, Lawrenceville, Virginia
77
8-24-94
Merchants Bank Vicksburg, Vicksburg, Mississippi
Merger
Merchants Bank, NA, Vicksburg, Mississippi
1. Each proposed transaction was to be effected under
the charter of the first-named bank. The entries are in
chronological order of approval.
Date of
approval
10-28-94
58
2. Where no assets are listed, the bank is newly organized and not in operation,
Federal Reserve
Directories and Meetings
346 81st Annual Report, 1994
Board of Governors of the Federal Reserve System
December 31,1994
Members
Term expires
A L A N GREENSPAN, of New York, Chairman'
January 31, 2006
ALAN S. BLINDER, of New Jersey, Vice Chairman '
January 31, 1996
SUSAN M. PHILLIPS, of Iowa
January 31, 1998
LAWRENCE B. LINDSEY, of Virginia
January 31, 2000
JOHN P. LAWARE, of Massachusetts
January 31, 2002
EDWARD W. KELLEY, JR., of Texas
January 31, 2004
JANET L. YELLEN, of California
January 31, 2008
Officers
OFFICE OF BOARD MEMBERS
DIVISION OF CONSUMER
Joseph R. Coyne, Assistant to the Board
Donald J. Winn, Assistant to the Board
Theodore E. Allison, Assistant to the Board
for Federal Reserve System Affairs
Lynn Fox, Deputy Congressional Liaison
Bob Stahly Moore, Special Assistant
to the Board
Winthrop P. Hambley, Special Assistant
to the Board
Diane E. Werneke, Special Assistant
to the Board
AND COMMUNITY AFFAIRS
Griffith L. Garwood, Director
Glenn E. Loney, Associate Director
Dolores S. Smith, Associate Director
Maureen P. English, Assistant Director
Irene Shawn McNulty, Assistant Director
LEGAL DIVISION
J. Virgil Mattingly, Jr., General Counsel
Scott G. Alvarez, Associate General
Counsel
Richard M. Ashton, Associate
General Counsel
Oliver Ireland, Associate General
Coumel
Kathleen M. O'Day, Associate General
Counsel
Robert deV. Frierson, Assistant General
Counsel
^ . . TT A17U .
. .
„
,
Kathenne H. Wheatley, Assistant General
Counsel
OFFICE
William
Jennifer
Barbara
OF THE SECRETARY
W. Wiles, Secretary
J. Johnson, Deputy Secretary
R. Lowrey, Associate Secretary
1. The designations as Chairman and Vice Chairman
expire on March 2, 1996, and June 24, 1998, respectively,
Digitizedunless the service of these members of the Board shall
for FRASER
have terminated sooner.
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
~
^
o
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
j a m e s I. Garner, Deputy Associate Director
William C. Schneider, Jr., Project Director,
National Information Center
Howard A. Amer, Assistant Director
G e m l d A E d w a r d s ? J r Assistant
Director
_ _
.
. .
_.
T
James D. Goetzinger, Assistant Director
, w TT _ ° T A .
o
Stephen M. Hoffman, Jr., Assistant
Director
Laura M. Homer, Assistant Director
James V Hou t Jr
P ' - 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 347
Board of Governors—Continued
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
Donald B. Adams, Assistant Director
Thomas A. Connors, Assistant Director
Peter Hooper III, Assistant Director
Karen H. Johnson, Assistant Director
Catherine L. Mann, Assistant Director
Ralph W. Smith, Jr., Assistant Director
David H. Howard, Senior Adviser
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT
S. David Frost, Staff Director
Portia W. Thompson, Equal Employment
Opportunity Programs Adviser
DIVISION OF HUMAN
RESOURCES MANAGEMENT
David L. Shannon, Director
John R. Weis, Associate Director
Anthony V. DiGioia, Assistant Director
Joseph H. Hayes, Jr., Assistant Director
Fred Horowitz, Assistant Director
OFFICE OF THE CONTROLLER
DIVISION OF RESEARCH
AND STATISTICS
Michael J. Prell, Director
Edward C. Ettin, Deputy Director
David J. Stockton, Deputy Director
Martha Bethea, Associate Director
William R. Jones, Associate Director
Myron L. Kwast, Associate Director
Patrick M. Parkinson, Associate Director
Thomas D. Simpson, Associate Director
Lawrence Slifman, Associate Director
Martha S. Scanlon, Deputy
Associate Director
Peter A. Tinsley, Deputy
Associate Director
Flint Brayton, Assistant Director
David S. Jones, Assistant Director
Stephen A. Rhoades, Assistant Director
Charles S. Struckmeyer, Assistant Director
Patricia White, Assistant Director
Joyce K. Zickler, Assistant Director
John J. Mingo, Senior Adviser
Glenn B. Canner, Adviser
DIVISION OF MONETARY AFFAIRS
Donald L. Kohn, Director
David E. Lindsey, Deputy Director
Brian F. Madigan, Associate Director
Richard D. Porter, Deputy Associate
Director
Vincent R. Reinhart, Assistant Director
Normand R.V. Bernard, Special Assistant
to the Board
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
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
Louise L. Roseman, Associate 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
Florence M. Young, Assistant Director
348 81st Annual Report, 1994
Board of Governors—Continued
OFFICE OF THE INSPECTOR GENERAL
Brent L. Bowen, Inspector General
Donald L. Robinson, Assistant Inspector
General
Barry R. Snyder, Assistant Inspector
General
Federal Open Market Committee
December 31,1994
Members
ALAN GREENSPAN, Chairman, Board of Governors
WILLIAM J. McDONOUGH, Vice Chairman, President, Federal Reserve Bank of New York
A L A N S. BLINDER, Board of Governors
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
EDWARD W. KELLEY, JR., Board of Governors
JOHN P. LAWARE, Board of Governors
LAWRENCE B. LINDSEY, Board of Governors
ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco
SUSAN M. PHILLIPS, Board of Governors
JANET L. YELLEN, Board of Governors
Alternate Members
THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City
THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis
CATHY E. MlNEHAN, President, Federal Reserve Bank of Boston
MICHAEL H. MOSKOW, President, Federal Reserve Bank of Chicago
JAMES H. OLTMAN, First Vice President, Federal Reserve Bank of New York
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
JACK H. BEEBE,
Associate Economist
MARVIN S. GOODFRIEND,
Associate Economist
DAVID E. LINDSEY,
Associate Economist
FREDERICK S. MISHKIN,
Associate Economist
LARRY J. PROMISEL,
Associate Economist
CHARLES J. SIEGMAN,
Associate Economist
THOMAS D. SIMPSON,
Associate Economist
MARK S. SNIDERMAN,
Associate Economist
DAVID J. STOCKTON,
Associate Economist
SHEILA E. TSCHINKEL,
Associate Economist
Directories and Meetings 349
Federal Open Market Committee—Continued
JOAN E. LOVETT, Manager for Domestic Operations, System Open Market Account
PETER R. FISHER, Manager for Foreign Operations, System Open Market Account
During 1994 the Federal Open Market Committee held ten meetings (see Minutes of
Federal Open Market Committee Meetings
in this REPORT.)
Federal Advisory Council
December 31,1994
Members
District 1—MARSHALL N. CARTER, Chairman and Chief Executive Officer,
State Street Bank and Trust Company, Boston, Massachusetts
District 2—J. CARTER BACOT, Chairman and Chief Executive Officer,
The Bank of New York, New York, New York
District 3—ANTHONY P. TERRACCIANO, Chairman, President, and Chief Executive Officer,
First Fidelity Bancorporation, Newark, New Jersey
District 4—FRANK V. CAHOUET, Chairman, President, and Chief Executive Officer,
Mellon Bank Corporation and Mellon Bank, N.A., Pittsburgh, Pennsylvania
District 5—RICHARD G. TILGHMAN, Chairman and Chief Executive Officer,
Crestar Financial Corporation, Richmond, Virginia
District 6—CHARLES E. RICE, Chairman and Chief Executive Officer,
Barnett Banks, Inc., Jacksonville, Florida
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 BankShares, Inc., Victoria, Texas
District 12—RICHARD M. ROSENBERG, Chairman and Chief Executive Officer,
Bank of America, San Francisco, California
Officers
RICHARD M. ROSENBERG, President
EUGENE A. MILLER, Vice President
HERBERT V. PROCHNOW, Secretary Emeritus
JAMES E. ANNABLE, Co-Secretary
WILLIAM J. KORSVIK, Co-Secretary
350 81st Annual Report, 1994
Federal Advisory Council—Continued
Directors
MARSHALL N. CARTER
ANTHONY P. TERRACCIANO
The Federal Advisory Council met on February 10-11, May 12-13, September 8-9,
and November 3-4, 1994. The Board of
Governors met with the council on February 11, May 13, September 9, and November 4, 1994. The council, which is composed
of one representative of the banking industry
ANDREW B. CRAIG, III
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,
Consumer Advisory Council
December 31,1994
Members
BARRY A. ABBOTT, ESQ., Director, Howard, Rice, Nemerovski, Canady, Robertson,
Falk & Rabkin, 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
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 S. BROOKS, Deputy Borough President, Office of the Bronx Borough
President, Bronx, New York
CATHY CLOUD, Enforcement Program Director, National Fair Housing Alliance,
Washington, D.C.
ALVIN J. COWANS, President and Chief Executive Officer, McCoy Federal Credit Union,
Orlando, Florida
MICHAEL D. EDWARDS, President, Prairie Security Bank, Yelm, Washington
MICHAEL FERRY, Staff Attorney, Consumer Unit, Legal Services of Eastern Missouri, Inc.,
St. Louis, Missouri
ELIZABETH G. FLORES, Senior Vice President and Community Reinvestment Officer,
Laredo National Bank, Laredo, Texas
NORMA L. FREIBERG, Community Activist, New Orleans, Louisiana
LORI GAY, Executive Director, Los Angeles Neighborhood Housing Services,
Los Angeles, California
GARY S. HATTEM, Managing Director, Community Development Group, Bankers Trust
Company, New York, New York
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
KATHARINE W. MCKEE, Associate Director, Center for Community Self-Help, Durham,
North Carolina
EDMUND MIERZWINSKI, Consumer Advocate, U.S. Public Interest Research Group,
http://fraser.stlouisfed.org/
Washington, St. Louis
Federal Reserve Bank ofD.C.
Directories and Meetings 351
Consumer Advisory Council—Continued
ANNE B. SHLAY, Associate Director, Institute for Public Policy Studies, Temple
University, Philadelphia, Pennsylvania
JOHN V. SKINNER, President and Chief Executive Officer, Jewelers Financial Services, Inc.,
Irving, Texas
REGINALD J. SMITH, President, United Missouri Mortgage Company, Kansas City,
Missouri
LOWELL N. SWANSON, President (Retired), United Finance Company, Portland, Oregon
JOHN E. TAYLOR, President and Chief Executive Officer, The National Community
Reinvestment Coalition, Washington, D.C.
MICHAEL W. TIERNEY, Program Director, Local Initiatives Support Corporation,
Washington, D.C.
LORRAINE VANETTEN, Vice President and Community Lending Officer, Standard Federal
Bank of Troy, Troy, Michigan
GRACE W. WEINSTEIN, Financial Writer and Consultant, Englewood, New Jersey
LILY K. YAO, President and Chief Executive Officer, Pioneer Federal Savings Bank,
Honolulu, Hawaii
ROBERT O. ZDENEK, Senior Program Officer, Annie E. Casey Foundation, Greenwich,
Connecticut
Officers
JEAN POGGE, Chairman
JAMES L. WEST, Vice Chairman
Vice President, Development
Deposits, South Shore Bank,
Chicago, Illinois
President, Jim West
Financial Group, Inc.,
Tijeras, New Mexico
The Consumer Advisory Council met with
members of the Board of Governors on
March 24, June 23, and November 3, 1994.
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 31,1994
Members
MALCOLM E. COLLIER, Chairman and Chief Executive Officer, First Federal Savings
Bank, Lake wood, Colorado
WILLIAM A. COOPER, Chairman and Chief Executive Officer, TCF Bank Savings, fsb,
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 of the Board, First Federal Savings Bank, Sheridan,
Wyoming
KERRY KILLINGER, Chairman, President, and Chief Executive Officer, Washington Mutual
Savings Bank, Seattle, Washington
352
81st Annual Report, 1994
Thrift Institutions Advisory Council—Continued
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, Downey Savings and Loan
Association, Newport Beach, California
STEPHEN D. TAYLOR, President and Chief Executive Officer, American Savings of Florida,
F.S.B., Miami, Florida
JOHN M. TIPPETS, President and Chief Executive Officer, American Airlines Employees
Federal Credit Union, DFW Airport, Texas
Officers
BEATRICE D'AGOSTINO, President
The members of the Thrift Institutions
Advisory Council met with the Board of
Governors on January 28, June 3, and
December 16, 1994. The council, which
is composed of representatives from credit
CHARLES JOHN KOCH, 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.
Officers of Federal Reserve Banks and Branches
December 31,1994
BANK or Branch
Chairman'
Deputy Chairman
President
First Vice President
BOSTON2
Jerome H. Grossman
Warren B. Rudman
Cathy E. Minehan
Paul M. Connolly
NEW YORK2
William J. McDonough
James H. Oltman
Buffalo
Maurice R.
Greenberg
David A. Hamburg
Joseph J. Castiglia
PHILADELPHIA
James M. Mead
Donald J. Kennedy
Edward G. Boehne
William H. Stone, Jr.
Jerry L. Jordan
Sandra Pianalto
Cincinnati
A. William Reynolds
G. Watts
Humphrey, Jr.
John N. Taylor, Jr.
Robert P. Bozzone
Pittsburgh
RICHMOND2
Henry J. Faison
Claudine B. Malone
J. Alfred Broaddus, Jr.
Jimmie R.
Monhollon
CLEVELAND2
Baltimore
Charlotte
Rebecca Hahn
Windsor
Harold D. Kingsmore
Vice President
in charge of Branch
Carl W. Turnipseed3
Charles A. Cerino3
Harold J. Swart3
Ronald B. Duncan3
Walter A. Varvel3
Directories and Meetings 353
Officers of Federal Reserve Banks and BranchesContinued
BANK or Branch
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
CHICAGO2
Detroit
ST. LOUIS
Little Rock
Louisville
Memphis
MINNEAPOLIS
Helena
KANSAS CITY
Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN FRANCISCO
Los Angeles
Portland
Salt Lake City
Seattle
Chairman'
Deputy Chairman
President
First Vice President
Vice President
in charge of Branch
Leo Benatar
Hugh M. Brown
Shelton E. Allred
Samuel H. Vickers
Dorothy C. Weaver
Paula Lovell
Jo Ann Slaydon
Robert P. Forrestal
Jack Guynn
Donald E. Nelson3
Richard G. Cline
Robert M. Healey
J. Michael Moore
Michael H. Moskow
William C. Conrad
Robert H. Quenon
John F. McDonnell
Robert D. Nabholz, Jr.
Laura M. Douglas
Sidney Wilson, Jr.
Thomas C. Melzer
James R. Bowen
Gerald A.
Rauenhorst
Jean D. Kinsey
Lane W. Basso
Gary H. Stern
Colleen K. Strand
Burton A. Dole, Jr.
Herman Cain
Barbara B. Grogan
Ernest L. Holloway
Sheila Griffin
Thomas M. Hoenig
Richard K. Rasdall
Cece Smith
Roger R.
Hemminghaus
Alvin T. Johnson
Judy Ley Allen
Erich Wendl
Robert D. McTeer, Jr.
Tony J. Salvaggio
James A. Vohs
Judith M. Runstad
Anita Landecker
William A. Hilliard
Gerald R. Sherratt
George F. Russell, Jr.
Robert T. Parry
Patrick K. Barron
NOTE. A current list of these officers appears each
month in the Federal Reserve Bulletin.
1. The Chairman of a Federal Reserve Bank serves, by
statute, as Federal Reserve Agent.
2. Additional offices of these Banks are located at
Lewiston, Maine; Windsor Locks, Connecticut; Utica at
Fred R. Herr3
James D. Hawkins3
James T. Curry HI
Melvyn K. Purcell
Robert J. Musso
Roby L. Sloan3
Karl W. Ashman
Howard Wells
John P. Baumgartner
John D. Johnson
Kent M.Scott 3
David J. France
Harold L. Shewmaker
Sammie C. Clay
Robert Smith III 3
James L. Stull3
John F. Moore3
A. Kenneth Ridd
Andrea P. Wolcott
Gordon R. G.
Werkema3
Oriskany, New York; Jericho, New York; East Rutherford, New Jersey; Columbus, Ohio; Charleston, West
Virginia; Culpeper, Virginia; Columbia, South Carolina;
Indianapolis, Indiana; Milwaukee, Wisconsin; and
Des Moines, Iowa.
3. Senior Vice President.
354 81st Annual Report, 1994
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 1 and 2,
and on December 1 and 2, 1994.
The members of the Executive Committee of the Conference of Chairmen during
1994 were Burton A. Dole, Jr., Chairman;
Jerome H. Grossman, Vice Chairman, and
James A. Vohs, member.
On December 2, 1994, the Conference
elected its Executive Committee for 1995,
naming Jerome H. Grossman as Chairman,
Cece Smith as Vice Chairman, and A. William Reynolds as the third member.
Conference of Presidents
The presidents of the Federal Reserve Banks
are organized into the Conference of Presidents, which meets periodically to consider
matters of common interest and to consult
with, and advise, the Board of Governors.
Robert T. Parry, President of the Federal
Reserve Bank of San Francisco, served as
Chairman of the Conference in 1994. On
March 8, 1994, the Conference elected
Robert T. McTeer, President of the Federal
Reserve Bank of Dallas, as its Vice Chairman, to replace Richard F. Syron, who
resigned as President of the Federal Reserve
Bank of Boston. Robert L. Feinberg, of the
Federal Reserve Bank of San Francisco,
served as its Secretary. Rena DeSisto, of the
Federal Reserve Bank of Boston, served as
its Assistant Secretary until March 31, 1994,
and Helen Holcomb, of the Federal Reserve
Bank of Dallas, served as its Assistant Secretary for the balance of the year.
On November 17, 1994, the Conference
elected Robert T. McTeer, President of the
Federal Reserve Bank of Dallas, as its Chairman for 1995-96 and Thomas M. Hoenig,
President of the Federal Reserve Bank of
Kansas City, as its Vice Chairman.
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.
James H. Oltman, First Vice President of
the Federal Reserve Bank of New York,
served as Chairman of the Conference in
1994, and Tony J. Salvaggio, First Vice
President of the Federal Reserve Bank of
Dallas, served as its Vice Chairman. Ethan
S. Harris, of the Federal Reserve Bank of
New York, served as its Secretary, and
Joanna O. Kolson, of the Federal Reserve
Bank of Dallas, served as its Assistant
Secretary.
On October 11, 1994, the Conference
elected Tony J. Salvaggio, First Vice President of the Federal Reserve Bank of Dallas,
as its Chairman for 1995, and Sandra
Pianalto, First Vice President of the Federal
Reserve Bank of Cleveland, 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 organizational affiliation, and
the date the director's term expires. Each
Federal Reserve Bank has a nine-member
board: 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.
Directories and Meetings 355
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. Annually, the Board of Governors
designates one of the Class C directors as
chairman of the board and Federal Reserve
Agent of each District Bank, and it designates 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."
356 81st Annual Report, 1994
Term expires
Dec. 31
DISTRICT 1—BOSTON
Class A
Robert M. Silva
Ira Stepanian
David A. Page
Class B
Edward H. Ladd
Joan T. Bok
Stephen L. Brown
Class C
Jerome H. Grossman
Warren B. Rudman, Esq
John E. Flynn
President, Chief Executive Officer, and Director,
The Citizens National Bank, Putnam, Connecticut
Chairman and Chief Executive Officer,
The Bank of Boston Corporation,
Boston, Massachusetts
President and Chief Executive Officer,
Ocean National Bank of Kennebunk,
Kennebunk, Maine
1994
Chairman, Standish, Ayer and Wood, Inc.,
Boston, Massachusetts
Chairman, New England Electric System,
Westborough, Massachusetts
Chairman and Chief Executive Officer,
John Hancock Mutual Life Insurance Company,
Boston, Massachusetts
1994
Chairman and Chief Executive Officer,
New England Medical Center, Inc.,
Boston, Massachusetts
Sheehan, Phinney, Bass, and Green,
Manchester, New Hampshire
Executive Director, The Quality Connection,
East Dennis, Massachusetts
1994
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 and Chief Executive Officer,
The First National Bank of Long Island,
Glen Head, New York
1994
Chairman and Chief Executive Officer, AT&T,
Basking Ridge, New Jersey
Chairman and Chief Executive Officer, Pfizer Inc.,
New York, New York
1994
1995
1996
1995
1996
1995
1996
DISTRICT 2—NEW YORK
Class A
Thomas G. Labrecque
Robert G. Wilmers
J. William Johnson
Class B
Robert E. Allen
William C. Steere, Jr
1995
1996
1995
Directories and Meetings 357
Term expires
Dec. 31
DISTRICT 2, Class B— Continued
Sandra Feldman
Class C
Maurice R. Greenberg
Herbert L. Washington
David A. Hamburg
President, United Federation of Teachers,
New York, New York
1996
Chairman and Chief Executive Officer,
American International Group, Inc.,
New York, New York
Owner, HLW Fast Track, Inc., Rochester, New York
President, Carnegie Corporation of New York,
New York, New York
1994
1995
1996
BUFFALO BRANCH
Appointed by the Federal Reserve Bank
Richard H. Popp
Operating Partner, Southview Farm,
Castile, New York
Charles M. Mitschow
Chairman, Western Region, Marine Midland Bank,
Buffalo, New York
George W. Hamlin IV
President and Chief Executive Officer, The
Canandaigua National Bank and Trust
Company, Canandaigua, New York
Louise C. Woerner
Chairman and Chief Executive Officer, HCR,
Rochester, New York
Appointed by the Board of Governors
Donald L. Rust
Plant Manager, Tonawanda Engine Plant,
General Motors Powertrain Division, General
Motors Corporation, Buffalo, New York
F. C. Richardson
President, Buffalo State College, Buffalo, New York
Joseph J. Castiglia
President and Chief Executive Officer, Pratt &
Lambert, Inc., Buffalo, New York
1994
1994
1995
1996
1994
1995
1996
DISTRICT 3—PHILADELPHIA
Class A
H. Bernard Lynch
Carl L. Campbell
Terry K. Dunkle
Class B
James A. Hagen
President and Chief Executive Officer,
The First National Bank of Wyoming,
Wyoming, Delaware
President and Chief Executive Officer, Keystone
Financial, Inc., Harrisburg, Pennsylvania
Chairman, United States National Bank,
Johnstown, Pennsylvania
Chairman, President, and Chief Executive
Officer, Consolidated Rail Corporation
(CONRAIL), Philadelphia, Pennsylvania
1994
1995
1996
1994
358 81st Annual Report, 1994
Term expires
Dec. 31
DISTRICT 3, Class B— Continued
David W. Huggins
J. Richard Jones
Class C
Donald J. Kennedy
James M. Mead
Joan Carter
President and Chief Executive Officer, RMS
Technologies, Inc., Marlton, New Jersey
President and Chief Executive Officer,
Jackson-Cross Company,
Philadelphia, Pennsylvania
1995
Business Manager, International Brotherhood of
Electrical Workers, Local Union No. 269,
Trenton, New Jersey
President and Chief Executive Officer, Capital
Blue Cross, Harrisburg, Pennsylvania
President and Chief Operating Officer, United
Medical Corporation, Haddonfield, New Jersey
1994
Chairman and Chief Executive Officer, The Park
National Bank, Newark, Ohio
Chairman and Chief Executive Officer, National
City Corporation, Cleveland, Ohio
Chairman, President, and Chief Executive Officer,
The Apple Creek Banking Company,
Apple Creek, Ohio
1994
President and Chief Executive Officer, Battelle
Memorial Institute, Columbus, Ohio
President and Chief Executive Officer, American
Micrographics Company, Inc., Monroeville,
Pennsylvania
President, Cincom Systems, Inc., Cincinnati, Ohio
1994
President, GWH Holdings, Inc.,
Pittsburgh, Pennsylvania
Chairman, GenCorp, Fairlawn, Ohio
Executive Secretary-Treasurer, Ohio State
Building and Construction Trades Council,
Columbus, Ohio
1994
1996
1995
1996
DISTRICT 4—CLEVELAND
Class A
William T. McConnell
Edward B. Brandon
Alfred C. Leist
Class B
Douglas E. Olesen
I. N. Rendall Harper, Jr
Thomas M. Nies
Class C
G. Watts Humphrey, Jr.
A. William Reynolds
Robert Y. Farrington
1995
1996
1995
1996
1995
1996
CINCINNATI BRANCH
Appointed by the Federal Reserve Bank
Marvin J. Stammen
President and Chief Executive Officer, Second
National Bank, Greenville, Ohio
1994
Directories and Meetings 359
Term expires
Dec. 31
DISTRICT 4, CINCINNATI BRANCH
Appointed by the Federal Reserve Bank—Continued
Jerry W. Carey
C. Wayne Shumate
Phillip R. Cox
President and Chief Executive Officer,
Union National Bank and Trust Company,
Barbourville, Kentucky
Chairman and Chief Executive Officer,
Kentucky Textiles, Inc., Paris, Kentucky
President, Cox Financial Corporation,
Cincinnati, Ohio
Appointed by the Board of Governors
Raymond A. Bradbury
Chairman (Retired), Martin County Coal
Corporation, Inez, Kentucky
Eleanor Hicks
President, M.I.N.D.S. International, Cincinnati, Ohio
John N. Taylor, Jr
Chairman and Chief Executive Officer,
Kurz-Kasch, Inc., Dayton, Ohio
1995
1996
1996
1994
1995
1996
PITTSBURGH BRANCH
Appointed by the Federal Reserve Bank
David S. Dahlmann
President and Chief Executive Officer,
Southwest National Corporation, Greensburg,
Pennsylvania
Helen J. Clark
Chairman, President, and Chief Executive Officer,
Apollo Trust Company, Apollo, Pennsylvania
Randall L. C. Russell
President and Chief Executive Officer, Ranbar
Technology, Inc., Glenshaw, Pennsylvania
Wesley W. von Schack
Chairman, President, and Chief Executive Officer,
DQE, Pittsburgh, Pennsylvania
Appointed by the Board of Governors
Jack B. Piatt
Chairman, Millcraft Industries, Inc.,
Washington, Pennsylvania
Robert P. Bozzone
Vice Chairman of the Board, Allegheny Ludlum
Corporation, Pittsburgh, Pennsylvania
Sandra L. Phillips
Executive Director, Pittsburgh Partnership for
Neighborhood Development, Pittsburgh,
Pennsylvania
1994
1995
1996
1996
1994
1995
1996
DISTRICT 5—RICHMOND
Class A
Webb C. Hayes IV
Charles E. Weller
Chairman, Palmer National Bancorp, Inc., and
President, The Palmer National Bank,
Washington, D.C.
President, Elkridge National Bank and ENB
Financial Corporation, Elkridge, Maryland
1994
1995
360 81st Annual Report, 1994
Term expires
Dec. 31
DISCTICT 5, Class A—Continued
Robert M. Freeman
Class B
L. Newton Thomas, Jr
R. E. Atkinson, Jr
Paul A. DelaCourt
Class C
Claudine B. Malone
Henry J. Faison
Stephen Brobeck
Chairman and Chief Executive Officer, Signet
Banking Corporation, Richmond, Virginia
1996
Senior Vice President (Retired), ITT/Carbon
Industries, Inc., Charleston, West Virginia
Chairman, Dilmar Oil Company, Inc., Florence,
South Carolina
Chairman, The North Carolina Enterprise
Corporation, Raleigh, North Carolina
1994
President, Financial & Management Consulting, Inc.,
McLean, Virginia
Chairman, Faison Associates, Charlotte,
North Carolina
Executive Director, Consumer Federation of
America, Washington, D.C.
1994
1995
1996
1995
1996
BALTIMORE BRANCH
Appointed by the Federal Reserve Bank
F. Levi Ruark
Chairman, President, and Chief Executive Officer,
The National Bank of Cambridge,
Cambridge, Maryland
Thomas J. Hughes
President and Chief Executive Officer, Navy
Federal Credit Union, Vienna, Virginia
Richard M. Adams
Chairman and Chief Executive Officer, United
Bankshares, Inc., Parkersburg, West Virginia
Morton I. Rapoport
President and Chief Executive Officer,
University of Maryland Medical System,
Baltimore, Maryland
Appointed by the Board of Governors
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
Michael R. Watson
President, Association of Maryland Pilots,
Baltimore, Maryland
1994
1994
1995
1996
1994
1995
1996
CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank
Dorothy H. Aranda
President, Dohara Associates, Inc.,
Hilton Head Island, South Carolina
Vacancy
1994
1994
Directories and Meetings 361
Term expires
Dec. 31
DISTRICT 5, CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank—Continued
David B. Jordan
Jim M. Cherry, Jr
Vice Chairman, Chief Executive Officer, and
Director, Security Capital Bancorp,
Salisbury, North Carolina
President and Chief Executive Officer,
Williamsburg First National Bank,
Kingstree, South Carolina
Appointed by the Board of Governors
Harold D. Kingsmore
President and Chief Executive Officer, Graniteville
Company, Graniteville, South Carolina
James O. Roberson
President and Chief Executive Officer, Research
Triangle Foundation of North Carolina,
Research Triangle Park, North Carolina
Dennis D. Lowery
Chief Executive Officer and Chairman,
Continental Ltd., Charlotte, North Carolina
1995
1996
1994
1995
1996
DISTRICT 6—ATLANTA
Class A
D. Paul Jones, Jr
W. H. Swain
James B. Williams
Class B
Victoria B. Jackson
J. Thomas Holton
Andre M. Rubenstein
Class C
Hugh M. Brown
Leo Benatar
Daniel E. Sweat, Jr.
Chairman and Chief Executive Officer, Compass
Bane shares, Inc., Birmingham, Alabama
Chairman, First National Bank, Oneida, Tennessee
Chairman and Chief Executive Officer, SunTrust
Banks, Inc., Atlanta, Georgia
1994
1995
1996
President, DSS/ProDiesel, Nashville, Tennessee
Chairman and President, Sherman International
Corporation, Birmingham, Alabama
Chairman and Chief Executive Officer, Rubenstein
Brothers, Inc., New Orleans, Louisiana
1994
1995
President and Chief Executive Officer, BAMSI, Inc.,
Titusville, Florida
Chairman and President, Engraph, Inc.,
Atlanta, Georgia
Program Director, The Atlanta Project,
Atlanta, Georgia
1994
1996
1995
1996
BIRMINGHAM BRANCH
Appointed by the Federal Reserve Bank
Marlin D. Moore, Jr.
Chairman, Pritchett-Moore, Inc.,
Tuscaloosa, Alabama
1994
362 81st Annual Report, 1994
Term expires
Dec. 31
DISTRICT 6, BIRMINGHAM BRANCH
Appointed by the Federal Reserve Bank—Continued
Columbus Sanders
J. Stephen Nelson
Julian W. Banton
President, Consolidated Industries, Inc.,
Huntsville, Alabama
Chairman and Chief Executive Officer, First
National Bank, Brewton, Alabama
Chairman, President, and Chief Executive
Officer, SouthTrust Bank of Alabama, N.A.,
Birmingham, Alabama
Appointed by the Board of Governors
Shelton E. Allred
Chairman, President, and Chief Executive Officer,
Frit Incorporated, Ozark, Alabama
Patricia B. Compton
President, Patco, Inc., Georgiana, Alabama
Donald E. Boomershine
President, Better Business Bureau of Central
Alabama, Inc., Birmingham, Alabama
1994
1995
1996
1994
1995
1996
JACKSONVILLE BRANCH
Appointed by the Federal Reserve Bank
Perry M. Dawson
President and Chief Executive Officer, Suncoast
Schools Federal Credit Union, Tampa, Florida
Arnold A. Heggestad
William H. Dial Professor and Director, College
of Business Administration, University of
Florida, Gainesville, Florida
Royce B. Walden
Vice President, Ward Bradford & Company,
Orlando, Florida
William G. Smith, Jr.
President, Capital City First National Bank,
Tallahassee, Florida
Appointed by the Board of Governors
Samuel H. Vickers
Chairman, President, and Chief Executive Officer,
Design Containers, Inc., Jacksonville, Florida
Lana Jane Lewis-Brent
President, Paul Brent Designer, Inc.,
Panama City, Florida
Joan Dial Ruffier
General Partner, Sunshine Cafes, Orlando, Florida
1994
1994
1995
1996
1994
1995
1996
MIAMI BRANCH
Appointed by the Federal Reserve Bank
Roberto G. Blanco
Vice Chairman and Chief Financial Officer,
Republic National Bank of Miami,
Miami, Florida
E. Anthony Newton
President and Chief Executive Officer, Island
National Bank and Trust Company,
Palm Beach, Florida
Pat L. Tornillo, Jr.
Executive Vice President, United Teachers of Dade,
Miami, Florida
1994
1995
1996
Directories and Meetings 363
Term expires
Dec. 31
DISTRICT 6, MIAMI BRANCH
Appointed by the Federal Reserve Bank—Continued
Steven C. Shimp
President, O-A-K/Florida, Inc.,
Fort Myers, Florida
Appointed by the Board of Governors
Dorothy C. Weaver
President, Intercap Investments, Inc.,
Coral Gables, Florida
R. Kirk Landon
Chairman and Chief Executive Officer,
American Bankers Insurance Group,
Miami, Florida
Michael T. Wilson
President, Vinegar Bend Farms, Inc.,
Belle Glade, Florida
1996
1994
1995
1996
NASHVILLE BRANCH
Appointed by the Federal Reserve Bank
William Baxter Lee III
Chairman and President, Southeast Services
Corporation, Knoxville, Tennessee
John E. Seward, Jr
President and Chief Executive Officer, The Paty
Company, Piney Flats, Tennessee
James D. Harris
President and Chief Executive Officer, Brentwood
National Bank, Brentwood, Tennessee
Williams E. Arant, Jr
President and Chief Executive Officer, First
National Bank of Knoxville, Knoxville, Tennessee
Appointed by the Board of Governors
James E. Dalton, Jr
President and Chief Executive Officer, Quorum
Health Group, Inc., Brentwood, Tennessee
Vacancy
Paula Lovell
President, Lovell Communications, Inc.,
Nashville, Tennessee
1994
1994
1995
1996
1994
1995
1996
NEW ORLEANS BRANCH
Appointed by the Federal Reserve Bank
Kay L. Nelson
Managing Director, Nelson Capital Corporation,
New Orleans, Louisiana
Angus R. Cooper
Chairman and Chief Executive Officer,
Cooper/T. Smith Corporation, Mobile, Alabama
Thomas E. Walker
President and Chief Executive Officer, Bank of
Forest, Forest, Mississippi
Howard C. Gaines
Chairman and Chief Executive Officer, First National
Bank of Commerce, New Orleans, Louisiana
Appointed by the Board of Governors
Jo Ann Slaydon
President, Slaydon Consultants and Insight
Productions and Advertising,
Baton Rouge, Louisiana
1994
1994
1995
1996
1994
364 81st Annual Report, 1994
Term expires
Dec. 31
DISTRICT 6, NEW ORLEANS BRANCH
Appointed by the Board of Governors—Continued
Lucimarian Tolliver
Roberts
Victor Bussie
President, Mississippi Coast Coliseum
Commission, Pass Christian, Mississippi
President, Louisiana AFL-CIO,
Baton Rouge, Louisiana
1995
1996
DISTRICT 7—CHICAGO
Class A
Stefan S. Anderson
Arnold C. Schultz
David W. Fox
Class B
Thomas C. Dorr
Donald J. Schneider
A. Charlene Sullivan
Class C
Duane L. Burnham
Richard G. Cline
Robert M. Healey
Chairman, President, and Chief Executive Officer,
First Merchants Bank, N.A. and First Merchants
Corporation, Muncie, Indiana
Chairman and President, Grundy National Bank,
Grundy Center, Iowa
Chairman and Chief Executive Officer, The
Northern Trust Corporation and The Northern
Trust Company, Chicago, Illinois
1994
1995
1996
President and Chief Executive Officer, Dorr's
Pine Grove Farm Co., Marcus, Iowa
President, Schneider National, Inc.,
Green Bay, Wisconsin
Associate Professor of Management, Krannert
Graduate School of Management, Purdue
University, West Lafayette, Indiana
1994
Chairman and Chief Executive Officer, Abbott
Laboratories, Abbott Park, Illinois
Chairman and Chief Executive Officer, NICOR Inc.,
Naperville, Illinois
Member, Illinois State Labor Relations Board,
Chicago, Illinois
1994
1995
1996
1995
1996
DETROIT BRANCH
Appointed by the Federal Reser\>e Bank
Charles R. Weeks
Chairman, President, and Chief Executive Officer,
Citizens Banking Corporation, Flint, Michigan
Norman F. Rodgers
President and Chief Executive Officer, Hillsdale
County National Bank, Hillsdale, Michigan
William E. Odom
Chairman and Chief Executive Officer, Ford
Motor Credit Company, Dearborn, Michigan
Charles E. Allen
President and Chief Executive Officer, Graimark
Realty Advisors, Inc., Detroit, Michigan
1994
1995
1996
1996
Directories and Meetings 365
Term expires
Dec. 31
DISTRICT 7, DETROIT BRANCH—Continued
Appointed by the Board of Governors
John D. Forsyth
Executive Director, University of Michigan
Hospitals, Ann Arbor, Michigan
J. Michael Moore
Chairman and Chief Executive Officer, Invetech
Company, Detroit, Michigan
Florine Mark
President and Chief Executive Officer, The WW
Group, Farmington Hills, Michigan
1994
1995
1996
DISTRICT 8—ST. LOUIS
Class A
Henry G. River, Jr.
Douglas M. Lester
W. D. Glover
Class B
Sandra B.
Sanderson-Chesnut
Richard E. Bell
Warren R. Lee
Class C
Robert H. Quenon
John F. McDonnell
Veo Peoples, Jr
President and Chief Executive Officer,
First National Bank in Pinckneyville,
Pinckneyville, Illinois
Chairman and President, Trans Financial
Bancorp, Inc., Bowling Green, Kentucky
Chairman and Chief Executive Officer,
First National Bank of Eastern Arkansas,
Forrest City, Arkansas
1994
1995
1996
President and Chief Executive Officer,
Sanderson Plumbing Products, Inc.,
Columbus, Mississippi
President and Chief Executive Officer, Riceland
Foods, Inc., Stuttgart, Arkansas
President, W. R. Lee & Associates, Inc.,
Louisville, Kentucky
1994
Mining Consultant, St. Louis, Missouri
Chairman, McDonnell Douglas Corporation,
St. Louis, Missouri
Partner, Peoples, Hale & Coleman,
St. Louis, Missouri
1994
1995
1995
1996
1996
LITTLE ROCK BRANCH
Appointed by the Federal Reserve Bank
Barnett Grace
Chairman and Chief Executive Officer, First
Commercial Bank, N.A., Little Rock, Arkansas
Mark A. Shelton III
President, M. A. Shelton Farming Company,
Altheimer, Arkansas
Mahlon A. Martin
President, Winthrop Rockefeller Foundation,
Little Rock, Arkansas
1994
1995
1996
366 81st Annual Report, 1994
Term expires
Dec. 31
DISTRICT 8, LITTLE ROCK BRANCH
Appointed by the Federal Reserve Bank—Continued
James V. Kelley
Chairman, President, and Chief Executive
Officer, First United Bancshares, Inc.,
El Dorado, Arkansas
Appointed by the Board of Governors
Robert Daniel Nabholz, Jr. ..Chief Executive Officer, Nabholz Construction
Corporation, Conway, Arkansas
Betta Carney
President and Chief Executive Officer, World
Wide Travel Service, Inc., Little Rock, Arkansas
Janet M. Jones
President, The Janet Jones Company,
Little Rock, Arkansas
1996
1994
1995
1996
LOUISVILLE BRANCH
Appointed by the Federal Reserve Bank
Thomas E. Spragens, Jr.
President, The Farmers National Bank,
Lebanon, Kentucky
Malcolm B. Chancey, Jr. ....Chairman and Chief Executive Officer, Liberty
National Bank & Trust Company of Kentucky,
Louisville, Kentucky
Robert M. Hall
Owner, East Fork Growers, Seymour, Indiana
Charles D. Storms
President and Chief Executive Officer,
Red Spot Paint and Varnish Company, Inc.,
Evansville, Indiana
Appointed by the Board of Governors
Laura M. Douglas
Legal Director, Louisville & Jefferson County
Metropolitan Sewer District,
Louisville, Kentucky
Daniel L. Ash
Consultant, Wenz-Neely Company,
Louisville, Kentucky
John A. Williams
Chairman and Chief Executive Officer,
Computer Services, Inc., Paducah, Kentucky
1994
1995
1996
1996
1994
1995
1996
MEMPHIS BRANCH
Appointed by the Federal Reserve Bank
Lewis F. Mallory, Jr
Chairman and Chief Executive Officer,
National Bank of Commerce of Mississippi,
Starkville, Mississippi
Anthony M. Rampley
President, Chief Executive Officer, and Director,
Arkansas Glass Container Corporation,
Jonesboro, Arkansas
Katie S. Winchester
President and Director, First Citizens National
Bank, Dyersburg, Tennessee
Benjamin W. Rawlins, Jr. ...Chairman and Chief Executive Officer, Union
Planters Corporation, Memphis, Tennessee
1994
1995
1996
1996
Directories and Meetings 367
Term expires
Dec. 31
DISTRICT 8, MEMPHIS BRANCH—Continued
Appointed by the Board of Governors
Sidney Wilson, Jr
Owner, Wilson Automotive Group Inc.,
Jackson, Tennessee
John V. Myers
President, Better Business Bureau,
Memphis, Tennessee
Woods E. Eastland
President and Chief Executive Officer,
Staple Cotton Cooperative Association,
Greenwood, Mississippi
1994
1995
1996
DISTRICT 9—MINNEAPOLIS
Class A
William W. Strausburg
Susanne V. Boxer
Jerry B. Melby
Class B
Duane E. Dingmann
Dennis W. Johnson
Clarence D. Mortenson
Class C
Jean D. Kinsey
Gerald A. Rauenhorst
David A. Koch
Chairman and Chief Executive Officer, First
Bank Montana, N.A., and General Manager,
First Bank-Regional Banking Group,
Billings, Montana
President and Chief Executive Officer, MFC
First National Bank, Houghton, Michigan
President, First National Bank,
Bowbells, North Dakota
1994
1995
1996
President, Trubilt Auto Body, Inc.,
Eau Claire, Wisconsin
President, TMI Systems Design Corporation
and TMI Transport Corporation,
Dickinson, North Dakota
President, M/C Professional Associates, Inc.,
Pierre, South Dakota
1994
Professor, Consumption and Consumer
Economics, Department of Agricultural and
Applied Economics, University of Minnesota,
St. Paul, Minnesota
Chairman and Chief Executive Officer, Opus
Corporation, Minneapolis, Minnesota
Chairman and Chief Executive Officer, Graco, Inc.,
Golden Valley, Minnesota
1994
1995
1996
1995
1996
HELENA BRANCH
Appointed by the Federal Reserve Bank
Nancy M. Stephenson
Executive Director, Neighborhood Housing
Services, Great Falls, Montana
Donald E. Olsson, Jr.
President, Ronan State Bank, Ronan, Montana
Ronald D. Scott
President and Chief Executive Officer, The First
State Bank of Malta, Malta, Montana
1994
1994
1995
368
81st Annual Report, 1994
Term expires
Dec. 31
DISTRICT 9, HELENA BRANCH—Continued
Appointed by the Board of Governors
Lane W. Basso
President, Deaconess Medical Center of
Billings, Inc., Billings, Montana
Matthew J. Quinn
President, Carroll College, Helena, Montana
1994
1995
DISTRICT 10—KANSAS CITY
Class A
Charles I. Moyer
William L. McQuillan
Lawrence W. Menefee
Class B
Frank J. Yaklich, Jr.
W. W. Allen
Charles W. Nichols
Class C
Burton A. Dole, Jr
Herman Cain
Colleen D. Hernandez
Chairman and Chief Executive Officer,
First National Bank of Phillipsburg,
Phillipsburg, Kansas
President, Chief Executive Officer, and Director,
City National Bank, Greeley, Nebraska
Chairman and Chief Executive Officer, Union
Colony Bank, Greeley, Colorado
Deputy Project Manager, Manufacturing
Sciences Corporation, Denver, Colorado
Chairman and Chief Executive Officer, Phillips
Petroleum Company, Bartlesville, Oklahoma
Managing Partner, Davison & Sons Cattle
Company, Arnett, Oklahoma
Chairman and President, Puritan-Bennett
Corporation, Overland Park, Kansas
President and Chief Executive Officer,
Godfather's Pizza, Inc., Omaha, Nebraska
Executive Director, Kansas City Neighborhood
Alliance, Kansas City, Missouri
1994
1995
1996
1994
1995
1996
1994
1995
1996
DENVER BRANCH
Appointed by the Federal Reserve Bank
Richard I. Ledbetter
President and Chief Executive Officer,
First National Bank of Farmington,
Farmington, New Mexico
Clifford E. Kirk
President and Chief Executive Officer, First
National Bank of Gillette, Gillette, Wyoming
Peter I. Wold
Partner, Wold Oil & Gas Company,
Casper, Wyoming
Peter R. Decker
President, Peter R. Decker & Associates,
Denver, Colorado
Appointed by the Board of Governors
Barbara B. Grogan
President, Western Industrial Contractors, Inc.,
Denver, Colorado
1994
1994
1995
1996
1994
Directories and Meetings 369
Term expires
Dec. 31
DISTRICT 10, DENVER BRANCH
Appointed by the Board of Governors—Continued
Sandra K. Woods
Floyd R. Correa
Vice President, Environmental Health and
Safety Systems, Coors Brewing Company,
Golden, Colorado
President, Correa Enterprises, Inc.,
Albuquerque, New Mexico
1995
1996
OKLAHOMA CITY BRANCH
Appointed by the Federal Reserve Bank
John Wm. Laisle
President and Chief Executive Officer, MidFirst
Bank, SSB, Oklahoma City, Oklahoma
C. Kendric Fergeson
Chairman and Chief Executive Officer, The
National Bank of Commerce, Altus, Oklahoma
Dennis M. Mitchell
President, Citizens Bank of Ardmore,
Ardmore, Oklahoma
Gordona Duca
President and Owner, Gordona Duca, Inc.,
Realtors, Tulsa, Oklahoma
Appointed by the Board of Governors
Victor R. Schock
President and Chief Executive Officer, Credit
Counseling Centers, Tulsa, Oklahoma
Barry L. Eller
Sr. Vice President and General Manager,
MerCruiser, Stillwater, Oklahoma
Ernest L. Holloway
President, Langston University, Langston, Oklahoma
1994
1995
1995
1996
1994
1995
1996
OMAHA BRANCH
Appointed by the Federal Reserve Bank
Donald A. Leu
President and Chief Executive Officer, Consumer
Credit Counseling Service, Omaha, Nebraska
Thomas H. Olson
Chairman, First National Bank, Sidney, Nebraska
Robert L. Peterson
Chairman, President, and Chief Executive Officer,
IBP, Inc., Dakota City, Nebraska
Bruce R. Lauritzen
President, First National Bank of Omaha,
Omaha, Nebraska
Appointed by the Board of Governors
A. L. Shoener
Executive Vice President - Operations, Union
Pacific Railroad, Omaha, Nebraska
Sheila Griffin
Special Advisor to the Governor of the State of
Nebraska for International Trade,
Lincoln, Nebraska
LeRoy W. Thorn
President, T-L Irrigation Company,
Hastings, Nebraska
1994
1994
1995
1996
1994
1995
1996
370 81st Annual Report, 1994
Term expires
Dec. 31
DISTRICT 11—DALLAS
Class A
Vacancy
Eugene M. Phillips
Gayle M. Earls
Class B
Peyton Yates
Milton Carroll
J. B. Cooper, Jr
Class C
Cece Smith
Roger R. Hemminghaus
James A. Martin
Chairman and President, The First National
Bank of Panhandle, Panhandle, Texas
President and Chief Executive Officer, Texas
Independent Bank, Dallas, Texas
President, Yates Drilling Company, and
Executive Vice President, Yates Petroleum
Corporation, Artesia, New Mexico
Chairman and Chief Executive Officer,
Instrument Products, Inc., Houston, Texas
Farmer, Roscoe, Texas
General Partner, Phillips-Smith Specialty Retail
Group, Dallas, Texas
Chairman, President, and Chief Executive Officer,
Diamond Shamrock, Inc., San Antonio, Texas
Second General Vice President, International
Association of Bridge, Structural, and
Ornamental Iron Workers, Austin, Texas
1994
1995
1996
1994
1995
1996
1994
1995
1996
EL PASO BRANCH
Appointed by the Federal Reserve Bank
Hugo Bustamante, Jr.
Owner and Chief Executive Officer, CarLube, Inc.
and ProntoLube, Inc., El Paso, Texas
Wayne Merritt
Chairman and President, Texas National Bank
of Midland, Midland, Texas
Ben H. Haines, Jr.
President and Chief Operating Officer,
First National Bank of Dona Ana County,
Las Cruces, New Mexico
Veronica K. Callaghan
Vice President and Principal, KASCO Ventures,
Inc., El Paso, Texas
Appointed by the Board of Governors
Alvin T. Johnson
President, Management Assistance Corporation
of America, El Paso, Texas
W. Thomas Beard III
President, Leoncita Cattle Company, Alpine, Texas
Patricia Z. Holland-Branch ..President and Director of Design, PZH Contract
Design, Inc., El Paso, Texas
1994
1995
1996
1996
1994
1995
1996
Directories and Meetings 371
Term expires
Dec. 31
DISTRICT 11, DALLAS—Continued
HOUSTON BRANCH
Appointed by the Federal Reserve Bank
Tieman H. Dippel, Jr
Chairman and President, Brenham Bancshares, Inc.,
Brenham, Texas
J. Michael Solar
Managing Partner, Solar & Fernandes, L.L.P.,
Houston, Texas
Walter E. Johnson
President and Chief Executive Officer,
Southwest Bank of Texas, Houston, Texas
Judith B. Craven
President, United Way of the Texas Gulf Coast,
Houston, Texas
Appointed by the Board of Governors
Isaac H. Kempner III
Chairman, Imperial Holly Corporation,
Sugar Land, Texas
Judy Ley Allen
Partner and Administrator, Allen Investments,
Houston, Texas
Robert C. McNair
Chairman and Chief Executive Officer, Cogen
Technologies, Inc., Houston, Texas
1994
1995
1996
1996
1994
1995
1996
SAN ANTONIO BRANCH
Appointed by the Federal Reserve Bank
T. Jack Moore III
Owner and Manager, T.J. Moore Lumber Inc.,
Ingram, Texas
Gregory W. Crane
President and Chief Executive Officer,
Broadway National Bank, San Antonio, Texas
Juliet V. Garcia
President, University of Texas at Brownsville,
Brownsville, Texas
Douglas G. Macdonald
President, South Texas National Bank,
Laredo, Texas
Appointed by the Board of Governors
H. B. Zachry, Jr
Chairman and Chief Executive Officer,
H. B. Zachry Company, San Antonio, Texas
Carol L. Thompson
President, The Thompson Group, Austin, Texas
Erich Wendl
President and Chief Executive Officer, Maverick
Markets, Inc., Corpus Christi, Texas
1994
1995
1996
1996
1994
1995
1996
DISTRICT 12—SAN FRANCISCO
Class A
William E. B. Siart
Carl J. Schmitt
President, First Interstate Bancorp,
Los Angeles, California
Chairman and Chief Executive Officer,
University Bank & Trust Company,
Palo Alto, California
1994
1995
372 81st Annual Report, 1994
Term expires
Dec. 31
DISTRICT 12, Class A— Continued
Richard L. Mount
Class B
William L. Tooley
E. Kay Stepp
Gary G. Michael
Class C
Judith M. Runstad
Cynthia A. Parker
James A. Vohs
Chairman, President, and Chief Executive Officer,
Saratoga Bancorp, Saratoga, California
1996
Chairman, Tooley & Company, Investment
Builders, Los Angeles, California
Principal and Owner, Executive Solutions,
Portland, Oregon
Chairman and Chief Executive Officer,
Albertson's, Inc., Boise, Idaho
1994
Partner, Foster Pepper & Shefelman,
Seattle, Washington
Executive Director, Anchorage Neighborhood
Housing Services, Inc., Anchorage, Alaska
Chairman and Chief Executive Officer (Retired),
Kaiser Foundation Health Plan, Inc.
and Kaiser Foundation Hospitals,
Oakland, California
1994
1995
1996
1995
1996
Los ANGELES BRANCH
Appointed by the Federal Reserve Bank
William S. Randall
President, Southwest Region, First Interstate Bank,
Phoenix, Arizona
Antonia Hernandez
President and General Counsel, Mexican
American Legal Defense and Educational
Fund, Los Angeles, California
Steven R. Sensenbach
President and Chief Executive Officer, Vineyard
National Bank, Rancho Cucamonga, California
Thomas L. Stevens, Jr.
President, Los Angeles Trade-Technical College,
Los Angeles, California
Appointed by the Board of Governors
David L. Moore
President, Western Growers Association,
Newport Beach, California
Anne L. Evans
Chairman, Evans Hotels, San Diego, California
Anita Landecker
Western Regional Vice President,
Local Initiatives Support Corporation,
Los Angeles, California
1994
1994
1995
1996
1994
1995
1996
PORTLAND BRANCH
Appointed by the Federal Reserve Bank
Stuart H. Compton
Chairman, Pioneer Trust Bank, N.A., Salem, Oregon
Elizabeth K. Johnson
President, TransWestern, Inc., Scappoose, Oregon
Cecil W. Drinkward
President and Chief Executive Officer, Hoffman
Construction Company, Portland, Oregon
1994
1995
1996
Directories and Meetings 373
Term expires
Dec. 31
DISTRICT 12, PORTLAND BRANCH
Appointed by the Federal Reserve Bank—Continued
Gerry B. Cameron
Chairman and Chief Executive Officer,
U.S. Bancorp, Portland, Oregon
Appointed by the Board of Governors
William A. Hilliard
Editor (Retired), The Oregonian, Portland, Oregon
Carol A. Whipple
Owner/Manager, Rocking C Ranch, Elkton, Oregon
Ross R. Runkel
Professor of Law, Willamette University,
Salem, Oregon
1996
1994
1995
1996
SALT LAKE CITY BRANCH
Appointed by the Federal Reserve Bank
June M. Morris
Chief Executive Officer, Morris Air Corporation,
Salt Lake City, Utah
Roy C. Nelson
President, Bank of Utah, Ogden, Utah
Daniel R. Nelson
Chairman and Chief Executive Officer,
West One Bancorp, Boise, Idaho
Nancy Mortensen
Vice President - Marketing, ZCMI,
Salt Lake City, Utah
Appointed by the Board of Governors
Gerald R. Sherratt
President, Southern Utah University,
Cedar City, Utah
Richard E. Davis
President and Chief Executive Officer,
Salt Lake Convention & Visitors Bureau,
Salt Lake City, Utah
Constance G. Hogland
Executive Director, Boise Neighborhood
Housing Services, Inc., Boise, Idaho
1994
1995
1996
1996
1994
1995
1996
SEATTLE BRANCH
Appointed by the Federal Reserve Bank
Thomas E. Cleveland
Chairman, Enterprise Bank, Bellevue, Washington
Constance L. Proctor
Partner, Alston, Courtnage, MacAulay & Proctor,
Seattle, Washington
Tomio Moriguchi
President, Uwajimaya, Inc., Seattle, Washington
John V. Rindlaub
Chairman and Chief Executive Officer, Seafirst
Corporation, Seattle, Washington
Appointed by the Board of Governors
William R. Wiley
Senior Vice President, Science & Technology
Policy, Battelle Memorial Institute,
Richland, Washington
Emilie A. Adams
President and Chief Executive Officer, Better
Business Bureau Foundation, Seattle, Washington
George F. Russell, Jr
Chairman, Frank Russell Company,
Tacoma, Washington
1994
1995
1996
1996
1994
1995
1996
374 81st Annual Report, 1994
Maps of the Federal Reserve System
i
9
"1
MINNEAPOLIS 1
I
7
CHICAGO •
12
• SAN FRANCISCO
10 KANSAS CITY
o
•
OM
CLEVELAND
4
•
ST. LOUIS
8
11DALLAS
•
BOSTON
2 • NEW YORK
•
PHILADELPHIA
S
RICHMOND
6 •
ATLANTA
5
ALASKA
HAWAII
LEGEND
Both pages
• Federal Reserve Bank city
• Board of Governors of the Federal
Reserve System, Washington, D.C.
Facing page
• Federal Reserve Branch city
— Branch Boundary
NOTE
The Federal Reserve officially identifies
Districts by number and by Reserve
Bank city (shown on both pages) as well
as by letter (shown on the facing page).
In District 12, the Seattle Branch
serves Alaska and the San Francisco
Bank serves Hawaii.
The System serves commonwealths
and territories as follows: The New York
Bank serves the Commonwealth of
Puerto Rico and the U.S. Virgin Islands;
the San Francisco Bank serves American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands.
The maps show the boundaries within
the System as of year-end 1994.
Maps of the Federal Reserve System 375
1-A
^
4-D
3-C
2-B
ME
• '
1
5-E
Pittsburgh
•Cincinnati
•Charlotte
Buffalo
NJ
CT
NY
R]
NEW YORK
BOSTON
PHILADELPHIA
7-G
6-F
RICHMOND
CLEVELAND
3-H
•Nashville
Birmingham Jl
\I
J
Detroit*
__/
TN
• Memphis
Jacksonville
Little)
y
New Orleans
Louisville
"-•
Rock/
Miami*
CHICAGO
ATLANTA
ST. LOUIS
9-1
• Helena
MINNEAPOLIS
10-J
12-L
Omaha*
CO
\ MO
Denver
KS
Oklahoma City
Portland
KANSAS CITY
11-K
Salt Lake City
•Los Angeles
San Antonio
DALLAS
SAN FRANCISCO
376
Index
Agriculture, U.S. Department of, Packers
and Stockyards Administration, 225
American Financial Skylink, 214
Annunzio-Wylie Anti-Money Laundering
Act of 1992, 104
Assets and liabilities
Banks, by class, 323
Board of Governors, 292
Federal Reserve Banks, 302
Association of Graduates of the Military
Academy, 241
ATM transactions, fraud prevention, 274
Automated clearinghouses, 280
Bank examiners, training, 223
Bank Export Services Act, 268
Bank for International Settlements, 41
Bank Holding Company Act, banking
structure regulation, 264
Bank Holding Company Performance
Report, 254
Bank holding companies
Applications, 227
Delegation, 266
Timely processing. 265
Banking structure, supervision, 263
Change in regulatory restrictions on bank
products, 273
Community development investment,
217
Interstate banking, 237
Investments in bank premises, policy
statement, 101
Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994,
237
Risk-based capital guidelines,
supervisory policy, 101, 102, 257
Stock repurchases, 267
Supervision and regulation of, 250, 251
Bank Links, FRB New York, publication,
219
Bank Merger Act
Bank mergers, interstate, 237
Banking structure regulation, 264
Mergers and consolidations, 331
Bank Secrecy Act, 269
Bank Secrecy Act Advisory Council, 269
Banking offices, changes in number, 330
Banking structure, regulation of, 263-67
Banking supervision and regulation
Derivatives activities, 260
Enforcement actions, 251, 268
Examinations, 252
International activities, 254, 267
National Information Center, 260
Real estate appraisals, 260
Retail sales of nondeposit investment
products, 259
Scope of responsibilities, 250-56
Staff training, 261
Structured notes, guidance on, 259
Supervisory policy, 256
U.S. banking structure, 263
Bankruptcy Amendments of 1994, 247
Banks
Assets and liabilities, by class of bank,
323
Banking offices, changes in number, 330
Number, by class of bank, 323
Barnett Banks, Inc., 228
Basle Accord, 258
Basle Committee on Banking Regulation
and Supervisory Practices, 256
Board of Governors {See also Federal
Open Market Committee and Federal
Reserve System)
Banking supervision and regulation,
249-71
Compliance examinations, 223
Consumer and community affairs,
213-32
Equal opportunity, rules regarding, 107
Federal Reserve Banks, 277-90
Federal Reserve decisions, public notice,
265
Financial statements, 291
Legislation affecting, 237-47
Litigation, 233-35
Members and officers, 345
Policy actions, record of, 99-113
Recommendations from other agencies,
232
Index 377
Board of Governors—Continued
Regulatory simplification, 273-75
Salaries, 293
Testimony and legislative
recommendations, 231
Book-entry securities, 281
Bureau of Engraving and Printing, 282
Business spending and investment, 11, 13,
30,51-54,76-78
California, Orange County, bankruptcy, 24
Call Reports, 101, 263
Capital accounts
Banks, by class, 318
Federal Reserve Banks, 301, 302, 304
Cash flows, Board of Governors, statement,
294
Centralized accounting systems, Federal
Reserve Banks, 277
Chairmen, presidents, and vice presidents
of Federal Reserve Banks
Conferences, 354
List, 352
Salaries of presidents, 309
Change in Bank Control Act, banking
structure, regulation, and supervision,
265
Check clearing and collection, 278
Policy statement to amend Regulation J,
103
Volume of operations, table, 319
Closing the Gap: A Guide to Equal
Opportunity Lending, video, 214
Commodities Futures Trading Commission,
251
Community Affairs and Housing
Committee, Consumer Advisory
Council, 231
Community affairs seminars, 214
Community Development and Financial
Institutions Act of 1994, 241
Community development investment, 217
Community Improvements, FRB
Philadelphia, publication, 218
Community Reinvestment Act
Bank and bank holding company
applications, 227
Compliance, 226
Deposit production via interstate
banking, 239
Reform, 213
Training programs, 218
Community Reinvestment Forum, FRB
Cleveland, publication, 219
Compliance
Consumer leasing, 226
Consumer regulations, reports from other
agencies, 224
Examinations of banks, 223
Expedited Funds Availability Act, 227
Fair lending laws, 216
Comptroller of the Currency, Office of the,
226
Condition statements of Federal Reserve
Banks, 300-305
Conferences of chairmen, presidents, and
vice presidents of Federal Reserve
Banks, 353
Consolidated Farm and Rural Development
Act, 240
Consumer Advisory Council, 230, 349
Consumer and community affairs, 213-32
Bank and bank holding company
applications, 227
Community development, 217
Community Reinvestment Act reform,
213
Complaints, 228
Compliance examinations, 223
Consumer Advisory Council, 230
Electronic Fund Trasfer Act, 222
Fair lending activities, 213
HMDA data and fair lending, 214
Regulatory matters, 219
Testimony and legislative
recommendations, 231
Consumer Leasing Act, Regulation M,
amendment, 220
Consumer leasing, compliance, 226
Consumer price index, 20, 60, 84
Consumer spending in 1994, 8
Core Proficiency Examination, 262
Country transfer risk, risk-based capital
standards, 258
Credit markets in 1994, monetary policy,
29-34, 65, 89
Credit Process: A Guide for Small Business
Owners, FRB New York, publication,
218
Credit Practices Rule (Regulation AA), 227
Currency and coin, 282
Currency and Foreign Transactions
Reporting Act of 1970, 269
378 81st Annual Report, 1994
Deferred tax assets, requirements,
risk-based capital standards, 257
Deposit use in interstate branching, 239
Depository Institutions Disaster Relief Act
of 1992, 102, 260
Depository Institutions Disaster Relief Act
of 1993, amendment to Regulation Z,
220
Depository institutions, reserves and related
items, 324
Deposits
Banks, by class, 323
Direct, services, 222
Federal Reserve Banks, 302, 324
Derivatives activities and transactions, 258,
260, 263
Direct deposit services, 222
Directors, Federal Reserve Banks and
Branches, list, 353
Directory of Bank Holding Company
Community Development
Corporations, publication, 217
Discount rate, 25-29, 110-13, 320
Discrimination in lending, policy statement,
109
Dividends, Federal Reserve Banks, 312,
314
Earnings of Federal Reserve Banks (See
also Federal Reserve Banks), 283, 310
Economy
Business, 11-14
Developments in other countries, 35
Government spending, 15
Household, 8-11
Labor markets, 16-20
Overview of 1994, 3-22
Performance, 1993 and 1994, 48, 74
Price developments, 20-22
Projections, 46, 72
Edge Act corporations and agreement
corporations, 268
Electronic benefit transfer programs,
amendments to Regulation E, 219
Electronic data processing, supervision, 252
Electronic Federal Tax Deposit System,
282
Electronic fund transfers
ATM transactions, fraud prevention, 274
EFT Act, economic effects, 222
Fedwire, 279
Policy statements, 100
Regulation E, amendment, 219
Employment in 1994, 16
Empowerment Zones/Enterprise
Communities, seminar, 218
Equal Credit Opportunity Act, 221, 224
Equal opportunity, Board rules regarding,
107
Examinations, inspections, regulations, and
audits
Consumer affairs compliance, 223
Federal Reserve Banks, 282
Federal Reserve supervisory
responsibilities, 250
Interstate banking, 239
Specialized
Electronic data processing, 252
Fiduciary activities, 252
Government securities dealers and
brokers, 252
Municipal securities dealers and
clearing agencies, 253
Securities subsidiaries, 253
Transfer agents, supervision, 253
U.S. offices of foreign banks, charges for
inspections, 254
Expedited Funds Availability Act,
compliance, 227
Export Trading Company Act Amendments
of 1988, 268
Export trading companies, 268
Fair lending activities, 213
Federal Advisory Council, 348
Federal agency securities
Federal Reserve Bank holdings and
earnings, 302, 324
Federal Reserve open market
transactions, 306
Repurchase agreements, 301, 302, 306,
308
Federal Deposit Insurance Corporation,
225, 226
Federal Deposit Insurance Corporation
Improvement Act of 1991, 223, 251
Federal Financial Institutions Examination
Council, 213, 215, 217, 224-27, 263
Federal funds rate, 25-29
Federal Home Loan Bank of
San Francisco, 218
Federal Open Market Account (See Federal
Open Market Committee)
Federal Open Market Committee
Authorizations and directives, 115-20
Index 379
Federal Open Market
Committee—Continued
Federal Open Market Account, 115, 306
Examinations, 282
Meetings, minutes of, 115-212
Members and officers, list, 347
Federal Reserve Banks, 277-90
Assessments for expenses of Board of
Governors, 312, 314
Bank premises, 300, 302, 318
Branches
Bank premises, 318
Capital accounts, 301, 302
Chairmen, presidents, and vice presidents
of Federal Reserve Banks
Conferences, 354
List, 352
Salaries of presidents, 309
Condition statement, 300-305
Deposits, 301, 302
Directors, list, 353
District Banks
Atlanta
Community affairs programs, 214
Community partnership seminar, 218
Boston
Community affairs programs, 214
Empowerment Zones/Enterprise
Communities, seminar, 218
Chicago
Community affairs programs, 214
Financing exports seminar, 218
Cleveland
Bank premises, 284
Community Reinvestment Forum,
publication, 219
Residential Housing and Mortgage
Credit Project, 214
Dallas, Community affairs programs,
214
Kansas City
Bank premises, 284
Community affairs programs, 214
Minneapolis
Bank premises, 284
Community affairs programs, 214
New York
Bank Links, publication, 219
Bank premises, 284
Credit Process: A Guide for Small
Business Owners, publication,
218
Federal Reserve Banks—Continued
District Banks—Continued
Philadelphia, Community
Improvements, publication, 218
Richmond, Community affairs
programs, 214
San Francisco
Bank premises, 284
Community affairs programs, 214
Disaster relief seminar, 218
Dividends paid, 312, 315, 317
Examinations, inspections, regulations,
and audits, 250, 282
Interest rates, 110-113, 320
International activities, 254
Loans and securities, 300, 302, 308, 310,
324, 326, 328
Officers and employees
List of officers, 352
Number and salaries, 309
Operations, volume, 319
Payments to the U.S. Treasury, 315, 317
Premises, 284
Presidents and first vice presidents, 309,
352
Priced services, 278-82, 285-90, 324
Salaries, 309
Specialized examinations, 252-54
Surveillance and monitoring, 254
Federal Reserve notes
Condition statement data, 301, 302-305
Cost of issuance and redemption, 295,
312
Federal Reserve System (See also Board of
Governors)
Fees, Federal Reserve services to
depository institutions, 278-82,
285-90, 310, 324
Automated clearinghouse, 280
Book-entry securities, 281
Check clearing and collection, 278
Currency and coin, 282
Financial statements, pro forma,
285-90
Fiscal agency services, 281
Float-related, 282
Funds transfer, 279
Net settlement, 279, 280
Noncash collection, 281
Pricing of, 310
Private-sector adjustment factor, 278
Securities, U.S., 281
Volume of services, table, 279
380 81st Annual Report, 1994
Federal Reserve System—Continued
Loans to executive officers, 271
Map, 374
Membership, 271
Security and loan holdings, 284
Staff training, 261
Staff, technical assistance to member
banks, 256
Supervision and regulation,
responsibilities, 250, 256-63
Federal spending, 15, 53, 78-82
Federal Trade Commission, 225, 226
Fednet, 277
Fedwire, policy statements, 108, 110
Fees {See Federal Reserve System: Fees)
Fiduciary activities, supervision, 252
Financial Accounting Standards Board,
Statements of Financial Accounting
Standards
No. 87, Employers' Accounting for
Pensions, 289, 310
No. 106, Employers' Accounting for
Postretirement Benefits Other than
Pensions, 290
No. 114, Accounting by Creditors for
Impairment of a Loan, 263
No. 115, Collateralized Mortgage
Obligations, 263
Financial Action Task Force, 269
Financial markets, relation to monetary
policy, 23
Financial statements
Board of Governors, 291
Pro forma, Federal Reserve priced
services, 285-90
Fiscal agency services, 281
Float, 282
Foreign bank representative offices,
supervision of, 255
Foreign banking organizations
Compliance examinations, 223
Examination manual, 256
U.S. operations of, 255
Foreign currencies
Federal Reserve income on, 310
Operations and transactions, 40, 94
Foreign economies during 1994, 36
Foreign exchange and investments, 41,
55-58, 92, 268
Funds transfers {See also Federal Reserve
System: Fees and Regulations: E),
310,319
Germany, economy in 1994, 37
Glendate Federal Bank, FSB, 228
Gold certificate accounts of Reserve Banks
and gold stock, 302, 326, 328
Government securities, 252, 274
Government Securities Act of 1986, 252,
275
Government spending, 15, 53, 78-82
Group of Ten, 36, 256
Hearings, rules of practice, 107
Home Mortgage Disclosure Act
Data disclosure requirements, 214-17
Policy statement, 99
Regulation C, amendments regarding
mortgage data requirements, 219
Home Ownership and Equity Protection
Act of 1994,242
Household spending, 8, 30, 48-51, 74-76
Housing and Urban Development, U.S.
Department of, 218, 229
Income and expenses
Board of Governors, 293
Federal Reserve Banks, 283, 310
Income growth during 1994, 9
Industrial production, 12
Integrated accounting system, Federal
Reserve Banks, 277
Interest rate risk, capital standards, 258
Interest rates, Federal Reserve Banks,
25-29, 110-13,320
Internal rate of return formula, Regulation
DD, proposal, 221
International Banking Act of 1978, 239,
255
International activities, 35-41, 55, 267
Divestiture and cessation plans, policy
statement, 103
Edge Act corporations and agreement
corporations, 254
Foreign-office operations of U.S. banking
organizations, 254
Interstate branching laws, 239
Trade deficit, 35
Transactions, 38
U.S. activities of foreign banks, 254,
255, 263
International Monetary Fund, 38
Interpretations of regulations, 221
Interstate banking, 237
Interstate branching, 239
Index
Investments
Business, 1994, 11, 13, 76-78
Federal Reserve Banks, 300, 302
Public welfare, 102
State member banks, 323
Japan, economy in 1994, 36
Justice, U.S. Department of, 225, 266
Kennedy, Robert F, Memorial, 241
King, Martin Luther, Jr., Center for
Nonviolent Social Change, 218
Labor markets, 16, 58-60, 82-84
Legislation enacted, 237-46
Bankruptcy Amendments of 1994, 247
Community Development and Financial
Institutions Act of 1994, 241
Home Ownership and Equity Protection
Act of 1994, 242
Money Laundering Suppression Act of
1994, 246
National Flood Insurance Reform Act of
1994, 247
Paperwork reduction and regulatory
improvement, 244
Riegle Community Development and
Regulatory Improvement Act of
1994, 241
Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994,
237^1
Small Business Loan Securitization and
Secondary Market Enhancement Act
of 1994, 243
Lending in Indian Country—Cultural and
Legal Issues, seminar, 214
Litigation involving the Board of
Governors
Financial Institutions Supervisory Act
Cavallari, 234
CBC, Inc., 233
DLG Financial Corp., 234
First National Bank of Bellaire, 233
MacCallum, 233
Oppegard, 233
Pharaon, Ghaith R., 233
Other actions
Adams, 234
Amann, 235
Beckman, 235
Bennett, 235
381
Litigation involving the Board of
Governors—Continued
Other actions—Continued
Duces Tecum, Subpeona, 234, 235
Federal Reserve System, subpoena,
234
Jackson, 235
Kubany, 235
Richardson, 235
Scott, 235
Zemel, 234
Review of Board actions
National Title Resource Agency, 233
Scott, 233
Loan America Financial Corporation, 228
Loans
Banks, by class, 323
Federal Reserve Banks
Depository institutions, 300, 302, 310,
326, 328
Holdings and income, 300, 302, 326,
328
Interest rates, 320
Volume of operations, 319
Margin requirements, 322
Member banks
Assets and liabilities, 323
Banking offices, changes in number, 330
Number, 323
Reserve requirements, 321
Members Forum, Consumer Advisory
Council, 231
Mexico
Bank of, reciprocal currency agreement
with, 41,211
Economic developments, 35, 38
Monetary aggregates, growth in 1994, 3,
24, 31-34
Monetary policy
Credit markets, 29-31, 89
Developments in 1993, 62-69
Developments in 1994, 86-95
Financial markets relative to, 23-34
Projections for 1994-95, 72
Reports to the Congress
February 22, 1994, 43-69
July 20, 1994, 69-95
Money laundering
Annunzio-Wylie Anti-Money
Laundering Act of 1992, 104
382 81st Annual Report, 1994
Money laundering—Continued
Money Laundering Suppression Act of
1994, 246
Surveillance, 269
Mortgage loans to minorities, 214
Mortgage rates, 30
Municipal securities dealers, supervision,
253
Mutual savings banks, 330
National Association of Securities
Dealers, 259, 269
National Center for American Indian
Enterprise Development, 214
National Community Service Trust, 241
National Credit Union Administration, 213,
270
National Flood Insurance Reform Act of
1994, 247
National Fund for the Botanic Garden, 241
National Information Center, 260
Netting arrangements
Bilateral, requirements, risk-based capital
standards, 257, 258
Change in risk-based capital guidelines,
274
Contracts, 263
Policy statement, 107, 109
Settlement, 279, 280
New Dartmouth Bank, 228
Noncash collection services, 281
Nondeposit investment products, retail
sales, 259
Nonmember depository institutions
Assets and liabilities, 323
Banking offices, changes in number, 330
Number, 323
Officers of Federal Reserve Banks and
Branches, 351
Orange County, California, bankruptcy, 24
Organizing Committee for the Special
Olympic Games, 240
Overnight overdrafts, policy statement, 108
Paperwork Reduction and Regulatory
Improvement, 244
Payments system risk, policy statement,
108, 109
Personal consumption, 8
Planning and control system, Federal
Reserve Banks, 277
Point-of-sale system services, 222
Policy actions and statements
Board of Governors, 99-113
Bank related and nonbanking
activities, 266
Federal Open Market Committee
Domestic open market operations,
authorization, 115, 123
Domestic policy directive of
December 1993, 117
Foreign currency directive, 119, 126
Foreign currency operations,
authorization, 117, 124
Foreign currency operations,
procedural instructions, 120, 126
Reciprocal currency agreement, Bank of
Mexico, 211
Statements and other actions, 108-10
Discrimination in lending, 109
Fedwire funds transfer format, 110
Fedwire operating hours, 108, 110
Netting systems, 107, 109
Overnight overdrafts, 108
Payments system risk, 108, 109
System foreign currency arrangements,
200
Price developments, 20, 60-62, 84-86
Priced services, Federal Reserve, 278-82,
285-90, 310
Private-sector adjustment factor, Federal
Reserve priced services, 278
Profit and loss, Federal Reserve Banks, 312
Publications
"Securities Credit Transactions
Handbook," Federal Reserve
Regulatory Service, 271
Closing the Gap: A Guide to Equal
Opportunity Lending, video, 214
Directory of Bank Holding Company
Community Development
Corporations, 217
List of Foreign Stocks, 270
Over-the-Counter Marginable Stocks,
list, 270
Real estate appraisals, requirements, 260,
273
Recourse issues, risk-based capital
standards, 258
Regulation of the U.S. banking structure
Bank Holding Company Act, 264
Bank Merger Act, 264
Change in Bank Control Act, 265
Recommendations to the Board, 232
Index
Regulations
B, Equal Credit Opportunity Act
Compliance reports, 224
Proposed revisions, 221
C, Home Mortgage Disclosure
Data requirements, 219
Release of data in machine-readable
form, 99
D, Reserve Requirements of Depository
Institutions
Change in balances subject to
requirements, 99
E, Electronic Fund Transfers
Automated teller machine
requirements, 100
Compliance, 225
Electronic benefit transfer programs,
100, 219
H, Membership of State Banking
Organizations in the Federal
Reserve System
Investments in bank premises, 101
Risk-based capital guidelines, 101, 102
J, Collection of Checks and Other Items
by Federal Reserve Banks and
Funds Transfers through Fedwire
Uniform Commercial Code,
conformity with, 103
K, International Banking Operations
Divestiture and cessation plans, 103
M, Consumer Leasing
Compliance, 226
Consumer Leasing Act, 220
O, Loans to Executive Officers,
Directors, and Principal
Shareholders of Member Banks
Lending limits increased, 104
S, Reimbursement to Financial
Institutions for Assembling or
Providing Financial Records
Retention of records of transactions of
$3,000 or more, 104
T, Credit by Brokers and Dealers
Securities purchased from
broker-dealer, 104
Y, Bank Holding Companies and Change
in Bank Control
Anti-tying provisions, 105, 273
Regulatory burden reductions, 106
Riegle Community Development and
Regulatory Improvement Act of
1994, 105
383
Regulations—Continued
Y, Bank Holding Companies and Change
in Bank Control—Continued
Risk-based capital guidelines, 101,
102
Z, Truth in Lending
Compliance, 226
Depository Institutions Disaster Relief
Act of 1993, 220
Proposed revisions, 221
Riegle Community Development and
Regulatory Improvement Act of
1994, 220
AA, Unfair and Deceptive Acts or
Practices
Credit Practices Rule, compliance, 227
BB, Community Reinvestment Act
Compliance, 226
CC, Expedited Funds Availability Act
Compliance, 227
DD, Truth in Savings
Decrease in number of accounts
subject to, 106
Internal rate of return formula, 221
EE, Netting Eligibility for Financial
Institutions
Netting provisions, 107, 109
Regulatory burden, 106, 273-75
Regulatory Reports Monitoring System,
254
Reserve requirements of depository
institutions
Change in transaction balances subject to
requirements, 99
Table, 321
Reserves and related items, 324
Residential Housing and Mortgage Credit
Project, 214
Residential investment, 10
Resolving Legal Issues When Lending on
Indian Reservations, seminar, 214
Retail Sales of Nondeposit Investment
Products, supervisory policy, 259
Riegle Community Development and
Regulatory Improvement Act of 1994,
101, 105, 220, 241-47, 251, 258, 266
Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994,
237-41, 237
Risk-based capital guidelines
Amendments, 101-03, 256
Change in netting arrangements, 274
384 81st Annual Report, 1994
Risk-based capital guidelines—Continued
Proposals, 257-59
Supervisory policy, 256-59
Safety and soundness, supervision of, 250
Salaries
Board of Governors, 293
Federal Reserve Banks, 309
Same-day settlement, 278
Secondary Market Enhancement Act of
1994, 243
Securities
Available for sale, reporting
requirements, risk-based capital
standards, 257
Book-entry services, 281
Brokerage services, discount, 273
Broker-dealers, purchases from, 104
Credit, 322
Federal Reserve services, 281
Government transactions, 274
Regulation, 263, 269
Subsidiaries, supervision, 252
Tax-exempt market, 24
U.S. government, holdings by Federal
Reserve, 284, 300-308
Securities and Exchange Commission, 225,
251,269
Securities Exchange Act of 1934, 269
Shawmut National Corporation, 228
Silver coins, Reigle Act, 240
Small business
Small Business Administration, 225
Capital enhancement, 244
Loan securitization, 243
Special drawing rights, 300, 302, 324, 326,
328
State member banks
Applications, 227, 267
Assets and liabilities, 323
Banking offices, change in number, 330
Banking structure, supervision, 263
Community development investment,
217
Compliance
Complaints, 228, 229, 230
Fair lending laws, 216
Examinations and audits, 223
Financial disclosure, 268
Foreign branches, 267
Investments in bank premises, policy
statement, 101
State member banks—Continued
Loans to executive officers, 271
Number, by class of bank, 323
Reports of Condition, 101
Risk-based capital guidelines,
supervisory policy, 101, 102, 257
Safety and soundness supervision, 250
Supervison and regulation of, 250, 251
State laws under the Riegle Act, 240
Structured notes, guidance, supervisory
policy, 259
Supervision and regulation, Federal
Reserve System, responsibilities, 250
Supervisory Information System, 261
System to Estimate Examination Ratings
(SEER), 254
Testimony and legislative
recommendations, Board of
Governors, 231
Thrift Institutions Advisory Council, 350
Thrift Supervision, Office of, 225, 226, 270
Training Activities Manual, 249
Training, Federal Reserve System staff,
223, 261
Transfer agents, supervision, 253
Transportation, U.S. Department of, 225
Treasury Direct, 281
Treasury securities
Bank holdings, by class of bank, 323
Federal Reserve Banks
Holdings, 300, 302, 308, 324, 326,
328
Income, 310
Open market transactions, 306
Repurchase agreements
Tables, 300, 302, 306, 308, 324, 326,
328
Treasury, U.S. Department of the, 281
Truth in Lending Act, compliance, 226
Unfair and Deceptive Acts or Practices
Compliance, 227
FRB1/1-12500-O595C
@FedFRASER